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39–495 PDF 2007

S. HRG. 110–206

THE DEPARTMENT OF DEFENSE’S MANAGEMENT

OF COSTS UNDER THE LOGISTICS CIVIL AUGMENTATION PROGRAM (LOGCAP) CONTRACT

IN IRAQ

HEARING

BEFORE THE

COMMITTEE ON ARMED SERVICES 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 19, 2007

Printed for the use of the Committee on Armed Services

(

COMMITTEE ON ARMED SERVICES 

CARL LEVIN, Michigan, Chairman 

EDWARD M. KENNEDY, Massachusetts 

ROBERT C. BYRD, West Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

JACK REED, Rhode Island 

DANIEL K. AKAKA, Hawaii 

BILL NELSON, Florida 

E. BENJAMIN NELSON, Nebraska 

EVAN BAYH, Indiana 

HILLARY RODHAM CLINTON, New York 

MARK L. PRYOR, Arkansas 

JIM WEBB, Virginia 

CLAIRE McCASKILL, Missouri 

JOHN MCCAIN, Arizona 

JOHN WARNER, Virginia, 

JAMES M. INHOFE, Oklahoma 

JEFF SESSIONS, Alabama 

SUSAN M. COLLINS, Maine 

JOHN ENSIGN, Nevada 

SAXBY CHAMBLISS, Georgia 

LINDSEY O. GRAHAM, South Carolina 

ELIZABETH DOLE, North Carolina 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

MEL MARTINEZ, Florida 

RICHARD D. DEBOBES, Staff Director 

MICHAEL V. KOSTIW, Replublican Staff Director 

(II) 

C O N T E N T S 

CHRONOLOGICAL LIST OF WITNESSES 

THE DEPARTMENT OF DEFENSE’S MANAGEMENT OF COSTS UNDER THE LOGISTICS

CIVIL AUGMENTATION PROGRAM (LOGCAP) CONTRACT IN IRAQ

APRIL 19, 2007

Page

Dorgan, Senator Byron L., U.S. Senator from the State of North Dakota ......... 7

Bolton, Hon. Claude M., Jr., Assistant Secretary of the Army for Acquisition, 

Logistics, and Technology .................................................................................... 13

Ernst, Keith D., Acting Director, Defense Contract Management Agency ......... 15

Johnson, MG Jerome, USA, Commanding General, United States Army 

Sustainment Command ....................................................................................... 17

Reed, William H., Director, Defense Contract Audit Agency ............................... 22

Fitzgerald, Patrick J., Auditor General, Department of the Army ...................... 27

(III) 

(1)

THE DEPARTMENT OF DEFENSE’S MANAGEMENT OF COSTS UNDER THE LOGISTICS 

CIVIL AUGMENTATION PROGRAM (LOGCAP) 

CONTRACT IN IRAQ 

THURSDAY, APRIL 19, 2007 

U.S. SENATE, 

COMMITTEE ON ARMED SERVICES, 

Washington, DC. 

The committee met, pursuant to notice, at 9:35 a.m. in room SD–

106, Dirksen Senate Office Building, Senator Carl Levin (chairman) presiding. 

Committee members present: Senators Levin, Reed, Akaka, Bill 

Nelson, Clinton, Webb, McCaskill, Warner, Inhofe, Thune, and 

Martinez. 

Other Senators present: Senator Dorgan. 

Committee staff members present: Richard D. DeBobes, staff director; and Leah C. Brewer, nominations and hearings clerk. 

Majority staff members present: Peter K. Levine, general counsel; and Michael J. McCord, professional staff member. 

Minority staff members present: Michael V. Kostiw, Republican 

staff director; Derek J. Maurer, minority counsel; David M. 

Morriss, minority counsel; Lucian L. Niemeyer, professional staff 

member; and Bryan D. Parker, minority investigative counsel. 

Staff assistants present: David G. Collins, Fletcher L. Cork, and 

Jessica L. Kingston. 

Committee members’ assistants present: Jay Maroney, assistant 

to Senator Kennedy; David E. Bonine, assistant to Senator Byrd; 

Frederick M. Downey, assistant to Senator Lieberman; Elizabeth 

King, assistant to Senator Reed; Darcie Tokioka, assistant to Senator Akaka; Christopher Caple, assistant to Senator Bill Nelson; 

Jon Davey, assistant to Senator Bayh; Andrew Shapiro, assistant 

to Senator Clinton; Gordon I. Peterson, assistant to Senator Webb; 

Stephen C. Hedger, assistant to Senator McCaskill; Sandra Luff, 

assistant to Senator Warner; Vince Piperni, Mark Powers, and Jeremy Shull, assistants to Senator Inhofe; Mark J. Winter, assistant 

to Senator Collins; and Brian W. Walsh, assistant to Senator Martinez. 

OPENING STATEMENT OF SENATOR CARL LEVIN, CHAIRMAN 

Chairman LEVIN. Good morning, everybody. 

The Senate Armed Services Committee meets today to hear testimony about the Department of Defense’s (DOD) management of 

the Logistics Civil Augmentation Program (LOGCAP) contract 

2

under which Kellogg, Brown, & Root, Inc., (KBR), at least until recently a subsidiary of Halliburton, provided services to U.S. troops. 

There is a history of highly favorable treatment of this contractor 

throughout the contract. For example, the company was given work 

that appears to have far exceeded the scope of the contract. All of 

this added work was provided to the contractor without competition. The contractor resisted providing us with information that we 

needed to monitor and control costs. There were almost $2 billion 

of overcharges on the contract. The contractor received highly favorable settlements on these overcharges. There was strong evidence that a failure of oversight on this contract by the DOD paved 

the way for excessive payments that cost the taxpayers hundreds 

of millions of dollars. 

Under the LOGCAP contract, the contractor is responsible for 

providing a full spectrum of services to U.S. troops in the field, including dining facilities, living quarters, base camp operations and 

maintenance, facilities management, transportation, and distribution of supplies, water and ice, laundry and bath, airfield operations, detainee camp construction, and firefighting. 

Over the last 5 years, the DOD has obligated more than $20 billion under this contract, making it one of the largest, if not the 

largest, service contracts ever awarded to a single contractor. Almost from the outset of the Iraq war, there have been serious allegations that the contractor inflated cost estimates and incurred excessive and unnecessary costs. To date, DOD auditors have identified almost $2 billion in overpricing on this contract. 

For instance, in 2003 and 2004 KBR billed the Government for 

millions of meals that were never prepared. These overcharges occurred because KBR allowed its subcontractors to charge for a fixed 

number of meals, regardless of how many meals were prepared. 

Another example in the same period, KBR ordered thousands of 

trailers from vendors who charged anywhere from 200 percent to 

as much as 600 percent of the prices charged by the low bidders. 

When asked by the committee staff whether the problem with the 

trailers was symptomatic of a broader problem with KBR’s purchasing systems, the Defense Contract Audit Agency (DCAA) director replied, ‘‘Yes.’’ 

Under Federal Acquisition Regulations (FAR), the DOD is supposed to pay only reasonable costs incurred under a cost-plus contract like the LOGCAP contract, yet DOD reimbursed the contractor for almost the entire amount that it paid for the meals that 

were never served or prepared and the greatly overpriced trailers. 

Audit reports and contractor performance evaluations from 2005 

and 2006 reveal that similar cost problems continue to the present 

day. For example, the July 2005 report of the DOD Award Fee 

Evaluation Board criticized KBR decisions that added, in their 

words, ‘‘additional costs to the task order with no visible benefit to 

the customer.’’ The ‘‘customer’’ is us. 

A 2005 DCAA audit report found that KBR’s proposed labor costs 

were overstated by $30 million, or 51 percent, compared to historic 

averages. 

A November 2005 Army Audit Agency (AAA) audit report found 

that KBR had wasted between $40 million and $113 million by 

3

purchasing more vehicles than necessary, in their words, for the 

contract. 

A separate November 2005 AAA report found that KBR’s, ‘‘material handling equipment exceeded requirements,’’ and that, ‘‘staffing levels at the numerous distribution centers were excessive, adding $36 million to the cost of the contract.’’ 

The November 2005 report of the DOD Performance Evaluation 

Board criticized, ‘‘six layers of management in a 1-to-3 management/labor ratio, which duplicated decisionmaking and underutilized personnel.’’ 

A separate November 2005 evaluation report stated that, ‘‘Initial 

estimates are often inflated so that when projects are underbudget 

all the time, it is deceptive.’’ It is deceptive. 

A March 2006 DCAA audit report found that a KBR proposal was overpriced by $75 million because KBR’s proposed labor costs 

were overstated by 22 percent, subcontract costs were overstated 

by 21 percent, material costs were overstated by 59 percent, equipment costs were overstated by 21 percent, and other direct costs 

were overstated by 20 percent, compared to the performance of the 

same work under a previous task order. 

The March 2006 Evaluation Board report criticized the ‘‘overstated costs in proposals and the overengineering of customer requirements.’’ 

An April 2006 Army audit report found that the contractor refused to move excess personnel or equipment from the job to which 

they were assigned in which they weren’t needed—they were excess—to another job in order to accomplish needed work. According 

to the report, ‘‘When we brought this situation to the attention of 

top contractor operational personnel, they informed us that this 

was company policy.’’ 

A May 2006 DCAA report found that a KBR proposal overstated costs by almost $70 million, with labor costs overstated by 33 percent, material costs overstated by 47 percent, compared to actual 

incurred costs for the same effort under a previous task order. 

A May 2006 Evaluation Board stated that, ‘‘Unskilled labor appeared to be underutilized, seen in makework projects that contribute little.’’ 

An August 2006 DCAA audit found that KBR’s proposed subcontract costs for one task order were overstated by roughly $100 

million. Proposed costs for two subcontracts exceeded 200 percent 

of the amount charged by other subcontractors to perform similar 

work, while KBR proposed to substantially increase staffing levels 

without justification on numerous other subcontracts. 

The September 2006 Evaluation Board report criticized, ‘‘unsupported costs of $2.5 million, an overrun of $33 million, questioned 

costs, and an inaccurate burn rate, and an overestimated $74 million of proposed costs.’’ 

An October 2006 Evaluation Board criticized excessive costs on 

subcontracts. 

Now, that is a litany of excess, of overstatements, of representations made by the contractor, and that is only part of the reports 

that we have reviewed. It is a pretty sorry record. 

But what was the response? The DOD problems managing the 

costs under this LOGCAP contract, first of all, were exacerbated by 

4

the contractor’s lack of cooperation with the DOD information requests. For instance, a September 2005 DCAA audit report said the 

following: ‘‘We encountered significant problems in obtaining supporting cost or price data. In some cases the procurement files were 

not provided for review, and in other cases key information was not 

included in the procurement files. Failure to disclose cost or pricing 

data to the Government significantly impairs the reliability of the 

proposal as an acceptable basis for negotiation of fair and reasonable price.’’ 

A November 2006 DCAA audit report said the following: ‘‘The results of this audit are qualified due to the inadequacy of the documentation provided and the lengthy response time in obtaining documentation from the contractor. We implore KBR management and 

its Government compliance group to address the cited deficiencies 

and to work with the DCAA to improve its systems and related internal controls.’’ 

Can you imagine, we have to implore a contractor—implore a 

contractor, receiving billions of dollars of taxpayers’ money, to do 

what the law requires them to do, which is to give us documents 

and data? 

In a December 2006 meeting, Army auditor, Patrick Fitzgerald, 

told the committee staff that the Army continues to pay too much 

for services under the LOGCAP contract. According to Mr. Fitzgerald, there is, ‘‘no doubt we’re paying a premium for KBR services and that the premium had been exacerbated by the absence of 

effective cost controls on the part of the DOD.’’ 

LOGCAP management officials, the very people who are supposed to ensure that taxpayer funds are spent wisely, appeared to 

have ignored the extensive findings by their own auditors, as well 

as the cost concerns expressed in program documents, when they 

made award fee determinations for the LOGCAP contract. Rather 

than giving KBR low ratings to penalize the company for its poor 

cost performance—and that’s what we’re talking about here, is cost 

performance—program management officials consistently gave the 

company high ratings and paid the company high fees. 

Now, the absence of significant complaints about the contractor’s 

work product is not an excuse. We’re not talking about the work 

products. We’re talking about overpayment for a satisfactory work 

product. That’s the issue that’s before us. This is not a allegation 

that the work product was deficient or inadequate. What we’re 

looking at are overpayments for that work product, because, while 

it is satisfactory, it is inexcusable to overpay for a satisfactory work 

product. There was overpayment after overpayment after overpayment after overpayment on this contract. There is a history here 

which is totally unacceptable, a history of highly favorable treatment of this contractor throughout this contract. I’ve set forth some 

examples of that history at the beginning of this opening statement, and we’re going to explore that during this hearing. 

Senator Warner. 

STATEMENT OF SENATOR JOHN WARNER 

Senator WARNER. Mr. Chairman, on behalf of the distinguished 

ranking member, Senator McCain, I’d like to place his entire statement into the record. 

5

[The prepared statement of Senator McCain follows:]

PREPARED STATEMENT BY SENATOR JOHN MCCAIN

Mr. Chairman, I join you in welcoming our witnesses. Over the last few years, 

much has been written and said about the current Logistics Civil Augmentation 

Program (LOGCAP) contract—about the Government’s management of it, and the 

contractor’s performance under it. In some instances, the observations have been accurate; in others, they have not. I hope that today’s witnesses will bring clarity and 

understanding to the issues. I am particularly interested in the Army’s plan for improving the LOGCAP. 

The LOGCAP is not a new invention. Established in 1985, the program was designed to leverage corporate resources to support military operations, thus freeing 

military personnel to do what they do best: fight America’s enemies. It has been 

used in Somalia, the Balkans, and other places to support our troops. 

Although the current contract—LOGCAP III—was competitively awarded in 2001, 

it essentially operates as a sole-source contract. There is no competition for the individual multi-million and -billion dollar task orders issued under it, a practice that 

runs counter to the corporate best practices we exhort the Department of Defense 

(DOD) to employ. As we all know, robust competition on Government contracts ensures that the Government receives the best value at the lowest cost to the taxpayer. 

I am encouraged that the Army intends to inject more competition into the program by awarding contracts to three companies, which will then compete for work 

under individual task orders. But, the American people deserve to know why it took 

so long to do this. After all, reportedly in 2004, an internal Army memorandum recommended the Army immediately find ways to open up the contract to greater competition. 

There is no dispute that the LOGCAP contractor has provided the critical combat 

support services our troops need. According to numerous people, the contractor has 

been exceedingly responsive to commanders’ requirements to enhance the quality of 

life of our troops in theater. 

Nevertheless, various Government auditors have been critical of the Government’s 

and the contractor’s cost control efforts. According to one report, the Government 

had problems preparing independent Government cost estimates, reviewing the contractor’s rough orders of magnitude, and definitizing task orders. Consequently, the 

Government’s risk increased because of the limited visibility and control over contractor costs. 

Even worse, as I understand it, the Government cannot say with certainty the 

amount of money allegedly lost through ineffective cost controls. That is unacceptable. We must have a full and accurate accounting of how the taxpayer’s dollar was 

spent and the reasons for any resources squandered. 

I also question whether the Government properly planned to use the LOGCAP 

contract. The original scope of work called on the contractor to support up to 50,000 

troops for 180 days. Disturbingly, the Government Accountability Office concluded 

that the Government had not planned how best to use the LOGCAP contract until 

after the fall of Baghdad. 

So we may fulfill our oversight responsibility, the Army must advise this committee in detail on the contemplated nature of the new LOGCAP contracts it will 

award, their fee structures, performance criteria, and potential for conflict of interests. I am keenly interested in the separate planning and support contract that the 

Army recently awarded. Under this contract, it appears that the Government is delegating functions that it ought to be performing itself. Such a role parallels that of 

lead systems integrators in major defense acquisition programs, about which I have 

previously voiced much reservation. 

I have been long concerned about the problems we have in our acquisition of 

major weapons systems: cost overruns, delivery delays, and broken systems. For 

years, I have called for the need to examine the whole procurement process as it 

works today in the DOD. We must strike a course in acquisition that brings into 

line affordability imperatives with the warfighter’s mission requirements. 

My concerns apply equally to the acquisition of services. In fiscal year 2005, the 

DOD spent $141 billion on service contracts, a 72 percent increase in a decade, and 

an amount exceeding that obligated on supplies and equipment, including major 

weapons systems. The explosion in the number and value of services contracts deserves careful consideration. 

In my judgment, we need to provide General Petraeus and our troops every tool 

they need to successfully prosecute the current strategy in Iraq. Every dollar we 

save by improving the LOGCAP is another dollar for Mine Resistant Ambush ProVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
6

tected vehicles, another dollar for body armor, another dollar for ammunition, another dollar for medical supplies. Our brave men and women in Iraq and Afghanistan deserve no less.

Senator WARNER. Before addressing one or two paragraphs of 

that statement, I listened very carefully to your rendition of, presumably, documents and other various adjudications on this very 

complicated contract. But I do think, as we pursue our inquiry here 

on the committee, we have to give recognition to the fact that this 

contract, both in Afghanistan and in Iraq, was performed under 

very erratic, unanticipated, and, indeed, high-risk conditions to 

those employees in-country performing these contracts. The military efforts in both of these areas of responsibility (AORs) have 

been courageous and highly dependent upon the services flowing 

from this contract. 

All of that has to be taken into consideration as we look at the 

various aspects. Unquestionably, there are some grounds for justifiable criticism, but, on the other hand, I would hope some of our 

witnesses would bring to light the difficulty of performing this contract. This war, in many respects, in both areas, certainly in Iraq, 

grew at unanticipated rates, large infusion of added troops on very 

short notice, accompanied by many civilians and contractors, who, 

likewise, were, in some measure, dependent upon the contract and 

its performance. 

So, Mr. Chairman, I’d like to refer to Senator McCain’s last three 

paragraphs here. I know, working as former chairman of this committee with Senator McCain, he had a tremendous interest in this 

subject. He states, in his statement, ‘‘I’ve been long concerned 

about the problems we have in our acquisition of major weapons 

systems, cost overruns, delivery delays, and broken systems. For 

years, I have called for the need to examine the whole procurement 

process as it works today in DOD. We must strike a course in acquisition that brings into line affordability imperatives with the 

warfighter’s mission requirements. My concerns apply equally to 

the acquisition of services. In fiscal year 2005, the DOD spent $141 

billion in service contracts, a 72 percent increase in a decade, and 

an amount exceeding that obligated on supplies and equipment, including major weapons systems. The explosion in the number and 

value of services contracts deserves careful consideration.’’ 

He concludes, ‘‘In my judgment, we need to provide General 

Petraeus and our troops every tool they need to successfully prosecute the current strategy in Iraq. Every dollar we save by improving the LOGCAP is another dollar for mine-resistant, ambush-protected vehicles, another dollar for body armor, and another dollar 

for ammunition. Our brave men and women in Iraq and Afghanistan deserve no less.’’ 

I join you, Mr. Chairman, in welcoming our distinguished colleague, Senator Dorgan. He undoubtedly has spent a great deal of 

his own personal time in the commitment on this subject, Senator, 

and I look forward to hearing your statement. 

Chairman LEVIN. What we will now do is call upon our first witness, Senator Dorgan, who has spent an extraordinary amount of 

time and shown just an amazing amount of commitment to the 

issue of going after waste and abuse in government contracting. As 

head of the Democratic Policy Committee, he has held hearings to 

7

fill in where there’s been a shortage of oversight in this matter, 

and we commend him for that. We are delighted that he’s here 

today to share some of his knowledge and experience with us. 

Senator Dorgan. 

STATEMENT OF SENATOR BYRON L. DORGAN, U.S. SENATOR 

FROM THE STATE OF NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, members of the committee, 

thank you very much for hearing me this morning. I did chair 10 

hearings, not because I found joy in doing so, but because we had 

many whistleblowers come to me and to others to say, ‘‘Something 

is seriously wrong, and the people need to know it.’’ 

I want to talk a little about the LOGCAP project today, but I 

want to also encourage you to take a look at the Restore Iraqi Oil 

(RIO) contract; and I want to do that, only because there’s been a 

substantial amount of information about the RIO contract. The top 

civilian contract official in our Federal Government at the Corps of 

Engineers, the top civilian official, said this about RIO: ‘‘It was the 

worst contract abuse I witnessed during my entire professional career, which spans over 20 years,’’ concerns contracts awarded to 

Halliburton subsidiary KBR. For that, she has been demoted. She 

took on the old-boys network and was demoted for being a whistleblower. 

But here’s what I received in the mail 17 months ago from the 

Inspector General (IG). I referred what Ms. Bunnatine Greenhouse, 

the top civilian contracting official at the Corps of Engineers, had 

alleged about these contracts, the RIO contracts, to the IG. Here’s 

what she wrote to me: ‘‘The Defense Criminal Investigative Service, 

the IG, has examined the allegations made by Ms. Bunnatine 

Greenhouse, principal assistant responsible for contracting for the 

Army Corps of Engineers, and has shared its findings with the Department of Justice (DOJ). The DOJ is in the process of considering 

whether to pursue the matter. As this is an ongoing criminal investigation, the requested information will be provided when the investigation is concluded.’’ That was about 17 months ago. 

The point is this, serious allegations were raised by the top contracting official in our Government about the RIO contact. It apparently is being investigated. It was referred to the DOJ by the IG. 

I really do encourage you to take a look at that, as well. 

I don’t doubt, as Senator Warner indicated, that services were 

provided under the LOGCAP contract under some very difficult circumstances. I don’t doubt that a bit. In a war zone, it’s hard to provide services, and there are undoubtedly extraordinary employees 

on the part of KBR and others who did heroic work. I don’t doubt 

that. 

But let me tell you what bothers me about these issues. I want 

to just go through a list of things that I have learned from people 

who have come forward who were desperate and wanted to say, 

‘‘Here’s what has happened.’’ 

Under the LOGCAP contract—sole-source, no bid—here’s what I 

found from people who came forward and testified openly. Let me 

start with the small issues. 

A man named Henry Bunting, he was in Kuwait, so he wasn’t 

in a war zone in a tough delivery circumstance. He was a purVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
8

chaser for KBR in Kuwait, and he was told that you need to buy 

hand towels for the soldiers, so he ordered the hand towels. That 

was part of what he did. But then, his supervisor said, ‘‘No, no, no, 

you can’t order those hand towels. You have to order these hand 

towels.’’ Triple the cost. Why? Because the company logo has to be 

on the hand towel. KBR has to be embroidered on the hand towel. 

Triple the cost. Henry said, ‘‘But that’s going to increase the cost 

of the hand towels.’’ ‘‘Doesn’t matter,’’ he was told, ‘‘it’s a cost-plus 

contract.’’ 

Now, this is a tiny little issue. But whether it’s this, $617,000 

worth of soda, or $7,400 a month for leasing a sport utility vehicle, 

or deciding to build an ice factory in the desert, and then taking 

the bid that’s 800 percent higher than another qualified bidder to 

build the ice factory in the desert, these are issues that are very 

important to the taxpayer and to the soldiers. I believe that what 

I’m going to tell you about this LOGCAP contract is a disservice 

to the American taxpayer and a disservice to our soldiers. 

You’re going to hear from the DCAA. In June 2005 they said 

Halliburton had billed taxpayers $1.4 billion in questionable and 

undocumented charges. Of those, $813 million were from the 

LOGCAP contract. Some of them got resolved, some didn’t. We 

don’t know how they were resolved. 

Under the LOGCAP contract, the troops in Iraq, at, I believe, all 

of our bases in Iraq, were allowed to shower, bathe, and sometimes 

brush their teeth with water that tested positive for E. coli and 

chloroform bacteria, and was more contaminated than raw water 

from the highly polluted Euphrates River. Now, how do I know 

this? I know this, because this is from an internal Halliburton report written by Will Granger, who was in charge of all water quality in the military installations in Iraq. Here’s what his internal report says: ‘‘The alleged discovery of unidentified larvae at the Al 

Ramadi Base in late March revealed no disinfection to nonpotable 

water was occurring for water designated for showering purposes. 

This caused an unknown population to be exposed to potentially 

harmful water for an indeterminate amount of time,’’ and he says, 

‘‘this event should be considered a near miss, as the consequences 

of these actions could have been very severe, resulting in mass 

sickness or death.’’ 

Now, I have the internal report, written by the man who was in 

charge of all water quality. The company denied this existed. They 

actually created another report that was never approved by the 

man that still works for them, who was in charge of making this 

report. 

By the way, after I held a hearing on this, a young woman, who 

is a doctor serving in the Army in Iraq, sent me an e-mail, and she 

said, ‘‘You know, I read about what was said. I found exactly the 

same thing at my military base, and I had my lieutenant follow the 

water line right on back.’’ It’s true, what was being sent in as nonpotable water was more contaminated than the raw water you’d get 

from the Euphrates River, and that’s what soldiers were washing 

their faces in and showering in, contaminated water. 

Now, the company says, ‘‘Didn’t happen.’’ In fact, the Army originally said it didn’t happen. But it did happen, of course, and the 

9

IG is also investigating that. I will provide this letter for your perusal. 

I would encourage you to talk to a man named Rory Mayberry. 

Rory Mayberry was a supervisor at a food service enterprise, KBR 

Food Service, in Iraq. Rory said that he questioned the company’s 

decision, when he learned about it, to charge for meals that had 

never been served, and he was told by managers, ‘‘this needs to be 

done, because KBR lost money in prior months when the Government suspended some dining hall payments. Got to charge for 

meals that aren’t served.’’ 

He said he was told, by the way, by his company, ‘‘If you talk 

to Government auditors when they come here, one of two things 

will happen: you’ll be fired or you’ll be sent to an active combat 

zone. Don’t you dare talk to a Government auditor.’’ He said that 

they routinely served food that had the date stamp expired on it—

routinely—and were told by their supervisors, ‘‘Doesn’t matter. 

Feed it to the troops.’’ 

Perhaps, that Halliburton sent some truck drivers into a known 

combat zone—there’s substantial evidence about that—and without 

warning them of the danger that existed. These were truck drivers 

that were their employees. A number of truck drivers died, a couple 

of soldiers died. Halliburton, then, by the way, sent letters to some 

of the other truck drivers who had been part of that, offering to 

nominate the surviving truck drivers for a DOD medal, provided 

they would sign a medical records release that doubled also as a 

waiver of any rights to seek legal recourse against the company for 

that particular issue. It was unbelievable to read what they tried 

to do with respect to those truck drivers. 

I will give you the names of people to call who will tell you that 

they watched brand-new trucks being burned on the side of the 

road, not in a combat zone, because they had a flat tire and didn’t 

have the right wrench to fix it, and trucks being abandoned because they had a fuel pump that was plugged—brand-new trucks—

because they could be replaced on a cost-plus basis. 

The list is pretty substantial, and I’m going to provide all of the 

information that I have learned about LOGCAP. 

My point is not to tarnish anybody or anything. My point is that 

I think that when you have a circumstance like this, and you give 

billions of dollars in sole-source, no-bid contracts that are cost-plus, 

and then you have the contractor say to employees, ‘‘Don’t you dare 

talk to Government auditors,’’ and you have rampant evidence of 

waste, fraud, and abuse, I think all of us ought to be concerned. 

I think that’s a disservice to the taxpayer, and I think it’s a disservice to American soldiers. 

I think profiteering during wartime is unbelievable, and it’s inexcusable. I’m glad you’re looking into the LOGCAP project. 

If I might make one additional comment, I hope that what all of 

this will do is persuade us to move with respect to some legislative 

actions that will begin to deal with contracting abuse. I believe that 

awarding big umbrella contracts of over $100 million on a solesource basis, and then say, ‘‘Go do it, and we’ll add to the contracts,’’ and, ‘‘We know it’s difficult. Do the best you can,’’ and then 

you see substantial evidence of these kinds of things I’ve described, 

it almost makes you ill. 

10

I really believe that we have a very serious problem. I think this 

is probably some of the most significant waste, fraud, and abuse 

that we’ve seen in this country’s history. I hope all of us have exactly the same reaction to it. 

If it happened—and I believe it did—let’s stop it. Let’s find out 

how it happened, why it happened, who was responsible for it, and 

let’s put an end to it. 

So, Mr. Chairman, that concludes my testimony. I am going to 

provide you a substantial amount of information that I have gathered. 

Again, it’s by people who wanted to come forward to say that the 

water contract, some people came to me and said, ‘‘Do you understand what’s happening here, that we have soldiers at bases that 

are getting potable and nonpotable water, and the nonpotable 

water they’re using for showering and washing their face and various things is more contaminated than the water they’d get if they 

just put a hose in the Euphrates River, and they don’t know it? 

The company says it didn’t happen, and here’s the report. By the 

way, here’s the e-mail from the guy in Iraq in charge of it all.’’ 

Frankly, we all ought to be angered about that sort of thing. 

So, thanks for holding these hearings. I’m pleased that you’re 

doing it. I think that the truth is a very important commodity here 

in trying to find out what happened and how to fix it and make 

sure it never happens again to our taxpayers, and especially, most 

especially, to our soldiers. 

Chairman LEVIN. Thank you, Senator Dorgan, for all your effort, 

your energy, your passion. The hearing today is exactly designed 

to address the issues which you talk about on the LOGCAP contract. We’re going to find out, not just what some of these abuses 

were—and you’ve outlined a number of them, as well—but there’s 

just been such a long list of audit reports which show the same 

problem: overcharges and failures on the part of the Army to properly audit the LOGCAP contract where these failures existed. So, 

that is what this hearing is all about, and we are going to see if 

we can get explanations for these failures, for this history of favorable treatment of this contractor. We’re going to use your materials, make them part of the record; we’ve already made good use 

of those materials, and we are very appreciative of your testimony 

here today. 

Senator WARNER. Mr. Chairman, if I might add, we thank our 

colleague. Do you have corroborative evidence, written evidence, 

documentary evidence, of some of the very striking accusations that 

you’ve drawn our attention to? For example, these indications that, 

‘‘We’ll give you a medal if you don’t testify,’’ is there any record of 

that, other than verbal? 

Senator DORGAN. That is, Senator Warner, the most unbelievable 

thing to read. I will provide you with the letters that were sent to 

the truck drivers saying that, ‘‘We want you to sign this waiver,’’ 

which is designed to look like a waiver with respect to medical or—

but it—‘‘And we’re going to award you a medal, or recommend’’—

and, by the way, this medal can only be given by the Secretary of 

Defense—but suggesting that the company’s going to give them a 

medal. 

Senator WARNER. You do have those letters? 

11

Senator DORGAN. Absolutely. In writing—when I saw them, it as 

unbelievable. 

Senator WARNER. I think it’s important that that evidentiary material be made available to the committee. 

Likewise, I’m always concerned about the whistleblower situation, and you relate that an individual who did come forward—did 

she not seek the normal legislative protection that Congress has 

given whistleblowers, and prevent that demotion? 

Senator DORGAN. Let me tell you about Bunnatine Greenhouse. 

I’ll do it in just 30 seconds. Bunnatine Greenhouse, an unbelievable 

success story, and 2 nights ago, I was on the phone with the general who made her the top contracting official in the United States. 

He’s retired now, for 6 years. I said, ‘‘General’’—I called him at 9 

o’clock at night—I said, ‘‘General, the fact is they’ve demoted her 

and given her bad’’—she had performance evaluations that were 

outstanding every year, top of the class. All of a sudden, once she 

decided to say that this abuse was the most blatant abuse she’d 

seen—she’s talking about having the companies in the meetings 

where the contracts are being developed—all of a sudden, her recommendations were awful and she was demoted. The general that 

I talked to the other night who was the one that promoted her said, 

‘‘She has taken an unbelievable beating, and it’s been unbelievably 

unfair to her. This woman should not have been treated that way. 

She was the top of the class of people that are working for the Federal Government in contracting.’’ 

So, I hope you will call her in front of this committee. She came 

to one of the hearings I held and spoke out. She had a lot of courage to do it. She knew that she was in trouble over there. But I 

hope you’ll call her in front of this committee. 

Senator WARNER. Now, this was in the Corps of Engineers? 

Senator DORGAN. This is the United States Corps of Engineers—

the Army Corps of Engineers. 

Senator WARNER. Yes, I’m familiar, yes. 

Senator DORGAN. The person that rose to the top—this is a great 

story with this woman and her family. 

Senator WARNER. Without getting into further details, by coincidence I met with the nominated officer to become the new head of 

the Corps of Engineers, and it might well be that, Mr. Chairman, 

we would ask, as a part of his—he’s already been reviewed by our 

committee, but it’s not too late to open the record to determine 

what knowledge this individual may have had, and his willingness 

to begin to give it a second examination as to its fairness. 

Chairman LEVIN. There’s also a pending IG review. 

Senator DORGAN. There’s a review of her allegations about the 

contract abuse that has been sent by the IG, after review, to the 

DOJ, and it’s under criminal investigation, according to the letter. 

But there’s no IG review, I don’t believe, of her demotion. The issue 

of her employment was a different issue. She’s paid a horrible price 

for having the courage to speak out. 

Chairman LEVIN. Yes, what we’ll do is, on that specific case, 

then, we’ll ask the DOJ to tell us what the status is, just what the 

status is of the investigation, when they expect their review to be 

completed, and we will refer the entire matter to—if there’s not 

been an IG review of it, the IG for his report. 

12

Senator DORGAN. The main point of it is, I think we want to encourage people to speak out. 

Chairman LEVIN. Absolutely. We’re going to protect whistleblowers. We’ve made a big effort in this in Congress, to protect 

whistleblowers. We’ve even had a big battle, in terms of the Senate 

Select Committee on Intelligence. We want to make it possible for 

whistleblowers who have classified information to present that information to any Member of Congress with clearance, or anybody 

who has clearance to hear it. Instead, we’ve been thwarted by the 

administration in even receiving that whistleblower information. 

But there’s a pending nominee to be the Director of the Corps of 

Engineers. So, as Senator Warner suggests, we will ask that witness if that person is willing to undertake a review of this matter 

if, and when, that person is confirmed. 

Senator DORGAN. Senator Warner, let me, just with one more 

point, say that that was on the RIO contract, not the LOGCAP contract. But, again, what this woman, the top contracting official, 

said, ‘‘It is the worst contract abuse I have witnessed during my 

entire professional career.’’ She’s talking about the mechanics and 

the way this contract was created and awarded. For that, she paid 

for it with her career. 

Senator WARNER. As the chairman said, and we’ve worked together here these many years on this committee, and Senator 

Grassley has been a pioneer on the question of whistleblowers, 

along with members on both sides, and that is—one of the strongest oversight tools that Congress has is the utilization of corroborated testimony from whistleblowers. 

Senator BILL NELSON. Mr. Chairman? 

Chairman LEVIN. Senator Nelson? 

Senator BILL NELSON. It’s my understanding from listening to 

you and Senator Warner, that we are going to make it clear to the 

nominee to be the top general in the Corps of Engineers that he 

must state to us that he will have a thorough examination of this 

issue before we would proceed with the confirmation of his nomination. Is that correct? 

Senator WARNER. Well, I’m not sure——

Chairman LEVIN. He’s going to confirm—he will state whether or 

not, before we vote on his confirmation, he is willing to undertake 

a thorough review of this matter. We can’t complete the review before the vote on his confirmation, but what we can do, and will do, 

is ask him this question, before the vote on his confirmation: ‘‘Will 

you undertake a thorough review of this matter?’’ 

Senator WARNER. That would be the correct thing, Mr. Chairman. This gentleman, whom I have had the privilege of meeting, 

is an extraordinary nominee to be the head of the Corps. In all 

probability, he has no direct knowledge or participation in these 

matters, as such, just the representation to the Senate that, as a 

part of the confirmation process, he will undertake an examination 

of this issue. 

Chairman LEVIN. Thank you. 

Thank you, again, Senator Dorgan. 

Senator WARNER. Thank you, Senator Dorgan. 

Chairman LEVIN. Secretary Bolton, would you like to begin with 

your opening statement? 

13

STATEMENT OF HON. CLAUDE M. BOLTON, JR., ASSISTANT 

SECRETARY OF THE ARMY FOR ACQUISITION, LOGISTICS, 

AND TECHNOLOGY 

Mr. BOLTON. Mr. Chairman, thank you very much. Good morning, Chairman Levin. 

Chairman LEVIN. Let me interrupt you for just one moment 

while we seat the other witnesses. Let’s get the right names again 

in front of the witnesses, so we can all be clear as to who is talking. 

Thank you. 

Secretary Bolton, you begin, please. 

Mr. BOLTON. Again, thank you very much. To you and to Senator 

Warner, distinguished committee members, thank you for this opportunity to appear before you to discuss the Army’s LOGCAP. 

