[Senate Hearing 110-206]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 110-206
 
  THE DEPARTMENT OF DEFENSE'S MANAGEMENT OF COSTS UNDER THE LOGISTICS 
          CIVIL AUGMENTATION PROGRAM (LOGCAP) CONTRACT IN IRAQ 

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2007

                               __________

         Printed for the use of the Committee on Armed Services

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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

EDWARD M. KENNEDY, Massachusetts     JOHN McCAIN, Arizona
ROBERT C. BYRD, West Virginia        JOHN WARNER, Virginia,
JOSEPH I. LIEBERMAN, Connecticut     JAMES M. INHOFE, Oklahoma
JACK REED, Rhode Island              JEFF SESSIONS, Alabama
DANIEL K. AKAKA, Hawaii              SUSAN M. COLLINS, Maine
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
EVAN BAYH, Indiana                   LINDSEY O. GRAHAM, South Carolina
HILLARY RODHAM CLINTON, New York     ELIZABETH DOLE, North Carolina
MARK L. PRYOR, Arkansas              JOHN CORNYN, Texas
JIM WEBB, Virginia                   JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           MEL MARTINEZ, Florida

                   Richard D. DeBobes, Staff Director

              Michael V. Kostiw, Republican Staff Director

                                  (ii)

  




















                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

  The Department of Defense's Management of Costs Under the Logistics 
          Civil Augmentation Program (LOGCAP) Contract in Iraq

                             april 19, 2007

                                                                   Page

Dorgan, Senator Byron L., U.S. Senator from the State of North 
  Dakota.........................................................     7
Bolton, Hon. Claude M., Jr., Assistant Secretary of the Army for 
  Acquisition, Logistics, and Technology.........................    13
Ernst, Keith D., Acting Director, Defense Contract Management 
  Agency.........................................................    15
Johnson, MG Jerome, USA, Commanding General, United States Army 
  Sustainment Command............................................    17
Reed, William H., Director, Defense Contract Audit Agency........    22
Fitzgerald, Patrick J., The Auditor General, Department of the 
  Army...........................................................    27

                                 (iii)


  THE DEPARTMENT OF DEFENSE'S MANAGEMENT OF COSTS UNDER THE LOGISTICS 
          CIVIL AUGMENTATION PROGRAM (LOGCAP) CONTRACT IN IRAQ

                              ----------                              


                        THURSDAY, APRIL 19, 2007

                                       U.S. Senate,
                               Committee on Armed Services,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m. in room 
SD-106, Dirksen Senate Office Building, Senator Carl Levin 
(chairman) presiding.
    Committee members present: Senators Levin, Reed, Akaka, 
Bill Nelson, Clinton, Webb, McCaskill, Warner, Inhofe, Thune, 
and Martinez.
    Other Senators present: Senator Dorgan.
    Committee staff members present: Richard D. DeBobes, staff 
director; and Leah C. Brewer, nominations and hearings clerk.
    Majority staff members present: Peter K. Levine, general 
counsel; and Michael J. McCord, professional staff member.
    Minority staff members present: Michael V. Kostiw, 
Republican staff director; Derek J. Maurer, minority counsel; 
David M. Morriss, minority counsel; Lucian L. Niemeyer, 
professional staff member; and Bryan D. Parker, minority 
investigative counsel.
    Staff assistants present: David G. Collins, Fletcher L. 
Cork, and Jessica L. Kingston.
    Committee members' assistants present: Jay Maroney, 
assistant to Senator Kennedy; David E. Bonine, assistant to 
Senator Byrd; Frederick M. Downey, assistant to Senator 
Lieberman; Elizabeth King, assistant to Senator Reed; Darcie 
Tokioka, assistant to Senator Akaka; Christopher Caple, 
assistant to Senator Bill Nelson; Jon Davey, assistant to 
Senator Bayh; Andrew Shapiro, assistant to Senator Clinton; 
Gordon I. Peterson, assistant to Senator Webb; Stephen C. 
Hedger, assistant to Senator McCaskill; Sandra Luff, assistant 
to Senator Warner; Vince Piperni, Mark Powers, and Jeremy 
Shull, assistants to Senator Inhofe; Mark J. Winter, assistant 
to Senator Collins; and Brian W. Walsh, assistant to Senator 
Martinez.

       OPENING STATEMENT OF SENATOR CARL LEVIN, CHAIRMAN

    Chairman Levin. Good morning, everybody.
    The Senate Armed Services Committee meets today to hear 
testimony about the Department of Defense's (DOD) management of 
the Logistics Civil Augmentation Program (LOGCAP) contract 
under which Kellogg, Brown, & Root, Inc., (KBR), at least until 
recently a subsidiary of Halliburton, provided services to U.S. 
troops.
    There is a history of highly favorable treatment of this 
contractor throughout the contract. For example, the company 
was given work that appears to have far exceeded the scope of 
the contract. All of this added work was provided to the 
contractor without competition. The contractor resisted 
providing us with information that we needed to monitor and 
control costs. There were almost $2 billion of overcharges on 
the contract. The contractor received highly favorable 
settlements on these overcharges. There was strong evidence 
that a failure of oversight on this contract by the DOD paved 
the way for excessive payments that cost the taxpayers hundreds 
of millions of dollars.
    Under the LOGCAP contract, the contractor is responsible 
for providing a full spectrum of services to U.S. troops in the 
field, including dining facilities, living quarters, base camp 
operations and maintenance, facilities management, 
transportation, and distribution of supplies, water and ice, 
laundry and bath, airfield operations, detainee camp 
construction, and firefighting.
    Over the last 5 years, the DOD has obligated more than $20 
billion under this contract, making it one of the largest, if 
not the largest, service contracts ever awarded to a single 
contractor. Almost from the outset of the Iraq war, there have 
been serious allegations that the contractor inflated cost 
estimates and incurred excessive and unnecessary costs. To 
date, DOD auditors have identified almost $2 billion in 
overpricing on this contract.
    For instance, in 2003 and 2004 KBR billed the Government 
for millions of meals that were never prepared. These 
overcharges occurred because KBR allowed its subcontractors to 
charge for a fixed number of meals, regardless of how many 
meals were prepared.
    Another example in the same period, KBR ordered thousands 
of trailers from vendors who charged anywhere from 200 percent 
to as much as 600 percent of the prices charged by the low 
bidders. When asked by the committee staff whether the problem 
with the trailers was symptomatic of a broader problem with 
KBR's purchasing systems, the Defense Contract Audit Agency 
(DCAA) director replied, ``Yes.''
    Under Federal Acquisition Regulations (FAR), the DOD is 
supposed to pay only reasonable costs incurred under a cost-
plus contract like the LOGCAP contract, yet DOD reimbursed the 
contractor for almost the entire amount that it paid for the 
meals that were never served or prepared and the greatly 
overpriced trailers.
    Audit reports and contractor performance evaluations from 
2005 and 2006 reveal that similar cost problems continue to the 
present day. For example, the July 2005 report of the DOD Award 
Fee Evaluation Board criticized KBR decisions that added, in 
their words, ``additional costs to the task order with no 
visible benefit to the customer.'' The ``customer'' is us.
    A 2005 DCAA audit report found that KBR's proposed labor 
costs were overstated by $30 million, or 51 percent, compared 
to historic averages.
    A November 2005 Army Audit Agency (AAA) audit report found 
that KBR had wasted between $40 million and $113 million by 
purchasing more vehicles than necessary, in their words, for 
the contract.
    A separate November 2005 AAA report found that KBR's, 
``material handling equipment exceeded requirements,'' and 
that, ``staffing levels at the numerous distribution centers 
were excessive, adding $36 million to the cost of the 
contract.''
    The November 2005 report of the DOD Performance Evaluation 
Board criticized, ``six layers of management in a 1-to-3 
management/labor ratio, which duplicated decisionmaking and 
underutilized personnel.''
    A separate November 2005 evaluation report stated that, 
``Initial estimates are often inflated so that when projects 
are underbudget all the time, it is deceptive.'' It is 
deceptive.
    A March 2006 DCAA audit report found that a KBR proposal 
was overpriced by $75 million because KBR's proposed labor 
costs were overstated by 22 percent, subcontract costs were 
overstated by 21 percent, material costs were overstated by 59 
percent, equipment costs were overstated by 21 percent, and 
other direct costs were overstated by 20 percent, compared to 
the performance of the same work under a previous task order.
    The March 2006 Evaluation Board report criticized the 
``overstated costs in proposals and the overengineering of 
customer requirements.''
    An April 2006 Army audit report found that the contractor 
refused to move excess personnel or equipment from the job to 
which they were assigned in which they weren't needed--they 
were excess--to another job in order to accomplish needed work. 
According to the report, ``When we brought this situation to 
the attention of top contractor operational personnel, they 
informed us that this was company policy.''
    A May 2006 DCAA report found that a KBR proposal overstated 
costs by almost $70 million, with labor costs overstated by 33 
percent, material costs overstated by 47 percent, compared to 
actual incurred costs for the same effort under a previous task 
order.
    A May 2006 Evaluation Board stated that, ``Unskilled labor 
appeared to be underutilized, seen in makework projects that 
contribute little.''
    An August 2006 DCAA audit found that KBR's proposed 
subcontract costs for one task order were overstated by roughly 
$100 million. Proposed costs for two subcontracts exceeded 200 
percent of the amount charged by other subcontractors to 
perform similar work, while KBR proposed to substantially 
increase staffing levels without justification on numerous 
other subcontracts.
    The September 2006 Evaluation Board report criticized, 
``unsupported costs of $2.5 million, an overrun of $33 million, 
questioned costs, and an inaccurate burn rate, and an 
overestimated $74 million of proposed costs.''
    An October 2006 Evaluation Board criticized excessive costs 
on subcontracts.
    Now, that is a litany of excess, of overstatements, of 
representations made by the contractor, and that is only part 
of the reports that we have reviewed. It is a pretty sorry 
record.
    But what was the response? The DOD problems managing the 
costs under this LOGCAP contract, first of all, were 
exacerbated by the contractor's lack of cooperation with the 
DOD information requests. For instance, a September 2005 DCAA 
audit report said the following: ``We encountered significant 
problems in obtaining supporting cost or price data. In some 
cases the procurement files were not provided for review, and 
in other cases key information was not included in the 
procurement files. Failure to disclose cost or pricing data to 
the Government significantly impairs the reliability of the 
proposal as an acceptable basis for negotiation of fair and 
reasonable price.''
    A November 2006 DCAA audit report said the following: ``The 
results of this audit are qualified due to the inadequacy of 
the documentation provided and the lengthy response time in 
obtaining documentation from the contractor. We implore KBR 
management and its Government compliance group to address the 
cited deficiencies and to work with the DCAA to improve its 
systems and related internal controls.''
    Can you imagine, we have to implore a contractor--implore a 
contractor, receiving billions of dollars of taxpayers' money, 
to do what the law requires them to do, which is to give us 
documents and data?
    In a December 2006 meeting, Army auditor, Patrick 
Fitzgerald, told the committee staff that the Army continues to 
pay too much for services under the LOGCAP contract. According 
to Mr. Fitzgerald, there is, ``no doubt we're paying a premium 
for KBR services and that the premium had been exacerbated by 
the absence of effective cost controls on the part of the 
DOD.''
    LOGCAP management officials, the very people who are 
supposed to ensure that taxpayer funds are spent wisely, 
appeared to have ignored the extensive findings by their own 
auditors, as well as the cost concerns expressed in program 
documents, when they made award fee determinations for the 
LOGCAP contract. Rather than giving KBR low ratings to penalize 
the company for its poor cost performance--and that's what 
we're talking about here, is cost performance--program 
management officials consistently gave the company high ratings 
and paid the company high fees.
    Now, the absence of significant complaints about the 
contractor's work product is not an excuse. We're not talking 
about the work products. We're talking about overpayment for a 
satisfactory work product. That's the issue that's before us. 
This is not a allegation that the work product was deficient or 
inadequate. What we're looking at are overpayments for that 
work product, because, while it is satisfactory, it is 
inexcusable to overpay for a satisfactory work product. There 
was overpayment after overpayment after overpayment after 
overpayment on this contract. There is a history here which is 
totally unacceptable, a history of highly favorable treatment 
of this contractor throughout this contract. I've set forth 
some examples of that history at the beginning of this opening 
statement, and we're going to explore that during this hearing.
    Senator Warner.

                STATEMENT OF SENATOR JOHN WARNER

    Senator Warner. Mr. Chairman, on behalf of the 
distinguished ranking member, Senator McCain, I'd like to place 
his entire statement into the record.
    [The prepared statement of Senator McCain follows:]
               Prepared Statement by Senator John McCain
    Mr. Chairman, I join you in welcoming our witnesses. Over the last 
few years, much has been written and said about the current Logistics 
Civil Augmentation Program (LOGCAP) contract--about the Government's 
management of it, and the contractor's performance under it. In some 
instances, the observations have been accurate; in others, they have 
not. I hope that today's witnesses will bring clarity and understanding 
to the issues. I am particularly interested in the Army's plan for 
improving the LOGCAP.
    The LOGCAP is not a new invention. Established in 1985, the program 
was designed to leverage corporate resources to support military 
operations, thus freeing military personnel to do what they do best: 
fight America's enemies. It has been used in Somalia, the Balkans, and 
other places to support our troops.
    Although the current contract--LOGCAP III--was competitively 
awarded in 2001, it essentially operates as a sole-source contract. 
There is no competition for the individual multi-million and -billion 
dollar task orders issued under it, a practice that runs counter to the 
corporate best practices we exhort the Department of Defense (DOD) to 
employ. As we all know, robust competition on Government contracts 
ensures that the Government receives the best value at the lowest cost 
to the taxpayer.
    I am encouraged that the Army intends to inject more competition 
into the program by awarding contracts to three companies, which will 
then compete for work under individual task orders. But, the American 
people deserve to know why it took so long to do this. After all, 
reportedly in 2004, an internal Army memorandum recommended the Army 
immediately find ways to open up the contract to greater competition.
    There is no dispute that the LOGCAP contractor has provided the 
critical combat support services our troops need. According to numerous 
people, the contractor has been exceedingly responsive to commanders' 
requirements to enhance the quality of life of our troops in theater.
    Nevertheless, various Government auditors have been critical of the 
Government's and the contractor's cost control efforts. According to 
one report, the Government had problems preparing independent 
Government cost estimates, reviewing the contractor's rough orders of 
magnitude, and definitizing task orders. Consequently, the Government's 
risk increased because of the limited visibility and control over 
contractor costs.
    Even worse, as I understand it, the Government cannot say with 
certainty the amount of money allegedly lost through ineffective cost 
controls. That is unacceptable. We must have a full and accurate 
accounting of how the taxpayer's dollar was spent and the reasons for 
any resources squandered.
    I also question whether the Government properly planned to use the 
LOGCAP contract. The original scope of work called on the contractor to 
support up to 50,000 troops for 180 days. Disturbingly, the Government 
Accountability Office concluded that the Government had not planned how 
best to use the LOGCAP contract until after the fall of Baghdad.
    So we may fulfill our oversight responsibility, the Army must 
advise this committee in detail on the contemplated nature of the new 
LOGCAP contracts it will award, their fee structures, performance 
criteria, and potential for conflict of interests. I am keenly 
interested in the separate planning and support contract that the Army 
recently awarded. Under this contract, it appears that the Government 
is delegating functions that it ought to be performing itself. Such a 
role parallels that of lead systems integrators in major defense 
acquisition programs, about which I have previously voiced much 
reservation.
    I have been long concerned about the problems we have in our 
acquisition of major weapons systems: cost overruns, delivery delays, 
and broken systems. For years, I have called for the need to examine 
the whole procurement process as it works today in the DOD. We must 
strike a course in acquisition that brings into line affordability 
imperatives with the warfighter's mission requirements.
    My concerns apply equally to the acquisition of services. In fiscal 
year 2005, the DOD spent $141 billion on service contracts, a 72 
percent increase in a decade, and an amount exceeding that obligated on 
supplies and equipment, including major weapons systems. The explosion 
in the number and value of services contracts deserves careful 
consideration.
    In my judgment, we need to provide General Petraeus and our troops 
every tool they need to successfully prosecute the current strategy in 
Iraq. Every dollar we save by improving the LOGCAP is another dollar 
for Mine Resistant Ambush Protected vehicles, another dollar for body 
armor, another dollar for ammunition, another dollar for medical 
supplies. Our brave men and women in Iraq and Afghanistan deserve no 
less.

    Senator Warner. Before addressing one or two paragraphs of 
that statement, I listened very carefully to your rendition of, 
presumably, documents and other various adjudications on this 
very complicated contract. But I do think, as we pursue our 
inquiry here on the committee, we have to give recognition to 
the fact that this contract, both in Afghanistan and in Iraq, 
was performed under very erratic, unanticipated, and, indeed, 
high-risk conditions to those employees in-country performing 
these contracts. The military efforts in both of these areas of 
responsibility (AORs) have been courageous and highly dependent 
upon the services flowing from this contract.
    All of that has to be taken into consideration as we look 
at the various aspects. Unquestionably, there are some grounds 
for justifiable criticism, but, on the other hand, I would hope 
some of our witnesses would bring to light the difficulty of 
performing this contract. This war, in many respects, in both 
areas, certainly in Iraq, grew at unanticipated rates, large 
infusion of added troops on very short notice, accompanied by 
many civilians and contractors, who, likewise, were, in some 
measure, dependent upon the contract and its performance.
    So, Mr. Chairman, I'd like to refer to Senator McCain's 
last three paragraphs here. I know, working as former chairman 
of this committee with Senator McCain, he had a tremendous 
interest in this subject. He states, in his statement, ``I've 
been long concerned about the problems we have in our 
acquisition of major weapons systems, cost overruns, delivery 
delays, and broken systems. For years, I have called for the 
need to examine the whole procurement process as it works today 
in DOD. We must strike a course in acquisition that brings into 
line affordability imperatives with the warfighter's mission 
requirements. My concerns apply equally to the acquisition of 
services. In fiscal year 2005, the DOD spent $141 billion in 
service contracts, a 72 percent increase in a decade, and an 
amount exceeding that obligated on supplies and equipment, 
including major weapons systems. The explosion in the number 
and value of services contracts deserves careful 
consideration.''
    He concludes, ``In my judgment, we need to provide General 
Petraeus and our troops every tool they need to successfully 
prosecute the current strategy in Iraq. Every dollar we save by 
improving the LOGCAP is another dollar for mine-resistant, 
ambush-protected vehicles, another dollar for body armor, and 
another dollar for ammunition. Our brave men and women in Iraq 
and Afghanistan deserve no less.''
    I join you, Mr. Chairman, in welcoming our distinguished 
colleague, Senator Dorgan. He undoubtedly has spent a great 
deal of his own personal time in the commitment on this 
subject, Senator, and I look forward to hearing your statement.
    Chairman Levin. What we will now do is call upon our first 
witness, Senator Dorgan, who has spent an extraordinary amount 
of time and shown just an amazing amount of commitment to the 
issue of going after waste and abuse in government contracting. 
As head of the Democratic Policy Committee, he has held 
hearings to fill in where there's been a shortage of oversight 
in this matter, and we commend him for that. We are delighted 
that he's here today to share some of his knowledge and 
experience with us.
    Senator Dorgan.

  STATEMENT OF SENATOR BYRON L. DORGAN, U.S. SENATOR FROM THE 
                     STATE OF NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, members of the committee, 
thank you very much for hearing me this morning. I did chair 10 
hearings, not because I found joy in doing so, but because we 
had many whistleblowers come to me and to others to say, 
``Something is seriously wrong, and the people need to know 
it.''
    I want to talk a little about the LOGCAP project today, but 
I want to also encourage you to take a look at the Restore 
Iraqi Oil (RIO) contract; and I want to do that, only because 
there's been a substantial amount of information about the RIO 
contract. The top civilian contract official in our Federal 
Government at the Corps of Engineers, the top civilian 
official, said this about RIO: ``It was the worst contract 
abuse I witnessed during my entire professional career, which 
spans over 20 years,'' concerns contracts awarded to 
Halliburton subsidiary KBR. For that, she has been demoted. She 
took on the old-boys network and was demoted for being a 
whistleblower.
    But here's what I received in the mail 17 months ago from 
the Inspector General (IG). I referred what Ms. Bunnatine 
Greenhouse, the top civilian contracting official at the Corps 
of Engineers, had alleged about these contracts, the RIO 
contracts, to the IG. Here's what she wrote to me: ``The 
Defense Criminal Investigative Service, the IG, has examined 
the allegations made by Ms. Bunnatine Greenhouse, principal 
assistant responsible for contracting for the Army Corps of 
Engineers, and has shared its findings with the Department of 
Justice (DOJ). The DOJ is in the process of considering whether 
to pursue the matter. As this is an ongoing criminal 
investigation, the requested information will be provided when 
the investigation is concluded.'' That was about 17 months ago.
    The point is this, serious allegations were raised by the 
top contracting official in our Government about the RIO 
contact. It apparently is being investigated. It was referred 
to the DOJ by the IG. I really do encourage you to take a look 
at that, as well.
    I don't doubt, as Senator Warner indicated, that services 
were provided under the LOGCAP contract under some very 
difficult circumstances. I don't doubt that a bit. In a war 
zone, it's hard to provide services, and there are undoubtedly 
extraordinary employees on the part of KBR and others who did 
heroic work. I don't doubt that.
    But let me tell you what bothers me about these issues. I 
want to just go through a list of things that I have learned 
from people who have come forward who were desperate and wanted 
to say, ``Here's what has happened.''
    Under the LOGCAP contract--sole-source, no bid--here's what 
I found from people who came forward and testified openly. Let 
me start with the small issues.
    A man named Henry Bunting, he was in Kuwait, so he wasn't 
in a war zone in a tough delivery circumstance. He was a 
purchaser for KBR in Kuwait, and he was told that you need to 
buy hand towels for the soldiers, so he ordered the hand 
towels. That was part of what he did. But then, his supervisor 
said, ``No, no, no, you can't order those hand towels. You have 
to order these hand towels.'' Triple the cost. Why? Because the 
company logo has to be on the hand towel. KBR has to be 
embroidered on the hand towel. Triple the cost. Henry said, 
``But that's going to increase the cost of the hand towels.'' 
``Doesn't matter,'' he was told, ``it's a cost-plus contract.''
    Now, this is a tiny little issue. But whether it's this, 
$617,000 worth of soda, or $7,400 a month for leasing a sport 
utility vehicle, or deciding to build an ice factory in the 
desert, and then taking the bid that's 800 percent higher than 
another qualified bidder to build the ice factory in the 
desert, these are issues that are very important to the 
taxpayer and to the soldiers. I believe that what I'm going to 
tell you about this LOGCAP contract is a disservice to the 
American taxpayer and a disservice to our soldiers.
    You're going to hear from the DCAA. In June 2005 they said 
Halliburton had billed taxpayers $1.4 billion in questionable 
and undocumented charges. Of those, $813 million were from the 
LOGCAP contract. Some of them got resolved, some didn't. We 
don't know how they were resolved.
    Under the LOGCAP contract, the troops in Iraq, at, I 
believe, all of our bases in Iraq, were allowed to shower, 
bathe, and sometimes brush their teeth with water that tested 
positive for E. coli and chloroform bacteria, and was more 
contaminated than raw water from the highly polluted Euphrates 
River. Now, how do I know this? I know this, because this is 
from an internal Halliburton report written by Will Granger, 
who was in charge of all water quality in the military 
installations in Iraq. Here's what his internal report says: 
``The alleged discovery of unidentified larvae at the Al Ramadi 
Base in late March revealed no disinfection to nonpotable water 
was occurring for water designated for showering purposes. This 
caused an unknown population to be exposed to potentially 
harmful water for an indeterminate amount of time,'' and he 
says, ``this event should be considered a near miss, as the 
consequences of these actions could have been very severe, 
resulting in mass sickness or death.''
    Now, I have the internal report, written by the man who was 
in charge of all water quality. The company denied this 
existed. They actually created another report that was never 
approved by the man that still works for them, who was in 
charge of making this report.
    By the way, after I held a hearing on this, a young woman, 
who is a doctor serving in the Army in Iraq, sent me an e-mail, 
and she said, ``You know, I read about what was said. I found 
exactly the same thing at my military base, and I had my 
lieutenant follow the water line right on back.'' It's true, 
what was being sent in as nonpotable water was more 
contaminated than the raw water you'd get from the Euphrates 
River, and that's what soldiers were washing their faces in and 
showering in, contaminated water.
    Now, the company says, ``Didn't happen.'' In fact, the Army 
originally said it didn't happen. But it did happen, of course, 
and the IG is also investigating that. I will provide this 
letter for your perusal.
    I would encourage you to talk to a man named Rory Mayberry. 
Rory Mayberry was a supervisor at a food service enterprise, 
KBR Food Service, in Iraq. Rory said that he questioned the 
company's decision, when he learned about it, to charge for 
meals that had never been served, and he was told by managers, 
``this needs to be done, because KBR lost money in prior months 
when the Government suspended some dining hall payments. Got to 
charge for meals that aren't served.''
    He said he was told, by the way, by his company, ``If you 
talk to Government auditors when they come here, one of two 
things will happen: you'll be fired or you'll be sent to an 
active combat zone. Don't you dare talk to a Government 
auditor.'' He said that they routinely served food that had the 
date stamp expired on it--routinely--and were told by their 
supervisors, ``Doesn't matter. Feed it to the troops.''
    Perhaps, that Halliburton sent some truck drivers into a 
known combat zone--there's substantial evidence about that--and 
without warning them of the danger that existed. These were 
truck drivers that were their employees. A number of truck 
drivers died, a couple of soldiers died. Halliburton, then, by 
the way, sent letters to some of the other truck drivers who 
had been part of that, offering to nominate the surviving truck 
drivers for a DOD medal, provided they would sign a medical 
records release that doubled also as a waiver of any rights to 
seek legal recourse against the company for that particular 
issue. It was unbelievable to read what they tried to do with 
respect to those truck drivers.
    I will give you the names of people to call who will tell 
you that they watched brand-new trucks being burned on the side 
of the road, not in a combat zone, because they had a flat tire 
and didn't have the right wrench to fix it, and trucks being 
abandoned because they had a fuel pump that was plugged--brand-
new trucks--because they could be replaced on a cost-plus 
basis.
    The list is pretty substantial, and I'm going to provide 
all of the information that I have learned about LOGCAP.
    My point is not to tarnish anybody or anything. My point is 
that I think that when you have a circumstance like this, and 
you give billions of dollars in sole-source, no-bid contracts 
that are cost-plus, and then you have the contractor say to 
employees, ``Don't you dare talk to Government auditors,'' and 
you have rampant evidence of waste, fraud, and abuse, I think 
all of us ought to be concerned. I think that's a disservice to 
the taxpayer, and I think it's a disservice to American 
soldiers.
    I think profiteering during wartime is unbelievable, and 
it's inexcusable. I'm glad you're looking into the LOGCAP 
project.
    If I might make one additional comment, I hope that what 
all of this will do is persuade us to move with respect to some 
legislative actions that will begin to deal with contracting 
abuse. I believe that awarding big umbrella contracts of over 
$100 million on a sole-source basis, and then say, ``Go do it, 
and we'll add to the contracts,'' and, ``We know it's 
difficult. Do the best you can,'' and then you see substantial 
evidence of these kinds of things I've described, it almost 
makes you ill.
    I really believe that we have a very serious problem. I 
think this is probably some of the most significant waste, 
fraud, and abuse that we've seen in this country's history. I 
hope all of us have exactly the same reaction to it.
    If it happened--and I believe it did--let's stop it. Let's 
find out how it happened, why it happened, who was responsible 
for it, and let's put an end to it.
    So, Mr. Chairman, that concludes my testimony. I am going 
to provide you a substantial amount of information that I have 
gathered.
    Again, it's by people who wanted to come forward to say 
that the water contract, some people came to me and said, ``Do 
you understand what's happening here, that we have soldiers at 
bases that are getting potable and nonpotable water, and the 
nonpotable water they're using for showering and washing their 
face and various things is more contaminated than the water 
they'd get if they just put a hose in the Euphrates River, and 
they don't know it? The company says it didn't happen, and 
here's the report. By the way, here's the e-mail from the guy 
in Iraq in charge of it all.'' Frankly, we all ought to be 
angered about that sort of thing.
    So, thanks for holding these hearings. I'm pleased that 
you're doing it. I think that the truth is a very important 
commodity here in trying to find out what happened and how to 
fix it and make sure it never happens again to our taxpayers, 
and especially, most especially, to our soldiers.
    Chairman Levin. Thank you, Senator Dorgan, for all your 
effort, your energy, your passion. The hearing today is exactly 
designed to address the issues which you talk about on the 
LOGCAP contract. We're going to find out, not just what some of 
these abuses were--and you've outlined a number of them, as 
well--but there's just been such a long list of audit reports 
which show the same problem: overcharges and failures on the 
part of the Army to properly audit the LOGCAP contract where 
these failures existed. So, that is what this hearing is all 
about, and we are going to see if we can get explanations for 
these failures, for this history of favorable treatment of this 
contractor. We're going to use your materials, make them part 
of the record; we've already made good use of those materials, 
and we are very appreciative of your testimony here today.
    Senator Warner. Mr. Chairman, if I might add, we thank our 
colleague. Do you have corroborative evidence, written 
evidence, documentary evidence, of some of the very striking 
accusations that you've drawn our attention to? For example, 
these indications that, ``We'll give you a medal if you don't 
testify,'' is there any record of that, other than verbal?
    Senator Dorgan. That is, Senator Warner, the most 
unbelievable thing to read. I will provide you with the letters 
that were sent to the truck drivers saying that, ``We want you 
to sign this waiver,'' which is designed to look like a waiver 
with respect to medical or--but it--``And we're going to award 
you a medal, or recommend''--and, by the way, this medal can 
only be given by the Secretary of Defense--but suggesting that 
the company's going to give them a medal.
    Senator Warner. You do have those letters?
    Senator Dorgan. Absolutely. In writing--when I saw them, it 
as unbelievable.
    Senator Warner. I think it's important that that 
evidentiary material be made available to the committee.
    Likewise, I'm always concerned about the whistleblower 
situation, and you relate that an individual who did come 
forward--did she not seek the normal legislative protection 
that Congress has given whistleblowers, and prevent that 
demotion?
    Senator Dorgan. Let me tell you about Bunnatine Greenhouse. 
I'll do it in just 30 seconds. Bunnatine Greenhouse, an 
unbelievable success story, and 2 nights ago, I was on the 
phone with the general who made her the top contracting 
official in the United States. He's retired now, for 6 years. I 
said, ``General''--I called him at 9 o'clock at night--I said, 
``General, the fact is they've demoted her and given her 
bad''--she had performance evaluations that were outstanding 
every year, top of the class. All of a sudden, once she decided 
to say that this abuse was the most blatant abuse she'd seen--
she's talking about having the companies in the meetings where 
the contracts are being developed--all of a sudden, her 
recommendations were awful and she was demoted. The general 
that I talked to the other night who was the one that promoted 
her said, ``She has taken an unbelievable beating, and it's 
been unbelievably unfair to her. This woman should not have 
been treated that way. She was the top of the class of people 
that are working for the Federal Government in contracting.''
    So, I hope you will call her in front of this committee. 
She came to one of the hearings I held and spoke out. She had a 
lot of courage to do it. She knew that she was in trouble over 
there. But I hope you'll call her in front of this committee.
    Senator Warner. Now, this was in the Corps of Engineers?
    Senator Dorgan. This is the United States Corps of 
Engineers--the Army Corps of Engineers.
    Senator Warner. Yes, I'm familiar, yes.
    Senator Dorgan. The person that rose to the top--this is a 
great story with this woman and her family.
    Senator Warner. Without getting into further details, by 
coincidence I met with the nominated officer to become the new 
head of the Corps of Engineers, and it might well be that, Mr. 
Chairman, we would ask, as a part of his--he's already been 
reviewed by our committee, but it's not too late to open the 
record to determine what knowledge this individual may have 
had, and his willingness to begin to give it a second 
examination as to its fairness.
    Chairman Levin. There's also a pending IG review.
    Senator Dorgan. There's a review of her allegations about 
the contract abuse that has been sent by the IG, after review, 
to the DOJ, and it's under criminal investigation, according to 
the letter. But there's no IG review, I don't believe, of her 
demotion. The issue of her employment was a different issue. 
She's paid a horrible price for having the courage to speak 
out.
    Chairman Levin. Yes, what we'll do is, on that specific 
case, then, we'll ask the DOJ to tell us what the status is, 
just what the status is of the investigation, when they expect 
their review to be completed, and we will refer the entire 
matter to--if there's not been an IG review of it, the IG for 
his report.
    Senator Dorgan. The main point of it is, I think we want to 
encourage people to speak out.
    Chairman Levin. Absolutely. We're going to protect 
whistleblowers. We've made a big effort in this in Congress, to 
protect whistleblowers. We've even had a big battle, in terms 
of the Senate Select Committee on Intelligence. We want to make 
it possible for whistleblowers who have classified information 
to present that information to any Member of Congress with 
clearance, or anybody who has clearance to hear it. Instead, 
we've been thwarted by the administration in even receiving 
that whistleblower information. But there's a pending nominee 
to be the Director of the Corps of Engineers. So, as Senator 
Warner suggests, we will ask that witness if that person is 
willing to undertake a review of this matter if, and when, that 
person is confirmed.
    Senator Dorgan. Senator Warner, let me, just with one more 
point, say that that was on the RIO contract, not the LOGCAP 
contract. But, again, what this woman, the top contracting 
official, said, ``It is the worst contract abuse I have 
witnessed during my entire professional career.'' She's talking 
about the mechanics and the way this contract was created and 
awarded. For that, she paid for it with her career.
    Senator Warner. As the chairman said, and we've worked 
together here these many years on this committee, and Senator 
Grassley has been a pioneer on the question of whistleblowers, 
along with members on both sides, and that is--one of the 
strongest oversight tools that Congress has is the utilization 
of corroborated testimony from whistleblowers.
    Senator Bill Nelson. Mr. Chairman?
    Chairman Levin. Senator Nelson?
    Senator Bill Nelson. It's my understanding from listening 
to you and Senator Warner, that we are going to make it clear 
to the nominee to be the top general in the Corps of Engineers 
that he must state to us that he will have a thorough 
examination of this issue before we would proceed with the 
confirmation of his nomination. Is that correct?
    Senator Warner. Well, I'm not sure----
    Chairman Levin. He's going to confirm--he will state 
whether or not, before we vote on his confirmation, he is 
willing to undertake a thorough review of this matter. We can't 
complete the review before the vote on his confirmation, but 
what we can do, and will do, is ask him this question, before 
the vote on his confirmation: ``Will you undertake a thorough 
review of this matter?''
    Senator Warner. That would be the correct thing, Mr. 
Chairman. This gentleman, whom I have had the privilege of 
meeting, is an extraordinary nominee to be the head of the 
Corps. In all probability, he has no direct knowledge or 
participation in these matters, as such, just the 
representation to the Senate that, as a part of the 
confirmation process, he will undertake an examination of this 
issue.
    Chairman Levin. Thank you.
    Thank you, again, Senator Dorgan.
    Senator Warner. Thank you, Senator Dorgan.
    Chairman Levin. Secretary Bolton, would you like to begin 
with your opening statement?

