From the archive, originally posted by: [ spectre ]


The Great Iraq Swindle

How Bush Allowed an Army of For-Profit Contractors to Invade the U.S.
BY Matt Taibbi  /  Aug 23, 2007

How is it done? How do you screw the taxpayer for millions, get away
with it and then ride off into the sunset with one middle finger
extended, the other wrapped around a chilled martini? Ask Earnest O.
Robbins — he knows all about being a successful contractor in Iraq.

You start off as a well-connected bureaucrat: in this case, as an Air
Force civil engineer, a post from which Robbins was responsible for
overseeing 70,000 servicemen and contractors, with an annual budget of
$8 billion. You serve with distinction for thirty-four years, becoming
such a military all-star that the Air Force frequently sends you to
the Hill to testify before Congress — until one day in the summer of
2003, when you retire to take a job as an executive for Parsons, a
private construction company looking to do work in Iraq.

Now you can finally move out of your dull government housing on
Bolling Air Force Base and get your wife that dream home you’ve been
promising her all these years. The place on Park Street in Dunn
Loring, Virginia, looks pretty good — four bedrooms, fireplace,
garage, 2,900 square feet, a nice starter home in a high-end
neighborhood full of spooks, think-tankers and ex-apparatchiks moved
on to the nest-egg phase of their faceless careers. On October 20th,
2003, you close the deal for $775,000 and start living that private-
sector good life.

A few months later, in March 2004, your company magically wins a
contract from the Coalition Provisional Authority in Iraq to design
and build the Baghdad Police College, a facility that’s supposed to
house and train at least 4,000 police recruits. But two years and $72
million later, you deliver not a functioning police academy but one of
the great engineering clusterfucks of all time, a practically useless
pile of rubble so badly constructed that its walls and ceilings are
literally caked in shit and piss, a result of subpar plumbing in the
upper floors.

You’ve done such a terrible job, in fact, that when auditors from the
Special Inspector General for Iraq Reconstruction visit the college in
the summer of 2006, their report sounds like something out of one of
the Saw movies: “We witnessed a light fixture so full of diluted urine
and feces that it would not operate,” they write, adding that “the
urine was so pervasive that it had permanently stained the ceiling
tiles” and that “during our visit, a substance dripped from the
ceiling onto an assessment team member’s shirt.” The final report
helpfully includes a photo of a sloppy brown splotch on the
outstretched arm of the unlucky auditor.

When Congress gets wind of the fias-co, a few members on the House
Oversight Committee demand a hearing. To placate them, your company
decides to send you to the Hill — after all, you’re a former Air
Force major general who used to oversee this kind of contracting
operation for the government. So you take your twenty-minute ride in
from the suburbs, sit down before the learned gentlemen of the
committee and promptly get asked by an irritatingly eager Maryland
congressman named Chris Van Hollen how you managed to spend $72
million on a pile of shit.

You blink. Fuck if you know. “I have some conjecture, but that’s all
it would be” is your deadpan answer.

The room twitters in amazement. It’s hard not to applaud the balls of
a man who walks into Congress short $72 million in taxpayer money and
offers to guess where it all might have gone.

Next thing you know, the congressman is asking you about your
company’s compensation. Touchy subject — you’ve got a “cost-plus”
contract, which means you’re guaranteed a base-line profit of three
percent of your total costs on the deal. The more you spend, the more
you make — and you certainly spent a hell of a lot. But before this
milk-faced congressman can even think about suggesting that you give
these millions back, you’ve got to cut him off. “So you won’t
voluntarily look at this,” Van Hollen is mumbling, “and say, given
what has happened in this project . . . ”

“No, sir, I will not,” you snap.

“. . . ‘We will return the profits.’ . . .”

“No, sir, I will not,” you repeat.

Your testimony over, you wait out the rest of the hearing, go home,
take a bath in one of your four bathrooms, jump into bed with the
little woman. . . . A year later, Iraq is still in flames, and your
president’s administration is safely focused on reclaiming $485
million in aid money from a bunch of toothless black survivors of
Hurricane Katrina. But the house you bought for $775K is now -assessed
at $929,974, and you’re sure as hell not giving it back to anyone.

“Yeah, I don’t know what I expected him to say,” Van Hollen says now
about the way Robbins responded to being asked to give the money back.
“It just shows the contempt they have for us, for the taxpayer, for

Operation Iraqi Freedom, it turns out, was never a war against Saddam –
Hussein’s Iraq. It was an invasion of the federal budget, and no
occupying force in history has ever been this efficient. George W.
Bush’s war in the Mesopotamian desert was an experiment of sorts, a
crude first take at his vision of a fully privatized American
government. In Iraq the lines between essential government services
and for-profit enterprises have been blurred to the point of absurdity
— to the point where wounded soldiers have to pay retail prices for
fresh underwear, where modern-day chattel are imported from the Third
World at slave wages to peel the potatoes we once assigned to grunts
in KP, where private companies are guaranteed huge profits no matter
how badly they fuck things up.

And just maybe, reviewing this appalling history of invoicing orgies
and million-dollar boondoggles, it’s not so far-fetched to think that
this is the way someone up there would like things run all over — not
just in Iraq but in Iowa, too, with the state police working for
Corrections Corporation of America, and DHL with the contract to
deliver every Christmas card. And why not? What the Bush
administration has created in Iraq is a sort of paradise of perverted
capitalism, where revenues are forcibly extracted from the customer by
the state, and obscene profits are handed out not by the market but by
an unaccountable government bureauc-racy. This is the triumphant
culmination of two centuries of flawed white-people thinking, a
preposterous mix of authoritarian socialism and laissez-faire profit-
eering, with all the worst aspects of both ideologies rolled up into
one pointless, supremely idiotic military adventure — American men
and women dying by the thousands, so that Karl Marx and Adam Smith can
blow each other in a Middle Eastern glory hole.

It was an awful idea, perhaps the worst America has ever tried on
foreign soil. But if you were in on it, it was great work while it
lasted. Since time immemorial, the  distribution of government
largesse had followed a staid, paper-laden procedure in which the
federal government would post the details of a contract in periodicals
like Commerce Business Daily or, more -recently, on the FedBizOpps Web
site. Competitive bids were solicited and contracts were awarded in
accordance with the labyrinthine print of the U.S. Code, a
straightforward system that worked well enough before the Bush years
that, as one lawyer puts it, you could “count the number of cases of
criminal fraud on the fingers of one hand.”

There were exceptions to the rule, of course — emergencies that
required immediate awards, contracts where there was only one
available source of materials or labor, classified deals that involved
national security. What no one knew at the beginning of the war was
that the Bush administration had essentially decided to treat the
entire Iraqi theater as an exception to the rules. All you had to do
was get to Iraq and the game was on.

But getting there wasn’t easy. To travel to Iraq, would-be contractors
needed permission from the Bush administration, which was far from
blind in its appraisal of applicants. In a much-ballyhooed example of
favoritism, the White House originally installed a clown named Jim
O’Beirne at the relevant evaluation desk in the Department of Defense.
O’Beirne proved to be a classic Bush villain, a moron’s moron who
judged applicants not on their Arabic skills or their relevant
expertise but on their Republican bona fides; he sent a twenty-four-
year-old who had never worked in finance to manage the reopening of
the Iraqi stock exchange, and appointed a recent graduate of an
evangelical university for home-schooled kids who had no accounting
experience to manage Iraq’s $13 billion budget. James K. Haveman, who
had served as Michigan’s community-health director under a GOP
governor, was put in charge of rehabilitating Iraq’s health-care
system and decided that what this war-ravaged, malnourished,
sanitation-deficient country most urgently needed was . . . an anti-
smoking campaign.

