Department of State Contract for Security Installation at	 
Embassies (08-NOV-06, GAO-07-34R).				 
                                                                 
In March 2003, the Department of State (State) awarded a	 
sole-source contract to EmbSEC, a Virginia limited liability	 
corporation, for work at U.S. embassies. The contract currently  
has a ceiling price of $354 million. The contractor is required  
to install and maintain technical security equipment, such as	 
alarms, cameras, and controlled-access equipment; establish X-ray
capability for special projects; and maintain and repair physical
security products. The contractor also procures equipment and	 
materials and operates the warehouse where they are stored.	 
EmbSEC was created as a joint venture, mentor/protege partnership
under the Small Business Administration's (SBA) 8(a) business	 
development program. A joint venture in the 8(a) program is an	 
agreement between an 8(a) participant and one or more businesses 
to work together on a specific 8(a) contract. SBA regulations	 
state that the purpose of the mentor/protege relationship is to  
enhance the capabilities of the protege and to improve its	 
ability to successfully compete for contracts. The EmbSEC joint  
venture is comprised of RDR, Inc., the mentor, and BP		 
International (BPI), the protege, an 8(a) firm at the time the	 
contract was awarded. The terms of the EmbSEC joint venture state
that RDR will perform operations support, database development,  
and security system design and installation under the contract,  
in addition to performing administrative services under the joint
venture, such as accounting and contract administration. BPI is  
to provide program management, warehousing, computer resource,	 
and procurement services. EmbSEC's only source of revenue is its 
contract with State. We received a tip on our fraud hotline	 
regarding the EmbSEC contract. The objectives of our review,	 
conducted under the authority of the Comptroller General to	 
conduct evaluations on his own initiative, were to determine (1) 
the basis for awarding the contract without competition, (2) the 
effect of treating travel costs, which comprise a large portion  
of contract costs, as firm, fixed-price, and (3) whether contract
administration is being effectively carried out. We are sending a
separate management letter to the Administrator of the Small	 
Business Administration (SBA) regarding this contract.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-34R 					        
    ACCNO:   A63144						        
  TITLE:     Department of State Contract for Security Installation at
Embassies							 
     DATE:   11/08/2006 
  SUBJECT:   Competition					 
	     Contract administration				 
	     Contract oversight 				 
	     Defense audits					 
	     Embassies						 
	     Facility security					 
	     Federal procurement				 
	     Firm fixed price contracts 			 
	     Fraud						 
	     Joint ventures					 
	     Program management 				 
	     Sole source procurement				 
	     Travel costs					 
	     Waivers						 
	     Contract mismanagement				 
	     Iraq						 
	     SBA 8(a) Business Development Program		 

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GAO-07-34R

   

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United States Government Accountability Office

Washington, DC 20548

November 8, 2006

Henrietta H. Fore Under Secretary for Management

Charles E. Williams Director and Chief Operating Officer Bureau of
Overseas Buildings Operations Department of State

Subject: Department of State Contract for Security Installation at
Embassies

In March 2003, the Department of State (State) awarded a sole-source
contract to EmbSEC, a Virginia limited liability corporation, for work at
U.S. embassies. The contract currently has a ceiling price of $354
million. The contractor is required to install and maintain technical
security equipment, such as alarms, cameras, and controlled-access
equipment; establish X-ray capability for special projects; and maintain
and repair physical security products. The contractor also procures
equipment and materials and operates the warehouse where they are stored.

EmbSEC was created as a joint venture, mentor/protege partnership under
the Small Business Administration's (SBA) 8(a) business development
program. A joint venture in the 8(a) program is an agreement between an
8(a) participant and one or more businesses to work together on a specific
8(a) contract. SBA regulations state that the purpose of the
mentor/protege relationship is to enhance the capabilities of the protege
and to improve its ability to successfully compete for contracts. The
EmbSEC joint venture is comprised of RDR, Inc., the mentor, and BP
International (BPI), the protege, an 8(a) firm at the time the contract
was awarded. The terms of the EmbSEC joint venture state that RDR will
perform operations support, database development, and security system
design and installation under the contract, in addition to performing
administrative services under the joint venture, such as accounting and
contract administration. BPI is to provide program management,
warehousing, computer resource, and procurement services. EmbSEC's only
source of revenue is its contract with State.

