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CONTRACTING TO FEED U.S. TROOPS IN AFGHANISTAN: HOW DID THE DEFENSE DEPARTMENT 

END UP IN A MULTI–BILLION DOLLAR BILLING 

DISPUTE? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY 

OF THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

APRIL 17, 2013 

Serial No. 113–38 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

JOHN L. MICA, Florida 

MICHAEL R. TURNER, Ohio 

JOHN J. DUNCAN, JR., Tennessee 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

PAUL A. GOSAR, Arizona 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

TREY GOWDY, South Carolina 

BLAKE FARENTHOLD, Texas 

DOC HASTINGS, Washington 

CYNTHIA M. LUMMIS, Wyoming 

ROB WOODALL, Georgia 

THOMAS MASSIE, Kentucky 

DOUG COLLINS, Georgia 

MARK MEADOWS, North Carolina 

KERRY L. BENTIVOLIO, Michigan 

RON DESANTIS, Florida 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

JACKIE SPEIER, California 

MATTHEW A. CARTWRIGHT, Pennsylvania 

MARK POCAN, Wisconsin 

TAMMY DUCKWORTH, Illinois 

ROBIN L. KELLY, Illinois 

DANNY K. DAVIS, Illinois 

TONY CARDENAS, California 

STEVEN A. HORSFORD, Nevada 

MICHELLE LUJAN GRISHAM, New Mexico 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

STEPHEN CASTOR, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

SUBCOMMITTEE ON NATIONAL SEURITY, HOMELAND DEFENSE AND FOREIGN

OPERATIONS, 

JASON CHAFFETZ, Utah, Chairman 

JOHN L. MICA, Florida 

JOHN J. DUNCAN, JR., Tennessee 

JUSTIN AMASH, Michigan 

PAUL A. GOSAR, Arizona 

TREY GOWDY, South Carolina 

CYNTHIA M. LUMMIS, Wyoming 

ROB WOODALL, Georgia 

KERRY L. BENTIVOLIO, Michigan 

JOHN F. TIERNEY, Massachusetts Ranking 

Minority Member 

CAROLYN B. MALONEY, New York 

STEPHEN F. LYNCH, Massachusetts 

JACKIE SPEIER, California 

PETER WELCH, Vermont 

MICHELLE LUJAN GRISHAM, New Mexico 

(III) 

C O N T E N T S 

Page 

Hearing held on April 17, 2013 .............................................................................. 1 

WITNESSES 

Mr. Michael Schuster, Managing Director, Logistics Division, Supreme Group 

B.V. 

Oral Statement ................................................................................................. 7 

Written Statement ............................................................................................ 9 

Mr. Daniel Blair, Deputy Inspector General for Auditing, U.S. Department 

of Defense 

Oral Statement ................................................................................................. 31 

Written Statement ............................................................................................ 32 

Mr. Matthew Beebe, Deputy Senior Acquisition Executive, Defense Logistics 

Agency 

Oral Statement ................................................................................................. 45 

Written Statement ............................................................................................ 47 

Mr. William Kenny, Acquisition Executive, Troop Support, Defense Logistics 

Agency 

Oral Statement ................................................................................................. 56 

Mr. Gary Shifton, Chief, Oconus Division, Defense Logistics Agency 

Oral Statement ................................................................................................. 57 

APPENDIX 

The Hon. Jason Chaffetz, a Member of Congress from the State of Utah, 

Opening Statement .............................................................................................. 70 

Independent Audit on Parts of Price Adjustment Proposal submitted by Supreme Food Service GMBH Related to Premium Outbound Transportation 

Effort to Forward Operating Bases in Afghanistan .......................................... 72 

Response to Questions sent from Chairman Jason Chaffetz and Ranking 

Member Tierney to Kirkland & Ellis LLP ......................................................... 77 

(1) 

CONTRACTING TO FEED U.S. TROOPS IN AFGHANISTAN: HOW DID THE DEFENSE DEPARTMENT END UP IN A MULTI–BILLION 

DOLLAR BILLING DISPUTE? 

Wednesday, April 17, 2013, 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON NATIONAL SECURITY, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:23 p.m. in room 

2154, Rayburn House Office Building, the Honorable Jason 

Chaffetz [chairman of the subcommittee], presiding. 

Present: Representatives Chaffetz, Mica, Duncan, Amash, Issa, 

Tierney, Speier, Duckworth, and Welch. 

Staff Present: Alexia Ardolina, Majority Assistant Clerk; Molly 

Boyl, Majority Parliamentarian; Lawrence J. Brady, Majority Staff 

Director; Linda Good, Majority Chief Clerk; Mitchell S. Kominsky, 

Majority Counsel; Jim Lewis, Majority Senior Policy Advisor; Mark 

D. Marin, Majority Director of Oversight; Laura L. Rush, Majority 

Deputy Chief Clerk; Scott Schmidt, Majority Deputy Director of 

Digital Strategy; Rebecca Watkins, Majority Deputy Director of 

Communications; Sang H. Yi, Majority Professional Staff Member; 

Jaron Bourke, Minority Director of Administration; Beverly Fraser 

Britton, Minority Counsel; Devon Hill, Minority Staff Assistant; 

Peter Kenny, Minority Counsel; Rory Sheehan, Minority New 

Media Press Secretary; and Carlos Uriarte, Minority Counsel. 

Mr. CHAFFETZ. The committee will come to order. 

I would like to begin this hearing by stating the Oversight Committee Mission Statement. 

We exist to secure two fundamental principles. First, Americans 

have the right to know that the money Washington takes from 

them is well spent. Second, Americans deserve an efficient, effective government that works for them. 

Our duty on the Oversight and Government Reform Committee 

is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right 

to know what they are getting from the government. 

We will work tirelessly in partnership with citizen watchdogs to 

deliver the facts to the American people and bring genuine reform 

to the Federal bureaucracy. This is the mission of the Oversight 

and Government Reform Committee. 

2 

Welcome to today’s hearing which is entitled Contracting to Feed 

U.S. Troops in Afghanistan: How Did the Defense Department end 

up in a Multi-Billion Dollar Billing Dispute? 

I would like to welcome Ranking Member Cummings; Chairman 

Issa, who I know will be joining us; certainly Ranking Member 

Tierney, members of the subcommittee and the people joining us 

here in the audience. 

Today’s hearing continues the subcommittee’s effort to oversee 

the billions spent in support of military and civilian operations in 

Afghanistan. In 2011, the subcommittee conducted a bipartisan investigation led by Congressman Tierney, and now Senator Flake, 

of the Defense Department’s Host Nation Trucking contract. 

The purpose of the contract was to supply our military through 

the use of private contractors. However, almost since its inception, 

allegations surfaced that the warlords of the Taliban would seek 

protection payments for safe passage through tribal areas. According to those familiar with the contract, the result was a potential 

windfall for our enemy. 

The problems with the host nation trucking contract highlighted 

the importance of adequate contracting oversight. Proper contract 

administration is one of the main defenses against the waste, fraud 

and abuse that can potentially happen overseas, particularly as we 

deal with billions of dollars. 

In the case of the Defense Logistics Agency, DLA, prime vendor 

contract with Supreme Foodservice, billions of dollars are at stake, 

as well as the very important mission of feeding our troops in Afghanistan. Currently, the DLA believes it has overpaid Supreme by 

roughly $757 million. Meanwhile, Supreme has submitted a claim 

against DLA for over $1.8 billion. 

From the outset, the contract was modified through verbal 

change orders significantly altering performance requirements. The 

most troubling findings of the Defense Inspector General report included the excessive delays in definitizing these change orders. The 

IG noted that the government’s contracting officer did not definitize 

or issue contract modifications in a timely manner, as required by 

federal acquisition regulations. 

The IG also concluded that the government overpaid Supreme by 

almost $100 million in transportation costs and over $26 million for 

packaging materials for chilled or frozen food products. 

These uncertainties in the contract were compounded by the incomplete pricing audits conducted by the Defense Contract Audit 

Agency. The DCAA conducted two separate audits of pricing considerations negotiated between DLA and Supreme. According to the 

DCAA’s 2011 audit, Supreme failed to provide adequate support 

documentation to demonstrate the reasonableness of proposed 

costs. 

The concerns with this prime vendor contract are ongoing and 

have been for some time. Despite all these concerns, the government continued to contract with Supreme and even exercised options to extend the contract. We have well established contracting 

procedures. If we are not going to use them, why have them? 

This is a congressional hearing. It is not a court of law but we 

do seek to get to the bottom of these issues and to understand how 

the Federal Government continued to have such massive chalVerDate Aug 31 2005 11:01 Jul 16, 2013 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\81829.TXT APRIL
3 

lenges in its contracting. It is a vital and necessary part of what 

we are doing overseas, but it certainly demands more attention. 

Mr. CHAFFETZ. I would now like to recognize the distinguished 

Ranking Member, the gentleman from Massachusetts, Mr. Tierney, 

who has worked tirelessly on this issue and is passionate about it, 

for his opening statement. 

Mr. TIERNEY. Thank you, Mr. Chairman. 

Mr. Schuster, thank you for joining us here today. 

This hearing as the Chairman said focuses on one of the largest 

military contracts in Afghanistan and how it is that the Defense 

Department and the contractor, Supreme Foodservice, wound up in 

a multibillion dispute. We will hear about how the Defense Logistics Agency continued to pay Supreme billions of dollars in spite of 

very strong concerns at the Agency that taxpayers were being overbilled. 

It took DLA six years to demand that Supreme reimburse the government for more than $750 million in what it believed were 

overpayments. That is an astounding amount of money. I want to 

put that in perspective. Overpayments alleged to Supreme are sufficient to pay for nearly 100,000 children to have access to a Head 

Start program. 

This should dispel the notion that the Department of Defense 

budget is not riddled with ineffectiveness, waste, fraud and abuse. 

It is a budget which we all ought to take into consideration when 

we are dealing with our own national budget issues. 

The hearing today follows a series of committee inquiries, identified in part by the Chairman, into some of the largest contingency 

contracts. In 2008, then Chairman Henry Waxman and the full 

committee examined allegations of corruption in the DLA fuel contracts in Iraq. In 2010, I led a six month investigation with then 

Ranking Member, Jeff Flake, of the Host Nation Trucking Contract 

in Afghanistan 

In that investigation, we released a report entitled, Warlord Inc., 

that found a vast protection racket in which warlords, criminals 

and insurgents extorted contractors for safe passage. 

Also, in 2010 I led a bipartisan investigation of DLA fuel contracts in Kurdistan, a major transit hub for Afghanistan. We issued 

a report entitled, Mystery at Madis, which outlined serious concerns with potential corruption and lack of oversight. Again, billions of dollars were involved in that case. 

That brings us to today’s hearing on the food contract in Afghanistan. The subcommittee began looking into the Subsistence Prime 

Vendor Contract in Afghanistan shortly after the Defense Department Inspector General issued a report in 2011 that found serious 

problems with the contract. At our subcommittee hearing in December 2011, then Defense Department Inspector General Gordon 

Heddel described this contract as ‘‘an example of just how bad it 

can get.’’ 

We also have a Commission on Wartime Contracting in Iraq and 

Afghanistan that then Congressman Jim Leach and I put into legislation. It studied the problems of the war zone spending and basically tried to look out for this food service contract in particular, 

singled it out as a prominent example of government mismanagement. Charles Tiefer, who is a member of that Commission, said 

4 

‘‘Supreme has had years and years of non-competed monopoly status that the Defense Logistics Agency kept saying it would avoid.’’ 

As discussed further on in these remarks, and during the hearing, I hope, the Defense Logistics Agency even gave Supreme a 

bridge contract that Mr. Tiefer said was ‘‘like an employer keeping 

some wasteful employee on the payroll longer than necessary in 

order to garnish wages.’’ 

Since formally launching our investigation, the subcommittee has 

reviewed thousands of documents, held numerous briefings with 

representatives from Supreme and senior officials from the Defense 

Logistics Agency trying to understand what went wrong and why. 

This has been a bipartisan effort from the very beginning and I 

truly appreciate the support of Chairman Chaffetz and his staff for 

the investigation. 

Between December 2005 and September 2011, the Defense Logistics Agency paid Supreme Food Service $5.5 billion to deliver food 

to our troops in Afghanistan. Remarkably during the entire time, 

the Defense Logistics Agency and Supreme never agreed on a final 

pricing for over $1.4 billion paid to deliver food to hundreds of forward operating bases throughout the country. 

While Supreme was originally contracted to deliver food to just 

four locations in Afghanistan, that number ballooned to 68 locations even before Supreme started to perform on the contract. The 

number of locations eventually reached a high of 265 by early 2012. 

This change was more than a simple increase in the number of delivery destinations and amounted to a massive change in requirements because it dramatically increased the difficulty of reaching 

deliver sites and required the use of more expensive transportation 

such as helicopters and fixed wing aircraft. 

Unfortunately, this is only where the problems began. In six 

months, Supreme presented a bill for $33.5 million. The bill was 

so large that at the time the Defense Logistics Agency was not 

even sure they had the funds to pay the contractor before the end 

of that fiscal year. When DLA finally issued a formal modification, 

nearly a year after the verbal change order, it realized Supreme’s 

rates were unreasonable and agreed to only pay them 75 percent 

of that bill. 

Over the next five years, DLA would unsuccessfully try to negotiate a fair and reasonable rate with Supreme and every time, the 

parties were miles apart. DLA finally exercised its discretion to set 

the rates for itself by unilaterally definitizing the contract. But by 

then, the overpayments had accumulated to a massive size. Supreme owed the government $757 million in overpayments. 

Despite all of these problems, the agency failed to rebid the contract after the contract expired and decided to grant Supreme a nobid extension of the contract that ended up lasting two more years. 

I will be very interested to hear from DLA why they decided to 

grant Supreme an extension valued at $4 billion instead of competitively rebidding the contract. 

I will also be interested to hear the role that retired Army Lieutenant General Robert Dail, the former Director of the DLA, 

played, and is now, of course, President of the United States-based 

Supreme Company, and the work of then Major General Dan 

5 

Mongeon, also retired Army, does with Agility, who was a partner 

in part of this venture with Supreme. 

There seems to be a lot more to this story. For six years, Supreme refused to provide sufficient documentation requested by Defense Department auditors and DLA contracting officers to justify 

their charges. The audits show that Supreme was essentially double billing the government for delivering food to the forward operating bases by charging both the original fixed distribution fee and 

the additional premium outbound transportation fee which appeared to already include the distribution fee. 

The Defense Logistics Agency also found that Supreme spent $58 

million to build and operate a warehouse in southern Afghanistan 

to strategically position itself for a follow-on contract and then Supreme tried to past the cost of this investment on to the United 

States Government. 

There is more. There are separate allegations that Supreme used 

an affiliate in the United Arab Emirates to increase their profits 

on fresh fruits and vegetables as well as dairy products that were 

delivered to our bases in Afghanistan. If true, this would be similar 

to a very questionable relationship that was discovered in the Iraqi 

food service contract that eventually led to the indictment of PWC 

Agility, Mr. Mongeon’s group and also a partner with Supreme in 

this venture. 

Clearly, the public deserves to know what went so horribly 

wrong, but I also want to hear how we can assure that this never 

happens again. While the war in Afghanistan may be winding 

down, the United States has been involved in over 15 stabilization 

and reconstruction operations around the world since the end of 

World War II, the majority of which have been within the last 20 

years. 

The Commission on Wartime contracts estimates that up to $60 

billion in U.S. funds were lost due to waste, fraud and abuse in 

Iraq and Afghanistan. I look forward to hearing from the witnesses 

today about what we can do to stop this hemorrhaging of taxpayer 

dollars. 

Thank you, Mr. Chairman. 

Mr. CHAFFETZ. Thank you. 

We have two panels today so we will need to keep moving along 

but I would be happy to entertain any additional opening statements. I will first recognize the gentleman from Florida, Mr. Mica, 

for five minutes. 

Mr. MICA. Thank you and I will try to be brief. 

First, thanks for conducting this hearing and both of your ongoing efforts in this regard. 

Every week on this committee hearing testimony, particularly 

about Afghanistan, and the rest of the Federal Government, you 

are appalled at the waste, fraud and abuse. We heard the Special 

Inspector General for Afghanistan there is $20 billion worth of aid 

they cannot even funnel into a corrupt country. 

They also told us the problems are management of contracts and 

we see examples here and corruption which we also heard outlined 

here. This has to be one of the prime poster child for government 

contracts spun out of control. 

6 

First of all, I understand it went to a privately held company 

based in Amsterdam. I had a similar deal with local competition 

in another area. Some of these foreign vendors know the game better and play it better. They get the contracts and then ratchet it 

up. This thing has gone from a little bit to a huge bit, hundreds 

and hundreds of millions of dollars are now in dispute, tens of millions of dollars which is unbelievable. 

First, I think we have to go back and look at what has happened 

here and not let it happen again and hold some folks accountable. 

Secondly, if we are looking for areas in which to cut waste, fraud 

and abuse and rip off of the taxpayer, this is the kind of contract 

that has to be stopped in its tracks. 

I will not undermine Obama and I was appalled at what happened during the Bush Administration in political undermining on 

our position in Iraq, but we need to get out of Afghanistan sooner 

rather than later and put this whole wasteful episode behind us. 

In a time of national deficits and United States economic and national security being threatened by our physical situation, this kind 

of stuff going on has to be brought to a halt. 

Thank you. I yield. 

Mr. CHAFFETZ. Thank you. 

Do any other members care to make an opening statement? The 

gentleman from Tennessee. 

Mr. DUNCAN. I will be brief. 

I will just say this. Under both Republican and Democratic administrations, I have been very outspoken about this revolving door 

at the Pentagon. It happens in just about all departments and 

agencies in the Federal Government, but I think it is the worst in 

the Defense Department. 

I read here that General Dail gave the new contractor of the year 

award to Supreme in 2007, retired from the Army in 2008 and four 

months later, he was hired as president of Supreme Group’s new 

entity. This is shameful, this is scandalous. It is ridiculous that 

this kind of thing goes on so repeatedly in the Federal Government. 

Fiscal conservatives ought to be the most horrified about this. 

Then you talk about giving no bid, multibillion dollar contracts, 

waste of hundreds of millions, it is sickening. It also disturbs me 

that we give out these wonderful contracts—all sweetheart, insider 

type deals given to foreign-owned companies. Supreme is a Swissowned company. Now they have given the new mega billion dollar, 

I think a $10 billion contract, to a company in Dubai. We ought to 

be looking for American companies, truly American companies, to 

do these contracts. 

Thank you, Mr. Chairman. 

Mr. CHAFFETZ. Thank you. 

If there are no other members seeking time for an opening statement, I will now recognize our first panel. 

Mr. Michael Schuster is the Managing Director of the Logistics 

Division for Supreme Food Service. We thank you for being here. 

I recognize there are others within the organization that could 

have been here but you are here with us today. For your presence, 

we are grateful and appreciate the time to go through this. 

Pursuant to committee rules, all witnesses will be sworn before 

they testify. Please rise and raise your right hand. 

7 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth? 

[Witness responds in the affirmative.] 

Mr. CHAFFETZ. Let the record reflect that the witness answered 

in the affirmative. You may be seated. 

In order to allow time for discussion, please limit your time to 

five minutes but given that you are the only member on this panel, 

feel free to take a little extra time. We will do the same with members in this complicated topic. 

Please know your entire written statement will be made a part 

of the record. We will now recognize you for five minutes. 

WITNESS STATEMENTS 

STATEMENT OF MICHAEL SCHUSTER, MANAGING DIRECTOR, 

LOGISTICS DIVISION, SUPREME GROUP B.V. 

Mr. SCHUSTER. Good afternoon, Mr. Chairman Chaffetz, Ranking 

Member Tierney and distinguished members of the subcommittee. 

My name is Mick Schuster. I am the Managing Director of Supreme Foodservice. 

Supreme is a global supply chain company founded in 1957 that 

operates in approximately 20 countries around the world. One of 

those countries is Afghanistan where we deliver food and supplies 

to U.S. and NATO troops. 

Our success in creating a supply chain that can reach the deepest parts of Afghanistan has been a force-multiplier for the U.S. 

Government and has been one of our proudest achievements. Despite operating in one of the most isolated and dangerous areas in 

the world, we have consistently outstanding performance exceeding 

contractual requirements. 

As you know, the Defense Logistics Agency executed a SPV contract with Supreme in June 2005 for the delivery of food, beverages 

and other goods to U.S. troops in Afghanistan. Under the terms of 

the original contract, Supreme was responsible for making deliveries to four and only four locations in Afghanistan: Kabul, 

Bagram, Kandahar and Forwarding Operating Base Salerno. 

Another contractor was supposed to convert Supreme’s bulk deliveries into smaller ones appropriate for distribution to the numerous forwarding operating bases in Afghanistan. 

Only weeks after the contract was awarded, DLA commenced 

dramatically expanding Supreme’s responsibilities. By August 

2005, DLA had directed Supreme to deliver to dozens of forward 

operating bases in remote regions in Afghanistan. The number of 

deliveries continued to increase and at the peak of the program, 

Supreme was delivering to over 250 different points at 120 locations throughout Afghanistan. 

