[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
  CONTRACTING TO FEED U.S. TROOPS IN AFGHANISTAN: HOW DID THE DEFENSE 
      DEPARTMENT END UP IN A MULTI-BILLION DOLLAR BILLING DISPUTE? 

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 17, 2013

                               __________

                           Serial No. 113-38

                               __________

Printed for the use of the Committee on Oversight and Government Reform

         Available via the World Wide Web: http://www.fdsys.gov
                      http://www.house.gov/reform

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

81-829 PDF                       WASHINGTON : 2013 


              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland, 
MICHAEL R. TURNER, Ohio                  Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee       CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania         JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee          MATTHEW A. CARTWRIGHT, 
TREY GOWDY, South Carolina               Pennsylvania
BLAKE FARENTHOLD, Texas              MARK POCAN, Wisconsin
DOC HASTINGS, Washington             TAMMY DUCKWORTH, Illinois
CYNTHIA M. LUMMIS, Wyoming           ROBIN L. KELLY, Illinois
ROB WOODALL, Georgia                 DANNY K. DAVIS, Illinois
THOMAS MASSIE, Kentucky              TONY CARDENAS, California
DOUG COLLINS, Georgia                STEVEN A. HORSFORD, Nevada
MARK MEADOWS, North Carolina         MICHELLE LUJAN GRISHAM, New Mexico
KERRY L. BENTIVOLIO, Michigan
RON DeSANTIS, Florida

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                    Stephen Castor, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

    Subcommittee on National Seurity, Homeland Defense and Foreign 
                              Operations,

                     JASON CHAFFETZ, Utah, Chairman
JOHN L. MICA, Florida                JOHN F. TIERNEY, Massachusetts 
JOHN J. DUNCAN, JR., Tennessee           Ranking Minority Member
JUSTIN AMASH, Michigan               CAROLYN B. MALONEY, New York
PAUL A. GOSAR, Arizona               STEPHEN F. LYNCH, Massachusetts
TREY GOWDY, South Carolina           JACKIE SPEIER, California
CYNTHIA M. LUMMIS, Wyoming           PETER WELCH, Vermont
ROB WOODALL, Georgia                 MICHELLE LUJAN GRISHAM, New Mexico
KERRY L. BENTIVOLIO, Michigan



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 17, 2013...................................     1

                               WITNESSES

Mr. Michael Schuster, Managing Director, Logistics Division, 
  Supreme Group B.V.
    Oral Statement...............................................     7
    Written Statement............................................     9
Mr. Daniel Blair, Deputy Inspector General for Auditing, U.S. 
  Department of Defense
    Oral Statement...............................................    31
    Written Statement............................................    32
Mr. Matthew Beebe, Deputy Senior Acquisition Executive, Defense 
  Logistics Agency
    Oral Statement...............................................    45
    Written Statement............................................    47
Mr. William Kenny, Acquisition Executive, Troop Support, Defense 
  Logistics Agency
    Oral Statement...............................................    56
Mr. Gary Shifton, Chief, Oconus Division, Defense Logistics 
  Agency
    Oral Statement...............................................    57

                                APPENDIX

The Hon. Jason Chaffetz, a Member of Congress from the State of 
  Utah, Opening Statement........................................    70
Independent Audit on Parts of Price Adjustment Proposal submitted 
  by Supreme Food Service GMBH Related to Premium Outbound 
  Transportation Effort to Forward Operating Bases in Afghanistan    72
Response to Questions sent from Chairman Jason Chaffetz and 
  Ranking Member Tierney to Kirkland & Ellis LLP.................    77


  CONTRACTING TO FEED U.S. TROOPS IN AFGHANISTAN: HOW DID THE DEFENSE 
      DEPARTMENT END UP IN A MULTI-BILLION DOLLAR BILLING DISPUTE?

                              ----------                              


                       Wednesday, April 17, 2013,

                  House of Representatives,
                 Subcommittee on National Security,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:23 p.m. in 
room 2154, Rayburn House Office Building, the Honorable Jason 
Chaffetz [chairman of the subcommittee], presiding.
    Present: Representatives Chaffetz, Mica, Duncan, Amash, 
Issa, Tierney, Speier, Duckworth, and Welch.
    Staff Present: Alexia Ardolina, Majority Assistant Clerk; 
Molly Boyl, Majority Parliamentarian; Lawrence J. Brady, 
Majority Staff Director; Linda Good, Majority Chief Clerk; 
Mitchell S. Kominsky, Majority Counsel; Jim Lewis, Majority 
Senior Policy Advisor; Mark D. Marin, Majority Director of 
Oversight; Laura L. Rush, Majority Deputy Chief Clerk; Scott 
Schmidt, Majority Deputy Director of Digital Strategy; Rebecca 
Watkins, Majority Deputy Director of Communications; Sang H. 
Yi, Majority Professional Staff Member; Jaron Bourke, Minority 
Director of Administration; Beverly Fraser Britton, Minority 
Counsel; Devon Hill, Minority Staff Assistant; Peter Kenny, 
Minority Counsel; Rory Sheehan, Minority New Media Press 
Secretary; and Carlos Uriarte, Minority Counsel.
    Mr. Chaffetz. The committee will come to order.
    I would like to begin this hearing by stating the Oversight 
Committee Mission Statement.
    We exist to secure two fundamental principles. First, 
Americans have the right to know that the money Washington 
takes from them is well spent. Second, Americans deserve an 
efficient, effective government that works for them.
    Our duty on the Oversight and Government Reform Committee 
is to protect these rights. Our solemn responsibility is to 
hold government accountable to taxpayers because taxpayers have 
a right to know what they are getting from the government.
    We will work tirelessly in partnership with citizen 
watchdogs to deliver the facts to the American people and bring 
genuine reform to the Federal bureaucracy. This is the mission 
of the Oversight and Government Reform Committee.
    Welcome to today's hearing which is entitled Contracting to 
Feed U.S. Troops in Afghanistan: How Did the Defense Department 
end up in a Multi-Billion Dollar Billing Dispute?
    I would like to welcome Ranking Member Cummings; Chairman 
Issa, who I know will be joining us; certainly Ranking Member 
Tierney, members of the subcommittee and the people joining us 
here in the audience.
    Today's hearing continues the subcommittee's effort to 
oversee the billions spent in support of military and civilian 
operations in Afghanistan. In 2011, the subcommittee conducted 
a bipartisan investigation led by Congressman Tierney, and now 
Senator Flake, of the Defense Department's Host Nation Trucking 
contract.
    The purpose of the contract was to supply our military 
through the use of private contractors. However, almost since 
its inception, allegations surfaced that the warlords of the 
Taliban would seek protection payments for safe passage through 
tribal areas. According to those familiar with the contract, 
the result was a potential windfall for our enemy.
    The problems with the host nation trucking contract 
highlighted the importance of adequate contracting oversight. 
Proper contract administration is one of the main defenses 
against the waste, fraud and abuse that can potentially happen 
overseas, particularly as we deal with billions of dollars.
    In the case of the Defense Logistics Agency, DLA, prime 
vendor contract with Supreme Foodservice, billions of dollars 
are at stake, as well as the very important mission of feeding 
our troops in Afghanistan. Currently, the DLA believes it has 
overpaid Supreme by roughly $757 million. Meanwhile, Supreme 
has submitted a claim against DLA for over $1.8 billion.
    From the outset, the contract was modified through verbal 
change orders significantly altering performance requirements. 
The most troubling findings of the Defense Inspector General 
report included the excessive delays in definitizing these 
change orders. The IG noted that the government's contracting 
officer did not definitize or issue contract modifications in a 
timely manner, as required by federal acquisition regulations.
    The IG also concluded that the government overpaid Supreme 
by almost $100 million in transportation costs and over $26 
million for packaging materials for chilled or frozen food 
products.
    These uncertainties in the contract were compounded by the 
incomplete pricing audits conducted by the Defense Contract 
Audit Agency. The DCAA conducted two separate audits of pricing 
considerations negotiated between DLA and Supreme. According to 
the DCAA's 2011 audit, Supreme failed to provide adequate 
support documentation to demonstrate the reasonableness of 
proposed costs.
    The concerns with this prime vendor contract are ongoing 
and have been for some time. Despite all these concerns, the 
government continued to contract with Supreme and even 
exercised options to extend the contract. We have well 
established contracting procedures. If we are not going to use 
them, why have them?
    This is a congressional hearing. It is not a court of law 
but we do seek to get to the bottom of these issues and to 
understand how the Federal Government continued to have such 
massive challenges in its contracting. It is a vital and 
necessary part of what we are doing overseas, but it certainly 
demands more attention.
    Mr. Chaffetz. I would now like to recognize the 
distinguished Ranking Member, the gentleman from Massachusetts, 
Mr. Tierney, who has worked tirelessly on this issue and is 
passionate about it, for his opening statement.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Schuster, thank you for joining us here today.
    This hearing as the Chairman said focuses on one of the 
largest military contracts in Afghanistan and how it is that 
the Defense Department and the contractor, Supreme Foodservice, 
wound up in a multibillion dispute. We will hear about how the 
Defense Logistics Agency continued to pay Supreme billions of 
dollars in spite of very strong concerns at the Agency that 
taxpayers were being overbilled.
    It took DLA six years to demand that Supreme reimburse the 
government for more than $750 million in what it believed were 
overpayments. That is an astounding amount of money. I want to 
put that in perspective. Overpayments alleged to Supreme are 
sufficient to pay for nearly 100,000 children to have access to 
a Head Start program.
    This should dispel the notion that the Department of 
Defense budget is not riddled with ineffectiveness, waste, 
fraud and abuse. It is a budget which we all ought to take into 
consideration when we are dealing with our own national budget 
issues.
    The hearing today follows a series of committee inquiries, 
identified in part by the Chairman, into some of the largest 
contingency contracts. In 2008, then Chairman Henry Waxman and 
the full committee examined allegations of corruption in the 
DLA fuel contracts in Iraq. In 2010, I led a six month 
investigation with then Ranking Member, Jeff Flake, of the Host 
Nation Trucking Contract in Afghanistan
    In that investigation, we released a report entitled, 
Warlord Inc., that found a vast protection racket in which 
warlords, criminals and insurgents extorted contractors for 
safe passage.
    Also, in 2010 I led a bipartisan investigation of DLA fuel 
contracts in Kurdistan, a major transit hub for Afghanistan. We 
issued a report entitled, Mystery at Madis, which outlined 
serious concerns with potential corruption and lack of 
oversight. Again, billions of dollars were involved in that 
case.
    That brings us to today's hearing on the food contract in 
Afghanistan. The subcommittee began looking into the 
Subsistence Prime Vendor Contract in Afghanistan shortly after 
the Defense Department Inspector General issued a report in 
2011 that found serious problems with the contract. At our 
subcommittee hearing in December 2011, then Defense Department 
Inspector General Gordon Heddel described this contract as ``an 
example of just how bad it can get.''
    We also have a Commission on Wartime Contracting in Iraq 
and Afghanistan that then Congressman Jim Leach and I put into 
legislation. It studied the problems of the war zone spending 
and basically tried to look out for this food service contract 
in particular, singled it out as a prominent example of 
government mismanagement. Charles Tiefer, who is a member of 
that Commission, said ``Supreme has had years and years of non-
competed monopoly status that the Defense Logistics Agency kept 
saying it would avoid.''
    As discussed further on in these remarks, and during the 
hearing, I hope, the Defense Logistics Agency even gave Supreme 
a bridge contract that Mr. Tiefer said was ``like an employer 
keeping some wasteful employee on the payroll longer than 
necessary in order to garnish wages.''
    Since formally launching our investigation, the 
subcommittee has reviewed thousands of documents, held numerous 
briefings with representatives from Supreme and senior 
officials from the Defense Logistics Agency trying to 
understand what went wrong and why. This has been a bipartisan 
effort from the very beginning and I truly appreciate the 
support of Chairman Chaffetz and his staff for the 
investigation.
    Between December 2005 and September 2011, the Defense 
Logistics Agency paid Supreme Food Service $5.5 billion to 
deliver food to our troops in Afghanistan. Remarkably during 
the entire time, the Defense Logistics Agency and Supreme never 
agreed on a final pricing for over $1.4 billion paid to deliver 
food to hundreds of forward operating bases throughout the 
country.
    While Supreme was originally contracted to deliver food to 
just four locations in Afghanistan, that number ballooned to 68 
locations even before Supreme started to perform on the 
contract. The number of locations eventually reached a high of 
265 by early 2012. This change was more than a simple increase 
in the number of delivery destinations and amounted to a 
massive change in requirements because it dramatically 
increased the difficulty of reaching deliver sites and required 
the use of more expensive transportation such as helicopters 
and fixed wing aircraft.
    Unfortunately, this is only where the problems began. In 
six months, Supreme presented a bill for $33.5 million. The 
bill was so large that at the time the Defense Logistics Agency 
was not even sure they had the funds to pay the contractor 
before the end of that fiscal year. When DLA finally issued a 
formal modification, nearly a year after the verbal change 
order, it realized Supreme's rates were unreasonable and agreed 
to only pay them 75 percent of that bill.
    Over the next five years, DLA would unsuccessfully try to 
negotiate a fair and reasonable rate with Supreme and every 
time, the parties were miles apart. DLA finally exercised its 
discretion to set the rates for itself by unilaterally 
definitizing the contract. But by then, the overpayments had 
accumulated to a massive size. Supreme owed the government $757 
million in overpayments.
    Despite all of these problems, the agency failed to rebid 
the contract after the contract expired and decided to grant 
Supreme a no-bid extension of the contract that ended up 
lasting two more years. I will be very interested to hear from 
DLA why they decided to grant Supreme an extension valued at $4 
billion instead of competitively rebidding the contract.
    I will also be interested to hear the role that retired 
Army Lieutenant General Robert Dail, the former Director of the 
DLA, played, and is now, of course, President of the United 
States-based Supreme Company, and the work of then Major 
General Dan Mongeon, also retired Army, does with Agility, who 
was a partner in part of this venture with Supreme.
    There seems to be a lot more to this story. For six years, 
Supreme refused to provide sufficient documentation requested 
by Defense Department auditors and DLA contracting officers to 
justify their charges. The audits show that Supreme was 
essentially double billing the government for delivering food 
to the forward operating bases by charging both the original 
fixed distribution fee and the additional premium outbound 
transportation fee which appeared to already include the 
distribution fee.
    The Defense Logistics Agency also found that Supreme spent 
$58 million to build and operate a warehouse in southern 
Afghanistan to strategically position itself for a follow-on 
contract and then Supreme tried to past the cost of this 
investment on to the United States Government.
    There is more. There are separate allegations that Supreme 
used an affiliate in the United Arab Emirates to increase their 
profits on fresh fruits and vegetables as well as dairy 
products that were delivered to our bases in Afghanistan. If 
true, this would be similar to a very questionable relationship 
that was discovered in the Iraqi food service contract that 
eventually led to the indictment of PWC Agility, Mr. Mongeon's 
group and also a partner with Supreme in this venture.
    Clearly, the public deserves to know what went so horribly 
wrong, but I also want to hear how we can assure that this 
never happens again. While the war in Afghanistan may be 
winding down, the United States has been involved in over 15 
stabilization and reconstruction operations around the world 
since the end of World War II, the majority of which have been 
within the last 20 years.
    The Commission on Wartime contracts estimates that up to 
$60 billion in U.S. funds were lost due to waste, fraud and 
abuse in Iraq and Afghanistan. I look forward to hearing from 
the witnesses today about what we can do to stop this 
hemorrhaging of taxpayer dollars.
    Thank you, Mr. Chairman.
    Mr. Chaffetz. Thank you.
    We have two panels today so we will need to keep moving 
along but I would be happy to entertain any additional opening 
statements. I will first recognize the gentleman from Florida, 
Mr. Mica, for five minutes.
    Mr. Mica. Thank you and I will try to be brief.
    First, thanks for conducting this hearing and both of your 
ongoing efforts in this regard.
    Every week on this committee hearing testimony, 
particularly about Afghanistan, and the rest of the Federal 
Government, you are appalled at the waste, fraud and abuse. We 
heard the Special Inspector General for Afghanistan there is 
$20 billion worth of aid they cannot even funnel into a corrupt 
country.
    They also told us the problems are management of contracts 
and we see examples here and corruption which we also heard 
outlined here. This has to be one of the prime poster child for 
government contracts spun out of control.
    First of all, I understand it went to a privately held 
company based in Amsterdam. I had a similar deal with local 
competition in another area. Some of these foreign vendors know 
the game better and play it better. They get the contracts and 
then ratchet it up. This thing has gone from a little bit to a 
huge bit, hundreds and hundreds of millions of dollars are now 
in dispute, tens of millions of dollars which is unbelievable.
    First, I think we have to go back and look at what has 
happened here and not let it happen again and hold some folks 
accountable. Secondly, if we are looking for areas in which to 
cut waste, fraud and abuse and rip off of the taxpayer, this is 
the kind of contract that has to be stopped in its tracks.
    I will not undermine Obama and I was appalled at what 
happened during the Bush Administration in political 
undermining on our position in Iraq, but we need to get out of 
Afghanistan sooner rather than later and put this whole 
wasteful episode behind us.
    In a time of national deficits and United States economic 
and national security being threatened by our physical 
situation, this kind of stuff going on has to be brought to a 
halt.
    Thank you. I yield.
    Mr. Chaffetz. Thank you.
    Do any other members care to make an opening statement? The 
gentleman from Tennessee.
    Mr. Duncan. I will be brief.
    I will just say this. Under both Republican and Democratic 
administrations, I have been very outspoken about this 
revolving door at the Pentagon. It happens in just about all 
departments and agencies in the Federal Government, but I think 
it is the worst in the Defense Department.
    I read here that General Dail gave the new contractor of 
the year award to Supreme in 2007, retired from the Army in 
2008 and four months later, he was hired as president of 
Supreme Group's new entity. This is shameful, this is 
scandalous. It is ridiculous that this kind of thing goes on so 
repeatedly in the Federal Government. Fiscal conservatives 
ought to be the most horrified about this.
    Then you talk about giving no bid, multibillion dollar 
contracts, waste of hundreds of millions, it is sickening. It 
also disturbs me that we give out these wonderful contracts--
all sweetheart, insider type deals given to foreign-owned 
companies. Supreme is a Swiss-owned company. Now they have 
given the new mega billion dollar, I think a $10 billion 
contract, to a company in Dubai. We ought to be looking for 
American companies, truly American companies, to do these 
contracts.
    Thank you, Mr. Chairman.
    Mr. Chaffetz. Thank you.
    If there are no other members seeking time for an opening 
statement, I will now recognize our first panel.
    Mr. Michael Schuster is the Managing Director of the 
Logistics Division for Supreme Food Service. We thank you for 
being here. I recognize there are others within the 
organization that could have been here but you are here with us 
today. For your presence, we are grateful and appreciate the 
time to go through this.
    Pursuant to committee rules, all witnesses will be sworn 
before they testify. Please rise and raise your right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth?
    [Witness responds in the affirmative.]
    Mr. Chaffetz. Let the record reflect that the witness 
answered in the affirmative. You may be seated.
    In order to allow time for discussion, please limit your 
time to five minutes but given that you are the only member on 
this panel, feel free to take a little extra time. We will do 
the same with members in this complicated topic.
    Please know your entire written statement will be made a 
part of the record. We will now recognize you for five minutes.

