[Senate Hearing 110-206]
[From the U.S. Government Publishing Office]
S. Hrg. 110-206
THE DEPARTMENT OF DEFENSE'S MANAGEMENT OF COSTS UNDER THE LOGISTICS
CIVIL AUGMENTATION PROGRAM (LOGCAP) CONTRACT IN IRAQ
=======================================================================
HEARING
before the
COMMITTEE ON ARMED SERVICES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 19, 2007
__________
Printed for the use of the Committee on Armed Services
----------
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COMMITTEE ON ARMED SERVICES
CARL LEVIN, Michigan, Chairman
EDWARD M. KENNEDY, Massachusetts JOHN McCAIN, Arizona
ROBERT C. BYRD, West Virginia JOHN WARNER, Virginia,
JOSEPH I. LIEBERMAN, Connecticut JAMES M. INHOFE, Oklahoma
JACK REED, Rhode Island JEFF SESSIONS, Alabama
DANIEL K. AKAKA, Hawaii SUSAN M. COLLINS, Maine
BILL NELSON, Florida JOHN ENSIGN, Nevada
E. BENJAMIN NELSON, Nebraska SAXBY CHAMBLISS, Georgia
EVAN BAYH, Indiana LINDSEY O. GRAHAM, South Carolina
HILLARY RODHAM CLINTON, New York ELIZABETH DOLE, North Carolina
MARK L. PRYOR, Arkansas JOHN CORNYN, Texas
JIM WEBB, Virginia JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri MEL MARTINEZ, Florida
Richard D. DeBobes, Staff Director
Michael V. Kostiw, Republican Staff Director
(ii)
C O N T E N T S
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CHRONOLOGICAL LIST OF WITNESSES
The Department of Defense's Management of Costs Under the Logistics
Civil Augmentation Program (LOGCAP) Contract in Iraq
april 19, 2007
Page
Dorgan, Senator Byron L., U.S. Senator from the State of North
Dakota......................................................... 7
Bolton, Hon. Claude M., Jr., Assistant Secretary of the Army for
Acquisition, Logistics, and Technology......................... 13
Ernst, Keith D., Acting Director, Defense Contract Management
Agency......................................................... 15
Johnson, MG Jerome, USA, Commanding General, United States Army
Sustainment Command............................................ 17
Reed, William H., Director, Defense Contract Audit Agency........ 22
Fitzgerald, Patrick J., The Auditor General, Department of the
Army........................................................... 27
(iii)
THE DEPARTMENT OF DEFENSE'S MANAGEMENT OF COSTS UNDER THE LOGISTICS
CIVIL AUGMENTATION PROGRAM (LOGCAP) CONTRACT IN IRAQ
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THURSDAY, APRIL 19, 2007
U.S. Senate,
Committee on Armed Services,
Washington, DC.
The committee met, pursuant to notice, at 9:35 a.m. in room
SD-106, Dirksen Senate Office Building, Senator Carl Levin
(chairman) presiding.
Committee members present: Senators Levin, Reed, Akaka,
Bill Nelson, Clinton, Webb, McCaskill, Warner, Inhofe, Thune,
and Martinez.
Other Senators present: Senator Dorgan.
Committee staff members present: Richard D. DeBobes, staff
director; and Leah C. Brewer, nominations and hearings clerk.
Majority staff members present: Peter K. Levine, general
counsel; and Michael J. McCord, professional staff member.
Minority staff members present: Michael V. Kostiw,
Republican staff director; Derek J. Maurer, minority counsel;
David M. Morriss, minority counsel; Lucian L. Niemeyer,
professional staff member; and Bryan D. Parker, minority
investigative counsel.
Staff assistants present: David G. Collins, Fletcher L.
Cork, and Jessica L. Kingston.
Committee members' assistants present: Jay Maroney,
assistant to Senator Kennedy; David E. Bonine, assistant to
Senator Byrd; Frederick M. Downey, assistant to Senator
Lieberman; Elizabeth King, assistant to Senator Reed; Darcie
Tokioka, assistant to Senator Akaka; Christopher Caple,
assistant to Senator Bill Nelson; Jon Davey, assistant to
Senator Bayh; Andrew Shapiro, assistant to Senator Clinton;
Gordon I. Peterson, assistant to Senator Webb; Stephen C.
Hedger, assistant to Senator McCaskill; Sandra Luff, assistant
to Senator Warner; Vince Piperni, Mark Powers, and Jeremy
Shull, assistants to Senator Inhofe; Mark J. Winter, assistant
to Senator Collins; and Brian W. Walsh, assistant to Senator
Martinez.
OPENING STATEMENT OF SENATOR CARL LEVIN, CHAIRMAN
Chairman Levin. Good morning, everybody.
The Senate Armed Services Committee meets today to hear
testimony about the Department of Defense's (DOD) management of
the Logistics Civil Augmentation Program (LOGCAP) contract
under which Kellogg, Brown, & Root, Inc., (KBR), at least until
recently a subsidiary of Halliburton, provided services to U.S.
troops.
There is a history of highly favorable treatment of this
contractor throughout the contract. For example, the company
was given work that appears to have far exceeded the scope of
the contract. All of this added work was provided to the
contractor without competition. The contractor resisted
providing us with information that we needed to monitor and
control costs. There were almost $2 billion of overcharges on
the contract. The contractor received highly favorable
settlements on these overcharges. There was strong evidence
that a failure of oversight on this contract by the DOD paved
the way for excessive payments that cost the taxpayers hundreds
of millions of dollars.
Under the LOGCAP contract, the contractor is responsible
for providing a full spectrum of services to U.S. troops in the
field, including dining facilities, living quarters, base camp
operations and maintenance, facilities management,
transportation, and distribution of supplies, water and ice,
laundry and bath, airfield operations, detainee camp
construction, and firefighting.
Over the last 5 years, the DOD has obligated more than $20
billion under this contract, making it one of the largest, if
not the largest, service contracts ever awarded to a single
contractor. Almost from the outset of the Iraq war, there have
been serious allegations that the contractor inflated cost
estimates and incurred excessive and unnecessary costs. To
date, DOD auditors have identified almost $2 billion in
overpricing on this contract.
For instance, in 2003 and 2004 KBR billed the Government
for millions of meals that were never prepared. These
overcharges occurred because KBR allowed its subcontractors to
charge for a fixed number of meals, regardless of how many
meals were prepared.
Another example in the same period, KBR ordered thousands
of trailers from vendors who charged anywhere from 200 percent
to as much as 600 percent of the prices charged by the low
bidders. When asked by the committee staff whether the problem
with the trailers was symptomatic of a broader problem with
KBR's purchasing systems, the Defense Contract Audit Agency
(DCAA) director replied, ``Yes.''
Under Federal Acquisition Regulations (FAR), the DOD is
supposed to pay only reasonable costs incurred under a cost-
plus contract like the LOGCAP contract, yet DOD reimbursed the
contractor for almost the entire amount that it paid for the
meals that were never served or prepared and the greatly
overpriced trailers.
Audit reports and contractor performance evaluations from
2005 and 2006 reveal that similar cost problems continue to the
present day. For example, the July 2005 report of the DOD Award
Fee Evaluation Board criticized KBR decisions that added, in
their words, ``additional costs to the task order with no
visible benefit to the customer.'' The ``customer'' is us.
A 2005 DCAA audit report found that KBR's proposed labor
costs were overstated by $30 million, or 51 percent, compared
to historic averages.
A November 2005 Army Audit Agency (AAA) audit report found
that KBR had wasted between $40 million and $113 million by
purchasing more vehicles than necessary, in their words, for
the contract.
A separate November 2005 AAA report found that KBR's,
``material handling equipment exceeded requirements,'' and
that, ``staffing levels at the numerous distribution centers
were excessive, adding $36 million to the cost of the
contract.''
The November 2005 report of the DOD Performance Evaluation
Board criticized, ``six layers of management in a 1-to-3
management/labor ratio, which duplicated decisionmaking and
underutilized personnel.''
A separate November 2005 evaluation report stated that,
``Initial estimates are often inflated so that when projects
are underbudget all the time, it is deceptive.'' It is
deceptive.
A March 2006 DCAA audit report found that a KBR proposal
was overpriced by $75 million because KBR's proposed labor
costs were overstated by 22 percent, subcontract costs were
overstated by 21 percent, material costs were overstated by 59
percent, equipment costs were overstated by 21 percent, and
other direct costs were overstated by 20 percent, compared to
the performance of the same work under a previous task order.
The March 2006 Evaluation Board report criticized the
``overstated costs in proposals and the overengineering of
customer requirements.''
An April 2006 Army audit report found that the contractor
refused to move excess personnel or equipment from the job to
which they were assigned in which they weren't needed--they
were excess--to another job in order to accomplish needed work.
According to the report, ``When we brought this situation to
the attention of top contractor operational personnel, they
informed us that this was company policy.''
A May 2006 DCAA report found that a KBR proposal overstated
costs by almost $70 million, with labor costs overstated by 33
percent, material costs overstated by 47 percent, compared to
actual incurred costs for the same effort under a previous task
order.
A May 2006 Evaluation Board stated that, ``Unskilled labor
appeared to be underutilized, seen in makework projects that
contribute little.''
An August 2006 DCAA audit found that KBR's proposed
subcontract costs for one task order were overstated by roughly
$100 million. Proposed costs for two subcontracts exceeded 200
percent of the amount charged by other subcontractors to
perform similar work, while KBR proposed to substantially
increase staffing levels without justification on numerous
other subcontracts.
The September 2006 Evaluation Board report criticized,
``unsupported costs of $2.5 million, an overrun of $33 million,
questioned costs, and an inaccurate burn rate, and an
overestimated $74 million of proposed costs.''
An October 2006 Evaluation Board criticized excessive costs
on subcontracts.
Now, that is a litany of excess, of overstatements, of
representations made by the contractor, and that is only part
of the reports that we have reviewed. It is a pretty sorry
record.
But what was the response? The DOD problems managing the
costs under this LOGCAP contract, first of all, were
exacerbated by the contractor's lack of cooperation with the
DOD information requests. For instance, a September 2005 DCAA
audit report said the following: ``We encountered significant
problems in obtaining supporting cost or price data. In some
cases the procurement files were not provided for review, and
in other cases key information was not included in the
procurement files. Failure to disclose cost or pricing data to
the Government significantly impairs the reliability of the
proposal as an acceptable basis for negotiation of fair and
reasonable price.''
A November 2006 DCAA audit report said the following: ``The
results of this audit are qualified due to the inadequacy of
the documentation provided and the lengthy response time in
obtaining documentation from the contractor. We implore KBR
management and its Government compliance group to address the
cited deficiencies and to work with the DCAA to improve its
systems and related internal controls.''
Can you imagine, we have to implore a contractor--implore a
contractor, receiving billions of dollars of taxpayers' money,
to do what the law requires them to do, which is to give us
documents and data?
In a December 2006 meeting, Army auditor, Patrick
Fitzgerald, told the committee staff that the Army continues to
pay too much for services under the LOGCAP contract. According
to Mr. Fitzgerald, there is, ``no doubt we're paying a premium
for KBR services and that the premium had been exacerbated by
the absence of effective cost controls on the part of the
DOD.''
LOGCAP management officials, the very people who are
supposed to ensure that taxpayer funds are spent wisely,
appeared to have ignored the extensive findings by their own
auditors, as well as the cost concerns expressed in program
documents, when they made award fee determinations for the
LOGCAP contract. Rather than giving KBR low ratings to penalize
the company for its poor cost performance--and that's what
we're talking about here, is cost performance--program
management officials consistently gave the company high ratings
and paid the company high fees.
Now, the absence of significant complaints about the
contractor's work product is not an excuse. We're not talking
about the work products. We're talking about overpayment for a
satisfactory work product. That's the issue that's before us.
This is not a allegation that the work product was deficient or
inadequate. What we're looking at are overpayments for that
work product, because, while it is satisfactory, it is
inexcusable to overpay for a satisfactory work product. There
was overpayment after overpayment after overpayment after
overpayment on this contract. There is a history here which is
totally unacceptable, a history of highly favorable treatment
of this contractor throughout this contract. I've set forth
some examples of that history at the beginning of this opening
statement, and we're going to explore that during this hearing.
Senator Warner.
STATEMENT OF SENATOR JOHN WARNER
Senator Warner. Mr. Chairman, on behalf of the
distinguished ranking member, Senator McCain, I'd like to place
his entire statement into the record.
[The prepared statement of Senator McCain follows:]
Prepared Statement by Senator John McCain
Mr. Chairman, I join you in welcoming our witnesses. Over the last
few years, much has been written and said about the current Logistics
Civil Augmentation Program (LOGCAP) contract--about the Government's
management of it, and the contractor's performance under it. In some
instances, the observations have been accurate; in others, they have
not. I hope that today's witnesses will bring clarity and understanding
to the issues. I am particularly interested in the Army's plan for
improving the LOGCAP.
The LOGCAP is not a new invention. Established in 1985, the program
was designed to leverage corporate resources to support military
operations, thus freeing military personnel to do what they do best:
fight America's enemies. It has been used in Somalia, the Balkans, and
other places to support our troops.
Although the current contract--LOGCAP III--was competitively
awarded in 2001, it essentially operates as a sole-source contract.
There is no competition for the individual multi-million and -billion
dollar task orders issued under it, a practice that runs counter to the
corporate best practices we exhort the Department of Defense (DOD) to
employ. As we all know, robust competition on Government contracts
ensures that the Government receives the best value at the lowest cost
to the taxpayer.
I am encouraged that the Army intends to inject more competition
into the program by awarding contracts to three companies, which will
then compete for work under individual task orders. But, the American
people deserve to know why it took so long to do this. After all,
reportedly in 2004, an internal Army memorandum recommended the Army
immediately find ways to open up the contract to greater competition.
There is no dispute that the LOGCAP contractor has provided the
critical combat support services our troops need. According to numerous
people, the contractor has been exceedingly responsive to commanders'
requirements to enhance the quality of life of our troops in theater.
Nevertheless, various Government auditors have been critical of the
Government's and the contractor's cost control efforts. According to
one report, the Government had problems preparing independent
Government cost estimates, reviewing the contractor's rough orders of
magnitude, and definitizing task orders. Consequently, the Government's
risk increased because of the limited visibility and control over
contractor costs.
Even worse, as I understand it, the Government cannot say with
certainty the amount of money allegedly lost through ineffective cost
controls. That is unacceptable. We must have a full and accurate
accounting of how the taxpayer's dollar was spent and the reasons for
any resources squandered.
I also question whether the Government properly planned to use the
LOGCAP contract. The original scope of work called on the contractor to
support up to 50,000 troops for 180 days. Disturbingly, the Government
Accountability Office concluded that the Government had not planned how
best to use the LOGCAP contract until after the fall of Baghdad.
So we may fulfill our oversight responsibility, the Army must
advise this committee in detail on the contemplated nature of the new
LOGCAP contracts it will award, their fee structures, performance
criteria, and potential for conflict of interests. I am keenly
interested in the separate planning and support contract that the Army
recently awarded. Under this contract, it appears that the Government
is delegating functions that it ought to be performing itself. Such a
role parallels that of lead systems integrators in major defense
acquisition programs, about which I have previously voiced much
reservation.
I have been long concerned about the problems we have in our
acquisition of major weapons systems: cost overruns, delivery delays,
and broken systems. For years, I have called for the need to examine
the whole procurement process as it works today in the DOD. We must
strike a course in acquisition that brings into line affordability
imperatives with the warfighter's mission requirements.
My concerns apply equally to the acquisition of services. In fiscal
year 2005, the DOD spent $141 billion on service contracts, a 72
percent increase in a decade, and an amount exceeding that obligated on
supplies and equipment, including major weapons systems. The explosion
in the number and value of services contracts deserves careful
consideration.
In my judgment, we need to provide General Petraeus and our troops
every tool they need to successfully prosecute the current strategy in
Iraq. Every dollar we save by improving the LOGCAP is another dollar
for Mine Resistant Ambush Protected vehicles, another dollar for body
armor, another dollar for ammunition, another dollar for medical
supplies. Our brave men and women in Iraq and Afghanistan deserve no
less.
Senator Warner. Before addressing one or two paragraphs of
that statement, I listened very carefully to your rendition of,
presumably, documents and other various adjudications on this
very complicated contract. But I do think, as we pursue our
inquiry here on the committee, we have to give recognition to
the fact that this contract, both in Afghanistan and in Iraq,
was performed under very erratic, unanticipated, and, indeed,
high-risk conditions to those employees in-country performing
these contracts. The military efforts in both of these areas of
responsibility (AORs) have been courageous and highly dependent
upon the services flowing from this contract.
All of that has to be taken into consideration as we look
at the various aspects. Unquestionably, there are some grounds
for justifiable criticism, but, on the other hand, I would hope
some of our witnesses would bring to light the difficulty of
performing this contract. This war, in many respects, in both
areas, certainly in Iraq, grew at unanticipated rates, large
infusion of added troops on very short notice, accompanied by
many civilians and contractors, who, likewise, were, in some
measure, dependent upon the contract and its performance.
So, Mr. Chairman, I'd like to refer to Senator McCain's
last three paragraphs here. I know, working as former chairman
of this committee with Senator McCain, he had a tremendous
interest in this subject. He states, in his statement, ``I've
been long concerned about the problems we have in our
acquisition of major weapons systems, cost overruns, delivery
delays, and broken systems. For years, I have called for the
need to examine the whole procurement process as it works today
in DOD. We must strike a course in acquisition that brings into
line affordability imperatives with the warfighter's mission
requirements. My concerns apply equally to the acquisition of
services. In fiscal year 2005, the DOD spent $141 billion in
service contracts, a 72 percent increase in a decade, and an
amount exceeding that obligated on supplies and equipment,
including major weapons systems. The explosion in the number
and value of services contracts deserves careful
consideration.''
He concludes, ``In my judgment, we need to provide General
Petraeus and our troops every tool they need to successfully
prosecute the current strategy in Iraq. Every dollar we save by
improving the LOGCAP is another dollar for mine-resistant,
ambush-protected vehicles, another dollar for body armor, and
another dollar for ammunition. Our brave men and women in Iraq
and Afghanistan deserve no less.''
I join you, Mr. Chairman, in welcoming our distinguished
colleague, Senator Dorgan. He undoubtedly has spent a great
deal of his own personal time in the commitment on this
subject, Senator, and I look forward to hearing your statement.
Chairman Levin. What we will now do is call upon our first
witness, Senator Dorgan, who has spent an extraordinary amount
of time and shown just an amazing amount of commitment to the
issue of going after waste and abuse in government contracting.
As head of the Democratic Policy Committee, he has held
hearings to fill in where there's been a shortage of oversight
in this matter, and we commend him for that. We are delighted
that he's here today to share some of his knowledge and
experience with us.
Senator Dorgan.
STATEMENT OF SENATOR BYRON L. DORGAN, U.S. SENATOR FROM THE
STATE OF NORTH DAKOTA
Senator Dorgan. Mr. Chairman, members of the committee,
thank you very much for hearing me this morning. I did chair 10
hearings, not because I found joy in doing so, but because we
had many whistleblowers come to me and to others to say,
``Something is seriously wrong, and the people need to know
it.''
I want to talk a little about the LOGCAP project today, but
I want to also encourage you to take a look at the Restore
Iraqi Oil (RIO) contract; and I want to do that, only because
there's been a substantial amount of information about the RIO
contract. The top civilian contract official in our Federal
Government at the Corps of Engineers, the top civilian
official, said this about RIO: ``It was the worst contract
abuse I witnessed during my entire professional career, which
spans over 20 years,'' concerns contracts awarded to
Halliburton subsidiary KBR. For that, she has been demoted. She
took on the old-boys network and was demoted for being a
whistleblower.
But here's what I received in the mail 17 months ago from
the Inspector General (IG). I referred what Ms. Bunnatine
Greenhouse, the top civilian contracting official at the Corps
of Engineers, had alleged about these contracts, the RIO
contracts, to the IG. Here's what she wrote to me: ``The
Defense Criminal Investigative Service, the IG, has examined
the allegations made by Ms. Bunnatine Greenhouse, principal
assistant responsible for contracting for the Army Corps of
Engineers, and has shared its findings with the Department of
Justice (DOJ). The DOJ is in the process of considering whether
to pursue the matter. As this is an ongoing criminal
investigation, the requested information will be provided when
the investigation is concluded.'' That was about 17 months ago.
The point is this, serious allegations were raised by the
top contracting official in our Government about the RIO
contact. It apparently is being investigated. It was referred
to the DOJ by the IG. I really do encourage you to take a look
at that, as well.
I don't doubt, as Senator Warner indicated, that services
were provided under the LOGCAP contract under some very
difficult circumstances. I don't doubt that a bit. In a war
zone, it's hard to provide services, and there are undoubtedly
extraordinary employees on the part of KBR and others who did
heroic work. I don't doubt that.
But let me tell you what bothers me about these issues. I
want to just go through a list of things that I have learned
from people who have come forward who were desperate and wanted
to say, ``Here's what has happened.''
Under the LOGCAP contract--sole-source, no bid--here's what
I found from people who came forward and testified openly. Let
me start with the small issues.
A man named Henry Bunting, he was in Kuwait, so he wasn't
in a war zone in a tough delivery circumstance. He was a
purchaser for KBR in Kuwait, and he was told that you need to
buy hand towels for the soldiers, so he ordered the hand
towels. That was part of what he did. But then, his supervisor
said, ``No, no, no, you can't order those hand towels. You have
to order these hand towels.'' Triple the cost. Why? Because the
company logo has to be on the hand towel. KBR has to be
embroidered on the hand towel. Triple the cost. Henry said,
``But that's going to increase the cost of the hand towels.''
``Doesn't matter,'' he was told, ``it's a cost-plus contract.''
Now, this is a tiny little issue. But whether it's this,
$617,000 worth of soda, or $7,400 a month for leasing a sport
utility vehicle, or deciding to build an ice factory in the
desert, and then taking the bid that's 800 percent higher than
another qualified bidder to build the ice factory in the
desert, these are issues that are very important to the
taxpayer and to the soldiers. I believe that what I'm going to
tell you about this LOGCAP contract is a disservice to the
American taxpayer and a disservice to our soldiers.
You're going to hear from the DCAA. In June 2005 they said
Halliburton had billed taxpayers $1.4 billion in questionable
and undocumented charges. Of those, $813 million were from the
LOGCAP contract. Some of them got resolved, some didn't. We
don't know how they were resolved.
Under the LOGCAP contract, the troops in Iraq, at, I
believe, all of our bases in Iraq, were allowed to shower,
bathe, and sometimes brush their teeth with water that tested
positive for E. coli and chloroform bacteria, and was more
contaminated than raw water from the highly polluted Euphrates
River. Now, how do I know this? I know this, because this is
from an internal Halliburton report written by Will Granger,
who was in charge of all water quality in the military
installations in Iraq. Here's what his internal report says:
``The alleged discovery of unidentified larvae at the Al Ramadi
Base in late March revealed no disinfection to nonpotable water
was occurring for water designated for showering purposes. This
caused an unknown population to be exposed to potentially
harmful water for an indeterminate amount of time,'' and he
says, ``this event should be considered a near miss, as the
consequences of these actions could have been very severe,
resulting in mass sickness or death.''
Now, I have the internal report, written by the man who was
in charge of all water quality. The company denied this
existed. They actually created another report that was never
approved by the man that still works for them, who was in
charge of making this report.
By the way, after I held a hearing on this, a young woman,
who is a doctor serving in the Army in Iraq, sent me an e-mail,
and she said, ``You know, I read about what was said. I found
exactly the same thing at my military base, and I had my
lieutenant follow the water line right on back.'' It's true,
what was being sent in as nonpotable water was more
contaminated than the raw water you'd get from the Euphrates
River, and that's what soldiers were washing their faces in and
showering in, contaminated water.
Now, the company says, ``Didn't happen.'' In fact, the Army
originally said it didn't happen. But it did happen, of course,
and the IG is also investigating that. I will provide this
letter for your perusal.
I would encourage you to talk to a man named Rory Mayberry.
Rory Mayberry was a supervisor at a food service enterprise,
KBR Food Service, in Iraq. Rory said that he questioned the
company's decision, when he learned about it, to charge for
meals that had never been served, and he was told by managers,
``this needs to be done, because KBR lost money in prior months
when the Government suspended some dining hall payments. Got to
charge for meals that aren't served.''
He said he was told, by the way, by his company, ``If you
talk to Government auditors when they come here, one of two
things will happen: you'll be fired or you'll be sent to an
active combat zone. Don't you dare talk to a Government
auditor.'' He said that they routinely served food that had the
date stamp expired on it--routinely--and were told by their
supervisors, ``Doesn't matter. Feed it to the troops.''
Perhaps, that Halliburton sent some truck drivers into a
known combat zone--there's substantial evidence about that--and
without warning them of the danger that existed. These were
truck drivers that were their employees. A number of truck
drivers died, a couple of soldiers died. Halliburton, then, by
the way, sent letters to some of the other truck drivers who
had been part of that, offering to nominate the surviving truck
drivers for a DOD medal, provided they would sign a medical
records release that doubled also as a waiver of any rights to
seek legal recourse against the company for that particular
issue. It was unbelievable to read what they tried to do with
respect to those truck drivers.
I will give you the names of people to call who will tell
you that they watched brand-new trucks being burned on the side
of the road, not in a combat zone, because they had a flat tire
and didn't have the right wrench to fix it, and trucks being
abandoned because they had a fuel pump that was plugged--brand-
new trucks--because they could be replaced on a cost-plus
basis.
The list is pretty substantial, and I'm going to provide
all of the information that I have learned about LOGCAP.
My point is not to tarnish anybody or anything. My point is
that I think that when you have a circumstance like this, and
you give billions of dollars in sole-source, no-bid contracts
that are cost-plus, and then you have the contractor say to
employees, ``Don't you dare talk to Government auditors,'' and
you have rampant evidence of waste, fraud, and abuse, I think
all of us ought to be concerned. I think that's a disservice to
the taxpayer, and I think it's a disservice to American
soldiers.
I think profiteering during wartime is unbelievable, and
it's inexcusable. I'm glad you're looking into the LOGCAP
project.
If I might make one additional comment, I hope that what
all of this will do is persuade us to move with respect to some
legislative actions that will begin to deal with contracting
abuse. I believe that awarding big umbrella contracts of over
$100 million on a sole-source basis, and then say, ``Go do it,
and we'll add to the contracts,'' and, ``We know it's
difficult. Do the best you can,'' and then you see substantial
evidence of these kinds of things I've described, it almost
makes you ill.
I really believe that we have a very serious problem. I
think this is probably some of the most significant waste,
fraud, and abuse that we've seen in this country's history. I
hope all of us have exactly the same reaction to it.
If it happened--and I believe it did--let's stop it. Let's
find out how it happened, why it happened, who was responsible
for it, and let's put an end to it.
So, Mr. Chairman, that concludes my testimony. I am going
to provide you a substantial amount of information that I have
gathered.
Again, it's by people who wanted to come forward to say
that the water contract, some people came to me and said, ``Do
you understand what's happening here, that we have soldiers at
bases that are getting potable and nonpotable water, and the
nonpotable water they're using for showering and washing their
face and various things is more contaminated than the water
they'd get if they just put a hose in the Euphrates River, and
they don't know it? The company says it didn't happen, and
here's the report. By the way, here's the e-mail from the guy
in Iraq in charge of it all.'' Frankly, we all ought to be
angered about that sort of thing.
So, thanks for holding these hearings. I'm pleased that
you're doing it. I think that the truth is a very important
commodity here in trying to find out what happened and how to
fix it and make sure it never happens again to our taxpayers,
and especially, most especially, to our soldiers.
Chairman Levin. Thank you, Senator Dorgan, for all your
effort, your energy, your passion. The hearing today is exactly
designed to address the issues which you talk about on the
LOGCAP contract. We're going to find out, not just what some of
these abuses were--and you've outlined a number of them, as
well--but there's just been such a long list of audit reports
which show the same problem: overcharges and failures on the
part of the Army to properly audit the LOGCAP contract where
these failures existed. So, that is what this hearing is all
about, and we are going to see if we can get explanations for
these failures, for this history of favorable treatment of this
contractor. We're going to use your materials, make them part
of the record; we've already made good use of those materials,
and we are very appreciative of your testimony here today.
Senator Warner. Mr. Chairman, if I might add, we thank our
colleague. Do you have corroborative evidence, written
evidence, documentary evidence, of some of the very striking
accusations that you've drawn our attention to? For example,
these indications that, ``We'll give you a medal if you don't
testify,'' is there any record of that, other than verbal?
Senator Dorgan. That is, Senator Warner, the most
unbelievable thing to read. I will provide you with the letters
that were sent to the truck drivers saying that, ``We want you
to sign this waiver,'' which is designed to look like a waiver
with respect to medical or--but it--``And we're going to award
you a medal, or recommend''--and, by the way, this medal can
only be given by the Secretary of Defense--but suggesting that
the company's going to give them a medal.
Senator Warner. You do have those letters?
Senator Dorgan. Absolutely. In writing--when I saw them, it
as unbelievable.
Senator Warner. I think it's important that that
evidentiary material be made available to the committee.
Likewise, I'm always concerned about the whistleblower
situation, and you relate that an individual who did come
forward--did she not seek the normal legislative protection
that Congress has given whistleblowers, and prevent that
demotion?
Senator Dorgan. Let me tell you about Bunnatine Greenhouse.
I'll do it in just 30 seconds. Bunnatine Greenhouse, an
unbelievable success story, and 2 nights ago, I was on the
phone with the general who made her the top contracting
official in the United States. He's retired now, for 6 years. I
said, ``General''--I called him at 9 o'clock at night--I said,
``General, the fact is they've demoted her and given her
bad''--she had performance evaluations that were outstanding
every year, top of the class. All of a sudden, once she decided
to say that this abuse was the most blatant abuse she'd seen--
she's talking about having the companies in the meetings where
the contracts are being developed--all of a sudden, her
recommendations were awful and she was demoted. The general
that I talked to the other night who was the one that promoted
her said, ``She has taken an unbelievable beating, and it's
been unbelievably unfair to her. This woman should not have
been treated that way. She was the top of the class of people
that are working for the Federal Government in contracting.''
So, I hope you will call her in front of this committee.
She came to one of the hearings I held and spoke out. She had a
lot of courage to do it. She knew that she was in trouble over
there. But I hope you'll call her in front of this committee.
Senator Warner. Now, this was in the Corps of Engineers?
Senator Dorgan. This is the United States Corps of
Engineers--the Army Corps of Engineers.
Senator Warner. Yes, I'm familiar, yes.
Senator Dorgan. The person that rose to the top--this is a
great story with this woman and her family.
Senator Warner. Without getting into further details, by
coincidence I met with the nominated officer to become the new
head of the Corps of Engineers, and it might well be that, Mr.
Chairman, we would ask, as a part of his--he's already been
reviewed by our committee, but it's not too late to open the
record to determine what knowledge this individual may have
had, and his willingness to begin to give it a second
examination as to its fairness.
Chairman Levin. There's also a pending IG review.
Senator Dorgan. There's a review of her allegations about
the contract abuse that has been sent by the IG, after review,
to the DOJ, and it's under criminal investigation, according to
the letter. But there's no IG review, I don't believe, of her
demotion. The issue of her employment was a different issue.
She's paid a horrible price for having the courage to speak
out.
Chairman Levin. Yes, what we'll do is, on that specific
case, then, we'll ask the DOJ to tell us what the status is,
just what the status is of the investigation, when they expect
their review to be completed, and we will refer the entire
matter to--if there's not been an IG review of it, the IG for
his report.
Senator Dorgan. The main point of it is, I think we want to
encourage people to speak out.
Chairman Levin. Absolutely. We're going to protect
whistleblowers. We've made a big effort in this in Congress, to
protect whistleblowers. We've even had a big battle, in terms
of the Senate Select Committee on Intelligence. We want to make
it possible for whistleblowers who have classified information
to present that information to any Member of Congress with
clearance, or anybody who has clearance to hear it. Instead,
we've been thwarted by the administration in even receiving
that whistleblower information. But there's a pending nominee
to be the Director of the Corps of Engineers. So, as Senator
Warner suggests, we will ask that witness if that person is
willing to undertake a review of this matter if, and when, that
person is confirmed.
Senator Dorgan. Senator Warner, let me, just with one more
point, say that that was on the RIO contract, not the LOGCAP
contract. But, again, what this woman, the top contracting
official, said, ``It is the worst contract abuse I have
witnessed during my entire professional career.'' She's talking
about the mechanics and the way this contract was created and
awarded. For that, she paid for it with her career.
Senator Warner. As the chairman said, and we've worked
together here these many years on this committee, and Senator
Grassley has been a pioneer on the question of whistleblowers,
along with members on both sides, and that is--one of the
strongest oversight tools that Congress has is the utilization
of corroborated testimony from whistleblowers.
Senator Bill Nelson. Mr. Chairman?
Chairman Levin. Senator Nelson?
Senator Bill Nelson. It's my understanding from listening
to you and Senator Warner, that we are going to make it clear
to the nominee to be the top general in the Corps of Engineers
that he must state to us that he will have a thorough
examination of this issue before we would proceed with the
confirmation of his nomination. Is that correct?
Senator Warner. Well, I'm not sure----
Chairman Levin. He's going to confirm--he will state
whether or not, before we vote on his confirmation, he is
willing to undertake a thorough review of this matter. We can't
complete the review before the vote on his confirmation, but
what we can do, and will do, is ask him this question, before
the vote on his confirmation: ``Will you undertake a thorough
review of this matter?''
Senator Warner. That would be the correct thing, Mr.
Chairman. This gentleman, whom I have had the privilege of
meeting, is an extraordinary nominee to be the head of the
Corps. In all probability, he has no direct knowledge or
participation in these matters, as such, just the
representation to the Senate that, as a part of the
confirmation process, he will undertake an examination of this
issue.
Chairman Levin. Thank you.
Thank you, again, Senator Dorgan.
Senator Warner. Thank you, Senator Dorgan.
Chairman Levin. Secretary Bolton, would you like to begin
with your opening statement?
STATEMENT OF HON. CLAUDE M. BOLTON, JR., ASSISTANT SECRETARY OF
THE ARMY FOR ACQUISITION, LOGISTICS, AND TECHNOLOGY
Mr. Bolton. Mr. Chairman, thank you very much. Good
morning, Chairman Levin.
Chairman Levin. Let me interrupt you for just one moment
while we seat the other witnesses. Let's get the right names
again in front of the witnesses, so we can all be clear as to
who is talking. Thank you.
Secretary Bolton, you begin, please.
Mr. Bolton. Again, thank you very much. To you and to
Senator Warner, distinguished committee members, thank you for
this opportunity to appear before you to discuss the Army's
LOGCAP.
I respectfully request that my written statement be made
part of the record for today's hearing.
Let me begin by thanking you, on behalf of the members of
the acquisition and logistics workforce and our soldiers, who
serve with great distinction throughout the world, for your
continuing support.
