The Basics of Halliburton's Military Contracts
When a government announces a new work project to be completed by one company, it generally requires a number of different companies to submit competing proposals (or bids). The company submitting the most efficient and lowest-cost bid usually wins the contract. But under a "no-bid" contract, there is no bidding. Instead, the government awards the contract to one preferred company without determining if other companies can complete the work for a lower cost to the government.
The Army awarded Halliburton a no-bid contract in March 2003 to rebuild Iraq's oil industry infrastructure. The no-bid contract created enough outrage in Congress that the Pentagon later cancelled it and opened-up the bidding process to companies other than Halliburton.
Most of Halliburton's government contracts were awarded through competitive bidding, but the no-bid Iraqi contract, and the secret way in which it was awarded to Halliburton, touched-off a firestorm of public suspicion that Dick Cheney and Halliburton are working together to increase the revenues of Halliburton. After the no-bid contract was cancelled, the company has been exposed for the repeated fraud and abuse in its government contracts. Allegations of corruption continue today.
Halliburton earns money from the government primarily through its "cost-plus" contracts. Under a cost-plus contract, a government contractor like Halliburton purchases all the necessary items to complete a job order and is subsequently reimbursed all those costs from the government -- and then paid a percentage of those costs (the plus) as a fee. A typical contractor earns a base fee of 1 percent of the estimated contract cost and an "incentive fee" of up to 9 percent of the cost estimate based on the contractor's performance in a number of areas, including cost control. The upshot: The contractor will never spend $1 million to do a job when it can spend $10 million and thereby earn a higher fee. So, contractors actually earn more money by wasting taxpayer money. The cost-plus method of accounting is the primary system today for determining how much government contractors are owed by the taxpayer. Congress and whistle blowers have criticized Halliburton and the Army Corp of Engineers for inflating costs via cost-plus contracts.
Halliburton's most lucrative contract is with the U.S. Army. It is officially known as "LOGCAP" (or Logistics Civil Augmentation Program). LOGCAP is a "cost plus" contract performed by Halliburton's KBR subsidiary. This is the contract that requires KBR to feed, house and transport troops around Iraq and the middle east.
The LOGCAP contract is the most lucrative contract being performed in Iraq today. Under the cost-plus provisions of LOGCAP, the U.S. government pays KBR 1 percent of every purchase KBR makes with the possibility of an additional 2 percent as an incentive bonus that is paid if the company is operating efficiently and honestly. When KBR buys food for the troops, it is paid 1 percent of the cost of that food. When KBR constructs a new military housing facility, it is paid 1 percent of the construction costs. When KBR houses its staff at hotels or purchases trucks and equipment to carryout its duties, it is paid 1 percent of those costs.
LOGCAP and other cost-plus contracts require the company to purchase items only from a vendor offering the lowest price if the amount of the purchase order exceeds $2,500. Thus, purchase orders exceeding $2,500 require KBR to search for competing vendors in order to find the lowest price available. But KBR often takes a purchase order exceeding $2,500 and breaks it down into its parts so that the order becomes more than one purchase order, each valued below $2,500. This allows the company to avoid searching for the lowest-priced vendor, which results in higher costs to the U.S. taxpayer. About 70 to 80 percent of KBR's purchase orders are below $2,500 - mainly because large-value purchases are broken down so they don't exceed $2,500.
A former employee of Halliburton said the company's motto is "Don't worry about price. It's cost-plus." Congressman Henry Waxman (D-CA) said "The higher Halliburton's costs are, the larger its profits will be." Of the firms for which Halliburton purchased items, Waxman said "Many of the preferred firms were unreliable or charged 'outrageous' prices. [Halliburton] Supervisors did not encourage buyers to identify alternative vendors and, in some cases, wanted to use a higher price vendor on the preferred list rather than a new, cheaper vendor."