                       WITNESS STATEMENTS

  STATEMENT OF MICHAEL SCHUSTER, MANAGING DIRECTOR, LOGISTICS 
                  DIVISION, SUPREME GROUP B.V.

    Mr. Schuster. Good afternoon, Mr. Chairman Chaffetz, 
Ranking Member Tierney and distinguished members of the 
subcommittee.
    My name is Mick Schuster. I am the Managing Director of 
Supreme Foodservice.
    Supreme is a global supply chain company founded in 1957 
that operates in approximately 20 countries around the world. 
One of those countries is Afghanistan where we deliver food and 
supplies to U.S. and NATO troops.
    Our success in creating a supply chain that can reach the 
deepest parts of Afghanistan has been a force-multiplier for 
the U.S. Government and has been one of our proudest 
achievements. Despite operating in one of the most isolated and 
dangerous areas in the world, we have consistently outstanding 
performance exceeding contractual requirements.
    As you know, the Defense Logistics Agency executed a SPV 
contract with Supreme in June 2005 for the delivery of food, 
beverages and other goods to U.S. troops in Afghanistan. Under 
the terms of the original contract, Supreme was responsible for 
making deliveries to four and only four locations in 
Afghanistan: Kabul, Bagram, Kandahar and Forwarding Operating 
Base Salerno.
    Another contractor was supposed to convert Supreme's bulk 
deliveries into smaller ones appropriate for distribution to 
the numerous forwarding operating bases in Afghanistan.
    Only weeks after the contract was awarded, DLA commenced 
dramatically expanding Supreme's responsibilities. By August 
2005, DLA had directed Supreme to deliver to dozens of forward 
operating bases in remote regions in Afghanistan. The number of 
deliveries continued to increase and at the peak of the 
program, Supreme was delivering to over 250 different points at 
120 locations throughout Afghanistan.
    This required Supreme to change fundamentally the way it 
executes its responsibilities and to develop and operate a 
network of airplanes, helicopters and trucks able to reach the 
isolated regions of Afghanistan, a mountainous country the size 
of Texas but with little functioning infrastructure and extreme 
weather patterns.
    Although DLA's original solicitation said only remnants of 
the Taliban were still active, Supreme had to build this 
network in an active war zone. Notably, 312 of our 
subcontractors have lost their lives delivering food to U.S. 
and Coalition troops.
    There has never been any dispute that the changes DLA made 
to Supreme's contract entitled Supreme to additional 
compensation. To reiterate, the government hired Supreme to 
deliver to four central locations in Afghanistan, not hundreds 
of remote ones. Supreme and DLA consequently negotiated 
supplemental rates for those services called premium outbound 
transportation or POT.
    DLA insisted that Supreme offer a single set of fixed rates 
but would be guaranteed for the five year period of the 
contract, regardless of the delivery location in Afghanistan. 
This meant that Supreme bore all the risks of making these 
delivering including changes in the security environment, fuel 
prices, delivery locations, troop strength, and road and 
weather conditions.
    In August 2006, after nearly a year of uncompensated POT 
deliveries, Supreme and DLA agreed to pricing that would become 
final after verification. This was a commercial item contract. 
Verification should have involved comparison of market prices 
for related services and a determination that the offered price 
was fair and reasonable. DLA instructed DCAA to audit Supreme 
as if this was a cost-plus contract, which it is not.
    I would like to conclude by emphasizing two points. First, 
I want to emphasize Supreme's view, that the DCAA audits were 
fundamentally flawed. This was a commercial, fixed price 
contract, not a cost-plus contract.
    Second, I want to emphasize that this is a purely 
contractual dispute which we are working to resolve with DLA 
through the appropriate process. Furthermore, since February 
2013, DLA has withheld payment of $21.7 million per month from 
Supreme and to date, a payment of $303 million has been made 
against the $758 million under dispute.
    In the meantime, Supreme remains committed to supporting 
our client and servicing the war fighter in Afghanistan.
    Thank you, and I look forward to answering any questions 
you may have.
    [Prepared statement of Mr. Schuster follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Chaffetz. Thank you, Mr. Schuster.
    I will now recognize myself for five minutes.
    When you agreed to accept this extraordinary verbal 
contract modification, I assume it was verbal or was it 
written?
    Mr. Schuster. Mr. Chairman, it was a verbal notice from 
DLA.
    Mr. Chaffetz. Did it occur to you that there would be some 
sort of pricing dispute at this point?
    Mr. Schuster. It was our expectation that we would scope 
what was required and put requests for supplemental pricing 
into DLA.
    Mr. Chaffetz. Given that we are so many years after the 
fact, we are not even close, we are talking about hundreds of 
millions of dollars. What went wrong? What should have happened 
that did not happen?
    Mr. Schuster. We put in proposed pricing. We just could not 
agree on what was fair and reasonable in the pricing. I think 
there were mechanisms within the contract like ADR that we 
should have used early on to resolve the dispute.
    Mr. Chaffetz. Your testimony often refers to ``market 
prices'' for this contract. Can you explain how Supreme 
determined the market rate for premium outbound transportation 
in Afghanistan?
    Mr. Schuster. We looked at available benchmarks in the 
marketplace. By available benchmarks, we spoke to suppliers who 
were capable of providing those services. We also looked at 
comparable benchmarks; for example, U.S. Transcom rates, and 
used those to develop our pricing.
    Mr. Chaffetz. One of the accusations is that Supreme was 
reluctant to provide supporting documentation. Why not provide 
supporting documentation? What happened to that?
    Mr. Schuster. In relation to the pricing, we put together 
fully transparent pricing models.
    Mr. Chaffetz. My guess is they are going to disagree with 
you on that one.
    Mr. Schuster. We provided market benchmarks to substantiate 
our rates. That is what we believe we did.
    Mr. Chaffetz. In your written testimony, you state that 
``312 of your subcontractors have been killed while delivering 
food to U.S. and Coalition troops.'' Were they all directly 
related to performance of this contract?
    Mr. Schuster. Yes, Mr. Chairman, the 312 deceased all 
operated on this contract. They were either truck drivers or 
convoy security guards that protect the convoys making the 
delivery.
    Mr. Chaffetz. What was the nature and circumstances of such 
a high number of fatalities?
    Mr. Schuster. The size of the contract and the number of 
movements we make in terms of vehicles, helicopter or fixed 
wing is immense every day. It is largely insurgent attacks on 
truck movements.
    Mr. Chaffetz. What sort of safety protocols were in place? 
It seems like an exceptionally high number. Were you in a 
position where you had to offer security payments? Were you 
also having to, as other contractors had to, offer security 
payments or pay off the bad guys essentially?
    Mr. Schuster. Mr. Chairman, we definitely did not do that. 
In terms of our contract, CENTCOM private security was required 
so we had a fully compliant CENTCOM private security program.
    Mr. Chaffetz. I want to go over the last part of your 
statement. Supreme claimed that DLA owes the company $1.8 
billion; they think they overpaid by three quarter of a 
billion. That seems like an awfully big gap. How do you account 
for that difference?
    Mr. Schuster. I go back to what I said in my statement. We 
see this is as a commercial contract, commercial items 
contract. The assessments made by DCAA have been based on a 
cost-plus contract. That is at the heart of the difference. In 
a commercial items contract, we use comparable market prices to 
develop fair and reasonable pricing. That is what we have done.
    Mr. Chaffetz. When you say this was a verbal expansion, you 
went from four sites to 250. Did somebody just walk down and 
say, hey, let's add these 30. How does that work?
    Mr. Schuster. It does not happen like that. The contracting 
officer at DLA would be in contact with us and say we would 
like to add these additional sites to the contract. We would 
then go away and make an assessment of our ability to do it and 
what mode of transport we would select to perform that mission.
    That then goes back to DLA. They then approve that site is 
now in the contract. A DODAC is created and then we start 
filling orders.
    Mr. Chaffetz. Do you sign that, did they sign that or you 
just move on?
    Mr. Schuster. Basically, the signoff is when a DODAC, which 
is the delivery or the account for that site, is added. That is 
the green light to go.
    Mr. Chaffetz. My time has expired. I will now recognize the 
gentleman from Massachusetts, Mr. Tierney, for five minutes.
    Mr. Tierney. Thank you.
    Mr. Schuster, how many United States Government contracts 
had Supreme won before it won the food contract in Afghanistan, 
contracts of the same nature?
    Mr. Schuster. That was our first U.S. Government contract.
    Mr. Tierney. Your first is a contract valued at $726 
million with a maximum value over five years of $4.2 billion, 
no experience, no prior contract, out of the box. This is the 
contract you got?
    Mr. Schuster. It was our first U.S. Government contract. We 
have significant past performance operating around the globe 
doing similar contracts for other countries, UKMD, NATO 
contracts.
    Mr. Tierney. None in Afghanistan?
    Mr. Schuster. We have been operating in Afghanistan since 
January 2002.
    Mr. Tierney. With the same nature contract as we signed in 
this one?
    Mr. Schuster. We went to Afghanistan in 2002 with the 
British Ministry of Defense.
    Mr. Tierney. I am asking you was it the same type of 
contract you had here, delivering to forward operating bases?
    Mr. Schuster. Yes, it is a food supply contract to forward 
operating bases for British Ministry of Defense.
    Mr. Tierney. When you made your original proposed prices 
for distribution and all that in July 2005 for those four 
locations, what did you use as the basis for determining what 
you were going to bid?
    Mr. Schuster. It was very simple. We determined the size of 
the infrastructure we needed in terms of warehousing, the 
personnel and all the operating costs to run that and then the 
distribution method to deliver to those four sites, which was 
all by road.
    Mr. Tierney. Before that contract even started, you got 
notice from DLA they would like to expand it to 68 more bases?
    Mr. Schuster. Correct.
    Mr. Chaffetz. What did you do then to consider what your 
fee should be to do that?
    Mr. Schuster. Again, we did an assessment of what the 
requirement was.
    Mr. Tierney. Had you ever done anything like that before, 
go out to 68 bases similarly situated?
    Mr. Schuster. No, because a large number of these bases 
were in the east of Afghanistan, mountainous regions and hence, 
the requirement for rotary wing or fixed wing aircraft to 
support us.
    Mr. Tierney. But you had no prior experience getting out to 
areas like that?
    Mr. Schuster. Not into the east of Afghanistan, no.
    Mr. Tierney. Did you know anyone who did?
    Mr. Schuster. No.
    Mr. Tierney. So you had no comparables on which to base 
your costs, you were basically estimating?
    Mr. Schuster. No. As I stated in my previous answer to the 
Chairman, we used a combination of comparable market rates, for 
example USTRANSCOM rates.
    Mr. Tierney. What is the comparable market rate to a 
forward operating base situated like one of the 68?
    Mr. Schuster. U.S. Transcom publishes fixed wing and rotary 
wing rates, annual rates for delivery to within Afghanistan.
    Mr. Tierney. By mile?
    Mr. Schuster. I am not 100 percent sure. I think it is by 
pound.
    Mr. Tierney. By pound of product?
    Mr. Schuster. It is by price pound, gross pound.
    Mr. Tierney. More expensive to deliver lettuce than to 
deliver fruit?
    Mr. Schuster. No, it is by pound, so it is by weight.
    Mr. Tierney. That was one of your factors. What else did 
you factor in?
    Mr. Schuster. We took quotations from various suppliers who 
were operating within the country.
    Mr. Tierney. Who were those? Were those part of the 
trucking contractors that had contracts with the U.S. 
Government or were they independents?
    Mr. Schuster. They were largely transport contractors we 
had already used on other contracts we had operated since 2002.
    Mr. Tierney. They gave you bids for their services?
    Mr. Schuster. Yes.
    Mr. Tierney. Did you have security as a component as well?
    Mr. Schuster. Back in 2006 or 2005, contract security was 
not part of it.
    Mr. Tierney. That was not your responsibility?
    Mr. Schuster. No, it wasn't part of our responsibility.
    Mr. Tierney. Who was going to secure delivery to the 68 
bases? You were going to get them there and not worry about how 
secure it was in getting them there?
    Mr. Schuster. We asked for door to door delivery from the 
supply. It was not until 2007 that we implemented CENTCOM 
approved product security.
    Mr. Tierney. Your subcontractor included security in their 
price?
    Mr. Schuster. Yes.
    Mr. Tierney. Did you know who they hired for their 
security?
    Mr. Schuster. Yes.
    Mr. Tierney. What types of companies did they hire to do 
their security?
    Mr. Schuster. Most of them were local Kabul-based 
companies. They had their own security teams.
    Mr. Tierney. Pretty much the same outfits that were doing 
it for the trucking industry for the United States supplies 
otherwise?
    Mr. Schuster. I would say yes.
    Mr. Tierney. So warlords and other people like that?
    Mr. Schuster. Potentially.
    Mr. Tierney. How do you get a price value from them that 
you can trust?
    Mr. Schuster. Generally, we would put out a tender and ask 
for rates and then we would compare them and select based on a 
combination of price and capability.
    Mr. Tierney. How did you know you weren't being extorted?
    Mr. Schuster. We have operated in Afghanistan since 2002, 
so we had some feel for the market in terms of the rates.
    Mr. Tierney. So you have been paying similar people for 
that period of time?
    Mr. Schuster. No, I wouldn't say that. We have operated in 
the market and we felt we were paying a fair price for what 
they were asking us to do.
    Mr. Tierney. When the contract went to a larger group of 
delivery sites, you didn't agree to any price in the beginning 
of that so you undertook going from four to 68 without having 
any agreement on what the pricing would be?
    Mr. Schuster. Correct.
    Mr. Tierney. Is that a usual business practice for Supreme?
    Mr. Schuster. I have been with Supreme since 2001 and I 
have operated a number of contracts for the British Ministry of 
Defense around the world, the Balkans, Iraq and Afghanistan, 
typically we have lent forward, and when they asked us to do 
something we have gone and done it and we fixed up the 
contractual piece a few months later. Yes, we have done this 
before.
    Mr. Tierney. Mr. Chairman, I understand we have to do other 
rounds so at this point I will yield and reserve.
    Mr. Chaffetz. The gentleman yields back.
    I will now recognize the Chairman of the full committee, 
the Representative from California, Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman, and thank you for 
holding this important hearing.
    We are now more than a decade into a war and when I look 
across at Congresswoman Speier, I think about the fact that 
this war started under her predecessor. Actually, the first 
half of this war was under her predecessor. If we are not going 
to get to where we can honestly conduct operations there 
without waste, fraud or abuse after this long, when can we?
    It is time and I think that both the Chairman and the 
Ranking Member are doing the right thing, focusing on the fact 
that this pervasive problem continues, continues and continues. 
Whether it is us backfilling $1 billion at the Kabul Bank or 
contracting still costing us unconscionable amounts of numbers, 
or in fact, the challenges in simply not getting shot in the 
back by the very people we are trying to free, this has been a 
war that this committee has a special obligation for. I want to 
thank again the Chairman and the Ranking Member for your 
relentless support of exactly this issue.
    I would yield to the Chairman if he would like the 
remainder of my time.
    I would ask unanimous consent that my entire opening 
statement be placed in the record.
    Mr. Chaffetz. Without objection, so ordered.
    I thank the Chairman.
    We will now recognize the gentlewoman from Illinois, Ms. 
Duckworth, for five minutes.
    Ms. Duckworth. Thank you, Mr. Chairman.
    Mr. Schuster, in 2010, my understanding is you were in 
negotiations over what the outbound transportation rate was, 
trying to come to an agreement. As part of the initial 
response, the DCAA basically found your rates were too high and 
continued to negotiate. I am speaking specifically for the 
transportation costs such as the helicopter and fixed wing 
costs.
    In October 2011, when DLA began a final round of 
negotiations, Supreme offered a new proposal, but it was 
interesting that less than a year from the previous offer you 
made, you had reduced the rate for helicopter transportation 
and doubled the cost for fixed wing transportation. Why would 
reducing the cost of helicopter transportation affect the price 
you would charge for fixed wing transportation?
    Mr. Schuster. I think at the time what DLA asked us to do 
was to put together a price that was to hold for five years, 
regardless of the number of locations, the mix of type of 
transport, so we had to build that into our risk assessment in 
terms of developing our pricing. I think at different points in 
time when we put together our price we were basing our rates on 
what was actually happening.
    When we first put together our rates in 2005, we were 
estimating what was going to happen for the next five years. 
When we did the two other rate increases, I think our fixed 
rate costs were up significantly. We were flying to more 
expensive fixed wing sites, so our costs went up. Our rotary 
