Windfalls of war: KBR, the government’s concierge

Introduction

The rush to war in the months following the terrorist attacks of 9/11 created an urgency in the Pentagon, not just for military operations but also for contracting.

When U.S. forces moved into Afghanistan in 2001, there was little, if any, infrastructure to support and house U.S. troops. The military needed someone to do everything from housing troops to rebuilding airfields. The solution was a contract called the Logistics Civil Augmentation Program, or LOGCAP, a type of umbrella contract the Army had been using to support is military bases overseas. In late 2001, the Army, after a competition, awarded LOGCAP III to KBR. The Houston-based firm, once a subsidiary of Halliburton, began providing everything from showers to dining halls.

Even beyond single-source contracts, the Pentagon has other types of contracts it can use to quickly award work without having to compete specific jobs. They include umbrella-type contracts, like LOGCAP, that allow the government to buy unspecified goods and services over long periods of time. “It’s the government’s way of saying ‘We don’t know what we want, and we don’t know how much it costs,’” said Laura Peterson, a senior policy analyst with Taxpayers for Common Sense, a watchdog group. “Instead they say, ‘we’ll put you on retainer and tell you later what we want and when we want it, and you just bill us.’ You become the government’s concierge, and it’s like a gigantic monopoly.”

Indeed, that’s the way LOGCAP III operated for almost a decade. And while KBR was competitively awarded the umbrella contract in December 2001, it didn’t have to compete for any of the subsequent work, which totaled over $37 billion by the end of July this year. For the next 10 years, the company provided water systems, heaters, tents, and dining facilities. The company also provided electricians, cooks and cleaners and other civilian workers needed to run military bases.

When the U.S. went to war in Iraq in 2003, KBR came along too, eventually providing modern dining facilities for military and State Department personnel, featuring everything from made-to-order Caesar salads to a dessert station featuring over a dozen types of pie and cakes. Though costs were supposed to be limited to $20 a person per day, a State Department Inspector General investigation found personnel were being encouraged to scan their attendance at meals and snacks as many times as possible. A notice in an embassy newsletter read, “more scans = more goodies,” and the Inspector General found people were scanning multiple times, which hid the true cost of the meals. “One person scanned his card 25 times in two days,” the report states. A later Defense Contract Audit Agency report confirmed those findings, saying that headcount inflation could be as high as 36 percent.

As LOGCAP expanded in Iraq, adding more and more work, KBR came under increasing scrutiny, particularly when the Army tried to extend the contract into new areas. In 2003, the U.S. Army Corps of Engineers, at the direction of the Pentagon, was preparing to issue KBR a sole-source award, known as the Restore Iraqi Oil, or RIO contract, based on urgent need, over the objections of Bunnatine Greenhouse.

As the senior contracting official at the Army Corp of Engineers, Greenhouse questioned the selection of KBR as a the only qualified company, and raised a number of concerns about the justification for the sole-source ward, ranging from nonexistent cost estimates to the lack of reasonable justification for granting a sole-source contract for more than one year. “The fact that it was a no-bid, sole source contract meant that the government was placing KBR in the position of being able to define what the reasonable costs would be to execute the RIO contract and then charging the government what it defined as being reasonable,” she testified in 2005 to the Senate Democratic Policy Committee. In addition, a Defense Contract Audit Agency audit found the company had overcharged the RIO contract by $61 million.

Greenhouse maintains the Army retaliated against her for voicing her concerns on the sole-source contract and then later making statements to Congress criticizing the deal; she was eventually stripped of her high-level position and her security clearance. Greenhouse sued the government, and the National Whistleblowers Center announced in July 2011 that the U.S. government had agreed to pay Greenhouse $970,000 to settle her claims.

Despite Greenhouse’s allegations, and a series of audit reports criticizing the contingency contract, Army officials continued to deny that there was anything improper with the decision to sole-source the oil contract to KBR.

