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US: Halliburton's Performance Worsens under Second Iraqi Oil Contract

by Committee on Government Reform Minority Officeyubanet.com
March 28th, 2006

Today Rep. Waxman released the first analysis of Halliburton's RIO 2 contract to restore Iraq's southern oil fields. The examination of previously undisclosed correspondence, evaluations, and audits reveals that government officials and investigators have harshly criticized Halliburton's performance under RIO 2. The documents disclose an "overwhelmingly negative" performance, including:
Intentional Overcharging: Halliburton repeatedly overcharged the taxpayer, apparently intentionally. In one case, "[c]ost estimates had hidden rate factors to increase cost of project without informing the Government." In another instance, Halliburton "tried to inflate cost estimate by $26M." In a third example, Halliburton claimed costs for laying concrete pads and footings that the Iraqi Oil Ministry had "already put in place."
Exorbitant Costs: Halliburton was "accruing exorbitant indirect costs at a rapid rate." Government officials concluded that Halliburton's "lack of cost containment and funds management is the single biggest detriment to this program." They found a "lack of cost control ... in Houston, Kuwait, and Iraq." In a partial review of the RIO 2 contract, DCAA auditors challenged $45 million in costs as unreasonable or unsupported.
Inadequate Cost Reporting: Halliburton "universally failed to provide adequate cost information," had "profound systemic problems," provided "substandard" cost reports that did "not meet minimum standards," and submitted reports that had been "vetted of any information that would allow tracking of details." Halliburton produced "unacceptable unchecked cost reports."
Schedule Delays: Halliburton's work under RIO 2 was continually plagued by delays. Halliburton had a "50% late completion" rate for RIO 2 projects. Evaluations noted "untimely work" and "schedule slippage."
Refusal to Cooperate: Evaluations described Halliburton as "obstructive" with oversight officials. Despite the billions in taxpayer funds Halliburton has been paid, the company's "leadership demonstrated minimal cooperative attitude resolving problems."


Halliburton is the largest private contractor in Iraq. The company has operated there under three mega-contracts: the "LOGCAP" contract to provide support to U.S. troops; the original "Restore Iraqi Oil" (RIO) contract, which Halliburton received in secret without competitive bidding in March 2003; and the RIO 2 contract, which was awarded to Halliburton in January 2004.

Previous reports by government auditors and congressional investigators have evaluated the LOGCAP and RIO contracts. This report, however, is the first to examine the RIO 2 contract. It reveals that government officials and investigators have harshly criticized Halliburton's performance under RIO 2, citing "profound systemic problems," "exorbitant indirect costs," "misleading" and "distorted" cost reports, a "lack of cost control," an "overwhelmingly negative" evaluation, and an "obstructive" corporate attitude toward oversight.

The RIO 2 contract is critically important to the successful reconstruction of Iraq. The mammoth $1.2 billion contract gave Halliburton the responsibility for restoring the oil fields in southern Iraq, which historically have been Iraq's largest and most productive. Three years ago, Bush Administration officials promised that Iraq would be able to fund its own reconstruction out of its oil revenues. The successful restoration of the southern oil fields, which the Administration entrusted to Halliburton under RIO 2, was supposed to pay for the rebuilding of much of the rest of Iraq's infrastructure. But these promises have not been fulfilled.

To evaluate Halliburton's performance under RIO 2, this report analyzes hundreds of pages of previously undisclosed correspondence, evaluations, and audits. The documents reviewed in preparation of the report include correspondence from the Project and Contracting Office (PCO), the Defense Department agency charged with overseeing RIO 2; evaluations by a private contractor, Foster-Wheeler, hired to help the PCO oversee the contract; documentation related to award-fee determinations; and audits by the Defense Contract Audit Agency (DCAA).

These documents show that between July 2004 and July 2005, Halliburton's performance under RIO 2 repeatedly received scathing critiques:

Intentional Overcharging: The PCO board evaluating Halliburton's request for award fees found that Halliburton repeatedly overcharged the taxpayer, apparently intentionally. In one case, "[c]ost estimates had hidden rate factors to increase cost of project without informing the Government." In another instance, Halliburton "tried to inflate cost estimate by $26M." In yet a third example, Halliburton claimed costs for laying concrete pads and footings that the Iraqi Oil Ministry had "already put in place."

Exorbitant Costs: The PCO reported that Halliburton was "accruing exorbitant indirect costs at a rapid rate" and that Halliburton's "lack of cost containment and funds management is the single biggest detriment to this program." The oversight contractor found a "lack of cost control in Houston, Kuwait, and Iraq." In a partial review of the RIO 2 contract, DCAA auditors challenged $45 million in costs as unreasonable or unsupported.

Inadequate Cost Reporting: The PCO found that Halliburton "universally failed to provide adequate cost information," had "profound systemic problems," provided "substandard" cost reports that did "not meet minimum standards," and submitted reports that had been "vetted of any information that would allow tracking of details." The oversight contractor complained about "unacceptable unchecked cost reports."