wings were going to more efficient sites and the rates came 
down.
    Ms. Duckworth. It costs significantly more to fly rotary 
wing than fixed wing?
    Mr. Schuster. It does significantly, yes.
    Ms. Duckworth. Yet it was the fixed wing prices you doubled 
in order to lower your rotary wing rates?
    Mr. Schuster. No, that is not correct. The cost of 
operating aircraft is driven by the flight hour, how long you 
fly. What I was saying was the profile of our fixed wing 
flights was now longer, so they were more expensive whereas our 
rotary wing was largely in the east and the cost had come down 
significantly.
    Ms. Duckworth. Let's talk a bit more about your premium 
outbound transportation rate. The original transportation fees 
in the contract only provided for delivering food, as you said, 
to the four original bases. You referred to this as the 
distribution fee. The premium outbound transportation rate was 
added to the contract later when it was radically expanded and 
was meant to apply to the distribution of food to hundreds of 
bases in Afghanistan.
    According to the audit from DCAA in 2008, you were charging 
both a distribution fee and the premium outbound transportation 
rate to deliver food to the forward operating bases. This seems 
to me like a case of double billing. Did Supreme charge DLA 
both a distribution fee and a premium outbound transportation 
rate for distributing food to the FOBs?
    Mr. Schuster. In response to your question, when we 
originally requested to put in pricing for the expanded 
requirement, we advised DLA that the premium outbound 
transportation rate is supplemental or in addition to the base 
distribution fee. That has always been our position.
    To answer your question, when the premium sites came on, we 
were entitled to bill for both the base and the premium.
    Ms. Duckworth. Even though the distribution fee was part of 
the POT?
    Mr. Schuster. The distribution fee was for deliveries to 
the original four sites.
    Ms. Duckworth. I don't quite understand how you are 
separating those out. My understanding is the premium outbound 
transportation rate included the distribution fee in that?
    Mr. Schuster. No, it did not. It was always in addition to 
the base distribution fee. The base distribution fee was to the 
four original sites.
    Ms. Duckworth. What you are saying is for the additional 
sites, you are not actually double charging the distribution 
fee for goods that were delivered?
    Mr. Schuster. No.
    Ms. Duckworth. Is it true that in March of 2010, you 
offered to settle with DLA over this double billing dispute?
    Mr. Schuster. In March of 2010, as part of our negotiating 
strategy, we said we would like to resolve this issue and part 
of that was we offered up a small percentage of the normal 
distribution that we would pay back to the government.
    Ms. Duckworth. I am out of time, Mr. Chairman.
    Mr. Chaffetz. I thank the gentlewoman.
    I will now recognize the gentleman from Florida, Mr. Mica, 
for five minutes.
    Mr. Mica. Thank you.
    I had to step out for a moment, but again, it looks like 
this contract ballooned from $4.2 billion over five years to 
over $26 billion, including a two year extension. Is that 
correct?
    Mr. Schuster. Mr. Mica, that sounds a little high. I think 
the total contract value to date is around $8 billion.
    Mr. Mica. However, the maximum value of the contract 
ballooned to $26 billion is what I am told including a two year 
extension. There is a difference there. Again, I am getting the 
information from our staff but that is a wide disparity if you 
are saying $8 billion and it is $26 billion.
    Let me turn to Ms. Duckworth's working on some of these 
costs and I have some of the IG potential overpayment findings.
    To go back to the basic contract in the beginning in 2005, 
I understand from the IG you did not incorporate the airlift 
requirement in the contract or document the airlift price. Is 
that correct? This is on fruits and vegetables, $454 million, 
to move them. That is half a billion dollars to move fresh 
fruits and vegetables from 2005 through 2010.
    My question was, you did not incorporate the airlift 
requirements in the contract or require documenting the airlift 
price?
    Mr. Schuster. In response to your question, we have an 
email agreement from DLA, agreeing the rates as fair and 
reasonable for the inbound airlift. Those rates were then 
incorporated into the contract under two MODs.
    Mr. Mica. Again, I am telling you what the IG found. They 
found that Supreme was paid approximately $454 million, almost 
half a billion, for airlift services for fruits and vegetables 
from UAE to Afghanistan during that five year period. That is 
what they are saying you did not do and you did not have in 
place an airlift requirement in the contract or document the 
airlift price at the very beginning, is that correct? You are 
saying no?
    Mr. Schuster. I am saying we had a rate that was agreed.
    Mr. Mica. Again, that is their finding.
    They also found you had an overpayment of $98.4 million for 
transportation costs within Afghanistan from 2005 to 2008. What 
is your response?
    Mr. Schuster. The $98 million was for minimum weights, our 
rate proposal for airlift stipulated a rate per pound and also 
a minimum weight which is a normal commercial term in the 
aviation industry. We bill the higher of either the billable or 
the minimum weight and that is what that difference is.
    Mr. Mica. Another point from the IG report is $25.9 or $26 
million for I guess triwall packaging costs from December 2005 
to 2010, they believe that was an overpayment. What is your 
response?
    Mr. Schuster. The triwall rates associated with premium 
outbound transportation, we had an agreed rate for triwalls 
that was determined as fair and reasonable at the 100 percent 
rate. The IG is saying their understanding is any rate 
associated with premium outbound transportation should be paid 
at 75 percent. That is the delta between the 100 percent 
payment we believe we are entitled to and the 75 percent that 
DLA or the IG says we should have been paid.
    Mr. Mica. Again, there is a huge disparity between what our 
committee has found and what the IG says and we are relying on 
them for overseeing and providing us some of the contract 
disparity information.
    Finally, this is an Amsterdam-based company, privately-
owned. Were you involved in the beginning when this contract 
was let? What kind of competition was there to include American 
vendors?
    Mr. Schuster. Mr. Mica, I was not involved in the contract 
during the acquisition phase.
    Mr. Mica. Do you know of opportunities for American firms 
to participate and did they compete?
    Mr. Schuster. I don't know.
    Mr. Mica. Can you get that information for the committee?
    Mr. Schuster. Yes, I can.
    Mr. Mica. I would appreciate that.
    I yield back.
    Mr. Chaffetz. I thank the gentleman.
    I now recognize the gentleman from Vermont, Mr. Welch, for 
five minutes.
    Mr. Welch. Thank you, Mr. Chairman, and Ranking Member. I 
appreciate your ongoing persistence on this.
    I have a couple of questions, Mr. Schuster.
    In 2009, U.S. attorney for the Northern District of Georgia 
indicted PWC, the subsistence prime vendor in Iraq, Kuwait and 
Jordan, on charges of defrauding the government. The indictment 
explained that Count II relates to PWC's alleged fraudulent 
over billing of the U.S. by having vendors use a consolidation 
facility and placing the consolidation costs of PWC profit into 
the delivered price paid by the U.S. Are you aware of those 
allegations against PWC?
    Mr. Schuster. Yes.
    Mr. Welch. In court proceedings between Supreme and PWC 
Agility, allegations have also emerged that Supreme engaged in 
some of the same dubious business practices that led the 
Department of Justice to indict PWC Agility for attempting to 
defraud the U.S. Government in Iraq.
    According to documents produced to the committee, Supreme 
used a subsidiary in the United Arab Emirates, Jamal Ali Foods 
Company, JAFCO, to package and transport fruits, vegetables and 
dairy products into Afghanistan. My understanding from our 
investigation is that JAFCO is a 49 percent subsidiary of 
Supreme Foodservice, is that correct?
    Mr. Schuster. That is correct, Mr. Welch.
    Mr. Welch. According to a filing made by PWC Agility, 
Supreme has an even closer relationship with JAFCO than PWC 
Agility had with an affiliated company at the center of its 
alleged scheme to defraud the U.S. Government. Again reading 
from the file, ``JAFCO purchased the local market ready items 
and then sold the products to Supreme at prices that included 
large profits for JAFCO.'' The filing further asserts that 
Supreme then invoiced DLA for the products, including the JAFCO 
products, in an additional fee that included a profit for 
Supreme.
    Mr. Schuster, is there any merit to the allegation that the 
price of local, market ready goods being charged the government 
includes a profit for JAFCO?
    Mr. Schuster. In response to your question, I was not 
involved in the program when JAFCO was set up.
    Mr. Welch. I didn't ask if you were involved.
    Mr. Schuster. What I do know is that when the scope of the 
contract changed from the four original sites to the 68 
additional FOBs, there was a requirement to change the way we 
supplied fruits and vegetables. At that time, JAFCO was set up 
to perform that requirement. In addition to that, for control 
and rather than outsourcing to a third party, we set up JAFCO 
and JAFCO did perform the activity of consolidation and 
procurement of fresh fruits and vegetables.
    Mr. Welch. I will try to translate that. It sounds like the 
answer is yes.
    Mr. Schuster. Can you repeat the question?
    Mr. Welch. Is there any merit to the allegation that the 
price of local market ready goods being charged to the 
government includes a profit to JAFCO?
    Mr. Schuster. I would need to get back with an answer on 
that. I was not directly involved at that time.
    Mr. Welch. You may not have been but it sounds like you are 
stonewalling because this is like Business 101. You know where 
your money comes from and if you can get a profit from two 
sources instead of one without the person paying, namely the 
taxpayer, and you get away with it, that is a cause of concern.
    That does not happen accidentally. Is there a profit that 
was included for JAFCO? That is the question. Do you want to 
make a phone call?
    Mr. Schuster. No, I don't need to make a phone call. I was 
not involved at that time.
    Mr. Welch. It is not whether you were involved, it is your 
company. You are here representing your company.
    Mr. Chairman, cell phone use permitted here? This is pretty 
outrageous. This is a big deal. It is over a billion dollars. 
We have had soldiers out in the field risking life and limb and 
we have profiteers ripping off the taxpayer and you won't give 
us an answer to a pretty simple question where your company 
knows the answer. Either you know it and won't tell us or your 
company sent someone who was deliberately not given the 
information they knew would be relevant to this hearing.
    Mr. Schuster. I know this issue is part of an ongoing 
investigation.
    Mr. Welch. Let us at least have the witness get back to us.
    One last question, has JAFCO ever been the subject of a 
criminal investigation by the U.S. Government?
    Mr. Schuster. I know there is an investigation going on now 
by the DOJ.
    Mr. Welch. Criminal?
    Mr. Schuster. I don't know whether it is criminal or civil.
    Mr. Welch. Let us get the answer when you get a chance to 
check with people who know.
    Mr. Schuster. I will do that, Mr. Welch.
    Mr. Welch. I yield back.
    Mr. Chaffetz. Thank you.
    I now recognize the gentlewoman from California, Ms. 
Speier, for five minutes.
    Ms. Speier. Mr. Chairman, thank you. To you and the Ranking 
Member, I really applaud your efforts in carrying on this 
investigation because it really goes to the core of what our 
problems are in procurement in the Department of Defense.
    Mr. Schuster, thank you for being here.
    I was kind of astonished by one thing you said in answer to 
a question by Mr. Tierney. I got the impression, correct me if 
I am wrong, that contracting with the United States or Britain 
without having a formalized contract is something you have done 
in the past where there wasn't pricing put in place so the 
actual amount of the contract was not clearly defined?
    Mr. Schuster. I was referring to the British Ministry of 
Defense contract and they have a worldwide food supply contract 
which has a framework agreement. If they need to deploy to 
someplace like Afghanistan, they give us the order to go, we go 
and do it but there is a framework of how that pricing will be 
dealt with, so there is a contract in place that deals with the 
pricing.
    Ms. Speier. But there really wasn't one in the contract 
with the United States Department of Defense?
    Mr. Schuster. There was an original solicitation that was 
awarded. The requirement changes from four sites.
    Ms. Speier. I know but in the original contract, there was 
actually a lower bidder, correct?
    Mr. Schuster. I cannot comment on that. I am not part of 
the evaluation process.
    Ms. Speier. It just doesn't quite add up that you would go 
into a contract without having it fully flushed out in terms of 
what you were going to be paid and now there is an ongoing 
dispute that we are talking in terms of billions of dollars as 
to whether you owe the United States Government $700 million or 
whether we owe you over $1 billion.
    Let me move on to the issue of the warehouse. My 
understanding is that you built a warehouse literally across 
the street from Camp Leatherneck?
    Mr. Schuster. Correct.
    Ms. Speier. At the time when you used that facility, it was 
being used to provide food, not just to the United States 
military, but also to the British troops, is that correct?
    Mr. Schuster. Yes. The Helmand facility was constructed as 
a response to the two U.S. surges in 2010 and 2011 when there 
was an increased troop requirement. Therefore, there was an 
increased operational requirement for warehousing. We made a 
commercial decision to construct a facility in Helmand to 
support that requirement.
    Ms. Speier. You said the company made the decision to 
construct that facility?
    Mr. Schuster. Yes.
    Ms. Speier. You weren't forced to, you weren't asked to. It 
was a decision you made because it would make it closer to 
where the product had to be delivered, correct?
    Mr. Schuster. In response to your question, there was a 
troop surge, so there was a requirement. We have to respond to 
that requirement, so we have multiple options. We build 
warehouses in Kabul, Bagram, Helmand. We made the choice to put 
it in Helmand because that was where the bulk of the troops 
were going to be.
    Ms. Speier. I understand that you then wanted to bill the 
U.S. Government $58 million for building that warehouse?
    Mr. Schuster. This goes back to the original heart of the 
matter. FOB Leatherneck is not one of the original four sites.
    Ms. Speier. Why don't you just answer the question? Were 
you asking the United States to pay $58 million?
    Mr. Schuster. We only asked after DLA said we were not 
entitled to POT for FOB Leatherneck.
    Ms. Speier. POT is what?
    Mr. Schuster. Premium outbound transportation.
    Ms. Speier. You were basically going to try to make it up 
by charging the Federal Government $58 million?
    Mr. Schuster. No.
    Ms. Speier. My understanding is that you charged the 
taxpayers of this country $12 million to transport food across 
the street. Is that correct?
    Mr. Schuster. No.
    Ms. Speier. That is not correct?
    Mr. Schuster. In response to your question, I go back to 
the original contract, commercial item contract, deliveries to 
four sites, normal distribution fee covers the four sites. 
Premium outbound transportation covers the additional sites. 
Leatherneck was an additional site.
    Ms. Speier. It was across the street, wasn't it?
    Mr. Schuster. It is across the street, yes.
    Ms. Speier. There was a billing of $12 million to deliver 
goods across the street?
    Mr. Schuster. That was the definition of the contract that 
says it is a premium site.
    Ms. Speier. Whether it cost you $12 million or not, it was 
a great way to soak the Federal Government, it sounds like?
    Mr. Schuster. No, it wasn't. As I said, in relation to the 
$56 million, we only pursued that after premium outbound 
transportation for Leatherneck was disallowed.
    Ms. Speier. So if I can't get paid what I want, then I will 
just steal the other money to make up the difference, is that 
sort of what you are saying?
    Mr. Schuster. No, I am not saying that.
    Ms. Speier. I yield back.
    Mr. Chaffetz. The gentlewoman yields back.
    Let me make sure I understand this timeline. My 
understanding is on June 3, 2005, is when Supreme signed the 
original contract. Then there was an IG report, dated March 2, 
2011, with some fairly serious allegations that they overpaid 
the prime vendor potentially $98.4 million in transportation 
costs, overpaid the prime vendor approximately $25.9 million 
for triwall costs, paid $454.9 million to the prime vendor for 
airlifting fresh fruit, and it goes on.
    Then knowing this IG report was out there, they did sign a 
Price Negotiating Memorandum No. 10, I believe it is called, 
that was signed December 9, 2011. Did I get the timeline right?
    Mr. Schuster. Not for MOD 10.
    Mr. Chaffetz. What?
    Mr. Schuster. Not from Modification 10. That was in 2006.
    Mr. Chaffetz. Maybe I have the number wrong, but this is 
the Price Negotiation Memorandum. It says ``price analysis 
proposed, definitization of the UCA Modification P00010.'' 
Nevertheless, there was a price memorandum that was signed, I 
am happy to hand it down to you, that the DLA signed extending 
your contract with a maximum value, this is what I think Mr. 
Mica was getting at, for $26 billion, the maximum value?
    Mr. Schuster. They did extend that contract, yes.
    Mr. Chaffetz. I think this is what all of us here on the 
dais find mystifying. The DLA evidently thinks you are doing 
pretty good and maybe doesn't have any other options. The 
Inspector General comes in and cites hundreds of millions of 
dollars of potential overpayments and yet, the same DLA comes 
in, this is why I am excited to get to the second panel, 
extends the food service contract by billions and billions of 
dollars, extends the maximum value to $26 billion.
