Report | Feb. 12, 2020

Audit of Contract Costs for Hurricane Recovery Efforts at Navy Installations DODIG-2020-060

Audit

Publicly Released: February 14, 2020

Objective

The objective of this audit was to determine whether the Navy controlled costs for the Global Contingency Construction Contract task orders issued to support the military base recovery efforts from the 2017 and 2018 hurricanes.

We announced the audit to review task orders issued by the Navy and Air Force. After announcing the audit, we determined that the Air Force contracting officials were still reviewing the contractor’s pricing proposal and negotiating prices with the contractor, which is the basis for contract cost control. Therefore, we removed the Air Force task order from the scope of our audit and focused only on the task orders issued by the Navy for the 2017 and 2018 hurricanes.

Background

In 2017 and 2018, five major hurricanes made landfall in the United States and its territories, causing an estimated total of $314 billion in damage for the United States. The 2017 and 2018 hurricanes caused significant damage to Puerto Rico and military bases in four states. In 2017, Hurricanes Harvey, Irma, and Maria made landfall within a month of each other. In 2018, Hurricanes Florence and Michael made landfall in the United States.

On June 14, 2013, Naval Facilities Engineering Command (NAVFAC) Atlantic awarded the Global Contingency Construction-Multiple Award Contract (GCC-MAC) to four companies, including Environmental Chemical Corporation and URS Group (a subsidiary of AECOM). The GCC-MAC was an indefinite-delivery indefinite-quantity contract with a base year and four option years. Under the GCC-MAC, NAVFAC could award cost-plus-award fee and firm-fixed-price task orders. As of September 23, 2019, NAVFAC awarded $1.25 billion in task orders under the GCC-MAC. Specifically, NAVFAC awarded 24 task orders valued at $973.9 million for recovery efforts for Hurricanes Matthew, Harvey, Irma, Maria, Florence, and Michael. We reviewed the $35.9 million task order to recover Naval Air Station Key West in south Florida after Hurricane Irma and the $89.3 million task order to recover Camp Lejeune and Marine Corps Air Station Cherry Point after Hurricane Florence.

Findings

We determined that NAVFAC Southeast (SE) contracting officials did not control costs when awarding and administering the GCC-MAC task order issued to recover Naval Air Station Key West after Hurricane Irma. Specifically, the NAVFAC SE contracting officials did not:

  • include detailed and specific contract requirements in the task order;
     
  • request, obtain, or analyze a cost proposal from the prime contractor;
     
  • document their determination of fair and reasonable prices; or
     
  • limit the task order to the initial recovery efforts.

This occurred because NAVFAC SE assigned three task orders for hurricane recovery to the same contracting officer within 2 weeks, even though the contracting officer was already responsible for other contracts. In addition, the NAVFAC SE contracting officials chose not to implement NAVFAC contracting procedures when planning, awarding, and administering the task order for the initial recovery work. The NAVFAC SE contracting officials also developed their own procedures in an attempt to convert the cost-plus-award fee task order to firm-fixed-price. However, the NAVFAC SE contracting officials did not formally modify the contract using a Standard Form 30, “Modification of Contract,” to convert any of the contract terms or conditions from cost-plus-award fee to firm-fixed, in accordance with the Federal Acquisition Regulation.

As a result, without a cost proposal or documentation of NAVFAC SE’s determination of fair and reasonable prices for the initial $9.3 million of the $35.9 million hurricane recovery, we could not verify that the NAVFAC SE contracting officials obtained fair and reasonable prices. Furthermore, the procedures that NAVFAC SE used may have created an illegal cost-plus-percentage-of-cost contracting system that did not incentivize the contractor to complete the contract efficiently or effectively. The United States Code, the Federal Acquisition Regulation, and the Government Accountability Office prohibit the use of cost-plus-percentage-of-cost system of contracting. The cost-plus-percentage-of-cost contracting system is a contracting system where the Government contracts to pay costs, undetermined when the contract was awarded and to be incurred in the future, plus a commission based on a percentage of the future costs. Consequently, NAVFAC SE may have incorrectly paid the prime contractor profit, which increased proportionally with the contractor’s costs.

In addition, we determined that NAVFAC Mid-Atlantic (MIDLANT) contracting officials and the Camp Lejeune Public Works Department implemented several best practices when developing, awarding, and overseeing the initial GCC-MAC task order issued to recover Camp Lejeune and Cherry Point after Hurricane Florence. For example, the officials developed detailed disaster recovery plans, prepositioned contractors, provided extensive oversight, and limited the task order to the initial recovery efforts. However, the NAVFAC MIDLANT contracting officials did not control costs when evaluating the prime contractor’s proposal and negotiating the task order modifications.