Now, I'll be brief. We have two important missions in Iraq,
to support reconstruction, contracting, and to provide support
to our courageous men and women in uniform. Contracting to
support the reconstruction of Iraq, and troop support, is
carried out by the Joint Contracting Command Iraq and
Afghanistan. However, support to U.S. and coalition forces is
provided under the LOGCAP III contract, which is under the
auspices of the United States Army Materiel Command with
support provided by the Defense Contract Management Agency
(DCMA).
LOGCAP was established in 1985 to provide basic life
support and facility support until other support capabilities
arrived or could be arranged. World events, however, have
zeroed in on LOGCAP as, often, the only option to provide
complex, rapid, and diversified area support requirements in
multiple countries, mostly under harsh and hostile conditions.
The exponential growth in the existing LOGCAP contract, over a
relatively short time, has stressed both the Government and
contract resources, as well as the business systems and
processes. We have made, and will continue to make,
improvements to our processes, our systems, and contract. The
program's strength lies in the dedication, innovation, and
perseverance of the LOGCAP personnel--military, civilian, and
contractor. We are proud of the dedication, commitment, and
hard work displayed by the LOGCAP personnel in supporting our
troops and in rebuilding Iraq.
Mr. Chairman, this concludes my opening remarks. Again, I
want to thank you, the distinguished members of this committee,
for your continuing wisdom, your guidance, your steadfast
support, and I look forward to your questions.
Thank you very much.
[The prepared statement of Mr. Bolton follows:]
Prepared Statement by Hon. Claude M. Bolton, Jr.
Thank you for this opportunity to report to you on the United
States Army's Logistics Civil Augmentation Program (LOGCAP). I am
pleased to represent U.S. Army leadership as well as the military and
civilian men and women who are, along with our contractors, supporting
our fighting forces and working to reconstruct Iraq. Our success would
be impossible without the tremendous support the Army receives from
you, the members of the Senate Armed Services Committee. We thank you
for your wisdom, advice, and strong support.
The U.S. Army acquisition workforce has two very important missions
in Iraq: to support reconstruction contracting and to provide support
for the troops. Contracting to support reconstruction is carried out by
the Joint Contracting Command-Iraq/Afghanistan (JCC-I/A) under the
acquisition authority of the U.S. Army. JCC-I/A also provides support
to the Multi-National Security Transition Command-Iraq (MNSTC-I) in
training and equipping Iraqi forces and to the U.S. Government's
mission in Afghanistan. Support to U.S. and coalition forces is
provided under the LOGCAP-III contract under the auspices of the U.S.
Army Material Command (AMC).
The Army has worked with contractors to provide supplies and
services during both peacetime and contingency operations dating back
to the Revolutionary War. On December 6, 1985, LOGCAP was established
with the publication of Army Regulation 700-137. The newly established
program was used in 1988 when the Third United States Army requested
that the U.S. Army Corps of Engineers (USACE) contract out a management
plan to construct and maintain two petroleum pipeline systems in
Southwest Asia in support of contingency operations.
The first comprehensive multifunctional LOGCAP Support (LOGCAP I)
contract was competitively awarded by the USACE in August 1992 and this
effort supported most U.S. military operations from 1992-1996.
LOGCAP was not envisioned to remain in place for years and the
original intent of the LOGCAP contract was only to provide basic life
and facilities support such as base camps, dining facilities, food
service, supply point operations, local and line haul motor transport,
and sea and aerial points until other support capabilities arrived or
could be arranged. However, external world events have shown that
LOGCAP is often the only option that could provide complex, rapid, and
diversified area support requirements.
In 1996, AMC assumed the contract administration, management, and
execution responsibilities for the LOGCAP Umbrella Support Contract.
AMC re-competed the contract in 1997 (LOGCAP II) and again in 2001
(LOGCAP III). With the sudden and tragic events of September 11, 2001,
the dynamics of logistics civil augmentation support significantly
changed from anything we've seen in history. LOGCAP proved again to be
rapid, responsive, and flexible. There is no other organic support
(Active-Duty, Reserve, or National Guard) that allows us to meet these
type of needs and thus LOGCAP is, and will remain, a vital avenue to
prosecute the global war on terrorism. LOGCAP supports multiple
countries, services, and agencies, most under harsh and hostile
conditions. The LOGCAP III contract is approximately $23 billion, with
an outside the continental United States force structure of 55,715 men
and women of which approximately 29,200 are subcontractors. Under the
LOGCAP contract, the Army has delivered to our forces: 36.2 million
bags of mail; 200 million tons of ice; 7.6 billion gallons of potable
water; 533 million meals; and 26.7 million bundles of laundry. The
services provided to our uniformed men and women have been of the
highest quality. Still, with these services come associated challenges.
The exponential growth in the existing LOGCAP contract over a
relatively short period of time has stressed both Government and
contractor resources, as well as business systems and processes. We
have made and will continue to make improvements to our processes,
systems, and contract. For example, to improve management of our
processes and refine requirements we have established three program
offices in Iraq, Kuwait, and Afghanistan. The offices are staffed with
a cadre of logistics analysts, contract specialists, and cost analysts.
Workforce members are in daily contact with senior commanders and
logisticians and participate in all aspects of operational planning and
execution. We continue to work closely with the Defense Contract
Management Agency (DCMA) on contractor systems issues. DCMA has
deployed Administrative Contracting Officers and Quality Assurance
Representatives throughout the region to provide oversight. In
addition, we have appointed more than 450 Contracting Officer
Representatives to provide daily oversight of contractor performance.
Under my direction AMC, DCMA and the Defense Contract Audit Agency have
worked hard to resolve the backlog of undefinitized contract actions
(UCAs)--with success. There currently are no outstanding UCAs. The
LOGCAP office, with support from other Department of Defense agencies,
is aggressively managing and monitoring the contractor's cost
performance; the Joint Acquisition Review Board adds another measure of
cost control through the management and approval of requirements, thus
ensuring expenditures are for bona fide needs.
The mission in Iraq is one of constant change. Support to Iraqi
Forces has increased as we have worked to hand over the fight for
freedom and the battle against the insurgency to the Iraqi Government.
The LOGCAP contract is also changing as we move away from a one
contractor configuration as currently exists under LOGCAP III to
multiple contractors under LOGCAP IV. We are confident that the
additional execution capability--providing for competition at the
individual task order level--will provide us with more robust capacity
and effectiveness.
Regardless of the contract vehicle, however, one thing has and will
remain constant over time: our commitment to ensuring that all
contractors who support our courageous military men and women and
reconstruction efforts in Iraq comply with the terms and conditions of
their contracts.
On January 30, 2007, the Army learned that Kellogg, Brown, and Root
(KBR) services may have inappropriately charged the Army for security
costs under LOGCAP III. In light of this information and on the basis
that privately acquired security should not have been charged or paid
under the contract, the contracting officer took action to adjust over
$19 million in payments to KBR.
The U.S. Army is committed to providing full disclosure of the
results of any investigations. If KBR violated the terms and conditions
of the LOGCAP III contract and knowingly or unknowingly incurred costs
under the contract, the U.S. Army will take appropriate steps under the
terms of the contract to recoup any funds paid for those services.
LOGCAP capitalizes on the synergistic effect of integrating the
combined capabilities of the military members of the U.S. Army, as well
as Army civilians and the commercial civil sector. The program's
strength, however, lies in the dedication, innovation, and perseverance
of LOGCAP personnel--military, civilian, and contractor. We are proud
of the dedication, commitment, and hard work displayed by LOGCAP
personnel in supporting our troops and rebuilding Iraq.
Chairman Levin. Thank you very much, Secretary Bolton.
Let us now call on Mr. Ernst, who's the Acting Director of
the DCMA.
Mr. Ernst?
STATEMENT OF KEITH D. ERNST, ACTING DIRECTOR, DEFENSE CONTRACT
MANAGEMENT AGENCY
Mr. Ernst. Good morning, Mr. Chairman and members of the
committee. I appreciate this opportunity to appear before you
today to discuss the role of the DCMA in ensuring performance
under the LOGCAP in Iraq and Afghanistan.
I respectfully request that my written statement be made
part of the record for today's hearing.
DCMA's oversight of contractor-provided services for our
Nation's deployed forces in Iraq and Afghanistan is a
responsibility of unprecedented magnitude, and one with a
commensurate level of challenge. DCMA maintains a cadre of
approximately 83 military and civilian personnel in Iraq,
Afghanistan, and Kuwait to support LOGCAP. These individuals
deploy in theater for 6-month tours and specialize in one of
three functional areas: contract administration, quality
assurance, or property management.
In carrying out their responsibilities, these personnel
ensure that the LOGCAP contractor is performing in a manner
consistent with contract requirements, is using adequate
effective quality processes, is recommending cost-containment
strategies, and is adapting the level and nature of their
support to meet shifting requirements.
DCMA's in-theater cadre is complemented by a network of
non-DCMA personnel, referred to as contracting officer
representatives (CORs). CORs receive specialized training in
one of several LOGCAP support functions, such as food
preparation, laundry service, or waste disposal. Currently
numbering approximately 450, the CORs are members of the
deployed units that receive the contractor-provided services.
DCMA's in-theater cadre and the CORs serve as a team that
closely monitors contractor performance of LOGCAP services at
their respective locations.
At the corporate level, DCMA provided oversight of dining
facilities renegotiations, resulting in more favorable contract
terms. We supported the DCAA's revocation of direct billing
privileges for KBR, meaning that every cost voucher submitted
by KBR must now be approved by DCAA before payment. DCMA also
identifies to LOGCAP negotiators any risk posed by estimating
system issues to ensure these issues are adequately considered
and mitigated during negotiations.
The in-theater contract management mission is clearly a
formidable one. Aspects of such a mission, including personnel
security and safety, workload shifts and dispersions, and
personnel placement, are a continual challenge. DCMA constantly
works to effectively balance resource requirements between our
core mission and contingency contracting administration service
commitments to ensure that core mission areas, such as flight-
critical product and level I subsafe hardware, along with high-
investment programs and sustainment support, continue to
achieve their intended goals.
This concludes my prepared remarks. I will be happy to
answer any questions you may have.
[The prepared statement of Mr. Ernst follows:]
Prepared Statement by Keith D. Ernst
Mr. Chairman and members of the committee: I appreciate this
opportunity to appear before you today to discuss the role of the
Defense Contract Management Agency (DCMA) in ensuring contractor
performance under the Logistics Civil Augmentation Program (LOGCAP) in
Iraq. DCMA's oversight of contractor-provided services for our Nation's
deployed forces in Iraq is a responsibility of unprecedented magnitude
and one with a commensurate level of challenge.
DCMA maintains a cadre of approximately 83 military and civilian
personnel in Iraq, Afghanistan, and Kuwait to support LOGCAP. These
individuals deploy in theater for 6-month tours and specialize in one
of three functional areas: contract administration, quality assurance,
or property management. In carrying out their responsibilities, these
personnel ensure that LOGCAP contractor's performance is consistent
with contract requirements; is using adequate, effective quality
processes; is recommending cost-containment strategies; and is adapting
the level and nature on their support to meet shifting requirements.
Prior to their deployment to theater, these personnel undergo
specialized training for the demands of their LOGCAP-related duties.
Each of DCMA's deployed Administrative Contracting Officers (ACOs) and
most of our Quality Assurance Representatives (QARs) are certified in
accordance with the Defense Acquisition Workforce Improvement Act
(DAWIA). DCMA's in-theater cadre is complemented by a network of non-
DCMA personnel referred to as Contracting Officer Representatives
(CORs). CORs receive specialized training in one of several LOGCAP
support functions, such as food preparation, laundry service, or waste
disposal. Currently numbering approximately 450, the CORs are members
of the deployed units that receive the contractor-provided services.
DCMA's in theater cadre and the CORs serve as a team that closely
monitors contractor performance of certain services at their respective
locations. The CORs routinely submit input to DCMA's QARs. The CORs
also have a direct line to the cognizant DCMA ACOs.
Our ACOs receive requirements from the LOGCAP Support Unit (LSU)
after that unit makes should-cost estimates on the requirement. The
assigned ACO then requests a proposal from the contractor, and, once
the LSU validates the proposal for accuracy and cost reasonableness,
formally tasks the contractor to begin work. In theatre, our ACOs also
provide material requisition approval, lease approval, and consent to
subcontract in accordance with prescribed contract terms. At the
corporate level, DCMA establishes and monitors various overhead rates
and factors. Our ACOs also conduct formal Performance Evaluation Boards
(PEBs) using the identified award fee criteria. DCMA and the supported
customer's CORs provide feedback to the contractor on acceptable
performance as well as on those areas needing improvement. In the
conduct of the PEB, our ACOs review the contractor's Cost Avoidance
Measures (CAMs). CAMs are submitted by the contractor to document cost
savings and avoidances. The contractor is motivated to submit CAMs as
they are tied directly to fee initiatives in the Award Fee Board
criteria. The contractor can increase the amount of fee it is awarded
by demonstrating good stewardship of taxpayer dollars. Our ACOs also
provide input for the semi-annual Award Fee Evaluation Board--the board
which determines the contractor's level of earned fee.
At the corporate level, DCMA provides oversight of Dining
Facilities renegotiations, resulting in more favorable contract terms.
In this regard, we supported the Defense Contract Audit Agency's (DCAA)
revocation of direct billing privileges for Kellogg Brown and Root
(KBR), meaning that every cost voucher submitted by KBR now must be
approved by DCAA before payment. DCMA also identifies to LOGCAP
negotiators any risks posed by estimating system issues to ensure they
are adequately considered and mitigated during negotiations.
The role of our property administrators is to ensure the contractor
has a viable property management system--one that minimizes and
controls the loss, theft, misuse, and destruction of Government
property. Property Administrators are also responsible for
investigating incidents of property loss to determine accountability. A
DCMA conducted survey in 2006 on the principal LOGCAP contractor
examined 14 property management functional areas. Our survey uncovered
no systemic issues, and we deemed the contractor's property management
system to be satisfactory.
The in-theater contract-oversight mission is clearly a formidable
one. Aspects of such a mission, including personnel security and
safety, workload shifts and dispersion, and personnel placement, are a
continual challenge. DCMA constantly works to effectively balance
resource requirements between its core mission and its Contingency
Contract Administration Services commitments to ensure that core
mission areas such as Flight Critical and Level I Subsafe hardware,
along with high-investment programs and sustainment support, continue
to achieve their intended goals.
This concludes my prepared remarks. I will be happy to answer any
questions you may have.
Chairman Levin. Thank you, Mr. Ernst.
Let us go now to General Johnson, Commanding General of the
United States Army Sustainment Command.
General Johnson?
STATEMENT OF MG JEROME JOHNSON, USA, COMMANDING GENERAL, UNITED
STATES ARMY SUSTAINMENT COMMAND
General Johnson. Good morning, Mr. Chairman and members of
the Senate Armed Services Committee. Thank you for the
opportunity to report to you on the United States Army's
LOGCAP.
The Army Sustainment Command is responsible for the
execution of LOGCAP, in addition to several other missions:
coordination of Army materiel commands, field support
operations, coordination of reset, materiel management, armor
preposition stocks, and contingency contracting.
The Army Sustainment Command executes this through 11
brigades located throughout the world--7 field support
brigades, which handles logistics missions, and 4 contingency
contract brigades, recently created.
It is my privilege to represent the United States Army, as
well as its dedicated military, DOD civilians, and contractors
whose steadfast support of America's fighting forces in
Afghanistan, Iraq, and Kuwait are critical to our efforts. Our
work and our success to date are directly attributable to the
resources and guidance you provide. I thank you for the
oversight and direction as we continue to improve LOGCAP.
I would also like to thank Claude Bolton, Assistant
Secretary of the Army for Acquisition, Logistics, and
Technology (AL&T), who is here today; Tina Ballard, who is the
Deputy Assistant Secretary of the Army for Policy and
Procurement; General Benjamin Griffin, who commands the Army
Materiel Command; and my other colleagues at the table who have
participated in improving this program. Their leadership has
helped us address numerous challenges and develop improvements
in managing LOGCAP.
From three qualified bidders, the LOGCAP contract was
competitively awarded to KBR in December 2001. Under the
contract, individual task orders are developed to provide
specific support services. The contractor is paid a cost-plus 1
percent base fee, and the contractor may earn up to 2 percent
award fee on negotiated costs. The program has grown rapidly
from a peacetime value of several million dollars to over $5
billion today. As a result, we encountered the following
challenges: controlling theater requirements, contractor
business systems not meeting the standard, definitizing task
orders, conducting timely award-fee boards, accounting for
property, and outright fraud and criminal activity.
In August 2004, we aggressively attacked these issues and
began corrective actions. These challenges were validated by
both the DCAA, the AAA, and the DCMA. The actions we took were
as follows: appointed a senior contracting official to run the
program, establishing a requirement review process,
establishing a review process of business systems of the
contractor, definitizing all over-age contracts, conducting
timely award fee boards, establishing property controls,
working with the DOJ to prosecute those who broke the law, and
expanding our partnership with the DCMA and the DCAA.
With Mr. Bolton's help, we've established a senior
executive program manager for LOGCAP. James Loehrl, who is here
with me today, serves as the LOGCAP manager and also as my
principal assistant responsible for contracting.
We established four program management offices in
Afghanistan, Iraq, and Kuwait. We also improved predeployment
training for our LOGCAP support unit. We continue to improve
oversight and management of the program. Only yesterday, we
promoted Lee Thompson, who's here with me today, to the Senior
Executive Service to act as Director for LOGCAP Support
Operations. This will allow Mr. Loehrl to focus primarily on
the contracting issues, while Mr. Thompson will dig deeper into
how we support the forces on the ground.
To address theater requirements, we established a Joint
Acquisition Review Board to review and approve all LOGCAP work
requirements. We also have a Coalition Acquisition Review Board
that provides additional review and approval or work
requirements over $10 million. Now, with the help of DCAA and
DCMA, all of the contractors' business systems are acceptable.
They're not where we want them to be, but they meet the
standard.
As I mentioned before, in October 2004 we began the
establishment of four program management offices in
Afghanistan, Iraq, and Kuwait. These offices are staffed with
logistics specialists, contract specialists, and cost analysis
who provide detailed oversight of the contract and independent
Government estimates.
Additionally, our DCMA and our DCAA partners are co-located
and integrated with the deputy program manager staff. Between
November 2004 and March 2005, we definitized 55 over-age task
orders valued at $14 billion. Now all new task orders are
definitized before they are issued or within the 180-day
standard required by regulation.
Contract award fee evaluations are now on schedule. Mr.
Loehrl, the LOGCAP manager, has made 11 trips to the theater to
chair award fee boards.
We have established a Contractor-Acquired Property Review
Board that ensures excess contract property is distributed to
locations needed. The contractor is required to use excess
equipment prior to purchasing new items. We directed the
contractor to improve his supply chain. As a result, the
contractor implemented, along with the help of Defense
Logistics Agency, competitive commodity agreements with support
vendors for equipments and supplies, such as generators,
communication items, vehicles, and lumber. This standardizes
maintenance and reduces spare parts costs needed to maintain
equipment. To date, these efforts have resulted in a cost
avoidance of over $26 million.
In cases of waste, fraud, and abuse, the U.S. Attorney's
Office has indicted six people, and successfully prosecuted
four cases of fraud. In all cases, restitution has been ordered
against the individuals convicted of fraud.
With regard to cost control, the contractor is required to
provide cost reports every 2 weeks on active task orders. These
reports identify variances between budgets, actual
expenditures, and available funding. This allows the management
personnel in theater to identify trends needing correction
immediately.
Our ``Alpha Contracting'' initiative brings the combatant
commanders' representatives, the contractor, the contracting
officer, and the DCAA, along with the DCMA, together so we can
rapidly agree on costs and estimates for needed support
operations in theater. Cost avoidance for this process has been
dramatic. In 2005 and 2006, initial LOGCAP estimates for work
in Iraq exceeded $10 billion. Through ``Alpha Contracting''
initiative and should-cost analysis and independent Government
estimates, this was reduced to $4 billion, a $6 billion cost
avoidance.
We recognize the need to have closer oversight of
subcontract actions. The prime contractor is now required to
obtain our consent to subcontract for services that exceed
$500,000. A review is done of any contracting actions with the
subcontractor.
LOGCAP III grew so rapidly that it nearly exceeded a single
contractor's capacity. To minimize this risk, LOGCAP IV will
use multiple contractors. This will increase Government
contract oversight and reduce program risk, while reducing cost
through competitive, continuous task-order competition.
You specifically asked for my views on the cost-
effectiveness of the program. This program is operating in a
very difficult, complex, and ever-changing environment. Given
what this program has been asked to do and the circumstances it
operates under, it is cost-effective. However, there is a
breakeven point as we continue with the war on a long-term
basis. With your continued support and guidance, this program
will continue to improve and ensure basic support is provided
to America's fighting forces, at the least cost, on time, and
to standard.
Thank you for allowing me to speak today. I look forward to
your questions.
[The prepared statement of General Johnson follows:]
Prepared Statement by MG Jerome Johnson, USA
Mr. Chairman, members of the Senate Armed Services Committee, thank
you for this opportunity to report to you on the United States Army's
Logistics Civil Augmentation Program (LOGCAP). It is my privilege to
represent the United States Army, as well as the dedicated military,
Department of Defense (DOD) civilians, and contractors whose steadfast
support of America's fighting forces in Afghanistan, Iraq, and Kuwait
are critical to our efforts. Our work and our success to date are
directly attributable to the resources and guidance you provide. I
thank you for your oversight and direction as we continue to improve
LOGCAP.
I would also like to thank Claude Bolton, Assistant Secretary of
the Army for Acquisition, Logistics, and Technology, who is here today;
Tina Ballard, who is the Deputy Assistant Secretary of the Army for
Policy and Procurement; and General Benjamin Griffin, who commands the
Army Materiel Command. Their leadership has helped us address numerous
challenges and develop improvements in managing LOGCAP.
From three qualified bidders, the LOGCAP III contract was
competitively awarded to Kellogg, Brown, and Root, Incorporated, in
December 2001. Under the contract, individual task orders are developed
to provide specific support services. For many task orders, the
contractor is paid negotiated costs plus a 1-percent base fee; the
contractor may earn up to a 2-percent award fee on the negotiated
costs. The program has grown rapidly from a peacetime value of several
million dollars per year to over $5 billion per year today. The program
provides logistics and life support services to our fighting forces,
freeing them to focus on their combat missions. The program is designed
to rapidly expand during contingency operations and to drawdown during
peacetime.
LOGCAP III was first used in Southwest Asia in support of the troop
buildup in Kuwait. Once U.S. forces crossed the berm into Iraq, LOGCAP
crossed with them:
establishing and operating base camps
feeding hungry troops
furnishing transportation services
operating warehouses
delivering mail
transporting fuel and supplies
LOGCAP personnel became a force multiplier for our warfighters.
We encountered a number of challenges with LOGCAP III during the
rapid buildup of our forces in Southwest Asia. These challenges
included:
controlling theater requirements
overwhelming the contractor's business systems
definitizing task orders
conducting timely award fee boards
accounting for property
fraud
Despite early challenges, at no time did our servicemembers go
without our LOGCAP support, we always placed their needs first.
In August 2004, we aggressively attacked these issues and began
corrective actions. Many of the issues were later validated in audits
conducted by the Defense Contract Audit Agency (DCAA), the Army Audit
Agency (AAA) and the DOD Inspector General.
While LOGCAP still has a number of challenges, we have implemented
a number of improvements, including:
Appointing a senior contracting official to run the
program
Establishing a requirement review process
Insisting KBR improve their business systems
Definitizing all over-age task orders
Conducting timely award fee boards
Establishing property controls
Working with the Department of Justice to prosecute
those who broke the law
Expanding our partnership with DCMA and DCAA
Rapid program growth drove the need for enhanced oversight. With
Mr. Bolton's help, we have established a Senior Executive Service
Program Manager for LOGCAP. This person serves as the focal point for
day-to-day management of LOGCAP and staff direction. James Loehrl, who
is with me today, serves as my LOGCAP Manager and also my Principal
Assistant Responsible for Contracting. We established Deputy Program
Management offices in Afghanistan, Iraq, and Kuwait. We also improved
pre-deployment training for our Logistics Support Unit soldiers.
To address theater requirements, we work directly with forward
units to identify and define needed services. We established a Joint
Acquisition Review Board to review and approve LOGCAP work
requirements. We have a Coalition Acquisition Review Board that
provides an additional review and approval for work requirements over
$10 million.
Along with our Defense Contract Management Agency (DCMA) and DCAA
partners, we insisted KBR improve their business systems. Now, all of
KBR's business systems are acceptable. As I mentioned before, in
October 2004 we began establishing Deputy Program Management offices in
Afghanistan, Iraq, and Kuwait. These offices are staffed by: logistics
specialists, contract specialists, and cost analysts who provide
detailed oversight of the contract. Additionally, our DCMA and DCAA
partners are colocated and integrated with the Deputy Program Manager
staff.
Between November 2004 and March 2005, we definitized 55 over-age
task orders valued at $14 billion. Now, all new task orders are
definitized before they are issued or within the normal 180-day
standard.
Contract award fee evaluations are now on schedule. The LOGCAP
Manager has made 11 trips to theater to chair award fee boards. Every 3
months, we evaluate contractor performance and determine appropriate
award fees. Through November 2006, KBR earned $256 million of a
potential $287 million in award fees; this equates to 89 percent of
potential fees. This process provides the contractor with important
feedback on where improvements are needed.
To maximize the use of contract-purchased property, we have
established a Contractor Acquired Property Review Board that ensures
excess contract property is distributed to needed locations. The
contractor is required to utilize excess equipment prior to purchasing
new items. Also, the contractor implemented a competitive commodity
agreement with support vendors for equipment such as generators,
communications items and vehicles. This standardizes maintenance and
reduces the number of spare and repair parts needed to maintain
equipment. To date these efforts have saved over $26 million.
In cases of waste, fraud, and abuse, we fully cooperate with any
and all investigations and prosecutions. The U.S. Attorney's office has
indicted six people and successfully prosecuted four cases of fraud. In
all cases, restitution has been ordered against the individuals
convicted of fraud.
We work closely with DCMA and DCAA to address recommendations,
improve contract administration, and improve contractor oversight. To
date, we have sustained over $600 million of DCAA recommendations in
our task order negotiations.
We continue to learn and grow from our experience and implement
changes as they are needed. Every day we seek to:
reduce costs
improve performance and oversight
reduce program risk
As LOGCAP continues to mature, we recognize that future LOGCAP
contract oversight staffs must be on the ground quickly--ready to
operate. We will be postured to move Deputy Program Management offices
into theaters as required. Tied to this is the rapid development of
independent Government cost estimates. These estimates will assure that
we remain good stewards of the resources provided to us. We are
developing automated tools to assist our Government teams in preparing
statements of work and cost estimates. We will not let future oversight
lag when the program grows rapidly to meet warfighter needs.
With regards to cost control the contractor is required to provide
cost reports every 2 weeks for active task orders. These reports
identify variances between budgets, actual expenditures, and available
funding. This management tool provides DCMA and other program personnel
with a quick understanding of trends needing attention.
Another lesson learned that we will carry into future LOGCAP
operations is to have standardized statements of work which will allow
combatant commanders to quickly select support options. This
standardization will allow the LOGCAP contractor to efficiently plan
and establish logistics and life support operations.
Our ``Alpha Contracting'' initiative emerged from our need to
streamline the task order negotiation process. This initiative brings
the combatant commander, the contractor, the contracting officer, and
the DCAA together so they can rapidly agree on and put needed support
operations in place. Cost avoidance from this process has been
dramatic. In 2005 and 2006, initial LOGCAP estimates for work in Iraq
exceeded $10 billion. Through the Alpha Contracting initiative and
General Casey's directive to minimize services, this was reduced to $4
billion--a $6 billion avoidance. This is also one of the places we are
making use of AAA reviews. When AAA identifies potential areas of
overstaffing or underutilization of equipment, we use that information
as a part of our negotiation process.
We recognize the need to have closer oversight of subcontract
actions. The prime contractor is now required to obtain our consent to
subcontract for services that exceed $500,000.
LOGCAP III grew so rapidly that it nearly exceeded a single
contractor's capacity. To minimize this risk, LOGCAP IV will utilize
multiple contractors. One contractor will provide pre-war planning and
program management support. Up to three contractors will provide
performance services, with all of them competing for work identified in
separate task orders. This will increase Government contract oversight
and reduce the program risk of exceeding a single contractor's
capacity, while reducing costs through continuous task order
competition.
LOGCAP IV will go a long way toward expanding performance capacity,
reducing costs, and improving Government oversight. It will also
provide us with increased flexibility to meet rapidly changing
requirements.
In conclusion, LOGCAP is more than just a contract. It is a
critical program designed to provide essential support services to our
Nation's sons and daughters who fight for our freedom.
You specifically asked for my views about the cost effectiveness of
this program. I will tell you that this program is operating in a very
difficult, complex and ever-changing environment. Given what this
program has been asked to do, and the circumstance it operates under,
it is cost effective. We've managed to overcome numerous challenges in
LOGCAP while always maintaining our support to our Nation's soldiers,
sailors, airmen, and marines.
Despite any and all program challenges, we performed our mission
and succeeded in supporting our servicemembers. In forward battle
zones, LOGCAP has served over 533 million meals to hungry troops,
washed over 26 million bundles of their laundry, and delivered over 36
million bags of mail that included letters from their loved ones at
home.
We stand ready to meet tomorrow's challenges to support America's
warfighters where and when they need us.
Thank you for inviting me to speak with you today; this concludes
my statement.
Chairman Levin. Thank you so much, General Johnson.
Now let's call on William Reed, the Director of the DCAA.
Mr. Reed.
STATEMENT OF WILLIAM H. REED, DIRECTOR, DEFENSE CONTRACT AUDIT
AGENCY
Mr. Reed. Mr. Chairman, Senator Warner, and members of the
committee, thank you for the opportunity to appear today to
discuss DCAA's oversight of contract costs related to military
operations and reconstruction in Iraq, particularly related to
the LOGCAP.
DCAA has been an integral part of the oversight and
management controls instituted by DOD to ensure integrity and
regulatory compliance by contractors performing services in
Iraq. Our services include audits and professional advice to
acquisition officials on accounting and financial matters, to
assist them in the negotiating, award, administration, and
settlement of contracts. Decisionmaking authority on DCAA
recommendations resides with contracting officers within the
procurement organizations who work closely with DCAA throughout
the contracting process.
Since April 2003, DCAA has worked with all U.S. procurement
organizations, including those of the United States Agency for
International Development and the State Department, to
establish the resources and planning information needed to
provide audits of contracts for Iraq reconstruction. To carry
out these audit requirements, DCAA opened an office in Iraq in
May 2003, and implemented planning and coordination procedures
to effectively integrate audit work between that office and
more than 50 DCAA continental United States audit offices with
cognizance of companies performing contracts in Iraq.
Currently, we are auditing contracts of 93 contractors,
holding 175 prime contracts with contract ceiling amounts of
$51.8 billion, of which $38.5 billion has been funded at the
end of fiscal year 2006.
I would like to point out that DCAA audits of cost-
reimbursable contracts represent a continuous effort from
evaluation of proposed prices to final closeout and payment.
Initial audits of contractor business systems, internal
controls, and preliminary testing of contract costs are carried
out to provide a basis for provisional approval of contractor
interim payments and early detection of deficiencies.
Comprehensive contract cost audits are performed annually
throughout the life of the contract, and are used by the
contracting activity to adjust provisionally approved interim
payments and ultimately to negotiate final payment to
contractors.
Through fiscal year 2006, we have issued more than 1,800
reports on Iraq-related contracts. Approximately 350 of those
reports were on KBR specifically. We estimate to issue another
600 reports in fiscal year 2007. DCAA oversight of contracts in
Iraq have found a number of problems. Our actions have ranged
from recommending changes in business processes, to reduction
of proposed or billed costs, to referral of our findings to the
IG for investigation and possible legal action against the
contractor. Overall, these audits have recommended reductions
in proposed and billed costs of $4.9 billion.
Where appropriate, we have taken action to reduce
contractor-billed costs for disputed amounts, pending a
contracting officer decision.
In addition, we have found $5.1 billion of estimated costs
where the contractor did not provide sufficient information to
explain the basis of the estimated amounts. These unsupported
costs are usually resolved through contractor's submission of
additional documentation at the time of contract price
negotiations.
Turning now to the LOGCAP, it is the single largest Iraq-
related contract. It was awarded to Halliburton subsidiary,
KBR, and currently has a contract ceiling of $22.5 billion.
DCAA has provided comprehensive and continuous contract audit
oversight on the LOGCAP, and I would like today to comment on
some of our work in that regard.
In supporting the Army contracting officers in the pricing
of contracts, DCAA has audited 68 LOGCAP task order proposals,
valued at $16.2 billion, and have found audit exceptions or
costs questioned of $1.9 billion. DCAA has received and
analyzed the results of negotiation on task orders, valued at
$12.8 billion, and negotiated price reductions of $600 million
have been achieved to date.
A recent example of our audit work in this area is the
review of the proposal for task order 139. Task order 139 is
the latest order for dining facilities, laundry, and other
life-support measures for U.S. troops and civilians. Our review
of the initial proposal was completed in August 2006. We
questioned $262 million of the $3.7 billion proposal. KBR
agreed to $160 million of the questioned costs, and the balance
was addressed at recent negotiations.
It is notable that in this pricing action, that there was a
significant improvement over previous similar proposals which
were plagued by estimating deficiencies, causing multiple
proposal submissions and delays in negotiating the task-order
price.
I'd now like to comment on our audit work, in terms of the
reliability of business systems affecting contract costs. Our
audits have addressed the adequacy of contractor internal
controls and business systems, as well as compliance with
acquisition regulations and contract terms. While KBR's
business systems are adequate overall, our reviews have
disclosed a number of estimating and accounting-system
deficiencies requiring improvement. The contractor has
submitted corrective action plans, and DCAA, in coordination
with the responsible contracting officers, are monitoring
progress and making the needed improvements.
Another area of our work has been accelerated testing of
billed costs. Due to the unique risk of contingency contracting
and conditions in Iraq, DCAA has placed more emphasis on
examining contractor costs as they are being incurred, rather
than waiting until the contractor submits its annual incurred-
cost claims.
One example of our audit work in this area is our review of
dining facility costs, as was mentioned, Mr. Chairman, in your
opening statement. KBR provides meal services to the troops and
other DOD personnel at over 60 dining facilities in Iraq and
Kuwait. Our audit work, beginning in late 2003, found that KBR
and its subcontractors were basing their payment requests on an
estimated number of meals, which substantially exceeded the
actual number of meals served. For the period May 2004 to May
2005, DCAA withheld $212 million from KBR interim billings,
pending resolution of this matter.