We received a tip on our fraud hotline regarding the EmbSEC contract.1 The
objectives of our review, conducted under the authority of the Comptroller
General to conduct evaluations on his own initiative, were to determine
(1) the basis for awarding the contract without competition, (2) the
effect of treating travel costs, which comprise a large portion of
contract costs, as firm, fixed-price, and (3) whether contract
administration is being effectively carried out. We are sending a separate
management letter to the Administrator of the Small Business
Administration (SBA) regarding this contract.2

1 The purpose of GAO's FraudNET is to facilitate reporting of allegations
of fraud, waste, abuse, or mismanagement of federal funds. Allegations are
received via e-mail at [email protected].

Background

RDR has been performing security installation work for State for a number
of years, dating back to work it performed as a subcontractor beginning in
1987. When its first contract as the prime contractor--which had been
awarded in 1992 and included a base year plus 4 option years--was about to
expire, RDR requested that State expedite the solicitation for the
follow-on contract so that the company would be eligible to compete for it
before graduating from the 8(a) program. RDR was the only 8(a) offeror for
that contract, subcontracting with DynCorp, International.3 The contract
also had a 5-year period of performance. In preparation for the 2003
contract award, State officials wanted RDR to continue the security
installation work, and RDR subsequently partnered with BPI, an 8(a) firm,
under an 8(a) joint venture. DynCorp is again the subcontractor.

The 8(a) program is one of the federal government's primary means for
developing small businesses owned by socially and economically
disadvantaged individuals. Firms approved as 8(a) participants can receive
business development assistance from SBA but may only participate in the
8(a) program for a maximum of 9 years. Contracting officers can award
contracts to 8(a) firms without competition below certain dollar
thresholds--namely up to $5 million for manufacturing and up to $3 million
for all other contracts. SBA's Associate Administrator for 8(a) Business
Development may accept a requirement for a sole-source award above these
thresholds if there is not a reasonable expectation that at least two
eligible 8(a) participants will submit offers at a fair price.

State's Security Management Division within the Bureau of Overseas
Buildings Operations (OBO) is the program office that requested the
security installation services. OBO directs the worldwide overseas
buildings program for State. For the EmbSEC contract, contracting
officer's representatives (COR) within OBO prepare statements of the work
to be performed under each task order and review the contractor's
proposals. The contract was initially awarded as a time-and-materials
contract.4 This contract type may be used only when it is not possible at
the time of contract award to estimate accurately the extent or duration
of the work or to anticipate costs with any reasonable degree of
confidence. In November 2003, the contract was modified bilaterally to
convert it to an indefinite delivery/indefinite quantity contract with
firm, fixed-price task orders, with an effective date of December 1,
2003.5 The contract type was changed to help control costs after overruns
were experienced in the first year. The contract provides for indefinite
quantity, within stated limits, of supplies or services during a fixed
period, with the government placing task orders under the contract for
individual requirements. Because the orders under this contract are firm,
fixed-price, once the price is approved by the government, it is not
subject to adjustment on the basis of the contractor's cost experience.
Thus, firm, fixed-price contracts place upon the contractor maximum risk
and full responsibility for all costs and resulting profit or loss. The
contract's period of performance includes the base year and 4 option
years. To date, 3 option years have been exercised and, according to State
officials, 258 task orders had been issued as of August 2006.

2 GAO, State Department Contract for Security Installation at Embassies
Awarded to 8(a) Joint Venture, GAO-07-33R (Washington, D.C.: Nov. 8,
2006).

3 DynCorp was acquired by Computer Sciences Corporation in 2003.

4 Time-and-materials contracts provide for acquiring supplies or services
on the basis of (1) direct labor hours at specified fixed hourly rates
that include wages, overhead, general and administrative expenses, and
profit and (2) materials at cost. Federal Acquisition Regulation (FAR)
16.601(a)(1) and (2) (2006).

