Army Plan Lets Halliburton Keep Disputed Payments
By NEIL KING JR., Staff Reporter, The Wall Street Journal
The U.S. Army, in what could be the final twist in a complicated and drawn-out controversy, is laying the groundwork to let Halliburton Co. keep several billion dollars it was paid for work in Iraq that Pentagon auditors say is questionable or unsupported by proper documentation.
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Halliburton Company's building in Houston.
The Army has acknowledged that the Houston-based company might never be able to account properly for some of its Iraq work, and has hired a consulting firm to estimate what Halliburton's services "should cost." According to Pentagon documents and internal memorandums, that estimate will serve as the basis for "an equitable settlement" under which the Pentagon could drop many of the claims its auditors have made against the company's Kellogg Brown & Root unit, which has done the company's Iraq work. The documents were reviewed by The Wall Street Journal.
In one internal communication distributed within the Army, Brig. Gen. Jerome Johnson, head of the Army's Field Support Command, called the move to hire the consultants the only way to resolve the dispute between Pentagon auditors and the Halliburton unit. "If supporting documentation just does not exist, we must have an equitable solution to declaring an acceptable cost level and moving forward," he wrote. "It would be totally inappropriate and unfair of us to disallow all costs when, in the fog of the contingency, KBR did not obtain sufficient supporting documentation."
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But some disgruntled Pentagon officials describe the effort to broker an outside settlement with KBR as unusual in a contract of this magnitude. The company has taken heavy criticism from inside the Defense Department and from Congress for its accounting practices in Iraq.
KBR so far has billed about $12 billion in Iraq; almost $3 billion of that remains in dispute. Pentagon records show that $650 million in Halliburton billings is deemed "questionable," a term government auditors use when they see strong evidence of overcharges or contracting irregularities. Another $2 billion is considered "unsupported," meaning that KBR remains unable to provide sufficient paperwork.
An Army spokesman said the Army had established two teams, which include employees of the consulting firm, to determine "fair and equitable costs" of the Halliburton work. He said the teams are reviewing information and intend to determine those costs "while ensuring KBR's continued effectiveness in support of our field operations." The Army aims to settle the matter by March.
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William Walter, a KBR vice president for accounting, said in an interview that it was "false" to suggest that any remaining disputes concerned unsupported or questioned costs in Iraq. "The whole of this is a disagreement between the auditors and KBR," he said. "We haven't overbilled the government by one nickel."
In an environment as challenging as Iraq, Mr. Walter said, the Army often required KBR to make procurements and perform tasks within days, so that contracts were often concluded by e-mail or over the phone rather than in writing. "We have boatloads of documentation for everything," he said. The problem is that much of it isn't organized "in the nice and neat and orderly fashion" that Pentagon auditors are used to in normal contracting environments, he said.
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Still, a move to overrule Pentagon auditors and drop government efforts to seek at least some reimbursement from Halliburton could draw criticism. Formerly headed by Vice President Dick Cheney, Halliburton's role in Iraq has been intensely debated in this closely fought election, in part because of the questions about overbilling. Democratic presidential candidate Sen. John Kerry has blasted the Bush administration for going soft on Halliburton. Mr. Cheney, who quit as Halliburton's chief executive when he agreed to run for vice president in 2000, has dismissed the criticism as a diversionary tactic.
KBR moved into Iraq in the summer of 2003 to feed, house and look after U.S. troops and to repair Iraq's battered oil infrastructure. Within months, Pentagon officials began telling Defense Secretary Donald Rumsfeld the company was responsible for cost overruns and slipshod billing. In one memo written on Dec. 10, 2003, the department's top financial officer, Dov Zakheim, alerted Mr. Rumsfeld of "significant issues regarding the timeliness and adequacy of KBR price proposals" and "deficiencies" in its billing, purchasing, and estimating systems.
Some Defense officials claim that despite a series of similar alerts running into this summer, Mr. Rumsfeld and his deputies applied little pressure on the Army to force KBR to clean up its act. Instead, they say, the problems continued to mount into 2004 as massive bills piled up that lacked sufficient documentation or were branded as questionable by Pentagon auditors.
