there are no women out there who i think of a you could put in their. >> guest: and looked hard at and after a while i started asking everyone including of and i interviewed in the war of the women and they answer finally came to me that is now so different when black women -- their breakthroughs on their own in the '60s and '70s. i think it is the same decisions that black women are making with even greater saliency. @@@@@@bbb@ contracting,

dcma. our second panel will consist of witnesses from the contracting industry. the three companies represented are the three primary contractors, prologue cap 4 logistics contract, the witnesses are william ballihaus, president anesthesia c.e.o. of dyncorp, william walter, director at kbr, david methot, with fluor government group. before we hearing the responses from the witnesses, we want to offer basic remarks on the purpose of today's hearing. from 2001 through mid mid 2009, congress has appropriated about

$880 billion to fund u.s. overseas contingency operations with a great majority of that funding devoted to iraq and afghanistan. over that period, america's reliance on contractors has grown to unprecedented proportions. to support logistics security more than 240,000 contract employees, about 80% of them, foreign nationals, work in iraq and afghanistan at one time to support department of -- the department of defense. additional contractor employees support the department of state and the u.s. agency for international development. contractor employees outnumber u.s. military person emin both theaters. they have a critical mission and according to reports from the military in theater, they are doing an exceptionally good job providing security, transportation, meals, laundry and other services. the questions raised today in no

way detract from the overwhelming good opinions of contractors' support for u.s. missions, or obscure the fact that nearly 1,400 contract employees have died on duty in southwest asia. the questions do however reflect serious concerns about government's ability to evaluate the cost of contractor services, and provide good stewardship of taxpayers' dollars. are we spending too much for services for which we could and should be paying p less? are we overpaying and wasting precious resources? the commission's internal report at what cost, called policymakers and lawmakersg attention to eight issues of immediate concern that we felt should not languish unaddressed until completion of our final report. one of the eight was contractor business systems, about which we simply said, too many contractor

business systems are inadequate and must be fixed. commission staff examined a selection of reports on 100 business systems used by 15 contractors, who had raised $43 billion in contracts for work in iraq and afghanistan. we learned that 30 of those 100 systems had been judged inadequate or inadequate if part by the defense contract audit agency. fully half of the billion in compensation systems were considered inadequate. every other category of applicable business systems, accounting, budget, electronic data processing, indirect and other direct costs, labor and purchasing, also showed inadequatcies, although to a lesser extent. as we issued the interim report, dcaa identified three more contract business systems as inadequate, including the labor billing and compensation systems that are essential parts of a

contractor's overall management control structure. this issue of inadequate business systems in the contingency contracting environment is growing. but after more than six years, the opposite should be expected. this is a serious problem that should concern the president, every member of congress, and every taxpayer. as the commission said in its interim report, significant deficiencies in contractor systems increase the likelihood that contractors will provide proposal estimates that include unallowable costs or that they will request reimbursement of contract costs to which they are not entimed. or which they cannot support. the commission's may 2009 hearing heard that although that through fiscal year 2008, dcaa had taken exception to over $13 billion in question and

unsupported costs associated with the efforts in theater. some of those shortcomings reflect inconsistencies or ineffective operations of contractor business systems. and even if further inquiries provide documentation for question costs, their shortcomings demanded extra time and effort from federal oversight personnel that shouldn't have been needed and has resulted in higher costs for taxpayers. dcaa has also testified that inadequate government systems may prevent the government from closing out some iraq and afghanistan contracts for years. because of missing or incorrect data. u.s. army contracting demand previously testified before this commission about "overtaxed business systems under log cap 3 that created problems with management subcontractors making accurate estimates, reporting

costs and purchases and other issues." army contracting command has adopted a policy under the new, three vendor task force competition log cap 4 contract that seg greghts 15% of the award pool to provide incentives for good management business systems. and small business subcontractor performance. this is a welcome reform, but the test will be in its consistent and strict application. the harsh fact we still face is that some contractor business system deficiencies have remained uncorrected. without consequences. for months or even years. federal regulations require contractors to maintain adequate business systems. regulations also permit, but doc not require contractor officers to withhold payment when a contractor fails to correct significant deficiencies. but previous dcaa testimony

indicates that many contractors continue to operate inadequate business systems with little fear of effective discipline. further, there appears to be disagreement at times between dcma and dcaa on whether withholds should be imposed after a dcaa determination of inadequacy. we will explore these disagreements at today's hearing at some length. this state of affairs is both alarming and puzzling. why can't private corporations, who don't face bureaucratic obstacles to change of a federal department, find ways to make prompt corrections to systems that log vital data? how can large corporations manage their affairs effectively and provide accurate information to shareholders, let alone meet their regulatory obligations to the federal government with business systems that are truly inadequate. our federal definitions of

adequacy irrelevant to real world operations or are contractors using some parallel system of enterprise management that remains invisible to federal oversight? with whatever concerns we have, with the private sector, we don't intend to give the government a free pass on this issue. contractors are not the only ones with business systems issues. for example, the business systems modernization program at the department of defense has been on the government accountability office's high risk list since 1995. not 2005, 1995. tackling that issue is outside the commission's mandate, but we can still ask, is government doing its job to ensure that contractors comply with federal requirements? it's a procuring contracting officer, the administrative contracting officer and the auditor can ensure that needed improvements are timely made, who can?

and who is accountable on the federal side of contracting? these are just a few of the questions that might colleagues and i hope to learn about -- learn more about in today's hearing. again, we thank our witnesses for their cooperation. as is customary, a question and answering period will follow the testimony. after we adjourn, the hearing record will remain open for 10 business days, to allow responses to questions. for the record. and with that, we welcome our witnesses. our first panel, i'd invite you to stand. i would like to swear you in as is the custom of this commission. raising your right hand. do you solemnly swear or affirm that the testimony you will give before this commission is the truth, the whole truth, and nothing but the truth? thank you.

>> your statements are long in some instances, so we will, as you know, ask you to summarize your statements. we'd like you to keep you were statements between five and seven minutes, that would be our preference. and we'll be sure to make sure that anything that you need to say, you'll be allowed to say even if we haven't asked the question, we'll give you that opportunity at the end. so we're going to go in order with you, mr. parsons, then you ms. stevenson and then you, mr. ricci. >> thank you, distinguished commissioners of the commission on wartime contracting, thank you for for this opportunity to discuss the importance of contractor business systems in army contracting. effective business systems are central to the conduct of sound business operations.

contractors must have systems in place such as accounting, payroll and billing at the time of contract award that are in compliance with government cost accounting standards, federal acquisition regulations and federal regulation acquisitions. the systems must reasonably contract labor and material contracts, ensure purchase and fabricated material charged or allocated to a contract are based on valid requirements. maintain a consistent equitible and unbuy aced logic for costing of material transactions and labor. contractors must maintain the systems throughout the life of the contract. the army considers the relative condition of a contractor's management systems, including business systems, during the source selection process. generally, this is included as part of the management area of contractor proposals and related evaluation criteria. under the logcap 4 source selection, the criteria established that managements of which business systems was a subfactor took precedence over

all other factors. this area was given a higher than usual wait because of the difficulties of managing quick response program@@@@@@@ " 7 consider whether the contractor has the necessary accounting and operational controls in place, such as accounting, payroll, and invoicing systems, applicable to the services being performed by the contractor and

subcontractors. when cost site contracts, the contracting officer must determine that the contractor's accounting system and related internal controls provide reasonable assurance that the accounting system and cost data are reliable, misallocations and mischarges are mimeoed and contract allocations and charges are consistent with invoice procedures. during contract performance, the contractor must maintain its systems to support billing and payment under its contract, and must be able to accurately track the cots associated with the contract baseline and any changes made to the contract. the cost allocation amongst various work packages must be verifiable and must track back to the discrete contract change. this is the method the government uses to l validate the cost charged under the contract are fair, reasonable, and applicable. if a problem with any of the contractors' business systems is noted during a dcaa incurred cost audit or dcma surveillance, the contracting officer is

notified. dcaa and dcma work together to resolve what adjustments will be made to the billing rates or invoices and the contracting officer supports that process by taking appropriate contract action, if necessary. in the case of an award fee contract, pressure can be brought to bear through the award fee criteria. that is one ofúthe levers used under the logcap award fee process, which has criteria directly associated with corporate management and business systems. should the contractor not react in a timely manner, the army will dialogue with senior management in the corporate chain. depending on the severity of the problem, senior army or defense officials may engage with the contractor's most senior managers to make sure the army's needs are met at a reasonable price. the army contracting command is committed to excellence in all contracting, including the log cap contracts. we continue to collect lessons learned and make adjustments

along the way to ensure mission success and protect the government of the u.s. taxpayers. the army is committed to excellence in managing and documenting contractor performance and the overall discipline of contract administrative services. this is my honor to lead the army contracting command team as we persevere to achieve those goals. thank you for inviting me today to speak with you. this concludes my statement. >> thank you. >> chairman thibault, chairman shays and members of the commission, thank you for the opportunity to have before you today. i am pleased to be here. as requested, i will describe the audit effort performed by dcaa on business systems for contractors performing effort in thee term. a more detailed account is provided in the statement that i ask be submitted for the record. dcaa has implemented planning and coordination procedures to effectively integrate audit work

between the iraq branch office, opened in may 2003, and more than 60 dcaa offices stateside. just recently, i approved the opening of a second audit office in theater in afghanistan. through june 2009, dcaa has completed over 200 business system audits and has cited deficiencies in more than half of these audits. when a contractor's business system is inadequate, the data generated by the contractor is unreliable. which in turn results in the risk of non-compliances, with government laws and regulations, mischarging, fraudulent acts and contract overpayments. the requirement for adequate business systems dates back to 1977, to the foreign corrupt practices act. the results of which were further refined in 1985 by the national commission on fraudulent financial reporting, known as the treadway

commission. the commission developed a framework that defined internal control as a process, designed to provide reasonable assurance about the republic liability of financial reporting, efficiency and effectiveness of operations, and compliance with applicable laws and regulations. currently, public laws, contract terms require government contractors to maintain adequate business systems. using these previous bodies of work on internal controls, dcaa established audit procedures for the 10 contractor business systems listed if my written testimony. dcaa's opinion on contractor business systems is advisory and the contracting officer, usually dcma, has the ultimate decision to approve or disapprove the contractor systems. since inadequate business system is considered a critical

breakdown in the contractor's processes, the acquisition regulations require contracting officers take certain actions, when deficiencies are found, such as considering whether it's appropriate to suspend a portion of interim payments. even when the contractor has proposed an apparently adequate corrective action plan, until that plan is effectively implemented, the contractor is still processing transactions with an inadequate system of internal controls. as a result, there is a greater risk of overpayment. during our audits of contracts and contractor business systems in theater, we have reported a number of system deficiencies. for example, since march 2p09, we have reported three business systems at dyncorp to be inadequate. in the last few months, 50% of sampled billings at dyncorp have been rejected for exceeding

allowable amounts. shortly after dyncorp was awarded the task orders for kuwait, it submitted change order proposals, requesting an increase in price at about 51% or $50 million increase. the increase is primarily due to stated incurred to hire employees in theater. we identified a number of other billing deficiencies throughout our audits of the department of state contracts at dyncorp, resulting in $13 million of overpayments being refunded. as stated in hour testimony to the commission on may 4, we have reported a number of issues related to system deficiency at kbr. rather than repeating the extensive list of issues, in this testimony, we refer the commission to our prior testimony. however, it is worth noting the effects of this inadequacies in kbr's purchasing system resulted in significant unreasonable

subcontract prices, on logcap iii contract. we have issued in excess of 100 suspensions, known as a dcaa form 1, suspending hundreds of millions of dollars due to unreasonable and unsupported costs, many of which stem from deficient systems. in april 2009, dcaa issued an audit report on kbr's purchasing system with an opinion of inadequate, primarily due to kbr's failure to perform adequate price analysis of subcontractor proposals as required by the regulations. for example, kbr purchased about 4100 living units at an average units price of $38,000. with a lower priced vendor proposed 18,000, for containers having similar amenities, the $20,000 unit price difference equates to $82 million. dcaa has found that contractors do not always follow through to

correct deficiencies in internal controls. in june 2006, dcaa reported significant deficiencies withc kbr's purchasing system, and in that same year, kbr stated it initiated a corrective action plan. but our followup audit issued three years later in april 2009, we identified similar deficiencies as well as two new deficiencies that led to issuing an overall opinion of inadequate. based on these events, it is clear that kbr did not take the correction of the reported deficiencies seriously. we believe a contributing factor is dcma's practice of recognizing the existence of a contractor's corrective action plan as the basis to render a system adequate. auditing contracts for contractors performing effort in theater has been very challenging in many areas.

these challenges are discussed in greater detail in my written testimony. for example, it appears that dcaa and contracting officers apply different criteria when assessing the adequacy of systems. dcaa must follow the government auditing standard, which encompasses months of testing contractor internal controls before rendering an opinion. in contrast, just recently, dcma performed its review of kbr's purchasing system in about a week. >> mr. skwrao: try to finish up in the next minute. >> yes, i'm also done sir and determined that the system was adequate. clearly, we have different criteria. and the be -- on the opinions of an adequate system. in closing, the challenge of applying sound business practices having daunting and required our auditors to be flexible. i would be pleased to take your questions. >> thank you.