In the meantime, as LOGCAP grew, the problems became hard to ignore. Pentagon audits and government reports accused KBR of overbilling. At one Wartime Contracting Commission hearing, April Stephenson, then head of the Defense Contract Audit Agency, confirmed that the LOGCAP III contract had generated $553 million in questionable billing and 32fraud referrals for investigation. “I have to say in the history of DCAA I do not think we are aware of a program, a contract or a contractor that has had this number of suspensions or referrals,” she testified.

Some criminal charges have already resulted regarding the LOGCAP contract, including a former employee who pleaded guilty to receiving kickbacks on a subcontract to a Kuwaiti company.

The U.S. government is also now in the middle of a $100 million lawsuit against KBR, alleging breach of contract and false claims related to providing private security under the LOGCAP contract. A federal judge in August rejected the company’s bid to have the suit thrown out.

KBR issued a statement Tuesday saying, “We conduct our business with integrity, transparency, accountability, and discipline. When we have identified potential issues, we have reported them to our clients and the appropriate agencies as required, and have fully cooperated with those agencies to investigate and address each issue. While we do not agree with some allegations raised by the goverment, we have initiated efforts to revolve these issues.”

Facing mounting criticism of the LOGCAP contract, the Army eventually held a new LOGCAP competition, and in 2007 awarded contracts to three companies — KBR, DynCorp, and Fluor Corporation — under what was called LOGCAP IV. Unlike the previous LOGCAP III, the three companies under LOGCAP IV would compete for individual task orders, creating an incentive for lower price and better services, and quelling the major criticism of the previous contract structure.

In 2010, however, the Army announced that rather than moving to the competitively awarded LOGCAP IV for base services, it would extend the LOGCAP III for work in Iraq. “Theater commanders have raised concerns that a transition from LOGCAP III to LOGCAP IV would strain logistics and transportation assets in Iraq at the same time that a massive withdrawal of U.S. forces, weapons and equipment is under way,” according to an Army release about the decision.

As of July 2011, just $5.7 billion had been spent on LOGCAP IV, compared to over $37 billion on LOGCAP III.

LOGCAP may have been the largest of the limited competition wartime services contracts, but it was by no means the only one. Another contract that drew criticism was a five-year contract to Supreme Services to deliver food supplies to Afghanistan. That contract, awarded in 2004, was already worth over $5 billion when the Defense Logistics Agency chose to extend it in 2010, without competition, for another two years and an additional $4 billion. A DOD Inspector General investigation released shortly after the extension found numerous lapses of oversight of the contract.

Among other problems, the Inspector General determined the company had overbilled the Army, and identified potential overpayments totaling nearly $100 million for transportation costs to Afghanistan, and another $26 million in overpayments related to shipping perishables. The report also found the Army had paid a staggering $455 million for transporting fresh fruits and vegetables to Afghanistan from the United Arab Emirates without ever determining whether the prices were “fair and reasonable.” The transportation rate, it turns out, had been the same rate negotiated with a prior vendor, a Kuwaiti company which was subsequently indicted by the Department of Justice on criminal charges.

Such contracts, like LOGCAP, which are counted as “competitive” in database figures, likely hide a much worse picture, according to Charles Tiefer, a member of the Wartime Contracting Commission. KBR did win the initial contract competitively, he said, but “for the next 10 years there were task orders without further competition that went to KBR.”

Tiefer said that during commission hearings, it came out that contracts that use indefinite delivery, indefinite quantity task orders, like LOGCAP, were counted as “competitive” in federal data figures, even though subsequent work under it wasn’t competed — over $30 billion in the case of LOGCAP III.

“It’s not at all an obscure example,” he said. “It shows that the rate of real competition may be less than the claimed rate of competition.”

Next: Pentagon spends millions of US tax dollars on Russian-made helicopters to outfit Iraqi and Afghan militaries

(UPDATE: This story was updated Aug. 30 with response from KBR)