5 The contract also provides for time-and-materials task orders. However,
according to the contracting officer, the vast majority of the orders
issued to date have been fixed-price.

Results in Brief

State relied on a waiver of 8(a) competitive thresholds, granted by SBA in
2001, to award the sole-source contract to EmbSEC. An SBA official
approved the waiver on behalf of the Associate Administrator for 8(a)
Business Development.6 However, the waiver was improper because SBA was
not authorized to grant it. SBA can only authorize sole-source 8(a) awards
above the competitive thresholds (1) for specific procurements and (2) if
it determines that other 8(a) firms cannot compete for the requirement. In
this case, SBA authorized State to make sole-source 8(a) awards in any
amount for contracts that "supplement the security of U.S. Government
diplomatic posts and protect the lives of Departmental personnel." The
waiver was not tied to a specific procurement, but was a blanket waiver
that could be applied to any contract pertaining to security at diplomatic
posts. SBA headquarters officials were unaware of the waiver until we
brought it to their attention; they agreed that it was improper. State
incorporated the waiver in its procurement regulation in April 2004, but
officials told us it has been used only for the EmbSEC contract. It is not
clear why State relied on the waiver instead of using competitive
procedures to award the 2003 contract. Five years earlier, when RDR was
awarded the prior contract as the only 8(a) offerer, the contracting
officer expressed concern with the lack of competition, noting that "it
would be in the best interest of the government to re-compete this
requirement at the earliest practical time." State officials indicated to
us that a number of companies could perform this work.

Using a firm, fixed-price, rather than cost-reimbursable, arrangement for
travel costs has had unintended consequences under this contract, leading
to instances where the government has paid far more than the contractor's
actual costs in airfare, per diem, excess baggage, and other travel costs,
in addition to the contractor's negotiated profit rate. For example, the
contractor priced its proposal to include 23 travelers for work in
Baghdad, Iraq. However, only 10 actually made the trip, and the government
paid $380,000 more than the contractor's incurred costs, according to a
State analysis. According to contractor representatives and government
officials, accurately estimating travel costs is difficult because travel
under this contract is highly unpredictable. Often it is not known ahead
of time when the travel will occur or how long it will last. Contractor
representatives explained that they must cover the risk of this
unpredictability in preparing their task order proposals and that they can
never be certain all of their costs will be covered. CORs in OBO told us
they review the reasonableness of the contractor's proposed technical
approach and number of hours for each task order but not the number of
travelers. Since we began this review, OBO officials said they are paying
increased attention to the contractor's proposed travel costs. The
contracting officer recently negotiated a contract clause that allows the
government to recover unused travel funds after work is completed, but the
clause has not yet been invoked because work under recent task orders has
not been completed.

According to contracting officials, they have struggled to administer this
contract and exercise appropriate oversight. For example, after the
contractor notified State of accidental errors it had made in pricing its
proposals, the contracting office took initial steps in November 2005 to
request an audit by the Defense Contract Audit Agency due to concerns
about the pricing errors and other aspects of the contract, such as travel
costs.7 However, the office has not followed up to actually get the audit
under way because it lacked the staff to do so. Much of the contracting
officer's time has been taken up with resolving disagreements with the
contractor. In July 2006, EmbSEC complained to State about a large number
of outstanding requests for adjustments to task order prices, some of
which are more than a year old, and $2.8 million in work completed or
partially completed without a corresponding contractual document under
which it could submit invoices. State officials told us they have recently
taken actions in response, such as permitting partial funding for work
begun before final negotiations on all price components are complete. We
also found that the contracting office was not monitoring the percentage
of the work being performed by the subcontractor as opposed to the 8(a)
joint venture.

6 The official who approved the waiver is no longer with SBA.

We are making several recommendations, pertaining to competition, travel
costs, contract type, and contract administration. We also are
recommending that State delete reference to the blanket waiver from its
acquisition regulation. In written comments on a draft of this report,
State concurred with our recommendations and made additional comments,
which we address in the agency comments section of this letter. State's
comments are reproduced in their entirety in appendix I. We also received
technical comments from EmbSEC and RDR, Inc., which we incorporated as
appropriate.

