A Spoiled KBR Demands More and More From the Army

Most parents realize that if you set a pattern of giving in to the demands of your children, they will develop a sense of entitlement and make more and unreasonable demands. Once you learn that giving in leads to more demands and even tantrums, it is very difficult to change the situation. Defense contractors are very like those children, responding to any concession by the government with even more demands. The Iraq and Afghanistan contractors are some of the worse government brats. Attempts to curb this behavior are often met with legal and political resistance, aided and abetted by contractors’ political friends.

Jim McElhatton, in an excellent article in the May 5 Federal Times, highlights the classic case of this phenomenon: the Army’s treatment of KBR on the LOGCAP III contract. This contract, which provided services for troops in Iraq, Afghanistan and other locations from 2001 to 2011, is the Army’s largest service contract ever. KBR was paid over $38 billion for providing this support. Now that the contract is over, KBR is claiming it will cost at least $500 million to perform “close-out” activities under the contract. Knowing KBR’s proclivity to throwing political and legal tantrums for years, the Army has asked KBR for a fixed price to perform these actions. KBR refuses to work under this contract that can control costs and instead, wants an open-ended contract which will cover all of their costs plus a profit. KBR, as described in the Federal Times article, has filed suit in the Federal Court of Claims on this issue.

The main lesson to be learned from this situation is the long shadow cast by the Army’s earlier actions to benefit of KBR financially and let them run loose in these war zones for years. From late 2004 through 2006, the Army continually took actions to benefit KBR, at the expense of the Government and of support to the troops. The two leaders of the LOGCAP contracting effort were replaced (I was one of them) -apparently at KBR’s request. New leaders then negotiated with KBR to settle contract costs at terms favorable to KBR. To accomplish this, they ignored the audit findings of the Defense Contract Audit Agency (DCAA) which questioned over $1 billion in costs, mainly due to poor cost accounting, estimating and purchasing systems within KBR. Finally, the Army gave KBR high award fees on the contract, even when work was poorly performed. KBR had the Army right where it wanted it.

This attitude, which effectively decoupled the profits made from the quality of work, led to even worse work. And there were real world consequences. Over the course of KBR’s performance, soldiers suffered from sickness due to improperly treated water at several bases. Several soldiers died from electrocution suspected to have been caused by KBR’s substandard wiring at bases. The Army had to institute a special program to correct electrical problems at bases in Iraq, Kuwait and Afghanistan. Of course, KBR continued to receive high award fees under the contract. These and other maddening effects are described in my book War for Profit.

In April of 2007, the Senate Armed Services Committee held a hearing on management of the LOGCAP contract. Sen. Carl Levin (D-Michigan) the chairman, opened the hearing by stating, “There is a history of highly favorable treatment of this contractor throughout the contract …The contractor resisted providing us the information that we needed to monitor and control costs. There were almost $2 billion in overcharges on the contract. The contractor received highly favorable settlements on these overcharges.”

The Army, represented by the assistant secretary of the army for acquisition, logistics and technology and the major general commanding the Army Sustainment Command, inadvertently confirmed this charge of favorable treatment by continually defending KBR during the hearing and providing information to the committee that was misleading or false. They tried to deny overcharging, KBR responsibility for poor water quality and even misstated the amount of money paid KBR for housing. They incredibly stated that KBR earned high award fees for having good business systems, when DCAA auditors found exactly the opposite. The Army was forced to issue corrections to the testimony and DOD IG investigations confirmed the inaccuracies in the testimony.

In testimony before the Commission on Wartime Contracting in 2009, April Stevenson, Director of the Defense Contract Audit Agency (DCAA), described the problems with KBR business systems in great detail. She pointed out how the Army had ignored the findings of the DCAA when it negotiated costs and provided KBR high award fees. Shortly thereafter, Stevenson was removed from her position and the head of the Army Audit Agency was put in as her replacement. This insured no further criticism of the Army by DCAA.