Town-selectmen types like Haveman weren’t the only people who got
passes to enter Iraq in the first few years. The administration also
greenlighted brash, modern-day forty-niners like Scott Custer and Mike
Battles, a pair of ex-Army officers and bottom-rank Republican pols
(Battles had run for Congress in Rhode Island and had been a Fox News
commentator) who had decided to form a security company called Custer
Battles and make it big in Iraq. “Battles knew some people from his
congres-sional run, and that’s how they got there,” says Alan Grayson,
an attorney who led a whistle-blower lawsuit against the pair for
defrauding the government.

Before coming to Iraq, Custer Battles hadn’t done even a million
dollars in business. The company’s own Web site brags that Battles had
to borrow cab fare from Jordan to Iraq and arrived in Baghdad with
less than $500 in his pocket. But he had good timing, arriving just as
a security contract for Baghdad International Airport was being “put
up” for bid. The company site raves that Custer spent “three sleepless
nights” penning an offer that impressed the CPA enough to hand the
partners $2 million in cash, which Battles promptly stuffed into a
duffel bag and drove to deposit in a Lebanese bank.

Custer Battles had lucked into a sort of Willy Wonka’s paradise for
contractors, where a small pool of Republican-friendly businessmen
would basically hang around the Green Zone waiting for a contracting
agency to come up with a work order. In the early days of the war, the
idea of “competition” was a farce, with deals handed out so quickly
that there was no possibility of making rational or fairly priced
estimates. According to those familiar with the process, contracting
agencies would request phony “bids” from several contractors, even
though the winner had been picked in advance. “The losers would play
ball because they knew that eventually it would be their turn to be
the winner,” says Grayson.

To make such deals legal, someone in the military would simply sign a
piece of paper invoking an exception. “I know one guy whose business
was buying -weapons on the black market for contractors,” says Pratap
Chatterjee, a writer who has spent months in the Mideast researching a
forthcoming book on Iraq contracts. “It’s illegal — but he got
military people to sign papers allowing him to do it.”

The system not only had the advantage of eliminating red tape in a war
zone, it also encouraged the “entrepreneurship” of patriots like
Custer and Battles, who went from bumming cab fare to doing $100
million in government contracts practically overnight. And what
business they did! The bid that Custer claimed to have spent “three
sleepless nights” putting together was later described by Col. Richard
Ballard, then the inspector general of the Army, as looking “like
something that you and I would write over a bottle of vodka, complete
with all the spelling and syntax errors and annexes to be filled in
later.” The two simply “presented it the next day and then got awarded
about a $15 million contract.”

The deal charged Custer Battles with the responsibility to perform
airport -security for civilian flights. But there were never any
civilian flights into Baghdad’s airport during the life of their
contract, so the CPA gave them a job managing an airport checkpoint,
which they failed miserably. They were also given scads of money to
buy expensive X-ray equipment and set up an advanced canine bomb-
sniffing system, but they never bought the equipment. As for the dog,
Ballard reported, “I eventually saw one dog. The dog did not appear to
be a certified, trained dog.” When the dog was brought to the
checkpoint, he added, it would lie down and “refuse to sniff the
vehicles” — as outstanding a metaphor for U.S. contractor performance
in Iraq as has yet been produced.

Like most contractors, Custer Battles was on a cost-plus arrangement,
which means its profits were guaranteed to rise with its spending. But
according to testimony by officials and former employees, the partners
also charged the government millions by making out phony invoices to
shell companies they controlled. In another stroke of genius, they
found a bunch of abandoned Iraqi Airways forklifts on airport
property, repainted them to disguise the company markings and billed
them to U.S. tax-payers as new equipment. Every time they scratched
their asses, they earned; there was so much money around for
contractors, officials literally used $100,000 wads of cash as toys.
“Yes — $100 bills in plastic wrap,” Frank Willis, a former CPA
official, acknowledged in Senate testimony about Custer Battles. “We
played football with the plastic-wrapped bricks for a little while.”

The Custer Battles show only ended when the pair left a spreadsheet
behind after a meeting with CPA officials — a spreadsheet that
scrupulously detailed the pair’s phony invoicing. “It was the worst
case of fraud I’ve ever seen, hands down,” says Grayson. “But it’s
also got to be the first instance in history of a defendant leaving
behind a spreadsheet full of evidence of the crime.”

But even being the clumsiest war profit-eers of all time was not
enough to bring swift justice upon the heads of Mr. Custer and Mr.
Battles — and this is where the story of America’s reconstruction
effort gets really interesting. The Bush administration not only
refused to prosecute the pair — it actually tried to stop a lawsuit
filed against the contractors by whistle-blowers hoping to recover the
stolen money. The administration argued that Custer Battles could not
be found guilty of defrauding the U.S. government because the CPA was
not part of the U.S. government. When the lawsuit went forward despite
the administration’s objections, Custer and Battles mounted a defense
that recalled Nuremberg and Lt. Calley, arguing that they could not be
guilty of theft since it was done with the government’s approval.

The jury disagreed, finding Custer Battles guilty of ripping off
taxpayers. But the verdict was set aside by T.S. Ellis III, a federal
judge who cited the administration’s “the CPA is not us” argument. The
very fact that private contractors, aided by the government itself,
could evade conviction for what even Ellis, a Reagan-appointed judge,
called “significant” evidence of fraud, says everything you need to
know about the true nature of the war we are fighting in Iraq. Is it –
really possible to bilk American taxpayers for repainted forklifts
stolen from Iraqi Airways and claim that you were just following
orders? It is, when your commander in chief is George W. Bush. font
size=”3″>There isn’t a brazen, two -bit, purse-snatching money caper
you can think of that didn’t happen at least 10,000 times with your
tax dollars in Iraq. At the very outset of the occupation, when L.
Paul Bremer was installed as head of the CPA, one of his first
brilliant ideas for managing the country was to have $12 billion in
cash flown into Baghdad on huge wooden pallets and stored in palaces
and government buildings. To pay contractors, he’d have agents go to
the various stashes — a pile of $200 million in one of Saddam’s
former palaces was watched by a single soldier, who left the key to
the vault in a backpack on his desk when he went out to lunch —
withdraw the money, then crisscross the country to pay the bills. When
desperate auditors later tried to trace the paths of the money, one
agent could account for only $6,306,836 of some $23 million he’d
withdrawn. Bremer’s office “acknowledged not having any supporting
documentation” for $25 million given to a different agent. A ministry
that claimed to have paid 8,206 guards was able to document payouts to
only 602. An agent who was told by auditors that he still owed
$1,878,870 magically produced exactly that amount, which, as the
auditors dryly noted, “suggests that the agent had a reserve of cash.”

In short, some $8.8 billion of the $12 billion proved impossible to
find. “Who in their right mind would send 360 tons of cash into a war
zone?” asked Rep. Henry Waxman, chairman of the House Oversight
Committee. “But that’s exactly what our government did.”

Because contractors were paid on cost-plus arrangements, they had a
powerful incentive to spend to the hilt. The undisputed master of
milking the system is KBR, the former Halliburton subsidiary so
ubiquitous in Iraq that soldiers even encounter its customer-survey
sheets in outhouses. The company has been exposed by whistle-blowers
in numerous Senate hearings for everything from double-charging
taxpayers for $617,000 worth of sodas to overcharging the government
600 percent for fuel shipments. When things went wrong, KBR simply
scrapped expensive gear: The company dumped 50,000 pounds of nails in
the desert because they were too short, and left the Army no choice
but to set fire to a supply truck that had a flat tire. “They did not
have the proper wrench to change the tire,” an Iraq vet named Richard
Murphy told investigators, “so the decision was made to torch the

In perhaps the ultimate example of military capitalism, KBR reportedly
ran convoys of empty trucks back and forth across the insurgent-laden
desert, pointlessly risking the lives of soldiers and drivers so the
company could charge the taxpayer for its phantom deliveries. Truckers
for KBR, knowing full well that the trips were bullshit, derisively
referred to their cargo as “sailboat fuel.”

