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Iraq Fraud and Waste Nightmare, Redux

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For those who hoped that the KBR fraud and waste mess was exposed and behind us, take a look at what my co-author Robert Bauman found when he examined the new contract designed to supply our troops in Iraq (the administration is now talking about permanent bases again) and beyond for the next 10 years:

In the Byzantine world that is defense procurement, nothing is ever what it seems. This can be said of the newly announced LOGCAP IV, the newest contract to support our troops in Iraq and around the world. The notorious old contract, LOGCAP III was the contract where KBR, formerly owned by Halliburton, over-billed the government while not supplying the troops with what they need. The Army just announced a new "strategy" for the LOGCAP IV contract by splitting the work among three contractors - KBR, Fluor, and DynCorp, with each company expecting work valued at $5 billion per year for ten years, a total of $150 billion. The Army says this new "strategy" will reduce the risk to the government and result in a more competitive environment "meant to control costs and enhance quality" (Didn't the Army say the same thing to justify privatizing their logistics?). On top of this, the Army awarded a LOGCAP IV "support" contract to a fourth contractor - SERCO, to provide planning and management support on the contract.

It can be said that splitting this huge contract is a positive step toward competition and cost controls. But I don't see it that way. Yes, there are three contractors on this massive contract. But, in reality, where is the competition? If each contractor is guaranteed the same value of the work, despite their bids, performance and costs, competition is only an illusion. If the government really wanted to control costs, they would award the majority of the contract at set intervals to the contractor who keeps their costs lowest while doing the best job for the troops. That is real competition and would put in the right incentives. This new contract promises to have four contractors, secure in their portion of the contract, continuing KBR's tradition of inflated billings while not adequately supplying the troops, especially those outside the bases.

LOGCAP IV services troops throughout the world, not just Iraq. Given that KBR is completely entrenched in Iraq and to change contractors there would be disruptive and costly, KBR, most likely, will continue its work in Iraq on the major support task orders and the other two contractors will divide up work on smaller task orders or in other countries. That would not do much to change the status quo for KBR in Iraq. This arrangement also sets an environment for a possible scenario in which an alliance or collusion among the contractors could occur in order to keep costs at an artificially high level, manipulate who is going to get what task order and to protect the status quo. There are few incentives in this new contract to control costs.

And what role will SERCO have in the determination of which contractors get the work? Under the support contract, SERCO will provide "acquisition and life cycle management support for the program." There is a fundamental problem of having a contractor involved in the acquisition, planning, and management support over LOGCAP IV, especially since a contractor's first priority is to make money for itself. After all, this support contract is a cost reimbursable type, known for the ease in which you can overcharge the government. The incentive here is not to save money for the Army and this climate creates many questions about that contractor's relationships with the other three contractors. Will this new management company provide the Army its analysis and assessments of who wins task orders and at what cost for itself and the other contractors being awarded the task orders? In other words, it appears that the contractors will run the show and DOD's already strapped acquisition and oversight personnel will be forced to take a back seat in the process. This could be another recipe for overcharging and fraud. We can't afford this during a war.

The cost of $5 billion per year per contractor is also an illusion given the cost history of the over-inflated LOGCAP III and the unknown future of contingencies the services are to be used for. LOGCAP III was sailing along at about an expected $60 million per year before the Iraq war started in March 2003 and then exploded to an estimated 8.5 billion per year from March 2003 to 2006. Within LOGCAP III, Task Order 59 was the first major task order to establish bases in Iraq and support the troops. It was valued at $3.9 billion in July 2003 and ended up costing $9.7 billion by April 2005. The value of a contract is only good until the contract is signed. After that, it will be bombarded with modifications adding significant costs to that initial value. Also, task orders, especially the major support task orders, most likely will be based on historical costs. These historical costs are highly inflated from previous work in Iraq. From recent government audits, such as the Special Inspector General for Iraq Reconstruction audit report, we are just now getting a good idea of how costs on task orders have been inflated. That audit reflected overcharging on just one task order for services by KBR within the Green Zone. What about costs of all the other task orders for services throughout Iraq? When, and if, such costs are ever audited, the overcharges promise to be staggering. It is these costs that form the basis for estimating future work for new task orders under LOGCAP IV. Not a pretty sight when contemplating the future costs of the contract especially when the contractor SERCO, not the government, will be doing the pricing analysis on contractor submitted estimates.

The only way that the Army will get control of costs under LOGCAP IV will be to significantly raise the level of government oversight. First, the government needs to scrub the numbers from the fat LOGAP III contract and bring the billings and historical costs back to earth. In order for oversight to work for the new contract, it has to include technical experts in cost analysis who can properly determine whether the contractor's internal costs are reasonable including evaluation of whether requested contract modifications are necessary and reasonable. This is a type of oversight that has not existed to date and has led to inflated costs. But, with the new "support contract," the Army apparently has outsourced their oversight responsibilities. Pentagon oversight staffing levels have decreased an estimated 40 percent since the 1990s and have not been replenished while defense service contracts have increased 78 percent creating a serious shortage of qualified technical contract experts to conduct the necessary oversight over LOGCAP IV. This, apparently, has forced the Army to outsource in order to provide resources for acquisition management and oversight. By doing this, the Army is only masking its inability to manage and oversee the contract itself. But, who is going to provide oversight over SERCO? Who is going to watch the watchers? Certainly not the Army. They don't have the personnel to do that in a meaningful way.

Let's summarize: no realistic competition; costs that will surely increase well beyond initial expectations; no cost control incentives, no meaningful government oversight over contractor cost controls. LOGCAP IV is not what it seems. As I outlined in my book, LOG CAP III was a disaster in supplying our troops what they needed and massively picked the taxpayers pocket. Congress, you appropriate the money for this, are you listening?

Robert Bauman, CFE (Certified Fraud Examiner)

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