Basis for the Sole-Source Award Was an Improper SBA Waiver

On September 18, 2001, State requested that SBA waive 8(a) competitive
thresholds for contracts that "supplement the security of U.S. Government
diplomatic posts and protect the lives of Departmental personnel." An SBA
official approved the waiver on behalf of the Associate Administrator for
8(a) Business Development the next day to apply "for the duration of the
national state of emergency" as declared by the President; the waiver
contains no expiration date. This waiver was improper because SBA was not
authorized to issue it. SBA can waive the competitive thresholds for a
specific contract opportunity after determining that there is not a
reasonable expectation that at least two eligible 8(a) participants will
submit offers at a fair price8 but was not authorized to approve a blanket
waiver, as was done here. In its letter approving the waiver, SBA agreed
that "it is not reasonable that the Department of State would have the
time to advertise, evaluate and negotiate with several contractors to
obtain reasonable pricing." State, however, had identified no specific
requirement under which this would be the case. State officials said they
interpret the waiver as a "security policy" after the September 2001
terrorist attacks and never viewed it as pertaining to a specific
requirement. SBA's Associate Administrator for 8(a) Business Development
and a representative from SBA's Office of General Counsel were not aware
of the waiver until we brought it to their attention. They agreed that it
was improper.

State made the waiver authority effective on September 19, 2001, via a
procurement information bulletin. It was subsequently incorporated in
State's acquisition regulation9 on April 13, 2004, so that, according to
officials, it would be more visible to contracting officers. Officials
from State's Office of Small Business Utilization and from the contracting
office told us the EmbSEC contract is the only one that has been awarded
under the waiver.

7 The Defense Contract Audit Agency performs contract audits for the
Department of Defense. The agency also provides contract audit services to
some other government agencies.

8 13 C.F.R.124.506(d) (2001). These standards remain in place. See 13
C.F.R. 124.506(d) (2006).

9 Department of State Acquisition Regulation, 48 C.F.R. 619.805-2 (2005).

It is unclear why State did not use competitive procedures to award this
contract. State contracting officers had raised concerns in the past about
the lack of competition for the security installation work. In
recommending RDR for the 1998 contract award as the only 8(a) offerer
under a competitive solicitation, the contracting officer noted that RDR
had been either the prime or subcontractor on contracts to provide these
services for the past 10 years. The contracting officer expressed concern
with the lack of competition and concluded that "it would be in the best
interest of the government to re-compete this requirement at the earliest
practical time." CORs in OBO indicated to us that a number of companies
could perform the security installation work. Nevertheless, State's desire
to continue contracting with RDR after it had graduated from the 8(a)
program led RDR to seek out an 8(a) company with which to form a joint
venture for the follow-on, sole-source contract. After the first year of
the contract, the contracting officer decided to initiate a competitive
8(a) acquisition rather than extend the contract another year, citing
unresolved pricing issues and "mounting evidence" that negotiated rates
were significantly higher than rates for similar services on other
contracts. However, State eventually reopened negotiations with EmbSEC and
was able to reach agreement on a pricing structure that the contracting
officer determined to be fair and reasonable.

