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Iraq Reconstruction Rep. Waxman revealed today that Administration officials, acting at the request of Halliburton, redacted a Pentagon report to conceal more than $100 million in fuel overcharges from international auditors. In letters to government auditors, Halliburton subsidiary KBR explains that it redacted statements that it considered "factually inaccurate or misleading" and gives consent for the release of the audits to international auditors "in redacted form." The Administration then sent the heavily redacted report to the International Advisory and Monitoring Board overseeing the Development Fund for Iraq, the fund established by the U.N. for the management of Iraq's oil sales and foreign donations. An interactive feature reveals the extent of the redactions in the first ten pages of the Pentagon report. Rep. Waxman has released the original Defense Department audit report with Halliburton's edits highlighted. In light of this new information, Rep. Waxman has asked National Security Subcommittee Chairman Shays to hold immediate hearings on U.S. management of the Development Fund for Iraq. REDACTED VERSION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| And here is the audit uncovered, with the redaction removed Note words in bold were covered.
The cost or pricing data and the information other than cost or pricing data submitted by the offeror are not adequate. Our examination of the $875,255,894 proposal disclosed $108,409,622 in questioned costs and $1,255,333 in unresolved costs. We recommend contract price negotiations not be concluded until KBR provides the schedule of actual costs for the Turkey and Jordan fuel which reconciles to KBR's accounting records, and the results of the technical evaluation are considered by the contracting officer. SIGNIFICANT ISSUES: 1. KBR represented the proposal is based on actual costs. The data provided did not reconcile to KBR's accounting records, and KBR was unable to demonstrate the proposal was based on actual costs. As discussed on page 5, in the Recorded Costs paragraph, KBR proposed direct costs of $800,765,540 while $817,899,175 was charged to the RIO 5 Job Cost Ledger (JCL) as of August 31, 2004. We requested a schedule of the actual costs for the procurement of the Turkey and Jordan fuel. In response, KBR provided a schedule of cost data, but the cost data did not reconcile to KBR's accounting records. We requested a revised schedule. To date, KBR has not provided the revised data; see Restriction paragraph 1, page 4, for further details. With $502,932,525 proposed for Turkey fuel and $10,601,096 for Jordan fuel, we believe it is essential this requested information be provided for government review before negotiations are concluded. In addition, KBR has proposed a credit for material costs of $4,358,895 for kerosene purchased from Turkey vendors. It is illogical to have negative proposed costs for kerosene and KBR needs to explain the proposed credit. Refer to Note 5c (3), page 18 for further details. KBR proposed $252,808,547 for unleaded gasoline and kerosene, and related transportation purchased from Kuwait vendors; however, when we requested supporting documentation for the proposed costs KBR provided spreadsheets which did not support the proposed amount. The supporting schedule reflected costs of $225,599,379, a difference of $27,209,168. Refer to Note 5c (1), page 11 for further details.
2. Proposed costs for the fuels procured from a Kuwait supplier (Altanmia) are based on May 2003 purchase orders negotiated in a very short time frame. Our audit found purchase orders and procurement files related to the Kuwait supplier did not contain data to support the reasonableness of the negotiated purchase orders. We recognize the challenges faced by KBR during the early stages of the war; however, KBR did not periodically update its purchase order files to document the reasonableness of the negotiated prices and the circumstances surrounding the purchase order awards within a reasonable period of time (e.g., 30 to 90 days after "urgent and compelling" circumstances subsided). It is not reasonable to use prices negotiated in only a few days, under extremely difficult circumstances, for the entire period of performance which extends for almost a year (229 days). Effective subcontract administration of purchase order files requires ongoing (e.g., monthly) documented reviews of the continued reasonableness of the Kuwait fuel prices and efforts to renegotiate these prices if such reviews indicated unreasonable prices. KBR's purchase order files submitted to us do not include adequate documentation to demonstrate the reasonableness of the Kuwait fuel prices over the life of the purchase orders. We only found two instances where KBR renegotiated some of the prices. In November 2003 and January 2004, KBR negotiated some reductions to the pricing for the Kuwait fuel transportation costs. However, KBR's purchase order files do not include documentation to demonstrate these updated transportation prices were fair and reasonable. In the absence of adequate supporting data, we explored alternative methods to evaluate the reasonableness of the Kuwait fuel prices. We found the Defense Energy Support Center (DESC) awarded purchase orders in March 2004 to Altanmia for transportation and to Kuwait Petroleum Company (KPC) for unleaded fuel. We used the DESC negotiated prices as a benchmark to assess the reasonableness of the proposed KBR costs and questioned $62,046,284. We believe KBR should have actively pursued reducing its negotiated prices with Altanmia after the initial award in May of 2003. Refer to Note 5c (1) Kuwaiti Material & Subcontract Costs, page Error! Bookmark not defined. for further details. 