This required Supreme to change fundamentally the way it executes its responsibilities and to develop and operate a network of 

airplanes, helicopters and trucks able to reach the isolated regions 

of Afghanistan, a mountainous country the size of Texas but with 

little functioning infrastructure and extreme weather patterns. 

Although DLA’s original solicitation said only remnants of the 

Taliban were still active, Supreme had to build this network in an 

8 

active war zone. Notably, 312 of our subcontractors have lost their 

lives delivering food to U.S. and Coalition troops. 

There has never been any dispute that the changes DLA made 

to Supreme’s contract entitled Supreme to additional compensation. 

To reiterate, the government hired Supreme to deliver to four central locations in Afghanistan, not hundreds of remote ones. Supreme and DLA consequently negotiated supplemental rates for 

those services called premium outbound transportation or POT. 

DLA insisted that Supreme offer a single set of fixed rates but 

would be guaranteed for the five year period of the contract, regardless of the delivery location in Afghanistan. This meant that 

Supreme bore all the risks of making these delivering including 

changes in the security environment, fuel prices, delivery locations, 

troop strength, and road and weather conditions. 

In August 2006, after nearly a year of uncompensated POT deliveries, Supreme and DLA agreed to pricing that would become final 

after verification. This was a commercial item contract. Verification 

should have involved comparison of market prices for related services and a determination that the offered price was fair and reasonable. DLA instructed DCAA to audit Supreme as if this was a costplus contract, which it is not. 

I would like to conclude by emphasizing two points. First, I want 

to emphasize Supreme’s view, that the DCAA audits were fundamentally flawed. This was a commercial, fixed price contract, not 

a cost-plus contract. 

Second, I want to emphasize that this is a purely contractual dispute which we are working to resolve with DLA through the appropriate process. Furthermore, since February 2013, DLA has withheld payment of $21.7 million per month from Supreme and to 

date, a payment of $303 million has been made against the $758 

million under dispute. 

In the meantime, Supreme remains committed to supporting our 

client and servicing the war fighter in Afghanistan. 

Thank you, and I look forward to answering any questions you 

may have. 

[Prepared statement of Mr. Schuster follows:] 

9 


Insert offset folio 1 here 81829.001

WRITTEN TESTIMONY BY 

MICHAEL SCHUSTER 

MANAGING DIRECTOR, SUPREME FOODSERVICE 

BEFORE THE 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

SUBCOMMITTEE ON NATIONAL SECURITY 

U.S. HOUSE OF REPRESENTATIVES 

APRIL 17,2013 

Good afternoon, Mr. Chainnan, Ranking member Tierney, and distinguished members of 

the Subcommittee. My name is Mick Schuster, and I am Managing Director of Logistics at 

Supreme Foodservice. Supreme is a global supply chain company founded in 1957 that operates 

in approximately 20 countries around the world. One of those countries is Afghanistan, where 

we deliver food and supplies to U.S. and NATO troops. Our success in creating a supply chain 

that can reach the deepest parts of Afghanistan has been a force-multiplier for the U.S. 

government and has been one of our proudest accomplishments. Despite operating in one of the 

most isolated and dangerous areas in the world, we have achieved consistently outstanding 

perfonnance exceeding contractual requirements. 1 

As you know, the Defense Logistics Agency (or "DLA" for short) executed a Subsistence 

Prime Vendor (SPY) contract with Supreme in June 2005 for the delivery of food, beverages, 

and other goods to U.S. troops in Afghanistan. Under the tenns of the original contract, Supreme 

was responsible for making deliveries to four and only four locations in Afghanistan: Kabul, 

Bagram, Kandahar, and Forward Operating Base Salerno. Another contractor was supposed to 

convert Supreme's bulk deliveries into smaller ones appropriate for distribution to the numerous 

forward operating bases throughout Afghanistan. 

Supreme Group is a global leader in the provision of end-to-end supply chain solutions to 

defense, government, and commercial sector clients around the world. The company provides 

critical, life-sustaining services that empower clients to accomplish missions in challenging and 

austere environments. Supreme offers a unique breadth of capabilities-ranging from 

procurement, transportation and storage through to technology and full site services. Today, its 

legacy of proven and trusted performance in challenging environments spans more than fifty 

years; covering 20 nations across five continents. 

Supreme has a long history of supporting international organizations and governments. 

Its current clients include the United Nations (UN), the North Atlantic Treaty Organization 

(NATO), and leading military forces including the US Department of Defense (DoD) and the 

UK Ministry of Defence (MoD). Over the years, the company has also partnered with many 

commercial clients. The Group's excellent reputation is built on the key strengths of delivering 

where others carmot; implementing rapid response solutions; and creating fully integrated supply 

chain solutions. 
10 


Insert offset folio 2 here 81829.002

Only weeks after Supreme was awarded the SPY contract, DLA began dramatically 

expanding Supreme's responsibilities. By August 2005, DLA had directed Supreme to deliver to 

dozens of forward operating bases in remote regions of Afghanistan. The number of delivery 

locations continued to increase, and, at the peak of the program, Supreme was delivering to over 

250 different points at 120 locations throughout Afghanistan. This required Supreme to change 

fundamentally the way it executes its responsibilities and to develop and operate a network of 

airplanes, helicopters, and trucks able to reach isolated regions of Afghanistan-a mountainous 

country the size of Texas but with little functioning infrastructure and cxtreme weather patterns. 

And although DLA's original solicitation said that only "remnants" of the Taliban were still 

active, Supreme had to build this network in an active war zone. Notably, 312 of our 

subcontractors have lost their lives delivering food to U.S. and coalition troops. 

There has never been any dispute that the changes DLA made to Supreme's contract 

entitled Supreme to additional compensation. To reiterate, the government hired Supreme to 

deliver to four central locations in Afghanistan, not hundreds of remote ones. Supreme and DLA 

consequently negotiated supplemental rates for those services, called "premium outbound 

transportation" or "POT." DLA insisted that Supreme offer a single set of fixed rates that would 

be guaranteed for the five-year life of the contract, regardless of delivery location in Afghanistan. 

This meant that Supreme bore all of the risks of making these deliveries-including changes in 

the security environment, fuel prices, delivery locations, troop strength, and road and weather 

conditions. 

In August 2006--after nearly a year of uncompensated POT deliveries-Supreme and 

DLA agreed to pricing that would become final after verification. This was a commercial item 

contract. Verification should have involved a comparison to market prices for related services 

and a determination that the offered price was "fair and reasonable." DLA instructed DCAA to 

audit Supreme as if this were a cost-plus contract-which it is not. 

I would like to conclude by emphasizing two points: 

First, I want to emphasize Supreme's view that DCAA's audits were fundamentally 

flawed. Operating under the incorrect assumption that this was a cost-plus contract, DCAA 

disallowed a significant amount of Supreme's costs. For example, it disallowed 100% of the fuel 

costs incurred by Supreme for POT deliveries because Supreme did not keep records in 

accordance with a cost type contract. This obviously does not reflect reality. There is no dispute 

that Supreme actually made the deliveries and incurred these costs, and, under the rules for 

commercial, fixed-price contracts, DCAA cannot just "disallow" them. Relying on these audits, 

DLA unilaterally set POT prices that we believe are unreasonable. For example, as a result of 

DLA's unilateral rate decision, we are now being paid less for POT road deliveries to forward 

operating bases than what we are paid to deliver to the four original sites--<iespite the challenges 

in servicing forward operating bases. 

Second, I want to emphasize that there are procedures for resolving disputes between 

DLA and a contractor, and we are using those procedures to reach a resolution here. After the 

DLA contracting officer issued a final decision unilaterally changing the prices for POT services 

in December 20 II, Supreme filed a formal appeal with the Armed Services Board of Contract 

2 
11 


Insert offset folio 3 here 81829.003

Appeals. That case is in the process of discovery and is moving forward. Despite this dispute, 

we continue to work closely with DLA and greatly value our relationship with them. We are 

confident that this dispute will be resolved in due eourse through the appropriate channels. In 

the meantime, Supreme remains committed to performing the contract at a high success level. 

Thank you. I look forward to any questions you may have. 

3 
12 

Mr. CHAFFETZ. Thank you, Mr. Schuster. 

I will now recognize myself for five minutes. 

When you agreed to accept this extraordinary verbal contract 

modification, I assume it was verbal or was it written? 

Mr. SCHUSTER. Mr. Chairman, it was a verbal notice from DLA. 

Mr. CHAFFETZ. Did it occur to you that there would be some sort 

of pricing dispute at this point? 

Mr. SCHUSTER. It was our expectation that we would scope what 

was required and put requests for supplemental pricing into DLA. 

Mr. CHAFFETZ. Given that we are so many years after the fact, 

we are not even close, we are talking about hundreds of millions 

of dollars. What went wrong? What should have happened that did 

not happen? 

Mr. SCHUSTER. We put in proposed pricing. We just could not 

agree on what was fair and reasonable in the pricing. I think there 

were mechanisms within the contract like ADR that we should 

have used early on to resolve the dispute. 

Mr. CHAFFETZ. Your testimony often refers to ‘‘market prices’’ for 

this contract. Can you explain how Supreme determined the market rate for premium outbound transportation in Afghanistan? 

Mr. SCHUSTER. We looked at available benchmarks in the marketplace. By available benchmarks, we spoke to suppliers who were 

capable of providing those services. We also looked at comparable 

benchmarks; for example, U.S. Transcom rates, and used those to 

develop our pricing. 

Mr. CHAFFETZ. One of the accusations is that Supreme was reluctant to provide supporting documentation. Why not provide supporting documentation? What happened to that? 

Mr. SCHUSTER. In relation to the pricing, we put together fully 

transparent pricing models. 

Mr. CHAFFETZ. My guess is they are going to disagree with you 

on that one. 

Mr. SCHUSTER. We provided market benchmarks to substantiate 

our rates. That is what we believe we did. 

Mr. CHAFFETZ. In your written testimony, you state that ‘‘312 of 

your subcontractors have been killed while delivering food to U.S. 

and Coalition troops.’’ Were they all directly related to performance 

of this contract? 

Mr. SCHUSTER. Yes, Mr. Chairman, the 312 deceased all operated 

on this contract. They were either truck drivers or convoy security 

guards that protect the convoys making the delivery. 

Mr. CHAFFETZ. What was the nature and circumstances of such 

a high number of fatalities? 

Mr. SCHUSTER. The size of the contract and the number of movements we make in terms of vehicles, helicopter or fixed wing is immense every day. It is largely insurgent attacks on truck movements. 

Mr. CHAFFETZ. What sort of safety protocols were in place? It 

seems like an exceptionally high number. Were you in a position 

where you had to offer security payments? Were you also having 

to, as other contractors had to, offer security payments or pay off 

the bad guys essentially? 

13 

Mr. SCHUSTER. Mr. Chairman, we definitely did not do that. In 

terms of our contract, CENTCOM private security was required so 

we had a fully compliant CENTCOM private security program. 

Mr. CHAFFETZ. I want to go over the last part of your statement. 

Supreme claimed that DLA owes the company $1.8 billion; they 

think they overpaid by three quarter of a billion. That seems like 

an awfully big gap. How do you account for that difference? 

Mr. SCHUSTER. I go back to what I said in my statement. We see 

this is as a commercial contract, commercial items contract. The 

assessments made by DCAA have been based on a cost-plus contract. That is at the heart of the difference. In a commercial items 

contract, we use comparable market prices to develop fair and reasonable pricing. That is what we have done. 

Mr. CHAFFETZ. When you say this was a verbal expansion, you 

went from four sites to 250. Did somebody just walk down and say, 

hey, let’s add these 30. How does that work? 

Mr. SCHUSTER. It does not happen like that. The contracting officer at DLA would be in contact with us and say we would like to 

add these additional sites to the contract. We would then go away 

and make an assessment of our ability to do it and what mode of 

transport we would select to perform that mission. 

That then goes back to DLA. They then approve that site is now 

in the contract. A DODAC is created and then we start filling orders. 

Mr. CHAFFETZ. Do you sign that, did they sign that or you just 

move on? 

Mr. SCHUSTER. Basically, the signoff is when a DODAC, which 

is the delivery or the account for that site, is added. That is the 

green light to go. 

Mr. CHAFFETZ. My time has expired. I will now recognize the 

gentleman from Massachusetts, Mr. Tierney, for five minutes. 

Mr. TIERNEY. Thank you. 

Mr. Schuster, how many United States Government contracts 

had Supreme won before it won the food contract in Afghanistan, 

contracts of the same nature? 

Mr. SCHUSTER. That was our first U.S. Government contract. 

Mr. TIERNEY. Your first is a contract valued at $726 million with 

a maximum value over five years of $4.2 billion, no experience, no 

prior contract, out of the box. This is the contract you got? 

Mr. SCHUSTER. It was our first U.S. Government contract. We 

have significant past performance operating around the globe doing 

similar contracts for other countries, UKMD, NATO contracts. 

Mr. TIERNEY. None in Afghanistan? 

Mr. SCHUSTER. We have been operating in Afghanistan since 

January 2002. 

Mr. TIERNEY. With the same nature contract as we signed in this 

one? 

Mr. SCHUSTER. We went to Afghanistan in 2002 with the British 

Ministry of Defense. 

Mr. TIERNEY. I am asking you was it the same type of contract 

you had here, delivering to forward operating bases? 

Mr. SCHUSTER. Yes, it is a food supply contract to forward operating bases for British Ministry of Defense. 

14 

Mr. TIERNEY. When you made your original proposed prices for 

distribution and all that in July 2005 for those four locations, what 

did you use as the basis for determining what you were going to 

bid? 

Mr. SCHUSTER. It was very simple. We determined the size of the 

infrastructure we needed in terms of warehousing, the personnel 

and all the operating costs to run that and then the distribution 

method to deliver to those four sites, which was all by road. 

Mr. TIERNEY. Before that contract even started, you got notice 

from DLA they would like to expand it to 68 more bases? 

Mr. SCHUSTER. Correct. 

Mr. CHAFFETZ. What did you do then to consider what your fee 

should be to do that? 

Mr. SCHUSTER. Again, we did an assessment of what the requirement was. 

Mr. TIERNEY. Had you ever done anything like that before, go out 

to 68 bases similarly situated? 

Mr. SCHUSTER. No, because a large number of these bases were 

in the east of Afghanistan, mountainous regions and hence, the requirement for rotary wing or fixed wing aircraft to support us. 

Mr. TIERNEY. But you had no prior experience getting out to 

areas like that? 

Mr. SCHUSTER. Not into the east of Afghanistan, no. 

Mr. TIERNEY. Did you know anyone who did? 

Mr. SCHUSTER. No. 

Mr. TIERNEY. So you had no comparables on which to base your 

costs, you were basically estimating? 

Mr. SCHUSTER. No. As I stated in my previous answer to the 

Chairman, we used a combination of comparable market rates, for 

example USTRANSCOM rates. 

Mr. TIERNEY. What is the comparable market rate to a forward 

operating base situated like one of the 68? 

Mr. SCHUSTER. U.S. Transcom publishes fixed wing and rotary 

wing rates, annual rates for delivery to within Afghanistan. 

Mr. TIERNEY. By mile? 

Mr. SCHUSTER. I am not 100 percent sure. I think it is by pound. 

Mr. TIERNEY. By pound of product? 

Mr. SCHUSTER. It is by price pound, gross pound. 

Mr. TIERNEY. More expensive to deliver lettuce than to deliver 

fruit? 

Mr. SCHUSTER. No, it is by pound, so it is by weight. 

Mr. TIERNEY. That was one of your factors. What else did you 

factor in? 

Mr. SCHUSTER. We took quotations from various suppliers who 

were operating within the country. 

Mr. TIERNEY. Who were those? Were those part of the trucking 

contractors that had contracts with the U.S. Government or were 

they independents? 

Mr. SCHUSTER. They were largely transport contractors we had 

already used on other contracts we had operated since 2002. 

Mr. TIERNEY. They gave you bids for their services? 

Mr. SCHUSTER. Yes. 

Mr. TIERNEY. Did you have security as a component as well? 

15 

Mr. SCHUSTER. Back in 2006 or 2005, contract security was not 

part of it. 

Mr. TIERNEY. That was not your responsibility? 

Mr. SCHUSTER. No, it wasn’t part of our responsibility. 

Mr. TIERNEY. Who was going to secure delivery to the 68 bases? 

You were going to get them there and not worry about how secure 

it was in getting them there? 

Mr. SCHUSTER. We asked for door to door delivery from the supply. It was not until 2007 that we implemented CENTCOM approved product security. 

Mr. TIERNEY. Your subcontractor included security in their price? 

Mr. SCHUSTER. Yes. 

Mr. TIERNEY. Did you know who they hired for their security? 

Mr. SCHUSTER. Yes. 

Mr. TIERNEY. What types of companies did they hire to do their 

security? 

Mr. SCHUSTER. Most of them were local Kabul-based companies. 

They had their own security teams. 

Mr. TIERNEY. Pretty much the same outfits that were doing it for 

the trucking industry for the United States supplies otherwise? 

Mr. SCHUSTER. I would say yes. 

Mr. TIERNEY. So warlords and other people like that? 

Mr. SCHUSTER. Potentially. 

Mr. TIERNEY. How do you get a price value from them that you 

can trust? 

Mr. SCHUSTER. Generally, we would put out a tender and ask for 

rates and then we would compare them and select based on a combination of price and capability. 

Mr. TIERNEY. How did you know you weren’t being extorted? 

Mr. SCHUSTER. We have operated in Afghanistan since 2002, so 

we had some feel for the market in terms of the rates. 

Mr. TIERNEY. So you have been paying similar people for that period of time? 

Mr. SCHUSTER. No, I wouldn’t say that. We have operated in the 

market and we felt we were paying a fair price for what they were 

asking us to do. 

Mr. TIERNEY. When the contract went to a larger group of delivery sites, you didn’t agree to any price in the beginning of that so 

you undertook going from four to 68 without having any agreement 

on what the pricing would be? 

Mr. SCHUSTER. Correct. 

Mr. TIERNEY. Is that a usual business practice for Supreme? 

Mr. SCHUSTER. I have been with Supreme since 2001 and I have 

operated a number of contracts for the British Ministry of Defense 

around the world, the Balkans, Iraq and Afghanistan, typically we 

have lent forward, and when they asked us to do something we 

have gone and done it and we fixed up the contractual piece a few 

months later. Yes, we have done this before. 

Mr. TIERNEY. Mr. Chairman, I understand we have to do other 

rounds so at this point I will yield and reserve. 

Mr. CHAFFETZ. The gentleman yields back. 

I will now recognize the Chairman of the full committee, the 

Representative from California, Mr. Issa. 

16 

Mr. ISSA. Thank you, Mr. Chairman, and thank you for holding 

this important hearing. 

We are now more than a decade into a war and when I look 

across at Congresswoman Speier, I think about the fact that this 

war started under her predecessor. Actually, the first half of this 

war was under her predecessor. If we are not going to get to where 

we can honestly conduct operations there without waste, fraud or 

abuse after this long, when can we? 

It is time and I think that both the Chairman and the Ranking 

Member are doing the right thing, focusing on the fact that this 

pervasive problem continues, continues and continues. Whether it 

is us backfilling $1 billion at the Kabul Bank or contracting still 

costing us unconscionable amounts of numbers, or in fact, the challenges in simply not getting shot in the back by the very people we 

are trying to free, this has been a war that this committee has a 

special obligation for. I want to thank again the Chairman and the 

Ranking Member for your relentless support of exactly this issue. 

I would yield to the Chairman if he would like the remainder of 

my time. 

I would ask unanimous consent that my entire opening statement be placed in the record. 

Mr. CHAFFETZ. Without objection, so ordered. 

I thank the Chairman. 

We will now recognize the gentlewoman from Illinois, Ms. 

Duckworth, for five minutes. 

Ms. DUCKWORTH. Thank you, Mr. Chairman. 

Mr. Schuster, in 2010, my understanding is you were in negotiations over what the outbound transportation rate was, trying to 

come to an agreement. As part of the initial response, the DCAA 

basically found your rates were too high and continued to negotiate. I am speaking specifically for the transportation costs such 

as the helicopter and fixed wing costs. 

In October 2011, when DLA began a final round of negotiations, 

Supreme offered a new proposal, but it was interesting that less 

than a year from the previous offer you made, you had reduced the 

rate for helicopter transportation and doubled the cost for fixed 

wing transportation. Why would reducing the cost of helicopter 

transportation affect the price you would charge for fixed wing 

transportation? 

Mr. SCHUSTER. I think at the time what DLA asked us to do was 

to put together a price that was to hold for five years, regardless 

of the number of locations, the mix of type of transport, so we had 

to build that into our risk assessment in terms of developing our 

pricing. I think at different points in time when we put together 

our price we were basing our rates on what was actually happening. 

When we first put together our rates in 2005, we were estimating 

what was going to happen for the next five years. When we did the 

two other rate increases, I think our fixed rate costs were up significantly. We were flying to more expensive fixed wing sites, so 

our costs went up. Our rotary wings were going to more efficient 

sites and the rates came down. 

Ms. DUCKWORTH. It costs significantly more to fly rotary wing 

than fixed wing? 

17 

Mr. SCHUSTER. It does significantly, yes. 

