Senators question millions in defense firm's award fees

Defense contractor KBR Inc. received $256 million in award fees and glowing evaluations from a review board despite repeated negative comments on monthly performance reports about its logistics support work in Iraq and Afghanistan, and lawmakers have asked for an accounting of millions of dollars in reported overcharges.

At a Senate Armed Services Committee hearing Thursday, lawmakers took Defense officials to task for allowing excessive billing by KBR -- until recently a subsidiary of Halliburton Inc. -- for its support work provided under the Army's Logistics Civil Augmentation Program, or LOGCAP, contract.

Sen. Carl Levin, D-Mich., chairman of the committee, presented a laundry list of audit reports and fee evaluation board notations in which the company was cited for between $40 million and $113 million on unneeded vehicles. The firm also was faulted for overpricing labor, material and subcontracting costs in a proposal by $75 million, and overstating the cost of a proposed subcontract by $100 million.

Levin asked five senior officials with Army and Defense audit and contracting divisions to respond to the reports, noting the apparent contradiction in monthly ratings between July 2005 and December 2006, when the company received 61 "excellent," 42 "very good," and seven "good" marks. None were average or below.

"How in the heck could they be given these ratings?" Levin asked, noting that even to qualify for a "good" rating, standards require that a company not have inflated its costs.

Reading a litany of performance critiques, Sen. Claire McCaskill, D-Mo., questioned how KBR, which was eligible to receive up to 2 percent of its total costs as an award for good performance, was given an average of 88 percent of the maximum.

Claude Bolton, assistant secretary of the Army for acquisition, logistics and technology, defended the awards as appropriate based partly on the company's excellent evaluations for technical performance.

The evaluation criteria for the fee were based 70 percent on contract management and cost, he said, noting that the Army initially had problems with the company's cost tracking systems but those were addressed to reach a level the organization found "adequate," if not outstanding. He said reviews from the field of KBR's technical performance were universally glowing, which contributed to its high award fees.

Bolton told senators that the structure of the contract, which reimbursed KBR fully for all incurred costs with a 1 percent additional reimbursement as a base fee and up to 2 percent as an award fee, represented a remarkably low profit margin that made him question why a contractor would bid on the work.

But senators described overpriced proposals and questionable invoicing as a means of inflating the cost portion of the contract to boost the base amount on which the award fee would be calculated.

Defense officials refuted a charge raised by Sen. Byron Dorgan, D-N.D., who testified before the panel that KBR had provided contaminated water for bathing. Bolton said he had personally investigated the allegation and found that during the period in question the Navy, not KBR, had been in charge of providing water. He further said that a check of medical records found no cases of illness resulting from contaminated water.

Bolton also said the Army was withholding payments associated with possible subcontractor costs for a private security company, since LOGCAP requires that contractors use the military for their security needs.

He said that reviews finding high cost estimates in KBR proposals demonstrated that the system worked, because it allowed the Army to obtain better prices before agreeing to the work.

One of the key criticisms of the LOGCAP contract has been that after winning the award in 2001, KBR has not faced competition on individual task orders. Bolton said that under the next LOGCAP contract, three different companies will be given awards to allow for competition at the task order level.