3. KBR negotiated fixed-unit-rate and firm-fixed-price subcontracts with various Turkey vendors to deliver fuel into Iraq. During the performance of the subcontracts, the market price of the fuel increased. The Turkey subcontractors asked KBR to increase the unit price of the fuel to compensate for losses due to market increases. KBR agreed to pay the higher prices retroactively instead of the negotiated subcontract unit prices and issued change orders reflecting the higher unit prices. We do not believe it was appropriate to retroactively adjust the fuel unit prices of KBR's fixed-unit-rate and firm-fixed-price subcontracts when there are no provisions in the subcontracts to do so. We therefore questioned the retroactive application resulting in $16,826,584 of questioned cost as further described on page 18 (Turkey Unleaded and Kerosene Fuel). 4. KBR proposed Liquefied Petroleum Gas (LPG) purchased from Kuwait at $82,100 for material (fuel) costs and $27,514,833 in LPG subcontract (transportation) costs. It is illogical that it would cost $27,514,833 to deliver $82,100 in LPG fuel. Refer to note 5c (2), page 17 for further details. 5. We unresolved the proposed demurrage costs totaling $1,255,333. Concurrent audit activity is being conducted by our office to determine the validity of the proposed demurrage charges. Therefore, the results of audit are limited to the extent that completion of the audit may result in additional questioned costs. Refer to Kuwaiti LPG Fuel and Transportation Costs on page 17. 6. The results of audit are restricted because we have not received the requested technical review of the proposed number and need for tanker trucks, number of LPG barges, quantity of fuel, and a determination if there was, or was not, a sufficient supply of fuel from Turkey and Jordan to justify the need for procuring fuel from Kuwait, a higher priced source. On July 20, 2004, we requested a status on the technical report; however, the COE has not provided us a response on our request. During our evaluation of proposals for RIO TOs 7 through 10, we were told a technical report would not be provided. We conducted our examination in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the examination to obtain reasonable assurance that the proposal is free of material misstatement. An examination includes: · evaluating the contractor's internal controls, assessing control risk, and determining the extent of audit testing needed based on the control risk assessment; · examining, on a test basis, evidence supporting the amounts and disclosures in the proposal; · assessing the accounting principles used and significant estimates made by the contractor; · evaluating the overall proposal presentation; and · determining the need for technical specialist assistance. We evaluated the proposed costs using the applicable requirements contained in the: · Federal Acquisition Regulation (FAR); · Defense FAR Supplement (DFARS); and · Cost Accounting Standards (CAS). We consider KBR's estimating system to be inadequate (see Contractor Organization and System starting on Page 23 with Estimating System discussed on page 26). On August 4, 2004, we issued a report on the contractor's estimating system. Our examination of the estimating system disclosed the following five significant deficiencies in KBR's estimating system that result in proposed costs that are not current, accurate, and complete. Inadequate Cost Estimating Development Lack of Management Reviews; Lack of System Description and Integration; Insufficient Training, Experience and Guidance to Estimators; and Inadequate Policies, Procedures, and Practices for Providing Updates to the Government. The scope of our examination reflects our assessment of control risk and includes audit tests designed to provide a reasonable basis for our opinion. RESTRICTIONS 1. KBR represented the proposal is based on actual costs; however, the data provided did not reconcile to KBR's accounting records. KBR proposed direct costs of $800,765,450 while $817,899,175 was charged to the RIO 5 JCL as of August 31, 2004. In addition, KBR was unable to demonstrate the proposal was based on actual costs. For example, KBR proposed $252,808,547 for unleaded gasoline and kerosene, and related transportation; however, when we requested supporting documentation for the proposed costs KBR provided spreadsheets which did not support the proposed amount. The schedule supports costs of $225,599,379, a difference of $27,209,168. Refer to Note 5c (1), page 11 for further details. In addition, we have requested a schedule of actual costs for the procurement of fuels from Turkey and Jordan, for $502,932,525, and $10,601,096, respectively. To date, KBR has not provided the requested data; therefore, the results of audit are limited accordingly. Refer to Note 5c (3 and 5), pages 18 and 19, for further details. 2. Concurrent audit activity is being conducted by our office to determine the validity of the proposed demurrage charges totaling $1,255,333 (Assignment No. 3311-2004K17900040, which will be issued during November 2004). Therefore, the results of audit are restricted to the extent the receipt of the above audit may result in questioned costs. Data was requested for these costs in June 13, 2004 and again on September 15, 2004 in our access to records letter addressed to the Chief Operating Officer of KBR. KBR recently provided some data on September 29, 2004, related to these costs. We are currently evaluating this data. Refer to Note 5c (2) Kuwaiti LPG Fuel and Transportation Costs, Page 17 for further details. 