    It is only after the fact, after all this dust has settled, 
that now they are saying they had overpaid some $750 million. 
It begs more questions than it answers.
    Supreme is one of the larger food service vendors around 
the globe. You have dealt with other governments. You talked 
about the British specifically. What is the United States 
Government doing or not doing or what should it be doing? You 
have perspective on how others deal with this.
    Mr. Schuster. Yes, I do have perspective. All contracts 
have terms and conditions and dispute resolution clauses. At a 
certain point where you know you are so far apart, those 
clauses should be enacted immediately.
    Mr. Chaffetz. What is it that other governments are doing 
that we are not doing, what else specifically? We are not only 
the Oversight Committee, we are also Government Reform. If I 
were you, I wouldn't want to be sitting here today. You want to 
be awarded other contracts, your reputation is one the line. 
What is it that our Federal Government, after decades of war, 
has not figured how to do in the wartime atmosphere?
    Mr. Schuster. If I use my experience from other contracts, 
as I said there is good experience in terms of what is 
happening on the ground. People understand what the requirement 
really is. They put people on the ground who can look into that 
and that makes it a hell of a lot easier to understand what it 
is you are asking a contractor to do. If you define the 
requirement clearly, there are terms and conditions, there is 
transparency and mechanisms in the contract that allow you to 
negotiate.
    Mr. Chaffetz. You didn't see that from how we did it?
    Mr. Schuster. It has been difficult on certain elements to 
negotiate.
    Mr. Chaffetz. Something we will continue to further 
explore.
    I now recognize the gentleman from Massachusetts, Mr. 
Tierney, for five minutes.
    Mr. Tierney. Thank you.
    Mr. Schuster, when I last left you, we were talking a 
little bit about the original contract and how it was you 
developed your pricing on that basis. You estimated those 
prices you gave me some of the categories on that. Was one of 
the things you put into that pricing bribes and fees of that 
nature?
    Mr. Schuster. Mr. Tierney, definitely not.
    Mr. Tierney. Can you explain to me how in an email exchange 
from Michael Epps--he works for your company, correct?
    Mr. Schuster. He did work for our company.
    Mr. Tierney. An email from him to Maryanne DeMayo at the 
DLA included documentation along that line. One of the line 
items is subtotal for dispatching team, overhead and other 
costs, cost per month $2,000, cost per day $125, comments, 
includes bribes and tolls.
    Mr. Schuster. I have not seen that document.
    Mr. Tierney. It is a serious matter with us and consistent 
with the other investigations we have done. Everyone seems to 
know bribes are being paid, but no one seems to be doing much 
about it. That was the document Mr. Epps included with his 
email to Maryanne DeMayo on March 15, 2006.
    Mr. Schuster. I have no explanation for what is there.
    Mr. Tierney. At some point in time, you are trying to 
resolve how you are going to pay for those additional bases and 
what the cost is going to be. The government asks you for 
backup documentation, they wanted additional information on how 
you came about your pricing.
    Mr. Schuster. Yes.
    Mr. Tierney. Your email of August 28, 2008 to the Defense 
Contracting Audit Agency responding to a request they made for 
additional information about your original proposal, the one in 
2005 we spoke about. Here is what you said, ``Yes, you are 
correct that we don't have any of the budgetary estimating data 
that was used to develop the proposed prices for the June 2005 
contract award for the non-forward operating base 
requirements.''
    I think part of your contention was you weren't obligated 
to share these but that is beside the point. They can argue 
that somewhere else. You went on to say you just didn't have 
any, that all the work you had done in trying to figure out 
your base price, all the things you took into consideration, 
you didn't have a single bit of documentation or data 
estimating your budget or budgetary documentation that you 
could share. Can that possibly be true?
    Mr. Schuster. It couldn't be true. We had to build our 
pricing from something.
    Mr. Tierney. Why did you write to them, you are absolutely 
correct that we don't have any budgetary estimating data and 
then refuse to deliver it?
    Mr. Schuster. At the time, I could not find any records 
within the company that indicated we had that.
    Mr. Tierney. Have you found any since?
    Mr. Schuster. No, I have not.
    Mr. Tierney. It is pretty difficult to come to some 
resolution in a negotiation with a company that doesn't have 
back-up data for the basis of its original costs, right?
    Mr. Schuster. The original costs.
    Mr. Tierney. Were the foundation for the additional costs.
    Mr. Schuster. With DCAA, it was the additional costs.
    Mr. Tierney. You refused to provide even data you had to 
have, never mind the data they wanted with respect to the 
additional costs. You wouldn't even give them data that by your 
own admission you have to have when you are setting out a fee 
structure to budget. I think it shows some of the difficulty 
your company has presented to DLA over that.
    In the beginning, when you were looking for this contract, 
the nature of which you had never had with the United States 
Government before, you formed some sort of association with 
PWC?
    Mr. Schuster. Yes, we did.
    Mr. Tierney. They were hired as a consultant. Would that be 
a fair expression?
    Mr. Schuster. I was not involved in the acquisition phase 
but they were involved as a consultant to support us during the 
acquisition phase.
    Mr. Tierney. You paid them 3.5 percent of your profit?
    Mr. Schuster. I am not sure. I am not privy to that. I 
wasn't involved in it.
    Mr. Tierney. You were the logistics guy back then, right?
    Mr. Schuster. No, I wasn't involved in the contract during 
the acquisition phase.
    Mr. Tierney. What was your position?
    Mr. Schuster. I was operating the EK MOD, worldwide fixed 
contract. I only came onto the SPV contract in 2006 to run the 
operation.
    Mr. Tierney. It is curious that they wouldn't provide you 
with somebody else to help testify for the earlier part of 
that. Agility was in. Do you know what their function was? Were 
they advising Supreme on what to bid, how to bid and what to 
base it on?
    Mr. Schuster. No, I wasn't involved in the acquisition 
process.
    Mr. Tierney. Were you involved with the extension of the 
contract in 2010?
    Mr. Schuster. Yes, I was involved. I was involved in the 
negotiations.
    Mr. Tierney. What did you rely on PWC to do at that point 
in time? Were they still associated with you?
    Mr. Schuster. They were not associated with us. I need to 
get back with exact dates but I think we stopped dealing with 
them either in 2007 or 2008.
    Mr. Tierney. Lieutenant General Dail is President of United 
States Supreme Group. What role did he play on advising how you 
would proceed in terms of trying to get the extension, a no bid 
extension?
    Mr. Schuster. Mr. Dowell was not involved at all in SPV.
    Mr. Tierney. You hired a former director of the DLA as 
president of your company. When it came to a significant 
contract or an expansion of sort of a monopoly on things, you 
didn't ask his advice at all?
    Mr. Schuster. He is not involved on the SPV contract.
    Mr. Tierney. What did you hire him for?
    Mr. Schuster. To develop additional business in the U.S. 
for us.
    Mr. Tierney. But nothing to do with the DLA contracts?
    Mr. Schuster. No, as I understand it, I am not sure what 
the term is, but he is not allowed to be involved in this 
contract.
    Mr. Tierney. He is well beyond that two year period, right?
    Mr. Schuster. Yes, he is.
    Mr. Tierney. So he would be able to be involved?
    Mr. Schuster. No, he wasn't involved in the contract 
extension. I negotiated that with two other people.
    Mr. Tierney. I yield.
    Mr. Chaffetz. You yield back. We are going to recognize the 
gentleman from Vermont, Mr. Welch, again.
    Mr. Welch. Thank you, Mr. Chairman.
    In the DCAA audit published on August 29, 2011, the 
auditors raised concerns about significant unallowable costs 
included in Supreme's proposal. They also found due to lack of 
records provided to the auditors, they had no way of knowing 
the extent to which Supreme was including unallowable costs in 
trying to pass along these costs to the government. There is a 
failure to provide the documentation that is necessary to make 
a review and it begins the hassle.
    One thing we do know is that Supreme tried to get DLA to 
pay for over $3 million in legal and tax advice. Specifically, 
the report found, ``We obtained and reviewed engagement letters 
provided to support legal costs proposed for Debevoise, 
Plimpton, LLP and Constantine Cannon, LLP.''
    According to the engagement letter with Debevoise, Supreme 
engaged Debevoise as counsel in connection with an 
investigation being conducted by the Defense Criminal 
Investigative Service and possibly the U.S. Department of 
Justice which may help to give us an answer to that last 
question you had a hard time with.
    Is it true that Supreme tried to bill the government, i.e., 
the taxpayers, for legal fees in connection with a criminal 
investigation?
    Mr. Schuster. Mr. Welch, the answer to that is no and I 
will explain. This contract is a commercial item contract, FAR 
Part 12 contract, not a FAR Part 31 cost contract. We have 
extensive records that meet IFRS international standards. We 
provided all the documents that we had to DCAA. They were just 
not in the format that a FAR Part 31 contract requires because 
it is not a FAR Part 31 contract.
    Mr. Welch. What you are stating is that there was no effort 
to include in bills submitted to the taxpayer payment for legal 
costs incurred in the engagement with Debevoise for 
representation on tax and criminal investigation matters? Is 
that your testimony?
    Mr. Schuster. What I am saying is that we provided our 
commercially available accounting records which do not 
segregate costs into a FAR Part 31 contract.
    Mr. Welch. That is the point. There were no records.
    Mr. Schuster. There are records.
    Mr. Welch. Let me ask my question again. Is it your 
testimony that Supreme did not attempt to include in their 
bills to the U.S. taxpayer costs associated with engaging legal 
representation for representation on tax in criminal 
investigation matters?
    Mr. Schuster. No. We did not attempt.
    Mr. Welch. Did Supreme hire legal counsel to defend it 
against a criminal investigation into the operations of its 
subsidiary in the United Arab Emirates, the Jamal Ali Food 
Companies or JAFCO?
    Mr. Schuster. Yes, we did.
    Mr. Welch. Mr. Chairman, in connection with this testimony, 
I would offer Defense Contract Audit Agency audit into the 
record.
    Mr. Chaffetz. Without objection, so ordered.
    Mr. Welch. I yield back.
    Mr. Chaffetz. The gentleman yields.
    I will now recognize the gentlewoman from Illinois, Ms. 
Duckworth, for five minutes.
    Ms. Duckworth. Thank you, Mr. Chairman.
    Mr. Schuster, I would like to go back to the cost of flying 
helicopters and airplanes. In 2005, Supreme submitted a pricing 
proposal for the POT for the DLA contract. The response from 
the DLA contracting officer was the proposed charge Supreme 
wanted to charge for helicopter transportation was over 300 
times the going cost at the time that DLA was paying for 
helicopter transportation.
    As I said before, in October 2011 in the final found of 
negotiations, DLA said somehow the price of helicopter 
transport had dropped so significantly that the price of fixed 
wing transport had increased significantly. How do you drop the 
cost of helicopter transportation by 300 percent?
    Mr. Schuster. I am not aware of the document related to the 
300 percent and I am not aware that DLA provided us the detail 
of that so that we could do a comparable against the rates we 
had.
    Ms. Duckworth. In 2011, you did, as part of the ongoing 
negotiation, double the rate for fixed wing aircraft. You 
lowered the rate for helicopter transportation but doubled the 
fixed wing craft transportation. You said this was because the 
aircraft were going into more difficult places than helicopters 
were going to and that was more expensive?
    Mr. Schuster. Not more difficult, they were now flying 
further. Their missions were further, therefore, more costly.
    Ms. Duckworth. More costly than helicopters?
    Mr. Schuster. They are not directly comparable. Both rates 
are per pound but the way we are billed is per flight hour.
    Ms. Duckworth. I am a helicopter pilot. I don't know if you 
know this. I flew Black Hawks. I can tell you that the 
helicopters can fly across the length of Afghanistan just as 
well as the fixed wing can and it is cheaper to fly fixed wing.
    My difficulty with this is that it seems to me you are 
doing with the helicopter and fixed wing contract exactly what 
you are doing with the price of delivering goods across the 
street to FOB Leatherneck. You couldn't get the U.S. Government 
to pay for you to move things across the street, so you are 
going to try to charge us for the warehouse. You can't get us 
to pay you for this exorbitant rate for helicopter 
transportation, so you are just going to increase or double the 
price for fixed wing aircraft.
    I want to go back to the premium outbound transportation 
rates. You said that at no point did Supreme charge both the 
distribution fee and the premium outbound transportation rate 
to deliver to the FOBs or the original four bases?
    Mr. Schuster. I said that any delivery to a FOB location 
incurs the premium outbound transportation rate and the normal 
distribution fee.
    Ms. Duckworth. The premium outbound transportation rate 
does not include the distribution fee?
    Mr. Schuster. No.
    Ms. Duckworth. That is interesting because the Defense 
Contract Audit Agency report in 2008, are you familiar with 
that report?
    Mr. Schuster. Yes.
    Ms. Duckworth. In that report, they found that the premium 
outbound transportation rate included the distribution fee, so 
by charging both the distribution fee and the POT you were 
double billing the U.S. Government for that distribution fee. 
Do you agree or not?
    Mr. Schuster. No, I disagree with DCAA's position.
    Ms. Duckworth. I yield back my time, Mr. Chairman.
    Mr. Chaffetz. At this point, we are going to thank our 
witness for your attendance. Mr. Schuster, would you agree to 
respond to other additional questions we might have for this 
panel?
    Mr. Schuster. Yes.
    Mr. Chaffetz. We appreciate it.
    Ms. Chairman may I just ask a follow up question? The 
gentlewoman from California?
    Ms. Speier. Thank you, Mr. Chairman. I will be brief.
    Can you tell me how many other military retirees from the 
United States military you have hired besides General Dail?
    Mr. Schuster. I don't know that off the top of my head.
    Ms. Speier. Is it two, five, ten?
    Mr. Schuster. There might be three or four.
    Ms. Speier. Are they generals typically?
    Mr. Schuster. No.
    Ms. Speier. One general and who else?
    Mr. Schuster. I think there are a couple of colonels maybe.
    Ms. Speier. All engaged with DLA?
    Mr. Schuster. No. They are involved in a number of our 
contracts.
    Ms. Speier. How about British representatives?
    Mr. Schuster. We have an office in the UK and we have maybe 
two former British commissioned officers on our team.
    Ms. Speier. General Dail was hired four months after he 
retired and he is precluded, based on your testimony, from 
negotiating for a period of two years, so you hire him to do 
what, again?
    Mr. Schuster. He is responsible for the Supreme USA office 
or company. He is responsible for business development of 
military and non-military contracts.
    Ms. Speier. How many contracts has he been able to develop 
for you?
    Mr. Schuster. I don't know that off the top of my head. I 
would have to get back with that?
    Ms. Speier. Would you please find out and report that to 
the committee?
    Mr. Schuster. Sure.
    Ms. Speier. These are contracts you want to develop in the 
United States for activities in the United States or in foreign 
destinations?
    Mr. Schuster. They can be anywhere in the world, global 
contracts, anywhere in the world.
    Ms. Speier. He could have been negotiating a separate 
contract in Afghanistan unrelated to this one?
    Mr. Schuster. Not that I am aware of.
    Ms. Speier. You are going to provide the committee the 
contracts he was negotiating or the rainmaking he was 
attempting on your behalf here in the United States?
    Mr. Schuster. I will provide a list of the opportunities 
that they have pursued.
    Ms. Speier. And ones that resulted in contracts?
    Mr. Schuster. Yes.
    Ms. Speier. Thank you. I yield.
    Mr. Chaffetz. The gentlewoman yields.
    We thank you, Mr. Schuster, for your time and participation 
here today.
    We will now take a brief recess as we reset for the next 
panel.
    [Recess.]
    Mr. Chaffetz. The committee will come to order.
    We will now recognize the second panel. Mr. Daniel Blair is 
the Deputy Inspector General for Auditing, Department of 
Defense; Mr. Matthew Beebe is the Deputy Senior Acquisition 
Executive, Defense Logistics Agency; Mr. William Kenny is the 
Acquisition Executive, for Troop Support, Defense Logistics 
Agency; and Mr. Gary Shifton is Chief, OCONUS Division, Defense 
Logistics Agency.
    Pursuant to committee rules, all witnesses will be sworn 
before they testify. Being that you are already standing, 
please raise your right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth?
    [Witnesses respond in the affirmative.]
    Mr. Chaffetz. Let the record reflect that all witnesses 
answered in the affirmative. You may be seated.
    In order to allow time for a candid discussion, and give or 
take we would ask that you limit your testimony to five 
minutes. It is my understanding Mr. Blair and Mr. Beebe will be 
offering opening statements and Mr. Beebe, you are representing 
the thoughts and perspective of Mr. Kenny and Mr. Shifton as 
well, is that correct?
    Mr. Beebe. Yes, sir.
    Mr. Chaffetz. Thank you. We will have the two opening 
statements and then go to questions. Mr. Blair, we will 
recognize you now for five minutes.