STATEMENT OF HON. CLAUDE M. BOLTON, JR., ASSISTANT SECRETARY OF 
      THE ARMY FOR ACQUISITION, LOGISTICS, AND TECHNOLOGY

    Mr. Bolton. Mr. Chairman, thank you very much. Good 
morning, Chairman Levin.
    Chairman Levin. Let me interrupt you for just one moment 
while we seat the other witnesses. Let's get the right names 
again in front of the witnesses, so we can all be clear as to 
who is talking. Thank you.
    Secretary Bolton, you begin, please.
    Mr. Bolton. Again, thank you very much. To you and to 
Senator Warner, distinguished committee members, thank you for 
this opportunity to appear before you to discuss the Army's 
LOGCAP.
    I respectfully request that my written statement be made 
part of the record for today's hearing.
    Let me begin by thanking you, on behalf of the members of 
the acquisition and logistics workforce and our soldiers, who 
serve with great distinction throughout the world, for your 
continuing support.
    Now, I'll be brief. We have two important missions in Iraq, 
to support reconstruction, contracting, and to provide support 
to our courageous men and women in uniform. Contracting to 
support the reconstruction of Iraq, and troop support, is 
carried out by the Joint Contracting Command Iraq and 
Afghanistan. However, support to U.S. and coalition forces is 
provided under the LOGCAP III contract, which is under the 
auspices of the United States Army Materiel Command with 
support provided by the Defense Contract Management Agency 
(DCMA).
    LOGCAP was established in 1985 to provide basic life 
support and facility support until other support capabilities 
arrived or could be arranged. World events, however, have 
zeroed in on LOGCAP as, often, the only option to provide 
complex, rapid, and diversified area support requirements in 
multiple countries, mostly under harsh and hostile conditions. 
The exponential growth in the existing LOGCAP contract, over a 
relatively short time, has stressed both the Government and 
contract resources, as well as the business systems and 
processes. We have made, and will continue to make, 
improvements to our processes, our systems, and contract. The 
program's strength lies in the dedication, innovation, and 
perseverance of the LOGCAP personnel--military, civilian, and 
contractor. We are proud of the dedication, commitment, and 
hard work displayed by the LOGCAP personnel in supporting our 
troops and in rebuilding Iraq.
    Mr. Chairman, this concludes my opening remarks. Again, I 
want to thank you, the distinguished members of this committee, 
for your continuing wisdom, your guidance, your steadfast 
support, and I look forward to your questions.
    Thank you very much.
    [The prepared statement of Mr. Bolton follows:]
            Prepared Statement by Hon. Claude M. Bolton, Jr.
    Thank you for this opportunity to report to you on the United 
States Army's Logistics Civil Augmentation Program (LOGCAP). I am 
pleased to represent U.S. Army leadership as well as the military and 
civilian men and women who are, along with our contractors, supporting 
our fighting forces and working to reconstruct Iraq. Our success would 
be impossible without the tremendous support the Army receives from 
you, the members of the Senate Armed Services Committee. We thank you 
for your wisdom, advice, and strong support.
    The U.S. Army acquisition workforce has two very important missions 
in Iraq: to support reconstruction contracting and to provide support 
for the troops. Contracting to support reconstruction is carried out by 
the Joint Contracting Command-Iraq/Afghanistan (JCC-I/A) under the 
acquisition authority of the U.S. Army. JCC-I/A also provides support 
to the Multi-National Security Transition Command-Iraq (MNSTC-I) in 
training and equipping Iraqi forces and to the U.S. Government's 
mission in Afghanistan. Support to U.S. and coalition forces is 
provided under the LOGCAP-III contract under the auspices of the U.S. 
Army Material Command (AMC).
    The Army has worked with contractors to provide supplies and 
services during both peacetime and contingency operations dating back 
to the Revolutionary War. On December 6, 1985, LOGCAP was established 
with the publication of Army Regulation 700-137. The newly established 
program was used in 1988 when the Third United States Army requested 
that the U.S. Army Corps of Engineers (USACE) contract out a management 
plan to construct and maintain two petroleum pipeline systems in 
Southwest Asia in support of contingency operations.
    The first comprehensive multifunctional LOGCAP Support (LOGCAP I) 
contract was competitively awarded by the USACE in August 1992 and this 
effort supported most U.S. military operations from 1992-1996.
    LOGCAP was not envisioned to remain in place for years and the 
original intent of the LOGCAP contract was only to provide basic life 
and facilities support such as base camps, dining facilities, food 
service, supply point operations, local and line haul motor transport, 
and sea and aerial points until other support capabilities arrived or 
could be arranged. However, external world events have shown that 
LOGCAP is often the only option that could provide complex, rapid, and 
diversified area support requirements.
    In 1996, AMC assumed the contract administration, management, and 
execution responsibilities for the LOGCAP Umbrella Support Contract. 
AMC re-competed the contract in 1997 (LOGCAP II) and again in 2001 
(LOGCAP III). With the sudden and tragic events of September 11, 2001, 
the dynamics of logistics civil augmentation support significantly 
changed from anything we've seen in history. LOGCAP proved again to be 
rapid, responsive, and flexible. There is no other organic support 
(Active-Duty, Reserve, or National Guard) that allows us to meet these 
type of needs and thus LOGCAP is, and will remain, a vital avenue to 
prosecute the global war on terrorism. LOGCAP supports multiple 
countries, services, and agencies, most under harsh and hostile 
conditions. The LOGCAP III contract is approximately $23 billion, with 
an outside the continental United States force structure of 55,715 men 
and women of which approximately 29,200 are subcontractors. Under the 
LOGCAP contract, the Army has delivered to our forces: 36.2 million 
bags of mail; 200 million tons of ice; 7.6 billion gallons of potable 
water; 533 million meals; and 26.7 million bundles of laundry. The 
services provided to our uniformed men and women have been of the 
highest quality. Still, with these services come associated challenges.
    The exponential growth in the existing LOGCAP contract over a 
relatively short period of time has stressed both Government and 
contractor resources, as well as business systems and processes. We 
have made and will continue to make improvements to our processes, 
systems, and contract. For example, to improve management of our 
processes and refine requirements we have established three program 
offices in Iraq, Kuwait, and Afghanistan. The offices are staffed with 
a cadre of logistics analysts, contract specialists, and cost analysts. 
Workforce members are in daily contact with senior commanders and 
logisticians and participate in all aspects of operational planning and 
execution. We continue to work closely with the Defense Contract 
Management Agency (DCMA) on contractor systems issues. DCMA has 
deployed Administrative Contracting Officers and Quality Assurance 
Representatives throughout the region to provide oversight. In 
addition, we have appointed more than 450 Contracting Officer 
Representatives to provide daily oversight of contractor performance. 
Under my direction AMC, DCMA and the Defense Contract Audit Agency have 
worked hard to resolve the backlog of undefinitized contract actions 
(UCAs)--with success. There currently are no outstanding UCAs. The 
LOGCAP office, with support from other Department of Defense agencies, 
is aggressively managing and monitoring the contractor's cost 
performance; the Joint Acquisition Review Board adds another measure of 
cost control through the management and approval of requirements, thus 
ensuring expenditures are for bona fide needs.
    The mission in Iraq is one of constant change. Support to Iraqi 
Forces has increased as we have worked to hand over the fight for 
freedom and the battle against the insurgency to the Iraqi Government. 
The LOGCAP contract is also changing as we move away from a one 
contractor configuration as currently exists under LOGCAP III to 
multiple contractors under LOGCAP IV. We are confident that the 
additional execution capability--providing for competition at the 
individual task order level--will provide us with more robust capacity 
and effectiveness.
    Regardless of the contract vehicle, however, one thing has and will 
remain constant over time: our commitment to ensuring that all 
contractors who support our courageous military men and women and 
reconstruction efforts in Iraq comply with the terms and conditions of 
their contracts.
    On January 30, 2007, the Army learned that Kellogg, Brown, and Root 
(KBR) services may have inappropriately charged the Army for security 
costs under LOGCAP III. In light of this information and on the basis 
that privately acquired security should not have been charged or paid 
under the contract, the contracting officer took action to adjust over 
$19 million in payments to KBR.
    The U.S. Army is committed to providing full disclosure of the 
results of any investigations. If KBR violated the terms and conditions 
of the LOGCAP III contract and knowingly or unknowingly incurred costs 
under the contract, the U.S. Army will take appropriate steps under the 
terms of the contract to recoup any funds paid for those services.
    LOGCAP capitalizes on the synergistic effect of integrating the 
combined capabilities of the military members of the U.S. Army, as well 
as Army civilians and the commercial civil sector. The program's 
strength, however, lies in the dedication, innovation, and perseverance 
of LOGCAP personnel--military, civilian, and contractor. We are proud 
of the dedication, commitment, and hard work displayed by LOGCAP 
personnel in supporting our troops and rebuilding Iraq.

    Chairman Levin. Thank you very much, Secretary Bolton.
    Let us now call on Mr. Ernst, who's the Acting Director of 
the DCMA.
    Mr. Ernst?

STATEMENT OF KEITH D. ERNST, ACTING DIRECTOR, DEFENSE CONTRACT 
                       MANAGEMENT AGENCY

    Mr. Ernst. Good morning, Mr. Chairman and members of the 
committee. I appreciate this opportunity to appear before you 
today to discuss the role of the DCMA in ensuring performance 
under the LOGCAP in Iraq and Afghanistan.
    I respectfully request that my written statement be made 
part of the record for today's hearing.
    DCMA's oversight of contractor-provided services for our 
Nation's deployed forces in Iraq and Afghanistan is a 
responsibility of unprecedented magnitude, and one with a 
commensurate level of challenge. DCMA maintains a cadre of 
approximately 83 military and civilian personnel in Iraq, 
Afghanistan, and Kuwait to support LOGCAP. These individuals 
deploy in theater for 6-month tours and specialize in one of 
three functional areas: contract administration, quality 
assurance, or property management.
    In carrying out their responsibilities, these personnel 
ensure that the LOGCAP contractor is performing in a manner 
consistent with contract requirements, is using adequate 
effective quality processes, is recommending cost-containment 
strategies, and is adapting the level and nature of their 
support to meet shifting requirements.
    DCMA's in-theater cadre is complemented by a network of 
non-DCMA personnel, referred to as contracting officer 
representatives (CORs). CORs receive specialized training in 
one of several LOGCAP support functions, such as food 
preparation, laundry service, or waste disposal. Currently 
numbering approximately 450, the CORs are members of the 
deployed units that receive the contractor-provided services. 
DCMA's in-theater cadre and the CORs serve as a team that 
closely monitors contractor performance of LOGCAP services at 
their respective locations.
    At the corporate level, DCMA provided oversight of dining 
facilities renegotiations, resulting in more favorable contract 
terms. We supported the DCAA's revocation of direct billing 
privileges for KBR, meaning that every cost voucher submitted 
by KBR must now be approved by DCAA before payment. DCMA also 
identifies to LOGCAP negotiators any risk posed by estimating 
system issues to ensure these issues are adequately considered 
and mitigated during negotiations.
    The in-theater contract management mission is clearly a 
formidable one. Aspects of such a mission, including personnel 
security and safety, workload shifts and dispersions, and 
personnel placement, are a continual challenge. DCMA constantly 
works to effectively balance resource requirements between our 
core mission and contingency contracting administration service 
commitments to ensure that core mission areas, such as flight-
critical product and level I subsafe hardware, along with high-
investment programs and sustainment support, continue to 
achieve their intended goals.
    This concludes my prepared remarks. I will be happy to 
answer any questions you may have.
    [The prepared statement of Mr. Ernst follows:]
                  Prepared Statement by Keith D. Ernst
    Mr. Chairman and members of the committee: I appreciate this 
opportunity to appear before you today to discuss the role of the 
Defense Contract Management Agency (DCMA) in ensuring contractor 
performance under the Logistics Civil Augmentation Program (LOGCAP) in 
Iraq. DCMA's oversight of contractor-provided services for our Nation's 
deployed forces in Iraq is a responsibility of unprecedented magnitude 
and one with a commensurate level of challenge.
    DCMA maintains a cadre of approximately 83 military and civilian 
personnel in Iraq, Afghanistan, and Kuwait to support LOGCAP. These 
individuals deploy in theater for 6-month tours and specialize in one 
of three functional areas: contract administration, quality assurance, 
or property management. In carrying out their responsibilities, these 
personnel ensure that LOGCAP contractor's performance is consistent 
with contract requirements; is using adequate, effective quality 
processes; is recommending cost-containment strategies; and is adapting 
the level and nature on their support to meet shifting requirements.
    Prior to their deployment to theater, these personnel undergo 
specialized training for the demands of their LOGCAP-related duties. 
Each of DCMA's deployed Administrative Contracting Officers (ACOs) and 
most of our Quality Assurance Representatives (QARs) are certified in 
accordance with the Defense Acquisition Workforce Improvement Act 
(DAWIA). DCMA's in-theater cadre is complemented by a network of non-
DCMA personnel referred to as Contracting Officer Representatives 
(CORs). CORs receive specialized training in one of several LOGCAP 
support functions, such as food preparation, laundry service, or waste 
disposal. Currently numbering approximately 450, the CORs are members 
of the deployed units that receive the contractor-provided services. 
DCMA's in theater cadre and the CORs serve as a team that closely 
monitors contractor performance of certain services at their respective 
locations. The CORs routinely submit input to DCMA's QARs. The CORs 
also have a direct line to the cognizant DCMA ACOs.
    Our ACOs receive requirements from the LOGCAP Support Unit (LSU) 
after that unit makes should-cost estimates on the requirement. The 
assigned ACO then requests a proposal from the contractor, and, once 
the LSU validates the proposal for accuracy and cost reasonableness, 
formally tasks the contractor to begin work. In theatre, our ACOs also 
provide material requisition approval, lease approval, and consent to 
subcontract in accordance with prescribed contract terms. At the 
corporate level, DCMA establishes and monitors various overhead rates 
and factors. Our ACOs also conduct formal Performance Evaluation Boards 
(PEBs) using the identified award fee criteria. DCMA and the supported 
customer's CORs provide feedback to the contractor on acceptable 
performance as well as on those areas needing improvement. In the 
conduct of the PEB, our ACOs review the contractor's Cost Avoidance 
Measures (CAMs). CAMs are submitted by the contractor to document cost 
savings and avoidances. The contractor is motivated to submit CAMs as 
they are tied directly to fee initiatives in the Award Fee Board 
criteria. The contractor can increase the amount of fee it is awarded 
by demonstrating good stewardship of taxpayer dollars. Our ACOs also 
provide input for the semi-annual Award Fee Evaluation Board--the board 
which determines the contractor's level of earned fee.
    At the corporate level, DCMA provides oversight of Dining 
Facilities renegotiations, resulting in more favorable contract terms. 
In this regard, we supported the Defense Contract Audit Agency's (DCAA) 
revocation of direct billing privileges for Kellogg Brown and Root 
(KBR), meaning that every cost voucher submitted by KBR now must be 
approved by DCAA before payment. DCMA also identifies to LOGCAP 
negotiators any risks posed by estimating system issues to ensure they 
are adequately considered and mitigated during negotiations.
    The role of our property administrators is to ensure the contractor 
has a viable property management system--one that minimizes and 
controls the loss, theft, misuse, and destruction of Government 
property. Property Administrators are also responsible for 
investigating incidents of property loss to determine accountability. A 
DCMA conducted survey in 2006 on the principal LOGCAP contractor 
examined 14 property management functional areas. Our survey uncovered 
no systemic issues, and we deemed the contractor's property management 
system to be satisfactory.
    The in-theater contract-oversight mission is clearly a formidable 
one. Aspects of such a mission, including personnel security and 
safety, workload shifts and dispersion, and personnel placement, are a 
continual challenge. DCMA constantly works to effectively balance 
resource requirements between its core mission and its Contingency 
Contract Administration Services commitments to ensure that core 
mission areas such as Flight Critical and Level I Subsafe hardware, 
along with high-investment programs and sustainment support, continue 
to achieve their intended goals.
    This concludes my prepared remarks. I will be happy to answer any 
questions you may have.

    Chairman Levin. Thank you, Mr. Ernst.
    Let us go now to General Johnson, Commanding General of the 
United States Army Sustainment Command.
    General Johnson?

