Pentagon Seeks $756.9 Million Overpayment Refund From Supreme Foodservice

The Pentagon is pressing one of the largest contractors in Afghanistan, Supreme Foodservice AG, to refund within 30 days overpayments of $756.9 million in unsupported transportation costs, according to a spokeswoman.

The Defense Logistics Agency made the decision last week “after extensive negotiations, in which Supreme and the agency were unable to agree on final rates” for a contract first awarded in December 2005, said agency spokeswoman Mimi Schirmacher in a statement.

Supreme Foodservice of Ziegelbrucke, Switzerland, through Sept. 30 has been paid $5.5 billion since 2005 to supply and transport food, water, three-layered corrugated packing boxes and other non-food items to U.S. troops in Afghanistan. It provides fresh fruits and vegetables to as many as 246 sites in Afghanistan under the agency’s “Subsistence Prime Vendor” program.

Schirmacher said the Defense Logistics Agency can’t break down the $756.9 million by category “since it involves proprietary pricing information.”

Company spokeswoman Victoria Frost said in an e-mail that the contested rates have been in negotiations for several years. The company “strongly disputes” the repayment request and will appeal, she said.

‘Just How Bad’

Pentagon Inspector General Gordon Heddell, whose auditors in a March report first highlighted Defense Logistics Agency oversight deficiencies, said at a Dec. 7 hearing that the original Supreme contract was “an example of just how bad it can get.” The contract “wasn’t well-designed” or “well- thought out.”

Only this year has the defense agency assessed final transportation rates for a contract awarded in 2005, Heddell said.

“We are just now determining what should have been the reasonable and fair prices to pay,” Heddell told a House oversight committee.

Supreme’s head of Washington-based operations is Robert Dail, a former Army Lieutenant General who headed the DLA between August 2006 and November 2008. He presented Supreme in January 2007 with the agency’s “New Contractor of the Year Award.” He joined Supreme in March 2009 as president of Supreme Group USA in Reston, Virginia.

Pricing Dispute

Frost said the $756.9 million represented the difference between “previously agreed upon” interim transportation rates and those DLA “unilaterally determined” were final.

These final prices “differed significantly” from the temporary rates, she said.

“Supreme intends to submit a claim to DLA that reflects the fair and reasonable price of performing the work in Afghanistan’s tough, remote and dangerous environment,” she said.

“Disagreements with unilateral actions are a fairly routine part of doing business with the government,” she said. “However, since this particular decision may be the subject of litigation, Supreme will not provide any further comments.”

Heddell’s earlier audit disclosed that DLA personnel overseeing the Supreme contracts failed to prevent overpayments and potentially incorrect charges.

Transport Overpayment

The agency may have overpaid $124.3 million for transportation and corrugated packing boxes, according to the report. Pentagon personnel also had no assurance that billings for another $103 million in boxes were accurate or “even chargeable to the contract,” it said.

The company also was paid about $455 million for airlifting fresh fruits and vegetables from storage areas in the United Arab Emirates to Afghanistan, without military personnel ensuring the prices were “fair and reasonable,” according to the audit.

The audit was mandated by Congress in the fiscal 2008 defense bill. It required the inspector general to identify “potential fraud, waste and abuse” in contracts for logistical support for Iraq and Afghanistan.

Supreme provided food and non-food distribution as required while Defense Logistics Agency personnel “did not adhere” to federal regulations for making contract provisions final “in a timely manner,” the audit said.

The agency also failed to set up quality assurance and other procedures “to monitor contractor costs and performance,” it said.

Contract Renewed

The company’s initial December 2005 contract was renewed in December 2010 for one base-year and two six-month options.

The Heddell audit recommended that DLA in future contract modifications review Supreme Foodservice “proposed profit rates to ensure the rates reflect any reduced cost risks as a result of more than four years of actual contract performance.”

The company has claimed profit rates of 13 percent for helicopter costs, 10 percent for fixed-wing aircraft and 9 percent for trucking, the audit said.

Supreme Foodservice between December 2005 and December 2008 was overpaid an estimated $98.4 million for transportation costs in part because reimbursement rates “were significantly higher than the rates needed to reimburse the vendor for costs and associated profits,” the report said.

Supreme also may have been overpaid a $1.8 million performance bonus because Pentagon personnel didn’t adequately review company claims.

The payment was based on records indicating the company achieved a 99.4 percent order “fill-rate” during the six-month period ending December 2008. The audit concluded that Pentagon contracts officers reviewed only 1.6 percent of orders to determine the high rate.

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

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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