KBR to Get $568 Million Army Order as Federal Agency Alleges Kickbacks

KBR Inc. was selected for a no-bid contract worth as much as $568 million through 2011 for military support services in Iraq, the Army said.

The Army’s decision was announced yesterday only hours after the Justice Department said it will pursue a lawsuit accusing the Houston-based company of taking kickbacks from two subcontractors on Iraq-related work. The Army also awarded the work to KBR over objections from members of Congress, who have pushed the Pentagon to seek bids for further logistics contracts.

The Justice Department said yesterday the government will join a suit filed by whistleblowers alleging that two freight- forwarding firms gave KBR transportation department employees kickbacks in the form of meals, drinks, sports tickets and golf outings.

“Defense contractors cannot take advantage of the ongoing war effort by accepting unlawful kickbacks,” said Assistant Attorney General Tony West, in a statement.

KBR, the Army’s largest contractor in Iraq, will review the litigation when it is received and “will continue to cooperate with the government,” company spokeswoman Heather Browne said in an e-mail. “Gifts of dinners, baseball tickets and similar items would violate KBR policies and KBR was not aware of these violations.”

KBR will continue to provide services such as housing, meals, laundry, showers, water purification and bathroom cleaning under the new order, which was placed under a military contract KBR won in late 2001, shortly after the U.S. invaded Afghanistan.

‘Appropriate Safeguards’

The Army has “reviewed the government’s notice to intervene” in the whistleblower lawsuit, Army spokesman Dan Carlson said. “We feel we have appropriate safeguards in place” to protect the government’s interests.

The no-bid work order is unusual because the Army, at the insistence of Congress, has since April 2008 put all logistics orders to bid, pitting KBR against Falls Church, Virginia-based DynCorp International Inc. and Irving, Texas-based Fluor Corp.

The Army didn’t put the work out for bids because U.S. commanders in Iraq advised against it, saying that enlisting a new company would be too disruptive, Army program director Lee Thompson said in an interview before the Justice Department action was announced. The U.S. force in Iraq is scheduled to shrink from 94,000 troops today to 50,000 by August, with a complete withdrawal by December 2011.

Transition Costs

The Army, in a statement, said putting to bid an order for 18 months’ work, and making the transition to a new contractor, would cost at least $77 million. The KBR work order will be awarded by Aug. 31, said Mike Hutchison, deputy director of Army logistics contracting.

The lawsuit is the second government action this year against KBR. The U.S. sued the company on April 1, alleging that it used private armed security guards in Iraq between 2003 and 2006 in violation of its Army contract and then improperly billed for their services.

Before yesterday’s Justice Department announcement, the Army had said in an e-mailed statement that it was aware of the April lawsuit and would use “additional oversight measures to ensure only reasonable, allowable costs are paid” under the new work order.

The new lawsuit, filed in a Texas federal court, was based on information from two whistleblowers who work in the air cargo industry, the Justice Department statement said. The whistleblowers can get a portion of any money the Justice Department obtains in the case.

Senate Objections

KBR’s no-bid work order drew criticism from Congress even before it was announced.

Senator Claire McCaskill, the Missouri Democrat who heads a subcommittee that oversees military contracting, and the panel’s ranking Republican, Susan Collins of Maine, wrote Defense Secretary Robert Gates on April 30 urging the Army against “continued reliance” on KBR in light of the Justice Department’s April lawsuit.

Under the new competitive-bid approach, KBR on March 2 won a one-year, $571 million contract with four option years that, if exercised, could be worth as much as $2.77 billion.

That contract calls for KBR to provide services including transportation and postal operations. DynCorp initially protested the award and then dropped its objections.

To contact the reporter on this story: Tony Capaccio at acapaccio@bloomberg.net

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