Ms. DUCKWORTH. Yet it was the fixed wing prices you doubled 

in order to lower your rotary wing rates? 

Mr. SCHUSTER. No, that is not correct. The cost of operating aircraft is driven by the flight hour, how long you fly. What I was saying was the profile of our fixed wing flights was now longer, so they 

were more expensive whereas our rotary wing was largely in the 

east and the cost had come down significantly. 

Ms. DUCKWORTH. Let’s talk a bit more about your premium outbound transportation rate. The original transportation fees in the 

contract only provided for delivering food, as you said, to the four 

original bases. You referred to this as the distribution fee. The premium outbound transportation rate was added to the contract later 

when it was radically expanded and was meant to apply to the distribution of food to hundreds of bases in Afghanistan. 

According to the audit from DCAA in 2008, you were charging 

both a distribution fee and the premium outbound transportation 

rate to deliver food to the forward operating bases. This seems to 

me like a case of double billing. Did Supreme charge DLA both a 

distribution fee and a premium outbound transportation rate for 

distributing food to the FOBs? 

Mr. SCHUSTER. In response to your question, when we originally 

requested to put in pricing for the expanded requirement, we advised DLA that the premium outbound transportation rate is supplemental or in addition to the base distribution fee. That has always been our position. 

To answer your question, when the premium sites came on, we 

were entitled to bill for both the base and the premium. 

Ms. DUCKWORTH. Even though the distribution fee was part of 

the POT? 

Mr. SCHUSTER. The distribution fee was for deliveries to the 

original four sites. 

Ms. DUCKWORTH. I don’t quite understand how you are separating those out. My understanding is the premium outbound 

transportation rate included the distribution fee in that? 

Mr. SCHUSTER. No, it did not. It was always in addition to the 

base distribution fee. The base distribution fee was to the four 

original sites. 

Ms. DUCKWORTH. What you are saying is for the additional sites, 

you are not actually double charging the distribution fee for goods 

that were delivered? 

Mr. SCHUSTER. No. 

Ms. DUCKWORTH. Is it true that in March of 2010, you offered to 

settle with DLA over this double billing dispute? 

Mr. SCHUSTER. In March of 2010, as part of our negotiating 

strategy, we said we would like to resolve this issue and part of 

that was we offered up a small percentage of the normal distribution that we would pay back to the government. 

Ms. DUCKWORTH. I am out of time, Mr. Chairman. 

Mr. CHAFFETZ. I thank the gentlewoman. 

I will now recognize the gentleman from Florida, Mr. Mica, for 

five minutes. 

Mr. MICA. Thank you. 

18 

I had to step out for a moment, but again, it looks like this contract ballooned from $4.2 billion over five years to over $26 billion, 

including a two year extension. Is that correct? 

Mr. SCHUSTER. Mr. Mica, that sounds a little high. I think the 

total contract value to date is around $8 billion. 

Mr. MICA. However, the maximum value of the contract 

ballooned to $26 billion is what I am told including a two year extension. There is a difference there. Again, I am getting the information from our staff but that is a wide disparity if you are saying 

$8 billion and it is $26 billion. 

Let me turn to Ms. Duckworth’s working on some of these costs 

and I have some of the IG potential overpayment findings. 

To go back to the basic contract in the beginning in 2005, I understand from the IG you did not incorporate the airlift requirement in the contract or document the airlift price. Is that correct? 

This is on fruits and vegetables, $454 million, to move them. That 

is half a billion dollars to move fresh fruits and vegetables from 

2005 through 2010. 

My question was, you did not incorporate the airlift requirements 

in the contract or require documenting the airlift price? 

Mr. SCHUSTER. In response to your question, we have an email 

agreement from DLA, agreeing the rates as fair and reasonable for 

the inbound airlift. Those rates were then incorporated into the 

contract under two MODs. 

Mr. MICA. Again, I am telling you what the IG found. They found 

that Supreme was paid approximately $454 million, almost half a 

billion, for airlift services for fruits and vegetables from UAE to Afghanistan during that five year period. That is what they are saying you did not do and you did not have in place an airlift requirement in the contract or document the airlift price at the very beginning, is that correct? You are saying no? 

Mr. SCHUSTER. I am saying we had a rate that was agreed. 

Mr. MICA. Again, that is their finding. 

They also found you had an overpayment of $98.4 million for 

transportation costs within Afghanistan from 2005 to 2008. What 

is your response? 

Mr. SCHUSTER. The $98 million was for minimum weights, our 

rate proposal for airlift stipulated a rate per pound and also a minimum weight which is a normal commercial term in the aviation 

industry. We bill the higher of either the billable or the minimum 

weight and that is what that difference is. 

Mr. MICA. Another point from the IG report is $25.9 or $26 million for I guess triwall packaging costs from December 2005 to 

2010, they believe that was an overpayment. What is your response? 

Mr. SCHUSTER. The triwall rates associated with premium outbound transportation, we had an agreed rate for triwalls that was 

determined as fair and reasonable at the 100 percent rate. The IG 

is saying their understanding is any rate associated with premium 

outbound transportation should be paid at 75 percent. That is the 

delta between the 100 percent payment we believe we are entitled 

to and the 75 percent that DLA or the IG says we should have been 

paid. 

19 

Mr. MICA. Again, there is a huge disparity between what our 

committee has found and what the IG says and we are relying on 

them for overseeing and providing us some of the contract disparity 

information. 

Finally, this is an Amsterdam-based company, privately-owned. 

Were you involved in the beginning when this contract was let? 

What kind of competition was there to include American vendors? 

Mr. SCHUSTER. Mr. Mica, I was not involved in the contract during the acquisition phase. 

Mr. MICA. Do you know of opportunities for American firms to 

participate and did they compete? 

Mr. SCHUSTER. I don’t know. 

Mr. MICA. Can you get that information for the committee? 

Mr. SCHUSTER. Yes, I can. 

Mr. MICA. I would appreciate that. 

I yield back. 

Mr. CHAFFETZ. I thank the gentleman. 

I now recognize the gentleman from Vermont, Mr. Welch, for five 

minutes. 

Mr. WELCH. Thank you, Mr. Chairman, and Ranking Member. I 

appreciate your ongoing persistence on this. 

I have a couple of questions, Mr. Schuster. 

In 2009, U.S. attorney for the Northern District of Georgia indicted PWC, the subsistence prime vendor in Iraq, Kuwait and Jordan, on charges of defrauding the government. The indictment explained that Count II relates to PWC’s alleged fraudulent over billing of the U.S. by having vendors use a consolidation facility and 

placing the consolidation costs of PWC profit into the delivered 

price paid by the U.S. Are you aware of those allegations against 

PWC? 

Mr. SCHUSTER. Yes. 

Mr. WELCH. In court proceedings between Supreme and PWC 

Agility, allegations have also emerged that Supreme engaged in 

some of the same dubious business practices that led the Department of Justice to indict PWC Agility for attempting to defraud the 

U.S. Government in Iraq. 

According to documents produced to the committee, Supreme 

used a subsidiary in the United Arab Emirates, Jamal Ali Foods 

Company, JAFCO, to package and transport fruits, vegetables and 

dairy products into Afghanistan. My understanding from our investigation is that JAFCO is a 49 percent subsidiary of Supreme 

Foodservice, is that correct? 

Mr. SCHUSTER. That is correct, Mr. Welch. 

Mr. WELCH. According to a filing made by PWC Agility, Supreme 

has an even closer relationship with JAFCO than PWC Agility had 

with an affiliated company at the center of its alleged scheme to 

defraud the U.S. Government. Again reading from the file, ‘‘JAFCO 

purchased the local market ready items and then sold the products 

to Supreme at prices that included large profits for JAFCO.’’ The 

filing further asserts that Supreme then invoiced DLA for the products, including the JAFCO products, in an additional fee that included a profit for Supreme. 

20 

Mr. Schuster, is there any merit to the allegation that the price 

of local, market ready goods being charged the government includes 

a profit for JAFCO? 

Mr. SCHUSTER. In response to your question, I was not involved 

in the program when JAFCO was set up. 

Mr. WELCH. I didn’t ask if you were involved. 

Mr. SCHUSTER. What I do know is that when the scope of the 

contract changed from the four original sites to the 68 additional 

FOBs, there was a requirement to change the way we supplied 

fruits and vegetables. At that time, JAFCO was set up to perform 

that requirement. In addition to that, for control and rather than 

outsourcing to a third party, we set up JAFCO and JAFCO did perform the activity of consolidation and procurement of fresh fruits 

and vegetables. 

Mr. WELCH. I will try to translate that. It sounds like the answer 

is yes. 

Mr. SCHUSTER. Can you repeat the question? 

Mr. WELCH. Is there any merit to the allegation that the price 

of local market ready goods being charged to the government includes a profit to JAFCO? 

Mr. SCHUSTER. I would need to get back with an answer on that. 

I was not directly involved at that time. 

Mr. WELCH. You may not have been but it sounds like you are 

stonewalling because this is like Business 101. You know where 

your money comes from and if you can get a profit from two 

sources instead of one without the person paying, namely the taxpayer, and you get away with it, that is a cause of concern. 

That does not happen accidentally. Is there a profit that was included for JAFCO? That is the question. Do you want to make a 

phone call? 

Mr. SCHUSTER. No, I don’t need to make a phone call. I was not 

involved at that time. 

Mr. WELCH. It is not whether you were involved, it is your company. You are here representing your company. 

Mr. Chairman, cell phone use permitted here? This is pretty outrageous. This is a big deal. It is over a billion dollars. We have had 

soldiers out in the field risking life and limb and we have profiteers 

ripping off the taxpayer and you won’t give us an answer to a pretty simple question where your company knows the answer. Either 

you know it and won’t tell us or your company sent someone who 

was deliberately not given the information they knew would be relevant to this hearing. 

Mr. SCHUSTER. I know this issue is part of an ongoing investigation. 

Mr. WELCH. Let us at least have the witness get back to us. 

One last question, has JAFCO ever been the subject of a criminal 

investigation by the U.S. Government? 

Mr. SCHUSTER. I know there is an investigation going on now by 

the DOJ. 

Mr. WELCH. Criminal? 

Mr. SCHUSTER. I don’t know whether it is criminal or civil. 

Mr. WELCH. Let us get the answer when you get a chance to 

check with people who know. 

Mr. SCHUSTER. I will do that, Mr. Welch. 

21 

Mr. WELCH. I yield back. 

Mr. CHAFFETZ. Thank you. 

I now recognize the gentlewoman from California, Ms. Speier, for 

five minutes. 

Ms. SPEIER. Mr. Chairman, thank you. To you and the Ranking 

Member, I really applaud your efforts in carrying on this investigation because it really goes to the core of what our problems are in 

procurement in the Department of Defense. 

Mr. Schuster, thank you for being here. 

I was kind of astonished by one thing you said in answer to a 

question by Mr. Tierney. I got the impression, correct me if I am 

wrong, that contracting with the United States or Britain without 

having a formalized contract is something you have done in the 

past where there wasn’t pricing put in place so the actual amount 

of the contract was not clearly defined? 

Mr. SCHUSTER. I was referring to the British Ministry of Defense 

contract and they have a worldwide food supply contract which has 

a framework agreement. If they need to deploy to someplace like 

Afghanistan, they give us the order to go, we go and do it but there 

is a framework of how that pricing will be dealt with, so there is 

a contract in place that deals with the pricing. 

Ms. SPEIER. But there really wasn’t one in the contract with the 

United States Department of Defense? 

Mr. SCHUSTER. There was an original solicitation that was 

awarded. The requirement changes from four sites. 

Ms. SPEIER. I know but in the original contract, there was actually a lower bidder, correct? 

Mr. SCHUSTER. I cannot comment on that. I am not part of the 

evaluation process. 

Ms. SPEIER. It just doesn’t quite add up that you would go into 

a contract without having it fully flushed out in terms of what you 

were going to be paid and now there is an ongoing dispute that we 

are talking in terms of billions of dollars as to whether you owe the 

United States Government $700 million or whether we owe you 

over $1 billion. 

Let me move on to the issue of the warehouse. My understanding 

is that you built a warehouse literally across the street from Camp 

Leatherneck? 

Mr. SCHUSTER. Correct. 

Ms. SPEIER. At the time when you used that facility, it was being 

used to provide food, not just to the United States military, but 

also to the British troops, is that correct? 

Mr. SCHUSTER. Yes. The Helmand facility was constructed as a 

response to the two U.S. surges in 2010 and 2011 when there was 

an increased troop requirement. Therefore, there was an increased 

operational requirement for warehousing. We made a commercial 

decision to construct a facility in Helmand to support that requirement. 

Ms. SPEIER. You said the company made the decision to construct 

that facility? 

Mr. SCHUSTER. Yes. 

Ms. SPEIER. You weren’t forced to, you weren’t asked to. It was 

a decision you made because it would make it closer to where the 

product had to be delivered, correct? 

22 

Mr. SCHUSTER. In response to your question, there was a troop 

surge, so there was a requirement. We have to respond to that requirement, so we have multiple options. We build warehouses in 

Kabul, Bagram, Helmand. We made the choice to put it in 

Helmand because that was where the bulk of the troops were going 

to be. 

Ms. SPEIER. I understand that you then wanted to bill the U.S. 

Government $58 million for building that warehouse? 

Mr. SCHUSTER. This goes back to the original heart of the matter. 

FOB Leatherneck is not one of the original four sites. 

Ms. SPEIER. Why don’t you just answer the question? Were you 

asking the United States to pay $58 million? 

Mr. SCHUSTER. We only asked after DLA said we were not entitled to POT for FOB Leatherneck. 

Ms. SPEIER. POT is what? 

Mr. SCHUSTER. Premium outbound transportation. 

Ms. SPEIER. You were basically going to try to make it up by 

charging the Federal Government $58 million? 

Mr. SCHUSTER. No. 

Ms. SPEIER. My understanding is that you charged the taxpayers 

of this country $12 million to transport food across the street. Is 

that correct? 

Mr. SCHUSTER. No. 

Ms. SPEIER. That is not correct? 

Mr. SCHUSTER. In response to your question, I go back to the 

original contract, commercial item contract, deliveries to four sites, 

normal distribution fee covers the four sites. Premium outbound 

transportation covers the additional sites. Leatherneck was an additional site. 

Ms. SPEIER. It was across the street, wasn’t it? 

Mr. SCHUSTER. It is across the street, yes. 

Ms. SPEIER. There was a billing of $12 million to deliver goods 

across the street? 

Mr. SCHUSTER. That was the definition of the contract that says 

it is a premium site. 

Ms. SPEIER. Whether it cost you $12 million or not, it was a great 

way to soak the Federal Government, it sounds like? 

Mr. SCHUSTER. No, it wasn’t. As I said, in relation to the $56 million, we only pursued that after premium outbound transportation 

for Leatherneck was disallowed. 

Ms. SPEIER. So if I can’t get paid what I want, then I will just 

steal the other money to make up the difference, is that sort of 

what you are saying? 

Mr. SCHUSTER. No, I am not saying that. 

Ms. SPEIER. I yield back. 

Mr. CHAFFETZ. The gentlewoman yields back. 

Let me make sure I understand this timeline. My understanding 

is on June 3, 2005, is when Supreme signed the original contract. 

Then there was an IG report, dated March 2, 2011, with some fairly serious allegations that they overpaid the prime vendor potentially $98.4 million in transportation costs, overpaid the prime vendor approximately $25.9 million for triwall costs, paid $454.9 million to the prime vendor for airlifting fresh fruit, and it goes on. 

23 

Then knowing this IG report was out there, they did sign a Price 

Negotiating Memorandum No. 10, I believe it is called, that was 

signed December 9, 2011. Did I get the timeline right? 

Mr. SCHUSTER. Not for MOD 10. 

Mr. CHAFFETZ. What? 

Mr. SCHUSTER. Not from Modification 10. That was in 2006. 

Mr. CHAFFETZ. Maybe I have the number wrong, but this is the 

Price Negotiation Memorandum. It says ‘‘price analysis proposed, 

definitization of the UCA Modification P00010.’’ Nevertheless, there 

was a price memorandum that was signed, I am happy to hand it 

down to you, that the DLA signed extending your contract with a 

maximum value, this is what I think Mr. Mica was getting at, for 

$26 billion, the maximum value? 

Mr. SCHUSTER. They did extend that contract, yes. 

Mr. CHAFFETZ. I think this is what all of us here on the dais find 

mystifying. The DLA evidently thinks you are doing pretty good 

and maybe doesn’t have any other options. The Inspector General 

comes in and cites hundreds of millions of dollars of potential overpayments and yet, the same DLA comes in, this is why I am excited to get to the second panel, extends the food service contract 

by billions and billions of dollars, extends the maximum value to 

$26 billion. 

It is only after the fact, after all this dust has settled, that now 

they are saying they had overpaid some $750 million. It begs more 

questions than it answers. 

Supreme is one of the larger food service vendors around the 

globe. You have dealt with other governments. You talked about 

the British specifically. What is the United States Government 

doing or not doing or what should it be doing? You have perspective on how others deal with this. 

Mr. SCHUSTER. Yes, I do have perspective. All contracts have 

terms and conditions and dispute resolution clauses. At a certain 

point where you know you are so far apart, those clauses should 

be enacted immediately. 

Mr. CHAFFETZ. What is it that other governments are doing that 

we are not doing, what else specifically? We are not only the Oversight Committee, we are also Government Reform. If I were you, 

I wouldn’t want to be sitting here today. You want to be awarded 

other contracts, your reputation is one the line. What is it that our 

Federal Government, after decades of war, has not figured how to 

do in the wartime atmosphere? 

Mr. SCHUSTER. If I use my experience from other contracts, as 

I said there is good experience in terms of what is happening on 

the ground. People understand what the requirement really is. 

They put people on the ground who can look into that and that 

makes it a hell of a lot easier to understand what it is you are asking a contractor to do. If you define the requirement clearly, there 

are terms and conditions, there is transparency and mechanisms in 

the contract that allow you to negotiate. 

Mr. CHAFFETZ. You didn’t see that from how we did it? 

Mr. SCHUSTER. It has been difficult on certain elements to negotiate. 

Mr. CHAFFETZ. Something we will continue to further explore. 

24 

I now recognize the gentleman from Massachusetts, Mr. Tierney, 

for five minutes. 

Mr. TIERNEY. Thank you. 

Mr. Schuster, when I last left you, we were talking a little bit 

about the original contract and how it was you developed your pricing on that basis. You estimated those prices you gave me some of 

the categories on that. Was one of the things you put into that pricing bribes and fees of that nature? 

Mr. SCHUSTER. Mr. Tierney, definitely not. 

Mr. TIERNEY. Can you explain to me how in an email exchange 

from Michael Epps—he works for your company, correct? 

Mr. SCHUSTER. He did work for our company. 

Mr. TIERNEY. An email from him to Maryanne DeMayo at the 

DLA included documentation along that line. One of the line items 

is subtotal for dispatching team, overhead and other costs, cost per 

month $2,000, cost per day $125, comments, includes bribes and 

tolls. 

Mr. SCHUSTER. I have not seen that document. 

Mr. TIERNEY. It is a serious matter with us and consistent with 

the other investigations we have done. Everyone seems to know 

bribes are being paid, but no one seems to be doing much about 

it. That was the document Mr. Epps included with his email to 

Maryanne DeMayo on March 15, 2006. 

Mr. SCHUSTER. I have no explanation for what is there. 

Mr. TIERNEY. At some point in time, you are trying to resolve 

how you are going to pay for those additional bases and what the 

cost is going to be. The government asks you for backup documentation, they wanted additional information on how you came 

about your pricing. 

Mr. SCHUSTER. Yes. 

Mr. TIERNEY. Your email of August 28, 2008 to the Defense Contracting Audit Agency responding to a request they made for additional information about your original proposal, the one in 2005 we 

spoke about. Here is what you said, ‘‘Yes, you are correct that we 

don’t have any of the budgetary estimating data that was used to 

develop the proposed prices for the June 2005 contract award for 

the non-forward operating base requirements.’’ 

I think part of your contention was you weren’t obligated to 

share these but that is beside the point. They can argue that somewhere else. You went on to say you just didn’t have any, that all 

the work you had done in trying to figure out your base price, all 

the things you took into consideration, you didn’t have a single bit 

of documentation or data estimating your budget or budgetary documentation that you could share. Can that possibly be true? 

Mr. SCHUSTER. It couldn’t be true. We had to build our pricing 

from something. 

Mr. TIERNEY. Why did you write to them, you are absolutely correct that we don’t have any budgetary estimating data and then 

refuse to deliver it? 

Mr. SCHUSTER. At the time, I could not find any records within 

the company that indicated we had that. 

Mr. TIERNEY. Have you found any since? 

Mr. SCHUSTER. No, I have not. 

25 

Mr. TIERNEY. It is pretty difficult to come to some resolution in 

a negotiation with a company that doesn’t have back-up data for 

the basis of its original costs, right? 

Mr. SCHUSTER. The original costs. 

Mr. TIERNEY. Were the foundation for the additional costs. 

Mr. SCHUSTER. With DCAA, it was the additional costs. 

Mr. TIERNEY. You refused to provide even data you had to have, 

never mind the data they wanted with respect to the additional 

costs. You wouldn’t even give them data that by your own admission you have to have when you are setting out a fee structure to 

budget. I think it shows some of the difficulty your company has 

presented to DLA over that. 