I respectfully request that my written statement be made part of 

the record for today’s hearing. 

Let me begin by thanking you, on behalf of the members of the 

acquisition and logistics workforce and our soldiers, who serve with 

great distinction throughout the world, for your continuing support. 

Now, I’ll be brief. We have two important missions in Iraq, to 

support reconstruction, contracting, and to provide support to our 

courageous men and women in uniform. Contracting to support the 

reconstruction of Iraq, and troop support, is carried out by the 

Joint Contracting Command Iraq and Afghanistan. However, support to U.S. and coalition forces is provided under the LOGCAP III 

contract, which is under the auspices of the United States Army 

Materiel Command with support provided by the Defense Contract 

Management Agency (DCMA). 

LOGCAP was established in 1985 to provide basic life support 

and facility support until other support capabilities arrived or could 

be arranged. World events, however, have zeroed in on LOGCAP 

as, often, the only option to provide complex, rapid, and diversified 

area support requirements in multiple countries, mostly under 

harsh and hostile conditions. The exponential growth in the existing LOGCAP contract, over a relatively short time, has stressed 

both the Government and contract resources, as well as the business systems and processes. We have made, and will continue to 

make, improvements to our processes, our systems, and contract. 

The program’s strength lies in the dedication, innovation, and perseverance of the LOGCAP personnel—military, civilian, and contractor. We are proud of the dedication, commitment, and hard 

work displayed by the LOGCAP personnel in supporting our troops 

and in rebuilding Iraq. 

Mr. Chairman, this concludes my opening remarks. Again, I 

want to thank you, the distinguished members of this committee, 

for your continuing wisdom, your guidance, your steadfast support, 

and I look forward to your questions. 

Thank you very much. 

[The prepared statement of Mr. Bolton follows:]

PREPARED STATEMENT BY HON. CLAUDE M. BOLTON, JR. 

Thank you for this opportunity to report to you on the United States Army’s Logistics Civil Augmentation Program (LOGCAP). I am pleased to represent U.S. 

Army leadership as well as the military and civilian men and women who are, along 

with our contractors, supporting our fighting forces and working to reconstruct Iraq. 

Our success would be impossible without the tremendous support the Army receives 

14

from you, the members of the Senate Armed Services Committee. We thank you for 

your wisdom, advice, and strong support. 

The U.S. Army acquisition workforce has two very important missions in Iraq: to 

support reconstruction contracting and to provide support for the troops. Contracting to support reconstruction is carried out by the Joint Contracting CommandIraq/Afghanistan (JCC–I/A) under the acquisition authority of the U.S. Army. JCC–

I/A also provides support to the Multi-National Security Transition Command-Iraq 

(MNSTC–I) in training and equipping Iraqi forces and to the U.S. Government’s 

mission in Afghanistan. Support to U.S. and coalition forces is provided under the 

LOGCAP–III contract under the auspices of the U.S. Army Material Command 

(AMC). 

The Army has worked with contractors to provide supplies and services during 

both peacetime and contingency operations dating back to the Revolutionary War. 

On December 6, 1985, LOGCAP was established with the publication of Army Regulation 700–137. The newly established program was used in 1988 when the Third 

United States Army requested that the U.S. Army Corps of Engineers (USACE) contract out a management plan to construct and maintain two petroleum pipeline systems in Southwest Asia in support of contingency operations. 

The first comprehensive multifunctional LOGCAP Support (LOGCAP I) contract 

was competitively awarded by the USACE in August 1992 and this effort supported 

most U.S. military operations from 1992–1996. 

LOGCAP was not envisioned to remain in place for years and the original intent 

of the LOGCAP contract was only to provide basic life and facilities support such 

as base camps, dining facilities, food service, supply point operations, local and line 

haul motor transport, and sea and aerial points until other support capabilities arrived or could be arranged. However, external world events have shown that 

LOGCAP is often the only option that could provide complex, rapid, and diversified 

area support requirements. 

In 1996, AMC assumed the contract administration, management, and execution 

responsibilities for the LOGCAP Umbrella Support Contract. AMC re-competed the 

contract in 1997 (LOGCAP II) and again in 2001 (LOGCAP III). With the sudden 

and tragic events of September 11, 2001, the dynamics of logistics civil augmentation support significantly changed from anything we’ve seen in history. LOGCAP 

proved again to be rapid, responsive, and flexible. There is no other organic support 

(Active-Duty, Reserve, or National Guard) that allows us to meet these type of needs 

and thus LOGCAP is, and will remain, a vital avenue to prosecute the global war 

on terrorism. LOGCAP supports multiple countries, services, and agencies, most 

under harsh and hostile conditions. The LOGCAP III contract is approximately $23 

billion, with an outside the continental United States force structure of 55,715 men 

and women of which approximately 29,200 are subcontractors. Under the LOGCAP 

contract, the Army has delivered to our forces: 36.2 million bags of mail; 200 million 

tons of ice; 7.6 billion gallons of potable water; 533 million meals; and 26.7 million 

bundles of laundry. The services provided to our uniformed men and women have 

been of the highest quality. Still, with these services come associated challenges. 

The exponential growth in the existing LOGCAP contract over a relatively short 

period of time has stressed both Government and contractor resources, as well as 

business systems and processes. We have made and will continue to make improvements to our processes, systems, and contract. For example, to improve management of our processes and refine requirements we have established three program 

offices in Iraq, Kuwait, and Afghanistan. The offices are staffed with a cadre of logistics analysts, contract specialists, and cost analysts. Workforce members are in 

daily contact with senior commanders and logisticians and participate in all aspects 

of operational planning and execution. We continue to work closely with the Defense 

Contract Management Agency (DCMA) on contractor systems issues. DCMA has deployed Administrative Contracting Officers and Quality Assurance Representatives 

throughout the region to provide oversight. In addition, we have appointed more 

than 450 Contracting Officer Representatives to provide daily oversight of contractor 

performance. Under my direction AMC, DCMA and the Defense Contract Audit 

Agency have worked hard to resolve the backlog of undefinitized contract actions 

(UCAs)—with success. There currently are no outstanding UCAs. The LOGCAP office, with support from other Department of Defense agencies, is aggressively managing and monitoring the contractor’s cost performance; the Joint Acquisition Review Board adds another measure of cost control through the management and approval of requirements, thus ensuring expenditures are for bona fide needs. 

The mission in Iraq is one of constant change. Support to Iraqi Forces has increased as we have worked to hand over the fight for freedom and the battle against 

the insurgency to the Iraqi Government. The LOGCAP contract is also changing as 

we move away from a one contractor configuration as currently exists under 

15

LOGCAP III to multiple contractors under LOGCAP IV. We are confident that the 

additional execution capability—providing for competition at the individual task 

order level—will provide us with more robust capacity and effectiveness. 

Regardless of the contract vehicle, however, one thing has and will remain constant over time: our commitment to ensuring that all contractors who support our 

courageous military men and women and reconstruction efforts in Iraq comply with 

the terms and conditions of their contracts. 

On January 30, 2007, the Army learned that Kellogg, Brown, and Root (KBR) 

services may have inappropriately charged the Army for security costs under 

LOGCAP III. In light of this information and on the basis that privately acquired 

security should not have been charged or paid under the contract, the contracting 

officer took action to adjust over $19 million in payments to KBR. 

The U.S. Army is committed to providing full disclosure of the results of any investigations. If KBR violated the terms and conditions of the LOGCAP III contract 

and knowingly or unknowingly incurred costs under the contract, the U.S. Army 

will take appropriate steps under the terms of the contract to recoup any funds paid 

for those services. 

LOGCAP capitalizes on the synergistic effect of integrating the combined capabilities of the military members of the U.S. Army, as well as Army civilians and the 

commercial civil sector. The program’s strength, however, lies in the dedication, innovation, and perseverance of LOGCAP personnel—military, civilian, and contractor. We are proud of the dedication, commitment, and hard work displayed by 

LOGCAP personnel in supporting our troops and rebuilding Iraq.

Chairman LEVIN. Thank you very much, Secretary Bolton. 

Let us now call on Mr. Ernst, who’s the Acting Director of the 

DCMA. 

Mr. Ernst? 

STATEMENT OF KEITH D. ERNST, ACTING DIRECTOR, 

DEFENSE CONTRACT MANAGEMENT AGENCY 

Mr. ERNST. Good morning, Mr. Chairman and members of the 

committee. I appreciate this opportunity to appear before you today 

to discuss the role of the DCMA in ensuring performance under the 

LOGCAP in Iraq and Afghanistan. 

I respectfully request that my written statement be made part of 

the record for today’s hearing. 

DCMA’s oversight of contractor-provided services for our Nation’s 

deployed forces in Iraq and Afghanistan is a responsibility of unprecedented magnitude, and one with a commensurate level of 

challenge. DCMA maintains a cadre of approximately 83 military 

and civilian personnel in Iraq, Afghanistan, and Kuwait to support 

LOGCAP. These individuals deploy in theater for 6-month tours 

and specialize in one of three functional areas: contract administration, quality assurance, or property management. 

In carrying out their responsibilities, these personnel ensure that 

the LOGCAP contractor is performing in a manner consistent with 

contract requirements, is using adequate effective quality processes, is recommending cost-containment strategies, and is adapting the level and nature of their support to meet shifting requirements. 

DCMA’s in-theater cadre is complemented by a network of nonDCMA personnel, referred to as contracting officer representatives 

(CORs). CORs receive specialized training in one of several 

LOGCAP support functions, such as food preparation, laundry service, or waste disposal. Currently numbering approximately 450, the 

CORs are members of the deployed units that receive the contractor-provided services. DCMA’s in-theater cadre and the CORs 

16

serve as a team that closely monitors contractor performance of 

LOGCAP services at their respective locations. 

At the corporate level, DCMA provided oversight of dining facilities renegotiations, resulting in more favorable contract terms. We 

supported the DCAA’s revocation of direct billing privileges for 

KBR, meaning that every cost voucher submitted by KBR must 

now be approved by DCAA before payment. DCMA also identifies 

to LOGCAP negotiators any risk posed by estimating system issues 

to ensure these issues are adequately considered and mitigated 

during negotiations. 

The in-theater contract management mission is clearly a formidable one. Aspects of such a mission, including personnel security 

and safety, workload shifts and dispersions, and personnel placement, are a continual challenge. DCMA constantly works to effectively balance resource requirements between our core mission and 

contingency contracting administration service commitments to ensure that core mission areas, such as flight-critical product and 

level I subsafe hardware, along with high-investment programs and 

sustainment support, continue to achieve their intended goals. 

This concludes my prepared remarks. I will be happy to answer 

any questions you may have. 

[The prepared statement of Mr. Ernst follows:]

PREPARED STATEMENT BY KEITH D. ERNST

Mr. Chairman and members of the committee: I appreciate this opportunity to appear before you today to discuss the role of the Defense Contract Management Agency (DCMA) in ensuring contractor performance under the Logistics Civil Augmentation Program (LOGCAP) in Iraq. DCMA’s oversight of contractor-provided services 

for our Nation’s deployed forces in Iraq is a responsibility of unprecedented magnitude and one with a commensurate level of challenge. 

DCMA maintains a cadre of approximately 83 military and civilian personnel in 

Iraq, Afghanistan, and Kuwait to support LOGCAP. These individuals deploy in theater for 6-month tours and specialize in one of three functional areas: contract administration, quality assurance, or property management. In carrying out their responsibilities, these personnel ensure that LOGCAP contractor’s performance is consistent with contract requirements; is using adequate, effective quality processes; is 

recommending cost-containment strategies; and is adapting the level and nature on 

their support to meet shifting requirements. 

Prior to their deployment to theater, these personnel undergo specialized training 

for the demands of their LOGCAP-related duties. Each of DCMA’s deployed Administrative Contracting Officers (ACOs) and most of our Quality Assurance Representatives (QARs) are certified in accordance with the Defense Acquisition Workforce 

Improvement Act (DAWIA). DCMA’s in-theater cadre is complemented by a network 

of non-DCMA personnel referred to as Contracting Officer Representatives (CORs). 

CORs receive specialized training in one of several LOGCAP support functions, such 

as food preparation, laundry service, or waste disposal. Currently numbering approximately 450, the CORs are members of the deployed units that receive the contractor-provided services. DCMA’s in theater cadre and the CORs serve as a team 

that closely monitors contractor performance of certain services at their respective 

locations. The CORs routinely submit input to DCMA’s QARs. The CORs also have 

a direct line to the cognizant DCMA ACOs. 

Our ACOs receive requirements from the LOGCAP Support Unit (LSU) after that 

unit makes should-cost estimates on the requirement. The assigned ACO then requests a proposal from the contractor, and, once the LSU validates the proposal for 

accuracy and cost reasonableness, formally tasks the contractor to begin work. In 

theatre, our ACOs also provide material requisition approval, lease approval, and 

consent to subcontract in accordance with prescribed contract terms. At the corporate level, DCMA establishes and monitors various overhead rates and factors. 

Our ACOs also conduct formal Performance Evaluation Boards (PEBs) using the 

identified award fee criteria. DCMA and the supported customer’s CORs provide 

feedback to the contractor on acceptable performance as well as on those areas needing improvement. In the conduct of the PEB, our ACOs review the contractor’s Cost 

17

Avoidance Measures (CAMs). CAMs are submitted by the contractor to document 

cost savings and avoidances. The contractor is motivated to submit CAMs as they 

are tied directly to fee initiatives in the Award Fee Board criteria. The contractor 

can increase the amount of fee it is awarded by demonstrating good stewardship of 

taxpayer dollars. Our ACOs also provide input for the semi-annual Award Fee Evaluation Board—the board which determines the contractor’s level of earned fee. 

At the corporate level, DCMA provides oversight of Dining Facilities renegotiations, resulting in more favorable contract terms. In this regard, we supported the 

Defense Contract Audit Agency’s (DCAA) revocation of direct billing privileges for 

Kellogg Brown and Root (KBR), meaning that every cost voucher submitted by KBR 

now must be approved by DCAA before payment. DCMA also identifies to LOGCAP 

negotiators any risks posed by estimating system issues to ensure they are adequately considered and mitigated during negotiations. 

The role of our property administrators is to ensure the contractor has a viable 

property management system—one that minimizes and controls the loss, theft, misuse, and destruction of Government property. Property Administrators are also responsible for investigating incidents of property loss to determine accountability. A 

DCMA conducted survey in 2006 on the principal LOGCAP contractor examined 14 

property management functional areas. Our survey uncovered no systemic issues, 

and we deemed the contractor’s property management system to be satisfactory. 

The in-theater contract-oversight mission is clearly a formidable one. Aspects of 

such a mission, including personnel security and safety, workload shifts and dispersion, and personnel placement, are a continual challenge. DCMA constantly works 

to effectively balance resource requirements between its core mission and its Contingency Contract Administration Services commitments to ensure that core mission 

areas such as Flight Critical and Level I Subsafe hardware, along with high-investment programs and sustainment support, continue to achieve their intended goals. 

This concludes my prepared remarks. I will be happy to answer any questions you 

may have.

Chairman LEVIN. Thank you, Mr. Ernst. 

Let us go now to General Johnson, Commanding General of the 

United States Army Sustainment Command. 

General Johnson? 

STATEMENT OF MG JEROME JOHNSON, USA, COMMANDING 

GENERAL, UNITED STATES ARMY SUSTAINMENT COMMAND 

General JOHNSON. Good morning, Mr. Chairman and members of 

the Senate Armed Services Committee. Thank you for the opportunity to report to you on the United States Army’s LOGCAP. 

The Army Sustainment Command is responsible for the execution of LOGCAP, in addition to several other missions: coordination 

of Army materiel commands, field support operations, coordination 

of reset, materiel management, armor preposition stocks, and contingency contracting. 

The Army Sustainment Command executes this through 11 brigades located throughout the world—7 field support brigades, 

which handles logistics missions, and 4 contingency contract brigades, recently created. 

It is my privilege to represent the United States Army, as well 

as its dedicated military, DOD civilians, and contractors whose 

steadfast support of America’s fighting forces in Afghanistan, Iraq, 

and Kuwait are critical to our efforts. Our work and our success 

to date are directly attributable to the resources and guidance you 

provide. I thank you for the oversight and direction as we continue 

to improve LOGCAP. 

I would also like to thank Claude Bolton, Assistant Secretary of 

the Army for Acquisition, Logistics, and Technology (AL&T), who 

is here today; Tina Ballard, who is the Deputy Assistant Secretary 

of the Army for Policy and Procurement; General Benjamin Griffin, 

18

who commands the Army Materiel Command; and my other colleagues at the table who have participated in improving this program. Their leadership has helped us address numerous challenges 

and develop improvements in managing LOGCAP. 

From three qualified bidders, the LOGCAP contract was competitively awarded to KBR in December 2001. Under the contract, individual task orders are developed to provide specific support services. The contractor is paid a cost-plus 1 percent base fee, and the 

contractor may earn up to 2 percent award fee on negotiated costs. 

The program has grown rapidly from a peacetime value of several 

million dollars to over $5 billion today. As a result, we encountered 

the following challenges: controlling theater requirements, contractor business systems not meeting the standard, definitizing 

task orders, conducting timely award-fee boards, accounting for 

property, and outright fraud and criminal activity. 

In August 2004, we aggressively attacked these issues and began 

corrective actions. These challenges were validated by both the 

DCAA, the AAA, and the DCMA. The actions we took were as follows: appointed a senior contracting official to run the program, establishing a requirement review process, establishing a review 

process of business systems of the contractor, definitizing all overage contracts, conducting timely award fee boards, establishing 

property controls, working with the DOJ to prosecute those who 

broke the law, and expanding our partnership with the DCMA and 

the DCAA. 

With Mr. Bolton’s help, we’ve established a senior executive program manager for LOGCAP. James Loehrl, who is here with me 

today, serves as the LOGCAP manager and also as my principal 

assistant responsible for contracting. 

We established four program management offices in Afghanistan, 

Iraq, and Kuwait. We also improved predeployment training for 

our LOGCAP support unit. We continue to improve oversight and 

management of the program. Only yesterday, we promoted Lee 

Thompson, who’s here with me today, to the Senior Executive Service to act as Director for LOGCAP Support Operations. This will 

allow Mr. Loehrl to focus primarily on the contracting issues, while 

Mr. Thompson will dig deeper into how we support the forces on 

the ground. 

To address theater requirements, we established a Joint Acquisition Review Board to review and approve all LOGCAP work requirements. We also have a Coalition Acquisition Review Board 

that provides additional review and approval or work requirements 

over $10 million. Now, with the help of DCAA and DCMA, all of 

the contractors’ business systems are acceptable. They’re not where 

we want them to be, but they meet the standard. 

As I mentioned before, in October 2004 we began the establishment of four program management offices in Afghanistan, Iraq, 

and Kuwait. These offices are staffed with logistics specialists, contract specialists, and cost analysis who provide detailed oversight 

of the contract and independent Government estimates. 

Additionally, our DCMA and our DCAA partners are co-located 

and integrated with the deputy program manager staff. Between 

November 2004 and March 2005, we definitized 55 over-age task 

orders valued at $14 billion. Now all new task orders are definiVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
19

tized before they are issued or within the 180-day standard required by regulation. 

Contract award fee evaluations are now on schedule. Mr. Loehrl, 

the LOGCAP manager, has made 11 trips to the theater to chair 

award fee boards. 

We have established a Contractor-Acquired Property Review 

Board that ensures excess contract property is distributed to locations needed. The contractor is required to use excess equipment 

prior to purchasing new items. We directed the contractor to improve his supply chain. As a result, the contractor implemented, 

along with the help of Defense Logistics Agency, competitive commodity agreements with support vendors for equipments and supplies, such as generators, communication items, vehicles, and lumber. This standardizes maintenance and reduces spare parts costs 

needed to maintain equipment. To date, these efforts have resulted 

in a cost avoidance of over $26 million. 

In cases of waste, fraud, and abuse, the U.S. Attorney’s Office 

has indicted six people, and successfully prosecuted four cases of 

fraud. In all cases, restitution has been ordered against the individuals convicted of fraud. 

With regard to cost control, the contractor is required to provide 

cost reports every 2 weeks on active task orders. These reports 

identify variances between budgets, actual expenditures, and available funding. This allows the management personnel in theater to 

identify trends needing correction immediately. 

Our ‘‘Alpha Contracting’’ initiative brings the combatant commanders’ representatives, the contractor, the contracting officer, 

and the DCAA, along with the DCMA, together so we can rapidly 

agree on costs and estimates for needed support operations in theater. Cost avoidance for this process has been dramatic. In 2005 

and 2006, initial LOGCAP estimates for work in Iraq exceeded $10 

billion. Through ‘‘Alpha Contracting’’ initiative and should-cost 

analysis and independent Government estimates, this was reduced 

to $4 billion, a $6 billion cost avoidance. 

We recognize the need to have closer oversight of subcontract actions. The prime contractor is now required to obtain our consent 

to subcontract for services that exceed $500,000. A review is done 

of any contracting actions with the subcontractor. 

LOGCAP III grew so rapidly that it nearly exceeded a single contractor’s capacity. To minimize this risk, LOGCAP IV will use multiple contractors. This will increase Government contract oversight 

and reduce program risk, while reducing cost through competitive, 

continuous task-order competition. 

You specifically asked for my views on the cost-effectiveness of 

the program. This program is operating in a very difficult, complex, 

and ever-changing environment. Given what this program has been 

asked to do and the circumstances it operates under, it is cost-effective. However, there is a breakeven point as we continue with the 

war on a long-term basis. With your continued support and guidance, this program will continue to improve and ensure basic support is provided to America’s fighting forces, at the least cost, on 

time, and to standard. 

Thank you for allowing me to speak today. I look forward to your 

questions. 

20

[The prepared statement of General Johnson follows:]

PREPARED STATEMENT BY MG JEROME JOHNSON, USA 

Mr. Chairman, members of the Senate Armed Services Committee, thank you for 

this opportunity to report to you on the United States Army’s Logistics Civil Augmentation Program (LOGCAP). It is my privilege to represent the United States 

Army, as well as the dedicated military, Department of Defense (DOD) civilians, 

and contractors whose steadfast support of America’s fighting forces in Afghanistan, 

Iraq, and Kuwait are critical to our efforts. Our work and our success to date are 

directly attributable to the resources and guidance you provide. I thank you for your 

oversight and direction as we continue to improve LOGCAP. 

I would also like to thank Claude Bolton, Assistant Secretary of the Army for Acquisition, Logistics, and Technology, who is here today; Tina Ballard, who is the 

Deputy Assistant Secretary of the Army for Policy and Procurement; and General 

Benjamin Griffin, who commands the Army Materiel Command. Their leadership 

has helped us address numerous challenges and develop improvements in managing 

LOGCAP. 

From three qualified bidders, the LOGCAP III contract was competitively awarded to Kellogg, Brown, and Root, Incorporated, in December 2001. Under the contract, individual task orders are developed to provide specific support services. For 

many task orders, the contractor is paid negotiated costs plus a 1-percent base fee; 

the contractor may earn up to a 2-percent award fee on the negotiated costs. The 

program has grown rapidly from a peacetime value of several million dollars per 

year to over $5 billion per year today. The program provides logistics and life support services to our fighting forces, freeing them to focus on their combat missions. 

The program is designed to rapidly expand during contingency operations and to 

drawdown during peacetime. 

LOGCAP III was first used in Southwest Asia in support of the troop buildup in 

Kuwait. Once U.S. forces crossed the berm into Iraq, LOGCAP crossed with them:

• establishing and operating base camps 

• feeding hungry troops 

• furnishing transportation services 

• operating warehouses 

• delivering mail 

• transporting fuel and supplies

LOGCAP personnel became a force multiplier for our warfighters. 

We encountered a number of challenges with LOGCAP III during the rapid buildup of our forces in Southwest Asia. These challenges included:

• controlling theater requirements 

• overwhelming the contractor’s business systems 

• definitizing task orders 

• conducting timely award fee boards 

• accounting for property 

• fraud

Despite early challenges, at no time did our servicemembers go without our 

LOGCAP support, we always placed their needs first. 

In August 2004, we aggressively attacked these issues and began corrective actions. Many of the issues were later validated in audits conducted by the Defense 

Contract Audit Agency (DCAA), the Army Audit Agency (AAA) and the DOD Inspector General. 

While LOGCAP still has a number of challenges, we have implemented a number 

of improvements, including:

• Appointing a senior contracting official to run the program 

• Establishing a requirement review process 

• Insisting KBR improve their business systems 

• Definitizing all over-age task orders 

• Conducting timely award fee boards 

• Establishing property controls 

• Working with the Department of Justice to prosecute those who broke the 

law 

• Expanding our partnership with DCMA and DCAA

Rapid program growth drove the need for enhanced oversight. With Mr. Bolton’s 

help, we have established a Senior Executive Service Program Manager for 

LOGCAP. This person serves as the focal point for day-to-day management of 

LOGCAP and staff direction. James Loehrl, who is with me today, serves as my 

21

LOGCAP Manager and also my Principal Assistant Responsible for Contracting. We 

established Deputy Program Management offices in Afghanistan, Iraq, and Kuwait. 

We also improved pre-deployment training for our Logistics Support Unit soldiers. 

To address theater requirements, we work directly with forward units to identify 

and define needed services. We established a Joint Acquisition Review Board to review and approve LOGCAP work requirements. We have a Coalition Acquisition Review Board that provides an additional review and approval for work requirements 

over $10 million. 

Along with our Defense Contract Management Agency (DCMA) and DCAA partners, we insisted KBR improve their business systems. Now, all of KBR’s business 

systems are acceptable. As I mentioned before, in October 2004 we began establishing Deputy Program Management offices in Afghanistan, Iraq, and Kuwait. 

These offices are staffed by: logistics specialists, contract specialists, and cost analysts who provide detailed oversight of the contract. Additionally, our DCMA and 

DCAA partners are colocated and integrated with the Deputy Program Manager 

staff. 

Between November 2004 and March 2005, we definitized 55 over-age task orders 

valued at $14 billion. Now, all new task orders are definitized before they are issued 

or within the normal 180-day standard. 

Contract award fee evaluations are now on schedule. The LOGCAP Manager has 

made 11 trips to theater to chair award fee boards. Every 3 months, we evaluate 

contractor performance and determine appropriate award fees. Through November 

2006, KBR earned $256 million of a potential $287 million in award fees; this 

equates to 89 percent of potential fees. This process provides the contractor with important feedback on where improvements are needed. 

To maximize the use of contract-purchased property, we have established a Contractor Acquired Property Review Board that ensures excess contract property is 

distributed to needed locations. The contractor is required to utilize excess equipment prior to purchasing new items. Also, the contractor implemented a competitive 

commodity agreement with support vendors for equipment such as generators, communications items and vehicles. This standardizes maintenance and reduces the 

number of spare and repair parts needed to maintain equipment. To date these efforts have saved over $26 million. 

In cases of waste, fraud, and abuse, we fully cooperate with any and all investigations and prosecutions. The U.S. Attorney’s office has indicted six people and successfully prosecuted four cases of fraud. In all cases, restitution has been ordered 

against the individuals convicted of fraud. 

We work closely with DCMA and DCAA to address recommendations, improve 

contract administration, and improve contractor oversight. To date, we have sustained over $600 million of DCAA recommendations in our task order negotiations. 

We continue to learn and grow from our experience and implement changes as 

they are needed. Every day we seek to:

• reduce costs 

• improve performance and oversight 

• reduce program risk

As LOGCAP continues to mature, we recognize that future LOGCAP contract 

oversight staffs must be on the ground quickly—ready to operate. We will be postured to move Deputy Program Management offices into theaters as required. Tied 

to this is the rapid development of independent Government cost estimates. These 

estimates will assure that we remain good stewards of the resources provided to us. 

We are developing automated tools to assist our Government teams in preparing 

statements of work and cost estimates. We will not let future oversight lag when 

the program grows rapidly to meet warfighter needs. 

With regards to cost control the contractor is required to provide cost reports 

every 2 weeks for active task orders. These reports identify variances between budgets, actual expenditures, and available funding. This management tool provides 

DCMA and other program personnel with a quick understanding of trends needing 

attention. 

Another lesson learned that we will carry into future LOGCAP operations is to 

have standardized statements of work which will allow combatant commanders to 

quickly select support options. This standardization will allow the LOGCAP contractor to efficiently plan and establish logistics and life support operations. 

Our ‘‘Alpha Contracting’’ initiative emerged from our need to streamline the task 

order negotiation process. This initiative brings the combatant commander, the contractor, the contracting officer, and the DCAA together so they can rapidly agree 

on and put needed support operations in place. Cost avoidance from this process has 

been dramatic. In 2005 and 2006, initial LOGCAP estimates for work in Iraq exVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
22

ceeded $10 billion. Through the Alpha Contracting initiative and General Casey’s 

directive to minimize services, this was reduced to $4 billion—a $6 billion avoidance. 

This is also one of the places we are making use of AAA reviews. When AAA identifies potential areas of overstaffing or underutilization of equipment, we use that information as a part of our negotiation process. 

We recognize the need to have closer oversight of subcontract actions. The prime 

contractor is now required to obtain our consent to subcontract for services that exceed $500,000. 

LOGCAP III grew so rapidly that it nearly exceeded a single contractor’s capacity. 

To minimize this risk, LOGCAP IV will utilize multiple contractors. One contractor 

will provide pre-war planning and program management support. Up to three contractors will provide performance services, with all of them competing for work identified in separate task orders. This will increase Government contract oversight and 

reduce the program risk of exceeding a single contractor’s capacity, while reducing 

costs through continuous task order competition. 

LOGCAP IV will go a long way toward expanding performance capacity, reducing 

costs, and improving Government oversight. It will also provide us with increased 

flexibility to meet rapidly changing requirements. 

In conclusion, LOGCAP is more than just a contract. It is a critical program designed to provide essential support services to our Nation’s sons and daughters who 

fight for our freedom. 

You specifically asked for my views about the cost effectiveness of this program. 

I will tell you that this program is operating in a very difficult, complex and everchanging environment. Given what this program has been asked to do, and the circumstance it operates under, it is cost effective. We’ve managed to overcome numerous challenges in LOGCAP while always maintaining our support to our Nation’s 

soldiers, sailors, airmen, and marines. 

Despite any and all program challenges, we performed our mission and succeeded 

in supporting our servicemembers. In forward battle zones, LOGCAP has served 

over 533 million meals to hungry troops, washed over 26 million bundles of their 

laundry, and delivered over 36 million bags of mail that included letters from their 

loved ones at home. 

We stand ready to meet tomorrow’s challenges to support America’s warfighters 

where and when they need us. 

Thank you for inviting me to speak with you today; this concludes my statement.

Chairman LEVIN. Thank you so much, General Johnson. 

Now let’s call on William Reed, the Director of the DCAA. 

Mr. Reed. 

STATEMENT OF WILLIAM H. REED, DIRECTOR, DEFENSE 

CONTRACT AUDIT AGENCY 

Mr. REED. Mr. Chairman, Senator Warner, and members of the 

committee, thank you for the opportunity to appear today to discuss DCAA’s oversight of contract costs related to military operations and reconstruction in Iraq, particularly related to the 

LOGCAP. 

DCAA has been an integral part of the oversight and management controls instituted by DOD to ensure integrity and regulatory 

compliance by contractors performing services in Iraq. Our services 

include audits and professional advice to acquisition officials on accounting and financial matters, to assist them in the negotiating, 

award, administration, and settlement of contracts. Decisionmaking authority on DCAA recommendations resides with contracting officers within the procurement organizations who work 

closely with DCAA throughout the contracting process. 

Since April 2003, DCAA has worked with all U.S. procurement 

organizations, including those of the United States Agency for 

International Development and the State Department, to establish 

the resources and planning information needed to provide audits of 

contracts for Iraq reconstruction. To carry out these audit requirements, DCAA opened an office in Iraq in May 2003, and impleVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
23

mented planning and coordination procedures to effectively integrate audit work between that office and more than 50 DCAA continental United States audit offices with cognizance of companies 

performing contracts in Iraq. 

Currently, we are auditing contracts of 93 contractors, holding 

175 prime contracts with contract ceiling amounts of $51.8 billion, 

of which $38.5 billion has been funded at the end of fiscal year 

2006. 

I would like to point out that DCAA audits of cost-reimbursable 

contracts represent a continuous effort from evaluation of proposed 

prices to final closeout and payment. Initial audits of contractor 

business systems, internal controls, and preliminary testing of contract costs are carried out to provide a basis for provisional approval of contractor interim payments and early detection of deficiencies. Comprehensive contract cost audits are performed annually throughout the life of the contract, and are used by the contracting activity to adjust provisionally approved interim payments 

and ultimately to negotiate final payment to contractors. 

Through fiscal year 2006, we have issued more than 1,800 reports on Iraq-related contracts. Approximately 350 of those reports 

were on KBR specifically. We estimate to issue another 600 reports 

in fiscal year 2007. DCAA oversight of contracts in Iraq have found 

a number of problems. Our actions have ranged from recommending changes in business processes, to reduction of proposed or 

billed costs, to referral of our findings to the IG for investigation 

and possible legal action against the contractor. Overall, these audits have recommended reductions in proposed and billed costs of 

$4.9 billion. 

Where appropriate, we have taken action to reduce contractorbilled costs for disputed amounts, pending a contracting officer decision. 

In addition, we have found $5.1 billion of estimated costs where 

the contractor did not provide sufficient information to explain the 

basis of the estimated amounts. These unsupported costs are usually resolved through contractor’s submission of additional documentation at the time of contract price negotiations. 

Turning now to the LOGCAP, it is the single largest Iraq-related 

contract. It was awarded to Halliburton subsidiary, KBR, and currently has a contract ceiling of $22.5 billion. DCAA has provided 

comprehensive and continuous contract audit oversight on the 

LOGCAP, and I would like today to comment on some of our work 

in that regard. 

In supporting the Army contracting officers in the pricing of contracts, DCAA has audited 68 LOGCAP task order proposals, valued 

at $16.2 billion, and have found audit exceptions or costs questioned of $1.9 billion. DCAA has received and analyzed the results 

of negotiation on task orders, valued at $12.8 billion, and negotiated price reductions of $600 million have been achieved to date. 

A recent example of our audit work in this area is the review of 

the proposal for task order 139. Task order 139 is the latest order 

for dining facilities, laundry, and other life-support measures for 

U.S. troops and civilians. Our review of the initial proposal was 

completed in August 2006. We questioned $262 million of the $3.7 

24

billion proposal. KBR agreed to $160 million of the questioned 

costs, and the balance was addressed at recent negotiations. 

It is notable that in this pricing action, that there was a significant improvement over previous similar proposals which were 

plagued by estimating deficiencies, causing multiple proposal submissions and delays in negotiating the task-order price. 

I’d now like to comment on our audit work, in terms of the reliability of business systems affecting contract costs. Our audits have 

addressed the adequacy of contractor internal controls and business systems, as well as compliance with acquisition regulations 

and contract terms. While KBR’s business systems are adequate 

overall, our reviews have disclosed a number of estimating and accounting-system deficiencies requiring improvement. The contractor has submitted corrective action plans, and DCAA, in coordination with the responsible contracting officers, are monitoring 

progress and making the needed improvements. 

Another area of our work has been accelerated testing of billed 

costs. Due to the unique risk of contingency contracting and conditions in Iraq, DCAA has placed more emphasis on examining contractor costs as they are being incurred, rather than waiting until 

the contractor submits its annual incurred-cost claims. 

One example of our audit work in this area is our review of dining facility costs, as was mentioned, Mr. Chairman, in your opening 

statement. KBR provides meal services to the troops and other 

DOD personnel at over 60 dining facilities in Iraq and Kuwait. Our 

audit work, beginning in late 2003, found that KBR and its subcontractors were basing their payment requests on an estimated 

number of meals, which substantially exceeded the actual number 

of meals served. For the period May 2004 to May 2005, DCAA 

withheld $212 million from KBR interim billings, pending resolution of this matter. 

KBR and its subcontractors believe the terms of their respective 

contracts and subcontracts permitted this billing practice. The 

Army contracting officer negotiated a settlement, which denied reimbursement of $55.1 million of the actual cost. Most notable, however, the early identification of this issue by DCAA and the support 

of the Army Sustainment Command contracting officials led to 

KBR negotiating new subcontracts which corrected the billing practices of concern to DCAA and the Army. We estimate that the new 

subcontract terms and prices save more than $200 million over 

what would have been paid under the old subcontract terms for a 

comparable period. 