>> good morning, chairman thibault, chairman shays and commissioners, on bar of the defense contract agency, i thank you for the opportunity to thank today on contractor business systems. dcma is responsible for the administration of about 325,000 contract were unliquidated obligations of over $220 billion, awarded to over 19,000 contractors. dcma accepts approximately three quarters of a million shipments of supplies and 1150 aircraft each year. we also manage over 136 billion of government property and administer about $36 billion worth of contract financing payments each year. that workload, coupled with a significant reduction in personnel over the years, has posed a tremendous challenge to the agency. contractor maintenance of reliable business systems would help address that challenge. simply put, robust planning and control systems increase the likelihood that conforming supplies and services are delivered on time and at a fair

price. : recommendations are appropriately considered last november we revised our internal policies to any determination inconsistent with dca recommendations the subject of higher level review that may

include review by the dcma head of contracting activity, a senior executive service position within dcma. there are several major contract businesses by regulation. these systems are accounting, estimating material management and accounting, property, earned value and cost accounting standards disclosure statements. there is no consolidated list of these systems in the fares or defars. many contractors maintain adequate systems but there is room for improvement. even the largest defense contractors with years of experience in government contracting have significant deficiencies in their system. only two of the 10 largest business units have "systems across-the-board. four of those ten business units are considered inadequate and three or more of the seven systems evaluated. taking a broader view of the 435 contractor purchasing systems that have been reviewed, 19, about 5%, have had their approvals withheld.

of the 2479 contractor property systems that have been reviewed, 80 about 3% have been found inadequate. of the 66 earned value emergency management compliance in april 2006, only four suppliers have been found fully compliant with those guidelines. however, focusing on whether a system is rated acceptable doesn't paint the whole picture. that's because an acceptable system may contain some deficiencies. long-standing practice and regulatory guidance allows contractors in many cases to avoid having systems disapproved if they submit adequate corrective action plans and make timely progress against those plans. the system rating is important as it may result in specific consequences. for example, disapproved purchasing system automatically leads to increased subcontract consent requirements. but knowledge of the individual deficiencies is no less important. the impact can often be

mitigated by government action albeit typically through the expenditure of additional government resources. @@@@@@ )gr , @ @ @ @ @ @ @ @ @ @ increase post-war reviews for defective pricing. an inadequate property system may lead the government to revoke its assumption of risk and hold contractors liable for

loss, damage, destruction or theft of government property but with an exception of mas none of the consequences expressly and importantly contractually include reductions in contract price, payments or financing. certain clauses allow the government to impact cash flow when contractors fail to maintain acceptable systems or correct deficiencies in a timely manner. both the payment based clauses allow tore reduction or suspension of those financing payments for any material noncompliance with contract terms. the incentive fee and fixed fee clauses allow the contracting officer to withhold payment of fee after 85% has been paid up to a total of $100,000. although this has generally been done to ensure submission of final rate proposals, not to encourage improvements in business systems. finally, the allowable cost of payment clause gives the contracting officer the authority to suspend or disallow reimbursement of costs found to be unallowable.

however, unless a system deficiency has been found to directly impact a specific cost allowibility, use of this clause is generally not appropriate. before it can be used to suspend cost under our current contractual authority, we need to demonstrate through substantial evidence a reasonable nexus or causality deficiency and a cost to be suspended. i know i'm over and i'll finish up quickly. we recently offered some ideas to the director of defense procurement policy additional incentives to for compliance. we're also considering submitting a specific regulatory change to address suspension of costs for deficiencies. we will work this with the director of defense procurement and acquisition policy through the formal rulemaking process including the opportunity for public comment. in closing, we share the concerns you have with the

adequacy of contractor business systems and appreciate congressional support of our efforts to obtain improvements in them. again, thank you for the opportunity to appear before the commission. this concludes my statement. i'd be pleased to answer any questions. >> thank you very much. we're going to go in this order. commissioner thibault and commissioner hanky and then myself. we're going to go for eight minutes. and we will -- we'll go for 8 minutes and then we'll have a follow-up question of 5. so mr. thibault? >> thank you, commissioner shays. thank you for each of you taking the time to come up and prepare for this. i have several areas of interest. this is a really important area. i don't see any difference of a view that it's a really important area and i'm going to talk about, though, i see

differences of treatment of the outcomes. but before i go into that, director stephenson, you indicated to us last may, four months ago, you acknowledged the uptick or the significant increase in afghanistan for workload. and a big part of this commission's effort is to try to take lessons learned from iraq and the importance and i know the dcaa was one of, if not the first, noncombat agency to go into iraq in 2003, summer of 2003, and the event started in early spring of 2003. and in may, we kind of highlighted that when we went out, we didn't see as much of dcaa as we might have expected given the uptick. can you talk a little bit about actions you might have taken and then the other thing we talked about is dcaa going to get out into the outlying areas where so

much of the costs are incurred and look at operations? can you update what, if any, actions you have taken as the director? >> yes, we took your recommendations very seriously and we do appreciate the commission's support on these. shortly after that hearing, we did assess what the staffing needs both in iraq, kuwait, afghanistan. i call that the in-theater effort. and just recently, we have opened an office in afghanistan. we'll have two offices. we'll have the iraq branch offices until the drawdown is complete and audits are no longer necessary in that area and we have the office that will be opening in afghanistan and we're coordinating with centcom on the logistics that's necessary for that. we've also approved and have a manager in afghanistan right now along with an audit team, although, it's not as the office is set up, it is on a temporary travel basis. we are shifting as need be.

on your question regarding the operations audits, we have initiated 15 operations audits split between iraq, kuwait, afghanistan. in iraq, it's mostly focused on the drawdown and do we have too many people doing too little work. in afghanistan, it is the control of various things such as the transition of equipment and property. we anticipate we will be spending in 2010 over 12,000 hours on operations audits. >> thank you. one of the things, and then i'll move it around, but one of the areas that we were also interested in -- and i think i'd like to start with you, mr. parsons, at the last hearing was the business system evaluations in terms of coordination between the three

organizations, the three organizations that are here now in terms of, you know, is there -- we felt and we got an agreement from every agency that there was a need for improved or more directed or more focused. there were various coordination activities but we had these differences that we're going to talk about and update in a bit, but i guess i'm interested in following that hearing, what kind of actions were you involved in that were trying to address these differences where you might have dcaa saying it's a 50% or that we have very significant issue and you might have dcma with a different view. so can you talk a little bit about what actions -- you know, and the army is so critical because you're the ones spending money on the contracting effort, mr. parsons? >> as i mentioned in thee statement these business systems are very important to us as far

as our contract skill under logcap and as such we put a lot of focus on that on the source selection for the basic logcap contract and at the task order level. and there's some differences of opinion between dcaa and dcma and that's one of the things the contracting officer has to wrestle with. and the contracting officer is informed by dcaa of audits where they are finding inadequacies they are in communication with dcma as well and they've got to understand the positions of those organizations. i think it was last month that we actually held a meeting out at rock island where dcma and dcaa participated all the regional directors, in fact, were in from dcaa and gave a very thorough review of all of the issues that they have identified with a different contractor business systems and there was quite a bit of discussion about those.

and as recently as a couple of weeks ago, dcaa gave a follow update on the contracting service center that they have with these business systems. so the contracting officer needs to address them when they make the responsibility and determination they make tradeoffs between what the information provided by dcaa and then dcma and come to a conclusion on whether they believe or not the rkl is so high that it can't be mitigated on whether it can be mitigated and take appropriate action. >> let me say thank you for that. let me share -- it seems we're doing a lot of talkingsy but it seems on based on some of the testimony that we haven't done a lot of resolving and/iñ dcaa answers through theruñ comptrol and they come up from the acquisition side and my observation seems like something is not getting done in terms of addressing these important issues in trying to figure it out.

and director stephenson it's really focused as much with you mr. ricci you share 475 contract to purchasing systems reviews performed by your cpsr team with -- i think the number was 19 exceptions. that's a pretty small percentage just as an observation. you just shared that typically than 50%. so you got whatever 19 out of 45 which is maybe 45% and you got 50% south one advisory organization saying to contractors and saying to your customers, the army, hey, we got a 50% hit rate problem. we got another one saying we got another 5% hit rate problem and i'm just talking about purchasing. now, i'm sensitized because when you briefed us, mr. ricci, and we appreciated it in advance of the hearing, you outlined --

and -- there it is, the staffing reductions that your cpsr teams have encountered and i think it's important to share in '94 your cpsr team your thresholds are pretty low and it's important to look at you had 102 individuals performing these reviews. you had -- you went down by 2002 to 32 and in the present you have 14 that you shared with us. you also said,, i believe, that you thought it was reasonable. i'm here to tell you/[w intuity and logically that it really doesn't seem reasonable and then i feel like we kind of got a hatfields and mccoys situation going on because in director stephenson's testimony, she stated that the cpsr team conducted its review in less than a week. so shes,l didn't put that in th because as a compliment, quite frankly, and she said there were 2 or 300 separate procurements

by week's end they said it was adequate and dcaa for long-standing had said it was inadequate so using that as an÷ example and using the  it is really troubling that we have these differences and that the two agencies haven't been able to resolve it. lasti point is that you end up with companies, you know, there are great companies out there and maybe they don't know how to assess this much rather the army. there are companies out there that have had continuing problems and maybe they're using it as excuses. well, dcma is telling me one thing. if you look up at that chart up there, dcma is telling me one thing and the others are telling me something else. when i get to the questions at the next round, i'm going to be focused just on that and what's going on here? what qiq going to take to get these twohkñ agencies together figure out a good course of

action and to speak as one since you have a mutual customer, united states military in this case. mr. chairman? >> thank you, that's a nice introduction, but it may get answered before you get your second round. >> well, that's just excellent. >> thank you, mr. chairman. my respect to miss stephenson and the dcaa for the professional diligence for your two lieutenants. always a resource for me. my chairman, mr. thibault, i respect and draw on his deep insight into these systems. i could not look into them without him.le okay. at the mayt0b 4thñ0 hearing we expressed our concern that the army contracting command might not

>> i have to admit i tried every angle possible to get involved with the preaward audits of the task orders for afghanistan. i have met with mr. parsons. he did follow through on his effort to meet. i met with charlie williams, lee thompson. i even went to -- within at & l and met with sheik assad and expressed the risks associated with the preaward as mr. parsons mentioned, we all had a meeting where i brought in every one of

my executives involved with the three contractors, and we had a meeting whtd%@%2)r'sk$rrs%"'rr$r there's nothing more important. the commission sent me two weeks ago to baghdad to talk to -- i ended up talking to general odierno and i'll talk more about

that later. for the drawdown is such auditing of proposals crucial for the new task order in iraq, which is coming? it hasn't been completed yet. it's coming. >> i would say the audits are more critical with the drawdown. and the reason being prior to awarding the task orders for the drawdown, we have to have a good understanding of the prices at a low enough level that when the draw down occurs we can assess cost containment and cost growth. and given the inadequacies with the business systems with these three contractors, if these internal controls are not improved, coupled with a poorly priced drawdown, the drawdown in iraq and these iraq task orders are become a deep pocket for these contractors. >> a what? >> a deep pocket. it is going to be critical that we have an adequately priced drawdown. now, in this effort as mr. parsons said, we've had at

least two meetings since june to talk about dca's involvement. i have mr. parson's commitment that we will be involved with auditing the task orders on the preaward basis for iraq. >> well, we've heard promises of cooperation before. i'm glad this is a little more than in the past. what objections are you meeting and how do you answer them about why they didn't last time and they wouldn't this time let you audit the proposals which as you say could become a deep pocket, the drawdown could become a deep pocket for contractors. go ahead. >> i'll talk in generalities whether it's been from afghanistan or kuwait for the task orders in general. i hear such things as dcaa takes too long. we need an audit quickly. i've heard that you asked for too much data. you want the contractors to submit more data than what perhaps is needed. and you have too many issues that gets raised that delay in the awarding of the contract.

