KBR Connected to Alleged Fraud, Pentagon Auditor Says

By Ellen Nakashima
Washington Post Staff Writer
Tuesday, May 5, 2009

KBR, the Army's largest contractor in Iraq and Afghanistan, is linked to "the vast majority" of suspected combat-zone fraud cases that have been referred to investigators, as well as a majority of the $13 billion in "questioned" or "unsupported" costs, the Pentagon's top auditor said yesterday.

In testimony before the bipartisan Commission on Wartime Contracting in Iraq and Afghanistan, April G. Stephenson, director of the Defense Contract Audit Agency, said investigators have sent to the inspector general a total of 32 cases of suspected overbilling, bribery and other violations since 2004.

"I don't think we're aware of a program, contract or contractor that has had this number of suspensions or referrals," Stephenson said. KBR's work accounts for 43 percent of the Pentagon's audited Iraq contracting dollars, according to the agency's data.

Stephenson's disclosures come as the Pentagon prepares to draw down forces in Iraq, requiring major support from contractors, while ramping up reconstruction efforts in Afghanistan. Lawmakers are pushing the government to introduce more competition in its procurement programs.

Asked for comment, KBR spokeswoman Heather Browne said in an e-mail that KBR, then a subsidiary of Halliburton, was awarded the opportunity in 2001 to perform the Army's war-zone logistics work "following a competitive bidding process." The value of that work is now more than $31 billion. She said the firm "in no way condones or tolerates illegal or unethical behavior."

President Obama has made contract reform a top priority. Shortly after taking office, he vowed to end no-bid contracts that he said "have wasted billions" of dollars in Iraq.

The hearing focused on contracts for logistics in war zones, which involves housing and feeding troops, washing their clothes, providing their recreation. Costs soared to $5.7 billion in 2008 from $55 million in 2001.

While KBR won the 2001 logistics contract in a competitive process, all task orders for that work, some worth billions of dollars apiece, were not competitively bid. Some commission members yesterday said they believed that contributed to overbilling and waste. They wanted to know why the Army had not moved faster to award logistics orders competitively two years after creating a program to do so.

"Is part of the problem that, in essence with this one contractor, we've basically said, 'KBR is too big to fail?' " asked commissioner Christopher Shays, a former GOP congressman from Connecticut. "Or too important -- so we are almost treating it like we treat DOD? It's too big to fail, so we still fund them?"

Stephenson also revealed that some $553 million in payments have been suspended or blocked because contract officials questioned them or said they were invalid. The payments were run up by KBR in Iraq, said commissioner Charles Tiefer, a contract law professor at the University of Baltimore.

The commissioners cited a May 1 letter to Defense Secretary Robert M. Gates from Sens. Claire McCaskill (D-Mo.) and Susan Collins (R-Maine), calling on the Pentagon to do more to recover more than $100 million in overcharges and excessive profits associate with KBR employees suspected of fraud.

A large portion of the Logistics Civil Augmentation Program, called Logcap, consists of subcontracting. Last week, Stephenson's agency issued a report that found the internal controls of KBR's purchasing system to be inadequate.

Defense Contract Management Agency Director Charlie E. Williams Jr. said that finding will be taken into account as the Pentagon makes awards under its new logistics contract program, called Logcap 4. To ensure the government gets the best price for the service, the Pentagon chose three contractors who may compete for Logcap 4 business. They are DynCorp International, Fluor and KBR.

"In terms of lessons learned, how did KBR become one of the contractors on Logcap 4?" commission member Linda J. Gustitus asked.

Jeffrey Parsons, executive director of U.S. Army Contracting Command, said he was involved in the source selection and was not aware of any inadequate KBR systems.

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