KBR and its subcontractors believe the terms of their
respective contracts and subcontracts permitted this billing
practice. The Army contracting officer negotiated a settlement,
which denied reimbursement of $55.1 million of the actual cost.
Most notable, however, the early identification of this issue
by DCAA and the support of the Army Sustainment Command
contracting officials led to KBR negotiating new subcontracts
which corrected the billing practices of concern to DCAA and
the Army. We estimate that the new subcontract terms and prices
save more than $200 million over what would have been paid
under the old subcontract terms for a comparable period.
In this example and others, DCAA worked closely with the
Army acquisition community, both at the headquarters and field
level, to reduce contractor billed costs for potentially
unreasonable expenditures. In the past, DCAA withholdings have
totaled more than $230 million on LOGCAP task orders.
Currently, we are withholding $49.6 million from KBR billings.
The most recent example of withholdings is related to
security costs. The LOGCAP contract specifically states that
the Army will provide necessary security to contractor
personnel performing the contract.
As such, the Army believes costs incurred by KBR and its
lower-tier subcontractors for security are unallowable, and
should not be reimbursed under the LOGCAP contract. DCAA is
working with the Army to identify lower-tier subcontract
security costs, and currently the Army has directed DCAA to
withhold $19.7 million from KBR billings, pending resolution of
this matter.
In closing, I want to underscore that DCAA is an integral
part of the oversight and management controls instituted by DOD
to ensure an integrated and well-managed contract audit process
in Iraq. We've had a continuous presence in Iraq, in the Middle
East theater of operations since May 2003, staffing our office
entirely with civilian volunteers. To date, more than 180 DCAA
auditors have served tours, and, fortunately, none have been
injured or killed.
The challenges in applying business practices and auditing
in Iraq are daunting, and have required our auditors to be
flexible, while insisting that the DOD will not tolerate the
billing of costs that do not comply with contract terms or are
not appropriately documented and supported.
Thank you, again, for the opportunity to appear before you
today, and I look forward to addressing whatever questions you
may have for me.
Thank you.
[The prepared statement of Mr. Reed follows:]
Prepared Statement by William H. Reed
Mr. Chairman, members of the committee, my statement will summarize
the Defense Contract Audit Agency's (DCAA) oversight of contract costs
related to military operations and reconstruction in Iraq including
audit work related to the Logistics Civil Augmentation Program.
dod contract performance oversight responsibility
DCAA has been an integral part of the oversight and management
controls instituted by DOD to ensure integrity and regulatory
compliance by contractors performing services in Iraq. DCAA's services
include audits and professional advice to acquisition officials on
accounting and financial matters to assist them in the negotiation,
award, administration, and settlement of contracts. Decisionmaking
authority on DCAA recommendations resides with contracting officers
within the procurement organizations who work closely with DCAA
throughout the contracting process.
dcaa staffing and actions
Since April 2003, DCAA has worked with all U.S. procurement
organizations, including those of the United States Agency for
International Development and the State Department, to establish the
resources and planning information needed to provide audits of
contracts for Iraq Reconstruction. To carry out these extensive audit
requirements, DCAA opened an office in Iraq in May 2003 and implemented
planning and coordination procedures to effectively integrate audit
work between that office and more than 50 DCAA continental United
States Audit Offices with cognizance of companies performing contracts
in Iraq. DCAA is responsible for auditing Iraq-related contracts at 93
contractors. These contractors hold more than 175 prime contracts with
contract ceiling amounts of $51.8 billion, of which $38.5 billion had
been funded at the end of fiscal year 2006.
DCAA audits of cost-reimbursable contracts represent a continuous
effort from evaluation of proposed prices to final closeout and
payment. Initial audits of contractor business system internal controls
and preliminary testing of contract costs are carried out to provide a
basis for provisional approval of contractor interim payments and early
detection of deficiencies. Comprehensive contract cost audits are
performed annually throughout the life of the contract and are used by
the contracting activity to adjust provisionally approved interim
payments and ultimately to negotiate final payment to the contractor.
dcaa audit results
Through fiscal year 2006 DCAA has issued more than 1,800 reports on
Iraq-related contracts. We estimate issuing another 600 reports in
fiscal year 2007. DCAA oversight of contracts in Iraq has found a
number of problems. Our actions have ranged from recommending changes
in business processes--to reduction of proposed or billed costs--to
referral of our findings to the Inspector General for investigation and
possible legal action against a contractor. Overall, these audits have
recommended reductions in proposed and billed contract costs of $4.9
billion. Where appropriate, DCAA has taken action to reduce contractor
billed costs for disputed amounts pending a contracting officer
decision. In addition, DCAA has identified $5.1 billion of estimated
costs where the contractor did not provide sufficient information to
explain the basis for the estimated amounts. These unsupported costs
were usually resolved through contractor submission of additional
supporting information at the time of contract price negotiation.
logistics civil augmentation program
The Logistics Civil Augmentation Program (LOGCAP) is the single
largest Iraq-related contract. The LOGCAP contract was awarded to the
Halliburton subsidiary, Kellogg, Brown, and Root (KBR) and currently
has a contract ceiling of $22.5 billion. The contract provides for
logistical and life support for U.S. troops and civilians in Iraq,
Kuwait, and Afghanistan. DCAA has provided comprehensive and continuous
contract audit oversight on the LOGCAP. The results of our audit work
to date by major type of activity are as follows:
1. Support to Army Contracting Officers in the Pricing of
Contracts--DCAA audits of 68 LOGCAP task order proposals valued
at $16.2 billion resulted in audit exceptions (costs
questioned) of $1.9 billion. DCAA has received and analyzed the
results of negotiations on task orders valued at $12.8 billion.
Negotiated price reductions of $600 million have been achieved
to date. A recent example of our audit work in this area is our
review of the proposal for task order 139. Task order 139 is
the latest order for dining facilities, laundry and other life
support measures for the U.S. troops and civilians. Our review
of the initial proposal was completed in August 2006. DCAA
questioned $262 million of the $3.7 billion proposal. KBR
agreed to $160 million of the questioned cost and the balance
was addressed at recent negotiations. Most notable is that this
pricing action was a significant improvement over previous
similar proposal reviews which were plagued by estimating
deficiencies, causing multiple proposal submissions and delays
in negotiating the task order price.
2. Reliability of Business Systems Affecting Contract Costs--
DCAA audits have addressed the adequacy of contractor internal
controls and business systems, as well as compliance with
acquisition regulations and contract terms. While KBR's
business systems are adequate overall, DCAA reviews have
disclosed a number of estimating and accounting system
deficiencies requiring improvement. The contractor has
submitted corrective action plans and DCAA, in coordination
with the responsible contracting officers, are monitoring
progress in making the needed improvements.
3. Accelerated Testing of Billed Costs--Due to the unique
risks of contingency contracting and conditions in Iraq, DCAA
has placed more emphasis on examining contractor costs as they
are being incurred, rather than waiting until the contractor
submits its annual incurred cost claim. One example of our
audit work in this area is our review of dining facility costs.
KBR provides meal services to the troops and other DOD
personnel at over 60 dining facilities in Iraq and Kuwait. DCAA
audits beginning in late 2003 found that KBR and its
subcontractors were basing their payment requests on an
estimated number of meals which substantially exceeded the
actual number of meals served. For the period May 2004 to May
2005, DCAA withheld $212 million from KBR interim billings
pending resolution of this matter. KBR and its subcontractors
believed that the terms of their respective contracts and
subcontracts permitted this billing practice. The Army
contracting officer negotiated a settlement which denied
reimbursement of $55.1 million of the actual cost. The early
identification of this issue by DCAA, and the support of the
Army Sustainment Command contracting officials, led to KBR
negotiating new subcontracts which corrected the billing
practices of concern to DCAA and the Army. We estimate that the
new subcontract terms and prices saved more than $200 million
over what would have been paid under the old subcontract terms
for a comparable period.
In this example and others, DCAA worked closely with the Army
acquisition community, both at the Headquarters and field level, to
reduce contractor billed costs for potentially unreasonable
expenditures. In the past, DCAA withholdings have totaled more than
$230 million on LOGCAP task orders. Currently, DCAA is withholding
$49.6 million from KBR billings. A recent example is the withholding
related to security costs. The LOGCAP contract specifically states that
the Army will provide necessary security to contractor personnel
performing on the contract. As such, the Army believes costs incurred
by KBR and its lower tier subcontractors for security are unallowable
and should not be reimbursed under the LOGCAP contract. DCAA is working
with the Army to identify lower tier subcontractor security costs and
the Army has directed DCAA to withhold $19.7 million from KBR billings.
closing
In closing, I want to underscore that DCAA is an integral part of
the oversight and management controls instituted by DOD to ensure an
integrated and well-managed contract audit process in Iraq. We have had
a continuous presence in Iraq and the Middle East Theatre of Operations
since May 2003, staffing our office entirely with civilian volunteers.
To date more than 180 DCAA auditors have served tours and fortunately,
none have been injured or killed. The challenges in applying business
practices and auditing in Iraq are daunting and have required our
auditors to be flexible while insisting that the Department will not
tolerate the billing of costs that do not comply with contract terms or
are not appropriately documented and supported. DCAA has been and will
continue to be vigilant about contract audit oversight and protecting
the taxpayers' interests.
I look forward to addressing whatever questions or comments you
have on DCAA's important role in Iraq. Thank you.
Chairman Levin. Thank you so much, Mr. Reed.
Now let me call on Patrick Fitzgerald, the Auditor General
for the Army.
Mr. Fitzgerald?
STATEMENT OF PATRICK J. FITZGERALD, THE AUDITOR GENERAL,
DEPARTMENT OF THE ARMY
Mr. Fitzgerald. Mr. Chairman and distinguished members of
the committee, thank you for the opportunity to be here today
to discuss our audit work related to LOGCAP.
I have submitted my full statement to the committee, and I
ask, respectfully, that that be made part of the hearing
record.
Chairman Levin. It will be made part of the record.
Mr. Fitzgerald. Thank you, Senator.
I have been with the U.S. AAA for more than 26 years, and
became the Auditor General in March 2006. As the Auditor
General, I am responsible for the worldwide operations of Army
audit. The agency is the Army's internal audit organization,
and, throughout our history, we have deployed with our troops:
in Vietnam, in Bosnia, during Operations Desert Storm and
Desert Shield, and, most recently, in Operation Enduring
Freedom (OEF) and Operation Iraqi Freedom (OIF).
Since 2002, we have done extensive work on LOGCAP in
support of both OEF and OIF. In December 2004, General Casey
asked us to help him reduce the overall cost of the LOGCAP
contract in support of OIF. We promptly established a permanent
presence on the ground in Iraq, and, since May 2005, we've
continually had 10 to 30 auditors deployed in theater.
We established two audit objectives to support General
Casey's request. These objectives were: (1) to determine if the
overall management of LOGCAP was adequate, and (2) to determine
if the contractor was providing the needed services in a cost-
effective manner.
Since beginning our LOGCAP work in Iraq, we have issued 15
audit reports that included monetary benefits of about $175
million. We have also identified other initiatives that improve
cost-effectiveness of the program, but we could not quantify
the monetary benefits.
In April 2006, we reported improvements in the overall
management of the LOGCAP. However, we also reported that the
management structure in Iraq was not conducive to making sure
LOGCAP was managed in the most efficient manner. For example,
we found that more centralized control was needed to make sure
requirements were properly identified and to make sure contract
support was effectively integrated into the command's combat
service support mission. We also found that contracting
activities in the theater were fragmented and did not have
enough personnel to provide adequate contractor oversight.
To evaluate the adequacy and cost-effectiveness of the
services, we conducted a series of audits focusing on specific
LOGCAP functions. Some of these functions included theater
transportation, warehouse staffing, distribution functions, the
use of nontactical vehicles, and operation of clothing
facilities. Our work to date has shown that LOGCAP operations
were providing services needed to support our soldiers.
Commanders and soldiers were consistently satisfied with the
services. However, we also found that the Army could acquire
services more cost-effectively by making improvements in
several areas, such as reducing staffing levels at distribution
centers, reducing the quantity of material handling equipment
and nontactical vehicles, and increasing the accountability and
visibility over material and equipment.
In our 15 reports, we have made many recommendations to
Army commands, and those commands have agreed to take
corrective action in response to those recommendations. In
fact, in many cases, commanders in the field took immediate
action to fix the problems that we brought to their attention.
In closing, I would like to thank you, once again, Mr.
Chairman, for inviting me to appear before this committee to
discuss this very important topic. We are continuing our LOGCAP
work and have audits ongoing. We plan to remain responsive to
Army leadership and continue to work to the best possible
solutions to these many Army challenges.
Since 2005, the agency has deployed 96 auditors, who have
served on the ground with our soldiers in Iraq, Afghanistan,
and Kuwait. Our auditors are proud to serve alongside our
soldiers. The dedication and hard work of our auditors have
provided valuable realtime support to the Army.
Thank you, again, for the opportunity to testify before you
today, and I would be glad to answer any questions.
[The prepared statement of Mr. Fitzgerald follows:]
Prepared Statement by Patrick J. Fitzgerald
Mr. Chairman and distinguished members of the committee, it is my
pleasure to be here today and have the opportunity to discuss with you
our audit work related to the Logistics Civil Augmentation Program
(LOGCAP).
I have been with U.S. Army Audit Agency for more than 26 years and
became The Auditor General of the Army in March 2006. As The Auditor
General, I am responsible for the worldwide operations of Army Audit.
The Agency is the Army's internal audit organization, and we provide
objective and independent auditing services that help Army leaders make
informed decisions, resolve issues, use resources effectively and
efficiently, and satisfy statutory and fiduciary responsibilities. The
scope of our audit responsibility includes selecting the subjects and
organizations within the Army to audit, as well as responding to
requests for audit service from Army officials.
Throughout its history, Army Audit Agency has deployed with our
troops--in Vietnam and Bosnia, during Operations Desert Storm and
Desert Shield, and lately in support of Operation Enduring Freedom and
Operation Iraqi Freedom. We have performed extensive audit work on
LOGCAP in support of Operation Enduring Freedom and Operation Iraqi
Freedom dating back to 2002. During 2003 General Kern, the Commander,
U.S. Army Materiel Command, asked us to conduct an overall audit of
LOGCAP operations. LOGCAP is the Army's program for using civilian
contractors as an additional means to adequately support the current
and programmed force by performing selected services during wartime and
other operations. The principal objective of LOGCAP is to provide
combat support and combat service support to combatant commanders and
Army service component commanders, primarily during contingency
operations, throughout the full range of military operations, including
reconstitution and replenishment.
In response to General Kern's request, we focused our audit on
overall program management, cost controls, and asset management. We did
audit work at various locations in the United States and overseas--
including Uzbekistan, Afghanistan, Kuwait, and Turkey--and in November
2005 we issued a summary report on our LOGCAP work.
In this report we stated that, overall, the Army was adequately
managing the LOGCAP contract. The program provided essential services
to soldiers and did a good job of meeting the Army's needs. Adequate
procedures were in place to control costs under the contract, standards
of services were recorded in theater-level documents, and acquisition
review boards were in place to review and approve requirements.
However, we did find systemic problems related to preparing independent
Government cost estimates, reviewing contractor rough orders of
magnitude, and definitizing task orders. It is important to note that
some of these problems occurred because of the large volume of work
involved and the need to process contract actions quickly.
Because responsibility for property administration under this
contract was delegated to Defense Contract Management Agency, we were
unable to fully evaluate accountability for assets under the contract.
But we did find some areas where improvements were needed in managing
Government-furnished property given to or acquired by the contractor.
Including our summary report, we issued eight audit reports and
made audit recommendations to various organizations involved in the
LOGCAP process. Some key recommendations were that the:
Assistant Secretary of the Army (Acquisition,
Logistics, and Technology) develop Army guidance for approving
requirements for deployment operations, including acquisition
approval thresholds, members of joint acquisition review
boards, and documentation of board actions.
Deputy Chief of Staff, G-4 establish guidance
addressing how to transfer Government property to contractors
in the absence of a Government property officer to conduct
joint inventories and to summarize key management controls
related to LOGCAP in an annex to Army Regulation 715-9
(Contractors Accompanying the Force).
Commander, U.S. Army Field Support Command (now, U.S.
Army Sustainment Command) makes sure Defense Contract Audit
Agency stayed actively involved in monitoring costs.
Army organizations agreed with our recommendations and said they
would take implementing actions.
In December 2004 General Casey, the Commander, Multi-National
Force-Iraq, asked us to audit LOGCAP operations supporting Operation
Iraqi Freedom. General Casey's goal was to reduce overall costs without
degrading the welfare of our deployed forces. Accordingly, we
established two audit objectives to help reach the Army's goal. These
objectives are to determine whether:
Overall management of the program was adequate.
The contractor was providing the needed services in a
cost-effective manner.
We promptly established a permanent presence on the ground in Iraq,
and since May 2005 we have had from 10 to 30 auditors in the Southwest
Asia theater of operations at any given time. Early on, we found that
the Army faced some significant challenges regarding LOGCAP operations.
One challenge was that LOGCAP in the Iraq Area of Operations is the
U.S. Army's greatest reliance on contractor support in its history. The
Army had about 90 Forward Operating Bases and LOGCAP supported about 60
of them. Other major challenges were that the nature of operations was
asymmetric, and personnel did not have freedom of movement and
communications.
Since beginning our LOGCAP work in Iraq, we have issued 15 audit
reports that include agreed-to monetary benefits totaling about $175
million. We have also identified other cost avoidance initiatives we
could not reasonably estimate the value of.
In April 2006 we reported that activities were improving overall
management of the program. However, we also reported that the
management structure in the Iraq Area of Operations was not conducive
to making sure LOGCAP was managed in the most effective and efficient
manner. More specifically:
Contracting activities in theater were fragmented and
too understaffed to effectively scrutinize command's
requirements.
More centralized control was needed to make sure
requirements were properly identified and contract support was
effectively integrated into the command's combat service
support mission.
Dispersed locations and high turnover of personnel who
managed the contract made it difficult to ensure that
requirements were fully necessary and cost-efficiently
obtained, and that ongoing work was properly managed.
To address these problems, we recommended that the:
Commander, Multi-National Force-Iraq establish a
forces requirements branch for centralized control and better
interface with LOGCAP management within the theater, and make
sure the branch is adequately staffed (personnel and expertise)
and headed by an individual who can effectively interface with
all command levels.
Commander, Army Sustainment Command coordinate with
the Commander, Multi-National Force-Iraq to define roles
between LOGCAP managers in each organization and establish
training classes on LOGCAP that include exercises on developing
statements of work, independent Government cost estimates, and
requirements.
Commander, Army Materiel Command include information
on the role of the LOGCAP Support Unit and establish a
permanent presence by the unit at predeployment planning
meetings.
To examine and evaluate the adequacy and cost-effectiveness of
services, we conducted a series of audits focusing on specific
functions under the LOGCAP contract. Some of these functions included
theater transportation, warehouse staffing, nontactical vehicles,
distribution functions, and clothing issue facilities.
Our body of work to date has shown that LOGCAP operations were
providing the services needed to support our soldiers and satisfy the
mission. Commanders and soldiers were consistently satisfied with the
services. However, our audit work also showed that services under the
LOGCAP contract could be acquired more cost-effectively. For example:
Staffing levels at many distribution centers exceeded
operational needs.
Onhand material handling equipment exceeded
requirements.
A significant number of the contractor's nontactical
vehicles were underused and the contractor had more vehicles
than needed.
Some of the recommendations from our function-specific reports were
that the Army:
Evaluate contractor personnel levels to make sure
staffing levels (for both labor and management) are
appropriate.
Use underutilized assets to offset future contractor
procurements.
Develop and follow quality assurance surveillance
plans to make sure the contractor performs as efficiently as
possible.
Use standard property book systems to gain and
maintain accountability over assets, and perform 100-percent
inventories.
In the 23 reports we have issued on LOGCAP, we have made many
recommendations to the responsible Army commands. (A complete list of
the reports is attached to this statement.) These commands have stated
they would take corrective action in response to our recommendations.
In many cases commanders in the field took immediate action to correct
problems we brought to their attention.
In addition to our completed work, we have ongoing audits
addressing these LOGCAP areas: dining facility operations, supply
support activity operations, bulk fuel controls, cross-leveling and
distribution of Government-furnished property managed by contractors,
and Defense Basing Act insurance rates.
In conclusion, I would like to say that I am very proud of my
auditors on the ground with our soldiers in Iraq, Afghanistan, and
Kuwait. Their dedication and hard work have provided valuable, real-
time help to the Army. I appreciate the opportunity to testify before
you today to provide a summary status of our LOGCAP audit work, and I
will be glad to respond to your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Levin. Thank you, Mr. Fitzgerald.
Let me start by going into an issue involving what are
called ``living containers,'' which is a type of trailer. KBR
subcontracted to acquire a large number of these containers
from a number of sources, and the contractor determined that it
could obtain them for somewhere between $8,000 to $19,000 each.
Despite that, they ordered thousands of units from other
vendors, whose bid prices were in the range of $35,000 to
$40,000 per unit. So, as a result, KBR paid 260 percent to 600
percent of the reasonable price for the trailers.
Now, over a 2-year period, the DCAA tried to pin down a
rationale for these added costs. KBR contended that it went to
the high bidders because they claimed the low bidders first
lacked adequate production capacity. The DCAA found that was
not true. Then KBR claimed that the low bidders were not
qualified to perform the work. The auditors found that KBR's
own documents indicated that the low bidders were qualified.
Then they claimed that the plan was to concentrate one supplier
for each camp. The DCAA was unable to identify any such alleged
plan. Then KBR claimed that the high bidders offered features
and amenities that were not available from the low bidders. The
DCAA found that the features and amenities were comparable.
Then KBR claimed that they paid a premium for prompt delivery
to shift the risk to the subcontractor for late delivery or
damage to the trailers. The DCAA noted that KBR actually
rebutted its own argument on that point by paying a claim
related to delay and damage.
Now, first, Mr. Reed, did I accurately summarize DCAA's
findings relative to the trailers?
Mr. Reed. Yes, you did.
Chairman Levin. Now, Secretary Bolton, the FAR says that
the DOD pays costs incurred under a cost-plus contract only if
those costs are reasonable. In this case, KBR paid its
subcontractors 260 percent to 600 percent of the prices that
KBR itself had determined to be reasonable. Not one of those
explanations that were given by the company for doing so, for
paying the high price, hold any water. Yet, the DOD decided to
pay KBR the full $100 million, which is at issue here, by which
the subcontracts were overpriced. Why did the DOD pay that
extra money?
Mr. Bolton. Mr. Chairman, let me defer to General Johnson,
who has all the information.
Chairman Levin. All right, thank you.
General Johnson?
General Johnson. Sir, the DOD has not paid KBR the $100
million for the trailers. As a matter of fact, KBR's costs are
still suspended. We have allowed a minor portion for the
provided appropriate, acceptable documentation and negotiated
costs of $1.4 million against a $5.6 million bill, and $25
million where they've provided appropriate documented evidence
and reasonable costs have been negotiated against the remaining
$51 million of $25.6 million; $4.2 million is still being
withheld, $25.7 million is also pending against the second
order. The remaining roughly $45 million have been taken off of
the table.
Chairman Levin. General, the document that you provided to
the committee says the following, that ``the parties have
agreed to recognize the costs of the containers acquired.'' The
letter dated January 24, 2006, memorandum to the attention of
Mr. Valiant DuHart.
General Johnson. Sir, Mr. DuHart is a procurement
contracting officer within my command. I have not recognized
those costs. The current status is what I explained to you.
Chairman Levin. This is January 24, 2006.
General Johnson. Yes, sir. As of today's date, the only
costs that have been recognized are the $1.4 million and the
$25.6 million that I just identified. The remaining costs are
pending, and KBR has not provided appropriate documentation or
demonstrated reasonableness of cost.
Chairman Levin. Is that, then, inaccurate, that memo of a
year ago?
General Johnson. That letter is inaccurate. Sir, frankly, I
review most of those before they go out. Sometimes they get out
prior to my and Mr. Loehrl's review. Obviously, that's one that
did. But those costs have not been recognized.
Chairman Levin. So, the $100 million that I've described
for overpricing of those containers has not been paid? While
you're looking at that, let me move on, because of the timing
here.
General Johnson. Sir, we'll update that information for
you.
[The information referred to follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Levin. Despite what that document says, you're
saying that $100 million has been paid. Is that what you're
saying?
General Johnson. No, sir, I'm not saying none of it's been
paid. $1.4 million has been paid.
Chairman Levin. No, I'm just talking about the $100 million
that I have identified. Of that $100 million, which is in
excess of the reasonable cost--I've identified it, I've
described it here for you--that the reasonable cost here, what
they could have obtained these containers for versus what they
paid for them, we estimated is $100 million. You're saying some
of that $100 million has been paid?
General Johnson. A total of $27 million has been paid, has
been allowed.
Chairman Levin. The gentleman's shaking his head no, behind
you.
General Johnson. Sir, we're getting a bit of apples and
oranges mixed here.
Chairman Levin. Okay.
General Johnson. Okay?
Chairman Levin. All right, you're saying $27 million of
that $100 million has been paid. Is that your bottom line?
General Johnson. I will say $27 million has been paid to
KBR for container operations of those questioned costs.
Chairman Levin. All right.
General Johnson. $100 million I'm not aware of.
Chairman Levin. All right.
General Johnson. Okay?
Chairman Levin. Now, on top of the $100 million--and I
think maybe this is one of the issues--the subcontractor claims
that KBR and the Government owe it an additional $50 million
because that was caused by delays that resulted from its
waiting for military convoys into Iraq. The DCAA has determined
that that was not true, that that $50 million that they claim
was not caused by delays. They've made no such showing, no
documentation, of delays costing it $50 million in addition to
what it had previously been promised.
Is that, first of all true, Mr. Reed?
Mr. Reed. Yes. I would point out that DCAA's point was we
were not given documentation that would substantiate that
allegation.
Chairman Levin. But first it gave you documentation, did it
not--it claimed that its cost for the truck and driver was $750
a day. Is that true? That's what it first told you?
Then it reduced it to $500 a day, then it said its costs
were $300 a day, and then it provided no documentation that it
had paid any of those amounts. Is that accurate?
Mr. Reed. Yes, sir.
Chairman Levin. So, first they claimed $700, then they say
they paid $500, then they said they paid $300--none of which
was true, because they obviously changed their story--and then
they provided no documentation for the $300. That $50 million
is part of the $150 million, General Johnson, that we're
talking about here. The man behind you--and what is your name,
sir? The gentleman behind you?
General Johnson. That's Mr. Loehrl, sir. He's the Director
of the LOGCAP.
Chairman Levin. He's shaking his head this way. Would you
agree with his head-shake, up and down, yes?
General Johnson. Roger, sir.
Chairman Levin. Okay. So, now, you're saying, of that $150
million, so far only $100-and--only $27 million has been paid.
Is that where we're at?
General Johnson. That's right, sir.
Chairman Levin. Okay.
General Johnson. Now, some of those costs were negotiated
away and never reached the point of even being considered.
That's why the difference in the numbers you're seeing.
Chairman Levin. All right. Is there still an outstanding
claim for the balance of $150 million?
General Johnson. There's an outstanding claim for $25 plus
$4.2 million--$29.9 million. That's all the outstanding claim
that remains. The rest of those costs were negotiated away.
Chairman Levin. All right. So, we're all talking about the
container contract.
General Johnson. That's right, sir. The only thing that's
pending on the container contract is $29.9 million.
Chairman Levin. All right. The facts that I gave, that KBR
tried to obtain from us the reimbursement for the containers
that they paid, which were unreasonable--is that correct?
General Johnson. That's correct, sir.
Chairman Levin. When they decided to pay the higher price
instead of the lower price, and they decided that they were
going to pay 260 percent to 600 percent of prices which were
reasonable, when they billed us for that, did they also get
profit--did they expect to be paid a profit on that amount, at
that time, when they billed us for it?
General Johnson. I don't know what KBR expected. I will
tell you the way it works.
Chairman Levin. No, not the way it worked. Wouldn't they
assume that they would get a profit on the amount of money----
General Johnson. They would probably assume that they would
get at least the base fee of 1 percent, and they'd have an
opportunity for 2 percent in award fees.
Chairman Levin. All right. So, therefore, they would
normally expect that the more they paid for those containers,
the greater their profit would be. Is that fair?
General Johnson. That's fair, sir.
Chairman Levin. All right. That's one of the big issues
here, obviously, is, they overpay for containers, they send us
the bill, they got paid part of it, which they never should
have been paid, and then, on top of that, the more they pay for
containers, because of the lack of competition, the more they
expect to be paid in profit, as well. Is that a fair statement?
Normally, they would expect that.
General Johnson. They have to understand, they have to get
through the audit process, the price negotiation, and
independent Government estimate, but, yes.
Chairman Levin. Yes. Okay. With that expectation, they
would expect that the more they were able to pay for those
containers, if it was approved by the auditors and by the
system, that the greater their profit would be. Is that fair?
General Johnson. That's fair, sir.
Chairman Levin. Thank you. My time's up.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
This subject is an extremely important one, and it has a
degree of complexity that's somewhat unusual for our types of
hearings, in that it requires so many detailed documents and
other means of evidence. I felt that your opening statement
listed a number of very serious allegations, and, with your
concurrence, I would like to, as my first question, submit your
opening statement, in its entirety, to each of our witnesses,
asking them to make such comments for the record as they deem
appropriate and given their particular areas of expertise. Do
you concur?
Chairman Levin. I would very much welcome that, as a matter
of fact. We were quoting their audits in that statement at
great length, so we're happy to have them review those quotes,
or anything else in that statement, of course.
Senator Warner. I thank the chair, because I think the
committee will need that for the record.
[The information referred to follows:]
Review by Patrick J. Fitzgerald
At the Senate Armed Services Committee hearing on the Logistics
Civil Augmentation Program (LOGCAP) on April 19, 2007, Senator Warner
asked the witness panel to review Chairman Levin's opening statement
and provide comments.
We have reviewed Chairman Levin's statement and believe the general
themes are consistent with our audit results that contractor oversight
was insufficient and improvements in cost-effectiveness were needed in
LOGCAP operations. We believe the statement fairly and accurately
presented the issues, challenges, and problems we found during our work
on LOGCAP.
We identified a few minor issues. The third and fourth bullets
reference November 2005 Army Audit Agency (AAA) audit reports. These
reports were issued in November 2006. A sentence in the fourth bullet
stated that AAA found that ``Staffing levels at the numerous
distribution centers were excessive,'' but our report states that
``Staffing levels at the numerous distribution centers appeared
excessive.''
We appreciate the opportunity to participate in the committee's
review of LOGCAP operations.
Senator Warner. Before I go to some other more detailed
questions, our distinguished colleague, Senator Dorgan, raised
this question of the water, and that's the type of reporting
that will come out of a hearing like this and, understandably,
will attract the attention of those following this case,
because it's simple and straightforward, and water is something
that all of us depend on every day. Does anyone have any
knowledge of this water problem to which our distinguished
colleague referred? Is it an isolated case that occurred? I
assume there are probably several hundred watering situations
throughout that AOR in Iraq. Is this but one? Were there a
number of them? What steps are we taking to correct it or
verify the accuracy of the reports?
General, would you like to start on that?
First, General, it would be helpful if the record would
reflect how long have you been in this important position that
you now occupy?
General Johnson. Sir, I assumed command in June 2004. I've
been in command approximately 2 years and 9 months.
Senator Warner. Fine. Secretary Bolton, you've been, for
some time, haven't you?
Mr. Bolton. Yes, sir.
Senator Warner. How many years is that?
Mr. Bolton. We're going into the 6th year, sir.
Senator Warner. Six years. So, each of you had an
opportunity to really have a period within which to understand
these problems and deal with it.
Mr. Bolton. Absolutely.
Senator Warner. Now, you're going to address the water
problem, General.
General Johnson. Sir, we've looked into the water power
problem at Al Ramadi. A couple of issues.
One, during the time of the allegation, KBR was not
operating the water site. It was being operated by an Army unit
during Reverse Osmosis Water Purification Unit (ROWPU)
operations.
Senator Warner. So, KBR was not involved in this water?
General Johnson. Not during the time that the allegation
was made. KBR assumed control of the operation about 2 months
later.
Senator Warner. All right, we have to get this straight.
So, at the time of the allegations, KBR did not have a
responsibility. That responsibility rested entirely with the
Corps of Engineers?
General Johnson. It was an Army water unit that had the
capability to produce water using an Army ROWPU.
Senator Warner. Now, those units indigenous in the core
table of organization or in the regular divisional----
General Johnson. They are part of normal organizations. I
think that was an Air Force unit. I'd have to check my facts on
what type of unit, because we had Air Force, Navy, and Army
units producing water at that time.
Senator Warner. All right.
General Johnson. I don't remember exactly which one it was.
I just know it was a military unit, and not KBR, at that time.
Senator Warner. All right. So, in any event, the
responsibility for the potability and safety of that water
rested with the Army, as opposed to any LOGCAP contractor.
General Johnson. At that time.
Senator Warner. At that time, all right.
Now, was this an isolated incident at one installation, or
was this type of problem being experienced prevalent throughout
other areas of the AOR?
General Johnson. Al Ramadi is the only reported incident
that we have that I know of.
Senator Warner. This gentleman keeps coming up. Maybe he
could join us at the table.
General Johnson. Oh, okay. For the first couple of years of
this operation, I was doing it personally. He's the guy that
took over for me.
Senator Warner. All right.
General Johnson. He works for me.
Senator Warner. I'm not dismissing his credibility. I'm
just trying to associate for the record, which will be read by
others, his participation. His name, sir?
General Johnson. His name is James Loehrl. He's the
Director of the LOGCAP for the Army Sustainment Command. He
works under my supervision.
Senator Warner. Thank you very much. We welcome him.
Go right ahead.
General Johnson. Yes, sir.
What he just provided me was that the Army units produce,
KBR distributes, a Navy medical unit did preventive med
evaluation of the water and found no problem. Additionally, the
DOD IG has been doing a complete investigation of water in
Iraq. No issues have been found thus far that I'm aware of.
Senator Warner. Other than this one.
General Johnson. We found no issues there, sir.
Senator Warner. I beg your pardon?
General Johnson. We found no issues with the water there.
After the inspection, we did not confirm the allegations that
were made.
Senator Warner. I see. So, the representations made by our
colleague this morning were examined, and no facts were found
to sustain the allegations?
General Johnson. That is correct.
[The information referred to follows:]
Review by MG Jerome Johnson, USA,
I testified before the Senate Armed Services Committee on April 19,
2007, on the Department of Defense's management of costs under the
Logistics Civil Augmentation Program contract in Iraq. Senator Dorgan
has questioned the accuracy of my testimony during the hearing
regarding the water quality provided to our troops in Iraq.
Prior to my testimony before the committee, I reviewed all
information available to the Army on this issue, including the
information presented before the Democratic Policy Committee. After
Senator Dorgan raised his concerns, I reviewed my testimony for
accuracy. Based on my review of the information available to me at that
time, my testimony regarding the provision of water to our soldiers was
true and accurate.