In Fallujah, where the company was paid based on how many soldiers
used the base rec center, KBR supervisors ordered employees to juke
the head count by taking an hourly tally of every soldier in the
facility. “They were counting the same soldier five, six, seven
times,” says Linda Warren, a former postal worker who was employed by
KBR in Fallujah. “I was even directed to count every empty bottle of
water left behind in the facility as though they were troops who had
been there.”

Yet for all the money KBR charged taxpayers for the rec center, it
didn’t provide much in the way of services to the soldiers engaged in
the heaviest fighting of the war. When Warren ordered a karaoke
machine, the company gave her a cardboard box stuffed with jumbled-up
electronic components. “We had to borrow laptops from the troops to
set up a music night,” says Warren, who had a son serving in Fallujah
at the time. “These boys needed R&R more than anything, but the
company wouldn’t spend a dime.” (KBR refused requests for an
interview, but has denied that it inflated troop counts or committed
other wrongdoing in Iraq.)

One of the most dependable methods for burning taxpayer funds was
simply to do nothing. After securing a contract in Iraq, companies
would mobilize their teams, rush them into the war zone and then wait,
citing the security situation or delayed paperwork — all the while
charging the government for housing, meals and other expenses. Last
year, a government audit of twelve major contracts awarded to KBR,
Parsons and other companies found that idle time often accounted for
more than half of a contract’s total costs. In one deal awarded to
KBR, the company’s “indirect” administrative costs were $52.7 million,
and its direct costs — the costs associated with the -actual job —
were only $13.4 million.

Companies jacked up the costs even higher by hiring out layers of
subcontractors to do their work for them. In some cases, each
subcontractor had its own cost-plus arrangement. “We called those
‘cascading contracts,’ ” says Rep. Van Hollen. “Each subcontractor
piles on a lot of costs, and eventually they would snowball into a
huge payout. It was a green light for waste.”

In March 2004, Parsons — the firm represented by Earnest O. Robbins
— was given nearly $1 million to build a fire station in Ainkawa, a
small Christian community in one of the safest parts of Iraq. Parsons
subcontracted the design to a British company called TPS Consult and
the construction to a California firm called Innovative Technical
Solutions Inc. ITSI, in turn, hired an Iraqi outfit called Zozik to do
the actual labor.

A year and a half later, government -auditors visited the site and
found that the fire station was less than half finished. What little
had been built was marred by serious design flaws, including concrete
columns so shoddily constructed that they were riddled with holes that
looked like “honeycombing.” But getting the fuck-ups fixed proved
problematic. The auditors “made a request that was sent to the Army
Corps, which delivered it to Parsons, who then asked ITSI, which asked
TPS Consult to check on the work done by Zozik,” writes Chatterjee,
who describes the mess in his forthcoming book, Baghdad Bonanza. The
multiple layers of subcontractors made it almost impossible to resolve
the issue — and every day the delays dragged on meant more money for
the companies.

Sometimes the government simply handed out money to companies it made
up out of thin air. In 2006, the Army Corps of Engineers found itself
unable to award contracts by the September deadline imposed by
Congress, meaning it would have to “de-obligate” the money and return
it to the government. Rather than suffer that awful fate, the corps
obligated $362 million — spread out over ninety-six different
contracts — to “Dummy Vendor.” In their report on the mess, auditors
noted that money to nobody “does not constitute proper obligations.”

But even obligating money to no one was better than what sometimes
happened in Iraq: handing out U.S. funds to the enemy. Since the
beginning of the war, rumors have abounded about contractors paying
protection money to insurgents to avoid attacks. No less an authority
than Ahmed Chalabi, the head of the Iraqi National Congress, claimed
that such payoffs are a “significant source” of income for Al Qaeda.
Moreover, when things go missing in Iraq — like bricks of $100 bills,
or weapons, or trucks — it is a fair assumption that some of the
wayward booty ends up in the wrong hands. In July, a federal audit
found that 190,000 weapons are missing in Iraq — nearly one out of
every three arms supplied by the United States. “These weapons almost
certainly ended up on the black market, where they are repurchased by
insurgents,” says Chatterjee. font size=”3″>For all the creative ways
that contractors came up with to waste, mismanage and steal public
money in Iraq, the standard remained good old-fashioned fucking up.
Take the case of the Basra Children’s Hospital, a much-ballyhooed “do-
gooder” project championed by Laura Bush and Condi Rice. This was
exactly the sort of grandstanding, self-serving, indulgent and
ultimately useless project that tended to get the go-ahead under
reconstruction. Like the expensive telephone-based disease-
notification database approved for use in hospitals without
telephones, or the natural-gas-powered electricity turbines green-
lighted for installation in a country without ready sources of natural
gas, the Basra Children’s Hospital was a state-of-the-art medical
facility set to be built in a town without safe drinking water. “Why
build a hospital for kids, when the kids have no clean water?” said
Rep. Jim Kolbe, a Republican from Arizona.

Bechtel was given $50 million to build the hospital — but a year
later, with the price tag soaring to $169 million, the company was
pulled off the project without a single bed being ready for use. The
government was unfazed: Bechtel, explained USAID spokesman David
Snider, was “under a ‘term contract,’ which means their job is over
when their money ends.”

Their job is over when their money ends. When I call Snider to clarify
this amazing statement, he declines to discuss the matter further. But
if you look over the history of the Iraqi reconstruction -effort, you
will find versions of this excuse every-where. When Custer Battles was
caught delivering broken trucks to the Army, a military official says
the company told him, “We were only told we had to deliver the trucks.
The contract doesn’t say they had to work.”

Such excuses speak to a monstrous vacuum of patriotism; it would be
hard to imagine contractors being so blithely disinterested in results
during World War II, where every wasted dollar might mean another
American boy dead from gangrene in the Ardennes. But the rampant waste
of money and resources also suggests a widespread contempt for the
ostensible “purpose” of our presence in Iraq. Asked to cast a vote for
the war effort, contractors responded by swiping everything they could
get their hands on — and the administration’s acquiescence in their
thievery suggests that it, too, saw making a buck as the true mission
of the war. Two witnesses scheduled to testify before Congress against
Custer Battles ultimately declined not only because they had received
death threats but because they, too, were contractors and feared that
they would be shut out of future government deals. To repeat:
Witnesses were afraid to testify in an effort to -recover government
funds because they feared reprisal from the government.

The Bush administration’s lack of interest in recovering stolen funds
is one of the great scandals of the war. The White House has failed to
litigate a single case against a contractor under the False Claims Act
and has not sued anybody for breach of contract. It even declined to
join in a lawsuit filed by whistle-blowers who are accusing KBR of
improper invoicing in Fallujah. “For all the Bush administration
claims to do in the war against terrorism,” Grayson said in
congressional testimony, “it is a no-show in the war against war
profiteers.” In nearly five years of some of the worst graft and
looting in American history, the administration has recovered less
than $6 million.

What’s more, when anyone in the government tried to question what
contractors were up to with taxpayer money, they were immediately
blackballed and treated like an enemy. Take the case of Bunnatine
“Bunny” Greenhouse, an outspoken and energetic woman of sixty-three
who served as the chief procurement executive for the Army Corps of
Engineers. In her position, Greenhouse was responsible for signing off
on sole-source contracts — those awarded without competitive bids and
thus most prone to corruption. Long before Iraq, she had begun to
notice favoritism in the awarding of contracts to KBR, which was
careful to recruit executives who had served in the military. “That
was why I joined the corps: to stop this kind of clubby contracting,”
she says.

A few weeks before the Iraq War -started, Greenhouse was asked to sign
off on the contract to restore Iraqi oil. The deal, she noticed, was
suspicious on a number of fronts. For one thing, the company that had
designed the project, KBR, was the same company that was being awarded
the contract — a highly unusual and improper situation. For another,
the corps wanted to award a massive “emergency” contract to KBR with
no competition for up to five years, which Greenhouse thought was
crazy. Who ever heard of a five-year emergency? After auditing the
deal, the Pentagon found that KBR had overcharged the government $61
million for fuel. “The abuse related to contracts awarded to KBR,”
Greenhouse testified before the Senate, “represents the most blatant
and improper contract abuse I have witnessed during the course of my
professional career.”