and we recognize -- we sincerely recognize that delays in contract audits do no one any good. and to mitigate this, we have set up a central person that will be the point of contact on all the iraq -- on all the logcap task orders to help facility. if we have enough time -- and i'm not talking months. we can do this in weeks. >> weeks, you said. >> we can do this in weeks if we have enough time we can certainly do this. and generally, it can even be in four weeks or less depending on the amount of data. if contractor estimating systems provide adequate data that's easily supported when we go in and we assess it, we can get in and out quite quickly. however, if the contractor data is deficient and in some instances it's been severely deficient, that will indeed hamper our audits getting done quickly. >> let me get on to another topic which is key for the second panel. when i asked them about their

labor system and whether that poses risks to the contractor drawdown in iraq, risks to it, you have some familiarity with kbr labor system on task order 159, the last big task order. i look on page 11 and it says, we questioned 368 million and change, of direct labor costs as summarized by schedule. what's the problem with kbr's labor system? is it too high a level of generality and you can't -- you won't have internal controls within kbr to tap into, to keep them from becoming as you said a deep pocket in situations like this? >> our internal controls in labor are in process. i want to be careful that i don't get into issues that might be premature. however, there are a couple of

issues that i can talk about. we have recently provided -- kbr recently as in last month, what we call a statement of condition for their assessment regarding the level of data that is gathered within their labor system meeting at a too high of a level to be able to assess whether the tasks are being accomplished or even better yet, when there are change order proposals and there's a lot of change order proposals. >> that's technical talk. a statement of recommendations, is that in effect -- could we, lay people, consider that a criticism of the kbr system? >> i call it a statement of condition because it's in the process of the contractor having an opportunity to respond to it. we want to ensure that we have not missed something. but this is very similar to what was in the task order 159 report which is the level of detail. you need to ensure labor is at a low enough detail that when a change order proposal or the drawdown proposals or other things come in place -- and

there's a lot of those that come in place, that there's not a duplication of the reimbursement of labor costs where you aren't paying the same person doing the same effort more than once. >> my time is almost over. i want a short answer to this. is there a danger that kbr will in effect build double fee on its labor being used in change order situations in the drawdown? double fee -- you know, once on the basic contract, once -- >> absent improvement in their internal controls, there is a risk of a payment of inappropriate or double fees as you're saying. there is a risk. >> thank you, my time is expired. >> before going to mr. hanky, let me just say to the other witnesses, take notes on anything you want. mr. parsons, you'll be given an opportunity to respond anything you have heard. i'll use my time if i have to but you'll all be able to respond on everything that's been asked. >> a question for mr. parsons. your statement, page 2 and page

3, twice says the army considers the relative condition of contractors of management systems relative to what? you've gone out of the way to say there the army considers the relative strength of systems -- most importantly during the selection process. >> correct. during the source selection, we put a lot of increased emphasis on management proposals submitted by the contractors with an emphasis on the contractor business systems because of the importance miss stevenson has said with these costs that are being incurred and estimated. >> so if you have three proposals, three vendors, you're comparing those three relative to each other or to a standard? >> to both. to both. so first of all, you're going to determine whether or not these systems are approved. identify if there are deficiencies in there what the risk associated with those

deficiencies -- whether there is opinions by the dcma on corrective action plans that have been submitted or other mitigating actions so you compare -- you compare them to the standards of whether the systems are approved and then to one another. is one contractor business systems in better state of health than the others? >> how do you make a judgment about systems relative strengths to a standard, to an independent objective accessible standard other than relying on your experts, dcaa and dcma? >> we do rely upon those experts but we do have people that are familiar with, you know, price analysts and cost analysts that understand a lot of these aspects. they do evaluate what -- the conditions of the systems are based on what dcaa has found and then make some kind of judgment on how much risk we may be assuming with going with a

contractor that may have those deficiencies. so we don't -- you know, i think we do have the expertise but ultimately we do have to rely upon our subject matter experts out of dcaa and dcma. >> okay, you've had some vendors with long-standing systems problems, deficiencies, correct? >> correct. >> and some of those deficiencies date back to '2004, '5, '6 have not gotten better, in fact have gotten worse if i understand the estimating system at kbr, is that right, miss stephenson. but it's gotten worse over time. okay. in that context, your statement, mr. parsons, you said, quote, contractors must have systems in place such as accounting, payroll and billing at time of contract award that are in compliance with cost accounting, the far and the defar. to me, that statement is no willing room. they must have it in place at the time of award as soon as

they are compliant. so how did you do what you did which was award contracts to vendors who don't have compliant systems? >> again, this is back to dcma's role versus dcaa's role and at the time we made those awards all the systems were either in -- were in approved status by dcma. so while dcaa identified issues and found those systems to be inadequate or inadequate in part from way back, dcma ultimately is the one that makes the call on whether those systems are approved and the contracting officer has to rely upon that judgment. >> it seems to me -- something as simple as this is going on, if you ask -- if my kid asks mom to do something and she says no, he goes and get a different answer. he goes and asks me for something that he may get a different answer about. and he finds the answer he wants.

miss stephenson, i want to talk about your grading scale. and as i understand last year you changed from a three-grade system to a two-grade system and i would like you in the time remaining to just walk us through your thought process and your rationale for making that change. it used to be you'd have an inadequate, inadequate in part or an adequate judgment and now you have effectively a past/fail, adequate or inadequate. that strikes me as interesting because the language of accounting isn't always just binary. as you know and construct me on, you have material weaknesses and significant deficiency and less reportable deficiencies. it seems if you have a pass/fail system, you're removing that

judgment. you're supplying less information to your dcma and your commanders and if i'm looking at a report card and it's a, b, c, f i know where to focus first. if i'm looking at a report card that's pass/fail and it's mostly passes or it's mostly fails, i don't know where my most risk is so just walk us through why you made that change and how it's been implemented. >> sure. i'd be happy to. prior to december, you're right, we had three opinions that we provided. adequate, inadequate and in time we have assessed the inadequate and part opinion was not getting the attention it needed by either the contracting community or the -- what i'll call the contracting officer community whether that's with the service or if dcma.

case in point, kbr's purchasing system was inadequate in part in 2006. as part of our process of reassessing our systems and our audits of internal controls, as we have done in the past year, through various things that have come to our attention through oversight organizations, we have gone back to the basics of the auditing standards and the acquisition regulations to determine if an inadequate in part opinion is required and it is not. in fact, under the auditing standards it's either adequate or inadequate. >> are those the yellow book standards. >> yes. >> you didn't -- you don't have any discretion. the auditing standards applied to the federal government are adequate or inadequate. >> right. when we assessed it, we saw that the there really wasn't a requirement for inadequate in part. there wasn't a requirement in the acquisition regulations. and given that inadequate in part was not getting the attention it needed and many

times was seen as a caution as opposed to an issue, we realized we needed to change something. >> do the accounting standards prevent you from having anything other than adequate, inadequate? >> i wouldn't say it prevents but i wouldn't say it's required. so because it's not required, we assess what we could do better in this process. now, keep in mind we only perform internal control audits at very large companies. >> uh-huh. >> that have internal controls. these are the very, very large companies. in order to report a deficiency, it's a breakdown in what's called a controlled objective. i'm sorry to get into the accounting terminology but it's a control objective. if it fails, it's critical to the system. so even though one of many may fail, in the past that may have been inadequate in part because they all didn't fail, case in point, 2006 kbr, the subcontract piece failed, however, that

piece resulted in hundreds of millions of dollars of overcharges to the government. we realized we had to do something different. we were at risk. and we were@@@@@@@ "rr$ba$rr commissioner. >> i'm struck -- i'm struck by the way the term is adequate. we're not really asking these

systems to be stellar or role models. we're asking them to be adequate. we basically them to be a c. so it's pretty depressing to think that some of our major companies can't meet a c standard for getting their business systems in order. now, i know it's technical term they use in auditing but the impression is that it just has to be adequate. you said all three of you that it's -- i think april stephenson you used the term, it's critical, it's crucial. the and they said the business systems are crucial to protecting the taxpayers. it's of great concern when i think mr. ricci you said that only two in your testimony only two of the major defense contractors out of 10 have "business systems. now, the both of you have a regular review these business

systems. dcaa does it from the auditing perspective. trying to meet the generally accepted government auditing standards. to ensure the adequacy of controls. and dcma you do it from a contract management perspective. to improve a contractor's system and to reduce the risk to government. is that right? so you come at this from different perspectives? >> slightly. >> both of you -- mr. ricci, is that right? >> i would say we kind of look for compliance with acquisition regulation and again, in order to reduce the risk and also to save us time and money by being able to rely upon the systems. >> okay. >> so if i could just -- one point about inadequate in part. acquisition regulations recognize the disapproval of selected part of the systems. so since again that's what's in our regulation, we would continue to make such

recommendations whereas dcaa, it's black or white, i guess. >> uh-huh. but with kbr you never found an inadequate in part system? >> no. >> mr. ricci, have you? your view, the dcma view is the green line for those top four systems that you're particularly involved in in that first chart. and you've never found an inadequate in part system for kbr. in fact, you never found an inadequate system for kbr, have you? >> i don't believe that the formal status that we assigned to any of them have been unacceptable or disapproved. >> right. and that's even though, director stephenson is saying that the purchasing system in kbr has gotten worse over the years, not better. it hasn't even improved. it has gotten worse. and yet dcma is still assessing that purchasing system as

adequate. >> you know, one thing to understand is that dcaa has responsibility for some of these systems. dcma has authority for performing a review for others. purchasing, for example, by regulation, dcma, with our purchasing specialists, conduct the reviews and provide recommendations to the acos. we actually do our reviews in accordance which was once part of the regulation appendix c that we actually provided to this commission. again, dcma's audit -- they're doing it, i guess, for internal control purposes for that 242.75 subsection of the far. to talk about the purchasing, if i may -- [inaudible] >> okay. dcma, okay, issued a report on

june 10th that basically looked at the purchase orders awarded basically during calendar year '07. in that report, we had 13 recommendations. those recommendations essentially mirror those in the 2009 dcaa audit report that has been referred to. now, dcaa has them grouped in three but if you go through specifically what they are, they're essentially the same. the thing is that the 2009 dcaa audit was based upon data for calendar year '07. whereas, our 2009 cpsr that we recently completed -- i believe that's july, july 10th -- we looked at 200 purchase orders from july '08 to april '09. a time period that affordeded kbr the opportunity to make the corrective actions. so again, dcaa -- i know they're currently always doing audits of

subcontracts on all the task orders so that may be calling their opinion but the 2009 audit again was simply an audit that was delayed for release. so i don't think that it's reasonable to compare it again. you talked about the fact that we did it in a week. actually, i believe it was like three and a half or four days. we sent four people in. that means they looked at a purchase order. probably one every 30 to 45 minutes. since it was a follow-up on those thirteen deficiencies that we found a year before, i don't know that it is unreasonable. again, these folks do this full time and so until dcaa issues an audit, i know they're working on one now, and we'll be happy to see it, we'll definitely consider any findings, i must go with the recommendations from the cpsr group that's given that authority in the regulation. >> director stephenson, do you want to respond to that?

>> where to begin. first of all, i'm going to say the proof of the inadequate purchase system is in the proposal. task order 159, october, 2008, a billion dollars unsupported because of the inadequacies with kbr's purchasing system. i think that alone regardless of the other testing that we have done have shown that there is systemic deficiencies in this system that need to be addressed. i do not want to pass judgment on how another organization reviews invoices but with my expertise i have looked at a number of invoices over the years and been involved with a number of reviews i could not possibly determine the adequacy of an invoice, 2 to 300 invoices in a week, i could do that. i'm not sure how others people do that. it takes a lot of peeling back the laser to determine if something is adequate. we obviously have a disconnect between our two organizations, and i do invite mr. ricci and our organization to work

together to try to address this. the disconnect is just too large. >> mr. parsons, did you have anything to add to that? >> well, i think just this exchange demonstrates the complexity and difficulty of these -- of these issues. and i agree with mr. ricci. i think, you know, the regulations do need to be examined in this area to be more specific. and what are those standards? i think even the standards that we are going to hold the contractors accountable for in front all the different systems need to be very specific and very clear. and my opinion -- i don't think they always are that clear. and there is a lot of room for judgment and differing of opinions and that's part of the difficulty that needs to be resolved. i can tell you personally i'm upset after what we did with logcap iv that some of these business systems have some deficiencies and some of these

contractors are going to get a wakeup call when we start doing the award fee determinations where we've set aside an award fee for, you know, management and for the business systems to see if it get their attention because i don't disagree with miss stephenson that in many cases we have not gotten their attention. >> have you sought for this regulatory change or is this something you want to go forward. this is an issue that's been going around for some time. there was a 2002 d.o.d. ig report that there was miscommunication between dcma and dcaa. lack of cooperation. and then there was a 2009 d.o.d. ig report. i mean, it seems to me it has been a very pressing issue for some time. has your office taken any responsibility to try to move the ball forward? >> no, ma'am, we have not. >> do you wish you had? >> i do believe this is an issue that needs to be addressed at the osd level, you know, certainly the army could initiate some type of regulatory

proposed change but i really think the issue, like you said, has been around and needs to be addressed by osd. >> okay, i want to move over to one issue and another issue here -- [inaudible] >> i thought i had a minute left. oh, i'm in the bad part. well, it's a long question. it's about with holds. so i'll do it the second round. thanks. >> let me just say, mr. ricci. you've left the impression that dcaa's inadequacies in every case you've either ignored them or overruled them. that's the impression that's left so far with this -- for kbr. so i would just like to ask this question, have you ever accepted dcaa's -- >> like i said, dcaa is intrical -- >> i didn't ask that. have you ever accepted them? have you ever said -- they said they're inadequate and so you

agreed they're inadequate or have you overruled them every time? >> no, i can provide data for the other contractors. we're looking at really -- >> you know, that's not an answer to my question. it will be a question i'll get into. >> okay. >> thank you. mr. ricci, first of all, i want to point something out to everybody here. this isn't just about the details of green eye shades. this is operation and maintenance budgets. every dollar that get wasted or gets lost is money that could have gone to training, that could have gone to the maintenance of our equipment and, therefore, goes to the protection of our soldiers' lives. it's not just the taxpayers. it's the kids that are being shot at. and i don't want us to lose sight of that, number one. mr. ricci, i would like for you to define adequate for me. i'll tell you why, on page 7 you make the remark, the logcap

contractors each have only one, quote-unquote, inadequate system. as i understand it, if a contractor has a corrective action plan, you rule the contractor adequate in that business system, yes or no? >> generally, yes. >> generally yes. give me an example where you didn't. >> on e3 contractors? >> no, where somebody has a corrective action plan. sometimes you say that's not enough. i would like an example please. >> not with e3 contractors. >> not with those contractors, okay. so somebody says i'm going to fix something, i promise i'm going to be a good boy. they tell you that in 2003. do you give them six months before you come back to it to see if they corrected it? >> generally, six months to a year, yes. >> as my colleague here pointed out, in some of these systems, some have actually gotten worse. it's six years since 2003. what have you done about that? >> if you're referring to the kbr purchasing system. >> i'm referring --

