Contractor Could Lose $400 million

By Jay Price
The News & Observer

Friday 02 March 2007

Military contracting giant KBR Inc. could be docked up to $400 million for improperly using private security companies in Iraq, the company disclosed this week.

The Army has already said it withheld about $20 million in payments to KBR's parent company, Halliburton, because the company's subcontractors used private security contractors, including North Carolina-based Blackwater USA. Army officials have said that private security companies were not allowed under Halliburton's main contract in Iraq and that the military was to provide security.

The Army began looking into the use of private security firms by KBR's subcontractors after a congressional investigation sparked by a series of stories in The News & Observer. KBR has won billions in contracts to provide troops in Iraq with basic needs.

In its annual report to the Securities and Exchange Commission on Wednesday, KBR said the Army was continuing to review its contract and that it would begin withholding more payments unless the company "can provide timely information sufficient to show that such action is not necessary to protect the government's interests." If KBR fails, it could lose $400 million in Army payments, although the actual losses could be lower, according to the report.

KBR contends that its Army contract does not prohibit subcontractors from hiring private security services. It's unclear how many security companies might have worked under the KBR contract, but it's certain that Blackwater was not the only one.

In 2004, The N&O investigated Blackwater's work in Iraq and the deaths and public mutilation of four of its workers in Fallujah. Prompted in part by the articles, U.S. Rep. Henry Waxman, a Democrat from California who now heads the House Oversight and Government Reform Committee, started an investigation into how layers of subcontracts in Iraq add to the Pentagon's costs and limit its ability to oversee the work.

It was during a hearing of Waxman's committee last month that a top Army contracting official revealed that the Army had decided to withhold $19.6 million in payments to KBR. Waxman released a statement Thursday saying that the Army's decision showed why Congress must keep an eye on Pentagon contracts.

"Our investigation might mean a savings of hundreds of millions of dollars for taxpayers," Waxman said. "It would have been better if the money had never been wasted in the first place, but there's at least a chance now to fix this expensive mistake."

-------