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How's Haliburton Doing with YOUR MONEY?
Not good, sorry.
Source: Henry Waxman, 2006-03-28
Candidate: Republican Party
Halliburton is the largest private contractor in Iraq. The company has operated
there under three mega-contracts: the “LOGCAP” contract to provide support to
U.S. troops; the original “Restore Iraqi Oil” (RIO) contract, which Halliburton
received in secret without competitive bidding in March 2003; and the RIO 2
contract, which was awarded to Halliburton in January 2004.
Previous reports by government auditors and congressional investigators have
evaluated the LOGCAP and RIO contracts. This report, however, is the first to
examine the RIO 2 contract. It reveals that government officials and investigators
have harshly criticized Halliburton’s performance under RIO 2, citing “profound
systemic problems,” “exorbitant indirect costs,” “misleading” and “distorted” cost
reports, a “lack of cost control,” an “overwhelmingly negative” evaluation, and an
“obstructive” corporate attitude toward oversight.
The RIO 2 contract is critically important to the successful reconstruction of Iraq.
The mammoth $1.2 billion contract gave Halliburton the responsibility for
restoring the oil fields in southern Iraq, which historically have been Iraq’s largest
and most productive. Three years ago, Bush Administration officials promised
that Iraq would be able to fund its own reconstruction out of its oil revenues. The
successful restoration of the southern oil fields, which the Administration
entrusted to Halliburton under RIO 2, was supposed to pay for the rebuilding of
much of the rest of Iraq’s infrastructure. But these promises have not been
fulfilled.
To evaluate Halliburton’s performance under RIO 2, this report analyzes
hundreds of pages of previously undisclosed correspondence, evaluations, and
audits. The documents reviewed in preparation of the report include
correspondence from the Project and Contracting Office (PCO), the Defense
Department agency charged with overseeing RIO 2; evaluations by a private
contractor, Foster-Wheeler, hired to help the PCO oversee the contract;
documentation related to award-fee determinations; and audits by the Defense
Contract Audit Agency (DCAA).
These documents show that between July 2004 and July 2005, Halliburton’s
performance under RIO 2 repeatedly received scathing critiques:
• Intentional Overcharging: The PCO board evaluating Halliburton’s
request for award fees found that Halliburton repeatedly overcharged the
taxpayer, apparently intentionally. In one case, “[c]ost estimates had
hidden rate factors to increase cost of project without informing the
Government.” In another instance, Halliburton “tried to inflate cost
estimate by $26M.” In yet a third example, Halliburton claimed costs for
laying concrete pads and footings that the Iraqi Oil Ministry had “already
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
put in place.”
• Exorbitant Costs: The PCO reported that Halliburton was “accruing
exorbitant indirect costs at a rapid rate” and that Halliburton’s “lack of
cost containment and funds management is the single biggest detriment to
this program.” The oversight contractor found a “lack of cost control …
in Houston, Kuwait, and Iraq.” In a partial review of the RIO 2 contract,
DCAA auditors challenged $45 million in costs as unreasonable or
unsupported.
• Inadequate Cost Reporting: The PCO found that Halliburton
“universally failed to provide adequate cost information,” had “profound
systemic problems,” provided “substandard” cost reports that did “not
meet minimum standards,” and submitted reports that had been “vetted of
any information that would allow tracking of details.” The oversight
contractor complained about “;unacceptable unchecked cost reports.”
• Schedule Delays: Halliburton’s work under RIO 2 was continually
plagued by delays. According to the PCO, Halliburton had a “50% late
completion” rate for RIO 2 projects. Evaluations by the award fee board
noted “untimely work” and “schedule slippage.”
• Refusal to Cooperate: PCO evaluations described Halliburton as
“obstructive” with oversight officials. Despite the billions in taxpayer
funds Halliburton has been paid, the company’s “leadership demonstrated
minimal cooperative attitude resolving problems.”
The decision to award Halliburton the RIO 2 contract was controversial. Before
the award of the contract, DCAA auditors warned the Defense Department not to
enter into additional contracts with Halliburton because of “significant
deficiencies” in the company’s cost estimating system, but the Department
ignored this advice. It now appears that problems that led to the unusual DCAA
warning have been realized in RIO 2, with serious implications for the
reconstruction effort in Iraq and federal taxpayers.
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
1
PURPOSE AND METHODOLOGY
Halliburton is the largest private contractor in Iraq. It has worked under three
huge contracts: (1) the Logistics Civil Augmentation Program (LOGCAP)
contract with the U.S. Army to provide logistical support to the troops; (2) the
original Restore Iraqi Oil (RIO) contract to import fuel into Iraq and rebuild Iraq’s
oil infrastructure facilities; and (3) the follow-on Restore Iraqi Oil (RIO 2)
contract to continue rebuilding Iraq’s oil infrastructure in southern Iraq. To date,
Halliburton has been paid $13.5 billion for providing troop support in Iraq under
the LOGCAP contract, and it has received $2.4 billion under RIO.1 The RIO 2
contract is worth up to $1.2 billion.