Unfortunately, the Senate Armed Services Committee did not follow up on the problems with this testimony, along with information from the Commission on Wartime Contracting hearings, and provide more oversight of the Army. Problems with the contract continued and so did the favorable treatment of KBR. But KBR, seeing no real discipline, continued to run all over the Army.

Now the additional bills for this treatment are coming due.

The current issue is a direct result of those decisions by the Army in 2004-2005. The “closeout” costs would have been resolved on a bi-yearly basis, if KBR had been forced to actually provide the appropriate cost data through approved business systems. DCAA was prepared to provide final audits of each task order (which generally covered a two year period) after work was completed, but KBR could not, or would not, provide auditable data. Now we are at the end of all performance and KBR says it will take over one half a billion dollars and up to 15 years to close out the contract. They expect to be paid this money and to earn their normal profit on the deal. And by the way, they cannot provide a sufficient estimate of the costs to give the Army a fixed price for the effort. And so it goes.

The Army has already made a major concession to KBR by agreeing to pay for these close-out activities separately from the terms of the base contract. All cost type contracts require final audit of incurred costs and close out negotiations following completion of the actual work on the contract. The contractor has been paid for the actual work on the contract and administrative close-out costs are generally included in overhead rates applied to those costs. If close-out costs are high, then the administrative contracting officer will adjust the overhead rates, in the future, to account for these increased costs. Had this taken place during the course of the ten years of the contract, the final close-out activities and costs would not be such an issue.

Consider the possible result of the KBR proposal. The government will give KBR a $500 million (I am told by Army sources KBR is now floating $750 million) cost contract which will take 15 years to “close-out.” At that point, this contract will require close-out actions and KBR will demand another cost contract to pay for those. So it will go for several generations. KBR will have devised a perfect self-licking ice cream cone and perfect job security for years – long after these wars have ended.

As McElhatton has reported in a follow-up article on June 4, the Department of Justice, in a court filing, argues that accepting KBR’s position would impact thousands of Federal cost type contracts. Cost contracts have always consisted of two phases. The first is actual performance of the scope of work which is delivery of supplies or performance of a service. This is done during the term of the contract. Following completion of the scope of work, the second phase is administrative close-out. This can only be accomplished when work is complete and final costs can be audited. By claiming the second phase must be accomplished during the term of the contract, KBR wishes to radically revise the notion of a cost contract. In a surprising move, it appears the Department of Justice is seriously contesting this view.

Should the court refer the matter back to the Army and KBR for a negotiated settlement, which is a likely outcome, the Army must make their final stand to enforce the terms of the contract and pay reasonable costs only. They must rely on DCAA audit reports, not the private contractor they have used in the past. They must refuse to bow to internal pressure to settle in favor of the contractor, especially from those “leaders” who expect lucrative jobs with defense contractors when they leave government. It is finally time to take the keys away from the teenager and ground him.

As a final observation, this problem is not unique to KBR in the Defense Department. Dina Rasor of Truthout has documented the problems with the Air Force F-35 program. Rasor has also explained the manner in which military officers easily become part of this very flawed procurement process, the kind of actions I personally observed. Unfortunately, this problem is also not unique to the Department of Defense. The networking of contractors, government officials and Congress affects every agency to some extent. It may be in the form of regulatory capture rather than procurement, but it is there. We desperately need an administration which will take on this problem government wide. Every new agency secretary must be committed to addressing the issue as it is manifest in her agency. Congressional confirmation hearings should raise this question with the proposed public servant. Congressional oversight should track and correct agencies that do not live up to the standard. This would be a far better use of committee time than pursuing purely political scandal investigations.

As you can see, I remain a bit of an idealist concerning what our government can accomplish, especially after spending my career overseeing bratty and politically-connected defense contractors. It is up to us to demand these high standards from all public servants, senior administration leaders and members of Congress. And KBR must be forced to justify how they spent over $38 billion slinging hash, building barracks, doing laundry and driving trucks for these years.