Self-Dealing and the War Service Industry, Part I

Part of the Series

Solutions

On April 19, 2007, the Senate Armed Services Committee held a hearing on the Army’s management of KBR’s contract, called LOGCAP, which provided support and logistics to our troops in Iraq and Afghanistan. Sen. Carl Levin, chairman of the committee, began the hearing by noting, “There has been a history of highly favorable treatment of this contractor (KBR) throughout the contract.” Chairman Levin was correct, but greatly understated the problem of KBR holding the government hostage during these wars as the only contractor that was providing support to the troops. KBR was and is a politically connected company that used all their connections to run up the costs on LOGCAP early in the wars so that future contracts would be fat and lucrative. They also used their well-placed political clout to make sure they got their bonus money even though their performance was poor.

This is the first part of a three-part series that will show self-dealing by leaders in the Army, who arranged for this favorable treatment of KBR, at the time a subsidiary of Halliburton. We will lead you through the actions and the consequences of these actions and the effects on the troops and the Army budget. In this column, we will examine the Army’s management of the LOGCAP contract. In the second column, we will examine the Army Corps of Engineers management of the Restore Iraqi Oil contract with KBR. In the third column, we will examine the leaders in the Army, who have profited from their pro-KBR actions.

LOGCAP

The LOGCAP (Logistics Civil Augmentation Program) contract is the Army’s major contract to provide logistics support to troops engaged in overseas deployments, known as contingency missions. Under the LOGCAP contract, troops are housed; fed; provided with sanitation and morale, welfare and recreation opportunities. With this broad mission, it became the Army’s largest service contract ever during the Iraqi and Afghanistan wars. The contract in its third version provided KBR with over $50 billion in contract funds and approximately $1.5 billion in profits. Many of these dollars were unearned by KBR because of grossly inflated costs and poor performance.

As early as 2004, the Army had a problem with KBR. While KBR had set up Army camps in Iraq and Afghanistan and they were supplying the troops, they had wasted millions of dollars in doing so through poor subcontracting practices, poor maintenance of transportation vehicles and hiring employees at higher-than-justified salaries. The government managers for these contracts had requested the Defense Contract Audit Agency (DCAA) to audit KBR’s incurred costs – the amount of money that KBR has spent to date. DCAA reported that they could not provide accurate audits, because KBR did not have the ability to provide sufficient cost data for the audits. KBR’s cost accounting system, cost estimating system and procurement system were all incompetent and did not provide auditable data, as required by their contract. DCAA then discovered in June 2004 that $1.2 billion in KBR costs were unsupported by documentation and, therefore, should not be recognized by the Army when determining how much or even whether KBR should eligible for a bonus, known as award fees. In addition, DCAA found that $250 million in costs for KBR-run dining facilities (DFACS) should not be allowed because they were unreasonably high based upon faulty KBR procurement practices.

Controlling the initial costs under LOGCAP was crucial at this point in the wars. First, these KBR costs, however inflated, would be the cost base of what the Army would spend on follow-on contracts for KBR or another contractor. In other words, they would be the historic cost basis on how much it would cost to have contractors supply troops year after year in these two wars and future wars. KBR had all the incentive in the world to artificially run up the costs because they would make more on the follow-up contracts. It is an old, tried and true contractor trick that has made the Pentagon overpay for planes, ships, tanks, spare parts or war logistic services for years.

Second, in spring 2004, the Army Commander in Iraq, Gen. George Casey, was given a budget of approximately $80 billion for the war effort. Every dollar wasted on LOGCAP would cost the troops other types of support that could have been provided by that dollar for other vital equipment such as body armor, bomb detection and enhanced armor for their vehicles.

Army contract managers, in June 2004, informed KBR of two actions they would take:

1. They would start withholding 15 percent of all KBR payments until KBR provided auditable proposals to negotiate contract costs bases for award (bonus) fees.
2. They would unilaterally settle these negotiations based upon DCAA recommendations. If KBR could provide better data, these settlements would be modified.

KBR was in trouble because the Army was actually holding them accountable to their signed contract. They were required to provide support to our soldiers in an effective and efficient manner. While they had been somewhat effective in supplying the troops (serious problems on supplying the troops would eventually surface), they had been very wasteful and inefficient. Either as a plan or because of poor business practices, KBR could not produce the data to support their proposed and expended costs.

KBR’s Reaction

KBR reacted to the problem, not by fixing their flawed accounting system and controlling costs, but by doing what many defense contractors have done for years when they get in trouble with the Pentagon – they hired one of the Pentagon’s own – a retired general. KBR decided to hire retired Lt. Gen. Paul Cerjan to be the KBR LOGCAP manager. Mr. Cerjan was apparently hired because he had incredible influence with Army leadership. After he retired from the Army, Mr. Cerjan had worked for defense contractors Loral and Lockheed Martin. He had also been president of Pat Robertson’s Regent University, which sent many true believers into the Bush administration. He was also a member of neoconservative pro-Israeli organizations. He had worked his way into being an ultimate influence peddler.

His mission was to turn things around for KBR and he was very successful. With the exception of moving a few people, he did not change the status quo at KBR. Instead, he was determined to change the Army’s treatment of KBR and cripple the Army oversight staff, who were trying to do the right thing. He demanded the Army not implement the 15 percent withholding of payments. He demanded that no task order in the contract be unilaterally settled. He demanded that the Army quickly negotiate all task orders and not use the DCAA position of questioning costs. He demanded that the Army quickly hold award fee boards and provide KBR high bonus fees. Finally, he insisted that the civilian in charge of the LOGCAP contract, Mr. Charles Smith (the co-author of this article) and the lead procuring contracting officer be removed.