In this example and others, DCAA worked closely with the Army 

acquisition community, both at the headquarters and field level, to 

reduce contractor billed costs for potentially unreasonable expenditures. In the past, DCAA withholdings have totaled more than 

$230 million on LOGCAP task orders. Currently, we are withholding $49.6 million from KBR billings. 

The most recent example of withholdings is related to security 

costs. The LOGCAP contract specifically states that the Army will 

provide necessary security to contractor personnel performing the 

contract. 

As such, the Army believes costs incurred by KBR and its lowertier subcontractors for security are unallowable, and should not be 

25

reimbursed under the LOGCAP contract. DCAA is working with 

the Army to identify lower-tier subcontract security costs, and currently the Army has directed DCAA to withhold $19.7 million from 

KBR billings, pending resolution of this matter. 

In closing, I want to underscore that DCAA is an integral part 

of the oversight and management controls instituted by DOD to ensure an integrated and well-managed contract audit process in 

Iraq. We’ve had a continuous presence in Iraq, in the Middle East 

theater of operations since May 2003, staffing our office entirely 

with civilian volunteers. To date, more than 180 DCAA auditors 

have served tours, and, fortunately, none have been injured or 

killed. 

The challenges in applying business practices and auditing in 

Iraq are daunting, and have required our auditors to be flexible, 

while insisting that the DOD will not tolerate the billing of costs 

that do not comply with contract terms or are not appropriately 

documented and supported. 

Thank you, again, for the opportunity to appear before you today, 

and I look forward to addressing whatever questions you may have 

for me. 

Thank you. 

[The prepared statement of Mr. Reed follows:]

PREPARED STATEMENT BY WILLIAM H. REED

Mr. Chairman, members of the committee, my statement will summarize the Defense Contract Audit Agency’s (DCAA) oversight of contract costs related to military 

operations and reconstruction in Iraq including audit work related to the Logistics 

Civil Augmentation Program. 

DOD CONTRACT PERFORMANCE OVERSIGHT RESPONSIBILITY

DCAA has been an integral part of the oversight and management controls instituted by DOD to ensure integrity and regulatory compliance by contractors performing services in Iraq. DCAA’s services include audits and professional advice to 

acquisition officials on accounting and financial matters to assist them in the negotiation, award, administration, and settlement of contracts. Decisionmaking authority on DCAA recommendations resides with contracting officers within the procurement organizations who work closely with DCAA throughout the contracting process. 

DCAA STAFFING AND ACTIONS

Since April 2003, DCAA has worked with all U.S. procurement organizations, including those of the United States Agency for International Development and the 

State Department, to establish the resources and planning information needed to 

provide audits of contracts for Iraq Reconstruction. To carry out these extensive 

audit requirements, DCAA opened an office in Iraq in May 2003 and implemented 

planning and coordination procedures to effectively integrate audit work between 

that office and more than 50 DCAA continental United States Audit Offices with 

cognizance of companies performing contracts in Iraq. DCAA is responsible for auditing Iraq-related contracts at 93 contractors. These contractors hold more than 

175 prime contracts with contract ceiling amounts of $51.8 billion, of which $38.5 

billion had been funded at the end of fiscal year 2006. 

DCAA audits of cost-reimbursable contracts represent a continuous effort from 

evaluation of proposed prices to final closeout and payment. Initial audits of contractor business system internal controls and preliminary testing of contract costs 

are carried out to provide a basis for provisional approval of contractor interim payments and early detection of deficiencies. Comprehensive contract cost audits are 

performed annually throughout the life of the contract and are used by the contracting activity to adjust provisionally approved interim payments and ultimately 

to negotiate final payment to the contractor. 

26

DCAA AUDIT RESULTS

Through fiscal year 2006 DCAA has issued more than 1,800 reports on Iraq-related contracts. We estimate issuing another 600 reports in fiscal year 2007. DCAA 

oversight of contracts in Iraq has found a number of problems. Our actions have 

ranged from recommending changes in business processes—to reduction of proposed 

or billed costs—to referral of our findings to the Inspector General for investigation 

and possible legal action against a contractor. Overall, these audits have recommended reductions in proposed and billed contract costs of $4.9 billion. Where appropriate, DCAA has taken action to reduce contractor billed costs for disputed 

amounts pending a contracting officer decision. In addition, DCAA has identified 

$5.1 billion of estimated costs where the contractor did not provide sufficient information to explain the basis for the estimated amounts. These unsupported costs 

were usually resolved through contractor submission of additional supporting information at the time of contract price negotiation. 

LOGISTICS CIVIL AUGMENTATION PROGRAM

The Logistics Civil Augmentation Program (LOGCAP) is the single largest Iraqrelated contract. The LOGCAP contract was awarded to the Halliburton subsidiary, 

Kellogg, Brown, and Root (KBR) and currently has a contract ceiling of $22.5 billion. 

The contract provides for logistical and life support for U.S. troops and civilians in 

Iraq, Kuwait, and Afghanistan. DCAA has provided comprehensive and continuous 

contract audit oversight on the LOGCAP. The results of our audit work to date by 

major type of activity are as follows:

1. Support to Army Contracting Officers in the Pricing of Contracts—

DCAA audits of 68 LOGCAP task order proposals valued at $16.2 billion 

resulted in audit exceptions (costs questioned) of $1.9 billion. DCAA has received and analyzed the results of negotiations on task orders valued at 

$12.8 billion. Negotiated price reductions of $600 million have been 

achieved to date. A recent example of our audit work in this area is our 

review of the proposal for task order 139. Task order 139 is the latest order 

for dining facilities, laundry and other life support measures for the U.S. 

troops and civilians. Our review of the initial proposal was completed in 

August 2006. DCAA questioned $262 million of the $3.7 billion proposal. 

KBR agreed to $160 million of the questioned cost and the balance was addressed at recent negotiations. Most notable is that this pricing action was 

a significant improvement over previous similar proposal reviews which 

were plagued by estimating deficiencies, causing multiple proposal submissions and delays in negotiating the task order price. 

2. Reliability of Business Systems Affecting Contract Costs—DCAA audits have addressed the adequacy of contractor internal controls and business systems, as well as compliance with acquisition regulations and contract terms. While KBR’s business systems are adequate overall, DCAA reviews have disclosed a number of estimating and accounting system deficiencies requiring improvement. The contractor has submitted corrective action plans and DCAA, in coordination with the responsible contracting officers, are monitoring progress in making the needed improvements. 

3. Accelerated Testing of Billed Costs—Due to the unique risks of contingency contracting and conditions in Iraq, DCAA has placed more emphasis 

on examining contractor costs as they are being incurred, rather than waiting until the contractor submits its annual incurred cost claim. One example of our audit work in this area is our review of dining facility costs. KBR 

provides meal services to the troops and other DOD personnel at over 60 

dining facilities in Iraq and Kuwait. DCAA audits beginning in late 2003 

found that KBR and its subcontractors were basing their payment requests 

on an estimated number of meals which substantially exceeded the actual 

number of meals served. For the period May 2004 to May 2005, DCAA 

withheld $212 million from KBR interim billings pending resolution of this 

matter. KBR and its subcontractors believed that the terms of their respective contracts and subcontracts permitted this billing practice. The Army 

contracting officer negotiated a settlement which denied reimbursement of 

$55.1 million of the actual cost. The early identification of this issue by 

DCAA, and the support of the Army Sustainment Command contracting officials, led to KBR negotiating new subcontracts which corrected the billing 

practices of concern to DCAA and the Army. We estimate that the new subcontract terms and prices saved more than $200 million over what would 

have been paid under the old subcontract terms for a comparable period.

27

In this example and others, DCAA worked closely with the Army acquisition community, both at the Headquarters and field level, to reduce contractor billed costs 

for potentially unreasonable expenditures. In the past, DCAA withholdings have totaled more than $230 million on LOGCAP task orders. Currently, DCAA is withholding $49.6 million from KBR billings. A recent example is the withholding related to security costs. The LOGCAP contract specifically states that the Army will 

provide necessary security to contractor personnel performing on the contract. As 

such, the Army believes costs incurred by KBR and its lower tier subcontractors for 

security are unallowable and should not be reimbursed under the LOGCAP contract. 

DCAA is working with the Army to identify lower tier subcontractor security costs 

and the Army has directed DCAA to withhold $19.7 million from KBR billings. 

CLOSING

In closing, I want to underscore that DCAA is an integral part of the oversight 

and management controls instituted by DOD to ensure an integrated and well-managed contract audit process in Iraq. We have had a continuous presence in Iraq and 

the Middle East Theatre of Operations since May 2003, staffing our office entirely 

with civilian volunteers. To date more than 180 DCAA auditors have served tours 

and fortunately, none have been injured or killed. The challenges in applying business practices and auditing in Iraq are daunting and have required our auditors to 

be flexible while insisting that the Department will not tolerate the billing of costs 

that do not comply with contract terms or are not appropriately documented and 

supported. DCAA has been and will continue to be vigilant about contract audit 

oversight and protecting the taxpayers’ interests. 

I look forward to addressing whatever questions or comments you have on DCAA’s 

important role in Iraq. Thank you.

Chairman LEVIN. Thank you so much, Mr. Reed. 

Now let me call on Patrick Fitzgerald, the Auditor General for 

the Army. 

Mr. Fitzgerald? 

STATEMENT OF PATRICK J. FITZGERALD, THE AUDITOR 

GENERAL, DEPARTMENT OF THE ARMY 

Mr. FITZGERALD. Mr. Chairman and distinguished members of 

the committee, thank you for the opportunity to be here today to 

discuss our audit work related to LOGCAP. 

I have submitted my full statement to the committee, and I ask, 

respectfully, that that be made part of the hearing record. 

Chairman LEVIN. It will be made part of the record. 

Mr. FITZGERALD. Thank you, Senator. 

I have been with the U.S. AAA for more than 26 years, and became the Auditor General in March 2006. As the Auditor General, 

I am responsible for the worldwide operations of Army audit. The 

agency is the Army’s internal audit organization, and, throughout 

our history, we have deployed with our troops: in Vietnam, in Bosnia, during Operations Desert Storm and Desert Shield, and, most 

recently, in Operation Enduring Freedom (OEF) and Operation 

Iraqi Freedom (OIF). 

Since 2002, we have done extensive work on LOGCAP in support 

of both OEF and OIF. In December 2004, General Casey asked us 

to help him reduce the overall cost of the LOGCAP contract in support of OIF. We promptly established a permanent presence on the 

ground in Iraq, and, since May 2005, we’ve continually had 10 to 

30 auditors deployed in theater. 

We established two audit objectives to support General Casey’s 

request. These objectives were: (1) to determine if the overall management of LOGCAP was adequate, and (2) to determine if the contractor was providing the needed services in a cost-effective manner. 

28

Since beginning our LOGCAP work in Iraq, we have issued 15 

audit reports that included monetary benefits of about $175 million. We have also identified other initiatives that improve cost-effectiveness of the program, but we could not quantify the monetary 

benefits. 

In April 2006, we reported improvements in the overall management of the LOGCAP. However, we also reported that the management structure in Iraq was not conducive to making sure LOGCAP 

was managed in the most efficient manner. For example, we found 

that more centralized control was needed to make sure requirements were properly identified and to make sure contract support 

was effectively integrated into the command’s combat service support mission. We also found that contracting activities in the theater were fragmented and did not have enough personnel to provide adequate contractor oversight. 

To evaluate the adequacy and cost-effectiveness of the services, 

we conducted a series of audits focusing on specific LOGCAP functions. Some of these functions included theater transportation, 

warehouse staffing, distribution functions, the use of nontactical 

vehicles, and operation of clothing facilities. Our work to date has 

shown that LOGCAP operations were providing services needed to 

support our soldiers. Commanders and soldiers were consistently 

satisfied with the services. However, we also found that the Army 

could acquire services more cost-effectively by making improvements in several areas, such as reducing staffing levels at distribution centers, reducing the quantity of material handling equipment 

and nontactical vehicles, and increasing the accountability and visibility over material and equipment. 

In our 15 reports, we have made many recommendations to 

Army commands, and those commands have agreed to take corrective action in response to those recommendations. In fact, in many 

cases, commanders in the field took immediate action to fix the 

problems that we brought to their attention. 

In closing, I would like to thank you, once again, Mr. Chairman, 

for inviting me to appear before this committee to discuss this very 

important topic. We are continuing our LOGCAP work and have 

audits ongoing. We plan to remain responsive to Army leadership 

and continue to work to the best possible solutions to these many 

Army challenges. 

Since 2005, the agency has deployed 96 auditors, who have 

served on the ground with our soldiers in Iraq, Afghanistan, and 

Kuwait. Our auditors are proud to serve alongside our soldiers. The 

dedication and hard work of our auditors have provided valuable 

realtime support to the Army. 

Thank you, again, for the opportunity to testify before you today, 

and I would be glad to answer any questions. 

[The prepared statement of Mr. Fitzgerald follows:]

PREPARED STATEMENT BY PATRICK J. FITZGERALD

Mr. Chairman and distinguished members of the committee, it is my pleasure to 

be here today and have the opportunity to discuss with you our audit work related 

to the Logistics Civil Augmentation Program (LOGCAP). 

I have been with U.S. Army Audit Agency for more than 26 years and became 

The Auditor General of the Army in March 2006. As The Auditor General, I am responsible for the worldwide operations of Army Audit. The Agency is the Army’s inVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
29

ternal audit organization, and we provide objective and independent auditing services that help Army leaders make informed decisions, resolve issues, use resources 

effectively and efficiently, and satisfy statutory and fiduciary responsibilities. The 

scope of our audit responsibility includes selecting the subjects and organizations 

within the Army to audit, as well as responding to requests for audit service from 

Army officials. 

Throughout its history, Army Audit Agency has deployed with our troops—in 

Vietnam and Bosnia, during Operations Desert Storm and Desert Shield, and lately 

in support of Operation Enduring Freedom and Operation Iraqi Freedom. We have 

performed extensive audit work on LOGCAP in support of Operation Enduring 

Freedom and Operation Iraqi Freedom dating back to 2002. During 2003 General 

Kern, the Commander, U.S. Army Materiel Command, asked us to conduct an overall audit of LOGCAP operations. LOGCAP is the Army’s program for using civilian 

contractors as an additional means to adequately support the current and programmed force by performing selected services during wartime and other operations. The principal objective of LOGCAP is to provide combat support and combat 

service support to combatant commanders and Army service component commanders, primarily during contingency operations, throughout the full range of military operations, including reconstitution and replenishment. 

In response to General Kern’s request, we focused our audit on overall program 

management, cost controls, and asset management. We did audit work at various 

locations in the United States and overseas—including Uzbekistan, Afghanistan, 

Kuwait, and Turkey—and in November 2005 we issued a summary report on our 

LOGCAP work. 

In this report we stated that, overall, the Army was adequately managing the 

LOGCAP contract. The program provided essential services to soldiers and did a 

good job of meeting the Army’s needs. Adequate procedures were in place to control 

costs under the contract, standards of services were recorded in theater-level documents, and acquisition review boards were in place to review and approve requirements. However, we did find systemic problems related to preparing independent 

Government cost estimates, reviewing contractor rough orders of magnitude, and definitizing task orders. It is important to note that some of these problems occurred 

because of the large volume of work involved and the need to process contract actions quickly. 

Because responsibility for property administration under this contract was delegated to Defense Contract Management Agency, we were unable to fully evaluate 

accountability for assets under the contract. But we did find some areas where improvements were needed in managing Government-furnished property given to or 

acquired by the contractor. 

Including our summary report, we issued eight audit reports and made audit recommendations to various organizations involved in the LOGCAP process. Some key 

recommendations were that the:

• Assistant Secretary of the Army (Acquisition, Logistics, and Technology) 

develop Army guidance for approving requirements for deployment operations, including acquisition approval thresholds, members of joint acquisition review boards, and documentation of board actions. 

• Deputy Chief of Staff, G–4 establish guidance addressing how to transfer 

Government property to contractors in the absence of a Government property officer to conduct joint inventories and to summarize key management 

controls related to LOGCAP in an annex to Army Regulation 715–9 (Contractors Accompanying the Force). 

• Commander, U.S. Army Field Support Command (now, U.S. Army 

Sustainment Command) makes sure Defense Contract Audit Agency stayed 

actively involved in monitoring costs.

Army organizations agreed with our recommendations and said they would take 

implementing actions. 

In December 2004 General Casey, the Commander, Multi-National Force-Iraq, 

asked us to audit LOGCAP operations supporting Operation Iraqi Freedom. General 

Casey’s goal was to reduce overall costs without degrading the welfare of our deployed forces. Accordingly, we established two audit objectives to help reach the 

Army’s goal. These objectives are to determine whether:

• Overall management of the program was adequate. 

• The contractor was providing the needed services in a cost-effective manner.

We promptly established a permanent presence on the ground in Iraq, and since 

May 2005 we have had from 10 to 30 auditors in the Southwest Asia theater of operations at any given time. Early on, we found that the Army faced some significant 

30

challenges regarding LOGCAP operations. One challenge was that LOGCAP in the 

Iraq Area of Operations is the U.S. Army’s greatest reliance on contractor support 

in its history. The Army had about 90 Forward Operating Bases and LOGCAP supported about 60 of them. Other major challenges were that the nature of operations 

was asymmetric, and personnel did not have freedom of movement and communications. 

Since beginning our LOGCAP work in Iraq, we have issued 15 audit reports that include agreed-to monetary benefits totaling about $175 million. We have also identified other cost avoidance initiatives we could not reasonably estimate the value of. 

In April 2006 we reported that activities were improving overall management of 

the program. However, we also reported that the management structure in the Iraq 

Area of Operations was not conducive to making sure LOGCAP was managed in the 

most effective and efficient manner. More specifically:

• Contracting activities in theater were fragmented and too understaffed to 

effectively scrutinize command’s requirements. 

• More centralized control was needed to make sure requirements were 

properly identified and contract support was effectively integrated into the 

command’s combat service support mission. 

• Dispersed locations and high turnover of personnel who managed the contract made it difficult to ensure that requirements were fully necessary and 

cost-efficiently obtained, and that ongoing work was properly managed.

To address these problems, we recommended that the: 

• Commander, Multi-National Force-Iraq establish a forces requirements 

branch for centralized control and better interface with LOGCAP management within the theater, and make sure the branch is adequately staffed 

(personnel and expertise) and headed by an individual who can effectively 

interface with all command levels. 

• Commander, Army Sustainment Command coordinate with the Commander, Multi-National Force-Iraq to define roles between LOGCAP managers in each organization and establish training classes on LOGCAP that 

include exercises on developing statements of work, independent Government cost estimates, and requirements. 

• Commander, Army Materiel Command include information on the role of 

the LOGCAP Support Unit and establish a permanent presence by the unit 

at predeployment planning meetings.

To examine and evaluate the adequacy and cost-effectiveness of services, we conducted a series of audits focusing on specific functions under the LOGCAP contract. 

Some of these functions included theater transportation, warehouse staffing, nontactical vehicles, distribution functions, and clothing issue facilities. 

Our body of work to date has shown that LOGCAP operations were providing the 

services needed to support our soldiers and satisfy the mission. Commanders and 

soldiers were consistently satisfied with the services. However, our audit work also 

showed that services under the LOGCAP contract could be acquired more cost-effectively. For example:

• Staffing levels at many distribution centers exceeded operational needs. 

• Onhand material handling equipment exceeded requirements. 

• A significant number of the contractor’s nontactical vehicles were 

underused and the contractor had more vehicles than needed.

Some of the recommendations from our function-specific reports were that the 

Army:

• Evaluate contractor personnel levels to make sure staffing levels (for both 

labor and management) are appropriate. 

• Use underutilized assets to offset future contractor procurements. 

• Develop and follow quality assurance surveillance plans to make sure the 

contractor performs as efficiently as possible. 

• Use standard property book systems to gain and maintain accountability 

over assets, and perform 100-percent inventories.

In the 23 reports we have issued on LOGCAP, we have made many recommendations to the responsible Army commands. (A complete list of the reports is attached 

to this statement.) These commands have stated they would take corrective action 

in response to our recommendations. In many cases commanders in the field took 

immediate action to correct problems we brought to their attention. 

In addition to our completed work, we have ongoing audits addressing these 

LOGCAP areas: dining facility operations, supply support activity operations, bulk 

fuel controls, cross-leveling and distribution of Government-furnished property managed by contractors, and Defense Basing Act insurance rates. 

31

In conclusion, I would like to say that I am very proud of my auditors on the 

ground with our soldiers in Iraq, Afghanistan, and Kuwait. Their dedication and 

hard work have provided valuable, real-time help to the Army. I appreciate the opportunity to testify before you today to provide a summary status of our LOGCAP 

audit work, and I will be glad to respond to your questions. 


419ful1.eps
32

Chairman LEVIN. Thank you, Mr. Fitzgerald. 

Let me start by going into an issue involving what are called ‘‘living containers,’’ which is a type of trailer. KBR subcontracted to acquire a large number of these containers from a number of sources, 

and the contractor determined that it could obtain them for somewhere between $8,000 to $19,000 each. Despite that, they ordered 

thousands of units from other vendors, whose bid prices were in 

the range of $35,000 to $40,000 per unit. So, as a result, KBR paid 

260 percent to 600 percent of the reasonable price for the trailers. 

Now, over a 2-year period, the DCAA tried to pin down a rationale for these added costs. KBR contended that it went to the high 

bidders because they claimed the low bidders first lacked adequate 

production capacity. The DCAA found that was not true. Then KBR 

claimed that the low bidders were not qualified to perform the 

work. The auditors found that KBR’s own documents indicated that 

the low bidders were qualified. Then they claimed that the plan 

was to concentrate one supplier for each camp. The DCAA was unable to identify any such alleged plan. Then KBR claimed that the 

high bidders offered features and amenities that were not available 

from the low bidders. The DCAA found that the features and 

amenities were comparable. Then KBR claimed that they paid a 

premium for prompt delivery to shift the risk to the subcontractor 

for late delivery or damage to the trailers. The DCAA noted that 

KBR actually rebutted its own argument on that point by paying 

a claim related to delay and damage. 

Now, first, Mr. Reed, did I accurately summarize DCAA’s findings relative to the trailers? 

Mr. REED. Yes, you did. 


419ful2.eps
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Chairman LEVIN. Now, Secretary Bolton, the FAR says that the 

DOD pays costs incurred under a cost-plus contract only if those 

costs are reasonable. In this case, KBR paid its subcontractors 260 

percent to 600 percent of the prices that KBR itself had determined 

to be reasonable. Not one of those explanations that were given by 

the company for doing so, for paying the high price, hold any 

water. Yet, the DOD decided to pay KBR the full $100 million, 

which is at issue here, by which the subcontracts were overpriced. 

Why did the DOD pay that extra money? 

Mr. BOLTON. Mr. Chairman, let me defer to General Johnson, 

who has all the information. 

Chairman LEVIN. All right, thank you. 

General Johnson? 

General JOHNSON. Sir, the DOD has not paid KBR the $100 million for the trailers. As a matter of fact, KBR’s costs are still suspended. We have allowed a minor portion for the provided appropriate, acceptable documentation and negotiated costs of $1.4 million against a $5.6 million bill, and $25 million where they’ve provided appropriate documented evidence and reasonable costs have 

been negotiated against the remaining $51 million of $25.6 million; 

$4.2 million is still being withheld, $25.7 million is also pending 

against the second order. The remaining roughly $45 million have 

been taken off of the table. 

Chairman LEVIN. General, the document that you provided to the 

committee says the following, that ‘‘the parties have agreed to recognize the costs of the containers acquired.’’ The letter dated January 24, 2006, memorandum to the attention of Mr. Valiant DuHart. 

General JOHNSON. Sir, Mr. DuHart is a procurement contracting 

officer within my command. I have not recognized those costs. The 

current status is what I explained to you. 

Chairman LEVIN. This is January 24, 2006. 

General JOHNSON. Yes, sir. As of today’s date, the only costs that 

have been recognized are the $1.4 million and the $25.6 million 

that I just identified. The remaining costs are pending, and KBR 

has not provided appropriate documentation or demonstrated reasonableness of cost. 

Chairman LEVIN. Is that, then, inaccurate, that memo of a year 

ago? 

General JOHNSON. That letter is inaccurate. Sir, frankly, I review 

most of those before they go out. Sometimes they get out prior to 

my and Mr. Loehrl’s review. Obviously, that’s one that did. But 

those costs have not been recognized. 

Chairman LEVIN. So, the $100 million that I’ve described for 

overpricing of those containers has not been paid? While you’re 

looking at that, let me move on, because of the timing here. 

General JOHNSON. Sir, we’ll update that information for you. 

[The information referred to follows:]

34


419ful43.eps
35


419ful44.eps 419ful45.eps
36

Chairman LEVIN. Despite what that document says, you’re saying that $100 million has been paid. Is that what you’re saying? 

General JOHNSON. No, sir, I’m not saying none of it’s been paid. 

$1.4 million has been paid. 

Chairman LEVIN. No, I’m just talking about the $100 million that 

I have identified. Of that $100 million, which is in excess of the 

reasonable cost—I’ve identified it, I’ve described it here for you—

that the reasonable cost here, what they could have obtained these 

containers for versus what they paid for them, we estimated is 

$100 million. You’re saying some of that $100 million has been 

paid? 

General JOHNSON. A total of $27 million has been paid, has been 

allowed. 

Chairman LEVIN. The gentleman’s shaking his head no, behind 

you. 

General JOHNSON. Sir, we’re getting a bit of apples and oranges 

mixed here. 

Chairman LEVIN. Okay. 

General JOHNSON. Okay? 

Chairman LEVIN. All right, you’re saying $27 million of that $100 

million has been paid. Is that your bottom line? 

General JOHNSON. I will say $27 million has been paid to KBR 

for container operations of those questioned costs. 

Chairman LEVIN. All right. 

General JOHNSON. $100 million I’m not aware of. 

Chairman LEVIN. All right. 

General JOHNSON. Okay? 

Chairman LEVIN. Now, on top of the $100 million—and I think 

maybe this is one of the issues—the subcontractor claims that KBR 

and the Government owe it an additional $50 million because that 

was caused by delays that resulted from its waiting for military 

convoys into Iraq. The DCAA has determined that that was not 

true, that that $50 million that they claim was not caused by 

delays. They’ve made no such showing, no documentation, of delays 

costing it $50 million in addition to what it had previously been 

promised. 

Is that, first of all true, Mr. Reed? 

Mr. REED. Yes. I would point out that DCAA’s point was we were 

not given documentation that would substantiate that allegation. 

Chairman LEVIN. But first it gave you documentation, did it 

not—it claimed that its cost for the truck and driver was $750 a 

day. Is that true? That’s what it first told you? 

Then it reduced it to $500 a day, then it said its costs were $300 

a day, and then it provided no documentation that it had paid any 

of those amounts. Is that accurate? 

Mr. REED. Yes, sir. 

Chairman LEVIN. So, first they claimed $700, then they say they 

paid $500, then they said they paid $300—none of which was true, 

because they obviously changed their story—and then they provided no documentation for the $300. That $50 million is part of 

the $150 million, General Johnson, that we’re talking about here. 

The man behind you—and what is your name, sir? The gentleman 

behind you? 

37

General JOHNSON. That’s Mr. Loehrl, sir. He’s the Director of the 

LOGCAP. 

Chairman LEVIN. He’s shaking his head this way. Would you 

agree with his head-shake, up and down, yes? 

General JOHNSON. Roger, sir. 

Chairman LEVIN. Okay. So, now, you’re saying, of that $150 mil- lion, so far only $100-and—only $27 million has been paid. Is that 

where we’re at? 

General JOHNSON. That’s right, sir. 

Chairman LEVIN. Okay. 

General JOHNSON. Now, some of those costs were negotiated 

away and never reached the point of even being considered. That’s 

why the difference in the numbers you’re seeing. 

Chairman LEVIN. All right. Is there still an outstanding claim for 

the balance of $150 million? 

General JOHNSON. There’s an outstanding claim for $25 plus $4.2 

million—$29.9 million. That’s all the outstanding claim that remains. The rest of those costs were negotiated away. 

Chairman LEVIN. All right. So, we’re all talking about the container contract. 

General JOHNSON. That’s right, sir. The only thing that’s pending on the container contract is $29.9 million. 

Chairman LEVIN. All right. The facts that I gave, that KBR tried 

to obtain from us the reimbursement for the containers that they 

paid, which were unreasonable—is that correct? 

General JOHNSON. That’s correct, sir. 

Chairman LEVIN. When they decided to pay the higher price instead of the lower price, and they decided that they were going to 

pay 260 percent to 600 percent of prices which were reasonable, 

when they billed us for that, did they also get profit—did they expect to be paid a profit on that amount, at that time, when they 

billed us for it? 

General JOHNSON. I don’t know what KBR expected. I will tell 

you the way it works. 

Chairman LEVIN. No, not the way it worked. Wouldn’t they assume that they would get a profit on the amount of money——

General JOHNSON. They would probably assume that they would 

get at least the base fee of 1 percent, and they’d have an opportunity for 2 percent in award fees. 

Chairman LEVIN. All right. So, therefore, they would normally 

expect that the more they paid for those containers, the greater 

their profit would be. Is that fair? 

General JOHNSON. That’s fair, sir. 

Chairman LEVIN. All right. That’s one of the big issues here, obviously, is, they overpay for containers, they send us the bill, they 

got paid part of it, which they never should have been paid, and 

then, on top of that, the more they pay for containers, because of 

the lack of competition, the more they expect to be paid in profit, 

as well. Is that a fair statement? Normally, they would expect that. 

General JOHNSON. They have to understand, they have to get 

through the audit process, the price negotiation, and independent 

Government estimate, but, yes. 

Chairman LEVIN. Yes. Okay. With that expectation, they would 

expect that the more they were able to pay for those containers, if 

38

it was approved by the auditors and by the system, that the greater their profit would be. Is that fair? 

General JOHNSON. That’s fair, sir. 

Chairman LEVIN. Thank you. My time’s up. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

This subject is an extremely important one, and it has a degree 

of complexity that’s somewhat unusual for our types of hearings, in 

that it requires so many detailed documents and other means of 

evidence. I felt that your opening statement listed a number of very 

serious allegations, and, with your concurrence, I would like to, as 

my first question, submit your opening statement, in its entirety, 

to each of our witnesses, asking them to make such comments for 

the record as they deem appropriate and given their particular 

areas of expertise. Do you concur? 

Chairman LEVIN. I would very much welcome that, as a matter 

of fact. We were quoting their audits in that statement at great 

length, so we’re happy to have them review those quotes, or anything else in that statement, of course. 

Senator WARNER. I thank the chair, because I think the committee will need that for the record. 

[The information referred to follows:]

REVIEW BY PATRICK J. FITZGERALD

At the Senate Armed Services Committee hearing on the Logistics Civil Augmentation Program (LOGCAP) on April 19, 2007, Senator Warner asked the witness 

panel to review Chairman Levin’s opening statement and provide comments. 

We have reviewed Chairman Levin’s statement and believe the general themes 

are consistent with our audit results that contractor oversight was insufficient and 

improvements in cost-effectiveness were needed in LOGCAP operations. We believe 

the statement fairly and accurately presented the issues, challenges, and problems 

we found during our work on LOGCAP. 

We identified a few minor issues. The third and fourth bullets reference November 2005 Army Audit Agency (AAA) audit reports. These reports were issued in November 2006. A sentence in the fourth bullet stated that AAA found that ‘‘Staffing 

levels at the numerous distribution centers were excessive,’’ but our report states 

that ‘‘Staffing levels at the numerous distribution centers appeared excessive.’’ 

We appreciate the opportunity to participate in the committee’s review of 

LOGCAP operations.

Senator WARNER. Before I go to some other more detailed questions, our distinguished colleague, Senator Dorgan, raised this 

question of the water, and that’s the type of reporting that will 

come out of a hearing like this and, understandably, will attract 

the attention of those following this case, because it’s simple and 

straightforward, and water is something that all of us depend on 

every day. Does anyone have any knowledge of this water problem 

to which our distinguished colleague referred? Is it an isolated case 

that occurred? I assume there are probably several hundred watering situations throughout that AOR in Iraq. Is this but one? Were 

there a number of them? What steps are we taking to correct it or 

verify the accuracy of the reports? 

General, would you like to start on that? 

First, General, it would be helpful if the record would reflect how 

long have you been in this important position that you now occupy? 

General JOHNSON. Sir, I assumed command in June 2004. I’ve 

been in command approximately 2 years and 9 months. 

39

Senator WARNER. Fine. Secretary Bolton, you’ve been, for some 

time, haven’t you? 

Mr. BOLTON. Yes, sir. 

Senator WARNER. How many years is that? 

Mr. BOLTON. We’re going into the 6th year, sir. 

Senator WARNER. Six years. So, each of you had an opportunity 

to really have a period within which to understand these problems 

and deal with it. 

Mr. BOLTON. Absolutely. 

Senator WARNER. Now, you’re going to address the water problem, General. 

General JOHNSON. Sir, we’ve looked into the water power problem at Al Ramadi. A couple of issues. 

One, during the time of the allegation, KBR was not operating 

the water site. It was being operated by an Army unit during Reverse Osmosis Water Purification Unit (ROWPU) operations. 

Senator WARNER. So, KBR was not involved in this water? 

General JOHNSON. Not during the time that the allegation was 

made. KBR assumed control of the operation about 2 months later. 

Senator WARNER. All right, we have to get this straight. So, at 

the time of the allegations, KBR did not have a responsibility. That 

responsibility rested entirely with the Corps of Engineers? 

General JOHNSON. It was an Army water unit that had the capability to produce water using an Army ROWPU. 

Senator WARNER. Now, those units indigenous in the core table 

of organization or in the regular divisional——

General JOHNSON. They are part of normal organizations. I think 

that was an Air Force unit. I’d have to check my facts on what type 

of unit, because we had Air Force, Navy, and Army units producing 

water at that time. 

Senator WARNER. All right. 

General JOHNSON. I don’t remember exactly which one it was. I 

just know it was a military unit, and not KBR, at that time. 

Senator WARNER. All right. So, in any event, the responsibility 

for the potability and safety of that water rested with the Army, 

as opposed to any LOGCAP contractor. 

General JOHNSON. At that time. 

Senator WARNER. At that time, all right. 

Now, was this an isolated incident at one installation, or was this 

type of problem being experienced prevalent throughout other 

areas of the AOR? 

General JOHNSON. Al Ramadi is the only reported incident that 

we have that I know of. 

Senator WARNER. This gentleman keeps coming up. Maybe he 

could join us at the table. 

General JOHNSON. Oh, okay. For the first couple of years of this 

operation, I was doing it personally. He’s the guy that took over for 

me. 

Senator WARNER. All right. 

General JOHNSON. He works for me. 

Senator WARNER. I’m not dismissing his credibility. I’m just trying to associate for the record, which will be read by others, his 

participation. His name, sir? 

40

General JOHNSON. His name is James Loehrl. He’s the Director 

of the LOGCAP for the Army Sustainment Command. He works 

under my supervision. 

Senator WARNER. Thank you very much. We welcome him. 

Go right ahead. 

General JOHNSON. Yes, sir. 

What he just provided me was that the Army units produce, 

KBR distributes, a Navy medical unit did preventive med evaluation of the water and found no problem. Additionally, the DOD IG 

has been doing a complete investigation of water in Iraq. No issues 

have been found thus far that I’m aware of. 

Senator WARNER. Other than this one. 

General JOHNSON. We found no issues there, sir. 

Senator WARNER. I beg your pardon? 

General JOHNSON. We found no issues with the water there. 

After the inspection, we did not confirm the allegations that were 

made. 

Senator WARNER. I see. So, the representations made by our colleague this morning were examined, and no facts were found to 

sustain the allegations? 

General JOHNSON. That is correct. 

[The information referred to follows:]

REVIEW BY MG JEROME JOHNSON, USA, 

I testified before the Senate Armed Services Committee on April 19, 2007, on the 

Department of Defense’s management of costs under the Logistics Civil Augmentation Program contract in Iraq. Senator Dorgan has questioned the accuracy of my 

testimony during the hearing regarding the water quality provided to our troops in 

Iraq. 

Prior to my testimony before the committee, I reviewed all information available 

to the Army on this issue, including the information presented before the Democratic Policy Committee. After Senator Dorgan raised his concerns, I reviewed my 

testimony for accuracy. Based on my review of the information available to me at 

that time, my testimony regarding the provision of water to our soldiers was true 

and accurate. 

It appears, however, that there is some confusion as to the extent of the Army 

review of this issue. The Army reviewed the provision of water throughout Iraq focusing on the allegations that contaminated water was provided to our troops at Al 

Ramadi and at Q West.