>> well, that's what the focus appears to be on. >> no, no, no. i'm referring to any system. you've ruled a ton of systems is adequate. we've heard from mr. parsons and they see things are going hell in a hand basket while you rule them adequate because there's a corrective action plan. tell me at what point you invoke defar 247 and withhold the money? is it a year, six months, two years, three years, five years? we're in a war of seven years, when? >> it would depend upon the severity and their lack of progress. >> give me a case where you did that. >> we have numerous systems that are inadequate throughout all the contractors that we are responsible for. >> so give me -- >> on these three contractors here, we have not yet done so. >> not once since 2003; correct? >> correct. >> okay, fine.

next question, page 10, you make a whole play here of why actions that involve withholding funds are, quote-unquote -- do not represent the hammer some folks seem to believe it. i don't know who the folks are. i want to quote the dfar, parenthesis a4. the aco which is the administrative contracting officer will consider whether it's appropriate to suspend a percentage of progress payments or reimbursements of costs proportionate to the estimated cost to the government. considering audit reports relevant input. until the contractor submits a corrective action plan acceptable to the aco and correct the deficiencies -- now it seems to me if you withhold 15% of somebody's money, you're going to get their attention. why is that not a hammer? >> okay. this regulatory guidance has no contractual authority behind it.

when you look at the acquisition regulation, this subsecti/n@@@@@ corrected, that's a sledgehammer. why do you think this isn't effective? that's what i want to know? >> that's guidance that give us no authority -- >> no. i'm not interested in the

guidance. def >> if the person chooses to do that why it won't make a difference? >> because i have other contract clauses that provide other direction. >> and 15% withhold is not effective? i know you have other clauses. i'm asking you about this clause. i want to know why it's not effective? >> that gives the aco no contractual authority. it tell us to consider doing this, okay, and then we need to find a clause like the progress payments, performance-based payments clause and the remedy comes through those clauses. again, the authority is provided there. >> so there are remedies elsewhere, fine. when was the last time you withheld payments from these three contractors? >> there's lots of suspension of cost but i don't believe that we've actually withheld funds.

again, withholding of funds is not really a term of art. i mean, there's suspension or reduction of financing payments. but again, given regulatory guidelines, for example, if i could read you what it says for estimating systems, which dcaa finds to be inadequate -- here's the guidance. if the contractor has neither submitted an acceptable corrective action plan, nor corrected significant deficiencies within 45 days, the aco shall disapprove all or selected portions of the system. again, the regulation says there that if they submit the corrective action plan, they make timely progress, we don't disapprove the system. in my opinion, we're making a little too much of the overall status of the system when what we need to focus on with the questions that were directed to mr. parsons are the significant deficiencies themselves.

again, purchasing for kbr, i guess, every commissioner will ask me about it. but even if we disapprove the system, commissioner, all we're going to do is they're going to be subject to additional consent requirements. the army has already made kbr subject to them. so in effect, whether the system is inadequate and inadequate in part or adequate doesn't so much change what the government actions would be to protect its interest. >> could i just ask a question. >> just a minute. what i would simply remark is this, to my simple mind, if somebody with holds money from a contract, you're going to get their attention and they're not just going to give you a plan. they're actually going to act on it and since we've seen over the last seven years that people have given you plans but haven't acted on it, and you keep saying they're adequate, you're not helping them, the taxpayer, or the soldier, sailor, marine or airmen who desperately needs that o & m money.

>> i just want to ask if you find a purchasing system inadequate, does that mean that your c.o. has to review each purchasing invoice before it's approved? is there work that becomes incumbent upon your dcma employee if you were to find that purchasing system inadequate? >> yeah, either us or the contracting officers. it's often delegated but at times withheld as you're going to hear tomorrow in the gls. >> so to some extent there's an advantage for you to find the purchasing system adequate because you don't have to -- >> it would be different. i don't believe that enters into our decision. again, our purchasing system analysts are in a separate group like a center, if you will, so -- >> thank you. >> thank you. let me may on my preparatory remarks build on the commissioner. the key issue for me and i think

the key issue as you've seen from all the commissioners is that of accountability. and unless and until we hold these contractors responsible for continually having inadequate business systems, we'll continue to see waste, fraud and abuse and the very same mistakes we made in iraq at the beginning of that war in 2003 are going to be repeated and continued as we draw down there and they're going to be continued in afghanistan as we ramp up there. and as the commissioner said, this is not a waste, fraud and abuse issue but it has real consequences on the battlefield for the lives of our men and women there. so there is no more important issue it seems to me for us to be focusing on today than business systems. it's anything but dry. now, with that, by way of preface i want to get into this whole issue of coordination. to me it's not an issue of coordination between dcma and dcaa. it sounds like you have lots of meetings. it's at the end of the -- and you've all acknowledged this, but we haven't really talked about it explicitly.

at the end of the day, dcma calls the tune and all we have demonstrated in the hearings so far, dcma deems these systems to be adequate. and this allows contractors to play dcma and dcaa against each other. now, we're going to get into this with mr. walter from kbr in his testimony. but he says on page 2, our systems are regularly reviewed and approved by the government. just last month the government's most recent review resulted in approval. and then at the end he makes this plaintive plea, if the commission can identify the means that will allow the government to speak with one voice in instructing its contractors in future contingencies this would be a significant improvement of the contracting system and i say to that amen. so with that, my question is this, isn't the fundamental problem that dcma's audit recommendations audit to be auditory.

can you elaborate on your review on that matter and then i want to hear from mr. parsons and mr. ricci. >> i have to say over my years my frustration has probably led me to say i would like them to be mandatory. however ibz do recognize that not all systems it's just dcaa. i would say instead of mandatory i would like there to be an accountability when dcaa's findings are ignored or appeared to be ignored. and i think the purchasing system is that example. and it is certainly -- knocks the wind out of here when you hear a week is spent when your own people have spent thousands of hours reviewing a system testing transactions and found over time there to be a significant amount of costs that were overcharged to the government. that's my concern at the end of the day. i along with commissioner -- this is for the soldiers that we're protecting. money that can be better spent for the soldiers. so i would like there to be a better accountability.

>> all right. i want to give mr. ricci and mr. parsons an opportunity to comment on that. i think it's only fair. mr. ricci? >> again, we're responsible for dispositioning all audit findings for reportable audits in the contract follow-up system. and again, we definitely value dcaa's input and to ensure the recommendations are fully considered, again, we established this board of review process that if the contracting officer seeks to make a decision that's contrary to a dcaa recommendations it will be elevated and in many cases will rest with the senior contracting personnel. >> it sounds like i just demonstrated while it's considered, it's never ultimately used to hold contractors accountable, right? >> i mean, it has not been -- we have not disapproved any of the systems for the three

contractors, correct. but again, we're looking at 3 out of 19 solvent contractors we administer and understand most of these rules don't apply to small business. i'm just saying the universe is much larger than the three, commissioner. >> mr. parsons? >> sir, i'll just repeat, i don't disagree that we need to hold contractors accountable but i think the real question is, what are we holding them accountable for? what are the standards that are expected and then getting to some other points, what do we mean by adequate? and to be quite honest with you, i don't think that those standards and the definition of what is adequate have been vetted through the regulatory system for all these systems and i think that's where some of the frustration -- i know when the contracting officer part gets is that when you read the dcaa opinion and you get the dcma opinion. you take a look what's in the regulations. there's a lot of room for interpretation and it's not real clear in many cases and it gives that -- so i think something

needs to be done. >> well, i think that's a fair point. let's delve in that. in your testimony, miss stephenson, there are standards the dcaa reaches its opinions by way of contrast as i understand it from your testimony the aco has considerable discretion as you just acknowledged it sounds like mr. parsons in coming to a conclusion and yet at the end of the day, it's the entity, aco, dcaa/aco that has the final decision with regard to the matter and yet that entity doesn't have any objective standards that they are forced to rely on by way of -- by virtue of contracts of dcaa. let me ask about the withhold interest, isn't the answer that this language that was just on the screen, dfars they will consider that the appropriate that the aco shall expend a percentage until a corrective

action plan is not just submitted but corrected and audited by dcaa to confirm that the -- that the plan has been implemented and corrected deficiencies? isn't that answer in this particular interest? >> i have seen the withhold being very powerful over time. and i'll give a case in point. titan corporation which was now l3 used to be the incumbent to the linguist contract we'll be discussing tomorrow. in 2004, had almost a nonexistent internal control system in theater on labor. we issued an inadequate opinion and recommended a withhold. within 30 days of our recommendation to dcma they implemented a 10% withhold on all labor. that went on for two years. and it went up to $40 million, and i will tell you that withhold was the greatest carrot that contractor had to correct those deficiencies to where they adequately staffed their billing and accounting department. they adequately -- they put

adequate staff not only in the restin area where their corporate headquarters was for their segment but also in theater. they met weekly with our people and went through everything that they were trying to do. thursday night action. -- this got action. i have seen it with our floor. although there has not been an actual percentage withheld, joist recently in july, the contracting officer based on our advice on some issues that we reported have not reported fluor to build certain indirect costs. that got fluor's instant attention and they are working hard to improve those systems. i feel it's effective. ..

>> mr. ricci? >> again, opposite of the army, but i can to the extent i would make that part of the plan they can base their decision on that to some degree. also considering other factors, ability to perform. >> would you all, mr. parsons, mr. ricci, were you for or against the idea of a mandatory suspension, the last question. four and an adequate system?

>> we actually proposed clauses that would essentially give us that ability to defense procurement recently. i think it would be very helpful, as well as revisions to the regulatory language which i read estimated one, also for property it applied that you direct the contract officer not to disapprove a system if there is an adequate corrective action plan in place. so i would welcome that. >> mr. parsons? >> i support that is what. i don't disagree with the ms. stephenson. i think that suspensions and withhold you get the attention of the contractors and i think we just need to be very specific again about what those standards are, very specific in the contract that we will withhold in the event that there are deficiencies found. >> thank you, and thank the three of you for your frankness today. at the risk of beating a dead

horse, mr. ricci, aco? >> i need to make the point that for 15 years, dcma had no internal controlling such as this. this has really put in place in march of this year are okay.

so it is relatively -- >> and how many times? >> i can think of one time, but we are talking probably, i don't know, seven to 10 borge review that actually got raised to my level because of dollar value or other issues. so once i'm. >> and how many times was the one time when you did not support the aco or the dcaa recommendation? >> we actually supported neither the aco nor dcaa but we decided we need to find a certain, this was a cost accountant, not compliance, we are going to pursue recovery of over $45 million. >> in continuing a line of questioning that we have heard from others here, i fully recognize today the different missions of your two organizations, but i also remain

concerned, and the ms. stephenson called it a disconnect. others, commissioner kieffer refer to it as, you know, provinces of cooperation. and i think those are nice wor words, but i don't see evidence of a lot happening in that area, other than we're going to get together and talk about it. let me say that, you know, i come from an operational background. so my tendency is to support the force in the field. and i gather in many cases, that is the tendency of the contracting officer, and i can understand the pressures that a contracting officer comes under from the field. but i also have to believe that

there are occasions when dcaa has made a recommendation for a business system when the outcome of that can be so onerous, so costly, that they should prevail. so my question to the two of you -- to the three of you, is how would you react to an independent, more senior forum to resolve the differences? not the day to day differences, but the ones that dcaa, for example, can show as hugely significant. >> i am all for trying anything different that will help resolve these major issues eric the kbr

purchasing system i realize we have used up a lot today, but by golly, that has resulted in us over paying hundreds of millions of dollars. when we are in that situation, when this is money that is going in the contractors pocket than to the soldier, we need to find a better way. so commissioner green, i am open to anything that can be suggested to try to resolve these issues, to where we can get these systems improve. that is ultimately what we need. the systems improved so we don't have these overcharges. >> we are today is the court of last resort? to resolve differences between the two? >> when i have differences, i take them to charlie williams, the director of dcma, or to check aside, within html. >> but to me, that is on dcma side. you know, you kind of run out of altitude and airspeed after that.

