Third and last in this popular series about an arcane subject, from a guest blogger with experience on both sides of the military contracting table. I'd like to thank Robin for taking the time to offer us her expertise on this important subject at a timely moment.
Halliburton, Part 3/3
by Robin Burk
Welcome to the 3rd and last installment of our special report on Halliburton and defense contracting.
Complaints about Halliburton's role in the reconstruction of Iraq took on new focus recently with claims they overcharged for fuel
. This installment looks at that controversy, and tries to make sense of it in light of the "Military Contracting 101" crash course you've received from the previous 2 installments [Part I
| Part II
As Democrats and some in the Pentagon criticized the company publicly,
Halliburton defended its prices, noting that the Army insisted on issuing short-term orders only
, which prevented Halliburton's Kellog Brown & Root subsidiary from negotiating more favorable terms. The company also stated that it had saved the government money by proposing that fuel be purchased from Turkey
rather than Kuwait for delivery to northern Iraq.
The Pentagon's comptroller agreed that it did not appear the company was trying to cheat the US government, noting that an "antiquated" accounting system and the complexity of billing at headquarters for work done in Iraq might also be problems.
However, Democratic criticism of Halliburton continued, as presidential hopeful Joe Lieberman announced that an internal Halliburton audit
raised questions about the price charged by the Kuwaitis for the fuel they delivered under a subcontract issued by KBR, a claim the company denied.
Halliburton went on the offensive Monday, claiming the US pressured it to buy more expensive fuel from Kuwait
as a political favor to the Kuwaitis. Defenders of the company also note that Gen. Sanchez originally requested rapid delivery of fuel from Kuwait because of an uprising in Basra due to lack of gas and cooking fuel
. As additional fuel was delivered to other cities, the Kuwaiti subcontractor continued to demand surcharges due to the danger of attacks by insurgents.
What's going on in all these claims and counterclaims? How did Halliburton get a huge uncompeted contract in Iraq anyway? Isn't this obviously the result of Vice Pres. Cheney steering profits to his cronies at the expense of the US taxpayer?
LONG AGO IN AN ADMINISTRATION FAR, FAR AWAY
Halliburton is one of the largest engineering and energy services companies in the world. Its Kellog, Brown & Root subsidiary started as the BrownShipbuilding Co.
in Houston in 1942 and they continue to be managing owners of the Devonport Royal Dockyards in the UK, where British surface combat ships and nuclear submarines are refueled and refitted. KBR provides a wide range of other naval and air defence services
to the UK.
In addition to their expertise in oil and gas drilling, mining and power generation, KBR's government operations group provides a broad array of facilities, logistics and emergency response services to federal, state and local governments in the US. KBR is responsible for security upgrades to US embassies, consulates and annexes
worldwide. They also have extensive experience in managing disaster response
around the world.
However, the springboard for their contract in Iraq lies in the Clinton administration's decision to outsource military base logistics services.
In 1992 KBR won an open competition to provide the service support for overseas troops. This contract, called the Logcap, is awarded every few years. KBR won the it in 1992, lost in 1997, and won it again in 2001. Under the deal, KBR builds bases, supplies water, operates laundries and performs thousands of other tasks.
In an Op Ed
in the New York Times (full text here
), David Brooks writes that:
bq. "Though the G.A.O. has found that KBR sometimes overcharges, in general the company has an outstanding reputation among the panoply of auditing agencies that monitor these contracts."
Logcap is an umbrella contract which allows DOD to procure a wide range of services, but when conflicts emerge there are sometimes unforseen but urgent needs. In the Federal Acquisition Regulations Congress specifically establishes circumstances and mechanisms for awarding contracts without competitive bid when a clear case can be made that this is in the best interests of the government.
The Clinton Administration issued a temporary non-bid contract to Halliburton during the Balkans conflict under these FAR provisions. The Bush administration did the same thing in the runup to the invasion of Iraq.