In the beginning, when you were looking for this contract, the 

nature of which you had never had with the United States Government before, you formed some sort of association with PWC? 

Mr. SCHUSTER. Yes, we did. 

Mr. TIERNEY. They were hired as a consultant. Would that be a 

fair expression? 

Mr. SCHUSTER. I was not involved in the acquisition phase but 

they were involved as a consultant to support us during the acquisition phase. 

Mr. TIERNEY. You paid them 3.5 percent of your profit? 

Mr. SCHUSTER. I am not sure. I am not privy to that. I wasn’t 

involved in it. 

Mr. TIERNEY. You were the logistics guy back then, right? 

Mr. SCHUSTER. No, I wasn’t involved in the contract during the 

acquisition phase. 

Mr. TIERNEY. What was your position? 

Mr. SCHUSTER. I was operating the EK MOD, worldwide fixed 

contract. I only came onto the SPV contract in 2006 to run the operation. 

Mr. TIERNEY. It is curious that they wouldn’t provide you with 

somebody else to help testify for the earlier part of that. Agility 

was in. Do you know what their function was? Were they advising 

Supreme on what to bid, how to bid and what to base it on? 

Mr. SCHUSTER. No, I wasn’t involved in the acquisition process. 

Mr. TIERNEY. Were you involved with the extension of the contract in 2010? 

Mr. SCHUSTER. Yes, I was involved. I was involved in the negotiations. 

Mr. TIERNEY. What did you rely on PWC to do at that point in 

time? Were they still associated with you? 

Mr. SCHUSTER. They were not associated with us. I need to get 

back with exact dates but I think we stopped dealing with them 

either in 2007 or 2008. 

Mr. TIERNEY. Lieutenant General Dail is President of United 

States Supreme Group. What role did he play on advising how you 

would proceed in terms of trying to get the extension, a no bid extension? 

Mr. SCHUSTER. Mr. Dowell was not involved at all in SPV. 

Mr. TIERNEY. You hired a former director of the DLA as president of your company. When it came to a significant contract or an 

expansion of sort of a monopoly on things, you didn’t ask his advice 

at all? 

26 

Mr. SCHUSTER. He is not involved on the SPV contract. 

Mr. TIERNEY. What did you hire him for? 

Mr. SCHUSTER. To develop additional business in the U.S. for us. 

Mr. TIERNEY. But nothing to do with the DLA contracts? 

Mr. SCHUSTER. No, as I understand it, I am not sure what the 

term is, but he is not allowed to be involved in this contract. 

Mr. TIERNEY. He is well beyond that two year period, right? 

Mr. SCHUSTER. Yes, he is. 

Mr. TIERNEY. So he would be able to be involved? 

Mr. SCHUSTER. No, he wasn’t involved in the contract extension. 

I negotiated that with two other people. 

Mr. TIERNEY. I yield. 

Mr. CHAFFETZ. You yield back. We are going to recognize the 

gentleman from Vermont, Mr. Welch, again. 

Mr. WELCH. Thank you, Mr. Chairman. 

In the DCAA audit published on August 29, 2011, the auditors 

raised concerns about significant unallowable costs included in 

Supreme’s proposal. They also found due to lack of records provided 

to the auditors, they had no way of knowing the extent to which 

Supreme was including unallowable costs in trying to pass along 

these costs to the government. There is a failure to provide the documentation that is necessary to make a review and it begins the 

hassle. 

One thing we do know is that Supreme tried to get DLA to pay 

for over $3 million in legal and tax advice. Specifically, the report 

found, ‘‘We obtained and reviewed engagement letters provided to 

support legal costs proposed for Debevoise, Plimpton, LLP and Constantine Cannon, LLP.’’ 

According to the engagement letter with Debevoise, Supreme engaged Debevoise as counsel in connection with an investigation 

being conducted by the Defense Criminal Investigative Service and 

possibly the U.S. Department of Justice which may help to give us 

an answer to that last question you had a hard time with. 

Is it true that Supreme tried to bill the government, i.e., the taxpayers, for legal fees in connection with a criminal investigation? 

Mr. SCHUSTER. Mr. Welch, the answer to that is no and I will 

explain. This contract is a commercial item contract, FAR Part 12 

contract, not a FAR Part 31 cost contract. We have extensive 

records that meet IFRS international standards. We provided all 

the documents that we had to DCAA. They were just not in the format that a FAR Part 31 contract requires because it is not a FAR 

Part 31 contract. 

Mr. WELCH. What you are stating is that there was no effort to 

include in bills submitted to the taxpayer payment for legal costs 

incurred in the engagement with Debevoise for representation on 

tax and criminal investigation matters? Is that your testimony? 

Mr. SCHUSTER. What I am saying is that we provided our commercially available accounting records which do not segregate costs 

into a FAR Part 31 contract. 

Mr. WELCH. That is the point. There were no records. 

Mr. SCHUSTER. There are records. 

Mr. WELCH. Let me ask my question again. Is it your testimony 

that Supreme did not attempt to include in their bills to the U.S. 

27 

taxpayer costs associated with engaging legal representation for 

representation on tax in criminal investigation matters? 

Mr. SCHUSTER. No. We did not attempt. 

Mr. WELCH. Did Supreme hire legal counsel to defend it against 

a criminal investigation into the operations of its subsidiary in the 

United Arab Emirates, the Jamal Ali Food Companies or JAFCO? 

Mr. SCHUSTER. Yes, we did. 

Mr. WELCH. Mr. Chairman, in connection with this testimony, I 

would offer Defense Contract Audit Agency audit into the record. 

Mr. CHAFFETZ. Without objection, so ordered. 

Mr. WELCH. I yield back. 

Mr. CHAFFETZ. The gentleman yields. 

I will now recognize the gentlewoman from Illinois, Ms. 

Duckworth, for five minutes. 

Ms. DUCKWORTH. Thank you, Mr. Chairman. 

Mr. Schuster, I would like to go back to the cost of flying helicopters and airplanes. In 2005, Supreme submitted a pricing proposal for the POT for the DLA contract. The response from the 

DLA contracting officer was the proposed charge Supreme wanted 

to charge for helicopter transportation was over 300 times the 

going cost at the time that DLA was paying for helicopter transportation. 

As I said before, in October 2011 in the final found of negotiations, DLA said somehow the price of helicopter transport had 

dropped so significantly that the price of fixed wing transport had 

increased significantly. How do you drop the cost of helicopter 

transportation by 300 percent? 

Mr. SCHUSTER. I am not aware of the document related to the 

300 percent and I am not aware that DLA provided us the detail 

of that so that we could do a comparable against the rates we had. 

Ms. DUCKWORTH. In 2011, you did, as part of the ongoing negotiation, double the rate for fixed wing aircraft. You lowered the rate 

for helicopter transportation but doubled the fixed wing craft transportation. You said this was because the aircraft were going into 

more difficult places than helicopters were going to and that was 

more expensive? 

Mr. SCHUSTER. Not more difficult, they were now flying further. 

Their missions were further, therefore, more costly. 

Ms. DUCKWORTH. More costly than helicopters? 

Mr. SCHUSTER. They are not directly comparable. Both rates are 

per pound but the way we are billed is per flight hour. 

Ms. DUCKWORTH. I am a helicopter pilot. I don’t know if you 

know this. I flew Black Hawks. I can tell you that the helicopters 

can fly across the length of Afghanistan just as well as the fixed 

wing can and it is cheaper to fly fixed wing. 

My difficulty with this is that it seems to me you are doing with 

the helicopter and fixed wing contract exactly what you are doing 

with the price of delivering goods across the street to FOB Leatherneck. You couldn’t get the U.S. Government to pay for you to move 

things across the street, so you are going to try to charge us for 

the warehouse. You can’t get us to pay you for this exorbitant rate 

for helicopter transportation, so you are just going to increase or 

double the price for fixed wing aircraft. 

28 

I want to go back to the premium outbound transportation rates. 

You said that at no point did Supreme charge both the distribution 

fee and the premium outbound transportation rate to deliver to the 

FOBs or the original four bases? 

Mr. SCHUSTER. I said that any delivery to a FOB location incurs 

the premium outbound transportation rate and the normal distribution fee. 

Ms. DUCKWORTH. The premium outbound transportation rate 

does not include the distribution fee? 

Mr. SCHUSTER. No. 

Ms. DUCKWORTH. That is interesting because the Defense Contract Audit Agency report in 2008, are you familiar with that report? 

Mr. SCHUSTER. Yes. 

Ms. DUCKWORTH. In that report, they found that the premium 

outbound transportation rate included the distribution fee, so by 

charging both the distribution fee and the POT you were double 

billing the U.S. Government for that distribution fee. Do you agree 

or not? 

Mr. SCHUSTER. No, I disagree with DCAA’s position. 

Ms. DUCKWORTH. I yield back my time, Mr. Chairman. 

Mr. CHAFFETZ. At this point, we are going to thank our witness 

for your attendance. Mr. Schuster, would you agree to respond to 

other additional questions we might have for this panel? 

Mr. SCHUSTER. Yes. 

Mr. CHAFFETZ. We appreciate it. 

Ms. Chairman may I just ask a follow up question? The gentlewoman from California? 

Ms. SPEIER. Thank you, Mr. Chairman. I will be brief. 

Can you tell me how many other military retirees from the 

United States military you have hired besides General Dail? 

Mr. SCHUSTER. I don’t know that off the top of my head. 

Ms. SPEIER. Is it two, five, ten? 

Mr. SCHUSTER. There might be three or four. 

Ms. SPEIER. Are they generals typically? 

Mr. SCHUSTER. No. 

Ms. SPEIER. One general and who else? 

Mr. SCHUSTER. I think there are a couple of colonels maybe. 

Ms. SPEIER. All engaged with DLA? 

Mr. SCHUSTER. No. They are involved in a number of our contracts. 

Ms. SPEIER. How about British representatives? 

Mr. SCHUSTER. We have an office in the UK and we have maybe 

two former British commissioned officers on our team. 

Ms. SPEIER. General Dail was hired four months after he retired 

and he is precluded, based on your testimony, from negotiating for 

a period of two years, so you hire him to do what, again? 

Mr. SCHUSTER. He is responsible for the Supreme USA office or 

company. He is responsible for business development of military 

and non-military contracts. 

Ms. SPEIER. How many contracts has he been able to develop for 

you? 

Mr. SCHUSTER. I don’t know that off the top of my head. I would 

have to get back with that? 

29 

Ms. SPEIER. Would you please find out and report that to the 

committee? 

Mr. SCHUSTER. Sure. 

Ms. SPEIER. These are contracts you want to develop in the 

United States for activities in the United States or in foreign destinations? 

Mr. SCHUSTER. They can be anywhere in the world, global contracts, anywhere in the world. 

Ms. SPEIER. He could have been negotiating a separate contract 

in Afghanistan unrelated to this one? 

Mr. SCHUSTER. Not that I am aware of. 

Ms. SPEIER. You are going to provide the committee the contracts 

he was negotiating or the rainmaking he was attempting on your 

behalf here in the United States? 

Mr. SCHUSTER. I will provide a list of the opportunities that they 

have pursued. 

Ms. SPEIER. And ones that resulted in contracts? 

Mr. SCHUSTER. Yes. 

Ms. SPEIER. Thank you. I yield. 

Mr. CHAFFETZ. The gentlewoman yields. 

We thank you, Mr. Schuster, for your time and participation here 

today. 

We will now take a brief recess as we reset for the next panel. 

[Recess.] 

Mr. CHAFFETZ. The committee will come to order. 

We will now recognize the second panel. Mr. Daniel Blair is the 

Deputy Inspector General for Auditing, Department of Defense; Mr. 

Matthew Beebe is the Deputy Senior Acquisition Executive, Defense Logistics Agency; Mr. William Kenny is the Acquisition Executive, for Troop Support, Defense Logistics Agency; and Mr. Gary 

Shifton is Chief, OCONUS Division, Defense Logistics Agency. 

Pursuant to committee rules, all witnesses will be sworn before 

they testify. Being that you are already standing, please raise your 

right hand. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth? 

[Witnesses respond in the affirmative.] 

Mr. CHAFFETZ. Let the record reflect that all witnesses answered 

in the affirmative. You may be seated. 

In order to allow time for a candid discussion, and give or take 

we would ask that you limit your testimony to five minutes. It is 

my understanding Mr. Blair and Mr. Beebe will be offering opening 

statements and Mr. Beebe, you are representing the thoughts and 

perspective of Mr. Kenny and Mr. Shifton as well, is that correct? 

Mr. BEEBE. Yes, sir. 

Mr. CHAFFETZ. Thank you. We will have the two opening statements and then go to questions. Mr. Blair, we will recognize you 

now for five minutes. 

STATEMENT OF DANIEL BLAIR 

Mr. BLAIR. Chairman Chaffetz, Ranking Member Tierney and 

distinguished members of the subcommittee, good afternoon and 

thank you for the opportunity to appear before you today to discuss 

30 

our completed and ongoing audits of the Supreme Prime Vendor 

Subsistence Contract in Afghanistan. I would also like to thank you 

for your continued interest in oversight in this area. 

Today, I will highlight some of the problems we identified during 

our initial audit. I will describe DLA’s actions to address some of 

our recommendations. I will identify additional opportunities to improve contract administration and discuss some lessons learned. In December 2005, DLA awarded a five year, $762 million contract to Supreme Foodservice to provide food and other non-food 

distribution to four locations in Afghanistan. Over the next few 

years, this contract expanded significantly through verbal change 

orders to cover additional locations. 

By May 2010, DLA had paid Supreme about $3 billion, including $1.6 billion for food and water and $1.4 billion for transportation 

and storage costs. 

Our initial audit of DLA’s contract oversight efforts identified 

significant potential overpayments and contract administration 

flaws. For example, DLA potentially overpaid the contractor about 

$124 million in transportation and triwall costs. DLA also paid 

nearly $455 million to airlift food into Afghanistan without incorporating this requirement into the contract and without documenting whether the airlift price was fair and reasonable. Further, DLA failed to validate whether nearly $104 million of 

triwall costs were accurate or chargeable to the contract. Finally, 

DLA did not develop a quality assurance plan and detailed procedures to monitor the contractor’s performance and verify that invoices being paid were accurate. 

During our follow-up audit, we noted that DLA had taken some 

corrective action to address these problems. Because this report is 

not yet final, it would not be appropriate to discuss these actions 

in detail. However, I would like to broadly describe some of DLA’s 

efforts. 

For example, DLA unilaterally definitized the price they would 

pay Supreme to airlift food into Afghanistan in December 2011. 

This was six years after the verbal change order went into effect. 

In addition, DLA is seeking a $756 million refund from the contractor and has also developed a quality assurance plan. 

However, we also identified additional areas where DLA could 

further strengthen its contract oversight efforts and help the Department collect overpayments. For example, DLA could expand its 

efforts to develop adequate documentation supporting its conclusion 

that the Department is paying fair and reasonable prices. They 

could also take additional actions to obtain critical information 

from contractors and develop strategies to recover overpayments. 

After careful reviewing DLA’s actions on this contract, several 

lessons learned become apparent and today I would like to highlight four. 

First, DLA should definitize contracts within the appropriate period of time, which is generally 180 days if possible. Although 

verbal change orders are permissible, these actions should be incorporated timely into the contract and should be used on a limited 

basis. 

Second, when using provisional rates, do not pay more than the 

agreed upon amounts. Paying more than provisional rates may reVerDate Aug 31 2005 11:01 Jul 16, 2013 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\DOCS\81829.TXT APRIL
31 

sult in escalating costs and the Department may experience difficulty recouping these overpayments. In addition, it is important 

to determine that the Department is paying fair and reasonable 

prices for the goods and services it receives. 

Third, unilateral contracting officer determinations should be 

used sooner to protect the government’s interest in the contract 

and begin collection efforts sooner. 

Finally, develop and implement a quality assurance plan and detailed procedures to monitor the contractor’s performance and 

verify the accuracy of payments. Had DLA taken this important 

step, they would have prevented many of the overpayments from 

being made in the first place. 

In closing, I would like to thank the subcommittee for inviting 

me to testify today. It is clear that our audit efforts and related recommendations to collect overpayments are having an impact on the 

Department. We are encouraged by the actions and efforts of DLA 

senior leadership, especially those efforts to collect the amounts 

owed to the Department. 

However, to be truly effective, these corrective actions should be 

applied more broadly as appropriate to other DLA contracts rather 

than just fixing the problems we identify. Given the fiscal challenges the country is facing, every reasonable effort should be 

taken to save valuable funds and put them to their best possible 

use. 

This concludes my statement and I would be happy to answer 

any questions you have for me. 

[Prepared statement of Mr. Blair follows:] 

32 


Insert offset folio 4 here 81829.004

April 17, 2013 

Expected Release 

2:00 p.m. 

Statement of 

Mr. Daniel R. Blair 

Deputy Inspector General for Auditing 

Department of Defense Inspector General 

before the 

Subcommittee on National Security 

Committee on Oversight and Government Reform 

on 

"Contracting to Feed U.S. Troops in Afghanistan: 

How did the Defense Department End Up in 

a Multi-Billion Dollar Billing Dispute?" 

1 
33 


Insert offset folio 5 here 81829.005

Chairman Chaffetz, Ranking Member Tierney, and distinguished members of the 

Subcommittee: Good aftcrnoon and thank you for thc opportunity to appear before you 

to discuss Department of Dcfense Inspector General (DoD IG) completed and ongoing 

audits of the Subsistence Prime Vendor Contract in Afghanistan. On behalf of the DoD 

IG, I would like to thank this Subcommittee for its continued interest and oversight in this 

area. Taking corrective action to address Inspector General recommendations is essential 

to good government and the effective stewardship ofthe taxpayer's dollars. Additionally, 

identifying and implementing lessons learned is essential to minimizing the risks of 

repeating mistakes of the past. 

Today I will highlight problems identified during our initial audit, 1 Defense Logistics 

Agency (DLA) actions taken to address the report recommendations, additional 

opportunities to improve contract administration, and lessons learned that could be 

applied by DLA to future contracts. 

BACKGROUND ON THE INITIAL AUDIT AND THE PRIME VENDOR CONTRACT 

DoD !G's overall focus of the audit was to evaluate the DLA's contract administration of 

Supreme Foodservices GmbH,2 the prime vendor (PV)3 for food and nonfood products 

for our warfighters in Afghanistan. Specifically, the audit reviewed whether the 

assignment of contracting officer's representatives (CORs) and execution ofthe Quality 

Assurance Surveillance Plan (QASP) and procedures were effective for assessing 

contractor costs and performance. 

DLA has the overall responsibility for procuring, managing, and distributing subsistence 

products throughout the supply chain. In addition, DLA provides worldwide dining hall 

support to authorized customers, to include providing contract administration for these 

facilities. 

1 000 IG Report No. 0-2011-047, "Improvements Needed in Contract Administration of the Subsistence Prime 

Vendor Contract for Afghanistan," March 2, 2011 

2 The contractor's headquarters are located in Ziegelbruecke, Switzerland. 

3 PV is generally a single commercial contractor that serves as the major provider of products and services to 

various Federal customers within a geographical region or zone. 

2 
34 


Insert offset folio 6 here 81829.006

Supreme Foodservice GmbH was awarded a 60-month prime vendor contract, starting 

December 3, 2005. This was a fixed-price, indefinite-quantity contract and was initially 

valued at approximately $726.2 million.4 At the time the contract was awarded, the PV 

was required to provide food and nonfood distribution support to four activities in 

Afghanistan-Bagram, Kabul, Salerno, and Kandahar. 

PV's warehouse in Kabul, Afghanistan 

On August 26, 2005, the contracting officer issued a verbal change order, rather than a 

formal contract modification, for the PV to provide the same food and distribution 

support to 68 additional activities throughout Afghanistan. According to DLA, security 

concerns within the warzone and the lack of developed roads in Afghanistan prevented 

the PV from always using ground transportation to service the additional activities. 

Consequently, the contracting officer also verbally authorized the PV to use a 

combination of fixed-wing aircraft, helicopters, and ground transportation. This verbal 

authorization remained undefinitized for I year until the contracting officer modified the 

contract in August 2006. 5 Although verbal change orders are permissible, the Defense 

Federal Acquisition Regulation Supplement requires that undefinitized contract actions 

4 An indefinite-quantity contract provides for an indefinite quantity, within stated limits, of supplies or services 

during a fixed period. Contracting officers may use an indefinite-quantity contract when the Government cannot 

predetermine, above a specified minimum, the precise quantities of supplies or services that the Government will 

require during the contract period. 

S Definitization is the process where certain aspects of a contract that have not yet been finalized such as specific 

terms, specifications, or prices are formally agreed upon and included in the contract. 

3 
35 


Insert offset folio 7 here 81829.007

be definitized within 180 days of the contract modification. While there are exceptions 

allowing heads of agencies to waive the 180-day requirement if necessary to support 

contingency operations, as of April 2010, subsistence contracting officials had not 

requested a waiver. 

Fixed-wing aircraft used to deliver supplies. 

