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Examples of Preferential Treatment for Halliburton
US House Committee on Government Reform, Minority Staff

27 June 2005

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Despite the magnitude of Halliburton's questioned and unsupported costs, the company has repeatedly received special treatment from Defense Department officials. As the eight examples below illustrate, the objections of career officials have been overruled, the requirements of federal procurement regulations have been waived, and Halliburton has been awarded millions of dollars in unjustified fees.


1. Award of the Iraq Oil Contingency Planning Contract

In the fall of 2002, Michael Mobbs, a political appointee in the office of Douglas Feith, Under Secretary for Policy at the Defense Department, made the decision to award the oil infrastructure work in Iraq to Halliburton. This decision was made in secret without competition from any other companies. White House officials, including the Vice President's chief of staff, were briefed on this decision.(1) The first sole-source contract that Halliburton received relating to reconstruction in Iraq was a $1.9 million task order under the LOGCAP contract to draw up contingency plans for U.S. occupation of the Iraqi oil fields. This contract was awarded in November 2002. At the time this no-bid contract was awarded, Mr. Mobbs knew that the company that received the contingency contract would also be awarded the much larger RIO contract.(2)

A career attorney with the Army Materiel Command objected to this plan on the grounds that it would violate federal procurement law. The attorney observed that the oil planning work had nothing to do with providing meals, laundry, and other logistical support under the LOGCAP contract, and therefore it should be awarded out under a separate contract. These objections were overruled, however, after the intervention of a senior Defense Department lawyer who worked with Mr. Mobbs.(3)

The Government Accountability Office later analyzed the transaction and concluded that it was not "in accordance with legal requirements" because "preparation of the contingency support plan for this mission was beyond the scope of the contract."(4) GAO added that the work "should have been awarded using competitive procedures."(5)


2. Award of the RIO Contract

Despite strenuous objections from the chief contracting official at the Army Corps of Engineers, the Defense Department secretly awarded Halliburton a five-year, no-bid contract to repair Iraq's oil infrastructure in March 2003. Bunnatine H. Greenhouse served as the Principal Assistant Responsible for Contracting (PARC) with the Army Corps of Engineers. Ms. Greenhouse objected for several reasons to the award to Halliburton of the RIO contract, which was worth up to $7 billion.

First, Ms. Greenhouse objected to awarding Halliburton a contract for which it developed the specifications. In particular, she was "concerned that the award to KBR conflicted with the usual practice of excluding contractors who prepare cost estimates and courses of action, such as KBR did in its contingency plan, from bidding on the follow-on implementation contract due to the potential for conflicts of interest and overreaching by the contractor."(6)

Second, Ms. Greenhouse objected to awarding Halliburton a so-called "emergency" contract lasting up to five years. Although she agreed that a "compelling emergency" might justify a one-year award, she "could not understand why the emergency conditions would prohibit [the government] from extending the contract the following year or any subsequent years if the prosecution of the war made that necessary."(7)

Ms. Greenhouse also objected to Halliburton's proposed costs, arguing that Halliburton's charges for initial deployment "should be lower" since Halliburton was already deployed, and that the government should not pay for indemnification liability coverage already covered under other contracts.(8)

Finally, Ms. Greenhouse objected to allowing Halliburton access to internal government meetings and information. For example, she attended a meeting at the Pentagon on February 26, 2003, to discuss cost issues before the oil infrastructure contract had been awarded. When Halliburton officials arrived and began participating in the meeting, "she was so disturbed" that she requested that they be told to leave. By that time, she had concluded that the line between Halliburton and government officials "had become so blurred that a perception of a conflict of interest existed."(9)

Despite all of these objections, the Army Corps of Engineers ultimately chose to award the contract to Halliburton in secret after excluding all other potential contractors. The Corps rejected Ms. Greenhouse's specific recommendation for a limited duration arrangement and awarded the contract for a five-year term.


3. Waiver of the Requirement to Provide Cost and Pricing Data

In December 2003, days after Defense Department auditors preliminarily concluded that Halliburton was charging excessive amounts for fuel imports from Kuwait into Iraq, the Department granted Halliburton a special waiver releasing the company from providing certified cost and pricing data from its Kuwaiti fuel subcontractor.

