The suspension comes after months of internal USAID reviews of IRD’s performance in the field and reports from the agency’s inspector general that the nonprofit allegedly mischarged millions of dollars in overhead costs. The Special Inspector General for Afghanistan Reconstruction and the FBI are also investigating the organization.

“The Agency’s review revealed serious misconduct in IRD’s performance, management, internal controls and present responsibility,” USAID said in a statement Monday. “USAID has a zero tolerance policy for mismanagement of American taxpayer funds and will take every measure at our disposal to recover these funds.”

Since 2007, USAID has awarded more than $2.4 billion in contracts and cooperative agreements to IRD, much of it to fund stabilization and community-development projects in Iraq and Afghanistan. Several of those projects have been the subjects of investigations following allegations of waste and fraud.

IRD also has been criticized for providing lavish salaries and millions in bonuses to its employees, including the husband-and-wife team who ran the organization, as well as their family members. Many of the allegations were contained in a Washington Post investigation published last May.

The suspension takes effect immediately, blocking IRD from new federal contracts. The nonprofit will be permitted to complete projects that are underway.

“It is what it is, and we have to deal with it,” said Roger Ervin, who took over IRD as president six weeks ago. “I take this as an opportunity to make some changes, and many of them are already underway. I think we can show in short order that we can demonstrate that we are a good service provider for USAID, and I think we can address this pretty quickly.”

Ervin said he and other senior managers are restructuring the organization and cooperating with USAID and federal investigators. “The only way we’re going to satisfy the government is to be as transparent as possible,” he said.

Earlier this month, Sen. Bob Corker (R-Tenn.), chairman of the Senate Foreign Relations Committee, sent a letter to USAID questioning why IRD and another contractor continued to receive federal work in the face of the allegations.

“It is difficult to understand why USAID continues to put U.S. tax dollars and national security objectives at risk by doing business with organizations that consistently fail to meet their obligations and engage in potentially illegal and unethical activities,” Corker wrote to USAID Administrator Rajiv Shah.

A Post analysis of federal tax forms and contracting data shows that IRD has relied on USAID for much of its funding.

Between 2007 and 2013, IRD reported revenue of a little more than $3 billion — 76 percent of it coming from USAID. At the height of its involvement in Iraq and Afghanistan, in 2010, IRD reported $706 million in revenue, 83 percent of it from USAID.

Of the more than $2.4 billion in USAID funding that IRD has received since 2007, 82 percent has gone toward projects in Iraq and Afghanistan. Those projects were designed to rebuild war-wrecked cities and towns and construct vast networks of roads.

But the projects were difficult to execute in the field, and workers said in interviews with The Post that vast sums of money were being squandered.

IRD was founded in 1998 by Arthur B. Keys, an ordained minister, and his wife, Jasna Basaric-Keys, who is from Bosnia-Herzegovina. As the nonprofit won more federal work, salaries and bonuses at IRD began to soar.

Together, Keys and his wife earned more than $5.9 million in compensation between 2008 and 2012. Their daughter and Basaric-Keys’s brother received more than $1.3 million during that time.

In 2013, Keys was slated to receive $690,000 in compensation, plus a $900,000 contribution to his retirement account. His wife, chief of IRD’s operations, received $1.1 million in compensation, which included a $289,273 bonus.

But new managers and board members at IRD balked at the size of the payouts and demanded that the couple surrender a significant portion of the money. Aware that USAID was considering suspending IRD, the new mangers tried to reform the organization and rein in excessive compensation.

“We reviewed the totality of the compensation package, and we were not comfortable with the numbers,” said Steve Bartlett, a former congressman from Texas who joined IRD’s board last summer. “We thought it was inappropriate.”

After months of negotiations, Keys and his wife returned or forfeited $1.7 million in retirement pay and bonuses, according to the nonprofit’s 2013 tax return. Keys relinquished his claim to $590,625 in retirement money that had been set aside for him in 2012. He also forfeited $320,710 due to be deposited in his retirement account last year.

Keys’s wife returned $176,318 of a $289,273 bonus she received in 2013. She also returned $496,211 in a retirement account and $120,313 out of $121,065 in “other compensation” she collected from the nonprofit.

