Sunday, May 25, 2008

KBR Loses Its Monopoly

After nearly two years of wrangling, the Army has finally broken up the monopoly held by KBR for work in Kuwait, Iraq and Afghanistan. The positive signs stop there, though.

Yet even as the Pentagon begins to pull apart the enormous KBR contract, critics warn that the new three-company deal could actually result in higher costs for American taxpayers and weak oversight by the military. In fact, under the new deal, KBR and the two other companies could actually make more than three times as much as KBR has been paid each year since the war began.

Although every single past undertaking within the framework of the two theaters has seen enormous cost overruns and mismanagement, the Army would like to assure voters that they have everything under control. That proposal seems laughable when considering that if the contract managed to come in under the projection it would be the first such instance.

Critics also say they doubt that the new contract will result in significant cost savings or better services for soldiers in Iraq. The Army has built into the deal the potential for larger profits for the contractors than existed under the prior contract, and it plans to outsource much of the management and oversight of the contractors to yet another company, Serco Inc., for $59 million.

Incredibly, despite the long trail of cost overruns, corruption and mismanagement, the Army contract has outsourced the oversight of the contract, making oversight that much harder, spending another $60 million, and ensuring that any past problems involving the contractors will continue unabated.

KBR, though sure the most (in)famous of the three--KBR, Fluor, and DynCorp--it is not alone in its shortcomings.

Like KBR, DynCorp, based in Falls Church, Va., has had serious problems in past contracting work, including allegations that its employees engaged in sex trafficking in Bosnia while working on a police training contract there in the late 1990s. In addition, government auditors concluded last year that the State Department’s $1.2 billion contract with DynCorp for police training in Iraq was so badly managed that they could not determine exactly what was done for the money.

In addition to the run-of-the-mill payments for phantom services, DynCorp manages to throw in the added sex trafficking to up the ante.

A large part of cost overruns revolve around the cost-plus nature of these contracts, which stipulate "all...costs are reimbursed by the Army, as long as the compan[ies] can convince the government that they are reasonable." Invariably, "reasonable" wins, even if there's no product, as has recently been shown.

Tack-on fees are also sure to boost the costs of the contract, despite the promises. While KBR received fees up to 3 percent on top of the contract price under the previous arrangement, the new contract includes fees of up to 10 percent for the three companies. Bloated fees, cost-plus pricing, and two additional work forces are sure to add to money management issues. Issues that will receive even less scrutiny now that the task has been delivered to a British subsidiary.

Though admirable that the Army has finally broken a no-bid monopoly after 5 years, it has managed in the process to ensure, rather than prevent, further corruption and overspending. War is expensive, but paying for phantom services and placing the pricing in the hands of those doing the work is not a necessary part of the spending. To proactively structure a contract so as to all-but-guarantee that those problems will worsen instead of improving on an already-broken system is disturbing, no less so simply because it is par for the course.

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