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IRAQ: Controversial Contractor’s Iraq Work Is Split Up


by JAMES RISENThe New York Times
May 24th, 2008

WASHINGTON — Sometime soon, a group of American corporate executives and military leaders will quietly sit down and divide Iraq into three parts.

Their meeting will not have anything to do with Iraq’s national sovereignty, but instead will involve slicing up billions of dollars in work for the defense contractors that support the American military’s presence in the country.

For the first time since the war began, the largest single Pentagon contract in Iraq is being divided among three companies, ending the monopoly held by KBR, the Houston-based corporation that has been accused of wasteful spending and mismanagement and of exploiting its political ties to Vice President Dick Cheney.

Yet even as the Pentagon begins to pull apart the enormous KBR contract, critics warn that the new three-company deal could actually result in higher costs for American taxpayers and weak oversight by the military. In fact, under the new deal, KBR and the two other companies could actually make more than three times as much as KBR has been paid each year since the war began.

Last month the Pentagon awarded the companies pieces of a new contract to provide food, shelter and basic services for American soldiers, a 10-year, $150 billion deal that stretches far beyond the final days of the Bush administration. KBR will still get a sizable chunk of the business, but now it will have to share the work with Fluor Corporation and DynCorp International.

Army officials and executives of the three companies are planning to meet in the next few weeks to start the complex process of breaking up KBR’s sprawling operations in Iraq.

KBR, previously a subsidiary of Halliburton Company" href="http://topics.nytimes.com/top/news/business/companies/halliburton_company/index.html?inline=nyt-org">Halliburton, once headed by Mr. Cheney, has collected more than $24 billion since the war began. It has 40,000 employees in Iraq and 28,000 more in Afghanistan and Kuwait.

But KBR has come under fire from Congress and Pentagon auditors for complaints ranging from making more than $200 million in excessive charges, including meals never served to soldiers, to delivering unsafe water to American troops to doing little to prevent sexual assaults of its female employees, often by their KBR co-workers.

Army officials acknowledge that they were under intense pressure from Capitol Hill to give KBR some competition, yet leading Democratic lawmakers and other critics say the new contract will merely paper over the fundamental problems that stem from the Pentagon’s heavy dependence on outside contractors in Iraq.

“This is just another verse in the same old song,” said Senator Byron L. Dorgan, a Democrat from North Dakota who is one of the leading Congressional critics of KBR and other major defense contractors. “It appears to me that this is a broken process.”

Critics also say they doubt that the new contract will result in significant cost savings or better services for soldiers in Iraq. The Army has built into the deal the potential for larger profits for the contractors than existed under the prior contract, and it plans to outsource much of the management and oversight of the contractors to yet another company, Serco Inc., for $59 million.

“This new contract sounds good, they are splitting it up, but there are serious flaws, including what looks like outsourcing oversight,” said Dina Rasor, an investigator and co-author of a book about contracting in Iraq. “And the size of the contract is enormous. When you think of these big, multibillion-dollar defense contracts and contractors, you think of companies like Lockheed, and you can see their big airplane plants. But what is KBR doing for all this money? They are slinging hash, washing laundry.”

Army officials said that they would not be able to actually shift work from KBR to the other companies until late this year, meaning that the change would be under way just as Americans are choosing a new president. The Army officials said the huge new multiyear contract for Iraq would not commit any new presidential administration to paying billions of dollars to defense contractors for services in Iraq if the new president decided to withdraw American troops.

It is not clear how the Pentagon will try to untangle KBR’s operations in Iraq to share them with DynCorp and Fluor. Lee Thompson, the executive director of the Logistics Civil Augmentation Program, as the program is called, said the Army would first try to split work in Kuwait among the three companies, and would then move on to Afghanistan and Iraq.

Even if the United States remains in Iraq long term, the contract could ultimately cost much less than $150 billion over 10 years, Mr. Thompson said. But after being caught off guard by the scale of the spending at the start of the war, the Army is building in a cushion this time, he said.