It appears, however, that there is some confusion as to the extent
of the Army review of this issue. The Army reviewed the provision of
water throughout Iraq focusing on the allegations that contaminated
water was provided to our troops at Al Ramadi and at Q West.
Mr. Bolton. Senator Warner, if I could add to what General
Johnson's already talked about----
Senator Warner. Now, wait a minute. Just a minute. Would
you go more slowly?
Mr. Bolton. Yes, sir. If I may add to what General Johnson
has already said, my first visit to the AOR was at the time of
the allegation. So, I took personal interest in this, and
followed it. As General Johnson's already pointed out, KBR was
not in charge of the water at the time. A military unit was. In
addition to the checks that were made, we also checked all
medical records to see if anyone had gotten ill from any
tainted water. We found zero of those, and we checked those
twice.
I would tell you that water, as you pointed out, is
extremely important. We have produced, under LOGCAP, 7.5
billion gallons of water and some 200 tons of ice during the
course of this contract.
Senator Warner. All right.
Mr. Bolton. So, this is very important.
Senator Warner. I must press on, gentlemen. I think you
have put before the committee a rebuttal of this case with
regard to water, which we accept, for the moment.
At the time the Army awarded the LOGCAP III contract to
KBR, were there any other companies that bid on it, or could
have bid on it, or delivered the same level of service? I am
just unfamiliar with what the competition is, particularly at
the time LOGCAP III was offered.
Mr. Bolton. Senator Warner, there were three competitors,
to include KBR, and they submitted their proposals. The Army
did a source selection on that and picked KBR. I won't go into
the other proposals, but the other proposals lacked what we
needed, and they were also more expensive.
Senator Warner. All right.
Now, the performance contracts under LOGCAP IV, to
Secretary Bolton and General Johnson, how many companies
competed? You said this. You've already answered that. But why
does the Army intend to limit the number of contractors to
three in the current bidding process for four?
Mr. Bolton. I don't know if I have a good answer on that.
It is an open competition. In fact, we intend to have a
contractor who will do the planning and work for us, and then
we'll have up to three additional contractors. So, you could
have four contractors here. They will actually do the tasks,
and we'll compete those tasks.
Senator Warner. All right. My last question, to the
General, from a military standpoint, do you factor in, in the
bidding of these contracts, and judging the performance of the
contracts, the extenuating circumstances in-country that the
contractors are experiencing? In other words, it is a high-risk
area. It's what we call 360-degree risk area. In other words,
there's no clear front line and rear echelon, as you and I were
trained as youngsters, that existed in other conflicts.
Everybody's in it. To what extent do you factor those factual
circumstances of high risk, ever-changing operating tempo,
requirement to feed so many troops one day, and the next day
they're augmented or have been transported somewhere else--how
has that complicated the implementation of these contracts,
from your professional military standpoint?
General Johnson. Sir, it's caused significant complication.
First of all, the contract is supposed to be awarded and
executed in what we call a permissive environment--i.e. front
lines, real lines--and the contractor would operate in that
permissive environment, where he would not be under attack,
normally. The complicating factor is the nonpermissive
environment. The contractor is operating under stress of
attack. We have to provide tactical combat forces to protect
the convoys when they go.
To the contractors' credit--and, frankly, to some personal
individuals over there that I found enormous; and, frankly,
it's probably because they're a bunch of retired guys who
didn't know that they were out of uniform--Paul Cerjan, Remo
Williams--who physically accompanied convoys through hostile
environments early in the war to ensure that the troops were
provided with appropriate services.
Now, frankly, we had some issues with the KBR management
structure at the kind of senior-to-mid level, but these guys on
the ground--the Cerjans, the Williams'--what they did was far
and beyond what the contract called for. Had they not taken
those actions, we would not have been able to support our
soldiers.
Additionally, I might add, when brought to KBR's attention,
the issues that we were having at the contractor level--Mr.
Loehrl and the procurement contracting officer, with many of
their mid-level managers--KBR replaced an entire group of mid-
level managers, and that situation's improved quite a bit, the
estimates have gotten better, and the cooperation with the
contracting officers have gotten quite a bit better. They're
not where we want to be, but, when they replaced that
management structure, it made a significant different.
Senator Warner. I thank the witnesses.
General Johnson. I hope that answers your question.
Senator Warner. I thank you, Mr. Chairman.
Chairman Levin. Thank you, Senator Warner.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman.
I would like to thank all the witnesses for being here
today, and would particularly like to thank Senator Dorgan for
his efforts to investigate these contracting problems during
the last Congress. I did support him in his legislation, that
was dropped at the end of the 109th Congress, on these
problems. Like Senator Dorgan, I continue to be very concerned
about the contracting abuses and war profiteering in Iraq. So,
I thank you, Mr. Chairman, for calling this very important
hearing today.
No question, we feel that the resources in our country are
not unlimited, and it is our duty to the taxpayers that our
service men and women have all that they need, and to make sure
that the tax dollars meant to be used for defense of our Nation
are not wasted. That's where I am. We've heard cases of abuses
here, and I'm sure we have many more. But I want to look at
what problems may be here in Washington, DC.
Secretary Bolton, this has to do with the acquisition
workforce. In April 2006, the AAA reported that DOD remains
insufficiently staffed and inadequately organized to provide
effective oversight for the LOGCAP contract. Mr. Secretary, why
is it that 4 years into the war in Iraq, we still haven't been
able to provide adequate staffing to oversee this contract? Do
you believe that the shortage of contract oversight personnel
is specific to this contract, or is it symptomatic of a broader
shortage in the DOD?
Mr. Bolton. Senator Akaka, thank you very much for the
question. It's good seeing you again, sir.
I'll go back several years, when I was confirmed here, in
front of Senator Levin and Senator Warner at the time, I made a
statement during that particular confirmation hearing, that I
had a grave concern on the declining nature of the aquisition
workforce. I stated then, and it's come to pass, that, within
my tenure, a large number of professional aquisition types
would retire, that demographics were against us. They're still
against us. What remains of my workforce over the next 3 years,
half of the civilian workforce--that's roughly 45,000--are
eligible to retire. Not a whole lot of folks coming in behind
them. The workload continues to increase. Rough numbers, when
the wall went down in 1989, the Army had about 140,000 people
in this area. Today, we have 45,000.
Now, we've been able to do the workload, because of a lot
of things that you've heard this morning on LOGCAP. We have put
evaluation boards in place. We rely heavily upon the audit
agencies and others. We used to do a lot of that internally. We
have to rely upon these agencies. On this particular contract,
it really exploded--no pun intended. LOGCAP was designed, as I
said in my opening comments, to do contingency, short-term,
until you can get in with regular pieces of contracts and so
forth. That didn't happen here because of the nature of the
war.
Now, going back to the workforce, trying to pull people out
of the United States to put over there who are already working
very, very hard on other activities, and then making that
happen, and also putting them into an environment, as noted
earlier by Senator Warner, a very difficult environment--
austere, hostile, without the infrastructure of having a
computer system, a business system, a banking system--and yet,
myself and others here--when it comes to auditing, only know
one way of doing that, and that's the way we do it stateside,
in an air-conditioned building with an infrastructure, and we
impose that upon our people. They did a fantastic job.
But, to your point, could we use more people? Yes, we
could. We've enlisted others from other agencies to do that.
There are roughly 500 people auditing this contract right now
in country; 350 of them live with the various posts and camps
out there, reviewing what the contractor's doing on a daily
basis. Then, as others here have testified, they have 50 to 100
or so of their own auditors who are in and out of there.
The caution of just saying ``more people'' is the
environment. It's a hostile environment. Every person I send
over there is a target. Unfortunately, I've had people hurt,
and several killed. So, as I look at this, we do the best job
we can, and I think it's a pretty good job, under very
difficult conditions. I believe we need to--and this is all of
us, and we've talked about this before, as a group here--take a
look at what's required in this type of an environment, and
make sure that the next time we do this, we have the right
contract vehicles in place, but, more importantly, we have the
right processes and tools for dedicated Americans to actually
do very good work in a very difficult environment.
So, to your point, I think it's absolutely right, it is
systemic. We could use more, but we have to be cautious on the
environment. I believe there are other tools we could use.
LOGCAP IV is a perfect example, where we will be competing the
task orders and drive a lot of the concerns down. But the
auditing folks will still be there. For those who don't know,
at one time I used to be an IG, so I know the value of this
work and what needs to be done.
Senator Akaka. My concern is, there are problems out there.
They've been mentioned. We are short. But what are we doing to
try to correct these problems? I'm saying this because this is
my same concern with Hurricane Katrina. After 20 hearings, we
discovered that many of the problems were because there were
positions that were unfilled. They could not carry out what
needed to be done. If that's the case also here, then we need
to make changes immediately to correct that. This is what I'm
looking for, and that was what my question was all about.
Mr. Fitzgerald and General Johnson, it is striking that all
of the instances of the use of LOGCAP funds for military
construction activities appear to occur in Iraq. But there were
no similar cases in Afghanistan. I may be wrong, correct me if
I am. My question to you is, please explain why this was the
case. Was there a leadership problem in Iraq? Why would there
not have been consistent guidance from the Army and Central
Command such that we would have seen these problems in both
countries, or in neither of them, rather than only in Iraq?
Mr. Fitzgerald?
Mr. Fitzgerald. Sir, our audit work did show that some
funds were used to do military construction in Iraq. When we
made command aware of that--command was already aware of it
when we made them aware of it, and our understanding was that
they were taking action to report that the funding may have not
been the right funding to be used, and it was being worked in
accordance with the procedures and policies of the Army at that
point.
I can't comment on any construction work done in
Afghanistan, sir.
Senator Akaka. General?
General Johnson. Sir, we received guidance early on in the
war, and, in accordance with regulation, construction, if you
will, or purchase of equipment that's contingent or necessary
to execute an operational mission may be done. That was done
both in Afghanistan and Iraq. As we moved from really volatile
contingency operations, constantly moving, we got to a
situation where the lawyers began to tell us that, ``You need
to look more at contingency construction authority rather than
using the earlier pieces of that legislation that said,
incidental to providing the service.'' We've done that, and
that's been a gradual process, and that's what you've been
hearing about.
The reason that you hear more of that in Iraq than you do
in Afghanistan is, frankly, the nature of the battlefield and
the nature of the fight. Iraq is an open country. It's a war
that started off very much as a maneuver warfare. So, in many
cases the contracting goes back to the dining facility (DFAC)
problem that we identified earlier on. A commander might say
that, ``I have objective A that's in the western part of this
country, and this brigade's going there. I need food services,
I need a base camp, I need laundry services, and I need fuel
and food brought there as I execute the mission.'' In a
maneuver operation, you may start out at objective A, you may
get instructions, in the middle of the process, to move to
objective B, C, or D. That happened in Iraq. So you end up with
those kind of things happening, and that led to the DFAC piece,
where they bought food and stuff, and spent money, but did not
service as many troops as initially planned. The same thing
with construction. You've built facilities in order to execute
missions.
In Afghanistan, you had some of the same situations occur,
but, because it wasn't as much of a maneuver operation, they
did not need as much construction, so, therefore, it never got
to the point where we started to interfere with military civic
action, and we got out of the contingency phase.
I hope that's clear.
Senator Akaka. Thank you. Thank you for your response. My
time is up.
Chairman Levin. Thank you, Senator Akaka.
Senator McCaskill.
Senator McCaskill. Thank you, Mr. Chairman.
This hearing is very, very important to me. Sixty-six years
ago, almost to the exact date, a man by the name of Harry S.
Truman held the Senate seat that I sit in. At that point in
time, he decided that, on behalf of the American people, he was
not going to tolerate war profiteering. After reading all the
information for this hearing, as an auditor, I am stunned. As a
Senator, I'm sick to my stomach, and as an American, I'm angry.
The testimony that has been given so far about whether or
not there is sufficient personnel within the Army to monitor
these contracts, I, frankly, don't buy. I have reviewed reports
from the AAA, from the DCAA, from the Monthly Performance
Evaluation Boards, and the semi-annual award fee evaluation. I
have read reports dating beginning--and I let it go the first
few years, understanding that there was rapidly changing
circumstances and difficulty on the ground. So, beginning mid-
June, I began reading. In June 2005, July 2005, August 2005,
September 2005, October 2005, several reports in November 2005,
in January 2006, March 2006, April 2006, May 2006, June 2006,
September 2006, November 2006, and December 2006, there were
reports generated by dedicated auditors and by people that work
for the United States Government that continually set out
problems with contractor management, problems with cost
performance, problems with access to information on behalf of
this contractor. You would have to be deaf, dumb, and blind to
read all of these reports and not come away with the
inescapable conclusion that something is terribly wrong with
this contractor.
The most outrageous fact that is incontrovertible at this
hearing this morning--and, frankly, one of the most depressing
things is how few Senators are here--is that that contract was
renewed in December 2006. Wait. That's not the worst. The worst
part is, in this contract there is a provision for a
performance bonus for work well done. Seventy percent of the
evaluation for that bonus--70 percent of the criteria in the
contract for getting a performance bonus is contractor
management and cost performance. Believe it or not, you gave
them ``excellent'' and you gave them hundreds of millions of
dollars for a job well done.
Now, Secretary Bolton, did you approve that bonus?
Mr. Bolton. I didn't approve that.
Senator McCaskill. Who approved that bonus?
Mr. Bolton. The command who has that contract. That is not
my privy.
Senator McCaskill. Shouldn't it be?
Mr. Bolton. No, it shouldn't be.
Senator McCaskill. Okay. Then, who is the person--I want to
know the name of the person who decided that this contractor,
after all the reports I just laid out all the work done by
these great auditors--who is the person that thought that their
job was excellent?
Mr. Bolton. We can certainly provide the process, as well
as the names. It is not unlike any other contract. In this
particular case, the Evaluation Board meets every month to take
a look at the contractor and costs and schedule and technical,
as well as quality. While he may get an excellent in some
areas, other areas he doesn't. So, the average that this
contractor has gotten, over the periods, has been about 88
percent, 89 percent. That equates to about $250 million, of the
$280 million or so that he could get.
I remind the Senator, as well, that when you look at the
fee structure on this for award fee, it's only 2 percent.
Compared to any other contract that I've seen, that's an
incredibly small amount of money.
With regards to the comments that were made earlier on the
cost-plus, what we do on the cost-plus, in terms of that fee,
is not unlike any other contract that we have in the Federal
Government. That's why we have all these auditors and an
Evaluation Board whose job it is, with all the comments,
whether it's yours or anybody else, to go and look at every one
of those as we review the contractor and the costs. That's why
we have upwards of several hundred million dollars in question
right now.
Senator McCaskill. With all due respect, Mr. Secretary, I
have read all these reports, as an auditor, looking from the
outside, and if you think this Evaluation Board--it would be
different if 100 percent of the award was on technical
performance, because, in reading all the information, clearly
there are a number of favorable comments about the work that
was actually performed. But 70 percent of this award--and, by
the way, I'm not going to feel sorry for them that they only
got 2 percent. This is not a time to think, ``Well, gosh, it
was only 2 percent. We ought to give it to them.'' Seventy
percent, according to your specifications, are contractor
management and cost performance.
Mr. Bolton. That's right.
Senator McCaskill. Now, do you think that bonus should have
been paid? Is that your testimony today?
Mr. Bolton. I'm deferring to the experts in the field, who
see this day in and day out, who made the judgment in the
field. I would not question a field commander. I can make a lot
of decisions back here, but I rely upon the people, the
experts, the men and women we put there who have the
experience, just as you have, to make that judgment.
Senator McCaskill. Let me ask the auditors on the panel.
Would you have paid that award bonus, based on what you know
about this contractor?
Mr. Reed. It's really not appropriate for the auditors to
engage directly in the Award Fee Board decisions. We certainly
were consulted. We did provide input. That's our role, to
provide the input. The results of our reports were provided. We
were at the Award Fee Board meetings, and we were given a
chance to speak and make presentations.
Senator McCaskill. Were your presentations that this was an
excellent contractor, when it came to contractor management and
cost performance? Was that the testimony that your agency gave,
as an audit agency?
Mr. Reed. No.
Senator McCaskill. Mr. Fitzgerald, how about you?
Mr. Fitzgerald. Senator, we work closely--I would echo what
Mr. Reed said, that we work closely with General Johnson's
command to make sure that they know what we're doing, what
we're finding, and so that they can take that into
consideration as they go forward on these award fee boards.
Senator McCaskill. Was it your recommendation, at any time,
that you thought this contractor deserved an excellent rating
in contractor management and cost performance?
Mr. Fitzgerald. To be very specific, we weren't asked for a
recommendation, and, no, we didn't give a recommendation.
Senator McCaskill. General Johnson, do you believe that
there were any mistakes made, in terms of awarding this
contractor a bonus for excellence in contractor management and
cost performance?
General Johnson. Senator, ultimately I'm responsible for
that. What I do every time--and I review each one of those
award fee letters--initially, I was very concerned, and I
talked to each commander in the field. In fact, I just came
back from Iraq last month. The commanders in the field are,
frankly, elated with the support they're receiving from the
contractor. Its cost performance and cost systems are not what
we want them to be, and they have been rated accordingly in the
award fee process. Their performance, the technical and the
managerial, if you put those two together, represents 60
percent of the award fee process, versus the 70 percent if you
throw in the cost and the management. But if you put the
performance, the management, and the technical, which is
delivering support to troops in the field, they have performed
excellent. That's a fact that is constantly echoed in both Iraq
and Afghanistan and Kuwait. That's incontrovertible. I can't
argue with the guy in the field.
Their cost systems, we have asked--we've had constant
review on them. We've had DCAA, DCMA, and the AAA review their
cost systems. When their cost systems were not meeting the
standard, we appropriately deducted that from the award fee
process. It was taken into consideration.
Early on in the process, they were receiving less than 80
percent of the total award fee. As their cost systems became
acceptable, which they are now--they're not what we want them
to be, but they are acceptable, so they don't get excellents
for costs, but they do get excellents for management, and they
get excellents for technical performance.
Senator McCaskill. It seems to me that the reports that are
generated by the people that are supposed to be evaluating
their performance, should hold precedence over the field
commanders when it comes to contractor management and cost
performance. I will tell you that, time and time again,
throughout these reports in 2005 and 2006, they were cited for
contractor management, they were cited for the inability to
move people, who weren't working, into jobs where they would be
working, people who were sitting around doing nothing. It is
stunning how bad this is. Frankly, what's even more stunning
is, there doesn't seem to be an acknowledgment, either by you,
Secretary Bolton, or by you, General Johnson, that there's
something wrong with the systems if we're paying $200 and some
million for good work when a record like this exists.
Thank you, Mr. Chairman.
Chairman Levin. Thank you, Senator McCaskill.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Mr. Fitzgerald, in a series of audits over the last 2
years, the AAA has found that KBR hired more employees than it
needed to run warehouses, then paid its staff to sit and wait
for work that didn't show up; bought more nontactical vehicles
than it needed, at a cost of as much as $100 million; purchased
more material and handling equipment than it needed, at a cost
of $26 million; overstaffed at distribution centers, and
refused to move idle personnel or equipment placed in one
location to another to accomplish needed work. Is that a fair
summary of some of the conclusions?
Mr. Fitzgerald. Yes, Senator. Our work indicates that there
were opportunities where we could have been more cost-
effective.
Senator Reed. Now, are these results typical of the LOGCAP
contracts you reviewed, or is this an aberration? Are we
consistently seeing these problems on other contracts?
Mr. Fitzgerald. We have seen, in our work--there are always
challenges in defining and developing requirements, translating
those into good statement of work to make sure--especially in a
cost-plus contract, to make sure that we have a good,
independent Government cost estimate so that we're in a good
position to negotiate a fair and reasonable price, and then,
finally, obviously, to do good contractor administration and
oversight to make sure we get what we contracted for.
Senator Reed. Right. But let me go back to the question. Is
this typical of what you've found, in looking at other
contracts, or is this just an aberration--total aberration?
Mr. Fitzgerald. The opportunities for improvement here are
probably more so than we see on other contracts.
Senator Reed. I think what you're saying is that this is
not atypical, that this was found in other contracts.
Mr. Fitzgerald. Yes, sir.
Senator Reed. I'm told that you've briefed our committee
staff, and indicated that if there are adequate program
management personnel representing the Government, that contract
surveillance, quality assurance--we would have at least been
able to identify these problems earlier, and correct these
problems. Is that accurate?
Mr. Fitzgerald. Yes, Senator. On two occasions, we made
recommendations--and the Army has reacted to those to create a
force requirements branch in command to make sure that we
define and develop requirements well so that they can be
translated to good statements of work, and also to establish
clear lines of responsibilities--there's a lot of people
playing in this arena--to make sure that we get what we're
paying for, and to make sure we had good roles and
responsibilities and accountability.
Senator Reed. How early did you notify your superiors in
the Department of Army that this management oversight function
was deficient?
Mr. Fitzgerald. The work we did was probably mostly in the
calendar year 2005, and that would be the time. As soon as
things come to our attention, we get with command and start
working that. I have to say, when we did get with General
Johnson's folks, they did take action to start addressing those
issues.
Senator Reed. So, most of your audit activity and resulting
recommendations were in calendar year 2005/2006. That's where
you discovered a lot of these particular deficiencies with KBR.
Mr. Fitzgerald. With regard to LOGCAP in OIF and OEF, yes,
sir.
Senator Reed. Are you confident that if you went out today,
these problems would not exist, that you've fixed the system,
that you have enough people out there, with the contract review
and surveillance and quality assurance?
Mr. Fitzgerald. Senator, I think improvements have been
made. But to say that everything is perfect now, I wouldn't go
that far.
One of the things I would like to add, though, is, we talk
about staffing; it's not just the number of people, it's having
the right people in the right places with the right skills and
competencies to do the jobs that they need to do.
Senator Reed. No, I agree with you. One of the persistent
themes--and it's not just LOGCAP, it's translators, it's types
of equipment bought, et cetera. Everyone will tell you, ``We
need the right people and expertise, et cetera.'' We've been at
this now for more than 4 years, and, if we don't have the right
people, and enough of them, then it's the responsibility of
Secretary Bolton and General Johnson to stand up, at this
committee, and say, ``We don't have them, we need them.''
So, Secretary Bolton, do we have all the people we need
with the expertise deployed to overlook these contracts now?
Mr. Bolton. I would agree with the auditor that we could
use more. As I mentioned earlier, more of the right expertise--
but just having more in this particular theater may not be the
right answer, because of the nature of the war. As I said
earlier, every person I send over there becomes a target, and I
have lost people over there. So, we have to guard against that.
So, finding ways of doing the job better, which we've done,
with the help of the auditors over the last couple of years, is
one way of doing that.
Senator Reed. General Johnson, do you have enough people
with the expertise to do this job? If you don't, have you made
the request to your superiors for additional resources, in
terms of personnel? Or are these personnel so scarce or
unwilling that it's impossible to fill all the holes?
General Johnson. Yes. Yes, sir. You've answered the
question, frankly.
I have made the request. As I mentioned during my
statement, Mr. Bolton, with significant effort, has obtained
two Senior Executive Service (SES) positions for me, and that's
really helped a lot. We've also staffed up the program
officers. We started doing that, and, really we had to justify
that, and that's where Mr. Reed and Mr. Fitzgerald came in
handy in going out, auditing, and verifying what we were saying
we needed.
So, we got people. The bottom line, though, falls back to
your latter statement, sir. In many cases, the right skillset
is just not there, and putting another person over there as a
target does not help us.
Senator Reed. Thank you very much. I think this just, once
again, demonstrates to me that we've not mobilized the Nation
to fight this war. We've just sent a lot of good soldiers,
marines, and sailors out there, but we haven't mobilized the
Nation.
Thank you.
Chairman Levin. Thank you, Senator Reed.
Senator Webb, I haven't been handed a card, but I believe
that Senator Webb is next.
Senator Webb. Thank you, Mr. Chairman.
Gentlemen, I would like to start by saying that I hope you
all understand that this is not political posturing on this
side of the aisle over here on these issues. There's a wide
spectrum of experience up here, different types of experience,
and there's a great concern that we have felt from our
constituents about the amount of money that's been put into
programs that don't have a lot of transparency. That's what
we're really trying to do here.
Mr. Chairman, I would like to say, just as a starting
point, that I don't want us to leave this hearing today with
the notion, from people who've watched it, thinking that this
is simply an Army problem. It's not an Army problem, it's not a
DOD problem, it's a national problem with respect to these
programs over in Iraq. It's more about war profiteering,
accountability, transparency, and the proper use of civilians
in a war zone. It's every bit as much of that as it is about
the programs that we're looking at, although it's very
important to be looking at them.
I'd like to associate myself with something that Senator
McCaskill began with when she mentioned Senator Truman. There
is a natural tendency toward corporate excess. There's no way
to deny that. That's why we have to have a balance in the
system. One of the things that then-Senator Truman did at the
very beginning of World War II, actually before we had been
attacked at Pearl Harbor, after mobilization, was to work very
hard to put accountability into the corporate process. They had
extensive hearings over a period of years. I think that the
country was better off for the fact that that happened.
I have a couple of questions, and I suppose they would
properly--at least the first couple, be directed toward
Secretary Bolton, but if someone else would be better to answer
them, that would be fine, too. I had to step out of the room
for a moment. When I came back in, I believe the question had
been answered, asked, and answered about the initial contract
here with KBR. That was a competed contract? Is that correct?
Who were the other competitors in that contract?
General Johnson. Sir, there were three competitors:
Raytheon, DynCorp, and KBR.
Senator Webb. This was a 10-year contract that was awarded?
General Johnson. Sir, that's correct. One prime year, and 9
option years.
Senator Webb. Is that usual--10-year contracts, are they
usual?
Mr. Bolton. On this particular--if you say ``usual,'' for
LOGCAP or just in general?
Senator Webb. For these types of services that are being
provided.
Mr. Bolton. It has been, for LOGCAP, on this one. LOGCAP
IV, we plan to do the same thing, a base year, plus 9 options.
Senator Webb. You wouldn't say that it's unusual to get a
10-year contract?
Mr. Bolton. No, sir, not at all. With the option years, it
allows us to stop, as we will with the three, rather than
taking that to the end.
Senator Webb. Okay.
I am interested in a historical reference, in terms of
trying to compare the costs. This is something that you
obviously may not have today, you may, but I would like to know
how much the Government pays KBR for a meal, per meal, or you
can do it per day, and what that cost entails, and if there's
any historical referent on that when these services were
provided, inside the military itself.
Mr. Bolton. I don't know about the historical part, but
today it's about $3.05 per meal.
Senator Webb. That's for the food.
Mr. Bolton. That's for the food, yes, sir.
Senator Webb. All right. I would like to give you a written
question on this, so we can get a historical referent in terms
of manpower costs versus what it would have been like when the
military was providing those services.
Mr. Bolton. Right. Will do.
[The information referred to follows:]
[See question for the record #41.]
Senator Webb. Now, I have another question that concerns
me. I've spent a good bit of time over the past couple of years
expressing my concern about the private security contractors in
Iraq. I know this is not the subject of the hearing today, but
there have been a number of reports about the lack of
accountability from these people, the lack of rules of
engagement, the lack of legal accountability, in terms of
incidents that have occurred. We have heard, at the staff
level, that in the next couple of months in the LOGCAP
contracts, the contract that will be awarded will require the
contractors to actually be responsible for their own security.
I don't know if that's true, but I'd be interested to know if
that's true, first of all.
Mr. Bolton. Obviously, we can take that for the record.
We're in the source selection right now, but the
instructions going in were not to do that. That's not the case
with the current LOGCAP III. It hasn't been. In fact, we are
withholding some money from the KBR right now, because we
suspect that one of their subs actually did that.
Now, under other contracts in Iraq--reconstruction, for
example--it is permissible, in those particular contracts.
There are very strict rules about how to do that, which even
require the okay of the commander there.
But, on this particular contract, no. I don't believe.
Senator Webb. So, in your contracts, you're not putting in
an expansion in the responsibilities of civilian security
folks?
Mr. Bolton. Senator Webb, to my knowledge, no, but I'll
check on that, and we'll get that for the record.
[The information referred to follows:]
The Theater Commander will provide force protection for the LOGCAP
IV performance contractor in theater. If the Government cannot provide
force protection, the contract permits the contractor to request,
through the contracting officer to the Theater Commander, for the use
of private armed security.
Mr. Bolton. There are a number of reasons we do this. Under
the original LOGCAP, and the theme of the LOGCAP--a
contingency, you're in and you're out. The military forces
there will provide the security for you. If I start arming
civilians, they become combatants. That's not good under
international law. That's not good for them, it's not good for
us. So, it's been banned on this particular contract.
Senator Webb. Appreciate that. Thank you.
Thank you, Mr. Chairman.
Chairman Levin. Thank you, Senator Webb.
Senator Clinton.
Senator Clinton. Thank you, Mr. Chairman. Thank you for
holding this hearing. It is especially important to get to the
bottom of the questions that we're asking today.
Mr. Chairman, I would respectfully request that you perhaps
consider either charging one of our existing subcommittees or
creating a special subcommittee to delve more deeply into the
issues that are being raised here. The seriousness of these
allegations, and, frankly, the waste and fraud that is so
evident from so much of what we've heard, merits that. But, in
addition, we have to figure out what we're going to do, going
forward. We cannot afford to continue this.
Over the last 4 years, we have paid KBR $20 billion to
provide logistics support in Iraq. Now, I thought when we
entered a contract, we were in charge of telling the contractor
what to do. But some of the reports that we have seen on this
committee make it sound as though the contractor is in charge
of telling the United States military, the United States
Government, what to do.
Here are a few excerpts from some of the DOD documents:
From July 2005, ``There were concerns as to the
contractor's reluctance to downsize the labor force after the
transfer or support missions to the sustainment contractor.''
Also July 2005, ``The use of self-directed work added
additional costs to the task order, with no visible benefit to
the Government.''
March 2006, ``There was no effort to coordinate with the
contracting officer to de-scope changes based on the reduction
of requirements and to establish a new definite price.''
April 2006, ``Command personnel advised us that the
contractor wouldn't move idle personnel or equipment assigned
from one task order to another task order to accomplish needed
work. When we brought this situation to the attention of top
contractor operational personnel, they informed us this was a
company policy.''
Secretary Bolton, why is the contractor permitted to be
``reluctant to downsize the labor force''? Why are they adding
self-directed work to the contract? Why aren't they
coordinating with Government officials in order to reduce
requirements and costs? How can they have a company policy that
requires the United States taxpayer to pay for idle workers?
Who's in charge of this contact? DOD or the contractor?
Mr. Bolton. I would hope that the DOD is, Senator Clinton.
In response to allegations such as those, what we have done
is put together several panels, run by the Government, run by
the Army. One is to look at requirements--these are
requirements that come on a regular basis from the commanders
to make sure that the commander is getting what he or she
really wants. Sometimes those requirements are inflated. We
also have a group whose job it is, once we have those
requirements, to actually figure out how much it's going to
cost, and then negotiate that with the contractor, who has
already put in a bid. Many times, those bids are a lot larger
and higher than we'd like them to be. So, we put people in
place to correct some of the things that you've just mentioned.
Are we there yet? Are we perfect yet? No. I'll take your
allegations and anybody else that I get from the auditors here,
which we've done over the years, and we will correct those. I
think we're getting better, but we are not there yet.
Senator Clinton. Of course, one of the problems has been
the extraordinary increase in the outsourcing of Government
functions to private contractors. I think the latest figures I
saw is that we now have three times more private contract
employees than we do military and civilian employees. There is
no evidence that these contract employees perform better than
Government employees, or that they do it more cost-effectively.
There has been no database or system of accountability to keep
track of all of these contractors.
Now, in October 2005, DOD issued DOD Instruction 302.42,
which included the requirement that DOD develop or designate a
joint database to maintain by-name accountability of
contractors deploying with the force, and a summary of the
services or capabilities they provide. Government
Accountability Office (GAO) Report 0714, titled, ``Military
Operations High Level DOD Action Needed to Address Longstanding
Problems with Management and Oversight of Contractors
Supporting Deployed Forces,'' provides great detail on these
DOD instructions and the importance of having full
accountability.
May I ask, starting with Secretary Bolton, for a yes-or-no
answer, if any of you have reviewed GAO Report 0714?
Secretary Bolton?
Mr. Bolton. Only at the summary level.
Senator Clinton. Next, please?
Mr. Reed. No.
Mr. Ernst. Yes, ma'am.
Mr. Fitzgerald. Yes, Senator.
General Johnson. Yes, Senator.
Senator Clinton. Okay.
The GAO report concluded that the Army was still in the
process of implementing the database, and that it is uncertain
when the process will be completed. So, this has been going on
now for 2\1/2\ years--or 2--I guess, a little less than that,
and we still don't have it. Does anyone know when the process
will be completed? Can any witness answer that? [No response.]
Does anyone know when our deployed senior leaders and
commanders will have a grasp of the accountability problem with
all these contractors? [No response.]
I'll let the record show that, to both questions, all of
the witnesses shook their heads no.
Chairman Levin. The record will indicate that, unless the
witnesses indicate, right now, otherwise.
Mr. Bolton. Only to talk about the database, we do have a
Synchronized Predeployment Operational Tracker (SPOT) report
that we provide the commanders. That's still an emerging
database. That does account for the contractors.
The problem that the commander has is more than just the
people that I have on contract. Since that commander is
responsible for the entire battlespace, it's not only my
contractors, it's contractors from the coalition forces, it's a
contractor from private companies, that he also has to be
concerned.
The database that you referenced earlier is still maturing.
That's at the DOD level. We are part of that. I cannot answer
your question in terms of when it will be complete and how
we'll keep it updated.
Senator Clinton. Secretary Bolton, which Army staff agency
is responsible for the implementation of this database?
Mr. Bolton. That will fall under me. If we're talking about
contracting and contractors, once I have that, I'll issue a
policy on it.
Senator Clinton. There was a disagreement reported in the
GAO report as to whether this falls under logistics or
personnel. Has that disagreement been resolved?
Mr. Bolton. I don't know if it's been resolved yet or not.
General Johnson?
General Johnson. No, it has not been resolved. I'm a bit
reluctant in answering this, because I don't know the current
status, I'm in the field now, versus the building.
There was a system and a team established as we moved into
the warfight. We called it ``Triple C,'' which is a Contract
Control Cell. It was established by the Army's Materiel
Command, operated under my command, to make an effort to
account for contractors on the battlefield. Frankly, it was
bigger than us. That's when we got the help of DOD, the
Logistics Management and Readiness crew, and they came up with
a SPOT report.
Now, we have taken that to the field commanders. They have
looked at it. In many cases, it does not provide some of the
data points that they want so that they can manage these
contractors, and it's going to require some implementation of
procedures, as Mr. Bolton has outlined, that we currently just
don't have. So, in some cases we have some accountability. We
don't have what we need.