There have been multiple reviews of the LOGCAP and RIO contracts. The
Special Investigations Division has examined these contracts for Rep. Henry A.
Waxman in several reports.2 In addition, the contracts have been examined by the
Defense Contract Audit Agency (DCAA), the Army Audit Agency, the
Government Accountability Office, and the Special Inspector General for Iraq
Reconstruction.3 These reviews and audits have identified multiple problems
with Halliburton’s performance under the contracts, including unreasonable and
unsupported costs of over $1.4 billion.4
There have been, however, no public assessments of Halliburton’s performance
under the RIO 2 contract.
At the request of Rep. Waxman, this report is the first detailed analysis of
Halliburton’s efforts under RIO 2. The report is based on four sets of previously
undisclosed documents: (1) months of correspondence involving Halliburton and
officials in the Project and Contracting Office, the Defense Department agency set
up to oversee RIO 2 and other Iraq reconstruction contracts; (2) evaluations of
RIO 2 conducted by Foster-Wheeler, a contractor hired to assist the PCO in
______________________________________________________________
1 U.S. Army Field Support Command, Media Obligation Spreadsheet, 27 Jan 06 (Jan. 27,
2006); U.S. Army Corps of Engineers, Frequently Asked Questions: Engineer Support to
Operation Iraqi Freedom (Jan. 26, 2006) (available online at
http://www.hq.usace.army.mil/CEPA/Iraq/March03-table.htm).
2 See, e.g., Minority Staff, House Committee on Government Reform, Halliburton’s
Questioned and Unsupported Costs in Iraq Exceed $1.4 Billion (June 27, 2005); Minority
Staff, House Committee on Government Reform, Halliburton’s Gasoline Overcharges
(July 21, 2004).
3 See, e.g., Army Audit Agency, Logistics Civil Augmentation Program in Kuwait: U.S.
Army Field Support Command (Audit Report A-2005-0043-ALE) (Nov. 24, 2004);
Government Accountability Office, DOD’s Extensive Use of Logistics Support Contracts
Requires Strengthened Oversight (GAO-04-854) (July 21, 2004); Special Inspector
General for Iraq Reconstruction, Pipeline River Crossing: Al Fatah, Iraq (Jan. 27, 2006).
4 Halliburton’s Questioned and Unsupported Costs in Iraq Exceed $1.4 Billion, supra note
2.
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
2
oversight of the RIO 2 contract; (3) documentation related to the government’s
RIO 2 award fee determinations; and (4) DCAA audits of Halliburton’s RIO 2
cost proposals. The documents cover the period from January 2004 to July 2005.
BACKGROUND
The Bush Administration started planning for the take-over of Iraq’s oil fields
nearly a year before the invasion of Iraq. During the summer of 2002, a special
team within the Pentagon called the Energy Infrastructure Planning Group was
established and charged with developing a plan to restore and operate Iraq’s oil
infrastructure in the event that the United States became an occupying power.5
According to Administration officials, the revitalization of Iraq’s oil fields would
play a pivotal role in the reconstruction of Iraq. In March 2003, for example,
then-Deputy Secretary of Defense Paul Wolfowitz assured members of Congress
that Iraq’s oil sector would be rehabilitated quickly, enabling Iraq’s oil revenues
to fund the reconstruction effort. In congressional testimony, Mr. Wolfowitz
stated: “We’re dealing with a country that can really finance its own
reconstruction, and relatively soon.”6 Echoing these views, the head of the U.S.
Agency for International Development, Andrew S. Natsios, stated a month later
that “the American part” of the cost of rebuilding Iraq “will be just $1.7 billion.”7
Halliburton’s Contingency Planning Contract
From nearly the beginning, Halliburton had a major role in the Administration’s
oilfield planning. In the fall of 2002, Michael Mobbs, a Defense Department
political appointee and the head of the Energy Infrastructure Planning Group,
decided to award the oil infrastructure planning work to Halliburton. This
decision was made in secret without competition from any other companies.8
As a result, Halliburton received a $1.9 million task order under the LOGCAP
contract in November 2002 to draw up contingency plans for U.S. occupation of
the Iraqi oil fields. At the time this no-bid contract was awarded, Mr. Mobbs
______________________________________________________________
5 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).
6 House Committee on Appropriations, Subcommittee on Defense, Hearing on FY2004
Appropriations, 108th Cong. (Mar. 23, 2003).