3. On June 4, 2004, we requested a technical evaluation from the COE to determine the reasonableness of the number and need for tanker trucks and LPG barges, the quantity of fuel, and a determination if there was or was not a sufficient supply of fuel from Turkey and Jordan to justify the need for procuring fuel from Kuwait. As of this report date, the COE has not provided DCAA a technical evaluation to incorporate into this audit report. We consider the technical analysis to be essential for our results of audit. Accordingly, the audit results are restricted to the extent additional costs could have been questioned based on a technical evaluation. In our opinion, the cost or pricing data and the information other than cost or pricing data submitted by the offeror are not adequate (see comments on Exhibit A, Note 5). The proposal was not prepared in all respects in accordance with applicable Cost Accounting Standards and appropriate provisions of FAR and the DoD FAR Supplement (see comments on Exhibit A, Note 5). We discussed these inadequacies and noncompliances with XXXXXXXXXXX on May 25, 2004 and XXXXXXXXXXX on October 8, 2004. Because the noncompliances and inadequacies are considered significant, we do not believe the proposal is an acceptable basis for negotiation of a fair and reasonable price. At your request, we have nevertheless, evaluated the proposal to the extent possible in the circumstances. To make the cost or pricing data adequate, it is essential for KBR to provide supporting cost data that reconciles to KBR accounting records for the proposed $502,932,525 for Turkey fuel and $10,601,096 for Jordan fuel. Also, the technical evaluation described above is significant enough to materially impact the results of audit. We recommend contract price negotiations not be concluded until (1) the supporting cost data for the Turkey and Jordan fuel is provided by KBR, (2) the results of the technical evaluation are considered by the contracting officer, and (3) our office is contacted concerning the status of the audit of demurrage costs. As of August 31, 2004, recorded direct costs on TO 5 have exceeded the proposed direct costs by $17,133,635. Specifically, KBR proposed direct costs of $800,765,540 while $817,899,175 was charged to the RIO 5 Job Cost Ledger (JCL) as of August 31, 2004. KBR is currently analyzing the validity of all RIO transactions and expects to make adjustments to all RIO TOs upon completion of its analysis. The purpose of this analysis is to ensure the accuracy of recorded information and its consistency with supporting documents. This analysis has resulted in numerous adjustments to the JCL and more adjustments are expected. Since KBR has not reflected all adjustments in its official books and records, we are unable to perform our review of the correcting entries. KBR plans to complete its analysis and process the adjusting journal vouchers in the near future. Our office plans to review the adjusting entries when KBR's adjustments are completed. Any consideration of recorded costs during negotiations should include the impact of these adjustments to ensure accuracy of the cost information. Proposed Costs Our examination of the $875,255,894 proposal disclosed $108,409,622 in questioned costs and $1,255,333 in unresolved costs, as summarized below.
Explanatory Notes 1. The amounts in this column are presented solely for the convenience of the procurement activity in developing its negotiation objective. They represent only the arithmetic difference between the amounts proposed and the sum of the related questioned and unresolved costs. You should not consider the amounts to be audit approved or recommended amounts. DCAA does not approve or recommend prospective costs because the amounts depend partly on factors outside the realm of accounting expertise, such as opinions on technical and production matters. 2. Labor a. Summary of Conclusions We questioned $46,929 of labor costs primarily due to KBR proposing danger pay and area differential in excess of Department of State Standardized Regulations (DSSR). We used DSSR rates effective as of February 2003. Questioned costs are summarized as follows:
b. Basis of Contractor's Rates KBR's proposed direct labor costs are based on KBR's representation of recorded costs (these representations do not reconcile to its JCLs). x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x In addition to basic pay, employees received premiums such as foreign service bonus, danger pay, and area differential based on location. KBR proposed danger pay and area differential rates of xx percent for Kuwait and between xx and xx percent for Jordan and Turkey. x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x Labor rates used in this proposal are the actual labor rates currently being paid to the workforce; xxxxxxxxxxxxxxxxxxxxxxxxxxxxx x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x xxxxxxxxxxxxxxxxxxxxxxxx. Rest and Relaxation (R&R) is based on xxxxxxxxxxx employment agreements which states, "Employees are eligible for 14 days paid leave and travel after working 12 weeks at site."