mr. ricci? >> i would say what apel said is correct, that mr. assad would probably deal with any serious issues. although i don't recall ever being over there for a meeting on a specific contractor system status. but actually i believe it should rest within the contracting authority so i believe it should be within dcma. >> you don't support in a separate independent board, if you will, or individual who would mediate these differences? >> i am a believer in contractual authority in this case the aco. so again, anything i think needs to be considered given the differences of opinion, but i wouldn't be inclined to do that. >> mr. parsons, do you have an opinion on this? >> yes, sir. , i think it goes back to what i have been making a point before.

i think the underlying issue is why are there differences of opinions. putting another board above two bodies to resolve what differences to me isn't the long term solution. to me is that let's go find out why there is this ability to have divergent opinions of what ought to be in my mind some reasonable standards put in place, and let's clear that up so that there isn't this kind of disagreement or a lot of room for interpretation rather than putting another board in. i agree with mr. ricci. it still needs to be in the contracting authority. >> okay. for you, mr. parsons, one hopefully quick question. in february of this year, the logcap directed that kbr freeze its hiring and staffing. this was based on a $50 million labor cost overrun.

in the recent trip to iraq, the commission was told by senior military folks that they were reiterating to kbr the necessity to draw down the workforce. what is the interaction between army contracting command, kbr, in the field, it in ensuring that this happens? >> mr. lee thompson, who is the executive program director for logcap has got a responsibility to ensure that that is happening, and he is tracking that on a weekly basis with reports coming out of kbr. he has been making frequent trips over to iraq and afghanistan, especially iraq to verify that. >> is the size of that contracting force coming down? >> of kbr's organic force is coming down, yes. >> thank you.

>> i give myself eight minutes. we are in one fight that we're all on the same team. those of you out there, and you are on the same team. but it doesn't sound like it and it doesn't look like it. and that we need to do is go with the truth takes is. whatever that takes us. what comes across to me is, ms. stephenson, you have been ignored so you have changed the system and you have made the system worse. because you're basically saying adequate or in a adequate, and there are too many and adequate with huge varying degrees, where do you put your attention. some are inadequate and some are really inadequate. mr. ricci, you come across like you will tolerate dcaa, but you're going to ignore it. that's the way you come across. mr. parsons, you come across as saying you know what, these systems are bad and we're going

to check it out but they have been bad for a long time. and you haven't been, you, and china appear to have been around. and it just strikes me as pathetic. because it is not a hard thing to resolve. you need to pay more attention, mr. ricci to what dcaa does. dcaa is suggesting. you give the impression that everything is advisory. her opinion is advisory. you have advisories on whether you can withhold money or not. we could write the system, we could recommend as a commission that we force you to do what you have to do. take away all good judgment, take away all flexibility, and in would have other problems that come from that. that's what we will have. so, mr. ricci, you have basically given me the impression that all of the inadequate you have overruled. articularly as it relates to these three contracts. and that is stunning. you have got to explain to me if

it's advisory, you have the authority. it doesn't say you have to use it. why the hell don't you use it once in a while? explained to me just because it's advisory doesn't mean you can't do it. so why haven't you done it? why haven't you withhold money, kept it back, tell me why. >> okay. short answer would be, okay, prefer. that contract provision that we keep saying does not in and of itself have any teeth. i must go to the financing clauses or the allowable cost in payment clause. we do, not what these contractors, these are cost contracts. but we do do a lot -- >> are you saying it is advisory but do you have to go toward? do you have the authority to withhold money? >> i have the authority to reduce or suspend progress

payments on fixed-price contracts. >> that is basically withholding money. but you do have the authority? >> in certain cases, depending upon what causes are in the contracts. >> you do have the authority. >> yes, sir, and we do respin or reduce payments quite often because the threshold, any compliance with the contract. it is in fact easier. you will see we have far more withhold comment if you will, on fixed-price contract directed at the financing than we normally do on cost site contracts. >> you can also withhold from cost contracts as well. ande, but you can withhold. >> again, these are all aware. there are few withhold that we can do. again, up to 100 grand, so not too significant. our withhold of the reimbursement of costs on these

contracts that we are talking about comes from the allowable cost a miklos. and again, there we believe we need to show a logical nexus or between a specific system deficiency and the cost, meaning that the specific deficiency is likely to lead -- >> you know what, i'm struck with the fact that there is a little bit of gray area so you're going to make sure that you are going to be totally on the contractor's side. it would be rather refreshing for you to test it, to have them complain about it. but it strikes me you might get some action before then. ms. stephenson, how do you respond to what mr. ricci has said? >> i know that dcma has been withhold on cost type contract to the inadequate systems and i have seen that they work. i saw that they got action. i feel it can be done. i am not an attorney. i don't know about the causes and all that but i know it has been done. it has been effective and it has

gotten action and it has resulted in appropriate costs being charged to contact. >> since i joined this commission the one thing that i am struck with is that people on the inside aren't outraged. the way they should be outraged. we have contractors who go overseas and their folks -- and there may be, you know, six electricians in a basement and you only need to and they're only working two hours a day in terms of jobs, but they are on duty for 12 and they charge 12. we have civil servants who go and charge 12 hours a day and get double their salary in half a year. and there is no outrage because people save that's just the way the system works. it would be refreshing to see some outrage with this to see, mr. ricci, for you to just be so outraged at some of this and say no, it ain't going to happen. and then see what it gets you.

i think it would get you a lot. this commission has talked about the fact that if this hearing ended up kind of the way it has, that we are going to ask you to come back in 60 days. and we are going to ask you to show us that you have resolve these differences. because it is just wrong. and i hope, ms. stephenson, that you reevaluate this pass/fail. >> and if i can, just for one second, when you say outrage, we are outraged. we are absolutely outraged at this. we have been inside and seen this go on for too long. consequently, we did change. and as you say you would like us to reassess -- >> let me daiwa. and i do feel your outrage and you are a very credible witness and i want to say that. it is a little easier to be on the side of just reviewing. it easy for us to criticize. is he for you to criticize. i give them a little slack that they have to make the system ultimately work. and they have got lots of other

pressures. but it seems asic to me that if mr. ricci is going to ignore@@@' stephenson expressed absolute support to involve herself in that pressing action. that was in may. said she had been communicating for an extended period. you were supporting, and then

yet when we were briefed by dcaa about a month ago, they indicated the army's present position is that they hope to involve dcaa war in iraq but they they did not involve dcaa and afghanistan and logcap iv in afghanistan. billions and billions of dollars with issues that everybody knows about and we have talked about. why didn't you used dcaa's support earlier, or it may in whatever format? whether director stephenson says i can do something in very few weeks. i can tailor it. why didn't you? >> the acquisition strategy for logcap iv was assuming that the competition would drive the reasonable price at. >> but don't we know that you can still use of audit services for cost realism to assure they are properly putting the packages together for a variety of other means? so i don't want to hear about

acquisition strategy. i want to hear why didn't you use dcaa. >> based on information that they were provided in the proposal, at the cost detail level that they had they felt that they had sufficient competition and had enough information to do that analysis to ensure themselves the cost was realistic. >> so the short version would be as i listened to, they didn't feel they needed dcaa input, regardless of dcaa's offer to tailor that input in any way, shape or form. they felt in their opinion they didn't need a. >> correct. >> is that the simple short version? >> correct, along with the other thing you understand from operational needs we need to get those task orders awarded to support the war fighter xo in terms of that you are talking about the timeliness of dcaa's director stephenson said i will tailor it, but you said regardless you had concerns about timeliness. >> right. >> let me go on. >> can i follow up though? >> you will get a chance at the

end. because i don't want my chairperson to jump me again. i want to go back. we are trying to help you, david, mr. ricci. in the sense of trying to bring issues out and focus on them and support you. so i want to go back. 1994, you are right. we are using contractor purchasing system review is subcontracting is sort of a featured area for discussion. your teams, and i've worked with your teams. there are some pretty sharp people. i have worked with them extensively in my time, and i am pretty impressed by what they do. they had 102 people in 1984. they have 14 faq would have to grow it by 800% to be back where you were and we have seen study after study. we could have charged that the workload is more demanding right now for dcma, more demanding, then it was back in. but we all got out with this peace dividend and we absolutely support the secretaries

initiative to hire. absolutely support them. i am just at a loss how, and i think you clarified, and my question is going to be focused. you clarified that the team that went in in the review and kbr where we have this difference of opinion that we are getting animated on, is that there were 13 follow-up items and they looked at the items, they were satisfied. dcaa came in and said we brought all sorts of new items to the table in a detailed brief, and they expressed concern they were addressed. >> i don't believe that is correct. when i said that cpsr team that. i made a very good this was reviewed at a very high level, which this commission is. they try to put their best people on it and they try to do the best job that they can. i'm sure they did. they don't want to be here talking to you next. dcaa identified 20 to 30 purchase orders that they thought the team should look at

and those were included in the sample. they said they did. so again, i had the review results from the cpsr team. dcaa is working on an audit, and again, the clause provides that we can revoke our acceptance at any time. if i get contrary evidence from dcaa we are going to look at it and we're going to do what we think is right. but right now all i'm saying is i said and dedicated specialists, and they reported that the deficiencies were corrected. >> so we have this difference of opinion. i have one last, and it is in support i think of comment by commissioner zakheim and by cochair chaise. that is at the pass/fail, i like the analogy except i wouldn't say abc or f. the april report card on system adequacy. i would just propose that you look seriously at it. you are trying to get their attention. i think we are trying to let you get their attention.

but we sat with your regional executives, the two regional directors, and they said, for example, and dyncorp, they are doing the whole series of reviews. they said with a new policy everyone of them is going to show as an adequate. it will be surprising if it is not. and they said the same thing about kbr. if i am a contracting officer, i get back to the point they raise. tell me which ones and we get into suspensions, i wanted to withhold cost consistent with the guidance. but i would say tell me which ones and how it's impacted that i need to focus on. don't just go cross them off. that might be what i do it as a contracting officer and i would think would be more hopeful to them if you would be willing to stand back and say material internal control we does, you have to move the. internal control weaknesses, maybe we except the corrective action plan. you know, it's in the party together and find something where it's not a sponsor, the

hatfield and mccoy because i've talked to enough people on the side that i proposed you it's not just a disconnect. it is the hatfields and the mccoys, and that is not the government that i knew. and it is disappointing. so i go back and i encourage you, go back and look at what you can do in terms of holding your independent reporting, aggressive reporting. i commend you for that. you are kind of out on a plateau that is very narrow on all sides. and you are standing there, and i commend you for that but sometimes i think, you know, i'm not even going to ask for a response or i would ask you to consider what my cochair, my partner, and the other commissioners have said. thank. >> mr. tiefer? >> thank you, mr. chairman, and identify myself completely with the remarks of chairman tivo on this subject. we left with an impression at the beginning of may by you, mr. parsons which was not carried out that you're going to work real hard in getting in on it from ms. stephenson.

