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Army to reimburse disputed contract

The Army has decided to reimburse a Halliburton subsidiary for nearly all of its costs on a disputed $2.41-billion no-bid contract to deliver fuel and repair oil equipment in Iraq, even though the Pentagon's own auditors had identified more than $250-million in charges as potentially excessive or unjustified.

The Army said in response to questions on Friday that questionable business practices by the subsidiary, Kellogg, Brown & Root, had in some cases driven up the company's costs.

But in the haste and peril of war, it had largely done as well as could be expected, the Army said, and aside from a few penalties, the government was compelled to reimburse the company for its costs.

Under the type of contract awarded to the company, "the contractor is not required to perform perfectly to be entitled to reimbursement," said Rhonda James, a spokeswoman for the southwestern division of the U.S. Army Corps of Engineers in Dallas, where the contract is administered.

The contract has been the subject of intense scrutiny after disclosures in 2003 that it had been awarded without competitive bidding. That produced criticism from congressional Democrats and others that the company had benefited from its connection with Dick Cheney, who was Halliburton's chief executive before becoming vice president.

Later that year auditors began focusing on the fuel deliveries under the contract, finding that the fuel transportation costs that the company was charging the Army were in some cases nearly triple what others were charging to do the same job. But Kellogg, Brown & Root, which has consistently maintained that its costs were justified, characterized the Army's decision as an official repudiation of those criticisms.

"Once all the facts were fully examined, it is clear, and now confirmed, that KBR performed this work appropriately per the client's direction and within the contract terms," said Cathy Mann, a company spokeswoman, in a written statement on the decision. The company's charges, she said, "were deemed properly incurred."

The Pentagon's Defense Contract Audit Agency had questioned $263-million in costs for fuel deliveries, pipeline repairs and other tasks that auditors said were potentially inflated or unsupported by documentation. But the Army decided to pay all but $10.1-million of those contested costs, which were mostly for trucking fuel from Kuwait and Turkey.

That means the Army is withholding payment on just 3.8 percent of the charges questioned by the Pentagon audit agency, which is far below the rate at which the agency's recommendations are usually followed or sustained by the military.

Figures provided by the Pentagon audit agency on thousands of military contracts during the past three years show how far the Halliburton decision lies outside the norm.

In 2003, the military withheld an average of 66.4 percent of what the auditors had recommended; in 2004 the figure was 75.2 percent, and in 2005 it was 56.4 percent.

Rick Barton, co-director of the post-conflict reconstruction project at the Center for Strategic and International Studies in Washington, said that despite the difficulties of doing business in a war zone, the low rate of recovery on such huge and disputed charges was hard to understand. "To think that it's near zero is ridiculous when you're talking these kinds of numbers," Barton said.

The Halliburton contract is referred to as a "cost-plus" agreement, meaning that after the company recovers its costs, it also receives various markups and award fees. Although the markups and fees are difficult to calculate exactly using the Army figures, they appear to be about $100-million.

One of Halliburton's most persistent critics, Rep. Henry A. Waxman, D-Calif., who is the ranking minority member of the House Committee on Government Reform, said in a written statement about the Army's decision: "Halliburton gouged the taxpayer, government auditors caught the company red-handed, yet the Pentagon ignored the auditors and paid Halliburton hundreds of millions of dollars and a huge bonus."

About $208-million of the disputed charges were mostly related to the cost of importing fuel, which was at the heart of the controversy surrounding the contract. Kellogg, Brown & Root hired a little-known Kuwaiti company, Altanmia, to transport fuel in enormous truck convoys. The Pentagon auditors found that in part because of the transportation fees that Kellogg, Brown & Root agreed to pay Altanmia, the cost for a gallon of gasoline was roughly 40 percent higher than what the American military paid when it did the job itself - under a separate contract it had negotiated with Altanmia.

The Army said in a written statement that it had largely accepted Kellogg, Brown & Root's assertions that costs had been driven up by factors beyond its control - the exigencies of war and the hard-line negotiating stance of the state-owned Kuwait Petroleum Corp. The Army said the Kuwait fuel company blocked attempts by Kellogg, Brown & Root to renegotiate its transportation contract with Altanmia.

The Kellogg, Brown & Root contract will be paid with about $900-million of American taxpayer money and $1.5-billion of Iraqi oil proceeds and money seized from Saddam Hussein's government. Official criticism of the work became so intense that in November, an auditing board sponsored by the United Nations recommended that the United States repay some or all of the $208-million related to the alleged fuel overcharges - an allegation Halliburton says has never been justified.

Mann said the Army's decision showed that "any claims that the figures contained in these audit reports are "overcharges' are uninformed and flat wrong." She said that the fuel charges themselves had been 100 percent reimbursed, and that the reductions all came from adjustments on administrative costs from that mission.

The Army conceded that some of the criticisms of the company's business practices were legitimate. As a result, the Army said, it would exclude about half of the auditors' questioned charges from the amount used to derive the markups and fees. That decision could cost the company a maximum of about $7-million.

James said that in addition to the other modest penalties that Kellogg, Brown & Root had been assessed by the Army, the sliding percentages on some of the fees had been lowered by unspecified amounts to reflect shortcomings in the company's dealings in Iraq.

"All fees were awarded in accordance with the award fee plan set out in the contract, which placed more emphasis on timely mission accomplishment than on cost control and paperwork," James said.