LOGCAP's a bit different. We probably have pretty close
to--I'd be in the 90-percent-range confident that I know how
many LOGCAP contractors I have on the battlefield, and where.
But when we open up the scope to all the contractors on the
battlefield, we have contractors who perform what we call field
service representatives, who follow particular systems that are
in the field that have--that require contract repair, and we
have numerous other contractors that--supporting contractors.
So, that's the complexity of the problem.
Doesn't answer, and doesn't give an excuse for not having
the capability. We are working very hard at it. We're just not
there yet.
Mr. Bolton. Senator Clinton, if I could just add a note
that I was handed on SPOT, that's the tracking of the
contractors, that is in the Office of Secretary of Defense
Business Transformation Office, and it's still under
development.
Senator Clinton. Mr. Chairman, I think that the issues that
this hearing has raised are such serious ones, this whole
question about contracting out services, where the chain of
command either doesn't exist or it's essentially outsourced, as
well, to the contractor, or whether it's certainly confused,
and where people cannot be held accountable. The failure to
have adequate databases, and that's on top of the testimony
from our colleague, Senator Dorgan, about just outright fraud
and abuse and just heartbreaking waste in the system. So, I
think that this certainly is an issue that demands our
attention and perhaps an effort to try to sort out all of these
various problems of accountability, trying to get a better
handle on what should or shouldn't be outsourced. I hope that
this committee can take a lead on trying to establish a strong
foundation, similar to what our colleague, Senator McCaskill,
referred to with the groundbreaking work of then-Senator
Truman, because we just cannot let this go on. It's not fair to
the people in the field, it's not fair to the people in the DOD
who are, frankly, outmanned, they have inadequate databases,
it's like sending them into a battle with a popgun against
heavy artillery, because the contractors have so much more
capacity to be able to manipulate the system. The end loser is
the soldier in the field and, frankly, all the rest of us.
Chairman Levin. We will have a second and third round here,
and this hearing is far from the end of this investigation, I
can assure all members of the committee. We're now going to
start a second round.
I just want to close the loop on the containers, which we
were overcharged for. The document, General, which you have
seen, if you could, for the record, explain why it is that that
document says that something was paid, which wasn't paid, that
would be satisfactory on that. If you could do that for the
record.
General Johnson. Yes, sir, I will.
[The information referred to follows:]
Several different cost issues were covered during the discussion on
container costs. We had three separate issues with KBR concerning costs
for containers. One of these issues involved a claim KBR received and
paid to a subcontractor, First Kuwaiti Trading Company (FKTC), for
alleged Government-caused delays. The other two issues involved the
purchase price paid by KBR. During the hearing, when I stated that
costs had not been paid, I was referring to the costs of the claim
($51.3 million) and one of the instances involving container purchase
price ($4.5 million). The document the committee chair had in his
possession involved the third issue of container purchase price and
questioned costs of $99 million. These costs have been reimbursed.
The $51.3 million claim was submitted by KBR for costs it paid to a
subcontractor (FKTC). The subcontractor claimed that these costs were
incurred as a result of Government delays in moving living containers
from Kuwait to Iraq. Based on a DCAA audit recommendation, the
Government did not pay $25.7 million of this claim. On the second
issue, concerning higher costs for living containers, $4.5 million was
not paid to KBR. This reflected the difference in costs between the
higher cost containers obtained from Prime Projects International and
La Nouvelle and lower cost containers that could have been obtained
from a supplier named Tepe.
The January 24, 2006, letter you mention is from DCAA to the
contracting officer, Mr. Duhart. It is separate from the two situations
mentioned above. The $99 million, an element of KBR's definitization
proposal for task order 0059, was questioned by DCAA as container costs
in excess of those available from a lower cost supplier. KBR asserted
the lower cost containers had different features which might not be
technically acceptable and the low cost supplier might not be able to
meet the delivery requirements due to limited capacity. With the
acknowledgement of DCAA, the contracting officer resolved this during
negotiations by allowing the cost for the containers but not paying any
base or award fee on those costs. The negotiated settlement included a
re-opener provision for KBR to submit a request for the withheld fee if
they could provide further data to support their actions. KBR has not
provided that information and, as a consequence, has not been paid any
fee on those costs.
Chairman Levin. Let's talk, now, about access to
information.
Back in December 2005, the DCAA audit report says that,
``We encountered significant problems in obtaining supporting
cost or pricing data. In some cases, the procurement files were
not provided for review. In other cases, key information was
not included in the procurement files. Failure to disclose cost
or pricing data to the Government significantly impairs the
reliability of the proposal as an acceptable basis for
negotiation of a fair and reasonable price.''
Then, in December 2006--this was just a few months ago;
this isn't 2003, 2004, 2005--still, the DCAA audit, November,
says that they could not qualify their audit, because of
inadequate documentation. Here's what they say: ``We implore
KBR management and its Government compliance group to address
the cited deficiencies and to work with the DCAA to improve its
systems.'' Why do we have to implore people that we're paying
billions of dollars to? Secretary Bolton, why should we need to
implore? Why don't we direct them to either do it or we're
going to get a different contractor, which, of course, we
should have had a long time ago?
Mr. Bolton. I'll defer, in terms of the wording of that
particular document, to my----
Chairman Levin. Should we have to implore? I'll ask you
that.
Mr. Bolton. No, we should really have the information that
we want.
Chairman Levin. All right.
Mr. Bolton. The contractors know that when they're going
into business with us. Why it happened here, I just don't know.
Chairman Levin. All right.
Mr. Bolton. I will tell you, Mr. Chairman, that it's not
isolated to this. I have other contractors where I have had
similar problems in the past, not related to the LOGCAP or this
area of the world. But I agree with you.
Chairman Levin. This is one of a large number of problems
with the LOGCAP contract. As was answered to Senator Reed, this
isn't the way the Pentagon usually handles contracts. This is
an unusual number of audit reports--month after month after
month after month. In my opening statement, which you're going
to respond to at Senator Warner's request, Senator McCaskill
went through, month by month by month, audit reports showing
inadequacies, failures, overstatements, exaggerated claims. So,
I hope this isn't a typical contract. It better not be, for the
sake of all of us. But it's totally unacceptable, I think, to
everybody.
Here's what happened in September 2006. Again, this is
relatively recently. The Army Evaluation Board report for the
LOGCAP contract said the following, that the DCMA, Mr. Ernst,
this is your agency, this is what you said a few months ago for
the LOGCAP--relative to the LOGCAP contract, ``DCMA sees a
downward trend in performance in responding on critical
information requests from the corporate office.''
Now, I can understand the fog of war and all the other
issues that relate to your folks in the field. General Johnson,
I think we have great respect--and I'll tell you all that--for
folks who take real risks to get what our troops need. Okay?
That, I hope, would be clear. We have no respect for a company
that does not provide information to people sitting in your
air-conditioned offices, Secretary Bolton. That's what we're
talking about here. We're not talking about these folks in the
field who are providing the meals. We're talking about a
company, which, month after month, overstates, overcharges, and
misstates what the claims are. We're going to keep going at it.
This is not the last hearing that we're going to have on this
matter.
But in September 2006, DCMA sees a downward trend in
performance in responding on critical information requests,
from the corporate office: ``Often, the DCAA does not receive
information they request from KBR. The sluggish responsiveness
to Government requests at the corporate level must be
aggressively addressed.''
By the way, when the requests for information are sent to
KBR, here's what the Evaluation Board said in December 2006,
that ``requests for information received pushback due to
corporate policy regarding internal documents.''
Now, Mr. Reed, does KBR have any right to deny auditors and
program officials access to documents supporting its contract
costs on the grounds that these are internal documents?
Mr. Reed. No, they do not, if it's related to the specific
costs being claimed or billed on their contract.
Chairman Levin. All right. So, now, what did we do about
it, Mr. Secretary?
What action did we take against KBR when they pushed back
and said, ``these are internal documents''?
Mr. Bolton. KBR, or anybody else--and we've done it with
KBR--when we find that the auditors or my managers are not
getting what they want, we withhold some money. We have a $55
million settlement, for example. I told them if they didn't
provide the documents, I would take that, unilaterally, and
they could sue me in court.
By the way, when we did that, when I did that, they
provided the documents.
Chairman Levin. This is 4 years after they get a contract,
you have to threaten them to get documents. Why do we tolerate
this for 4 years?
Secretary Bolton, this committee has pushed very hard to
get some competition into this deal, for the last couple of
years, at least. You've agreed that this LOGCAP contract was
designed to handle short-term contingencies. Short-term
contingencies. As a matter of fact, this scope of work in this
LOGCAP contract was that the contractor will initiate support
for a force up to 25,000 personnel. That was supposed to be the
scope of the work, 25,000 personnel. Then, the contractor may
be required to increase support for up to 50,000 personnel.
We're over 150,000 personnel.
Now, why has this noncompetitive situation been going on
for so long? We've brought this to your attention for the last
couple of years, Mr. Secretary.
Mr. Bolton. In response to your concerns--and, quite
frankly, ours--we are in the middle of source selection to have
other contractors--in fact, more contractors--do this.
Chairman Levin. Why has it taken so long? We've raised this
question for 2 years, at least.
Mr. Bolton. I think, in terms of keeping this current
contractor, it's just the nature of the----
Chairman Levin. No, I'm talking about lack of competition.
Why have we not had multiple contractors so we could have
competition on task orders for this many years? We brought this
to your attention in 2004 and 2005, and now we're negotiating
multiple contracts. Why has it taken so long? When you have a
contractor who, month after month after month, is supplying
exaggerated estimates, has provided erroneous information,
refuses to give documents, which are absolutely required under
law, why has it taken so many years to negotiate multiple
contracts?
Mr. Bolton. I think you'll find, 2005, we did recompete
some of the work there, and that was beneficial to us. As I
just mentioned, LOGCAP IV is in its source selection right now
to provide more contractors there. With regard to the earlier
concerns, ``Why didn't we do this sooner?,'' if you look at
where we started, in 2002, the scope--and you've mentioned it
in your remarks there, going from 25 to 50--it was a lack of
time to adequately go out and compete all the task orders when
we had a constant demand, and an escalating demand, from the
warfighter.
Chairman Levin. No, but you could have--look, if you--we
have time now--we're still at war--you have time now to
negotiate multiple contracts so you can get----
Mr. Bolton. Oh, no--what I was talking about is an ongoing
contract.
Chairman Levin. I understand. But why didn't you negotiate
multiple contracts so you could have some competition for task
orders before now? That's the question.
Mr. Bolton. If you go back to when we put this contract
together before the war, we looked at it the same way we did
all the others.
Chairman Levin. I understand.
Mr. Bolton. We looked at it as a contingent, and we only
had roughly $50 million when we looked at the first task order.
Chairman Levin. I understand. I'm not asking about that.
I'm saying why didn't you do, in 2004, what you're doing now?
Why didn't you do, in 2005, what you're doing now? Get multiple
contractors? Why didn't you do, in 2006, what you're doing now?
That's my question. We brought this to your attention in 2004
and 2005. Why didn't you do, in 2004 and 2005, what you're
doing now?
Mr. Bolton. Good question. I don't have a good answer for
you.
Chairman Levin. Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
In recent years, the DOD has institutionalized civilian
contracting such that it's become a necessary function of
large-scale military operations, and, in all likelihood, the
prevalence of contracting use as a vehicle for service
distribution will likely increase. I would pose this to any of
the members of the panel. Do you have any reason to believe
that the amount of civilian contracting concurrent to military
operations will decrease?
Mr. Bolton. Given where we are today, I don't see it
decreasing. As long as we have warfighters in the field, we
will have this. One of the reasons we have the LOGCAP was so
that we could put more soldiers, or military, in combat. If I
were to replace that with organic soldiers, just one-on-one,
I'd look at 56,000 additional soldiers to do the work that's
being done right now. Rightly or wrongly, if you say that, then
you have to almost double or triple that. The reason is that
you're going to have to rotate those soldiers. You're going to
have to have a group there to take care of the work, you have
to have someone getting ready to come over, and then you have
to have someone who's idle. That's a lot of soldiers.
In addition, if you look at the funding part of this, a
soldier, once we recruit them, we have the soldier and the
family. So, I have families back home here that I'm also going
to have to support and fund. With a contractor, he's on the
field, and, when he leaves, I don't pay him anymore.
So, I think, from just a business sense, it's the right
thing for the Army, and, quite frankly, the other Services,
because they have similar vehicles to do this. What this war
has taught us, the lessons learned here, is, once you protract
this, and particularly if it's a protraction where things are
changing in the field constantly, how are you going to
accommodate for that? We think the LOGCAP IV will allow us to
do that, in terms of having several contractors. We can compete
these task orders rather than setting up a separate source
selection during the time of war to recompete a task order, and
run the risk of not having service to the warfighter. I think
that will be better.
The other is training of our folks. We do contingency
training very, very well, but that's a short-term answer.
Nation-building or protracted, we need to learn how to do that
better, both in contracting, management, and even auditing. So,
I think we'll learn more there. I wish I had a crystal ball
that said we're going to be finished with this next year, next
month, and all of the LOGCAP folks will be coming home. I just
don't have that.
Senator Thune. What alternatives to a LOGCAP-type--or a
LOGCAP-like contracting vehicle have been considered? Are there
other alternatives?
Mr. Bolton. The only alternative that I know of--and I'll
defer to General Johnson here in a bit--is putting organic
there. You're either going to have civilians--a contractor--or
you're going to do it with soldiers, airmen, or seamen.
Starting in the mid-1980s, we were asked by Congress to take a
look at using contract or civil manpower to do the jobs that
they could do for us, and that's what we've done. I think the
first contract was in the 1988 timeframe. Then another one in
1992, then 1996, and then the follow-on.
But all of those were always geared at short-term. I think
your question was spot-on, in terms of if you're going to have
a protraction here--and the chairman's also indicated this--is
there a better way? Right now, I don't know of a better way.
General Johnson may have some additional thoughts.
General Johnson. Sir, we've looked at this real hard, and
there are a couple of alternatives. One, if you decide to go
with all military personnel. Mr. Bolton has explained that
fairly well. In essence, the LOGCAP exists virtually as a
theater support command would exist, with about 50,000 to
60,000 personnel. You'd need 120,000 to 200,000 soldiers to
replicate that capability with the assorted infrastructure that
goes with soldiers, hospitals, housing, and, of course, their
long-term retirement pay, and the rotation and training bases
to keep them in action to replicate the LOGCAP 57,000 or so
that are in theater.
As Mr. Bolton said, when the contractor leaves the
battlefield, he's left the battlefield; you don't pay him when
he comes back, and his infrastructure is up to him or her.
So, that's if you try to put soldiers, alone. But we do
probably need more soldier or military structure for early-
entry operations. The contractor, in early-entry operations, is
not the best answer, and I think the Army is working on that in
their total Army analysis process.
For the longer-term operation, if you decided to go with
something other than a LOGCAP, one of the problems we're having
right now is we had multiple contingency contractors with each
brigade, and each brigade were beginning to exercise their
contingency contracting capability to support themselves. I've
been in about 12 to 15 different military operations over my
30-year career. That's a fallacy that we're trying to correct
by creating contingency contractor brigades. Those contingency
contractor brigades provide area support and give us some kind
of joint acquisition review before we buy anything.
For instance, moving into Bosnia, I can remember the days
we were down in Zapania buying hay to keep the trucks and
things from sinking in gravel. You had a contingency contractor
for each brigade. A bail of hay ended up being $1,000. That's
terrible. We finally instituted a Joint Acquisition Board so
that we flattened that out.
So, if you did something other than this LOGCAP piece, you
would have unnecessarily created competitiveness and cause
prices to go up within the area. If you then move into nation-
building, you've probably decimated the local economy, because
the local businessmen will not be able to compete with the
prices that the U.S. Government will cause to be created,
something that we've had to work in this case with KBR on their
supply-chain piece, to make agreements external to the theater
for supplies so the prices level off in both Afghanistan and
Iraq.
Lastly, you will create a management nightmare. We do not
have, as we've stated, people with the necessary expertise,
right now, to man as we would like to. I think we're doing it
adequate, but adequate is not what we seek here. We have to do
a better job for our American soldiers and our American
taxpayers. Our American military and our taxpayers deserve
better. But we're doing an adequate job in management. We do
not have the number of people with the appropriate skills to
manage the contracts that we have, to include LOGCAP.
If you broke LOGCAP down into various contracts, you create
multiple contract administration requirements, you will
complicate the commander's ability to execute operations in
theater, because then, when he wanted to move troops, he could
end up talking to a base-camp contractor, a transportation
contractor, an ammunition contractor, a food-supply contractor,
and it just depends on how many pieces you break that up into,
rather than having one point of contact that he can talk to and
say, ``Here's what I have to do,'' and then allow the
Government to work the requirements and then come up with one
contractor to perform the mission. So, we're going to have to
have balance there.
Then, as I said in my opening statement, we've really got
to look at what we do in long-term war, because there is a
breakeven point, even on an instrument such as LOGCAP. I think
it's cost-effective now. It's like buying a house in Washington
and--I guess the price is probably close to $900,000 now for a
house--but if you paid that cash, you paid $900,000. That's
kind of what we're doing for LOGCAP, we're paying cash. If you
paid that over the 30- to 50-year life span of a mortgage,
you're going to pay three times that. So, that's the price you
have to determine of what you want to pay and how you want to
pay it over time. Frankly, that's for you to determine, not me.
I'll just tell you what the complexities are of executing a war
in this environment, given those types of instruments to
support the forces.
Thank you. I hope that answers your question, sir.
Senator Thune. It did, and just one quick follow-up. The
whole basic principle of hiring civilian contractors is to
augment military operations, as I understand, and provide
assistance in meeting support requirements, and that they would
not be a replacement for force structure. In this particular
case, which category does KBR fall into when executing LOGCAP?
Do they augment force structure, or are they replacing it?
General Johnson. Sir, that's a question I would prefer that
the building handle. In the total Army analysis process, there
is what we call a COMPO 9, which is for contractor support and
civilian military equivalents for soldiers. So, I would defer
that so we can take back and get you an appropriate answer from
the appropriate force-structure personnel.
[The information referred to follows:]
LOGCAP is mitigating force structure shortfalls during this time of
persistent conflict to enable commanders to accomplish operational
missions. The current force structure is a result of force management
decisions made previously which assumed risk largely in Combat Service
Support (CSS) functions which are offset by LOGCAP and host nation
support. DOD policy, however, directs that functions where there is a
potential risk of engaging in direct hostile fire be deemed inherently
governmental and military essential. This includes many support
functions on a noncontiguous battlefield covered by LOGCAP contracts.
The Grow the Army Plan addresses many of these CSS shortfalls now
supported by LOGCAP, but will require some time to build these unit
capabilities. The Army will strive to ensure that only non-inherently
governmental functions are contracted out.
Senator Thune. I see, Mr. Chairman, my time is expired.
Chairman Levin. Thank you, Senator Thune.
Senator McCaskill.
Senator McCaskill. Thank you, Mr. Chairman.
General Johnson, who is your contact person at KBR? Who is
the individual you deal with at your level?
General Johnson. I deal with Bruce Stanski, who's the
president of KBR.
Senator McCaskill. Bruce Stanski? Would you have any
objection--or, Secretary Bolton, would you have any objection,
in this contract you're about to execute, saying that the first
time that it is documented that there is a difficulty getting
access to information by the auditors, that they would be no
longer eligible for a performance bonus?
Mr. Bolton. With any contractor, regardless of their
actions, we keep what I call a report card--and you may be
familiar with that--a contract performance report. We do that
on a regular basis. That becomes part of a file. When I do a
source selection, I look at the history on all those
contractors. If I discover there's been a problem, that is used
as part of the evaluation criteria for a contractor.
So, whoever is selected to be--all the contractors for the
LOGCAP IV, if they do not perform, and that's documented, it
will become part of their file, which we will review during any
future source selection.
Senator McCaskill. What I would then like to see, if
possible, are the documents that recommend these bonuses,
because the chairman outlined a number of instances that are
specific, recent, where--the arrogance of this company as to
whether or not their information belongs to us or belongs to
them. When you enter in a contract with a Government agency to
do work for them, the documents surrounding that work don't
belong to you, they belong to the Government that you're
working for. The idea that they're saying that these are
internal documents, and that they're causing the auditors--and,
by the way, every time an auditor is denied access, it costs us
money. Time is money when it comes to audit work. I am blown
away by the concept that there would be this kind of history of
access issues, and they'd be ``excellent.'' Either access
issues are not important to you as a contracting agency of the
Government, or you don't think they're important, in terms of
whether or not someone is doing their job for the United States
of America.
Mr. Bolton. Senator, as I pointed out earlier, when it got
to my level that we were having some problems, we took a
unilateral action, which is basically to hold their money, and,
if they wanted it back, they can sue me in court. We get the
documents that we wanted. I agree with you, that's not the
performance we expect out of a contractor.
I also agree with you, when you waste your time going into
audit, and someone's not providing you that information, that
is wrong, that is not what we expect, and we take the
appropriate actions. So, when it got to my level, we did what I
thought was right.
Senator McCaskill. The difficult part of this--and this
kind of a macro-look at it, is that in Government--in the
private sector, there is accountability, called the ``bottom
line.'' It's called ``profit.'' If you're not making a profit,
you're in trouble. That is an incredible discipline over a
private entity. In Government, the accountability is in the
process of contracting, the oversight of those contracts, and
how and when they get their money, and, frankly, whether or not
people are disciplined, that work for the Government that mess
it up. What is amazing to me about this entire incident is that
it had gone on for years, and there was no accountability. None
whatsoever. No money was withheld. Maybe you threatened it
once. The bottom line is, how in the world would this company
think they're in trouble if we're telling them, every year,
they're excellent? We told them, every year, ``You're
excellent''--not, ``You're average,'' not that, ``You're below
average,'' but that, ``You're excellent.'' That's why I am so
confused about the bottom line coming out of this hearing.
The same thing with cost-plus. The abstract--and I get the
abstract--is that we do civilian contracting because it saves
us money, that we can put them in place when we need them, and
we don't need them anymore, we don't have the contract, unlike
the ongoing support costs of the Active military. The problem
is, when you do cost-plus, you are giving them a license to
make profit. They don't have to have accountability anymore,
because the profit's built in. They can relax. They can put
their feet up, put their head back, don't worry about profit.
Do you know, Secretary Bolton, what kind of profit Halliburton
has made on this contract for the last 5 years?
Mr. Bolton. I don't know about Halliburton. My contract's
with KBR. They, according to the contract, have a 1 percent
base fee, which is very low compared to any cost-plus contract
I've ever seen in the 30 years I've been at this, and an award
fee of only 2 percent, and normally it's much, much higher than
that. So, my questions tend to be why a contractor would even
go into this, because the bottom line is so small, particularly
when you look at when they competed for this, and there was no
war, there was no idea that there would be billions and
billions of dollars here.
But, to your point, we take a very close look at the amount
of money that we pay. I feel the same way, that, ``I want a
dollar's worth of work out of you.'' When we discover--whether
it's through the auditors--I think the chairman mentioned
several incidents of evaluation boards--those are my people,
those are the folks I put there to--and along with the DCMA--
check on this, on a monthly basis. They found that. They
challenged the contractor. When they challenged the contractor,
several hundred million dollars, whatever, then we talked to
them, and they don't get all of that. When it comes to the
award fee, as General Johnson mentioned earlier, there are
three parts. A couple of those parts, they did very, very well,
and we get that from the field commanders. There are parts they
didn't do well, and they didn't get the money. So, if we
concentrate----
Senator McCaskill. They got 88 percent of it.
Mr. Bolton. That's right, they did, and some----
Senator McCaskill. Eighty-eight percent--when my kids come
home with 88 percent, they don't get grounded. Eighty-eight
percent is pretty darn good for this kind of record.
Mr. Bolton. Yes, ma'am. But it's interesting for me to
note, as I sit here--I have been taken to task many, many times
on contracts, in the award fee. That is because folks are above
88 percent--way above 80 percent. When I hit, at 60, 70, or 80
percent on a contract, where I've grown up, folks say, ``Okay,
I guess you're doing your job.'' In this particular contract,
when you look at all the monies that we've withheld over the 4
years, and all things that we've done, it amounts to about 4.7
percent; 4.7 percent. I compare that against all other
contracts, and I find I'm in the ballpark. That means, even
though I have two, three, or four times the number of auditors
on this big contract, apparently the folks who are actually
doing the work--not just the contractor, but those who are in
the management office overseeing--are doing a pretty good job,
because they're hitting about the same average I would expect
from any contract, in terms of the number of times they will
question the contract, the amount of money that they're
withholding, and so forth.
Now, could we do better? Yes, we might be able to bump that
up 5 percent, maybe even 6 percent. But that's still not too
bad. Perfect? Absolutely not, because we'd like to drive that
to something else. But I think the men and women who are
actually doing the work are doing the very best they can, and,
I think, quite frankly, a very good job.
Senator McCaskill. What percentage of the civilian
contracts in Iraq are cost-plus?
Mr. Bolton. I think it's a third when you look at--well,
when you say ``Iraq''--I'm talking about LOGCAP right now,
because we'll have a cost-plus, we'll have a fixed-fee, and a
reimbursable type. So, I think it's about a third in terms of
the types of contracts. We can get that for the record, to be
more precise.
Senator McCaskill. I would appreciate that.
Mr. Bolton. Yes, ma'am.
Senator McCaskill. In terms of dollars spent, I'd like the
percentages, too, not just number of contracts, but in terms of
dollars spent, how much is cost-plus.
Mr. Bolton. Absolutely.
[The information referred to follows:]
In the first years of the Iraq conflict, cost-type contracts were
used because uncertainties involved in contract performance did not
permit costs to be estimated with the accuracy needed to use fixed-
price types of contracts. Over the 4-year span of fiscal years 2003-
2006, roughly 46 percent of Army contracts in Iraq were cost-type
contracts.
Notable, however, is that: (1) the percentage of cost-type
contracts in fiscal year 2006 was approximately 13 percent, and (2) the
highest percentage of cost-type contracts was in fiscal year 2004, at
roughly 83 percent. This is due principally to the fact that in 2004,
design-build contract task orders were awarded (on a cost basis) across
the spectrum of Iraq reconstruction: electricity, water, and oil
infrastructure and numerous health care (e.g., health care centers,
hospitals) and public safety/security and justice projects (e.g.,
police stations, fire stations, courts). In 2006, the Army, and in
particular the Joint Contracting Command-Iraq/Afghanistan made a
concerted effort to migrate towards fixed-price contracts.
Senator McCaskill. The other thing I would like is some
kind of information for the record, Mr. Chairman, about
Antideficiency Act (ADA) violations. I've discovered, in the
short time I've been here, that we've gotten into a habit, in
some instances, of using operational monies to build what they
call ``temporary buildings.'' I had the opportunity to visit
one of those temporary buildings at Fort Belvoir. It didn't
feel very temporary to me. It was 230,000 square feet. So, I--
and at the Army Materiel Command, I might add--and so if we are
building buildings with O&M money instead of MILCON money, I
would like to know how much of that is going on within LOGCAP
and what ADA violations, if any, any of you are aware of, and
what the status of those violations is as it relates to this
contracting in this particular theater.
Mr. Bolton. Senator, happy to take that for the record.
[The information referred to follows:]
Three of the five cases initiated thus far have been closed as ``No
ADA'' and the Army expects to complete the two remaining ADA
investigations by 30 December 2007. In the three cases that have been
closed, the funding was either determined appropriate (e.g., within the
$1.5 million limitation for life, health, and safety) or the proper
funding was obtained. As a result, we have found no failure to conform
to the Federal Acquisition Regulations.
Senator McCaskill. Thank you.
Mr. Bolton. Thank you.
Senator McCaskill. Thank you, Mr. Chairman.
Chairman Levin. Thank you.
Let me pick up where Senator McCaskill was on these
ratings. She doesn't understand how they could possibly get the
ratings that they got. Let me give you some of the underlying
data which supports what she's saying.
KBR's ratings over the--I'm just going to take an 18-month
period, from July 2005 to December 2006--they got 61
``excellent'' ratings, 42 ``very good'' ratings, 7 ``good''
ratings, and no ``average or below'' rating for contract costs.
That flies in the face of what happened during that period:
October 2005, DCAA report, labor costs overstated.
November 2005, AAA audit, KBR wasted between $40 and $113
million by purchasing more vehicles than necessary.
A November 2005 Army audit report, staffing levels
excessive.
An Evaluation Board report, November 2005, estimates
inflated.
2006 DCAA report, KBR proposal was overpriced by $70
million; subcontract costs, overstated by 21 percent; equipment
costs, overstated by 21 percent.
March 2006, Evaluation Board said they overstated costs and
proposals, and overengineered customer requirements.
May 2006, DCAA audit report, proposal of KBR overstated
costs by $70 million.
August 2006, DCAA audit finds KBR's proposed subcontract
costs for one task order were overstated by roughly $100
million.
That's what's going on during this period. That's what the
audit reports say. How in the heck could they be given these
ratings? Not one ``poor'' one. Not one ``poor'' one.
By the way, in order to even get a ``good'' rating,
according to your own definitions, the cost system established
must be not inflated. To get a ``good'' rating, you cannot
inflate costs. They shouldn't have been given even a ``good''
rating. How did this happen?
Mr. Bolton. Obviously, we can take each one of those for
the record and give you a reason, and compare and contrast
that.
[The information referred to follows:]
The audit and Performance Evaluation Board (PEB) comments discussed
during our testimony correctly identify shortcomings with the
contractor's cost proposals and Rough Order of Magnitude estimates.
However the purpose of the audit, and the purpose of the PEB are
different. The auditor report is based only on what KBR provided to
support proposed costs, as it should be. The award fee board considers
several factors in deciding on an adjectival rating in the cost area.
One factor the board can consider in contractor proposals that the
auditor does not is the environment in which the proposals were
required--frequently changing Government requirements, expedited cost
submissions, and many foreign subcontractors to collect cost
information from. These conditions affect the quality of the cost
proposals. Other factors the board considered were the contractor's
cost system to track and report costs, and cost avoidance measures
resulting in cost underruns from the negotiated cost baseline. The
adjectival rating is the result of the board considering the proposal
problems, as well as the proposal environment and positive performance
that occurred during this period.
Chairman Levin. Are you not a bit, yourself, concerned that
you could have all these kind of--these are separate ratings,
by the way, for costs.
Mr. Bolton. Right.
Chairman Levin. I'm not talking about technical and
management performance, because that's a different issue; we
accept that. On costs, though, 18-month period, they didn't get
one ``below-average'' rating, they got seven ``goods,'' which
they didn't deserve. But 61 ``excellents'' and 42 ``very
goods.'' Are you not troubled by that?
Mr. Bolton. Senator, I'm always concerned----
Chairman Levin. Not always. Specifically concerned. Are you
not specifically concerned, when I read those numbers to you?
Mr. Bolton. Let me put it this way. I say I'm ``always
concerned,'' because my job is not to look at a glass that's
half empty, nor a glass that's half full, just to look at the
glass. So, you stated in there that the Evaluation Board, for
example, determined that the proposal was inflated. That's
exactly what that board is designed to do. We didn't pay that
price, though, because the board said to the contractor,
``You've given me your proposal that I will not accept; and,
therefore, you need to bring that down.''
Chairman Levin. Right.
Mr. Bolton. Now, that part of it is not part----
Chairman Levin. But the award-fee determinations are
supported by these ratings.
Mr. Bolton. But the award fee takes place later.
Chairman Levin. I understand.
Look at those ratings that they're based on. Aren't you
troubled that you're providing award fees based on ratings
which are so totally unrealistic, in terms of what your own
boards were finding?
You are not concerned by that?
Mr. Bolton. I'm not concerned, from the standpoint of with
the example that we've just discussed. If the Evaluation Board
is doing their job--and it sounds as if, according to what
you've read there, they are--and they're in front of the
process where I'm going to make an award, which is 6 months
down the road, and the contractor brings the cost down because
I identified it, and starts to perform, then he's going to be
judged on that, not what happened during the negotiation.
Chairman Levin. Okay, I am concerned. I don't see how you
can award fees based on these kind of ratings, when the ratings
completely ignore what has happened, in terms of overpricing,
exaggeration, statements of fact which aren't true, and so
forth. So, I'm sorry to hear you're not concerned, but I'm very
much concerned, because those award fees, which Senator
McCaskill's talking about, are based on those ratings.
Let me go on to the scope of the contract. This contract
basically told this contractor that, ``You would be providing
the support for up to 50,000 personnel in Iraq.'' Now, would
you not agree that, since there's 150,000 troops in Iraq alone,
that the LOGCAP effort goes beyond that scope?
Mr. Bolton. It certainly goes beyond what we initially
intended.
Chairman Levin. Not just intended, but what the contract
provided for: Up to 50,000.
Mr. Bolton. The reason I'm hesitating is that scope has a
very definite legal interpretation, and I would be stepping out
of my lane to say we are operating on a contract that's beyond
scope. I don't believe that to be the case. But I'd have to
take that for the record to get the legal opinion.
[The information referred to follows:]
The contract was not modified, did not need to be modified.
Chairman Levin. Okay, you would, then, agree that the
contractor is being, presumably, paid to support up to 150,000
troops in Iraq. You'd agree to that much.
Mr. Bolton. Oh, yes, sir.
Chairman Levin. Would you agree that the contract says that
the purpose of the contract, or the scope of the contract, is
for the contractor to provide for support--and I'm reading
this--for up to 50,000 personnel in Iraq? Would you agree to
that?
Mr. Bolton. At one time, that's true.
Chairman Levin. Was the contract modified?
Mr. Bolton. I believe it was, but I'd have to check. I'd
have to take that for the record.
[The information referred to follows:]
No. The 50,000 figure is mentioned only in the scope of work under
planning requirements. This specifically relates to the upper limit the
contractor should use in developing a written contingency plan for the
Worldwide Management and Staffing Plan, and does not establish the
scope of the whole contract. Clause B.2 of the contract relates to the
scope of contractor support in actual operations. It states the
Government's maximum level of support required on the contract shall
not exceed the equivalent of two Major Regional Conflicts plus one
small scale contingency per year for the life of the contract. The
contractor's support of troops in Southwest Asia is within the scope of
the contract.
Chairman Levin. General Johnson, was the contract modified?
General Johnson. Sir, the contract was not modified, did
not need to be modified.
Chairman Levin. All right.
General Johnson. The 50,000 was for the planning effort.
That's what they formulated their plan on, for up to 50,000.
The requirement for the contract supported the Army's strategic
plan for two regional major contingencies, which obviously
would equate to more than 50,000 individuals. The 50,000 was a
planning figure that they always had to be prepared to execute.
Chairman Levin. I understand. So, you're saying that the
statement of work in the LOGCAP contract itself is not what I'm
reading from the LOGCAP contract, which is ``Contractor may be
required''----
All right. Let me read you the piece of the contract that
I'm referring to, ``Contractor may be required to increase
support for up to 50,000 personnel per event,'' which means
Iraq. Is there a different part of the contract you're
referring to?
