KBR vs. Army: On largest services contract, ‘things have gotten very nasty’

KBR vs. Army: On largest services contract, ‘things have gotten very nasty’

May. 5, 2013 – 06:00AM
A KBR employee serves a Thanksgiving dinner at Kirkuk Air Base, Iraq.

A KBR employee serves a Thanksgiving dinner at Kirkuk Air Base, Iraq. (Sgt. Sean Simmons//Army)

Army contracting officer Robert Egan gave contractor KBR Inc. a rare ultimatum: Provide a firm, fixed price on remaining work to close out the largest government services contract in U.S. history. Or else, he added, he was finished talking.

“Until I see that FFP deliverable, I cannot enter further communication exchanges with your contracts team,” Egan told the company in aFeb. 26 email.

At issue is the final stage of the Army’s $38 billion Logistics Civil Augmentation Program (LOGCAP) III, the 12-year-old logistics contract that has supported virtually all U.S. military logistics operations in Iraq. The Army seeks to revise the pricing terms on the final work to be done on the contract to be firm, fixed price instead of cost-reimbursable. In response, KBR has filed a lawsuit seeking to keep to the existing cost-reimbursable terms.

At stake in the dispute is far more than varying interpretations of contracting procedures. By its own estimates, KBR says the closeout work on the contract will cost more than $500 million and take up to 13 years. The final decision on the closeout, as well as years of still-unresolved audits, could cost or save the government hundreds of million of dollars in additional costs.

The dispute reflects a sharply fractured relationship between the Army and one of its biggest contractors. Especially telling are internal emails between the Army and KBR, submitted to the federal court as part of the lawsuit.

“The emails show things have gotten very nasty between KBR and the Defense Department,” said Charles Tiefer, professor of government contracting at the University of Baltimore and a member of the Commission on Wartime Contracting, created by Congress to fix widespread problems that have plagued contract operations in Iraq and Afghanistan.

Tiefer said the dispute has grown bigger and more intense than anyone expected.

“The emails show that the Defense Department, in its dealings with KBR, feels like it’s wrestling with a giant python,” Tiefer said. “The kind of willingness to work with KBR that you saw for a number of years during the Iraq War has completely gone.”

In a statement to Federal Times, KBR said its relationship with the Army “remains strong,” noting that the company continues to be awarded government contracts, such as for supporting U.S. forces in Bahrain.

“Additionally, we enjoy frank, open and continuous communications with the Army,” the company said.

A spokesman for the Army declined comment.

But as Tiefer sees it, KBR seeks “an open-ended, meter-keeps-running arrangement” that will result in a far bigger bill to the Army.

Throughout the LOGCAP III program, awarded to KBR in 2001, the Army issued 160 task orders by 2010 for everything from dining services for U.S. troops to in-theater delivery of housing for civilian and military personnel. Those previous task orders were awarded on a cost-reimbursable basis, meaning KBR is reimbursed for its costs plus a fee based on costs incurred. But in July 2012, KBR said the Army decided contract closeout activities must be performed on a firm, fixed-price basis, meaning the Army wanted KBR to provide a fixed dollar figure for the remaining work and absorb any excess costs beyond that.

This closeout, KBR says in its lawsuit, is the culmination of years “in an austere, remote and hostile environment,” requiring the resolution of all open issues, including audits, vendor disputes, litigation, subpoenas and other activities.

Fixed-price contracts and task orders are generally viewed as less risky and less expensive than cost-reimbursable work when the work to be done is well-understood and limited in scope. The Obama administration made it a reform priority in 2009 to use more firm, fixed-price contracts and fewer cost-reimbursable contracts.

KBR reacted swiftly to Egan’s email demanding a fixed-price closeout: “KBR is unwilling to accept such a proposal,” KBR senior contracts manager Mary Wade said in a letter.

“LOGCAP III close-out activity does not lend itself to a firm fixed-price arrangement,” Wade wrote.

“Currently, there is no way to accurately define the scope or duration of work. There is no detailed statement of work because no one knows what is going to be done, when it will be done and how long long it will take to complete.

“We see no need to change it,” she concluded.

The Army wasn’t convinced. Months after Wade’s letter, the dispute remained unresolved, and communications grew increasingly strained.

After receiving a phone message from KBR official R.W. Nicholson about some earlier email correspondence, Egan replied with an email saying not to expect a response from his office any time soon.

“This office will not reply to communications from KBR on which it is not a primary addressee,” he wrote, adding that the company also had raised concerns to the Army Materiel Command’s chief counsel the previous week.

“If this is indeed the case … this office is again prohibited from responding to your earlier emails, as KBR has made the unilateral business decision to (yet again) elevate not only beyond the PCO [procuring contracting official] level of execution, but beyond … ”

Court battle

Three days after Egan’s Feb. 26 email, KBR filed a pre-award bid protest with the Government Accountability Office.

The protest was hardly the only dispute between the Army and KBR. In the company’s most recent quarterly report with the Securities and Exchange Commission, KBR outlines pages of pending litigation and disputes that often involved the government.

After GAO threw out the case a few weeks later on jurisdictional grounds, KBR filed a 21-page lawsuit in the U.S. Court of Federal Claims accusing the Army of using the wrong type of contract, acting in bad faith and violating procurement regulations.

KBR noted the contract had largely been performed on a cost-reimbursement basis throughout the Iraq and Afghanistan wars. The company argued the Army had underfunded task orders and did not have the money now to fund closeout activities, violating the Anti-Deficiency Act.

The company said closeout tasks can’t be estimated, citing costs stemming from litigation with subcontractors and tort cases filed against KBR by military and civilian personnel as well as future unresolved audits. “Currently, neither KBR nor the Army can accurately define the scope or duration of work contemplated under this request for proposal,” the company said in court papers.

Such uncertainty, the company argued, should rule out a firm fixed-price arrangement.

The Justice Department, which represents the Army in the KBR case, urged the court to toss out the lawsuit on the grounds that KBR refused to provide the Army information it needed to decide whether the closeout could be performed on a fixed-price basis.

Government lawyers questioned how KBR could file a bid protest on a contract it’s held since 2001, while continuing to perform and get paid for closeout activities.

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