US: Army Overseer Tells of Ouster Over KBR Stir

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

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.

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.

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."

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.

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

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."

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.

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

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.

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."

AMP Section Name:War & Disaster Profiteering
  • 15 Halliburton
  • 20 Logistics
  • 176 War Profiteers Site
  • 185 Corruption
  • 187 Privatization
  • 208 Regulation

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