ms. stephenson, i'm going to revisit some of the key systems, especially first labor system and in the subcontract system that handles the contract but i want to set a context. the commission simi to baghdad. i realized i didn't at least ask them what i was talking about. general de niro sat with me in his baghdad office tuesday july 28 i believe it was and he shared his challenges and perspectives about the drawdown in general, but about what i call the contract drawdown in particular. and this afternoon i'm going to refer to a washington post article because it is on the public record and it says in a command wide directive issued january 31, general odierno, etc. etc. ordered all military units to start cutting u.s. contractors at a target rate of 5% each quarter and to hire more iraqi's to do their jobs. as we transition more and more responsibility, as we transition

more responsibility, to control the governor of iraq, it is time to make this change your tv is reducing the footprint of u.s. contractors. he wants to bring the numbers down. he shared vision with me with his real reduction of contractors, not playing games. not just eliminating vacancies. but real. how would what you describe that you just issued a statement of conditions, a form of criticism of the kbr labor system, how might it get in the way of oversight in baghdad of whether kbr does a real reduction, and thereby saved the cost? >> i tell you, the labor system when it comes to the drawdown is going to play a critical role. and that's one of the reasons we got out ahead and try to identify the weaknesses as this drawdown is beginning to start. it will be critical that these internal control weaknesses within that labor system be addressed probably. because without the lack -- with

this lack of visibility that we are in right now, we do not know, the risk, i should say the risk is significantly higher, that we will not know if the cost-containment is indeed happening, or if what we have is cost growth. it will be critical to get this corrected quickly. i am in hopes that kbr has taken our statement of condition and recommendation seriously, and is right now putting improvement in place to improve that system. >> think you. i have a very quick question and i don't want to dwell on it. it is the allow ability system and its component, on allowable excess on compensation. you had a report in 2006, had one order of report that said their compensation system was not adequate. on this particular element, the end allow ability, you ticked off that kbr would be pleaded in

fy 2003, in 2004, 719,000, in 2005 kbr deleted for .1 million, what do you talk about when you say they deleted these? >> there is a statutory requirement that has been intimated in the regulations that places a ceiling or a cap or limit that the government will take on the top five executives within a company. >> is that from the ceo down? >> yes and it is the top five. when we talk about kbr reboot x. amount, that means the amount that was above that cap, they have removed from that sufficient. >> because they originally had in their submission and then they later realized that. >> sometimes it is that we. in a particular instance of kbr i'm not sure if it got him, came out later or took it out before they submitted to. >> let's go back to labor. we not only, we found that general warner was the logistics person who was closest to watching the drawdown, showed us

charts, but handled contractors as a whole, but this is what general odierno said specifically when i asked him specifically, he said what we have looked at logcap as we close these bases. i wasn't seeing a reduction of contractors. we had to make logcap accountable. now logcap means kbr, because there is a monopoly of logcap in iraq, and kbr subcontractors, is there a problem with the purchasing system with kbr watching its subcontractors and do you have even less visibility into the subcontractor labor than you had into kbr's own labor? >> yes, we have less visibility into subcontract labor than we do kbr employee labor. and yes, the risk is greater because of the weaknesses with kbr's purchasing system as related to subcontracts. and yes, it is a great risk with the drawdown that if those weaknesses are not improved, we will not know what the

appropriate amount of the subcontract costs could be and we will not know if there has been quoted cost-containment that everyone has been speaking of. >> thank you, madam director. >> thank you, commissioner >> you get a lot of credibility to, i'm going to look at this in the award heat process and i'm going to hold contractors accountable for systems in the incentive reward these, right? and it just struck me, what's the maximum dollar value in an award fee scenario that you can withhold from the contractor? i heard a hundred thousand dollars. >> will, -- >> is that the maximum number you have? >> the award fee is just that, it is a key that is, you know, earned by the contractor above what is expected. 15% of the award fee pool has

been set aside for corporate management. part of that assessment -- >> but you can withhold, i heard already one of the statement, up to 85%. >> 15% of the award fee, it will be 15 million will be set aside for the corporate management. >> so it is not capped at 100,000. i was crossing apples. >> i didn't mean to mislead you, commissioner. there are three different types of the. there is dixie, and a worthy. since the award fee, they have a lot of authority to craft their own solution to the. i only refer to the insanity, not an award fee. >> logcap iv and the transition from 3 the 4. we commanded you in may for having a competitive basis for awarding logcap iv and particularly logcap iv passport is. in the interim report, we lauded

the army for apparently finding the savings 4hat/g%@ @ @ @ @ @ g proposal audit on network? >> for the preaward? >> yes. >> no, we did not. >> did you, april stephenson, did your organization do an audit on that?

>> the preaward, no, sir. >> okay. jeff, i'm going to ask you to tell us what is going on here. because we read in the statement that now shortly after award, and i want to know exactly after a war, when was it awarded to dyncorp? >> when was the award? i will have to get back. i do whenever. >> would you ask one of the staff in the audience? >> i think about five or six months ago. >> whenever the award to the contractor come in until you i've got a new number for? >> i think what several months after the initial award and there was a request for a just and. i think we are getting dcaa assistance on this. >> what happened? >> i really don't know. i would have to get back to you. >> you don't know? >> no, i don't. >> commissioner, do you mind if i shed some light? we were informed as to why they came in for the price increase is they needed to hire employees

in theater. the employees in theater were kbr, and the employees wanted more money. and dyncorp -- they wanted more money, and that was part of the increase. >> what's the connection with that scenario, which is set beyond unfortunate, which their labor system or the estimating system? what is the connection that you would make? >> the connection i would make is more with the estimating system in this particular case. but i don't know the amount or the level of data that was submitted with the proposal, whether it was at a low enough level that the army could assess whether dyncorp had actually had employee agreements are actually had gone out to determine what the cost of that labor would be. having to hire kbr employees on the market or whoever else they hired, what that cost would be prior to putting that did in. that is something a preaward audit would have looked into. did they actually go out and determine what that labor would be, or did they put a number

into a proposal on the hopes that is what people would be hired for. >> so you, with the right level of detail in the work, you could have found something? >> we could have found something that i am optimistic we could have found something, we miss things also but i'm optimistic we could have found that they had and did not actually checked with the labor would be on the market. >> okay. as much as we were thrilled to see a first result, and the army was thrilled to see if you i am sure, with a 44% reduction over an old price, than to have within months of an award, the contractor coming in to say the old price is not good, i'm going to give you a change of proposal and give you raa or request for equitable adjustment and come in and say i can't do the work for what i did. you are going to have to pay me this price. that is -- this is a rhetorical question. where did the savings from competition go? >> that is a rhetorical question. again, it's the reason why the contracting officer with the eca

assistance is trying to figure that out. you know, what has changed that has caused the labor rates, sort of labor to go up as much as what dyncorp is claiming it to go up. and, you know, ms. stephenson and i have had this conversation before, and it may be somewhat true that do we really have an environment in those deployed theaters that allowed you to have competition. and as a result, we are definitely getting dcaa involve with the iraq task force as a result of what we have learned. deck just a quick question. missed under. >> if they come back with much higher number, once they have a contract until they had a contract? >> when you say withdraw the contract, we always have the option not to exercise options. so that is something the contracting officer is going to have to wrestle with, okay, do we exercise the option.

>> thank you. are we able to say what that number is? by the way, what the proposed cost increase is. or is that confidential? okay. so we know it's about $50 million in. so it's a 50% cost increase. okay. mr. ricci, you were saying that this dfars clause isn't embodied in a contract clause, and therefore you can't use it to do a withhold, it's kind of unenforceable, is that right? you have to look at other caus causes. >> that's our position here that is not a cause. that is regular toward. >> so my question to you is, do you need more authority, regulatory, for withhold? do you want more authority and do you need more authority? >> if this is unacceptable, and i think that we all agreed it is, i would need more authority,

maybe a contract clause that implements that, some changes to existing causes. but what i would also like, what we need, i need a regulatory guidance, nobody here except the mere submission of an acceptable corrective action plan that that should affect the status, but that is the regulatory direction. so i would need that direction change. the contract officers, they go by the contractor to. >> where is the radio tour direction that the submission of it corrective action plan is adequate to make a business system adequate? >> it varies by system. another think -- >> the application of this statement is the absolute opposite philosophy that you have to have a corrective action plan and it has to be and the deficiencies have to be corrected in order to -- >> i understand. again, that's what you would assume that says. that right there. but again, remember, going through what causes are in there that mandate certain systems,

there are seven. and they are actually different from the internal control, dcaa looks at, that dfar doesn't even mention the terms much less provide any coverage. >> is there ever like content regulation says that a corrective action plan is sufficient? >> within the clause, yes. do you want me to redo if you? for estimating and for properties, it is very explicit sirach it's as if they submit corrective action plans in the system can be approved? >> if they submit it, and make adequate progress, the system -- >> but there is a requirement for adequate progress. corrective action plan alone is not sufficient. >> for estimating systems, it's as if the contractor in acceptable correction plan would be sufficient for estimating systems, again, if they did make progress against it, then we are going to take the position of.

>> would you yield for a second? the challenges you don't sound like you want that authority. it does say, and it corrects the deficiencies, and the deficiencies aren't being corrected. you haven't asked for that authority. so i don't have a warm and fuzzy feeling like you really would like to use this. it's like you are finding every reason to avoid withholding. are you on record at any time saying i don't have the authority, i want the authority, please give it to me? >> i hope so. >> no,. >> yes. i would like to have the authority. >> mr. ricci, you are under oath, and i only say that by saying i asked a simple question. have you ever asked for this author >> i provided --

>> i want you to be real careful not. >> i will be real careful of. >> and this is not coming off your time. >> we provided a presentation, and we identified enhancements, we called them greater incentives, that we would like to see so we could have, let's say more of a hammer with contract -- >> that's not what i asked of you. have you ever asked for the authority to withhold money from contractors? >> i mean, i did a presentation where i suggested these are changes that are beneficial for us to have that authority. i have never submitted --

>> i'm going to suspend there. it is her time. >> guest, i will yield. >> and you will get the time. >> you said that the presentation primary was earned value management system, dbms, right? >> it is not on the table today, is it we are talking about a set of business system that are not e.g. ms, are we? >> it would not be on. i don't know why it would not be on. we have a list of the 10 business system. evm is mostly about making progress, not about the 10 business systems. as for these 10 business systems, not your evm presentation. would you answer the chairman's questions as to the business systems we're talking about today. the chairman's question was had you asked in so many words for the authority he is talking

about? >> and can i just asked, all we need is a yes or a no. >> i don't believe that i have specifically requested additional authority for the accounting system and related internal control. >> you have three minutes. we will give you an extra minute. >> okay. let me ask, do you think that the fact that these three companies and these contracts are involved in contingency contracting, make it more likely for dcma more likely to improve the business system than not? i mean, is there an element of the fact that in a contingency situation we have to make sure we deliver to the troops and this is about logistics? does it, the decision that your people would make in terms of approving a business system? >> i believe that the standards we would have would be, it would consider the environment that they are operating in. the fact that a lot of the prime

contractors that have eight deficient system that i mention in my testament, they're making subcontractor of war to raytheon, companies here with established suppliers whereas kbr and the others logcap contractors, they are dealing with subcontractors that really can't be expected to have the same level of sophistication. so the short answer is yes. i believe that considered. >> actually doesn't that make the requirement for solid business system even more important that kbr is dealing with subcontractors that are not known? >> it would make it more important, yes. >> let me just ask about how we determine whether a corrective action plan is complete. i think this is a pretty fuzzy area to where the responsibility lies if they correction plan is offered and accepted. how do we determine and who determines, who has the responsibility to determine the progress on a corrective action plan and when it's complete when

there has been sufficient progress made on it? >> can i start? >> please. >> certainly with a corrective action plan, when a contractor informs us that the correction action plan has been implemented and the system is ready to test, meaning that they have indeed implemented it, we generally will permit a cycle of cost, whatever that may get usually three months to get a complete cycle of costs in the system. and then perform a follow-up audit to determine whether the system has indeed improved. sometimes there is a length of time that it takes for the contractor to implement it, and we don't go in while they are implement it known that the deficiencies are still going to exist that we do give them an opportunity to fix the question is who monitors what that length of time is. i have to say for most instances that is the contracting officer who is going to monitor that. however, i will say in some instances we could have done a better job in monitoring that and saying something sooner and asking for a withholds or.

i do say we could have done that. especially with kbr's purchasing system. however, we did take that into effect when we did the number of suspensions that we have done, over 10 145 of some suspensions. what we did while they were implementing those corrections to ensure the government interests were protected. ultimately, the audit of the corrective system, idly, says whether that action plan has been effective or not. >> okay. so that usually takes how long did? >> usually anywhere from six months to a year. >> so is it reasonable to have a withhold vote for that length of time? >> i have seen it in the past, and it has been useful. we have been pieces of the system, and as that piece was audited it determined to be adequate the portion of the withhold was returned. >> so there is a way. >> there is a way we can do it. >> thank you. >> thank you. >> i would like to follow up on that. first, mr. ricci, from what i

u)"@ this is a first year we have asked for a lot more than what we have over the past. we hope to just a flat. >> so over the past you were prepared to stay flat. again, you didn't ask last year.

you didn't ask for an increase? even though you had all the stuff going on and hundreds of millions of dollars being flushed down the toilet and you didn't have for any more people? >> i can provide based. >> did you or did you? >> again, i'm not on that side of the house, the comptroller site but i don't believe we asked for a permit is increased. >> david, if i can. i think we can focus and i think you will know you went from 102 to 14. and you got all the stuff, lots of challenges. again, that's present. the end of fy 2090 are you going forward it in 2010 with the same 14, or did you ask for 25 or 50 in order to get the job done? >> i personally asked for more from our comptroller. again, i can guarantee that will go forward. >> let me ask director

stephenson. so we were talked a little earlier about you get a crack at this corrective action plans and essentially you say, well, they have done something, they haven't done something, it takes six to 12 months. then what happens? you go back to dcma and you tell them they haven't done it, or the army? who do you go to and what you say? >> it goes back to dcma. we have the instant scenario with dyncorp right now. they have pre-and adequate system. they have exhibited corrective action plan. the dcma contracting officer asked us to look at it whether we thought the action plan as written was adequate. we determined one of the three was not. and at that point in time we wrote the contracting officer and dyncorp and said this needs to be improved before it is even considered an adequate for corrective action plan. on the other two, that were considered adequate, given that they were just implemented were given about three months to get a cycle so we can adequate test

in the new process, and then we will initiate an audit. once that audit is completed it will be issued back to dcma, and because it is a logcap iv contract we have a green agreement with the army that we include the army so they will be aware if there is indeed an issue. and in the meantime, if we find problems we will do suspension on a real-time basis and not wait for that system report opinion to be issued. >> so if you have a corrective action plan that was put together in 2442005, you will keep coming back and saying they still haven't done anything, correct? >> that's right and we will follow up with a recommendation for withhold. >> so now, mr. ricci, given that, are you saying even though you have been told the corrective action plan has not been implemented, your hands are tied and you still can't have a withhold? >> i can withhold cost if we can

show the causality between the deficiency and that cost. if we don't do that, it is essentially a penalty. >> fine. then let me ask director stephenson. when you go back to mr. ricci's organization, do you show the logical pathology? >> yes. task order 159, a billion dollars in october 2008. i don't think you get any better than that. >> mr. ricci, if dcaa shows you logical, are you willing that they are illogical? >> the fact that 1 billion? >> billion. >> one billion was considered suspended doesn't in and of itself, it is suspended, right? >> if i can elaborate. it was a billion dollars that kbr did not perform adequate price competition or adequate analysis of the psalm contracts. this is not a suspension. they fail to do their job.

