Halliburton contracts balloon

Introduction

The oil services company Halliburton, largely through its subsidiary Kellogg, Brown & Root, has received more revenue from government contracts in the last year than from 1998 through 2002. In 2003, when the company had record revenue of $16.3 billion, Halliburton received contracts from the Department of Defense worth $4.3 billion, while in the previous five years it obtained less than $2.5 billion from the military, according to an analysis by the Center for Public Integrity.

Although figures are not yet available for 2004, government revenue is bound to increase as a result of the contracts the company has won for work in postwar Afghanistan and Iraq, which so far potentially totals $11.4 billion. Some of that work was actually awarded earlier; many of the company’s contracts extend for multiple years.

In 1998, Halliburton’s total revenue was $14.5 billion; that year, the company got contracts from the Pentagon worth $284 million. Two years later, revenue had dropped to just under $12 billion while work under DoD contracts more than doubled. In 2002, DoD awarded Halliburton tasks worth $485 million while the company’s revenue was $12.6 billion.

Of the more than 150 American companies that together have received U.S. government contracts potentially worth more than $51 billion for postwar work in Afghanistan and Iraq, Halliburton is by far the largest recipient of contracts awarded in the two countries.

As part of its continuing Windfalls of War project, the Center for Public Integrity has been compiling information on contracts awarded by the U.S. government for support in Operation Enduring Freedom and Operation Iraqi Freedom. The Center has compiled its list of contractors and contract awards through information obtained from 95 requests and appeals filed under the Freedom of Information Act or through official government and company sources.

A company under investigation

Halliburton, where Vice President Richard Cheney served as CEO from 1995 to 2000, has come under increased scrutiny because of allegations of overcharging on food service and fuel distribution contracts, poor management and close ties to the administration.

This year, two audit reports by the Defense Contract Audit Agency found several deficiencies in KBR’s billing system. As a result, the agency is withholding $186 million in payments for food service until KBR provides additional data showing that the meals billed actually were provided, according to congressional testimony by William H. Reed, the director of DCAA.

The Pentagon’s Inspector General also launched a criminal investigation in February 2004 into whether KBR overcharged the government while it was importing fuel from Kuwait to Iraq. Patrice Mingo, a spokeswoman for Halliburton, told the Center that the company has not received an official notification of an investigation by DOD’s IG office. A Pentagon spokeswoman said the investigation is on-going. In a February press release the company said it welcomed a review of all its government contracts and denied overcharging.

On Aug. 3, 2004, the Securities and Exchange Commission fined Halliburton $7.5 million for failure to disclose a change in its accounting practice. This change in accounting for cost overruns, while not out of the norm, means that public filings by the company were misleading in 1998 and 1999, according to the SEC. For example, in the second quarter of 1998 Halliburton used the new accounting practices without disclosing them and reported a pre-tax income of $228.7 million. If the old accounting practices had been used the pre-tax income would have been $183.3 million.

Robert C. Muchmore Jr., Halliburton’s former controller, also agreed to a $50,000 fine by the SEC while a suit was filed against Gary V. Morris, the company’s former chief financial officer. Vice President Cheney, Halliburton’s chief executive officer during the period when these statements were released, provided testimony to the SEC but was not investigated. Halliburton and Muchmore neither admit nor deny the SEC’s findings.

In a shareholder class-action lawsuit in Dallas, four anonymous former accountants for Halliburton alleged earlier this month that the company had systematically committed accounting fraud to make projects appear more profitable.

On August 17, Halliburton said that the Army Materiel Command would start to withhold 15 percent of payments on future invoices under the LOGCAP III contract. A day later the Army reversed its decision, for reasons unknown. In the past, extensions to Halliburton had been given because, an Army spokeswoman said, neither the government nor the company had the necessary staff to review the increased number of bills.

The Army did not return phone calls, but told the Washington Post that suggestions that Halliburton receives special treatment are wrong.

Anatomy of $11.4 billion

In Iraq, Halliburton subsidiary Kellogg Brown & Root has been awarded five contracts worth at least $10.8 billion, including more than $5.6 billion under the U.S. Army’s Logistics Civil Augmentation Program contract, an omnibus contract that allows the Army to call on KBR for support in all of its field operations. When the Army needs a service performed, it issues a “task order,” which lays out specific work requirements under the contract.

From 1992 to 1997, KBR held the first LOGCAP contract awarded by the Army, but when it was time to renew the contract, the company lost in the competitive bidding process to DynCorp after the General Accounting Office reported in February 1997 that KBR had overrun its estimated costs in the Balkans by 32 percent (some of which was attributed to an increase in the Army’s demands). KBR beat out DynCorp and defense giant Raytheon for the third LOGCAP contract in December 2001, this one to run 10 years.

Under the LOGCAP contract, in November 2002 the Army Corps of Engineers tasked KBR to develop a contingency plan for extinguishing oil well fires in Iraq. Not surprisingly, on March 24, 2003, the Army Corps announced publicly that KBR had been awarded a contract to restore oil-infrastructure in Iraq, potentially worth $7 billion. The contract KBR received—contract DACA63-03-D-0005—would eventually include 10 distinct task orders. KBR did not come close to reaching the contract ceiling, billing just over $2.5 billion. No additional task orders are being added to the contract, according to the Army Corps. (For more information on contract DACA63-03-D-0005, see Inside a War-Time Contract.)

The contract was awarded without submission for public bids or congressional notification. In their response to congressional inquiries, Army officials said they determined that extinguishing oil fires fell under the range of services provided under LOGCAP, meaning that KBR could deploy quickly and without additional security clearances. They also said that the contract’s classified status prevented open bidding. The contract was later declassified after the Center for Public Integrity filed a lawsuit under the Freedom of Information Act.

In June 2003, the Army Corps announced that it would replace KBR’s oil-infrastructure contract with two publicly bid contracts and in January 2004, the Army Corps awarded a contract that has a maximum value of $1.2 billion to KBR. The company is to continue its work to repair Iraq’s oil infrastructure in southern Iraq. The contract for the northern region, with a maximum value of $800 million, went to Parsons.

In January 2004, the Army Corps awarded a contract with a potential value of $1.5 billion to KBR. The contract is for a full range of engineering services in the U.S. Central Command’s area of operations, which includes Iraq and Afghanistan. The contract has a $500 million ceiling for the first year and four one-year options, each with an annual ceiling of $250 million.

Kellogg Brown & Root received a contract in August 2002 worth $110.7 million from the State Department to design and build office buildings and diplomatic staff apartments for the U.S. Embassy in Kabul, Afghanistan, as well as renovate existing offices. Additionally, as of June 2004, KBR had received 11 task orders under the LOGCAP contract for work in Afghanistan totaling $489 million.

Senior fellow Larry Makinson and database editor Aron Pilhofer contributed to this report.