By Susan Cornwell

WASHINGTON (Reuters) - Lawmakers are reconsidering a 1990 law that makes the State Department accept the lowest bids for contracts to provide private security at most U.S. diplomatic posts, a requirement that can lead to the hiring of thousands of guards based on how cheap they are rather than their quality.

Concerns about the policy, which was aimed at cutting costs, were heightened by the assault on the U.S. mission in Benghazi, Libya, last September, in which U.S. Ambassador Chris Stevens and three other Americans were killed. None of the local guards was outside the lightly defended complex when it was overrun by militants, according to the results of a U.S. government inquiry.

Fifteen months earlier, at the heavily guarded U.S. Embassy in Pakistan - a walled compound within a gated diplomatic enclave - dozens of local guards refused to work for three days. The strike over pay and benefits potentially put security at risk, the U.S. State Department inspector general's office said in an audit in February 2012.

A government spending bill, which passed Congress this week, gives the State Department the flexibility to hire local guards for Afghanistan, Pakistan "and other hostile or high-risk areas" on a best-value basis, allowing for the appropriate trade-offs between cost and quality, a Senate aide said, although the provisions are due to expire at the end of September.

Senators Robert Menendez and Bob Corker, the leading Democrat and Republican on the Foreign Relations Committee, are also discussing whether to propose permanent changes to the way local guards are hired as part of embassy security legislation in the coming months, aides to both men said.

Many people think of the Marines, the sentinels at the front doors of many U.S. embassies, as the buildings' protectors. But they are there mainly to safeguard classified documents. There were no Marines at the Benghazi mission, a temporary facility.

It is the host country - and when it cannot or will not, the locally hired guards - that the U.S. government typically relies on to help keep its diplomats and buildings safe.

'POORLY PAID AND MOTIVATED'

One of the last things former Secretary of State Hillary Clinton asked Congress to do before she left office on February 1 was to change the law requiring that most local guard contracts be awarded on a "lowest price technically acceptable" basis.

The money-saving requirement applies in "dangerous places like Libya," she said.

"We have requested a change in the legislation that would allow us to use some discretion to try to deal with the varieties and vagaries of these local guard forces," she told the House Foreign Affairs Committee in January.

Corker heard complaints about the lowest-price rule from U.S. embassies during a recent trip to several African countries. He visited war-torn Mali, as well as Senegal, Algeria and Tunisia, all of which are confronted with the spread of weapons from Libya after Muammar Gaddafi's overthrow.

The lowest-priced bid requirement encourages companies to snatch a contract from a competitor by lowering the embassy guards' pay, Corker said. "You're just cutting wages of people who actually have performed well and been on the front lines," he said.

The State Department inspector general's office says that changing the law would probably end up costing more - a tough sell in the current atmosphere of fiscal tightening. There are about 30,000 local guards protecting roughly 285 U.S. diplomatic facilities worldwide, the State Department says.

During the past several years, about $500 million has been spent annually on the guards. That does not include Iraq and Afghanistan, which have been budgeted separately.

In December, a State Department-ordered inquiry into the Benghazi attack cited numerous failures, including serious leadership deficiencies at the department that led to insufficient security.

But it also labeled as "inadequate" the responses of the local guards, who worked for a British company called Blue Mountain Group. None was keeping watch outside before the attack, and it was unclear whether they sounded any alarms, the review said.

Since the Benghazi attacks, the company has repeatedly declined to comment in response to Reuters' inquiries.

The lowest-priced rule for local guard contracts "often results in poorly paid and motivated guards," Michael Raynor, former executive director of the State Department's Bureau of African Affairs, wrote last year.

"Paying guards less than living wages" not only has security costs, Raynor wrote to the State Department inspector general, but also "undercuts our Missions' broader engagement in championing human rights."

"What it allowed was cheap guarding ... from the local population, or inexpensive Third World guarding from elsewhere," said Charles Tiefer, law professor at the University of Baltimore and member of the U.S. Commission on Wartime Contracting, which examined spending in Iraq and Afghanistan.

Last year's audit by the inspector general's office related one particularly large problem at the U.S. Embassy in Pretoria, South Africa. The embassy had to issue 60 "deficiency notices" to its local guard contractor for performance problems.

Over two-thirds of 86 U.S. diplomatic posts surveyed reported some problems with guard forces, such as absenteeism and turnover, the audit said.

UNAPPROVED GUARDS POSED SECURITY RISK

The June 2011 guard strike in Islamabad, Pakistan, posed a security risk because although the contractor replaced the strikers, it did so with unapproved guards who had not undergone required background checks, another audit from the State Department inspector general's office said last year.

The strikers had been hired under a 2007 contract awarded to G4S Secure Solutions International Inc on a lowest-price basis. The protest ended when the contractor agreed to increase the guards' pay, the audit said.

Their salaries were not revealed in the unclassified version of the report. A spokeswoman for the company, a subsidiary of the British-based G4S security services firm, declined comment.

Cameron Munter, who was ambassador to Pakistan during the 2011 guard strike, said, "The obvious end result that any ambassador wants is a motivated guard force that can be depended on in a crisis to do the things it's been trained to do."

But Munter also warned that changing contracting rules was not a panacea for safety.

"If all we learn from Chris Stevens' death is that we have to spend money differently, we haven't addressed the real issue - which is, we need to be informed and we have to think hard about how we are best informed, in order to protect ourselves. This is a question of smart security," Munter said.

(Editing by Warren Strobel and Peter Cooney)