Pentagon Lost Leverage in Food Supplier Fight, Solons Say

The Pentagon may have recovered more than a third of the $757 million in overpayments it says went to Supreme Foodservice, a contractor in Afghanistan, yet several U.S. lawmakers say that’s too little, too late.

In a Capitol Hill hearing yesterday, lawmakers questioned why no officials at the Defense Logistics Agency, which wants Supreme to return the entire $757 million, were punished over the handling of the contract. Supreme has been paid at least $5.5 billion to supply food and water to troops, and says it’s owed an additional $1.8 billion.

“It’s hard to find what went right with this,” said U.S. Representative Jason Chaffetz, who leads the House Oversight and Government Reform Committee’s National Security subcommittee. “Nobody was fired. Nobody was dismissed.”

Chaffetz, a Utah Republican, said he was concerned that no one at the agency that oversees the contract would be held accountable for the overpayments.

The Pentagon’s demand for refunds “followed six years of unsuccessful negotiations between DLA and Supreme over fair and reasonable rates for distributing food to hundreds of forward operating bases throughout Afghanistan,” according to a memo prepared by the subcommittee’s Democratic staff.

Daniel Blair, a deputy inspector general for auditing at the Pentagon, testified that the logistics agency could have been more aggressive when it first discovered the overcharges.

Withhold Payments

“In my view, if you withhold payments,” you have more leverage, Blair said.

Matthew Beebe, the defense agency’s deputy director for acquisition, agreed that the “process has taken too long” and that more could be done.

The agency in March 2012 began withholding $21.8 million a month from the Ziegelbrücke, Switzerland-based supplier, Beebe said. As of March 31, the agency had recovered $283 million, he said.

Gary Shifton, a division chief at the agency who was involved in managing the contract, testified that he received high ratings and bonuses during his involvement with the contract.

During the hearing, Massachusetts Representative John Tierney, the top Democrat on the subcommittee, questioned whether the agency was withholding enough money each month.

Supreme Appeal

Supreme has appealed the agency’s refund demands to the U.S. Armed Services Board of Contract Appeals, and the case is scheduled to be heard in April 2014.

Michael Schuster, a managing director at Supreme, told the lawmakers that the Pentagon’s audits of the company were “fundamentally flawed,” operating as if the contract was cost- plus, and not a fixed-price agreement. Schuster said the heart of the dispute came from this discrepancy.

Under a “cost-plus contract,” a supplier is paid for all of its allowed expenses.

Schuster said the agency had rapidly expanded the company’s responsibility weeks after awarding the fixed-price contract in 2005. The changes required Supreme to “change fundamentally” its approach to working in isolated and dangerous Afghanistan, Schuster said.

‘War Zone’

“Although the military agency’s original solicitation said that only ‘remnants’ of the Taliban were still active, Supreme had to build this network in an active war zone,” he said. More than 300 subcontractors for Supreme have been killed while delivering food to troops in the country, he said.

“It is outrageous that the American taxpayer has been on the hook for over $750 million in overpayments to Supreme,” Tierney said in a statement. “While I am encouraged that DLA has been successful in recouping a portion of these funds, I am deeply concerned about the federal government’s ability to collect once the contract ends.”

Supreme earlier this month sued the Pentagon in the U.S. Court of Federal Claims for awarding a separate $10 billion food contract to Anham FZCO. Supreme’s accord remains in effect.

Representative Peter Welch, a Democrat from Vermont, said at yesterday’s hearing that taxpayers have been paying the bill while Supreme and the Pentagon work out their conflict.

“I’d like to put the burden on the bad guys,” Welch said.

To contact the reporters on this story: Danielle Ivory in Washington at divory@bloomberg.net; Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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