Mr. BOLTON. Senator Warner, if I could add to what General 

Johnson’s already talked about——

Senator WARNER. Now, wait a minute. Just a minute. Would you 

go more slowly? 

Mr. BOLTON. Yes, sir. If I may add to what General Johnson has 

already said, my first visit to the AOR was at the time of the allegation. So, I took personal interest in this, and followed it. As General Johnson’s already pointed out, KBR was not in charge of the 

water at the time. A military unit was. In addition to the checks 

that were made, we also checked all medical records to see if anyone had gotten ill from any tainted water. We found zero of those, 

and we checked those twice. 

I would tell you that water, as you pointed out, is extremely important. We have produced, under LOGCAP, 7.5 billion gallons of 

water and some 200 tons of ice during the course of this contract. 

Senator WARNER. All right. 

Mr. BOLTON. So, this is very important. 

41

Senator WARNER. I must press on, gentlemen. I think you have 

put before the committee a rebuttal of this case with regard to 

water, which we accept, for the moment. 

At the time the Army awarded the LOGCAP III contract to KBR, 

were there any other companies that bid on it, or could have bid 

on it, or delivered the same level of service? I am just unfamiliar 

with what the competition is, particularly at the time LOGCAP III 

was offered. 

Mr. BOLTON. Senator Warner, there were three competitors, to 

include KBR, and they submitted their proposals. The Army did a 

source selection on that and picked KBR. I won’t go into the other 

proposals, but the other proposals lacked what we needed, and they 

were also more expensive. 

Senator WARNER. All right. 

Now, the performance contracts under LOGCAP IV, to Secretary 

Bolton and General Johnson, how many companies competed? You 

said this. You’ve already answered that. But why does the Army 

intend to limit the number of contractors to three in the current 

bidding process for four? 

Mr. BOLTON. I don’t know if I have a good answer on that. It is 

an open competition. In fact, we intend to have a contractor who 

will do the planning and work for us, and then we’ll have up to 

three additional contractors. So, you could have four contractors 

here. They will actually do the tasks, and we’ll compete those 

tasks. 

Senator WARNER. All right. My last question, to the General, 

from a military standpoint, do you factor in, in the bidding of these 

contracts, and judging the performance of the contracts, the extenuating circumstances in-country that the contractors are experiencing? In other words, it is a high-risk area. It’s what we call 360-

degree risk area. In other words, there’s no clear front line and 

rear echelon, as you and I were trained as youngsters, that existed 

in other conflicts. Everybody’s in it. To what extent do you factor 

those factual circumstances of high risk, ever-changing operating 

tempo, requirement to feed so many troops one day, and the next 

day they’re augmented or have been transported somewhere else—

how has that complicated the implementation of these contracts, 

from your professional military standpoint? 

General JOHNSON. Sir, it’s caused significant complication. First 

of all, the contract is supposed to be awarded and executed in what 

we call a permissive environment—i.e. front lines, real lines—and 

the contractor would operate in that permissive environment, 

where he would not be under attack, normally. The complicating 

factor is the nonpermissive environment. The contractor is operating under stress of attack. We have to provide tactical combat 

forces to protect the convoys when they go. 

To the contractors’ credit—and, frankly, to some personal individuals over there that I found enormous; and, frankly, it’s probably because they’re a bunch of retired guys who didn’t know that 

they were out of uniform—Paul Cerjan, Remo Williams—who physically accompanied convoys through hostile environments early in 

the war to ensure that the troops were provided with appropriate 

services. 

42

Now, frankly, we had some issues with the KBR management 

structure at the kind of senior-to-mid level, but these guys on the 

ground—the Cerjans, the Williams’—what they did was far and beyond what the contract called for. Had they not taken those actions, we would not have been able to support our soldiers. 

Additionally, I might add, when brought to KBR’s attention, the 

issues that we were having at the contractor level—Mr. Loehrl and 

the procurement contracting officer, with many of their mid-level 

managers—KBR replaced an entire group of mid-level managers, 

and that situation’s improved quite a bit, the estimates have gotten 

better, and the cooperation with the contracting officers have gotten quite a bit better. They’re not where we want to be, but, when 

they replaced that management structure, it made a significant different. 

Senator WARNER. I thank the witnesses. 

General JOHNSON. I hope that answers your question. 

Senator WARNER. I thank you, Mr. Chairman. 

Chairman LEVIN. Thank you, Senator Warner. 

Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. 

I would like to thank all the witnesses for being here today, and 

would particularly like to thank Senator Dorgan for his efforts to 

investigate these contracting problems during the last Congress. I 

did support him in his legislation, that was dropped at the end of 

the 109th Congress, on these problems. Like Senator Dorgan, I continue to be very concerned about the contracting abuses and war 

profiteering in Iraq. So, I thank you, Mr. Chairman, for calling this 

very important hearing today. 

No question, we feel that the resources in our country are not 

unlimited, and it is our duty to the taxpayers that our service men 

and women have all that they need, and to make sure that the tax 

dollars meant to be used for defense of our Nation are not wasted. 

That’s where I am. We’ve heard cases of abuses here, and I’m sure 

we have many more. But I want to look at what problems may be 

here in Washington, DC. 

Secretary Bolton, this has to do with the acquisition workforce. 

In April 2006, the AAA reported that DOD remains insufficiently 

staffed and inadequately organized to provide effective oversight 

for the LOGCAP contract. Mr. Secretary, why is it that 4 years into 

the war in Iraq, we still haven’t been able to provide adequate 

staffing to oversee this contract? Do you believe that the shortage 

of contract oversight personnel is specific to this contract, or is it 

symptomatic of a broader shortage in the DOD? 

Mr. BOLTON. Senator Akaka, thank you very much for the question. It’s good seeing you again, sir. 

I’ll go back several years, when I was confirmed here, in front of 

Senator Levin and Senator Warner at the time, I made a statement 

during that particular confirmation hearing, that I had a grave 

concern on the declining nature of the aquisition workforce. I stated then, and it’s come to pass, that, within my tenure, a large number of professional aquisition types would retire, that demographics 

were against us. They’re still against us. What remains of my 

workforce over the next 3 years, half of the civilian workforce—

that’s roughly 45,000—are eligible to retire. Not a whole lot of folks 

43

coming in behind them. The workload continues to increase. Rough 

numbers, when the wall went down in 1989, the Army had about 

140,000 people in this area. Today, we have 45,000. 

Now, we’ve been able to do the workload, because of a lot of 

things that you’ve heard this morning on LOGCAP. We have put 

evaluation boards in place. We rely heavily upon the audit agencies 

and others. We used to do a lot of that internally. We have to rely 

upon these agencies. On this particular contract, it really exploded—no pun intended. LOGCAP was designed, as I said in my 

opening comments, to do contingency, short-term, until you can get 

in with regular pieces of contracts and so forth. That didn’t happen 

here because of the nature of the war. 

Now, going back to the workforce, trying to pull people out of the 

United States to put over there who are already working very, very 

hard on other activities, and then making that happen, and also 

putting them into an environment, as noted earlier by Senator 

Warner, a very difficult environment—austere, hostile, without the 

infrastructure of having a computer system, a business system, a 

banking system—and yet, myself and others here—when it comes 

to auditing, only know one way of doing that, and that’s the way 

we do it stateside, in an air-conditioned building with an infrastructure, and we impose that upon our people. They did a fantastic job. 

But, to your point, could we use more people? Yes, we could. 

We’ve enlisted others from other agencies to do that. There are 

roughly 500 people auditing this contract right now in country; 350 

of them live with the various posts and camps out there, reviewing 

what the contractor’s doing on a daily basis. Then, as others here 

have testified, they have 50 to 100 or so of their own auditors who 

are in and out of there. 

The caution of just saying ‘‘more people’’ is the environment. It’s 

a hostile environment. Every person I send over there is a target. 

Unfortunately, I’ve had people hurt, and several killed. So, as I 

look at this, we do the best job we can, and I think it’s a pretty 

good job, under very difficult conditions. I believe we need to—and 

this is all of us, and we’ve talked about this before, as a group 

here—take a look at what’s required in this type of an environment, and make sure that the next time we do this, we have the 

right contract vehicles in place, but, more importantly, we have the 

right processes and tools for dedicated Americans to actually do 

very good work in a very difficult environment. 

So, to your point, I think it’s absolutely right, it is systemic. We 

could use more, but we have to be cautious on the environment. I 

believe there are other tools we could use. LOGCAP IV is a perfect 

example, where we will be competing the task orders and drive a 

lot of the concerns down. But the auditing folks will still be there. 

For those who don’t know, at one time I used to be an IG, so I 

know the value of this work and what needs to be done. 

Senator AKAKA. My concern is, there are problems out there. 

They’ve been mentioned. We are short. But what are we doing to 

try to correct these problems? I’m saying this because this is my 

same concern with Hurricane Katrina. After 20 hearings, we discovered that many of the problems were because there were positions that were unfilled. They could not carry out what needed to 

44

be done. If that’s the case also here, then we need to make changes 

immediately to correct that. This is what I’m looking for, and that 

was what my question was all about. 

Mr. Fitzgerald and General Johnson, it is striking that all of the 

instances of the use of LOGCAP funds for military construction activities appear to occur in Iraq. But there were no similar cases in 

Afghanistan. I may be wrong, correct me if I am. My question to 

you is, please explain why this was the case. Was there a leadership problem in Iraq? Why would there not have been consistent 

guidance from the Army and Central Command such that we 

would have seen these problems in both countries, or in neither of 

them, rather than only in Iraq? 

Mr. Fitzgerald? 

Mr. FITZGERALD. Sir, our audit work did show that some funds 

were used to do military construction in Iraq. When we made command aware of that—command was already aware of it when we 

made them aware of it, and our understanding was that they were 

taking action to report that the funding may have not been the 

right funding to be used, and it was being worked in accordance 

with the procedures and policies of the Army at that point. 

I can’t comment on any construction work done in Afghanistan, 

sir. 

Senator AKAKA. General? 

General JOHNSON. Sir, we received guidance early on in the war, 

and, in accordance with regulation, construction, if you will, or purchase of equipment that’s contingent or necessary to execute an 

operational mission may be done. That was done both in Afghanistan and Iraq. As we moved from really volatile contingency operations, constantly moving, we got to a situation where the lawyers 

began to tell us that, ‘‘You need to look more at contingency construction authority rather than using the earlier pieces of that legislation that said, incidental to providing the service.’’ We’ve done 

that, and that’s been a gradual process, and that’s what you’ve 

been hearing about. 

The reason that you hear more of that in Iraq than you do in Afghanistan is, frankly, the nature of the battlefield and the nature 

of the fight. Iraq is an open country. It’s a war that started off very 

much as a maneuver warfare. So, in many cases the contracting 

goes back to the dining facility (DFAC) problem that we identified 

earlier on. A commander might say that, ‘‘I have objective A that’s 

in the western part of this country, and this brigade’s going there. 

I need food services, I need a base camp, I need laundry services, 

and I need fuel and food brought there as I execute the mission.’’ 

In a maneuver operation, you may start out at objective A, you 

may get instructions, in the middle of the process, to move to objective B, C, or D. That happened in Iraq. So you end up with those 

kind of things happening, and that led to the DFAC piece, where 

they bought food and stuff, and spent money, but did not service 

as many troops as initially planned. The same thing with construction. You’ve built facilities in order to execute missions. 

In Afghanistan, you had some of the same situations occur, but, 

because it wasn’t as much of a maneuver operation, they did not 

need as much construction, so, therefore, it never got to the point 

45

where we started to interfere with military civic action, and we got 

out of the contingency phase. 

I hope that’s clear. 

Senator AKAKA. Thank you. Thank you for your response. My 

time is up. 

Chairman LEVIN. Thank you, Senator Akaka. 

Senator McCaskill. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

This hearing is very, very important to me. Sixty-six years ago, 

almost to the exact date, a man by the name of Harry S. Truman 

held the Senate seat that I sit in. At that point in time, he decided 

that, on behalf of the American people, he was not going to tolerate 

war profiteering. After reading all the information for this hearing, 

as an auditor, I am stunned. As a Senator, I’m sick to my stomach, 

and as an American, I’m angry. 

The testimony that has been given so far about whether or not 

there is sufficient personnel within the Army to monitor these contracts, I, frankly, don’t buy. I have reviewed reports from the AAA, 

from the DCAA, from the Monthly Performance Evaluation Boards, 

and the semi-annual award fee evaluation. I have read reports dating beginning—and I let it go the first few years, understanding 

that there was rapidly changing circumstances and difficulty on the 

ground. So, beginning mid-June, I began reading. In June 2005, 

July 2005, August 2005, September 2005, October 2005, several reports in November 2005, in January 2006, March 2006, April 2006, 

May 2006, June 2006, September 2006, November 2006, and December 2006, there were reports generated by dedicated auditors 

and by people that work for the United States Government that 

continually set out problems with contractor management, problems with cost performance, problems with access to information on 

behalf of this contractor. You would have to be deaf, dumb, and 

blind to read all of these reports and not come away with the inescapable conclusion that something is terribly wrong with this contractor. 

The most outrageous fact that is incontrovertible at this hearing 

this morning—and, frankly, one of the most depressing things is 

how few Senators are here—is that that contract was renewed in 

December 2006. Wait. That’s not the worst. The worst part is, in 

this contract there is a provision for a performance bonus for work 

well done. Seventy percent of the evaluation for that bonus—70 

percent of the criteria in the contract for getting a performance 

bonus is contractor management and cost performance. Believe it 

or not, you gave them ‘‘excellent’’ and you gave them hundreds of 

millions of dollars for a job well done. 

Now, Secretary Bolton, did you approve that bonus? 

Mr. BOLTON. I didn’t approve that. 

Senator MCCASKILL. Who approved that bonus? 

Mr. BOLTON. The command who has that contract. That is not 

my privy. 

Senator MCCASKILL. Shouldn’t it be? 

Mr. BOLTON. No, it shouldn’t be. 

Senator MCCASKILL. Okay. Then, who is the person—I want to 

know the name of the person who decided that this contractor, 

after all the reports I just laid out all the work done by these great 

46

auditors—who is the person that thought that their job was excellent? 

Mr. BOLTON. We can certainly provide the process, as well as the 

names. It is not unlike any other contract. In this particular case, 

the Evaluation Board meets every month to take a look at the contractor and costs and schedule and technical, as well as quality. 

While he may get an excellent in some areas, other areas he 

doesn’t. So, the average that this contractor has gotten, over the 

periods, has been about 88 percent, 89 percent. That equates to 

about $250 million, of the $280 million or so that he could get. 

I remind the Senator, as well, that when you look at the fee 

structure on this for award fee, it’s only 2 percent. Compared to 

any other contract that I’ve seen, that’s an incredibly small amount 

of money. 

With regards to the comments that were made earlier on the 

cost-plus, what we do on the cost-plus, in terms of that fee, is not 

unlike any other contract that we have in the Federal Government. 

That’s why we have all these auditors and an Evaluation Board 

whose job it is, with all the comments, whether it’s yours or anybody else, to go and look at every one of those as we review the 

contractor and the costs. That’s why we have upwards of several 

hundred million dollars in question right now. 

Senator MCCASKILL. With all due respect, Mr. Secretary, I have 

read all these reports, as an auditor, looking from the outside, and 

if you think this Evaluation Board—it would be different if 100 

percent of the award was on technical performance, because, in 

reading all the information, clearly there are a number of favorable 

comments about the work that was actually performed. But 70 percent of this award—and, by the way, I’m not going to feel sorry for 

them that they only got 2 percent. This is not a time to think, 

‘‘Well, gosh, it was only 2 percent. We ought to give it to them.’’ 

Seventy percent, according to your specifications, are contractor 

management and cost performance. 

Mr. BOLTON. That’s right. 

Senator MCCASKILL. Now, do you think that bonus should have 

been paid? Is that your testimony today? 

Mr. BOLTON. I’m deferring to the experts in the field, who see 

this day in and day out, who made the judgment in the field. I 

would not question a field commander. I can make a lot of decisions 

back here, but I rely upon the people, the experts, the men and 

women we put there who have the experience, just as you have, to 

make that judgment. 

Senator MCCASKILL. Let me ask the auditors on the panel. 

Would you have paid that award bonus, based on what you know 

about this contractor? 

Mr. REED. It’s really not appropriate for the auditors to engage 

directly in the Award Fee Board decisions. We certainly were consulted. We did provide input. That’s our role, to provide the input. 

The results of our reports were provided. We were at the Award 

Fee Board meetings, and we were given a chance to speak and 

make presentations. 

Senator MCCASKILL. Were your presentations that this was an 

excellent contractor, when it came to contractor management and 

47

cost performance? Was that the testimony that your agency gave, 

as an audit agency? 

Mr. REED. No. 

Senator MCCASKILL. Mr. Fitzgerald, how about you? 

Mr. FITZGERALD. Senator, we work closely—I would echo what 

Mr. Reed said, that we work closely with General Johnson’s command to make sure that they know what we’re doing, what we’re 

finding, and so that they can take that into consideration as they 

go forward on these award fee boards. 

Senator MCCASKILL. Was it your recommendation, at any time, 

that you thought this contractor deserved an excellent rating in 

contractor management and cost performance? 

Mr. FITZGERALD. To be very specific, we weren’t asked for a recommendation, and, no, we didn’t give a recommendation. 

Senator MCCASKILL. General Johnson, do you believe that there 

were any mistakes made, in terms of awarding this contractor a 

bonus for excellence in contractor management and cost performance? 

General JOHNSON. Senator, ultimately I’m responsible for that. 

What I do every time—and I review each one of those award fee 

letters—initially, I was very concerned, and I talked to each commander in the field. In fact, I just came back from Iraq last month. 

The commanders in the field are, frankly, elated with the support 

they’re receiving from the contractor. Its cost performance and cost 

systems are not what we want them to be, and they have been 

rated accordingly in the award fee process. Their performance, the 

technical and the managerial, if you put those two together, represents 60 percent of the award fee process, versus the 70 percent 

if you throw in the cost and the management. But if you put the 

performance, the management, and the technical, which is delivering support to troops in the field, they have performed excellent. 

That’s a fact that is constantly echoed in both Iraq and Afghanistan and Kuwait. That’s incontrovertible. I can’t argue with the 

guy in the field. 

Their cost systems, we have asked—we’ve had constant review 

on them. We’ve had DCAA, DCMA, and the AAA review their cost 

systems. When their cost systems were not meeting the standard, 

we appropriately deducted that from the award fee process. It was 

taken into consideration. 

Early on in the process, they were receiving less than 80 percent 

of the total award fee. As their cost systems became acceptable, 

which they are now—they’re not what we want them to be, but 

they are acceptable, so they don’t get excellents for costs, but they 

do get excellents for management, and they get excellents for technical performance. 

Senator MCCASKILL. It seems to me that the reports that are 

generated by the people that are supposed to be evaluating their 

performance, should hold precedence over the field commanders 

when it comes to contractor management and cost performance. I 

will tell you that, time and time again, throughout these reports 

in 2005 and 2006, they were cited for contractor management, they 

were cited for the inability to move people, who weren’t working, 

into jobs where they would be working, people who were sitting 

around doing nothing. It is stunning how bad this is. Frankly, 

48

what’s even more stunning is, there doesn’t seem to be an acknowledgment, either by you, Secretary Bolton, or by you, General Johnson, that there’s something wrong with the systems if we’re paying 

$200 and some million for good work when a record like this exists. 

Thank you, Mr. Chairman. 

Chairman LEVIN. Thank you, Senator McCaskill. 

Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. 

Mr. Fitzgerald, in a series of audits over the last 2 years, the 

AAA has found that KBR hired more employees than it needed to 

run warehouses, then paid its staff to sit and wait for work that 

didn’t show up; bought more nontactical vehicles than it needed, at 

a cost of as much as $100 million; purchased more material and 

handling equipment than it needed, at a cost of $26 million; 

overstaffed at distribution centers, and refused to move idle personnel or equipment placed in one location to another to accomplish needed work. Is that a fair summary of some of the conclusions? 

Mr. FITZGERALD. Yes, Senator. Our work indicates that there 

were opportunities where we could have been more cost-effective. 

Senator REED. Now, are these results typical of the LOGCAP 

contracts you reviewed, or is this an aberration? Are we consistently seeing these problems on other contracts? 

Mr. FITZGERALD. We have seen, in our work—there are always 

challenges in defining and developing requirements, translating 

those into good statement of work to make sure—especially in a 

cost-plus contract, to make sure that we have a good, independent 

Government cost estimate so that we’re in a good position to negotiate a fair and reasonable price, and then, finally, obviously, to do 

good contractor administration and oversight to make sure we get 

what we contracted for. 

Senator REED. Right. But let me go back to the question. Is this 

typical of what you’ve found, in looking at other contracts, or is this 

just an aberration—total aberration? 

Mr. FITZGERALD. The opportunities for improvement here are 

probably more so than we see on other contracts. 

Senator REED. I think what you’re saying is that this is not 

atypical, that this was found in other contracts. 

Mr. FITZGERALD. Yes, sir. 

Senator REED. I’m told that you’ve briefed our committee staff, 

and indicated that if there are adequate program management personnel representing the Government, that contract surveillance, 

quality assurance—we would have at least been able to identify 

these problems earlier, and correct these problems. Is that accurate? 

Mr. FITZGERALD. Yes, Senator. On two occasions, we made recommendations—and the Army has reacted to those to create a 

force requirements branch in command to make sure that we define and develop requirements well so that they can be translated 

to good statements of work, and also to establish clear lines of responsibilities—there’s a lot of people playing in this arena—to 

make sure that we get what we’re paying for, and to make sure we 

had good roles and responsibilities and accountability. 

49

Senator REED. How early did you notify your superiors in the Department of Army that this management oversight function was 

deficient? 

Mr. FITZGERALD. The work we did was probably mostly in the 

calendar year 2005, and that would be the time. As soon as things 

come to our attention, we get with command and start working 

that. I have to say, when we did get with General Johnson’s folks, 

they did take action to start addressing those issues. 

Senator REED. So, most of your audit activity and resulting recommendations were in calendar year 2005/2006. That’s where you 

discovered a lot of these particular deficiencies with KBR. 

Mr. FITZGERALD. With regard to LOGCAP in OIF and OEF, yes, 

sir. 

Senator REED. Are you confident that if you went out today, 

these problems would not exist, that you’ve fixed the system, that 

you have enough people out there, with the contract review and 

surveillance and quality assurance? 

Mr. FITZGERALD. Senator, I think improvements have been made. 

But to say that everything is perfect now, I wouldn’t go that far. 

One of the things I would like to add, though, is, we talk about 

staffing; it’s not just the number of people, it’s having the right 

people in the right places with the right skills and competencies to 

do the jobs that they need to do. 

Senator REED. No, I agree with you. One of the persistent 

themes—and it’s not just LOGCAP, it’s translators, it’s types of 

equipment bought, et cetera. Everyone will tell you, ‘‘We need the 

right people and expertise, et cetera.’’ We’ve been at this now for 

more than 4 years, and, if we don’t have the right people, and 

enough of them, then it’s the responsibility of Secretary Bolton and 

General Johnson to stand up, at this committee, and say, ‘‘We don’t 

have them, we need them.’’ 

So, Secretary Bolton, do we have all the people we need with the 

expertise deployed to overlook these contracts now? 

Mr. BOLTON. I would agree with the auditor that we could use 

more. As I mentioned earlier, more of the right expertise—but just 

having more in this particular theater may not be the right answer, because of the nature of the war. As I said earlier, every person I send over there becomes a target, and I have lost people over 

there. So, we have to guard against that. So, finding ways of doing 

the job better, which we’ve done, with the help of the auditors over 

the last couple of years, is one way of doing that. 

Senator REED. General Johnson, do you have enough people with 

the expertise to do this job? If you don’t, have you made the request to your superiors for additional resources, in terms of personnel? Or are these personnel so scarce or unwilling that it’s impossible to fill all the holes? 

General JOHNSON. Yes. Yes, sir. You’ve answered the question, 

frankly. 

I have made the request. As I mentioned during my statement, 

Mr. Bolton, with significant effort, has obtained two Senior Executive Service (SES) positions for me, and that’s really helped a lot. 

We’ve also staffed up the program officers. We started doing that, 

and, really we had to justify that, and that’s where Mr. Reed and 

50

Mr. Fitzgerald came in handy in going out, auditing, and verifying 

what we were saying we needed. 

So, we got people. The bottom line, though, falls back to your latter statement, sir. In many cases, the right skillset is just not 

there, and putting another person over there as a target does not 

help us. 

Senator REED. Thank you very much. I think this just, once 

again, demonstrates to me that we’ve not mobilized the Nation to 

fight this war. We’ve just sent a lot of good soldiers, marines, and 

sailors out there, but we haven’t mobilized the Nation. 

Thank you. 

Chairman LEVIN. Thank you, Senator Reed. 

Senator Webb, I haven’t been handed a card, but I believe that 

Senator Webb is next. 

Senator WEBB. Thank you, Mr. Chairman. 

Gentlemen, I would like to start by saying that I hope you all 

understand that this is not political posturing on this side of the 

aisle over here on these issues. There’s a wide spectrum of experience up here, different types of experience, and there’s a great concern that we have felt from our constituents about the amount of 

money that’s been put into programs that don’t have a lot of transparency. That’s what we’re really trying to do here. 

Mr. Chairman, I would like to say, just as a starting point, that 

I don’t want us to leave this hearing today with the notion, from 

people who’ve watched it, thinking that this is simply an Army 

problem. It’s not an Army problem, it’s not a DOD problem, it’s a 

national problem with respect to these programs over in Iraq. It’s 

more about war profiteering, accountability, transparency, and the 

proper use of civilians in a war zone. It’s every bit as much of that 

as it is about the programs that we’re looking at, although it’s very 

important to be looking at them. 

I’d like to associate myself with something that Senator 

McCaskill began with when she mentioned Senator Truman. There 

is a natural tendency toward corporate excess. There’s no way to 

deny that. That’s why we have to have a balance in the system. 

One of the things that then-Senator Truman did at the very beginning of World War II, actually before we had been attacked at 

Pearl Harbor, after mobilization, was to work very hard to put accountability into the corporate process. They had extensive hearings over a period of years. I think that the country was better off 

for the fact that that happened. 

I have a couple of questions, and I suppose they would properly—

at least the first couple, be directed toward Secretary Bolton, but 

if someone else would be better to answer them, that would be fine, 

too. I had to step out of the room for a moment. When I came back 

in, I believe the question had been answered, asked, and answered 

about the initial contract here with KBR. That was a competed 

contract? Is that correct? Who were the other competitors in that 

contract? 

General JOHNSON. Sir, there were three competitors: Raytheon, 

DynCorp, and KBR. 

Senator WEBB. This was a 10-year contract that was awarded? 

General JOHNSON. Sir, that’s correct. One prime year, and 9 option years. 

51

Senator WEBB. Is that usual—10-year contracts, are they usual? 

Mr. BOLTON. On this particular—if you say ‘‘usual,’’ for LOGCAP 

or just in general? 

Senator WEBB. For these types of services that are being provided. 

Mr. BOLTON. It has been, for LOGCAP, on this one. LOGCAP IV, 

we plan to do the same thing, a base year, plus 9 options. 

Senator WEBB. You wouldn’t say that it’s unusual to get a 10-

year contract? 

Mr. BOLTON. No, sir, not at all. With the option years, it allows 

us to stop, as we will with the three, rather than taking that to 

the end. 

Senator WEBB. Okay. 

I am interested in a historical reference, in terms of trying to 

compare the costs. This is something that you obviously may not 

have today, you may, but I would like to know how much the Government pays KBR for a meal, per meal, or you can do it per day, 

and what that cost entails, and if there’s any historical referent on 

that when these services were provided, inside the military itself. 

Mr. BOLTON. I don’t know about the historical part, but today it’s 

about $3.05 per meal. 

Senator WEBB. That’s for the food. 

Mr. BOLTON. That’s for the food, yes, sir. 

Senator WEBB. All right. I would like to give you a written question on this, so we can get a historical referent in terms of manpower costs versus what it would have been like when the military 

was providing those services. 

Mr. BOLTON. Right. Will do. 

[The information referred to follows:]

[See question for the record #41.]

Senator WEBB. Now, I have another question that concerns me. 

I’ve spent a good bit of time over the past couple of years expressing my concern about the private security contractors in Iraq. I 

know this is not the subject of the hearing today, but there have 

been a number of reports about the lack of accountability from 

these people, the lack of rules of engagement, the lack of legal accountability, in terms of incidents that have occurred. We have 

heard, at the staff level, that in the next couple of months in the 

LOGCAP contracts, the contract that will be awarded will require 

the contractors to actually be responsible for their own security. I 

don’t know if that’s true, but I’d be interested to know if that’s 

true, first of all. 

Mr. BOLTON. Obviously, we can take that for the record. 

We’re in the source selection right now, but the instructions 

going in were not to do that. That’s not the case with the current 

LOGCAP III. It hasn’t been. In fact, we are withholding some 

money from the KBR right now, because we suspect that one of 

their subs actually did that. 

Now, under other contracts in Iraq—reconstruction, for example—it is permissible, in those particular contracts. There are very 

strict rules about how to do that, which even require the okay of 

the commander there. 

But, on this particular contract, no. I don’t believe. 

52

Senator WEBB. So, in your contracts, you’re not putting in an expansion in the responsibilities of civilian security folks? 

Mr. BOLTON. Senator Webb, to my knowledge, no, but I’ll check 

on that, and we’ll get that for the record. 

[The information referred to follows:]

The Theater Commander will provide force protection for the LOGCAP IV performance contractor in theater. If the Government cannot provide force protection, 

the contract permits the contractor to request, through the contracting officer to the 

Theater Commander, for the use of private armed security.

Mr. BOLTON. There are a number of reasons we do this. Under 

the original LOGCAP, and the theme of the LOGCAP—a contingency, you’re in and you’re out. The military forces there will provide the security for you. If I start arming civilians, they become 

combatants. That’s not good under international law. That’s not 

good for them, it’s not good for us. So, it’s been banned on this particular contract. 

Senator WEBB. Appreciate that. Thank you. 

Thank you, Mr. Chairman. 

Chairman LEVIN. Thank you, Senator Webb. 

Senator Clinton. 

Senator CLINTON. Thank you, Mr. Chairman. Thank you for 

holding this hearing. It is especially important to get to the bottom 

of the questions that we’re asking today. 

Mr. Chairman, I would respectfully request that you perhaps 

consider either charging one of our existing subcommittees or creating a special subcommittee to delve more deeply into the issues 

that are being raised here. The seriousness of these allegations, 

and, frankly, the waste and fraud that is so evident from so much 

of what we’ve heard, merits that. But, in addition, we have to figure out what we’re going to do, going forward. We cannot afford to 

continue this. 

Over the last 4 years, we have paid KBR $20 billion to provide 

logistics support in Iraq. Now, I thought when we entered a contract, we were in charge of telling the contractor what to do. But 

some of the reports that we have seen on this committee make it 

sound as though the contractor is in charge of telling the United 

States military, the United States Government, what to do. 

Here are a few excerpts from some of the DOD documents: 

From July 2005, ‘‘There were concerns as to the contractor’s reluctance to downsize the labor force after the transfer or support 

missions to the sustainment contractor.’’ 

Also July 2005, ‘‘The use of self-directed work added additional 

costs to the task order, with no visible benefit to the Government.’’ 

March 2006, ‘‘There was no effort to coordinate with the contracting officer to de-scope changes based on the reduction of requirements and to establish a new definite price.’’ 

April 2006, ‘‘Command personnel advised us that the contractor 

wouldn’t move idle personnel or equipment assigned from one task 

order to another task order to accomplish needed work. When we 

brought this situation to the attention of top contractor operational 

personnel, they informed us this was a company policy.’’ 

Secretary Bolton, why is the contractor permitted to be ‘‘reluctant to downsize the labor force’’? Why are they adding self-directed work to the contract? Why aren’t they coordinating with 

53

Government officials in order to reduce requirements and costs? 

How can they have a company policy that requires the United 

States taxpayer to pay for idle workers? Who’s in charge of this 

contact? DOD or the contractor? 

Mr. BOLTON. I would hope that the DOD is, Senator Clinton. 

In response to allegations such as those, what we have done is 

put together several panels, run by the Government, run by the 

Army. One is to look at requirements—these are requirements that 

come on a regular basis from the commanders to make sure that 

the commander is getting what he or she really wants. Sometimes 

those requirements are inflated. We also have a group whose job 

it is, once we have those requirements, to actually figure out how 

much it’s going to cost, and then negotiate that with the contractor, 

who has already put in a bid. Many times, those bids are a lot larger and higher than we’d like them to be. So, we put people in place 

to correct some of the things that you’ve just mentioned. 

Are we there yet? Are we perfect yet? No. I’ll take your allegations and anybody else that I get from the auditors here, which 

we’ve done over the years, and we will correct those. I think we’re 

getting better, but we are not there yet. 

Senator CLINTON. Of course, one of the problems has been the extraordinary increase in the outsourcing of Government functions to 

private contractors. I think the latest figures I saw is that we now 

have three times more private contract employees than we do military and civilian employees. There is no evidence that these contract employees perform better than Government employees, or 

that they do it more cost-effectively. There has been no database 

or system of accountability to keep track of all of these contractors. 

Now, in October 2005, DOD issued DOD Instruction 302.42, 

which included the requirement that DOD develop or designate a 

joint database to maintain by-name accountability of contractors 

deploying with the force, and a summary of the services or capabilities they provide. Government Accountability Office (GAO) Report 

0714, titled, ‘‘Military Operations High Level DOD Action Needed 

to Address Longstanding Problems with Management and Oversight of Contractors Supporting Deployed Forces,’’ provides great 

detail on these DOD instructions and the importance of having full 

accountability. 

May I ask, starting with Secretary Bolton, for a yes-or-no answer, if any of you have reviewed GAO Report 0714? 

Secretary Bolton? 

Mr. BOLTON. Only at the summary level. 

Senator CLINTON. Next, please? 

Mr. REED. No. 

Mr. ERNST. Yes, ma’am. 

Mr. FITZGERALD. Yes, Senator. 

General JOHNSON. Yes, Senator. 

Senator CLINTON. Okay. 

The GAO report concluded that the Army was still in the process 

of implementing the database, and that it is uncertain when the 

process will be completed. So, this has been going on now for 21⁄2

years—or 2—I guess, a little less than that, and we still don’t have 

it. Does anyone know when the process will be completed? Can any 

witness answer that? [No response.] 

54

Does anyone know when our deployed senior leaders and commanders will have a grasp of the accountability problem with all 

these contractors? [No response.] 

I’ll let the record show that, to both questions, all of the witnesses shook their heads no. 

Chairman LEVIN. The record will indicate that, unless the witnesses indicate, right now, otherwise. 

Mr. BOLTON. Only to talk about the database, we do have a Synchronized Predeployment Operational Tracker (SPOT) report that 

we provide the commanders. That’s still an emerging database. 

That does account for the contractors. 

The problem that the commander has is more than just the people that I have on contract. Since that commander is responsible 

for the entire battlespace, it’s not only my contractors, it’s contractors from the coalition forces, it’s a contractor from private companies, that he also has to be concerned. 

The database that you referenced earlier is still maturing. That’s 

at the DOD level. We are part of that. I cannot answer your question in terms of when it will be complete and how we’ll keep it updated. 

Senator CLINTON. Secretary Bolton, which Army staff agency is 

responsible for the implementation of this database? 

Mr. BOLTON. That will fall under me. If we’re talking about contracting and contractors, once I have that, I’ll issue a policy on it. 

Senator CLINTON. There was a disagreement reported in the 

GAO report as to whether this falls under logistics or personnel. 

Has that disagreement been resolved? 

Mr. BOLTON. I don’t know if it’s been resolved yet or not. 

General Johnson? 

General JOHNSON. No, it has not been resolved. I’m a bit reluctant in answering this, because I don’t know the current status, I’m 

in the field now, versus the building. 

There was a system and a team established as we moved into the 

warfight. We called it ‘‘Triple C,’’ which is a Contract Control Cell. 

It was established by the Army’s Materiel Command, operated 

under my command, to make an effort to account for contractors 

on the battlefield. Frankly, it was bigger than us. That’s when we 

got the help of DOD, the Logistics Management and Readiness 

crew, and they came up with a SPOT report. 

Now, we have taken that to the field commanders. They have 

looked at it. In many cases, it does not provide some of the data 

points that they want so that they can manage these contractors, 

and it’s going to require some implementation of procedures, as Mr. 

Bolton has outlined, that we currently just don’t have. So, in some 

cases we have some accountability. We don’t have what we need. 