Army officials have been working for two years to undo KBR’s monopoly on business in Iraq.

As the war dragged on much longer than anticipated, the Army’s initial, pre-invasion decision to grant Halliburton a no-bid contract for Iraq emerged as a sensitive political issue for the Bush administration because of Mr. Cheney’s connections to the company. Army officials realized they had to bring in some other companies. “It didn’t take a rocket scientist to figure out we were getting beat up by the Hill,” Mr. Thompson said.

Five companies submitted bids (primarily covering work in Iraq, Kuwait and Afghanistan), and the Army initially awarded contracts to KBR, Fluor and DynCorp last June. But the two losing companies protested, and the Government Accountability Office upheld their protests in October, ruling that the Army had given preferential treatment to the winning companies. The Army then made some adjustments in the contract and announced in April that the same three companies had won again.

Heather Browne, a spokeswoman for KBR, defended the company’s performance. “When issues have been raised, KBR has fully cooperated by providing information requested of us,” she said. “We remain committed to ethics and integrity and work daily to provide quality services to our customer, the U.S. military.”

Like KBR, DynCorp, based in Falls Church, Va., has had serious problems in past contracting work, including allegations that its employees engaged in sex trafficking in Bosnia while working on a police training contract there in the late 1990s. In addition, government auditors concluded last year that the State Department’s $1.2 billion contract with DynCorp for police training in Iraq was so badly managed that they could not determine exactly what was done for the money. Just last week, DynCorp lost a racial discrimination and breach-of-contract lawsuit in Virginia when a jury found in favor of a minority subcontractor that had done work in Iraq and Afghanistan. A DynCorp spokesman said the company would appeal the $15 million judgment.

DynCorp officials said they recognized that taking over part of KBR’s work on such a highly controversial — and politically sensitive — contract in Iraq could lead to even greater public scrutiny of the company. “We understand what we are getting into here, there’s no question about it,” said Greg Lagana, a DynCorp spokesman. “But we think we can really do well at it.”

A spokesman for Irving, Tex.-based Fluor declined to discuss in detail the company’s involvement in the Iraq contract. In a prepared statement, a company official said, “We look forward to providing the personnel and equipment to sustain our troops across the globe.”

While the Army hopes to inject some competition into its Iraq contracting by splitting it three ways and requiring the companies to bid against one another for individual pieces of the work, it is also sweetening the incentives by offering much higher rewards than in the earlier contract.

Until now, KBR has been paid on a “cost-plus” basis, meaning that all of its costs are reimbursed by the Army, as long as the company can convince the government that they are reasonable. On top of that, KBR has been awarded fees, including a base fee equal to 1 percent of costs and a performance fee of an additional 2 percent of costs.

Under the new contract, the three companies will be eligible to get base fees worth up to 3 percent of the costs of the contract, and award fees that could raise the total fees up to 10 percent of costs.

“There will be higher fees than in the last contract, but we are trying to incentivize them to compete,” Mr. Thompson said.

But such high fees on cost-plus contracts require oversight, and the Army has decided to bring in Serco, a Reston, Va.-based division of a British company, to do that. It will help manage the other three contractors and perform cost and price analysis of them.

Mr. Thompson said the Army would remain in charge of judging the contractors’ performance, and a spokeswoman for the United States Army Sustainment Command, which is in charge of the contract, said that an Army inquiry found no conflicts of interest between Serco and the three other contractors.

Steve McCarney, a Serco spokesman, added that the company had performed independent assessments of government operations in the past, including several for the Navy. “We don’t have any relationships with the other contractors, and all of our assessments will be independent,” he said.

But Congressional leaders and other critics say that having an outside contractor manage the others and analyze their prices and costs means that there will be little real government oversight to maintain spending discipline.

“The Army can say that they are retaining the final say, but when they outsource this much work on contract management, they really are outsourcing oversight,” said Representative Henry A. Waxman, the California Democrat who is chairman of the House Oversight and Government Reform Committee, which has been investigating defense contractors in Iraq.





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