<PAGE>

                                                                 EXHIBIT 10.40.1
Westinghouse
Government Services Group
Morrison Knudsen Corporation
1500 West 3/rd/ Street
Cleveland, OHIO 44113-1406
Phone: (216) 523-3777

Thomas H. Zarges
Chairman


August 18, 1999

                         CONFIDENTIAL AND PROPRIETARY


Mr. Ambrose L. Schwallie
Westinghouse Savannah River Company
Building 703-A
Aiken, SC 29808

     Re: Employment Letter Agreement

Dear Ambrose:

     This letter agreement (the "Employment Agreement," or the "Agreement")
documents the terms of your employment.  The Employment Agreement is made
between you and Westinghouse Government Services Company LLC and is effective as
of August 1, 1999.  The Agreement covers the general terms of your employment as
well as special retention incentives related to the sale of the Westinghouse
businesses.

     For purposes of this Employment Agreement, the following terms have
specific meanings.  "Westinghouse" refers to the CBS Corporation operating unit
that contained the government and environmental services business (GESCO),
including the Westinghouse Savannah River Company, as it existed before the
Closing Date.  This operating unit, which is now primarily contained in
Westinghouse Government Services Company LLC, is referred to in this letter as
"WGS," and the Westinghouse Savannah River Company LLC is referred to as "WSRC."
"MK" refers to Morrison Knudsen Corporation and its affiliates.  "Related
Entity" refers to WGS, WSRC, MK, any at least 50%-owned subsidiaries of WGS or
MK and to Westinghouse Government Environmental Services Company LLC and
Westinghouse Electric Company LLC and any at least 50%-owned subsidiaries of
those entities.  "WGSG" refers collectively to WGS, Westinghouse Government
Environmental Services Company LLC and any at least 50%-owned subsidiaries of
those entities.  "Common Stock" refers to the common stock of MK, par value of
$.01 per share.  "Closing Date" means March 22, 1999, the date of the closing
formalizing the transfer of the Westinghouse assets from CBS Corporation to WGS.
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 2

     1.  Position and Duties.  From August 1, 1999, through August 31, 1999, you
will be employed as the President of WSRC.  During that period, you will be the
senior executive of the Department of Energy Savannah River site and will be
accountable to the President of WGS.

     After August 31, 1999, you will be employed as an Executive Vice President
of MK and as Chief Executive Officer and President of WGSG.  In that capacity,
you will be accountable to the Chairman of the Board of WGS.

     During the term of this Agreement, you agree to devote your full attention
and time during normal business hours to the business and affairs of WSRC and/or
WGSG, as the case may be, and to use your reasonable best efforts to perform
faithfully and efficiently such responsibilities.

     2.  Term.  This Employment Agreement will have a term commencing August 1,
1999 and expiring March 31, 2000, except as otherwise mutually agreed by you and
WGS.

     3.  Compensation and Incentive Arrangements.

     a.  Base Salary.  Effective August 1, 1999, you will be entitled to a Base
Salary at the rate of $325,000 per year, payable monthly. (Although the increase
in Base Salary rate will be effective as of August 1, 1999, actual payment of
the increased rate will commence after August 31, 1999.)  Your Base Salary will
be subject to periodic review and adjustment by WGS.

     b.  Retention Bonus.  You will receive a retention bonus in the amount of
$191,500 upon the first anniversary of the Closing Date, conditioned upon your
continued employment through such anniversary and upon the satisfactory
performance of your job duties as determined by the Chairman of the WGS Board.

     c.  Annual Incentive.  You will receive Annual Incentive compensation
pursuant to a plan established by WGS.  Your initial award will be based on the
percentage of the annual Business Plan target that WGSG meets for the fiscal
year ending November 30, 1999.  Your award will be determined based on the
following chart (employing straight-line interpolation for the percentages not
shown on the chart):


        Percentage of Target Achieved             Award Amount
        -----------------------------             ------------

                      80%                           $ 48,750

                     100%                           $162,500 (target award)

                     130%                           $284,375
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 3

     WGS may adjust the target award amount from time to time at its discretion,
including for the purpose of taking into account events beyond your control.
All awards are subject to final WGS Board approval.

     d.  Stock Options.  In connection with your election as an Executive Vice
President of MK, you will be granted options to purchase 50,000 shares of Common
Stock of MK at a price equal to the per share closing price of MK's Common Stock
as of the date of grant.  The option will be granted under, and be subject to,
the terms and conditions of the Morrison Knudsen Corporation Amended Restated
Stock Option Plan and will vest 25% each year for four years.  The option will
be granted in lieu of your participation in the Long-Term Incentive Compensation
Plan established by WGS.