STATEMENT OF MG JEROME JOHNSON, USA, COMMANDING GENERAL, UNITED 
                STATES ARMY SUSTAINMENT COMMAND

    General Johnson. Good morning, Mr. Chairman and members of 
the Senate Armed Services Committee. Thank you for the 
opportunity to report to you on the United States Army's 
LOGCAP.
    The Army Sustainment Command is responsible for the 
execution of LOGCAP, in addition to several other missions: 
coordination of Army materiel commands, field support 
operations, coordination of reset, materiel management, armor 
preposition stocks, and contingency contracting.
    The Army Sustainment Command executes this through 11 
brigades located throughout the world--7 field support 
brigades, which handles logistics missions, and 4 contingency 
contract brigades, recently created.
    It is my privilege to represent the United States Army, as 
well as its dedicated military, DOD civilians, and contractors 
whose steadfast support of America's fighting forces in 
Afghanistan, Iraq, and Kuwait are critical to our efforts. Our 
work and our success to date are directly attributable to the 
resources and guidance you provide. I thank you for the 
oversight and direction as we continue to improve LOGCAP.
    I would also like to thank Claude Bolton, Assistant 
Secretary of the Army for Acquisition, Logistics, and 
Technology (AL&T), who is here today; Tina Ballard, who is the 
Deputy Assistant Secretary of the Army for Policy and 
Procurement; General Benjamin Griffin, who commands the Army 
Materiel Command; and my other colleagues at the table who have 
participated in improving this program. Their leadership has 
helped us address numerous challenges and develop improvements 
in managing LOGCAP.
    From three qualified bidders, the LOGCAP contract was 
competitively awarded to KBR in December 2001. Under the 
contract, individual task orders are developed to provide 
specific support services. The contractor is paid a cost-plus 1 
percent base fee, and the contractor may earn up to 2 percent 
award fee on negotiated costs. The program has grown rapidly 
from a peacetime value of several million dollars to over $5 
billion today. As a result, we encountered the following 
challenges: controlling theater requirements, contractor 
business systems not meeting the standard, definitizing task 
orders, conducting timely award-fee boards, accounting for 
property, and outright fraud and criminal activity.
    In August 2004, we aggressively attacked these issues and 
began corrective actions. These challenges were validated by 
both the DCAA, the AAA, and the DCMA. The actions we took were 
as follows: appointed a senior contracting official to run the 
program, establishing a requirement review process, 
establishing a review process of business systems of the 
contractor, definitizing all over-age contracts, conducting 
timely award fee boards, establishing property controls, 
working with the DOJ to prosecute those who broke the law, and 
expanding our partnership with the DCMA and the DCAA.
    With Mr. Bolton's help, we've established a senior 
executive program manager for LOGCAP. James Loehrl, who is here 
with me today, serves as the LOGCAP manager and also as my 
principal assistant responsible for contracting.
    We established four program management offices in 
Afghanistan, Iraq, and Kuwait. We also improved predeployment 
training for our LOGCAP support unit. We continue to improve 
oversight and management of the program. Only yesterday, we 
promoted Lee Thompson, who's here with me today, to the Senior 
Executive Service to act as Director for LOGCAP Support 
Operations. This will allow Mr. Loehrl to focus primarily on 
the contracting issues, while Mr. Thompson will dig deeper into 
how we support the forces on the ground.
    To address theater requirements, we established a Joint 
Acquisition Review Board to review and approve all LOGCAP work 
requirements. We also have a Coalition Acquisition Review Board 
that provides additional review and approval or work 
requirements over $10 million. Now, with the help of DCAA and 
DCMA, all of the contractors' business systems are acceptable. 
They're not where we want them to be, but they meet the 
standard.
    As I mentioned before, in October 2004 we began the 
establishment of four program management offices in 
Afghanistan, Iraq, and Kuwait. These offices are staffed with 
logistics specialists, contract specialists, and cost analysis 
who provide detailed oversight of the contract and independent 
Government estimates.
    Additionally, our DCMA and our DCAA partners are co-located 
and integrated with the deputy program manager staff. Between 
November 2004 and March 2005, we definitized 55 over-age task 
orders valued at $14 billion. Now all new task orders are 
definitized before they are issued or within the 180-day 
standard required by regulation.
    Contract award fee evaluations are now on schedule. Mr. 
Loehrl, the LOGCAP manager, has made 11 trips to the theater to 
chair award fee boards.
    We have established a Contractor-Acquired Property Review 
Board that ensures excess contract property is distributed to 
locations needed. The contractor is required to use excess 
equipment prior to purchasing new items. We directed the 
contractor to improve his supply chain. As a result, the 
contractor implemented, along with the help of Defense 
Logistics Agency, competitive commodity agreements with support 
vendors for equipments and supplies, such as generators, 
communication items, vehicles, and lumber. This standardizes 
maintenance and reduces spare parts costs needed to maintain 
equipment. To date, these efforts have resulted in a cost 
avoidance of over $26 million.
    In cases of waste, fraud, and abuse, the U.S. Attorney's 
Office has indicted six people, and successfully prosecuted 
four cases of fraud. In all cases, restitution has been ordered 
against the individuals convicted of fraud.
    With regard to cost control, the contractor is required to 
provide cost reports every 2 weeks on active task orders. These 
reports identify variances between budgets, actual 
expenditures, and available funding. This allows the management 
personnel in theater to identify trends needing correction 
immediately.
    Our ``Alpha Contracting'' initiative brings the combatant 
commanders' representatives, the contractor, the contracting 
officer, and the DCAA, along with the DCMA, together so we can 
rapidly agree on costs and estimates for needed support 
operations in theater. Cost avoidance for this process has been 
dramatic. In 2005 and 2006, initial LOGCAP estimates for work 
in Iraq exceeded $10 billion. Through ``Alpha Contracting'' 
initiative and should-cost analysis and independent Government 
estimates, this was reduced to $4 billion, a $6 billion cost 
avoidance.
    We recognize the need to have closer oversight of 
subcontract actions. The prime contractor is now required to 
obtain our consent to subcontract for services that exceed 
$500,000. A review is done of any contracting actions with the 
subcontractor.
    LOGCAP III grew so rapidly that it nearly exceeded a single 
contractor's capacity. To minimize this risk, LOGCAP IV will 
use multiple contractors. This will increase Government 
contract oversight and reduce program risk, while reducing cost 
through competitive, continuous task-order competition.
    You specifically asked for my views on the cost-
effectiveness of the program. This program is operating in a 
very difficult, complex, and ever-changing environment. Given 
what this program has been asked to do and the circumstances it 
operates under, it is cost-effective. However, there is a 
breakeven point as we continue with the war on a long-term 
basis. With your continued support and guidance, this program 
will continue to improve and ensure basic support is provided 
to America's fighting forces, at the least cost, on time, and 
to standard.
    Thank you for allowing me to speak today. I look forward to 
your questions.
    [The prepared statement of General Johnson follows:]
              Prepared Statement by MG Jerome Johnson, USA
    Mr. Chairman, members of the Senate Armed Services Committee, thank 
you for this opportunity to report to you on the United States Army's 
Logistics Civil Augmentation Program (LOGCAP). It is my privilege to 
represent the United States Army, as well as the dedicated military, 
Department of Defense (DOD) civilians, and contractors whose steadfast 
support of America's fighting forces in Afghanistan, Iraq, and Kuwait 
are critical to our efforts. Our work and our success to date are 
directly attributable to the resources and guidance you provide. I 
thank you for your oversight and direction as we continue to improve 
LOGCAP.
    I would also like to thank Claude Bolton, Assistant Secretary of 
the Army for Acquisition, Logistics, and Technology, who is here today; 
Tina Ballard, who is the Deputy Assistant Secretary of the Army for 
Policy and Procurement; and General Benjamin Griffin, who commands the 
Army Materiel Command. Their leadership has helped us address numerous 
challenges and develop improvements in managing LOGCAP.
    From three qualified bidders, the LOGCAP III contract was 
competitively awarded to Kellogg, Brown, and Root, Incorporated, in 
December 2001. Under the contract, individual task orders are developed 
to provide specific support services. For many task orders, the 
contractor is paid negotiated costs plus a 1-percent base fee; the 
contractor may earn up to a 2-percent award fee on the negotiated 
costs. The program has grown rapidly from a peacetime value of several 
million dollars per year to over $5 billion per year today. The program 
provides logistics and life support services to our fighting forces, 
freeing them to focus on their combat missions. The program is designed 
to rapidly expand during contingency operations and to drawdown during 
peacetime.
    LOGCAP III was first used in Southwest Asia in support of the troop 
buildup in Kuwait. Once U.S. forces crossed the berm into Iraq, LOGCAP 
crossed with them:

         establishing and operating base camps
         feeding hungry troops
         furnishing transportation services
         operating warehouses
         delivering mail
         transporting fuel and supplies

    LOGCAP personnel became a force multiplier for our warfighters.
    We encountered a number of challenges with LOGCAP III during the 
rapid buildup of our forces in Southwest Asia. These challenges 
included:

         controlling theater requirements
         overwhelming the contractor's business systems
         definitizing task orders
         conducting timely award fee boards
         accounting for property
         fraud

    Despite early challenges, at no time did our servicemembers go 
without our LOGCAP support, we always placed their needs first.
    In August 2004, we aggressively attacked these issues and began 
corrective actions. Many of the issues were later validated in audits 
conducted by the Defense Contract Audit Agency (DCAA), the Army Audit 
Agency (AAA) and the DOD Inspector General.
    While LOGCAP still has a number of challenges, we have implemented 
a number of improvements, including:

         Appointing a senior contracting official to run the 
        program
         Establishing a requirement review process
         Insisting KBR improve their business systems
         Definitizing all over-age task orders
         Conducting timely award fee boards
         Establishing property controls
         Working with the Department of Justice to prosecute 
        those who broke the law
         Expanding our partnership with DCMA and DCAA

    Rapid program growth drove the need for enhanced oversight. With 
Mr. Bolton's help, we have established a Senior Executive Service 
Program Manager for LOGCAP. This person serves as the focal point for 
day-to-day management of LOGCAP and staff direction. James Loehrl, who 
is with me today, serves as my LOGCAP Manager and also my Principal 
Assistant Responsible for Contracting. We established Deputy Program 
Management offices in Afghanistan, Iraq, and Kuwait. We also improved 
pre-deployment training for our Logistics Support Unit soldiers.
    To address theater requirements, we work directly with forward 
units to identify and define needed services. We established a Joint 
Acquisition Review Board to review and approve LOGCAP work 
requirements. We have a Coalition Acquisition Review Board that 
provides an additional review and approval for work requirements over 
$10 million.
    Along with our Defense Contract Management Agency (DCMA) and DCAA 
partners, we insisted KBR improve their business systems. Now, all of 
KBR's business systems are acceptable. As I mentioned before, in 
October 2004 we began establishing Deputy Program Management offices in 
Afghanistan, Iraq, and Kuwait. These offices are staffed by: logistics 
specialists, contract specialists, and cost analysts who provide 
detailed oversight of the contract. Additionally, our DCMA and DCAA 
partners are colocated and integrated with the Deputy Program Manager 
staff.
    Between November 2004 and March 2005, we definitized 55 over-age 
task orders valued at $14 billion. Now, all new task orders are 
definitized before they are issued or within the normal 180-day 
standard.
    Contract award fee evaluations are now on schedule. The LOGCAP 
Manager has made 11 trips to theater to chair award fee boards. Every 3 
months, we evaluate contractor performance and determine appropriate 
award fees. Through November 2006, KBR earned $256 million of a 
potential $287 million in award fees; this equates to 89 percent of 
potential fees. This process provides the contractor with important 
feedback on where improvements are needed.
    To maximize the use of contract-purchased property, we have 
established a Contractor Acquired Property Review Board that ensures 
excess contract property is distributed to needed locations. The 
contractor is required to utilize excess equipment prior to purchasing 
new items. Also, the contractor implemented a competitive commodity 
agreement with support vendors for equipment such as generators, 
communications items and vehicles. This standardizes maintenance and 
reduces the number of spare and repair parts needed to maintain 
equipment. To date these efforts have saved over $26 million.
    In cases of waste, fraud, and abuse, we fully cooperate with any 
and all investigations and prosecutions. The U.S. Attorney's office has 
indicted six people and successfully prosecuted four cases of fraud. In 
all cases, restitution has been ordered against the individuals 
convicted of fraud.
    We work closely with DCMA and DCAA to address recommendations, 
improve contract administration, and improve contractor oversight. To 
date, we have sustained over $600 million of DCAA recommendations in 
our task order negotiations.
    We continue to learn and grow from our experience and implement 
changes as they are needed. Every day we seek to:

         reduce costs
         improve performance and oversight
         reduce program risk

    As LOGCAP continues to mature, we recognize that future LOGCAP 
contract oversight staffs must be on the ground quickly--ready to 
operate. We will be postured to move Deputy Program Management offices 
into theaters as required. Tied to this is the rapid development of 
independent Government cost estimates. These estimates will assure that 
we remain good stewards of the resources provided to us. We are 
developing automated tools to assist our Government teams in preparing 
statements of work and cost estimates. We will not let future oversight 
lag when the program grows rapidly to meet warfighter needs.
    With regards to cost control the contractor is required to provide 
cost reports every 2 weeks for active task orders. These reports 
identify variances between budgets, actual expenditures, and available 
funding. This management tool provides DCMA and other program personnel 
with a quick understanding of trends needing attention.
    Another lesson learned that we will carry into future LOGCAP 
operations is to have standardized statements of work which will allow 
combatant commanders to quickly select support options. This 
standardization will allow the LOGCAP contractor to efficiently plan 
and establish logistics and life support operations.
    Our ``Alpha Contracting'' initiative emerged from our need to 
streamline the task order negotiation process. This initiative brings 
the combatant commander, the contractor, the contracting officer, and 
the DCAA together so they can rapidly agree on and put needed support 
operations in place. Cost avoidance from this process has been 
dramatic. In 2005 and 2006, initial LOGCAP estimates for work in Iraq 
exceeded $10 billion. Through the Alpha Contracting initiative and 
General Casey's directive to minimize services, this was reduced to $4 
billion--a $6 billion avoidance. This is also one of the places we are 
making use of AAA reviews. When AAA identifies potential areas of 
overstaffing or underutilization of equipment, we use that information 
as a part of our negotiation process.
    We recognize the need to have closer oversight of subcontract 
actions. The prime contractor is now required to obtain our consent to 
subcontract for services that exceed $500,000.
    LOGCAP III grew so rapidly that it nearly exceeded a single 
contractor's capacity. To minimize this risk, LOGCAP IV will utilize 
multiple contractors. One contractor will provide pre-war planning and 
program management support. Up to three contractors will provide 
performance services, with all of them competing for work identified in 
separate task orders. This will increase Government contract oversight 
and reduce the program risk of exceeding a single contractor's 
capacity, while reducing costs through continuous task order 
competition.
    LOGCAP IV will go a long way toward expanding performance capacity, 
reducing costs, and improving Government oversight. It will also 
provide us with increased flexibility to meet rapidly changing 
requirements.
    In conclusion, LOGCAP is more than just a contract. It is a 
critical program designed to provide essential support services to our 
Nation's sons and daughters who fight for our freedom.
    You specifically asked for my views about the cost effectiveness of 
this program. I will tell you that this program is operating in a very 
difficult, complex and ever-changing environment. Given what this 
program has been asked to do, and the circumstance it operates under, 
it is cost effective. We've managed to overcome numerous challenges in 
LOGCAP while always maintaining our support to our Nation's soldiers, 
sailors, airmen, and marines.
    Despite any and all program challenges, we performed our mission 
and succeeded in supporting our servicemembers. In forward battle 
zones, LOGCAP has served over 533 million meals to hungry troops, 
washed over 26 million bundles of their laundry, and delivered over 36 
million bags of mail that included letters from their loved ones at 
home.
    We stand ready to meet tomorrow's challenges to support America's 
warfighters where and when they need us.
    Thank you for inviting me to speak with you today; this concludes 
my statement.

    Chairman Levin. Thank you so much, General Johnson.
    Now let's call on William Reed, the Director of the DCAA.
    Mr. Reed.

STATEMENT OF WILLIAM H. REED, DIRECTOR, DEFENSE CONTRACT AUDIT 
                             AGENCY

    Mr. Reed. Mr. Chairman, Senator Warner, and members of the 
committee, thank you for the opportunity to appear today to 
discuss DCAA's oversight of contract costs related to military 
operations and reconstruction in Iraq, particularly related to 
the LOGCAP.
    DCAA has been an integral part of the oversight and 
management controls instituted by DOD to ensure integrity and 
regulatory compliance by contractors performing services in 
Iraq. Our services include audits and professional advice to 
acquisition officials on accounting and financial matters, to 
assist them in the negotiating, award, administration, and 
settlement of contracts. Decisionmaking authority on DCAA 
recommendations resides with contracting officers within the 
procurement organizations who work closely with DCAA throughout 
the contracting process.
    Since April 2003, DCAA has worked with all U.S. procurement 
organizations, including those of the United States Agency for 
International Development and the State Department, to 
establish the resources and planning information needed to 
provide audits of contracts for Iraq reconstruction. To carry 
out these audit requirements, DCAA opened an office in Iraq in 
May 2003, and implemented planning and coordination procedures 
to effectively integrate audit work between that office and 
more than 50 DCAA continental United States audit offices with 
cognizance of companies performing contracts in Iraq.
    Currently, we are auditing contracts of 93 contractors, 
holding 175 prime contracts with contract ceiling amounts of 
$51.8 billion, of which $38.5 billion has been funded at the 
end of fiscal year 2006.
    I would like to point out that DCAA audits of cost-
reimbursable contracts represent a continuous effort from 
evaluation of proposed prices to final closeout and payment. 
Initial audits of contractor business systems, internal 
controls, and preliminary testing of contract costs are carried 
out to provide a basis for provisional approval of contractor 
interim payments and early detection of deficiencies. 
Comprehensive contract cost audits are performed annually 
throughout the life of the contract, and are used by the 
contracting activity to adjust provisionally approved interim 
payments and ultimately to negotiate final payment to 
contractors.
    Through fiscal year 2006, we have issued more than 1,800 
reports on Iraq-related contracts. Approximately 350 of those 
reports were on KBR specifically. We estimate to issue another 
600 reports in fiscal year 2007. DCAA oversight of contracts in 
Iraq have found a number of problems. Our actions have ranged 
from recommending changes in business processes, to reduction 
of proposed or billed costs, to referral of our findings to the 
IG for investigation and possible legal action against the 
contractor. Overall, these audits have recommended reductions 
in proposed and billed costs of $4.9 billion.
    Where appropriate, we have taken action to reduce 
contractor-billed costs for disputed amounts, pending a 
contracting officer decision.
    In addition, we have found $5.1 billion of estimated costs 
where the contractor did not provide sufficient information to 
explain the basis of the estimated amounts. These unsupported 
costs are usually resolved through contractor's submission of 
additional documentation at the time of contract price 
negotiations.
    Turning now to the LOGCAP, it is the single largest Iraq-
related contract. It was awarded to Halliburton subsidiary, 
KBR, and currently has a contract ceiling of $22.5 billion. 
DCAA has provided comprehensive and continuous contract audit 
oversight on the LOGCAP, and I would like today to comment on 
some of our work in that regard.
    In supporting the Army contracting officers in the pricing 
of contracts, DCAA has audited 68 LOGCAP task order proposals, 
valued at $16.2 billion, and have found audit exceptions or 
costs questioned of $1.9 billion. DCAA has received and 
analyzed the results of negotiation on task orders, valued at 
$12.8 billion, and negotiated price reductions of $600 million 
have been achieved to date.
    A recent example of our audit work in this area is the 
review of the proposal for task order 139. Task order 139 is 
the latest order for dining facilities, laundry, and other 
life-support measures for U.S. troops and civilians. Our review 
of the initial proposal was completed in August 2006. We 
questioned $262 million of the $3.7 billion proposal. KBR 
agreed to $160 million of the questioned costs, and the balance 
was addressed at recent negotiations.
    It is notable that in this pricing action, that there was a 
significant improvement over previous similar proposals which 
were plagued by estimating deficiencies, causing multiple 
proposal submissions and delays in negotiating the task-order 
price.
    I'd now like to comment on our audit work, in terms of the 
reliability of business systems affecting contract costs. Our 
audits have addressed the adequacy of contractor internal 
controls and business systems, as well as compliance with 
acquisition regulations and contract terms. While KBR's 
business systems are adequate overall, our reviews have 
disclosed a number of estimating and accounting-system 
deficiencies requiring improvement. The contractor has 
submitted corrective action plans, and DCAA, in coordination 
with the responsible contracting officers, are monitoring 
progress and making the needed improvements.
    Another area of our work has been accelerated testing of 
billed costs. Due to the unique risk of contingency contracting 
and conditions in Iraq, DCAA has placed more emphasis on 
examining contractor costs as they are being incurred, rather 
than waiting until the contractor submits its annual incurred-
cost claims.
    One example of our audit work in this area is our review of 
dining facility costs, as was mentioned, Mr. Chairman, in your 
opening statement. KBR provides meal services to the troops and 
other DOD personnel at over 60 dining facilities in Iraq and 
Kuwait. Our audit work, beginning in late 2003, found that KBR 
and its subcontractors were basing their payment requests on an 
estimated number of meals, which substantially exceeded the 
actual number of meals served. For the period May 2004 to May 
2005, DCAA withheld $212 million from KBR interim billings, 
pending resolution of this matter.
    KBR and its subcontractors believe the terms of their 
respective contracts and subcontracts permitted this billing 
practice. The Army contracting officer negotiated a settlement, 
which denied reimbursement of $55.1 million of the actual cost. 
Most notable, however, the early identification of this issue 
by DCAA and the support of the Army Sustainment Command 
contracting officials led to KBR negotiating new subcontracts 
which corrected the billing practices of concern to DCAA and 
the Army. We estimate that the new subcontract terms and prices 
save more than $200 million over what would have been paid 
under the old subcontract terms for a comparable period.
    In this example and others, DCAA worked closely with the 
Army acquisition community, both at the headquarters and field 
level, to reduce contractor billed costs for potentially 
unreasonable expenditures. In the past, DCAA withholdings have 
totaled more than $230 million on LOGCAP task orders. 
Currently, we are withholding $49.6 million from KBR billings.
    The most recent example of withholdings is related to 
security costs. The LOGCAP contract specifically states that 
the Army will provide necessary security to contractor 
personnel performing the contract.
    As such, the Army believes costs incurred by KBR and its 
lower-tier subcontractors for security are unallowable, and 
should not be reimbursed under the LOGCAP contract. DCAA is 
working with the Army to identify lower-tier subcontract 
security costs, and currently the Army has directed DCAA to 
withhold $19.7 million from KBR billings, pending resolution of 
this matter.
    In closing, I want to underscore that DCAA is an integral 
part of the oversight and management controls instituted by DOD 
to ensure an integrated and well-managed contract audit process 
in Iraq. We've had a continuous presence in Iraq, in the Middle 
East theater of operations since May 2003, staffing our office 
entirely with civilian volunteers. To date, more than 180 DCAA 
auditors have served tours, and, fortunately, none have been 
injured or killed.
    The challenges in applying business practices and auditing 
in Iraq are daunting, and have required our auditors to be 
flexible, while insisting that the DOD will not tolerate the 
billing of costs that do not comply with contract terms or are 
not appropriately documented and supported.
    Thank you, again, for the opportunity to appear before you 
today, and I look forward to addressing whatever questions you 
may have for me.
    Thank you.
    [The prepared statement of Mr. Reed follows:]
                 Prepared Statement by William H. Reed
    Mr. Chairman, members of the committee, my statement will summarize 
the Defense Contract Audit Agency's (DCAA) oversight of contract costs 
related to military operations and reconstruction in Iraq including 
audit work related to the Logistics Civil Augmentation Program.
           dod contract performance oversight responsibility
    DCAA has been an integral part of the oversight and management 
controls instituted by DOD to ensure integrity and regulatory 
compliance by contractors performing services in Iraq. DCAA's services 
include audits and professional advice to acquisition officials on 
accounting and financial matters to assist them in the negotiation, 
award, administration, and settlement of contracts. Decisionmaking 
authority on DCAA recommendations resides with contracting officers 
within the procurement organizations who work closely with DCAA 
throughout the contracting process.
                       dcaa staffing and actions
    Since April 2003, DCAA has worked with all U.S. procurement 
organizations, including those of the United States Agency for 
International Development and the State Department, to establish the 
resources and planning information needed to provide audits of 
contracts for Iraq Reconstruction. To carry out these extensive audit 
requirements, DCAA opened an office in Iraq in May 2003 and implemented 
planning and coordination procedures to effectively integrate audit 
work between that office and more than 50 DCAA continental United 
States Audit Offices with cognizance of companies performing contracts 
in Iraq. DCAA is responsible for auditing Iraq-related contracts at 93 
contractors. These contractors hold more than 175 prime contracts with 
contract ceiling amounts of $51.8 billion, of which $38.5 billion had 
been funded at the end of fiscal year 2006.
    DCAA audits of cost-reimbursable contracts represent a continuous 
effort from evaluation of proposed prices to final closeout and 
payment. Initial audits of contractor business system internal controls 
and preliminary testing of contract costs are carried out to provide a 
basis for provisional approval of contractor interim payments and early 
detection of deficiencies. Comprehensive contract cost audits are 
performed annually throughout the life of the contract and are used by 
the contracting activity to adjust provisionally approved interim 
payments and ultimately to negotiate final payment to the contractor.
                           dcaa audit results
    Through fiscal year 2006 DCAA has issued more than 1,800 reports on 
Iraq-related contracts. We estimate issuing another 600 reports in 
fiscal year 2007. DCAA oversight of contracts in Iraq has found a 
number of problems. Our actions have ranged from recommending changes 
in business processes--to reduction of proposed or billed costs--to 
referral of our findings to the Inspector General for investigation and 
possible legal action against a contractor. Overall, these audits have 
recommended reductions in proposed and billed contract costs of $4.9 
billion. Where appropriate, DCAA has taken action to reduce contractor 
billed costs for disputed amounts pending a contracting officer 
decision. In addition, DCAA has identified $5.1 billion of estimated 
costs where the contractor did not provide sufficient information to 
explain the basis for the estimated amounts. These unsupported costs 
were usually resolved through contractor submission of additional 
supporting information at the time of contract price negotiation.
                  logistics civil augmentation program
    The Logistics Civil Augmentation Program (LOGCAP) is the single 
largest Iraq-related contract. The LOGCAP contract was awarded to the 
Halliburton subsidiary, Kellogg, Brown, and Root (KBR) and currently 
has a contract ceiling of $22.5 billion. The contract provides for 
logistical and life support for U.S. troops and civilians in Iraq, 
Kuwait, and Afghanistan. DCAA has provided comprehensive and continuous 
contract audit oversight on the LOGCAP. The results of our audit work 
to date by major type of activity are as follows:

          1. Support to Army Contracting Officers in the Pricing of 
        Contracts--DCAA audits of 68 LOGCAP task order proposals valued 
        at $16.2 billion resulted in audit exceptions (costs 
        questioned) of $1.9 billion. DCAA has received and analyzed the 
        results of negotiations on task orders valued at $12.8 billion. 
        Negotiated price reductions of $600 million have been achieved 
        to date. A recent example of our audit work in this area is our 
        review of the proposal for task order 139. Task order 139 is 
        the latest order for dining facilities, laundry and other life 
        support measures for the U.S. troops and civilians. Our review 
        of the initial proposal was completed in August 2006. DCAA 
        questioned $262 million of the $3.7 billion proposal. KBR 
        agreed to $160 million of the questioned cost and the balance 
        was addressed at recent negotiations. Most notable is that this 
        pricing action was a significant improvement over previous 
        similar proposal reviews which were plagued by estimating 
        deficiencies, causing multiple proposal submissions and delays 
        in negotiating the task order price.
          2. Reliability of Business Systems Affecting Contract Costs--
        DCAA audits have addressed the adequacy of contractor internal 
        controls and business systems, as well as compliance with 
        acquisition regulations and contract terms. While KBR's 
        business systems are adequate overall, DCAA reviews have 
        disclosed a number of estimating and accounting system 
        deficiencies requiring improvement. The contractor has 
        submitted corrective action plans and DCAA, in coordination 
        with the responsible contracting officers, are monitoring 
        progress in making the needed improvements.
          3. Accelerated Testing of Billed Costs--Due to the unique 
        risks of contingency contracting and conditions in Iraq, DCAA 
        has placed more emphasis on examining contractor costs as they 
        are being incurred, rather than waiting until the contractor 
        submits its annual incurred cost claim. One example of our 
        audit work in this area is our review of dining facility costs. 
        KBR provides meal services to the troops and other DOD 
        personnel at over 60 dining facilities in Iraq and Kuwait. DCAA 
        audits beginning in late 2003 found that KBR and its 
        subcontractors were basing their payment requests on an 
        estimated number of meals which substantially exceeded the 
        actual number of meals served. For the period May 2004 to May 
        2005, DCAA withheld $212 million from KBR interim billings 
        pending resolution of this matter. KBR and its subcontractors 
        believed that the terms of their respective contracts and 
        subcontracts permitted this billing practice. The Army 
        contracting officer negotiated a settlement which denied 
        reimbursement of $55.1 million of the actual cost. The early 
        identification of this issue by DCAA, and the support of the 
        Army Sustainment Command contracting officials, led to KBR 
        negotiating new subcontracts which corrected the billing 
        practices of concern to DCAA and the Army. We estimate that the 
        new subcontract terms and prices saved more than $200 million 
        over what would have been paid under the old subcontract terms 
        for a comparable period.

    In this example and others, DCAA worked closely with the Army 
acquisition community, both at the Headquarters and field level, to 
reduce contractor billed costs for potentially unreasonable 
expenditures. In the past, DCAA withholdings have totaled more than 
$230 million on LOGCAP task orders. Currently, DCAA is withholding 
$49.6 million from KBR billings. A recent example is the withholding 
related to security costs. The LOGCAP contract specifically states that 
the Army will provide necessary security to contractor personnel 
performing on the contract. As such, the Army believes costs incurred 
by KBR and its lower tier subcontractors for security are unallowable 
and should not be reimbursed under the LOGCAP contract. DCAA is working 
with the Army to identify lower tier subcontractor security costs and 
the Army has directed DCAA to withhold $19.7 million from KBR billings.
                                closing
    In closing, I want to underscore that DCAA is an integral part of 
the oversight and management controls instituted by DOD to ensure an 
integrated and well-managed contract audit process in Iraq. We have had 
a continuous presence in Iraq and the Middle East Theatre of Operations 
since May 2003, staffing our office entirely with civilian volunteers. 
To date more than 180 DCAA auditors have served tours and fortunately, 
none have been injured or killed. The challenges in applying business 
practices and auditing in Iraq are daunting and have required our 
auditors to be flexible while insisting that the Department will not 
tolerate the billing of costs that do not comply with contract terms or 
are not appropriately documented and supported. DCAA has been and will 
continue to be vigilant about contract audit oversight and protecting 
the taxpayers' interests.
    I look forward to addressing whatever questions or comments you 
have on DCAA's important role in Iraq. Thank you.

    Chairman Levin. Thank you so much, Mr. Reed.
    Now let me call on Patrick Fitzgerald, the Auditor General 
for the Army.
    Mr. Fitzgerald?