LOGCAP’s a bit different. We probably have pretty close to—I’d 

be in the 90-percent-range confident that I know how many 

LOGCAP contractors I have on the battlefield, and where. But 

when we open up the scope to all the contractors on the battlefield, 

we have contractors who perform what we call field service representatives, who follow particular systems that are in the field 

that have—that require contract repair, and we have numerous 

other contractors that—supporting contractors. So, that’s the complexity of the problem. 

55

Doesn’t answer, and doesn’t give an excuse for not having the capability. We are working very hard at it. We’re just not there yet. 

Mr. BOLTON. Senator Clinton, if I could just add a note that I 

was handed on SPOT, that’s the tracking of the contractors, that 

is in the Office of Secretary of Defense Business Transformation 

Office, and it’s still under development. 

Senator CLINTON. Mr. Chairman, I think that the issues that 

this hearing has raised are such serious ones, this whole question 

about contracting out services, where the chain of command either 

doesn’t exist or it’s essentially outsourced, as well, to the contractor, or whether it’s certainly confused, and where people cannot 

be held accountable. The failure to have adequate databases, and 

that’s on top of the testimony from our colleague, Senator Dorgan, 

about just outright fraud and abuse and just heartbreaking waste 

in the system. So, I think that this certainly is an issue that demands our attention and perhaps an effort to try to sort out all of 

these various problems of accountability, trying to get a better handle on what should or shouldn’t be outsourced. I hope that this 

committee can take a lead on trying to establish a strong foundation, similar to what our colleague, Senator McCaskill, referred to 

with the groundbreaking work of then-Senator Truman, because 

we just cannot let this go on. It’s not fair to the people in the field, 

it’s not fair to the people in the DOD who are, frankly, outmanned, 

they have inadequate databases, it’s like sending them into a battle 

with a popgun against heavy artillery, because the contractors have 

so much more capacity to be able to manipulate the system. The 

end loser is the soldier in the field and, frankly, all the rest of us. 

Chairman LEVIN. We will have a second and third round here, 

and this hearing is far from the end of this investigation, I can assure all members of the committee. We’re now going to start a second round. 

I just want to close the loop on the containers, which we were 

overcharged for. The document, General, which you have seen, if 

you could, for the record, explain why it is that that document says 

that something was paid, which wasn’t paid, that would be satisfactory on that. If you could do that for the record. 

General JOHNSON. Yes, sir, I will. 

[The information referred to follows:]

Several different cost issues were covered during the discussion on container 

costs. We had three separate issues with KBR concerning costs for containers. One 

of these issues involved a claim KBR received and paid to a subcontractor, First Kuwaiti Trading Company (FKTC), for alleged Government-caused delays. The other 

two issues involved the purchase price paid by KBR. During the hearing, when I 

stated that costs had not been paid, I was referring to the costs of the claim ($51.3 

million) and one of the instances involving container purchase price ($4.5 million). 

The document the committee chair had in his possession involved the third issue 

of container purchase price and questioned costs of $99 million. These costs have 

been reimbursed. 

The $51.3 million claim was submitted by KBR for costs it paid to a subcontractor 

(FKTC). The subcontractor claimed that these costs were incurred as a result of 

Government delays in moving living containers from Kuwait to Iraq. Based on a 

DCAA audit recommendation, the Government did not pay $25.7 million of this 

claim. On the second issue, concerning higher costs for living containers, $4.5 million was not paid to KBR. This reflected the difference in costs between the higher 

cost containers obtained from Prime Projects International and La Nouvelle and 

lower cost containers that could have been obtained from a supplier named Tepe. 

The January 24, 2006, letter you mention is from DCAA to the contracting officer, 

Mr. Duhart. It is separate from the two situations mentioned above. The $99 milVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
56

lion, an element of KBR’s definitization proposal for task order 0059, was questioned 

by DCAA as container costs in excess of those available from a lower cost supplier. 

KBR asserted the lower cost containers had different features which might not be 

technically acceptable and the low cost supplier might not be able to meet the delivery requirements due to limited capacity. With the acknowledgement of DCAA, the 

contracting officer resolved this during negotiations by allowing the cost for the containers but not paying any base or award fee on those costs. The negotiated settlement included a re-opener provision for KBR to submit a request for the withheld 

fee if they could provide further data to support their actions. KBR has not provided 

that information and, as a consequence, has not been paid any fee on those costs.

Chairman LEVIN. Let’s talk, now, about access to information. 

Back in December 2005, the DCAA audit report says that, ‘‘We 

encountered significant problems in obtaining supporting cost or 

pricing data. In some cases, the procurement files were not provided for review. In other cases, key information was not included 

in the procurement files. Failure to disclose cost or pricing data to 

the Government significantly impairs the reliability of the proposal 

as an acceptable basis for negotiation of a fair and reasonable 

price.’’ 

Then, in December 2006—this was just a few months ago; this 

isn’t 2003, 2004, 2005—still, the DCAA audit, November, says that 

they could not qualify their audit, because of inadequate documentation. Here’s what they say: ‘‘We implore KBR management 

and its Government compliance group to address the cited deficiencies and to work with the DCAA to improve its systems.’’ Why 

do we have to implore people that we’re paying billions of dollars 

to? Secretary Bolton, why should we need to implore? Why don’t we 

direct them to either do it or we’re going to get a different contractor, which, of course, we should have had a long time ago? 

Mr. BOLTON. I’ll defer, in terms of the wording of that particular 

document, to my——

Chairman LEVIN. Should we have to implore? I’ll ask you that. 

Mr. BOLTON. No, we should really have the information that we 

want. 

Chairman LEVIN. All right. 

Mr. BOLTON. The contractors know that when they’re going into 

business with us. Why it happened here, I just don’t know. 

Chairman LEVIN. All right. 

Mr. BOLTON. I will tell you, Mr. Chairman, that it’s not isolated 

to this. I have other contractors where I have had similar problems 

in the past, not related to the LOGCAP or this area of the world. 

But I agree with you. 

Chairman LEVIN. This is one of a large number of problems with 

the LOGCAP contract. As was answered to Senator Reed, this isn’t 

the way the Pentagon usually handles contracts. This is an unusual number of audit reports—month after month after month 

after month. In my opening statement, which you’re going to respond to at Senator Warner’s request, Senator McCaskill went 

through, month by month by month, audit reports showing inadequacies, failures, overstatements, exaggerated claims. So, I hope 

this isn’t a typical contract. It better not be, for the sake of all of 

us. But it’s totally unacceptable, I think, to everybody. 

Here’s what happened in September 2006. Again, this is relatively recently. The Army Evaluation Board report for the 

LOGCAP contract said the following, that the DCMA, Mr. Ernst, 

this is your agency, this is what you said a few months ago for the 

57

LOGCAP—relative to the LOGCAP contract, ‘‘DCMA sees a downward trend in performance in responding on critical information requests from the corporate office.’’ 

Now, I can understand the fog of war and all the other issues 

that relate to your folks in the field. General Johnson, I think we 

have great respect—and I’ll tell you all that—for folks who take 

real risks to get what our troops need. Okay? That, I hope, would 

be clear. We have no respect for a company that does not provide 

information to people sitting in your air-conditioned offices, Secretary Bolton. That’s what we’re talking about here. We’re not talking about these folks in the field who are providing the meals. 

We’re talking about a company, which, month after month, overstates, overcharges, and misstates what the claims are. We’re going 

to keep going at it. This is not the last hearing that we’re going 

to have on this matter. 

But in September 2006, DCMA sees a downward trend in performance in responding on critical information requests, from the 

corporate office: ‘‘Often, the DCAA does not receive information 

they request from KBR. The sluggish responsiveness to Government requests at the corporate level must be aggressively addressed.’’ 

By the way, when the requests for information are sent to KBR, 

here’s what the Evaluation Board said in December 2006, that ‘‘requests for information received pushback due to corporate policy regarding internal documents.’’ 

Now, Mr. Reed, does KBR have any right to deny auditors and 

program officials access to documents supporting its contract costs 

on the grounds that these are internal documents? 

Mr. REED. No, they do not, if it’s related to the specific costs 

being claimed or billed on their contract. 

Chairman LEVIN. All right. So, now, what did we do about it, Mr. 

Secretary? 

What action did we take against KBR when they pushed back 

and said, ‘‘these are internal documents’’? 

Mr. BOLTON. KBR, or anybody else—and we’ve done it with 

KBR—when we find that the auditors or my managers are not getting what they want, we withhold some money. We have a $55 million settlement, for example. I told them if they didn’t provide the 

documents, I would take that, unilaterally, and they could sue me 

in court. 

By the way, when we did that, when I did that, they provided 

the documents. 

Chairman LEVIN. This is 4 years after they get a contract, you 

have to threaten them to get documents. Why do we tolerate this 

for 4 years? 

Secretary Bolton, this committee has pushed very hard to get 

some competition into this deal, for the last couple of years, at 

least. You’ve agreed that this LOGCAP contract was designed to 

handle short-term contingencies. Short-term contingencies. As a 

matter of fact, this scope of work in this LOGCAP contract was 

that the contractor will initiate support for a force up to 25,000 

personnel. That was supposed to be the scope of the work, 25,000 

personnel. Then, the contractor may be required to increase support for up to 50,000 personnel. We’re over 150,000 personnel. 

58

Now, why has this noncompetitive situation been going on for so 

long? We’ve brought this to your attention for the last couple of 

years, Mr. Secretary. 

Mr. BOLTON. In response to your concerns—and, quite frankly, 

ours—we are in the middle of source selection to have other contractors—in fact, more contractors—do this. 

Chairman LEVIN. Why has it taken so long? We’ve raised this 

question for 2 years, at least. 

Mr. BOLTON. I think, in terms of keeping this current contractor, 

it’s just the nature of the——

Chairman LEVIN. No, I’m talking about lack of competition. Why 

have we not had multiple contractors so we could have competition 

on task orders for this many years? We brought this to your attention in 2004 and 2005, and now we’re negotiating multiple contracts. Why has it taken so long? When you have a contractor who, 

month after month after month, is supplying exaggerated estimates, has provided erroneous information, refuses to give documents, which are absolutely required under law, why has it taken 

so many years to negotiate multiple contracts? 

Mr. BOLTON. I think you’ll find, 2005, we did recompete some of 

the work there, and that was beneficial to us. As I just mentioned, 

LOGCAP IV is in its source selection right now to provide more 

contractors there. With regard to the earlier concerns, ‘‘Why didn’t 

we do this sooner?,’’ if you look at where we started, in 2002, the 

scope—and you’ve mentioned it in your remarks there, going from 

25 to 50—it was a lack of time to adequately go out and compete 

all the task orders when we had a constant demand, and an escalating demand, from the warfighter. 

Chairman LEVIN. No, but you could have—look, if you—we have 

time now—we’re still at war—you have time now to negotiate multiple contracts so you can get——

Mr. BOLTON. Oh, no—what I was talking about is an ongoing 

contract. 

Chairman LEVIN. I understand. But why didn’t you negotiate 

multiple contracts so you could have some competition for task orders before now? That’s the question. 

Mr. BOLTON. If you go back to when we put this contract together before the war, we looked at it the same way we did all the 

others. 

Chairman LEVIN. I understand. 

Mr. BOLTON. We looked at it as a contingent, and we only had 

roughly $50 million when we looked at the first task order. 

Chairman LEVIN. I understand. I’m not asking about that. I’m 

saying why didn’t you do, in 2004, what you’re doing now? Why 

didn’t you do, in 2005, what you’re doing now? Get multiple contractors? Why didn’t you do, in 2006, what you’re doing now? 

That’s my question. We brought this to your attention in 2004 and 

2005. Why didn’t you do, in 2004 and 2005, what you’re doing now? 

Mr. BOLTON. Good question. I don’t have a good answer for you. 

Chairman LEVIN. Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. 

In recent years, the DOD has institutionalized civilian contracting such that it’s become a necessary function of large-scale 

military operations, and, in all likelihood, the prevalence of conVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
59

tracting use as a vehicle for service distribution will likely increase. 

I would pose this to any of the members of the panel. Do you have 

any reason to believe that the amount of civilian contracting concurrent to military operations will decrease? 

Mr. BOLTON. Given where we are today, I don’t see it decreasing. 

As long as we have warfighters in the field, we will have this. One 

of the reasons we have the LOGCAP was so that we could put 

more soldiers, or military, in combat. If I were to replace that with 

organic soldiers, just one-on-one, I’d look at 56,000 additional soldiers to do the work that’s being done right now. Rightly or wrongly, if you say that, then you have to almost double or triple that. 

The reason is that you’re going to have to rotate those soldiers. 

You’re going to have to have a group there to take care of the work, 

you have to have someone getting ready to come over, and then you 

have to have someone who’s idle. That’s a lot of soldiers. 

In addition, if you look at the funding part of this, a soldier, once 

we recruit them, we have the soldier and the family. So, I have 

families back home here that I’m also going to have to support and 

fund. With a contractor, he’s on the field, and, when he leaves, I 

don’t pay him anymore. 

So, I think, from just a business sense, it’s the right thing for the 

Army, and, quite frankly, the other Services, because they have 

similar vehicles to do this. What this war has taught us, the lessons learned here, is, once you protract this, and particularly if it’s 

a protraction where things are changing in the field constantly, 

how are you going to accommodate for that? We think the LOGCAP 

IV will allow us to do that, in terms of having several contractors. 

We can compete these task orders rather than setting up a separate source selection during the time of war to recompete a task 

order, and run the risk of not having service to the warfighter. I 

think that will be better. 

The other is training of our folks. We do contingency training 

very, very well, but that’s a short-term answer. Nation-building or 

protracted, we need to learn how to do that better, both in contracting, management, and even auditing. So, I think we’ll learn 

more there. I wish I had a crystal ball that said we’re going to be 

finished with this next year, next month, and all of the LOGCAP 

folks will be coming home. I just don’t have that. 

Senator THUNE. What alternatives to a LOGCAP-type—or a 

LOGCAP-like contracting vehicle have been considered? Are there 

other alternatives? 

Mr. BOLTON. The only alternative that I know of—and I’ll defer 

to General Johnson here in a bit—is putting organic there. You’re 

either going to have civilians—a contractor—or you’re going to do 

it with soldiers, airmen, or seamen. Starting in the mid-1980s, we 

were asked by Congress to take a look at using contract or civil 

manpower to do the jobs that they could do for us, and that’s what 

we’ve done. I think the first contract was in the 1988 timeframe. 

Then another one in 1992, then 1996, and then the follow-on. 

But all of those were always geared at short-term. I think your 

question was spot-on, in terms of if you’re going to have a protraction here—and the chairman’s also indicated this—is there a better 

way? Right now, I don’t know of a better way. 

General Johnson may have some additional thoughts. 

60

General JOHNSON. Sir, we’ve looked at this real hard, and there 

are a couple of alternatives. One, if you decide to go with all military personnel. Mr. Bolton has explained that fairly well. In essence, the LOGCAP exists virtually as a theater support command 

would exist, with about 50,000 to 60,000 personnel. You’d need 

120,000 to 200,000 soldiers to replicate that capability with the assorted infrastructure that goes with soldiers, hospitals, housing, 

and, of course, their long-term retirement pay, and the rotation and 

training bases to keep them in action to replicate the LOGCAP 

57,000 or so that are in theater. 

As Mr. Bolton said, when the contractor leaves the battlefield, 

he’s left the battlefield; you don’t pay him when he comes back, and 

his infrastructure is up to him or her. 

So, that’s if you try to put soldiers, alone. But we do probably 

need more soldier or military structure for early-entry operations. 

The contractor, in early-entry operations, is not the best answer, 

and I think the Army is working on that in their total Army analysis process. 

For the longer-term operation, if you decided to go with something other than a LOGCAP, one of the problems we’re having 

right now is we had multiple contingency contractors with each brigade, and each brigade were beginning to exercise their contingency contracting capability to support themselves. I’ve been in 

about 12 to 15 different military operations over my 30-year career. 

That’s a fallacy that we’re trying to correct by creating contingency 

contractor brigades. Those contingency contractor brigades provide 

area support and give us some kind of joint acquisition review before we buy anything. 

For instance, moving into Bosnia, I can remember the days we 

were down in Zapania buying hay to keep the trucks and things 

from sinking in gravel. You had a contingency contractor for each 

brigade. A bail of hay ended up being $1,000. That’s terrible. We 

finally instituted a Joint Acquisition Board so that we flattened 

that out. 

So, if you did something other than this LOGCAP piece, you 

would have unnecessarily created competitiveness and cause prices 

to go up within the area. If you then move into nation-building, 

you’ve probably decimated the local economy, because the local 

businessmen will not be able to compete with the prices that the 

U.S. Government will cause to be created, something that we’ve 

had to work in this case with KBR on their supply-chain piece, to 

make agreements external to the theater for supplies so the prices 

level off in both Afghanistan and Iraq. 

Lastly, you will create a management nightmare. We do not 

have, as we’ve stated, people with the necessary expertise, right 

now, to man as we would like to. I think we’re doing it adequate, 

but adequate is not what we seek here. We have to do a better job 

for our American soldiers and our American taxpayers. Our American military and our taxpayers deserve better. But we’re doing an 

adequate job in management. We do not have the number of people 

with the appropriate skills to manage the contracts that we have, 

to include LOGCAP. 

If you broke LOGCAP down into various contracts, you create 

multiple contract administration requirements, you will complicate 

61

the commander’s ability to execute operations in theater, because 

then, when he wanted to move troops, he could end up talking to 

a base-camp contractor, a transportation contractor, an ammunition contractor, a food-supply contractor, and it just depends on 

how many pieces you break that up into, rather than having one 

point of contact that he can talk to and say, ‘‘Here’s what I have 

to do,’’ and then allow the Government to work the requirements 

and then come up with one contractor to perform the mission. So, 

we’re going to have to have balance there. 

Then, as I said in my opening statement, we’ve really got to look 

at what we do in long-term war, because there is a breakeven 

point, even on an instrument such as LOGCAP. I think it’s costeffective now. It’s like buying a house in Washington and—I guess 

the price is probably close to $900,000 now for a house—but if you 

paid that cash, you paid $900,000. That’s kind of what we’re doing 

for LOGCAP, we’re paying cash. If you paid that over the 30- to 

50-year life span of a mortgage, you’re going to pay three times 

that. So, that’s the price you have to determine of what you want 

to pay and how you want to pay it over time. Frankly, that’s for 

you to determine, not me. I’ll just tell you what the complexities 

are of executing a war in this environment, given those types of instruments to support the forces. 

Thank you. I hope that answers your question, sir. 

Senator THUNE. It did, and just one quick follow-up. The whole 

basic principle of hiring civilian contractors is to augment military 

operations, as I understand, and provide assistance in meeting support requirements, and that they would not be a replacement for 

force structure. In this particular case, which category does KBR 

fall into when executing LOGCAP? Do they augment force structure, or are they replacing it? 

General JOHNSON. Sir, that’s a question I would prefer that the 

building handle. In the total Army analysis process, there is what 

we call a COMPO 9, which is for contractor support and civilian 

military equivalents for soldiers. So, I would defer that so we can 

take back and get you an appropriate answer from the appropriate 

force-structure personnel. 

[The information referred to follows:]

LOGCAP is mitigating force structure shortfalls during this time of persistent 

conflict to enable commanders to accomplish operational missions. The current force 

structure is a result of force management decisions made previously which assumed 

risk largely in Combat Service Support (CSS) functions which are offset by LOGCAP 

and host nation support. DOD policy, however, directs that functions where there 

is a potential risk of engaging in direct hostile fire be deemed inherently governmental and military essential. This includes many support functions on a noncontiguous battlefield covered by LOGCAP contracts. The Grow the Army Plan addresses 

many of these CSS shortfalls now supported by LOGCAP, but will require some 

time to build these unit capabilities. The Army will strive to ensure that only noninherently governmental functions are contracted out.

Senator THUNE. I see, Mr. Chairman, my time is expired. 

Chairman LEVIN. Thank you, Senator Thune. 

Senator McCaskill. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

General Johnson, who is your contact person at KBR? Who is the 

individual you deal with at your level? 

62

General JOHNSON. I deal with Bruce Stanski, who’s the president 

of KBR. 

Senator MCCASKILL. Bruce Stanski? Would you have any objection—or, Secretary Bolton, would you have any objection, in this 

contract you’re about to execute, saying that the first time that it 

is documented that there is a difficulty getting access to information by the auditors, that they would be no longer eligible for a performance bonus? 

Mr. BOLTON. With any contractor, regardless of their actions, we 

keep what I call a report card—and you may be familiar with 

that—a contract performance report. We do that on a regular basis. 

That becomes part of a file. When I do a source selection, I look 

at the history on all those contractors. If I discover there’s been a 

problem, that is used as part of the evaluation criteria for a contractor. 

So, whoever is selected to be—all the contractors for the 

LOGCAP IV, if they do not perform, and that’s documented, it will 

become part of their file, which we will review during any future 

source selection. 

Senator MCCASKILL. What I would then like to see, if possible, 

are the documents that recommend these bonuses, because the 

chairman outlined a number of instances that are specific, recent, 

where—the arrogance of this company as to whether or not their 

information belongs to us or belongs to them. When you enter in 

a contract with a Government agency to do work for them, the documents surrounding that work don’t belong to you, they belong to 

the Government that you’re working for. The idea that they’re saying that these are internal documents, and that they’re causing the 

auditors—and, by the way, every time an auditor is denied access, 

it costs us money. Time is money when it comes to audit work. I 

am blown away by the concept that there would be this kind of history of access issues, and they’d be ‘‘excellent.’’ Either access issues 

are not important to you as a contracting agency of the Government, or you don’t think they’re important, in terms of whether or 

not someone is doing their job for the United States of America. 

Mr. BOLTON. Senator, as I pointed out earlier, when it got to my 

level that we were having some problems, we took a unilateral action, which is basically to hold their money, and, if they wanted it 

back, they can sue me in court. We get the documents that we 

wanted. I agree with you, that’s not the performance we expect out 

of a contractor. 

I also agree with you, when you waste your time going into 

audit, and someone’s not providing you that information, that is 

wrong, that is not what we expect, and we take the appropriate actions. So, when it got to my level, we did what I thought was right. 

Senator MCCASKILL. The difficult part of this—and this kind of 

a macro-look at it, is that in Government—in the private sector, 

there is accountability, called the ‘‘bottom line.’’ It’s called ‘‘profit.’’ 

If you’re not making a profit, you’re in trouble. That is an incredible discipline over a private entity. In Government, the accountability is in the process of contracting, the oversight of those contracts, and how and when they get their money, and, frankly, 

whether or not people are disciplined, that work for the Government that mess it up. What is amazing to me about this entire inciVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
63

dent is that it had gone on for years, and there was no accountability. None whatsoever. No money was withheld. Maybe you 

threatened it once. The bottom line is, how in the world would this 

company think they’re in trouble if we’re telling them, every year, 

they’re excellent? We told them, every year, ‘‘You’re excellent’’—not, 

‘‘You’re average,’’ not that, ‘‘You’re below average,’’ but that, 

‘‘You’re excellent.’’ That’s why I am so confused about the bottom 

line coming out of this hearing. 

The same thing with cost-plus. The abstract—and I get the abstract—is that we do civilian contracting because it saves us 

money, that we can put them in place when we need them, and we 

don’t need them anymore, we don’t have the contract, unlike the 

ongoing support costs of the Active military. The problem is, when 

you do cost-plus, you are giving them a license to make profit. They 

don’t have to have accountability anymore, because the profit’s 

built in. They can relax. They can put their feet up, put their head 

back, don’t worry about profit. Do you know, Secretary Bolton, 

what kind of profit Halliburton has made on this contract for the 

last 5 years? 

Mr. BOLTON. I don’t know about Halliburton. My contract’s with 

KBR. They, according to the contract, have a 1 percent base fee, 

which is very low compared to any cost-plus contract I’ve ever seen 

in the 30 years I’ve been at this, and an award fee of only 2 percent, and normally it’s much, much higher than that. So, my questions tend to be why a contractor would even go into this, because 

the bottom line is so small, particularly when you look at when 

they competed for this, and there was no war, there was no idea 

that there would be billions and billions of dollars here. 

But, to your point, we take a very close look at the amount of 

money that we pay. I feel the same way, that, ‘‘I want a dollar’s 

worth of work out of you.’’ When we discover—whether it’s through 

the auditors—I think the chairman mentioned several incidents of 

evaluation boards—those are my people, those are the folks I put 

there to—and along with the DCMA—check on this, on a monthly 

basis. They found that. They challenged the contractor. When they 

challenged the contractor, several hundred million dollars, whatever, then we talked to them, and they don’t get all of that. When 

it comes to the award fee, as General Johnson mentioned earlier, 

there are three parts. A couple of those parts, they did very, very 

well, and we get that from the field commanders. There are parts 

they didn’t do well, and they didn’t get the money. So, if we concentrate——

Senator MCCASKILL. They got 88 percent of it. 

Mr. BOLTON. That’s right, they did, and some——

Senator MCCASKILL. Eighty-eight percent—when my kids come 

home with 88 percent, they don’t get grounded. Eighty-eight percent is pretty darn good for this kind of record. 

Mr. BOLTON. Yes, ma’am. But it’s interesting for me to note, as 

I sit here—I have been taken to task many, many times on contracts, in the award fee. That is because folks are above 88 percent—way above 80 percent. When I hit, at 60, 70, or 80 percent 

on a contract, where I’ve grown up, folks say, ‘‘Okay, I guess you’re 

doing your job.’’ In this particular contract, when you look at all 

the monies that we’ve withheld over the 4 years, and all things 

64

that we’ve done, it amounts to about 4.7 percent; 4.7 percent. I 

compare that against all other contracts, and I find I’m in the ballpark. That means, even though I have two, three, or four times the 

number of auditors on this big contract, apparently the folks who 

are actually doing the work—not just the contractor, but those who 

are in the management office overseeing—are doing a pretty good 

job, because they’re hitting about the same average I would expect 

from any contract, in terms of the number of times they will question the contract, the amount of money that they’re withholding, 

and so forth. 

Now, could we do better? Yes, we might be able to bump that up 

5 percent, maybe even 6 percent. But that’s still not too bad. Perfect? Absolutely not, because we’d like to drive that to something 

else. But I think the men and women who are actually doing the 

work are doing the very best they can, and, I think, quite frankly, 

a very good job. 

Senator MCCASKILL. What percentage of the civilian contracts in 

Iraq are cost-plus? 

Mr. BOLTON. I think it’s a third when you look at—well, when 

you say ‘‘Iraq’’—I’m talking about LOGCAP right now, because 

we’ll have a cost-plus, we’ll have a fixed-fee, and a reimbursable 

type. So, I think it’s about a third in terms of the types of contracts. We can get that for the record, to be more precise. 

Senator MCCASKILL. I would appreciate that. 

Mr. BOLTON. Yes, ma’am. 

Senator MCCASKILL. In terms of dollars spent, I’d like the percentages, too, not just number of contracts, but in terms of dollars 

spent, how much is cost-plus. 

Mr. BOLTON. Absolutely. 

[The information referred to follows:]

In the first years of the Iraq conflict, cost-type contracts were used because uncertainties involved in contract performance did not permit costs to be estimated with 

the accuracy needed to use fixed-price types of contracts. Over the 4-year span of 

fiscal years 2003–2006, roughly 46 percent of Army contracts in Iraq were cost-type 

contracts. 

Notable, however, is that: (1) the percentage of cost-type contracts in fiscal year 

2006 was approximately 13 percent, and (2) the highest percentage of cost-type contracts was in fiscal year 2004, at roughly 83 percent. This is due principally to the 

fact that in 2004, design-build contract task orders were awarded (on a cost basis) 

across the spectrum of Iraq reconstruction: electricity, water, and oil infrastructure 

and numerous health care (e.g., health care centers, hospitals) and public safety/security and justice projects (e.g., police stations, fire stations, courts). In 2006, the 

Army, and in particular the Joint Contracting Command-Iraq/Afghanistan made a 

concerted effort to migrate towards fixed-price contracts.

Senator MCCASKILL. The other thing I would like is some kind 

of information for the record, Mr. Chairman, about Antideficiency 

Act (ADA) violations. I’ve discovered, in the short time I’ve been 

here, that we’ve gotten into a habit, in some instances, of using 

operational monies to build what they call ‘‘temporary buildings.’’ 

I had the opportunity to visit one of those temporary buildings at 

Fort Belvoir. It didn’t feel very temporary to me. It was 230,000 

square feet. So, I—and at the Army Materiel Command, I might 

add—and so if we are building buildings with O&M money instead 

of MILCON money, I would like to know how much of that is going 

on within LOGCAP and what ADA violations, if any, any of you 

65

are aware of, and what the status of those violations is as it relates 

to this contracting in this particular theater. 

Mr. BOLTON. Senator, happy to take that for the record. 

[The information referred to follows:]

Three of the five cases initiated thus far have been closed as ‘‘No ADA’’ and the 

Army expects to complete the two remaining ADA investigations by 30 December 

2007. In the three cases that have been closed, the funding was either determined 

appropriate (e.g., within the $1.5 million limitation for life, health, and safety) or 

the proper funding was obtained. As a result, we have found no failure to conform 

to the Federal Acquisition Regulations. 

Senator MCCASKILL. Thank you. 

Mr. BOLTON. Thank you. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

Chairman LEVIN. Thank you. 

Let me pick up where Senator McCaskill was on these ratings. 

She doesn’t understand how they could possibly get the ratings 

that they got. Let me give you some of the underlying data which 

supports what she’s saying. 

KBR’s ratings over the—I’m just going to take an 18-month period, from July 2005 to December 2006—they got 61 ‘‘excellent’’ ratings, 42 ‘‘very good’’ ratings, 7 ‘‘good’’ ratings, and no ‘‘average or 

below’’ rating for contract costs. That flies in the face of what happened during that period: 

October 2005, DCAA report, labor costs overstated. 

November 2005, AAA audit, KBR wasted between $40 and $113 

million by purchasing more vehicles than necessary. 

A November 2005 Army audit report, staffing levels excessive. 

An Evaluation Board report, November 2005, estimates inflated. 

2006 DCAA report, KBR proposal was overpriced by $70 million; 

subcontract costs, overstated by 21 percent; equipment costs, overstated by 21 percent. 

March 2006, Evaluation Board said they overstated costs and 

proposals, and overengineered customer requirements. 

May 2006, DCAA audit report, proposal of KBR overstated costs by $70 million. 

August 2006, DCAA audit finds KBR’s proposed subcontract costs for one task order were overstated by roughly $100 million. 

That’s what’s going on during this period. That’s what the audit 

reports say. How in the heck could they be given these ratings? Not 

one ‘‘poor’’ one. Not one ‘‘poor’’ one. 

By the way, in order to even get a ‘‘good’’ rating, according to 

your own definitions, the cost system established must be not inflated. To get a ‘‘good’’ rating, you cannot inflate costs. They 

shouldn’t have been given even a ‘‘good’’ rating. How did this happen? 

Mr. BOLTON. Obviously, we can take each one of those for the 

record and give you a reason, and compare and contrast that. 

[The information referred to follows:]

The audit and Performance Evaluation Board (PEB) comments discussed during 

our testimony correctly identify shortcomings with the contractor’s cost proposals 

and Rough Order of Magnitude estimates. However the purpose of the audit, and 

the purpose of the PEB are different. The auditor report is based only on what KBR 

provided to support proposed costs, as it should be. The award fee board considers 

several factors in deciding on an adjectival rating in the cost area. One factor the 

board can consider in contractor proposals that the auditor does not is the environment in which the proposals were required—frequently changing Government reVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
66

quirements, expedited cost submissions, and many foreign subcontractors to collect 

cost information from. These conditions affect the quality of the cost proposals. 

Other factors the board considered were the contractor’s cost system to track and 

report costs, and cost avoidance measures resulting in cost underruns from the negotiated cost baseline. The adjectival rating is the result of the board considering 

the proposal problems, as well as the proposal environment and positive performance that occurred during this period. 

Chairman LEVIN. Are you not a bit, yourself, concerned that you 

could have all these kind of—these are separate ratings, by the 

way, for costs. 

Mr. BOLTON. Right. 

Chairman LEVIN. I’m not talking about technical and management performance, because that’s a different issue; we accept that. 

On costs, though, 18-month period, they didn’t get one ‘‘below-average’’ rating, they got seven ‘‘goods,’’ which they didn’t deserve. But 

61 ‘‘excellents’’ and 42 ‘‘very goods.’’ Are you not troubled by that? 

Mr. BOLTON. Senator, I’m always concerned——

Chairman LEVIN. Not always. Specifically concerned. Are you not 

specifically concerned, when I read those numbers to you? 

Mr. BOLTON. Let me put it this way. I say I’m ‘‘always concerned,’’ because my job is not to look at a glass that’s half empty, 

nor a glass that’s half full, just to look at the glass. So, you stated 

in there that the Evaluation Board, for example, determined that 

the proposal was inflated. That’s exactly what that board is designed to do. We didn’t pay that price, though, because the board 

said to the contractor, ‘‘You’ve given me your proposal that I will 

not accept; and, therefore, you need to bring that down.’’ 

Chairman LEVIN. Right. 

Mr. BOLTON. Now, that part of it is not part——

Chairman LEVIN. But the award-fee determinations are supported by these ratings. 

Mr. BOLTON. But the award fee takes place later. 

Chairman LEVIN. I understand. 

Look at those ratings that they’re based on. Aren’t you troubled 

that you’re providing award fees based on ratings which are so totally unrealistic, in terms of what your own boards were finding? 

You are not concerned by that? 

Mr. BOLTON. I’m not concerned, from the standpoint of with the 

example that we’ve just discussed. If the Evaluation Board is doing 

their job—and it sounds as if, according to what you’ve read there, 

they are—and they’re in front of the process where I’m going to 

make an award, which is 6 months down the road, and the contractor brings the cost down because I identified it, and starts to 

perform, then he’s going to be judged on that, not what happened 

during the negotiation. 

Chairman LEVIN. Okay, I am concerned. I don’t see how you can 

award fees based on these kind of ratings, when the ratings completely ignore what has happened, in terms of overpricing, exaggeration, statements of fact which aren’t true, and so forth. So, I’m 

sorry to hear you’re not concerned, but I’m very much concerned, 

because those award fees, which Senator McCaskill’s talking about, 

are based on those ratings. 

Let me go on to the scope of the contract. This contract basically 

told this contractor that, ‘‘You would be providing the support for 

up to 50,000 personnel in Iraq.’’ Now, would you not agree that, 

67

since there’s 150,000 troops in Iraq alone, that the LOGCAP effort 

goes beyond that scope? 

Mr. BOLTON. It certainly goes beyond what we initially intended. 

Chairman LEVIN. Not just intended, but what the contract provided for: Up to 50,000. 

Mr. BOLTON. The reason I’m hesitating is that scope has a very 

definite legal interpretation, and I would be stepping out of my 

lane to say we are operating on a contract that’s beyond scope. I 

don’t believe that to be the case. But I’d have to take that for the 

record to get the legal opinion. 

[The information referred to follows:]

The contract was not modified, did not need to be modified. 

Chairman LEVIN. Okay, you would, then, agree that the contractor is being, presumably, paid to support up to 150,000 troops 

in Iraq. You’d agree to that much. 

Mr. BOLTON. Oh, yes, sir. 

Chairman LEVIN. Would you agree that the contract says that 

the purpose of the contract, or the scope of the contract, is for the 

contractor to provide for support—and I’m reading this—for up to 

50,000 personnel in Iraq? Would you agree to that? 

Mr. BOLTON. At one time, that’s true. 

Chairman LEVIN. Was the contract modified? 

Mr. BOLTON. I believe it was, but I’d have to check. I’d have to 

take that for the record. 

[The information referred to follows:]

No. The 50,000 figure is mentioned only in the scope of work under planning requirements. This specifically relates to the upper limit the contractor should use in 

developing a written contingency plan for the Worldwide Management and Staffing 

Plan, and does not establish the scope of the whole contract. Clause B.2 of the contract relates to the scope of contractor support in actual operations. It states the 

Government’s maximum level of support required on the contract shall not exceed 

the equivalent of two Major Regional Conflicts plus one small scale contingency per 

year for the life of the contract. The contractor’s support of troops in Southwest Asia 

is within the scope of the contract.

Chairman LEVIN. General Johnson, was the contract modified? 

General JOHNSON. Sir, the contract was not modified, did not 

need to be modified. 

Chairman LEVIN. All right. 