                   STATEMENT OF DANIEL BLAIR

    Mr. Blair. Chairman Chaffetz, Ranking Member Tierney and 
distinguished members of the subcommittee, good afternoon and 
thank you for the opportunity to appear before you today to 
discuss our completed and ongoing audits of the Supreme Prime 
Vendor Subsistence Contract in Afghanistan. I would also like 
to thank you for your continued interest in oversight in this 
area.
    Today, I will highlight some of the problems we identified 
during our initial audit. I will describe DLA's actions to 
address some of our recommendations. I will identify additional 
opportunities to improve contract administration and discuss 
some lessons learned.
    In December 2005, DLA awarded a five year, $762 million 
contract to Supreme Foodservice to provide food and other non-
food distribution to four locations in Afghanistan. Over the 
next few years, this contract expanded significantly through 
verbal change orders to cover additional locations.
    By May 2010, DLA had paid Supreme about $3 billion, 
including $1.6 billion for food and water and $1.4 billion for 
transportation and storage costs.
    Our initial audit of DLA's contract oversight efforts 
identified significant potential overpayments and contract 
administration flaws. For example, DLA potentially overpaid the 
contractor about $124 million in transportation and triwall 
costs. DLA also paid nearly $455 million to airlift food into 
Afghanistan without incorporating this requirement into the 
contract and without documenting whether the airlift price was 
fair and reasonable.
    Further, DLA failed to validate whether nearly $104 million 
of triwall costs were accurate or chargeable to the contract. 
Finally, DLA did not develop a quality assurance plan and 
detailed procedures to monitor the contractor's performance and 
verify that invoices being paid were accurate.
    During our follow-up audit, we noted that DLA had taken 
some corrective action to address these problems. Because this 
report is not yet final, it would not be appropriate to discuss 
these actions in detail. However, I would like to broadly 
describe some of DLA's efforts.
    For example, DLA unilaterally definitized the price they 
would pay Supreme to airlift food into Afghanistan in December 
2011. This was six years after the verbal change order went 
into effect. In addition, DLA is seeking a $756 million refund 
from the contractor and has also developed a quality assurance 
plan.
    However, we also identified additional areas where DLA 
could further strengthen its contract oversight efforts and 
help the Department collect overpayments. For example, DLA 
could expand its efforts to develop adequate documentation 
supporting its conclusion that the Department is paying fair 
and reasonable prices. They could also take additional actions 
to obtain critical information from contractors and develop 
strategies to recover overpayments.
    After careful reviewing DLA's actions on this contract, 
several lessons learned become apparent and today I would like 
to highlight four.
    First, DLA should definitize contracts within the 
appropriate period of time, which is generally 180 days if 
possible. Although verbal change orders are permissible, these 
actions should be incorporated timely into the contract and 
should be used on a limited basis.
    Second, when using provisional rates, do not pay more than 
the agreed upon amounts. Paying more than provisional rates may 
result in escalating costs and the Department may experience 
difficulty recouping these overpayments. In addition, it is 
important to determine that the Department is paying fair and 
reasonable prices for the goods and services it receives.
    Third, unilateral contracting officer determinations should 
be used sooner to protect the government's interest in the 
contract and begin collection efforts sooner.
    Finally, develop and implement a quality assurance plan and 
detailed procedures to monitor the contractor's performance and 
verify the accuracy of payments. Had DLA taken this important 
step, they would have prevented many of the overpayments from 
being made in the first place.
    In closing, I would like to thank the subcommittee for 
inviting me to testify today. It is clear that our audit 
efforts and related recommendations to collect overpayments are 
having an impact on the Department. We are encouraged by the 
actions and efforts of DLA senior leadership, especially those 
efforts to collect the amounts owed to the Department.
    However, to be truly effective, these corrective actions 
should be applied more broadly as appropriate to other DLA 
contracts rather than just fixing the problems we identify. 
Given the fiscal challenges the country is facing, every 
reasonable effort should be taken to save valuable funds and 
put them to their best possible use.
    This concludes my statement and I would be happy to answer 
any questions you have for me.
    [Prepared statement of Mr. Blair follows:]

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    Mr. Chaffetz. Thank you, Mr. Blair.
    We will now recognize Mr. Beebe for five minutes.

                   STATEMENT OF MATTHEW BEEBE

    Mr. Beebe. Good afternoon, Mr. Chairman, Ranking Member 
Tierney and distinguished members of the subcommittee.
    I am Matt Beebe, Deputy Director of Acquisition for the 
Defense Logistics Agency. I am delivering the opening statement 
today on behalf of DLA. We appreciate the opportunity to appear 
here today to discuss DLA's award to Supreme Foodservice for 
the Subsistence Prime Vendor Afghanistan Contract.
    As the Department of Defense's only combat logistics 
support agency, DLA's primary mission is to support American 
soldiers, sailors, airmen and Marines. DLA provides virtually 
every consumable item our military forces require, including 
food, fuel, medical supplies, uniform items and weapon systems 
repair parts.
    As the Deputy Director for DLA Acquisition, I am 
responsible for the DLA's acquisition program. With me today is 
Mr. Bill Kenny, the DLA Troop Support Acquisition Executive, 
and Mr. Gary Shifton, the DLA Troop Support Subsistence Supply 
Operations Division Chief.
    In 2004, DLA received a directive from the Army to provide 
subsistence support to service members deployed to Operation 
Enduring Freedom. DLA issued a fully competitive solicitation 
in October 2004 and awarded the contract to Supreme Foodservice 
in June 2005. The contract provides full service food and non-
food distribution support in Afghanistan and expires in 
December 2013.
    As awarded, the contract was written to use ground 
transportation for delivery to four sites in Afghanistan. 
Requirements there quickly changed with the military setting up 
many more forward operating bases than initially planned. Two 
months after contract award, DLA Troop Support issued a verbal 
change order to Supreme to support a significant increase in 
forward operating bases using a combination of ground, fixed 
wing aircraft and helicopters to make deliveries. This is 
referred to as premium outbound transportation.
    In December 2005, Supreme submitted proposed premium 
outbound transportation rates. These proposed rates represent 
the main area of disagreement between DLA and Supreme. In June 
2006, after performing on the contract for six months, Supreme 
billed DLA for premium outbound transportation using those 
proposed rates.
    That same month, DLA requested an audit from the Defense 
Contract Audit Agency to determine whether Supreme's rates were 
fair and reasonable. DLA also issued a contract modification to 
establish that Supreme would be reimbursed monthly at 75 
percent of the existing rate.
    DCAA audits conducted in 2008 and 2011 were unable to 
confirm the reasonableness of Supreme's in-theater 
transportation rates. In August 2010, during contract 
negotiations, DLA Troop Support issued a contract modification 
to further reduce the payment rate from 75 percent to 
approximately 50 percent.
    After unsuccessful negotiations and following completion of 
the 2011 audit, DLA unilaterally definitized the prices for 
premium outbound transportation. As a result, the contracting 
officer determined Supreme owed the government $756.9 million 
and sent a final decision letter to Supreme in December 2011.
    Supreme has appealed this decision to the Armed Services 
Board of Contract Appeals. As of March 31, 2013, DLA has 
received approximately $283 million and continues to collect 
more than $21 million per month.
    Throughout the Supreme contract, DLA has ensured continuous 
subsistence support to the military forces in Afghanistan. We 
acknowledge the issues associated with the DOD Inspector 
General's 2011 audit and have worked diligently to address 
these findings. We understand DLA must achieve both unwavering 
warfighter support and through contract management. We take 
very seriously our obligation to the American taxpayer and our 
stewardship responsibilities.
    We look forward to answering your questions.
    [Prepared statement of Mr. Beebe follows:]

