US: Defense Department Reviews Possible Halliburton Overcharges on Katrina Work

WASHINGTON, March 10 -- The DOD is investigating whether a Halliburton subsidiary has overcharged the Navy for hurricane reconstruction.

A review of KBR's bills to the Navy by the Department of Defense's inspector general for work last year restoring Navy facilities in Pensacola, Fl, damaged by Hurricane Ivan suggest KBR may be charging the Navy too much in labor.

Like its contract in Iraq, KBR's Navy construction contract is a cost-plus award arrangement. That means the company earns more in profit if its costs are higher, because its profit is figured as a percentage of the contract's cost.

"The rates paid to some KBR subcontractors for labor were significantly higher than the prevailing Bureau of Labor Statistics rates for the area impacted by the hurricane," the March 3 inspector general report states.

"The underlying documentation for the invoice that KBR submitted in January 2005 for the Hurricane Ivan recovery effort causes us concern about the ability of the Navy to obtain a fair and reasonable price for the labor and material needed to accomplish the tasks associated with natural disaster recovery efforts.... We plan to evaluate the costs paid on task orders issued in response to natural disasters in a follow-on audit," it says.

KBR and the Navy said KBR had to pay higher rates for labor because of the high demand for construction workers after the hurricane. However, the inspector general's report said the Navy's incentive fee to KBR to keep its costs down may not outweigh the added profit from paying higher labor fees.

KBR has been paid nearly $300 million for reconstruction work since it won the Navy Construction Capabilities contract in July 2004, including $35 million for the construction of a new prison at Guantanamo Bay Naval Base and more than $160 million for Hurricane Katrina reconstruction and mortuary services.

The inspector general's report, undertaken at the request of Sen. Ron Wyden, D-OR, found that there was nothing inherently wrong in the Navy's award of the five-year emergency reconstruction contract worth up to $500 million to Kellogg, Brown and Root.

However, the report said the Army and Navy had failed to consider KBR's performance under the controversial $13 billion Iraq logistics contract, a contract that has included documented bribery, kickbacks, and overcharges.

KBR's past performance on government contracts was one of the major measures by which it was supposed to be judged for the new contract, but neither the Army nor the Navy had entered the Iraq contract information into a military database that tracks contractor performance.

Of the 36 task orders completed on the Iraq Logistics Civil Augmentation Program, only one, worth $1 million, had made it into the database. The $209 million task order that included kickbacks worth $6 million paid to KBR employees was not entered into the database, and therefore was not considered by the Navy in its source selection. The Army has since entered the missing information, according to the inspector general's report.

Moreover, the Navy only checked the database for past performance on government contracts by business units that the companies discussed in their proposals for the work. If they did not highlight a business unit -- perhaps because of past performance problems -- it would not have been found in the check.

"As a result, actual technical factor ratings are difficult to justify, relevant past performance information was not available, and available information was not considered as a part of the source selection decision process for a $500 million contract," the report states. "Although we found nothing to indicate that the Construction Capabilities contract should have been awarded to one of the other offerers, the source selection procedures that the Naval Facilities Engineering Command used to support the decision to award the contract to KBR had shortcomings that could be improved."

The Pentagon is expected to direct in April that all significant performance data be entered into the database as it occurs, not just after the contract is completed.

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