Keys declined to say why he and his wife agreed to forfeit the money.

“I don’t believe I can talk about that,” he said in a brief interview last week.

IRD officials declined to say how much money the nonprofit paid Keys and his wife in 2014 before they retired at the end of last summer. They said those figures will be reported to the IRS this year.

Bartlett said that the couple was “compensated for the work they did” and that “they were not provided with any bonuses.”

By Scott Higham and Steven Rich of the Washington Post

The underlying dispute stemmed from a cost-reimbursement contract between KBR and the DOD, under which KBR was required to provide dining services for up to 50,000 troops in support of military operations in Iraq. As the military action escalated, however, the dining service requirements quickly and dramatically expanded to supporting 200,000 soldiers at 56 sites throughout Iraq.

After a “disastrous” attempt to self-perform certain portions of the expanded contract, KBR engaged a subcontractor, Tamimi Global Company, (“Tamimi”) to provide dining services at one of the Army camps and sought payment for those subcontractor services. The Defense Contract Audit Agency (“DCAA”) subsequently audited KBR and determined that KBR incurred $41 million in unreasonable subcontractor costs between July and December 2004. Acting on DCAA’s audit report, the contracting officer then withheld $41 million from payment to KBR. KBR filed a claim against the agency, which the Government denied, and then filed its claim appeal with the COFC. The COFC denied KBR‘s claim, adopting DCAA’s position that the costs were unreasonable because KBR did not engage in effective bargaining with Tamimi. The Court noted that although KBR‘s failed attempt at self-performance undermined its negotiating position, that complication did not mitigate KBR‘s failure or inability to negotiate better service rates with Tamimi.

Before the Federal Circuit, KBR argued that DCAA, the contracting agency, and the COFC impermissibly second-guessed KBR‘s business judgment in a wartime environment, contending that contractor’s cost of performance should be presumed reasonable unless the result of “gross misconduct,” “arbitrary action,” or “a clear abuse of discretion.” In substance, KBR advocated for application of the “business judgment rule” (a fundamental corporate law doctrine) to cost reasonableness determinations. The Federal Circuit rejected KBR‘s position, noting that earlier precedent deferring to contractor cost judgments does not outweigh the regulatory flexibility embodied in the cost principles contained in Federal Acquisition Regulation Part 31.

Now that the Supreme Court has denied certiorari and the Federal Circuit’s decision is final, contractors, subcontractors, accountants, auditors, and counsel must adapt to the newly recognized regulatory discretion held by all agency contracting personnel who are called upon to make cost reasonableness determinations. A few important aspects of theKBR decision may prove helpful to that adaptation process:

Documentation. Well-documented subcontractor price negotiations and flowdown provisions. KBR‘s exposure resulted from subcontract terms negotiated in and around the exigencies of a war zone at a time when performance was urgently needed. These unique circumstances left KBR without a comparable private marketplace benchmark for establishing cost reasonableness. KBR was forced to rely solely on its record of subcontract negotiations and the subcontract itself to establish reasonableness. Taking KBR‘s lessons learned to heart, cost-reimbursement contractors that are considering subcontracting should (i) look early (even at the time of proposal preparation) for a commercial market benchmark against which to make outsourcing price comparisons, and where no such counterpart exists, (ii) develop and pursue a robust plan for conducting and documenting subcontract negotiations, to include specially tailored clauses that enable the contractor to claw back costs paid and subsequently disallowed by the agency.

Burden of Proof. KBR I preserves the fundamental tenet that the burden to prove cost reasonableness always falls on the contractor. To meet that burden, contractors performing on large complex cost reimbursement contracts should expect and prepare for cost controversies and claims with the Government by meticulously documenting costs in order to justify their claim.

No Business Judgment Rule. The KBR I court took a dim view of KBR‘s argument that the costs were not unreasonable and were not the result of gross negligence. 

Second-Guessing — the New Standard. Cost-reimbursement contracts are now even more susceptible to agency second-guessing. Contractors should consider stepping up their administrative efforts to justify and document costs to mitigate the risk of material second-guessing during audit and closeout actions.