     4. Other Benefits and Perquisites.

     a.  Other Benefits.  From August 1, 1999, through August 31, 1999, you will
be eligible for the benefit arrangements offered to WSRC executives generally,
including the pension plan, executive pension plan, 401(k) plan, annual
vacation, relocation allowance, and medical and dental, group life, accidental
death and dismemberment, business travel, and disability income coverages.
After August 31, 1999, you will be eligible for the benefit arrangements offered
to WGSG executives generally, including the pension plan, executive pension
plan, 401(k) plan, annual vacation, relocation allowance, and medical/and
dental, group life, accidental death and dismemberment, business travel, and
disability income coverages.

     b.  Perquisites.  You will receive an annual lump sum perquisite allowance
of $8,000.  This lump sum allowance is in lieu of all specific reimbursements,
except that we will provide you with certain AYCO Company financial planning
services, including estate planning, insurance planning, cash flow analysis,
income tax position planning, retirement planning, and capital planning.

     c.  Relocation Allowance.  If you are required to relocate during the term
of this Agreement to a job location more than 50 miles from your current job
location, you will receive a relocation allowance of $50,000 in addition to any
relocation allowance under the regular relocation program.  In return for
receiving this special relocation allowance, you agree to waive any severance
benefits to which you might otherwise become entitled by virtue of the
relocation.

     5. Termination.  Your employment is "at will" and may be terminated by
either you or WGS at any time and for any reason.  Upon your termination, you
will be entitled to the benefits described below.
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 4

     a.  Benefits Upon Involuntary Separation.  You will receive certain
benefits upon your Involuntary Separation from employment prior to the first
anniversary of the Closing Date.  An Involuntary Separation occurs if your
employment is terminated by WSRC or WGS without Cause.

     "Cause" means any of the following: (1) misappropriating or embezzling
assets or committing an act of fraud or other dishonesty; (2) being convicted in
a court of law of, or entering a plea of nolo contendere to, (a) a felony or (b)
a crime involving moral turpitude; (3) engaging in any conduct that has caused
or may cause demonstrable and material injury or public embarrassment to WGS or
to its reputation, as determined by the WGS Board of Directors in its sole
discretion; (4) a significant or material failure to carry out your duties other
than by reason of incapacity; (5) intentionally violating in a material manner
any of the policies and/or procedures of WGS; (6) having and continuing to
maintain a conflict of interest with WGS which is not disclosed to WGS and
waived by the WGS Board of Directors; or (7) breaching your obligations under or
in connection with this Employment Agreement.

     If an Involuntary Separation occurs prior to the first anniversary of the
Closing Date, you will continue to receive your Base Salary for 12 months;
receive the target Annual Incentive award for the year of separation; receive
the retention bonus described in paragraph 3b but the retention bonus will be
prorated to reflect the portion of the one-year period after the Closing Date
that you were employed by WSRC and/or WGSG ; receive outplacement services
during the 12 months following such an Involuntary Separation; and be entitled
to purchase continued medical coverage for 12 months at your employee
contribution rate at the time of your Involuntary Separation.  Notwithstanding
the foregoing, any of the amounts or other benefits described in the preceding
sentence will be offset by any separation payments and other benefits received
from CBS Corporation as a result of such Involuntary Separation, and your rights
to such amounts or other benefits described in the preceding sentence arise only
to the extent that you have first exhausted the payments and other benefits
provided by CBS Corporation.

     Other than the payments and benefits described in this paragraph, no
additional severance or similar payments will be made to you.  Notwithstanding
the previous paragraphs, no payments or benefits will be provided upon an
Involuntary Separation unless you sign a waiver and release with respect to all
claims that you might make against WGS or any Related Entity.

     b.  Benefits Upon Other Termination of Employment.  If you terminate
employment but paragraph 5a above does not apply, (e.g., you have an Involuntary
Separation after the first anniversary of the Closing Date, you voluntarily
terminate employment, or you are terminated for Cause), you will be entitled to
any earned but unpaid Base Salary.
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 5

     c.  Benefits upon Death or Disability.  If your employment terminates
because of your permanent disability or death, you or your estate or designated
beneficiary will be entitled to any earned but unpaid Base Salary.