4 
36 


Insert offset folio 8 here 81829.008

As of September 2009, the PV's responsibility to provide food and distribution support 

had grown to over 150 activities or locations within Afghanistan. Between June 2005 

and May 31, 2010, DLA Troop Support personnel paid the PV about $3 billion, including 

$1.6 billion for food and water and $1.4 billion for nonfood items, such as transportation 

and storage costs. When the contract was scheduled to end in December 2010, DLA 

extended it for an additional 2 years. 

PRIME VENDOR CONTRACT ADMINISTRATION NEEDED IMPROVEMENT 

On March 2,2011, the DoD IG reported that DLA contracting officials did not provide 

sufficient oversight of the PV contract, valued at more than $3 billion. This occurred 

because the contracting officer did not appropriately definitize transportation rates as 

required by Defense Federal Acquisition Regulation Supplement 217.74, or issue contract 

modifications, as required by the Federal Acquisition Regulation. Specifically, the 

contracting officer did not establish permanent transportation rates for over 5 years and 

did not document that higher reimbursement rates for triwalls were fair and reasonable.6 

In addition, the contracting officer did not develop a QASP and written procedures to 

monitor the PV's costs and performance. As a result, DLA Troop Support personnel: 

• overpaid the PV potentially $98.4 million in transportation costs; 

• overpaid the PV approximately 

$25.9 million for triwalls; 

• paid $454.9 million to the PV for 

airlifting fresh fruit and vegetables 

without incorporating the airlift 

requirement in the contract and without 

documenting whether the airlift price of 

$3.74 per pound was fair and 

reasonable; and 

6 Triwalls are three-layered corrugated boxes used for packaging and shipping chilled or frozen food products. 

5 
37 


Insert offset folio 9 here 81829.009

• did not validate whether $103.6 million in triwall costs was accurate and 

chargeable to the contract. 

Some examples of where DLA's oversight was not effective follow: 

• The contracting officer did not establish permanent transportation rates in a timely 

manner. In fact, the verbal change order issued by the contracting officer on 

August 26, 2005, to provide food distribution support to 68 additional activities 

was not formally incorporated into the contract until 6 years later in 

December 2011. 

• DLA paid the contractor 100 percent of the triwall rates rather than 75 percent as 

stated in the contract. DLA and the PV agreed that from July 2006 forward, DLA 

would reimburse the PV monthly at 75 percent of the rates, pending the 

definitization of the final rates. 

• The contracting officer did not issue a contract modification requiring fresh fruits 

and vegetables to be airlifted to Afghanistan. In addition, the rate for airlift 

transportation was not incorporated into the contract, and there was no 

documentation demonstrating how the contracting officer determined the rates 

were fair and reasonable. 

• The contracting officer did not develop a QASP to monitor vendor performance 

because contracting officials believed that a generic contract management plan 

was the QASP. However, this plan only provided a general framework for 

administering overseas PV subsistence contracts and did not provide specific 

instructions needed to effectively administer the PV contract for Afghanistan. For 

example, the plan did not identify the: 

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Insert offset folio 10 here 81829.010

o work requiring surveillance; 

o method of surveillance; 

o technical requirements, or the specifications for inspections and testing. 

• Contracting officials did not effectively review the quantities oftriwalJs billed by 

the PV and did not independently verify that the number oftriwalJs billed was 

correct because customers at forward operating bases were not required to note the 

quantity of triwalls received. 

• The contracting officer did not have detailed written procedures for validating the 

PV's transportation invoices. 

Without a detailed QASP and the appropriate written procedures for reviewing invoices, 

the CORs lacked important tools to assess the PV's work, determine if the Department 

was actually receiving the goods and services in accordance with the contract terms, and 

prevent overpayments before they were made. Ifthere had been a QASP in place during 

the course of this contract, as required by the Federal Acquisition Regulation, the 

likelihood of overpayments could have been reduced. 

The DoD Office ofthe Inspector General recommended that the Commander, DLA 

Troop Support, direct responsible officials to: 

• determine fair and reasonable prices for transportation and triwalls and use those 

prices to definitize the August 2005 verbal change order; 

• recover triwall overpayments ($25.9 million as of May 28, 2010); 

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39 


Insert offset folio 11 here 81829.011

• request assistance from Defense Contract Audit Agency in determining a fair and 

reasonable price for airlift requirements from Sharjah, United Arab Emirates, and 

use the results to determine and document fair and reasonable airlift requirements; 

• compute and recover overpayments for transportation and triwall costs; 

• develop a QASP; and 

• perform a review of the individuals involved in administering the PV contract and 

initiate appropriate corrective action warranted by the review. 

The Acting Commander, DLA Troop Support anticipated that all recommendations 

would be fully implemented no later than December 31, 2011. 

ACTIONS TAKEN BY DLA ADDRESSED SOME OF THE REpORT 

RECOMMENDATIONS 

Based on the anticipated implementation of corrective actions to address the deficiencies 

identified in initial report, the DoD 10 audit team began a follow-up audit to assess the 

actions taken by DLA. The team reviewed whether DLA Troop Support implemented 

the recommendations made to address the problems and risks identified during the prior 

audit, and whether DLA corrective actions addressed the problems. The team recently 

completed this audit and issued the draft report to DLA on March 29, 2013. DLA is 

currently reviewing the findings and preparing their response to the report. Because this 

report is not yet final, it would be inappropriate to describe the findings in detail. 

However, in general, the audit team noted that DLA officials have taken corrective 

actions to address some of the recommendations, and there are some areas where 

additional actions by DLA will result in improved contractor administration and 

oversight and potentially recover additional funds owed to the Department. 

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Insert offset folio 12 here 81829.012

DLA 's COLLECTION EFFORTS AND OTHER ACTIONS TAKEN 

Because the contractor and DLA were unable to agree on a contract price to definitize 

transportation rates in Afghanistan, the contracting officer unilaterally definitized the 

prices. The contracting officer also signed and issued a final decision, debt 

determination, and demand for payment letter to the contractor on December 9, 2011. In 

summary, the DLA stated that the PV owes the Department approximately $756 million 

for overpayments of premium transportation fees incurred from December 12,2005, to 

September 30, 20 II. However, the PV did not voluntarily repay the debt. Instead, the 

PV filed a claim with the Armed Services Board of Contract Appeals, and according to a 

DLA Troop Support official, the case is scheduled for late April 2014. 

In addition to taking collection actions and finalizing the transportation rates, we noted 

that DLA appeared to have taken other corrective actions including developing and 

implementing a QASP. DLA officials reviewed the actions of the contracting officers 

and determined that no action was necessary because the contracting officers acted within 

the scope oftheir authority. 

IMPACT OF ONGOING LITIGATION 

There were some recommendations where we could not address DLA's corrective actions 

because of ongoing litigation. Specifically, we did not validate DLA's analysis or review 

the accuracy of data supporting their determination that the contractor had been overpaid 

approximately $756 million. Therefore, we did not evaluate whether DLA had taken 

appropriate action regarding: 

• re-determining fair and reasonable prices for premium transportation services, 

• calculating and recovering overpayments for premium transportation, and 

• refunding premium transportation overpayments to the Army. 

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ADDITIONAL OPPORTUNITIES TO IMPROVE CONTRACT ADMINISTRATION EXIST 

During the follow-up audit, the team identified additional actions DLA could take to 

address some of the problems and risks previously reported. These additional actions 

should strengthen contract administration and oversight, as well as help ensure the 

Department recoups overpayments. Because the report is not yet final, it would not be 

appropriate to discuss the areas in detail; however, there are additional efforts DLA 

should take regarding: 

• obtaining and maintaining adequate documentation to support price 

reasonableness, 

• taking additional actions to obtain critical information from contractors, and 

• developing strategies to recover overpayments. 

LESSONS LEARNED FOR FUTURE CONTRACTS 

Some of the problems encountered in the Subsistence PV Contract for Afghanistan 

contract were highlighted in our updated report on contingency contracting.7 This report 

provides a useful tool to senior DoD officials to help prevent many contracting problems. 

During the initial and follow-up audits of the Subsistence PV Contract for Afghanistan, 

several important lessons learned regarding contract administration and oversight were 

identified. Specifically: 

• Definitize contracts within the appropriate amount of time. Although verbal 

change orders and other undefinitized contracting actions are permissible, these 

actions should be incorporated timely into the contract and should be used in 

limited instances. During periods when these actions remain undefinitized, 

contract costs and performance risks transfer from the contractor to the 

Government. Undefinitized contract actions for supplies and services can result in 

7 DoD IG Report No. 0-2012-134, "Contingency Contracting: A Framework for Reform 2012 Update," September 

18,2012 

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a contractor not providing goods and services appropriately and at prices deemed 

acceptable to the Department. Therefore, it is critical that verbal change orders be 

incorporated as soon as possible into the contract through formal contract 

modifications to protect the Department's operational and financial interests. 

• When using prOvisional rates, verify tbeir reasonableness until tbe final rates 

are definitized. Without a definitized contract, responsible officials should 

exercise due diligence by verifying the reasonableness of provisional rates and not 

paying more than these provisional rates. Paying more than actual costs incurred, 

as evidenced in this contract, may result in costs escalating out of control, and the 

Depaltment experiencing difficulty recouping overpayments. 

• Ensure adequate documentation is obtained and maintained. For large and 

complex acquisitions, such as the Subsistence PV Contract, it is critical that 

responsible officials document key aspects of the contracting process, as required 

by laws and regulations, and maintain this documentation as appropriate. This 

documentation not only provides valuable complete background information, it 

also serves as a basis for informed decisions at each step in the acquisition 

process; supporting actions taken; providing information for reviews and 

investigations; and furnishing essential facts in the event of litigation or 

congressional inquiries. 

• Use unilateral contracting officer determinations sooner. Generally, 

Government contracts contain clauses that permit the eontraeting offieer to make 

unilateral changes, in designated areas, within the general scope of the contract. A 

unilateral modification is a contract modification signed only by the contracting 

officer. Unilateral modifications can be used to make administrative changes and 

to issue ehange orders and termination notices. Tfthe Government and the 

contractor cannot reach an agreement, the contracting officer should consider a 

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unilateral change (if allowed and warranted). By taking these actions sooner, thc 

Department will be better equipped to collect or offset future payments to the 

contractor. 

• Prepare and execute a QASP in a timely manner. Government quality controls, 

to include developing and implementing a QASP, are not only required but 

provide a valuable oversight tool that helps ensure the Department actually 

receives the goods and services it pays for. Surveillance, especially with a large, 

complex contract like the subsistence PV, is neccssary to ensure that the supplies 

or services conform to contract requirements. 

• Develop and implement specific procedures to verify the accuracy of invoices 

prior to making payments. Detailed written procedures help CORs accurately 

assess contractor invoices and approve only those costs allowable under the terms 

of the contract. The contracting officer had not developed written procedures to 

ensure that the cost of triwalJs delivered by road to non-forward operating bases 

was excluded from invoices. In addition, the CORs' review of some 

transportation invoices was incomplete or inaccurate because they did not include 

minimum order weights as part of the validation. Had written procedures been 

established for reviewing invoices, the CORs may have prevented some of the 

overpayments. 

• Minimize turnover in key positions (for example, contract officer). Turnover 

of acquisition professionals can adversely impact the quality and continuity of 

business. New contracting officers may be at a disadvantage because they are 

unfamiliar with key aspects of complex contracts and take additional time to 

establish the appropriate level of contact between the Government and the 

contractor. With each change in a key position, documentation, issues being 

tracked, and recollection ofkey decisions and directions may be lost in the 

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transition. In the end, the best interest of the Government may suffer because of 

the turnover in key officials. 

CONCLUSION 

Our completed and ongoing audits of the Subsistence Prime Vendor Contract in 

Afghanistan have had a significant impact by prompting DLA to initiate appropriate 

corrective action for overpayments and by improving contract administration by the 

Department. We are encouraged by efforts DLA senior leadership has taken to address 

some of the critical problems we identified, especially efforts to collect the significant 

amount of overpayments made on this contract. However, to be truly effective, these 

corrective actions must be applied, as appropriate, across DLA's other contract activities 

rather than fixing only the problems we identify. The DoD IG will continue to follow up 

on key recommendations made throughout the Department. Given the fiscal challenges 

the country is facing, every reasonable effort must be taken to conserve valuable funds 

and put them to their best possible use. 

13 
45 

Mr. CHAFFETZ. Thank you, Mr. Blair. 

We will now recognize Mr. Beebe for five minutes. 

STATEMENT OF MATTHEW BEEBE 

Mr. BEEBE. Good afternoon, Mr. Chairman, Ranking Member 

Tierney and distinguished members of the subcommittee. 

I am Matt Beebe, Deputy Director of Acquisition for the Defense 

Logistics Agency. I am delivering the opening statement today on 

behalf of DLA. We appreciate the opportunity to appear here today 

to discuss DLA’s award to Supreme Foodservice for the Subsistence 

Prime Vendor Afghanistan Contract. 

As the Department of Defense’s only combat logistics support 

agency, DLA’s primary mission is to support American soldiers, 

sailors, airmen and Marines. DLA provides virtually every 

consumable item our military forces require, including food, fuel, 

medical supplies, uniform items and weapon systems repair parts. 

As the Deputy Director for DLA Acquisition, I am responsible for 

the DLA’s acquisition program. With me today is Mr. Bill Kenny, 

the DLA Troop Support Acquisition Executive, and Mr. Gary 

Shifton, the DLA Troop Support Subsistence Supply Operations Division Chief. 

In 2004, DLA received a directive from the Army to provide subsistence support to service members deployed to Operation Enduring Freedom. DLA issued a fully competitive solicitation in October 

2004 and awarded the contract to Supreme Foodservice in June 

2005. The contract provides full service food and non-food distribution support in Afghanistan and expires in December 2013. 

As awarded, the contract was written to use ground transportation for delivery to four sites in Afghanistan. Requirements there 

quickly changed with the military setting up many more forward 

operating bases than initially planned. Two months after contract 

award, DLA Troop Support issued a verbal change order to Supreme to support a significant increase in forward operating bases 

using a combination of ground, fixed wing aircraft and helicopters 

to make deliveries. This is referred to as premium outbound transportation. 

In December 2005, Supreme submitted proposed premium outbound transportation rates. These proposed rates represent the 

main area of disagreement between DLA and Supreme. In June 

2006, after performing on the contract for six months, Supreme 

billed DLA for premium outbound transportation using those proposed rates. 

That same month, DLA requested an audit from the Defense 

Contract Audit Agency to determine whether Supreme’s rates were 

fair and reasonable. DLA also issued a contract modification to establish that Supreme would be reimbursed monthly at 75 percent 

of the existing rate. 

DCAA audits conducted in 2008 and 2011 were unable to confirm 

the reasonableness of Supreme’s in-theater transportation rates. In 

August 2010, during contract negotiations, DLA Troop Support 

issued a contract modification to further reduce the payment rate 

from 75 percent to approximately 50 percent. 

After unsuccessful negotiations and following completion of the 

2011 audit, DLA unilaterally definitized the prices for premium 

46 

outbound transportation. As a result, the contracting officer determined Supreme owed the government $756.9 million and sent a 

final decision letter to Supreme in December 2011. 

Supreme has appealed this decision to the Armed Services Board 

of Contract Appeals. As of March 31, 2013, DLA has received approximately $283 million and continues to collect more than $21 

million per month. 

Throughout the Supreme contract, DLA has ensured continuous 

subsistence support to the military forces in Afghanistan. We acknowledge the issues associated with the DOD Inspector General’s 

2011 audit and have worked diligently to address these findings. 

We understand DLA must achieve both unwavering warfighter 

support and through contract management. We take very seriously 

our obligation to the American taxpayer and our stewardship responsibilities. 

We look forward to answering your questions. 

[Prepared statement of Mr. Beebe follows:] 

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Insert offset folio 17 here 81829.017

Defense Logistics Agency 

Hearing before the 

House of Representatives Committee on Oversight and 

Government Reform 

Subcommittee on National Security 

April 17, 2013 

Good afternoon, Mr. Chairman, Ranking Member Tierney, and 

distinguished members of the Subcommittee. I am Matthew Beebe, Deputy 

Director of Acquisition at the Defense Logistics Agency (DLA). I am responsible 

to the Acquisition Director for the development, application, and oversight of DLA 

acquisition policy, plans, programs, systems, and operations for our agency's 

acquisition program. In fiscal year 2012, DLA generated $44 billion in sales and 

revenue while managing over 5.2 million items needed by our military services. 

With me is Mr. William Kenny, the DLA Troop Support Acquisition Executive, and 

Mr. Gary Shifton, the DLA Troop Support Subsistence Supplier Operations 

Division Chief. 

I appreciate the opportunity to discuss the Subsistence Prime VendorAfghanistan contract awarded by DLA to Supreme Foodservice. 

The DLA mission is to provide superior logistics support to America's 

warfighters. In accomplishing its worldwide mission, DLA uses six field activities, 

including DLA Troop Support, to buy, store and distribute food, fuel, uniform 

apparel, construction items and equipment, pharmaceuticals, medical and 

surgical products and equipment, and weapons systems repair parts to the 

military services. 

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Insert offset folio 18 here 81829.018

DLA is committed to meeting our customers' expectations, decreasing 

material and operating costs to maximize savings, reducing inventory to 

appropriate levels, and achieving audit readiness to ensure accountability. 

In 2004, DLA received the directive from the U.S. Army to provide food 

support to service members deployed for Operation Enduring Freedom. DLA 

issued a fully competitive solicitation in October 2004, and awarded the contract 

in June 2005 to Supreme Foodservice. This contract provides a full line of food 

and non-food products to service members in Afghanistan and, as extended, will 

expire in December 2013. Relevant information concerning the contract follows: 

• The initial award of the contract on December 3, 2005, had a base 

period of 18 months with two 12-month and one 18-month options 

for extension, ending on December 12, 2010. 

• On December 13, 2010, DLA extended the contract without 

competition pursuant to a Justification and Approval document, 

because Supreme was the only source able to provide the required 

support within the required timeframe. The extension was for one 

12-month base period and two six-month option periods, beginning 

December 13, 2010, and ending December 12, 2012. 

• On June 22, 2012, DLA issued a follow-on interim contract to 

Supreme for the period from December 13,2012, to December 12, 

2013, also because Supreme was the only source able to provide 

the required support within the specified timeframe. 

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• DLA used the two contract extensions to prepare the solicitation for 

the follow-on contract competition and to incorporate lessons 

learned from its experience with the Supreme contract and other 

contracts supporting OCONUS, as well as feedback from industry. 

The new solicitation was issued on April 26, 2011, as a full and 

open competition. The extensions also allowed sufficient time for 

comprehensive evaluation of the very complex technical proposals 

received from the offerors for the follow-on procurement, and for 

conducting negotiations with the offerors. Finally, the extensions 

were needed to provide time for transition following award of the 

new contract, and to provide uninterrupted support to U.S. and 

coalition military forces in Afghanistan during the anticipated 

litigation over the contract award, which did occur and is ongoing. 

The 2005 contract award called for delivery to four sites in Afghanistan -

Bagram, Kabul, Salerno, and Kandahar, using ground transportation for 

deliveries. Following that award, requirements in Afghanistan quickly increased, 

with the military planning to set up significantly more camps and forward 

operating bases than initially planned. In August 2005, two months after the 

contract award, DLA Troop Support officials issued an oral change order to 

Supreme to support additional activities throughout the theater, using a 

combination of ground transportation, fixed-wing aircraft and helicopters. This 

combination of transportation is generally referred to as "premium outbound 

transportation," and was necessary because many of the additional ordering 

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activities were operating in remote, mountainous regions, which presented 

significant transportation challenges. Supreme began preparation for contract 

performance during this period. 

In December 2005, when Supreme assumed full performance on the 

contract, they submitted proposed premium outbound transportation rates to 

DLA. After performing on the contract for six months, in June 2006, Supreme 

billed DLA for premium outbound transportation using Supreme's proposed rates. 

In order to ensure Supreme's rates were fair and reasonable, in August 2006, 

DLA requested an initial audit by the Defense Contract Audit Agency (DCM). 

Also in August 2006, DLA issued contract modification number 10 to formalize 

the oral change order that increased the number of supported sites. Modification 

number 10 included provisional payment rates, explicitly stated to be subject to 

audit. In October 2006, contract modification number 12 established that DLA 

Troop Support would reimburse Supreme monthly at 75 percent of the rates in 

modification 10, pending the results of a DCM review. The DCM conducted 

two separate audits, one in 2008 and another in 2011, using updated sets of 

proposals from Supreme received by DLA as part of our ongoing negotiations. 

The DCM audits were unable to confirm the reasonableness of the in-theater 

transportation rates proposed by Supreme, either because of lack of support by 

actual transportation costs or because of Supreme's lack of documentation to 

support its rates. 

In August 2010, during continued negotiations, DLA issued contract 

modification number 76 to further reduce the actual payment rate for premium 

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outbound transportation to approximately 50 percent of Supreme's proposed 

rates. 

During contract performance, DLA and Supreme repeatedly attempted to 

negotiate final rates. After negotiation attempts were unsuccessful and following 

completion of the second DCM audit, DLA unilaterally definitized the premium 

outbound transportation rates in December 2011 based upon information 

collected, including Supreme's actual costs to the extent known by DLA. 