7 Nightline, ABC News (Apr. 23, 2003).
8 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).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
3
knew that the company that received the contingency contract would also be
awarded the much larger RIO contract.9
The Government Accountability Office later investigated the award of the
contingency contract 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.”10 GAO added that the work
“should have been awarded using competitive procedures.”11
The Original RIO Contract
On March 8, 2003, the U.S. Army Corps of Engineers awarded Halliburton
subsidiary KBR a no-bid monopoly contract to restore and operate Iraq’s oil
infrastructure. The Restore Iraqi Oil contract was awarded in secret, and other
qualified companies, like Bechtel, which did most of the oilfield work after the
first Gulf War, were precluded from bidding.12 The Defense Department justified
awarding the lucrative no-bid contract to Halliburton on that basis that
Halliburton had done the pre-war planning for operation and restoration of Iraq’s
oilfields under the contingency contract.13
Halliburton charged approximately $2.4 billion under the RIO contract, which had
a potential value of $7 billion.14 Halliburton’s work was split generally between
oil infrastructure projects and fuel importation tasks. Work has concluded on all
ten RIO task orders.
Reps. Henry A. Waxman and John Dingell began to raise questions about
Halliburton’s RIO contract soon after the contract was awarded.15 In a series of
letters, they provided evidence that Halliburton’s prices to import gasoline from
Kuwait were too high. They reported that Halliburton appeared to be charging
______________________________________________________________
9 U.S. General Accounting Office, Rebuilding Iraq: Fiscal Year 2003 Contract
AwardProcedures 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”).
10 U.S. General Accounting Office, Rebuilding Iraq: Fiscal Year 2003 Contract Award
Procedures and Management Challenges (GAO-04-605) (June 2004).
11 Id.
12 Minority Staff, Special Investigations Division, House Committee on Government
Reform, Halliburton’s Gasoline Overcharges (July 21, 2004).
13 U.S. Army Corps of Engineers, Justification for Other Than Full and Open Competition
for Execution of the Contingency Support Plan (Feb. 27, 2003).
14 U.S. Army Corps of Engineers, Frequently Asked Questions: Engineer Support to
Operation Iraqi Freedom (Jan. 26, 2006).
15 Letter from Rep. Henry A. Waxman to Lt. Gen. Robert Flowers, U.S. Army Corps of
Engineers (Mar. 26, 2003).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
4
twice as much as it should have for fuel imports.16 Independent experts
characterized Halliburton’s charges as “highway robbery” and “outrageously
high.”17
These concerns about Halliburton’s inflated costs were validated by Pentagon
auditors. In its audits of the ten task orders under the RIO contract, DCAA
identified $219 million in “questioned” costs and $60 million in “unsupported”
costs.18 The DCAA auditors criticized virtually every aspect of Halliburton’s
work, including its excessive charges to import fuel into Iraq from Kuwait and its
unnecessary retroactive payments to its Turkish fuel subcontractors.19 Revised
audits lowered the total amount of questioned and unsupported costs to $263
million.20
______________________________________________________________
16 Letter from Reps. Henry A. Waxman and John D. Dingell to Lt. Gen. Robert Flowers,
U.S. Army Corps of Engineers (Oct. 21, 2003).
17 Letter from Reps. Henry A. Waxman and John D. Dingell to Joshua Bolten, Director,
Office of Management and Budget (Oct. 15, 2003).
18 DCAA, Report on Audit of Proposal for Restore Iraqi Oil, Task Order No. 1 (Audit
Report No. 3311-2004K17900011) (Mar. 19, 2004); DCAA, Report on Audit of Proposal
for Restore Iraqi Oil, Task Order No. 2 (Audit Report No. 3311-2004K17900009) (Apr.
9, 2004); DCAA, Report on Audit of Proposal for Restore Iraqi Oil, Task Order No. 3
(Audit Report No. 3311-2004K17900056) (Oct. 2, 2004); DCAA, Report on Audit of the
Additional Funding Proposal for RIO I Task Order No. 04 (Audit Report No. 3311-
2004K17900086) (Sept. 3, 2004); DCAA, Report on Audit of Revised Proposal for
Restore Iraqi Oil Delivery Order No. 5 (Audit Report No. 3311-2005K21000024) (Feb.
25, 2005); DCAA, Report on Audit of Proposal for Restore Iraqi Oil Task Order No. 6
(Audit Report No. 3311-2004K21000028) (Sept. 16, 2004); DCAA, Report on Audit of
Revised Proposal for Restore Iraqi Oil Delivery Order No. 7 (Audit Report No. 3311-
2005K21000025) (Feb. 25, 2005); DCAA, Report on Audit of Revised Proposal for
Restore Iraqi Oil Delivery Order No. 8 (Audit Report No. 3311-2005K21000026)(Feb.
25, 2005); DCAA, Report on Audit of Revised Proposal for Restore Iraqi Oil Delivery
Order No. 9 (Audit Report No. 3311-2005K21000019) (Feb. 3, 2005); DCAA, Report on
Audit of Revised Proposal for Restore Iraqi Oil Delivery Order No. 10 (Audit Report No.
3311-2005K21000020) (Feb. 3, 2005).