Pentagon spokesman Bryan Whitman said Defense leadership has been "vigilant and respectful of taxpayer dollars. With respect to these contracts, and in an effort to ensure transparency, there have been numerous audits and reviews undertaken," he said. "When irregularities have been noted, the Department has taken aggressive action to correct those deficiencies."
The Army has worried for months that withholding large payments or demanding significant reimbursements could jeopardize the services the company provides to troops and other U.S. personnel, which range from providing food services and laundry to refurbishing oil facilities and providing transportation. Army officials also worry that a crackdown on KBR's billing in Iraq could dissuade other companies from competing when the work is put up for bid, which could happen within months, depending on when commanders on the ground feel the situation is stable enough.
KBR, with more than 50 employees and subcontractors who have been killed in Iraq, has itself threatened to stop paying its many subcontractors in the field if the Army begins to withhold payments.
Army officials have repeatedly backed down from their own threats to withhold up to 15% of KBR's billings for its services to troops. Under federal rules, the government generally demands such withholding to minimize its exposure if costs are later determined to be unjustified. To lead the effort to reach a settlement, the Army early this month hired Virginia-based Resource Consulting Inc., which does a wide range of government contract work, mainly for the military, and is heavily staffed with retired military officials. The Army also has assembled a "Special Cost Analysis Team," made up of Army contracting and financial officials, to work alongside the consultants.
Bills still under scrutiny include charges for services rendered as far back as the spring of 2003. Auditors have concluded that of nearly $900 million in outstanding bills for fuel and transportation costs from Kuwait to Iraq, about $250 million is regarded as "questionable."
The biggest area of dispute surrounds the way that KBR and its subcontractors billed for millions of meals, totaling more than $900 million, served to U.S. and coalition troops last year. Auditors have completed reviews for billing at about a quarter of the dining facilities in Iraq and Kuwait and have reported to the Army that KBR overcharged by an average of around 40%. Questionable charges could approach nearly $400 million after a final review of the remaining dining facilities, Defense officials say.
By NEIL KING JR., Staff Reporter, The Wall Street Journal
The U.S. Army, in what could be the final twist in a complicated and drawn-out controversy, is laying the groundwork to let Halliburton Co. keep several billion dollars it was paid for work in Iraq that Pentagon auditors say is questionable or unsupported by proper documentation.
Getty Images
Halliburton Company's building in Houston.
The Army has acknowledged that the Houston-based company might never be able to account properly for some of its Iraq work, and has hired a consulting firm to estimate what Halliburton's services "should cost." According to Pentagon documents and internal memorandums, that estimate will serve as the basis for "an equitable settlement" under which the Pentagon could drop many of the claims its auditors have made against the company's Kellogg Brown & Root unit, which has done the company's Iraq work. The documents were reviewed by The Wall Street Journal.
In one internal communication distributed within the Army, Brig. Gen. Jerome Johnson, head of the Army's Field Support Command, called the move to hire the consultants the only way to resolve the dispute between Pentagon auditors and the Halliburton unit. "If supporting documentation just does not exist, we must have an equitable solution to declaring an acceptable cost level and moving forward," he wrote. "It would be totally inappropriate and unfair of us to disallow all costs when, in the fog of the contingency, KBR did not obtain sufficient supporting documentation."
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But some disgruntled Pentagon officials describe the effort to broker an outside settlement with KBR as unusual in a contract of this magnitude. The company has taken heavy criticism from inside the Defense Department and from Congress for its accounting practices in Iraq.
KBR so far has billed about $12 billion in Iraq; almost $3 billion of that remains in dispute. Pentagon records show that $650 million in Halliburton billings is deemed "questionable," a term government auditors use when they see strong evidence of overcharges or contracting irregularities. Another $2 billion is considered "unsupported," meaning that KBR remains unable to provide sufficient paperwork.
An Army spokesman said the Army had established two teams, which include employees of the consulting firm, to determine "fair and equitable costs" of the Halliburton work. He said the teams are reviewing information and intend to determine those costs "while ensuring KBR's continued effectiveness in support of our field operations." The Army aims to settle the matter by March.