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    Mr. Chaffetz. Thank you.
    I will now recognize myself for five minutes.
    Mr. Beebe, was there any dispute about the quality of the 
product or the actual food they were delivering? Was there any 
dispute about any of that?
    Mr. Beebe. No, there was not.
    Mr. Chaffetz. Is it fair to characterize the only question, 
problems or challenges you saw were purely contracting 
questions?
    Mr. Beebe. Related to rates, yes, sir.
    Mr. Chaffetz. Does Supreme still offer food services in 
Afghanistan to this day?
    Mr. Beebe. They are still our provider of food in 
Afghanistan.
    Mr. Chaffetz. You have a situation where you sign a 
contract and, you can qualify this, literally in two months 
after that contract signed, you have to renegotiate, things are 
changing rapidly?
    Mr. Beebe. Yes, sir. The original contract was not 
negotiated; it was a competitively bid contract. Yes, we then 
had to enter into a situation where requirements changed.
    Mr. Chaffetz. Were they the low bid contract?
    Mr. Beebe. Let me defer to Mr. Shifton.
    Mr. Chaffetz. Mr. Shifton, were they the low bid 
contractor?
    Mr. Shifton. My recollection is they were not the low bid 
contractor. They had the best technical proposal. We used a 
tradeoff process for award. They had a technically superior 
proposal to their competitor, Seven Seas.
    Mr. Chaffetz. There was only one other bidder?
    Mr. Shifton. Yes.
    Mr. Chaffetz. You are two months into this contract, you 
issue verbal orders and then you start getting into a spat or 
dispute about what are the rates? This is not five bucks; we 
are talking about an awful lot of money. Why was this a verbal 
agreement?
    Mr. Beebe. The primary priority was to ensure we had 
uninterrupted food service to the warfighter in Afghanistan. 
That was our primary responsibility while ensuring that we take 
proper actions within the contract management.
    Mr. Chaffetz. You are moving ahead, you have this dispute 
that is hundreds of millions of dollars and yet you went ahead 
and extended their contract by billions. Why is that? Mr. 
Kenny?
    Mr. Kenny. As Mr. Beebe indicated, our primary focus of the 
subsistence contracting team was to maintain that exceptional 
level of service to the men and women serving in Afghanistan. 
The use of unpriced actions, sole source contracts, verbal 
change orders is highly unusual, rarely used in the contracting 
process. We discourage its use. In fact, we have no unpriced 
contracting actions currently at the Troop Support Center.
    In this case, a decision was made because of the dynamics 
and requirements of the warfighter that we needed to take some 
unusual action. The reason we extended that contract on one and 
several occasions was we were attempting to put together an 
acquisition strategy and an acquisition plan that encompassed 
not only the lessons learned over the last three or four years 
of dealing with Supreme but struck that balance between 
effectiveness and efficiency.
    We developed and refined that strategy over a period of 
time. We did that with changing requirements, numbers of 
troops, troop surge, troop drawdown, where we are going to have 
the issues associated with fraud that we saw with PWC. We 
incorporated things like the Code of Business Ethics into the 
new solicitation.
    Mr. Chaffetz. It is not like we just went to war for the 
first time. We spent an awful lot of time in Iraq and we have 
been in Afghanistan ten plus years. That wasn't part of the 
original thing, a Code of Ethics?
    Mr. Kenny. Sir, there were a lot of lessons learned that 
came out of the PWC investigation.
    Mr. Chaffetz. My concern is I wonder if we actually learned 
any of those lessons. That is the thing. I struggle with why so 
late in the process this happens. I just do not understand. You 
say these lessons are learned, you say sole bids are an 
exception, you say we don't generally do verbal adjustments. 
That is not my experience. That is not my perspective. It 
scares me that you think that.
    Mr. Kenny. I can only speak for the Troop Support, with all 
due respect, what we learned from the PWC Justice 
investigations. We then enhanced our training for our work 
force and the provisions within our contracts.
    Mr. Chaffetz. Were you short of personnel? Did you not have 
enough people? What was the problem?
    Mr. Kenny. From my perspective, the contract management 
efforts we applied to this did not keep pace with the changes 
we were seeing in our requirements. We have made significant 
changes to that since that time.
    Mr. Chaffetz. Mr. Blair, I want to give you an opportunity 
to share some comments or perspective on this discussion we are 
having right here.
    Mr. Blair. One of the things that I alluded to in my 
statement was another report we issued last year, our 
contingency contracting report, an update report. We found some 
of the same issues that we see here in the Supreme contract are 
the same issues we find quite often in our audits. It really 
relates to contract oversight and inadequate contract 
oversight. It relates to inadequate invoice reviews. Those are 
the top two areas highlighted in this report.
    I do think that had that level of oversight been in effect 
from day one when this contract started and had it kept pace 
with the contract, I think DLA would not be in the position it 
is in at this point. That is a critical part of basic oversight 
for a contract, especially a contract of this complexity and 
this magnitude.
    Mr. Chaffetz. Thank you. Again, we do not seem to learn 
these lessons.
    I now recognize the gentleman from Massachusetts, Mr. 
Tierney, for five minutes
    Mr. Tierney. Mr. Shifton, where is Ms. DeMayo?
    Mr. Shifton. My understanding is Ms. DeMayo works out of an 
office in Virginia.
    Mr. Tierney. She is no longer doing the same 
responsibilities she had at the outset?
    Mr. Shifton. I am sorry, I misspoke. You said Ms. DeMayo? 
Ms. DeMayo is working in our Medical Directorate at Troop 
Support.
    Mr. Tierney. Was she responsible for the original contract 
or were you?
    Mr. Shifton. She was the contracting officer. I was her 
supervisor.
    Mr. Tierney. Tell me how it is that you have an original 
contract that I assume dealt with terms, scope, price and cost, 
right?
    Mr. Shifton. That is correct.
    Mr. Tierney. You approved all that?
    Mr. Shifton. Yes, I had oversight of all that.
    Mr. Tierney. That contract called for Supreme to document 
all the work and bills they submitted to you?
    Mr. Shifton. There are two parts to this. The first part is 
the award made to Supreme was a FAR Part 12 competitive award. 
The second part of this is the premium outbound transportation.
    Mr. Tierney. I am dealing with the original contract, four 
bases. You set your price, you set your scope, you set the 
terms on all of that. Did anywhere in that contract say when 
you submit a bill, we also want to see all the back-up 
documentation for how it is you got to negotiate this price?
    Mr. Shifton. Not really. It was a competitive acquisition, 
so we were doing price analysis against the bidders.
    Mr. Tierney. You had two bidders and you decided to go with 
the one with no experience?
    Mr. Shifton. No. We went with the one that actually had the 
better technical experience than the other.
    Mr. Tierney. What did the other one have? What is technical 
experience?
    Mr. Shifton. They actually were operating in Afghanistan 
and had experience moving product inside Afghanistan. The other 
had a template to do that type of work but had not performed it 
inside Afghanistan.
    Mr. Tierney. Mr. Schuster testified they had been doing 
exactly the same work they were doing here. It was an 
approximation of the same type of work?
    Mr. Shifton. That is fair, yes.
    Mr. Tierney. At some point you decided before the contract 
even starts that you now have to jump this up to 68 additional 
bases. You were informed by someone else you had to do it, 
right?
    Mr. Shifton. Right. Typically, once the contract is 
awarded, almost immediately thereafter we host a post-award 
conference where the customer, in this case, the Army, comes 
and Troop Support and the vendor meet. There is also a ramp-up 
period to this contract. One of the reasons why this decision 
was made back in August, a couple months after the contract was 
awarded, is we had to eliminate a supply chain to the Army and 
their distribution support and make a decision that Supreme 
would have to adjust for that in their supply chain. That is 
why we had to make that type of decision back in August so we 
would not have two duplicate supply chains moving into 
Afghanistan.
    Mr. Tierney. You are telling me that you couldn't let 
Supreme do the four bases and have the Army continue to do the 
remaining bases?
    Mr. Shifton. Right. The Army support of those bases 
primarily came out of two what they call Class I yards or 
subsistence yards, one at Bagram, one at Kandahar. Routinely, 
by the time the product from those yards got to the forward 
operating locations, there was spoilage. The Army had a lot of 
problems at that time storing subsistence type products and 
getting them out to forward locations. They came to us to see 
if it was viable to support those in our contract.
    Mr. Tierney. What additional documentation did you require 
of Supreme to determine they were qualified to do the 68 
additional bases?
    Mr. Shifton. I can't say it was so much probably 
documentation other than Supreme acknowledged they could do the 
support.
    Mr. Tierney. They gave you their word? Is that the way you 
generally do contracting business, 68 additional bases and 
billions of dollars, they give you their word, we can do it, 
don't worry?
    Mr. Shifton. No, it is not and we formalized subsequent to 
that. In 2006, we developed what is called a delivery support 
plan request for every single location in Afghanistan.
    Mr. Tierney. How late in 2006 was that?
    Mr. Shifton. It was in the later part.
    Mr. Tierney. A year into the contract and the extended part 
of the contract? In 2005, when you asked them to do the 
additional 68 bases and then more, what did they tell you they 
were going to charge you for it.
    Mr. Shifton. At that time, the decision was made that what 
they were going to charge us for would be subject to audit.
    Mr. Tierney. So nothing. They just said we will do it, we 
will get an audit and we will do it later?
    Mr. Beebe. Right.
    Mr. Tierney. And that was fine with you?
    Mr. Shifton. Again, at the time there was a limit to the 
amount of information we had in this type of support in 
Afghanistan. To answer your question, we accepted it, again, 
with the conditions that it would be subject to audit.
    Mr. Tierney. Why didn't you immediately ask for an audit of 
the fair and reasonableness right at that time in 2005?
    Mr. Shifton. Because at that point, we did not have any 
actuals that would be supportable by an audit.
    Mr. Tierney. So you were going to go for several months 
just winging it and hoping it all comes in to something 
reasonable. In the middle of 2006, you get whacked with a $33.5 
million bill that puts the hair on your head straight up, 
right?
    Mr. Shifton. Again, yes.
    Mr. Tierney. Who was telling you that you had to do this? 
Mr. Kenny, are you approving all this?
    Mr. Kenny. Sir, I did not personally approve that.
    Mr. Tierney. Mr. Shifton is out there and he is the closest 
one to the line here next to Ms. DeMayo who is not with us 
today for whatever reason, so he has to make some hard 
decisions. Somebody is telling him he has to get these 68 bases 
served and he has to take some other company's word for it 
without having any documentation and the estimates based on 
anything in particular. It has to be coming from your office, 
right?
    Mr. Kenny. Sir, if I may, my review of the documents of the 
sequence of events, yes, that verbal change order did take 
place. It was followed by a modification, I believe it was 
Modification 10 that the Chairman identified.
    Mr. Tierney. What was the date of that? Late 2006?
    Mr. Kenny. That is correct.
    Mr. Tierney. That is my point. The point is you are a year 
into this thing, you have taken a flyer for a year as to what 
is going to be the price of this thing and no way of 
establishing what it is, taking their word they are going to be 
able to perform the contract and we will all get to a price 
later on. Mr. Blair, how should that have been handled?
    Mr. Blair. According to the regulations, it should have 
been done within 180 days, if possible.
    Mr. Tierney. Do you think it was possible?
    Mr. Blair. That would be speculation on my part.
    Mr. Tierney. You have reviewed it, you are the Inspector 
General. You made a recommendation it should have been done 
within 180 days. Did you think it was possible?
    Mr. Blair. I think there are efforts that could have been 
taken to be more aggressive.
    Mr. Tierney. What would those efforts be?
    Mr. Blair. I have kind of a simplistic view since I am not 
an attorney when it comes to contracting actions. In my view, 
if you withhold payment on current or future amounts, if you 
issue a demand letter or a cure notice, you are starting to 
leverage and take more aggressive action rather than waiting a 
year.
    Mr. Tierney. You are going to pull the plug on me? I will 
take it up later.
    Mr. Chaffetz. We will now recognize the gentleman from 
Vermont.
    Mr. Welch. Thank you very much.
    First of all, gentlemen, thank you for your service. I have 
some appreciation of how tough it is. We have the troops out 
there and they have to get the water and the bullets. It is 
tough. We have a bad system when this kind of stuff happens but 
I do appreciate your service.
    In June 2010, five years after the performance started, the 
contracting officer finally realized that DLA was never going 
to be able to negotiate fair and reasonable rates with Supreme 
and recommended unilaterally definitizing the contract. The 