   STATEMENT OF PATRICK J. FITZGERALD, THE AUDITOR GENERAL, 
                     DEPARTMENT OF THE ARMY

    Mr. Fitzgerald. Mr. Chairman and distinguished members of 
the committee, thank you for the opportunity to be here today 
to discuss our audit work related to LOGCAP.
    I have submitted my full statement to the committee, and I 
ask, respectfully, that that be made part of the hearing 
record.
    Chairman Levin. It will be made part of the record.
    Mr. Fitzgerald. Thank you, Senator.
    I have been with the U.S. AAA for more than 26 years, and 
became the Auditor General in March 2006. As the Auditor 
General, I am responsible for the worldwide operations of Army 
audit. The agency is the Army's internal audit organization, 
and, throughout our history, we have deployed with our troops: 
in Vietnam, in Bosnia, during Operations Desert Storm and 
Desert Shield, and, most recently, in Operation Enduring 
Freedom (OEF) and Operation Iraqi Freedom (OIF).
    Since 2002, we have done extensive work on LOGCAP in 
support of both OEF and OIF. In December 2004, General Casey 
asked us to help him reduce the overall cost of the LOGCAP 
contract in support of OIF. We promptly established a permanent 
presence on the ground in Iraq, and, since May 2005, we've 
continually had 10 to 30 auditors deployed in theater.
    We established two audit objectives to support General 
Casey's request. These objectives were: (1) to determine if the 
overall management of LOGCAP was adequate, and (2) to determine 
if the contractor was providing the needed services in a cost-
effective manner.
    Since beginning our LOGCAP work in Iraq, we have issued 15 
audit reports that included monetary benefits of about $175 
million. We have also identified other initiatives that improve 
cost-effectiveness of the program, but we could not quantify 
the monetary benefits.
    In April 2006, we reported improvements in the overall 
management of the LOGCAP. However, we also reported that the 
management structure in Iraq was not conducive to making sure 
LOGCAP was managed in the most efficient manner. For example, 
we found that more centralized control was needed to make sure 
requirements were properly identified and to make sure contract 
support was effectively integrated into the command's combat 
service support mission. We also found that contracting 
activities in the theater were fragmented and did not have 
enough personnel to provide adequate contractor oversight.
    To evaluate the adequacy and cost-effectiveness of the 
services, we conducted a series of audits focusing on specific 
LOGCAP functions. Some of these functions included theater 
transportation, warehouse staffing, distribution functions, the 
use of nontactical vehicles, and operation of clothing 
facilities. Our work to date has shown that LOGCAP operations 
were providing services needed to support our soldiers. 
Commanders and soldiers were consistently satisfied with the 
services. However, we also found that the Army could acquire 
services more cost-effectively by making improvements in 
several areas, such as reducing staffing levels at distribution 
centers, reducing the quantity of material handling equipment 
and nontactical vehicles, and increasing the accountability and 
visibility over material and equipment.
    In our 15 reports, we have made many recommendations to 
Army commands, and those commands have agreed to take 
corrective action in response to those recommendations. In 
fact, in many cases, commanders in the field took immediate 
action to fix the problems that we brought to their attention.
    In closing, I would like to thank you, once again, Mr. 
Chairman, for inviting me to appear before this committee to 
discuss this very important topic. We are continuing our LOGCAP 
work and have audits ongoing. We plan to remain responsive to 
Army leadership and continue to work to the best possible 
solutions to these many Army challenges.
    Since 2005, the agency has deployed 96 auditors, who have 
served on the ground with our soldiers in Iraq, Afghanistan, 
and Kuwait. Our auditors are proud to serve alongside our 
soldiers. The dedication and hard work of our auditors have 
provided valuable realtime support to the Army.
    Thank you, again, for the opportunity to testify before you 
today, and I would be glad to answer any questions.
    [The prepared statement of Mr. Fitzgerald follows:]
              Prepared Statement by Patrick J. Fitzgerald
    Mr. Chairman and distinguished members of the committee, it is my 
pleasure to be here today and have the opportunity to discuss with you 
our audit work related to the Logistics Civil Augmentation Program 
(LOGCAP).
    I have been with U.S. Army Audit Agency for more than 26 years and 
became The Auditor General of the Army in March 2006. As The Auditor 
General, I am responsible for the worldwide operations of Army Audit. 
The Agency is the Army's internal audit organization, and we provide 
objective and independent auditing services that help Army leaders make 
informed decisions, resolve issues, use resources effectively and 
efficiently, and satisfy statutory and fiduciary responsibilities. The 
scope of our audit responsibility includes selecting the subjects and 
organizations within the Army to audit, as well as responding to 
requests for audit service from Army officials.
    Throughout its history, Army Audit Agency has deployed with our 
troops--in Vietnam and Bosnia, during Operations Desert Storm and 
Desert Shield, and lately in support of Operation Enduring Freedom and 
Operation Iraqi Freedom. We have performed extensive audit work on 
LOGCAP in support of Operation Enduring Freedom and Operation Iraqi 
Freedom dating back to 2002. During 2003 General Kern, the Commander, 
U.S. Army Materiel Command, asked us to conduct an overall audit of 
LOGCAP operations. LOGCAP is the Army's program for using civilian 
contractors as an additional means to adequately support the current 
and programmed force by performing selected services during wartime and 
other operations. The principal objective of LOGCAP is to provide 
combat support and combat service support to combatant commanders and 
Army service component commanders, primarily during contingency 
operations, throughout the full range of military operations, including 
reconstitution and replenishment.
    In response to General Kern's request, we focused our audit on 
overall program management, cost controls, and asset management. We did 
audit work at various locations in the United States and overseas--
including Uzbekistan, Afghanistan, Kuwait, and Turkey--and in November 
2005 we issued a summary report on our LOGCAP work.
    In this report we stated that, overall, the Army was adequately 
managing the LOGCAP contract. The program provided essential services 
to soldiers and did a good job of meeting the Army's needs. Adequate 
procedures were in place to control costs under the contract, standards 
of services were recorded in theater-level documents, and acquisition 
review boards were in place to review and approve requirements. 
However, we did find systemic problems related to preparing independent 
Government cost estimates, reviewing contractor rough orders of 
magnitude, and definitizing task orders. It is important to note that 
some of these problems occurred because of the large volume of work 
involved and the need to process contract actions quickly.
    Because responsibility for property administration under this 
contract was delegated to Defense Contract Management Agency, we were 
unable to fully evaluate accountability for assets under the contract. 
But we did find some areas where improvements were needed in managing 
Government-furnished property given to or acquired by the contractor.
    Including our summary report, we issued eight audit reports and 
made audit recommendations to various organizations involved in the 
LOGCAP process. Some key recommendations were that the:

         Assistant Secretary of the Army (Acquisition, 
        Logistics, and Technology) develop Army guidance for approving 
        requirements for deployment operations, including acquisition 
        approval thresholds, members of joint acquisition review 
        boards, and documentation of board actions.
         Deputy Chief of Staff, G-4 establish guidance 
        addressing how to transfer Government property to contractors 
        in the absence of a Government property officer to conduct 
        joint inventories and to summarize key management controls 
        related to LOGCAP in an annex to Army Regulation 715-9 
        (Contractors Accompanying the Force).
         Commander, U.S. Army Field Support Command (now, U.S. 
        Army Sustainment Command) makes sure Defense Contract Audit 
        Agency stayed actively involved in monitoring costs.

    Army organizations agreed with our recommendations and said they 
would take implementing actions.
    In December 2004 General Casey, the Commander, Multi-National 
Force-Iraq, asked us to audit LOGCAP operations supporting Operation 
Iraqi Freedom. General Casey's goal was to reduce overall costs without 
degrading the welfare of our deployed forces. Accordingly, we 
established two audit objectives to help reach the Army's goal. These 
objectives are to determine whether:

         Overall management of the program was adequate.
         The contractor was providing the needed services in a 
        cost-effective manner.

    We promptly established a permanent presence on the ground in Iraq, 
and since May 2005 we have had from 10 to 30 auditors in the Southwest 
Asia theater of operations at any given time. Early on, we found that 
the Army faced some significant challenges regarding LOGCAP operations. 
One challenge was that LOGCAP in the Iraq Area of Operations is the 
U.S. Army's greatest reliance on contractor support in its history. The 
Army had about 90 Forward Operating Bases and LOGCAP supported about 60 
of them. Other major challenges were that the nature of operations was 
asymmetric, and personnel did not have freedom of movement and 
communications.
    Since beginning our LOGCAP work in Iraq, we have issued 15 audit 
reports that include agreed-to monetary benefits totaling about $175 
million. We have also identified other cost avoidance initiatives we 
could not reasonably estimate the value of.
    In April 2006 we reported that activities were improving overall 
management of the program. However, we also reported that the 
management structure in the Iraq Area of Operations was not conducive 
to making sure LOGCAP was managed in the most effective and efficient 
manner. More specifically:

         Contracting activities in theater were fragmented and 
        too understaffed to effectively scrutinize command's 
        requirements.
         More centralized control was needed to make sure 
        requirements were properly identified and contract support was 
        effectively integrated into the command's combat service 
        support mission.
         Dispersed locations and high turnover of personnel who 
        managed the contract made it difficult to ensure that 
        requirements were fully necessary and cost-efficiently 
        obtained, and that ongoing work was properly managed.

    To address these problems, we recommended that the:
         Commander, Multi-National Force-Iraq establish a 
        forces requirements branch for centralized control and better 
        interface with LOGCAP management within the theater, and make 
        sure the branch is adequately staffed (personnel and expertise) 
        and headed by an individual who can effectively interface with 
        all command levels.
         Commander, Army Sustainment Command coordinate with 
        the Commander, Multi-National Force-Iraq to define roles 
        between LOGCAP managers in each organization and establish 
        training classes on LOGCAP that include exercises on developing 
        statements of work, independent Government cost estimates, and 
        requirements.
         Commander, Army Materiel Command include information 
        on the role of the LOGCAP Support Unit and establish a 
        permanent presence by the unit at predeployment planning 
        meetings.

    To examine and evaluate the adequacy and cost-effectiveness of 
services, we conducted a series of audits focusing on specific 
functions under the LOGCAP contract. Some of these functions included 
theater transportation, warehouse staffing, nontactical vehicles, 
distribution functions, and clothing issue facilities.
    Our body of work to date has shown that LOGCAP operations were 
providing the services needed to support our soldiers and satisfy the 
mission. Commanders and soldiers were consistently satisfied with the 
services. However, our audit work also showed that services under the 
LOGCAP contract could be acquired more cost-effectively. For example:

         Staffing levels at many distribution centers exceeded 
        operational needs.
         Onhand material handling equipment exceeded 
        requirements.
         A significant number of the contractor's nontactical 
        vehicles were underused and the contractor had more vehicles 
        than needed.

    Some of the recommendations from our function-specific reports were 
that the Army:

         Evaluate contractor personnel levels to make sure 
        staffing levels (for both labor and management) are 
        appropriate.
         Use underutilized assets to offset future contractor 
        procurements.
         Develop and follow quality assurance surveillance 
        plans to make sure the contractor performs as efficiently as 
        possible.
         Use standard property book systems to gain and 
        maintain accountability over assets, and perform 100-percent 
        inventories.

    In the 23 reports we have issued on LOGCAP, we have made many 
recommendations to the responsible Army commands. (A complete list of 
the reports is attached to this statement.) These commands have stated 
they would take corrective action in response to our recommendations. 
In many cases commanders in the field took immediate action to correct 
problems we brought to their attention.
    In addition to our completed work, we have ongoing audits 
addressing these LOGCAP areas: dining facility operations, supply 
support activity operations, bulk fuel controls, cross-leveling and 
distribution of Government-furnished property managed by contractors, 
and Defense Basing Act insurance rates.
    In conclusion, I would like to say that I am very proud of my 
auditors on the ground with our soldiers in Iraq, Afghanistan, and 
Kuwait. Their dedication and hard work have provided valuable, real-
time help to the Army. I appreciate the opportunity to testify before 
you today to provide a summary status of our LOGCAP audit work, and I 
will be glad to respond to your questions.
      
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    Chairman Levin. Thank you, Mr. Fitzgerald.
    Let me start by going into an issue involving what are 
called ``living containers,'' which is a type of trailer. KBR 
subcontracted to acquire a large number of these containers 
from a number of sources, and the contractor determined that it 
could obtain them for somewhere between $8,000 to $19,000 each. 
Despite that, they ordered thousands of units from other 
vendors, whose bid prices were in the range of $35,000 to 
$40,000 per unit. So, as a result, KBR paid 260 percent to 600 
percent of the reasonable price for the trailers.
    Now, over a 2-year period, the DCAA tried to pin down a 
rationale for these added costs. KBR contended that it went to 
the high bidders because they claimed the low bidders first 
lacked adequate production capacity. The DCAA found that was 
not true. Then KBR claimed that the low bidders were not 
qualified to perform the work. The auditors found that KBR's 
own documents indicated that the low bidders were qualified. 
Then they claimed that the plan was to concentrate one supplier 
for each camp. The DCAA was unable to identify any such alleged 
plan. Then KBR claimed that the high bidders offered features 
and amenities that were not available from the low bidders. The 
DCAA found that the features and amenities were comparable. 
Then KBR claimed that they paid a premium for prompt delivery 
to shift the risk to the subcontractor for late delivery or 
damage to the trailers. The DCAA noted that KBR actually 
rebutted its own argument on that point by paying a claim 
related to delay and damage.
    Now, first, Mr. Reed, did I accurately summarize DCAA's 
findings relative to the trailers?
    Mr. Reed. Yes, you did.
    Chairman Levin. Now, Secretary Bolton, the FAR says that 
the DOD pays costs incurred under a cost-plus contract only if 
those costs are reasonable. In this case, KBR paid its 
subcontractors 260 percent to 600 percent of the prices that 
KBR itself had determined to be reasonable. Not one of those 
explanations that were given by the company for doing so, for 
paying the high price, hold any water. Yet, the DOD decided to 
pay KBR the full $100 million, which is at issue here, by which 
the subcontracts were overpriced. Why did the DOD pay that 
extra money?
    Mr. Bolton. Mr. Chairman, let me defer to General Johnson, 
who has all the information.
    Chairman Levin. All right, thank you.
    General Johnson?
    General Johnson. Sir, the DOD has not paid KBR the $100 
million for the trailers. As a matter of fact, KBR's costs are 
still suspended. We have allowed a minor portion for the 
provided appropriate, acceptable documentation and negotiated 
costs of $1.4 million against a $5.6 million bill, and $25 
million where they've provided appropriate documented evidence 
and reasonable costs have been negotiated against the remaining 
$51 million of $25.6 million; $4.2 million is still being 
withheld, $25.7 million is also pending against the second 
order. The remaining roughly $45 million have been taken off of 
the table.
    Chairman Levin. General, the document that you provided to 
the committee says the following, that ``the parties have 
agreed to recognize the costs of the containers acquired.'' The 
letter dated January 24, 2006, memorandum to the attention of 
Mr. Valiant DuHart.
    General Johnson. Sir, Mr. DuHart is a procurement 
contracting officer within my command. I have not recognized 
those costs. The current status is what I explained to you.
    Chairman Levin. This is January 24, 2006.
    General Johnson. Yes, sir. As of today's date, the only 
costs that have been recognized are the $1.4 million and the 
$25.6 million that I just identified. The remaining costs are 
pending, and KBR has not provided appropriate documentation or 
demonstrated reasonableness of cost.
    Chairman Levin. Is that, then, inaccurate, that memo of a 
year ago?
    General Johnson. That letter is inaccurate. Sir, frankly, I 
review most of those before they go out. Sometimes they get out 
prior to my and Mr. Loehrl's review. Obviously, that's one that 
did. But those costs have not been recognized.
    Chairman Levin. So, the $100 million that I've described 
for overpricing of those containers has not been paid? While 
you're looking at that, let me move on, because of the timing 
here.
    General Johnson. Sir, we'll update that information for 
you.
    [The information referred to follows:]

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    Chairman Levin. Despite what that document says, you're 
saying that $100 million has been paid. Is that what you're 
saying?
    General Johnson. No, sir, I'm not saying none of it's been 
paid. $1.4 million has been paid.
    Chairman Levin. No, I'm just talking about the $100 million 
that I have identified. Of that $100 million, which is in 
excess of the reasonable cost--I've identified it, I've 
described it here for you--that the reasonable cost here, what 
they could have obtained these containers for versus what they 
paid for them, we estimated is $100 million. You're saying some 
of that $100 million has been paid?
    General Johnson. A total of $27 million has been paid, has 
been allowed.
    Chairman Levin. The gentleman's shaking his head no, behind 
you.
    General Johnson. Sir, we're getting a bit of apples and 
oranges mixed here.
    Chairman Levin. Okay.
    General Johnson. Okay?
    Chairman Levin. All right, you're saying $27 million of 
that $100 million has been paid. Is that your bottom line?
    General Johnson. I will say $27 million has been paid to 
KBR for container operations of those questioned costs.
    Chairman Levin. All right.
    General Johnson. $100 million I'm not aware of.
    Chairman Levin. All right.
    General Johnson. Okay?
    Chairman Levin. Now, on top of the $100 million--and I 
think maybe this is one of the issues--the subcontractor claims 
that KBR and the Government owe it an additional $50 million 
because that was caused by delays that resulted from its 
waiting for military convoys into Iraq. The DCAA has determined 
that that was not true, that that $50 million that they claim 
was not caused by delays. They've made no such showing, no 
documentation, of delays costing it $50 million in addition to 
what it had previously been promised.
    Is that, first of all true, Mr. Reed?
    Mr. Reed. Yes. I would point out that DCAA's point was we 
were not given documentation that would substantiate that 
allegation.
    Chairman Levin. But first it gave you documentation, did it 
not--it claimed that its cost for the truck and driver was $750 
a day. Is that true? That's what it first told you?
    Then it reduced it to $500 a day, then it said its costs 
were $300 a day, and then it provided no documentation that it 
had paid any of those amounts. Is that accurate?
    Mr. Reed. Yes, sir.
    Chairman Levin. So, first they claimed $700, then they say 
they paid $500, then they said they paid $300--none of which 
was true, because they obviously changed their story--and then 
they provided no documentation for the $300. That $50 million 
is part of the $150 million, General Johnson, that we're 
talking about here. The man behind you--and what is your name, 
sir? The gentleman behind you?
    General Johnson. That's Mr. Loehrl, sir. He's the Director 
of the LOGCAP.
    Chairman Levin. He's shaking his head this way. Would you 
agree with his head-shake, up and down, yes?
    General Johnson. Roger, sir.
    Chairman Levin. Okay. So, now, you're saying, of that $150 
million, so far only $100-and--only $27 million has been paid. 
Is that where we're at?
    General Johnson. That's right, sir.
    Chairman Levin. Okay.
    General Johnson. Now, some of those costs were negotiated 
away and never reached the point of even being considered. 
That's why the difference in the numbers you're seeing.
    Chairman Levin. All right. Is there still an outstanding 
claim for the balance of $150 million?
    General Johnson. There's an outstanding claim for $25 plus 
$4.2 million--$29.9 million. That's all the outstanding claim 
that remains. The rest of those costs were negotiated away.
    Chairman Levin. All right. So, we're all talking about the 
container contract.
    General Johnson. That's right, sir. The only thing that's 
pending on the container contract is $29.9 million.
    Chairman Levin. All right. The facts that I gave, that KBR 
tried to obtain from us the reimbursement for the containers 
that they paid, which were unreasonable--is that correct?
    General Johnson. That's correct, sir.
    Chairman Levin. When they decided to pay the higher price 
instead of the lower price, and they decided that they were 
going to pay 260 percent to 600 percent of prices which were 
reasonable, when they billed us for that, did they also get 
profit--did they expect to be paid a profit on that amount, at 
that time, when they billed us for it?
    General Johnson. I don't know what KBR expected. I will 
tell you the way it works.
    Chairman Levin. No, not the way it worked. Wouldn't they 
assume that they would get a profit on the amount of money----
    General Johnson. They would probably assume that they would 
get at least the base fee of 1 percent, and they'd have an 
opportunity for 2 percent in award fees.
    Chairman Levin. All right. So, therefore, they would 
normally expect that the more they paid for those containers, 
the greater their profit would be. Is that fair?
    General Johnson. That's fair, sir.
    Chairman Levin. All right. That's one of the big issues 
here, obviously, is, they overpay for containers, they send us 
the bill, they got paid part of it, which they never should 
have been paid, and then, on top of that, the more they pay for 
containers, because of the lack of competition, the more they 
expect to be paid in profit, as well. Is that a fair statement? 
Normally, they would expect that.
    General Johnson. They have to understand, they have to get 
through the audit process, the price negotiation, and 
independent Government estimate, but, yes.
    Chairman Levin. Yes. Okay. With that expectation, they 
would expect that the more they were able to pay for those 
containers, if it was approved by the auditors and by the 
system, that the greater their profit would be. Is that fair?
    General Johnson. That's fair, sir.
    Chairman Levin. Thank you. My time's up.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    This subject is an extremely important one, and it has a 
degree of complexity that's somewhat unusual for our types of 
hearings, in that it requires so many detailed documents and 
other means of evidence. I felt that your opening statement 
listed a number of very serious allegations, and, with your 
concurrence, I would like to, as my first question, submit your 
opening statement, in its entirety, to each of our witnesses, 
asking them to make such comments for the record as they deem 
appropriate and given their particular areas of expertise. Do 
you concur?
    Chairman Levin. I would very much welcome that, as a matter 
of fact. We were quoting their audits in that statement at 
great length, so we're happy to have them review those quotes, 
or anything else in that statement, of course.
    Senator Warner. I thank the chair, because I think the 
committee will need that for the record.
    [The information referred to follows:]
                    Review by Patrick J. Fitzgerald
    At the Senate Armed Services Committee hearing on the Logistics 
Civil Augmentation Program (LOGCAP) on April 19, 2007, Senator Warner 
asked the witness panel to review Chairman Levin's opening statement 
and provide comments.
    We have reviewed Chairman Levin's statement and believe the general 
themes are consistent with our audit results that contractor oversight 
was insufficient and improvements in cost-effectiveness were needed in 
LOGCAP operations. We believe the statement fairly and accurately 
presented the issues, challenges, and problems we found during our work 
on LOGCAP.
    We identified a few minor issues. The third and fourth bullets 
reference November 2005 Army Audit Agency (AAA) audit reports. These 
reports were issued in November 2006. A sentence in the fourth bullet 
stated that AAA found that ``Staffing levels at the numerous 
distribution centers were excessive,'' but our report states that 
``Staffing levels at the numerous distribution centers appeared 
excessive.''
    We appreciate the opportunity to participate in the committee's 
review of LOGCAP operations.

    Senator Warner. Before I go to some other more detailed 
questions, our distinguished colleague, Senator Dorgan, raised 
this question of the water, and that's the type of reporting 
that will come out of a hearing like this and, understandably, 
will attract the attention of those following this case, 
because it's simple and straightforward, and water is something 
that all of us depend on every day. Does anyone have any 
knowledge of this water problem to which our distinguished 
colleague referred? Is it an isolated case that occurred? I 
assume there are probably several hundred watering situations 
throughout that AOR in Iraq. Is this but one? Were there a 
number of them? What steps are we taking to correct it or 
verify the accuracy of the reports?
    General, would you like to start on that?
    First, General, it would be helpful if the record would 
reflect how long have you been in this important position that 
you now occupy?
    General Johnson. Sir, I assumed command in June 2004. I've 
been in command approximately 2 years and 9 months.
    Senator Warner. Fine. Secretary Bolton, you've been, for 
some time, haven't you?
    Mr. Bolton. Yes, sir.
    Senator Warner. How many years is that?
    Mr. Bolton. We're going into the 6th year, sir.
    Senator Warner. Six years. So, each of you had an 
opportunity to really have a period within which to understand 
these problems and deal with it.
    Mr. Bolton. Absolutely.
    Senator Warner. Now, you're going to address the water 
problem, General.
    General Johnson. Sir, we've looked into the water power 
problem at Al Ramadi. A couple of issues.
    One, during the time of the allegation, KBR was not 
operating the water site. It was being operated by an Army unit 
during Reverse Osmosis Water Purification Unit (ROWPU) 
operations.
    Senator Warner. So, KBR was not involved in this water?
    General Johnson. Not during the time that the allegation 
was made. KBR assumed control of the operation about 2 months 
later.
    Senator Warner. All right, we have to get this straight. 
So, at the time of the allegations, KBR did not have a 
responsibility. That responsibility rested entirely with the 
Corps of Engineers?
    General Johnson. It was an Army water unit that had the 
capability to produce water using an Army ROWPU.
    Senator Warner. Now, those units indigenous in the core 
table of organization or in the regular divisional----
    General Johnson. They are part of normal organizations. I 
think that was an Air Force unit. I'd have to check my facts on 
what type of unit, because we had Air Force, Navy, and Army 
units producing water at that time.
    Senator Warner. All right.
    General Johnson. I don't remember exactly which one it was. 
I just know it was a military unit, and not KBR, at that time.
    Senator Warner. All right. So, in any event, the 
responsibility for the potability and safety of that water 
rested with the Army, as opposed to any LOGCAP contractor.
    General Johnson. At that time.
    Senator Warner. At that time, all right.
    Now, was this an isolated incident at one installation, or 
was this type of problem being experienced prevalent throughout 
other areas of the AOR?
    General Johnson. Al Ramadi is the only reported incident 
that we have that I know of.
    Senator Warner. This gentleman keeps coming up. Maybe he 
could join us at the table.
    General Johnson. Oh, okay. For the first couple of years of 
this operation, I was doing it personally. He's the guy that 
took over for me.
    Senator Warner. All right.
    General Johnson. He works for me.
    Senator Warner. I'm not dismissing his credibility. I'm 
just trying to associate for the record, which will be read by 
others, his participation. His name, sir?
    General Johnson. His name is James Loehrl. He's the 
Director of the LOGCAP for the Army Sustainment Command. He 
works under my supervision.
    Senator Warner. Thank you very much. We welcome him.
    Go right ahead.
    General Johnson. Yes, sir.
    What he just provided me was that the Army units produce, 
KBR distributes, a Navy medical unit did preventive med 
evaluation of the water and found no problem. Additionally, the 
DOD IG has been doing a complete investigation of water in 
Iraq. No issues have been found thus far that I'm aware of.
    Senator Warner. Other than this one.
    General Johnson. We found no issues there, sir.
    Senator Warner. I beg your pardon?
    General Johnson. We found no issues with the water there. 
After the inspection, we did not confirm the allegations that 
were made.
    Senator Warner. I see. So, the representations made by our 
colleague this morning were examined, and no facts were found 
to sustain the allegations?
    General Johnson. That is correct.
    [The information referred to follows:]
                   Review by MG Jerome Johnson, USA,
    I testified before the Senate Armed Services Committee on April 19, 
2007, on the Department of Defense's management of costs under the 
Logistics Civil Augmentation Program contract in Iraq. Senator Dorgan 
has questioned the accuracy of my testimony during the hearing 
regarding the water quality provided to our troops in Iraq.
    Prior to my testimony before the committee, I reviewed all 
information available to the Army on this issue, including the 
information presented before the Democratic Policy Committee. After 
Senator Dorgan raised his concerns, I reviewed my testimony for 
accuracy. Based on my review of the information available to me at that 
time, my testimony regarding the provision of water to our soldiers was 
true and accurate.
    It appears, however, that there is some confusion as to the extent 
of the Army review of this issue. The Army reviewed the provision of 
water throughout Iraq focusing on the allegations that contaminated 
water was provided to our troops at Al Ramadi and at Q West.