Get Stock Quote: HAL
William Walter, a KBR vice president for accounting, said in an interview that it was "false" to suggest that any remaining disputes concerned unsupported or questioned costs in Iraq. "The whole of this is a disagreement between the auditors and KBR," he said. "We haven't overbilled the government by one nickel."
In an environment as challenging as Iraq, Mr. Walter said, the Army often required KBR to make procurements and perform tasks within days, so that contracts were often concluded by e-mail or over the phone rather than in writing. "We have boatloads of documentation for everything," he said. The problem is that much of it isn't organized "in the nice and neat and orderly fashion" that Pentagon auditors are used to in normal contracting environments, he said.
Talk About Halliburton
· Post Messages
· Top News Boards
Still, a move to overrule Pentagon auditors and drop government efforts to seek at least some reimbursement from Halliburton could draw criticism. Formerly headed by Vice President Dick Cheney, Halliburton's role in Iraq has been intensely debated in this closely fought election, in part because of the questions about overbilling. Democratic presidential candidate Sen. John Kerry has blasted the Bush administration for going soft on Halliburton. Mr. Cheney, who quit as Halliburton's chief executive when he agreed to run for vice president in 2000, has dismissed the criticism as a diversionary tactic.
KBR moved into Iraq in the summer of 2003 to feed, house and look after U.S. troops and to repair Iraq's battered oil infrastructure. Within months, Pentagon officials began telling Defense Secretary Donald Rumsfeld the company was responsible for cost overruns and slipshod billing. In one memo written on Dec. 10, 2003, the department's top financial officer, Dov Zakheim, alerted Mr. Rumsfeld of "significant issues regarding the timeliness and adequacy of KBR price proposals" and "deficiencies" in its billing, purchasing, and estimating systems.
Some Defense officials claim that despite a series of similar alerts running into this summer, Mr. Rumsfeld and his deputies applied little pressure on the Army to force KBR to clean up its act. Instead, they say, the problems continued to mount into 2004 as massive bills piled up that lacked sufficient documentation or were branded as questionable by Pentagon auditors.
Pentagon spokesman Bryan Whitman said Defense leadership has been "vigilant and respectful of taxpayer dollars. With respect to these contracts, and in an effort to ensure transparency, there have been numerous audits and reviews undertaken," he said. "When irregularities have been noted, the Department has taken aggressive action to correct those deficiencies."
The Army has worried for months that withholding large payments or demanding significant reimbursements could jeopardize the services the company provides to troops and other U.S. personnel, which range from providing food services and laundry to refurbishing oil facilities and providing transportation. Army officials also worry that a crackdown on KBR's billing in Iraq could dissuade other companies from competing when the work is put up for bid, which could happen within months, depending on when commanders on the ground feel the situation is stable enough.
KBR, with more than 50 employees and subcontractors who have been killed in Iraq, has itself threatened to stop paying its many subcontractors in the field if the Army begins to withhold payments.
Army officials have repeatedly backed down from their own threats to withhold up to 15% of KBR's billings for its services to troops. Under federal rules, the government generally demands such withholding to minimize its exposure if costs are later determined to be unjustified. To lead the effort to reach a settlement, the Army early this month hired Virginia-based Resource Consulting Inc., which does a wide range of government contract work, mainly for the military, and is heavily staffed with retired military officials. The Army also has assembled a "Special Cost Analysis Team," made up of Army contracting and financial officials, to work alongside the consultants.
Bills still under scrutiny include charges for services rendered as far back as the spring of 2003. Auditors have concluded that of nearly $900 million in outstanding bills for fuel and transportation costs from Kuwait to Iraq, about $250 million is regarded as "questionable."
The biggest area of dispute surrounds the way that KBR and its subcontractors billed for millions of meals, totaling more than $900 million, served to U.S. and coalition troops last year. Auditors have completed reviews for billing at about a quarter of the dining facilities in Iraq and Kuwait and have reported to the Army that KBR overcharged by an average of around 40%. Questionable charges could approach nearly $400 million after a final review of the remaining dining facilities, Defense officials say.