Also during this time period, in February 2011, a Department of Defense 

Inspector General's (DoD IG) report identified several recommendations for DLA 

Troop Support related to administration of the Supreme contract. As the result of 

existing contract administration efforts and the Inspector General's recommendations, 

DLA took the following actions: 

• We definitized the premium outbound transportation rates using data 

from an audit conducted by the DCM in August 2011. The rates were 

also informed by DLA technical analysis on the reasonableness of 

flight times and fuel consumption in calculating fixed rates per pound 

for fixed wing, rotary wing, and ground premium transportation. 

• The contracting officer determined that Supreme owed the government 

$756.9 million, and sent a final decision letter to Supreme on 

December 9, 2011. Supreme has appealed this decision to the Armed 

Services Board of Contract Appeals. 

• In March 2012, DLA began withholding $21.767 million per month from 

Supreme via an administrative offset against contract payments. As of 

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March 31, 2013, DLA has recouped $282,976,694 of the money we 

determined we are owed, and we will continue to use the monthly 

administrative offset through the Defense Finance and Accounting 

Service. On February 25, 2013, Supreme submitted a claim against 

DLA for $1.802 billion, asserting it is entitled to be paid its requested 

rates for premium outbound transportation. That claim is under review. 

• DLA also issued contract modifications confirming the rates paid for 

airlift for fresh fruits and vegetables and triwall from the UAE, based on 

the contracting officer's determination that the rates were fair and 

reasonable. The contracting officer determined that DLA made no 

overpayments for the airlift price of the fresh fruits and vegetables and 

the related triwall costs, and these were therefore not included in the 

claim against Supreme. 

• Lastly, DLA strengthened its contract oversight requirements including 

by formalizing a quality assurance surveillance plan. We improved 

government-furnished material accountability by authorizing an 

increase in the number of contracting officer representatives at the 

contractor's facilities in Afghanistan; there are currently three CORs 

located in Afghanistan. DLA also created additional contract oversight 

at the local level, regionally, and at DLA Headquarters. 

Mr. Chairman, we have not only recognized the areas that needed to be 

corrected in terms of contract administration with our Supreme contract for 

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Subsistence in Afghanistan, but we also have put measures in place to ensure 

overpayments and delays in agreement of terms do not occur in the future. 

For instance, DLA implemented a new procurement strategy with the new 

five-and-a-half year Subsistence Prime Vendor-Afghanistan contract, 

competitively awarded in June 2012. In this new contract, transportation costs 

are included in fixed distribution fees, ensuring the fees are already built into the 

pricing. Competition for award of the contract helps to ensure that the fees are 

reasonable. 

Implementation of the new contract, awarded to Anham, has been delayed 

due to a series of Government Accountability Office (GAO) protests and filings by 

Supreme with the Court of Federal Claims. Part of that process included a 

requirement that we re-evaluate certain factors in the proposals, and resulted in a 

new award decision that affirmed the award to Anham in December 2012. On 

March 27, 2013, the GAO denied Supreme's protest of the December 2012 

award decision. On April 5, 2013, Supreme filed an action in the Court of 

Federal Claims protesting the December 2012 award decision. That case is 

pending. 

Through the Supreme contract, DLA has ensured continuous food support 

to military forces in Afghanistan since the contract began eight years ago. At the 

height of operations, we provided food for more than 260 different forward 

operating bases, dining facilities, and storage facilities throughout Afghanistan, 

which translates into approximately 435 million meals. Prior to entering the 

drawdown phase, the DLA Troop Support Subsistence supply chain annually 

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exceeded over 10,000 40-foot container equivalents or 265 million pounds per 

year. Including bottled water, it was customary for our prime vendor to move 

over 700 thousand commercial cases of product per week. 

DLA acknowledges the issues associated with the DOD IG's 2011 findings 

and has worked diligently to correct them, while continuing to provide 

subsistence support to our brave men and women serving in Afghanistan. The 

issues with this contract largely arose from an effort to keep pace with a rapidly 

changing operational environment. However, we understand DLA must achieve 

both unwavering warfighter support and thorough contract management. 

DLA worked to protect the Government's interests by including provisions 

for audit of Supreme's proposed rates in the contract modifications implementing 

the changes, and two audits ultimately determined that Supreme was overpaid. 

DLA is now recouping the amount owed by Supreme through monthly 

administrative offsets against contract payments being made under the current 

extension contract. DLA has also implemented measures to ensure these kinds 

of issues will not be repeated. 

We take much pride in accomplishing our mission as America's combat 

logistic support agency. On behalf of myself, Mr. Kenny and Mr. Shifton, I thank 

you for the opportunity to discuss the Subsistence Prime Vendor contract to 

support service members in Afghanistan. 

We are happy to answer any of your questions. 

9 
55 

Mr. CHAFFETZ. Thank you. 

I will now recognize myself for five minutes. 

Mr. Beebe, was there any dispute about the quality of the product or the actual food they were delivering? Was there any dispute 

about any of that? 

Mr. BEEBE. No, there was not. 

Mr. CHAFFETZ. Is it fair to characterize the only question, problems or challenges you saw were purely contracting questions? 

Mr. BEEBE. Related to rates, yes, sir. 

Mr. CHAFFETZ. Does Supreme still offer food services in Afghanistan to this day? 

Mr. BEEBE. They are still our provider of food in Afghanistan. 

Mr. CHAFFETZ. You have a situation where you sign a contract 

and, you can qualify this, literally in two months after that contract signed, you have to renegotiate, things are changing rapidly? 

Mr. BEEBE. Yes, sir. The original contract was not negotiated; it 

was a competitively bid contract. Yes, we then had to enter into a 

situation where requirements changed. 

Mr. CHAFFETZ. Were they the low bid contract? 

Mr. BEEBE. Let me defer to Mr. Shifton. 

Mr. CHAFFETZ. Mr. Shifton, were they the low bid contractor? 

Mr. SHIFTON. My recollection is they were not the low bid contractor. They had the best technical proposal. We used a tradeoff 

process for award. They had a technically superior proposal to their 

competitor, Seven Seas. 

Mr. CHAFFETZ. There was only one other bidder? 

Mr. SHIFTON. Yes. 

Mr. CHAFFETZ. You are two months into this contract, you issue 

verbal orders and then you start getting into a spat or dispute 

about what are the rates? This is not five bucks; we are talking 

about an awful lot of money. Why was this a verbal agreement? 

Mr. BEEBE. The primary priority was to ensure we had uninterrupted food service to the warfighter in Afghanistan. That was our 

primary responsibility while ensuring that we take proper actions 

within the contract management. 

Mr. CHAFFETZ. You are moving ahead, you have this dispute that 

is hundreds of millions of dollars and yet you went ahead and extended their contract by billions. Why is that? Mr. Kenny? 

Mr. KENNY. As Mr. Beebe indicated, our primary focus of the 

subsistence contracting team was to maintain that exceptional 

level of service to the men and women serving in Afghanistan. The 

use of unpriced actions, sole source contracts, verbal change orders 

is highly unusual, rarely used in the contracting process. We discourage its use. In fact, we have no unpriced contracting actions 

currently at the Troop Support Center. 

In this case, a decision was made because of the dynamics and 

requirements of the warfighter that we needed to take some unusual action. The reason we extended that contract on one and several occasions was we were attempting to put together an acquisition strategy and an acquisition plan that encompassed not only 

the lessons learned over the last three or four years of dealing with 

Supreme but struck that balance between effectiveness and efficiency. 

56 

We developed and refined that strategy over a period of time. We 

did that with changing requirements, numbers of troops, troop 

surge, troop drawdown, where we are going to have the issues associated with fraud that we saw with PWC. We incorporated things 

like the Code of Business Ethics into the new solicitation. 

Mr. CHAFFETZ. It is not like we just went to war for the first 

time. We spent an awful lot of time in Iraq and we have been in 

Afghanistan ten plus years. That wasn’t part of the original thing, 

a Code of Ethics? 

Mr. KENNY. Sir, there were a lot of lessons learned that came out 

of the PWC investigation. 

Mr. CHAFFETZ. My concern is I wonder if we actually learned any 

of those lessons. That is the thing. I struggle with why so late in 

the process this happens. I just do not understand. You say these 

lessons are learned, you say sole bids are an exception, you say we 

don’t generally do verbal adjustments. That is not my experience. 

That is not my perspective. It scares me that you think that. 

Mr. KENNY. I can only speak for the Troop Support, with all due 

respect, what we learned from the PWC Justice investigations. We 

then enhanced our training for our work force and the provisions 

within our contracts. 

Mr. CHAFFETZ. Were you short of personnel? Did you not have 

enough people? What was the problem? 

Mr. KENNY. From my perspective, the contract management efforts we applied to this did not keep pace with the changes we were 

seeing in our requirements. We have made significant changes to 

that since that time. 

Mr. CHAFFETZ. Mr. Blair, I want to give you an opportunity to 

share some comments or perspective on this discussion we are having right here. 

Mr. BLAIR. One of the things that I alluded to in my statement 

was another report we issued last year, our contingency contracting 

report, an update report. We found some of the same issues that 

we see here in the Supreme contract are the same issues we find 

quite often in our audits. It really relates to contract oversight and 

inadequate contract oversight. It relates to inadequate invoice reviews. Those are the top two areas highlighted in this report. 

I do think that had that level of oversight been in effect from day 

one when this contract started and had it kept pace with the contract, I think DLA would not be in the position it is in at this point. 

That is a critical part of basic oversight for a contract, especially 

a contract of this complexity and this magnitude. 

Mr. CHAFFETZ. Thank you. Again, we do not seem to learn these 

lessons. 

I now recognize the gentleman from Massachusetts, Mr. Tierney, 

for five minutes 

Mr. TIERNEY. Mr. Shifton, where is Ms. DeMayo? 

Mr. SHIFTON. My understanding is Ms. DeMayo works out of an 

office in Virginia. 

Mr. TIERNEY. She is no longer doing the same responsibilities she 

had at the outset? 

Mr. SHIFTON. I am sorry, I misspoke. You said Ms. DeMayo? Ms. 

DeMayo is working in our Medical Directorate at Troop Support. 

57 

Mr. TIERNEY. Was she responsible for the original contract or 

were you? 

Mr. SHIFTON. She was the contracting officer. I was her supervisor. 

Mr. TIERNEY. Tell me how it is that you have an original contract 

that I assume dealt with terms, scope, price and cost, right? 

Mr. SHIFTON. That is correct. 

Mr. TIERNEY. You approved all that? 

Mr. SHIFTON. Yes, I had oversight of all that. 

Mr. TIERNEY. That contract called for Supreme to document all 

the work and bills they submitted to you? 

Mr. SHIFTON. There are two parts to this. The first part is the 

award made to Supreme was a FAR Part 12 competitive award. 

The second part of this is the premium outbound transportation. 

Mr. TIERNEY. I am dealing with the original contract, four bases. 

You set your price, you set your scope, you set the terms on all of 

that. Did anywhere in that contract say when you submit a bill, we 

also want to see all the back-up documentation for how it is you 

got to negotiate this price? 

Mr. SHIFTON. Not really. It was a competitive acquisition, so we 

were doing price analysis against the bidders. 

Mr. TIERNEY. You had two bidders and you decided to go with 

the one with no experience? 

Mr. SHIFTON. No. We went with the one that actually had the 

better technical experience than the other. 

Mr. TIERNEY. What did the other one have? What is technical experience? 

Mr. SHIFTON. They actually were operating in Afghanistan and 

had experience moving product inside Afghanistan. The other had 

a template to do that type of work but had not performed it inside 

Afghanistan. 

Mr. TIERNEY. Mr. Schuster testified they had been doing exactly 

the same work they were doing here. It was an approximation of 

the same type of work? 

Mr. SHIFTON. That is fair, yes. 

Mr. TIERNEY. At some point you decided before the contract even 

starts that you now have to jump this up to 68 additional bases. 

You were informed by someone else you had to do it, right? 

Mr. SHIFTON. Right. Typically, once the contract is awarded, almost immediately thereafter we host a post-award conference 

where the customer, in this case, the Army, comes and Troop Support and the vendor meet. There is also a ramp-up period to this 

contract. One of the reasons why this decision was made back in 

August, a couple months after the contract was awarded, is we had 

to eliminate a supply chain to the Army and their distribution support and make a decision that Supreme would have to adjust for 

that in their supply chain. That is why we had to make that type 

of decision back in August so we would not have two duplicate supply chains moving into Afghanistan. 

Mr. TIERNEY. You are telling me that you couldn’t let Supreme 

do the four bases and have the Army continue to do the remaining 

bases? 

Mr. SHIFTON. Right. The Army support of those bases primarily 

came out of two what they call Class I yards or subsistence yards, 

58 

one at Bagram, one at Kandahar. Routinely, by the time the product from those yards got to the forward operating locations, there 

was spoilage. The Army had a lot of problems at that time storing 

subsistence type products and getting them out to forward locations. They came to us to see if it was viable to support those in 

our contract. 

Mr. TIERNEY. What additional documentation did you require of 

Supreme to determine they were qualified to do the 68 additional 

bases? 

Mr. SHIFTON. I can’t say it was so much probably documentation 

other than Supreme acknowledged they could do the support. 

Mr. TIERNEY. They gave you their word? Is that the way you generally do contracting business, 68 additional bases and billions of 

dollars, they give you their word, we can do it, don’t worry? 

Mr. SHIFTON. No, it is not and we formalized subsequent to that. 

In 2006, we developed what is called a delivery support plan request for every single location in Afghanistan. 

Mr. TIERNEY. How late in 2006 was that? 

Mr. SHIFTON. It was in the later part. 

Mr. TIERNEY. A year into the contract and the extended part of 

the contract? In 2005, when you asked them to do the additional 

68 bases and then more, what did they tell you they were going to 

charge you for it. 

Mr. SHIFTON. At that time, the decision was made that what 

they were going to charge us for would be subject to audit. 

Mr. TIERNEY. So nothing. They just said we will do it, we will 

get an audit and we will do it later? 

Mr. BEEBE. Right. 

Mr. TIERNEY. And that was fine with you? 

Mr. SHIFTON. Again, at the time there was a limit to the amount 

of information we had in this type of support in Afghanistan. To 

answer your question, we accepted it, again, with the conditions 

that it would be subject to audit. 

Mr. TIERNEY. Why didn’t you immediately ask for an audit of the 

fair and reasonableness right at that time in 2005? 

Mr. SHIFTON. Because at that point, we did not have any actuals 

that would be supportable by an audit. 

Mr. TIERNEY. So you were going to go for several months just 

winging it and hoping it all comes in to something reasonable. In 

the middle of 2006, you get whacked with a $33.5 million bill that 

puts the hair on your head straight up, right? 

Mr. SHIFTON. Again, yes. 

Mr. TIERNEY. Who was telling you that you had to do this? Mr. 

Kenny, are you approving all this? 

Mr. KENNY. Sir, I did not personally approve that. 

Mr. TIERNEY. Mr. Shifton is out there and he is the closest one 

to the line here next to Ms. DeMayo who is not with us today for 

whatever reason, so he has to make some hard decisions. Somebody 

is telling him he has to get these 68 bases served and he has to 

take some other company’s word for it without having any documentation and the estimates based on anything in particular. It 

has to be coming from your office, right? 

Mr. KENNY. Sir, if I may, my review of the documents of the sequence of events, yes, that verbal change order did take place. It 

59 

was followed by a modification, I believe it was Modification 10 

that the Chairman identified. 

Mr. TIERNEY. What was the date of that? Late 2006? 

Mr. KENNY. That is correct. 

Mr. TIERNEY. That is my point. The point is you are a year into 

this thing, you have taken a flyer for a year as to what is going 

to be the price of this thing and no way of establishing what it is, 

taking their word they are going to be able to perform the contract 

and we will all get to a price later on. Mr. Blair, how should that 

have been handled? 

Mr. BLAIR. According to the regulations, it should have been 

done within 180 days, if possible. 

Mr. TIERNEY. Do you think it was possible? 

Mr. BLAIR. That would be speculation on my part. 

Mr. TIERNEY. You have reviewed it, you are the Inspector General. You made a recommendation it should have been done within 

180 days. Did you think it was possible? 

Mr. BLAIR. I think there are efforts that could have been taken 

to be more aggressive. 

Mr. TIERNEY. What would those efforts be? 

Mr. BLAIR. I have kind of a simplistic view since I am not an attorney when it comes to contracting actions. In my view, if you 

withhold payment on current or future amounts, if you issue a demand letter or a cure notice, you are starting to leverage and take 

more aggressive action rather than waiting a year. 

Mr. TIERNEY. You are going to pull the plug on me? I will take 

it up later. 

Mr. CHAFFETZ. We will now recognize the gentleman from 

Vermont. 

Mr. WELCH. Thank you very much. 

First of all, gentlemen, thank you for your service. I have some 

appreciation of how tough it is. We have the troops out there and 

they have to get the water and the bullets. It is tough. We have 

a bad system when this kind of stuff happens but I do appreciate 

your service. 

In June 2010, five years after the performance started, the contracting officer finally realized that DLA was never going to be able 

to negotiate fair and reasonable rates with Supreme and recommended unilaterally definitizing the contract. The price negotiating memorandum stated the contracting officer believes an agreement will never be reached and therefore, premium outbound 

transportation should be unilaterally definitized. 

Mr. Shifton, were you involved in the contracting officer’s decision to recommend that unilateral act in June 2010? 

Mr. SHIFTON. Yes. 

Mr. WELCH. Did you concur with his recommendation? 

Mr. SHIFTON. Yes. 

Mr. WELCH. But on July 9, 2010, the Integrity and Pricing Division notified the contracting officer that it disagreed with the recommendation and instead recommended that the contracting officer 

request a new DCAA audit through August 2010. To the best of 

your knowledge, why was that recommendation that was made and 

you agreed with to definitize the contract in June 2010 overturned? 

60 

Mr. SHIFTON. It was decided the data to definitize in June 2010 

was primarily based on events that happened during 2006 and 

2007 and part of 2008. It was decided it would be more advantageous to us and the contracting officer to have more actual data 

of events that happened, more flight information, more pounds 

transported, more fixed wing of product moved, to have more recent and relevant data to come up with a decision. Because the 

conditions on the ground had changed so much and the volumes 

were so much higher, they thought it was in our best interest to 

seek another audit. 

Mr. WELCH. That is interesting. When you say in our best interest, was it in our best interest in terms of getting a fair price or 

was it in our best interest in terms of no readily available alternative to get to our troops what they needed and we just had to 

bite the bullet and get shafted for a few years more? 

Mr. SHIFTON. No, I think it was a combination decision at the 

time. Recognizing not getting shafted, we reduced the rate down to 

50 percent versus the 75 percent. It was a determination that for 

us to be in our best position, in our best negotiation position, to 

have a new audit based on the most recent data. 

Mr. WELCH. At that time when the original recommendation was made, it was $682 million, a lot of money, but when DLA finally 

definitized the contract in December 2011, the overpayment had 

swelled to $757 million, an extra $75 million hit on the taxpayer. 

Mr. Beebe, Mr. Kenny, what are your views on that? Do you think 

we made the right decision? 

I understand it is a tough decision and a lot of competing things 

you have to do, but somehow, some way, it seems these contractors 

get away with larceny. 

Mr. KENNY. Sir, my prospective on this matter, we have heard 

about the contract being awarded was a FAR Part 12 contract. I 

think it is important to note to the committee that the contract 

modification that authorized premium authorized POT, premium 

transportation, was using the authority of FAR Part 31. FAR Part 

31 required Supreme to be subject to an audit and to provide the 

necessary documentation to support those premium authorized 

rates. 

As we have heard before, there were significant delays in obtaining that information, that supporting documentation which would 

allow the contracting officer to make a fair and reasonable determination. 

Mr. WELCH. One question I do have, it is tough, you have a lot 

of things going on but when you have three years of data and you 

are up to $600 million to $700 million, I am wondering at what 

point do you want to pull the plug and put the burden on them to 

come forward as opposed to the burden on us where we have to let 

it happen for another two years when the evidence we have, if past 

is prologue, it will just make it worse. That is kind of a tough call 

to me but I would like to put the burden on the bad guys. 

Mr. BEEBE. Yes, sir. If I may, I am not going to question the immediate decision that Mr. Shifton and then contracting officer 

made; it may have been the correct immediate decision to Mr. 

Blair’s comments. Overall, the process was taking too long. There 

is more we probably should have done to apply leverage to the conVerDate Aug 31 2005 11:01 Jul 16, 2013 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 C:\DOCS\81829.TXT APRIL
61 

tractor to work with DCAA to come to another means of a conclusion. 

Mr. WELCH. One final question. How much of a problem is it that 

some of the people you are dealing with at Supreme are former 

high ranking Defense Department officials? Does that, as a practical matter, make it tougher? 

Mr. KENNY. I will just give you my perspective. I have heard the 

name of General Dale. I know who he is. I know General Mungen. 

I served under each of those individuals. I have not had any personal contact since they took off their uniforms, any correspondence, any emails, any phone calls or any involvement in either of 

these contracts with either of those gentlemen. 

Mr. TIERNEY. Would the gentleman yield? 