General Johnson. The execution phases of the contract
requires the contractor to be able to execute operations for
two major contingencies in accordance with the Army's strategy.
Chairman Levin. All right. You'll get us the language,
then, in the contract, which you say supercedes this limit of
50,000?
General Johnson. Roger, sir. We'll provide you what's
necessary to show you the total effect.
[The information referred to follows:]
Clause: B.2. The Government's minimum requirement is the Worldwide
Management and Staffing Plan including the Army Transformation Annex,
which includes CLINs 0001AA, 0001AB, and 0001AC. While the locations
and types of support required in a given year may be varied and may
include a mix of Major Regional Contingencies (MRCs), small scale
contingencies, or other efforts identified in the SOW, the Government's
maximum level of support shall not exceed the equivalent of two MRCs
plus one small-scale contingency per year for the life of the contract.
All contract requirements will be awarded by individual task order.
Chairman Levin. All right.
According to a February 2005 DCAA report, KBR entered into
a sole-source, cost-plus subcontract with Navigant Consulting.
Is that a familiar contract to either--okay. Here's what it
did. It's a sole-source, cost-plus contract with Navigant
Consulting to ``obtain advice and assistance regarding Federal
Government procurement requirements and procedures.'' That's in
quotes. The report questions whether the costs of this
subcontract were reasonable. Are you familiar, Mr. Reed, with
the DCAA report on Navigant?
Mr. Reed. Not in great detail, but generally, with that
summary, yes, sir.
Chairman Levin. All right. Is it fair to say that they
entered into a contract with a subcontractor to advise them as
to whether or not they--relative to requirements and
procedures--is that fair?
Mr. Reed. That's my understanding, yes.
Chairman Levin. All right.
Now, why are we paying a contractor to pay somebody to give
them assistance regarding Government procurement procedures?
Why is that appropriate? Why is that within the scope of the
contract? As a matter of fact, is it?
Mr. Reed. It's not so unusual, I believe, for Government
contractors to use different types of expert consultants, be
they legal, contracting, or whatever. I guess the question is,
was it appropriate in this particular circumstance?
Chairman Levin. All right. Was it? Did you find it was?
Mr. Reed. I would have to go refresh my memory of that
audit-report language.
Chairman Levin. Okay. Do you know whether or not they would
earn a fee on that subcontract?
Mr. Reed. Yes, they would.
Chairman Levin. So, they are hiring somebody to advise them
on meeting the requirements of our procedures, our Government
procurement procedures. The more that they pay someone to
advise them on what, presumably, they knew when they entered
into the contract, the more they make, because they get a fee
based on what they pay contractors. Is that as absurd as it
sounds to me?
Mr. Reed. I think, in some circumstances, we might actually
have encouraged them to seek additional professional help,
given the problems we----
Chairman Levin. To meet our requirements.
Mr. Reed. To meet our requirements, because of their own
lack of capability and deficiencies in their business systems--
they, themselves, had told us that they did suffer, at times,
from inexperienced people. They promised us to get more help
to----
Chairman Levin. Didn't they promise to meet those
requirements when they got the contract?
Mr. Reed. Yes.
Chairman Levin. That's a promise they made to us when we
entered into the contract.
Mr. Reed. Yes.
Chairman Levin. When they don't meet those requirements,
and they hire a subcontractor to advise them on that, they even
make a fee on that.
Mr. Reed. That's correct.
Chairman Levin. Something's wrong here, folks. You can't
have a contractor that promises to do something, not do it,
hire somebody to advise them what they should do, and then make
money on their failure to do it. They're making a profit on
their own failure. It's intolerable.
I don't think anyone disagrees with that, so--if anyone
disagrees with that, why don't you say you disagree.
Mr. Bolton. I wouldn't say we would disagree.
Chairman Levin. You do, okay.
Mr. Bolton. No, I would say we would not disagree.
Chairman Levin. Okay.
Mr. Bolton. But, I think, as Mr. Reed's already pointed
out--and if you go back to when the Government accepted the bid
as the winner in this proposal, we were looking at this--and
I'm sure the contractor was, too--as another LOGCAP short-scope
contingency. We have the expertise. When we evaluated them,
said, ``Yes, this person has the expertise,'' we have escalated
way beyond that. My opening statement said that as well, that
we had stretched and stressed Government, as well as
contractor, capabilities. So, it doesn't surprise me that the
contractor is looking for additional expertise. Now, what we
need to do--and I think this is--your original comment--is to
find out whether or not that's really justified.
Chairman Levin. General Johnson said that the contract
required them to be prepared to provide this service for two
major contingencies. So, Secretary Bolton, it's not acceptable,
if what he says is accurate, that you continually use the
excuse that this was intended to be just a short-term provision
of services. It's one or the other.
Mr. Bolton. No, I don't know if I can follow your comment,
or your question.
Chairman Levin. Then let me try again. General Johnson said
that, no, the contract didn't just say 25,000 or 50,000, it
says whatever was required for two major contingencies. You're
now saying that, no, it was intended for something that would
be just short-term and few people. It's one or the other.
Mr. Bolton. No, you can actually have both. You can have
two major contingencies going on that are----
Chairman Levin. Both short-term?
Mr. Bolton.--that are short-term.
Chairman Levin. I see.
Mr. Bolton. But when they get protracted for several years,
I really do think you need to look at things differently, which
we're trying to do. Mr. Chairman, I think that's where you're
trying to drive us.
Chairman Levin. I was trying to drive you there 2 years
ago, without success.
Mr. Bolton. Yes, sir.
Chairman Levin. Senator Martinez.
Senator Martinez. Mr. Chairman, thank you very much, sir.
I have just a couple of questions. I guess I should ask
General Johnson, in the light of all of these problems--and I
noted, in your testimony, you indicated some of the things that
were done in improvements. But having come a little late, I
wondered if you can restate for me what is the way forward
here, how are we making improvements, how will the mistakes
that have been made not be repeated?
General Johnson. Yes, Senator.
Weaknesses that we noticed, that we found in KBR, or the
contractor, early on, included--it was really with the entire
program, the process, requirement escalation, uncontrolled, not
centralized, not validated appropriately. The contractor's
business systems were not capable of expanding to handle the
volume of workload, dollarswise, personnelwise, cost-
estimationwise, to provide us the information we needed. There
was fraud that had occurred in the system, in the contractor's
efforts.
We instituted several actions to take control of that and
try to fix the problems that had occurred. Oh, and,
additionally, at the time that I took command, we had 55 task
orders worth about $14 billion that were undefinitized. I
assume you know what ``definitization'' means.
Senator Martinez. No.
General Johnson. Okay. What that means is that we had not
properly structured the statement of work to say specifically
what the contractor was responsible to do. So, and it goes back
to, probably, the comments about the contractor taking on a
workload and giving himself a workload. Without a definitized
contract, if he's asked to do something in support of a
commander, he may elect to do that, because there are not the
parameters in the process that should be. We had 55 of those
that we had to work through.
Award Fee Boards had not been conducted at all. Now, that's
to the contractor's credit, and we need to give them credit for
executing this program for more than a year without an Award
Fee Board, and carrying, on their own books, a total of about
$1.1 billion worth of Government bills, and continuing to
execute. Accounting for property was not where it should have
been. As I mentioned earlier, fraud.
The actions we took--and, frankly, this was with Mr.
Bolton's help, Mrs. Ballard, and these gentlemen at the table,
because when I took command and we started identifying these,
of course, as with any military process or Government process,
you have to validate the reasons why you need people, why you
need the resources that you're asking for. By asking the DCMA,
the DCAA, and the AAA to go in the field and look at these,
they began to validate the problems that I just mentioned to
you. But we didn't wait for that to start taking action.
We appointed a senior contracting official, Jim Loehrl, who
eventually was promoted to SES and became the LOGCAP director
to run the program. We established a requirements review
rocess, in conjunction with the field, and, later on, with the
help of AAA's recommendation to General Casey, a Requirements
Board, and a division was set up inside the Multinational
Force-Iraq over there, to help scope the requirements.
We took KBR to task, establishing a process to review their
business systems over and over. To the credit of DCMA and DCAA,
they've brought those business systems to an acceptable range.
Frankly, that's what stuck us with giving them a fairly high
award fee. I was not comfortable with it, but the fact is,
their business systems were acceptable, and their technical and
managerial performance in executing the mission in the field,
frankly, was as close to flawless as you could have for a
contractor. We couldn't argue that. So, given the procurement
rules, they earned their award fee; it was not given to them.
In fact, on each one of the Award Fee Boards, Mr. Loehrl went
to theater more than 11 times, he sat down with commanders.
Before the award-fee approving official signed the letter, I
reviewed it. I made personal phone calls and visits, myself, to
the field. Most of the negative comments about KBR, frankly,
came from our own personal staff about their accounting systems
and their contracting processes, but it was that they were
unacceptable, they just weren't where we had wanted them to be.
To the credit of Bruce Stanski, when we leaned on him
pretty hard, he replaced his entire mid-level management, to
include some senior vice presidents, so that we would have a
much better relationship and a more responsive organization to
our requests.
We completed definitization, with a lot of help from Mrs.
Ballard. I called her the ``Lady with the Chains.'' She beat us
until we got it done. We finished that up between November 2004
and March 2005, and got those definitized. In the process of
doing that, with the help of Mr. Reed's folks, we looked at the
DFAC's problems, where the costs had been inflated. We
negotiated down to a point--and we used our should-cost
analysis, our own independent Government estimates, to
determine what we were going to pay KBR, and we disallowed $55
million of the costs. That's just the way that went.
We currently have in process about--we've had to spend the
costs of over $288 million as a result of those audits. We've
disapproved that $55 million. We've only allowed $183 million
of the $288 million. We're giving them the opportunity to go
out and provide the appropriate justification that will meet
the audit standards to pay them. If they don't do it, we'll use
our own independent Government estimate to determine what they
should be paid, or not.
We have completed the Award Fee Board process, as I
mentioned. We established property controls. We established a
board to manage contractor-acquired property. That board
decides where the property will go, because, in many cases, as
was mentioned earlier, KBR bought excess property. What had
happened, frankly, early in the process, military commanders
said, ``I'm going to do this.'' Of course, we had political
decisions that reversed some of those more aggressive actions
that they were going to go take, and they had bought property
and trucks to execute those missions, and, of course, they were
excess. Because of task orders, moving equipment or personnel
from one task order to another, it's like moving equipment or
personnel from one contract to another, it requires an
accounting system that works, it requires changing the plans,
and so forth. KBR was trying to get their business systems
acceptable, so they were reluctant to do that, because every
time they did it, it would cause more problems, and we'd put
them back to task.
As a result of that, what we did was collapse many of the
task orders that were supporting the forces into a major task
order. We started that out with 59. That evolved to 89, and now
139. What that allowed them to do was have all of that
capability on one task order, so moving people around became
very easy to do, so we wouldn't have an overage on one task
order and a shortage on another task order of personnel and
equipment. We do that with the Requirements Board and the
contractor--the Equipment Board.
Of course, to the credit of good people on the ground--Paul
Cerjan, Remo Williams, and other folks--they identified to us,
even before it became public knowledge, that they had some
individuals who had committed fraud and criminal activity. When
they did that, we engaged the Criminal Investigation Division
of the Army, verified those, and we took those folks to task.
Four out of six have been indicted, and four out of the six
have been convicted. Again, we created an ``Alpha Contracting''
process, we call it, where we bring the requiring activity in
theater, the contracting officer, the DCMA, the DCAA, and we
bring all those folks into a room together, because we're
having these estimating-system problems in estimations from KBR
that were, frankly, where they were trying to meet commanders-
in-the-fields' requirement probably more than they should have.
We come up with agreements on the price. That has saved us, in
fiscal years 2004/2005, the estimated cost as $10 billion to
execute the operations in Iraq. We got that down to $4 billion.
Senator Martinez. From $10 to $4 billion?
General Johnson. Yes, sir.
Senator Martinez. I know my time is expired, but I'd just
like a quick question here.
At some point, you went to a fixed price on the
subcontracts, from a cost-plus basis?
General Johnson. That's correct.
Senator Martinez. When was that?
General Johnson. That was after we finished the
definitization process, and we did the independent cost
estimates for the DFAC. What we found, that we would be better
off with a fixed price, and we negotiated that with KBR and got
it done.
Senator Martinez. Has that realized in cost savings, as
well?
General Johnson. Yes. I think DCAA said around $200
million--Mr. Reed?
Mr. Reed. Yes, that's correct.
Senator Martinez. My time is expired. Thank you very much.
Chairman Levin. Just to fill in one blank that I didn't get
on Senator Martinez's question, when was that change made? What
year and month?
General Johnson. For the fixed-price piece?
Chairman Levin. Yes.
General Johnson. That was, what, March?
Mr. Reed. December.
General Johnson. December?
Chairman Levin. Of what timeframe?
Mr. Reed. December-March timeframe, I think.
General Johnson. Right, when we were doing the
definitization.
Chairman Levin. Of what year?
General Johnson. 2004--early 2005, I think.
Mr. Reed. 2005.
General Johnson. Yes, that's right.
General Johnson. Early 2005.
Chairman Levin. Thank you.
Senator McCaskill.
Senator McCaskill. Thank you, Mr. Chairman. I have to
preside at 1 o'clock, so I'll be short.
Anybody on the panel, the auditors or the other witnesses,
are any of you ever aware of any punishment that a contractor
has received for instructing their employees not to tell about
waste, fraud, and abuse? Any punishment for retaliation against
a whistleblower that works for any of these contractors? [No
response.]
None? [No response.]
Are you aware of any investigations that have been
undertaken concerning protecting the whistleblowers? Not
Government whistleblowers that work for the Government, but
whistleblowers that work for these contractors?
Mr. Reed. I would speak of one issue. Certainly, if we
needed to interview employees relevant to an audit that we were
conducting, and those employees were not made available to us
to answer our legitimate and reasonable questions, then we
would certainly disallow those costs and not reimburse them,
and perhaps even take some other action, like referring it for
investigation.
The more difficult issue is, I think, when you want a
general availability to people which is not tied to a specific
audit in question, where you get this--you can't really dispute
the fact that they caution their employees, who they feel may
not understand the issues and the facts correctly, to go
through the proper channels of their management to talk to us.
Senator McCaskill. There is a law on the books about
protection of whistleblowers that work for contractors. Is
there any requirement in any of the contracts that you all are
involved in that law, along with a promise of anonymity and a
phone number, be given to every employee hired by that
contractor?
Mr. Reed. I don't know if that's a provision of this
particular contract, or----
Senator McCaskill. Don't you think that would be a great
idea?
Mr. Reed. It's the law, so--and I'll tell you, we have 20
ongoing investigation, criminal types; half of those are the
result of the whistleblower. They are protected.
Senator McCaskill. They're the best. Having done this for a
while, the very best information you get--and particularly in
this environment, because I refuse to believe that many of the
people hired by these companies aren't Americans first, just
like all of you are. When they're over there, and they're
watching trucks being burned, and they're watching people
sitting around doing no work, they want to tell someone,
because they're not making the plus on the cost-plus. They want
to tell, and I want to know, are they handed a card when they
go to work for this contractor under these contracts that they
can put in their wallet that says, ``You are protected under
the law, your anonymity will be protected, it would be--your
boss would be punished, and here is a number you can call''--is
that happening right now with our defense contracts?
Mr. Bolton. I don't believe so, but I'll take that for the
record.
[The information referred to follows:]
The Federal Acquisition Regulation (FAR) Subpart 3.9--Whistleblower
Protection for Contractor Employees implements 10 U.S.C. 2409 and 41
U.S.C. 251. This allows any employee of a contractor who believes that
he or she has been discharged, demoted, or otherwise discriminated
against may file a complaint with the Inspector General of the agency
that awarded the contract. FAR Subpart 3.9 also addresses the
procedures for investigating complaints and remedies. The maximum
penalty for violation is complete compensation for damages to the
employee. This can include rehiring, back pay, employment benefits,
attorneys' fees, or other fees that were lost or otherwise reasonably
incurred by the whistleblower throughout the course of bringing the
complaint regarding the reprisal to the head of the agency. Defense
contractor employees seeking whistleblower reprisal protection must
report allegations directly to the Department of Defense (DOD)
Inspector General (IG). There is no known requirement provided in the
contracts that would require contractors to provided written notice of
whistleblower protection to its employees. However, the Defense Federal
Acquisition Supplement Subpart 203.7002, requires the use of a clause
(252.203-7002) in solicitations and contracts expected to exceed $5
million, except when performance will take place in a foreign country.
Clause 252.203-7002 (Display of DOD Hotline Poster) requires the
following:
(a) The contractor shall display prominently in common work
areas within business segments performing work under DOD
contracts, DOD Hotline Posters prepared by the DOD Office of
the Inspector General.
(b) DOD Hotline Posters may be obtained from the DOD IG,
ATTN: Defense Hotline, 400 Army Navy Drive, Washington, DC
22262-2884.
(c) The contractor need not comply with paragraph (a) of this
clause if it has established a mechanism, such as a hotline, by
which employees may report suspected instances of improper
conduct, and instructions that encourage employees to make such
reports.
Therefore, through the use of the above clause, contractor
employees should have visible access to the DOD IG hotline phone number
for reporting fraud, waste, abuse, mismanagement, and reprisals.
Mr. Bolton. Again, I'll say, not only this contract, since
we're talking to LOGCAP, we've had several criminal
investigations--and General Johnson mentioned 4 of those--the
20 that are ongoing right now--and there may be more--half of
those are because of the whistleblower.
Senator McCaskill. Right
Mr. Bolton. They are protected. So, people do know about
it.
Senator McCaskill. But we've heard from whistleblowers--I
think you heard Senator Dorgan talk about it--that were
banished to Fallujah, that were told that they were not allowed
to do this, or they would be terminated, or they would be
punished. It's bad enough, hard enough, I mean, we heard the
story of the Government employee who's been demoted after being
a whistleblower--it's hard enough for us to protect the
whistleblowers that work for the Government. Is it one step
removed and much more difficult to protect whistleblowers that
work for a private contractor. I think if we want that flow of
information, and if we're serious at all about holding down
costs under these circumstances, particularly in these
environments, I think we have an affirmative duty to make sure
that every one of those employees understands that they're
protected and how much we would appreciate knowing the waste,
fraud, and abuse that they are witnessing, day in and day out.
Frankly, I haven't even had time today to talk about the
stories I've heard from my friends who have come back from over
there. The unit where the people that were trained on food
service were told that what they were supposed to do at times
of meals--they took turns--some of them sat around, but some of
them took turns standing at the door just doing the counter for
KBR. Now, they were trained to work in the kitchen, they were
trained to be cooks, but, instead, what they did is they stood
outside the door of the dining facility with a counter, and
their job was to make sure KBR got all the money they were
entitled to.
Now, I haven't even had time to get into all that, but I do
think the protection of these whistleblowers in the private
sector is something that we are ignoring. I don't think we're
taking it seriously enough. I would certainly appreciate it--
and I'll follow up with this, and I hope the committee will
follow up with this, with Secretary Gates--it wouldn't be hard
to do this, to require our contractors to give that information
to everybody who works for them.
Mr. Ernst. Senator, could I make a comment, please?
Just for a point of reference, DCMA, we have a Contract
Integrity Center, and we do annual fraud awareness and things
of that type, and whistleblower protection, for our folks. It's
interesting that periodically we do get hits on our Web site
from contractor employees raising issues. Of course, we refer
each hit to the appropriate authorities at that point in time
when it comes in.
Senator McCaskill. I bet there's a lot more out there. But
think about how you feel. You're working for this private
contractor, they're paying your salary, you're not sure what's
going to happen to you if you say anything. I think that the
environment is not conducive for us getting the best
information. We can save, I think, hundreds of millions of
dollars if we just take that simple step, letting them know
that they're protected, and then following up and protecting
them if there's a retaliation. I'm hopeful that we will follow
up on this hearing for this Government employee that was
demoted, because if we don't hold people accountable that
demote whistleblowers, we're in a world of hurt. Frankly, after
this hearing, I will tell you, I think we're in a world of
hurt, and I can understand why the DOD has been on the GAO
high-risk list since 1990.
Thank you, Mr. Chairman.
Chairman Levin. Thank you, Senator McCaskill.
I just have one additional question, and then I'll call on
Senator Thune to see if he has any additional questions.
This is to you, Mr. Reed. In your prepared statement, you
state that the DCAA audits of Iraq contracts have recommended
reductions in the proposed LOGCAP contract of about $1.9
billion, there was excessive billings of $1.9 billion. Does
that sound right?
Mr. Reed. The $1.9 billion is the correct amount, it
includes both billings and proposed costs.
Chairman Levin. All right. So, that $1.9 billion in costs
that have been billed and proposed costs, both.
Mr. Reed. That's correct.
Chairman Levin. Okay. Now, the negotiated price reductions
have been $600 million, is that correct?
Mr. Reed. That's correct.
Chairman Levin. Which leaves $1.3 billion which has either
been paid or is still at issue. Is that correct?
Mr. Reed. That's correct.
Chairman Levin. Of that $1.3 billion, how much of that has
already been paid, approximately?
Mr. Reed. Let me see if I can--if I may restate, just for a
moment, to get it straight in my own mind. Of the $1.9 billion,
$1.1 billion has been negotiated.
Chairman Levin. Does that mean paid?
Mr. Reed. Yes.
Chairman Levin. Okay.
Mr. Reed. Or allowed in the price----
Chairman Levin. Or allowed?
Mr. Reed.--and ultimately----
Chairman Levin. It would be--it's allowed.
Mr. Reed.--and, ultimately, to be paid.
Chairman Levin. Okay. To be paid, or has been paid, $1.9
billion.
Mr. Reed. That's correct.
Chairman Levin. Okay.
Mr. Reed. So, of the $1.9 billion, $1.1 billion has been
negotiated, of which----
Chairman Levin. Well, don't----
Mr. Reed.--$600 million----
Chairman Levin.--say ``negotiated,'' if you don't mind. Use
the word that is more accurate for us, which is----
Mr. Reed. Accepted.
Chairman Levin.--it's accepted, it's allowed.
Mr. Reed. Accepted.
Chairman Levin. Okay. Yes.
Mr. Reed. $1.1 billion has been resolved. They've allowed
$500 million, and disallowed $600 million of that $1.1 billion.
No?
Chairman Levin. I don't think so, not according to our
numbers.
Mr. Reed. Perhaps I should submit that for the record,
because I----
Chairman Levin. No, I think we ought to go----
Mr. Reed.--think we're getting all----
Chairman Levin.--through it now.
Mr. Reed.--confused here.
Chairman Levin. Let's go back to the $1.9 billion you have
recommended should not be allowed. Start with that.
Mr. Reed. Okay.
Chairman Levin. You've recommended $1.9 billion be
disallowed. Is that correct?
Mr. Reed. We started off with $1.9 billion that we said----
Chairman Levin. You've recommended that should be
disallowed.
Mr. Reed. It should not be accepted in prices or paid.
Chairman Levin. Right. It should not be accepted, $1.9
billion.
Mr. Reed. Right. Of the $1.9 billion----
Chairman Levin. How much has been paid or allowed? $1.1
billion--that's what you just said, I think.
Mr. Reed. I believe what I'm saying is, to the best of my
recollection, of the $1.9 billion, $1.1 billion of those
exceptions have been addressed, and $600 million of the $1.1
billion has----
Chairman Levin. No, of the $1.9 billion----
Mr. Reed.--not been allowed.
Chairman Levin.--of the $1.9 billion.
Mr. Reed. Of--$700 million of the $1.9 billion is still
outstanding.
Chairman Levin. Okay. Here we go. $700 million is still
outstanding.
Mr. Reed. Right.
Chairman Levin. $600 million has been--is not going to be
allowed--they've agreed would not be paid, and----
Mr. Reed. Okay, but----
Chairman Levin.--one-point-----
Mr. Reed.--may I--let me just take one more shot.
Chairman Levin. Go ahead.
Mr. Reed. Okay. We started with $1.9 billion of exceptions.
Chairman Levin. Which you've recommended should not be
paid.
Mr. Reed. Which we recommended should not be paid.
Chairman Levin. Right.
Mr. Reed. Negotiations have taken place. Issues have been
resolved on $1.1 billion of those exceptions----
Chairman Levin. Okay.
Mr. Reed.--leaving $800 million still to be addressed.
Chairman Levin. Okay. Of the $1.1 billion that has been
resolved, how much has been resolved in favor of the
contractor, how much resolved in favor of the Government?
Mr. Reed. In favor of the Government, $600 million----
Chairman Levin. Okay.
Mr. Reed.--of the $1.1 billion----
Chairman Levin. Yes.
Mr. Reed.--has been sustained----
Chairman Levin. Okay.
Mr. Reed.--as a disallowance.
Chairman Levin. Right. That leaves $500 million has been
allowed.
Mr. Reed. Correct.
Chairman Levin. Okay. Got it.
What is the normal average typical resolution of these
recommendations of yours to disallow costs? Does it typically
come out around two-thirds?
Mr. Reed. Yes, it does. Over time, and in hundreds of
reports, it comes out to about two-thirds.
Chairman Levin. About two-thirds. So far, it's about 55
percent has been----
Mr. Reed. Approximately, yes.
Chairman Levin. So far, in terms of what's been resolved,
these disputed, it's below the long-term average, in terms of
the Government prevailing.
Mr. Reed. Yes, but I would caution that when you compare an
average over----
Chairman Levin. I agree.
Mr. Reed.--over years, with one specific action--there's a
lot of variability in these----
Chairman Levin. I understand.
Mr. Reed.--settlements and individual actions.
Chairman Levin. I'm sure--these are a lot of individual
actions in this $1.9 billion, is it not?
Mr. Reed. Yes.
Chairman Levin. Okay.
Senator Thune.
Senator Martinez. No----
Chairman Levin. I'm sorry, Senator Martinez. Forgive me.
Mel, I apologize. I'm so used to seeing John Thune there for
the morning, I called on Senator Thune.
Senator Martinez.
Senator Martinez. Not a problem, sir. Thank you, but, no, I
have no further questions.
Chairman Levin. Thank you.
Okay. I want to thank our witnesses for a number of things.
Obviously, this is a hearing which is a very, very important
hearing, going into a contract which has been a matter of huge
concern because of the lack of competitive pricing which
results from this contract going to one contractor instead of
to multiple contractors who would be able to provide some
competition when it comes to the tasking orders, which is what
counts.
We've gone through, this morning, facts that show that the
costs which have been--and the estimated costs by this
contractor which have been provided to the Government have been
overstated, overpriced, inflated, that there's been waste of
taxpayers' dollars, and there's been unsupported claims by this
contractor.
Obviously, this is a very disturbing situation. Many of you
have spent a good deal of time trying to correct it. We thank
you for those efforts to correct these flaws. We thank you for
your efforts to provide services to our troops at a fair cost.
But we still have, with this contract, what I am afraid has
been true, which is, they've gotten treatment which they should
not have been given, which was too favorable when it comes to
what they've been allowed, what they've been allowed to get
away with, and what they've denied us, which is the
documentation so that we can do the proper auditing in a prompt
fashion. So, we end up by saying we're not going to end here,
by a longshot.
To each of you, and to your agencies, you've been
cooperative with the committee, and we thank you for that. To
each of you, those of you, particularly, who have devoted so
much of your time to try to straighten this out and to try to
get a fair deal for the Government, we are grateful to those of
you who have spent a great deal of your time in doing that.
To those, particularly in your agencies, that are out there
on the front line and--we commend them for their willingness to
take those risks. We know that the provision of the services
themselves has been not only satisfactory, but, in many cases,
exemplary out in the field. We've witnessed that ourselves in
our visits.
But what we also have witnessed is something which is
totally unacceptable, and that is overcharging, overpricing,
overstating, inflated costs for services which are good
services, but still, because of the costs which they've charged
us, we cannot accept that, even for a good service. If you get
a good automobile and you're satisfied with it, you still don't
want to be overcharged for that automobile, or anything else.
It's inexcusable that we have a company that's tried to get
away with it, and has gotten away with too much. At the same
time, they and their people have provided, in many cases,
services under very difficult circumstances.
Both things are true, and we're grateful for part of it,
and we're very, very unwilling to accept the excesses and the
abuses and the waste just because, in the process, our soldiers
have been given some damn good meals under some very difficult
circumstances.
So, that's where it sits. Senator Martinez, would you like
to add a comment?
Senator Martinez. Mr. Chairman, I think you adequately
expressed a lot of the concerns and frustrations. I also
believe that it's important for us to keep in mind the
magnitude and scope of the project, which is enormous, and the
length of time involved. So, I think, from that standpoint,
it's also important to keep some perspective on the difficulty
ahead, and thank all of the witnesses for their participation
today and the work that they're doing on behalf of the American
people and to serve our Armed Forces, and particularly those in
harm's way.
Chairman Levin. Thank you very much, Senator Martinez.
We, again, thank our witnesses for their appearance and for
their cooperation with this committee, which has been
consistent. We will stand adjourned.
[The information provided by Senator Dorgan follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[Questions for the record with answers supplied follow:]
Questions Submitted by Senator Edward M. Kennedy
contract mismanagement
1. Senator Kennedy. Major General Johnson, in your testimony, you
stated that the Logistics Civil Augmentation Program (LOGCAP) has grown
rapidly from a value of ``several million'' dollars per year to over $5
billion per year today. I am concerned that this exceptional cost
growth calls into question the validity of the original competition for
the contract and arguably amounts to a cardinal change. At any time,
did the Army discuss this cost growth and the potential need for a new
competition?
General Johnson. The growth of this program is within the scope of
the awarded contract, which is directly tied to the number of major
conflicts that could occur each year (two major conflicts and one minor
conflict per year). The contract was intentionally structured to allow
for rapid growth and flexibility to support unknown future
contingencies. Nonetheless, as the program grew and began to strain the
resources of a single contractor, the Army in 2004 took action to
identify various methods of increasing contractor support and to assess
the risks involved with various strategies. This involved developing an
acquisition strategy for LOGCAP support with multiple contractors
competitively responding to global requirements for urgent support.
This strategy was discussed with industry, and with senior Army
leadership to obtain input and to refine and select a future strategy
for LOGCAP. Because of the breadth and depth of the program, a thorough
analysis was performed and the final strategy determined in 2006. This
strategy resulted in a separate LOGCAP IV Planning contract, which was
awarded in February 2007, and the multiple LOGCAP IV Performance
contracts, which are anticipated to be awarded in June 2007.
[Update--The Army announced on June 27, 2007 that it had awarded
LOGCAP IV Performance contracts to three companies. The three companies
are DynCorp; Fluor; and Kellogg, Brown, & Root, (KBR).]
2. Senator Kennedy. Secretary Bolton and Major General Johnson, the
Army chose to select a single awardee under the LOGCAP III contract.
Please provide any and all documentation laying out the justification
for that decision. Was there any discussion on making other awards as
the size of the contract grew?
Mr. Bolton and General Johnson. There is no specific documentation
justifying awarding a single contract on LOGCAP III. In late 2000 and
early 2001, the Army developed the acquisition approach to award the
LOGCAP III contract. There was discussion about the number of contracts
to award on LOGCAP III. Prior and recent experience on LOGCAP II
revealed there were sporadic small operations requiring LOGCAP support,
resulting in workload that did not support more than one LOGCAP
contractor. Based on that limited workload, the decision was made to
award and maintain only one LOGCAP III contractor, and not pay to
sustain multiple contractors. Since the LOGCAP III contract was
structured as a series of 1 year options, the Government had the
ability to bring on additional contractors or replace the LOGCAP III
contract, as performance or workload warranted. As LOGCAP III
requirements grew to support troops in Afghanistan and Iraq, the Army
in 2004 began looking at ways to expand the number of contractors
supporting LOGCAP. This resulted in solicitations being issued in
August 2006 to replace LOGCAP III with multiple LOGCAP IV performance
contractors.
3. Senator Kennedy. Major General Johnson, in your testimony you
mentioned that one of the improvements made during contract performance
was the definitization of all ``over-age'' task orders. Please provide
a list of all task orders that fits these criteria with a brief
description of the goods or services to be provided under them, all
not-to-exceed figures during the life of the task order, final value,
and the number of days each task order was undefinitized.
General Johnson. Between November 2004 and March 2005, we
definitized 46 task orders of which 42 were over-aged. The high tempo
of operations resulted in numerous new combatant command requirements
and changes necessitating immediate placement of LOGCAP task orders.
This resulted in our placing a priority on awards rather than
definitizing actions. As of July 6, 2007, there are no undefinitized
contractual actions.
The over-aged task orders are identified in the following
spreadsheet.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
4. Senator Kennedy. Major General Johnson, for all undefinitized
task orders, please provide a separate spread sheet giving a brief
description of each task order, its value, and the number of days it
was undefinitized.
General Johnson. Between November 2004 and March 2005, we
definitized 46 task orders of which 42 were over-aged. As of July 6,
2007, there are no undefinitized contractual actions.
The referenced definitized task orders are identified in the
following spreadsheet.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
5. Senator Kennedy. Major General Johnson, did the Army ever
unilaterally supply missing terms to any undefinitized task orders, and
if so, did the contractor ever challenge such action through the
disputes process?
General Johnson. No unilateral terms or definitizations were ever
forced upon the contractor. There were no challenges through the
disputes process.
6. Senator Kennedy. Major General Johnson, please describe in
greater detail the Joint Acquisition Review Board (JARB) and the
Coalition Acquisition Review Board (CARB).
General Johnson.
Acquisition Review Boards (JARB, CARB, Super-Coalition Acquisition
Review Board (SUPERCARB))
In Kuwait, Iraq and Afghanistan, the leadership maintains a strict
approval process for all requirements, to include those executed under
the LOGCAP contract. Every new requirement that exceeds $50,000 must be
validated by an Acquisition Review Board (JARB and CARB) and approved
by a general officer. This approval process also includes internal
purchases or actions executed by KBR. Requirements that exceed $10
million must go through further scrutiny (SUPERCARB) and be approved by
a centralized review board in Kuwait. No requirement is funded unless
commands gain the recommendation of these boards and final approval at
the general officer level. While not a funding process, these review
boards review the proposed funds to ensure they are appropriate for the
type of work to be awarded.
Joint Acquisition Review Board
The JARB is a requirements validation process held in Iraq
that reviews Combat Support/Combat Services Support (CS/CSS)
requirements for supported units. The board ensures the
requirements are consistent with and necessary to support
operations
Coalition Acquisition Review Board
The CARB is fundamentally the same as the JARB but reviews
requirements associated with acquisitions for Kuwait/
Afghanistan.
Super-Coalition Acquisition Review Board
If a cost estimate associated with a requirement is over $10
million for Iraq, Kuwait or Afghanistan, the packet must go to
Coalition Forces Land Component Command (CFLCC) for the
``SUPERCARB'' review and approval, basically a JARB process at
a higher level of command.
No requirement is funded unless the customer obtains the
recommendation of these boards and final approval of general officer
level leadership.