According to the DCAA Contract Audit Manual, “questioned costs” are costs “on which
audit action has been completed” and “which are not considered acceptable.” Questioned
costs may be determined unacceptable for several reasons: they may be “unallowable”
under the contract terms; they may not be “allocable” because they are not “incurred
specifically for the contract;” or they may be “unreasonable in amount.” Costs are
considered unreasonable in amount when they “exceed that which would be incurred by a
prudent person in the conduct of a competitive business.” DCAA classifies charges as
“unsupported” when “the contractor does not furnish sufficient documentation to enable a
definitive conclusion” about the acceptability of the charges.
19 See, e.g., DCAA, Report on Audit of Revised Proposal for Restore Iraqi Oil Delivery
Order No. 5, supra note 18, at 2; DCAA, Report on Audit of Revised Proposal for
Restore Iraqi Oil Delivery Order No. 7, supra note 18, at 2.
20 Army to Pay Halliburton Unit Most Costs Disputed by Audit, New York Times (Feb. 27,
2006).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
5
The RIO 2 Contract
In response to widespread criticism of Halliburton’s no-bid RIO contract, the
Corps of Engineers promised to hold a competition for the oil sector work. On
April 8, 2003, just one month after the award of the RIO contract, Lt. Gen. Robert
Flowers, the Commander of the Corps of Engineers, assured Rep. Waxman that
“[t]here will be ample opportunity for competition of the overall requirements to
support the restoration of Iraq’s oil infrastructure.”21 Gen. Flowers promised that
“the requirements will be competed at the earliest opportunity consistent with
mission needs.”22 In May 2003, Gen. Flowers stated, “The best estimate for
award of the contract … is approximately the end of August.”23 However, the
award of the follow-on RIO 2 contract was repeatedly delayed until January 2004.
According to participants, the competition was not only slow but seriously
flawed. Sheryl Tappan, who led Bechtel’s proposal team in the competition
before Bechtel withdrew, characterized the competition as a “sham” and “farce.”24
In her testimony before the Senate, Ms. Tappan stated, “In my 12 years doing
government proposals, I had never seen anything as arrogant, as egregious as the
ways in which Pentagon officials … treated the bidders, how they ignored our
federal laws and regulations and the procedures that I still believe normally ensure
fair play.”25 Ms. Tappan accused the Corps of Engineers of misleading bidders
about the nature of the contract and structuring the competition to heavily favor
the incumbent contractor, Halliburton.
In January 2004, the Corps of Engineers finally awarded a pair of RIO 2
contracts. Parsons Corporation received an $800 million contract to restore oil
infrastructure in northern Iraq, while Halliburton received a $1.2 billion contract
to restore oil infrastructure in southern Iraq.26 Historically, the southern oil fields
have been Iraq’s largest and most productive.
Both of the RIO 2 contracts are “cost-plus,” meaning that the contractor is
reimbursed for costs it incurs under the contract and then receives its profit, or
______________________________________________________________
21 Letter from Lt. Gen. Robert B. Flowers, U.S. Army Corps of Engineers, to Rep. Henry A.
Waxman (Apr. 8, 2003).
22 Id.
23 Letter from Lt. Gen. Robert B. Flowers, U.S. Army Corps of Engineers, to Rep. Henry A.
Waxman (May 2, 2003).
24 Senate Democratic Policy Committee, An Oversight Hearing on Iraq Contracting Abuses
(Sept. 10, 2004).
25 Id.
26 U.S. Army Corps of Engineers, Press Release: U.S. Army Corps of Engineers Awards
Contracts for Repair of Iraq’s Oil Infrastructure (Jan. 16, 2004).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
6
fee, as a percentage of those costs. Under its RIO 2 contract, Halliburton can
receive up to 3% of its costs as an award fee.27
The award of the RIO 2 contract to Halliburton was controversial because DCAA
had warned the Corps of Engineers not to enter into future negotiations with the
company without consulting with the auditors. On December 31, 2003, DCAA
issued a “Flash Report,” alerting various Defense Department agencies about
“significant deficiencies” in Halliburton’s cost estimating system that “could
adversely affect the organization’s ability to propose subcontract costs in a
manner consistent with applicable government contract laws and regulations.”28
Based on that Flash Report, the auditors sent out a second memo on January 13,
2004, warning that Halliburton could not adequately estimate its costs for work in
Iraq.29 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.”30 It also stated:
We recommend that you contact us to ascertain the status of
[Halliburton’s] estimating system prior to entering into future
negotiations.31
On January 16, 2004, just three days after this memo was sent, the Army Corps of
Engineers awarded Halliburton the new $1.2 billion contract.32 The Corps of
Engineers confirmed that it had received the DCAA memo before making the
decision, but according to DCAA, the Corps did not consult with the auditors as
advised.33 In response to questions about why the Corps disregarded the auditor
______________________________________________________________
27 Projecting and Contracting Office, Amendment of Solicitation/Modification of Contract
(Dec. 16, 2004). There is no automatic base fee under the RIO 2 contract.