Would it be fair to surmise that they know just how messed up 

the process is at DLA and they would be advising their client, just 

go for it, because these guys aren’t going to set a price. They are 

going to keep paying you, we are going to appeal, go on and on and 

on and they know just how the process works. They didn’t hire 

these guys to sit around and play dominoes. 

Is that a fair assessment of the kind of advice of someone who 

had been in those positions, that one was the operating manager 

and the other was director of the whole DLA, that they would be 

able to give that kind of advice to a company like Supreme as to 

how to go about dealing with a contract like this. Whether or not 

they negotiated this particular contract, they could certainly tell 

them how the process works or does not work. 

Mr. KENNY. I am not sure what their roles and responsibilities 

are. I am aware that neither of them has an acquisition background. Whether they were able to advise the Supreme organization on how to navigate these waters, I could not comment. 

Mr. BEEBE. I might also add, and I am not going to speculate on 

what they might have been advising their employers or employees, 

but the circumstances surrounding this particular issue is not the 

norm of DLA, so if they were advising based on the norm at DLA, 

it would not be consistent with the findings in this particular case. 

Mr. CHAFFETZ. I thank the gentleman. 

I now recognize the gentlewoman from Illinois for a generous five 

minutes. 

Ms. DUCKWORTH. Thank you, Mr. Chairman. 

Mr. Blair, according to your office, DLA spent $455 million in 

transportation costs for local market ready products through May 

2010 for, according to the IG report, services that were not included in the contract and were based on rates that may not be fair 

and reasonable. Did DLA ever provide documentation to show the 

contracting officer how they determined the rates to be fair and 

reasonable? 

Mr. BLAIR. The documentation that we received was very 

sketchy. In short, no adequate documentation was provided. 

Ms. DUCKWORTH. By DLA? 

Mr. BLAIR. Correct. 

Ms. DUCKWORTH. Mr. Shifton, can you answer why that would 

have happened, why there would not have been proper documentation? 

62 

Mr. SHIFTON. The documentation we provided was based on a 

price analysis that we performed. We used USTRANSCOM’s not to 

exceed rates. We think we have a good foundation that the work 

we did is acceptable FAR practice and acceptable price analysis 

work. 

We used different contract rates that had actual bills against 

them and that is what we used to support our documentation. 

Ms. DUCKWORTH. Was that contract with Public Warehousing 

Company, Agility? Is that the contract you used? 

Mr. SHIFTON. That is part of the price analysis but not the entire 

part of the analysis. 

Ms. DUCKWORTH. Are they not subsequently being investigated 

or were they subsequently indicted? 

Mr. SHIFTON. That is correct. Again, PWC, in terms of their contract, had very little airlift connected to their contract. We used a 

significant amount of USTRANSCOM tenders prior to the Supreme 

contract moving fresh fruits and vegetables from the United Arab 

Emirates to Afghanistan. 

The difference with the Supreme price and the Transcom tender 

price is the Supreme price is based on per pound, there is 20 

pounds of carrots, whereas the USTRANSCOM price is a gross 

weight, pounds and the weight of the shipping container or pallet. 

Ms. DUCKWORTH. If that is the case and if that contract has been 

indicted, why are you using them even partially as a basis for determining whether or not the rates are fair and reasonable under 

the Supreme contract? 

Mr. SHIFTON. If my recollection serves me correctly, we used the 

information back in the 2005 time frame whereas the indictment 

of PWC happened far after that. We used information from PWC 

significantly prior to the indictment. Again, a significant part of 

our price analysis is based on the USTRANSCOM rates. 

Ms. DUCKWORTH. Do you disagree with Mr. Blair in his assessment that DLA did not provide adequate documentation to show 

how the rates to be fair and reasonable? 

Mr. SHIFTON. We concurred with the report. I think it goes back 

to Modification 10 was a poorly executed modification and just did 

not offer clarity. 

Ms. DUCKWORTH. You agree that you did not provide adequate 

documentation? 

Mr. SHIFTON. Yes, we concurred with the finding. 

Ms. DUCKWORTH. Are you satisfied now that throughout the performance of their contract, DLA has paid fair and reasonable rates 

for those local market ready products? 

Mr. SHIFTON. Yes, I am. 

Ms. DUCKWORTH. Mr. Blair, do you agree with that? 

Mr. BLAIR. We have not yet seen the additional documentation 

to really hone in on those rates. I really cannot comment on that 

at this point. 

Ms. DUCKWORTH. Mr. Blair, during the last hearing we heard 

about allegations that Supreme was using a subsidiary of United 

Arab Emirates, the Jamal Ali Food Company, JAFCO, to seek additional profit from the government. Basically, they were billing the 

government, getting their profit and also a profit to their own subVerDate Aug 31 2005 11:01 Jul 16, 2013 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 C:\DOCS\81829.TXT APRIL
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sidiary. Has your office looked into these allegations against Supreme? 

Mr. BLAIR. No, we have not. 

Ms. DUCKWORTH. You are sure you have not looked into them at 

all, there is no investigation underway? 

Mr. BLAIR. I know there is an investigation; I don’t know the 

scope of the investigation. Since I am from Audit, it would not be 

a part of our effort. 

Ms. DUCKWORTH. I will ask this question of both Mr. Blair and 

Mr. Shifton. In the previous panel, Mr. Schuster stated that at no 

time did Supreme charge DLA both a DOT fee as well as a distribution fee for delivery of goods to the FOBs. Would you agree 

with him on that? 

Mr. SHIFTON. No, we do not. Part of the $756 million being collected includes that for which we disagree with Mr. Schuster. 

Ms. DUCKWORTH. Mr. Blair? 

Mr. BLAIR. The scope of our work did not really focus on the detailed billings. That was really subject to the audit work by DCAA. 

We focused more on the oversight efforts of DLA, so we didn’t really get into that level of detail and to determine whether there was 

double billing or excessive billing. 

Ms. DUCKWORTH. Mr. SHIFTON. If I could clarify, just the portion of that $756 mil- lion, that credit you speak of, that overcharge, is $177 million we 

are collecting from Supreme. 

Ms. DUCKWORTH. Thank you, Mr. Shifton. 

I am out of time, Mr. Chairman. 

Mr. CHAFFETZ. I recognize myself and I will recognize Mr. 

Tierney. We will probably be calling votes but if there are additional questions, we will try to entertain those. 

Who is responsible? At the end of the day, my worry is blame everybody, nobody is held responsible. This is from March 2, 2011, 

the audit. It said, ‘‘The subsistence contracting officials at the DLA 

Troop Support did not provide sufficient oversight to contracting 

costs and performance, the contracting officer did not adhere to certain provisions of the Federal Acquisition Regulation, and the DOD 

supplement or develop a quality assurance surveillance plan and 

written procedures to monitor contract costs and performance.’’ 

Who is responsible? Who did not do all of those things because 

other than that, it went great. We overpaid everyone agrees by 

hundreds of millions of dollars. Who is responsible for that happening or not happening? 

Mr. KENNY. I will attempt to answer your question. 

Mr. CHAFFETZ. I will give you an A plus for being brave enough 

to answer that question. 

Mr. KENNY. We put together a team at Troop Support in conjunction with our DLA headquarters. We took a very thorough look at 

the circumstances and events surrounding the award and execution 

of this contract. 

We looked at what corrections needed to be made, what improvement and where we were challenged. As a result of that evaluation, 

two major themes came out of the report. One was we needed to 

make adjustments to our processes to accommodate where we have 

a contingency operation with rapidly changing requirements. 

64 

Our vehicles at the time were not flexible enough, were not agile 

enough to be able to accommodate the needs of the warfighter. 

That was number one. 

Two, we needed to do a better job in training and enhancing our 

education process for all our contracting professionals, whether in 

the area of contract documentation, the area of contract pricing, 

the need for additional contracting officer reps in-country. 

As a result of those recommendations and as a result of that review, we felt the need was not so much a disciplinary action or a 

personnel action, but a need to enhance our processes and improve 

the education and training of our workforce to able to deal with 

these types of situations in the future. 

Mr. CHAFFETZ. We had been at war for ten plus years between 

Iraq and Afghanistan. It is hard to find what went right with this. 

There was nobody fired, nobody dismissed, nobody was disciplined 

at all, is that what you are telling me? Is that the reality? 

Mr. KENNY. To answer your question, that is correct. The improvements I mentioned as far as processes, tools, making sure our 

folks had the IT tools to be able to monitor contract performance, 

having more individuals in-country and providing the necessary 

training so these documentation and pricing issues, if encountered 

in the future, we would know how to deal with them. 

Now we have much broader knowledge on the right business 

models—how to price this. One of our major problems was we had 

to price this in a sole source environment with a company like Supreme. In the follow-on contracts, we brought competition into the 

process which is always a major goal of the acquisition process. 

Mr. CHAFFETZ. When you re-upped with Supreme, you did not 

bid that out. 

Mr. KENNY. We did extend the contract with Supreme. 

Mr. CHAFFETZ. One of the conclusions was that you were going 

to have bids and you didn’t take any bids. 

Mr. KENNY. For the extensions, when we were building our acquisition strategy and our acquisition plan. 

Mr. CHAFFETZ. Your acquisition strategy has just come at a time 

when we actually are not even going to be there. That was back 

in 2006, right? When you originally started to expand, you were 

weeks into the contract, how to expand it. It gets to be March 2, 

2011, the IG comes out and says look at all these problems. Nine 

months later, nine months and seven days later, you sign a no-bid 

extension worth tens of billions of dollars. 

How do you look me in the face and say one of our conclusions 

was we have to take more bids and you didn’t take anymore bids? 

Mr. KENNY. At the time of the extensions when the justifications 

and approvals were being processed, at that same time, we were 

looking at the technical proposals received as a result of the solicitation that was issued. We received six proposals and conducted 

negotiations over that period of time. 

Part of the time necessary for those bridges, we wanted those 

bridges to come to an end, believe me sir part of the time required 

was to do the competitive process and select a new contractor to 

replace Supreme. 

Mr. CHAFFETZ. Did you? 

Mr. KENNY. Yes, sir. 

65 

Mr. CHAFFETZ. You just told me that Supreme is still offering 

food services in Afghanistan. 

Mr. KENNY. Supreme is still providing the support. They will be 

providing support until December 2013. One of the additional reasons that those contracts had to be extended was we have significant litigation. 

Mr. CHAFFETZ. We have a time crunch. Let me recognize the gentleman from Massachusetts. 

Mr. TIERNEY. Thank you. We have a bill that comes in the middle of 2006 for $33.5 million 

and the contracting officer is asked why they are asking for $33.5 

million which was an unauthorized commitment. Her answer was, 

I am a contracting officer with an unlimited warrant and I requested that the vendor do the work. 

One of your people, Chris Cofield, says this is so big, it is beyond 

my comprehension. Obviously, this is an unusual circumstance everyone was dealing with. 

When we inquire further what was going on from Ms. DeMayo, 

she said she didn’t get any support that she needed at the upper 

levels. ‘‘I spoke to quite a few individuals in policy and pricing and 

received much conflicting direction. No one was really eager to advise how I should proceed. I got a whole lot of let me say this about 

that, but don’t quote me for anything. I did my best to get some 

attention but in the December-January period, when I needed it 

most, I wasn’t able to attract a whole lot.’’ 

Were you the person, Mr. Shifton, who was telling her, let me 

say this about that but don’t quote me on anything? 

Mr. SHIFTON. No, sir. 

Mr. TIERNEY. Did you give her advice to go forward or not go forward? 

Mr. KENNY. Yes. 

Mr. TIERNEY. So she was wrong on that, she was getting all the 

support she could possibly need? 

Mr. SHIFTON. No, sir. I am not saying that there wasn’t frustration on her part of not getting more direction from other elements 

within Troop Support. 

Mr. TIERNEY. Who would she go to? Could she go to you, you 

would go to Mr. Kenny, Mr. Kenny would go to Mr. Beebe, is that 

the way it runs? 

Mr. SHIFTON. Typically for an action such as this, she would be 

reaching out to our support offices that give her advice in terms of 

contract policy and legal policy. 

Mr. TIERNEY. Have you taken action against any of them for 

leaving her out there on the limb, a contracting officer makes a decision to modify a contract verbally for $817 million, possibly as 

much as $2.46 billion, with an email? Have you taken any of them 

to task and said that is not the way you treat somebody, that is 

not the situation you put them in? 

Mr. SHIFTON. It has been several years since that time. I am sure 

there was frustration on my part as well. I think Mr. Kenny was 

trying to explain and if you want to consider a weakness on my 

part, there was just too much focus on the operations at the time 

and supporting the warfighter and not enough focus at the time on 

dotting the Is and crossing the Ts. 

66 

Mr. TIERNEY. But you had systems in place. All you had to do 

was run the systems, that is why they are there. Mr. Blair says 

there were requirements there if you had just tended to business, 

you would have asked for the proper documentation, you would 

have been monitoring these things as they went along, and you 

would not have waited more than 180 days to get it done. 

In fact, the first time that you modified and went to 75 percent, 

why didn’t you go to 50 percent then? 

Mr. SHIFTON. There is DFARs guidance. The proposal became 

subject to audit and we thought they had a qualifying proposal 

which allowed 75 percent. 

Mr. TIERNEY. Based on what? You had no documentation, you 

had no comparables of any note. You presented this is what they 

want to get paid and said I will give you 75 percent because I am 

not going to give you 100 percent because we had questions here 

but you haven’t given enough documentation to ascertain the answer to the question. 

Mr. SHIFTON. I am not disagreeing with you. We used, to the best 

of our ability, the guidance offered through DFARs. 

Mr. BEEBE. If I may add one point. 

Mr. TIERNEY. Were you involved in this at all, Mr. Beebe? Did 

people come up to you to ask you particular questions about this 

contract? 

Mr. BEEBE. At the time, I was not with DLA. 

Mr. TIERNEY. I don’t want to be rude to you but I appreciate you 

want to step in and help out your guys but I am trying to get to 

the basis of what happened then, so please excuse me on that. Now you have an extension coming up, a $4 billion extension, 

you have 24 bids. How many bids did you get for the extension in 

2010? 

Mr. KENNY. The acquisition that we awarded this past June 2012 

which went to ANHAM, six parties submitted offers, four of which 

were responsible bids. 

Mr. TIERNEY. At one point in time, somebody indicated the reason they had to give a sole source, no bid contract was there 

wouldn’t be any other responsible parties out there, but there were 

at least four, right? 

Mr. SHIFTON. But what we did was we sought through industry 

with a request for information as part of the market research, this 

acquisition, to get industry’s feedback. To support Afghanistan and 

the numbers, the infrastructure required equates to at least 90,000 

pallet positions, a warehouse that has cold storage capability for almost 50,000–60,000 of those pallets. You just don’t have that type 

of infrastructure in Afghanistan. 

We wanted to give industry a chance to give feedback, to partner 

and then have a plan to be able to meet the requirements of our 

solicitation. 

Mr. TIERNEY. One of the things that makes this even worse is 

this company went in there and by the nature of the contract, they 

had you by the nape of the neck because of all the things you just 

said. Once they were in, they got a foothold to run this out and you 

didn’t set the price, they were home free because they had things 

you couldn’t replicate fast enough to give them the boot and get 

them out of there, right? 

67 

Mr. SHIFTON. I don’t disagree with your analogy, except I would 

again say the contracting officer, we were taking action. Again, we 

reduced to the 75 percent down to 50 percent. 

Mr. TIERNEY. Late. That would have been nice if you had done 

that originally, you could have saved a whole boat of money. How 

are we going to get the rest of the money back? 

Mr. KENNY. Maybe I can answer that for you. Our intentions are 

to continue to collect the $21 million per month until the end of the 

performance period of the Supreme contract. 

Mr. TIERNEY. You have a contract now with an unsettled price, 

you argue what the price should be but based on what you are willing to pay, you are going to cut back $21 million on that and count 

that as savings. You could find out you overpaid them by that $21 

million too in which case, you got nothing back, right? 

Mr. KENNY. We believe that the fair and reasonable determination definitizing those provisional rates, we feel that was a correct 

determination by the contracting officer. We would intend to collect 

the balance. 

Mr. TIERNEY. You have no documentation. Were you here to hear 

what Mr. Tiefer from the Wartime Commission had to say? It is 

like an employer keeping some wasteful employee on the payroll 

longer than necessary in order to garnish the wages. It smacks of 

that. You are keeping them around and you are going to garnish 

their wages by paying them less than the contract but nobody 

knows what the contract price is, so you don’t know whether you 

are charging them $21 million less, $10 million less or too much. 

We are all still out here in this gray neverland, right? 

Mr. SHIFTON. Again, the basis of the rates we took unilateral action on, much of that is supported by the DCAA audit. The rates 

are what the government has determined to be fair and reasonable 

at this time. That is what Supreme is being paid and that is the 

credit we are collecting back. 

Mr. TIERNEY. Mr. Beebe, how is it you let this whole thing unravel or were you not there at the time? 

Mr. BEEBE. I personally wasn’t but I certainly will speak for 

DLA. 

Mr. TIERNEY. You don’t need to. You weren’t there. Mr. Kenny, 

you were there through this whole enterprise? 

Mr. KENNY. I was there from September 2010 on. 

Mr. TIERNEY. You weren’t there. Mr. Shifton, you are the only 

one left holding the bag? 

Mr. SHIFTON. Yes, sir. 

Mr. TIERNEY. I understand the position you are in, you have 

made that clear. I get a sense of where Ms. DeMayo is. I would like 

to know where the people are who were in Mr. Kenny’s position 

and Mr. Beebe’s position in terms of carrying out the rules and regulations and seeing what you and Ms. DeMayo did. Hopefully Mr. 

Blair’s work is going to result in going forward and giving us a 

template so we don’t end up in this situation again. 

Thank you all for your testimony. 

Mr. CHAFFETZ. Thank the gentleman. 

I will recognize the gentlewoman from Illinois very briefly as we 

have a vote on the floor. 

68 

Ms. DUCKWORTH. Thank you, Mr. Chairman. This will be very 

brief. 

Mr. Shifton, the contracting officer for all this who is not here 

today, not only was this person not disciplined in any way according to your testimony, what kind of evaluation did you give this 

person over the years she supervised this contract? 

Mr. SHIFTON. I am sure I gave her a very high rating. 

Ms. DUCKWORTH. You gave her a very high rating? 

Mr. SHIFTON. Yes, I did. 

Ms. DUCKWORTH. Did you give her a bonus in those years? 

Mr. SHIFTON. Yes, she annually received a monetary bonus. 

Ms. DUCKWORTH. A bonus for good work right? 

Mr. SHIFTON. Correct. 

Ms. DUCKWORTH. Mr. Kenny, how long have you been with DLA, 

since 2010? 

Mr. KENNY. I assumed the role of the Acquisition Executive for 

DLA Troop Support in September 2010. 

Ms. DUCKWORTH. 2010. When the original contract expired December 2010, instead of rebidding the contract, DLA granted Supreme the non-competitive extension through December 2012 and 

in June 2012, DLA granted Supreme another sole source extension 

lasting from December 2012 to December 2013. You were there for 

that period? 

Mr. KENNY. Yes. 

Ms. DUCKWORTH. Did you give Mr. Shifton an excellent rating or 

a high rating in his performance? 

Mr. KENNY. I am not the rating official for Mr. Shifton. 

Ms. DUCKWORTH. Did you receive a high performance rating, Mr. 

Shifton during this period? 

Mr. SHIFTON. Yes. 

Ms. DUCKWORTH. Did you receive bonuses all these years this 

has been going on, during this period? 

Mr. SHIFTON. Yes, I did. 

Ms. DUCKWORTH. Do you think that both you and this contracting officer, who have now led DLA into this situation where 

you are almost $1 billion in overpayment, do you think that type 

of performance warrants high ratings and bonuses, yes or no? 

Mr. SHIFTON. Yes, I gave Maryanne an award but again her job 

is much more comprehensive than this area. 

Ms. DUCKWORTH. It is almost $1 billion. This is what boggles the 

mind for me. I rated people in the Federal Government myself. I 

rated soldiers. In the civilian sector, if you went out and blew almost $1 billion of your company’s money, you would be fired. You, 

at the very least, would be demoted. You certainly wouldn’t be 

given an excellent rating and a bonus. This is what you have done 

with this contractor year after year and you yourself have been 

compensated. No wonder the problem continues. I don’t see anybody suffering the consequences. 

I am sorry, Mr. Chairman. I yield back. 

Mr. CHAFFETZ. Don’t apologize, I concur. I appreciate your passion on this issue. I share it. 

Gentlemen, we appreciate your testimony here today. We have a 

vote on the Floor. We will continue to pursue this. We appreciate 

69 

your responsiveness in responding to further questions and inquiries that we have. We thank you. 

The committee stands adjourned. 

[Whereupon, at 4:42 p.m., the subcommittee was adjourned.] 

(71) 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

72 


Insert offset folio 25 here 81829.025

Opening Statement of Jason Chaffetz, Chairman 

Subcommittee on National Security 

"Contracting to Feed U.S. Troops in Afghanistan: How did the Defense Department 

end up in a Multi-Billion Dollar Billing Dispute?" 

April 17, 2013 

Good morning and welcome to today's hearing: "Contracting to Feed U.S. Troops 

in Afghanistan: How did the Defense Department end up in a Multi-Billion Dollar Billing 

Dispute?" 

