Rewarding Failure

Contractors' mismanagement is no impediment to finding new work, critics say.

In late June, the Special Inspector General for Iraq Reconstruction released a scathing audit, charging that the Army's lead wartime logistics contractor, KBR Inc., had grossly overspent on food, failed to keep accurate fuel service records and provided better housing to its employees than to U.S. soldiers.

It was the latest failing report card for the former Halliburton subsidiary, which for the past six years has been the exclusive prime contractor of the Army's Logistics Civil Augmentation Program. The LOGCAP contract provides U.S. troops in Iraq and Afghanistan with housing, meals, fuel, and laundry and sanitation services, among other support.

Although allegations of misconduct and overbilling have followed the Houston-based firm for more than a decade, KBR has had little difficulty finding new work. In fact, just five days after the IG report, KBR was awarded a slice of the new LOGCAP IV contract, a lucrative deal worth as much as $50 billion. The other winners include Fluor Intercontinental Inc. of Greenville, S.C., and DynCorp International LLC of Fort Worth, Texas. But the contract is being held up by protests from two of the losing bidders.

KBR is far from the only contractor to repeatedly secure high-dollar procurements in spite of questionable performance records. According to the nonprofit watchdog group, Project on Government Oversight, the top 50 contractors in fiscal 2005 paid fines, penalties, restitution or civil settlements in excess of $12 billion over the previous 10 years.

POGO, which released an updated version of its Federal Contractor Misconduct Database (www.contractormisconduct.org), identified more than 379 instances of wrongdoing-ranging from defective pricing to human rights violations-by 42 of the top 50 contractors. Fluor was cited 21 times, KBR five times and DynCorp, through its parent company, Veritas Capital Fund, three times.

With such supposedly dubious track records, why does the government continue to rely on the same contractors? Critics point to a company's political connections to rationalize why the 'usual suspects' secure the most coveted contracts. Vice President Dick Cheney used to run Halliburton, therefore KBR gets rich in Iraq, they say. But, while six-figure campaign contributions and silver-tongued lobbyists certainly can grease the wheels for a congressional earmark, their impact on the federal procurement process is decidedly overrated.

Contracting experts suggest the acquisition process is tilted more by familiarity, expediency and the wide latitude afforded to procurement officials to interpret complex acquisition statutes. The Federal Acquisition Regulation states that "contracts shall be awarded to responsible contractors only," who have a "satisfactory record of integrity and business ethics." But there is no established governmentwide definition of "satisfactory," and contracting officials are granted wide latitude when evaluating past performance during pre-award responsibility determinations.

At a July 18 hearing of the House Subcommittee on Government Management, Organization and Procurement, William T. Woods, director of acquisition and sourcing management at the Government Accountability Office, explained that while "past performance must be a significant evaluation factor in the award process, agencies have broad discretion to set the precise weight . . . relative to other factors."

Lawmakers suggest that one reason companies with second-rate track records continue to win contracts is that agencies have difficulty sharing performance evaluation information. Procurement officials must check the General Services Administration's Excluded Parties List System to determine whether a contractor is disbarred or suspended from government contracting, but the list rarely includes large firms. Another required resource, the Past Performance Information Retrieval System, is not available to the public, and critics suggest its records are incomplete and outdated.

Rep. Carolyn Maloney, D-N.Y., introduced a bill in July that would create a centralized database of actions taken against federal contractors, including a description of each of the actions. "The federal government's watchdogs, the federal suspension and debarment officials, currently lack the information that they need to protect our business interests and taxpayers' dollars," Maloney said.

Transparency and oversight are only part of the equation, however. A more substantive issue concerns the criteria agencies use to evaluate a company's past performance. Take LOGCAP III, for example.

Independent auditors and government watchdogs have spotlighted numerous instances of wasteful spending and lax accounting management. But, with the exception of the decision to split the contract among three firms-a strategy some suggest is as much about pacifying Congress as it is about controlling costs-the Pentagon and KBR have hardly broken stride. The service has paid KBR more than $20 billion on the contract.

"KBR has a hold on [the Army]," says Dina Rasor, a defense contracting expert and co-author of Betraying Our Troops: The Destructive Results of Privatizing War (Palgrave McMillan, 2007), a new book that alleges KBR threatened work stoppages and repeatedly padded costs during the LOGCAP III contract. "They are the 900-pound gorilla in Iraq, and the Army doesn't want to change horses midstream."

The Army dismisses much of the criticism, insisting the LOGCAP IV contractors were selected as the best value, based on their "management, technical capability, past performance and price." Each of the winning firms has experience with extensive logistics and support contracts; DynCorp held the LOGCAP II contract while Fluor provided emergency housing for Hurricane Katrina evacuees. The three companies will compete for task orders under the new contract, which the Army expects will drive down costs.

Ultimately, the question of grading past performance could come down to an agency's priorities. During Katrina, speed took precedence while many civilian contracting shops value price and technical expertise more. With LOGCAP, the Army's goal has been to privatize as many logistical and support duties as possible, freeing up military units for other missions.

"From the beginning, the Army has always been more interested in handing off responsibility than cost," says Frank Camm, a senior economist at the RAND Corp., a defense-oriented public policy research group. "Iraq is far more chaotic than anyone expected . . . And without KBR they would have gotten messier."