28 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).
29 Defense Contract Audit Agency, Status of Brown & Root Services (BRS) Estimating
System Internal Controls (Jan. 13, 2004).
30 Id.
31 Id.
32 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”).
33 House Committee on Government Reform, The Complex Task of Coordinating Contracts
Amid Chaos: The Challenges of Rebuilding a Broken Iraq (Mar. 11, 2004).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
7
warnings, an Army spokesman stated: “We have our own internal audit process
[and we] haven’t turned up any serious wrongdoing or major problems.”34
Under the RIO 2 contract, Halliburton has been tasked with a range of oil
infrastructure restoration and fuel importation projects. The contract currently is
worth over $365 million out of a maximum value of $1.2 billion.35 The contract
is overseen by the Project and Contracting Office, which is operated by the
Defense Department. A private contractor, Foster-Wheeler, assists the PCO in
overseeing both RIO 2 contracts.
FINDINGS
The previously undisclosed correspondence, evaluations, and award fee
documentation reviewed in preparation of this report reveal multiple serious
problems with Halliburton’s performance under the contract. These problems
include apparently intentional overcharging, exorbitant costs, poor cost reporting,
slipping schedules, and refusal to cooperate with the government. Over the
course of a year, from July 2004 to July 2005, these problems emerged, worsened,
and persisted. By January 29, 2005, the problems were so severe that the PCO
took the extreme step of issuing a “cure notice” to Halliburton, which is a
notification that the contract may be terminated for cause. When Pentagon
auditors reviewed $365 million in Halliburton costs, they challenged $45 million
as questioned or unsupported.
Correspondence and Evaluations Reveal Persistent Problems
A review of hundred pages of correspondence between Halliburton and the PCO
and multiple evaluations prepared by the oversight contractor, Foster-Wheeler,
reveal a persistent pattern of deficient performance and inadequate cost reporting.
The story of Halliburton’s RIO 2 problems begins on May 29, 2004, when the
PCO provided Halliburton with a detailed description of the cost reporting it
expected from the company.36 Within two months, problems started to surface.
In July 2004, Halliburton was informed by the PCO that its “reporting needed to
show changes which have been made in the last six months to visibly demonstrate
we are not repeating past mistakes of the RIO contract.”37 The company was also
______________________________________________________________
34 Halliburton Contract Questions Dog White House, Chicago Tribune (Feb. 1, 2004).
35 Briefing by Defense Contract Audit Agency for Committee on Government Reform staff
(Mar. 3, 2006).
36 Letter from Coalition Provisional Authority, Program Management Office to KBR
Contracts Manager (May 29, 2004).
37 KBR, Minutes of Meeting (July 15, 2004).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
8
directed to commit to reducing its support staff in Kuwait to just ten individuals
within 90 days.38
On August 28, 2004, the PCO sent Halliburton a sharply worded “letter of
concern.”39 The letter began by stating, “you have universally failed to provide
adequate cost information as required.”40 According to the PCO, its “own failed
attempts to get [Halliburton] to provide adequate cost information under this
contract” and adverse audit findings “reflect profound systemic problems.”41 The
PCO also explained that Halliburton was “accruing exorbitant indirect costs at a
rapid pace.”42
In an attachment to the letter, the PCO noted that Halliburton “has not shown any
attempt to comply” with the cost reporting requirements established in the
original May, 29, 2004 letter.43 The PCO explained that Halliburton “has done
the minimum and has not shown initiative in providing the information required
despite repeated requests and several meetings.”44 The PCO then expressed the
concern that the reports that had been provided were “vetted of any information
that would allow tracking of details.”45 The PCO also complained that
Halliburton had denied the government access to its electronic cost reporting
system.
Meetings were held in October 2004 to further discuss these problems. At these
meetings, the PCO expressed concern that the size of Halliburton’s support staffs
in Houston and Kuwait was excessive. According to the PCO, the Kuwait office
had already spent 78% of its budget “in four months of a nineteen month
schedule.”46
A report from Foster-Wheeler in late October found that “unacceptable unchecked
cost reports [were] being issued” by Halliburton.47 The oversight contractor also
pointed out that Halliburton was prioritizing RIO 2 projects “without PCO
approval” and that there was a “lack of cost control … in Houston, Kuwait, and
______________________________________________________________
38 Id.
39 Letter from Project and Contracting Office to KBR (Aug. 28, 2004).
40 Id.
41 Id.
42 Id.
43 Project and Contracting Office, PCO Comments on the KBR July Monthly Reports
(undated).