And how did her superiors in the Pentagon respond to the wrongdoing
highlighted by their own chief procurement officer? First they gave
KBR a waiver for the overbilling, blaming the problem on an Iraqi
subcontractor. Then they dealt with Greenhouse by demoting her and
cutting her salary, citing a negative performance review. The
retaliation sent a clear message to any would-be whistle-blowers. “It
puts a chill on you,” Greenhouse says. “People are scared stiff.”

They were scared stiff in Iraq, too, and for good reason. When
civilian employees complained about looting or other improprieties,
contractors sometimes threatened to throw them outside the gates of
their bases — a life-threatening situation for any American. Robert
Isakson, a former FBI agent who worked for Custer Battles, says that
when he refused to go along with one scam involving a dummy company in
Lebanon, he was detained by company security guards, who seized his ID
badge and barred him from the base in Baghdad. He eventually had to
make a hazardous, Papillon-esque journey across hostile Iraq to Jordan
just to survive. (Custer Battles denies the charge.)

James Garrison, who worked at a KBR ice plant in Al Asad, recalls an
incident when Indian employees threatened to go on strike: “They
pulled a bus up, got them in there and said, ‘We’ll ship you outside
the front gate if you want to go on strike.’ ” Not surprisingly, the
workers changed their mind about a work stoppage.

You know the old adage:  You don’t pay a hooker to spend the night,
you pay her to leave in the morning. That maxim also applies to
civilian workers in Iraq. A soldier is a citizen with rights, a man to
be treated with honor and respect as a protector of us all; if one
loses a limb, you’ve got to take care of him, in theory for his whole
life. But a mercenary is just another piece of equipment you can bill
to the taxpayer: If one is hurt on the job, you can just throw it away
and buy another one. Today there are more civilians working for
private contractors in Iraq than there are troops on the ground. The
totality of the thievery in Iraq is such that even the honor of
patriotic service has been stolen — we’ve replaced soldiers and
heroes with disposable commodities, men we -expected to give us a big
bang for a buck and to never call us again.

Russell Skoug, who worked as a refrigeration technician for a
contractor called Wolfpack, found that out the hard way. These days
Skoug is back home in Diboll, Texas, and he doesn’t move around much;
he considers it a big accomplishment if he can make it to his mailbox
and back once a day. “I’m doing a lot if I can do that much,” he says,
laughing a little.

A year ago, on September 11th, Skoug was working for Wolfpack at a
base in Heet, Iraq. It was a convoy day — trucks braved the trip in
and out of the base every third day — and Skoug had a generator he
needed to fix. So he agreed to make a run to Al Asad. “If I would’ve
realized that it was September 11th, I never would’ve went out,” he
says. It would turn out to be the last run he would ever make in Iraq.

An Air Force vet, Skoug had come to Iraq as a civilian to repair
refrigeration units and air conditioners for a KBR subcontractor
called LSI. But when he arrived, he discovered that LSI had hired him
to fix Humvees. “I didn’t know jack-squat about Humvees,” he says. “I
could maybe change the oil, that was it.” (Asked about Skoug’s
additional assignment, KBR boasted: “Part of the reason for our
success is our ability to employ individuals with multiple

Working with him on his crew were two other refrigeration technicians,
neither of whom knew anything about fixing Humvees. Since Skoug and
most of his co-workers had worked for KBR in Afghanistan, they were
familiar with cost-plus contracting. The buzz around the base was that
cost-plus was the reason LSI was hiring air-conditioning guys to work
on unfamiliar military equipment at a cost to the taxpayer of $80,000
a year. “They was doing the same thing as KBR: just filling the body
count,” says Skoug.

Thanks to low troop -levels, all the military repair guys had been
pressed into service to fight the war, so Skoug was forced to sit in
the military storeroom on the base and study vehicle manuals that, as
a civilian, he wasn’t allowed to check out of the building. That was
how America fought terrorism in Iraq: It hired civilian air-
conditioning techs to fix Humvees using the instruction manual while
the real Humvee repairmen, earning a third of what the helpless
civilians were paid, drove around in circles outside the wire waiting
to get blown up by insurgents.

After much pleading and cajoling, Skoug managed to convince LSI to let
him repair some refrigeration units. But it turned out that the
company didn’t have any tools for the job. “They gave me a screwdriver
and a Leatherman, and that’s it,” he recalls. “We didn’t even have
freon gauges.” When Skoug managed to scrounge and cannibalize parts to
get the job done, he impressed the executives at Wolfpack enough to
hire him away from LSI for $10,000 a month. The job required Skoug,
who had been given no formal security training, to travel regularly on
dangerous convoys between bases. Wolfpack issued him an armored
vehicle, a Yugoslav-made AK-47 and a handgun, and wished him luck.

For nearly a year, Skoug did the job, trying at each stop to overcome
the hostility that many troops felt for civilian contractors who
surfed the Internet and played pool and watched movies all day for big
dollars while soldiers carrying seventy-pound packs of gear labored in
huts with broken air conditioning the civilian techs couldn’t be
bothered to repair. “They’d have the easiest thing to fix, and they
wouldn’t do it,” Skoug says. “They’d write that they’d fixed it or
that they just needed a part and then just leave it.” At Haditha Dam,
Skoug witnessed a near-brawl after some Marines, trying to get some
sleep after returning from patrol, couldn’t get a group of “KBR dudes”
to turn down the television in a common area late at night.

Toward the end of Skoug’s stay, insurgent activity in his area
increased to the point where the soldiers leading his convoys would
often drive only at night and without lights. Skoug and his co-workers
asked Wolfpack to provide them with night-vision goggles that cost as
little as $1,000 a pair, but the company refused. “Their attitude was,
we don’t need ’em and we’re not buying ’em,” says Thomas Lane, a
Wolfpack employee who served as Skoug’s security man on the night of
September 11th.

On that evening, the soldiers leading the convoy refused to let Skoug
drive his own vehicle back to Heet without night-vision goggles. So a
soldier took Skoug’s car, and Skoug was forced to be a passenger in a
military vehicle. “We start out the front gate, and I find out that
the truck that I was in was the frickin’ lead truck,” he recalls. “And
I’m going, ‘Oh, great.’ ”

The bomb went off about a half-hour later, ripping through the truck
floor and destroying four inches of Skoug’s left femur. “The
windshield looked like there was a film on it,” he says. “I find out
later it was a film — it was blood and meat and stuff all over the
windshield on the inside.” Skoug was loaded into the back of a Humvee,
his legs hanging out, and evacuated to an Army hospital in Germany
before being airlifted back to the States.

When Skoug arrived, it was his wife, Linda, who had to handle all his
affairs. She was the one who arranged for an air ambulance to take him
to Houston, where she had persuaded an orthopedic hospital to admit
him as a patient. She had to do this because almost right from the
start, Wolfpack washed its hands of Russell Skoug. The insurance
policy he had been given turned out to be useless — the company
denied all coverage, beginning with a $72,597 bill for his stay in the
German hospital. Despite assurances from Wolfpack chief Mark Atwood
that he would cover all Skoug’s expenses, neither he nor the insurance
company would pay for the $16,000 trip in the air ambulance. Nobody
paid for the operations Skoug had in Houston — as many as three a
day, every day for a month. And nobody paid for his subsequent rehab
stint in another Houston hospital — despite the fact that military
law requires every company contracting with the government to fully
insure all of its employees in the war zone.

Now that he’s out, sitting at home on his couch with only partial use
of his left hand and left leg, Skoug has a stack of unpaid medical
bills almost three inches tall. As he speaks, he keeps fidgeting. He
apologizes, explaining that he can’t sit still for very long. Why?
Because Skoug can no longer afford pain medication. “I take ibuprofen
sometimes,” he says, “but basically I just grin and bear it.”

