IRAQ: Controversial Contractor's Iraq Work Is Split Up

WASHINGTON - Sometime soon, a group of American corporate executives and military leaders will quietly sit down and divide Iraq into three parts.

Their meeting will not have
anything to do with Iraq's national sovereignty, but instead will
involve slicing up billions of dollars in work for the defense
contractors that support the American military's presence in the
country.

For the first time since the war began, the largest
single Pentagon contract in Iraq is being divided among three
companies, ending the monopoly held by KBR, the Houston-based
corporation that has been accused of wasteful spending and
mismanagement and of exploiting its political ties to Vice President Dick Cheney.

Yet
even as the Pentagon begins to pull apart the enormous KBR contract,
critics warn that the new three-company deal could actually result in
higher costs for American taxpayers and weak oversight by the military.
In fact, under the new deal, KBR and the two other companies could
actually make more than three times as much as KBR has been paid each
year since the war began.

Last month the Pentagon awarded the
companies pieces of a new contract to provide food, shelter and basic
services for American soldiers, a 10-year, $150 billion deal that
stretches far beyond the final days of the Bush administration. KBR
will still get a sizable chunk of the business, but now it will have to
share the work with Fluor Corporation and DynCorp International.

Army
officials and executives of the three companies are planning to meet in
the next few weeks to start the complex process of breaking up KBR's
sprawling operations in Iraq.

KBR, previously a subsidiary of Halliburton,
once headed by Mr. Cheney, has collected more than $24 billion since
the war began. It has 40,000 employees in Iraq and 28,000 more in
Afghanistan and Kuwait.

But KBR has come under fire from
Congress and Pentagon auditors for complaints ranging from making more
than $200 million in excessive charges, including meals never served to
soldiers, to delivering unsafe water to American troops to doing little
to prevent sexual assaults of its female employees, often by their KBR
co-workers.

Army officials acknowledge that they were under
intense pressure from Capitol Hill to give KBR some competition, yet
leading Democratic lawmakers and other critics say the new contract
will merely paper over the fundamental problems that stem from the
Pentagon's heavy dependence on outside contractors in Iraq.

"This is just another verse in the same old song," said Senator Byron L. Dorgan,
a Democrat from North Dakota who is one of the leading Congressional
critics of KBR and other major defense contractors. "It appears to me
that this is a broken process."

Critics also say they doubt
that the new contract will result in significant cost savings or better
services for soldiers in Iraq. The Army has built into the deal the
potential for larger profits for the contractors than existed under the
prior contract, and it plans to outsource much of the management and
oversight of the contractors to yet another company, Serco Inc., for
$59 million.

"This new contract sounds good, they are
splitting it up, but there are serious flaws, including what looks like
outsourcing oversight," said Dina Rasor, an investigator and co-author
of a book about contracting in Iraq. "And the size of the contract is
enormous. When you think of these big, multibillion-dollar defense
contracts and contractors, you think of companies like Lockheed, and
you can see their big airplane plants. But what is KBR doing for all
this money? They are slinging hash, washing laundry."

Army
officials said that they would not be able to actually shift work from
KBR to the other companies until late this year, meaning that the
change would be under way just as Americans are choosing a new
president. The Army officials said the huge new multiyear contract for
Iraq would not commit any new presidential administration to paying
billions of dollars to defense contractors for services in Iraq if the
new president decided to withdraw American troops.

It is not
clear how the Pentagon will try to untangle KBR's operations in Iraq to
share them with DynCorp and Fluor. Lee Thompson, the executive director
of the Logistics Civil Augmentation Program, as the program is called,
said the Army would first try to split work in Kuwait among the three
companies, and would then move on to Afghanistan and Iraq.

Even
if the United States remains in Iraq long term, the contract could
ultimately cost much less than $150 billion over 10 years, Mr. Thompson
said. But after being caught off guard by the scale of the spending at
the start of the war, the Army is building in a cushion this time, he
said.

Army officials have been working for two years to undo KBR's monopoly on business in Iraq.