7. Senator Kennedy. Major General Johnson, is cost reasonableness a
factor for determining appropriate award fees? If so, how is that
factor used to determine award fees?
General Johnson. First of all, the size of the award fee pool is
established based on estimated task order costs, which are negotiated
on each task order. The size of the award fee pool is not based upon
actual cost. Cost reasonableness is considered as a part of this
process.
Second, the award fee criteria have always considered cost control
as a significant factor (40 percent of the overall assessment). The
cost control factor includes assessment of a number of cost control
measures such as the contractor's ability to provide proper cost
estimates, cost tracking, cost avoidance measures, and cost
reasonableness, all taken in the context of the contingency
environment.
8. Senator Kennedy. Secretary Bolton, in your testimony, you stated
that ``the dynamics of logistics civil augmentation support
significantly changed from anything we've seen.'' I am concerned that
this ``significant change'' coupled with the exceptional cost growth
calls into question the validity of the original competition for the
contract and arguably amounts to a cardinal change. At any time, did
the Army discuss this cost growth and the potential need for a new
competition?
Mr. Bolton. The growth of LOGCAP support is within the scope of the
contract, which is tied to the number of major conflicts that could
occur each year. See the discussion in the response to question #1.
9. Senator Kennedy. Secretary Bolton, Congress has a clear
preference for multiple awards when the Government issues Infinite
Delivery-Infinite Quality (IDIQ) contracts. Cost reimbursement
contracts are one of the least desirable contract types available.
Would it negatively impact the Army's mission if Congress prevented the
use of cost reimbursement task orders under single award IDIQ contracts
for services valued over $100 million?
Mr. Bolton. No. Unless specifically authorized by Congress, all
Army contracts must comply with applicable statutes including those
involving military construction.
______
Questions Submitted by Senator Robert C. Byrd
contract mismanagement
10. Senator Byrd. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, with the
pending relocation of Halliburton corporate headquarters to the Middle
East, have adequate measures been taken to ensure that the records of
KBR, Inc. will remain available and accessible for current and future
congressional oversight and other investigations?
Mr. Reed. Yes, we believe adequate measures are in place to ensure
access to KBR, Inc. records. Prime contractors are obligated and
accountable for performing in accordance with the terms and conditions
of their U.S. Government contracts. The terms and conditions of a
Department of Defense (DOD) prime contract apply regardless of changes
to the prime contractor's organization. Corporate reorganizations or
relocations of corporate headquarters or business units do not affect
the applicability of the contract's terms or diminish the
responsibilities of the prime contractor. For example, the contract
clause that provides the Government with access to records of
negotiated contracts (FAR 52.215-2, ``Audit and Records-Negotiation'')
remains applicable.
The ``Audit and Records-Negotiation'' clause requires the prime
contractor to maintain records and make them available to the
Government for examination, audit, or reproduction until 3 years after
final payment under the contract or any longer period required by
statute or by other clauses of the contract. This clause provides for
Government access by not only the Government contracting officer and
authorized representatives of the contracting officer (normally Defense
Contract Audit Agency (DCAA)), but also by the Comptroller General of
the United States or an authorized representative. The Comptroller
General is given access to and the right to examine any of the
contractor's directly pertinent records involving transactions related
to the contract or its subcontractors. The Inspector General also has
statutory authority to gain access to contractor records under the
Inspector General Act of 1978, as amended.
There would be significant impact if Halliburton decides to become
organized under the laws of Dubai. However, it is our understanding
that action by the company to merge with or acquire domestic companies
would be subject to review by the Treasury Department's Committee on
Foreign Investments in the United States.
Mr. Ernst. The Halliburton corporate headquarters is not relocating
to the Middle East. This has been misreported. Halliburton is expanding
its presence in the Middle East and is relocating certain key
executives to Dubai to focus on development of the Middle East market.
This will have no affect on the availability of KBR records.
Mr. Fitzgerald. To date, we haven't encountered any problems with
access to KBR records and we don't anticipate future problems with
access to KBR records as a result of the pending relocation of
Halliburton corporate headquarters to the Middle East. Our LOGCAP audit
work focuses on evaluating Army policies, processes, and controls. When
we need information from KBR we go to the procuring contracting officer
(forward or rear) to make arrangements to obtain it. This is done under
the auspices of contract clauses.
11. Senator Byrd. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, do you
have any concerns related to Halliburton's divestment of KBR and your
agencies' continued ability to audit KBR, Inc.'s activities during the
course of the LOGCAP contract?
Mr. Reed. Halliburton's divestment of KBR should have no impact on
our ability to audit KBR, Inc. or the LOGCAP contract. Regardless of
the divestiture, KBR must maintain all appropriate contractor records
and make them available to the Government for examination and audit.
Mr. Ernst. I have no concern with our continued ability to audit
KBR activities after the divestiture as our access to records should
improve since only KBR records will now be required for audit. However,
Halliburton records will still be required for the settlement of costs
incurred prior to the divestiture of KBR by Halliburton.
Mr. Fitzgerald. To date, we haven't encountered any problems with
access to KBR records or personnel and we don't anticipate future
problems despite Halliburton's divestiture of KBR. Our LOGCAP audit
work focuses on evaluating Army policies, processes, and controls. When
we need information from KBR we go to the procuring contracting officer
(forward or rear) to make arrangements to obtain it. This is done under
the auspices of contract clauses.
12. Senator Byrd. Mr. Fitzgerald, when were Army auditors first
stationed on the ground in Iraq and why were they not in Iraq earlier?
Mr. Fitzgerald. U.S. Army Audit Agency (USAAA) auditors were first
permanently stationed on the ground in Iraq in May 2005 to audit LOGCAP
operations related to Operation Iraqi Freedom. Since May 2005, we have
had a continuous presence on the ground in Iraq. Intermittently during
the period June 2002 through August 2003 USAAA personnel operated in
deployed environments in Uzbekistan, Afghanistan, Turkey, and Kuwait to
audit LOGCAP operations in support of Operation Enduring Freedom and
Operation Iraqi Freedom. Additionally, auditors were on the ground in
Baghdad intermittently during calendar years 2004 and 2005 while
performing three audits of the Commander's Emergency Response Program/
Quick Response Fund.
13. Senator Byrd. Mr. Fitzgerald, do policies exist regarding the
deployment of Army auditors to the field during military engagements
that involve contractors?
Mr. Fitzgerald. There are no specific Army policies dealing with
the deployment of Army auditors during military engagements that
involve contractors. However, USAAA personnel have historically
deployed with our troops to audit Army and/or contractor operations
dating back to the Vietnam War. Currently, USAAA's authority to operate
in a deployed environment is supported in Army Regulation 36-5
(Auditing Service in the Department of the Army dated 16 December
1991). The regulation specifies that USAAA has unrestricted access to
Army operations. For joint operations, such as Operation Iraqi Freedom,
we also coordinate our audit coverage of joint activities and non-Army
DOD activities with the DOD Inspector General's Office.
14. Senator Byrd. Mr. Fitzgerald, should those policies be reviewed
in light of the experience with the LOGCAP contract?
Mr. Fitzgerald. Army Regulation 36-5 has served USAAA's purposes
over the years with regard to operating in a deployed environment. I
believe, however, that my staff could deploy more timely and
efficiently if operation plans recognized the need for audit controls
and oversight early in contingency operations. We are in the initial
stages of exploring options as to how this can best be accomplished, to
include making USAAA part of operation plans for engagements so that
our deployed role and related logistical support requirements can be
recognized and addressed from the outset of an engagement. In a similar
vein, based on our recent experiences with Hurricane Katrina, we are
working with the Army Corps of Engineers to enhance our ability to
deploy rapidly in the event of a natural disaster.
15. Senator Byrd. Mr. Reed and Mr. Ernst, does the DCAA have
sufficient auditors to provide detailed oversight of the billions of
dollars in contracts across the DOD?
Mr. Reed. Yes, DCAA has sufficient auditors to fulfill our contract
audit mission for the Department. While it is true that the volume of
contracts for which we have responsibility has grown, DCAA has made
good use of new technologies (i.e., automated working papers, enhanced
communications infrastructure) to increase auditor productivity.
Mr. Ernst. Defense Contract Management Agency (DCMA) believes that
DCAA has sufficient auditors to accomplish their mission.
16. Senator Byrd. Mr. Reed and Mr. Ernst, do your auditors have
sufficient authority to receive all of the support they require?
Mr. Reed. Yes, DCAA has sufficient authority to obtain the access
to required contractor books and records. The FAR clause at 52.215-2
provides our auditors with the primary authority for access to
contractor records. This clause must be inserted in all negotiated
contracts except those: (i) not exceeding the simplified acquisition
threshold; (ii) for commercial items; or (iii) for utility services.
This clause provides the contracting officer's representative with the
authority to examine and audit contractors' books, records, documents
and other evidence and accounting procedures and practices, regardless
of form (e.g., machine readable media such as disk, tape, et cetera) or
type (e.g., data bases, application software, data base management
software, utilities, et cetera), sufficient to reflect properly all
costs claimed to have been incurred or anticipated to be incurred in
performing cost-reimbursement, incentive, time-and-material, labor-
hour, or price-redeterminable contracts. For the most part, contractors
are cooperative and support the Agency's audit efforts. However, the
Agency does have procedures in place to pursue instances where
contractors deny or unreasonably delay our access to records.
Mr. Ernst. Current Federal Acquisition Regulations provide
sufficient authority to auditors.
17. Senator Byrd. Mr. Reed and Mr. Ernst, do audits that uncover
fraud or mismanagement receive the attention and action from the
Service Chiefs that they deserve?
Mr. Reed. DCAA has in place standard procedures for reporting
potential fraud and mismanagement. To date, DCAA has made more than 20
referrals related to Iraq reconstruction effort to the appropriate
investigative agencies. To the best of our knowledge, the investigative
agencies have taken these referrals seriously, and the referrals are
actively being worked.
Mr. Ernst. DCMA believes these audits receive the attention and
action from the Service Chiefs that they deserve.
18. Senator Byrd. Secretary Bolton, in light of some of the issues
that have been raised at today's hearing, what problems or challenges
do you see with the increasing reliance upon civilian contractors to
provide essential support services to the U.S. military, particularly
to those units and personnel deployed overseas?
Mr. Bolton. Contractors have played a vital role in supporting U.S.
Forces since the Revolutionary War. The highest number was during World
War II when an estimated 734,000 contractors supported the warfight.
While the U.S. Army is less than 40 percent of its size of 35 years
ago, the sustained strategic demand is unprecedented. The use of
contractors is a force multiplier enabling the U.S. Army to keep
soldiers engaged in core U.S. Army missions.
The Army is working tirelessly to balance the need to use
contractors to provide needed services while using soldiers and Army
civilians to perform inherently governmental functions. I see three
primary challenges with the Army's increasing reliance on civilian
contractors:
(1) The perception that we pay unreasonable and unallowable
costs. We do not. All incurred costs are reviewed prior to
payment and all costs are audited;
(2) The perception that contract fraud is prevalent overseas.
It is not. For example, the Special Inspector General for Iraq
Reconstruction (SIGIR) testified before a Subcommittee of the
House Judiciary Committee that contracting fraud in Iraq is a
relatively small component of the overall multi-million dollar
financial investment in the reconstruction of Iraq; and,
(3) The belief that that there are insufficient Government
personnel to perform proper contract administration and to
monitor contract performance. The Army has been stretched
beyond its capacity to support current contingency deployment
demands. The Army supports contingency operations with only 285
military contracting officers and civilian volunteers. To
address the military support we have designed deployable
modular contracting brigades. We are looking at recruitment
bonuses and retention bonuses to increase our cadre of
deployable civilians.
19. Senator Byrd. Secretary Bolton, how should procedures be
revised considering the U.S. military's experience with contractors in
Iraq?
Mr. Bolton. Considering the U.S. military's experience with
contractors in Iraq, we need to collectively recognize the role and
importance of Government contracting personnel to execute, administer,
and oversee contracts for contractor support services and
reconstruction. Procedures for training the operational and Big ``A''
Army in acquisition (from requirements generation to contractor
performance for sustainment) must become a staple of military education
and operational planning. Lessons learned in Iraq and future conflicts
must be captured, and we are in the process of capturing and
documenting these lessons in order to form future operational plans and
to include contracting in training exercises. We go to war with
logistics capability and we must doctrinally and procedurally recognize
that we must also go to war with the business side of soldier support.
The Army is in the final stages of staffing of two guides for
contingency contracting--an OCONUS Contingency Contracting Guide and a
CONUS Guide for Supporting Emergencies within the United States.
Additionally, documenting systems and processes in the development of
Joint Publication 4-10, Contracting and Contractor Management in Joint
Operations, and the updating of Army Regulation 715-9, Contractors
Accompanying the Force, will be useful tools for contracting officers.
______
Questions Submitted by Senator Daniel K. Akaka
army audit agency
20. Senator Akaka. Secretary Bolton, in April 2006, the Army Audit
Agency (AAA) reported that DOD remains insufficiently staffed and
inadequately organized to provide effective oversight for the LOGCAP
contract. The AAA report states:
``[T]he current management structure over LOGCAP operations
in the Iraq area of operations isn't conducive to ensuring the
program is managed in the most effective and efficient manner.
. . . Specifically, contracting activities in the theater have
been fragmented and too understaffed. . . . [O]perational
fragmentation among the key management offices, along with the
dispersed location and high turnover of personnel responsible
for managing work under the contract, make it difficult to
ensure new requirements are fully necessary or being obtained
in the most cost-efficient manner. . . .''
During the hearing, we discussed the shortage of contract oversight
personnel in the DOD. Please provide your plans to address this
shortage, as well as the potential loss of significant numbers of
additional acquisition personnel due to retirement in the upcoming
years. If the current fiscal year 2008 DOD budget request does not
provide sufficient resources for you to address shortages of
acquisition personnel, please indicate what level of resources is
needed.
Mr. Bolton. The Army does not have a sufficient number of
contracting officers and contract administrators. Currently, there are
5,563 1102s (contract specialist/contracting officer) within the Army.
This number is expected to decrease by 38 percent to 3,472 by 2011.
This projected loss is due to both retirement, and attrition (migration
to private industry, BRAC actions, regional hiring difficulties due to
lack of PCS funding, et cetera). Since 1995, the workforce numbers have
decreased by 53 percent, while the workload actions have increased by
278 percent. The decrease in 1102s has resulted in a lack of contract
administration (which has been validated by several outside audits),
and a lack of contract planning. New hires (1102s) of 418 per year
would result in 0 percent growth over the next 5 years and new hires
(1102s) of 529 per year would result in 10 percent growth over the next
5 years. The shortage is particularly severe for the Army's population
of 285 military contracting officers who support operations in Iraq and
Afghanistan. The Army, along with the other military services, has been
unable to provide the total number of Level II and III certified
military contracting officers requested by commanders in Iraq and
Afghanistan. This shortage is also evident within the DCMA which, on a
few occasions, was forced to turn down requests from the Army for the
administration for theater support contracts citing a lack of
resources.
Over recent years the size of the contracting workforce has been a
flat line while our workload has increased, in some cases as much as
200 percent or more. We are working within the Army to determine how to
resource our personnel requirements. We are also looking at our
civilian intern programs, and at our civilian recruitment and retention
practices. As the Army increases its strength, I have tasked my
Director, Acquisition Career Management, and Deputy Assistant Secretary
of the Army for Policy and Procurement to examine the manning
requirements in order to increase our 285 military contingency
contracting officers and our deployable civilian workforce. Last, I am
reexamining our utilization of CORs. The Army has already taken steps
to improve oversight of contract services by requiring trained CORs and
a Quality Assurance Surveillance Plan on service contracts greater than
$2,500.
21. Senator Akaka. Secretary Bolton, regarding the work environment
that contract oversight people in Iraq must deal with, and the
difficulty with sending civilian personnel into that environment, I
have serious concerns regarding the problems DOD is experiencing.
Specifically, the Department is relying heavily on auditors to find
contracting problems after the fact rather than direct oversight by the
contracting officer's technical representatives (COTRs). In my opinion,
it is inefficient to wait until an audit finds a problem to deal with
contractor performance problems because the audit is performed too late
to ensure that the contractor meets the needs of the commanders in the
field. Because of this, should the Department consider having a cadre
of Active-Duty military COTRs who can handle oversight of contracts
supporting our troops in combat zones?
Mr. Bolton. I agree that we must have the ability to provide
``real-time'' oversight of contractors supporting our troops in combat
zones. The Army has maintained a proactive approach in identifying and
rectifying contract discrepancies and does not rely solely on audits to
discover problems. In addition to military who are COTRs, we work
closely with the DCMA and the DCAA reviewing contractor performance as
it occurs and auditing vouchers at the time of submission. We have a
cadre of Contingency Contracting Teams and we are developing a new
approach to form and sustain a cadre of emergency essential Department
of the Army civilians to provide contracting and oversight in combat
zones. We are also assessing our practices to identify, train, and
utilize our COTRs.
contract mismanagement
22. Senator Akaka. Secretary Bolton, a cost-plus award fee contract
removes all risk from the contractor, and places it on the Government.
The only incentive for the contractor to control costs is supposed to
be the award fee. However, since the award fee is a percentage of the
contract costs, the contractor really does not have any incentive to
control costs, especially if the contractor gets the maximum fees
regardless of their performance. The only defense for the Government is
diligent contract oversight. It is pretty clear from the numerous audit
findings of AAA and the DCAA that diligent oversight has been lacking.
Why did the Army not use a fixed-fee type contract for LOGCAP?
Mr. Bolton. The LOGCAP III contract has multiple contract types,
including firm fixed price, that can be used when there are firm
requirements that are not susceptible to changes in scope, quantity, or
schedule. Since the predominant effort under LOGCAP III has involved
supporting contingency operations which are subject to continuous
changes in requirements, it is unrealistic to negotiate firm fixed
prices for this type of effort. As a result, the Government must bear
some of the risk through the use of a cost-type contract. We use
incentives such as award fee or incentive fee to encourage better
performance or cost control on larger dollar orders. For smaller dollar
orders, we can use cost plus fixed fee to avoid the administrative
burden associated with collecting information and evaluating
performance IAW established fee criteria, as well as holding boards to
determine award fee amounts. In those cases the administrative costs
far outweigh the amount of a fixed fee. To clarify: fee is paid on
negotiated costs, not actual costs and the contractor's efforts to
control costs will be reflected in award fee decisions and past
performance ratings. As a result, the contractor has little incentive
to run up costs. For cost plus award fee actions, a portion of fee
related to cost control can be withheld if it is shown they did not
reasonably control costs.
Furthermore, the contractor is not entitled to recover certain
types of costs (those identified as ``unallowable'' under the FAR), and
the contractor can only recover costs that are deemed ``reasonable''
under the circumstances.
23. Senator Akaka. Secretary Bolton, why did the Army not select
more than one contractor, in order to create competition?
Mr. Bolton. In late 2000 and early 2001, the Army was developing
the acquisition approach to award the next LOGCAP III contract in late
2001. There was discussion about the number of contracts to award on
LOGCAP III. Multiple awards were considered. However, through almost 4
years of LOGCAP II at that time, there had been sporadic small
operations requiring LOGCAP support, resulting in workload that did not
support more than one LOGCAP contractor. Based on that limited workload
experienced at that time, the decision was made to award and maintain
only one LOGCAP III contractor, and not pay to sustain multiple
contractors. The LOGCAP III contract was competitively awarded.
24. Senator Akaka. Secretary Bolton, why is one contract used for
all logistical support work, instead of breaking it down into smaller
contracts, some of which could probably be fixed-price contracts?
Mr. Bolton. As noted in the answer to the previous question, the
low activity on the LOGCAP II contract did not indicate a need for
multiple contracts on LOGCAP III. The concept of a contingency contract
at that time was to have a single contractor quickly respond to
requirements and be responsible for overall management of all the
logistics support work. LOGCAP support was envisioned to be for short
periods of time, not for long, drawn out conflicts.
The Army has examined LOGCAP requirements to determine if they can
be broken into smaller contracts, and in some cases, tasks were removed
from the LOGCAP contract and awarded through other contracts. Due to
the fluid and changing operational environments in Iraq and
Afghanistan, it has been difficult to identify requirements that could
be structured in smaller tasks and awarded on a fixed-price basis.
Furthermore, operational commanders find it even more difficult to deal
with multiple contractors in the area of conflict and they highly
desire having one ``belly-button'' to turn to.
logcap funds for both military construction and procurement
25. Senator Akaka. Secretary Bolton, last year the Army informally
proposed language to the congressional defense committees to
retroactively authorize the use of LOGCAP funds for both military
construction and procurement during the four previous fiscal years,
2003 through 2006. The committees did not support or enact such
legislative relief. Does the Army support such a proposal today, to
retroactively authorize actions that may be under Anti-Deficiency Act
(ADA) or other investigations?
Mr. Bolton. No, the Army does not support such a proposal today.
Since last year, the Army has worked with Central Command (CENTCOM) and
Office of the Secretary of Defense Comptroller to document and request
contingency construction authority for all construction projects that
exceeded the threshold for use of operation and maintenance (O&M)
funds. The Army has also put into place more stringent policies and
procedures on the use of O&M funds for military construction projects
and the procurement of equipment to prevent exceeding the expense/
investment threshold. Army funds for construction using the LOGCAP
contracting vehicle is approved only if the total project cost is
within the threshold of $750,000 or $1.5 million if the project is in
support of life, health, and safety. If the project exceeds this
threshold the scope of work is reduced to ensure the project does not
exceed the statutory limitation, or the requirement is processed as a
Contingency Construction Authority (CCA) request (if applicable), or
the project is cancelled for LOGCAP and forwarded to the U.S. Army
Corps of Engineers for processing. Also, equipment purchases required
to provide services under LOGCAP contracts that require procurement
funding are identified and the contractor must obtain approval prior to
commitment of any expenditure for any equipment that requires
procurement funding. Additionally, we have provided clarifying guidance
on the funding of leases of equipment.
26. Senator Akaka. Secretary Bolton, does the Army believe the use
of a LOGCAP contract as an acquisition method circumvents other
statutes applicable to military construction?
Mr. Bolton. No. Unless specifically authorized by Congress, all
Army contracts must comply with applicable statutes including those
involving military construction.
contractor oversight
27. Senator Akaka. Secretary Bolton, in your statement, you discuss
the large numbers of contractor personnel supporting our troops under
this contract. Numerous potential problems with the contract have been
identified due to the lack of adequate contractor oversight. A large
number of security contractors are also supporting operations in Iraq,
although I believe you indicated that it was under other contracts.
However, contractor security personnel do not operate under the
military's rules of engagement, and therefore, pose a potential risk to
our counterinsurgency operations since they could potentially take
actions that could inflame tensions. Given the problems with contractor
oversight for security personnel, what is the DOD doing about this
problem?
Mr. Bolton. We address contractor oversight of personnel, including
security personnel by requiring contractors to abide by the terms and
conditions in their contracts. DOD contracts in Iraq, Afghanistan, and
Kuwait require contractors and their subcontractors, authorized to
accompany U.S. Armed Forces deployed to those regions; to comply with
all applicable U.S., host nation, and third country national laws. They
are also required to comply with policies and directives of the
Combatant Commander.
DOD contractors, to include private security contractors, are
required to comply with the rules for use of force, which have been
established by the U.S. CENTCOM. Private security contractors in Iraq
must also observe U.S. CENTCOM arming policies and host nation
licensing and registration requirements. The performance work statement
and terms and conditions of private security contracts specifically
prohibit the contractor from engaging in any offensive operations, such
as military combat maneuvers and counterinsurgency operations. Private
security contractors are limited to defensive actions to protect
persons and/or property identified in their contracts.
army oversight of logcap
28. Senator Akaka. Mr. Fitzgerald, in your prepared statement, you
stated that the Army is adequately managing the LOGCAP contract. This
finding is somewhat difficult for me to understand given all of the
problems that have been identified with this contract. The AAA reported
on April 25, 2006, that ``Overall, we concluded that the current
management structure over LOGCAP operations in the Iraq area of
operations isn't conducive to ensuring the program is managed in the
most effective and efficient manner.'' Both the AAA and the DCAA have
identified hundreds of millions of dollars of overcharges and potential
fraud in this contract. Please explain what criteria is being used to
determine the adequacy of the Army's management of this contract.
Mr. Fitzgerald. Our criteria for evaluating how well the Army
managed the LOGCAP contract hasn't changed. However, the two referenced
conclusions we drew were based on a different body of evidence and
different timeframes. In our summary report A-2006-0022-ALL, dated 28
November 2005, we concluded that ``Overall, the Army's management of
the LOGCAP contract was adequate.'' This conclusion, which was
referenced in my prepared testimony, was based on our body of field
work and tests we conducted during June 2002-February 2004 in the
United States and in Turkey, Uzbekistan, Kuwait, and Afghanistan.
During this timeframe, the scope of LOGCAP operations was much smaller
than it grew to be during March 2004 and beyond. Notwithstanding our
overall conclusion, our summary report and the six preceding supporting
reports contained numerous recommendations to improve management of
LOGCAP operations. In report A-2006-0099-ALL, dated 25 April 2006, we
concluded that ``. . . the current management structure over LOGCAP
operations in the Iraq area of operations isn't conducive to ensuring
the program is managed in the most effective and efficient manner.''
Unlike the prior conclusion, this conclusion was based exclusively on
field work conducted in Iraq. The fieldwork and tests supporting this
conclusion were completed during May-July 2005.
29. Senator Akaka. Mr. Fitzgerald, it is clear that the Army is
relying on auditors to identify contract problems after the fact,
rather than direct oversight by COTRs to manage the contract.
Management of contracts through the audit process does not seem to be
an effective management process. At what point would the Army's
management of the contract be evaluated as inadequate?
Mr. Fitzgerald. The Army is using USAAA's audit work as one of the
tools it has to help improve the management and internal control
structure of the LOGCAP contract. All recommendations we made dealing
with the LOGCAP contract for both Operation Enduring Freedom and
Operation Iraqi Freedom were designed to improve both current and
future operations, processes, and controls. We view our work as
complementary to the work performed by COTRs and other contracting and
resource management officials who are working on various aspects of the
LOGCAP contract.
investigations of potential anti-deficiency act violations
30. Senator Akaka. Secretary Bolton and Mr. Fitzgerald, for over a
year now, the Army and the Office of the Secretary of Defense
Comptroller have been conducting investigations of potential ADA
violations concerning the use of operations and maintenance funds for
military construction and procurement activities through the LOGCAP in
Iraq. These investigations are in part resultant from a memo from the
DOD Office of General Counsel dated March 7, 2006, to the Office of the
Legal Counsel to the Chairman, Joint Chiefs of Staff. This committee
was briefed last October that up to $600 million in operations and
maintenance funds may have been carried out through LOGCAP for
unauthorized and illegal investment items and leases. In the Army's
internal review and investigation, at what organization or level of
contracting review did the failure to conform to Federal Acquisition
Regulations occur?
Mr. Bolton and Mr. Fitzgerald. Since the committee was briefed in
October 2006, the Army's Office of the ASA (FM&C) has been conducting
an investigation into potential ADA violations concerning the use of
operations and maintenance funds for military construction and
procurement activities. While our investigations are nearing
completion, no ADA violations have been identified to date (see
question #32 for status). To improve our overall funds controls
concerning the expenditure of O&M, thus minimizing and/or eliminating
the potential for future ADA violations, we have taken several
proactive measures.
First, all LOGCAP construction requirements are reviewed in
accordance with DA PAM 420-11, Project Definition and Work
Classification, by the Multi-National Corps-Iraq (MNC-I) Joint
Facilities Review Board to ensure proper funding has been allocated to
the project. The LOGCAP Support Officer is responsible for ensuring all
construction projects incidental to services performed by the LOGCAP
contractor are reviewed and approved by the MNC-I Joint Facilities
Utilization Board (JFUB) in accordance with applicable Multi-National
Forces-Iraq and MNC-I Fragmentary Orders and requirements management
guidance. If the total cost of the construction project exceeds
$750,000, ($1.5 million for construction in support of life, health,
and safety) the construction project is not approved for LOGCAP. When
this is the case, one of three courses of action will be taken by MNC-
I:
Reduce the scope of work to ensure total project will not
exceed the statutory limitation.
Hold the requirement and process a request for CCA.
Cancel the project for LOGCAP and forward package to the U.S.
Army Corps of Engineers for processing.
Second, the ASA (FM&C) has issued a funding memorandum that
provides guidance to ARCENT activities to determine the type of funding
used for specified in-theater service contracts that involve capital
assets. Two major leasing actions were addressed: Prime Power
Generation Equipment and Dining Facilities. The intent of the
memorandum was to assist resource managers, contracting officers, and
contractors alike in making better use of O&M funding for procurement
actions particularly as they relate to LOGCAP. It provides a detailed
discussion and analysis of the regulatory guidance impacting these
leasing actions.
Lastly, the ASA (FM&C) is finalizing a second memorandom that will
provide guidance regarding the type of funding to be used for specified
in-theater service contracts for leasing non-tactical vehicles.
Together, the above actions significantly improve the Army's
ability to effectively manage, account for, and control the use of O&M
funds for which it has been authorized and appropriated by Congress for
use in the current theater of operations.
31. Senator Akaka. Secretary Bolton and Mr. Fitzgerald, how has the
Army changed its policies and review processes for LOGCAP delivery
orders to ensure the proper authority is available for the use of
various fund sources?
Mr. Bolton and Mr. Fitzgerald.
Acquisition Review Boards (JARB, CARB, SUPERCARB)
In Kuwait, Iraq, and Afghanistan, the leadership maintains a strict
approval process for all requirements, to include those executed under
the LOGCAP contract. Every new requirement that exceeds $50,000 must be
validated by an Acquisition Review Board (JARB and CARB) and approved
by a general officer. This approval process also includes internal
purchases or actions executed by KBR. Requirements that exceed $10
million must go through further scrutiny (SUPERCARB) and be approved by
a centralized review board in Kuwait. No requirement is funded unless
Commands gain the recommendation of these boards and final approval at
the general officer level. While not a funding process, these review
boards review the proposed funds to ensure they are appropriate for the
type of work to be awarded.
Joint Acquisition Review Board
The JARB is a requirements validation process held in Iraq
that reviews CS/CSS requirements for supported units. The board
ensures the requirements are consistent with and necessary to
support operations.
Coalition Acquisition Review Board
The CARB is fundamentally the same as the JARB but reviews
requirements associated with acquisitions for Kuwait/
Afghanistan.
Super-Coalition Acquisition Review Board
If a cost estimate associated with a requirement is over $10
million for Iraq, Kuwait, or Afghanistan, the packet must go to
CFLCC for the ``SUPERCARB'' review and approval, basically a
JARB process at a higher level of command.
Joint Facilities Utilization Board
To control and manage construction, all commands have
established a JFUB. These boards evaluate and reconcile
requirements for real estate, use of existing facilities, and
ensure all potential construction is in line with established
master plans. Funding type and thresholds are also reviewed to
ensure that no fiscal violations occur.
Material Requisition Review Process
Subsequent to the review of the Acquisition Review Board
Approval, every requisition for supplies or services submitted
by KBR over $25,000 is personally reviewed and approved by the
Government Administrative Contracting Officer. In Iraq, those
requisitions that exceed $250,000 are reviewed and approved by
the Command Comptroller before KBR is authorized to execute the
procurement. Funding type and thresholds are reviewed to ensure
that no fiscal violations occur.
32. Senator Akaka. Secretary Bolton, what is the status of each
investigation?
Mr. Bolton. Army opened five investigations. Three are now closed;
two are still open.
33. Senator Akaka. Secretary Bolton, when are the investigations
expected to be completed?
Mr. Bolton. Army expects to complete the two remaining ADA
investigations by 30 December 2007.
34. Senator Akaka. Secretary Bolton, what results of the
investigation can you share with us, and what personnel actions have
been taken as a result of these investigations?
Mr. Bolton. Three of the five cases have been closed as ``No ADA''.
The funding was either determined appropriate (e.g., within the $1.5
million limitation for life, health, and safety) or the proper funding
was obtained.
35. Senator Akaka. Mr. Fitzgerald, were you asked to take part in
these investigations? If so, can you describe your role and any
findings or observations you may have about the investigations?
Mr. Fitzgerald. I wasn't asked to take part, and USAAA didn't
participate in the referenced investigations.
recompetition
36. Senator Akaka. Mr. Ernst, it appears that the contract has been
used beyond its intended scope of two regional conflicts of up to
25,000 troops each. Does DOD have a policy that requires recompetition
of a contract when the scope has been exceeded? If so, under what
conditions does the Department require the contract to undergo a new
competition?
Mr. Ernst. Recompetition of the contract is not a function
delegated to DCMA. This question would be more appropriately addressed
to the Army Sustainment Command.
37. Senator Akaka. Mr. Ernst, was that threshold exceeded in this
case, and if so, why did the contract not undergo recompetition?
Mr. Ernst. Recompetition of the contract is not a function
delegated to DCMA. This question would be more appropriately addressed
to the Army Sustainment Command
award fees
38. Senator Akaka. General Johnson, the Army has awarded 88 percent
of the available award fees to KBR, Inc. This level of award fees is
particularly surprising considering that technical performance is only
a basis for 30 percent of the fee. Contractor management is also 30
percent, and cost performance is 40 percent.
How is it that the Army has awarded KBR, Inc. 88 percent of the
available award fee despite numerous audit findings of overcharges
totaling hundreds of millions of dollars, inadequate accounting and
estimating systems, inadequate cost justifications, and KBR, Inc.'s
reluctance to provide appropriate supporting documentation and
information? Please provide a detailed and specific justification of
how the contractor was evaluated at this level of award fee.
General Johnson. The purpose of the award fee process is twofold:
One is to evaluate the contractor's performance and determine how much
fee to award; the second is to provide feedback to the contractor on
areas of strength the Government would like the contractor performance
to continue, and to identify areas the Government would like to see
improvement.
The award fee board and award fee determining official take all of
the contractor's performance, both positive and negative, into
consideration. The contractor's performance, above the minimum required
by the contract, is assessed for earning award fee. Weaknesses noted
during performance are balanced with the total effort performed by the
contractor to arrive at the overall rating, and award fee amount in
accordance with the award fee plan. Any areas for improvement are
described in the award fee letter so the contractor recognizes where
they must do better to earn a higher percentage of fee.
The 88 percent of award fee paid is the total of award fee paid on
over 150 individual task orders. It does not relate to any single task
order. Contractors generally start off receiving a lower percent of
their award fee and get better over time as they focus on the areas
noted for improvement during the award fee boards. KBR has not earned
award fee at the 88 percentage at every award fee board. The four award
fee boards conducted earlier in the life of the contract (2005)
resulted in award fees of 81 percent to approximately 83 percent.