    Mr. Bolton. Senator Warner, if I could add to what General 
Johnson's already talked about----
    Senator Warner. Now, wait a minute. Just a minute. Would 
you go more slowly?
    Mr. Bolton. Yes, sir. If I may add to what General Johnson 
has already said, my first visit to the AOR was at the time of 
the allegation. So, I took personal interest in this, and 
followed it. As General Johnson's already pointed out, KBR was 
not in charge of the water at the time. A military unit was. In 
addition to the checks that were made, we also checked all 
medical records to see if anyone had gotten ill from any 
tainted water. We found zero of those, and we checked those 
twice.
    I would tell you that water, as you pointed out, is 
extremely important. We have produced, under LOGCAP, 7.5 
billion gallons of water and some 200 tons of ice during the 
course of this contract.
    Senator Warner. All right.
    Mr. Bolton. So, this is very important.
    Senator Warner. I must press on, gentlemen. I think you 
have put before the committee a rebuttal of this case with 
regard to water, which we accept, for the moment.
    At the time the Army awarded the LOGCAP III contract to 
KBR, were there any other companies that bid on it, or could 
have bid on it, or delivered the same level of service? I am 
just unfamiliar with what the competition is, particularly at 
the time LOGCAP III was offered.
    Mr. Bolton. Senator Warner, there were three competitors, 
to include KBR, and they submitted their proposals. The Army 
did a source selection on that and picked KBR. I won't go into 
the other proposals, but the other proposals lacked what we 
needed, and they were also more expensive.
    Senator Warner. All right.
    Now, the performance contracts under LOGCAP IV, to 
Secretary Bolton and General Johnson, how many companies 
competed? You said this. You've already answered that. But why 
does the Army intend to limit the number of contractors to 
three in the current bidding process for four?
    Mr. Bolton. I don't know if I have a good answer on that. 
It is an open competition. In fact, we intend to have a 
contractor who will do the planning and work for us, and then 
we'll have up to three additional contractors. So, you could 
have four contractors here. They will actually do the tasks, 
and we'll compete those tasks.
    Senator Warner. All right. My last question, to the 
General, from a military standpoint, do you factor in, in the 
bidding of these contracts, and judging the performance of the 
contracts, the extenuating circumstances in-country that the 
contractors are experiencing? In other words, it is a high-risk 
area. It's what we call 360-degree risk area. In other words, 
there's no clear front line and rear echelon, as you and I were 
trained as youngsters, that existed in other conflicts. 
Everybody's in it. To what extent do you factor those factual 
circumstances of high risk, ever-changing operating tempo, 
requirement to feed so many troops one day, and the next day 
they're augmented or have been transported somewhere else--how 
has that complicated the implementation of these contracts, 
from your professional military standpoint?
    General Johnson. Sir, it's caused significant complication. 
First of all, the contract is supposed to be awarded and 
executed in what we call a permissive environment--i.e. front 
lines, real lines--and the contractor would operate in that 
permissive environment, where he would not be under attack, 
normally. The complicating factor is the nonpermissive 
environment. The contractor is operating under stress of 
attack. We have to provide tactical combat forces to protect 
the convoys when they go.
    To the contractors' credit--and, frankly, to some personal 
individuals over there that I found enormous; and, frankly, 
it's probably because they're a bunch of retired guys who 
didn't know that they were out of uniform--Paul Cerjan, Remo 
Williams--who physically accompanied convoys through hostile 
environments early in the war to ensure that the troops were 
provided with appropriate services.
    Now, frankly, we had some issues with the KBR management 
structure at the kind of senior-to-mid level, but these guys on 
the ground--the Cerjans, the Williams'--what they did was far 
and beyond what the contract called for. Had they not taken 
those actions, we would not have been able to support our 
soldiers.
    Additionally, I might add, when brought to KBR's attention, 
the issues that we were having at the contractor level--Mr. 
Loehrl and the procurement contracting officer, with many of 
their mid-level managers--KBR replaced an entire group of mid-
level managers, and that situation's improved quite a bit, the 
estimates have gotten better, and the cooperation with the 
contracting officers have gotten quite a bit better. They're 
not where we want to be, but, when they replaced that 
management structure, it made a significant different.
    Senator Warner. I thank the witnesses.
    General Johnson. I hope that answers your question.
    Senator Warner. I thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Warner.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    I would like to thank all the witnesses for being here 
today, and would particularly like to thank Senator Dorgan for 
his efforts to investigate these contracting problems during 
the last Congress. I did support him in his legislation, that 
was dropped at the end of the 109th Congress, on these 
problems. Like Senator Dorgan, I continue to be very concerned 
about the contracting abuses and war profiteering in Iraq. So, 
I thank you, Mr. Chairman, for calling this very important 
hearing today.
    No question, we feel that the resources in our country are 
not unlimited, and it is our duty to the taxpayers that our 
service men and women have all that they need, and to make sure 
that the tax dollars meant to be used for defense of our Nation 
are not wasted. That's where I am. We've heard cases of abuses 
here, and I'm sure we have many more. But I want to look at 
what problems may be here in Washington, DC.
    Secretary Bolton, this has to do with the acquisition 
workforce. In April 2006, the AAA reported that DOD remains 
insufficiently staffed and inadequately organized to provide 
effective oversight for the LOGCAP contract. Mr. Secretary, why 
is it that 4 years into the war in Iraq, we still haven't been 
able to provide adequate staffing to oversee this contract? Do 
you believe that the shortage of contract oversight personnel 
is specific to this contract, or is it symptomatic of a broader 
shortage in the DOD?
    Mr. Bolton. Senator Akaka, thank you very much for the 
question. It's good seeing you again, sir.
    I'll go back several years, when I was confirmed here, in 
front of Senator Levin and Senator Warner at the time, I made a 
statement during that particular confirmation hearing, that I 
had a grave concern on the declining nature of the aquisition 
workforce. I stated then, and it's come to pass, that, within 
my tenure, a large number of professional aquisition types 
would retire, that demographics were against us. They're still 
against us. What remains of my workforce over the next 3 years, 
half of the civilian workforce--that's roughly 45,000--are 
eligible to retire. Not a whole lot of folks coming in behind 
them. The workload continues to increase. Rough numbers, when 
the wall went down in 1989, the Army had about 140,000 people 
in this area. Today, we have 45,000.
    Now, we've been able to do the workload, because of a lot 
of things that you've heard this morning on LOGCAP. We have put 
evaluation boards in place. We rely heavily upon the audit 
agencies and others. We used to do a lot of that internally. We 
have to rely upon these agencies. On this particular contract, 
it really exploded--no pun intended. LOGCAP was designed, as I 
said in my opening comments, to do contingency, short-term, 
until you can get in with regular pieces of contracts and so 
forth. That didn't happen here because of the nature of the 
war.
    Now, going back to the workforce, trying to pull people out 
of the United States to put over there who are already working 
very, very hard on other activities, and then making that 
happen, and also putting them into an environment, as noted 
earlier by Senator Warner, a very difficult environment--
austere, hostile, without the infrastructure of having a 
computer system, a business system, a banking system--and yet, 
myself and others here--when it comes to auditing, only know 
one way of doing that, and that's the way we do it stateside, 
in an air-conditioned building with an infrastructure, and we 
impose that upon our people. They did a fantastic job.
    But, to your point, could we use more people? Yes, we 
could. We've enlisted others from other agencies to do that. 
There are roughly 500 people auditing this contract right now 
in country; 350 of them live with the various posts and camps 
out there, reviewing what the contractor's doing on a daily 
basis. Then, as others here have testified, they have 50 to 100 
or so of their own auditors who are in and out of there.
    The caution of just saying ``more people'' is the 
environment. It's a hostile environment. Every person I send 
over there is a target. Unfortunately, I've had people hurt, 
and several killed. So, as I look at this, we do the best job 
we can, and I think it's a pretty good job, under very 
difficult conditions. I believe we need to--and this is all of 
us, and we've talked about this before, as a group here--take a 
look at what's required in this type of an environment, and 
make sure that the next time we do this, we have the right 
contract vehicles in place, but, more importantly, we have the 
right processes and tools for dedicated Americans to actually 
do very good work in a very difficult environment.
    So, to your point, I think it's absolutely right, it is 
systemic. We could use more, but we have to be cautious on the 
environment. I believe there are other tools we could use. 
LOGCAP IV is a perfect example, where we will be competing the 
task orders and drive a lot of the concerns down. But the 
auditing folks will still be there. For those who don't know, 
at one time I used to be an IG, so I know the value of this 
work and what needs to be done.
    Senator Akaka. My concern is, there are problems out there. 
They've been mentioned. We are short. But what are we doing to 
try to correct these problems? I'm saying this because this is 
my same concern with Hurricane Katrina. After 20 hearings, we 
discovered that many of the problems were because there were 
positions that were unfilled. They could not carry out what 
needed to be done. If that's the case also here, then we need 
to make changes immediately to correct that. This is what I'm 
looking for, and that was what my question was all about.
    Mr. Fitzgerald and General Johnson, it is striking that all 
of the instances of the use of LOGCAP funds for military 
construction activities appear to occur in Iraq. But there were 
no similar cases in Afghanistan. I may be wrong, correct me if 
I am. My question to you is, please explain why this was the 
case. Was there a leadership problem in Iraq? Why would there 
not have been consistent guidance from the Army and Central 
Command such that we would have seen these problems in both 
countries, or in neither of them, rather than only in Iraq?
    Mr. Fitzgerald?
    Mr. Fitzgerald. Sir, our audit work did show that some 
funds were used to do military construction in Iraq. When we 
made command aware of that--command was already aware of it 
when we made them aware of it, and our understanding was that 
they were taking action to report that the funding may have not 
been the right funding to be used, and it was being worked in 
accordance with the procedures and policies of the Army at that 
point.
    I can't comment on any construction work done in 
Afghanistan, sir.
    Senator Akaka. General?
    General Johnson. Sir, we received guidance early on in the 
war, and, in accordance with regulation, construction, if you 
will, or purchase of equipment that's contingent or necessary 
to execute an operational mission may be done. That was done 
both in Afghanistan and Iraq. As we moved from really volatile 
contingency operations, constantly moving, we got to a 
situation where the lawyers began to tell us that, ``You need 
to look more at contingency construction authority rather than 
using the earlier pieces of that legislation that said, 
incidental to providing the service.'' We've done that, and 
that's been a gradual process, and that's what you've been 
hearing about.
    The reason that you hear more of that in Iraq than you do 
in Afghanistan is, frankly, the nature of the battlefield and 
the nature of the fight. Iraq is an open country. It's a war 
that started off very much as a maneuver warfare. So, in many 
cases the contracting goes back to the dining facility (DFAC) 
problem that we identified earlier on. A commander might say 
that, ``I have objective A that's in the western part of this 
country, and this brigade's going there. I need food services, 
I need a base camp, I need laundry services, and I need fuel 
and food brought there as I execute the mission.'' In a 
maneuver operation, you may start out at objective A, you may 
get instructions, in the middle of the process, to move to 
objective B, C, or D. That happened in Iraq. So you end up with 
those kind of things happening, and that led to the DFAC piece, 
where they bought food and stuff, and spent money, but did not 
service as many troops as initially planned. The same thing 
with construction. You've built facilities in order to execute 
missions.
    In Afghanistan, you had some of the same situations occur, 
but, because it wasn't as much of a maneuver operation, they 
did not need as much construction, so, therefore, it never got 
to the point where we started to interfere with military civic 
action, and we got out of the contingency phase.
    I hope that's clear.
    Senator Akaka. Thank you. Thank you for your response. My 
time is up.
    Chairman Levin. Thank you, Senator Akaka.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman.
    This hearing is very, very important to me. Sixty-six years 
ago, almost to the exact date, a man by the name of Harry S. 
Truman held the Senate seat that I sit in. At that point in 
time, he decided that, on behalf of the American people, he was 
not going to tolerate war profiteering. After reading all the 
information for this hearing, as an auditor, I am stunned. As a 
Senator, I'm sick to my stomach, and as an American, I'm angry.
    The testimony that has been given so far about whether or 
not there is sufficient personnel within the Army to monitor 
these contracts, I, frankly, don't buy. I have reviewed reports 
from the AAA, from the DCAA, from the Monthly Performance 
Evaluation Boards, and the semi-annual award fee evaluation. I 
have read reports dating beginning--and I let it go the first 
few years, understanding that there was rapidly changing 
circumstances and difficulty on the ground. So, beginning mid-
June, I began reading. In June 2005, July 2005, August 2005, 
September 2005, October 2005, several reports in November 2005, 
in January 2006, March 2006, April 2006, May 2006, June 2006, 
September 2006, November 2006, and December 2006, there were 
reports generated by dedicated auditors and by people that work 
for the United States Government that continually set out 
problems with contractor management, problems with cost 
performance, problems with access to information on behalf of 
this contractor. You would have to be deaf, dumb, and blind to 
read all of these reports and not come away with the 
inescapable conclusion that something is terribly wrong with 
this contractor.
    The most outrageous fact that is incontrovertible at this 
hearing this morning--and, frankly, one of the most depressing 
things is how few Senators are here--is that that contract was 
renewed in December 2006. Wait. That's not the worst. The worst 
part is, in this contract there is a provision for a 
performance bonus for work well done. Seventy percent of the 
evaluation for that bonus--70 percent of the criteria in the 
contract for getting a performance bonus is contractor 
management and cost performance. Believe it or not, you gave 
them ``excellent'' and you gave them hundreds of millions of 
dollars for a job well done.
    Now, Secretary Bolton, did you approve that bonus?
    Mr. Bolton. I didn't approve that.
    Senator McCaskill. Who approved that bonus?
    Mr. Bolton. The command who has that contract. That is not 
my privy.
    Senator McCaskill. Shouldn't it be?
    Mr. Bolton. No, it shouldn't be.
    Senator McCaskill. Okay. Then, who is the person--I want to 
know the name of the person who decided that this contractor, 
after all the reports I just laid out all the work done by 
these great auditors--who is the person that thought that their 
job was excellent?
    Mr. Bolton. We can certainly provide the process, as well 
as the names. It is not unlike any other contract. In this 
particular case, the Evaluation Board meets every month to take 
a look at the contractor and costs and schedule and technical, 
as well as quality. While he may get an excellent in some 
areas, other areas he doesn't. So, the average that this 
contractor has gotten, over the periods, has been about 88 
percent, 89 percent. That equates to about $250 million, of the 
$280 million or so that he could get.
    I remind the Senator, as well, that when you look at the 
fee structure on this for award fee, it's only 2 percent. 
Compared to any other contract that I've seen, that's an 
incredibly small amount of money.
    With regards to the comments that were made earlier on the 
cost-plus, what we do on the cost-plus, in terms of that fee, 
is not unlike any other contract that we have in the Federal 
Government. That's why we have all these auditors and an 
Evaluation Board whose job it is, with all the comments, 
whether it's yours or anybody else, to go and look at every one 
of those as we review the contractor and the costs. That's why 
we have upwards of several hundred million dollars in question 
right now.
    Senator McCaskill. With all due respect, Mr. Secretary, I 
have read all these reports, as an auditor, looking from the 
outside, and if you think this Evaluation Board--it would be 
different if 100 percent of the award was on technical 
performance, because, in reading all the information, clearly 
there are a number of favorable comments about the work that 
was actually performed. But 70 percent of this award--and, by 
the way, I'm not going to feel sorry for them that they only 
got 2 percent. This is not a time to think, ``Well, gosh, it 
was only 2 percent. We ought to give it to them.'' Seventy 
percent, according to your specifications, are contractor 
management and cost performance.
    Mr. Bolton. That's right.
    Senator McCaskill. Now, do you think that bonus should have 
been paid? Is that your testimony today?
    Mr. Bolton. I'm deferring to the experts in the field, who 
see this day in and day out, who made the judgment in the 
field. I would not question a field commander. I can make a lot 
of decisions back here, but I rely upon the people, the 
experts, the men and women we put there who have the 
experience, just as you have, to make that judgment.
    Senator McCaskill. Let me ask the auditors on the panel. 
Would you have paid that award bonus, based on what you know 
about this contractor?
    Mr. Reed. It's really not appropriate for the auditors to 
engage directly in the Award Fee Board decisions. We certainly 
were consulted. We did provide input. That's our role, to 
provide the input. The results of our reports were provided. We 
were at the Award Fee Board meetings, and we were given a 
chance to speak and make presentations.
    Senator McCaskill. Were your presentations that this was an 
excellent contractor, when it came to contractor management and 
cost performance? Was that the testimony that your agency gave, 
as an audit agency?
    Mr. Reed. No.
    Senator McCaskill. Mr. Fitzgerald, how about you?
    Mr. Fitzgerald. Senator, we work closely--I would echo what 
Mr. Reed said, that we work closely with General Johnson's 
command to make sure that they know what we're doing, what 
we're finding, and so that they can take that into 
consideration as they go forward on these award fee boards.
    Senator McCaskill. Was it your recommendation, at any time, 
that you thought this contractor deserved an excellent rating 
in contractor management and cost performance?
    Mr. Fitzgerald. To be very specific, we weren't asked for a 
recommendation, and, no, we didn't give a recommendation.
    Senator McCaskill. General Johnson, do you believe that 
there were any mistakes made, in terms of awarding this 
contractor a bonus for excellence in contractor management and 
cost performance?
    General Johnson. Senator, ultimately I'm responsible for 
that. What I do every time--and I review each one of those 
award fee letters--initially, I was very concerned, and I 
talked to each commander in the field. In fact, I just came 
back from Iraq last month. The commanders in the field are, 
frankly, elated with the support they're receiving from the 
contractor. Its cost performance and cost systems are not what 
we want them to be, and they have been rated accordingly in the 
award fee process. Their performance, the technical and the 
managerial, if you put those two together, represents 60 
percent of the award fee process, versus the 70 percent if you 
throw in the cost and the management. But if you put the 
performance, the management, and the technical, which is 
delivering support to troops in the field, they have performed 
excellent. That's a fact that is constantly echoed in both Iraq 
and Afghanistan and Kuwait. That's incontrovertible. I can't 
argue with the guy in the field.
    Their cost systems, we have asked--we've had constant 
review on them. We've had DCAA, DCMA, and the AAA review their 
cost systems. When their cost systems were not meeting the 
standard, we appropriately deducted that from the award fee 
process. It was taken into consideration.
    Early on in the process, they were receiving less than 80 
percent of the total award fee. As their cost systems became 
acceptable, which they are now--they're not what we want them 
to be, but they are acceptable, so they don't get excellents 
for costs, but they do get excellents for management, and they 
get excellents for technical performance.
    Senator McCaskill. It seems to me that the reports that are 
generated by the people that are supposed to be evaluating 
their performance, should hold precedence over the field 
commanders when it comes to contractor management and cost 
performance. I will tell you that, time and time again, 
throughout these reports in 2005 and 2006, they were cited for 
contractor management, they were cited for the inability to 
move people, who weren't working, into jobs where they would be 
working, people who were sitting around doing nothing. It is 
stunning how bad this is. Frankly, what's even more stunning 
is, there doesn't seem to be an acknowledgment, either by you, 
Secretary Bolton, or by you, General Johnson, that there's 
something wrong with the systems if we're paying $200 and some 
million for good work when a record like this exists.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator McCaskill.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Mr. Fitzgerald, in a series of audits over the last 2 
years, the AAA has found that KBR hired more employees than it 
needed to run warehouses, then paid its staff to sit and wait 
for work that didn't show up; bought more nontactical vehicles 
than it needed, at a cost of as much as $100 million; purchased 
more material and handling equipment than it needed, at a cost 
of $26 million; overstaffed at distribution centers, and 
refused to move idle personnel or equipment placed in one 
location to another to accomplish needed work. Is that a fair 
summary of some of the conclusions?
    Mr. Fitzgerald. Yes, Senator. Our work indicates that there 
were opportunities where we could have been more cost-
effective.
    Senator Reed. Now, are these results typical of the LOGCAP 
contracts you reviewed, or is this an aberration? Are we 
consistently seeing these problems on other contracts?
    Mr. Fitzgerald. We have seen, in our work--there are always 
challenges in defining and developing requirements, translating 
those into good statement of work to make sure--especially in a 
cost-plus contract, to make sure that we have a good, 
independent Government cost estimate so that we're in a good 
position to negotiate a fair and reasonable price, and then, 
finally, obviously, to do good contractor administration and 
oversight to make sure we get what we contracted for.
    Senator Reed. Right. But let me go back to the question. Is 
this typical of what you've found, in looking at other 
contracts, or is this just an aberration--total aberration?
    Mr. Fitzgerald. The opportunities for improvement here are 
probably more so than we see on other contracts.
    Senator Reed. I think what you're saying is that this is 
not atypical, that this was found in other contracts.
    Mr. Fitzgerald. Yes, sir.
    Senator Reed. I'm told that you've briefed our committee 
staff, and indicated that if there are adequate program 
management personnel representing the Government, that contract 
surveillance, quality assurance--we would have at least been 
able to identify these problems earlier, and correct these 
problems. Is that accurate?
    Mr. Fitzgerald. Yes, Senator. On two occasions, we made 
recommendations--and the Army has reacted to those to create a 
force requirements branch in command to make sure that we 
define and develop requirements well so that they can be 
translated to good statements of work, and also to establish 
clear lines of responsibilities--there's a lot of people 
playing in this arena--to make sure that we get what we're 
paying for, and to make sure we had good roles and 
responsibilities and accountability.
    Senator Reed. How early did you notify your superiors in 
the Department of Army that this management oversight function 
was deficient?
    Mr. Fitzgerald. The work we did was probably mostly in the 
calendar year 2005, and that would be the time. As soon as 
things come to our attention, we get with command and start 
working that. I have to say, when we did get with General 
Johnson's folks, they did take action to start addressing those 
issues.
    Senator Reed. So, most of your audit activity and resulting 
recommendations were in calendar year 2005/2006. That's where 
you discovered a lot of these particular deficiencies with KBR.
    Mr. Fitzgerald. With regard to LOGCAP in OIF and OEF, yes, 
sir.
    Senator Reed. Are you confident that if you went out today, 
these problems would not exist, that you've fixed the system, 
that you have enough people out there, with the contract review 
and surveillance and quality assurance?
    Mr. Fitzgerald. Senator, I think improvements have been 
made. But to say that everything is perfect now, I wouldn't go 
that far.
    One of the things I would like to add, though, is, we talk 
about staffing; it's not just the number of people, it's having 
the right people in the right places with the right skills and 
competencies to do the jobs that they need to do.
    Senator Reed. No, I agree with you. One of the persistent 
themes--and it's not just LOGCAP, it's translators, it's types 
of equipment bought, et cetera. Everyone will tell you, ``We 
need the right people and expertise, et cetera.'' We've been at 
this now for more than 4 years, and, if we don't have the right 
people, and enough of them, then it's the responsibility of 
Secretary Bolton and General Johnson to stand up, at this 
committee, and say, ``We don't have them, we need them.''
    So, Secretary Bolton, do we have all the people we need 
with the expertise deployed to overlook these contracts now?
    Mr. Bolton. I would agree with the auditor that we could 
use more. As I mentioned earlier, more of the right expertise--
but just having more in this particular theater may not be the 
right answer, because of the nature of the war. As I said 
earlier, every person I send over there becomes a target, and I 
have lost people over there. So, we have to guard against that. 
So, finding ways of doing the job better, which we've done, 
with the help of the auditors over the last couple of years, is 
one way of doing that.
    Senator Reed. General Johnson, do you have enough people 
with the expertise to do this job? If you don't, have you made 
the request to your superiors for additional resources, in 
terms of personnel? Or are these personnel so scarce or 
unwilling that it's impossible to fill all the holes?
    General Johnson. Yes. Yes, sir. You've answered the 
question, frankly.
    I have made the request. As I mentioned during my 
statement, Mr. Bolton, with significant effort, has obtained 
two Senior Executive Service (SES) positions for me, and that's 
really helped a lot. We've also staffed up the program 
officers. We started doing that, and, really we had to justify 
that, and that's where Mr. Reed and Mr. Fitzgerald came in 
handy in going out, auditing, and verifying what we were saying 
we needed.
    So, we got people. The bottom line, though, falls back to 
your latter statement, sir. In many cases, the right skillset 
is just not there, and putting another person over there as a 
target does not help us.
    Senator Reed. Thank you very much. I think this just, once 
again, demonstrates to me that we've not mobilized the Nation 
to fight this war. We've just sent a lot of good soldiers, 
marines, and sailors out there, but we haven't mobilized the 
Nation.
    Thank you.
    Chairman Levin. Thank you, Senator Reed.
    Senator Webb, I haven't been handed a card, but I believe 
that Senator Webb is next.
    Senator Webb. Thank you, Mr. Chairman.
    Gentlemen, I would like to start by saying that I hope you 
all understand that this is not political posturing on this 
side of the aisle over here on these issues. There's a wide 
spectrum of experience up here, different types of experience, 
and there's a great concern that we have felt from our 
constituents about the amount of money that's been put into 
programs that don't have a lot of transparency. That's what 
we're really trying to do here.
    Mr. Chairman, I would like to say, just as a starting 
point, that I don't want us to leave this hearing today with 
the notion, from people who've watched it, thinking that this 
is simply an Army problem. It's not an Army problem, it's not a 
DOD problem, it's a national problem with respect to these 
programs over in Iraq. It's more about war profiteering, 
accountability, transparency, and the proper use of civilians 
in a war zone. It's every bit as much of that as it is about 
the programs that we're looking at, although it's very 
important to be looking at them.
    I'd like to associate myself with something that Senator 
McCaskill began with when she mentioned Senator Truman. There 
is a natural tendency toward corporate excess. There's no way 
to deny that. That's why we have to have a balance in the 
system. One of the things that then-Senator Truman did at the 
very beginning of World War II, actually before we had been 
attacked at Pearl Harbor, after mobilization, was to work very 
hard to put accountability into the corporate process. They had 
extensive hearings over a period of years. I think that the 
country was better off for the fact that that happened.
    I have a couple of questions, and I suppose they would 
properly--at least the first couple, be directed toward 
Secretary Bolton, but if someone else would be better to answer 
them, that would be fine, too. I had to step out of the room 
for a moment. When I came back in, I believe the question had 
been answered, asked, and answered about the initial contract 
here with KBR. That was a competed contract? Is that correct? 
Who were the other competitors in that contract?
    General Johnson. Sir, there were three competitors: 
Raytheon, DynCorp, and KBR.
    Senator Webb. This was a 10-year contract that was awarded?
    General Johnson. Sir, that's correct. One prime year, and 9 
option years.
    Senator Webb. Is that usual--10-year contracts, are they 
usual?
    Mr. Bolton. On this particular--if you say ``usual,'' for 
LOGCAP or just in general?
    Senator Webb. For these types of services that are being 
provided.
    Mr. Bolton. It has been, for LOGCAP, on this one. LOGCAP 
IV, we plan to do the same thing, a base year, plus 9 options.
    Senator Webb. You wouldn't say that it's unusual to get a 
10-year contract?
    Mr. Bolton. No, sir, not at all. With the option years, it 
allows us to stop, as we will with the three, rather than 
taking that to the end.
    Senator Webb. Okay.
    I am interested in a historical reference, in terms of 
trying to compare the costs. This is something that you 
obviously may not have today, you may, but I would like to know 
how much the Government pays KBR for a meal, per meal, or you 
can do it per day, and what that cost entails, and if there's 
any historical referent on that when these services were 
provided, inside the military itself.
    Mr. Bolton. I don't know about the historical part, but 
today it's about $3.05 per meal.
    Senator Webb. That's for the food.
    Mr. Bolton. That's for the food, yes, sir.
    Senator Webb. All right. I would like to give you a written 
question on this, so we can get a historical referent in terms 
of manpower costs versus what it would have been like when the 
military was providing those services.
    Mr. Bolton. Right. Will do.
    [The information referred to follows:]

    [See question for the record #41.]

