Pentagon Recoups $283 Million in Supreme Foodservice Fight

The Pentagon has recouped more than a third of the $757 million in overpayments it says were made to Supreme Foodservice AG, a contractor in Afghanistan, according to an agency official.

The Defense Logistics Agency wants Supreme, based in Ziegelbrücke, Switzerland, to return the entire $757 million, Matthew Beebe, the agency’s deputy director for acquisition, said in prepared testimony for a hearing today in Congress. The company has claimed it’s owed $1.8 billion more than the $5.5 billion already paid under the contract to supply food and water to troops.

The military agency’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 Democratic staff of a House Oversight and Government Reform subcommittee.

The memo and prepared testimony were obtained by Bloomberg News in advance of the panel’s hearing.

The Defense Logistics Agency, which manages the contract, in March 2012 began withholding $21.8 million per month from Supreme, Beebe said. As of March 31 this year, the agency had recouped $283 million, he said.

Supreme Appeal

Supreme has appealed the agency’s demands with 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 today that the defense department’s audits of the company were “fundamentally flawed,” operating as if the contract was cost-plus, rather than fixed-price. Schuster said the “heart” of the dispute with the Pentagon came from this discrepancy.

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

In prepared testimony, he said that the Defense Logistics Agency had rapidly expanded the company’s responsibility weeks after awarding the contract in 2005. The changes required Supreme to “change fundamentally” its approach to working in isolated and dangerous Afghanistan, Schuster said.

“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 Afghanistan, he said.

Chaffetz, Tierney

U.S. Representatives Jason Chaffetz and John Tierney, the Republican chairman and the top Democratic, respectively, of the House Subcommittee on National Security, sent a letter to Schuster last May, requesting documents related to the contract. The committee is now reviewing them.

“It is outrageous that the American taxpayer has been on the hook for over $750 million in overpayments to Supreme,” Tierney said in an e-mailed 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.”

Pentagon Inspector General Gordon Heddell said at a Dec. 7, 2011, 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,” Heddell said.

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

Charles Tiefer, a law professor at the University of Baltimore and former member of the Commission on Wartime Contracting, said “Supreme Foodservice gouged the taxpayer big-time.”

“The government offered to pay Supreme all its costs and overhead, plus a generous profit,” Tiefer said in an e-mail. “Instead of taking the government’s sensible offer, Supreme overcharged massively on the blatantly fictitious notion that it deserved a made-up and highly inflated ‘market’ rate.”

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