IRAQ: Army Overseer Tells of Ouster Over KBR Stir

WASHINGTON - The Army official who managed the Pentagon's largest contract in Iraq
says he was ousted from his job when he refused to approve paying more
than $1 billion in questionable charges to KBR, the Houston-based
company that has provided food, housing and other services to American
troops.

The official, Charles M. Smith, was the senior civilian overseeing
the multibillion-dollar contract with KBR during the first two years of
the war. Speaking out for the first time, Mr. Smith said that he was
forced from his job in 2004 after informing KBR officials that the Army
would impose escalating financial penalties if they failed to improve
their chaotic Iraqi operations.

Army auditors had determined that KBR lacked credible data or
records for more than $1 billion in spending, so Mr. Smith refused to
sign off on the payments to the company. "They had a gigantic amount of
costs they couldn't justify," he said in an interview. "Ultimately, the
money that was going to KBR was money being taken away from the troops,
and I wasn't going to do that."

But he was suddenly replaced, he said, and his successors - after
taking the unusual step of hiring an outside contractor to consider
KBR's claims - approved most of the payments he had tried to block.

Army officials denied that Mr. Smith had been removed because of the
dispute, but confirmed that they had reversed his decision, arguing
that blocking the payments to KBR would have eroded basic services to
troops. They said that KBR had warned that if it was not paid, it would
reduce payments to subcontractors, which in turn would cut back on
services.

"You have to understand the circumstances at the time," said
Jeffrey P. Parsons, executive director of the Army Contracting Command.
"We could not let operational support suffer because of some other
things."

Mr. Smith's account fills in important gaps about the Pentagon's
handling of the KBR contract, which has cost more than $20 billion so
far and has come under fierce criticism from lawmakers.

While it was previously reported that the Army had held up large
payments to the company and then switched course, Mr. Smith has
provided a glimpse of what happened inside the Army during the biggest
showdown between the government and KBR. He is giving his account just
as the Pentagon has recently awarded KBR part of a 10-year, $150
billion contract in Iraq.

Heather Browne, a spokeswoman for KBR, said in a statement that the
company "conducts its operations in a manner that is compliant with the
terms of the contract." She added that it had not engaged in any
improper behavior.

Ever since KBR emerged as the dominant contractor in Iraq, critics
have questioned whether the company has benefited from its political
connections to the Bush administration. Until last year, KBR was known
as Kellogg, Brown and Root and was a subsidiary of Halliburton, the
Texas oil services giant, where Vice President Dick Cheney previously served as chief executive.

When told of Mr. Smith's account, Representative Henry A. Waxman,
the California Democrat who is chairman of the House Oversight and
Government Reform Committee, said it "is startling, and it confirms the
committee's worst fears. KBR has repeatedly gouged the taxpayer, and
the Bush administration has looked the other way every time."

Mr. Smith, a civilian employee of the Army for 31 years, spent his
entire career at the Rock Island Arsenal, the Army's headquarters for
much of its contracting work, near Davenport, Iowa. He said he had
waited to speak out until after he retired in February.

As chief of the Field Support Contracting Division of the Army Field
Support Command, he was in charge of the KBR contract from the start.
Mr. Smith soon came to believe that KBR's business operations in Iraq
were a mess. By the end of 2003, the Defense Contract Audit Agency told
him that about $1 billion in cost estimates were not credible and
should not be used as the basis for Army payments to the contractor.

"KBR didn't move proper business systems into Iraq," Mr. Smith said.

Along with the auditors, he said, he pushed for months to get KBR
to provide data to justify the spending, including approximately $200
million for food services. Mr. Smith soon felt under pressure to ease
up on KBR, he said. He and his boss, Maj. Gen. Wade H. McManus Jr.,
then the commander of the Army Field Support Command, were called to
Pentagon meetings with Tina Ballard, then the deputy assistant
secretary of the Army for policy and procurement.

Ms. Ballard urged them to clear up KBR's contract problems quickly,
but General McManus ignored the request, Mr. Smith said. Ms. Ballard
declined to comment for this article, as did General McManus.

Eventually, Mr. Smith began warning KBR that he would withhold
payments and performance bonuses until the company provided the Army
with adequate data to justify the expenses. The bonuses - worth up to 2
percent of the value of the work - had to be approved by special boards
of Army officials, and Mr. Smith made it clear that he would not set up
the boards without the information.

Mr. Smith also told KBR that, until the information was received, he
would withhold 15 percent of all payments on its future work in Iraq.

"KBR really did not like that, and they told me they were going to fight it," Mr. Smith recalled.

In August 2004, he told one of his deputies, Mary Beth Watkins, to
hand deliver a letter about the threatened penalties to a KBR official
visiting Rock Island. That official, whose name Mr. Smith said he could
not recall, responded by saying, "This is going to get turned around,"
Mr. Smith said.

Two officials familiar with the episode confirmed that account, but
would speak only on the condition of anonymity out of concern for their
jobs.

The next morning, Mr. Smith said he got a call from Brig. Gen.
Jerome Johnson, who succeeded General McManus when he retired the month
before. "He told me, "You've got to pull back that letter,"' Mr. Smith
recalled. General Johnson declined to comment for this article.

A day later, Mr. Smith discovered that he had been replaced when he
went to a meeting with KBR officials and found a colleague there in his
place. Mr. Smith was moved into a job planning for future contracts
with Iraq. Ms. Watkins, who also declined to comment, was reassigned as
well.

Mr. Parsons, the contracting director, confirmed the personnel
changes. But he denied that pressure from KBR was a factor in the
Army's decision making about the payments. "This issue was not decided
overnight, and had been discussed all the way up to the office of the
secretary of defense," he said.

Soon after Mr. Smith was replaced, the Army hired a contractor, RCI
Holding Corporation, to review KBR's costs. "They came up with
estimates, using very weak data from KBR," Mr. Smith said. "They
ignored D.C.A.A.'s auditors," he said, referring to the Defense
Contract Audit Agency.

Lt. Col. Brian Maka, a Pentagon spokesman, disputed that. He said in
a statement that the Army auditing agency "does not believe that RCI
was used to circumvent" the Army audits.

Paul Heagen, a spokesman for RCI's parent company, the Serco Group,
said his firm had insisted on working with the Army auditors. While KBR
did not provide all of the data Mr. Smith had been seeking, Mr. Heagen
said his company had used "best practices" and sound methodology to
determine KBR's costs.

Bob Bauman, a former Pentagon fraud investigator and contracting
expert, said that was unusual. "I have never seen a contractor given
that position, of estimating costs and scrubbing D.C.A.A.'s numbers,"
he said. "I believe they are treading on dangerous ground."

The Army also convened boards that awarded KBR high performance bonuses, according to Mr. Smith.

High grades on its work in Iraq also allowed KBR to win more work
from the Pentagon, and this spring, KBR was awarded a share in the new
10-year contract. The Army also announced that Serco, RCI's parent,
will help oversee the Army's new contract with KBR.

"In the end," Mr. Smith said, "KBR got what it wanted."

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