And here’s where this story turns into something perfectly symbolic of
everything that the war in Iraq stands for, a window into the soul of
for-profit contractors who not only left behind a breathtaking legacy
of fraud, waste and corruption but, through their calculating, greed-
fueled hijacking of this generation’s broadest and most far-reaching
foreign-policy initiative, pushed America into previously unknown
realms of moral insanity. When I contact Mark Atwood and ask him to
explain how he could watch one of his best employees get blown up and
crippled for life, and then cut him loose with debts totaling well
over half a million dollars, Atwood, safe in his office in Kuwait City
and contentedly suckling at the taxpayer teat, decides that answering
this one question is just too much to ask of poor old him.

“Right now,” Atwood says, “I just want some peace.”

When Linda Skoug petitioned Atwood for help, he refused, pointing out
that he had kept his now-useless employee on the payroll for four
whole months before firing him. “After I have put forth to help you
all out,” he wrote in an e-mail, “you are going to get on me for your
husband not having insurance.” He even implied that Skoug had brought
the accident upon himself by allowing the Army to place him at the
head of the convoy: “He was not even suppose [sic] to be in the lead
vehicle to begin with.”

And that, ladies and gentlemen, is the story of the Iraq War in a
nutshell. In the history of balls, the world has never seen anything
like the private contractors George W. Bush summoned to serve in
Operation Iraqi Freedom. Collectively, they are the final, polished
result of 231 years of natural selection in the crucible of American
capitalism: a bureaucrat class capable of stealing the same dollar
twice — once from the taxpayer and once from a veteran in a

The explanations that contractors offer for all the missing dollars,
all the myriad ways they looted the treasury and screwed guys like
Russell Skoug, rank among the most diabolical, shameless, tongue-
twisting bullshit in history. Going back over the various congres-
sional hearings and trying to decipher the corporate responses to the
mountains of thefts and fuck-ups is a thrilling intellectual journey,
not unlike tackling the Pharaonic hieroglyphs or the mating chatter of
colobus monkeys. Standing before Congress, contractors and the
officials who are supposed to monitor them say things like “As long as
we have the undefinitized contract issue that we have . . . we will
continue to see the same kinds of sustension rates” (translation: We
can’t get back any of the fucking money) and “The need for to-
fitnessization was viewed as voluntary, and that was inaccurate as the
general counsel to the Army observed in a June opinion” (translation:
The contractor wasn’t aware that he was required to keep costs down)
and “If we don’t know where we’re trying to go and don’t have
measures, then we won’t know how much longer it’s going to take us to
get there” (translation: There never was a plan in place, other than
to let contractors rip off every dollar they could).

According to the most reliable -estimates, we have doled out more than
$500 billion for the war, as well as $44 billion for the Iraqi
reconstruction effort. And what did America’s contractors give us for
that money? They built big steaming shit piles, set brand-new trucks
on fire, drove back and forth across the desert for no reason at all
and dumped bags of nails in ditches. For the most part, nobody at home
cared, because war on some level is always a waste. But what happened
in Iraq went beyond inefficiency, beyond fraud even. This was about
the business of government being corrupted by the profit motive to
such an extraordinary degree that now we all have to wonder how we
will ever be able to depend on the state to do its job in the future.
If catastrophic failure is worth billions, where’s the incentive to
deliver success? There’s no profit in patriotism, no cost-plus angle
on common decency. Sixty years after America liberated Europe, those
are just words, and words don’t pay the bills.

Government Contracting Best Practices
Helping You Win More Government Business

The Basics of Cost-Reimbursement Contracts

Many government contracts are fixed-price; the price quoted in the
proposal is final and should include all expenses. In some cases,
however, it’s difficult or impossible to know exactly how much certain
items or services are going to cost. In these situations, the
government will usually use a cost-reimbursement format for the
contract. Cost-reimbursement contracts are desirable because in most
cases the government assumes the cost risk.

In a cost-reimbursement contract, the final pricing will be decided
when the contract is completed, or at some other agreed-upon time in
the contracting period. A total cost estimate will be determined at
the beginning of the cost-reimbursement contract, to allow the
government agency to budget for the project and to establish a maximum
amount for reimbursement. The prime contractor may not exceed that
maximum without the contracting officer’s permission, but may stop
work if that maximum is reached (for government regulations on cost-
reimbursement contracts, see subpart 16.3 of the FAR). Cost-
reimbursement contracts come in several different forms:
Cost Contracts

Provide only for the actual costs of completing the contract. The
contractor receives no additional fee. Cost contracts are usually used
for research and nonprofit work.
Cost-Sharing Contracts

The contractor agrees to assume part of the burden of contract cost.
The government will reimburse the contractor for an agreed-upon
portion of the total cost. Like a cost contract, there is no
additional fee for the contractor. You should only enter into a cost-
sharing contract if the work will benefit you in some way sufficient
to offset your spending to complete the contract.
Cost-Plus-Fixed-Fee (CPFF) Contracts

The contractor receives reimbursement plus a predetermined fee. This
fee will be negotiated during the initial contract proceedings, and
will not change based on the actual contract cost. However, the fee
may change if the work required to complete the contract also changes.
This type of contract is useful in situations where the risk to the
contractor might otherwise outweigh any non-financial benefits. There
are two basic kinds of CPFF contracts:

* Completion: A goal or product is established, and the contractor
must deliver the product in order to receive the fee. If the costs
exceed the estimate, the government will continue to reimburse for
cost, but won’t increase the fixed fee.
* Term: The scope of work is less specific, but the contract
states a time period and level of effort expected of the contractor.
When that time period is up, if the government approves the work and
effort expended, the fee is paid. Further work will require a new

Cost-Plus-Incentive-Fee (CPIF) Contracts

The contractor receives reimbursement plus an adjustable fee. The
initial contract will set down targets for cost and fee, as well as a
minimum and maximum fee and a formula for fee adjustment. Once the
contract is completed, the contractor will be paid based on this
formula. In essence, the fee will be increased if the contract was
completed for less than the target cost, and decreased if the contract
went over the target cost. With a CPIF contract, it’s definitely in
the contractor’s best interest to keep costs as low as possible-the
less money you spend, the more money you’ll make, up to the maximum.
Cost-Plus-Award-Fee (CPAF) Contracts

The contractor receives reimbursement and a fixed fee, with the
potential to earn all or part of an additional fee. The government
will decide the amount of the award based on their assessment of the
contractor’s performance, based on factors such as cost management,
timeliness, and quality of work. Both CPAF and CPIF contracts are
intended to motivate contractors to complete the contract as well and
as cost-efficiently as possible.

Many of our clients use the Onvia Guide as safety net to make sure
they don’t miss out on government contracts. If you like to see how
the Onvia Guide can function as a safety net for government contracts,
shoot me an email at AskIrv [at] onvia [dot] com [dot] Tell me about what your company
does and I’ll be happy to show you a sample guide for your specific
industry. Together, we can see what contracts you might have missed.

Katrina Contracts Worth $2.4 Billion Offer Profit Guarantees
Under increasingly popular procedure, critics say, companies have no
incentive to control expenses

By Jenni Bergal and John Perry

WASHINGTON, June 21, 2007 – Federal agencies responding to Hurricanes
Katrina and Rita awarded more than $2.4 billion in contracts using a
controversial form of pricing that critics say offers no incentive for
cost savings.
Search Katrina contracts by vendor or state

The Federal Emergency Management Agency (FEMA), the U.S. Air Force and
the Environmental Protection Agency (EPA) were responsible for issuing
the bulk of the cost-plus-fixed-fee contracts, a data analysis by the
Center for Public Integrity has found.