On December 11, 2003, auditors from the Defense Contract Audit Agency held a press conference announcing that their draft audit had found that Halliburton billed for as much as $61 million in excessive costs to import gasoline from Kuwait into Iraq. The auditors indicated that Halliburton "has not demonstrated ... that they did an adequate subcontract pricing evaluation prior to award" of the subcontract to Altanmia.(10)

Rather than cooperate with this audit, however, Department officials took the opposite action. They granted Halliburton a waiver that eliminated Halliburton's responsibility to provide "any cost and pricing data" from its Kuwaiti subcontractor, Altanmia.(11) In the same waiver, the Department unilaterally declared that the company's gasoline prices were "fair and reasonable."(12) The purported rationale for granting the waiver was that Kuwaiti law prohibited the Kuwaiti subcontractor from submitting the information. As the waiver document stated, "it is a violation of Kuwaiti law for contractors to submit cost and pricing data for fuel products."(13) This premise turned out to false, as several independent sources confirmed that no Kuwaiti law prohibits the submission of certified cost and pricing data for fuel products.(14)


4. Award of the RIO 2 Contract

In January 2004, Defense Department officials awarded Halliburton a $1.2 billion follow-on oil infrastructure contract despite receiving a warning from Pentagon auditors not to enter future negotiations with the company without consulting with the auditors.

On December 31, [2003], the Defense Contract Audit Agency issued a "Flash Report," alerting various Defense Department agencies about "significant deficiencies" in Halliburton's cost estimating system.(15) According to the auditors, these deficiencies "could adversely affect the organization's ability to propose subcontract costs in a manner consistent with applicable government contract laws and regulations."(16)

Based on that Flash Report, the auditors then sent a second memo on January 13, 2004, warning that Halliburton could not adequately estimate its costs for work in Iraq.(17) The memo emphasized that Halliburton's systemic deficiencies "bring into question [Halliburton's] ability to consistently produce well-supported proposals that are acceptable as a basis for negotiation of fair and reasonable prices."(18) It also stated:

    We recommend that you contact us to ascertain the status of [Halliburton's] estimating system prior to entering into future negotiations.(19)

On January 16, 2004, just three days after this memo was sent, the Army Corps of Engineers awarded Halliburton a new $1.2 billion contract to restore and operate the oil infrastructure in the southern half of Iraq.(20) In response to questions about why the Corps disregarded the auditor warnings, an Army spokesman stated: "We have our own internal audit process [and we] haven't turned up any serious wrongdoing or major problems."(21)


5. Waiver of the Requirement to Withhold Partial Payments

Beginning in March 2004, the Defense Department granted Halliburton a series of waivers from a federal procurement rule requiring the Defense Department to withhold 15% of payments to Halliburton until the company submitted adequate cost estimates for its work in Iraq.

On August 16, 2004, the Defense Contract Audit Agency issued a memo to the Army Field Support Command, which administers Halliburton's LOGCAP troop support contract. In the memo, the auditor agency "strongly encourages" the Army to withhold 15% of Halliburton's payments because of "significant unsupported costs" and "numerous, systemic issues" with Halliburton's cost proposals.(22) Under these circumstances, the Federal Acquisition Regulation requires the Defense Department to protect the interests of the taxpayer by withholding 15% of reimbursements until disagreements are resolved.(23)
In the memo, the DCAA auditors reported that "[t]o date, KBR has not provided basic supporting data for the significant task order proposals."(24) The auditors wrote, "We do not believe the quality of KBR's proposals has improved. [E]ach successive update continues to be significantly deficient."(25) They also stated:

    It is clear to us KBR will not provide an adequate proposal until there is a consequence. Therefore, we strongly encourage you not to extend the implementation of this clause any further and only allow payment of the 85 percent as specified in the clause.(26)

Other government auditors, including the Special Inspector General for Iraq Reconstruction, agreed with this recommendation.(27)

Despite these multiple auditor entreaties, the Defense Department approved a final waiver of the 15% withholding provision on February 2, 2005. According to the Defense Department, the decision was made because "the additional financial strain" on Halliburton "could severely impact the level and responsiveness of the services provided to our forces."(28)


6. Redaction of Audit Findings

At Halliburton's request, and despite the urging of Army officials for a "sanity check," the Defense Department concealed the magnitude of Halliburton's questioned and unsupported costs in audit reports submitted in October 2004 to U.N. officials charged with overseeing the expenditure of Iraqi funds. Under the RIO contract, the Defense Department paid Halliburton with a mix of U.S. and Iraqi funds. Of the $2.5 billion Halliburton was ultimately paid, $1.6 billion came from Iraqi oil proceeds held in the U.S.-controlled Development Fund for Iraq, the successor to the Oil for Food program run by the United Nations.(29) The U.N. Security Council transferred control of these Iraqi funds to the United States through Resolution 1483, which directed the United States to use Iraqi funds "in a transparent manner" for the benefit of the Iraqi people.(30) This resolution also created the International Advisory and Monitoring Board (IAMB) to monitor U.S. compliance with the resolution.(31)