Specifically, the contracting officer did not effectively assess the prime contractor’s cost and pricing proposals or verify that the proposals were complete and accurate, in accordance with Federal and DoD acquisition regulations. This occurred because the NAVFAC MIDLANT contracting officials conducted an expedited proposal analysis themselves, without requesting expert assistance. The DoD acquisition regulations state that the DoD has a cadre of experts who can help contracting officers analyze prices, such as the Navy Price Fighters. As a result, the NAVFAC MIDLANT contracting officials paid excessive prices, which caused the Government to pay the prime contractor excess profit.

Recommendations

Among other recommendations, we recommend that the Commander of NAVFAC Atlantic:

  • review the task orders that NAVFAC SE issued for Hurricanes Matthew, Harvey, and Michael and request a Defense Contract Audit Agency (DCAA) audit to review the allowability of all costs and profit paid; and
     
  • re-evaluate the GCC-MAC procedures to ensure that they are clear, concise, and easy to implement during a disaster situation.

We recommend that the Commander of NAVFAC SE request a DCAA audit to review the allowability of all costs and profit paid, due to the cost-plus-percentage-of-cost contracting system and request a refund for any excess payment identified.

We recommend that the Commander of NAVFAC MIDLANT request a DCAA post-award audit to review all costs paid under the initial task order and subsequent follow-on task orders and request a refund for the excess payment identified.

Management Comments and Our Response

This report contains 14 recommendations addressed to the NAVFAC Atlantic Commander; the NAVFAC SE Commander; and the NAVFAC MIDLANT Commander. Of the 14 recommendations, 10 were resolved but will remain open until further actions are taken, and 4 were closed. Below is a description of NAVFAC Atlantic’s comments to nine of the recommendations.

The NAVFAC Atlantic Vice Commander responded for the Commanders of NAVFAC Atlantic, NAVFAC SE, and NAVFAC MIDLANT. The Vice Commander agreed with all 14 recommendations. Specifically, the Vice Commander stated that NAVFAC requested DCAA audits of the initial task orders that we reviewed and the subsequent follow-on task orders awarded by NAVFAC MIDLANT. Comments from the Vice Commander addressed the specifics of the recommendations to request DCAA audits; therefore, the recommendations are closed. The Vice Commander stated that NAVFAC SE and NAVFAC MIDLANT will request refunds or price adjustments, if appropriate, based on the results of the DCAA audits. The comments addressed the specifics of the recommendations to request refunds based on the results of the DCAA audits; therefore, those recommendations are resolved but will remain open. We will close the recommendations once NAVFAC SE and NAVFAC MIDLANT provide documentation that they requested refunds from the contractors, if appropriate.

The Vice Commander stated that NAVFAC Atlantic will review the NAVFAC SE hurricane recovery task orders with the NAVFAC SE Inspector General. The Vice Commander stated that, based on the results of the review, NAVFAC SE will request DCAA audits to determine the allowability of all costs and profit paid to the contractors and will request refunds or price adjustments, if necessary. The comments addressed the specifics of the recommendations to review the other NAVFAC SE hurricane recovery task orders and request DCAA audits, if necessary; therefore, the recommendations are resolved but will remain open. We will close the recommendations once NAVFAC Atlantic provides documentation that it reviewed the contracts and if applicable, requested DCAA audits.

The Vice Commander stated that NAVFAC Atlantic will conduct a workshop with all relevant GCC-MAC stakeholders. The Vice Commander also stated that the workshop will include discussions about requesting assistance when needed, augmenting staff when multiple natural disasters occur within a short period, the findings of this report, lessons learned during hurricane efforts, and an in-depth discussion on better planning, documentation, and best practices. The Vice Commander stated that, based on the results of the workshop, NAVFAC Atlantic will develop and update the GCC-MAC procedures and guidance. The Vice Commander’s comments addressed the specifics of the recommendation to reā€evaluate the GCC-MAC procedures; therefore, the recommendation is resolved but will remain open. We will close the recommendation when NAVFAC Atlantic provides documentation that it conducted the GCC-MAC workshop and reviewed, updated, and developed guidance.

All of the recommendations, summaries of management’s comments to the recommendations, and our responses are located in the “Recommendations, Management Comments, and Our Response” sections of the report.

This report is a result of Project No. D2019-D000AG-0110.000