     6.  Restrictive Covenants.  You agree to comply with the following
restrictive covenants during the term of this Agreement and thereafter for the
terms described below.  All payments and contributions for benefits provided for
in this Employment Agreement are made in consideration of, and are subject to,
among other things, your compliance with the following provision.

     a.  Noncompetition.  During the term of this Agreement and for a period of
18 months after your voluntary termination of employment, you must not (1)
acquire an ownership interest exceeding five percent in or (2) become employed
by, enter into a consulting arrangement with, or otherwise agree to perform
personal services for any business organization which is engaged in or intends
to become engaged in any business activity with respect to which you were
engaged in the course of your employment with Westinghouse, WSRC and WGSG
(including activities of any Related Entity).

     b.  Nonsolicitation.  During the term of this Agreement and for a period of
18 months after your voluntary termination of employment, you must not solicit
or endeavor to entice away from  WGS  or any Related Entity (1) any person who
is employed by WSRC or any Related Entity; (2) any customer or client of  WGS or
any Related Entity, unless (a) the person is no longer a customer or client of
WGS  or such Related Entity at the time of the solicitation, or (b) the business
activity for which you are soliciting the business of a customer or client does
not compete to any extent with the business activity of  WGS or any Related
Entity or in any manner interfere with the business activity of  WGS or any
Related Entity or in any manner interfere with the business relationship between
the customer or client and  WGS or such Related Entity.

     c.  Assistance in Litigation.  You will, upon reasonable notice and at our
expense, furnish such information and proper assistance to  WGS or any Related
Entity as we reasonably may require in connection with any litigation in which
we or any of our affiliates are, or may become, a party (other than litigation
in which you and we (or our affiliates) are opposing parties).  Notwithstanding
any other provision of this Employment Agreement, the obligation described in
this paragraph 6c continues at all times during and after the term of this
Agreement.

     d.  Confidentiality.  You must not knowingly disclose or reveal to any
unauthorized person, or make personal use of, any confidential information or
other trade secret relating to  WGS or any Related Entity.  Such confidential
information includes, but is not limited to, financial information about  WGS or
any Related Entity, contract terms with vendors, suppliers, and other parties,
customer and supplier lists and data, trade secrets, books, records, plans,
designs, systems, methods, programs, procedures, and other competitively-
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 6

sensitive information and any notes or analyses related thereto, including
without limitation information and documentation prepared or developed by you.
Upon your termination of employment, you agree to return any such confidential
information in your possession.  However, you are not prohibited from disclosing
any information that is reasonably necessary in the performance of your duties
for WSRC or WGSG nor shall you be prohibited from disclosing information that
is requested by an order of a court or administrative agency if, in the opinion
of counsel, you are required to do so.  Notwithstanding any other provision of
this Employment Agreement, the obligation described in this paragraph 6d
continues at all times during and after the term of this Agreement.

     7.  Miscellaneous.

     a.  Agreement Interpretation and Amendment.  This Agreement is governed by
and construed in accordance with the laws of the State of Delaware without
reference to any jurisdiction's choice of law principles.  This Agreement
constitutes the entire agreement between the parties and supersedes all prior
proposals and agreements, written or oral, and all other communications between
the parties related to the express subject matter of this Agreement.  The
headings in this Agreement are for convenience only and are not part of the
provisions of the Agreement and have no force or effect.  The invalidity or
unenforceability of any provision or portion of any provision of this Agreement
shall not affect the validity or enforceability of the remaining part of such
provision or of any other provision of this Agreement.  This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties to this Agreement or their respective successors and legal
representatives.

     b.  Notice.  All notices and other communications required under this
Agreement must be made in writing and given by hand delivery to the other party
or sent by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:

     If to you:
     ---------
     Ambrose L. Schwallie
     Building 703-A
     Aiken, SC 29808

     If to WGS:
     ---------
     Craig G. Taylor
     Morrison Knudsen Corporation
     P.O. Box 73
     720 Park Blvd.
     Boise, ID 83729
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 7