The Army’s Actions

The Army caved to their friend, the retired general, and cowardly did everything that Mr. Cerjan demanded. In July 2004, the Army Sustainment Command received a new commanding general. Maj. Gen. Jerome Johnson met with Army leadership and Mr. Cerjan in Washington, DC. In August, General Johnson directed that the 15 percent withhold should not be implemented. He removed the civilian LOGCAP leader and the lead contracting officer. In an unusual move, he directed that a private firm, RCI (now SERCO) should be hired to replace DCAA’s work on reviewing KBR proposals. Not surprisingly, RCI found that over 90 percent of KBR proposed costs were justified. They did this by accepting all incurred costs, ignoring DCAA questions and simply projecting the cost to complete task orders.

Following settlement of approved costs, the Army then held award fee review boards. The most important of these was the review board for Task Order 59 in the contract, which had a cost base in excess of $5 billion. At stake was award fees of up to $200 million. DCAA auditors attended the meeting and recommended no fee, based upon the lack of approved cost accounting, cost estimating and purchasing systems. The DCAA did this knowing that having these systems approved is key to managing any cost contract and a major part of award fee evaluation. The Army overrode DCAA, again, and despite KBR’s abysmal contract performance, gave KBR about 90 percent of the potential fee.

The Army conducted a separate negotiation of the KBR costs for dining facilities. DCAA had taken a 19 percent exception, $250 million, to the KBR costs. This exception was not based upon poor business systems, but on non-competitive negotiation of these subcontracts, on terms which allowed the subcontractors to charge for meals which they did not actually prepare and serve. The Army did KBR three favors on this negotiation:

1. They allowed almost all of KBR proposed costs, including all of the $250 million.
2. They gave KBR 100 percent of possible fee (profit) on the costs.
3. They converted the contract to firm fixed price rather than cost. This insured that DCAA could not perform a post-contract audit and call for disallowing the $250 million, which DCAA would have enforced since they had already determined the costs were unreasonably incurred.

By these unprecedented actions, the Army saved KBR approximately $550 million, money that KBR did not earn.

All of these favors for KBR were discussed in monthly briefings with senior Army leadership. The head of contracting at Army Materiel Command (AMC), Jeff Parsons, the higher command for General Johnson’s Army Sustainment Command, participated in these discussions. General Johnson’s superior officer, Lt. Gen. Richard Hack was briefed in meetings at AMC and at some briefings by video conference.

Ms. Tina Ballard, the deputy assistant secretary of the Army for acquisition, logistics and technology also attended these monthly video conferences and was very involved in the decision making. In one briefing, a question was raised about problems with converting the dining facilities contract to firm fixed price. Ms. Ballard quickly cut off discussion and announced that the matter was settled. She provided updates to Mr. Claude Bolton, the assistant secretary for acquisition, logistics and technology. In addition, the Army sustainment command provided Mr. Bolton with regular information papers apprising him of the status of these issues. Similar papers were provided to the Under Secretary of Defense for Acquisition, Logistics and Technology, Mr. Wynne. KBR had achieved their goal in hiring retired General Cejan because the Army and the Department of Defense allowed themselves to be rolled by KBR and accept huge and unaudited costs. Not only did KBR win in this procurement scuffle, but set it up to be richly overpaid on their contracts in the future.

The Results

Here are the sad results that were allowed by the public servants listed above. KBR was protected from its poor management and not forced to comply with contract terms and conditions. Approximately $1 billion in 2004 and 2005 was diverted from troops to KBR. These bad contract practices continued for the life of the LOGCAP III contract, which has been continually extended beyond its stated term in order to give KBR more lucrative sole source work.

KBR, after their victory over the Army, had an attitude of entitlement to do whatever they wanted on the contract, knowing they would receive high fees. The contract no longer contained a real incentive toward satisfactory performance. In this new climate, poor work on providing water to troops surfaced in 2006. Then, poor transportation practices came to light in Congressional hearings. Tragically, poor electrical work resulted in the deaths of at least two soldiers. Having made its bed with KBR, the Army in all of these cases defended KBR before Congress, rather than holding the company accountable to troops and taxpayers.

These favors proved to be very important to KBR’s parent company, Halliburton. In 2004, KBR was a drag on Halliburton earnings and stock price. Halliburton desperately needed the stock price to remain up as they had settled an asbestos law suit which Dick Cheney brought to the company when, as president of Halliburton, he acquired Dresser Industries. The settlement was a fixed price combination of stock and cash. If Halliburton stock declined, they had to put more cash into the deal, which they did not want to do. In late 2004, Halliburton was preparing to spin off KBR, along with their problems. However, the stock price of Halliburton began to increase when the KBR contracts were negotiated and the award fees began to roll in. The new cash cow KBR became a much more valuable asset. Halliburton was able to turn the spin off into an initial public offering, with Halliburton insiders making a lot of money on the deal. Seems everyone made good on the Army’s damning acquiescence except the troops and the taxpayers.

Conclusion

Why would the Army do these favors for KBR? Here, we must separate the Army from individual leaders. These decisions were made by a small group of individuals. These were Major General Johnson, Ms. Ballard, Mr. Parsons, Lieutenant General Hack and Bolton. There may have been higher officials involved, but their direction and actions are not in the public record. The Army failed to stop and punish anyone in this fiasco; the Congress held hearings, but no consequential follow up to stop this money grab; and the Department of Defense allowed a small cabal in the Army to give billions of dollars away to KBR that they did not earn. People in Washington make speeches and decry self-dealing by former government officials when they are hired by corporations to help raid the government money, but this tale of KBR shows the real, live consequences of allowing self-dealing and poor oversight when the government does not do its job. Troops in war go without, some even die.

Unfortunately, many of these actions are instances of self-dealing on the part of the officials. They were planning their future careers outside the military, the civilian workforce and political appointment. We will follow these post-government careers in part three of this series of columns.