When the IAMB requested copies of DCAA's audits of Halliburton's RIO contract, the Defense Department redacted every mention of every questioned and unsupported charge from every audit turned over to the international auditors. In total, references to excessive charges were blacked out over 460 times.(32) After examining the redacted audits, the chair of the IAMB reported that "it was impossible to determine the extent of alleged overcharges because the figures had been redacted."33

These extensive redactions were proposed by Halliburton and accepted by the Defense Department without modification. According to a letter Halliburton sent to the Army Corps of Engineers, Halliburton officials proposed redacting not just proprietary business information, but all portions of the audits they "believe are factually incorrect or misleading."34

When career officials at the Army recommended that the Department conduct a "sanity check" of Halliburton's redactions, this advice was rejected.(35) Instead, the Defense Department General Counsel's office warned that any Defense Department official who disclosed any part of the audits without the express permission of Halliburton would face criminal penalties under the Trade Secrets Act.(36) The ostensible rationale for these legal conclusions was that Defense Department officials were incapable of "second-guessing" Halliburton's assertion of what information in the audits was a trade secret.(37)


7. Award of Fees for Questioned Meal Charges

In April 2005, Defense Department officials dismissed auditor findings that Halliburton had submitted $200 million in questioned charges for dining facility services, deciding instead to retroactively change the formula for Halliburton's billing and increase the company's profit margin.

On April 5, 2005, the U.S. Army Field Support Command announced that Halliburton would receive $145 million out of $200 million (72.5%) of the costs DCAA questioned for meal services in Iraq.(38) In making this determination, the Defense Department "sustained" only 27.5% of DCAA's recommendations. The historical level is between 60% and 70%.

Nothing in the Army's press release found any fault with the auditors' conclusions that Halliburton had billed for meals it never served. Instead, the officials developed a new formula for calculating the number of meals for which Halliburton could charge. Rather than paying for one meal each time a person ate, the Department agreed to pay for 1.3 meals.(39)

At the same time, the Department increased the company's fee for the food services work. Although not mentioned anywhere in the Army's press release, Department officials agreed to increase the company's fee from 1% to 3%, generating an extra $26 million for Halliburton.(40)


8. Award of New Contracts

The favoritism shown Halliburton appears to be continuing. Despite the auditor findings of over $1.4 billion in questioned and unsupported costs in Iraq, Halliburton has recently received two new contract awards.

The first new contract is a contract with the Defense Department to build additional prison facilities for detainees at Guantanamo Bay, Cuba. According to the Defense Department, this contract, which was announced on June 18, 2005, is worth up to $500 million.(41)

Three days later, on June 21, 2005, the Department announced that Halliburton had also been awarded a new contract to provide a "logistics services" similar to LOGCAP to support U.S. forces deployed to Europe. According to the announcement by the Army Corps of Engineers, this contract is worth up to $1.25 billion.(42)

[See also: Bush administration distorts science to shield Halliburton from pollution laws]


Footnotes

(1) Briefing by Michael Mobbs, Special Assistant to the Under Secretary of Defense for Policy Douglas Feith, for Staff, House Government Reform Committee (June 8, 2003). See also Letter from Rep. Henry A. Waxman to Vice President Richard B. Cheney (June 13, 2004) (online at www.democrats.reform. house.gov/Documents/20040623114026- 70050.pdf) (describing June 8, 2004, briefing).

(2) U.S. General Accounting Office, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management Challenges (GAO-04-605) (June 2004) (concluding that "DOD recognized as early as November 2002 that the contractor, given its role in preparing a contingency support plan, would be in the best position to execute the plan").

(3) Briefing by Michael Mobbs, Special Assistant to the Under Secretary of Defense for Policy Douglas Feith, for Staff, House Government Reform Committee (June 8, 2003).

(4) U.S. General Accounting Office, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management Challenges (GAO-04-605) (June 2004).

(5) Id.

(6) Letter from Michael D. Kohn, Stephen M. Kohn, and David K. Colapinto, Counsel to Bunnatine H. Greenhouse, to the Honorable Les Brownlee, Acting Secretary of the Army (Oct. 21, 2004).

(7) Id.