Fixed-Price for Travel Has Led to Unintended Consequences

Changing the contract type from time-and-materials to one with firm,
fixed-price task orders was well intentioned, because time-and-materials
contracts provide no positive profit incentive to the contractor for cost
control or labor efficiency. However, treating travel as a fixed-price
item has led to unintended consequences. According to the contracting
officer, travel costs typically account for 30 to 45 percent of the task
order price. Because travel is fixed-price and not cost-reimbursable, the
government pays airfare and other associated travel costs for the number
of travelers proposed for each task order, regardless of the actual costs
the contractor incurs. According to our review of the contract file and
discussions with State personnel, there have been instances where the
contractor has proposed a number of travelers that turned out to be more
than actually traveled, and the government has thus paid for trips that
did not occur. For example, for work in Baghdad, Iraq, the contractor's
price proposal reflected 23 travelers, but only 10 actually traveled. For
work in Tashkent, Uzbekistan, 12 travelers were proposed and only 5
traveled. In the case of Baghdad, a State official calculated that the
government paid at least $380,000 more than incurred costs. Contractor
representatives told us that the proposed 23 travelers were for two
separate Baghdad projects that they expected to run concurrently. However,
due to schedule delays, the same technician staff ended up being used for
both projects back-to-back. They pointed out that the opposite situation
has also occurred, where the actual number of travelers exceeded the
number in the task order proposal. However, a November 2005 analysis by
State found that six of seven travel status reports submitted by the
contractor showed that fewer travelers actually made the trips than were
proposed.

The Federal Acquisition Regulation provides that a firm, fixed-price
contract be used in certain circumstances, such as when available cost or
pricing information permits realistic estimates of the probable costs of
performance.10 Firm, fixed-price contracts are suitable for acquiring
supplies or services on the basis of reasonably definite functional or
detailed specifications when the contracting officer can establish fair
and reasonable prices at the outset. State officials and contractor
representatives agree that travel under this contract is very
unpredictable. It is often not known in advance when the travel will occur
under each task order or how long it will last. Frequently, schedules are
changed with little notice. For example, general contractors at the
embassy sites must complete their work before installation of security
equipment can begin. If the general contractor is behind schedule,
EmbSEC's trip must be postponed. Sometimes schedule slips cause the
contractor to send fewer people for a longer period of time to complete
the work.

10 FAR16.202-2 (2006).

Contractor representatives told us they must consider the unpredictability
of travel costs when pricing their proposals and, while they furnish an
estimate that they believe to be fair and reasonable, they can never be
certain that all of their costs will be covered due to the extreme
uncertainty involved. The contractor maintains that the government is
paying a fixed price to successfully complete a technical installation
that is approved at the post and that schedule and other changes beyond
its control frequently occur after the project plan has been submitted.
According to the contractor, such changes can force resources to be
adjusted to accomplish the work on time and can result in situations where
fewer or more travelers than proposed are needed. Most of the CORs we
spoke with, who have extensive technical experience installing these
systems in the field, told us that they focus on the labor hours required
to complete a task and the technical aspects of the proposals, such as
what equipment is necessary; they do not typically assess the
reasonableness of the proposed number of travelers.

Another issue related to travel costs pertains to excess baggage handling
fees. These fees are intended to cover the contractor's expenses
associated with transporting equipment overseas. According to contractor
representatives and State officials, the tools and equipment needed under
this contract can be very large and bulky, requiring additional fees to
transport them in and out of the countries of destination. The
contractor's proposals for 200 task orders between December 2003 and July
2005 reflected a fixed price per traveler for excess baggage fees that
some State officials believed was too high. State paid this price until it
requested information on actual costs, which turned out to be much less.
An OBO official calculated that State overpaid $1.2 million during this 1
1/2 year period. Contractor representatives explained that excess baggage
fees are extremely variable and unpredictable and that this risk must be
considered when they price their proposals. However, the contractor agreed
to include the lower estimate in subsequent proposals.

The issue of travel costs has been a contentious one for State and the
contractor. In 2004, State's contracting officer attempted to change
travel to a cost-reimbursable expense, which would have removed the fee
the contractor was including in its travel costs. The contractor would not
agree without receiving consideration in return, stating that doing so
would undermine the agreed-upon fee structure of the contract, under which
air transportation and lodging were fee-bearing. In negotiating the most
recent contract option year, which began in March 2006, the contracting
officer again intended to convert travel to a cost-reimbursable item, and
in fact, the contractor's proposal for that option year did reflect some
portions of travel as cost-reimbursable. Ultimately, however, the
contracting officer decided that the contractor would have no incentive to
keep travel costs down under a cost-reimbursable arrangement and continued
to include it as fixed-price. However, a new contract clause was inserted
that allows recovery of unused travel funds after order completion.
According to the contracting officer, the clause has not been invoked to
date, because work under the current task orders is still ongoing. OBO
officials told us they are now tracking travel costs more closely.

