The Army this year rejected millions of dollars worth of billings for logistics services in Iraq and Afghanistan by contractors Dyncorp, Fluor and KBR on grounds they were faulty and excessive, a top Pentagon auditor said today.

April Stephenson, director of the Defense Contract Audit Agency (DCAA), said the chief reason the companies continually overbill the government is they rely on faulty accounting, cost-estimating, purchasing and other business systems.

Nevertheless, the Pentagon continues to allow those companies to use those unreliable business systems to calculate costs and bill the government. DCAA is responsible for auditing the business systems used by Defense Department contractors; another agency, the Defense Contract Management Agency (DCMA), is responsible for deciding whether to allow contractors to use them.

A top DCMA official said today his agency has allowed the contractors to continue using faulty and unreliable business systems.

"We've not disapproved any of the systems with these contractors," said David Ricci, executive director of DCMA.

The problem is extensive, DCAA's Stephenson said. The agency completed more than 200 audits of the three contractors' business systems through June and found problems with more than half, Stephenson said.

"When a contractor's business system and related internal controls are inadequate, the data generated by the contractor's system is unreliable, which in turn, results in the risk of noncompliances with government laws and regulations, mischarging, fraudulent acts and contract overpayments," Stephenson said.

Stephenson and Ricci testified before the bipartisan, congressionally chartered Wartime Contracting Commission, which is investigating how to improve war zone contracting.

Since March, DCAA found three DynCorp business systems were faulty and resulted in overcharges to the government. Of 29 sample billings DCAA reviewed, 15 — or $8.7 million of the $20.6 million reviewed — were rejected by DCAA. In one case, DynCorp billed the Army for labor rates that were 10 percent higher than what was proposed during the competition to win the work and approved by the contracting officer. The company's effort to bill at the higher rates was rejected, according to Stephenson.

Another logistics contractor, Fluor Federal Services, charged the government for costs that were not allowed, she said. The company billed the government for indirect labor costs that weren't disclosed to the government as required by law. DCAA rejected the billing as did the contracting officer, according to Stephenson's prepared statement.

And in April, DCAA found that KBR failed to perform adequate cost and price analysis on subcontractor proposals, failed to conduct market research for suppliers, failed to obtain contracting officer consent before subcontracting, and failed to justify prices billed to the Army were reasonable, she said. In one case, without any documentation, KBR awarded a $7.2 million subcontract for trucking services to a company whose price was 41 percent higher than the lowest bidder, according to Stephenson. Many of these problems have been previously identified but never fixed, she said.

The three companies — KBR, Dyncorp and Fluor — are prime contractors on the Army's Logistics Civil Augmentation Program (LOGCAP) IV.

For its part, DCMA said it has not forced contractors to adopt new and better business systems because the companies had developed plans to correct their faulty systems. DCMA's Ricci said that if a contractor submits an action plan to correct problems with a faulty business system, such as a cost-estimating system, DCMA cannot disapprove the system unless there is no progress made to fix the problems.

Ricci defended DCMA's decision not to use another Defense Department option: withholding 15 percent of payments to a contractor until it corrects flaws with a known faulty business system. That option exists as "guidance" only and "doesn't have the teeth" to be enacted because there is no contracting clause that would allow that, Ricci said.

Members of the Wartime Contracting Commission accused DCMA of caving to the contractors and not acting properly on the Defense Department's behalf.

Christopher Shays, the commission's co-chairman and a former Republican congressman, told Ricci that if there is a gray area in the law "you are going to make sure you are on the contractor side." Shays said it would be "refreshing" if DCMA tested the gray area to see if DCMA got results from contractors that didn't fix systems, rather than being fearful of complaints or legal actions.

Other commissioners also were outraged by DCMA's failure to halt use of faulty contractor business systems and its failure to withhold payments to them, if necessary.

Commissioner Dov Zakheim, a former Pentagon comptroller, said DCMA is hurting the warfighter by not withholding funds from the companies to force them to fix systems. "The poor contracting officers are seeing things go to hell in a hand basket because you rule [the systems] adequate," he said. Withholding 15 percent of contractor payments is "a sledge hammer" that DCMA can bring down upon contractors to force compliance with government rules, he said.

Jeff Parsons, the head of the Army Contracting Command, which manages the LOGCAP contracts, said that "personally I'm upset ... that so many business systems had deficiencies."

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