General JOHNSON. The 50,000 was for the planning effort. That’s 

what they formulated their plan on, for up to 50,000. The requirement for the contract supported the Army’s strategic plan for two 

regional major contingencies, which obviously would equate to 

more than 50,000 individuals. The 50,000 was a planning figure 

that they always had to be prepared to execute. 

Chairman LEVIN. I understand. So, you’re saying that the statement of work in the LOGCAP contract itself is not what I’m reading from the LOGCAP contract, which is ‘‘Contractor may be required’’——

All right. Let me read you the piece of the contract that I’m referring to, ‘‘Contractor may be required to increase support for up 

to 50,000 personnel per event,’’ which means Iraq. Is there a different part of the contract you’re referring to? 

68

General JOHNSON. The execution phases of the contract requires 

the contractor to be able to execute operations for two major contingencies in accordance with the Army’s strategy. 

Chairman LEVIN. All right. You’ll get us the language, then, in 

the contract, which you say supercedes this limit of 50,000? 

General JOHNSON. Roger, sir. We’ll provide you what’s necessary 

to show you the total effect. 

[The information referred to follows:]

Clause: B.2. The Government’s minimum requirement is the Worldwide Management and Staffing Plan including the Army Transformation Annex, which includes 

CLINs 0001AA, 0001AB, and 0001AC. While the locations and types of support required in a given year may be varied and may include a mix of Major Regional Contingencies (MRCs), small scale contingencies, or other efforts identified in the SOW, 

the Government’s maximum level of support shall not exceed the equivalent of two 

MRCs plus one small-scale contingency per year for the life of the contract. All contract requirements will be awarded by individual task order.

Chairman LEVIN. All right. 

According to a February 2005 DCAA report, KBR entered into a 

sole-source, cost-plus subcontract with Navigant Consulting. Is that 

a familiar contract to either—okay. Here’s what it did. It’s a solesource, cost-plus contract with Navigant Consulting to ‘‘obtain advice and assistance regarding Federal Government procurement requirements and procedures.’’ That’s in quotes. The report questions 

whether the costs of this subcontract were reasonable. Are you familiar, Mr. Reed, with the DCAA report on Navigant? 

Mr. REED. Not in great detail, but generally, with that summary, 

yes, sir. 

Chairman LEVIN. All right. Is it fair to say that they entered into 

a contract with a subcontractor to advise them as to whether or not 

they—relative to requirements and procedures—is that fair? 

Mr. REED. That’s my understanding, yes. 

Chairman LEVIN. All right. 

Now, why are we paying a contractor to pay somebody to give 

them assistance regarding Government procurement procedures? 

Why is that appropriate? Why is that within the scope of the contract? As a matter of fact, is it? 

Mr. REED. It’s not so unusual, I believe, for Government contractors to use different types of expert consultants, be they legal, contracting, or whatever. I guess the question is, was it appropriate 

in this particular circumstance? 

Chairman LEVIN. All right. Was it? Did you find it was? 

Mr. REED. I would have to go refresh my memory of that auditreport language. 

Chairman LEVIN. Okay. Do you know whether or not they would 

earn a fee on that subcontract? 

Mr. REED. Yes, they would. 

Chairman LEVIN. So, they are hiring somebody to advise them on 

meeting the requirements of our procedures, our Government procurement procedures. The more that they pay someone to advise 

them on what, presumably, they knew when they entered into the 

contract, the more they make, because they get a fee based on what 

they pay contractors. Is that as absurd as it sounds to me? 

Mr. REED. I think, in some circumstances, we might actually 

have encouraged them to seek additional professional help, given 

the problems we——

69

Chairman LEVIN. To meet our requirements. 

Mr. REED. To meet our requirements, because of their own lack 

of capability and deficiencies in their business systems—they, 

themselves, had told us that they did suffer, at times, from inexperienced people. They promised us to get more help to——

Chairman LEVIN. Didn’t they promise to meet those requirements when they got the contract? 

Mr. REED. Yes. 

Chairman LEVIN. That’s a promise they made to us when we entered into the contract. 

Mr. REED. Yes. 

Chairman LEVIN. When they don’t meet those requirements, and 

they hire a subcontractor to advise them on that, they even make 

a fee on that. 

Mr. REED. That’s correct. 

Chairman LEVIN. Something’s wrong here, folks. You can’t have 

a contractor that promises to do something, not do it, hire somebody to advise them what they should do, and then make money 

on their failure to do it. They’re making a profit on their own failure. It’s intolerable. 

I don’t think anyone disagrees with that, so—if anyone disagrees 

with that, why don’t you say you disagree. 

Mr. BOLTON. I wouldn’t say we would disagree. 

Chairman LEVIN. You do, okay. 

Mr. BOLTON. No, I would say we would not disagree. 

Chairman LEVIN. Okay. 

Mr. BOLTON. But, I think, as Mr. Reed’s already pointed out—

and if you go back to when the Government accepted the bid as the 

winner in this proposal, we were looking at this—and I’m sure the 

contractor was, too—as another LOGCAP short-scope contingency. 

We have the expertise. When we evaluated them, said, ‘‘Yes, this 

person has the expertise,’’ we have escalated way beyond that. My 

opening statement said that as well, that we had stretched and 

stressed Government, as well as contractor, capabilities. So, it 

doesn’t surprise me that the contractor is looking for additional expertise. Now, what we need to do—and I think this is—your original comment—is to find out whether or not that’s really justified. 

Chairman LEVIN. General Johnson said that the contract required them to be prepared to provide this service for two major 

contingencies. So, Secretary Bolton, it’s not acceptable, if what he 

says is accurate, that you continually use the excuse that this was 

intended to be just a short-term provision of services. It’s one or 

the other. 

Mr. BOLTON. No, I don’t know if I can follow your comment, or 

your question. 

Chairman LEVIN. Then let me try again. General Johnson said 

that, no, the contract didn’t just say 25,000 or 50,000, it says whatever was required for two major contingencies. You’re now saying 

that, no, it was intended for something that would be just shortterm and few people. It’s one or the other. 

Mr. BOLTON. No, you can actually have both. You can have two 

major contingencies going on that are——

Chairman LEVIN. Both short-term? 

Mr. BOLTON.—that are short-term. 

70

Chairman LEVIN. I see. 

Mr. BOLTON. But when they get protracted for several years, I 

really do think you need to look at things differently, which we’re 

trying to do. Mr. Chairman, I think that’s where you’re trying to 

drive us. 

Chairman LEVIN. I was trying to drive you there 2 years ago, 

without success. 

Mr. BOLTON. Yes, sir. 

Chairman LEVIN. Senator Martinez. 

Senator MARTINEZ. Mr. Chairman, thank you very much, sir. 

I have just a couple of questions. I guess I should ask General 

Johnson, in the light of all of these problems—and I noted, in your 

testimony, you indicated some of the things that were done in improvements. But having come a little late, I wondered if you can 

restate for me what is the way forward here, how are we making 

improvements, how will the mistakes that have been made not be 

repeated? 

General JOHNSON. Yes, Senator. 

Weaknesses that we noticed, that we found in KBR, or the contractor, early on, included—it was really with the entire program, 

the process, requirement escalation, uncontrolled, not centralized, 

not validated appropriately. The contractor’s business systems were 

not capable of expanding to handle the volume of workload, 

dollarswise, personnelwise, cost-estimationwise, to provide us the 

information we needed. There was fraud that had occurred in the 

system, in the contractor’s efforts. 

We instituted several actions to take control of that and try to 

fix the problems that had occurred. Oh, and, additionally, at the 

time that I took command, we had 55 task orders worth about $14 

billion that were undefinitized. I assume you know what 

‘‘definitization’’ means. 

Senator MARTINEZ. No. 

General JOHNSON. Okay. What that means is that we had not 

properly structured the statement of work to say specifically what 

the contractor was responsible to do. So, and it goes back to, probably, the comments about the contractor taking on a workload and 

giving himself a workload. Without a definitized contract, if he’s 

asked to do something in support of a commander, he may elect to 

do that, because there are not the parameters in the process that 

should be. We had 55 of those that we had to work through. 

Award Fee Boards had not been conducted at all. Now, that’s to 

the contractor’s credit, and we need to give them credit for executing this program for more than a year without an Award Fee 

Board, and carrying, on their own books, a total of about $1.1 billion worth of Government bills, and continuing to execute. Accounting for property was not where it should have been. As I mentioned 

earlier, fraud. 

The actions we took—and, frankly, this was with Mr. Bolton’s 

help, Mrs. Ballard, and these gentlemen at the table, because when 

I took command and we started identifying these, of course, as with 

any military process or Government process, you have to validate 

the reasons why you need people, why you need the resources that 

you’re asking for. By asking the DCMA, the DCAA, and the AAA 

to go in the field and look at these, they began to validate the probVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
71

lems that I just mentioned to you. But we didn’t wait for that to 

start taking action. 

We appointed a senior contracting official, Jim Loehrl, who eventually was promoted to SES and became the LOGCAP director to 

run the program. We established a requirements review rocess, in 

conjunction with the field, and, later on, with the help of AAA’s recommendation to General Casey, a Requirements Board, and a division was set up inside the Multinational Force-Iraq over there, to 

help scope the requirements. 

We took KBR to task, establishing a process to review their business systems over and over. To the credit of DCMA and DCAA, 

they’ve brought those business systems to an acceptable range. 

Frankly, that’s what stuck us with giving them a fairly high award 

fee. I was not comfortable with it, but the fact is, their business 

systems were acceptable, and their technical and managerial performance in executing the mission in the field, frankly, was as close 

to flawless as you could have for a contractor. We couldn’t argue 

that. So, given the procurement rules, they earned their award fee; 

it was not given to them. In fact, on each one of the Award Fee 

Boards, Mr. Loehrl went to theater more than 11 times, he sat 

down with commanders. Before the award-fee approving official 

signed the letter, I reviewed it. I made personal phone calls and 

visits, myself, to the field. Most of the negative comments about 

KBR, frankly, came from our own personal staff about their accounting systems and their contracting processes, but it was that 

they were unacceptable, they just weren’t where we had wanted 

them to be. 

To the credit of Bruce Stanski, when we leaned on him pretty 

hard, he replaced his entire mid-level management, to include some 

senior vice presidents, so that we would have a much better relationship and a more responsive organization to our requests. 

We completed definitization, with a lot of help from Mrs. Ballard. 

I called her the ‘‘Lady with the Chains.’’ She beat us until we got 

it done. We finished that up between November 2004 and March 

2005, and got those definitized. In the process of doing that, with 

the help of Mr. Reed’s folks, we looked at the DFAC’s problems, 

where the costs had been inflated. We negotiated down to a point—

and we used our should-cost analysis, our own independent Government estimates, to determine what we were going to pay KBR, 

and we disallowed $55 million of the costs. That’s just the way that 

went. 

We currently have in process about—we’ve had to spend the 

costs of over $288 million as a result of those audits. We’ve disapproved that $55 million. We’ve only allowed $183 million of the 

$288 million. We’re giving them the opportunity to go out and provide the appropriate justification that will meet the audit standards to pay them. If they don’t do it, we’ll use our own independent 

Government estimate to determine what they should be paid, or 

not. 

We have completed the Award Fee Board process, as I mentioned. We established property controls. We established a board to 

manage contractor-acquired property. That board decides where 

the property will go, because, in many cases, as was mentioned earlier, KBR bought excess property. What had happened, frankly, 

72

early in the process, military commanders said, ‘‘I’m going to do 

this.’’ Of course, we had political decisions that reversed some of 

those more aggressive actions that they were going to go take, and 

they had bought property and trucks to execute those missions, 

and, of course, they were excess. Because of task orders, moving 

equipment or personnel from one task order to another, it’s like 

moving equipment or personnel from one contract to another, it requires an accounting system that works, it requires changing the 

plans, and so forth. KBR was trying to get their business systems 

acceptable, so they were reluctant to do that, because every time 

they did it, it would cause more problems, and we’d put them back 

to task. 

As a result of that, what we did was collapse many of the task 

orders that were supporting the forces into a major task order. We 

started that out with 59. That evolved to 89, and now 139. What 

that allowed them to do was have all of that capability on one task 

order, so moving people around became very easy to do, so we 

wouldn’t have an overage on one task order and a shortage on another task order of personnel and equipment. We do that with the 

Requirements Board and the contractor—the Equipment Board. 

Of course, to the credit of good people on the ground—Paul 

Cerjan, Remo Williams, and other folks—they identified to us, even 

before it became public knowledge, that they had some individuals 

who had committed fraud and criminal activity. When they did 

that, we engaged the Criminal Investigation Division of the Army, 

verified those, and we took those folks to task. Four out of six have 

been indicted, and four out of the six have been convicted. Again, 

we created an ‘‘Alpha Contracting’’ process, we call it, where we 

bring the requiring activity in theater, the contracting officer, the 

DCMA, the DCAA, and we bring all those folks into a room together, because we’re having these estimating-system problems in 

estimations from KBR that were, frankly, where they were trying 

to meet commanders-in-the-fields’ requirement probably more than 

they should have. We come up with agreements on the price. That 

has saved us, in fiscal years 2004/2005, the estimated cost as $10 

billion to execute the operations in Iraq. We got that down to $4 

billion. 

Senator MARTINEZ. From $10 to $4 billion? 

General JOHNSON. Yes, sir. 

Senator MARTINEZ. I know my time is expired, but I’d just like 

a quick question here. 

At some point, you went to a fixed price on the subcontracts, 

from a cost-plus basis? 

General JOHNSON. That’s correct. 

Senator MARTINEZ. When was that? 

General JOHNSON. That was after we finished the definitization 

process, and we did the independent cost estimates for the DFAC. 

What we found, that we would be better off with a fixed price, and 

we negotiated that with KBR and got it done. 

Senator MARTINEZ. Has that realized in cost savings, as well? 

General JOHNSON. Yes. I think DCAA said around $200 million—

Mr. Reed? 

Mr. REED. Yes, that’s correct. 

Senator MARTINEZ. My time is expired. Thank you very much. 

73

Chairman LEVIN. Just to fill in one blank that I didn’t get on 

Senator Martinez’s question, when was that change made? What 

year and month? 

General JOHNSON. For the fixed-price piece? 

Chairman LEVIN. Yes. 

General JOHNSON. That was, what, March? 

Mr. REED. December. 

General JOHNSON. December? 

Chairman LEVIN. Of what timeframe? 

Mr. REED. December-March timeframe, I think. 

General JOHNSON. Right, when we were doing the definitization. 

Chairman LEVIN. Of what year? 

General JOHNSON. 2004—early 2005, I think. 

Mr. REED. 2005. 

General JOHNSON. Yes, that’s right. 

General JOHNSON. Early 2005. 

Chairman LEVIN. Thank you. 

Senator McCaskill. 

Senator MCCASKILL. Thank you, Mr. Chairman. I have to preside 

at 1 o’clock, so I’ll be short. 

Anybody on the panel, the auditors or the other witnesses, are 

any of you ever aware of any punishment that a contractor has received for instructing their employees not to tell about waste, 

fraud, and abuse? Any punishment for retaliation against a whistleblower that works for any of these contractors? [No response.] 

None? [No response.] 

Are you aware of any investigations that have been undertaken 

concerning protecting the whistleblowers? Not Government whistleblowers that work for the Government, but whistleblowers that 

work for these contractors? 

Mr. REED. I would speak of one issue. Certainly, if we needed to 

interview employees relevant to an audit that we were conducting, 

and those employees were not made available to us to answer our 

legitimate and reasonable questions, then we would certainly disallow those costs and not reimburse them, and perhaps even take 

some other action, like referring it for investigation. 

The more difficult issue is, I think, when you want a general 

availability to people which is not tied to a specific audit in question, where you get this—you can’t really dispute the fact that they 

caution their employees, who they feel may not understand the 

issues and the facts correctly, to go through the proper channels of 

their management to talk to us. 

Senator MCCASKILL. There is a law on the books about protection 

of whistleblowers that work for contractors. Is there any requirement in any of the contracts that you all are involved in that law, 

along with a promise of anonymity and a phone number, be given 

to every employee hired by that contractor? 

Mr. REED. I don’t know if that’s a provision of this particular contract, or——

Senator MCCASKILL. Don’t you think that would be a great idea? 

Mr. REED. It’s the law, so—and I’ll tell you, we have 20 ongoing 

investigation, criminal types; half of those are the result of the 

whistleblower. They are protected. 

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Senator MCCASKILL. They’re the best. Having done this for a 

while, the very best information you get—and particularly in this 

environment, because I refuse to believe that many of the people 

hired by these companies aren’t Americans first, just like all of you 

are. When they’re over there, and they’re watching trucks being 

burned, and they’re watching people sitting around doing no work, 

they want to tell someone, because they’re not making the plus on 

the cost-plus. They want to tell, and I want to know, are they 

handed a card when they go to work for this contractor under these 

contracts that they can put in their wallet that says, ‘‘You are protected under the law, your anonymity will be protected, it would 

be—your boss would be punished, and here is a number you can 

call’’—is that happening right now with our defense contracts? 

Mr. BOLTON. I don’t believe so, but I’ll take that for the record. 

[The information referred to follows:]

The Federal Acquisition Regulation (FAR) Subpart 3.9—Whistleblower Protection 

for Contractor Employees implements 10 U.S.C. 2409 and 41 U.S.C. 251. This allows any employee of a contractor who believes that he or she has been discharged, 

demoted, or otherwise discriminated against may file a complaint with the Inspector 

General of the agency that awarded the contract. FAR Subpart 3.9 also addresses 

the procedures for investigating complaints and remedies. The maximum penalty for 

violation is complete compensation for damages to the employee. This can include 

rehiring, back pay, employment benefits, attorneys’ fees, or other fees that were lost 

or otherwise reasonably incurred by the whistleblower throughout the course of 

bringing the complaint regarding the reprisal to the head of the agency. Defense 

contractor employees seeking whistleblower reprisal protection must report allegations directly to the Department of Defense (DOD) Inspector General (IG). There is 

no known requirement provided in the contracts that would require contractors to 

provided written notice of whistleblower protection to its employees. However, the 

Defense Federal Acquisition Supplement Subpart 203.7002, requires the use of a 

clause (252.203–7002) in solicitations and contracts expected to exceed $5 million, 

except when performance will take place in a foreign country. Clause 252.203–7002 

(Display of DOD Hotline Poster) requires the following:

(a) The contractor shall display prominently in common work areas within business segments performing work under DOD contracts, DOD Hotline 

Posters prepared by the DOD Office of the Inspector General. 

(b) DOD Hotline Posters may be obtained from the DOD IG, ATTN: Defense Hotline, 400 Army Navy Drive, Washington, DC 22262–2884. 

(c) The contractor need not comply with paragraph (a) of this clause if 

it has established a mechanism, such as a hotline, by which employees may 

report suspected instances of improper conduct, and instructions that encourage employees to make such reports.

Therefore, through the use of the above clause, contractor employees should have 

visible access to the DOD IG hotline phone number for reporting fraud, waste, 

abuse, mismanagement, and reprisals.

Mr. BOLTON. Again, I’ll say, not only this contract, since we’re 

talking to LOGCAP, we’ve had several criminal investigations—

and General Johnson mentioned 4 of those—the 20 that are ongoing right now—and there may be more—half of those are because 

of the whistleblower. 

Senator MCCASKILL. Right 

Mr. BOLTON. They are protected. So, people do know about it. 

Senator MCCASKILL. But we’ve heard from whistleblowers—I 

think you heard Senator Dorgan talk about it—that were banished 

to Fallujah, that were told that they were not allowed to do this, 

or they would be terminated, or they would be punished. It’s bad 

enough, hard enough, I mean, we heard the story of the Government employee who’s been demoted after being a whistleblower—

it’s hard enough for us to protect the whistleblowers that work for 

75

the Government. Is it one step removed and much more difficult to 

protect whistleblowers that work for a private contractor. I think 

if we want that flow of information, and if we’re serious at all 

about holding down costs under these circumstances, particularly 

in these environments, I think we have an affirmative duty to 

make sure that every one of those employees understands that 

they’re protected and how much we would appreciate knowing the 

waste, fraud, and abuse that they are witnessing, day in and day 

out. 

Frankly, I haven’t even had time today to talk about the stories 

I’ve heard from my friends who have come back from over there. 

The unit where the people that were trained on food service were 

told that what they were supposed to do at times of meals—they 

took turns—some of them sat around, but some of them took turns 

standing at the door just doing the counter for KBR. Now, they 

were trained to work in the kitchen, they were trained to be cooks, 

but, instead, what they did is they stood outside the door of the 

dining facility with a counter, and their job was to make sure KBR 

got all the money they were entitled to. 

Now, I haven’t even had time to get into all that, but I do think 

the protection of these whistleblowers in the private sector is something that we are ignoring. I don’t think we’re taking it seriously 

enough. I would certainly appreciate it—and I’ll follow up with 

this, and I hope the committee will follow up with this, with Secretary Gates—it wouldn’t be hard to do this, to require our contractors to give that information to everybody who works for them. 

Mr. ERNST. Senator, could I make a comment, please? 

Just for a point of reference, DCMA, we have a Contract Integrity Center, and we do annual fraud awareness and things of that 

type, and whistleblower protection, for our folks. It’s interesting 

that periodically we do get hits on our Web site from contractor 

employees raising issues. Of course, we refer each hit to the appropriate authorities at that point in time when it comes in. 

Senator MCCASKILL. I bet there’s a lot more out there. But think 

about how you feel. You’re working for this private contractor, 

they’re paying your salary, you’re not sure what’s going to happen 

to you if you say anything. I think that the environment is not conducive for us getting the best information. We can save, I think, 

hundreds of millions of dollars if we just take that simple step, letting them know that they’re protected, and then following up and 

protecting them if there’s a retaliation. I’m hopeful that we will follow up on this hearing for this Government employee that was demoted, because if we don’t hold people accountable that demote 

whistleblowers, we’re in a world of hurt. Frankly, after this hearing, I will tell you, I think we’re in a world of hurt, and I can understand why the DOD has been on the GAO high-risk list since 

1990. 

Thank you, Mr. Chairman. 

Chairman LEVIN. Thank you, Senator McCaskill. 

I just have one additional question, and then I’ll call on Senator 

Thune to see if he has any additional questions. 

This is to you, Mr. Reed. In your prepared statement, you state 

that the DCAA audits of Iraq contracts have recommended reducVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
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tions in the proposed LOGCAP contract of about $1.9 billion, there 

was excessive billings of $1.9 billion. Does that sound right? 

Mr. REED. The $1.9 billion is the correct amount, it includes both 

billings and proposed costs. 

Chairman LEVIN. All right. So, that $1.9 billion in costs that 

have been billed and proposed costs, both. 

Mr. REED. That’s correct. 

Chairman LEVIN. Okay. Now, the negotiated price reductions have been $600 million, is that correct? 

Mr. REED. That’s correct. 

Chairman LEVIN. Which leaves $1.3 billion which has either been 

paid or is still at issue. Is that correct? 

Mr. REED. That’s correct. 

Chairman LEVIN. Of that $1.3 billion, how much of that has already been paid, approximately? 

Mr. REED. Let me see if I can—if I may restate, just for a moment, to get it straight in my own mind. Of the $1.9 billion, $1.1 

billion has been negotiated. 

Chairman LEVIN. Does that mean paid? 

Mr. REED. Yes. 

Chairman LEVIN. Okay. 

Mr. REED. Or allowed in the price——

Chairman LEVIN. Or allowed? 

Mr. REED.—and ultimately——

Chairman LEVIN. It would be—it’s allowed. 

Mr. REED.—and, ultimately, to be paid. 

Chairman LEVIN. Okay. To be paid, or has been paid, $1.9 billion. 

Mr. REED. That’s correct. 

Chairman LEVIN. Okay. 

Mr. REED. So, of the $1.9 billion, $1.1 billion has been negotiated, 

of which——

Chairman LEVIN. Well, don’t——

Mr. REED.—$600 million——

Chairman LEVIN.—say ‘‘negotiated,’’ if you don’t mind. Use the 

word that is more accurate for us, which is——

Mr. REED. Accepted. 

Chairman LEVIN.—it’s accepted, it’s allowed. 

Mr. REED. Accepted. 

Chairman LEVIN. Okay. Yes. 

Mr. REED. $1.1 billion has been resolved. They’ve allowed $500 

million, and disallowed $600 million of that $1.1 billion. No? 

Chairman LEVIN. I don’t think so, not according to our numbers. 

Mr. REED. Perhaps I should submit that for the record, because 

I——

Chairman LEVIN. No, I think we ought to go——

Mr. REED.—think we’re getting all——

Chairman LEVIN.—through it now. 

Mr. REED.—confused here. 

Chairman LEVIN. Let’s go back to the $1.9 billion you have recommended should not be allowed. Start with that. 

Mr. REED. Okay. 

Chairman LEVIN. You’ve recommended $1.9 billion be disallowed. 

Is that correct? 

77

Mr. REED. We started off with $1.9 billion that we said——

Chairman LEVIN. You’ve recommended that should be disallowed. 

Mr. REED. It should not be accepted in prices or paid. 

Chairman LEVIN. Right. It should not be accepted, $1.9 billion. 

Mr. REED. Right. Of the $1.9 billion——

Chairman LEVIN. How much has been paid or allowed? $1.1 billion—that’s what you just said, I think. 

Mr. REED. I believe what I’m saying is, to the best of my recollec- tion, of the $1.9 billion, $1.1 billion of those exceptions have been 

addressed, and $600 million of the $1.1 billion has——

Chairman LEVIN. No, of the $1.9 billion——

Mr. REED.—not been allowed. 

Chairman LEVIN.—of the $1.9 billion. 

Mr. REED. Of—$700 million of the $1.9 billion is still outstanding. 

Chairman LEVIN. Okay. Here we go. $700 million is still outstanding. 

Mr. REED. Right. 

Chairman LEVIN. $600 million has been—is not going to be allowed—they’ve agreed would not be paid, and——

Mr. REED. Okay, but——

Chairman LEVIN.—one-point-——

Mr. REED.—may I—let me just take one more shot. 

Chairman LEVIN. Go ahead. 

Mr. REED. Okay. We started with $1.9 billion of exceptions. 

Chairman LEVIN. Which you’ve recommended should not be paid. 

Mr. REED. Which we recommended should not be paid. 

Chairman LEVIN. Right. 

Mr. REED. Negotiations have taken place. Issues have been resolved on $1.1 billion of those exceptions——

Chairman LEVIN. Okay. 

Mr. REED.—leaving $800 million still to be addressed. 

Chairman LEVIN. Okay. Of the $1.1 billion that has been resolved, how much has been resolved in favor of the contractor, how 

much resolved in favor of the Government? 

Mr. REED. In favor of the Government, $600 million——

Chairman LEVIN. Okay. 

Mr. REED.—of the $1.1 billion——

Chairman LEVIN. Yes. 

Mr. REED.—has been sustained——

Chairman LEVIN. Okay. 

Mr. REED.—as a disallowance. 

Chairman LEVIN. Right. That leaves $500 million has been allowed. 

Mr. REED. Correct. 

Chairman LEVIN. Okay. Got it. 

What is the normal average typical resolution of these recommendations of yours to disallow costs? Does it typically come out 

around two-thirds? 

Mr. REED. Yes, it does. Over time, and in hundreds of reports, 

it comes out to about two-thirds. 

Chairman LEVIN. About two-thirds. So far, it’s about 55 percent 

has been——

78

Mr. REED. Approximately, yes. 

Chairman LEVIN. So far, in terms of what’s been resolved, these 

disputed, it’s below the long-term average, in terms of the Government prevailing. 

Mr. REED. Yes, but I would caution that when you compare an 

average over——

Chairman LEVIN. I agree. 

Mr. REED.—over years, with one specific action—there’s a lot of 

variability in these——

Chairman LEVIN. I understand. 

Mr. REED.—settlements and individual actions. 

Chairman LEVIN. I’m sure—these are a lot of individual actions 

in this $1.9 billion, is it not? 

Mr. REED. Yes. 

Chairman LEVIN. Okay. 

Senator Thune. 

Senator MARTINEZ. No——

Chairman LEVIN. I’m sorry, Senator Martinez. Forgive me. Mel, 

I apologize. I’m so used to seeing John Thune there for the morning, I called on Senator Thune. 

Senator Martinez. 

Senator MARTINEZ. Not a problem, sir. Thank you, but, no, I 

have no further questions. 

Chairman LEVIN. Thank you. 

Okay. I want to thank our witnesses for a number of things. Obviously, this is a hearing which is a very, very important hearing, 

going into a contract which has been a matter of huge concern because of the lack of competitive pricing which results from this contract going to one contractor instead of to multiple contractors who 

would be able to provide some competition when it comes to the 

tasking orders, which is what counts. 

We’ve gone through, this morning, facts that show that the costs 

which have been—and the estimated costs by this contractor which 

have been provided to the Government have been overstated, overpriced, inflated, that there’s been waste of taxpayers’ dollars, and 

there’s been unsupported claims by this contractor. 

Obviously, this is a very disturbing situation. Many of you have 

spent a good deal of time trying to correct it. We thank you for 

those efforts to correct these flaws. We thank you for your efforts 

to provide services to our troops at a fair cost. 

But we still have, with this contract, what I am afraid has been 

true, which is, they’ve gotten treatment which they should not have 

been given, which was too favorable when it comes to what they’ve 

been allowed, what they’ve been allowed to get away with, and 

what they’ve denied us, which is the documentation so that we can 

do the proper auditing in a prompt fashion. So, we end up by saying we’re not going to end here, by a longshot. 

To each of you, and to your agencies, you’ve been cooperative 

with the committee, and we thank you for that. To each of you, 

those of you, particularly, who have devoted so much of your time 

to try to straighten this out and to try to get a fair deal for the 

Government, we are grateful to those of you who have spent a 

great deal of your time in doing that. 

79

To those, particularly in your agencies, that are out there on the 

front line and—we commend them for their willingness to take 

those risks. We know that the provision of the services themselves 

has been not only satisfactory, but, in many cases, exemplary out 

in the field. We’ve witnessed that ourselves in our visits. 

But what we also have witnessed is something which is totally 

unacceptable, and that is overcharging, overpricing, overstating, inflated costs for services which are good services, but still, because 

of the costs which they’ve charged us, we cannot accept that, even 

for a good service. If you get a good automobile and you’re satisfied 

with it, you still don’t want to be overcharged for that automobile, 

or anything else. It’s inexcusable that we have a company that’s 

tried to get away with it, and has gotten away with too much. At 

the same time, they and their people have provided, in many cases, 

services under very difficult circumstances. 

Both things are true, and we’re grateful for part of it, and we’re 

very, very unwilling to accept the excesses and the abuses and the 

waste just because, in the process, our soldiers have been given 

some damn good meals under some very difficult circumstances. 

So, that’s where it sits. Senator Martinez, would you like to add 

a comment? 

Senator MARTINEZ. Mr. Chairman, I think you adequately expressed a lot of the concerns and frustrations. I also believe that 

it’s important for us to keep in mind the magnitude and scope of 

the project, which is enormous, and the length of time involved. So, 

I think, from that standpoint, it’s also important to keep some perspective on the difficulty ahead, and thank all of the witnesses for 

their participation today and the work that they’re doing on behalf 

of the American people and to serve our Armed Forces, and particularly those in harm’s way. 

Chairman LEVIN. Thank you very much, Senator Martinez. 

We, again, thank our witnesses for their appearance and for 

their cooperation with this committee, which has been consistent. 

We will stand adjourned. 

[The information provided by Senator Dorgan follows:] 

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[Questions for the record with answers supplied follow:]

QUESTIONS SUBMITTED BY SENATOR EDWARD M. KENNEDY

CONTRACT MISMANAGEMENT

1. Senator KENNEDY. Major General Johnson, in your testimony, you stated that 

the Logistics Civil Augmentation Program (LOGCAP) has grown rapidly from a 

value of ‘‘several million’’ dollars per year to over $5 billion per year today. I am 

concerned that this exceptional cost growth calls into question the validity of the 

original competition for the contract and arguably amounts to a cardinal change. At 

any time, did the Army discuss this cost growth and the potential need for a new 

competition? 

General JOHNSON. The growth of this program is within the scope of the awarded 

contract, which is directly tied to the number of major conflicts that could occur 

each year (two major conflicts and one minor conflict per year). The contract was 

intentionally structured to allow for rapid growth and flexibility to support unknown 

future contingencies. Nonetheless, as the program grew and began to strain the resources of a single contractor, the Army in 2004 took action to identify various 

methods of increasing contractor support and to assess the risks involved with various strategies. This involved developing an acquisition strategy for LOGCAP support with multiple contractors competitively responding to global requirements for 

urgent support. This strategy was discussed with industry, and with senior Army 

leadership to obtain input and to refine and select a future strategy for LOGCAP. 

Because of the breadth and depth of the program, a thorough analysis was performed and the final strategy determined in 2006. This strategy resulted in a separate LOGCAP IV Planning contract, which was awarded in February 2007, and the 

multiple LOGCAP IV Performance contracts, which are anticipated to be awarded 

in June 2007. 

[Update—The Army announced on June 27, 2007 that it had awarded LOGCAP 

IV Performance contracts to three companies. The three companies are DynCorp; 

Fluor; and Kellogg, Brown, & Root, (KBR).]

2. Senator KENNEDY. Secretary Bolton and Major General Johnson, the Army 

chose to select a single awardee under the LOGCAP III contract. Please provide any 

and all documentation laying out the justification for that decision. Was there any 

discussion on making other awards as the size of the contract grew? 

Mr. BOLTON and General JOHNSON. There is no specific documentation justifying 

awarding a single contract on LOGCAP III. In late 2000 and early 2001, the Army 

developed the acquisition approach to award the LOGCAP III contract. There was 

discussion about the number of contracts to award on LOGCAP III. Prior and recent 

experience on LOGCAP II revealed there were sporadic small operations requiring 

LOGCAP support, resulting in workload that did not support more than one 

LOGCAP contractor. Based on that limited workload, the decision was made to 

award and maintain only one LOGCAP III contractor, and not pay to sustain multiple contractors. Since the LOGCAP III contract was structured as a series of 1 

year options, the Government had the ability to bring on additional contractors or 

replace the LOGCAP III contract, as performance or workload warranted. As 

LOGCAP III requirements grew to support troops in Afghanistan and Iraq, the 

Army in 2004 began looking at ways to expand the number of contractors supporting LOGCAP. This resulted in solicitations being issued in August 2006 to replace LOGCAP III with multiple LOGCAP IV performance contractors.

3. Senator KENNEDY. Major General Johnson, in your testimony you mentioned 

that one of the improvements made during contract performance was the 

definitization of all ‘‘over-age’’ task orders. Please provide a list of all task orders 

that fits these criteria with a brief description of the goods or services to be provided 

under them, all not-to-exceed figures during the life of the task order, final value, 

and the number of days each task order was undefinitized. 

General JOHNSON. Between November 2004 and March 2005, we definitized 46 

task orders of which 42 were over-aged. The high tempo of operations resulted in 

numerous new combatant command requirements and changes necessitating immediate placement of LOGCAP task orders. This resulted in our placing a priority on 

awards rather than definitizing actions. As of July 6, 2007, there are no 

undefinitized contractual actions. 

The over-aged task orders are identified in the following spreadsheet. 

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4. Senator KENNEDY. Major General Johnson, for all undefinitized task orders, 

please provide a separate spread sheet giving a brief description of each task order, 

its value, and the number of days it was undefinitized. 

General JOHNSON. Between November 2004 and March 2005, we definitized 46 

task orders of which 42 were over-aged. As of July 6, 2007, there are no 

undefinitized contractual actions. 

The referenced definitized task orders are identified in the following spreadsheet. 


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5. Senator KENNEDY. Major General Johnson, did the Army ever unilaterally supply missing terms to any undefinitized task orders, and if so, did the contractor ever 

challenge such action through the disputes process? 

General JOHNSON. No unilateral terms or definitizations were ever forced upon 

the contractor. There were no challenges through the disputes process.

6. Senator KENNEDY. Major General Johnson, please describe in greater detail the 

Joint Acquisition Review Board (JARB) and the Coalition Acquisition Review Board 

(CARB).


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General JOHNSON. 

Acquisition Review Boards (JARB, CARB, Super-Coalition Acquisition Review Board 

(SUPERCARB)) 

In Kuwait, Iraq and Afghanistan, the leadership maintains a strict approval process for all requirements, to include those executed under the LOGCAP contract. 

Every new requirement that exceeds $50,000 must be validated by an Acquisition 

Review Board (JARB and CARB) and approved by a general officer. This approval 

process also includes internal purchases or actions executed by KBR. Requirements 

that exceed $10 million must go through further scrutiny (SUPERCARB) and be approved by a centralized review board in Kuwait. No requirement is funded unless 

commands gain the recommendation of these boards and final approval at the general officer level. While not a funding process, these review boards review the proposed funds to ensure they are appropriate for the type of work to be awarded. 

