updated 7/27/2009 12:40:31 AM ET 2009-07-27T04:40:31

In Iraq, even the successful reconstruction projects aren't trouble-free.

Questionable payments, incomplete or missing paperwork and weak contract management marred the building of a hotel near the Baghdad airport, says a new report from the Special Inspector General for Iraq Reconstruction.

Investigators acknowledge the Caravan hotel was "successfully completed." But they found a bundle of problems that, if avoided, would have greatly lowered the risk of U.S. tax dollars being wasted.

In one example, U.S. authorities paid more than $1 million in cash to the Iraqi company doing the construction work even though the contract stated payments should be done electronically to prevent the money from being lost or stolen during the transfer.

Six payments totaling $4.2 million were made to TAMA Design Consultancy and Construction. Four were done by electronic fund transfer. But two — one for $421,706 and the other for $778,965 — were made in cash. Investigators found copies of signed invoices, but no explanation for the switch. An unnamed contracting official told them the situation was "unusual," but predated his arrival in Iraq.

Account vulnerable to waste, fraud
In comments printed at the end of the report, U.S. military officials said all the payments were handled properly. "It does not matter how we pay vendors as long as we pay them correctly and it is correctly documented," they said.

However, the report also indicates that U.S. officials in Iraq have ordered that all payments be done by electronic fund transfer.

The price tag for the Caravan Hotel is modest when compared with the nearly $50 billion the U.S. has invested in Iraq's rebuilding. But investigators scrutinized the project because the funds came out of an account, called the Commander's Emergency Response Program, that has been vulnerable to waste and fraud.

Under the program, U.S. military commanders are authorized to finance urgent, small-scale projects that improve conditions for the local population and create jobs. The idea is to generate a more positive attitude toward American forces and thus reduce attacks against them. Yet oversight of the money has not always been tight, leading the special inspector general and other investigative offices to pay close attention to projects.

As of March, the U.S. had committed close to $3.6 billion for the emergency response program in Iraq.

Delayed project
The Caravan, which opened in September 2008, lodges travelers coming to Baghdad for meetings and other events at a convention center near the city's airport.

TAMA was awarded nearly $4.2 million contract for the work in October 2007. TAMA initially said it could do the work for $2.7 million, according to the report, and investigators could find no explanation for the increased cost.

Construction took six months longer than planned, a delay due in part to a losing bidder protesting the award. But there was nothing in the contract file that gave any other reasons for the slip.

U.S. officials in Iraq have also delayed turning the hotel over to the Iraqi government because they were concerned the Iraqis would close the hotel and take all the furniture. That happened with two other projects, investigators were told.

In their comments, military officials said they are working on a plan to transfer the hotel to the Iraqis.

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