44 Id.
45 Id.
46 Project and Contracting Office, Review of KBR Cost Reports: Summary of Points Raised
26 Oct 04 – KBR Offices, Basra (undated).
47 Foster-Wheeler, Cost Review Meetings at KBR Offices, Basra — 25-29 Oct 04 (Oct. 29,
2004).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
9
Iraq” under one task order.48 Foster-Wheeler concluded that the company’s “top,
very top management” should be informed of the PCO’s “serious concerns.”49
Halliburton’s deficient performance continued into November 2004. In a
November 11 letter to Halliburton, the PCO stated that Halliburton’s recent
monthly cost report “does not meet minimum standards.”50 After noting
Halliburton’s “on-going cost reporting deficiencies,” the PCO explained that
Halliburton “failed to provide an adequate cost report in the nine months since
contract award.”51 The PCO warned that continued “substandard” cost reports
could result in a cure notice.52
Halliburton’s October, November, and December cost reports were similarly
criticized. Foster-Wheeler found Halliburton’s description of the progress made
on an oil field project to be “misleading” and “distorted.”53 The oversight
contractor also stated that “there are still too many people booking man hours in
Houston.”54 Although Halliburton acknowledged cost overruns and schedule
slippage in its December report, Foster-Wheeler found that Halliburton “does not
address … how they intend to reduce costs and get schedules back on target.”55
The PCO took the extreme step of issuing a “cure notice” on January 29, 2005.
This letter notified Halliburton that its RIO 2 contract could be terminated if the
ongoing problems were not cured. The contracting officer stated that
Halliburton’s “failure to deliver a useable, accurate cost report” was “endangering
performance of the contract.”56 He explained:
The Government has made numerous attempts to work with KBR to bring
their cost reporting procedures into minimal acceptable standards.… To
date, KBR has yet to produce a cost report that would meet minimal
acceptable standards to report accurate costs incurred to date.57
The cure notice also stated that Halliburton’s “lack of cost containment and funds
management is the single biggest detriment to this program.”58
______________________________________________________________
48 Id.
49 Id.
50 Memorandum from Project and Contracting Office to KBR (Nov. 11, 2004)
51 Id.
52 Id.
53 Foster-Wheeler, Follow-Up Cost Review — Qarmat Ali Water Injection (Nov 22, 2004).
54 Foster-Wheeler, Critique of KBR November 2004 Monthly Cost Report
55 Foster-Wheeler, PCO — Delinquencies with KBR Dec 2004 Monthly Report (undated).
56 Letter from Project and Contracting Office to KBR (Jan. 29, 2005).
57 Id.
58 Id.
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
10
On February 20, 2005, Halliburton presented its “Corrective Action Plan” for
addressing cost reporting deficiencies identified in the cure notice.59 The
company committed to making the necessary changes in its February cost report,
but these changes were not made. Foster-Wheeler’s analysis of the February cost
report disclosed ongoing problems. According to the oversight contractor,
“Baseline schedules are continually changing from one month to the next, making
it impossible to evaluate the slippage against the original plan.”60 Foster-Wheeler
found that under just one task order, Halliburton was billing for 30 excessive
employees in Houston.
On March 7, 2005, the PCO formally responded to Halliburton’s proposed
corrective actions. According to the PCO contracting officer, Halliburton’s
characterization of a February meeting between the parties was “not a factual
statement.”61 The contracting officer explained that “[t]he purpose of the meeting
was for the Government representatives to gain an understanding of the system to
help us understand how the cost reports have gotten so out of control.”62 He
stated, “Inaccurate data is primarily what has made the cost report ineffective to
date.”63 The contracting officer also expressed “sheer frustration with the
consistent lack of accurate data” despite “repeated failed attempts by the
Government.”64 Moreover, he was concerned that “it appears as though KBR is
billing the Government on estimated hours versus actual costs incurred.”65 He
concluded that “cost containment and control has become the number one issue
for this program.”66
Problems persisted in March and April. Foster-Wheeler highlighted schedule
delays in engineering and procurement.67 Under one task order, Halliburton
reported savings of $285,000 when, in fact, there was a cost overrun of more than
$1 million.68
By late May 2005, the contracting officer detected improvements in cost control
and reporting.69 However, the cure notice remained in effect for a full six months
______________________________________________________________
59 Kellogg Brown & Root, Monthly Cost Report Corrective Action Plan (Feb. 20, 2005).
60 Foster-Wheeler, SPCOC Critique — KBR Feb 2005 Monthly Report (Mar. 21, 2005).
61 Letter from Project and Contracting Office to KBR (Mar. 7, 2005).
62 Id.
63 Id.
64 Id.
65 Id.
66 Id.
67 Foster-Wheeler, PCO Oil Program — South: KBR Monthly Detailed Progress Report
Dated March 2005 (June 13, 2005).
68 Foster-Wheeler, Monthly Report Review: KBR Monthly Report, April 2005 (May 25,
2005).