This type of contracting, which provides guaranteed profits, often is
used when a federal agency needs to get something done quickly but
doesn’t know in advance how much it will cost, as was the case with
assisting the victims of the two hurricanes and cleaning up after the

Katrina rammed into the Gulf Coast on August 29, 2005, breaching
levees and flooding New Orleans with more than 100 billion gallons of
water. At least 1,400 Louisianans were killed, more than half of them
from New Orleans, and hundreds of thousands were left homeless.

The Center’s data analysis found that 27 percent of the $8.4 billion
in Katrina and Rita contracts awarded by FEMA through January 31,
2007, were cost-plus-fixed-fee. Nearly 21 percent of the EPA’s $212
million in contracts were cost-plus-fixed-fee, as were 36 percent of
the Air Force’s $167 million in contracts.

The Center review also found that FEMA continued to use cost-plus-
fixed-fee pricing well after the initial emergency.

The Bush administration increasingly has turned to cost-plus
contracts, according to a June 2006 report by the Democratic staff of
the U.S. House Committee on Oversight and Government Reform. The
report found that from 2000 to 2005, the administration’s use of this
type of contract had jumped from $62 billion to $110 billion.

These contracts “have been a problem for a long time,” said Steve
Ellis, vice president of Taxpayers for Common Sense, a Washington-
based nonpartisan budget watchdog group. “Harry Truman even criticized
cost-plus contracts when he was in the U.S. Senate,” he said.

Unlike a fixed-price contract, which generally pays contractors a set
amount – thus pressuring them to keep costs down because they are
responsible for any overruns – cost-plus-fixed-fee contracts allow
contractors to bill the government for all of their costs, plus an
extra profit based upon a guaranteed amount.

Critics argue that cost-plus contracts often offer companies no
incentive to save money or keep costs from ballooning. Industry
officials counter that companies often have no idea what the costs
will be in a disaster and that sometimes cost-plus is the most
sensible choice for the government and taxpayers.
FEMA leads the pack

FEMA was responsible for nearly 94 percent of all of the hurricane-
related cost-plus contracts, the Center’s analysis shows. Most of
those contracts were for installing and arranging for emergency
temporary trailers for evacuees in Louisiana, Mississippi and Alabama.
Those contracts were awarded to four large companies: Bechtel National
Inc., Fluor Enterprises Inc., Shaw Environmental & Infrastructure Inc.
and CH2M Hill Inc. Of the $3.3 billion awarded for those contracts,
about $1.97 billion was cost-plus, according to the Center’s analysis
of figures from the Federal Procurement Data System.

In July 2006, about 11 months after Katrina made landfall on the Gulf
Coast, FEMA signed four new task orders under the Shaw contract
totaling more than $17 million.

The Government Accountability Office, Congress’ investigative arm, has
rebuked FEMA for inadequately administering more than a dozen Katrina-
and Rita-related contracts, including three of the FEMA trailer
contracts. In a March 2006 report, GAO auditors wrote that FEMA had
not had sufficient staff monitoring the trailer contractors’
performance and that oversight personnel were rotated in and out of
the Gulf region frequently, with no overlap period in which to brief
their successors. (GAO did not specifically examine the Shaw contract
in connection with that report.)

A Hurricane Katrina task force set up by House Democrats also
criticized the trailer contracts. “While many FEMA contracts resulted
in waste, fraud, and abuse, none were more poorly designed or
administered than the trailer contracts,” the task force wrote in an
October 2006 report.

The report cited the Bechtel contract, which it said provided the
company $575 million for delivery and installation of 36,000 trailers
in southern Mississippi. “Despite the high cost, the delivery of
trailers was much too slow and horribly inefficient” and “the contract
gave no incentive for Bechtel to streamline the process, to train
crews to perform multiple tasks, or to take any other obvious steps to
improve efficiency,” the report found.

Jonathan Marshall, Bechtel’s media relations manager, disputed the
report’s findings. He said Bechtel received $324 million, not $575
million, for trailer installations, and that it got an additional $171
million to provide other services. “Our installation rate in the weeks
following Katrina was about 12 times faster than FEMA’s contractors
achieved after Hurricane Charlie hit Florida in 2004,” Marshall wrote
in an e-mail responding to the Center’s questions. “Faced with the
worst disaster in U.S. history, overcoming the challenges of ruined
infrastructure and a widely scattered workforce, we mobilized in
record time.”

FEMA has been roundly assailed for its overall response to the
disaster and government auditors have been particularly critical of
the agency’s handling of Katrina contracts.
“While many FEMA contracts resulted in waste, fraud, and abuse, none
were more poorly designed or administered than the trailer contracts.”
– October 2006 Katrina task force report, “Katrina and Beyond”

GAO criticizes spending

The GAO took FEMA to task in March 2006, when auditors found that
inadequate planning and communication in developing Katrina contract
requirements had resulted in misspending tens of millions of dollars,
including $3 million for 4,000 base camp beds that were never used.

One contractor spent about $10 million to renovate 160 rooms and
furnish an additional 80 rooms in military barracks in Alabama after a
FEMA survey team identified the barracks as potential temporary
housing for hurricane victims. Auditors wrote that FEMA headquarters
awarded the contract without consulting the agency’s local officials,
who considered the renovation unnecessary and said they had tried to
stop it. They said that only a few evacuees agreed to live there; by
the time officials finally decided to shut down the housing, there
were only six occupants.

In September 2006, the GAO again admonished FEMA for failing to have
sufficient contracts in place, especially for temporary housing and
public buildings, before Katrina struck. “The experience of Katrina
highlighted the need for better logistics planning and the need for
contracts to be in place prior to the disaster that could be activated
to lean forward and provide surge capacity for critical supplies and
services,” auditors wrote.

The following month, the congressional Democrats’ Hurricane Katrina
task force concluded that mistakes were made repeatedly in the
contracting process and that the situation was made worse by a
shortage of trained contract officials to oversee spending on the Gulf

The GAO also has chided federal agencies for inadequate planning and
preparation when it came to anticipating the needs for goods and
services and for failure to properly monitor contracts.

In November 2005, a GAO report examining the Katrina and Rita
contracts concluded that “the fact that disasters, such as hurricanes,
are not entirely predictable must not be an excuse for poor
contracting practices.”

Attacks on cost-plus contracting have stepped up since Hurricane
Katrina. Critics say that once the initial confusion after the storm
had settled down, some of the cost-plus contracts should have been
renegotiated with fixed prices.

“No incentive to save”

Federal contracting regulations say that cost-plus-fixed-fee contracts
give contractors “only a minimum incentive to control costs.” The
regulations allow for use of such contracts only when uncertain
conditions make fixed-price contracts inappropriate, such as for
research, study or “preliminary exploration,” or for development and

Scott Amey, general counsel for the Project on Government Oversight,
an independent, nonpartisan government watchdog group, said he sees
the heavy use of cost reimbursement contracts as “a big red flag.”

“There’s no incentive to save, and there’s fewer things the government
can do to recoup money that’s misspent,” Amey said.

Cost-plus contracts frequently have been used in the Iraq war and have
been criticized by government auditors and others as being wasteful.

“There’s very little incentive for a company to contain its costs,”
said Ellis, of Taxpayers for Common Sense. “That’s why, except in
exceptional circumstances, it’s a loser for taxpayers.”

Industry representatives say cost-plus contracts are no more
inherently abuse-prone than any other type of contract. They point out
that the companies that received cost-plus Katrina contracts were
dealing with many uncertainties in the Gulf Coast region that made it
impossible to determine costs beforehand.

“The presumption that everything could have been done on a fixed-price
basis ignores the risk involved,” said Stan Soloway, president of the
Professional Services Council, a trade association of companies that
provide services to the government. “In a completely uncertain
environment like the immediate aftermath of Katrina, that’s not a
smart way to do business for the government or the contractor.”

Keeping costs down

Soloway said that it’s wrong to assume that the government would save
money using fixed-price rather than cost-plus contracts in an
emergency situation such as Katrina. If companies were able to use
only fixed-price contracts, he said, they would end up bidding much
higher than the actual cost would be, and taxpayers would foot the

“There’s been an awful lot of rushing to judgment without considering
the circumstances and the situation on the ground,” he said.

