Pentagon claims $757 million overbilling by contractor in Afghanistan

Introduction

The Pentagon allowed a private firm providing food and water to U.S. troops in Afghanistan to overbill taxpayers $757 million and awarded the company no-bid contract extensions worth more than $4 billion over three years, according to the Pentagon’s chief internal watchdog and congressional investigators.

The deal represented one of the largest U.S. military contracts in Afghanistan. But the Defense Logistics Agency, which was overseeing the contract, failed repeatedly to verify that the contractor’s invoices were accurate, an official in the Defense Department inspector general’s office said. “This has to be one of the prime poster childs for a government contract spun out of control,” Rep. John Mica, R-Fla., said last week.

Mica and other members of the House Oversight and Governmental Reform Subcommittee on National Security expressed outrage at a hearing last week about the Pentagon’s handling of the deal, especially two contract extensions awarded amid a dispute between the government and the company over as much as $1 billion.

The criticism was bipartisan, and it also targeted the Swiss-based private contractor, Supreme Foodservice GmbH, which had previously supplied British troops in Afghanistan, Iraq and other hot spots.

The panel’s hearing, the first focused solely on the food contract, was convened to hear from agency and company officials about how a straightforward deal in 2005 to supply food and water to troops ballooned into a still-unresolved dispute with so much money at stake.

The company has denied wrongdoing. But several lawmakers at the hearing also accused it of trying to bill taxpayers improperly for a $58 million warehouse and charging $12 million to deliver food from that warehouse across the street to Camp Leatherneck in Helmand province.

“Despite all these concerns [over overbilling and undocumented costs], the government continued to contract with Supreme, and it even exercised options to extend the contract,” said Subcommittee Chairman Jason Chaffetz, R-Utah. “We have well-established contracting procedures. If we’re not going to use them, why have them?”

“It took DLA six years to demand that Supreme reimburse the government for more than $750 million in what it believed were overpayments — that’s an astounding amount of money,” said Rep. John Tierney of Massachusetts, the subcommittee’s ranking Democrat.

According to Tierney, DLA realized nearly a year after it expanded the scope of the contract to include many more delivery points — through verbal arrangements with Supreme — that its rates for transportation and storage costs were unreasonable. But the agency spent the next five and a half years trying unsuccessfully to negotiate fair and reasonable rates.

The House subcommittee, which launched a probe of the contract last spring, found that the defense agency already had paid Supreme $1.38 billion for distributing food to additional locations when it determined it had overpaid the firm by $756.9 million. “Despite all of these problems, the agency failed to rebid the contract after the contract expired [in 2010] and decided to grant Supreme a no-bid extension of the contract that ended up lasting two more years,” Tierney said.

Matthew Beebe, DLA’s deputy director for acquisition, told the panel that his agency has recouped $283 million — over a third of the $757 million in overpayments — by withholding nearly $22 million a month from Supreme, which is still supplying food and water to U.S. troops and NATO forces. The withholding, which began on March 2012, followed unsuccessful negotiations and audits in 2008 and 2011 to determine “whether Supreme’s rates were fair and reasonable,” Beebe said.

The company claims it is owed $1 billion more than the $5.5 billion it already has been paid over the life of the contract. It claims the initial contract allowed prices to be adjusted as the work expanded, and has appealed the refund demands to special government board.

Michael Schuster, Supreme Foodservice’s managing director for logistics, told the panel the audits were flawed. As its work progressed, Supreme had “to change fundamentally the way it executes its responsibilities and to develop and operate a network of airplanes, helicopters, and trucks able to reach isolated regions of Afghanistan,” Schuster said.

He added that DLA’s original solicitation said that only “remnants” of the Taliban were still active in areas of Afghanistan where his company would be operating. But as its mission expanded from four locations to 120 in remote areas, “312 of our subcontractors” lost their lives while delivering food to troops, he said. “Supreme had to build this network in an active war zone,” Schuster said.

At the hearing, Daniel R. Blair, the Pentagon’s deputy inspector general for auditing, told lawmakers however that the contract was expanded improperly through orders that were not written down promptly. The DLA contracting officer “did not provide sufficient oversight,” by failing to set appropriate rates and promptly modify the written contract.

Beebe confirmed that DLA extended the contract for two more years in 2010, even though a 2008 review of the contract by the Defense Contract Audit Agency found possible double-billing by the company for the cost of delivering food to the forward operating bases. DLA officials did not seek competition because Supreme “was the only source able to provide the required support within the required timeframe,” he said.

Last summer, Beebe added, the agency issued a follow-on interim contract to Supreme that expires Dec. 12, 2013. That, too, was not competed, he said.

When questioned by Rep. Jackie Speier, D-Calif., about the warehouse the company built in southern Afghanistan, Schuster said it was necessary because of the surge in U.S. troop strength there in 2010 and 2011. Speier then raised the $12 million delivery cost for transporting food from the warehouse across the street. “So whether it costs you $12 million or not, it was a great way to soak the federal government, it sounds like?” she asked.

“No, it wasn’t,” Schuster said.

Mica said he concluded that “we need to get out of Afghanistan sooner rather than later and put this whole wasteful episode behind us and, again, in a time of national deficits and the United States economic and national security being threatened by our fiscal situation.”