Joint Acquisition Review Board 

The JARB is a requirements validation process held in Iraq that reviews 

Combat Support/Combat Services Support (CS/CSS) requirements for supported units. The board ensures the requirements are consistent with and 

necessary to support operations 

Coalition Acquisition Review Board 

The CARB is fundamentally the same as the JARB but reviews requirements associated with acquisitions for Kuwait/Afghanistan. 

Super-Coalition Acquisition Review Board 

If a cost estimate associated with a requirement is over $10 million for 

Iraq, Kuwait or Afghanistan, the packet must go to Coalition Forces Land 

Component Command (CFLCC) for the ‘‘SUPERCARB’’ review and approval, basically a JARB process at a higher level of command.

No requirement is funded unless the customer obtains the recommendation of 

these boards and final approval of general officer level leadership.

7. Senator KENNEDY. Major General Johnson, is cost reasonableness a factor for 

determining appropriate award fees? If so, how is that factor used to determine 

award fees? 

General JOHNSON. First of all, the size of the award fee pool is established based 

on estimated task order costs, which are negotiated on each task order. The size of 

the award fee pool is not based upon actual cost. Cost reasonableness is considered 

as a part of this process. 

Second, the award fee criteria have always considered cost control as a significant 

factor (40 percent of the overall assessment). The cost control factor includes assessment of a number of cost control measures such as the contractor’s ability to provide 

proper cost estimates, cost tracking, cost avoidance measures, and cost reasonableness, all taken in the context of the contingency environment.

8. Senator KENNEDY. Secretary Bolton, in your testimony, you stated that ‘‘the dynamics of logistics civil augmentation support significantly changed from anything 

we’ve seen.’’ I am concerned that this ‘‘significant change’’ coupled with the exceptional cost growth calls into question the validity of the original competition for the 

contract and arguably amounts to a cardinal change. At any time, did the Army discuss this cost growth and the potential need for a new competition? 

Mr. BOLTON. The growth of LOGCAP support is within the scope of the contract, 

which is tied to the number of major conflicts that could occur each year. See the 

discussion in the response to question #1.

9. Senator KENNEDY. Secretary Bolton, Congress has a clear preference for multiple awards when the Government issues Infinite Delivery-Infinite Quality (IDIQ) 

contracts. Cost reimbursement contracts are one of the least desirable contract types 

available. Would it negatively impact the Army’s mission if Congress prevented the 

use of cost reimbursement task orders under single award IDIQ contracts for services valued over $100 million? 

Mr. BOLTON. No. Unless specifically authorized by Congress, all Army contracts 

must comply with applicable statutes including those involving military construction. 

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QUESTIONS SUBMITTED BY SENATOR ROBERT C. BYRD

CONTRACT MISMANAGEMENT

10. Senator BYRD. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, with the pending relocation of Halliburton corporate headquarters to the Middle East, have adequate 

measures been taken to ensure that the records of KBR, Inc. will remain available 

and accessible for current and future congressional oversight and other investigations? 

Mr. REED. Yes, we believe adequate measures are in place to ensure access to 

KBR, Inc. records. Prime contractors are obligated and accountable for performing 

in accordance with the terms and conditions of their U.S. Government contracts. 

The terms and conditions of a Department of Defense (DOD) prime contract apply 

regardless of changes to the prime contractor’s organization. Corporate reorganizations or relocations of corporate headquarters or business units do not affect the applicability of the contract’s terms or diminish the responsibilities of the prime contractor. For example, the contract clause that provides the Government with access 

to records of negotiated contracts (FAR 52.215–2, ‘‘Audit and Records-Negotiation’’) 

remains applicable. 

The ‘‘Audit and Records-Negotiation’’ clause requires the prime contractor to 

maintain records and make them available to the Government for examination, 

audit, or reproduction until 3 years after final payment under the contract or any 

longer period required by statute or by other clauses of the contract. This clause 

provides for Government access by not only the Government contracting officer and 

authorized representatives of the contracting officer (normally Defense Contract 

Audit Agency (DCAA)), but also by the Comptroller General of the United States 

or an authorized representative. The Comptroller General is given access to and the 

right to examine any of the contractor’s directly pertinent records involving transactions related to the contract or its subcontractors. The Inspector General also has 

statutory authority to gain access to contractor records under the Inspector General 

Act of 1978, as amended. 

There would be significant impact if Halliburton decides to become organized 

under the laws of Dubai. However, it is our understanding that action by the company to merge with or acquire domestic companies would be subject to review by 

the Treasury Department’s Committee on Foreign Investments in the United States. 

Mr. ERNST. The Halliburton corporate headquarters is not relocating to the Middle East. This has been misreported. Halliburton is expanding its presence in the 

Middle East and is relocating certain key executives to Dubai to focus on development of the Middle East market. This will have no affect on the availability of KBR 

records. 

Mr. FITZGERALD. To date, we haven’t encountered any problems with access to 

KBR records and we don’t anticipate future problems with access to KBR records 

as a result of the pending relocation of Halliburton corporate headquarters to the 

Middle East. Our LOGCAP audit work focuses on evaluating Army policies, processes, and controls. When we need information from KBR we go to the procuring 

contracting officer (forward or rear) to make arrangements to obtain it. This is done 

under the auspices of contract clauses.

11. Senator BYRD. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, do you have any concerns related to Halliburton’s divestment of KBR and your agencies’ continued ability to audit KBR, Inc.’s activities during the course of the LOGCAP contract? 

Mr. REED. Halliburton’s divestment of KBR should have no impact on our ability 

to audit KBR, Inc. or the LOGCAP contract. Regardless of the divestiture, KBR 

must maintain all appropriate contractor records and make them available to the 

Government for examination and audit. 

Mr. ERNST. I have no concern with our continued ability to audit KBR activities 

after the divestiture as our access to records should improve since only KBR records 

will now be required for audit. However, Halliburton records will still be required 

for the settlement of costs incurred prior to the divestiture of KBR by Halliburton. 

Mr. FITZGERALD. To date, we haven’t encountered any problems with access to 

KBR records or personnel and we don’t anticipate future problems despite 

Halliburton’s divestiture of KBR. Our LOGCAP audit work focuses on evaluating 

Army policies, processes, and controls. When we need information from KBR we go 

to the procuring contracting officer (forward or rear) to make arrangements to obtain it. This is done under the auspices of contract clauses.

12. Senator BYRD. Mr. Fitzgerald, when were Army auditors first stationed on the 

ground in Iraq and why were they not in Iraq earlier? 

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Mr. FITZGERALD. U.S. Army Audit Agency (USAAA) auditors were first permanently stationed on the ground in Iraq in May 2005 to audit LOGCAP operations 

related to Operation Iraqi Freedom. Since May 2005, we have had a continuous 

presence on the ground in Iraq. Intermittently during the period June 2002 through 

August 2003 USAAA personnel operated in deployed environments in Uzbekistan, 

Afghanistan, Turkey, and Kuwait to audit LOGCAP operations in support of Operation Enduring Freedom and Operation Iraqi Freedom. Additionally, auditors were 

on the ground in Baghdad intermittently during calendar years 2004 and 2005 

while performing three audits of the Commander’s Emergency Response Program/

Quick Response Fund.

13. Senator BYRD. Mr. Fitzgerald, do policies exist regarding the deployment of 

Army auditors to the field during military engagements that involve contractors? 

Mr. FITZGERALD. There are no specific Army policies dealing with the deployment 

of Army auditors during military engagements that involve contractors. However, 

USAAA personnel have historically deployed with our troops to audit Army and/or 

contractor operations dating back to the Vietnam War. Currently, USAAA’s authority to operate in a deployed environment is supported in Army Regulation 36–5 (Auditing Service in the Department of the Army dated 16 December 1991). The regulation specifies that USAAA has unrestricted access to Army operations. For joint operations, such as Operation Iraqi Freedom, we also coordinate our audit coverage 

of joint activities and non-Army DOD activities with the DOD Inspector General’s 

Office.

14. Senator BYRD. Mr. Fitzgerald, should those policies be reviewed in light of the 

experience with the LOGCAP contract? 

Mr. FITZGERALD. Army Regulation 36–5 has served USAAA’s purposes over the 

years with regard to operating in a deployed environment. I believe, however, that 

my staff could deploy more timely and efficiently if operation plans recognized the 

need for audit controls and oversight early in contingency operations. We are in the 

initial stages of exploring options as to how this can best be accomplished, to include 

making USAAA part of operation plans for engagements so that our deployed role 

and related logistical support requirements can be recognized and addressed from 

the outset of an engagement. In a similar vein, based on our recent experiences with 

Hurricane Katrina, we are working with the Army Corps of Engineers to enhance 

our ability to deploy rapidly in the event of a natural disaster.

15. Senator BYRD. Mr. Reed and Mr. Ernst, does the DCAA have sufficient auditors to provide detailed oversight of the billions of dollars in contracts across the 

DOD? 

Mr. REED. Yes, DCAA has sufficient auditors to fulfill our contract audit mission 

for the Department. While it is true that the volume of contracts for which we have 

responsibility has grown, DCAA has made good use of new technologies (i.e., automated working papers, enhanced communications infrastructure) to increase auditor 

productivity. 

Mr. ERNST. Defense Contract Management Agency (DCMA) believes that DCAA 

has sufficient auditors to accomplish their mission.

16. Senator BYRD. Mr. Reed and Mr. Ernst, do your auditors have sufficient authority to receive all of the support they require? 

Mr. REED. Yes, DCAA has sufficient authority to obtain the access to required 

contractor books and records. The FAR clause at 52.215–2 provides our auditors 

with the primary authority for access to contractor records. This clause must be inserted in all negotiated contracts except those: (i) not exceeding the simplified acquisition threshold; (ii) for commercial items; or (iii) for utility services. This clause provides the contracting officer’s representative with the authority to examine and 

audit contractors’ books, records, documents and other evidence and accounting procedures and practices, regardless of form (e.g., machine readable media such as 

disk, tape, et cetera) or type (e.g., data bases, application software, data base management software, utilities, et cetera), sufficient to reflect properly all costs claimed 

to have been incurred or anticipated to be incurred in performing cost-reimbursement, incentive, time-and-material, labor-hour, or price-redeterminable contracts. 

For the most part, contractors are cooperative and support the Agency’s audit efforts. However, the Agency does have procedures in place to pursue instances where 

contractors deny or unreasonably delay our access to records. 

Mr. ERNST. Current Federal Acquisition Regulations provide sufficient authority 

to auditors.

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17. Senator BYRD. Mr. Reed and Mr. Ernst, do audits that uncover fraud or mismanagement receive the attention and action from the Service Chiefs that they deserve? 

Mr. REED. DCAA has in place standard procedures for reporting potential fraud 

and mismanagement. To date, DCAA has made more than 20 referrals related to 

Iraq reconstruction effort to the appropriate investigative agencies. To the best of 

our knowledge, the investigative agencies have taken these referrals seriously, and 

the referrals are actively being worked. 

Mr. ERNST. DCMA believes these audits receive the attention and action from the 

Service Chiefs that they deserve.

18. Senator BYRD. Secretary Bolton, in light of some of the issues that have been 

raised at today’s hearing, what problems or challenges do you see with the increasing reliance upon civilian contractors to provide essential support services to the 

U.S. military, particularly to those units and personnel deployed overseas? 

Mr. BOLTON. Contractors have played a vital role in supporting U.S. Forces since 

the Revolutionary War. The highest number was during World War II when an estimated 734,000 contractors supported the warfight. While the U.S. Army is less than 

40 percent of its size of 35 years ago, the sustained strategic demand is unprecedented. The use of contractors is a force multiplier enabling the U.S. Army to keep 

soldiers engaged in core U.S. Army missions. 

The Army is working tirelessly to balance the need to use contractors to provide 

needed services while using soldiers and Army civilians to perform inherently governmental functions. I see three primary challenges with the Army’s increasing reliance on civilian contractors:

(1) The perception that we pay unreasonable and unallowable costs. We 

do not. All incurred costs are reviewed prior to payment and all costs are 

audited; 

(2) The perception that contract fraud is prevalent overseas. It is not. For 

example, the Special Inspector General for Iraq Reconstruction (SIGIR) testified before a Subcommittee of the House Judiciary Committee that contracting fraud in Iraq is a relatively small component of the overall multimillion dollar financial investment in the reconstruction of Iraq; and, 

(3) The belief that that there are insufficient Government personnel to 

perform proper contract administration and to monitor contract performance. The Army has been stretched beyond its capacity to support current 

contingency deployment demands. The Army supports contingency operations with only 285 military contracting officers and civilian volunteers. To 

address the military support we have designed deployable modular contracting brigades. We are looking at recruitment bonuses and retention bonuses to increase our cadre of deployable civilians.

19. Senator BYRD. Secretary Bolton, how should procedures be revised considering 

the U.S. military’s experience with contractors in Iraq? 

Mr. BOLTON. Considering the U.S. military’s experience with contractors in Iraq, 

we need to collectively recognize the role and importance of Government contracting 

personnel to execute, administer, and oversee contracts for contractor support services and reconstruction. Procedures for training the operational and Big ‘‘A’’ Army 

in acquisition (from requirements generation to contractor performance for 

sustainment) must become a staple of military education and operational planning. 

Lessons learned in Iraq and future conflicts must be captured, and we are in the 

process of capturing and documenting these lessons in order to form future operational plans and to include contracting in training exercises. We go to war with 

logistics capability and we must doctrinally and procedurally recognize that we must 

also go to war with the business side of soldier support. 

The Army is in the final stages of staffing of two guides for contingency contracting—an OCONUS Contingency Contracting Guide and a CONUS Guide for 

Supporting Emergencies within the United States. Additionally, documenting systems and processes in the development of Joint Publication 4–10, Contracting and 

Contractor Management in Joint Operations, and the updating of Army Regulation 

715–9, Contractors Accompanying the Force, will be useful tools for contracting officers. 

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QUESTIONS SUBMITTED BY SENATOR DANIEL K. AKAKA

ARMY AUDIT AGENCY

20. Senator AKAKA. Secretary Bolton, in April 2006, the Army Audit Agency 

(AAA) reported that DOD remains insufficiently staffed and inadequately organized 

to provide effective oversight for the LOGCAP contract. The AAA report states:

‘‘[T]he current management structure over LOGCAP operations in the 

Iraq area of operations isn’t conducive to ensuring the program is managed 

in the most effective and efficient manner. . . . Specifically, contracting activities in the theater have been fragmented and too understaffed. . . . [O]perational fragmentation among the key management offices, along with 

the dispersed location and high turnover of personnel responsible for managing work under the contract, make it difficult to ensure new requirements are fully necessary or being obtained in the most cost-efficient manner. . . .’’

During the hearing, we discussed the shortage of contract oversight personnel in 

the DOD. Please provide your plans to address this shortage, as well as the potential loss of significant numbers of additional acquisition personnel due to retirement 

in the upcoming years. If the current fiscal year 2008 DOD budget request does not 

provide sufficient resources for you to address shortages of acquisition personnel, 

please indicate what level of resources is needed. 

Mr. BOLTON. The Army does not have a sufficient number of contracting officers 

and contract administrators. Currently, there are 5,563 1102s (contract specialist/

contracting officer) within the Army. This number is expected to decrease by 38 percent to 3,472 by 2011. This projected loss is due to both retirement, and attrition 

(migration to private industry, BRAC actions, regional hiring difficulties due to lack 

of PCS funding, et cetera). Since 1995, the workforce numbers have decreased by 

53 percent, while the workload actions have increased by 278 percent. The decrease 

in 1102s has resulted in a lack of contract administration (which has been validated 

by several outside audits), and a lack of contract planning. New hires (1102s) of 418 

per year would result in 0 percent growth over the next 5 years and new hires 

(1102s) of 529 per year would result in 10 percent growth over the next 5 years. 

The shortage is particularly severe for the Army’s population of 285 military contracting officers who support operations in Iraq and Afghanistan. The Army, along 

with the other military services, has been unable to provide the total number of 

Level II and III certified military contracting officers requested by commanders in 

Iraq and Afghanistan. This shortage is also evident within the DCMA which, on a 

few occasions, was forced to turn down requests from the Army for the administration for theater support contracts citing a lack of resources. 

Over recent years the size of the contracting workforce has been a flat line while 

our workload has increased, in some cases as much as 200 percent or more. We are 

working within the Army to determine how to resource our personnel requirements. 

We are also looking at our civilian intern programs, and at our civilian recruitment 

and retention practices. As the Army increases its strength, I have tasked my Director, Acquisition Career Management, and Deputy Assistant Secretary of the Army 

for Policy and Procurement to examine the manning requirements in order to increase our 285 military contingency contracting officers and our deployable civilian 

workforce. Last, I am reexamining our utilization of CORs. The Army has already 

taken steps to improve oversight of contract services by requiring trained CORs and 

a Quality Assurance Surveillance Plan on service contracts greater than $2,500.

21. Senator AKAKA. Secretary Bolton, regarding the work environment that contract oversight people in Iraq must deal with, and the difficulty with sending civilian personnel into that environment, I have serious concerns regarding the problems 

DOD is experiencing. Specifically, the Department is relying heavily on auditors to 

find contracting problems after the fact rather than direct oversight by the contracting officer’s technical representatives (COTRs). In my opinion, it is inefficient 

to wait until an audit finds a problem to deal with contractor performance problems 

because the audit is performed too late to ensure that the contractor meets the 

needs of the commanders in the field. Because of this, should the Department consider having a cadre of Active-Duty military COTRs who can handle oversight of 

contracts supporting our troops in combat zones? 

Mr. BOLTON. I agree that we must have the ability to provide ‘‘real-time’’ oversight of contractors supporting our troops in combat zones. The Army has maintained a proactive approach in identifying and rectifying contract discrepancies and 

does not rely solely on audits to discover problems. In addition to military who are 

COTRs, we work closely with the DCMA and the DCAA reviewing contractor perVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00128 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
125

formance as it occurs and auditing vouchers at the time of submission. We have a 

cadre of Contingency Contracting Teams and we are developing a new approach to 

form and sustain a cadre of emergency essential Department of the Army civilians 

to provide contracting and oversight in combat zones. We are also assessing our 

practices to identify, train, and utilize our COTRs.

CONTRACT MISMANAGEMENT

22. Senator AKAKA. Secretary Bolton, a cost-plus award fee contract removes all 

risk from the contractor, and places it on the Government. The only incentive for 

the contractor to control costs is supposed to be the award fee. However, since the 

award fee is a percentage of the contract costs, the contractor really does not have 

any incentive to control costs, especially if the contractor gets the maximum fees regardless of their performance. The only defense for the Government is diligent contract oversight. It is pretty clear from the numerous audit findings of AAA and the 

DCAA that diligent oversight has been lacking. Why did the Army not use a fixedfee type contract for LOGCAP? 

Mr. BOLTON. The LOGCAP III contract has multiple contract types, including firm 

fixed price, that can be used when there are firm requirements that are not susceptible to changes in scope, quantity, or schedule. Since the predominant effort under 

LOGCAP III has involved supporting contingency operations which are subject to 

continuous changes in requirements, it is unrealistic to negotiate firm fixed prices 

for this type of effort. As a result, the Government must bear some of the risk 

through the use of a cost-type contract. We use incentives such as award fee or incentive fee to encourage better performance or cost control on larger dollar orders. 

For smaller dollar orders, we can use cost plus fixed fee to avoid the administrative 

burden associated with collecting information and evaluating performance IAW established fee criteria, as well as holding boards to determine award fee amounts. 

In those cases the administrative costs far outweigh the amount of a fixed fee. To 

clarify: fee is paid on negotiated costs, not actual costs and the contractor’s efforts 

to control costs will be reflected in award fee decisions and past performance ratings. As a result, the contractor has little incentive to run up costs. For cost plus 

award fee actions, a portion of fee related to cost control can be withheld if it is 

shown they did not reasonably control costs. 

Furthermore, the contractor is not entitled to recover certain types of costs (those 

identified as ‘‘unallowable’’ under the FAR), and the contractor can only recover 

costs that are deemed ‘‘reasonable’’ under the circumstances.

23. Senator AKAKA. Secretary Bolton, why did the Army not select more than one 

contractor, in order to create competition? 

Mr. BOLTON. In late 2000 and early 2001, the Army was developing the acquisition approach to award the next LOGCAP III contract in late 2001. There was discussion about the number of contracts to award on LOGCAP III. Multiple awards 

were considered. However, through almost 4 years of LOGCAP II at that time, there 

had been sporadic small operations requiring LOGCAP support, resulting in workload that did not support more than one LOGCAP contractor. Based on that limited 

workload experienced at that time, the decision was made to award and maintain 

only one LOGCAP III contractor, and not pay to sustain multiple contractors. The 

LOGCAP III contract was competitively awarded.

24. Senator AKAKA. Secretary Bolton, why is one contract used for all logistical 

support work, instead of breaking it down into smaller contracts, some of which 

could probably be fixed-price contracts? 

Mr. BOLTON. As noted in the answer to the previous question, the low activity on 

the LOGCAP II contract did not indicate a need for multiple contracts on LOGCAP 

III. The concept of a contingency contract at that time was to have a single contractor quickly respond to requirements and be responsible for overall management 

of all the logistics support work. LOGCAP support was envisioned to be for short 

periods of time, not for long, drawn out conflicts. 

The Army has examined LOGCAP requirements to determine if they can be broken into smaller contracts, and in some cases, tasks were removed from the 

LOGCAP contract and awarded through other contracts. Due to the fluid and changing operational environments in Iraq and Afghanistan, it has been difficult to identify requirements that could be structured in smaller tasks and awarded on a fixedprice basis. Furthermore, operational commanders find it even more difficult to deal 

with multiple contractors in the area of conflict and they highly desire having one 

‘‘belly-button’’ to turn to.

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LOGCAP FUNDS FOR BOTH MILITARY CONSTRUCTION AND PROCUREMENT

25. Senator AKAKA. Secretary Bolton, last year the Army informally proposed language to the congressional defense committees to retroactively authorize the use of 

LOGCAP funds for both military construction and procurement during the four previous fiscal years, 2003 through 2006. The committees did not support or enact such 

legislative relief. Does the Army support such a proposal today, to retroactively authorize actions that may be under Anti-Deficiency Act (ADA) or other investigations? 

Mr. BOLTON. No, the Army does not support such a proposal today. Since last 

year, the Army has worked with Central Command (CENTCOM) and Office of the 

Secretary of Defense Comptroller to document and request contingency construction 

authority for all construction projects that exceeded the threshold for use of operation and maintenance (O&M) funds. The Army has also put into place more stringent policies and procedures on the use of O&M funds for military construction 

projects and the procurement of equipment to prevent exceeding the expense/investment threshold. Army funds for construction using the LOGCAP contracting vehicle 

is approved only if the total project cost is within the threshold of $750,000 or $1.5 

million if the project is in support of life, health, and safety. If the project exceeds 

this threshold the scope of work is reduced to ensure the project does not exceed 

the statutory limitation, or the requirement is processed as a Contingency Construction Authority (CCA) request (if applicable), or the project is cancelled for LOGCAP 

and forwarded to the U.S. Army Corps of Engineers for processing. Also, equipment 

purchases required to provide services under LOGCAP contracts that require procurement funding are identified and the contractor must obtain approval prior to 

commitment of any expenditure for any equipment that requires procurement funding. Additionally, we have provided clarifying guidance on the funding of leases of 

equipment.

26. Senator AKAKA. Secretary Bolton, does the Army believe the use of a LOGCAP 

contract as an acquisition method circumvents other statutes applicable to military 

construction? 

Mr. BOLTON. No. Unless specifically authorized by Congress, all Army contracts 

must comply with applicable statutes including those involving military construction.

CONTRACTOR OVERSIGHT

27. Senator AKAKA. Secretary Bolton, in your statement, you discuss the large 

numbers of contractor personnel supporting our troops under this contract. Numerous potential problems with the contract have been identified due to the lack of adequate contractor oversight. A large number of security contractors are also supporting operations in Iraq, although I believe you indicated that it was under other 

contracts. However, contractor security personnel do not operate under the military’s rules of engagement, and therefore, pose a potential risk to our 

counterinsurgency operations since they could potentially take actions that could inflame tensions. Given the problems with contractor oversight for security personnel, 

what is the DOD doing about this problem? 

Mr. BOLTON. We address contractor oversight of personnel, including security personnel by requiring contractors to abide by the terms and conditions in their contracts. DOD contracts in Iraq, Afghanistan, and Kuwait require contractors and 

their subcontractors, authorized to accompany U.S. Armed Forces deployed to those 

regions; to comply with all applicable U.S., host nation, and third country national 

laws. They are also required to comply with policies and directives of the Combatant 

Commander. 

DOD contractors, to include private security contractors, are required to comply 

with the rules for use of force, which have been established by the U.S. CENTCOM. 

Private security contractors in Iraq must also observe U.S. CENTCOM arming policies and host nation licensing and registration requirements. The performance work 

statement and terms and conditions of private security contracts specifically prohibit the contractor from engaging in any offensive operations, such as military combat maneuvers and counterinsurgency operations. Private security contractors are 

limited to defensive actions to protect persons and/or property identified in their 

contracts.

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ARMY OVERSIGHT OF LOGCAP

28. Senator AKAKA. Mr. Fitzgerald, in your prepared statement, you stated that 

the Army is adequately managing the LOGCAP contract. This finding is somewhat 

difficult for me to understand given all of the problems that have been identified 

with this contract. The AAA reported on April 25, 2006, that ‘‘Overall, we concluded 

that the current management structure over LOGCAP operations in the Iraq area 

of operations isn’t conducive to ensuring the program is managed in the most effective and efficient manner.’’ Both the AAA and the DCAA have identified hundreds 

of millions of dollars of overcharges and potential fraud in this contract. Please explain what criteria is being used to determine the adequacy of the Army’s management of this contract. 

Mr. FITZGERALD. Our criteria for evaluating how well the Army managed the 

LOGCAP contract hasn’t changed. However, the two referenced conclusions we drew 

were based on a different body of evidence and different timeframes. In our summary report A–2006–0022-ALL, dated 28 November 2005, we concluded that ‘‘Overall, the Army’s management of the LOGCAP contract was adequate.’’ This conclusion, which was referenced in my prepared testimony, was based on our body of field 

work and tests we conducted during June 2002-February 2004 in the United States 

and in Turkey, Uzbekistan, Kuwait, and Afghanistan. During this timeframe, the 

scope of LOGCAP operations was much smaller than it grew to be during March 

2004 and beyond. Notwithstanding our overall conclusion, our summary report and 

the six preceding supporting reports contained numerous recommendations to improve management of LOGCAP operations. In report A–2006–0099–ALL, dated 25 

April 2006, we concluded that ‘‘. . . the current management structure over 

LOGCAP operations in the Iraq area of operations isn’t conducive to ensuring the 

program is managed in the most effective and efficient manner.’’ Unlike the prior 

conclusion, this conclusion was based exclusively on field work conducted in Iraq. 

The fieldwork and tests supporting this conclusion were completed during May–July 

2005.

29. Senator AKAKA. Mr. Fitzgerald, it is clear that the Army is relying on auditors 

to identify contract problems after the fact, rather than direct oversight by COTRs 

to manage the contract. Management of contracts through the audit process does 

not seem to be an effective management process. At what point would the Army’s 

management of the contract be evaluated as inadequate? 

Mr. FITZGERALD. The Army is using USAAA’s audit work as one of the tools it 

has to help improve the management and internal control structure of the LOGCAP 

contract. All recommendations we made dealing with the LOGCAP contract for both 

Operation Enduring Freedom and Operation Iraqi Freedom were designed to improve both current and future operations, processes, and controls. We view our work 

as complementary to the work performed by COTRs and other contracting and resource management officials who are working on various aspects of the LOGCAP 

contract.

INVESTIGATIONS OF POTENTIAL ANTI-DEFICIENCY ACT VIOLATIONS

30. Senator AKAKA. Secretary Bolton and Mr. Fitzgerald, for over a year now, the 

Army and the Office of the Secretary of Defense Comptroller have been conducting 

investigations of potential ADA violations concerning the use of operations and 

maintenance funds for military construction and procurement activities through the 

LOGCAP in Iraq. These investigations are in part resultant from a memo from the 

DOD Office of General Counsel dated March 7, 2006, to the Office of the Legal 

Counsel to the Chairman, Joint Chiefs of Staff. This committee was briefed last October that up to $600 million in operations and maintenance funds may have been 

carried out through LOGCAP for unauthorized and illegal investment items and 

leases. In the Army’s internal review and investigation, at what organization or 

level of contracting review did the failure to conform to Federal Acquisition Regulations occur? 

Mr. BOLTON and Mr. FITZGERALD. Since the committee was briefed in October 

2006, the Army’s Office of the ASA (FM&C) has been conducting an investigation 

into potential ADA violations concerning the use of operations and maintenance 

funds for military construction and procurement activities. While our investigations 

are nearing completion, no ADA violations have been identified to date (see question 

#32 for status). To improve our overall funds controls concerning the expenditure 

of O&M, thus minimizing and/or eliminating the potential for future ADA violations, 

we have taken several proactive measures. 

128

First, all LOGCAP construction requirements are reviewed in accordance with DA 

PAM 420–11, Project Definition and Work Classification, by the Multi-National 

Corps-Iraq (MNC–I) Joint Facilities Review Board to ensure proper funding has 

been allocated to the project. The LOGCAP Support Officer is responsible for ensuring all construction projects incidental to services performed by the LOGCAP contractor are reviewed and approved by the MNC–I Joint Facilities Utilization Board 

(JFUB) in accordance with applicable Multi-National Forces-Iraq and MNC–I Fragmentary Orders and requirements management guidance. If the total cost of the 

construction project exceeds $750,000, ($1.5 million for construction in support of 

life, health, and safety) the construction project is not approved for LOGCAP. When 

this is the case, one of three courses of action will be taken by MNC–I:

• Reduce the scope of work to ensure total project will not exceed the statutory limitation. 

• Hold the requirement and process a request for CCA. • Cancel the project for LOGCAP and forward package to the U.S. Army 

Corps of Engineers for processing.

Second, the ASA (FM&C) has issued a funding memorandum that provides guidance to ARCENT activities to determine the type of funding used for specified intheater service contracts that involve capital assets. Two major leasing actions were 

addressed: Prime Power Generation Equipment and Dining Facilities. The intent of 

the memorandum was to assist resource managers, contracting officers, and contractors alike in making better use of O&M funding for procurement actions particularly 

as they relate to LOGCAP. It provides a detailed discussion and analysis of the regulatory guidance impacting these leasing actions. 

Lastly, the ASA (FM&C) is finalizing a second memorandom that will provide 

guidance regarding the type of funding to be used for specified in-theater service 

contracts for leasing non-tactical vehicles. 

Together, the above actions significantly improve the Army’s ability to effectively 

manage, account for, and control the use of O&M funds for which it has been authorized and appropriated by Congress for use in the current theater of operations.

31. Senator AKAKA. Secretary Bolton and Mr. Fitzgerald, how has the Army 

changed its policies and review processes for LOGCAP delivery orders to ensure the 

proper authority is available for the use of various fund sources? 

Mr. BOLTON and Mr. FITZGERALD. 

Acquisition Review Boards (JARB, CARB, SUPERCARB) 

In Kuwait, Iraq, and Afghanistan, the leadership maintains a strict approval process for all requirements, to include those executed under the LOGCAP contract. 

Every new requirement that exceeds $50,000 must be validated by an Acquisition 

Review Board (JARB and CARB) and approved by a general officer. This approval 

process also includes internal purchases or actions executed by KBR. Requirements 

that exceed $10 million must go through further scrutiny (SUPERCARB) and be approved by a centralized review board in Kuwait. No requirement is funded unless 

Commands gain the recommendation of these boards and final approval at the general officer level. While not a funding process, these review boards review the proposed funds to ensure they are appropriate for the type of work to be awarded. 

Joint Acquisition Review Board 

The JARB is a requirements validation process held in Iraq that reviews 

CS/CSS requirements for supported units. The board ensures the requirements are consistent with and necessary to support operations. 

Coalition Acquisition Review Board 

The CARB is fundamentally the same as the JARB but reviews requirements associated with acquisitions for Kuwait/Afghanistan. 

Super-Coalition Acquisition Review Board 

If a cost estimate associated with a requirement is over $10 million for 

Iraq, Kuwait, or Afghanistan, the packet must go to CFLCC for the 

‘‘SUPERCARB’’ review and approval, basically a JARB process at a higher 

level of command. 

Joint Facilities Utilization Board 

To control and manage construction, all commands have established a 

JFUB. These boards evaluate and reconcile requirements for real estate, 

use of existing facilities, and ensure all potential construction is in line with 

established master plans. Funding type and thresholds are also reviewed to 

ensure that no fiscal violations occur. 

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Material Requisition Review Process 

Subsequent to the review of the Acquisition Review Board Approval, every requisition for supplies or services submitted by KBR over $25,000 

is personally reviewed and approved by the Government Administrative 

Contracting Officer. In Iraq, those requisitions that exceed $250,000 are reviewed and approved by the Command Comptroller before KBR is authorized to execute the procurement. Funding type and thresholds are reviewed 

to ensure that no fiscal violations occur.

32. Senator AKAKA. Secretary Bolton, what is the status of each investigation? 

Mr. BOLTON. Army opened five investigations. Three are now closed; two are still 

open.

33. Senator AKAKA. Secretary Bolton, when are the investigations expected to be 

completed? 

Mr. BOLTON. Army expects to complete the two remaining ADA investigations by 

30 December 2007.

34. Senator AKAKA. Secretary Bolton, what results of the investigation can you 

share with us, and what personnel actions have been taken as a result of these investigations? 

Mr. BOLTON. Three of the five cases have been closed as ‘‘No ADA’’. The funding was either determined appropriate (e.g., within the $1.5 million limitation for life, 

health, and safety) or the proper funding was obtained.

35. Senator AKAKA. Mr. Fitzgerald, were you asked to take part in these investigations? If so, can you describe your role and any findings or observations you may 

have about the investigations? 

Mr. FITZGERALD. I wasn’t asked to take part, and USAAA didn’t participate in the 

referenced investigations.

RECOMPETITION

36. Senator AKAKA. Mr. Ernst, it appears that the contract has been used beyond 

its intended scope of two regional conflicts of up to 25,000 troops each. Does DOD 

have a policy that requires recompetition of a contract when the scope has been exceeded? If so, under what conditions does the Department require the contract to 

undergo a new competition? 

Mr. ERNST. Recompetition of the contract is not a function delegated to DCMA. 

This question would be more appropriately addressed to the Army Sustainment 

Command.

37. Senator AKAKA. Mr. Ernst, was that threshold exceeded in this case, and if 

so, why did the contract not undergo recompetition? 

Mr. ERNST. Recompetition of the contract is not a function delegated to DCMA. 

This question would be more appropriately addressed to the Army Sustainment 

Command

AWARD FEES

38. Senator AKAKA. General Johnson, the Army has awarded 88 percent of the 

available award fees to KBR, Inc. This level of award fees is particularly surprising 

considering that technical performance is only a basis for 30 percent of the fee. Contractor management is also 30 percent, and cost performance is 40 percent. 

How is it that the Army has awarded KBR, Inc. 88 percent of the available award 

fee despite numerous audit findings of overcharges totaling hundreds of millions of 

dollars, inadequate accounting and estimating systems, inadequate cost justifications, and KBR, Inc.’s reluctance to provide appropriate supporting documentation 

and information? Please provide a detailed and specific justification of how the contractor was evaluated at this level of award fee. 

General JOHNSON. The purpose of the award fee process is twofold: One is to 

evaluate the contractor’s performance and determine how much fee to award; the 

second is to provide feedback to the contractor on areas of strength the Government 

would like the contractor performance to continue, and to identify areas the Government would like to see improvement. 

The award fee board and award fee determining official take all of the contractor’s 

performance, both positive and negative, into consideration. The contractor’s perVerDate 0ct 09 2002 09:47 Dec 11, 2007 Jkt 000000 PO 00000 Frm 00133 Fmt 6633 Sfmt 6621 C:\DOCS\39495.TXT SARMSER2 PsN: JUNEB
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formance, above the minimum required by the contract, is assessed for earning 

award fee. Weaknesses noted during performance are balanced with the total effort 

performed by the contractor to arrive at the overall rating, and award fee amount 

in accordance with the award fee plan. Any areas for improvement are described 

in the award fee letter so the contractor recognizes where they must do better to 

earn a higher percentage of fee. 