    Senator Webb. Now, I have another question that concerns 
me. I've spent a good bit of time over the past couple of years 
expressing my concern about the private security contractors in 
Iraq. I know this is not the subject of the hearing today, but 
there have been a number of reports about the lack of 
accountability from these people, the lack of rules of 
engagement, the lack of legal accountability, in terms of 
incidents that have occurred. We have heard, at the staff 
level, that in the next couple of months in the LOGCAP 
contracts, the contract that will be awarded will require the 
contractors to actually be responsible for their own security. 
I don't know if that's true, but I'd be interested to know if 
that's true, first of all.
    Mr. Bolton. Obviously, we can take that for the record.
    We're in the source selection right now, but the 
instructions going in were not to do that. That's not the case 
with the current LOGCAP III. It hasn't been. In fact, we are 
withholding some money from the KBR right now, because we 
suspect that one of their subs actually did that.
    Now, under other contracts in Iraq--reconstruction, for 
example--it is permissible, in those particular contracts. 
There are very strict rules about how to do that, which even 
require the okay of the commander there.
    But, on this particular contract, no. I don't believe.
    Senator Webb. So, in your contracts, you're not putting in 
an expansion in the responsibilities of civilian security 
folks?
    Mr. Bolton. Senator Webb, to my knowledge, no, but I'll 
check on that, and we'll get that for the record.
    [The information referred to follows:]

    The Theater Commander will provide force protection for the LOGCAP 
IV performance contractor in theater. If the Government cannot provide 
force protection, the contract permits the contractor to request, 
through the contracting officer to the Theater Commander, for the use 
of private armed security.

    Mr. Bolton. There are a number of reasons we do this. Under 
the original LOGCAP, and the theme of the LOGCAP--a 
contingency, you're in and you're out. The military forces 
there will provide the security for you. If I start arming 
civilians, they become combatants. That's not good under 
international law. That's not good for them, it's not good for 
us. So, it's been banned on this particular contract.
    Senator Webb. Appreciate that. Thank you.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Webb.
    Senator Clinton.
    Senator Clinton. Thank you, Mr. Chairman. Thank you for 
holding this hearing. It is especially important to get to the 
bottom of the questions that we're asking today.
    Mr. Chairman, I would respectfully request that you perhaps 
consider either charging one of our existing subcommittees or 
creating a special subcommittee to delve more deeply into the 
issues that are being raised here. The seriousness of these 
allegations, and, frankly, the waste and fraud that is so 
evident from so much of what we've heard, merits that. But, in 
addition, we have to figure out what we're going to do, going 
forward. We cannot afford to continue this.
    Over the last 4 years, we have paid KBR $20 billion to 
provide logistics support in Iraq. Now, I thought when we 
entered a contract, we were in charge of telling the contractor 
what to do. But some of the reports that we have seen on this 
committee make it sound as though the contractor is in charge 
of telling the United States military, the United States 
Government, what to do.
    Here are a few excerpts from some of the DOD documents:
    From July 2005, ``There were concerns as to the 
contractor's reluctance to downsize the labor force after the 
transfer or support missions to the sustainment contractor.''
    Also July 2005, ``The use of self-directed work added 
additional costs to the task order, with no visible benefit to 
the Government.''
    March 2006, ``There was no effort to coordinate with the 
contracting officer to de-scope changes based on the reduction 
of requirements and to establish a new definite price.''
    April 2006, ``Command personnel advised us that the 
contractor wouldn't move idle personnel or equipment assigned 
from one task order to another task order to accomplish needed 
work. When we brought this situation to the attention of top 
contractor operational personnel, they informed us this was a 
company policy.''
    Secretary Bolton, why is the contractor permitted to be 
``reluctant to downsize the labor force''? Why are they adding 
self-directed work to the contract? Why aren't they 
coordinating with Government officials in order to reduce 
requirements and costs? How can they have a company policy that 
requires the United States taxpayer to pay for idle workers? 
Who's in charge of this contact? DOD or the contractor?
    Mr. Bolton. I would hope that the DOD is, Senator Clinton.
    In response to allegations such as those, what we have done 
is put together several panels, run by the Government, run by 
the Army. One is to look at requirements--these are 
requirements that come on a regular basis from the commanders 
to make sure that the commander is getting what he or she 
really wants. Sometimes those requirements are inflated. We 
also have a group whose job it is, once we have those 
requirements, to actually figure out how much it's going to 
cost, and then negotiate that with the contractor, who has 
already put in a bid. Many times, those bids are a lot larger 
and higher than we'd like them to be. So, we put people in 
place to correct some of the things that you've just mentioned.
    Are we there yet? Are we perfect yet? No. I'll take your 
allegations and anybody else that I get from the auditors here, 
which we've done over the years, and we will correct those. I 
think we're getting better, but we are not there yet.
    Senator Clinton. Of course, one of the problems has been 
the extraordinary increase in the outsourcing of Government 
functions to private contractors. I think the latest figures I 
saw is that we now have three times more private contract 
employees than we do military and civilian employees. There is 
no evidence that these contract employees perform better than 
Government employees, or that they do it more cost-effectively. 
There has been no database or system of accountability to keep 
track of all of these contractors.
    Now, in October 2005, DOD issued DOD Instruction 302.42, 
which included the requirement that DOD develop or designate a 
joint database to maintain by-name accountability of 
contractors deploying with the force, and a summary of the 
services or capabilities they provide. Government 
Accountability Office (GAO) Report 0714, titled, ``Military 
Operations High Level DOD Action Needed to Address Longstanding 
Problems with Management and Oversight of Contractors 
Supporting Deployed Forces,'' provides great detail on these 
DOD instructions and the importance of having full 
accountability.
    May I ask, starting with Secretary Bolton, for a yes-or-no 
answer, if any of you have reviewed GAO Report 0714?
    Secretary Bolton?
    Mr. Bolton. Only at the summary level.
    Senator Clinton. Next, please?
    Mr. Reed. No.
    Mr. Ernst. Yes, ma'am.
    Mr. Fitzgerald. Yes, Senator.
    General Johnson. Yes, Senator.
    Senator Clinton. Okay.
    The GAO report concluded that the Army was still in the 
process of implementing the database, and that it is uncertain 
when the process will be completed. So, this has been going on 
now for 2\1/2\ years--or 2--I guess, a little less than that, 
and we still don't have it. Does anyone know when the process 
will be completed? Can any witness answer that? [No response.]
    Does anyone know when our deployed senior leaders and 
commanders will have a grasp of the accountability problem with 
all these contractors? [No response.]
    I'll let the record show that, to both questions, all of 
the witnesses shook their heads no.
    Chairman Levin. The record will indicate that, unless the 
witnesses indicate, right now, otherwise.
    Mr. Bolton. Only to talk about the database, we do have a 
Synchronized Predeployment Operational Tracker (SPOT) report 
that we provide the commanders. That's still an emerging 
database. That does account for the contractors.
    The problem that the commander has is more than just the 
people that I have on contract. Since that commander is 
responsible for the entire battlespace, it's not only my 
contractors, it's contractors from the coalition forces, it's a 
contractor from private companies, that he also has to be 
concerned.
    The database that you referenced earlier is still maturing. 
That's at the DOD level. We are part of that. I cannot answer 
your question in terms of when it will be complete and how 
we'll keep it updated.
    Senator Clinton. Secretary Bolton, which Army staff agency 
is responsible for the implementation of this database?
    Mr. Bolton. That will fall under me. If we're talking about 
contracting and contractors, once I have that, I'll issue a 
policy on it.
    Senator Clinton. There was a disagreement reported in the 
GAO report as to whether this falls under logistics or 
personnel. Has that disagreement been resolved?
    Mr. Bolton. I don't know if it's been resolved yet or not.
    General Johnson?
    General Johnson. No, it has not been resolved. I'm a bit 
reluctant in answering this, because I don't know the current 
status, I'm in the field now, versus the building.
    There was a system and a team established as we moved into 
the warfight. We called it ``Triple C,'' which is a Contract 
Control Cell. It was established by the Army's Materiel 
Command, operated under my command, to make an effort to 
account for contractors on the battlefield. Frankly, it was 
bigger than us. That's when we got the help of DOD, the 
Logistics Management and Readiness crew, and they came up with 
a SPOT report.
    Now, we have taken that to the field commanders. They have 
looked at it. In many cases, it does not provide some of the 
data points that they want so that they can manage these 
contractors, and it's going to require some implementation of 
procedures, as Mr. Bolton has outlined, that we currently just 
don't have. So, in some cases we have some accountability. We 
don't have what we need.
    LOGCAP's a bit different. We probably have pretty close 
to--I'd be in the 90-percent-range confident that I know how 
many LOGCAP contractors I have on the battlefield, and where. 
But when we open up the scope to all the contractors on the 
battlefield, we have contractors who perform what we call field 
service representatives, who follow particular systems that are 
in the field that have--that require contract repair, and we 
have numerous other contractors that--supporting contractors. 
So, that's the complexity of the problem.
    Doesn't answer, and doesn't give an excuse for not having 
the capability. We are working very hard at it. We're just not 
there yet.
    Mr. Bolton. Senator Clinton, if I could just add a note 
that I was handed on SPOT, that's the tracking of the 
contractors, that is in the Office of Secretary of Defense 
Business Transformation Office, and it's still under 
development.
    Senator Clinton. Mr. Chairman, I think that the issues that 
this hearing has raised are such serious ones, this whole 
question about contracting out services, where the chain of 
command either doesn't exist or it's essentially outsourced, as 
well, to the contractor, or whether it's certainly confused, 
and where people cannot be held accountable. The failure to 
have adequate databases, and that's on top of the testimony 
from our colleague, Senator Dorgan, about just outright fraud 
and abuse and just heartbreaking waste in the system. So, I 
think that this certainly is an issue that demands our 
attention and perhaps an effort to try to sort out all of these 
various problems of accountability, trying to get a better 
handle on what should or shouldn't be outsourced. I hope that 
this committee can take a lead on trying to establish a strong 
foundation, similar to what our colleague, Senator McCaskill, 
referred to with the groundbreaking work of then-Senator 
Truman, because we just cannot let this go on. It's not fair to 
the people in the field, it's not fair to the people in the DOD 
who are, frankly, outmanned, they have inadequate databases, 
it's like sending them into a battle with a popgun against 
heavy artillery, because the contractors have so much more 
capacity to be able to manipulate the system. The end loser is 
the soldier in the field and, frankly, all the rest of us.
    Chairman Levin. We will have a second and third round here, 
and this hearing is far from the end of this investigation, I 
can assure all members of the committee. We're now going to 
start a second round.
    I just want to close the loop on the containers, which we 
were overcharged for. The document, General, which you have 
seen, if you could, for the record, explain why it is that that 
document says that something was paid, which wasn't paid, that 
would be satisfactory on that. If you could do that for the 
record.
    General Johnson. Yes, sir, I will.
    [The information referred to follows:]

    Several different cost issues were covered during the discussion on 
container costs. We had three separate issues with KBR concerning costs 
for containers. One of these issues involved a claim KBR received and 
paid to a subcontractor, First Kuwaiti Trading Company (FKTC), for 
alleged Government-caused delays. The other two issues involved the 
purchase price paid by KBR. During the hearing, when I stated that 
costs had not been paid, I was referring to the costs of the claim 
($51.3 million) and one of the instances involving container purchase 
price ($4.5 million). The document the committee chair had in his 
possession involved the third issue of container purchase price and 
questioned costs of $99 million. These costs have been reimbursed.
    The $51.3 million claim was submitted by KBR for costs it paid to a 
subcontractor (FKTC). The subcontractor claimed that these costs were 
incurred as a result of Government delays in moving living containers 
from Kuwait to Iraq. Based on a DCAA audit recommendation, the 
Government did not pay $25.7 million of this claim. On the second 
issue, concerning higher costs for living containers, $4.5 million was 
not paid to KBR. This reflected the difference in costs between the 
higher cost containers obtained from Prime Projects International and 
La Nouvelle and lower cost containers that could have been obtained 
from a supplier named Tepe.
    The January 24, 2006, letter you mention is from DCAA to the 
contracting officer, Mr. Duhart. It is separate from the two situations 
mentioned above. The $99 million, an element of KBR's definitization 
proposal for task order 0059, was questioned by DCAA as container costs 
in excess of those available from a lower cost supplier. KBR asserted 
the lower cost containers had different features which might not be 
technically acceptable and the low cost supplier might not be able to 
meet the delivery requirements due to limited capacity. With the 
acknowledgement of DCAA, the contracting officer resolved this during 
negotiations by allowing the cost for the containers but not paying any 
base or award fee on those costs. The negotiated settlement included a 
re-opener provision for KBR to submit a request for the withheld fee if 
they could provide further data to support their actions. KBR has not 
provided that information and, as a consequence, has not been paid any 
fee on those costs.

    Chairman Levin. Let's talk, now, about access to 
information.
    Back in December 2005, the DCAA audit report says that, 
``We encountered significant problems in obtaining supporting 
cost or pricing data. In some cases, the procurement files were 
not provided for review. In other cases, key information was 
not included in the procurement files. Failure to disclose cost 
or pricing data to the Government significantly impairs the 
reliability of the proposal as an acceptable basis for 
negotiation of a fair and reasonable price.''
    Then, in December 2006--this was just a few months ago; 
this isn't 2003, 2004, 2005--still, the DCAA audit, November, 
says that they could not qualify their audit, because of 
inadequate documentation. Here's what they say: ``We implore 
KBR management and its Government compliance group to address 
the cited deficiencies and to work with the DCAA to improve its 
systems.'' Why do we have to implore people that we're paying 
billions of dollars to? Secretary Bolton, why should we need to 
implore? Why don't we direct them to either do it or we're 
going to get a different contractor, which, of course, we 
should have had a long time ago?
    Mr. Bolton. I'll defer, in terms of the wording of that 
particular document, to my----
    Chairman Levin. Should we have to implore? I'll ask you 
that.
    Mr. Bolton. No, we should really have the information that 
we want.
    Chairman Levin. All right.
    Mr. Bolton. The contractors know that when they're going 
into business with us. Why it happened here, I just don't know.
    Chairman Levin. All right.
    Mr. Bolton. I will tell you, Mr. Chairman, that it's not 
isolated to this. I have other contractors where I have had 
similar problems in the past, not related to the LOGCAP or this 
area of the world. But I agree with you.
    Chairman Levin. This is one of a large number of problems 
with the LOGCAP contract. As was answered to Senator Reed, this 
isn't the way the Pentagon usually handles contracts. This is 
an unusual number of audit reports--month after month after 
month after month. In my opening statement, which you're going 
to respond to at Senator Warner's request, Senator McCaskill 
went through, month by month by month, audit reports showing 
inadequacies, failures, overstatements, exaggerated claims. So, 
I hope this isn't a typical contract. It better not be, for the 
sake of all of us. But it's totally unacceptable, I think, to 
everybody.
    Here's what happened in September 2006. Again, this is 
relatively recently. The Army Evaluation Board report for the 
LOGCAP contract said the following, that the DCMA, Mr. Ernst, 
this is your agency, this is what you said a few months ago for 
the LOGCAP--relative to the LOGCAP contract, ``DCMA sees a 
downward trend in performance in responding on critical 
information requests from the corporate office.''
    Now, I can understand the fog of war and all the other 
issues that relate to your folks in the field. General Johnson, 
I think we have great respect--and I'll tell you all that--for 
folks who take real risks to get what our troops need. Okay? 
That, I hope, would be clear. We have no respect for a company 
that does not provide information to people sitting in your 
air-conditioned offices, Secretary Bolton. That's what we're 
talking about here. We're not talking about these folks in the 
field who are providing the meals. We're talking about a 
company, which, month after month, overstates, overcharges, and 
misstates what the claims are. We're going to keep going at it. 
This is not the last hearing that we're going to have on this 
matter.
    But in September 2006, DCMA sees a downward trend in 
performance in responding on critical information requests, 
from the corporate office: ``Often, the DCAA does not receive 
information they request from KBR. The sluggish responsiveness 
to Government requests at the corporate level must be 
aggressively addressed.''
    By the way, when the requests for information are sent to 
KBR, here's what the Evaluation Board said in December 2006, 
that ``requests for information received pushback due to 
corporate policy regarding internal documents.''
    Now, Mr. Reed, does KBR have any right to deny auditors and 
program officials access to documents supporting its contract 
costs on the grounds that these are internal documents?
    Mr. Reed. No, they do not, if it's related to the specific 
costs being claimed or billed on their contract.
    Chairman Levin. All right. So, now, what did we do about 
it, Mr. Secretary?
    What action did we take against KBR when they pushed back 
and said, ``these are internal documents''?
    Mr. Bolton. KBR, or anybody else--and we've done it with 
KBR--when we find that the auditors or my managers are not 
getting what they want, we withhold some money. We have a $55 
million settlement, for example. I told them if they didn't 
provide the documents, I would take that, unilaterally, and 
they could sue me in court.
    By the way, when we did that, when I did that, they 
provided the documents.
    Chairman Levin. This is 4 years after they get a contract, 
you have to threaten them to get documents. Why do we tolerate 
this for 4 years?
    Secretary Bolton, this committee has pushed very hard to 
get some competition into this deal, for the last couple of 
years, at least. You've agreed that this LOGCAP contract was 
designed to handle short-term contingencies. Short-term 
contingencies. As a matter of fact, this scope of work in this 
LOGCAP contract was that the contractor will initiate support 
for a force up to 25,000 personnel. That was supposed to be the 
scope of the work, 25,000 personnel. Then, the contractor may 
be required to increase support for up to 50,000 personnel. 
We're over 150,000 personnel.
    Now, why has this noncompetitive situation been going on 
for so long? We've brought this to your attention for the last 
couple of years, Mr. Secretary.
    Mr. Bolton. In response to your concerns--and, quite 
frankly, ours--we are in the middle of source selection to have 
other contractors--in fact, more contractors--do this.
    Chairman Levin. Why has it taken so long? We've raised this 
question for 2 years, at least.
    Mr. Bolton. I think, in terms of keeping this current 
contractor, it's just the nature of the----
    Chairman Levin. No, I'm talking about lack of competition. 
Why have we not had multiple contractors so we could have 
competition on task orders for this many years? We brought this 
to your attention in 2004 and 2005, and now we're negotiating 
multiple contracts. Why has it taken so long? When you have a 
contractor who, month after month after month, is supplying 
exaggerated estimates, has provided erroneous information, 
refuses to give documents, which are absolutely required under 
law, why has it taken so many years to negotiate multiple 
contracts?
    Mr. Bolton. I think you'll find, 2005, we did recompete 
some of the work there, and that was beneficial to us. As I 
just mentioned, LOGCAP IV is in its source selection right now 
to provide more contractors there. With regard to the earlier 
concerns, ``Why didn't we do this sooner?,'' if you look at 
where we started, in 2002, the scope--and you've mentioned it 
in your remarks there, going from 25 to 50--it was a lack of 
time to adequately go out and compete all the task orders when 
we had a constant demand, and an escalating demand, from the 
warfighter.
    Chairman Levin. No, but you could have--look, if you--we 
have time now--we're still at war--you have time now to 
negotiate multiple contracts so you can get----
    Mr. Bolton. Oh, no--what I was talking about is an ongoing 
contract.
    Chairman Levin. I understand. But why didn't you negotiate 
multiple contracts so you could have some competition for task 
orders before now? That's the question.
    Mr. Bolton. If you go back to when we put this contract 
together before the war, we looked at it the same way we did 
all the others.
    Chairman Levin. I understand.
    Mr. Bolton. We looked at it as a contingent, and we only 
had roughly $50 million when we looked at the first task order.
    Chairman Levin. I understand. I'm not asking about that. 
I'm saying why didn't you do, in 2004, what you're doing now? 
Why didn't you do, in 2005, what you're doing now? Get multiple 
contractors? Why didn't you do, in 2006, what you're doing now? 
That's my question. We brought this to your attention in 2004 
and 2005. Why didn't you do, in 2004 and 2005, what you're 
doing now?
    Mr. Bolton. Good question. I don't have a good answer for 
you.
    Chairman Levin. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    In recent years, the DOD has institutionalized civilian 
contracting such that it's become a necessary function of 
large-scale military operations, and, in all likelihood, the 
prevalence of contracting use as a vehicle for service 
distribution will likely increase. I would pose this to any of 
the members of the panel. Do you have any reason to believe 
that the amount of civilian contracting concurrent to military 
operations will decrease?
    Mr. Bolton. Given where we are today, I don't see it 
decreasing. As long as we have warfighters in the field, we 
will have this. One of the reasons we have the LOGCAP was so 
that we could put more soldiers, or military, in combat. If I 
were to replace that with organic soldiers, just one-on-one, 
I'd look at 56,000 additional soldiers to do the work that's 
being done right now. Rightly or wrongly, if you say that, then 
you have to almost double or triple that. The reason is that 
you're going to have to rotate those soldiers. You're going to 
have to have a group there to take care of the work, you have 
to have someone getting ready to come over, and then you have 
to have someone who's idle. That's a lot of soldiers.
    In addition, if you look at the funding part of this, a 
soldier, once we recruit them, we have the soldier and the 
family. So, I have families back home here that I'm also going 
to have to support and fund. With a contractor, he's on the 
field, and, when he leaves, I don't pay him anymore.
    So, I think, from just a business sense, it's the right 
thing for the Army, and, quite frankly, the other Services, 
because they have similar vehicles to do this. What this war 
has taught us, the lessons learned here, is, once you protract 
this, and particularly if it's a protraction where things are 
changing in the field constantly, how are you going to 
accommodate for that? We think the LOGCAP IV will allow us to 
do that, in terms of having several contractors. We can compete 
these task orders rather than setting up a separate source 
selection during the time of war to recompete a task order, and 
run the risk of not having service to the warfighter. I think 
that will be better.
    The other is training of our folks. We do contingency 
training very, very well, but that's a short-term answer. 
Nation-building or protracted, we need to learn how to do that 
better, both in contracting, management, and even auditing. So, 
I think we'll learn more there. I wish I had a crystal ball 
that said we're going to be finished with this next year, next 
month, and all of the LOGCAP folks will be coming home. I just 
don't have that.
    Senator Thune. What alternatives to a LOGCAP-type--or a 
LOGCAP-like contracting vehicle have been considered? Are there 
other alternatives?
    Mr. Bolton. The only alternative that I know of--and I'll 
defer to General Johnson here in a bit--is putting organic 
there. You're either going to have civilians--a contractor--or 
you're going to do it with soldiers, airmen, or seamen. 
Starting in the mid-1980s, we were asked by Congress to take a 
look at using contract or civil manpower to do the jobs that 
they could do for us, and that's what we've done. I think the 
first contract was in the 1988 timeframe. Then another one in 
1992, then 1996, and then the follow-on.
    But all of those were always geared at short-term. I think 
your question was spot-on, in terms of if you're going to have 
a protraction here--and the chairman's also indicated this--is 
there a better way? Right now, I don't know of a better way.
    General Johnson may have some additional thoughts.
    General Johnson. Sir, we've looked at this real hard, and 
there are a couple of alternatives. One, if you decide to go 
with all military personnel. Mr. Bolton has explained that 
fairly well. In essence, the LOGCAP exists virtually as a 
theater support command would exist, with about 50,000 to 
60,000 personnel. You'd need 120,000 to 200,000 soldiers to 
replicate that capability with the assorted infrastructure that 
goes with soldiers, hospitals, housing, and, of course, their 
long-term retirement pay, and the rotation and training bases 
to keep them in action to replicate the LOGCAP 57,000 or so 
that are in theater.
    As Mr. Bolton said, when the contractor leaves the 
battlefield, he's left the battlefield; you don't pay him when 
he comes back, and his infrastructure is up to him or her.
    So, that's if you try to put soldiers, alone. But we do 
probably need more soldier or military structure for early-
entry operations. The contractor, in early-entry operations, is 
not the best answer, and I think the Army is working on that in 
their total Army analysis process.
    For the longer-term operation, if you decided to go with 
something other than a LOGCAP, one of the problems we're having 
right now is we had multiple contingency contractors with each 
brigade, and each brigade were beginning to exercise their 
contingency contracting capability to support themselves. I've 
been in about 12 to 15 different military operations over my 
30-year career. That's a fallacy that we're trying to correct 
by creating contingency contractor brigades. Those contingency 
contractor brigades provide area support and give us some kind 
of joint acquisition review before we buy anything.
    For instance, moving into Bosnia, I can remember the days 
we were down in Zapania buying hay to keep the trucks and 
things from sinking in gravel. You had a contingency contractor 
for each brigade. A bail of hay ended up being $1,000. That's 
terrible. We finally instituted a Joint Acquisition Board so 
that we flattened that out.
    So, if you did something other than this LOGCAP piece, you 
would have unnecessarily created competitiveness and cause 
prices to go up within the area. If you then move into nation-
building, you've probably decimated the local economy, because 
the local businessmen will not be able to compete with the 
prices that the U.S. Government will cause to be created, 
something that we've had to work in this case with KBR on their 
supply-chain piece, to make agreements external to the theater 
for supplies so the prices level off in both Afghanistan and 
Iraq.
    Lastly, you will create a management nightmare. We do not 
have, as we've stated, people with the necessary expertise, 
right now, to man as we would like to. I think we're doing it 
adequate, but adequate is not what we seek here. We have to do 
a better job for our American soldiers and our American 
taxpayers. Our American military and our taxpayers deserve 
better. But we're doing an adequate job in management. We do 
not have the number of people with the appropriate skills to 
manage the contracts that we have, to include LOGCAP.
    If you broke LOGCAP down into various contracts, you create 
multiple contract administration requirements, you will 
complicate the commander's ability to execute operations in 
theater, because then, when he wanted to move troops, he could 
end up talking to a base-camp contractor, a transportation 
contractor, an ammunition contractor, a food-supply contractor, 
and it just depends on how many pieces you break that up into, 
rather than having one point of contact that he can talk to and 
say, ``Here's what I have to do,'' and then allow the 
Government to work the requirements and then come up with one 
contractor to perform the mission. So, we're going to have to 
have balance there.
    Then, as I said in my opening statement, we've really got 
to look at what we do in long-term war, because there is a 
breakeven point, even on an instrument such as LOGCAP. I think 
it's cost-effective now. It's like buying a house in Washington 
and--I guess the price is probably close to $900,000 now for a 
house--but if you paid that cash, you paid $900,000. That's 
kind of what we're doing for LOGCAP, we're paying cash. If you 
paid that over the 30- to 50-year life span of a mortgage, 
you're going to pay three times that. So, that's the price you 
have to determine of what you want to pay and how you want to 
pay it over time. Frankly, that's for you to determine, not me. 
I'll just tell you what the complexities are of executing a war 
in this environment, given those types of instruments to 
support the forces.
    Thank you. I hope that answers your question, sir.
    Senator Thune. It did, and just one quick follow-up. The 
whole basic principle of hiring civilian contractors is to 
augment military operations, as I understand, and provide 
assistance in meeting support requirements, and that they would 
not be a replacement for force structure. In this particular 
case, which category does KBR fall into when executing LOGCAP? 
Do they augment force structure, or are they replacing it?
    General Johnson. Sir, that's a question I would prefer that 
the building handle. In the total Army analysis process, there 
is what we call a COMPO 9, which is for contractor support and 
civilian military equivalents for soldiers. So, I would defer 
that so we can take back and get you an appropriate answer from 
the appropriate force-structure personnel.
    [The information referred to follows:]

    LOGCAP is mitigating force structure shortfalls during this time of 
persistent conflict to enable commanders to accomplish operational 
missions. The current force structure is a result of force management 
decisions made previously which assumed risk largely in Combat Service 
Support (CSS) functions which are offset by LOGCAP and host nation 
support. DOD policy, however, directs that functions where there is a 
potential risk of engaging in direct hostile fire be deemed inherently 
governmental and military essential. This includes many support 
functions on a noncontiguous battlefield covered by LOGCAP contracts. 
The Grow the Army Plan addresses many of these CSS shortfalls now 
supported by LOGCAP, but will require some time to build these unit 
capabilities. The Army will strive to ensure that only non-inherently 
governmental functions are contracted out.