69 Letter from Project and Contracting Office to KBR (May 29, 2005).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
11
until July 2005 because of outstanding problems. Over one year after the Defense
Department began identifying serious problems under the RIO 2 contract and
instructed Halliburton to correct them, the company’s performance was still
plagued by significant deficiencies.
Award Fee Determinations Confirm Halliburton’s Poor
Performance
Another indication of Halliburton’s consistently poor performance is its dismal
award fee evaluations. The first award fee determination covered the period from
January 16, 2004, to January 29, 2005. The second covered the period from
January 30, 2005, to July 27, 2005. Both are highly critical of Halliburton’s
performance.
First Award Fee Determination
In the first award fee determination, Halliburton was eligible for up to $7.9
million in award fees, but was granted $0.70 As a result, Halliburton received no
award fee for over a quarter of a billion dollars worth of work it had completed
under 16 task orders in 2004. According to the evaluation forms, its overall score
fell within the “poor-inadequate” range.71
The evaluations by the PCO upon which the award fee decision was made are
revealing. The reviewers “learned of a ‘Rate Factor’ that KBR had unilaterally
elected to include [in] all estimates … that was not revealed to the Government …
Only after KBR was compelled to deliver [original files] did the Government
understand that many elements of cost in the proposals were marked up with a
contingency.”72 In other words, “Cost Estimates had hidden rate factors to
increase cost of project without informing the Government.”73
In one case, Halliburton claimed costs for laying concrete pads and footings that
the Iraqi Ministry of Oil “had already put in place.”74 In another case, Halliburton
“tried to inflate [a] cost estimate by $26M” by paying “Turkish suppliers above
the actual costs incurred.”75 For yet another project, Halliburton “could never
justify quotes. When the Government pressed the issue and an actual quote was
produced, the quote was 50-75% lower.”76
______________________________________________________________
70 Project and Contracting Office, Award Fee Decision (May 6, 2005); Email from Joint
Contracting Command — Iraq (June 11, 2005).
71 Contractor Performance Evaluation Report (undated).
72 Project and Contracting Office, KBR Award Fee Board (Up to 29 Jan 05) (undated).
73 Id.
74 Id.
75 Id.
76 Id.
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
12
These were not isolated incidents. Under several task orders, the reviewers found
that Halliburton could not justify or substantiate its costs. An entire task order
“was terminated as the Government and KBR could not reach a fair and
reasonable price.”77 Moreover, the reviewers found that Halliburton was still
billing for too many support staff hours in Houston and “continued to overburden
existing task orders with excess manpower.”78
Other serious performance problems were noted, as well. The reviewers found
that 50% of RIO 2 projects had not been completed on time. They also found that
“[l]ittle effort has been shown to date to catch and correct schedule slippages.”79
According to the reviewers, “lapses in technical performance” forced the
government to bear unnecessary costs.80 Moreover, the reviewers found that
Halliburton “has not shown the initiative to address systemic problems with the
cost reporting system.”81
The PCO evaluation also described Halliburton’s “minimally cooperative
attitude.” The PCO reported, for example, that “it appeared that the Government
request” to access Halliburton’s Electronic Document Management System “had
been ignored.”82
Second Award Fee Determination
Halliburton’s persistent performance problems are also reflected in a second
award fee evaluation, covering the period from January 30, 2005, through July 27,
2005. In this instance, Halliburton received $876,713 in award fees, just 20% of
the amount for which it was eligible.83 The PCO’s Oil Sector Contracting Chief
characterized the evaluation upon which the decision was made as
“overwhelmingly negative.” 84 He also said that the evaluation “paints a picture
much more dire than [Halliburton’s score of] 75% might seem to represent.”85
The PCO reviewers presented one Halliburton “weakness” after another.86 The
reviewers expressed concern about “not realistic” and “inaccurate cost
______________________________________________________________
77 Id.
78 Id.
79 Id.
80 Id.
81 Id.
82 Id.
83 Project and Contracting Office, Award Fee Decision (undated).
84 Id.; Email from Joint Contracting Command — Iraq to Project and Contracting Office
(Aug. 18, 2005).
85 Id.
86 Project and Contracting Office, DB-KBR Six Months Evaluation for Period Ending 27 Jul
2005 (Aug. 19, 2005).
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
13
estimating,” as well as Halliburton’s failure to implement “cost avoidance
measures.”87 They found that bloated staffing in Kuwait was still “eating away at
limited resources.”88 The reviewers also found that Halliburton “did not
adequately demonstrate initiative needed to effect the recovery of schedule
slippage” despite its “untimely work.”89
The review again noted Halliburton’s resistance to oversight. According to the
PCO, Halliburton’s contracting department was “obstructive” and the company’s
“leadership demonstrated minimal cooperative attitude resolving problems.”90
The reviewers reported that the government’s requests to access Halliburton’s
electronic document management system met “with little success.”91
DCAA Audit Findings Challenge Costs
Audits from the Defense Contract Audit Agency shed additional light on
Halliburton’s failure to control costs under the RIO 2 contract, identifying
questioned and unsupported costs totaling $45 million.
