Tuesday, March 29, 2005

Halliburton Part II(b): The performance

Continuing in my exploration of Halliburton's role in the rebuilding of Iraq, I want to move on (so to speak), first, briefly, to the issue of cost-plus contracting for government work.

The LOGCAP contract is described at length here:

  • The cost-reimbursement pricing structure of the LOGCAP contract is
    necessary to provide the flexibility and responsiveness required to support military
    contingency operations. Under a cost-reimbursement type contract, there are no preestablished prices and services. Instead, there are “estimated” and “target” costs, but the Government is obligated to pay the contractor for all incurred costs which are reasonable, allowable, and allocable to the contract. Under all cost-reimbursement type contracts, including the LOGCAP contract, the Government assumes the majority of the risk related to the cost of performance. Because of this, intensive monitoring and oversight of the contractor’s costs are required when a cost-reimbursement type contract is used.
  • For LOGCAP services during an EVENT, the Government (i.e., appropriate
    military commander or MACOM) identifies its requirements and submits them to the
    contractor through the Government contracting officer. The contractor then quickly
    develops a rough order of magnitude (ROM) estimate of the costs and provides this
    cost estimate, along with an estimated performance time schedule, back to the
    Government. After the rough estimates of costs and performance times are reviewed,
    adjusted if necessary, and accepted, the necessary funding must be provided by the
    organization requiring the support.
  • These funds, along with the statement of requirements, are provided to the
    Government contracting officer who then reviews the funds and services to ensure that
    they conform to contracting and financial policies. After this check is completed, the Government contracting officer may issue an order to the contractor to perform the work. The prices for the services are still not firm, since the contractor remains entitled to reimbursement of his incurred costs. A partnership among the contracting officer, the contractor, and the organization receiving the support is formed to constantly monitor and control costs while ensuring responsive, effective services.
  • Contractor profit is expressed in terms of a base fee and an award fee which
    is payable for performance. An award fee pool is available to the contractor for above average performance under the LOGCAP contract. An award fee plan has been
    developed to focus contractor effort towards the areas of performance, coordination,
    flexibility, responsiveness, and cost control. The contractors performance is monitored by an appointed LOGCAP Award Fee Board. The Fee Determining Official (FDO) is the Commander, CETAD. The Award fee Board meets on a periodic basis to evaluate
    the contractors performance and recommends an award fee to the FDO. MACOM
    personnel may input to the Board during both planning and contingency execution
    phases. Input on contractor performance is encouraged from supported commanders
    and from the Government contracting officer staff in the area of operations.

In other words, the perception that Halliburton did a lot of work, presented the government with a bill, and received a check in return leaves out many steps and significant oversight. Importantly, the oversight is provided by government contract administrators, who are not only not appointed but often career civil servants, and therefore not likely to have been in Halliburton's or Cheney's pocket, barring outright bribery of individual administrators, which I've never seen alleged. My experience with the Feds and with private contracting, from both sides of the table, would tend to indicate the opposite, in fact: with so little to hold over the heads of contractors, those responsible for administering contracts seem to wield their one weapon - oversight - with a good deal of determination. That is to say, government administrators can get high on power, not to put too fine a point on it and not to offend any who may read these lines; given that the monies in question are Our Tax Dollars, I'd rather have the contract admin staff scrutinizing each expenditure than rubber-stamping invoices any day.

On to Halliburton's performance under LOGCAP (see my earlier post for a discussion of LOGCAP). Recall that the time period in question involves Halliburton's second time around: Halliburton was re-selected for the LOGCAP contract in 2001, after having been the LOGCAP contractor during the Clinton administration from 1992 (at LOGCAP's inception) until 1997.

Dick Cheney was Secretary of Defense under Bush 41 from March 1989 until January 1993. It's widely reported, but citations are vague to invisible, that in 1992-ish Cheney commissioned Brown & Root to perform one or two studies on military outsourcing, then awarded Brown & Root a contract (LOGCAP) that essentially gave them everything that their own study or studies concluded was optimal. As we have seen, the military takes a different view: LOGCAP, conceived in 1985 as a set of regional contracts for military support, wasn't working well. The need for several prime contractors, one for each region, was inefficient, both logistically and in terms of contract administration. In addition, local commanders resisted the presence of untrained civilian personnel in their areas of operations. It had already been concluded that a single global contract was the way to go. I'm having the devil's own time finding detail on the study or studies referenced; however, it's clear that Brown & Root, as a major oilfield services provider with the means to perform considerable additional support functions, would have been a logical choice for LOGCAP in the era of Desert Storm.

Cheney left office along with Bush 41 in January 1993. In 1995, he became CEO of Halliburton. Did he get the job because of his political connections? What good would they have done in the Clinton era? Surely "It's time for a change" should also have meant that any sweetheart contracts awarded under G.H.W. Bush would not be renewed under Clinton. So unless Halliburton was unfairly awarded LOGCAP in 1992 only because Cheney took a liking to them and the Clinton administration, which actually signed the LOGCAP contract, failed to notice the dearth of substance in the rationale for hiring Brown & Root, I have to conclude that Cheney's CEO-ship was not the result of Brown & Root's LOGCAP status in 1995.

Cheney resigned as CEO of Halliburton in 2000, having aggressively moved the company into the international sphere. Halliburton, like many other corporations during the '90s, benefited greatly from the global marketplace, and under Cheney's leadership became a world player where before it had been much more a national one. LOGCAP was up for re-award in 2001, after Cheney had already "cashed out" of Halliburton, to the extent that he could, in preparation for the 2000 Presidential race. Cheney's deferred compensation package (one common reason for a CEO to receive deferred compensation rather than a lump sum would be to avoid too great a cash outflow in one quarter, for instance) was structured in such a way that he would not benefit if Halliburton stock went up, and he took out insurance to protect his investment in the event that it went down. Further, he is donating the after-tax proceeds from the exercise of his stock options to charity. Link here - a sort of "hostile witness" link that nevertheless states my point.

The re-award of LOGCAP to Halliburton in 2001, as I stated in my earlier post may well have been colored by 9/11. I have not yet found a timeline to indicate how long the contract-award process is - it could easily be over a year, which would mean it would have been initiated by the (possibly lame-duck, depending on the timing) Clinton White House, on schedule. But even if the entire process took place under Bush 43, the Halliburton award still makes sense: the winner had to be an American company, it had to be able to provide oilfield services, it had to face the very real possibility of work in a Middle East combat zone with fast-moving military operations going on all around it. Who better? Who had last performed under these circumstances? Who was now, by dint of '90s growth and investment, that much more able to meet the military's needs?

Now, there are other issues one could discuss here, particularly CEO compensation, government contracting procedures, and the use of civilian contractors in war zones. But there's no noteworthy wrongdoing going on. Is there small-scale manipulation and abuse of the system? I wouldn't doubt it; but those things happen at levels far below CEO/VP, as anyone who's seen an episode of M*A*S*H involving making a phone call home or getting barbecued ribs shipped overseas can easily recall.

Next up: overcharges.

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