    Senator Thune. I see, Mr. Chairman, my time is expired.
    Chairman Levin. Thank you, Senator Thune.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman.
    General Johnson, who is your contact person at KBR? Who is 
the individual you deal with at your level?
    General Johnson. I deal with Bruce Stanski, who's the 
president of KBR.
    Senator McCaskill. Bruce Stanski? Would you have any 
objection--or, Secretary Bolton, would you have any objection, 
in this contract you're about to execute, saying that the first 
time that it is documented that there is a difficulty getting 
access to information by the auditors, that they would be no 
longer eligible for a performance bonus?
    Mr. Bolton. With any contractor, regardless of their 
actions, we keep what I call a report card--and you may be 
familiar with that--a contract performance report. We do that 
on a regular basis. That becomes part of a file. When I do a 
source selection, I look at the history on all those 
contractors. If I discover there's been a problem, that is used 
as part of the evaluation criteria for a contractor.
    So, whoever is selected to be--all the contractors for the 
LOGCAP IV, if they do not perform, and that's documented, it 
will become part of their file, which we will review during any 
future source selection.
    Senator McCaskill. What I would then like to see, if 
possible, are the documents that recommend these bonuses, 
because the chairman outlined a number of instances that are 
specific, recent, where--the arrogance of this company as to 
whether or not their information belongs to us or belongs to 
them. When you enter in a contract with a Government agency to 
do work for them, the documents surrounding that work don't 
belong to you, they belong to the Government that you're 
working for. The idea that they're saying that these are 
internal documents, and that they're causing the auditors--and, 
by the way, every time an auditor is denied access, it costs us 
money. Time is money when it comes to audit work. I am blown 
away by the concept that there would be this kind of history of 
access issues, and they'd be ``excellent.'' Either access 
issues are not important to you as a contracting agency of the 
Government, or you don't think they're important, in terms of 
whether or not someone is doing their job for the United States 
of America.
    Mr. Bolton. Senator, as I pointed out earlier, when it got 
to my level that we were having some problems, we took a 
unilateral action, which is basically to hold their money, and, 
if they wanted it back, they can sue me in court. We get the 
documents that we wanted. I agree with you, that's not the 
performance we expect out of a contractor.
    I also agree with you, when you waste your time going into 
audit, and someone's not providing you that information, that 
is wrong, that is not what we expect, and we take the 
appropriate actions. So, when it got to my level, we did what I 
thought was right.
    Senator McCaskill. The difficult part of this--and this 
kind of a macro-look at it, is that in Government--in the 
private sector, there is accountability, called the ``bottom 
line.'' It's called ``profit.'' If you're not making a profit, 
you're in trouble. That is an incredible discipline over a 
private entity. In Government, the accountability is in the 
process of contracting, the oversight of those contracts, and 
how and when they get their money, and, frankly, whether or not 
people are disciplined, that work for the Government that mess 
it up. What is amazing to me about this entire incident is that 
it had gone on for years, and there was no accountability. None 
whatsoever. No money was withheld. Maybe you threatened it 
once. The bottom line is, how in the world would this company 
think they're in trouble if we're telling them, every year, 
they're excellent? We told them, every year, ``You're 
excellent''--not, ``You're average,'' not that, ``You're below 
average,'' but that, ``You're excellent.'' That's why I am so 
confused about the bottom line coming out of this hearing.
    The same thing with cost-plus. The abstract--and I get the 
abstract--is that we do civilian contracting because it saves 
us money, that we can put them in place when we need them, and 
we don't need them anymore, we don't have the contract, unlike 
the ongoing support costs of the Active military. The problem 
is, when you do cost-plus, you are giving them a license to 
make profit. They don't have to have accountability anymore, 
because the profit's built in. They can relax. They can put 
their feet up, put their head back, don't worry about profit. 
Do you know, Secretary Bolton, what kind of profit Halliburton 
has made on this contract for the last 5 years?
    Mr. Bolton. I don't know about Halliburton. My contract's 
with KBR. They, according to the contract, have a 1 percent 
base fee, which is very low compared to any cost-plus contract 
I've ever seen in the 30 years I've been at this, and an award 
fee of only 2 percent, and normally it's much, much higher than 
that. So, my questions tend to be why a contractor would even 
go into this, because the bottom line is so small, particularly 
when you look at when they competed for this, and there was no 
war, there was no idea that there would be billions and 
billions of dollars here.
    But, to your point, we take a very close look at the amount 
of money that we pay. I feel the same way, that, ``I want a 
dollar's worth of work out of you.'' When we discover--whether 
it's through the auditors--I think the chairman mentioned 
several incidents of evaluation boards--those are my people, 
those are the folks I put there to--and along with the DCMA--
check on this, on a monthly basis. They found that. They 
challenged the contractor. When they challenged the contractor, 
several hundred million dollars, whatever, then we talked to 
them, and they don't get all of that. When it comes to the 
award fee, as General Johnson mentioned earlier, there are 
three parts. A couple of those parts, they did very, very well, 
and we get that from the field commanders. There are parts they 
didn't do well, and they didn't get the money. So, if we 
concentrate----
    Senator McCaskill. They got 88 percent of it.
    Mr. Bolton. That's right, they did, and some----
    Senator McCaskill. Eighty-eight percent--when my kids come 
home with 88 percent, they don't get grounded. Eighty-eight 
percent is pretty darn good for this kind of record.
    Mr. Bolton. Yes, ma'am. But it's interesting for me to 
note, as I sit here--I have been taken to task many, many times 
on contracts, in the award fee. That is because folks are above 
88 percent--way above 80 percent. When I hit, at 60, 70, or 80 
percent on a contract, where I've grown up, folks say, ``Okay, 
I guess you're doing your job.'' In this particular contract, 
when you look at all the monies that we've withheld over the 4 
years, and all things that we've done, it amounts to about 4.7 
percent; 4.7 percent. I compare that against all other 
contracts, and I find I'm in the ballpark. That means, even 
though I have two, three, or four times the number of auditors 
on this big contract, apparently the folks who are actually 
doing the work--not just the contractor, but those who are in 
the management office overseeing--are doing a pretty good job, 
because they're hitting about the same average I would expect 
from any contract, in terms of the number of times they will 
question the contract, the amount of money that they're 
withholding, and so forth.
    Now, could we do better? Yes, we might be able to bump that 
up 5 percent, maybe even 6 percent. But that's still not too 
bad. Perfect? Absolutely not, because we'd like to drive that 
to something else. But I think the men and women who are 
actually doing the work are doing the very best they can, and, 
I think, quite frankly, a very good job.
    Senator McCaskill. What percentage of the civilian 
contracts in Iraq are cost-plus?
    Mr. Bolton. I think it's a third when you look at--well, 
when you say ``Iraq''--I'm talking about LOGCAP right now, 
because we'll have a cost-plus, we'll have a fixed-fee, and a 
reimbursable type. So, I think it's about a third in terms of 
the types of contracts. We can get that for the record, to be 
more precise.
    Senator McCaskill. I would appreciate that.
    Mr. Bolton. Yes, ma'am.
    Senator McCaskill. In terms of dollars spent, I'd like the 
percentages, too, not just number of contracts, but in terms of 
dollars spent, how much is cost-plus.
    Mr. Bolton. Absolutely.
    [The information referred to follows:]

    In the first years of the Iraq conflict, cost-type contracts were 
used because uncertainties involved in contract performance did not 
permit costs to be estimated with the accuracy needed to use fixed-
price types of contracts. Over the 4-year span of fiscal years 2003-
2006, roughly 46 percent of Army contracts in Iraq were cost-type 
contracts.
    Notable, however, is that: (1) the percentage of cost-type 
contracts in fiscal year 2006 was approximately 13 percent, and (2) the 
highest percentage of cost-type contracts was in fiscal year 2004, at 
roughly 83 percent. This is due principally to the fact that in 2004, 
design-build contract task orders were awarded (on a cost basis) across 
the spectrum of Iraq reconstruction: electricity, water, and oil 
infrastructure and numerous health care (e.g., health care centers, 
hospitals) and public safety/security and justice projects (e.g., 
police stations, fire stations, courts). In 2006, the Army, and in 
particular the Joint Contracting Command-Iraq/Afghanistan made a 
concerted effort to migrate towards fixed-price contracts.

    Senator McCaskill. The other thing I would like is some 
kind of information for the record, Mr. Chairman, about 
Antideficiency Act (ADA) violations. I've discovered, in the 
short time I've been here, that we've gotten into a habit, in 
some instances, of using operational monies to build what they 
call ``temporary buildings.'' I had the opportunity to visit 
one of those temporary buildings at Fort Belvoir. It didn't 
feel very temporary to me. It was 230,000 square feet. So, I--
and at the Army Materiel Command, I might add--and so if we are 
building buildings with O&M money instead of MILCON money, I 
would like to know how much of that is going on within LOGCAP 
and what ADA violations, if any, any of you are aware of, and 
what the status of those violations is as it relates to this 
contracting in this particular theater.
    Mr. Bolton. Senator, happy to take that for the record.
    [The information referred to follows:]

    Three of the five cases initiated thus far have been closed as ``No 
ADA'' and the Army expects to complete the two remaining ADA 
investigations by 30 December 2007. In the three cases that have been 
closed, the funding was either determined appropriate (e.g., within the 
$1.5 million limitation for life, health, and safety) or the proper 
funding was obtained. As a result, we have found no failure to conform 
to the Federal Acquisition Regulations.

    Senator McCaskill. Thank you.
    Mr. Bolton. Thank you.
    Senator McCaskill. Thank you, Mr. Chairman.
    Chairman Levin. Thank you.
    Let me pick up where Senator McCaskill was on these 
ratings. She doesn't understand how they could possibly get the 
ratings that they got. Let me give you some of the underlying 
data which supports what she's saying.
    KBR's ratings over the--I'm just going to take an 18-month 
period, from July 2005 to December 2006--they got 61 
``excellent'' ratings, 42 ``very good'' ratings, 7 ``good'' 
ratings, and no ``average or below'' rating for contract costs. 
That flies in the face of what happened during that period:
    October 2005, DCAA report, labor costs overstated.
    November 2005, AAA audit, KBR wasted between $40 and $113 
million by purchasing more vehicles than necessary.
    A November 2005 Army audit report, staffing levels 
excessive.
    An Evaluation Board report, November 2005, estimates 
inflated.
    2006 DCAA report, KBR proposal was overpriced by $70 
million; subcontract costs, overstated by 21 percent; equipment 
costs, overstated by 21 percent.
    March 2006, Evaluation Board said they overstated costs and 
proposals, and overengineered customer requirements.
    May 2006, DCAA audit report, proposal of KBR overstated 
costs by $70 million.
    August 2006, DCAA audit finds KBR's proposed subcontract 
costs for one task order were overstated by roughly $100 
million.
    That's what's going on during this period. That's what the 
audit reports say. How in the heck could they be given these 
ratings? Not one ``poor'' one. Not one ``poor'' one.
    By the way, in order to even get a ``good'' rating, 
according to your own definitions, the cost system established 
must be not inflated. To get a ``good'' rating, you cannot 
inflate costs. They shouldn't have been given even a ``good'' 
rating. How did this happen?
    Mr. Bolton. Obviously, we can take each one of those for 
the record and give you a reason, and compare and contrast 
that.
    [The information referred to follows:]

    The audit and Performance Evaluation Board (PEB) comments discussed 
during our testimony correctly identify shortcomings with the 
contractor's cost proposals and Rough Order of Magnitude estimates. 
However the purpose of the audit, and the purpose of the PEB are 
different. The auditor report is based only on what KBR provided to 
support proposed costs, as it should be. The award fee board considers 
several factors in deciding on an adjectival rating in the cost area. 
One factor the board can consider in contractor proposals that the 
auditor does not is the environment in which the proposals were 
required--frequently changing Government requirements, expedited cost 
submissions, and many foreign subcontractors to collect cost 
information from. These conditions affect the quality of the cost 
proposals. Other factors the board considered were the contractor's 
cost system to track and report costs, and cost avoidance measures 
resulting in cost underruns from the negotiated cost baseline. The 
adjectival rating is the result of the board considering the proposal 
problems, as well as the proposal environment and positive performance 
that occurred during this period.

    Chairman Levin. Are you not a bit, yourself, concerned that 
you could have all these kind of--these are separate ratings, 
by the way, for costs.
    Mr. Bolton. Right.
    Chairman Levin. I'm not talking about technical and 
management performance, because that's a different issue; we 
accept that. On costs, though, 18-month period, they didn't get 
one ``below-average'' rating, they got seven ``goods,'' which 
they didn't deserve. But 61 ``excellents'' and 42 ``very 
goods.'' Are you not troubled by that?
    Mr. Bolton. Senator, I'm always concerned----
    Chairman Levin. Not always. Specifically concerned. Are you 
not specifically concerned, when I read those numbers to you?
    Mr. Bolton. Let me put it this way. I say I'm ``always 
concerned,'' because my job is not to look at a glass that's 
half empty, nor a glass that's half full, just to look at the 
glass. So, you stated in there that the Evaluation Board, for 
example, determined that the proposal was inflated. That's 
exactly what that board is designed to do. We didn't pay that 
price, though, because the board said to the contractor, 
``You've given me your proposal that I will not accept; and, 
therefore, you need to bring that down.''
    Chairman Levin. Right.
    Mr. Bolton. Now, that part of it is not part----
    Chairman Levin. But the award-fee determinations are 
supported by these ratings.
    Mr. Bolton. But the award fee takes place later.
    Chairman Levin. I understand.
    Look at those ratings that they're based on. Aren't you 
troubled that you're providing award fees based on ratings 
which are so totally unrealistic, in terms of what your own 
boards were finding?
    You are not concerned by that?
    Mr. Bolton. I'm not concerned, from the standpoint of with 
the example that we've just discussed. If the Evaluation Board 
is doing their job--and it sounds as if, according to what 
you've read there, they are--and they're in front of the 
process where I'm going to make an award, which is 6 months 
down the road, and the contractor brings the cost down because 
I identified it, and starts to perform, then he's going to be 
judged on that, not what happened during the negotiation.
    Chairman Levin. Okay, I am concerned. I don't see how you 
can award fees based on these kind of ratings, when the ratings 
completely ignore what has happened, in terms of overpricing, 
exaggeration, statements of fact which aren't true, and so 
forth. So, I'm sorry to hear you're not concerned, but I'm very 
much concerned, because those award fees, which Senator 
McCaskill's talking about, are based on those ratings.
    Let me go on to the scope of the contract. This contract 
basically told this contractor that, ``You would be providing 
the support for up to 50,000 personnel in Iraq.'' Now, would 
you not agree that, since there's 150,000 troops in Iraq alone, 
that the LOGCAP effort goes beyond that scope?
    Mr. Bolton. It certainly goes beyond what we initially 
intended.
    Chairman Levin. Not just intended, but what the contract 
provided for: Up to 50,000.
    Mr. Bolton. The reason I'm hesitating is that scope has a 
very definite legal interpretation, and I would be stepping out 
of my lane to say we are operating on a contract that's beyond 
scope. I don't believe that to be the case. But I'd have to 
take that for the record to get the legal opinion.
    [The information referred to follows:]

    The contract was not modified, did not need to be modified.

    Chairman Levin. Okay, you would, then, agree that the 
contractor is being, presumably, paid to support up to 150,000 
troops in Iraq. You'd agree to that much.
    Mr. Bolton. Oh, yes, sir.
    Chairman Levin. Would you agree that the contract says that 
the purpose of the contract, or the scope of the contract, is 
for the contractor to provide for support--and I'm reading 
this--for up to 50,000 personnel in Iraq? Would you agree to 
that?
    Mr. Bolton. At one time, that's true.
    Chairman Levin. Was the contract modified?
    Mr. Bolton. I believe it was, but I'd have to check. I'd 
have to take that for the record.
    [The information referred to follows:]

    No. The 50,000 figure is mentioned only in the scope of work under 
planning requirements. This specifically relates to the upper limit the 
contractor should use in developing a written contingency plan for the 
Worldwide Management and Staffing Plan, and does not establish the 
scope of the whole contract. Clause B.2 of the contract relates to the 
scope of contractor support in actual operations. It states the 
Government's maximum level of support required on the contract shall 
not exceed the equivalent of two Major Regional Conflicts plus one 
small scale contingency per year for the life of the contract. The 
contractor's support of troops in Southwest Asia is within the scope of 
the contract.

    Chairman Levin. General Johnson, was the contract modified?
    General Johnson. Sir, the contract was not modified, did 
not need to be modified.
    Chairman Levin. All right.
    General Johnson. The 50,000 was for the planning effort. 
That's what they formulated their plan on, for up to 50,000. 
The requirement for the contract supported the Army's strategic 
plan for two regional major contingencies, which obviously 
would equate to more than 50,000 individuals. The 50,000 was a 
planning figure that they always had to be prepared to execute.
    Chairman Levin. I understand. So, you're saying that the 
statement of work in the LOGCAP contract itself is not what I'm 
reading from the LOGCAP contract, which is ``Contractor may be 
required''----
    All right. Let me read you the piece of the contract that 
I'm referring to, ``Contractor may be required to increase 
support for up to 50,000 personnel per event,'' which means 
Iraq. Is there a different part of the contract you're 
referring to?
    General Johnson. The execution phases of the contract 
requires the contractor to be able to execute operations for 
two major contingencies in accordance with the Army's strategy.
    Chairman Levin. All right. You'll get us the language, 
then, in the contract, which you say supercedes this limit of 
50,000?
    General Johnson. Roger, sir. We'll provide you what's 
necessary to show you the total effect.
    [The information referred to follows:]

    Clause: B.2. The Government's minimum requirement is the Worldwide 
Management and Staffing Plan including the Army Transformation Annex, 
which includes CLINs 0001AA, 0001AB, and 0001AC. While the locations 
and types of support required in a given year may be varied and may 
include a mix of Major Regional Contingencies (MRCs), small scale 
contingencies, or other efforts identified in the SOW, the Government's 
maximum level of support shall not exceed the equivalent of two MRCs 
plus one small-scale contingency per year for the life of the contract. 
All contract requirements will be awarded by individual task order.

    Chairman Levin. All right.
    According to a February 2005 DCAA report, KBR entered into 
a sole-source, cost-plus subcontract with Navigant Consulting. 
Is that a familiar contract to either--okay. Here's what it 
did. It's a sole-source, cost-plus contract with Navigant 
Consulting to ``obtain advice and assistance regarding Federal 
Government procurement requirements and procedures.'' That's in 
quotes. The report questions whether the costs of this 
subcontract were reasonable. Are you familiar, Mr. Reed, with 
the DCAA report on Navigant?
    Mr. Reed. Not in great detail, but generally, with that 
summary, yes, sir.
    Chairman Levin. All right. Is it fair to say that they 
entered into a contract with a subcontractor to advise them as 
to whether or not they--relative to requirements and 
procedures--is that fair?
    Mr. Reed. That's my understanding, yes.
    Chairman Levin. All right.
    Now, why are we paying a contractor to pay somebody to give 
them assistance regarding Government procurement procedures? 
Why is that appropriate? Why is that within the scope of the 
contract? As a matter of fact, is it?
    Mr. Reed. It's not so unusual, I believe, for Government 
contractors to use different types of expert consultants, be 
they legal, contracting, or whatever. I guess the question is, 
was it appropriate in this particular circumstance?
    Chairman Levin. All right. Was it? Did you find it was?
    Mr. Reed. I would have to go refresh my memory of that 
audit-report language.
    Chairman Levin. Okay. Do you know whether or not they would 
earn a fee on that subcontract?
    Mr. Reed. Yes, they would.
    Chairman Levin. So, they are hiring somebody to advise them 
on meeting the requirements of our procedures, our Government 
procurement procedures. The more that they pay someone to 
advise them on what, presumably, they knew when they entered 
into the contract, the more they make, because they get a fee 
based on what they pay contractors. Is that as absurd as it 
sounds to me?
    Mr. Reed. I think, in some circumstances, we might actually 
have encouraged them to seek additional professional help, 
given the problems we----
    Chairman Levin. To meet our requirements.
    Mr. Reed. To meet our requirements, because of their own 
lack of capability and deficiencies in their business systems--
they, themselves, had told us that they did suffer, at times, 
from inexperienced people. They promised us to get more help 
to----
    Chairman Levin. Didn't they promise to meet those 
requirements when they got the contract?
    Mr. Reed. Yes.
    Chairman Levin. That's a promise they made to us when we 
entered into the contract.
    Mr. Reed. Yes.
    Chairman Levin. When they don't meet those requirements, 
and they hire a subcontractor to advise them on that, they even 
make a fee on that.
    Mr. Reed. That's correct.
    Chairman Levin. Something's wrong here, folks. You can't 
have a contractor that promises to do something, not do it, 
hire somebody to advise them what they should do, and then make 
money on their failure to do it. They're making a profit on 
their own failure. It's intolerable.
    I don't think anyone disagrees with that, so--if anyone 
disagrees with that, why don't you say you disagree.
    Mr. Bolton. I wouldn't say we would disagree.
    Chairman Levin. You do, okay.
    Mr. Bolton. No, I would say we would not disagree.
    Chairman Levin. Okay.
    Mr. Bolton. But, I think, as Mr. Reed's already pointed 
out--and if you go back to when the Government accepted the bid 
as the winner in this proposal, we were looking at this--and 
I'm sure the contractor was, too--as another LOGCAP short-scope 
contingency. We have the expertise. When we evaluated them, 
said, ``Yes, this person has the expertise,'' we have escalated 
way beyond that. My opening statement said that as well, that 
we had stretched and stressed Government, as well as 
contractor, capabilities. So, it doesn't surprise me that the 
contractor is looking for additional expertise. Now, what we 
need to do--and I think this is--your original comment--is to 
find out whether or not that's really justified.
    Chairman Levin. General Johnson said that the contract 
required them to be prepared to provide this service for two 
major contingencies. So, Secretary Bolton, it's not acceptable, 
if what he says is accurate, that you continually use the 
excuse that this was intended to be just a short-term provision 
of services. It's one or the other.
    Mr. Bolton. No, I don't know if I can follow your comment, 
or your question.
    Chairman Levin. Then let me try again. General Johnson said 
that, no, the contract didn't just say 25,000 or 50,000, it 
says whatever was required for two major contingencies. You're 
now saying that, no, it was intended for something that would 
be just short-term and few people. It's one or the other.
    Mr. Bolton. No, you can actually have both. You can have 
two major contingencies going on that are----
    Chairman Levin. Both short-term?
    Mr. Bolton.--that are short-term.
    Chairman Levin. I see.
    Mr. Bolton. But when they get protracted for several years, 
I really do think you need to look at things differently, which 
we're trying to do. Mr. Chairman, I think that's where you're 
trying to drive us.
    Chairman Levin. I was trying to drive you there 2 years 
ago, without success.
    Mr. Bolton. Yes, sir.
    Chairman Levin. Senator Martinez.
    Senator Martinez. Mr. Chairman, thank you very much, sir.
    I have just a couple of questions. I guess I should ask 
General Johnson, in the light of all of these problems--and I 
noted, in your testimony, you indicated some of the things that 
were done in improvements. But having come a little late, I 
wondered if you can restate for me what is the way forward 
here, how are we making improvements, how will the mistakes 
that have been made not be repeated?
    General Johnson. Yes, Senator.
    Weaknesses that we noticed, that we found in KBR, or the 
contractor, early on, included--it was really with the entire 
program, the process, requirement escalation, uncontrolled, not 
centralized, not validated appropriately. The contractor's 
business systems were not capable of expanding to handle the 
volume of workload, dollarswise, personnelwise, cost-
estimationwise, to provide us the information we needed. There 
was fraud that had occurred in the system, in the contractor's 
efforts.
    We instituted several actions to take control of that and 
try to fix the problems that had occurred. Oh, and, 
additionally, at the time that I took command, we had 55 task 
orders worth about $14 billion that were undefinitized. I 
assume you know what ``definitization'' means.
    Senator Martinez. No.
    General Johnson. Okay. What that means is that we had not 
properly structured the statement of work to say specifically 
what the contractor was responsible to do. So, and it goes back 
to, probably, the comments about the contractor taking on a 
workload and giving himself a workload. Without a definitized 
contract, if he's asked to do something in support of a 
commander, he may elect to do that, because there are not the 
parameters in the process that should be. We had 55 of those 
that we had to work through.
    Award Fee Boards had not been conducted at all. Now, that's 
to the contractor's credit, and we need to give them credit for 
executing this program for more than a year without an Award 
Fee Board, and carrying, on their own books, a total of about 
$1.1 billion worth of Government bills, and continuing to 
execute. Accounting for property was not where it should have 
been. As I mentioned earlier, fraud.
    The actions we took--and, frankly, this was with Mr. 
Bolton's help, Mrs. Ballard, and these gentlemen at the table, 
because when I took command and we started identifying these, 
of course, as with any military process or Government process, 
you have to validate the reasons why you need people, why you 
need the resources that you're asking for. By asking the DCMA, 
the DCAA, and the AAA to go in the field and look at these, 
they began to validate the problems that I just mentioned to 
you. But we didn't wait for that to start taking action.
    We appointed a senior contracting official, Jim Loehrl, who 
eventually was promoted to SES and became the LOGCAP director 
to run the program. We established a requirements review 
rocess, in conjunction with the field, and, later on, with the 
help of AAA's recommendation to General Casey, a Requirements 
Board, and a division was set up inside the Multinational 
Force-Iraq over there, to help scope the requirements.
    We took KBR to task, establishing a process to review their 
business systems over and over. To the credit of DCMA and DCAA, 
they've brought those business systems to an acceptable range. 
Frankly, that's what stuck us with giving them a fairly high 
award fee. I was not comfortable with it, but the fact is, 
their business systems were acceptable, and their technical and 
managerial performance in executing the mission in the field, 
frankly, was as close to flawless as you could have for a 
contractor. We couldn't argue that. So, given the procurement 
rules, they earned their award fee; it was not given to them. 
In fact, on each one of the Award Fee Boards, Mr. Loehrl went 
to theater more than 11 times, he sat down with commanders. 
Before the award-fee approving official signed the letter, I 
reviewed it. I made personal phone calls and visits, myself, to 
the field. Most of the negative comments about KBR, frankly, 
came from our own personal staff about their accounting systems 
and their contracting processes, but it was that they were 
unacceptable, they just weren't where we had wanted them to be.
    To the credit of Bruce Stanski, when we leaned on him 
pretty hard, he replaced his entire mid-level management, to 
include some senior vice presidents, so that we would have a 
much better relationship and a more responsive organization to 
our requests.
    We completed definitization, with a lot of help from Mrs. 
Ballard. I called her the ``Lady with the Chains.'' She beat us 
until we got it done. We finished that up between November 2004 
and March 2005, and got those definitized. In the process of 
doing that, with the help of Mr. Reed's folks, we looked at the 
DFAC's problems, where the costs had been inflated. We 
negotiated down to a point--and we used our should-cost 
analysis, our own independent Government estimates, to 
determine what we were going to pay KBR, and we disallowed $55 
million of the costs. That's just the way that went.
    We currently have in process about--we've had to spend the 
costs of over $288 million as a result of those audits. We've 
disapproved that $55 million. We've only allowed $183 million 
of the $288 million. We're giving them the opportunity to go 
out and provide the appropriate justification that will meet 
the audit standards to pay them. If they don't do it, we'll use 
our own independent Government estimate to determine what they 
should be paid, or not.
    We have completed the Award Fee Board process, as I 
mentioned. We established property controls. We established a 
board to manage contractor-acquired property. That board 
decides where the property will go, because, in many cases, as 
was mentioned earlier, KBR bought excess property. What had 
happened, frankly, early in the process, military commanders 
said, ``I'm going to do this.'' Of course, we had political 
decisions that reversed some of those more aggressive actions 
that they were going to go take, and they had bought property 
and trucks to execute those missions, and, of course, they were 
excess. Because of task orders, moving equipment or personnel 
from one task order to another, it's like moving equipment or 
personnel from one contract to another, it requires an 
accounting system that works, it requires changing the plans, 
and so forth. KBR was trying to get their business systems 
acceptable, so they were reluctant to do that, because every 
time they did it, it would cause more problems, and we'd put 
them back to task.
    As a result of that, what we did was collapse many of the 
task orders that were supporting the forces into a major task 
order. We started that out with 59. That evolved to 89, and now 
139. What that allowed them to do was have all of that 
capability on one task order, so moving people around became 
very easy to do, so we wouldn't have an overage on one task 
order and a shortage on another task order of personnel and 
equipment. We do that with the Requirements Board and the 
contractor--the Equipment Board.
    Of course, to the credit of good people on the ground--Paul 
Cerjan, Remo Williams, and other folks--they identified to us, 
even before it became public knowledge, that they had some 
individuals who had committed fraud and criminal activity. When 
they did that, we engaged the Criminal Investigation Division 
of the Army, verified those, and we took those folks to task. 
Four out of six have been indicted, and four out of the six 
have been convicted. Again, we created an ``Alpha Contracting'' 
process, we call it, where we bring the requiring activity in 
theater, the contracting officer, the DCMA, the DCAA, and we 
bring all those folks into a room together, because we're 
having these estimating-system problems in estimations from KBR 
that were, frankly, where they were trying to meet commanders-
in-the-fields' requirement probably more than they should have. 
We come up with agreements on the price. That has saved us, in 
fiscal years 2004/2005, the estimated cost as $10 billion to 
execute the operations in Iraq. We got that down to $4 billion.
    Senator Martinez. From $10 to $4 billion?
    General Johnson. Yes, sir.
    Senator Martinez. I know my time is expired, but I'd just 
like a quick question here.
    At some point, you went to a fixed price on the 
subcontracts, from a cost-plus basis?
    General Johnson. That's correct.
    Senator Martinez. When was that?
    General Johnson. That was after we finished the 
definitization process, and we did the independent cost 
estimates for the DFAC. What we found, that we would be better 
off with a fixed price, and we negotiated that with KBR and got 
it done.
    Senator Martinez. Has that realized in cost savings, as 
well?
    General Johnson. Yes. I think DCAA said around $200 
million--Mr. Reed?
    Mr. Reed. Yes, that's correct.
    Senator Martinez. My time is expired. Thank you very much.
    Chairman Levin. Just to fill in one blank that I didn't get 
on Senator Martinez's question, when was that change made? What 
year and month?
    General Johnson. For the fixed-price piece?
    Chairman Levin. Yes.
    General Johnson. That was, what, March?
    Mr. Reed. December.
    General Johnson. December?
    Chairman Levin. Of what timeframe?
    Mr. Reed. December-March timeframe, I think.
    General Johnson. Right, when we were doing the 
definitization.
    Chairman Levin. Of what year?
    General Johnson. 2004--early 2005, I think.
    Mr. Reed. 2005.
    General Johnson. Yes, that's right.
    General Johnson. Early 2005.
    Chairman Levin. Thank you.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman. I have to 
preside at 1 o'clock, so I'll be short.
    Anybody on the panel, the auditors or the other witnesses, 
are any of you ever aware of any punishment that a contractor 
has received for instructing their employees not to tell about 
waste, fraud, and abuse? Any punishment for retaliation against 
a whistleblower that works for any of these contractors? [No 
response.]
    None? [No response.]
    Are you aware of any investigations that have been 
undertaken concerning protecting the whistleblowers? Not 
Government whistleblowers that work for the Government, but 
whistleblowers that work for these contractors?
    Mr. Reed. I would speak of one issue. Certainly, if we 
needed to interview employees relevant to an audit that we were 
conducting, and those employees were not made available to us 
to answer our legitimate and reasonable questions, then we 
would certainly disallow those costs and not reimburse them, 
and perhaps even take some other action, like referring it for 
investigation.
    The more difficult issue is, I think, when you want a 
general availability to people which is not tied to a specific 
audit in question, where you get this--you can't really dispute 
the fact that they caution their employees, who they feel may 
not understand the issues and the facts correctly, to go 
through the proper channels of their management to talk to us.
    Senator McCaskill. There is a law on the books about 
protection of whistleblowers that work for contractors. Is 
there any requirement in any of the contracts that you all are 
involved in that law, along with a promise of anonymity and a 
phone number, be given to every employee hired by that 
contractor?
    Mr. Reed. I don't know if that's a provision of this 
particular contract, or----
    Senator McCaskill. Don't you think that would be a great 
idea?
    Mr. Reed. It's the law, so--and I'll tell you, we have 20 
ongoing investigation, criminal types; half of those are the 
result of the whistleblower. They are protected.
    Senator McCaskill. They're the best. Having done this for a 
while, the very best information you get--and particularly in 
this environment, because I refuse to believe that many of the 
people hired by these companies aren't Americans first, just 
like all of you are. When they're over there, and they're 
watching trucks being burned, and they're watching people 
sitting around doing no work, they want to tell someone, 
because they're not making the plus on the cost-plus. They want 
to tell, and I want to know, are they handed a card when they 
go to work for this contractor under these contracts that they 
can put in their wallet that says, ``You are protected under 
the law, your anonymity will be protected, it would be--your 
boss would be punished, and here is a number you can call''--is 
that happening right now with our defense contracts?
    Mr. Bolton. I don't believe so, but I'll take that for the 
record.
    [The information referred to follows:]

