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Army to Put Halliburton Contract Up for Bids

Adrian Moore
September 6, 2004, 10:28am

An overdue step to improve the quality and competitiveness of the support service contracts in Iraq. I believe this is from the Wall Street Journal, but I got it through AOL's push news service. Army to Put Halliburton Contract Up for Bids Military Plans to Break Up Iraq Logistics Operations Into at Least Six Pacts By NEIL KING JR. in Washington and RUSSELL GOLD in Dallas Staff Reporters, The Wall Street Journal (Sept. 7) - The U.S. Army plans to move within months to break up the multibillion-dollar logistics contract that Halliburton Co. has to feed, house and look after U.S. troops in Iraq, and to put out the work for competitive bid. The move, laid out in an internal Army memorandum, comes after more than a year in which Halliburton's work in Iraq under the contract has been plagued by accounting turmoil and accusations of overcharging. The contract, which the memo values at as much as $13 billion, has been used since early last year to provide massive support services for U.S. troops in Iraq and Kuwait, including housing, dining halls, transportation and laundry. U.S. Defense Department officials said the intention to rebid the contract wasn't meant to penalize Halliburton's Kellogg Brown & Root unit that handles the work, so much as to find greater efficiencies by parceling the work out to a wider range of companies. Halliburton spokeswoman Wendy Hall said the move was expected and had occurred in a previous contract with the Pentagon. She said KBR would consider bidding for parts of the work. In the memo, dated Aug. 25, the Army's chief of procurement policy, Tina Ballard, directed top officials within the U.S. Army Field Support Command "to immediately begin the transition to competitively awarded sustainment contracts for support of U.S. military forces in Iraq." The memo also addresses the Army's increasing frustration with efforts to devise a final estimated cost of the work. One option being considered is for the Army to forgo efforts to negotiate contract costs with KBR. The Army then could take unilateral action and come up with estimated costs on its own. If the Army pursues such a move, it could make it more difficult for KBR to stay within estimated costs, which would make it harder to qualify for its 2% bonus. This could have significant financial implications, said Halliburton's Ms. Hall, because "the award fee is where you make your money." Still, she said, the company viewed the Army's decision "as positive and will help to resolve outstanding issues." She also said the contract has provisions to allow KBR to dispute the Army's final estimates. The contract has been taxing on the company, eating up capital while its KBR unit is in bankruptcy proceedings. Through the end of June, the Houston company had spent $1.1 billion on the logistics contract and other, smaller contracts that it was expecting the government to reimburse. Pentagon auditors said in a report last month that KBR hadn't provided satisfactory details to back up more than $1.8 billion of work in Iraq and Kuwait. The Army still is debating whether to begin withholding payment on 15% of all billings until KBR is able to resolve the accounting backlog. Pentagon officials have discussed for months when the Army should revisit KBR's main Iraq contract. Under the contract, KBR is meant to serve as an all-purpose, quick-fix contractor to fill the military's needs -- everything from running dining halls to providing air-conditioned tents in the desert filled with weight-lifting equipment for the troops. The company is then reimbursed for its expenses, plus a profit margin of 1% and a possible 2% bonus. After a wartime surge in work, the Army is supposed to shift to a more permanent footing by putting the work out to competitive bid. A Pentagon official said the intention in Iraq is to break up the work into six or more smaller contracts, ranging from food services to transportation, and to complete the bidding process by year end. The exact timing, the official said, would be left up to Central Command, which is in charge of military operations in Iraq. Halliburton's ties to the Bush administration -- U.S. Vice President Dick Cheney was the company's chief executive from 1995 until 2000 -- have made it a lightning rod for criticism by Democrats. The company and its subcontractors have mobilized more than 30,000 employees and lost 45 of them to attacks in Iraq, according to a company spokeswoman. Amid disputes over billing, it also faces several possibilities where the Army may demand reimbursement for large sums it already has paid to KBR. That could erase the company's already thin profit margin in Iraq.

Adrian Moore is Vice President, Policy


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