By Matt Kelley
USA Today
Tuesday 17 July 2007
Government auditors discovered something odd last year when they reviewed KBR Inc.'s annual cost estimate to provide support services for U.S. troops in Iraq. The contractor proposed charging $110 million for housing, food, water, laundry and other services on bases that had been shut down.
KBR got a contract extension for $3.7 billion, but it agreed to drop the proposed $110 million spending on closed bases and an additional $50 million of duplicate charges and math errors, according to Defense Department records obtained by USA TODAY under the Freedom of Information Act.
Linda Theis of the Army Sustainment Command, the agency that oversees KBR's troop-support contract, downplayed the errors. They amount to just 4.3% of the contract amount, she said. "This percentage does not indicate a systemic weakness in business systems."
The errors occurred because KBR developed the proposal under a tight schedule, said company spokeswoman Heather Browne. The contract-review process, she said, worked as intended.
By far the largest government contractor in Iraq, KBR has been paid more than $20.1 billion through last October - about half of all government spending on contracts in Iraq, mostly under a multiyear Army contract to provide logistical support for U.S. troops. The company also has contracts to help rebuild Iraq's oil industry.
The Defense Contract Audit Agency (DCAA) has challenged nearly $2.2 billion of KBR's invoices and cost proposals. The Army has resolved nearly $1.3 billion of those questioned costs, paying KBR only $804 million, records show.
That 38% withholding rate is about average for Iraq contracts but well below the Pentagon's overall rate, which ranges from 56% to 75%. The DCAA calculated the amount of KBR's questioned and withheld costs at the request of the House Oversight Committee. It does not track such information for other contractors.
Congressional and government investigators, such as the Special Inspector General for Iraq Reconstruction, have accused KBR of mismanagement and overspending. Four former KBR managers have pleaded guilty to federal fraud charges for taking bribes and kickbacks from subcontractors on the logistics contract.
KBR was a subsidiary of Houston-based Halliburton until the companies split late last year. Congressional Democrats, such as Sen. Byron Dorgan of North Dakota, have suggested the company got special treatment in part because Vice President Cheney headed Halliburton for the five years before the 2000 election. Both the Bush administration and Halliburton have denied those allegations.
The Pentagon needs to crack down on KBR and other contractors, said Dorgan, head of the Democratic Policy Committee. "It requires a change in mind-set at the Pentagon, for them to slam their fist down on the table and say, 'We're not going to put up with this anymore.' "
Theis said that over the past several years, KBR has improved its business systems, which were "severely challenged" during the initial months after the 2003 invasion of Iraq. Browne said the company worked with contract managers to satisfy auditors' concerns.
"We have fully cooperated by providing information requested of us to resolve those issues," she said.
Other KBR problems flagged by auditors included:
- More than $57 million in questionable spending for shipping containers outfitted as housing for U.S. troops. In a statement submitted to the House Oversight Committee for a meeting in February, the DCAA said its auditors found KBR charged double for some handling costs, sought payment for "unjustified delays," and "selectively used higher-priced subcontractors without justification." The Army has paid $27 million of the disputed amount, records show. An additional $29.9 million on that contract remains in dispute, Theis said.
- About $212 million in overcharges for meal service, including for meals never served to troops. The Army settled the matter with KBR by withholding $55 million of the disputed amount.
- Weaknesses in most KBR business processes, including accounting, purchasing, estimating and billing. KBR has worked to correct the problems, and its internal systems have been rated as "acceptable" since April, four years after KBR first started work in Iraq, Theis said.
Pentagon Approves Disputed Iraq Costs
By Matt Kelley
USA Today
Tuesday 17 July 2007
The Pentagon approves disputed costs on Iraq contracts at a much higher rate than on military contracts as a whole, Defense Department records show.
Through last October, almost two-thirds of costs challenged by Pentagon auditors as inflated, erroneous or otherwise improper - more than $1 billion - were eventually approved by project managers. That compares with 44% for all defense contracts in 2005.
The low rate of withholding payments to Iraq contractors is evidence the Pentagon is turning a blind eye to waste and fraud, says Sen. Byron Dorgan of North Dakota, who has chaired several hearings into Iraq reconstruction problems for the Senate Democratic Policy Committee.
"I would have thought they would be apoplectic and furious about how they've been taken to the cleaners by some of these contractors," Dorgan said of Pentagon officials. "Some areas of the Pentagon seem to think, 'We're at war. What's a little waste?'"
Linda Theis, a spokeswoman for the Army office overseeing the largest contract in Iraq, said payments of questioned costs often happen when the contractor provides evidence justifying the spending.
"Sometimes the contractor is able to provide additional information or rationale to convince the contracting officer to include the cost in the estimate, and sometimes they do not," Theis wrote in an e-mail to USA TODAY.
Contracting officers often gave more weight to companies' justifications for costs in Iraq because they were operating in a war zone, the head of the Defense Contract Audit Agency (DCAA), William Reed, testified at a congressional hearing in February. "I am satisfied they are fairly considering our recommendations," Reed said of Pentagon contract managers.
The audit agency provided documents detailing costs challenged on contracts in Iraq to USA TODAY under the Freedom of Information Act.
The records show auditors have questioned $4 billion, or about 10%, of the $38.5 billion in Iraq reconstruction spending as of October. Contracting officers hadn't made final decisions on about $2.3 billion of that amount.
Here's how it works: Auditors review contract proposals and invoices for possible problems. They can recommend cutting proposed costs, withholding payments or temporarily blocking payments.
Contract managers make the final decision, usually after they investigate and document their reasoning in writing. The decisions are final and can't be challenged by the auditors.
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