(8) Id.

(9) Id.

(10) DOD News Briefing, Defense Contract Audit Agency (Dec. 11, 2003).

(11) U.S. Army Corps of Engineers, Waiver for Submission of Cost and Pricing Data (Dec. 19, 2003).

(12) Id.

(13) Id.

(14) See, e.g., Library of Congress, Kuwaiti Fuel Laws (Jan. 15, 2004) (concluding that "initial research did not reveal the existence of any law prohibiting companies from releasing cost and pricing data for fuel products in Kuwait"); see also Telephone conversation between Samad Al-Blouki and Minority Staff, Committee on Government Reform (Jan. 20, 2004) and Telephone conversation between Samad Al-Blouki and Minority Staff, Committee on Government Reform (Jan. 14, 2004) (former managing director of Kuwait Petroleum Corporation in Europe confirmed that there is no Kuwaiti law prohibiting the submission of certified cost and pricing data for fuel products).

(15) Defense Contract Audit Agency, Flash Report on Estimating System Deficiency Found in the Proposal for Contract No. DAAA09-02-D-0007, Task Order No. 59 (Audit Report No. 3311-2004K24020001) (Dec. 31, 2003).

(16) Id.

(17) Defense Contract Audit Agency, Status of Brown & Root Services (BRS) Estimating System Internal Controls (Jan. 13, 2004).

(18) Id.

(19) Id.

(20) U. S. Army Corps of Engineers, News Release: U. S. Army Corps of Engineers Awards Contracts for Repair of Iraq's Oil Infrastructure (Jan. 16, 2004) (including, but not limited to, "extinguishing oil well fires; environmental assessments and cleanup at oil sites; oil infrastructure condition assessments; engineering design and construction necessary to restore the infrastructure to a safe operating condition; oilfield, pipeline and refinery maintenance; procurement and importation of fuel products; distribution of fuel products within Iraq; technical assistance in marketing and sale/export; and technical assistance and consulting services to the Iraqi oil companies").

(21) Halliburton Contract Questions Dog White House, Chicago Tribune (Feb. 1, 2004).

(22) Memorandum from Defense Contract Audit Agency to U.S. Army Field Support Command (Aug. 16, 2004).

(23) Federal Acquisition Regulation, 48 C.F.R. 52.216-26.

(24) Id. [sic, see note 22]

(25) Id.

(26) Id.

(27) Special Inspector General for Iraq Reconstruction, Task Order 0044 of the Logistics Civilian Augmentation Program III Contract (Report No. 05-003) (Nov. 23, 2004).

(28) Letter from Benjamin S, Griffin, Commanding General, U.S. Army Materiel Command, to Rep. Henry A. Waxman (Mar. 6, 2005).

(29) U.S. Army Corps of Engineers, Frequently Asked Questions: Engineer Support to Operation Iraqi Freedom (Oct. 7, 2004) (online at www.hq.usace.army.mil/ CEPA/Iraq/March03-table.htm).

(30) U.N. Security Council Resolution 1483 (May 22, 2003).

(31) Id.

(32) See Letter from Rep. Henry A. Waxman to Rep. Christopher Shays (June 20, 2005) (online at www.democrats.reform.house.gov/ Documents/20050620110738-07899.pdf) (describing redactions process).

(33) U.N. Board Cites U.S. Contractor in Iraq, Washington Post (Dec. 15, 2004).

(34) Letter from Michael K. Morrow, Contracts Manager, KBR, to Gordon A. Sumner, Contracting Officer, U.S. Army Corps of Engineers (Sept. 28, 2004).

(35) Meeting between Colonel Emmett DuBose, U.S. Army Corps of Engineers, and J. Joseph Tyler, Chief of the Program Management Division of the U.S. Army Corps of Engineers, and Majority and Minority Staff, Subcommittee on National Security, Emerging Threats and International Relations (June 15, 2005).

(36) Id.

(37) Id.

(38) U.S. Army Field Support Command, News Release: Army Field Support Command Agrees to Pay for Dining Facility Services (Apr. 5, 2005).

(39) Army, Halliburton Settle Bill Dispute, Wall Street Journal (Apr. 6, 2005).

(40) Id.

(41) Halliburton Is Given New Prison Contract, Associated Press (June 19, 2005).

(42) U.S. Army Corps of Engineers, Press Release: U.S. Army Corps of Engineers Awards Logistics Support Contract to Provide Services in U.S. Army Europe's Area of Operations (June 21, 2005).


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