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US: Army and Halliburton Settle Bill Dispute

Halliburton will receive about 95% of what it billed, despite numerous concerns by Pentagon auditors that the company couldn't provide adequate documentation to justify its expenses. The favorable settlement is an indication the military brass is willing to treat Halliburton leniently since a large portion of the disputed services were performed in a theater of war.

by Russell Gold and Neil King Jr.The Wall Street Journal
April 6th, 2005

The Army and Halliburton Co. have resolved a long-standing dispute over the amount the Houston company billed for building and operating dining halls for troops in Iraq.

Halliburton will receive about 95% of what it billed, despite numerous concerns by Pentagon auditors that the company couldn't provide adequate documentation to justify its expenses. The favorable settlement is an indication the military brass is willing to treat Halliburton leniently since a large portion of the disputed services were performed in a theater of war.

The Army agreed to pay Halliburton $1.2 billion for dining services in Kuwait and Iraq during the first months of troop deployment, denying about $55 million in submitted bills.

Pentagon auditors initially questioned whether the company's Kellogg Brown & Root unit had overcharged the Army by as much as 40% for dining facilities. The dispute was over whether KBR should charge for the actual number of soldiers who entered the dining facility to eat, or whether the company should be allowed to charge for the projected number of meals it would serve -- a higher number. After numerous unsuccessful attempts by KBR to justify its spending, the Army determined the company might never be able to adequately account for its expenses and hired an outside consultant to examine the situation.

The consultant, working with auditors and Pentagon acquisition specialists, took several months to determine how much Halliburton should be paid. Under a set of agreements reached after extensive negotiations with Halliburton, the Army team agreed to a formula under which each time a person ate a meal, the Army would pay for 1.3 meals. Army officials said the logic was that most people ate more than their allotted portion.

The Army also agreed to give the company a no-fault grace period for the first three months of the contract in early 2003, during which the largest allegations of overcharging occurred, Army officials said.

In another break, the Army agreed to pay a fixed-price for the majority of the dining bills, instead of a reimbursement for actual expenditures. This increased Halliburton's profit to 3% from 1%, Army officials said, generating an extra $26 million for the company. That sum was not mentioned in the Army news release announcing the dining payments.

Halliburton spokeswoman Beverly Scippa described the overall dining-facility agreement as "fabulous news." She also noted that the denied $55 million would be withheld from Halliburton's subcontractors so the company "anticipates absolutely no negative financial impact."

P. W. Singer, a research fellow at the Brookings Institute, said the fee isn't a vindication of Halliburton's work in Iraq. The decision "illustrates that the government is finally starting to think like a smart client, i.e. checking its own numbers rather than automatically awarding the contractor what it claims," he said.

Halliburton has billed the Army $10.5 billion for its work under a wide-ranging support contract, including the dining halls. The company did everything from launder soldiers' clothes to drive truck convoys under the contract. Much of the bill remains unpaid, but yesterday Halliburton said it had settled on the terms defining the scope of the work the Army will reimburse. The agreement should speed up the payment of a 1% profit Halliburton was guaranteed for the work, as well as a bonus of up to 2%.

So far, the Army's "award fee board" that determines bonuses has given Halliburton good grades on a limited scope of work. Yesterday, for instance, the Army said it gave top marks for the company's work at Camp Bucca, an internment facility near the southern Iraqi port of Umm Qasr.

The resolution of this dispute doesn't put an end to questions about the company's operations in Iraq and Kuwait. Pentagon auditors are questioning another $108.4 million that Halliburton billed to deliver fuel to Iraq as part of a no-bid contract to rebuild the country's oil infrastructure, and a federal grand jury is probing whether the Pentagon showed improper favoritism when it awarded the company the contract. The company has denied wrongdoing and says it is cooperating with audits and investigations.

Earlier this week, David Lesar, Halliburton's chairman and chief executive, said the company didn't intend aggressively to pursue additional work in Iraq.





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