In response to a bipartisan document request, DCAA provided the Committee on
Government Reform with four initial audits of Halliburton’s RIO 2 contract.92
The audits examine $111 million in Halliburton costs under three task orders. In
these initial audits, the auditors detected significant questioned and unsupported
costs. As Table A shows, out of $111 million in RIO 2 costs examined, DCAA
challenged $57 million in costs as questioned or unsupported. This is more than
half of Halliburton’s costs for these projects. For one project, DCAA challenged
69% of Halliburton’s proposed costs.
______________________________________________________________
87 Id.
88 Id.
89 Id.
90 Id.
91 Id.
92 DCAA, Report on Audit of Recorded Direct Costs on Contract No. W9126G-04-D-0001,
Task Orders 2 and 5 (Audit Report No. 3311-2004K17900090) (Feb 19, 2005); DCAA,
Report on Audit of Proposal for Kellogg Brown and Root Services, Inc. NGL/LPG
Storage/Shipping Terminal at Umm Qasr (Project 5) (Audit Report No. 2131-
2005N21000005) (Feb. 5, 2005); DCAA, Report on Audit of TO 11 Project 2 Proposal
for the Khor Zubayr NGL Facility (Audit Report No. 2131-2005N21000002) (Feb. 5,
2005); DCAA, Report on Audit on Kellogg Brown & Root Services, Inc. Proposal for
Repair and Continuity of Iraqi Oil Infrastructure — South (Project 1) (Audit Report No.
2131-2005N21000001) (Feb. 5, 2005);
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
14
In the audits, DCAA repeatedly found that Halliburton “was unable to provide
adequate justification of price reasonableness for proposed equipment, material,
subcontract and other direct costs.”93 DCCA concluded: “we do not believe the
contractor’s proposal is an acceptable basis to negotiate a fair and reasonable
price due to the significant inadequacies in the cost and pricing data.”94
According to DCAA, eight additional audits of RIO 2 have been completed and
three are ongoing.95 Some of these additional audits may supersede the four
audits provided to the Committee. The complete set of 15 audits examines $365
million in Halliburton costs. DCAA identified $41 million in questioned costs
and $4 million in unsupported costs. Thus, DCAA has challenged a total of $45
million in costs, or 12% of the total costs examined.
CONCLUSION
Two years ago, despite warnings from auditors not to enter into further contracts
with Halliburton, the Defense Department awarded Halliburton a new oil
infrastructure contract, RIO 2. Internal government documents show that
Halliburton’s performance under RIO 2 has been deeply flawed. Among the
serious and persistent problems identified in the documents are repeated examples
of apparently intentional overcharging, exorbitant costs, poor cost reporting,
______________________________________________________________
93 See, e.g., DCAA, Report on Audit of Proposal for Kellogg Brown and Root Services, Inc.
NGL/LPG Storage/Shipping Terminal at Umm Qasr (Project 5) (Audit Report No. 2131-
2005N21000005)(Feb. 5, 2005).
94 Id.
95 Briefing by Defense Contract Audit Agency for Committee on Government Reform staff
(Mar. 3, 2006).
TABLE A:
QUESTIONED AND UNSUPPORTED COSTS UNDER
HALLIBURTON’S RIO 2 CONTRACT
Task Order Proposal
Value
Questioned or
Unsupported
Costs
Percentage of
Costs
Questioned/
Unsupported
2 $6,330,504 $712,543 11%
5 $3,702,820 $674,052 18%
11 (Project 1) $40,666,591 $28,088,218 69%
11 (Project 2) $31,700,937 $14,675,617 46%
11 (Project 5) $28,705,950 $12,845,449 45%
TOTALS $111,106,802 $56,995,879 51%
HALLIBURTON’S PERFORMANCE UNDER THE RESTORE IRAQI OIL 2 CONTRACT
15
slipping schedules, and a refusal to cooperate with the government. The impact
on the reconstruction effort in Iraq and on taxpayers is significant, with Pentagon
auditors challenging $45 million in RIO 2 costs.
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User Originated Comments:
From: new yorker
2006-04-03 00:00:00
i know, this article is ridiculously long just to
say the obvious. the only thing iraq oil is paying
for is the reconstruction of america. how else can
you pay those people to rig election results, and
comply with the "official" 9-11 bullshit story. it
cost money to buy time and fox news.
From: Linda
2006-03-29 00:00:00
another reason to rid ourselves of the washington
scoundals who refuse to investigate/oversee the
current administration
From: pissed-off americans
2006-03-29 00:00:00
what's with this ridiculously long bullshit
article?? tell it like it really is. the bush
family, and his administration, are without a
doubt, the biggest criminal organization ever!!
their original plan was to $$$teal all they could
in 4-8 years. for now, i guess they won. .
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