Auditors: Halliburton Intentionally Overcharged Contracts

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Documents Describe US Auditors' Battles With Halliburton
By Walter F. Roche Jr.
The Los Angeles Times

Friday 29 March 2006

A government study says the company overcharged on a crucial Iraq contract and did not comply with regular reporting obligations.

Washington - Frustrated government auditors pleaded, cajoled and finally threatened Halliburton Co. executives who repeatedly failed to comply with government reporting requirements under a key Iraq contract with a $1.2-billion potential price tag, newly released documents show.

The documents, along with a report, were issued Tuesday by the Democratic staff of the House Committee on Government Reform. Rep. Henry A. Waxman (D-Los Angeles) had requested the report on the contract, considered crucial to the restoration of oil production capacity in southern Iraq.

The 15-page report cites findings by auditors that Halliburton overcharged - "apparently intentionally" - on the contract by using hidden calculations, and attempted in one instance to bill the government for $26 million in costs it did not incur. Auditors also challenged $45 million in other costs, labeling them as "unreasonable or unsupported," the report said.

The report blamed the Department of Defense for awarding the contract despite warnings from auditors that Halliburton's cost estimating system had "significant deficiencies." Although federal officials have criticized the company and threatened to cancel its contracts, Halliburton remains the largest private contractor in Iraq.

The contract, awarded in January 2004, was one of three Iraq pacts for the company once headed by Vice President Dick Cheney.

Although the other two agreements - one for supplies for U.S. troops and the other for fuel and oil industry repairs - have faced heavy criticism as no-bid contracts, Waxman and his staff said Tuesday's report was the first to focus on the third Halliburton contract, for the repair of oil fields in southern Iraq, which was awarded after a competitive bidding process.

"Halliburton has pulled off the impossible," Waxman, a staunch critic of the firm, said in releasing the report. "It has actually done a worse job under its second Iraq oil contract than it did under the original no-bid contract."

Melissa Norcross, a spokeswoman for Halliburton and a subsidiary, KBR, dismissed the report as partisan, and said it focused on issues that had been resolved. She said Waxman failed to include a State Department report to Congress that commended the company "for numerous improvements" to its cost reporting system.

In the days after the U.S. invasion in March 2003, Bush administration officials said the revitalization of Iraq oil fields would finance the country's reconstruction. Since then, though, oil output has failed to exceed prewar levels.

The documents released Tuesday review objective examinations of Halliburton's performance and compliance, including by the Pentagon's Defense Contract Audit Agency. The records provide details of the repeated efforts of government auditors to get Halliburton to comply with record-keeping and reporting requirements.

"You are hereby notified that the government considers that you have universally failed to provide adequate cost information as required under the subject contract," a U.S. contracting officer wrote in an Aug. 28, 2004, letter to an executive of KBR, the Halliburton unit formerly known as Kellogg Brown & Root. "Furthermore, this contract is accruing exorbitant indirect costs at a rapid rate."

Another memo stated: "KBR has done the minimum and has not shown initiative in providing the information required, despite repeated requests."

Other audit documents cite Halliburton's "lack of cost controls." In November 2004, citing the continued lack of required data from Halliburton, government auditors warned that noncompliance would result in "adverse contractual action" and the issuance of a so-called cure notice.

In late 2004, alarmed U.S. officials discovered that Halliburton, in a routine monthly report, had projected an estimated $436-million cost overrun on the project. "This," the government delinquency report states, "is unacceptable."

In late January 2005, the Pentagon's Project and Contracting Office formally issued the threatened cure notice, and warned Halliburton that unless the deficiencies were corrected, the contract could be canceled.

"To date, KBR has yet to produce a cost report that would meet minimal acceptable standards," the Jan. 29, 2005, notice states, adding that the company "is in violation of its basic contractual requirements."

KBR responded with a corrective action plan on Feb. 20, 2005, and promised "to take the necessary measures to correct deficiencies," adding that measures had been taken to identify "systemic deficiencies." KBR blamed delays on government requests for voluminous information.

In a March 7, 2005, response, an official of the Joint Contracting Command cited the "repeated failed attempts by the government to get factual data from the cost report. In sheer frustration with the consistent lack of data, the government has been pushed into the position of asking for everything possible in an attempt to be able to track the KBR costs."