Report suggests widespread contracting problems at National Defence Dept.
at 20:05 on July 13, 2004, EST

OTTAWA (CP) - A new review of multimillion-dollar contracts at the National Defence Department is raising red flags about out-of-control spending for more than two dozen projects. The report was triggered in part by a $146-million fraud uncovered last year in which the department paid phoney invoices during a 10-year period. The RCMP is investigating the scandal involving Compaq Computer Corp., later bought by Hewlett-Packard (Canada) Co., which is reimbursing the money. Two large maintenance deals for weapons systems also showed problems - National Defence will not provide details - prompting the broad review of 258 service contracts each worth more than $1 million.

The review, begun last August, has uncovered widespread contract irregularities worth tens of millions of dollars. For example, auditors identified 15 major service contracts where the suppliers billed the department by at least 10 per cent above the appropriate amount - or about $35 million in total. "Numerous reports of profit excesses, unauthorized additional work," "unsupported contractors cost," and "no proper accounting records for recording costs," were typical findings. The audits either rejected the inflated invoices or required the contractors to reimburse the money.

The review authors also flagged four other contracts - worth between $10 million and $48 million - where costs spiralled by up to double the agreed amount. "Poorly defined job descriptions that appear inflated," said one analysis. "Insufficient evidence to support payment for software upgrade deliverables," said another. The January 2004 report is highly critical of the department's ability to adequately police its own contracts, citing shoddy information systems and a lack of high-level monitoring of potential problems.

"We've had a downsizing (of National Defence personnel) over a number of years in the department so there are fewer people available to manage the contracts," Chris Currie, one of the officials involved in the review, said in an interview. "So that's been one of the problem areas."

Alan Williams, the department's assistant deputy minister for materiel, said the exercise has identified potential problems but did not establish that rules had actually been broken. That will be determined only through further auditing and review. "The Hewlett-Packard file . . . shook us all up here," he said. "We need to be more vigilant."

In the end, the review - intended only as a preliminary survey - identified 25 high-risk contracts that will receive detailed audits during the next months. The review has also spawned at least two other broad examinations of potential contract irregularities, one focused on goods procurement and another on medical contracts. Both reports are in draft form, and Currie would neither release them nor discuss their contents.

One issue to be examined in subsequent audit work will be sole-sourcing, in which contracts are signed with a single supplier without a competitive process that can keep costs low. The review found that 44 per cent of the 258 high-value contracts were sole-sourced, and that about 20 per cent of all 12,000 Defence Department contracts currently active were let without inviting competing bids. Currie said some weapons systems are proprietary so that their purchase and servicing can be carried out only through a single supplier. But auditors will examine whether sole-sourcing levels are still too high, he said.

A former National Defence employee who now works for the Canadian Defence Industry Association says the department is more prone than others to contract fraud. "It's a large organization with a lot of procurement," said Norbert Cyr, vice-president of media relations for the industry group. "There are very few departments in government that have that size of discretionary spending."

Cyr added that downsizing over the years has made the department more vulnerable to fraud. "There were more people available in the past, in project offices, to do oversight type duties," he said. Trusted individuals within the department are most often responsible for fraud, he added.

DEAN BEEBY