I would like to welcome the Ranking Member Cummings, Ranking Membcr 

Tierney, Members of the Subcommittee, and members of the audience. 

Today's hearing continues the Subcommittee's efforts to oversee the billions 

spent in support of military and civilian operations in Afghanistan. 

In 2011, this Subcommittee conducted a bi-partisan investigation of the Defense 

Department's Host Nation Trucking contract led by Congressman Tierney and nowSenator Flake. The purpose ofthe contract was to supply our military through the use of 

private contractors. However - almost since its inception - allegations surfaced that 

warlords and the Taliban would seek "protection payments" for safe passage through 

tribal areas. According to those familiar with the contract, the result was a potential 

windfail for our enemy. 

The problems with the Host Nation Trucking contract highlighted the importance 

of adequate contracting oversight. Proper contract administration is a one of the main 

defenses against waste, fraud, and abuse. 

In the case of the Defense Logistics Agency's (DLA) prime vendor contract with 

Supreme Foodservice, billions of dollars are at stake, as well as the very important 

mission of feeding our troops in Afghanistan .. Currently, the DLA believes it has 

overpaid Supreme by $757 million. Meanwhile, Supreme has submitted a claim against 

DLA for over $1.8 billion. 

From the outset, this contract was modified through verbal change orderssignificantly altering performance requirements. The most troubling findings of a 

Defense Department Inspector General (IG) report included the excessive delays in 

definitizing these change orders. The IG noted that the government's contracting officer 

did not definitize or issue contract modifications in a timely manner, as required by 

federal acquisition regulations. 

The IG also concluded that the government overpaid Supreme by almost $100 

million in transportation costs and over $26 million for packaging materials for chilled or 

frozen food products. 
73 


Insert offset folio 26 here 81829.026

These uncertainties in the contract were compounded by incomplete pricing audits 

conducted by the Defense Contract Audit Agency (DCAA). The DCAA conducted two 

separate audits of pricing considerations negotiated between DLA and Supreme. 

According to the DCANs 2011 audit, Supreme failed to provide adequate supporting 

documentation to demonstrate the reasonableness of proposed costs. 

The concerns with this prime vendor contract are ongoing and have been for some 

time. Despite all of these concerns, the government continued to contract with Supreme 

and even exercised options to extend the contract. 

We have well established contracting procedures. If we are not going to use them 

- why have them? 

I will now recognize Ranking Member Tierney for his opening statement. 

2 
74 


Insert offset folio 27 here 81829.027

-For House Oversight and Government Reform Committee Use Only" 

Defense Contract Audit Agency 

United States 

Department of Defense 

August 29, 2011 

Independent Audit on Parts of Price Adjustment Proposal 

Submitted by Supreme Foodservice GmbH Related to Premium 

Outbound Transportation Effort to Forward Operating Bases in 

Afghanistan 

AUDIT REPORT NO. 2191-2011Ml7200001 

RESTRICTIONS: 

1. The contents of this audit report should not be released or disclosed, other than to those 

persons whose official duties require access in accordance with DoD 5200.1-R, Information 

Security, January 1997, Appendix 3, paragraph AP3.2.3. This docwnent may contain 

infOlmation exempt from mandatory disclosure under the Freedom of InfOlmation Act. 

Exemption 4, of the Freedom of Information Act, which addresses proprietary information, 

may apply. 

It is not practical to identify during the conduct of the audit those elements of the data which 

are proprietary. Proprietary detenninations should be made in the event of an external 

request for access. Unauthorized disclosure of proprietary information violates 18 U.S.C. 

1905 and, if the infOlmation is contractor bid or proposal or source selection information, 

41 U.S.C. 423. Any person who unlawfully discloses such infolination is subject to penalties 

such as fmes, imprisonment, andlor removal from office or employment. 

2. Under the provisions of Title 32, Code of Federal Regulations, Part 290.7(b), DCAA will 

refcr any Freedom of Information Act requests for audit reports received to the cognizant 

contracting agency for detelmination as to releasability and a direct response to the requestor. 
75 


Insert offset folio 28 here 81829.028

"For House Oversight and Government Reform Committee Use Only" 

b. Basis of Contractor's Costs: 

The fuel costs are based on a stated rate charged for the month by a related division, 

Supreme Fuels Division. The proposed costs are based on costs recorded in the general ledger 

for FYs 2007 - 2010. 

c. Audit Evaluation: 

We evaluated the fuel costs as discussed in Schedule B-2, Note 2, page 42. Supreme's 

failure to provide the requested andlor adequate supporting documentation has pl'evented us from 

evaluating the proposed fuel costs for compliance with FAR 31. 205-26, Material Costs. 

Because of the Denial of Access to Records the proposed costs are questioned in their entirety, 

It should be noted that the unaudited Account 51003, SecUlity also contains fuel costs, 

However, due to the DLA Troop Support imposed time constraint, we were not able to quantifY 

the amount of fuel costs included in Account 51003. Refer to the Scope of Audit, Limitation No. 

14 Lack of Adequate Time paragraph on page 12, 

Because we have questioned the proposed fuel costs in their entirety, the methodology 

applied by Supreme to allocate the fuel costs to the modes of delivery as well as the exchange 

rates used to convert Euro to USD have no impact on our audit results, However, should DLA 

Troop Support allow a portion of the proposed and questioned fuel costs, it should be noted that 

we have not eXanJined and therefore offer no opinion on the reasonableness of Supreme's 

allocation methodology or exchange rates. Refer to the following paragraphs included in the 

Scope of Audit section for further details: (i) Limitation No.1 0 Methodology to Split Allocated 

Overheads Between FOB and NFOB paragraph on page 10, (li) Limitation No. 11 Methodology 

to Split Allocated Overhead FOB Costs Between Modes of Delivery paragraph on page 11, and 

(iii) Limitation No. 12 Exchange Rates paragraph on page 11. 

7. Account 53201 - Legal and Tax Advice 

a. Sununmy of Conclusions: 

We question the Legal and Tax Advice costs eXanJined in the amount of $3,039,278 in 

their entirety based on (i) FAR 31.205-47, Costs Related to Legal and Other Proceedings, and (ii) 

Supreme's withdrawal of proposed legal costs related to the following three legal firms: 

Debevoise & Plinlpton LLP (DPL); Maclay MUl'J'ay & Spens LLP (MMS); and DLA Piper 

Middle East LLP (DLA). Supreme's failure to comply with the FAR 31 cost principles is 

discussed in the Scope of Audit, Limitation No.7 Noncompliances with FAR Part 31 pm'agraph 

on page 7. 

Due to the DLA Troop SUppOlt imposed time constraint, we did not examine proposed 

Legal and Tax Advice costs of $404,826, As a result, we do not express arJ opinion on whether 

these unaudited proposed legal costs m'e based on FAR Part 31 criteria. Refer to the Scope of 
76 


Insert offset folio 29 here 81829.029

"For House Oversight and Government Reform Committee Use Only" 

Audit, Limitation No. 14 Lack of Adequate Time paragraph on page 12 for further details. In 

addition, refer to the Results of Audit, Note 3 to the Statement of Amounts Proposed, Examined, 

Not Examined, and Audit Results, Allocated Overheads paragraph on page 17 for further details 

on the unaudited Allocated Overheads. 

As discussed in Exhibit E Note I on page 71, Supreme did not separately account for 

the FOB and NFOB costs in its ledgers. As a result, we evaluated the total costs in the account 

to include the FOB and NFOB costs. We then applied Supreme's allocation method in order to 

determine the applicable proposed, examined, not examined, and questioned amounts for the 

FOB portion. However, due to the DLA Troop Support imposed time constraint, we did not 

evaluate the reasonableness of Supreme's allocation methodology. Further, due to the DLA 

Troop SUppOlt imposed time constraint, we did not evaluate the reasonableness of the proposed 

exchange rates used to convert Euro to USD. Consequently, our audit results are impacted to the 

extent that had we been granted sufficient time to evaluate Supreme's allocation methodology 

and the exchange rates, our questioned costs would have differed. Refer to the following 

paragraphs included in the Scope of Audit section for further details: (i) Limitation No. 10 

Methodology to Split Allocated Overheads Between FOB and NFOB paragraph on page 10, (ii) 

Limitation No. 11 Methodology to Split Allocated Overhead FOB Costs Between Modes of 

Delivery paragraph on page 11, and (iii) Limitation No. 12 Exchange Rates paragraph on 

page 11. 

b. Basis of Contractor's Cost: 

Proposed costs are based on costs recorded in the general ledger for FY s 2008 - 20 I 0 

and are supported by third party invoices. 

c. Audit Evaluation: 

We obtained and reviewed engagement letters provided to support legal costs proposed 

for Debevoise & Plimpton LLP (DPL) and Constantine Cannon LLP (CCL). According to the 

DPL engagement letter, Supreme engaged DPL as counsel "... in connection with an 

investigation being conducted by the Defense Criminal Investigative Service and possibly the 

U.S. Department of Justice." According to the CCL engagement letter, Supreme Group B.V. and 

related Supreme entities engaged CCL for the following: 

• Supreme Group B.V. and related Supreme entities including Supreme Foodservice 

GmbH & Co. KG, Supreme Foodservice AG and Supreme GmbH retained CCL for 

the arbitration filed against Supreme by Public Warehousing Company and 

Professional Contract Administration, Inc. " ... for alleged breach of an October 

2004 Services Agreement and a related June 2006 Side Agreement." 

• Supreme Group B.V. retained CCL " ... to represent ... Supreme Fuels Trading 

FZE in connection with its case against Harry Sargeant, International Oil Trading 

Company, and others" for " ... conduct of Mr. Sargeant and his partners and 
77 


Insert offset folio 30 here 81829.030

"For House Oversight and Govemment Reform Committee Use Only" 

business ventures - in violation of the RICO Act, Shennan Act, and various state 

laws ... " 

During our examination, Supreme confirmed in a letter dated July 27, 2011 that it opted 

not to propose costs related to the following legal finns: 

Leila! Firm Name Amount Pr0i>.0sed 

DPL $ 964,971 

Maclay MUlTay & Spens LLP (MMS) $ 15,500 

DLA Piper Middle East LLP (DLA) $ 1,520 

As a result, we question the costs associated with DPL, MMS, and DLA based on Supreme's 

decision to no longer propose thesc legal eosts. 

As described above, the proposed eeL costs relate to arbitration for an alleged breach 

by Supreme of a serviees agreement and a side agreement. We discussed the status of arbitration 

with Supreme and were informed that the arbitration is still ongoing, We compared the purpose 

for the legal services being provided to the all ow ability criteria contained in FAR 31.205-47, 

Costs Related to Legal and Other Proceedings. Based on that comparison we determined that the 

proposed eCL costs are unallowable based on FAR 31.205-47. FAR 31.205-47 Paragraph (t)(i) 

states the following types of costs are unallowable unless the costs are incurred as a result of 

compliance with contract terms or written instruction from the contracting officer: 

. " costs of legal, accounting, and consultant services and directly 

associated costs incurred in connection with the defense or 

prosecution of lawsuits or appeals between contractors arising from 

either - an agreement or contract concerning a tearning an'angement, 

a joint venture, or similar an-angement of shared interest, . , 

In addition, FAR 31.205-47 Paragraph (b)(4) states that costs involved with resolution of 

proceedings by compromise (in this case arbitration) that could have resulted in a monetary 

penalty are unallowable. Although the arbitration is ongoing, the potential exists that Supreme 

may be fined a penalty. FAR 31.205-47 Paragraph (g) requires that costs that may be 

unallowable under Paragraph (b) are to be segregated and accounted for separately. However, 

Supreme has accumulated the legal costs with all other legal costs. Further, FAR 31.205-47 

Paragraph (g) goes on to state that: 

During the pendency of any proceeding covered by paragraph (b) ... 

of this subsection, the contracting officer shall generally withhold 

payment of such costs. However, if in the best interests of the 

Govemment, the contracting officer may provide for conditional 

payment upon provision of adequate security, or other adequate 

assurance, and agreement by the contractor to repay all unallowable 
78 


Insert offset folio 31 here 81829.031

"For House Oversight and Government Reform Committee Use Only" 

costs, plus interest, if the costs are subsequently determined to be 

unallowable. 

Based on the above FAR 31.205-47 criteria, we question the proposed $2,057,287 related to 

CCL in their entirety. Supreme's failure to comply with the FAR 31 cost principles is discussed 

in the Scope of Audit, Limitation No.7 Noncompliances with FAR Part 31 paragraph on page 7. 

Due to the significance of the questioned cost, we expanded the scope of our review to 

100 percent of the proposed legal cost totaling $3,444,104, However, due to the Limitation No. 

14 Lack of Adequate Time paragraph on page 12, we did not examine the remaining legal costs 

totaling $404,826 and therefore we do not express an opinion on whether the remaining proposed 

costs are based on FAR Part 31 criteria. 

Due to the DLA Troop Support imposed time constraint, we did not evaluate the 

reasonableness of the methodology applied by Supreme to allocate the Legal and Tax Advice 

costs to the modes of delivery as well as the exchange rates used to convert Euro to USD. 

Consequently, our audit results are impacted to the extent that had we been granted sufficient 

time to evaluate Supreme's allocation mcthodology and the exchange rates, our questioned costs 

would have differed. . Refer to the following paragraphs included in the Scope of Audit section 

for further details: (i) Limitation No. 10 Methodology to Split Allocated Overheads Between 

FOB and NFOB paragraph on page 10, (ii) Limitation No. 11 Methodology to Split Allocated 

Overhead FOB Costs Between Modes of Delivery paragraph on page 11, and (iii) Limitation No. 

12 Exchange Rates paragraph on page 11. 

8. Acconnt 53400 - Bad Debts 

a. Summary of Conclusions: 

We question the proposed Bad Debts cost of $466,316 in its entirety based on FAR 

31.205-3, Bad Debts. FAR 31.205-3, Bad Debts, states, "Bad debts, including actual or 

estimated losses arising from uncollectible accounts receivable due from customers and other 

claims, and any directly associated costs such as collection costs, and legal costs are 

unallowable." Supreme's failure to comply with the FAR 31 cost principles is discussed in the 

Scope of Audit, Limitation No.7 Noncompliances with FAR Part 31 paragraph on page 7. 

b. Basis of Contractor's Cost: 

The proposed Bad Debt costs are based on 100 percent of outstanding debts in excess of 

365 days as recorded in Supreme's general ledger for FYs 2007 - 2008. 
79 


Insert offset folio 32 here 81829.032

W_ Neil Eggleston 

To Ca!~ Writer Directly: 

(202) 879·5016 

neiLeggleston@kirk!and.com 

KIRKLAND &.. ELLIS LLP AND AfH{JAno f'AR"fN£RSHWS 

655 Fifteenth Sireet. NW. 

W .. ,hingtM. D.C 20005 

(202) 879·5000 

'."/'WIN.kirkland.com 

June 21, 2013 

Fac..'limiie· 

(202) 879·5200 

Via Hand Delivery CONFIDENTIAL TREATMENT 

REQUESTED 

The Honorable Jason Chaffet? 

Chairman 

U.S. House of Representatives 

Committee on Oversight and Government Reform 

Subcommittee on National Security, Homeland Defense, and Foreign Operations 

The Honorable John F Tierney 

Ranking Member 

U.S. House of Rcprcsentalives 

Committee on Oversight and Government Refonn 

Subcommittee on National Security, Homeland Defense, and Foreign Operations 

2157 Rayburn House Office Building 

'Washington, DC 20515·6143 

Re: Follo'w.up QueslionsfromApl'il17, 2013 Hearing 

Dear Chairman Chaftctz and Ranking Member Tierney: 

On behillf of Mick Schuster, I write in response to several follow-up questions from 

members of the COlluni!!ee during the Committee's April 17, 2013 hearing concerning Supreme 

Foodservice GmbH's ("Supreme") award and perfonnance of the Department of Defense's 

Subsistence Prime Vendor ("SPV") contract in Afghanistan We appreciate your providing 

Supreme with the opportunity to add its perspective to your review of this matter. 

1. Rep. John /viica: Were {here opporlunilies for American firms 10 participate in {he 

competition for {the} Subsislence Prime Vendor con/rocl Ihal was m ... arded 10 Supreme 

Foodservice? If so, did slIch A mericCin firms compete? 

The Defense Logistics Agency competed Solicitation SPM300-04-R-0323 for 

Subsistence Prime Vendor in several zones, including Afghanistan, on a full and open, 

unrestricted basis. The Solicitation was advcr1ised on U.S. Government public web sites, and 

competition was open to all eligible companies, including Supreme. Supreme Group is proud to 

Chicago Hong Kong London los Angeles Munich NewYofk PaloA!to San Franclsco ShMghai 
80 


Insert offset folio 33 here 81829.033

The Honorable Jason Chaffetz 

The Honorable John F. Tierney 

June 21. 2013 

Page 2 

KIRKLAND &. ELLIS LLP 

have been founded in 1957 by a former U.S. Anny foodservice soldier, and Supreme Group B.Y. 

is majority owned by U.S. citizens. Supreme has a long tradition of supplying U.S. troops, and 

has achieved an outstanding record of success in delivering goods in Afghanistan in the middle 

of an active military combat engagement, including to dangerous, remote, and inaccessible sites, 

at the cost of the lives of hundreds of subcontractors. Supreme was not involved in internal DLA 

decisions regarding which firms would be allowed to compete for the Spy contract. 

2. Ranking Member John Tierney: What services did the company jlkJa Public 

Warehousing Company ("PWC") provide to Supreme Foodservice in connection with the 

Subsistence Prime Vendor contract? 

Supreme retained PWC as a consultant in 2004, prior to being awarded the SPY contract. 

At that time, PWC operated as the prime vendor supplying food and related supplies to troops in 

Iraq, Kuwait, and Jordan. Supreme's contract with PWC contemplated that PWC would provide 

assistance with Supreme's bid to win the Spy contract, and, in the event Supreme was 

successful, would provide consulting and technical assistance during Supreme's performance of 

the contract. 

3. Ranking iv/ember John Tiemey: When did Supreme Foodservice terminate, void, or 

cancel ils agreement with the firm jlkJa Public Warehousing Company? 

Supreme terminated its agreement with PWC in or around March 2008. 

4. Rep. Peter Welch: Has the price of local marker ready ("LMR ") goods ever included a 

profit for the Supreme Group subsidiary, Jamal Ahli Foods Co. ("JAFCO ')? 

JAFCO was created after DLA significantly expanded the scope of the SPY contract only 

weeks after it was awarded, requiring Supreme to deliver to remote forward operating bases in 

addition to the four central locations contemplated by the original contract. JAFCO was pmt of 

the logistics solution for the expanded scope, and was entitled to charge an amollnt reflecting its 

costs and profit for performing services necessitated by that expansion. The government 

contirmed that this was appropriate when it awarded Supreme a follow-on contract in 2010 that 

included JAFCO's costs and profit in the pricing. 

5. Rep. Peter Welch. Has Supreme Foodservice or JAFCO ever been the subject of a 

criminal investigation by the Us. Govermilent (if yes, then please slate !he dale firsl 

l1olljied,jurisdiclion, and knowledge of current disposition)? 
81 

Æ 


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The Honorable Jason Chaffetz 

The Honorable John F. Tierney 

June21,2013 

Page 3 

KIRKLAND &.. ELLIS LLP 

Supreme was contacted by the Defense Criminal Investigation Service in the Spring of 

2009. Supreme has been cooperating with the Department of Justice since that time. 

6. Representative Jackie Speier: What business or contracts have former DLA Director 

!.ieutenant General Rober! Dail developed for Supreme Group or allY of ifS subsidiaries 

since joining Supreme? 

General Dail served as President of Supreme Group, USA from 2009-20 \ 3, based in 

Reston, Virginia. In that capacity, be was responsible for developing work that diversified 

Supreme into new areas of logistics services. Specifically, he led the Group into subcontract 

work fer multiple Prime contractors of the US Army's LOGCAP efforts in Afghanistan. Further, 

he led the company in creating a transportation business unit that successfully supported the 

USTRANSCOM's Northern Distribution Network in the Balties; the transportation and storage 

of Army and Air Force Exchange Service materiel in Afghanistan; and the commercial support 

of fuel supply at the Guam International Airport. In 2013, he became the Chief Commercial 

Officer of Supreme Group, taking on the additional international duties of Strategic Planning, 

Corporate Communications, Business Development, and oversight of regional offices in London, 

Reston, and Singapore for Supreme Group. 

General Dail was not the Director of the Defense Logistics Agency when it awarded 

Supreme its base contract or its suhsequent extension "bridge contracts." He was not employed 

by Supreme Group when it was awarded the base contract. While he was employed by Supreme 

when the Defense Logistics Agency extended the SPY contract with Supreme, he was not 

involved in the negotiations for this award and has not been involved in its day-te-day 

administration. In all respects, General Dail has been careful to abide by ethics advice provided 

to him by DLA cOlJnsel as he departed that agency, and private counsel since joining the 

Supreme Group. Both the Supreme Group and General Dail appreciate the importance of 

abiding by the highest standards of ethics in order to protect the U.S. Government, the company, 

and General Dail from even the appearance of impropriety. 

::; zt}~ W. Neil Eggleston 

NE/vmw