As
the war dragged on much longer than anticipated, the Army's initial,
pre-invasion decision to grant Halliburton a no-bid contract for Iraq
emerged as a sensitive political issue for the Bush administration
because of Mr. Cheney's connections to the company. Army officials
realized they had to bring in some other companies. "It didn't take a
rocket scientist to figure out we were getting beat up by the Hill,"
Mr. Thompson said.

Five companies submitted bids (primarily
covering work in Iraq, Kuwait and Afghanistan), and the Army initially
awarded contracts to KBR, Fluor and DynCorp last June. But the two
losing companies protested, and the Government Accountability Office
upheld their protests in October, ruling that the Army had given
preferential treatment to the winning companies. The Army then made
some adjustments in the contract and announced in April that the same
three companies had won again.

Heather Browne, a spokeswoman
for KBR, defended the company's performance. "When issues have been
raised, KBR has fully cooperated by providing information requested of
us," she said. "We remain committed to ethics and integrity and work
daily to provide quality services to our customer, the U.S. military."

Like
KBR, DynCorp, based in Falls Church, Va., has had serious problems in
past contracting work, including allegations that its employees engaged
in sex trafficking in Bosnia while working on a police training
contract there in the late 1990s. In addition, government auditors
concluded last year that the State Department's $1.2 billion contract
with DynCorp for police training in Iraq was so badly managed that they
could not determine exactly what was done for the money. Just last
week, DynCorp lost a racial discrimination and breach-of-contract
lawsuit in Virginia when a jury found in favor of a minority
subcontractor that had done work in Iraq and Afghanistan. A DynCorp
spokesman said the company would appeal the $15 million judgment.

DynCorp
officials said they recognized that taking over part of KBR's work on
such a highly controversial - and politically sensitive - contract in
Iraq could lead to even greater public scrutiny of the company. "We
understand what we are getting into here, there's no question about
it," said Greg Lagana, a DynCorp spokesman. "But we think we can really
do well at it."

A spokesman for Irving, Tex.-based Fluor
declined to discuss in detail the company's involvement in the Iraq
contract. In a prepared statement, a company official said, "We look
forward to providing the personnel and equipment to sustain our troops
across the globe."

While the Army hopes to inject some
competition into its Iraq contracting by splitting it three ways and
requiring the companies to bid against one another for individual
pieces of the work, it is also sweetening the incentives by offering
much higher rewards than in the earlier contract.

Until now,
KBR has been paid on a "cost-plus" basis, meaning that all of its costs
are reimbursed by the Army, as long as the company can convince the
government that they are reasonable. On top of that, KBR has been
awarded fees, including a base fee equal to 1 percent of costs and a
performance fee of an additional 2 percent of costs.

Under the
new contract, the three companies will be eligible to get base fees
worth up to 3 percent of the costs of the contract, and award fees that
could raise the total fees up to 10 percent of costs.

"There will be higher fees than in the last contract, but we are trying to incentivize them to compete," Mr. Thompson said.

But
such high fees on cost-plus contracts require oversight, and the Army
has decided to bring in Serco, a Reston, Va.-based division of a
British company, to do that. It will help manage the other three
contractors and perform cost and price analysis of them.

Mr.
Thompson said the Army would remain in charge of judging the
contractors' performance, and a spokeswoman for the United States Army
Sustainment Command, which is in charge of the contract, said that an
Army inquiry found no conflicts of interest between Serco and the three
other contractors.

Steve McCarney, a Serco spokesman, added
that the company had performed independent assessments of government
operations in the past, including several for the Navy. "We don't have
any relationships with the other contractors, and all of our
assessments will be independent," he said.

But Congressional
leaders and other critics say that having an outside contractor manage
the others and analyze their prices and costs means that there will be
little real government oversight to maintain spending discipline.

"The Army can say that they are retaining the final say, but when they
outsource this much work on contract management, they really are
outsourcing oversight," said Representative Henry A. Waxman,
the California Democrat who is chairman of the House Oversight and
Government Reform Committee, which has been investigating defense
contractors in Iraq.

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