Difficulties Keeping Pace with Contract Administration Workload

The extensive activity on this contract and the variety of projects
involved call for a significant amount of oversight. From our reviews of
contract documents and interviews with current and prior contracting
officers, it appears that the contracting office has had difficulty
keeping pace with the contract administration workload. For example, after
the contractor notified the government of accidental errors it had made in
pricing its proposals, in which it was charging the government for
government-furnished equipment,11 the contracting office contacted the
Defense Contract Audit Agency in November 2005. Due to concerns about the
pricing errors, as well as other aspects of the contract such as travel
costs, the office requested an audit of the contractor's estimating
system, overhead rates, and incurred costs for selected task orders. As of
this date, however, the audit has not been initiated because, according to
the contracting officer, he lacks the staff to follow up with the audit
agency. Recently, State officials told us they plan to turn their
attention once again to getting the audit underway.

Three additional aspects of this contract have required substantial time
and effort on the part of the contracting staff: the high number of
undefinitized task orders (that is, actions for which the contract terms,
specifications, or prices are not agreed to before performance begins);
contractor requests for payment adjustments based on such things as
changes to scope or unforeseen schedule delays; and monitoring the extent
of work the subcontractor is performing under the contract.

           o Undefinitized contract actions authorize the contractor to begin
           work immediately, before the contract's terms are definitized.
           Definitization of the contract's terms is to occur at the earliest
           practicable date. State officials explained that undefinitized
           orders have occurred under this contract because projects must be
           kept on schedule while negotiations are still under way. According
           to a contracting officer previously involved with the contract,
           she spent months working to definitize 96 task orders. In a July
           2006 letter to State, the contractor complained that it could not
           invoice for $2.8 million in work completed or partially completed
           under notices to proceed, pending definitization. State officials
           told us that, in response, they have changed their procedures and
           will now permit partial funding under undefinitized contract
           actions for such things as long-lead equipment, even if
           negotiations on other components of the price--such as travel
           costs--are still ongoing.

           o The contractor has requested over $3 million in adjustments to
           payments because of what it claims are changes in scope or delays
           for which it was not responsible. Almost 80 of these items are
           outstanding, and some of the requests for payment adjustments date
           back more than a year. The contracting officer told us that it
           takes a lot of time to sort through the details of these requests
           and that often only the project manager on site has the specific
           information needed. State officials said that in the time since
           the July 2006 letter was written, they have made 22 adjustments
           for $3.15 million, with additional requests for payment negotiated
           and approved and waiting for funding.

           o The contracting office is not monitoring the percentage of the
           work being performed by DynCorp, the subcontractor, as opposed to
           the work being performed by EmbSEC. Because this is an 8(a)
           contract for services, the joint venture is required to incur at
           least 50 percent of the personnel costs with its own employees.12
           The purpose of this requirement, which limits the amount of work
           that can be performed by the subcontractor, is to ensure that
           small businesses do not pass along the benefits of their contracts
           to their subcontractors. According to contractor representatives,
           an agreement is in place to ensure that DynCorp performs 40
           percent of the work. When we brought the limitation on
           subcontracting requirement to State's attention, the contracting
           officials said they do have a mechanism to track subcontracting
           activity and that they will start doing so under this contract. A
           recent subcontracting activity report, submitted by EmbSEC, shows
           that subcontracting has not exceeded the contract's limitation on
           subcontracting percentage.

           Conclusion

           Given the continued uncertainties surrounding security needs at
           U.S. embassies, State's desire for flexibilities in contracting
           for security installation is understandable. However, this desire
           does not obviate the need to use competitive contracting
           procedures to the extent possible and to establish firm terms and
           conditions for contract actions as soon as feasible. The recent
           inclusion of the contract clause allowing government recovery of
           unused travel funds is a step in the right direction toward
           addressing some of the problems we identified, but its
           implementation needs to be monitored to ensure that it
           accomplishes the intended goal. In the interim, a re-assessment of
           the contract type is called for, given the uncertainties
           associated with travel costs under this contract. In addition, a
           contract this complex carries with it a certain amount of risk
           that must be mitigated by careful government oversight and
           monitoring of contractor performance, including timely
           definitization of task orders.