� c. Audit Evaluation We performed the following procedures: We sampled and verified the proposed direct labor rates and corresponding labor categories to the contractor's records, SAP Display 0001 Organizational Assignment and Display 0008 Basic Pay. In addition, we verified the proposed direct labor costs to the contractor's labor representations. We compared the danger pay and area differential rates from the DSSR to the rates applied by KBR. We noted R&R charges were immaterial requiring no review Documentation describing the relationship of OAS and SEII to KBR was requested by our office. We asked for the rationale underlying why these costs are proposed as direct labor rather than subcontracts or inter-company costs. On May 21, July 13, and September 10, 2004, we requested organizational information on Halliburton owned legal entities. We received a partial response on September 24 and 25, 2004. We are reviewing the data provided to assess how the various Halliburton entities relate to each other and how costs are accounted for and allocated to government contracts. We questioned $46,929 of danger pay and area differential which is in excess of the February 2003 DSSR for danger pay and area differential. KBR proposed xx percent for area differential and danger pay for Kuwait and between xx and xx percent for Jordan and Turkey. According to the DSSR, as of February 2003, danger pay and area differential for Kuwait is 15 percent of employees' base pay and area differential for Turkey and Jordan is 10 percent (there is no danger pay for Turkey and Jordan). d. Contractor's Reaction KBR representatives do not concur with the questioned area differential and danger pay. KBR stated the DSSR does not apply to contractors but to federal employees; however, it does use the DSSR as a guideline. KBR set uplift percentages based on what it felt was needed to recruit and maintain employees for its work overseas. Also, KBR stated it should be paid the higher proposed rates instead of the DSSR rates because employees did not strictly stay in the countries where they performed most of their work because they often traveled into more dangerous countries to perform various tasks. e. Auditor's Response DCAA maintains that area differential and danger pay rates in excess of DSSR rates are unreasonable. The Department of State sets the DSSR rates to provide reasonable reimbursement of personnel and KBR has not demonstrated that the DSSR rates are not reasonable. We concur with KBR, if employees travel to more dangerous countries to work; those employees should be paid higher uplifts. However, KBR does not record on its timesheets where an employee is working. As a result, the contractor has no method for determining where employees work except for where they are assigned. 3. Other Labor Related Costs (OLRC) Associated with the above questioned labor costs, there are questioned OLRCs. However, these costs are not material and do not significantly impact this proposal; therefore, we have not included these costs in our results of audit. 4. Equipment Due to the insignificance of the individual equipment costs we did not review the proposed costs. 5. Materials and Subcontract Costs a. Summary of Conclusions We questioned $106,082,036 and unresolved $1,255,333 of proposed material and subcontract costs as detailed below:
Questioned costs are due to: · KBR's failure to demonstrate reasonable pricing for the Kuwaiti fuel and transportation costs of $62,046,284; · Differences between proposed and supporting data of $27,209,168; and · Unwarranted increases to the Turkey subcontracts for fuel which resulted in unreasonable costs of $16,826,584. Unresolved costs of $1,255,333 are due to the audit of demurrage still in process. Data was requested for these costs in June 13, 2004 and again on September 15, 2004 in our access to record letter addressed to the Chief Operating Officer of KBR. KBR recently provided some data on September 29, 2004, related to these costs. Therefore, the results of audit are limited to the extent that our completion of the audit may result in additional questioned costs. In addition, we requested a technical evaluation from the COE to determine the reasonableness of the proposed number and need for tanker trucks, number of LPG barges, quantity of fuel, and a determination if there was, or was not, a sufficient supply of fuel from Turkey and Jordan to justify the need for procuring fuel from Kuwait, a higher priced source. On July 20, 2004, we requested a status on the technical report; however, the COE has not provided us a response on our request. During our evaluation of proposals for RIO TOs 7 through 10, we were told a technical report would not be provided. b. Basis of Contractor's Cost Proposed Kuwaiti fuel and transportation costs are based on KBR's representation of actual costs. KBR provided a schedule of actual costs which is $27,209,168 less than proposed. KBR provided twelve purchase orders to support the costs; these purchase orders were negotiated in a very short time frame. The Kuwaiti transportation costs are based on a monthly rental fee, independent of the number of trips, and fuel costs are based on a unit price per liter. The Turkey proposed fuel costs are based on twelve purchase orders dated between May and September 2003. KBR issued change orders that retroactively increased the price on these Turkey fuel purchase orders. Proposed Jordan fuel costs are based on a subcontract with x x x x x x x x x x x x (10/19/03). Proposed demurrage costs are based on subcontractor invoices. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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