Keith Stephens, director of media relations for the Fluor Corp., the
parent company of Fluor Enterprises Inc., said FEMA got a good deal in
its contract with his company. “If you look at the amount of trailers
for the price, I think the government got exceptional value,” he said.

Stephens said cost-plus contracting was necessary, considering the
magnitude of the Katrina disaster. “You don’t really know what your
scope of work is going to be, so it’s difficult, if not impossible, to
have a fixed price on that,” he said.

Marshall, Bechtel’s spokesman, agreed, saying that cost-plus contracts
actually can be less expensive for customers, because contractors
don’t need to build a risk premium into their price. “Even when their
costs are fully reimbursed, most contractors have powerful incentives
to perform well and innovate,” Marshall wrote in an e-mail response.

Shaw Environmental did not respond to requests for comment.

John Corsi, director of corporate communications for CH2M Hill, said
FEMA selected his company “based on our capabilities.”

“We’re proud of what we delivered. We delivered more than 24,000
trailers,” he said.

FEMA declined to comment for this story. “We already have said all we
can say about Katrina and lessons learned,” said public information
officer Ashley Small.

Fixed price “not an option”

An Air Force spokesman said that while the agency tries to use fixed-
price contracts when the scope of work is known, it had to use cost-
plus contracts to demolish hurricane-damaged homes and repair utility
service after Katrina.

“Firm fixed price was not an option since we did not have a fixed
amount of work to accomplish,” Air Force spokesman Donald Manuszewski
said in an e-mail to the Center. “Due to the unknown extent of the
damage and repairs required, cost-plus worked extremely well.”
“There’s very little incentive for a company to contain its costs.
That’s why, except in exceptional circumstances, it’s a loser for
taxpayers.” – Steve Ellis, Taxpayers for Common Sense, on no-cost

Dale Kemery, an EPA spokesman, said that his agency’s cost-plus
Katrina contracts were awarded competitively before the storm. He said
that the agency used cost-plus because it wasn’t able to determine the
exact services it would need or the scope of those services.

He said that some of the contracts were for environmental damage
assessments and others were “Superfund Technical Assessment Response
Team (START)” contracts that provide technical support for the
agency’s first responders to react to environmental emergencies, such
as the oil spill in Louisiana caused by Katrina.

“Given the nature of the situation, these START teams get called in at
various times in various places,” Kemery said. “The contractor can’t
tell in advance what the costs will be.”

Kemery wouldn’t say how much each company received in additional fees
from the cost-plus contracts, citing confidentiality because it was
proprietary information. But he did say that the “plus” part averaged
4.45 percent of the total contract price.

Some experts believe that when disasters such as Katrina strike,
government agencies should have in place more indefinite, fixed-price
contracts to provide services and reconstruction. That way, they say,
the contractor is standing by and ready to act when the emergency
arises but the cost is controlled.

“You have to make sure the price is reasonable or that there’s no
incentive to take extra time. But at least you have the basic contract
in place. It increases competition and vastly simplifies the
contracting process,” said Christopher R. Yukins, an associate
professor of government contract law at George Washington Law School
in Washington, D.C. and co-director of the school’s Government
Procurement Law Program.
Contract disclosures sought

In March 2007, the House voted 347-73 to pass the Accountability in
Contracting Act, which would restrict the use of cost-plus and no-bid
contracts and require that overcharges of more than $10 million be
disclosed to Congress.

The bill’s sponsor is Rep. Henry A. Waxman, D-Calif., chairman of the
House Oversight and Government Reform Committee.

“The fact of the matter is, in recent years, we have had an enormous
outpouring of money spent in Iraq, in homeland security, in dealing
with Hurricane Katrina, and we have seen the same mistakes over and
over again: no-competition contracts; cost-plus contracts,” Waxman
argued during the March hearing debate on the bill, which was referred
to a Senate committee. “We have seen what the result has been: Wasted
taxpayer dollars.”

FEMA officials have said that since Katrina, they have improved
oversight and have put more advance contingency contracts in place to
better respond to future disasters.

Elaine Duke, the Department of Homeland Security’s chief procurement
officer, testified at a May 2006 House Committee on Oversight and
Government Reform hearing that the number of longer term FEMA
contracts prepared in advance had jumped from fewer than a dozen in
2005 to more than 70 in 2006.

Deborah Avant, a professor of political science and international
affairs at George Washington University, said it is incumbent on
government to be an effective management organization when it comes to

“The government needs to be thinking ahead of time about what is the
most effective way to contract,” said Avant, a contracting expert.
“FEMA needs to constantly not be putting out emergency fires, but
thinking strategically ahead about deploying contractors in a variety
of different scenarios.”

“The U.S. government has been contracting for … years and it’s been
contracting excessively for the last 15,” she said. “and it still
doesn’t seem to be very good at it.”

Outsourcing Government
Service contracting has risen dramatically in the last decade

WASHINGTON, October 30, 2003 – Government contracting has always been
a complex matter, thick with legal wrangling and bureaucracy, but the
last decade has seen a radical change in how the U.S. government
purchases goods and services.

At one time, federal agencies constructed buildings, built machines
and cleaned offices themselves, or found another agency to do it.
Today, the U.S. government spends some $200 billion a year buying
everything from information technology services to pencils to advanced
weapons systems from the private sector.

The Defense Department alone accounts for 75 percent of that spending.
Following a series of scandals in the 1980s, where the Pentagon was
revealed to have paid outrageous sums for commercially available
products, Congress decided to overhaul government procurement. The
result was the Federal Acquisition Streamlining Act of 1994, which
simplified the maze of procurement regulations to make it easier for
federal agencies to buy products from the private sector.

The new law dovetailed with former Vice President Al Gore’s
“Reinventing Government” initiative, which aimed to trim the federal
workforce, and matched the realities of the Pentagon’s shrinking
budget. As a result, where the federal workforce has shrunk, the
contractor workforce has grown. Paul Light, a scholar at the Brookings
Institution, calls this workforce the “shadow government,” and
estimated its size in 1999 at 5.6 million.

More than half of all government contracting today is spent on services
-an increase of about 24 percent since 1990-making it the largest
spending category. “Twenty years ago, (the government) contracted for
supplies, construction and services, in that order. Now it’s services,
supplies and construction, but services are what’s driving the train,”
says Steven Schooner, associate professor and co-director of the
government Procurement Law Program at George Washington University.

However, many contract acquisition and oversight staff were eliminated
in the rush to cut back the federal workforce-a 2003 General
Accounting Office report found that the Defense Department’s
acquisition workforce was reduced by more than 50 percent between 1990
and 2001, while the department’s contracting workload increased by
more than 12 percent. Since service contracts are more difficult to
write than an order for a commercial item or construction job, the
result is more ambiguity and less oversight, says Schooner.

Government contracts generally fall into one of three categories:

* fixed-price, where the government and contractor decide on a
price to which the contractor is bound even if costs run over;
* time-and-materials, where the government and contractor agree on
an hourly rate that includes labor, materials and overhead; and,
* cost-reimbursement, where the government reimburses the
contractor for costs incurred in providing a service.

Congress and the General Accounting Office have expressed strong
reservations about cost-reimbursement contracts, which make up the
highest value of those awarded in the last two years for
reconstruction in Iraq and Afghanistan. Such contracts allow the
government to respond to changing conditions, such as international
conflicts, and to call on the contractor to deliver by issuing a “task
order,” a sort of mini-contract which lays out specific work
requirements. The U.S. Army’s Logistics Civil Augmentation Program, or
LOGCAP, held by Halliburton subsidiary Kellogg, Brown & Root, is one
such contract.