price negotiating memorandum stated the contracting officer 
believes an agreement will never be reached and therefore, 
premium outbound transportation should be unilaterally 
definitized.
    Mr. Shifton, were you involved in the contracting officer's 
decision to recommend that unilateral act in June 2010?
    Mr. Shifton. Yes.
    Mr. Welch. Did you concur with his recommendation?
    Mr. Shifton. Yes.
    Mr. Welch. But on July 9, 2010, the Integrity and Pricing 
Division notified the contracting officer that it disagreed 
with the recommendation and instead recommended that the 
contracting officer request a new DCAA audit through August 
2010. To the best of your knowledge, why was that 
recommendation that was made and you agreed with to definitize 
the contract in June 2010 overturned?
    Mr. Shifton. It was decided the data to definitize in June 
2010 was primarily based on events that happened during 2006 
and 2007 and part of 2008. It was decided it would be more 
advantageous to us and the contracting officer to have more 
actual data of events that happened, more flight information, 
more pounds transported, more fixed wing of product moved, to 
have more recent and relevant data to come up with a decision. 
Because the conditions on the ground had changed so much and 
the volumes were so much higher, they thought it was in our 
best interest to seek another audit.
    Mr. Welch. That is interesting. When you say in our best 
interest, was it in our best interest in terms of getting a 
fair price or was it in our best interest in terms of no 
readily available alternative to get to our troops what they 
needed and we just had to bite the bullet and get shafted for a 
few years more?
    Mr. Shifton. No, I think it was a combination decision at 
the time. Recognizing not getting shafted, we reduced the rate 
down to 50 percent versus the 75 percent. It was a 
determination that for us to be in our best position, in our 
best negotiation position, to have a new audit based on the 
most recent data.
    Mr. Welch. At that time when the original recommendation 
was made, it was $682 million, a lot of money, but when DLA 
finally definitized the contract in December 2011, the 
overpayment had swelled to $757 million, an extra $75 million 
hit on the taxpayer. Mr. Beebe, Mr. Kenny, what are your views 
on that? Do you think we made the right decision?
    I understand it is a tough decision and a lot of competing 
things you have to do, but somehow, some way, it seems these 
contractors get away with larceny.
    Mr. Kenny. Sir, my prospective on this matter, we have 
heard about the contract being awarded was a FAR Part 12 
contract. I think it is important to note to the committee that 
the contract modification that authorized premium authorized 
POT, premium transportation, was using the authority of FAR 
Part 31. FAR Part 31 required Supreme to be subject to an audit 
and to provide the necessary documentation to support those 
premium authorized rates.
    As we have heard before, there were significant delays in 
obtaining that information, that supporting documentation which 
would allow the contracting officer to make a fair and 
reasonable determination.
    Mr. Welch. One question I do have, it is tough, you have a 
lot of things going on but when you have three years of data 
and you are up to $600 million to $700 million, I am wondering 
at what point do you want to pull the plug and put the burden 
on them to come forward as opposed to the burden on us where we 
have to let it happen for another two years when the evidence 
we have, if past is prologue, it will just make it worse. That 
is kind of a tough call to me but I would like to put the 
burden on the bad guys.
    Mr. Beebe. Yes, sir. If I may, I am not going to question 
the immediate decision that Mr. Shifton and then contracting 
officer made; it may have been the correct immediate decision 
to Mr. Blair's comments. Overall, the process was taking too 
long. There is more we probably should have done to apply 
leverage to the contractor to work with DCAA to come to another 
means of a conclusion.
    Mr. Welch. One final question. How much of a problem is it 
that some of the people you are dealing with at Supreme are 
former high ranking Defense Department officials? Does that, as 
a practical matter, make it tougher?
    Mr. Kenny. I will just give you my perspective. I have 
heard the name of General Dale. I know who he is. I know 
General Mungen. I served under each of those individuals. I 
have not had any personal contact since they took off their 
uniforms, any correspondence, any emails, any phone calls or 
any involvement in either of these contracts with either of 
those gentlemen.
    Mr. Tierney. Would the gentleman yield?
    Would it be fair to surmise that they know just how messed 
up the process is at DLA and they would be advising their 
client, just go for it, because these guys aren't going to set 
a price. They are going to keep paying you, we are going to 
appeal, go on and on and on and they know just how the process 
works. They didn't hire these guys to sit around and play 
dominoes.
    Is that a fair assessment of the kind of advice of someone 
who had been in those positions, that one was the operating 
manager and the other was director of the whole DLA, that they 
would be able to give that kind of advice to a company like 
Supreme as to how to go about dealing with a contract like 
this. Whether or not they negotiated this particular contract, 
they could certainly tell them how the process works or does 
not work.
    Mr. Kenny. I am not sure what their roles and 
responsibilities are. I am aware that neither of them has an 
acquisition background. Whether they were able to advise the 
Supreme organization on how to navigate these waters, I could 
not comment.
    Mr. Beebe. I might also add, and I am not going to 
speculate on what they might have been advising their employers 
or employees, but the circumstances surrounding this particular 
issue is not the norm of DLA, so if they were advising based on 
the norm at DLA, it would not be consistent with the findings 
in this particular case.
    Mr. Chaffetz. I thank the gentleman.
    I now recognize the gentlewoman from Illinois for a 
generous five minutes.
    Ms. Duckworth. Thank you, Mr. Chairman.
    Mr. Blair, according to your office, DLA spent $455 million 
in transportation costs for local market ready products through 
May 2010 for, according to the IG report, services that were 
not included in the contract and were based on rates that may 
not be fair and reasonable. Did DLA ever provide documentation 
to show the contracting officer how they determined the rates 
to be fair and reasonable?
    Mr. Blair. The documentation that we received was very 
sketchy. In short, no adequate documentation was provided.
    Ms. Duckworth. By DLA?
    Mr. Blair. Correct.
    Ms. Duckworth. Mr. Shifton, can you answer why that would 
have happened, why there would not have been proper 
documentation?
    Mr. Shifton. The documentation we provided was based on a 
price analysis that we performed. We used USTRANSCOM's not to 
exceed rates. We think we have a good foundation that the work 
we did is acceptable FAR practice and acceptable price analysis 
work.
    We used different contract rates that had actual bills 
against them and that is what we used to support our 
documentation.
    Ms. Duckworth. Was that contract with Public Warehousing 
Company, Agility? Is that the contract you used?
    Mr. Shifton. That is part of the price analysis but not the 
entire part of the analysis.
    Ms. Duckworth. Are they not subsequently being investigated 
or were they subsequently indicted?
    Mr. Shifton. That is correct. Again, PWC, in terms of their 
contract, had very little airlift connected to their contract. 
We used a significant amount of USTRANSCOM tenders prior to the 
Supreme contract moving fresh fruits and vegetables from the 
United Arab Emirates to Afghanistan.
    The difference with the Supreme price and the Transcom 
tender price is the Supreme price is based on per pound, there 
is 20 pounds of carrots, whereas the USTRANSCOM price is a 
gross weight, pounds and the weight of the shipping container 
or pallet.
    Ms. Duckworth. If that is the case and if that contract has 
been indicted, why are you using them even partially as a basis 
for determining whether or not the rates are fair and 
reasonable under the Supreme contract?
    Mr. Shifton. If my recollection serves me correctly, we 
used the information back in the 2005 time frame whereas the 
indictment of PWC happened far after that. We used information 
from PWC significantly prior to the indictment. Again, a 
significant part of our price analysis is based on the 
USTRANSCOM rates.
    Ms. Duckworth. Do you disagree with Mr. Blair in his 
assessment that DLA did not provide adequate documentation to 
show how the rates to be fair and reasonable?
    Mr. Shifton. We concurred with the report. I think it goes 
back to Modification 10 was a poorly executed modification and 
just did not offer clarity.
    Ms. Duckworth. You agree that you did not provide adequate 
documentation?
    Mr. Shifton. Yes, we concurred with the finding.
    Ms. Duckworth. Are you satisfied now that throughout the 
performance of their contract, DLA has paid fair and reasonable 
rates for those local market ready products?
    Mr. Shifton. Yes, I am.
    Ms. Duckworth. Mr. Blair, do you agree with that?
    Mr. Blair. We have not yet seen the additional 
documentation to really hone in on those rates. I really cannot 
comment on that at this point.
    Ms. Duckworth. Mr. Blair, during the last hearing we heard 
about allegations that Supreme was using a subsidiary of United 
Arab Emirates, the Jamal Ali Food Company, JAFCO, to seek 
additional profit from the government. Basically, they were 
billing the government, getting their profit and also a profit 
to their own subsidiary. Has your office looked into these 
allegations against Supreme?
    Mr. Blair. No, we have not.
    Ms. Duckworth. You are sure you have not looked into them 
at all, there is no investigation underway?
    Mr. Blair. I know there is an investigation; I don't know 
the scope of the investigation. Since I am from Audit, it would 
not be a part of our effort.
    Ms. Duckworth. I will ask this question of both Mr. Blair 
and Mr. Shifton. In the previous panel, Mr. Schuster stated 
that at no time did Supreme charge DLA both a DOT fee as well 
as a distribution fee for delivery of goods to the FOBs. Would 
you agree with him on that?
    Mr. Shifton. No, we do not. Part of the $756 million being 
collected includes that for which we disagree with Mr. 
Schuster.
    Ms. Duckworth. Mr. Blair?
    Mr. Blair. The scope of our work did not really focus on 
the detailed billings. That was really subject to the audit 
work by DCAA. We focused more on the oversight efforts of DLA, 
so we didn't really get into that level of detail and to 
determine whether there was double billing or excessive 
billing.
    Ms. Duckworth.
    Mr. Shifton. If I could clarify, just the portion of that 
$756 million, that credit you speak of, that overcharge, is 
$177 million we are collecting from Supreme.
    Ms. Duckworth. Thank you, Mr. Shifton.
    I am out of time, Mr. Chairman.
    Mr. Chaffetz. I recognize myself and I will recognize Mr. 
Tierney. We will probably be calling votes but if there are 
additional questions, we will try to entertain those.
    Who is responsible? At the end of the day, my worry is 
blame everybody, nobody is held responsible. This is from March 
2, 2011, the audit. It said, ``The subsistence contracting 
officials at the DLA Troop Support did not provide sufficient 
oversight to contracting costs and performance, the contracting 
officer did not adhere to certain provisions of the Federal 
Acquisition Regulation, and the DOD supplement or develop a 
quality assurance surveillance plan and written procedures to 
monitor contract costs and performance.''
    Who is responsible? Who did not do all of those things 
because other than that, it went great. We overpaid everyone 
agrees by hundreds of millions of dollars. Who is responsible 
for that happening or not happening?
    Mr. Kenny. I will attempt to answer your question.
    Mr. Chaffetz. I will give you an A plus for being brave 
enough to answer that question.
    Mr. Kenny. We put together a team at Troop Support in 
conjunction with our DLA headquarters. We took a very thorough 
look at the circumstances and events surrounding the award and 
execution of this contract.
    We looked at what corrections needed to be made, what 
improvement and where we were challenged. As a result of that 
evaluation, two major themes came out of the report. One was we 
needed to make adjustments to our processes to accommodate 
where we have a contingency operation with rapidly changing 
requirements.
    Our vehicles at the time were not flexible enough, were not 
agile enough to be able to accommodate the needs of the 
warfighter. That was number one.
    Two, we needed to do a better job in training and enhancing 
our education process for all our contracting professionals, 
whether in the area of contract documentation, the area of 
contract pricing, the need for additional contracting officer 
reps in-country.
    As a result of those recommendations and as a result of 
that review, we felt the need was not so much a disciplinary 
action or a personnel action, but a need to enhance our 
processes and improve the education and training of our 
workforce to able to deal with these types of situations in the 
future.
    Mr. Chaffetz. We had been at war for ten plus years between 
Iraq and Afghanistan. It is hard to find what went right with 
this. There was nobody fired, nobody dismissed, nobody was 
disciplined at all, is that what you are telling me? Is that 
the reality?
    Mr. Kenny. To answer your question, that is correct. The 
improvements I mentioned as far as processes, tools, making 
sure our folks had the IT tools to be able to monitor contract 
performance, having more individuals in-country and providing 