>> to my simple mind, that's a pretty logical causality. tell me why my mind is even simpler than that and it is illogical? we will take that one example about the price analysis. >> to the extent that did occur, we have the differences of opinion regarding the purchasing system. but if i can show that lack of adequate price analysis has led to unallowable cost, i can kind of say that 5%, yes, i can withhold cost with the notice to disallow costs. it's the blanket, say, i have a deficiency so it is 10%. so again at labor accounting system that april mentioned before, i can see how the labor accounting, you can definitely quantify it. you can do things also like disallow all the labor costs. so again, i'm not saying we can never do it.

i am saying it's not as broad. >> but nobody is arguing about that, and i want to go back to what my cochairmanhas said. when dcaa comes to you with something that looks pretty rigorous to me, and you know, this is a pretty rigorous organization. i think they are amongst the best of the u.s. government or anywhere in doing this kind of work. and they come to you with a rigorous argument and a rigorous case, there are two ways you can go. you could go and say, hey, we are losing billions of dollars here. it's affecting the people in the field, the men and women in the field. i have a strong case to back me up. i'm going to withhold. or, you could do what you have done which is find a way not to withhold. and it troubles me very, very deeply that you are coming up with reasons not to do things that frankly are undermined the efficiency and safety of our people in the field, as

cochairman shea has pointed out very eloquently. >> let me just pick up on that if i may. i agree with his. i survey, and i think it is true to say that all of us are trying to be fair to you, mr. ricci, here but you seem to be searching for an excuse, the rationale for not doing what is clearly called for. can we just intuit that there is definitely a nexus between efficiency and cost and that it may be a question of how much cost is but can't we stipulate to that? >> depend on what the deficiency, i don't believe all of them logically lead to suspension. >> but what about some of them and what about this particular one? >> i believe that we would need more granularity about what the specific deficiencies are and how they lead. the issue that i would have with this, and again, i just said my purchasing system team in there.

they found -- they didn't find any additional defects in the system. because the cost is suspended, doesn't mean it is ultimately not allowed. so that's the issue i have. certainly on a lot of these systems, we can look for greater opportunity to implement the withholds, and one thing that i will do is to pursue a policy that lays out when it is appropriate. because we used but it didn't happen here and i can speak for the contract officers. you can bring them before you, they would have to say position as me. again, i have coordinated this with our federal council. they also have the same concerns that we show this nexus that it is arbitrary. by the way, is there a statutory or regulatory requirement for the nexus be shown? >> yes, we believe that -- the

regulations indicate there should be such a nexus so that it doesn't end up being a de facto penalty. >> can you submit for the record a statement from her counsel to that effect and that points to the regulatory requirement that you think is their? >> it is an interpretation of the regulation, but i will provide something to that affect. >> back to the corrected action plan. is there a statutory or regulatory requirement to accept a corrective action plan before it has been implemented and validated by dcaa, a statutory or regulatory requirement that you have to accept it? >> i just want to get a little clarification. >> are you required by law or regulation to accept a corrective action plan before the plan has been implemented, and before it has been validated as being committed by dcaa audit? >> the regulations for most of the business systems is something i presented, not the one that dcaa --

>> talk about the ones we are talking about a. >> that is difficult because those comedy accounting, the purchasing, the estimating, there's contracts in the contract to maintain those systems. the other related internal controls, i understand why they are important, and i understand how dca does the reviews, but they are not expressly, explicitly set forth in the contract. and the requirements for what is adequate is not subject to the rulemaking process, but rather contained within the dcaa's own internal memo. >> who writes these contracts? do you have the right to insert into the contract whatever language you think is necessary in order to hold the contractorcontractor's feet to the fire? >> there is provision for special clauses, but they are the standard causes provided by regulation. they are reviewed, tailored or

custom closets. >> could yield a second on that one, clark? >> sherbet. >> there are a few tailored causes, the government and write a contract like anybody can write what they want, and in the contractor can decide whether or not to accept, isn't that correct, mr. ricci? >> yes, sir. again, we don't write the contract. >> me ask. you can write what you want, correct? >> yes, sir. , for an individual contract, as long as it is within the laws and regulations, the answer would be yes. but if you're going to put clauses in multiple contracts, there is a rulemaking process that has to be followed and has to be vetted. that is why there is a far counsel, dark council that does that. that is what mr. ricci was in many, that's what i would submit needs to be done is all the systems need to be examined, how are they with the standards and let's get on with it. >> to comment about this issue,

ms. stephenson? >> i have seen it happen without a contract clause. i was unaware until we were preparing for this hearing last week that dcma felt that there have to be explicit requirement in the contract clause 40 withhold. or we would have pursued a regulatory or statutory change because i have seen it done in a number of other instances, not in the logcap contractors, but others. especially small to medium companies. i see it happen when there is an adequate systems. . . considered

acceptable or adequate. the other internal control systems relative to accounting that would have that, that is the disconnect between the seven i connected, the focus contract to the business systems, i went through the regulation and pull out those systems that are supported by the contract clause. it is not that i didn't want silly recipes but it is difficult when the criteria and standards in the audit manual, not in the contract, which i believe would be an improvement and if we did mandate these expressly in the contract --

>> thank you. >> for -- >> thank you. let me take you off the hook for a moment. you may want to comment on this later, but for you, do you think it is realistic to have the current standards for business systems apply in a contingency environment, and are they practical in the real world? do non contingency contractors meet the business more readily than contingency contractors? >> we recognize in the early stages of a contingency environment, there are situations when contractors need to be brought on to deliver goods and services when business systems may not have been audited or those that were audited may have significantly changed because of the contingency. we recognize that and we

recognize that there is a need to get the goods and services in absence of@@@@@ @ @ @ @ @ @ @ @ >> i believe that the availability of subcontractors makes it more difficult. three people got killed over the weekend. i believe it is different.

>> mr. parsons, we have got indications that certain historical records, project files, data, etc. may not have been passed on to the new contractor. when transition planning was accomplished by the army, what steps were taken to ensure that the transition of people and data, who were made efficiently and effectively, the successful contractor? >> i will have to get back to you on the exact details but i do know the transition plans were proposed, were evaluated by the program office including our

offices in afghanistan, they were reviewed to see if they were adequate and there was oversight provided during the transition peace by the office. you probably had that discussion with the details. probably much more than we had thought of originally which is incorporated into the afghanistan question. i am sure that will happen as we go to iraq. >> there are some things that have fallen through the cracks in the oversight of that. last question, let me direct it to director stevenson, since you were the only one who seemed willing to support the proposal for and oversight group for at least consider that. if we were ultimately to make

some sort of recommendation that a higher level oversight group be established to deal and resolve the differences between these two organizations, how would you propose the makeup of that group? >> my initial thought is it should be at the undersecretary level, perhaps the undersecretary with the controller, that is one possibility but i am sure there are other possibilities if we give it some additional consideration but that would be my initial thought. >> there is supposed to be a deputy chief management officer. would you see that individual as perhaps doing the job commissioner green is talking about? >> i am willing to try anything. if that is what the department would like i will try it and we will see if it works.

than i am willing to try something else to see if it works. >> thank you very much. >> thank you, commissioner green. you have been in the hot seat more than the others. it has been quiet for you today. you have been on the side that seems to connect more with the commissioners of here. i just want to say, you are known to be one of the most knowledgeable people in contrasting. you are extraordinarily hard-working and you are a very good american and we appreciate your service. we would like to see things change a bit. sometimes when you go down a route you feel you have to stick with it. we would like you to think anew and act anew. i would just end by saying

you're going to be look at the issue of adequate and inadequate. the second issue, we think it is dysfunctional way the system is working. no disrespect to you, there needs to be more adjustment. it is not a disrespect to any of you, but it is fairly clear. your teams, going from 102 down to 14, it is the logical given that more than half of the folks in the battlefield where the battle arena are contractors, so we are going to ask you to look at that. with this whole issue of withholding money, not paying what ever, we think you can do

it now. you boxed yourself where you need more authority but that needs to be resolved as well. we are going to ask the folks that oversee you to take note of this hearing, we are going to come back in 60 days to see what has changed and we think it is not rocket science to change this. then we are going to all feel like we are headed in a much better direction because we started this hearing saying the system is bad, getting worse and we want it the other way around. i want to thank all of you for being here, we're going to take a 30 minute recess the we know you are great americans, you are working hard and we appreciate your love of your country and the hard work you put into it for our fighting men and women. we will be recessing for 30 minutes. i am willing to see how we can communicate at the commission.

okay, the other panel called at once, we will have 50. thank you very much, commissioner. we can work ñ

fluor first word was in september 2008 for the expansion of afghanistan's regional command east which consisted of the establishment and continue life support for forward operating bases. this was followed by an additional award in october 2008 for calibration and repair services from military equipping in iraq and afghanistan. anti-semitism made, fluor

received an award for construction, expansion and continue life support of eight fluor operating bases. recently fluor was awarded a task order for base life support and theater transportation function for u.s. and coalition forces in the afghanistan area of responsibility. the total by a task order is over $7 billion over five years, including one based year with four, one year option extensions. we are now working closely with the army to plan, chordate the transition of this work. as the chief compliance officer of fluor's government grew, i directly report to the president of and have any independent reporting relationship of our corporate compliance officer of fluor's board of directors board of directors. as well of the corporate compliance and ethics committee. i am accountable for ensuring fluor complies with federal contracting requirements and for implementing and overseeing an

effective business ethics and compliance program. this includes maintaining government approved business systems. i am supported by our corporate finance operations for dcaa and dcma court nation of our corporate business systems and in direct agreement. fluor's business systems and processes are well-established and designed to support global execution of engineering, procurement construction and o&m services to its customers are these systems are designed to support execution excellence and include effective internal controls and a sound business operations. after businesses and have received hundreds of reviews over the years and determined to be adequate by the u.s. government. historically, any business system and internal control audit issues identified have been resolved with the government. were a deficiencies were identified plans were submitted to the government and an appropriate level as senior management and shirt and limitation. follow-up audits have routinely

resulted in adequacy determinations of the affected business system. as a chief compliance officer for fluor to government group i am proud of our track record of performance and compliance across our government agencies. on behalf of over 2100 employees of fluor, we are cognizant of the unique role we played in support of the u.s. and coalition forces operating in iraq and afghanistan i look forward to your comments, questions and dialogue about fluor and our business systems. >> thank you. chairman thibault, chairman shays and members of the commission on behalf of dyncorp international's 25000 employees, serving in over 30 countries, thank you for the opportunity to participate in this hearing. i would like to start today by summarizing the three major points that shaped the recommendations of my full statement and i would like to request that my full statement is included in the record. thank you. the three points, .1. contingency operations are

different and offer unique challenges versus executing similar work in peaceful environments. at dyncorp international with our expense afforded u.s. national security and foreign policy objectives around the world, we understand these unique challenges intimately and firsthand. .2, successful contingency operations require trained leadership. capable of making timely decisions. while business systems and policies are enablers, it's people that make things happen. and three, successful contingency operations require a culture of performance, transparency, timeliness and accountability. throughout the acquisition lifecycle from both contractors and government employees. let me touch on each of these three points briefly and summarize my recommendations. first on unique challenges. the commission is well aware of the unique challenges associated with contingency contracting rapidly changing missions and requirements are at the top of

the list. but not least of all, contingency operations present a number of personal challenges for our people. from tough living conditions and working environments to long days, weeks, and months. this looks nothing like what you might see in domestic operations. these environments are astaire, hostile, and they are not for everyone. our employees understand these risks, yet they are motivated to serve and stand shoulder to shoulder with the war fighter. and it isn't just for the money. our employees come to work to make a difference, to serve today for a safe tomorrow. today, 65 employees from dyncorp international and our joint ventures have paid the ultimate sacrifice for our country and our company. dozens more have been injured. this is a reality of contingency support, and it is why i recommended to the commission our employee assistance program as a model for contractors to support followed and injured employees and their families.