Specific areas noted for improvement during that timeframe were KBR
business systems, relationship with DCAA, cost reporting, quality
control, and subcontractor management. Strengths reported were
outstanding technical performance considering the hostile and ever
changing environment of operations, teaming relationship with
Government personnel (KBR worked shoulder to shoulder with the
soldiers), identification and resolution of problems, cost avoidance
measures, emphasis on safety and reduction of accidents (resulting in
decrease to DBA insurance rates), and inventory accountability.
The award fee board noted that improvements were occurring during
this timeframe in the cost reporting/recording system. Also DCMA and
DCAA were working closely with KBR on their business systems. Since
early in 2007, all KBR business systems have been determined acceptable
by DCMA.
Any contract overcharge is a concern to the U.S. Government. Due to
some instances where DCAA has identified overcharges, KBR has not yet
been authorized to direct bill even though their billing system has
been approved. DCAA continues to be responsible for reviewing every
cost voucher submitted by KBR to ensure that costs billed are
allocable, allowable, and reasonable prior to payment. The contractor
error rate on previous submissions was tracked so any trends could be
analyzed. The error rate of 2-3 percent is very low and not indicative
of major systemic problems.
The inadequate cost justifications relate to DCAA audit of KBR
initial proposals. The challenge in a contingency environment is that
proposals are required to be prepared very quickly, and the contractor
may not have enough information to fully develop the rationale to
support costs. This is unlike the normal CONUS contracting process
where a contractor would have 30 to 60 days to gather information to
support their proposal. The purpose of the DCAA review is to note any
questioned or unsupported portions of a proposal. The DCAA findings are
brought to the contractor's attention and, during negotiations are
either supported with more information and accepted, or not accepted as
part of the definitized price. The questioned costs noted in the DCAA
review are tools used by the contracting officer during the negotiation
process. As noted by DCAA, over $600 million has been ``saved'' during
this process, proving that the process is working.
39. Senator Akaka. General Johnson, does the Army not consider
numerous cases of overcharges as characteristic not only of poor cost
performance, but of poor contractor management?
General Johnson. The Army is always concerned about overcharges. It
also recognizes many factors come into play, including the environment
where the support is provided, the urgency, and the magnitude of the
requirement. Because of the operational tempo and rapid growth of the
LOGCAP, KBR's estimating system and available proposal preparation
resources were stressed. This resulted in poorly prepared and supported
proposals for the initial task orders support OIF and OEF. Overall
proposals and estimating systems have improved with the assistance and
oversight of the DCAA and the DCMA. It is not unusual for DCAA to
question costs on initial proposals. When we require quick turn around
proposals where frequent changes of requirements exist it is also not
unusual to have even more costs questioned. In the end, the contractor
must provide support for their proposed costs. Government negotiators
address all the DCAA questioned and unsupported costs in coming to a
final negotiated agreement.
logcap evaluation
40. Senator Akaka. General Johnson, during the hearing you stated
that you believe that the KBR, Inc. contract is cost effective relative
to a military infrastructure that provides the same services. Has a
detailed evaluation been performed based on the actual costs
encountered with the LOGCAP contract? If so, please provide that
evaluation.
If not, please provide your basis for saying that it is cost
effective. In addition, please provide a breakdown of the contract
costs to date, including how much of the costs were overhead, labor,
profit, and equipment/materiel. Please also provide in addition the
Army's costs to issue and oversee the contract, including costs of the
associated audits.
General Johnson. A Congressional Budget Office study dated October
2005, Logistics Support for Deployed Military Forces, was prepared for
the Senate Armed Services Committee. It looked at the cost of
contracted services on LOGCAP Task Order 59 and compared it to the CBO
estimate for military units to provide the same services. Task Order 59
was the task order to provide LOGCAP support to Army units in most of
Iraq. The CBO report states on page 89 of the report that ``In all of
the alternative combinations, the total cost of using Army units,
including the cost of units in the rotation base, was higher than the
costs incurred under the LOGCAP contract.'' And the last paragraph on
the same page, ``CBO concluded that the overall result of this
analysis--that total costs for acquiring logistics support from the
LOGCAP contractor would be lower than the cost of providing those
services using Army units--would be unlikely to change if the split
between recurring and non-recurring costs differed from the weighted
average for the 10 sites.''
______
Questions Submitted by Senator Jim Webb
cost to contract out food services
41. Senator Webb. Secretary Bolton, the purpose of these questions
is to obtain a better understanding of the real cost to contract out
food services and other logistical measures as part of the Army's
LOGCAP. During the hearing, you stated that the cost of a soldier's
meal served by KBR under its contract was $3.05. What is the total cost
to provide such contracted messing (per soldier, per day) when all
costs under the food-services element of the contract with KBR are
considered (e.g., construction of mess hall, contracted cooks and other
personnel, shipping of pre-packaged food, et cetera)--in other words,
what is the real cost to feed a soldier each day?
Mr. Bolton. LOGCAP services include providing the dining facility,
and preparation and service of food. It does not include purchasing,
shipping, or transporting the food; this is a function of the Defense
Logistics Agency.
In 2006, for CENTCOM AOR, the average cost for LOGCAP III to
prepare and serve a meal was $3.36. This includes all costs associated
with providing food services; i.e. labor, materials, procuring
services, equipment, leasing dining facilities, property management,
and travel to mobilize/demobilize personnel.
42. Senator Webb. Secretary Bolton, what has been the total cost of
laundry services, using similar accounting methods?
Mr. Bolton. The cost of laundry services under LOGCAP III, since
inception to July 6, 2007, against 148 task orders, is $380,993,968.
This includes all costs associated with providing laundry services;
i.e. labor, materials, procuring services, equipment, property
management, and travel to mobilize/demobilize personnel.
43. Senator Webb. Secretary Bolton, how much funding was obligated
last year for food services and laundry services in the CENTCOM area of
responsibility under the provisions of this contract? How much is
funded this year?
Mr. Bolton. The 2006 cost paid for laundry services was $77,323,652
and for food services was $595,392,194.
The 2007 estimated cost (as of July 6, 2007) for laundry services
is $75,614,455 and for food services is $620,587,085. This includes
actual costs to date and projections for the balance of 2007.
This includes costs associated with providing laundry and food
services; i.e. labor, materials, procuring services, equipment, leasing
dining facilities, property management, and travel to mobilize/
demobilize personnel. However, for food services, this does not include
purchasing, shipping, or transporting the food; this is a function of
the Defense Logistics Agency.
44. Senator Webb. Secretary Bolton, how many military
servicemembers and U.S. Government civilian employees were fed last
year under this contract? What is the estimate this year?
Mr. Bolton. During calendar year 2006, LOGCAP provided 177,751,199
meals. LOGCAP provides support to 93 dining facilities across Iraq,
Afghanistan, and Djibouti feeding approximately 221,000 personnel which
includes all military Services, coalition forces, and civilians. With
the plus up of 20,000 military and required support personnel, the
number of meals will also increase by approximately 10 percent during
2007.
The U.S. military is responsible for counting the number of
personnel that eat in the DFACs from which the contractor identifies
the number of meals served.
45. Senator Webb. Secretary Bolton, how does the cost identified in
response to questions 39 and 40 compare to other historical examples
for the Active component (e.g., Vietnam, U.S. European Command during
the Cold War, et cetera); please normalize for ``then-year'' dollars?
Mr. Bolton. There is no way to accurately compare the cost of food
and laundry services in Iraq to historical costs in Vietnam and during
the Cold War. One complicating factor is the fact that the costs paid
under LOGCAP do not represent the total cost for food or laundry
services. For example, the cost of food services does not include the
direct cost of the food, which is provided under a separate DLA
contract, or facilities, which are paid for in a separate task order.
When other indirect costs, such as transportation, are considered, the
complexity of the cost comparison becomes daunting. This is
particularly true when one attempts to compare the cost of contracted
services, such as LOGCAP, to services which were provided by organic
combat support units during Vietnam and the Cold War.
A more accurate assessment of current and historical costs can be
made by comparing specific elements of cost over time. Since labor is
the largest cost driver in a service environment, a reasonable
comparison can be made by estimating the incremental cost of replacing
contracted support with combat support/combat service support units. An
exhaustive study of this nature was published by the Congressional
Budget Office in May 2005. In the report, titled ``Options for
Restructuring the Army,'' the CBO concluded that increasing the force
structure is clearly more expensive than using contracted support over
time.
______
Questions Submitted by Senator John McCain
contract mismanagement
46. Senator McCain. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, late
last year, in a written report, the Office of the SIGIR complained that
KBR, Inc. refused to provide it with information such as the amount of
people fed each day in its dining facilities and the amount of fuel
delivered to foreign embassies in Iraq, claiming that the data was
proprietary. This is information that KBR, Inc. keeps in support of the
LOGCAP contract. Reportedly, last year the Army Sustainment Command
represented that it had implemented corrective actions on this issue.
Has KBR, Inc. provided all the information your offices have requested
to enable you to perform your work relating to the LOGCAP contract? If
not, on what basis has KBR, Inc. refused to supply information and how
has it impeded your oversight and management efforts?
Mr. Reed. DCAA has experienced mixed results. Cooperation has been
inconsistent over time, resulting in inadequate proposals or claims,
delays in responding to DCAA document requests, and qualified audit
reports. Initially we gave the company the benefit of the doubt due to
its admission of inexperienced personnel and weak business processes.
While these were contributing factors, it is also evident that KBR
Government compliance representatives, who are the day-to-day interface
with DCAA auditors, have not always facilitated the audit process. We
believe they attempt to control the flow of documents and information
to DCAA as a means of managing the audit process and outcomes. DCAA has
challenged this practice and generally obtained the requested
information or a statement that the records are incomplete or missing.
If the contractor does not provide the required information, DCAA will
take exception to the related costs when processing contractor
billings, and in audit reports on contractor proposals and incurred
cost submissions.
Mr. Ernst. To my knowledge, KBR has not refused to provide
information to DCMA on this basis. Occasionally, KBR personnel at lower
levels will mistakenly refuse to provide data, but once this is
elevated to higher management levels, the refusal is revoked. I am
aware that KBR does not always provide requested information, claiming
difficulty in locating specific records. I do not consider this as a
refusal and eventually most of the records are located, although the
response is not timely and therefore it impedes the Government's
evaluation of incurred costs.
Mr. Fitzgerald. KBR, Inc. has provided USAAA with all the
information and data we requested relative to the LOGCAP contract. We
haven't encountered problems in obtaining the information needed to
perform our audits.
47. Senator McCain. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, has
KBR, Inc. labeled any information proprietary that, in your view, was
not proprietary? If so, was this a widespread practice, or isolated
occurrences?
Mr. Reed. DCAA does not normally review contractor information to
ensure the proprietary markings are correct. As a matter of standard
business practice, contractors make available proprietary information
to DCAA to perform our contract audit function. In response, DCAA
protects this information from any unauthorized disclosure.
Mr. Ernst. Prior to the corrective action taken by ASC, the
proprietary markings by KBR were too liberal and the use of the
markings was widespread. Since the corrective action, I am unaware of
any inappropriate markings.
Mr. Fitzgerald. USAAA hasn't encountered problems with KBR Inc.
withholding information because it was ``proprietary.''
48. Senator McCain. General Johnson, what corrective actions did
the Army implement to prevent the practice of KBR, Inc. improperly
labeling data as proprietary?
General Johnson. A SIGIR interim report titled ``Interim Audit
Report on Inappropriate Use of Proprietary Data Markings by the LOGCAP
Contract'' SIGIR-06-035 was issued on October 26, 2006. The report
noted the SIGIR's difficulty in obtaining information from KBR due to
the inappropriate use of markings on data. As the interim audit report
identified, KBR was in fact inappropriately marking data as
proprietary. The problem was brought to the attention of the LOGCAP
Director prior to issuance of the report and the Procuring Contracting
Officer (PCO) took immediate action to correct the problem. On
September 20, 2006, the PCO provided written direction to KBR
instructing them to release data requested by SIGIR that was
inappropriately marked as proprietary. The PCO then issued a contract
modification on October 30, 2006, directing KBR to adhere to proper
marking requirements of law, regulation, and the contract, and
clarified the Contracting Officer's right and intent to challenge
improper markings. To preclude similar occurrences in the future, the
PCO has also incorporated this language into LOGCAP IV solicitation.
On 14 Dec 06, subsequent to the above actions, the PCO issued KBR a
letter requesting their corporate policy and implementation plan for
marking data with proprietary legends. This letter referenced the SIGIR
interim audit 06-035, as well as the aforementioned modification to the
basic contract. KBR responded on 7 Jun 07 with a copy of their latest
procedural documents and those are undergoing careful review. Any
inconsistencies with the contract or DOD policy will be addressed by
the PCO.
49. Senator McCain. General Johnson, is KBR, Inc. following the
Army's policy? If not, what does the Army intend to do about this
practice?
General Johnson. On 14 Dec 06 the PCO issued KBR a letter
requesting their corporate policy and implementation plan for marking
data with proprietary legends. This letter referenced the SIGIR interim
audit 06-035, as well as the modification which added new language
addressing proprietary markings to the basic contract. KBR responded on
7 Jun 07 with a copy of their latest procedural documents and those are
undergoing careful review. Any inconsistencies with the contract or DOD
policy will be addressed by the PCO. There have been no instances of
improper markings brought to the attention of the PCO since the SIGIR
audit report.
50. Senator McCain. Secretary Bolton, is this practice of
contractors improperly labeling information proprietary a larger
problem within the defense industry?
Mr. Bolton. No. This problem has been isolated.
51. Senator McCain. Secretary Bolton, what is the DOD doing broadly
to check such an unacceptable practice?
Mr. Bolton. This problem has been isolated and has been addressed
with the contractor on a case-by-case basis.
52. Senator McCain. Secretary Bolton and General Johnson, according
to a February 16, 2007, News Release from U.S. Army Sustainment
Command, the U.S. Army awarded a $225 million planning and support
contract for the LOGCAP IV contract. The Release further states that
the Army will award the contracts for the actual performance of the
combat support/combat service support services later this year.
Under this planning and support contract, the contractor will,
among things, develop scopes of work, prepare independent cost
estimates, analyze the performance contractors' costs, and measure the
other contractors' performance.
It appears the contractor will be performing acquisition functions
closely associated with inherently Government functions. I am concerned
that this arrangement is or will become in the field of services
acquisitions the equivalent of the lead systems integrator in major
defense acquisition programs. Why did the Army decide to task a
contractor with these activities?
Mr. Bolton and General Johnson. It is not the intent of the program
to have the support contractor function as a lead integrator. All
discretionary decisions on program management remain the responsibility
of Government officials. The support contractor will only assist
Government staff in generating the documents you mentioned. The
Government will review all documents to ensure they reflect the
Government's need and determine if and how the documents will be used,
not the contractor. The support contractor is working to assist and
augment the Government staff. In that regard they are like support
contractors on other large programs who assist the program office in
various locations, but do not direct actions. It was decided that the
program and the supported units would be better served by a single
support contractor who understood all aspects of the program. The use
of contractor support to a core Government staff will make it easier to
flex the workforce as LOGCAP requirements fluctuate.
The functions that the contractor will be performing have been
determined to be non-governmental IAW FAR Sub-Part 7.5.
The contract Scope of Work (paragraph 1.3) states ``It is not the
intent of this contract to have the contractor perform inherently
governmental functions, or to have the contractor make discretionary
decisions for the Government relating to the program or contracted
support. The contractor will primarily provide advice, analysis, and
draft document submissions for Government approval.''
The contractor has also been directed that when attending meetings,
answering Government telephones, and working in other situations where
their contractor status is not obvious to third parties they will
identify themselves as contractors to avoid creating an impression that
contract personnel are Government employees, or official
representatives of a Governmental organization.
53. Senator McCain. Secretary Bolton and General Johnson, did the
Army make a written determination that appropriate military and
civilian DOD personnel cannot reasonably be made available to perform
the functions? Please provide the relevant written determination(s).
Mr. Bolton and General Johnson. A specific written determination
was not made, but the LOGCAP IV acquisition strategy clearly
articulated the need to hire contractor support to assist and augment
the LOGCAP Government staff. The Army does not have sufficient
personnel available to perform the functions the LOGCAP support
contractor will perform. For those inherently governmental positions,
such as the LOGCAP Deputy Program Directors for Afghanistan, Iraq, and
Kuwait, the Army has hired additional Government personnel. There is a
requirement on services contracts to make a determination that the
services being procured are nonpersonal. That determination, dated July
6, 2006 and signed by the Contracting Officer, is attached. The use of
contractor personnel in lieu of military and civilian DOD personnel for
non-inherently governmental functions allows us to meet mission
requirements.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
54. Senator McCain. Secretary Bolton and General Johnson, how has
the Army dealt with potential conflicts of interests? For example, if
the planning and support contractor has a pre-existing business
relationship with a performance contractor, how will that be dealt
with?
Mr. Bolton and General Johnson. The ASC legal office anticipated
these concerns and carefully drafted extensive conflict of interest
provisions for the support contract. This clause prohibits any
financial interest in the performance contractors which might cause or
give the appearance of a conflict of interest. The entire clause is
included in answer #55, but paragraph C of that clause is included here
as it specifically addresses this question. The support contractor is
required to flow this clause down to their subcontractors.
Clause H-4, Business Integrity and Organizational Conflict of
Interest: Paragraph C. The planning/support contractor (including its
key personnel) cannot have any actual or pending financial interest in
the LOGCAP IV performance contractors for the period of this contract
which might cause, or give the appearance of, a conflict with the
performance of the requirements under this contract. Clear mitigation
of any potential conflict must be presented to the satisfaction of the
contracting officer. The planning/support contractor is specifically
prohibited from performing under any of the LOGCAP IV contracts
(resulting from solicitation W52P1J-06-R-0049) as a LOGCAP IV prime
contractor, subsidiary, subcontractor-at any tier, vendor, supplier,
joint venture and/or any in any other business capacity that might
result in an OCI.
55. Senator McCain. Secretary Bolton and General Johnson, is there
an organizational conflict of interests clause, included directly or by
reference, in the planning and support contract? If so, please provide
a copy of the provision.
Mr. Bolton and General Johnson. Yes, there is a clause addressing
this in the LOGCAP IV Support Contract W52P1J-07-D-0010.
H-4 Business Integrity and Organizational Conflict of Interest
A. It is anticipated that the planning services provided under this
solicitation will require access to, and knowledge of, the proprietary
information of the LOGCAP IV performance contractors, non-public
Government information, pre-solicitation information, and information
which would impair the planning/support contractors objectivity. It is
further anticipated that the planning/support contractor will work
closely with each of the LOGCAP IV performance contractors after
contract award to implement the Government LOGCAP mission. While the
planning/support contractor will not engage in any activity that is
deemed inherently governmental, it is expected by the parties that the
contractor will be acting in support of, and in a fiduciary
relationship with, the Army.
B. To maintain the integrity of the expenditure of public funds, it
is imperative that the contractor maintain the highest degree of
integrity and honesty, and have standards of conduct and internal
control systems provide for:
(1) A written code of business ethics and conduct and an
ethics training program for all employees;
(2) Periodic reviews of company business practices,
procedures, policies, and internal controls for compliance with
standards of conduct and the special requirements of Government
contracting;
(3) A mechanism, such as a hotline, by which employees may
report suspected instances of improper conduct, and
instructions that encourage employees to make such reports;
(4) Internal and/or external audits, as appropriate;
(5) Disciplinary action for improper conduct;
(6) Timely reporting to appropriate Government officials of
any suspected or possible violation of law in connection with
Government contracts or any other irregularities in connection
with such contracts; and
(7) Full cooperation with any Government agencies responsible
for either investigation or corrective actions.
C. The planning/support contractor (including its key personnel)
cannot have any actual or pending financial interest in the LOGCAP IV
performance contractors for the period of this contract which might
cause, or give the appearance of, a conflict with the performance of
the requirements under this contract. Clear mitigation of any potential
conflict must be presented to the satisfaction of the contracting
officer. The planning/support contractor is specifically prohibited
from performing under any of the LOGCAP IV contracts (resulting from
solicitation W52P1J-06-R-0049) as a LOGCAP IV prime contractor,
subsidiary, subcontractor--at any tier, vendor, supplier, joint
venture, and/or any in any other business capacity that might result in
an OCI.
D. The contractor shall enter into an agreement with the LOGCAP IV
performance contractors to ensure proper access to, and protection of,
the LOGCAP IV performance contractors proprietary data (see FAR 9.505-
4(b)) and to establish working relationships, cooperation, and joint
participation in meeting LOGCAP planning and CS/CSS support needs. The
agreements shall address, at a minimum, the following:
(1) Identify the parties and their relationship;
(2) Identify the program involved and the relevant Government
contracts of the parties;
(3) Describe contractor interfaces by general subject matter;
(4) Specify categories of information to be exchanged or
support to be provided;
(5) Give expiration date (or event) of the agreement;
(6) State that if there is a conflict between the relevant
Government contract(s) and the agreement, the contract(s)
govern(s); and
(7) Have an agreement to protect proprietary data, including
restrictions on employees.
A copy of this agreement shall be made available to the contracting
officer. This agreement should be concluded as quickly as possible
after the contract awards. Failure to have this agreement in place may
limit the work that may be awarded under this contract until such
agreement is signed.
E. Release of non-public information obtained under this contract,
or use of such non-public information for purposes unrelated to the
performance of this contract, is prohibited. Contractor shall ensure
the return of all non-public information obtained under this contract
prior to contract closeout.
F. The contractor shall maintain adequate and reasonable ethics
policies and training procedures consistent with paragraph B above and
DFARs Part 203.70 to prevent its employees from releasing non-public
information or gaining any financial or employment interest that may
create a conflict with their duties under this contract.
G. All contract personnel attending meetings, answering Government
telephones, and working in other situations where their contractor
status is not obvious to third parties are required to identify
themselves as such to avoid creating the potential for confusion. The
contractor shall ensure that all employees wear badges (whether issued
by the Government or a separate badge provided by the company) that
clearly put others on notice that they are contractor employees. This
shall be evident from a minimum distance of 10 feet (whether by color,
large letters, or other means). The contractor must also ensure that
all documents or reports produced by contractors are suitably marked as
contractor products or that contractor participation is appropriately
disclosed.
H. The intent of this provision is to prevent the improper release
or disclosure of information, or any actual or perceived personal or
organizational conflict of interest that might arise in the performance
of this contract. In addition to other requirements, contractor shall
bring any potential conflicting relationships or financial interests,
held by the support contractor, its key employees, or subcontractors to
the attention of the contracting officer throughout the life of this
contract. If the contracting officer determines that an unacceptable
conflict exists, the contractor will take the actions necessary to
mitigate or eliminate the conflict.
I. This prohibition will remain in effect throughout the life of
the planning contract through final payment. Further, the contractor
shall include this prohibition in all negotiated subcontracts (to
exclude routine supply and service subcontracts) that it enters into.
56. Senator McCain. Secretary Bolton and General Johnson, was this
contract subject to full and open competition? If so, how many
companies competed for the contract?
Mr. Bolton and General Johnson. Yes, the LOGCAP IV support contract
was the result of full and open competition. Two companies provided
proposals.
57. Senator McCain. Secretary Bolton and General Johnson, what is
the contract type and formula for compensation?
Mr. Bolton and General Johnson. The LOGCAP IV support contract will
have task orders that can use the contract type that best fits the
requirement. The contract types used on the support contract are firm
fixed price, cost plus fixed fee, cost plus award fee, and cost only.
The formula for compensation is to pay the negotiated firm fixed
price or, for cost-reimbursable contracts, pay reasonable, allocable,
and allowable costs and fees. Fees paid are based on a percentage of
the negotiated estimated costs on cost reimbursable task orders as
follows:
Cost plus fixed fee order: fee will not exceed 8 percent of
the negotiated estimated cost.
Cost plus award fee order: total base and award fee combined
will not exceed 8 percent of the negotiated estimated cost. The
base fee will not exceed 2 percent.
These fees were proposed by the support contractor and accepted
during the full and open competition for the LOGCAP IV support
contract.
These fee percents are contractor proprietary information and
protected from release under FOIA and the Trade Secrets Act.
58. Senator McCain. Secretary Bolton and General Johnson, why does
the Army intend to limit the number of performance contractors under
LOGCAP IV to three? Why not more?
Mr. Bolton and General Johnson. The Army looked at the optimum
number of contractors to provide LOGCAP performance support. The intent
was to ensure good competition, but recognize that obtaining and
evaluating multiple proposals extends the time to award urgent task
orders. At the same time, the Army needs to maintain the programmatic
portion of the LOGCAP. One of the features that makes LOGCAP more than
just a contract is the planning and readiness posture that must be
maintained by the LOGCAP office and performance contractors. This
becomes more difficult and cost prohibitive as the number of
performance contractors increases.
To ensure competition, the LOGCAP IV performance contract requires
each contractor to propose on every task order. The Army decided that
receiving proposals from three very qualified LOGCAP contractors
provides sufficient competition in this urgent award environment. More
than three contractors would provide more competition, but the benefits
would be marginal, if at all, and the drawbacks from delays in awarding
task orders to provide support could be significant. Additionally, the
Government must fund a minimum requirement for each IDIQ contract
awarded. While this might not be a waste of resources during periods of
high military activity, it would be an unnecessary cost during times of
limited activity. Additional contractors also complicate issues
associated with contractors on the battlefield, and increases
administrative burden upon the Government to manage them.
59. Senator McCain. Secretary Bolton and General Johnson, has the
Army made any determination of the number of contractors available to
perform the work?
Mr. Bolton and General Johnson. The Army held industry days to
discuss LOGCAP IV performance contract requirements and potential
acquisition strategy approaches. Representatives from 80 companies
attended, made up of both large and small businesses. Some were
planning to be a prime contractor while others were looking for
specific subcontract opportunities with prime contractors. Due to the
potential size of each LOGCAP IV performance contract (up to $5 billion
per year), the Army anticipated some contractors would team up or have
large subcontractor teams. The industry days showed at least four to
six large contractors with the technical and financial capability of
performing the work. For that reason, we expected good competition for
LOGCAP IV.
60. Senator McCain. Secretary Bolton and General Johnson, what will
be the contract type and the compensation regimes under these
contracts?
Mr. Bolton and General Johnson. Like the support contract, the
LOGCAP IV performance contracts will include task orders that can use
the contract type that best fits the requirement. The contract types
available on the performance contract are firm fixed price, cost plus
fixed fee, cost plus award fee, and cost only.
The formula for compensation is to pay the negotiated firm fixed
price or, for cost-reimbursable contracts, pay reasonable, allocable,
and allowable costs and fees. Fees paid are based on a percentage of
the negotiated estimated costs on cost reimbursable task orders as
follows:
Cost plus fixed fee order: fee will not exceed 10 percent of
the negotiated estimated cost.
Cost plus award fee order: total base and award fee combined
will not exceed 10 percent of the negotiated estimated cost.
The base fee will not exceed 3 percent.
These are the maximum fee percentages allowed by the Request for
Proposal.
The actual fee percentages will be determined at the time of the
award of each task order subject to the limitations described above.
61. Senator McCain. Secretary Bolton, for over a year now, the Army
and the Office of the Secretary of Defense Comptroller have been
conducting investigations of potential ADA violations concerning the
use of operations and maintenance funds for military construction and
procurement activities through the LOGCAP in Iraq. These investigations
result, in part, from a March 7, 2006, memorandum from the DOD Office
of General Counsel to the Office of the Legal Counsel to the Chairman,
Joint Chiefs of Staff. This committee was briefed last October that up
to $600 million in operations and maintenance funds may have been
carried out through LOGCAP for unauthorized and illegal investment
items and leases. Please provide an update on the status of each
investigation, to include completion date, the results of the
investigation, and any personnel actions taken as a result of the
investigation.
Mr. Bolton. Three of the five cases initiated thus far have been
closed as ``No ADA'' and the Army expects to complete the two remaining
ADA investigations by 30 December 2007. In the three cases that have
been closed, the funding was either determined appropriate (e.g.,
within the $1.5 million limitation for life, health, and safety) or the
proper funding was obtained.
62. Senator McCain. Secretary Bolton, in the Army's internal review
and investigation, at what organization or level of contracting review
did the failure to conform to Federal Acquisition Regulations occur?
Mr. Bolton. We have found no failure to conform to Federal
Acquisition Regulations. Three of the five cases have been closed as
``No ADA'' and the Army expects to complete the two remaining ADA
investigations by 30 December 2007. In the three cases that have been
closed, the funding was either determined appropriate (e.g., within the
$1.5 million limitation for life, health, and safety) or the proper
funding was obtained.
63. Senator McCain. Secretary Bolton, how has the Army changed its
policies and review processes for LOGCAP task orders to ensure the
proper authority is available for the use of various fund sources?
Mr. Bolton.
Acquisition Review Boards (JARB, CARB, SUPERCARB)
In Kuwait, Iraq and Afghanistan, the leadership maintains a strict
approval process for all requirements, to include those executed under
the LOGCAP contract. Every new requirement that exceeds $50,000 must be
validated by an Acquisition Review Board (JARB and CARB) and approved
by a general officer. This approval process also includes internal
purchases or actions executed by KBR. Requirements that exceed $10
million must go through further scrutiny (SUPERCARB) and be approved by
a centralized review board in Kuwait. No requirement is funded unless
commands gain the recommendation of these boards and final approval at
the general officer level. While not a funding process, these review
boards review the proposed funds to ensure they are appropriate for the
type of work to be awarded.
Joint Acquisition Review Board
The JARB is a requirements validation process held in Iraq that
reviews CS/CSS requirements for supported units. The board ensures the
requirements are consistent with and necessary to support operations.
Coalition Acquisition Review Board
The CARB is fundamentally the same as the JARB but reviews
requirements associated with acquisitions for Kuwait/Afghanistan.
Super-Coalition Acquisition Review Board
If a cost estimate associated with a requirement is over $10
million for Iraq, Kuwait, or Afghanistan, the packet must go to CFLCC
for the ``SUPERCARB'' review and approval, basically a JARB process at
a higher level of command.
Joint Facilities Utilization Board
To control and manage construction, all commands have established a
JFUB. These boards evaluate and reconcile requirements for real estate,
use of existing facilities, and ensure all potential construction is in
line with established master plans. Funding type and thresholds are
also reviewed to ensure that no fiscal violations occur.
Material Requisition Review Process
Subsequent to the review of the Acquisition Review Board Approval,
every requisition for supplies or services submitted by KBR over
$25,000 is personally reviewed and approved by the Government
Administrative Contracting Officer. In Iraq, those requisitions that
exceed $250,000 are reviewed and approved by the Command Comptroller
before KBR is authorized to execute the procurement. Funding type and
thresholds are reviewed to ensure that no fiscal violations occur.
64. Senator McCain. Mr. Fitzgerald, were you asked to take part in
these investigations? If so, can you briefly describe your role and any
findings or observations you may have about the investigations?
Mr. Fitzgerald. I wasn't asked to take part, and USAAA didn't
participate in the referenced investigations.
65. Senator McCain. Mr. Reed, a number of your reports have
criticized KBR, Inc.'s cost estimating, accounting, and other systems.
With respect to 2005 and 2006, has KBR, Inc. sufficiently improved its
systems so that the inadequacies do not materially impact its cost
control efforts? If not, what problems still remain and if problems
remain, what is KBR, Inc. doing to remedy the remaining problems?
Mr. Reed. Yes, our reviews have disclosed a number of estimating
and accounting system deficiencies. While important, these deficiencies
impact only a part of KBR's overall business systems. KBR has developed
corrective action plans to address the system deficiencies. DCAA, in
coordination with the responsible contracting officer, is monitoring
the progress of the contractor's corrective action plan, and the
systems continue to be improved.
In the meantime, DCAA has established additional audit procedures
to protect the Government's interest until these corrective actions are
institutionalized. For example, DCAA performs transaction testing on
current billings (public vouchers) to ensure the costs are accounted
for properly (i.e.; the costs are allowable, allocable, and reasonable)
and comply with KBR's policies and procedures.
66. Senator McCain. General Johnson, what efforts have the Army and
the contractor made to move from cost plus subcontracts to fixed-price
subcontracts?
General Johnson. KBR has been actively pursuing the use of fixed-
price subcontracts. The Government encourages this where it makes sense
and requirements can be defined and priced. Many of KBR's subcontracts
are fixed price with variable quantities. The fixed price is on a unit
basis so as more, or less, of something is needed, the total price will
change, but the unit price will not change. The DFAC pricing is an
example of that.
The fixed-price method saves on administrative cost oversight since
costs have been negotiated up front. We do not encourage fixed price
where costs cannot reasonably be forecast. The result in those cases is
usually higher prices for higher risk, or aggressive pricing that could
raise the contractor's risk to deliver services or products if eventual
costs are significantly underestimated. Additionally, competitively
awarded fixed-priced subcontracts limit the Government's visibility
over subcontractor cost data. As such, it becomes more difficult to
understand the exact make up of certain subcontracted prices when they
are fixed-priced competitively awarded subcontracts.
The downside is that there are many modifications to the KBR fixed-
price subcontracts as the scope of work on the prime contract changes
and exceeds the agreed upon quantity or service parameters on the
subcontract. This fixed price with variable quantity works better at
the subcontract level, with very specific, narrow requirements on a
subcontract, where most elements of cost can be priced and only one
variable applies, such as quantity. It does not work well in broadly
defined requirements, where many of the individual elements making up
the overall cost cannot be estimated.
67. Senator McCain. General Johnson, when was the move initiated?
General Johnson. In discussion with DCMA, KBR has been using fixed-
price variable quantity subcontracts early and often on the contract.
These use fixed unit costs, with the actual costs varying based on the
quantity of services provided.
68. Senator McCain. General Johnson, what percentage of KBR, Inc.'s
subcontractors are now on fixed-price contracts?
General Johnson. As of December 30, 2006, KBR had 472 active
subcontracts. Of those, 467 or 98.94 percent, were fixed-price
subcontracts. As noted in the response in question #66, many of these
are fixed-price variable cost subcontracts. The fixed price is on a
unit basis so as units are ordered, the total price will change, but
the unit price will not change. This fixed price with variable quantity
works better at the subcontract level, with very specific, narrow
requirements on a subcontract, where most elements of cost can be
priced and only one variable, such as quantity, applies.
69. Senator McCain. General Johnson, how much in cost savings have
been realized so far by moving to fixed-price contracts?
General Johnson. At this time we have not calculated cost savings
by moving to fixed-price contracts. Developing these cost savings will
require extensive research of all of KBR's fixed-price subcontracts.
However, even when those are identified, we believe many factors
contribute to reduced costs, not just converting to a fixed-price
instrument. The reasons for using a cost reimbursable vehicle is that
requirements cannot be stabilized, which is usually the case in early
contingency operations. There are initial inefficiencies and urgent
actions to establish supply chains into a theater that will drive up
costs. Once requirements become more stable, costs can be better
estimated and a fixed-price instrument becomes more viable. There
should be a difference in costs because the conditions have changed
from those uncertainties requiring a cost reimbursable instrument.
[Whereupon, at 1:06 p.m., the committee adjourned.]