In particular, the Pentagon was deeply concerned about the likelihood that Iraq's oil wells would be set on fire or otherwise sabotaged, as was done in Kuwait by Iraqi armed forces during Gulf I. That was a major environmental disaster for Kuwait in addition to an economic blow. Pentagon planners were determined to prevent a repeat this time around. Under Logcap, Halliburton was asked to plan a disaster management approach to capping oil well fires and to dealing with other forseeable attacks on the oil infrastructure.
KBR was well suited to do this planning - some would say uniquely suited for the task. They are one of only a handful of companies world wide who combine the necessary engineering, oil field, construction, emergency response and project management skills in one organization. As the current Logcap contractor, they were certain to have a presence in Iraq even before major combat operations would die down. Moreover, KBR could potentially mobilize people who not only had the requisite technical and managerial skills but who also held security clearances - among KBR's government clients is the Defense Intelligence Agency
as well as the State Dept.
Equally important for success, KBR had approved labor and general & administrative rates already audited by DOD
. As we saw in Part 2 of this series, establishing and approving these rates is a complex, time-consuming activity. Leveraging existing approved rates made it possible to arrange critical support quickly and ensured that these portions of any service charges would be fair and advantageous to the Government. As with any cost plus contract, direct materials and sub-contractor charges would have to be approved on a task by task basis.
Logcap's Statement of Work allowed the government to direct KBR to plan emergency oil field services for Iraq under the existing umbrella contract. Executing that plan, however, was outside of Logcap's terms. It was for this reason that KBR was awarded a short-term non-competitive contract last Spring.
The terms of the contract called for KBR's allowable burdened costs (remember those?) to be reimbursed along with a very small profit margin (1% according to a company spokeswoman). However, other advantages might accrue to the company: they will have a presence in Iraq and -- assuming they are seen to do a good job -- would have an advantage in future competitive bids there. The Defense Contract Auditing Agency would, as usual, keep an eye on the one area of costs open to discussion, namely the direct materials costs and any subcontractor costs incurred when KBR undertook tasks as a result of this contract.
PUTTING IT ALL TOGETHER
Doing business with the United States government is a cumbersome process designed to prevent abuses while still advancing the best interests of the country. To achieve that balance, Congress has written and regularly modifies the FAR and the DFARS in order to provide government contracting officials a variety of mechanisms for for procuring goods and services at a fair cost to the taxpayer. The process includes substantial oversight at all phases, pre- and post-contract award.
One such mechanism is the ability to award a broad contract allowing agencies to procure a certain range of services without having to draw up a full acquisition package and run a competition each time. Such an Indefinite Delivery / Indefinite Quantity contract establishes the labor and overhead rates a federal agency will pay for approved services. Task or bid orders still must be issued under the auspices of such a contract for actual work to be performed and there is a maxiumum ceiling on the total value of services and goods that can be procured.
The announced value of such a contract may be very high, but until actual task orders are issued the contractor is not guaranteed any particular level of work.
The mechanisms of defense contracting can be clumsy. They aim at cost-effective compromise rather than the nth degree of bargain-hunting. It is not in the best interests of the US taxpayer, for instance, to spend $5 to avoid being overcharged $1.
We want real competition for contracts where that will bring the best value, but it would be foolish to ignore those cases where an incumbent contractor's expertise and resources offer the most likely way to achieve urgent and important results.
To quote David Brooks' NYT Op Ed once more:
bq. "The fact is that unlike the Congressional pork barrel machine, the federal procurement system is a highly structured process, which is largely insulated from crass political pressures ... The lesson of this Halliburton business is that some parts of our government really do make their decisions on the merits."
I haven't the faintest idea whether or not the rates paid for the Army's preferred Kuwaiti fuel subcontractor were appropriate. But I am pretty sure that the DCAA will make a reasonable and honest evaluation of them.
If they decide to disallow some portion of those charges, KBR may end up taking a loss on that portion of their work. That will signal other contractors not to overcharge. But abuses can go both ways: if capable companies believe the government is being unfair to KBR, we will all be the worse for it. KBR contractor and sub-contractor personnel have died while supporting the reconstruction of Iraq. That's a fact worth keeping in mind when we read about disputed materials charges on a temporary sole source contract.