Schedule Delays: Halliburton's work under RIO 2 was continually plagued by delays. According to the PCO, Halliburton had a "50% late completion" rate for RIO 2 projects. Evaluations by the award fee board noted "untimely work" and "schedule slippage."

Refusal to Cooperate: PCO evaluations described Halliburton as "obstructive" with oversight officials. Despite the billions in taxpayer funds Halliburton has been paid, the company's "leadership demonstrated minimal cooperative attitude resolving problems."

The decision to award Halliburton the RIO 2 contract was controversial. Before the award of the contract, DCAA auditors warned the Defense Department not to enter into additional contracts with Halliburton because of "significant deficiencies" in the company's cost estimating system, but the Department ignored this advice. It now appears that problems that led to the unusual DCAA warning have been realized in RIO 2, with serious implications for the reconstruction effort in Iraq and federal taxpayers.

BACKGROUND

The Bush Administration started planning for the take-over of Iraq's oil fields nearly a year before the invasion of Iraq. During the summer of 2002, a special team within the Pentagon called the Energy Infrastructure Planning Group was established and charged with developing a plan to restore and operate Iraq's oil infrastructure in the event that the United States became an occupying power.

According to Administration officials, the revitalization of Iraq's oil fields would play a pivotal role in the reconstruction of Iraq. In March 2003, for example, then-Deputy Secretary of Defense Paul Wolfowitz assured members of Congress that Iraq's oil sector would be rehabilitated quickly, enabling Iraq's oil revenues to fund the reconstruction effort. In congressional testimony, Mr. Wolfowitz stated: "We're dealing with a country that can really finance its own reconstruction, and relatively soon." Echoing these views, the head of the U.S. Agency for International Development, Andrew S. Natsios, stated a month later that "the American part" of the cost of rebuilding Iraq "will be just $1.7 billion."

Halliburton's Contingency Planning Contract

From nearly the beginning, Halliburton had a major role in the Administration's oilfield planning. In the fall of 2002, Michael Mobbs, a Defense Department political appointee and the head of the Energy Infrastructure Planning Group, decided to award the oil infrastructure planning work to Halliburton. This decision was made in secret without competition from any other companies.

As a result, Halliburton received a $1.9 million task order under the LOGCAP contract in November 2002 to draw up contingency plans for U.S. occupation of the Iraqi oil fields. At the time this no-bid contract was awarded, Mr. Mobbs knew that the company that received the contingency contract would also be awarded the much larger RIO contract.

The Government Accountability Office later investigated the award of the contingency contract and concluded that it was not "in accordance with legal requirements" because "preparation of the contingency support plan for this mission was beyond the scope of the contract." GAO added that the work "should have been awarded using competitive procedures."

DCAA Audit Findings Challenge Costs

Audits from the Defense Contract Audit Agency shed additional light on Halliburton's failure to control costs under the RIO 2 contract, identifying questioned and unsupported costs totaling $45 million.

In response to a bipartisan document request, DCAA provided the Committee on Government Reform with four initial audits of Halliburton's RIO 2 contract. The audits examine $111 million in Halliburton costs under three task orders. In these initial audits, the auditors detected significant questioned and unsupported costs. As Table A shows, out of $111 million in RIO 2 costs examined, DCAA challenged $57 million in costs as questioned or unsupported. This is more than half of Halliburton's costs for these projects. For one project, DCAA challenged 69% of Halliburton's proposed costs.



In the audits, DCAA repeatedly found that Halliburton "was unable to provide adequate justification of price reasonableness for proposed equipment, material, subcontract and other direct costs." DCCA concluded: "we do not believe the contractor's proposal is an acceptable basis to negotiate a fair and reasonable price due to the significant inadequacies in the cost and pricing data."

According to DCAA, eight additional audits of RIO 2 have been completed and three are ongoing. Some of these additional audits may supersede the four audits provided to the Committee. The complete set of 15 audits examines $365 million in Halliburton costs. DCAA identified $41 million in questioned costs and $4 million in unsupported costs. Thus, DCAA has challenged a total of $45 million in costs, or 12% of the total costs examined.

CONCLUSION

Two years ago, despite warnings from auditors not to enter into further contracts with Halliburton, the Defense Department awarded Halliburton a new oil infrastructure contract, RIO 2. Internal government documents show that Halliburton's performance under RIO 2 has been deeply flawed. Among the serious and persistent problems identified in the documents are repeated examples of apparently intentional overcharging, exorbitant costs, poor cost reporting, slipping schedules, and a refusal to cooperate with the government. The impact on the reconstruction effort in Iraq and on taxpayers is significant, with Pentagon auditors challenging $45 million in RIO 2 costs.

The full report is available for download.





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