           We are making recommendations to SBA in a separate letter.

           Recommendations for Executive Action

           To help manage risk under this contract, we recommend that the
           Under Secretary for Management direct the Director of the Bureau
           of OBO and the Assistant Secretary for Administration to take the
           following five actions:

           o compete the requirement at the earliest feasible opportunity;
           o closely monitor travel expenses incurred by the contractor, and
           take necessary steps to promptly recover unused travel funds after
           task order completion;
           o reevaluate the contract type, in light of unpredictable travel
           costs;
           o assess the workload of the contracting office to determine
           whether changes are needed to keep up with the contract
           administration workload, including timely definitization of
           contract actions; and
           o delete reference to the improper September 19, 2001 blanket
           waiver from State's acquisition regulation.

           Agency Comments

           In written comments on a draft of this report, State agreed with
           our findings and recommendations, stating that it is developing an
           acquisition plan to compete the requirement and that it does not
           plan to exercise the last option year under the contract. During
           the recompetition, it will carefully consider the contract type.
           State said that it is also more closely evaluating the
           contractor's proposed travel costs and that it intends to assess
           the workload of the contracting office. Finally, State will amend
           its acquisition regulation to remove reference to the blanket
           waiver.

           State also suggested that we disassociate the footnote on page
           one, regarding our fraud hotline, from the statement of our
           reporting objectives or that we clarify that we did not find
           fraud, waste, abuse, or mismanagement. The intent of the footnote
           is simply to describe the purpose of FraudNET for the general
           reader. That being said, we believe our findings do point to some
           mismanagement issues that could have led to waste of government
           funds. State also questioned the accuracy of two statements in the
           report, pertaining to its interest in retaining RDR for the
           follow-on contract and to the reason the contracting office
           requested assistance from the Defense Contract Audit Agency. Both
           of these statements are correct as written. State did seek to
           retain RDR specifically for the follow-on work. The contracting
           officer who inquired about the audit did so after the pricing
           errors reported by the contractor, viewing the pricing errors as
           one of several concerns with the contract. We added a sentence to
           the report to clarify this point. State's comment letter is
           reproduced in appendix I of this report.

           We also received comments from EmbSEC and RDR, which we
           incorporated where appropriate.

           Scope and Methodology

           We analyzed documents in State's EmbSEC contract files as well as
           the prior contract with RDR. We reviewed pertinent sections of the
           Federal Acquisition Regulation and State's supplement. We
           interviewed State contracting officials in the Facilities Design
           and Construction Division within the Office of
           Logistics/Acquisitions Management and program officials in the
           Security Management Division, Bureau of OBO. We also met with
           contractor representatives. We held discussions with SBA officials
           and reviewed pertinent small business regulations. We conducted
           our review from May 2006 to August 2006 in accordance with
           generally accepted government auditing standards. Key contributors
           to this correspondence were Michele Mackin, Assistant Director;
           John Krump; Sylvia Schatz; and Tatiana Winger.

           Sincerely,

           Katherine V. Schinasi, Managing Director
			  Acquisition and Sourcing 
			      Management

11 In August 2005, the State Department Inspector General found the
potential for double billing for government-furnished equipment on over 90
task orders. In one example, the contractor charged the government for an
$112,000 X-ray machine, which was later identified as government-furnished
equipment. Price reductions and cash refunds from the contractor of almost
$1.4 million resulted from the investigation, but no criminal or
administrative misconduct was found. Contractor representatives attributed
the problem to employee error.

12 FAR 52.219-14; 13 C.F.R. 124.510 and 13 C.F.R. 125.6.

Appendix: Comments from the Department of State

(120569)

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