Agency hid rising costs of Iraq projects

BAGHDAD, Iraq — The U.S. State Department agency in charge of $1.4 billion in reconstruction money in Iraq used an accounting shell game to hide ballooning cost overruns on its projects in Iraq and knowingly withheld information on schedule delays from Congress, a federal audit released late Friday has found.

The agency hid construction overruns by listing them as overhead or administrative costs, according to the audit, written by the Special Inspector-General for Iraq Reconstruction, an independent office that reports to Congress and the Pentagon.

Called the U.S. Agency for International Development (USAID), the agency administers foreign-aid projects around the world. It has been working in Iraq on reconstruction since shortly after the 2003 invasion.

The report by the inspector-general's office does not give a full accounting of all projects financed by the agency's $1.4 billion budget, but cites several examples.

The findings appeared in an audit of a children's hospital in Basra, but they referred to the wider reconstruction activities of the agency in Iraq. U.S. and Iraqi officials reported last week that the State Department planned to drop Bechtel, its contractor on that project, as signs of budget and scheduling problems began to surface.

The U.S. Embassy in Baghdad referred questions to the State Department, which declined to comment.

The high-tech, two-story children's hospital was championed by first lady Laura Bush. The first lady and Secretary of State Condoleezza Rice spoke highly of the project and lobbied Congress for the money.

In March 2005, USAID asked the Iraq Reconstruction and Management Office at the U.S. Embassy in Baghdad for permission to downsize some projects to ease widespread financing problems. In its request, it said that it had to "to absorb greatly increased construction costs" at the Basra hospital, and that it would make a modest shift of priorities and reduce "contractor overhead" on the project.

The embassy office approved the request. But the audit found that the agency interpreted the document as permission to change reporting of costs across its program.

Referring to the embassy office's approval, the inspector-general wrote, "The memorandum was not intended to give USAID blanket permission to change the reporting of all indirect costs."

The hospital's construction budget was $50 million. By April of this year, Bechtel had told the aid agency that because of escalating costs for security and other problems, the project would actually cost $98 million to complete. But in an official report to Congress that month, the agency "was reporting the hospital project cost as $50 million," the inspector-general wrote in the report.

The rest was reclassified as overhead, or "indirect costs." According to a contracting officer at the agency who was cited in the report, the agency "did not report these costs so it could stay within the $50 million authorization."

"We find the entire agreement unclear," the inspector-general wrote of the USAID request approved by the embassy. "The document states that hospital project cost increases would be offset by reducing contractor overhead allocated to the project, but project reports for the period show no effort to reduce overhead."

In another case cited in the report, a power-station project in Musayyib, the direct construction cost cited by USAID was $6.6 million, while the overhead cost was $27.6 million. The result is that the project's overhead, a figure normally no higher than 30 percent, was a stunning 418 percent.

The figures were even adjusted in the opposite direction when that helped the agency balance its books, the inspector-general found. On an electricity project at the Baghdad South power station, direct construction costs were reported by the agency as $164.3 million and indirect or overhead costs as $1.4 million.

That is just 0.8 percent overhead in a country where security costs are often staggering. A contracting officer told the inspector-general that the agency adjusted the figures "to stay within the authorization for each project."

The overall effect, the report said, was a "serious misstatement of hospital project costs." The true cost could reach $169.5 million.

The inspector-general also found that the agency failed to report known schedule delays to Congress.

On March 26, Bechtel informed the agency that the hospital project was 273 days behind, the inspector-general wrote.

But in its April report to Congress on the status of all projects, "USAID reported no problems with the project schedule."

Joseph Saloom, the newly appointed director of the reconstruction office at the U.S. Embassy, said he would take steps to improve the reporting of the costs of reconstruction projects in Iraq.

Information from The Associated Press is included in this report.