IG slams DOT for overuse of risky contracts

The Transportation Department relies too heavily on cost-reimbursement contracts and needs more high-level input to guide it away from using those riskier vehicles, according to a report from the DOT inspector general.

The White House, Congress and the Government Accountability Office have been urging federal agencies to reduce the use of potentially more expensive cost-reimbursement contracts in which a contractor is paid for all of its allowed expenses up to a set limit, plus additional payment to allow for a profit. Under fixed-price contracts, a contractor is paid a negotiated amount regardless of incurred expenses.

In response to the report, DOT officials said the agency is applying more “rigor” to its procurement practices. But they also defended the use of the contracts in some instances in which the outcome can be uncertain.

“Such circumstances are typical during research and development projects and complex services, which might include complex information technology development projects,” DOT Senior Procurement Executive Willie Smith said. “Under such circumstances, the risk of underutilizing cost-type contracts is that the vendor community is forced to price the uncertainty into the contract price, which increases the potential for the department to pay too much.”

Despite a growing emphasis on reducing the use of cost-reimbursement contracts, DOT’s IG said in the Aug. 5 report that the agency has done the opposite. From fiscal 2009 to fiscal 2012, DOT’s obligations under cost-reimbursement contracts rose from $322 million to $506 million, or from 18 percent to 22 percent of all DOT contracts, the IG said.

The dollar amounts of DOT cost-reimbursement contracts are so high, ranging into the hundreds of millions, the IG said even “minimal steps” toward improving the use and management of the contracts could produce substantial savings.

The IG reviewed a sample of 31 of the 655 DOT cost-reimbursement awards made between July 1, 2011, and May 31, 2012. Among the contracting agencies represented in the sample were the Federal Highway Administration, the Federal Railroad Administration, the Federal Transit Administration, the Maritime Administration, the National Highway Traffic Safety Administration, and the Research and Innovative Technology Administration’s John A. Volpe National Transportation Systems Center. The report did not include Federal Aviation Administration contracts.

The IG concluded that the six agencies did not fully comply with revised Federal Acquisition Regulation (FAR) requirements and attributed the noncompliance to a lack of internal guidance and oversight from DOT’s Office of the Senior Procurement Executive.

The IG noted that 16 of the 31 contract awards it reviewed did not have the documented justifications required for cost-reimbursement contracts and that 14 of the 16 awards were task orders.

The report also states that in 22 of the 31 contracts, DOT agencies had officially designated oversight personnel in writing, but only 12 of those people were designated before the award was made, as required. Additionally, the IG said oversight employees for five of the awards might not have been certified to perform such duties.

In a letter responding to the IG’s investigation, Smith said his office is updating its procurement systems, practices and processes to apply a risk-based approach and giving the department’s acquisition oversight and risk management policy a more prominent role.

“The updated policy will recognize the importance and complexities of business decisions associated with various contracting types and apply the resources of a new Acquisition Strategies Review Board towards reviewing certain acquisition strategy documents and will better ensure the rigor in application of FAR requirements across the department,” Smith said.