The 88 percent of award fee paid is the total of award fee paid on over 150 individual task orders. It does not relate to any single task order. Contractors generally 

start off receiving a lower percent of their award fee and get better over time as 

they focus on the areas noted for improvement during the award fee boards. KBR 

has not earned award fee at the 88 percentage at every award fee board. The four 

award fee boards conducted earlier in the life of the contract (2005) resulted in 

award fees of 81 percent to approximately 83 percent. Specific areas noted for improvement during that timeframe were KBR business systems, relationship with 

DCAA, cost reporting, quality control, and subcontractor management. Strengths reported were outstanding technical performance considering the hostile and ever 

changing environment of operations, teaming relationship with Government personnel (KBR worked shoulder to shoulder with the soldiers), identification and resolution of problems, cost avoidance measures, emphasis on safety and reduction of 

accidents (resulting in decrease to DBA insurance rates), and inventory accountability. 

The award fee board noted that improvements were occurring during this timeframe in the cost reporting/recording system. Also DCMA and DCAA were working 

closely with KBR on their business systems. Since early in 2007, all KBR business 

systems have been determined acceptable by DCMA. 

Any contract overcharge is a concern to the U.S. Government. Due to some instances where DCAA has identified overcharges, KBR has not yet been authorized 

to direct bill even though their billing system has been approved. DCAA continues 

to be responsible for reviewing every cost voucher submitted by KBR to ensure that 

costs billed are allocable, allowable, and reasonable prior to payment. The contractor 

error rate on previous submissions was tracked so any trends could be analyzed. 

The error rate of 2–3 percent is very low and not indicative of major systemic problems. 

The inadequate cost justifications relate to DCAA audit of KBR initial proposals. 

The challenge in a contingency environment is that proposals are required to be prepared very quickly, and the contractor may not have enough information to fully develop the rationale to support costs. This is unlike the normal CONUS contracting 

process where a contractor would have 30 to 60 days to gather information to support their proposal. The purpose of the DCAA review is to note any questioned or 

unsupported portions of a proposal. The DCAA findings are brought to the contractor’s attention and, during negotiations are either supported with more information 

and accepted, or not accepted as part of the definitized price. The questioned costs 

noted in the DCAA review are tools used by the contracting officer during the negotiation process. As noted by DCAA, over $600 million has been ‘‘saved’’ during this 

process, proving that the process is working.

39. Senator AKAKA. General Johnson, does the Army not consider numerous cases 

of overcharges as characteristic not only of poor cost performance, but of poor contractor management? 

General JOHNSON. The Army is always concerned about overcharges. It also recognizes many factors come into play, including the environment where the support is 

provided, the urgency, and the magnitude of the requirement. Because of the operational tempo and rapid growth of the LOGCAP, KBR’s estimating system and 

available proposal preparation resources were stressed. This resulted in poorly prepared and supported proposals for the initial task orders support OIF and OEF. 

Overall proposals and estimating systems have improved with the assistance and 

oversight of the DCAA and the DCMA. It is not unusual for DCAA to question costs 

on initial proposals. When we require quick turn around proposals where frequent 

changes of requirements exist it is also not unusual to have even more costs questioned. In the end, the contractor must provide support for their proposed costs. 

Government negotiators address all the DCAA questioned and unsupported costs in 

coming to a final negotiated agreement.

LOGCAP EVALUATION

40. Senator AKAKA. General Johnson, during the hearing you stated that you believe that the KBR, Inc. contract is cost effective relative to a military infrastructure 

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that provides the same services. Has a detailed evaluation been performed based on 

the actual costs encountered with the LOGCAP contract? If so, please provide that 

evaluation. 

If not, please provide your basis for saying that it is cost effective. In addition, 

please provide a breakdown of the contract costs to date, including how much of the 

costs were overhead, labor, profit, and equipment/materiel. Please also provide in 

addition the Army’s costs to issue and oversee the contract, including costs of the 

associated audits. 

General JOHNSON. A Congressional Budget Office study dated October 2005, Logistics Support for Deployed Military Forces, was prepared for the Senate Armed 

Services Committee. It looked at the cost of contracted services on LOGCAP Task 

Order 59 and compared it to the CBO estimate for military units to provide the 

same services. Task Order 59 was the task order to provide LOGCAP support to 

Army units in most of Iraq. The CBO report states on page 89 of the report that 

‘‘In all of the alternative combinations, the total cost of using Army units, including 

the cost of units in the rotation base, was higher than the costs incurred under the 

LOGCAP contract.’’ And the last paragraph on the same page, ‘‘CBO concluded that 

the overall result of this analysis—that total costs for acquiring logistics support 

from the LOGCAP contractor would be lower than the cost of providing those services using Army units—would be unlikely to change if the split between recurring 

and non-recurring costs differed from the weighted average for the 10 sites.’’ 

QUESTIONS SUBMITTED BY SENATOR JIM WEBB

COST TO CONTRACT OUT FOOD SERVICES

41. Senator WEBB. Secretary Bolton, the purpose of these questions is to obtain 

a better understanding of the real cost to contract out food services and other 

logistical measures as part of the Army’s LOGCAP. During the hearing, you stated 

that the cost of a soldier’s meal served by KBR under its contract was $3.05. What 

is the total cost to provide such contracted messing (per soldier, per day) when all 

costs under the food-services element of the contract with KBR are considered (e.g., 

construction of mess hall, contracted cooks and other personnel, shipping of prepackaged food, et cetera)—in other words, what is the real cost to feed a soldier each 

day? 

Mr. BOLTON. LOGCAP services include providing the dining facility, and preparation and service of food. It does not include purchasing, shipping, or transporting 

the food; this is a function of the Defense Logistics Agency. 

In 2006, for CENTCOM AOR, the average cost for LOGCAP III to prepare and 

serve a meal was $3.36. This includes all costs associated with providing food services; i.e. labor, materials, procuring services, equipment, leasing dining facilities, 

property management, and travel to mobilize/demobilize personnel.

42. Senator WEBB. Secretary Bolton, what has been the total cost of laundry services, using similar accounting methods? 

Mr. BOLTON. The cost of laundry services under LOGCAP III, since inception to 

July 6, 2007, against 148 task orders, is $380,993,968. This includes all costs associated with providing laundry services; i.e. labor, materials, procuring services, equipment, property management, and travel to mobilize/demobilize personnel.

43. Senator WEBB. Secretary Bolton, how much funding was obligated last year 

for food services and laundry services in the CENTCOM area of responsibility under 

the provisions of this contract? How much is funded this year? 

Mr. BOLTON. The 2006 cost paid for laundry services was $77,323,652 and for food 

services was $595,392,194. 

The 2007 estimated cost (as of July 6, 2007) for laundry services is $75,614,455 

and for food services is $620,587,085. This includes actual costs to date and projections for the balance of 2007. 

This includes costs associated with providing laundry and food services; i.e. labor, 

materials, procuring services, equipment, leasing dining facilities, property management, and travel to mobilize/demobilize personnel. However, for food services, this 

does not include purchasing, shipping, or transporting the food; this is a function 

of the Defense Logistics Agency.

44. Senator WEBB. Secretary Bolton, how many military servicemembers and U.S. 

Government civilian employees were fed last year under this contract? What is the 

estimate this year? 

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Mr. BOLTON. During calendar year 2006, LOGCAP provided 177,751,199 meals. 

LOGCAP provides support to 93 dining facilities across Iraq, Afghanistan, and 

Djibouti feeding approximately 221,000 personnel which includes all military Services, coalition forces, and civilians. With the plus up of 20,000 military and required 

support personnel, the number of meals will also increase by approximately 10 percent during 2007. 

The U.S. military is responsible for counting the number of personnel that eat in 

the DFACs from which the contractor identifies the number of meals served.

45. Senator WEBB. Secretary Bolton, how does the cost identified in response to 

questions 39 and 40 compare to other historical examples for the Active component 

(e.g., Vietnam, U.S. European Command during the Cold War, et cetera); please 

normalize for ‘‘then-year’’ dollars? 

Mr. BOLTON. There is no way to accurately compare the cost of food and laundry 

services in Iraq to historical costs in Vietnam and during the Cold War. One complicating factor is the fact that the costs paid under LOGCAP do not represent the 

total cost for food or laundry services. For example, the cost of food services does 

not include the direct cost of the food, which is provided under a separate DLA contract, or facilities, which are paid for in a separate task order. When other indirect 

costs, such as transportation, are considered, the complexity of the cost comparison 

becomes daunting. This is particularly true when one attempts to compare the cost 

of contracted services, such as LOGCAP, to services which were provided by organic 

combat support units during Vietnam and the Cold War. 

A more accurate assessment of current and historical costs can be made by comparing specific elements of cost over time. Since labor is the largest cost driver in 

a service environment, a reasonable comparison can be made by estimating the incremental cost of replacing contracted support with combat support/combat service 

support units. An exhaustive study of this nature was published by the Congressional Budget Office in May 2005. In the report, titled ‘‘Options for Restructuring 

the Army,’’ the CBO concluded that increasing the force structure is clearly more 

expensive than using contracted support over time. 

QUESTIONS SUBMITTED BY SENATOR JOHN MCCAIN

CONTRACT MISMANAGEMENT

46. Senator MCCAIN. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, late last year, in 

a written report, the Office of the SIGIR complained that KBR, Inc. refused to provide it with information such as the amount of people fed each day in its dining 

facilities and the amount of fuel delivered to foreign embassies in Iraq, claiming 

that the data was proprietary. This is information that KBR, Inc. keeps in support 

of the LOGCAP contract. Reportedly, last year the Army Sustainment Command 

represented that it had implemented corrective actions on this issue. Has KBR, Inc. 

provided all the information your offices have requested to enable you to perform 

your work relating to the LOGCAP contract? If not, on what basis has KBR, Inc. 

refused to supply information and how has it impeded your oversight and management efforts? 

Mr. REED. DCAA has experienced mixed results. Cooperation has been inconsistent over time, resulting in inadequate proposals or claims, delays in responding 

to DCAA document requests, and qualified audit reports. Initially we gave the company the benefit of the doubt due to its admission of inexperienced personnel and 

weak business processes. While these were contributing factors, it is also evident 

that KBR Government compliance representatives, who are the day-to-day interface 

with DCAA auditors, have not always facilitated the audit process. We believe they 

attempt to control the flow of documents and information to DCAA as a means of 

managing the audit process and outcomes. DCAA has challenged this practice and 

generally obtained the requested information or a statement that the records are 

incomplete or missing. If the contractor does not provide the required information, 

DCAA will take exception to the related costs when processing contractor billings, 

and in audit reports on contractor proposals and incurred cost submissions. 

Mr. ERNST. To my knowledge, KBR has not refused to provide information to 

DCMA on this basis. Occasionally, KBR personnel at lower levels will mistakenly 

refuse to provide data, but once this is elevated to higher management levels, the 

refusal is revoked. I am aware that KBR does not always provide requested information, claiming difficulty in locating specific records. I do not consider this as a 

refusal and eventually most of the records are located, although the response is not 

timely and therefore it impedes the Government’s evaluation of incurred costs. 

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Mr. FITZGERALD. KBR, Inc. has provided USAAA with all the information and 

data we requested relative to the LOGCAP contract. We haven’t encountered problems in obtaining the information needed to perform our audits.

47. Senator MCCAIN. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, has KBR, Inc. labeled any information proprietary that, in your view, was not proprietary? If so, was 

this a widespread practice, or isolated occurrences? 

Mr. REED. DCAA does not normally review contractor information to ensure the 

proprietary markings are correct. As a matter of standard business practice, contractors make available proprietary information to DCAA to perform our contract 

audit function. In response, DCAA protects this information from any unauthorized 

disclosure. 

Mr. ERNST. Prior to the corrective action taken by ASC, the proprietary markings 

by KBR were too liberal and the use of the markings was widespread. Since the 

corrective action, I am unaware of any inappropriate markings. 

Mr. FITZGERALD. USAAA hasn’t encountered problems with KBR Inc. withholding 

information because it was ‘‘proprietary.’’

48. Senator MCCAIN. General Johnson, what corrective actions did the Army implement to prevent the practice of KBR, Inc. improperly labeling data as proprietary? 

General JOHNSON. A SIGIR interim report titled ‘‘Interim Audit Report on Inappropriate Use of Proprietary Data Markings by the LOGCAP Contract’’ SIGIR–06–

035 was issued on October 26, 2006. The report noted the SIGIR’s difficulty in obtaining information from KBR due to the inappropriate use of markings on data. 

As the interim audit report identified, KBR was in fact inappropriately marking 

data as proprietary. The problem was brought to the attention of the LOGCAP Director prior to issuance of the report and the Procuring Contracting Officer (PCO) 

took immediate action to correct the problem. On September 20, 2006, the PCO provided written direction to KBR instructing them to release data requested by SIGIR 

that was inappropriately marked as proprietary. The PCO then issued a contract 

modification on October 30, 2006, directing KBR to adhere to proper marking requirements of law, regulation, and the contract, and clarified the Contracting Officer’s right and intent to challenge improper markings. To preclude similar occurrences in the future, the PCO has also incorporated this language into LOGCAP IV 

solicitation. 

On 14 Dec 06, subsequent to the above actions, the PCO issued KBR a letter requesting their corporate policy and implementation plan for marking data with proprietary legends. This letter referenced the SIGIR interim audit 06–035, as well as 

the aforementioned modification to the basic contract. KBR responded on 7 Jun 07 

with a copy of their latest procedural documents and those are undergoing careful 

review. Any inconsistencies with the contract or DOD policy will be addressed by 

the PCO.

49. Senator MCCAIN. General Johnson, is KBR, Inc. following the Army’s policy? 

If not, what does the Army intend to do about this practice? 

General JOHNSON. On 14 Dec 06 the PCO issued KBR a letter requesting their 

corporate policy and implementation plan for marking data with proprietary legends. This letter referenced the SIGIR interim audit 06–035, as well as the modification which added new language addressing proprietary markings to the basic 

contract. KBR responded on 7 Jun 07 with a copy of their latest procedural documents and those are undergoing careful review. Any inconsistencies with the contract or DOD policy will be addressed by the PCO. There have been no instances 

of improper markings brought to the attention of the PCO since the SIGIR audit 

report.

50. Senator MCCAIN. Secretary Bolton, is this practice of contractors improperly 

labeling information proprietary a larger problem within the defense industry? 

Mr. BOLTON. No. This problem has been isolated.

51. Senator MCCAIN. Secretary Bolton, what is the DOD doing broadly to check 

such an unacceptable practice? 

Mr. BOLTON. This problem has been isolated and has been addressed with the 

contractor on a case-by-case basis.

52. Senator MCCAIN. Secretary Bolton and General Johnson, according to a February 16, 2007, News Release from U.S. Army Sustainment Command, the U.S. 

Army awarded a $225 million planning and support contract for the LOGCAP IV 

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contract. The Release further states that the Army will award the contracts for the 

actual performance of the combat support/combat service support services later this 

year. 

Under this planning and support contract, the contractor will, among things, develop scopes of work, prepare independent cost estimates, analyze the performance 

contractors’ costs, and measure the other contractors’ performance. 

It appears the contractor will be performing acquisition functions closely associated with inherently Government functions. I am concerned that this arrangement 

is or will become in the field of services acquisitions the equivalent of the lead systems integrator in major defense acquisition programs. Why did the Army decide 

to task a contractor with these activities? 

Mr. BOLTON and General JOHNSON. It is not the intent of the program to have 

the support contractor function as a lead integrator. All discretionary decisions on 

program management remain the responsibility of Government officials. The support contractor will only assist Government staff in generating the documents you 

mentioned. The Government will review all documents to ensure they reflect the 

Government’s need and determine if and how the documents will be used, not the 

contractor. The support contractor is working to assist and augment the Government staff. In that regard they are like support contractors on other large programs 

who assist the program office in various locations, but do not direct actions. It was 

decided that the program and the supported units would be better served by a single support contractor who understood all aspects of the program. The use of contractor support to a core Government staff will make it easier to flex the workforce 

as LOGCAP requirements fluctuate. 

The functions that the contractor will be performing have been determined to be 

non-governmental IAW FAR Sub-Part 7.5. 

The contract Scope of Work (paragraph 1.3) states ‘‘It is not the intent of this contract to have the contractor perform inherently governmental functions, or to have 

the contractor make discretionary decisions for the Government relating to the program or contracted support. The contractor will primarily provide advice, analysis, 

and draft document submissions for Government approval.’’ 

The contractor has also been directed that when attending meetings, answering 

Government telephones, and working in other situations where their contractor status is not obvious to third parties they will identify themselves as contractors to 

avoid creating an impression that contract personnel are Government employees, or 

official representatives of a Governmental organization.

53. Senator MCCAIN. Secretary Bolton and General Johnson, did the Army make 

a written determination that appropriate military and civilian DOD personnel cannot reasonably be made available to perform the functions? Please provide the relevant written determination(s). 

Mr. BOLTON and General JOHNSON. A specific written determination was not 

made, but the LOGCAP IV acquisition strategy clearly articulated the need to hire 

contractor support to assist and augment the LOGCAP Government staff. The Army 

does not have sufficient personnel available to perform the functions the LOGCAP 

support contractor will perform. For those inherently governmental positions, such 

as the LOGCAP Deputy Program Directors for Afghanistan, Iraq, and Kuwait, the 

Army has hired additional Government personnel. There is a requirement on services contracts to make a determination that the services being procured are nonpersonal. That determination, dated July 6, 2006 and signed by the Contracting Officer, 

is attached. The use of contractor personnel in lieu of military and civilian DOD personnel for non-inherently governmental functions allows us to meet mission requirements. 

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54. Senator MCCAIN. Secretary Bolton and General Johnson, how has the Army 

dealt with potential conflicts of interests? For example, if the planning and support 

contractor has a pre-existing business relationship with a performance contractor, 

how will that be dealt with? 

Mr. BOLTON and General JOHNSON. The ASC legal office anticipated these concerns and carefully drafted extensive conflict of interest provisions for the support 

contract. This clause prohibits any financial interest in the performance contractors 

which might cause or give the appearance of a conflict of interest. The entire clause 

is included in answer #55, but paragraph C of that clause is included here as it specifically addresses this question. The support contractor is required to flow this 

clause down to their subcontractors. 

Clause H–4, Business Integrity and Organizational Conflict of Interest: Paragraph 

C. The planning/support contractor (including its key personnel) cannot have any actual or pending financial interest in the LOGCAP IV performance contractors for 

the period of this contract which might cause, or give the appearance of, a conflict 

with the performance of the requirements under this contract. Clear mitigation of 


419ful9.eps
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any potential conflict must be presented to the satisfaction of the contracting officer. 

The planning/support contractor is specifically prohibited from performing under 

any of the LOGCAP IV contracts (resulting from solicitation W52P1J–06–R–0049) 

as a LOGCAP IV prime contractor, subsidiary, subcontractor-at any tier, vendor, 

supplier, joint venture and/or any in any other business capacity that might result 

in an OCI.

55. Senator MCCAIN. Secretary Bolton and General Johnson, is there an organizational conflict of interests clause, included directly or by reference, in the planning 

and support contract? If so, please provide a copy of the provision. 

Mr. BOLTON and General JOHNSON. Yes, there is a clause addressing this in the 

LOGCAP IV Support Contract W52P1J–07–D–0010. 

H–4 Business Integrity and Organizational Conflict of Interest 

A. It is anticipated that the planning services provided under this solicitation will 

require access to, and knowledge of, the proprietary information of the LOGCAP IV 

performance contractors, non-public Government information, pre-solicitation information, and information which would impair the planning/support contractors objectivity. It is further anticipated that the planning/support contractor will work closely with each of the LOGCAP IV performance contractors after contract award to implement the Government LOGCAP mission. While the planning/support contractor 

will not engage in any activity that is deemed inherently governmental, it is expected by the parties that the contractor will be acting in support of, and in a fiduciary relationship with, the Army. 

B. To maintain the integrity of the expenditure of public funds, it is imperative 

that the contractor maintain the highest degree of integrity and honesty, and have 

standards of conduct and internal control systems provide for:

(1) A written code of business ethics and conduct and an ethics training 

program for all employees; 

(2) Periodic reviews of company business practices, procedures, policies, 

and internal controls for compliance with standards of conduct and the special requirements of Government contracting; 

(3) A mechanism, such as a hotline, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports; 

(4) Internal and/or external audits, as appropriate; 

(5) Disciplinary action for improper conduct; 

(6) Timely reporting to appropriate Government officials of any suspected 

or possible violation of law in connection with Government contracts or any 

other irregularities in connection with such contracts; and 

(7) Full cooperation with any Government agencies responsible for either 

investigation or corrective actions.

C. The planning/support contractor (including its key personnel) cannot have any 

actual or pending financial interest in the LOGCAP IV performance contractors for 

the period of this contract which might cause, or give the appearance of, a conflict 

with the performance of the requirements under this contract. Clear mitigation of 

any potential conflict must be presented to the satisfaction of the contracting officer. 

The planning/support contractor is specifically prohibited from performing under 

any of the LOGCAP IV contracts (resulting from solicitation W52P1J–06–R–0049) 

as a LOGCAP IV prime contractor, subsidiary, subcontractor—at any tier, vendor, 

supplier, joint venture, and/or any in any other business capacity that might result 

in an OCI. 

D. The contractor shall enter into an agreement with the LOGCAP IV performance contractors to ensure proper access to, and protection of, the LOGCAP IV performance contractors proprietary data (see FAR 9.505–4(b)) and to establish working relationships, cooperation, and joint participation in meeting LOGCAP planning 

and CS/CSS support needs. The agreements shall address, at a minimum, the following:

(1) Identify the parties and their relationship; 

(2) Identify the program involved and the relevant Government contracts 

of the parties; 

(3) Describe contractor interfaces by general subject matter; 

(4) Specify categories of information to be exchanged or support to be provided; 

(5) Give expiration date (or event) of the agreement; 

(6) State that if there is a conflict between the relevant Government contract(s) and the agreement, the contract(s) govern(s); and 

137

(7) Have an agreement to protect proprietary data, including restrictions 

on employees.

A copy of this agreement shall be made available to the contracting officer. This 

agreement should be concluded as quickly as possible after the contract awards. 

Failure to have this agreement in place may limit the work that may be awarded 

under this contract until such agreement is signed. 

E. Release of non-public information obtained under this contract, or use of such 

non-public information for purposes unrelated to the performance of this contract, 

is prohibited. Contractor shall ensure the return of all non-public information obtained under this contract prior to contract closeout. 

F. The contractor shall maintain adequate and reasonable ethics policies and 

training procedures consistent with paragraph B above and DFARs Part 203.70 to 

prevent its employees from releasing non-public information or gaining any financial 

or employment interest that may create a conflict with their duties under this contract. 

G. All contract personnel attending meetings, answering Government telephones, 

and working in other situations where their contractor status is not obvious to third 

parties are required to identify themselves as such to avoid creating the potential 

for confusion. The contractor shall ensure that all employees wear badges (whether 

issued by the Government or a separate badge provided by the company) that clearly put others on notice that they are contractor employees. This shall be evident 

from a minimum distance of 10 feet (whether by color, large letters, or other means). 

The contractor must also ensure that all documents or reports produced by contractors are suitably marked as contractor products or that contractor participation is 

appropriately disclosed. 

H. The intent of this provision is to prevent the improper release or disclosure 

of information, or any actual or perceived personal or organizational conflict of interest that might arise in the performance of this contract. In addition to other requirements, contractor shall bring any potential conflicting relationships or financial interests, held by the support contractor, its key employees, or subcontractors to the 

attention of the contracting officer throughout the life of this contract. If the contracting officer determines that an unacceptable conflict exists, the contractor will 

take the actions necessary to mitigate or eliminate the conflict. 

I. This prohibition will remain in effect throughout the life of the planning contract through final payment. Further, the contractor shall include this prohibition 

in all negotiated subcontracts (to exclude routine supply and service subcontracts) 

that it enters into.

56. Senator MCCAIN. Secretary Bolton and General Johnson, was this contract 

subject to full and open competition? If so, how many companies competed for the 

contract? 

Mr. BOLTON and General JOHNSON. Yes, the LOGCAP IV support contract was 

the result of full and open competition. Two companies provided proposals.

57. Senator MCCAIN. Secretary Bolton and General Johnson, what is the contract 

type and formula for compensation? 

Mr. BOLTON and General JOHNSON. The LOGCAP IV support contract will have 

task orders that can use the contract type that best fits the requirement. The contract types used on the support contract are firm fixed price, cost plus fixed fee, cost 

plus award fee, and cost only. 

The formula for compensation is to pay the negotiated firm fixed price or, for costreimbursable contracts, pay reasonable, allocable, and allowable costs and fees. Fees 

paid are based on a percentage of the negotiated estimated costs on cost reimbursable task orders as follows:

Cost plus fixed fee order: fee will not exceed 8 percent of the negotiated 

estimated cost. 

Cost plus award fee order: total base and award fee combined will not 

exceed 8 percent of the negotiated estimated cost. The base fee will not exceed 2 percent.

These fees were proposed by the support contractor and accepted during the full 

and open competition for the LOGCAP IV support contract. 

These fee percents are contractor proprietary information and protected from release under FOIA and the Trade Secrets Act.

58. Senator MCCAIN. Secretary Bolton and General Johnson, why does the Army 

intend to limit the number of performance contractors under LOGCAP IV to three? 

Why not more? 

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Mr. BOLTON and General JOHNSON. The Army looked at the optimum number of 

contractors to provide LOGCAP performance support. The intent was to ensure good 

competition, but recognize that obtaining and evaluating multiple proposals extends 

the time to award urgent task orders. At the same time, the Army needs to maintain the programmatic portion of the LOGCAP. One of the features that makes 

LOGCAP more than just a contract is the planning and readiness posture that must 

be maintained by the LOGCAP office and performance contractors. This becomes 

more difficult and cost prohibitive as the number of performance contractors increases. 

To ensure competition, the LOGCAP IV performance contract requires each contractor to propose on every task order. The Army decided that receiving proposals 

from three very qualified LOGCAP contractors provides sufficient competition in 

this urgent award environment. More than three contractors would provide more 

competition, but the benefits would be marginal, if at all, and the drawbacks from 

delays in awarding task orders to provide support could be significant. Additionally, 

the Government must fund a minimum requirement for each IDIQ contract awarded. While this might not be a waste of resources during periods of high military activity, it would be an unnecessary cost during times of limited activity. Additional 

contractors also complicate issues associated with contractors on the battlefield, and 

increases administrative burden upon the Government to manage them.

59. Senator MCCAIN. Secretary Bolton and General Johnson, has the Army made 

any determination of the number of contractors available to perform the work? 

Mr. BOLTON and General JOHNSON. The Army held industry days to discuss 

LOGCAP IV performance contract requirements and potential acquisition strategy 

approaches. Representatives from 80 companies attended, made up of both large 

and small businesses. Some were planning to be a prime contractor while others 

were looking for specific subcontract opportunities with prime contractors. Due to 

the potential size of each LOGCAP IV performance contract (up to $5 billion per 

year), the Army anticipated some contractors would team up or have large subcontractor teams. The industry days showed at least four to six large contractors with 

the technical and financial capability of performing the work. For that reason, we 

expected good competition for LOGCAP IV.

60. Senator MCCAIN. Secretary Bolton and General Johnson, what will be the contract type and the compensation regimes under these contracts? 

Mr. BOLTON and General JOHNSON. Like the support contract, the LOGCAP IV 

performance contracts will include task orders that can use the contract type that 

best fits the requirement. The contract types available on the performance contract 

are firm fixed price, cost plus fixed fee, cost plus award fee, and cost only. 

The formula for compensation is to pay the negotiated firm fixed price or, for costreimbursable contracts, pay reasonable, allocable, and allowable costs and fees. Fees 

paid are based on a percentage of the negotiated estimated costs on cost reimbursable task orders as follows:

Cost plus fixed fee order: fee will not exceed 10 percent of the negotiated 

estimated cost. 

Cost plus award fee order: total base and award fee combined will not 

exceed 10 percent of the negotiated estimated cost. The base fee will not 

exceed 3 percent.

These are the maximum fee percentages allowed by the Request for Proposal. 

The actual fee percentages will be determined at the time of the award of each 

task order subject to the limitations described above.

61. Senator MCCAIN. Secretary Bolton, for over a year now, the Army and the Office of the Secretary of Defense Comptroller have been conducting investigations of 

potential ADA violations concerning the use of operations and maintenance funds 

for military construction and procurement activities through the LOGCAP in Iraq. 

These investigations result, in part, from a March 7, 2006, memorandum from the 

DOD Office of General Counsel to the Office of the Legal Counsel to the Chairman, 

Joint Chiefs of Staff. This committee was briefed last October that up to $600 million in operations and maintenance funds may have been carried out through 

LOGCAP for unauthorized and illegal investment items and leases. Please provide 

an update on the status of each investigation, to include completion date, the results 

of the investigation, and any personnel actions taken as a result of the investigation. 

Mr. BOLTON. Three of the five cases initiated thus far have been closed as ‘‘No 

ADA’’ and the Army expects to complete the two remaining ADA investigations by 

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30 December 2007. In the three cases that have been closed, the funding was either 

determined appropriate (e.g., within the $1.5 million limitation for life, health, and 

safety) or the proper funding was obtained.

62. Senator MCCAIN. Secretary Bolton, in the Army’s internal review and investigation, at what organization or level of contracting review did the failure to conform to Federal Acquisition Regulations occur? 

Mr. BOLTON. We have found no failure to conform to Federal Acquisition Regulations. Three of the five cases have been closed as ‘‘No ADA’’ and the Army expects 

to complete the two remaining ADA investigations by 30 December 2007. In the 

three cases that have been closed, the funding was either determined appropriate 

(e.g., within the $1.5 million limitation for life, health, and safety) or the proper 

funding was obtained.

63. Senator MCCAIN. Secretary Bolton, how has the Army changed its policies and 

review processes for LOGCAP task orders to ensure the proper authority is available for the use of various fund sources? 

Mr. BOLTON. 

Acquisition Review Boards (JARB, CARB, SUPERCARB) 

In Kuwait, Iraq and Afghanistan, the leadership maintains a strict approval process for all requirements, to include those executed under the LOGCAP contract. 

Every new requirement that exceeds $50,000 must be validated by an Acquisition 

Review Board (JARB and CARB) and approved by a general officer. This approval 

process also includes internal purchases or actions executed by KBR. Requirements 

that exceed $10 million must go through further scrutiny (SUPERCARB) and be approved by a centralized review board in Kuwait. No requirement is funded unless 

commands gain the recommendation of these boards and final approval at the general officer level. While not a funding process, these review boards review the proposed funds to ensure they are appropriate for the type of work to be awarded.

Joint Acquisition Review Board 

The JARB is a requirements validation process held in Iraq that reviews CS/CSS 

requirements for supported units. The board ensures the requirements are consistent with and necessary to support operations. 

Coalition Acquisition Review Board 

The CARB is fundamentally the same as the JARB but reviews requirements associated with acquisitions for Kuwait/Afghanistan. 

Super-Coalition Acquisition Review Board 

If a cost estimate associated with a requirement is over $10 million for Iraq, Kuwait, or Afghanistan, the packet must go to CFLCC for the ‘‘SUPERCARB’’ review 

and approval, basically a JARB process at a higher level of command.

Joint Facilities Utilization Board 

To control and manage construction, all commands have established a JFUB. 

These boards evaluate and reconcile requirements for real estate, use of existing facilities, and ensure all potential construction is in line with established master 

plans. Funding type and thresholds are also reviewed to ensure that no fiscal violations occur. 

Material Requisition Review Process 

Subsequent to the review of the Acquisition Review Board Approval, every requisition for supplies or services submitted by KBR over $25,000 is personally reviewed and approved by the Government Administrative Contracting Officer. In 

Iraq, those requisitions that exceed $250,000 are reviewed and approved by the 

Command Comptroller before KBR is authorized to execute the procurement. Funding type and thresholds are reviewed to ensure that no fiscal violations occur.

64. Senator MCCAIN. Mr. Fitzgerald, were you asked to take part in these investigations? If so, can you briefly describe your role and any findings or observations 

you may have about the investigations? 

Mr. FITZGERALD. I wasn’t asked to take part, and USAAA didn’t participate in the 

referenced investigations.

65. Senator MCCAIN. Mr. Reed, a number of your reports have criticized KBR, 

Inc.’s cost estimating, accounting, and other systems. With respect to 2005 and 

2006, has KBR, Inc. sufficiently improved its systems so that the inadequacies do 

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not materially impact its cost control efforts? If not, what problems still remain and 

if problems remain, what is KBR, Inc. doing to remedy the remaining problems? 

Mr. REED. Yes, our reviews have disclosed a number of estimating and accounting 

system deficiencies. While important, these deficiencies impact only a part of KBR’s 

overall business systems. KBR has developed corrective action plans to address the 

system deficiencies. DCAA, in coordination with the responsible contracting officer, 

is monitoring the progress of the contractor’s corrective action plan, and the systems 

continue to be improved. 

In the meantime, DCAA has established additional audit procedures to protect the 

Government’s interest until these corrective actions are institutionalized. For example, DCAA performs transaction testing on current billings (public vouchers) to ensure the costs are accounted for properly (i.e.; the costs are allowable, allocable, and 

reasonable) and comply with KBR’s policies and procedures.

66. Senator MCCAIN. General Johnson, what efforts have the Army and the contractor made to move from cost plus subcontracts to fixed-price subcontracts? 

General JOHNSON. KBR has been actively pursuing the use of fixed-price subcontracts. The Government encourages this where it makes sense and requirements 

can be defined and priced. Many of KBR’s subcontracts are fixed price with variable 

quantities. The fixed price is on a unit basis so as more, or less, of something is 

needed, the total price will change, but the unit price will not change. The DFAC 

pricing is an example of that. 

The fixed-price method saves on administrative cost oversight since costs have 

been negotiated up front. We do not encourage fixed price where costs cannot reasonably be forecast. The result in those cases is usually higher prices for higher 

risk, or aggressive pricing that could raise the contractor’s risk to deliver services 

or products if eventual costs are significantly underestimated. Additionally, competitively awarded fixed-priced subcontracts limit the Government’s visibility over subcontractor cost data. As such, it becomes more difficult to understand the exact 

make up of certain subcontracted prices when they are fixed-priced competitively 

awarded subcontracts. 

The downside is that there are many modifications to the KBR fixed-price subcontracts as the scope of work on the prime contract changes and exceeds the agreed 

upon quantity or service parameters on the subcontract. This fixed price with variable quantity works better at the subcontract level, with very specific, narrow requirements on a subcontract, where most elements of cost can be priced and only 

one variable applies, such as quantity. It does not work well in broadly defined requirements, where many of the individual elements making up the overall cost cannot be estimated.

67. Senator MCCAIN. General Johnson, when was the move initiated? 

General JOHNSON. In discussion with DCMA, KBR has been using fixed-price 

variable quantity subcontracts early and often on the contract. These use fixed unit 

costs, with the actual costs varying based on the quantity of services provided.

68. Senator MCCAIN. General Johnson, what percentage of KBR, Inc.’s subcontractors are now on fixed-price contracts? 

General JOHNSON. As of December 30, 2006, KBR had 472 active subcontracts. Of 

those, 467 or 98.94 percent, were fixed-price subcontracts. As noted in the response 

in question #66, many of these are fixed-price variable cost subcontracts. The fixed 

price is on a unit basis so as units are ordered, the total price will change, but the 

unit price will not change. This fixed price with variable quantity works better at 

the subcontract level, with very specific, narrow requirements on a subcontract, 

where most elements of cost can be priced and only one variable, such as quantity, 

applies.

69. Senator MCCAIN. General Johnson, how much in cost savings have been realized so far by moving to fixed-price contracts? 

General JOHNSON. At this time we have not calculated cost savings by moving to 

fixed-price contracts. Developing these cost savings will require extensive research 

of all of KBR’s fixed-price subcontracts. However, even when those are identified, 

we believe many factors contribute to reduced costs, not just converting to a fixedprice instrument. The reasons for using a cost reimbursable vehicle is that requirements cannot be stabilized, which is usually the case in early contingency operations. There are initial inefficiencies and urgent actions to establish supply chains 

into a theater that will drive up costs. Once requirements become more stable, costs 

can be better estimated and a fixed-price instrument becomes more viable. There 

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should be a difference in costs because the conditions have changed from those uncertainties requiring a cost reimbursable instrument.

[Whereupon, at 1:06 p.m., the committee adjourned.]

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