     With copy to:
     ------------
     Alvia L. Henderson
     Morrison Knudsen Corporation
     P.O. Box 73
     720 Park Blvd.
     Boise, ID 83729

or to such other person or address as may be designated by either party in
writing in accordance with the provisions of this paragraph.  Notice will be
effective when actually received by the addressee.

     c.  Waiver.  The failure of WGS to insist upon strict compliance with any
of the provisions of this Agreement shall not be deemed to be a waiver of such
provision, nor shall WGS's waiver of a right under this Agreement at any
particular time be deemed to be a waiver of such right at any other time.

     d.  Assignment; Successors.  This Agreement shall be binding upon and inure
to the benefit of  you, WGS, and their respective heirs, executors,
administrators, and any permitted assigns.  This Agreement may not be assigned
in whole or in part by either party without the consent of the other, except
that WGS may assign this Agreement, without your consent, to any corporation,
general partnership, limited partnership, limited liability company, or limited
liability partnership, into which or with which it shall merge or consolidate or
to which it shall transfer substantially all of its assets.

                                     *****

     If the Agreement is acceptable to you, please sign the original copy of the
Agreement and return it to Craig G. Taylor at Morrison Knudsen Corporation, P.O.
Box 73, 720 Park Blvd., Boise, ID 83729.  You should keep a copy of this
Agreement for your records.  By signing and returning the unmodified original
copy of the Agreement, you acknowledge that you understand and accept the terms
and conditions set forth above.

Regards,

Westinghouse Government Services Company LLC

By:        /s/ Tom Zarges
       -----------------------------
       Thomas H. Zarges
       Chairman

Date:  August 19, 1999
<PAGE>

Mr. Ambrose Schwallie
August 20, 1999
Page 8

ACCEPTANCE

     I acknowledge that I have read, understand, and agree to the terms and
conditions stated in this Agreement.  By my signature, I acknowledge that the
consideration set forth in the Agreement is adequate compensation for all of the
obligations set forth in the Agreement, that I have had the opportunity to
consult with counsel of my own choosing regarding the Agreement, and that in
signing the Agreement, I intend to be legally bound by it.

/s/ A. L. Schwallie                      August 30, 1999

_______________________________          ___________________________
Ambrose L. Schwallie                     Date
<PAGE>

                                                                 Exhibit 10.40.2

                       AMENDMENT TO EMPLOYMENT AGREEMENT


     This Amendment to Employment Agreement (the "Amendment) is made as of this
5/th/ day of October, 1999 by and between Morrison Knudsen Corporation, a
Delaware corporation (the "Company") and Ambrose L. Schwallie, an executive
employee of the Company ("Executive").

     WHEREAS, the Company and Executive are parties to a certain Employment
Agreement made as of August 1, 1999 (the "Agreement"); and

     WHEREAS, under the Agreement, if Executive is required to relocate to a job
location more than 50 miles from his current job location prior to March 31,
2000, Executive is entitled to receive a Relocation Allowance of $50,000 in
addition to any relocation allowance under the Company's regular relocation
program; and

     WHEREAS, the Company has agreed that the Agreement  should be amended to
extend the term of the Relocation Allowance portion of the Agreement to March
31, 2001;

     NOW, THEREFORE, the Agreement is hereby amended by deleting paragraph c of
Section 4 in its entirety and replacing it with the following:

          c.   Relocation Allowance.  If you are required to relocate on or
     before March 31, 2001 to a job location more than 50 miles from your
     current job location, you will receive a relocation allowance of $50,000 in
     addition to any relocation allowance under the regular relocation program.
     In return for receiving this special relocation allowance, you agree to
     waive any severance benefits to which you might otherwise become entitled
     by virtue of the relocation.

     Except for the foregoing, the Agreement remains unamended and in full force
and effect.


     IN WITNESS WHEREOF, the Executive and the Company have executed this
Amendment this 5th day of October, 1999.

                              MORRISON KNUDSEN CORPORATION

                              By:  /s/ S. G. Hanks
                                 ---------------------------------
                                 Stephen G. Hanks
                                 Executive Vice President



                              EXECUTIVE

                              /s/  Ambrose L. Schwallie
                              ------------------------------------
                              Ambrose L. Schwallie
                                                     10/24/99