Under cost-reimbursement contracts-which one former Washington
government lawyer jokingly referred to as “defraud me please” contracts
-companies decide how much a service will cost to perform. These
contracts are also known as “cost-plus” contracts because the
contractor’s profit comes from fees paid by the government beyond the
cost of the service, which are calculated using one of several fee
arrangements. One common arrangement is award fees, in which the
contractor receives a base fee plus an additional fee based on
performance. The additional fee is often calculated as a percentage-
typically less than 10 percent, according to Schooner-of the service’s
cost. Critics say this structure gives contractors an incentive to
bill the government at a premium so that they will make a
correspondingly fat fee. Fixed fees-in which the government agrees to
pay a certain fee regardless of performance-are also fairly common.
However, this arrangement has also been sharply criticized for not
providing any incentive for contractors to do a good job or control
costs. “[Cost-plus contracts] are notoriously prone to abuse,” Rep.
Henry Waxman, the California Democrat who’s been the administration’s
fiercest critic on the contracting front, said in October.

Several of the contracts in Iraq and Afghanistan are also described as
“indefinite delivery/indefinite quantity” or ID/IQ contracts. This
means that, at the time the contract was awarded, the government did
not know how many services or products it wanted or when it wanted
them. A contract can be either indefinite-delivery or indefinite-
quantity or both. For example, if a contractor agrees to provide the
government with all the tires it needs at $40 per tire in six months,
that’s a fixed-price indefinite-quantity contract, but if it agrees to
provide 200 tires at $40 per tire whenever the government needs them,
that’s a fixed-price indefinite-delivery contract. If it agrees to
provide all the tires needed at $40 per tire whenever the government
needs them, that would be a fixed-price indefinite-delivery/indefinite-
quantity contract.

ID/IQ contracts are generally given to several companies at once so
that they can compete to fill each task order and give the government
the best price. However, Waxman has criticized the ID/IQ contracts
administered in Iraq for going to one contractor only, giving
companies like Halliburton and Bechtel a monopoly. “This is great for
the companies, but terrible for the taxpayer,” Waxman said.

Industry mobilizes to slow procurement reform
By ELISE CASTELLI  /  March 19, 2007

A coalition of industry groups is fighting new acquisition reform
proposals they say will slow government procurement and increase costs
to taxpayers.

A top concern are limits that would be placed on agencies’ use of no-
bid and cost-plus contracts under a significant piece of contract
reform legislation that overwhelmingly passed the House in a 347-73
vote March 15.

The “inflammatory language” of the bill and debate “implies there is
no accountability in contracting, and that is not the case,” said Trey
Hodgkins, senior director for defense programs for the Information
Technology Association of America.

Instead of attacking industry, reformers should look to reinforce the
ranks of the understaffed acquisition work force through recruitment
and training programs, Hodgkins said.

ITAA is one of 11 groups forming the Acquisition Reform Working Group,
which sent letters and a report to Capitol Hill decrying the measures
and demanding dialogue with Congress about these issues.

The bill, HR 1362, would require agencies to develop plans to limit
the use of no-bid contracts and cost-plus contracts, which allow
agencies to pay contractors their expenses for completing a contract
in addition to a negotiated fee. It would also require agencies to
report contractor overcharges of $10 million or more to Congress every

Acquisition spending is the fastest-growing portion of the federal
budget, accounting for nearly 40 percent of discretionary spending,
Rep. Henry Waxman, D-Calif., sponsor of the bill, said during the
floor debate.

“This surge has enriched private contractors like Halliburton, but has
come at steep cost to taxpayers through rising waste, fraud, abuse and
mismanagement,” Waxman said. The legislation will help the government
encourage competition, avoid abuse, save taxpayer dollars and promote
transparency, he said.

Although the House Oversight and Government Reform Committee, which
Waxman chairs, held hearings in February discussing management and
abuse of Defense and Homeland Security Department contracts, no
testimony was taken on the provisions of the legislation.

“Not allowing other perspectives to be aired is a disservice to
taxpayers,” Hodgkins said.

The White House also opposes the bill.

The industry groups also have expressed concern about contracting
restrictions recommended in a draft report from the congressionally
chartered Acquisition Advisory Panel. Six of the 11 coalition members
released their own 61-page assessment of the more than 80
recommendations made by the panel, which was chartered under the 2003
Services Acquisition Reform Act.

Many SARA panel recommendations are already showing up in contract
reform legislation and it was important to open a dialogue with
Congress, said Alan Chvotkin, vice president of the Professional
Services Council, another member of the coalition.

Objections to HR 1362

Among industry and administration objections to HR 1362:

· Reporting requirements. In addition to quarterly reports on
overcharges, the measure mandates agencies provide unredacted copies
of related audits to Congress on request. If this language passes,
protected proprietary information could be leaked, Hodgkins said.

This provision also raised concerns for the White House.

The bill also requires procurement shops to report the justifications
of no-bid contracts within 14 days of award.

Paul Denett, administrator of procurement policy for the Office of
Management and Budget, said in an interview he was concerned that the
bill’s reporting requirements would stretch thin already understaffed
contracting offices.
“That seemed quite excessive to me,” Denett said.

· Revolving door restrictions. Denett said he was pleased with a
change made by the House Armed Services Committee that would maintain
the current, one-year cooling-off period for those entering and
leaving government.

The original language of the so-called “revolving door” provisions
banned procurement officers from handling contracts involving their
former employers for two years. The provision also prevented former
government employees from joining the private-sector firms they
supervised in the public sector for two years after leaving the civil
service. This would avoid conflicts of interes
t that may lead to improper awards, Waxman said.
Denett said the original language could have hindered recruitment
efforts and aggravated staffing problems prompted by anticipated

· Limits on cost-plus contracting. Denett said the legislation’s
limits on cost-reimbursement contracts prevent contracting officers
from using their discretion to get the best deal for the government.

The legislation requires agencies to develop plans that contain
measurable goals and deadlines to minimize the use of cost-
reimbursement contracts.

“Cost-reimbursement contracts leave taxpayers vulnerable to wasteful
spending” because they provide no incentive for contractors to control
costs, Waxman said during the floor debate. In a statement, Waxman
said cost-plus contracts have grown by 75 percent in dollar value
since the start of the Bush administration.
The industry coalition says limits on cost-plus contracts would mean
government would be at risk for program failure. “Fixed-price
contracts are not appropriate in most development programs because
contractors and the government cannot adequately estimate the risks
involved,” the letter said.

As a result, fixed-price contracts might actually cost more money than
cost-plus contracts because vendors would be forced to plan for the
worst-case scenario rather than adjust to changes throughout the life
of the contract, they wrote. Furthermore, the limits could hinder
emergency responses where there is not the time to draw up a fixed-
price contract.

Objections to SARA panel

Industry groups also are taking aim at reforms proposed by the
advisory panel created by the Services Acquisition Reform Act (SARA).
Among those:
· Limits on time and materials contracts. The SARA panel recommended
reining in the use of time and materials contracts, a type of cost-
plus contract that allow contractors to charge for work on a
prenegotiated hourly rate. The recommendation would limit use of these
contracts to situations where an agency can clearly define its needs.

The industry groups say the recommendation would defeat the purpose of
time and material contracts, which are limited to situations where
requirements cannot be easily defined or there is not enough time to
fully define the needs.

· Expanded protest rights. Both the SARA panel and a contract reform
bill sponsored by Sen. Susan Collins, R-Maine, recommend companies get
the right to protest orders placed against existing multiple award
contracts. Although the recommendation appears to expand industry
rights, the group opposes it because it would slow down procurement,
raise costs of items being purchased and throw projects off schedule,
according to the industry report.

In addition to ITAA and PSC, four other groups contributed to the
assessment of the SARA panel recommendations: Aerospace Industries
Association, Contract Services Association, Electronic Industries
Alliance and National Defense Industrial Association. Other members of
the coalition are the American Council of Engineering Companies,
American Council of Independent Laboratories, American Shipbuilding
Association, American Electronics Association and U.S. Chamber of

{email: ecastelli [at] federaltimes [dot] com}

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