Halliburton Cited For Iraq Overhead
Costs in Oil Contract Called Extreme

By Griff Witte
Washington Post Staff Writer
Wednesday, October 25, 2006

Administrative overhead accounted for more than half the costs that a Halliburton Co. subsidiary passed on to the government under a key contract to restore Iraq's oil industry, a figure that critics said was unusually high.

A report released yesterday by the inspector general's office overseeing Iraq spending found that at least 55 percent, or $163 million, of $296 million in total costs rung up by Halliburton unit KBR went to expenses such as back-office support, transportation and security. That percentage was significantly higher than it was on work by other firms in Iraq, and experts said it is far above what is typically found on a government contract.

The findings are the latest that call into question KBR's work under the deal, which required the company to rehabilitate oil facilities in southern Iraq. Under the contract's terms, KBR is reimbursed for its costs and then receives a percentage for profit on top, an arrangement that critics contend has given the firm an incentive to run up its bills.

According to internal government documents released in March, auditors found that the company had repeatedly overcharged the government by, among other things, billing for work it didn't actually do and paying suppliers more than they were owed. Meanwhile, work schedules slid and company officials balked at requests for accurate cost estimates. At one point, officials threatened to terminate the deal. Instead, KBR -- which has received more money from the Iraq war effort than any other firm -- was allowed to keep the contract and is now winding up work.

In a statement, Halliburton spokeswoman Melissa Norcross defended the company's administrative spending. "All of these costs were incurred at the client's direction and for the client's benefit, and they have been extensively audited and deemed allowable and legitimate," she said.

The Army Corps of Engineers -- which oversaw the contracts -- acknowledged that some of the administrative costs were high. But in a response to the inspector general's findings, the Corps argued that important work was getting done even when money was being spent on administrative matters rather than directly on Corps projects.

In government contracting, administrative rates can vary widely depending on the kind of work being done and on the circumstances.

Work in Iraq, for instance, often involves high security costs that inflate overhead.

Yesterday's report by the special inspector general for Iraq reconstruction does not directly say whether KBR's overhead costs were excessive. But it does offer a more comprehensive look than was previously available at where the money has gone on the firm's oil contract, as well as on deals involving other companies to construct hospitals and schools. In many cases, contractors have failed to meet expectations, leaving the job of rebuilding critical services in Iraq to the Iraqis.

The United States has devoted more than $20 billion to rehabilitate Iraq, but critics contend that much of the money has been wasted as contractors used the government's checkbook to spend lavishly on hotels, food and employee salaries. Halliburton has come under particularly intense scrutiny because of the volume of work it has done in Iraq and because Vice President Cheney was once the firm's chief executive.

"Halliburton was given a blank check by the Bush Administration and the Republican Congress did nothing to stop the hemorrhaging of taxpayer dollars," said Rep. Henry A. Waxman (D-Calif.), a frequent Halliburton critic, in a statement.

Yesterday's report cites one contract in Iraq that had administrative rates of between 2.3 percent and 17 percent. Of the five contracts that auditors reviewed in depth, rates ranged from a high of 55 percent for the KBR deal to a low of 11 percent. The report cautions, however, that all of the estimates may be too low because of the way they were tabulated.

KBR's "rates are high," said Scott Amey, general counsel of the watchdog group Project on Government Oversight. "They would send up a red flag for me." But Amey said it would take a more thorough review of exactly where the money went to know how much was wasted.

In addition to noting KBR's overhead costs generally, the report focuses on a nine-month stretch between February 2004 -- when KBR was directed by the government to gear up for work -- and November 2004, when substantial work actually began. During that period, KBR spent $53 million on overhead and $13 million on direct project costs.

Report authors said that was due to "poor planning" by the government, which had asked the company to mobilize before key decisions had been made about which projects would be funded.

Halliburton stock jumped $1.58 yesterday, to close at $30.84 after news that the company had beaten Wall Street's expectations for third-quarter revenue and profit.

Halliburton had previously announced that it garnered $611 million in profit last quarter, up from $499 million in the comparable quarter last year.

KBR took in $1.2 billion in revenue for the quarter from Iraq-related work, though the company said the profit margin on that work was just 3.7 percent before corporate expenses and taxes.

Halliburton, which does most of its work in energy services, filed documents yesterday with federal regulators to spin off a portion of KBR as a public company.

Halliburton officials have said in the past that the unit is a drag on the parent company's earnings and share price.

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