the necessary training so these documentation and pricing 
issues, if encountered in the future, we would know how to deal 
with them.
    Now we have much broader knowledge on the right business 
models--how to price this. One of our major problems was we had 
to price this in a sole source environment with a company like 
Supreme. In the follow-on contracts, we brought competition 
into the process which is always a major goal of the 
acquisition process.
    Mr. Chaffetz. When you re-upped with Supreme, you did not 
bid that out.
    Mr. Kenny. We did extend the contract with Supreme.
    Mr. Chaffetz. One of the conclusions was that you were 
going to have bids and you didn't take any bids.
    Mr. Kenny. For the extensions, when we were building our 
acquisition strategy and our acquisition plan.
    Mr. Chaffetz. Your acquisition strategy has just come at a 
time when we actually are not even going to be there. That was 
back in 2006, right? When you originally started to expand, you 
were weeks into the contract, how to expand it. It gets to be 
March 2, 2011, the IG comes out and says look at all these 
problems. Nine months later, nine months and seven days later, 
you sign a no-bid extension worth tens of billions of dollars.
    How do you look me in the face and say one of our 
conclusions was we have to take more bids and you didn't take 
anymore bids?
    Mr. Kenny. At the time of the extensions when the 
justifications and approvals were being processed, at that same 
time, we were looking at the technical proposals received as a 
result of the solicitation that was issued. We received six 
proposals and conducted negotiations over that period of time.
    Part of the time necessary for those bridges, we wanted 
those bridges to come to an end, believe me sir part of the 
time required was to do the competitive process and select a 
new contractor to replace Supreme.
    Mr. Chaffetz. Did you?
    Mr. Kenny. Yes, sir.
    Mr. Chaffetz. You just told me that Supreme is still 
offering food services in Afghanistan.
    Mr. Kenny. Supreme is still providing the support. They 
will be providing support until December 2013. One of the 
additional reasons that those contracts had to be extended was 
we have significant litigation.
    Mr. Chaffetz. We have a time crunch. Let me recognize the 
gentleman from Massachusetts.
    Mr. Tierney. Thank you.
    We have a bill that comes in the middle of 2006 for $33.5 
million and the contracting officer is asked why they are 
asking for $33.5 million which was an unauthorized commitment. 
Her answer was, I am a contracting officer with an unlimited 
warrant and I requested that the vendor do the work.
    One of your people, Chris Cofield, says this is so big, it 
is beyond my comprehension. Obviously, this is an unusual 
circumstance everyone was dealing with.
    When we inquire further what was going on from Ms. DeMayo, 
she said she didn't get any support that she needed at the 
upper levels. ``I spoke to quite a few individuals in policy 
and pricing and received much conflicting direction. No one was 
really eager to advise how I should proceed. I got a whole lot 
of let me say this about that, but don't quote me for anything. 
I did my best to get some attention but in the December-January 
period, when I needed it most, I wasn't able to attract a whole 
lot.''
    Were you the person, Mr. Shifton, who was telling her, let 
me say this about that but don't quote me on anything?
    Mr. Shifton. No, sir.
    Mr. Tierney. Did you give her advice to go forward or not 
go forward?
    Mr. Kenny. Yes.
    Mr. Tierney. So she was wrong on that, she was getting all 
the support she could possibly need?
    Mr. Shifton. No, sir. I am not saying that there wasn't 
frustration on her part of not getting more direction from 
other elements within Troop Support.
    Mr. Tierney. Who would she go to? Could she go to you, you 
would go to Mr. Kenny, Mr. Kenny would go to Mr. Beebe, is that 
the way it runs?
    Mr. Shifton. Typically for an action such as this, she 
would be reaching out to our support offices that give her 
advice in terms of contract policy and legal policy.
    Mr. Tierney. Have you taken action against any of them for 
leaving her out there on the limb, a contracting officer makes 
a decision to modify a contract verbally for $817 million, 
possibly as much as $2.46 billion, with an email? Have you 
taken any of them to task and said that is not the way you 
treat somebody, that is not the situation you put them in?
    Mr. Shifton. It has been several years since that time. I 
am sure there was frustration on my part as well. I think Mr. 
Kenny was trying to explain and if you want to consider a 
weakness on my part, there was just too much focus on the 
operations at the time and supporting the warfighter and not 
enough focus at the time on dotting the Is and crossing the Ts.
    Mr. Tierney. But you had systems in place. All you had to 
do was run the systems, that is why they are there. Mr. Blair 
says there were requirements there if you had just tended to 
business, you would have asked for the proper documentation, 
you would have been monitoring these things as they went along, 
and you would not have waited more than 180 days to get it 
done.
    In fact, the first time that you modified and went to 75 
percent, why didn't you go to 50 percent then?
    Mr. Shifton. There is DFARs guidance. The proposal became 
subject to audit and we thought they had a qualifying proposal 
which allowed 75 percent.
    Mr. Tierney. Based on what? You had no documentation, you 
had no comparables of any note. You presented this is what they 
want to get paid and said I will give you 75 percent because I 
am not going to give you 100 percent because we had questions 
here but you haven't given enough documentation to ascertain 
the answer to the question.
    Mr. Shifton. I am not disagreeing with you. We used, to the 
best of our ability, the guidance offered through DFARs.
    Mr. Beebe. If I may add one point.
    Mr. Tierney. Were you involved in this at all, Mr. Beebe? 
Did people come up to you to ask you particular questions about 
this contract?
    Mr. Beebe. At the time, I was not with DLA.
    Mr. Tierney. I don't want to be rude to you but I 
appreciate you want to step in and help out your guys but I am 
trying to get to the basis of what happened then, so please 
excuse me on that.
    Now you have an extension coming up, a $4 billion 
extension, you have 24 bids. How many bids did you get for the 
extension in 2010?
    Mr. Kenny. The acquisition that we awarded this past June 
2012 which went to ANHAM, six parties submitted offers, four of 
which were responsible bids.
    Mr. Tierney. At one point in time, somebody indicated the 
reason they had to give a sole source, no bid contract was 
there wouldn't be any other responsible parties out there, but 
there were at least four, right?
    Mr. Shifton. But what we did was we sought through industry 
with a request for information as part of the market research, 
this acquisition, to get industry's feedback. To support 
Afghanistan and the numbers, the infrastructure required 
equates to at least 90,000 pallet positions, a warehouse that 
has cold storage capability for almost 50,000-60,000 of those 
pallets. You just don't have that type of infrastructure in 
Afghanistan.
    We wanted to give industry a chance to give feedback, to 
partner and then have a plan to be able to meet the 
requirements of our solicitation.
    Mr. Tierney. One of the things that makes this even worse 
is this company went in there and by the nature of the 
contract, they had you by the nape of the neck because of all 
the things you just said. Once they were in, they got a 
foothold to run this out and you didn't set the price, they 
were home free because they had things you couldn't replicate 
fast enough to give them the boot and get them out of there, 
right?
    Mr. Shifton. I don't disagree with your analogy, except I 
would again say the contracting officer, we were taking action. 
Again, we reduced to the 75 percent down to 50 percent.
    Mr. Tierney. Late. That would have been nice if you had 
done that originally, you could have saved a whole boat of 
money. How are we going to get the rest of the money back?
    Mr. Kenny. Maybe I can answer that for you. Our intentions 
are to continue to collect the $21 million per month until the 
end of the performance period of the Supreme contract.
    Mr. Tierney. You have a contract now with an unsettled 
price, you argue what the price should be but based on what you 
are willing to pay, you are going to cut back $21 million on 
that and count that as savings. You could find out you overpaid 
them by that $21 million too in which case, you got nothing 
back, right?
    Mr. Kenny. We believe that the fair and reasonable 
determination definitizing those provisional rates, we feel 
that was a correct determination by the contracting officer. We 
would intend to collect the balance.
    Mr. Tierney. You have no documentation. Were you here to 
hear what Mr. Tiefer from the Wartime Commission had to say? It 
is like an employer keeping some wasteful employee on the 
payroll longer than necessary in order to garnish the wages. It 
smacks of that. You are keeping them around and you are going 
to garnish their wages by paying them less than the contract 
but nobody knows what the contract price is, so you don't know 
whether you are charging them $21 million less, $10 million 
less or too much. We are all still out here in this gray 
neverland, right?
    Mr. Shifton. Again, the basis of the rates we took 
unilateral action on, much of that is supported by the DCAA 
audit. The rates are what the government has determined to be 
fair and reasonable at this time. That is what Supreme is being 
paid and that is the credit we are collecting back.
    Mr. Tierney. Mr. Beebe, how is it you let this whole thing 
unravel or were you not there at the time?
    Mr. Beebe. I personally wasn't but I certainly will speak 
for DLA.
    Mr. Tierney. You don't need to. You weren't there. Mr. 
Kenny, you were there through this whole enterprise?
    Mr. Kenny. I was there from September 2010 on.
    Mr. Tierney. You weren't there. Mr. Shifton, you are the 
only one left holding the bag?
    Mr. Shifton. Yes, sir.
    Mr. Tierney. I understand the position you are in, you have 
made that clear. I get a sense of where Ms. DeMayo is. I would 
like to know where the people are who were in Mr. Kenny's 
position and Mr. Beebe's position in terms of carrying out the 
rules and regulations and seeing what you and Ms. DeMayo did. 
Hopefully Mr. Blair's work is going to result in going forward 
and giving us a template so we don't end up in this situation 
again.
    Thank you all for your testimony.
    Mr. Chaffetz. Thank the gentleman.
    I will recognize the gentlewoman from Illinois very briefly 
as we have a vote on the floor.
    Ms. Duckworth. Thank you, Mr. Chairman. This will be very 
brief.
    Mr. Shifton, the contracting officer for all this who is 
not here today, not only was this person not disciplined in any 
way according to your testimony, what kind of evaluation did 
you give this person over the years she supervised this 
contract?
    Mr. Shifton. I am sure I gave her a very high rating.
    Ms. Duckworth. You gave her a very high rating?
    Mr. Shifton. Yes, I did.
    Ms. Duckworth. Did you give her a bonus in those years?
    Mr. Shifton. Yes, she annually received a monetary bonus.
    Ms. Duckworth. A bonus for good work right?
    Mr. Shifton. Correct.
    Ms. Duckworth. Mr. Kenny, how long have you been with DLA, 
since 2010?
    Mr. Kenny. I assumed the role of the Acquisition Executive 
for DLA Troop Support in September 2010.
    Ms. Duckworth. 2010. When the original contract expired 
December 2010, instead of rebidding the contract, DLA granted 
Supreme the non-competitive extension through December 2012 and 
in June 2012, DLA granted Supreme another sole source extension 
lasting from December 2012 to December 2013. You were there for 
that period?
    Mr. Kenny. Yes.
    Ms. Duckworth. Did you give Mr. Shifton an excellent rating 
or a high rating in his performance?
    Mr. Kenny. I am not the rating official for Mr. Shifton.
    Ms. Duckworth. Did you receive a high performance rating, 
Mr. Shifton during this period?
    Mr. Shifton. Yes.
    Ms. Duckworth. Did you receive bonuses all these years this 
has been going on, during this period?
    Mr. Shifton. Yes, I did.
    Ms. Duckworth. Do you think that both you and this 
contracting officer, who have now led DLA into this situation 
where you are almost $1 billion in overpayment, do you think 
that type of performance warrants high ratings and bonuses, yes 
or no?
    Mr. Shifton. Yes, I gave Maryanne an award but again her 
job is much more comprehensive than this area.
    Ms. Duckworth. It is almost $1 billion. This is what 
boggles the mind for me. I rated people in the Federal 
Government myself. I rated soldiers. In the civilian sector, if 
you went out and blew almost $1 billion of your company's 
money, you would be fired. You, at the very least, would be 
demoted. You certainly wouldn't be given an excellent rating 
and a bonus. This is what you have done with this contractor 
year after year and you yourself have been compensated. No 
wonder the problem continues. I don't see anybody suffering the 
consequences.
    I am sorry, Mr. Chairman. I yield back.
    Mr. Chaffetz. Don't apologize, I concur. I appreciate your 
passion on this issue. I share it.
    Gentlemen, we appreciate your testimony here today. We have 
a vote on the Floor. We will continue to pursue this. We 
appreciate your responsiveness in responding to further 
questions and inquiries that we have. We thank you.
    The committee stands adjourned.
    [Whereupon, at 4:42 p.m., the subcommittee was adjourned.]



                                APPENDIX

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               Material Submitted for the Hearing Record

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