second, on the topic of leadership i was pleased to see that this was an area of the commission's interim report. i fundamentally believe that successful contingency operations required for both contractors and the government competent, capable, leadership properly positioned to get the job done. on our largest and toughest programs like logcap and gls, i personally select our program leaders. similarly, i support the commission's interim findings on the need to deploy trained, dedicated contracting office representatives and administrative contracting officers to the field. the need for dedicated, well trained leadership in wartime operations is amplified by the unique challenges of the environment. third and finally, successful contingency operations require a culture of transparency, accountability, and an intense focus on performance across the board. even with the best leadership and business systems, there will

be issues. the key to success is instilling a proactive culture that works hard to prevent issues, but when they do occur, works hard to fix them fast. at dyncorp, we set a standard for ourselves imperfection with respect to program performance and compliance matters. now we realize the impact account of the standard. we are not perfect. but it is an ambition that drives our culture to be proactive in preventing issues and responding fast when they occur. the need for accountability responsiveness is behind two additional recommendations, included in my statement. first on the topic of business systems. i have recommended an addition to adopting a more graduated adequacy determination scale like was discussed this morning, that dcaa should adopt standards for prompt review of contractors corrective actions and responses. we have responded properly and thoroughly to dcaa findings, as this commission has noted.

and would appreciate timely follow-up from dcaa to reevaluate our systems. second, on the topic of undies in a tight contract actions, which i know is a significant topic of the commission's may 4 hearing, i have recommended that contractors be allowed to invoice and be paid as long as the contractor is responded and accountable in supporting contract definitive station. it can be penalizing to ask contractors to partially fund when the contract definitive station process is not completely within their control. on the other hand, i fully support withholding payments when contractors are not responsive in this process. i want to thank you again for the opportunity to appear today and i look forward to answering any questions that you might have and addressing any topics that may have come up this morning. thank you. >> mr. walter. >> thank you. thank you. i am the senior vice president of government compliance for kbr

with oversight responsibility for the business systems we're talking about here today. kbr looks forward to helping the commission identified lessons learned that can be applied to current operations as well as focused actionable recommendations that will enable positive changes to the contingency contracting process. critical to this discussion is the unique operating challenges in here and in a war zone. as well as understanding the challenges posed by competing governmental priorities inherent in a contingency contracting environment. kbr uses a variety of business systems to manage the day-to-day operations. these include systems to acquire goods and services, and to estimate at unit and report costs. anchored to provide services to provide the support to the war fighter. the primary systems include accounting, billing, purchasing, estimating and property. our systems are regularly reviewed and approved by the government. just last month the government's most recent review resulted in the continued approval of our purchasing system.

these approvals are not done in a vacuum. dcma and dcaa are resident in kbr facilities throughout the world with close to 50 government personnel in our houston office is alone. we are in daily dialogue with government representatives to ensure corporative communication and implement feedback in real time to provide transparent and to improve our services. for example, kbr lead interactive monthly meetings with representatives from dcma and dcaa regarding business systems. throughout our history as a government contractor which dates back to world war ii, kbr's business systems have been appropriate and sufficient. our business systems have evolved over the years to keep pace with the also evolving requirements of the government and the marketplace. prior to the iraq war our most recent expats has been supporting military forces in the balkans. is on the volume, based on the original logcap iii scope of work, we anticipated at the bottom of work would be comparable. however, as everyone knows what happened in iraq was dramatically different. magnitude and urgency of the logistical support needed in iraq present new and

extraordinary contracting challenges that any company with any business system would have faced. as you know, the military and the contractors encountered a rapidly changing and increasingly perilous situation in iraq that it was in this environment that the initial levels of service acquired of kbr under the logcap iii contract evolved to meet the other situation that america's courageous soldiers, civilians and contractors who support them confronted. this was true with respect to the number of personnel on the ground, the duration of the troop presence and the hazards posed by the insurgency. while the original contract clearly stated the essential services that kbr would perform, a specific requirement associated with those such as the location, the types of facilities that would be available, or those types of facilities that would have to be built at each camp and the availability of supplies and services were constantly in flux. does contractors frugally develop solutions to wartime ledges to go challenges on the ground and in real-time to support the 211,000 service

members and over 215 sites ü given the immediate need of operations, kbr identified an urgent requirement for deal and heavy-duty suvs. we went to the local dealerships in kuwait and we were charge the market rate of $43000 per

vehicle. subsequently, kbr worked diligently to put a supply chain in place to procure these types of vehicles at a discounted the great by december of that year. this is but one of the examples of the realities of contracting in a war zone and the demands placed on the contractor to meet governments demand on its schedule. with regard to the application of business systems in this challenging and ever-changing environ, we identified a need in 2003 to upgrade our county system to keep pace with a significant increase in data requirements associated with logcap iii. drug implication of this change, we invited dcaa participate and observe the entire process. further, once this is a mathematician was complete, kbr made presentations to dcaa personnel on its functionality on an operation. our business systems have evolved over time. as security, communications and acquisition workforce and proved we identified opportunities to utilize more stateside business systems and processes.

kbr was often the leader on these issues. we continue taking steps as necessary to maintain the best business systems and to serve the military's need in iraq and around the globe. finally, our experiences in iraq and extensive history in government contracting up for us a somewhat unique perspective on the challenges faced by the military and its wartime contractors. perhaps the most vivid observation i might make use of the contractors are often faced with multiple and at times competing priorities. the military commander on the ground may express an immediate need with the necessity. both the army and the army sustainment command and dcaa are responsible for overseeing our contract. and both give us instructions on what is or is not required or permitted under the contract. dcaa and other after the fact auditors come in later and provide their view. as you might imagine, many contract expenditures and actions look different to the soldier and his commander during the heat of the battle then they may appear months or years later by a stateside auditor.

as the contractor we face the challenge of meeting the very least of the army fighting the war while also satisfying the important domains of the contracting officers and government auditors. if the commission can identify the means that will allow the government to speak with one voice, and instructing its contractors in future wartime contingencies, this would be a significant improvement to the current expeditionary contracting system. the second observation involves the nature of the auditing process. from our perspective the current audit process for adequacy determination contains too many subjective aspects that very significantly between auditors leaving the contractor in an unattainable position to a greater like an objective criteria would provide contractors with an enhanced ability to meet and exceed the government expectations, and would indeed result in increased contractor efficiency for the government. >> if you would finish up in the next minute. >> yes, i am finishing a. i look forward to answering your questions. [laughter] >> that's comply. i wanted to catch my breath

year. i want to start out with my cochair, mr. thibault. [inaudible] >> i need a microphone, okay. thank you. i had a couple of points, three maybe, or questions and points and then i'm going to do for five minutes of my time to professor kiefer who has been leading the commission efforts on logistical support since the three companies are logistical support. i thought that made sense but i'm salvaging my last five minutes. you don't get any of that, professor. mr. methot, i just want to share something and then kind of calibrate and give you an opportunity. in your statement, page five, you don't have to look it up it is only $0.01 you probably haven't more comfortable than i do. you make a statement that fluor business systems have received multiple reviews over the years and were determined to be

adequate by the u.s. government. what i want to share with you, and it is all marked up that because of anything any company did, but because i was trying to understand that and because it points to some of the coordination and issues within the government. but the point is that it shows those nine systems which are the management warehousing, inventory isn't one that they look at in they tend not to have that. and i just want to share with you that six of their reviews, dcaa's review and fluor, it is one of those companies you are aware of this, a little slow for dcaa to be getting in and looking at. so they list based on their cycle, which is every three years, six of those nine as overdue. in other words, they have audits to do. i want to share that with you because fluor, with your current i guess i would call it winning structure in terms of contract award while you're only 6%, i'm willing to bet you're going to

be more than 6% in the future just doing some simple math. but what i want to also point out is the other three, the most three recent reviews, billing, inadequate in part, compensation, inadequate. set a september 2008 and february 2008 indirect cost and other direct which is primarily the submission was inadequate in part. so i would caution you that as someone who is really expanding, one of the issues, and mr. walter brought it out, as sometimes the challenges are greater than you anticipate it and i share that. mr. ballhaus, i commend you for being here. i commend all of you for being here, and thank you. what i want to share in this, if i take one more minute, then charles, you only get four, but i am wrapping appears i am not usually one for visuals but this is a big visual that your chief financial officer gave me with a lot of paper for you all. what this is is three responses

to this most recent reports that you talk about in your testimony, ms. stephenson talked about in her testimony. one for labor, one for billing system, and one for compensation system. corrective action plan. and what you have done. for the record, i think it is important that in april said on two of them she has backed off her standard recommendation to do wit withholds. and your chief financial officer, he is the one, i am very impressed. i was very curious. we put eight x. director on our static current officer, very senior who is on our staff to look at all three. they were very impressed. so i commend you for your actions to do that in terms of doing that, and it is important

i think that this commission when an organization is responsive, that they step out and acknowledge that. and my question, which i think you can help with is, i also commend you for having her chief financial officer, the whole government compliant folk and all that were there when we talked about finances. he was representing the company, and that was very impressive. because he knew inside and out the issues we were talking about. you primarily do government business. so to me that made all the sense in the world. and you are here. why are you here versus your government compliant person? >> first of all, thank you for the compliment. second of all, i am here because my name was on the invitation letter from the commission to attend the hearing. but also i think it sends a strong message and it is a message that reflects our corporate attitude around performance and compliance. you know, what our role as a

contractor support a u.s. national security foreign policy objectives, our role is to both perform and be compliant. and when we have issues that come up around our billing systems, we taken very seriously. now, one of the reasons why you may have gotten the response that you did in the thick pieces of paper that you held up, is we've reviewed many of those issues weekly with me. and so the fact that our cfo, mike thorne was knowledgeable and responsive on those matters is no surprise to me. >> will give mr. tiefer 12 minutes. >> i think mr. thibault for the extraordinary generosity. characteristic of him, but extraordinary nevertheless. mr. walter, we her testimony this morning by april stephenson about the problems, and this is in the context of a drawdown of contractors in iraq. the problems that will be posed

by kbr's labor system. you may have heard this, excuse me for once again setting the stage. i sat with general odierno. he shared his challenges and perceptions and he said, i am shortening this now, go, we'll look at logcap as we close the spaces. that is the plan, close the camps, close the bases and shrink the footprint and the costs. the footprint, meaning the number of people, both contractors and soldiers. that is the footprint. shrink it. as we close these bases, i wasn't seeing a reduction of contractors. we had to make logcap accountable. logcap in iraq means kbr and its subcontractors. can't mean anybody else. what i want to ask you, start with when i was asking the dcaa director, because she hasn't completed the cycles of labor

system devaluation, she referred me to the most recent task order, 159, the one that had over a billion dollars in question and unsupported costs. and specifically to the $368 million indirect labor costs, which were questioned, not merely unsupported. not merely give us a more documents. questioned. part of this is your job. are you familiar with the $368 million, and did dcaa in fact question that? >> i do not have access to the final dcaa audit report that was associated with 159. i do have bits and pieces of it. i do have the peace on the $1 billion of unsupported costs, which i would like to make the comment that that really is not an accurate statement where it is perceived as if it is an overbilling. what that is is a disagreement between kbr and the dcaa auditor looking at a series of individual subcontracts with

respect to what does make adequate competition with respect to those particular items. but i will look into the 300,000 -- 300 million, and if i get that information, i will gladly provide a response to you, sir there in a. i handed out some documents. i apologize for doing this over the last minute. we were in effect rushed from a trip to baghdad into the preparation of his hearing and it has been an effort to put stuff together. the first is a two-page article from the washington post, which i use only because it mentions specifically the 5% contractor drawdown. there are many, many articles on the subject of this is not special. this is a short question and answer. you have awareness of this 5% drawdown for iraq? >> i am familiar. >> yes. the next page is about the order we just talked about and i will skip it. my only reason for including this code chart is to show sort

of the vision of these logistics people of how to carry out general odierno order. that is, this is a total sort of draft down, slide down, glide down they like to see of the contractor footprint. and then they break it down into u.s. people, iraqi people and a third country people. and those three add up to the graph. glide down. now, what happened after general odierno gave his january 31 order that is on the public record in the washington post, is that it was in the following month and implication, and that is a couple of pages later. and i won't rush it. you can follow it. you see the big unclassified staff at the top, and it is a memo to your guy, your regional guy, and the subject is contracting officers direction for freezing kbr personnel in

iraq. and what it says is, number one, the intent of this letter is to be a responsible drawdown of personnel decrease the cost and footprint. the cost and the footprint. the footprint is the number of soldiers and the number of contractors. and wants to freeze a. a couple of interesting things and then i'm going to ask you. the interesting things about this comment is directed at kbr. it is not directed at contractors generally. it is direct it at kbr. kbr is, you want to be very, very rough about it, half of the contract in iraq. it is not granted to all of them, just at kbr. and the second thing is it is a rather strong measure. it is a freeze. and when one of our team talked to the pco, kevin martin about this, he said that although it mentions the general odierno order, it is also because there has been a $50 million cost overrun in iraq. and