    The Federal Acquisition Regulation (FAR) Subpart 3.9--Whistleblower 
Protection for Contractor Employees implements 10 U.S.C. 2409 and 41 
U.S.C. 251. This allows any employee of a contractor who believes that 
he or she has been discharged, demoted, or otherwise discriminated 
against may file a complaint with the Inspector General of the agency 
that awarded the contract. FAR Subpart 3.9 also addresses the 
procedures for investigating complaints and remedies. The maximum 
penalty for violation is complete compensation for damages to the 
employee. This can include rehiring, back pay, employment benefits, 
attorneys' fees, or other fees that were lost or otherwise reasonably 
incurred by the whistleblower throughout the course of bringing the 
complaint regarding the reprisal to the head of the agency. Defense 
contractor employees seeking whistleblower reprisal protection must 
report allegations directly to the Department of Defense (DOD) 
Inspector General (IG). There is no known requirement provided in the 
contracts that would require contractors to provided written notice of 
whistleblower protection to its employees. However, the Defense Federal 
Acquisition Supplement Subpart 203.7002, requires the use of a clause 
(252.203-7002) in solicitations and contracts expected to exceed $5 
million, except when performance will take place in a foreign country. 
Clause 252.203-7002 (Display of DOD Hotline Poster) requires the 
following:

          (a) The contractor shall display prominently in common work 
        areas within business segments performing work under DOD 
        contracts, DOD Hotline Posters prepared by the DOD Office of 
        the Inspector General.
          (b) DOD Hotline Posters may be obtained from the DOD IG, 
        ATTN: Defense Hotline, 400 Army Navy Drive, Washington, DC 
        22262-2884.
          (c) The contractor need not comply with paragraph (a) of this 
        clause if it has established a mechanism, such as a hotline, by 
        which employees may report suspected instances of improper 
        conduct, and instructions that encourage employees to make such 
        reports.

    Therefore, through the use of the above clause, contractor 
employees should have visible access to the DOD IG hotline phone number 
for reporting fraud, waste, abuse, mismanagement, and reprisals.

    Mr. Bolton. Again, I'll say, not only this contract, since 
we're talking to LOGCAP, we've had several criminal 
investigations--and General Johnson mentioned 4 of those--the 
20 that are ongoing right now--and there may be more--half of 
those are because of the whistleblower.
    Senator McCaskill. Right
    Mr. Bolton. They are protected. So, people do know about 
it.
    Senator McCaskill. But we've heard from whistleblowers--I 
think you heard Senator Dorgan talk about it--that were 
banished to Fallujah, that were told that they were not allowed 
to do this, or they would be terminated, or they would be 
punished. It's bad enough, hard enough, I mean, we heard the 
story of the Government employee who's been demoted after being 
a whistleblower--it's hard enough for us to protect the 
whistleblowers that work for the Government. Is it one step 
removed and much more difficult to protect whistleblowers that 
work for a private contractor. I think if we want that flow of 
information, and if we're serious at all about holding down 
costs under these circumstances, particularly in these 
environments, I think we have an affirmative duty to make sure 
that every one of those employees understands that they're 
protected and how much we would appreciate knowing the waste, 
fraud, and abuse that they are witnessing, day in and day out.
    Frankly, I haven't even had time today to talk about the 
stories I've heard from my friends who have come back from over 
there. The unit where the people that were trained on food 
service were told that what they were supposed to do at times 
of meals--they took turns--some of them sat around, but some of 
them took turns standing at the door just doing the counter for 
KBR. Now, they were trained to work in the kitchen, they were 
trained to be cooks, but, instead, what they did is they stood 
outside the door of the dining facility with a counter, and 
their job was to make sure KBR got all the money they were 
entitled to.
    Now, I haven't even had time to get into all that, but I do 
think the protection of these whistleblowers in the private 
sector is something that we are ignoring. I don't think we're 
taking it seriously enough. I would certainly appreciate it--
and I'll follow up with this, and I hope the committee will 
follow up with this, with Secretary Gates--it wouldn't be hard 
to do this, to require our contractors to give that information 
to everybody who works for them.
    Mr. Ernst. Senator, could I make a comment, please?
    Just for a point of reference, DCMA, we have a Contract 
Integrity Center, and we do annual fraud awareness and things 
of that type, and whistleblower protection, for our folks. It's 
interesting that periodically we do get hits on our Web site 
from contractor employees raising issues. Of course, we refer 
each hit to the appropriate authorities at that point in time 
when it comes in.
    Senator McCaskill. I bet there's a lot more out there. But 
think about how you feel. You're working for this private 
contractor, they're paying your salary, you're not sure what's 
going to happen to you if you say anything. I think that the 
environment is not conducive for us getting the best 
information. We can save, I think, hundreds of millions of 
dollars if we just take that simple step, letting them know 
that they're protected, and then following up and protecting 
them if there's a retaliation. I'm hopeful that we will follow 
up on this hearing for this Government employee that was 
demoted, because if we don't hold people accountable that 
demote whistleblowers, we're in a world of hurt. Frankly, after 
this hearing, I will tell you, I think we're in a world of 
hurt, and I can understand why the DOD has been on the GAO 
high-risk list since 1990.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator McCaskill.
    I just have one additional question, and then I'll call on 
Senator Thune to see if he has any additional questions.
    This is to you, Mr. Reed. In your prepared statement, you 
state that the DCAA audits of Iraq contracts have recommended 
reductions in the proposed LOGCAP contract of about $1.9 
billion, there was excessive billings of $1.9 billion. Does 
that sound right?
    Mr. Reed. The $1.9 billion is the correct amount, it 
includes both billings and proposed costs.
    Chairman Levin. All right. So, that $1.9 billion in costs 
that have been billed and proposed costs, both.
    Mr. Reed. That's correct.
    Chairman Levin. Okay. Now, the negotiated price reductions 
have been $600 million, is that correct?
    Mr. Reed. That's correct.
    Chairman Levin. Which leaves $1.3 billion which has either 
been paid or is still at issue. Is that correct?
    Mr. Reed. That's correct.
    Chairman Levin. Of that $1.3 billion, how much of that has 
already been paid, approximately?
    Mr. Reed. Let me see if I can--if I may restate, just for a 
moment, to get it straight in my own mind. Of the $1.9 billion, 
$1.1 billion has been negotiated.
    Chairman Levin. Does that mean paid?
    Mr. Reed. Yes.
    Chairman Levin. Okay.
    Mr. Reed. Or allowed in the price----
    Chairman Levin. Or allowed?
    Mr. Reed.--and ultimately----
    Chairman Levin. It would be--it's allowed.
    Mr. Reed.--and, ultimately, to be paid.
    Chairman Levin. Okay. To be paid, or has been paid, $1.9 
billion.
    Mr. Reed. That's correct.
    Chairman Levin. Okay.
    Mr. Reed. So, of the $1.9 billion, $1.1 billion has been 
negotiated, of which----
    Chairman Levin. Well, don't----
    Mr. Reed.--$600 million----
    Chairman Levin.--say ``negotiated,'' if you don't mind. Use 
the word that is more accurate for us, which is----
    Mr. Reed. Accepted.
    Chairman Levin.--it's accepted, it's allowed.
    Mr. Reed. Accepted.
    Chairman Levin. Okay. Yes.
    Mr. Reed. $1.1 billion has been resolved. They've allowed 
$500 million, and disallowed $600 million of that $1.1 billion. 
No?
    Chairman Levin. I don't think so, not according to our 
numbers.
    Mr. Reed. Perhaps I should submit that for the record, 
because I----
    Chairman Levin. No, I think we ought to go----
    Mr. Reed.--think we're getting all----
    Chairman Levin.--through it now.
    Mr. Reed.--confused here.
    Chairman Levin. Let's go back to the $1.9 billion you have 
recommended should not be allowed. Start with that.
    Mr. Reed. Okay.
    Chairman Levin. You've recommended $1.9 billion be 
disallowed. Is that correct?
    Mr. Reed. We started off with $1.9 billion that we said----
    Chairman Levin. You've recommended that should be 
disallowed.
    Mr. Reed. It should not be accepted in prices or paid.
    Chairman Levin. Right. It should not be accepted, $1.9 
billion.
    Mr. Reed. Right. Of the $1.9 billion----
    Chairman Levin. How much has been paid or allowed? $1.1 
billion--that's what you just said, I think.
    Mr. Reed. I believe what I'm saying is, to the best of my 
recollection, of the $1.9 billion, $1.1 billion of those 
exceptions have been addressed, and $600 million of the $1.1 
billion has----
    Chairman Levin. No, of the $1.9 billion----
    Mr. Reed.--not been allowed.
    Chairman Levin.--of the $1.9 billion.
    Mr. Reed. Of--$700 million of the $1.9 billion is still 
outstanding.
    Chairman Levin. Okay. Here we go. $700 million is still 
outstanding.
    Mr. Reed. Right.
    Chairman Levin. $600 million has been--is not going to be 
allowed--they've agreed would not be paid, and----
    Mr. Reed. Okay, but----
    Chairman Levin.--one-point-----
    Mr. Reed.--may I--let me just take one more shot.
    Chairman Levin. Go ahead.
    Mr. Reed. Okay. We started with $1.9 billion of exceptions.
    Chairman Levin. Which you've recommended should not be 
paid.
    Mr. Reed. Which we recommended should not be paid.
    Chairman Levin. Right.
    Mr. Reed. Negotiations have taken place. Issues have been 
resolved on $1.1 billion of those exceptions----
    Chairman Levin. Okay.
    Mr. Reed.--leaving $800 million still to be addressed.
    Chairman Levin. Okay. Of the $1.1 billion that has been 
resolved, how much has been resolved in favor of the 
contractor, how much resolved in favor of the Government?
    Mr. Reed. In favor of the Government, $600 million----
    Chairman Levin. Okay.
    Mr. Reed.--of the $1.1 billion----
    Chairman Levin. Yes.
    Mr. Reed.--has been sustained----
    Chairman Levin. Okay.
    Mr. Reed.--as a disallowance.
    Chairman Levin. Right. That leaves $500 million has been 
allowed.
    Mr. Reed. Correct.
    Chairman Levin. Okay. Got it.
    What is the normal average typical resolution of these 
recommendations of yours to disallow costs? Does it typically 
come out around two-thirds?
    Mr. Reed. Yes, it does. Over time, and in hundreds of 
reports, it comes out to about two-thirds.
    Chairman Levin. About two-thirds. So far, it's about 55 
percent has been----
    Mr. Reed. Approximately, yes.
    Chairman Levin. So far, in terms of what's been resolved, 
these disputed, it's below the long-term average, in terms of 
the Government prevailing.
    Mr. Reed. Yes, but I would caution that when you compare an 
average over----
    Chairman Levin. I agree.
    Mr. Reed.--over years, with one specific action--there's a 
lot of variability in these----
    Chairman Levin. I understand.
    Mr. Reed.--settlements and individual actions.
    Chairman Levin. I'm sure--these are a lot of individual 
actions in this $1.9 billion, is it not?
    Mr. Reed. Yes.
    Chairman Levin. Okay.
    Senator Thune.
    Senator Martinez. No----
    Chairman Levin. I'm sorry, Senator Martinez. Forgive me. 
Mel, I apologize. I'm so used to seeing John Thune there for 
the morning, I called on Senator Thune.
    Senator Martinez.
    Senator Martinez. Not a problem, sir. Thank you, but, no, I 
have no further questions.
    Chairman Levin. Thank you.
    Okay. I want to thank our witnesses for a number of things. 
Obviously, this is a hearing which is a very, very important 
hearing, going into a contract which has been a matter of huge 
concern because of the lack of competitive pricing which 
results from this contract going to one contractor instead of 
to multiple contractors who would be able to provide some 
competition when it comes to the tasking orders, which is what 
counts.
    We've gone through, this morning, facts that show that the 
costs which have been--and the estimated costs by this 
contractor which have been provided to the Government have been 
overstated, overpriced, inflated, that there's been waste of 
taxpayers' dollars, and there's been unsupported claims by this 
contractor.
    Obviously, this is a very disturbing situation. Many of you 
have spent a good deal of time trying to correct it. We thank 
you for those efforts to correct these flaws. We thank you for 
your efforts to provide services to our troops at a fair cost.
    But we still have, with this contract, what I am afraid has 
been true, which is, they've gotten treatment which they should 
not have been given, which was too favorable when it comes to 
what they've been allowed, what they've been allowed to get 
away with, and what they've denied us, which is the 
documentation so that we can do the proper auditing in a prompt 
fashion. So, we end up by saying we're not going to end here, 
by a longshot.
    To each of you, and to your agencies, you've been 
cooperative with the committee, and we thank you for that. To 
each of you, those of you, particularly, who have devoted so 
much of your time to try to straighten this out and to try to 
get a fair deal for the Government, we are grateful to those of 
you who have spent a great deal of your time in doing that.
    To those, particularly in your agencies, that are out there 
on the front line and--we commend them for their willingness to 
take those risks. We know that the provision of the services 
themselves has been not only satisfactory, but, in many cases, 
exemplary out in the field. We've witnessed that ourselves in 
our visits.
    But what we also have witnessed is something which is 
totally unacceptable, and that is overcharging, overpricing, 
overstating, inflated costs for services which are good 
services, but still, because of the costs which they've charged 
us, we cannot accept that, even for a good service. If you get 
a good automobile and you're satisfied with it, you still don't 
want to be overcharged for that automobile, or anything else. 
It's inexcusable that we have a company that's tried to get 
away with it, and has gotten away with too much. At the same 
time, they and their people have provided, in many cases, 
services under very difficult circumstances.
    Both things are true, and we're grateful for part of it, 
and we're very, very unwilling to accept the excesses and the 
abuses and the waste just because, in the process, our soldiers 
have been given some damn good meals under some very difficult 
circumstances.
    So, that's where it sits. Senator Martinez, would you like 
to add a comment?
    Senator Martinez. Mr. Chairman, I think you adequately 
expressed a lot of the concerns and frustrations. I also 
believe that it's important for us to keep in mind the 
magnitude and scope of the project, which is enormous, and the 
length of time involved. So, I think, from that standpoint, 
it's also important to keep some perspective on the difficulty 
ahead, and thank all of the witnesses for their participation 
today and the work that they're doing on behalf of the American 
people and to serve our Armed Forces, and particularly those in 
harm's way.
    Chairman Levin. Thank you very much, Senator Martinez.
    We, again, thank our witnesses for their appearance and for 
their cooperation with this committee, which has been 
consistent. We will stand adjourned.
    [The information provided by Senator Dorgan follows:]
      
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
        
    [Questions for the record with answers supplied follow:]
            Questions Submitted by Senator Edward M. Kennedy
                         contract mismanagement
    1. Senator Kennedy. Major General Johnson, in your testimony, you 
stated that the Logistics Civil Augmentation Program (LOGCAP) has grown 
rapidly from a value of ``several million'' dollars per year to over $5 
billion per year today. I am concerned that this exceptional cost 
growth calls into question the validity of the original competition for 
the contract and arguably amounts to a cardinal change. At any time, 
did the Army discuss this cost growth and the potential need for a new 
competition?
    General Johnson. The growth of this program is within the scope of 
the awarded contract, which is directly tied to the number of major 
conflicts that could occur each year (two major conflicts and one minor 
conflict per year). The contract was intentionally structured to allow 
for rapid growth and flexibility to support unknown future 
contingencies. Nonetheless, as the program grew and began to strain the 
resources of a single contractor, the Army in 2004 took action to 
identify various methods of increasing contractor support and to assess 
the risks involved with various strategies. This involved developing an 
acquisition strategy for LOGCAP support with multiple contractors 
competitively responding to global requirements for urgent support. 
This strategy was discussed with industry, and with senior Army 
leadership to obtain input and to refine and select a future strategy 
for LOGCAP. Because of the breadth and depth of the program, a thorough 
analysis was performed and the final strategy determined in 2006. This 
strategy resulted in a separate LOGCAP IV Planning contract, which was 
awarded in February 2007, and the multiple LOGCAP IV Performance 
contracts, which are anticipated to be awarded in June 2007.
    [Update--The Army announced on June 27, 2007 that it had awarded 
LOGCAP IV Performance contracts to three companies. The three companies 
are DynCorp; Fluor; and Kellogg, Brown, & Root, (KBR).]

    2. Senator Kennedy. Secretary Bolton and Major General Johnson, the 
Army chose to select a single awardee under the LOGCAP III contract. 
Please provide any and all documentation laying out the justification 
for that decision. Was there any discussion on making other awards as 
the size of the contract grew?
    Mr. Bolton and General Johnson. There is no specific documentation 
justifying awarding a single contract on LOGCAP III. In late 2000 and 
early 2001, the Army developed the acquisition approach to award the 
LOGCAP III contract. There was discussion about the number of contracts 
to award on LOGCAP III. Prior and recent experience on LOGCAP II 
revealed there were sporadic small operations requiring LOGCAP support, 
resulting in workload that did not support more than one LOGCAP 
contractor. Based on that limited workload, the decision was made to 
award and maintain only one LOGCAP III contractor, and not pay to 
sustain multiple contractors. Since the LOGCAP III contract was 
structured as a series of 1 year options, the Government had the 
ability to bring on additional contractors or replace the LOGCAP III 
contract, as performance or workload warranted. As LOGCAP III 
requirements grew to support troops in Afghanistan and Iraq, the Army 
in 2004 began looking at ways to expand the number of contractors 
supporting LOGCAP. This resulted in solicitations being issued in 
August 2006 to replace LOGCAP III with multiple LOGCAP IV performance 
contractors.

    3. Senator Kennedy. Major General Johnson, in your testimony you 
mentioned that one of the improvements made during contract performance 
was the definitization of all ``over-age'' task orders. Please provide 
a list of all task orders that fits these criteria with a brief 
description of the goods or services to be provided under them, all 
not-to-exceed figures during the life of the task order, final value, 
and the number of days each task order was undefinitized.
    General Johnson. Between November 2004 and March 2005, we 
definitized 46 task orders of which 42 were over-aged. The high tempo 
of operations resulted in numerous new combatant command requirements 
and changes necessitating immediate placement of LOGCAP task orders. 
This resulted in our placing a priority on awards rather than 
definitizing actions. As of July 6, 2007, there are no undefinitized 
contractual actions.
    The over-aged task orders are identified in the following 
spreadsheet.
      
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    4. Senator Kennedy. Major General Johnson, for all undefinitized 
task orders, please provide a separate spread sheet giving a brief 
description of each task order, its value, and the number of days it 
was undefinitized.
    General Johnson. Between November 2004 and March 2005, we 
definitized 46 task orders of which 42 were over-aged. As of July 6, 
2007, there are no undefinitized contractual actions.
    The referenced definitized task orders are identified in the 
following spreadsheet.
      
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    5. Senator Kennedy. Major General Johnson, did the Army ever 
unilaterally supply missing terms to any undefinitized task orders, and 
if so, did the contractor ever challenge such action through the 
disputes process?
    General Johnson. No unilateral terms or definitizations were ever 
forced upon the contractor. There were no challenges through the 
disputes process.

    6. Senator Kennedy. Major General Johnson, please describe in 
greater detail the Joint Acquisition Review Board (JARB) and the 
Coalition Acquisition Review Board (CARB).
    General Johnson.
Acquisition Review Boards (JARB, CARB, Super-Coalition Acquisition 
        Review Board (SUPERCARB))
    In Kuwait, Iraq and Afghanistan, the leadership maintains a strict 
approval process for all requirements, to include those executed under 
the LOGCAP contract. Every new requirement that exceeds $50,000 must be 
validated by an Acquisition Review Board (JARB and CARB) and approved 
by a general officer. This approval process also includes internal 
purchases or actions executed by KBR. Requirements that exceed $10 
million must go through further scrutiny (SUPERCARB) and be approved by 
a centralized review board in Kuwait. No requirement is funded unless 
commands gain the recommendation of these boards and final approval at 
the general officer level. While not a funding process, these review 
boards review the proposed funds to ensure they are appropriate for the 
type of work to be awarded.
    Joint Acquisition Review Board
          The JARB is a requirements validation process held in Iraq 
        that reviews Combat Support/Combat Services Support (CS/CSS) 
        requirements for supported units. The board ensures the 
        requirements are consistent with and necessary to support 
        operations
    Coalition Acquisition Review Board
          The CARB is fundamentally the same as the JARB but reviews 
        requirements associated with acquisitions for Kuwait/
        Afghanistan.
    Super-Coalition Acquisition Review Board
          If a cost estimate associated with a requirement is over $10 
        million for Iraq, Kuwait or Afghanistan, the packet must go to 
        Coalition Forces Land Component Command (CFLCC) for the 
        ``SUPERCARB'' review and approval, basically a JARB process at 
        a higher level of command.

    No requirement is funded unless the customer obtains the 
recommendation of these boards and final approval of general officer 
level leadership.

    7. Senator Kennedy. Major General Johnson, is cost reasonableness a 
factor for determining appropriate award fees? If so, how is that 
factor used to determine award fees?
    General Johnson. First of all, the size of the award fee pool is 
established based on estimated task order costs, which are negotiated 
on each task order. The size of the award fee pool is not based upon 
actual cost. Cost reasonableness is considered as a part of this 
process.
    Second, the award fee criteria have always considered cost control 
as a significant factor (40 percent of the overall assessment). The 
cost control factor includes assessment of a number of cost control 
measures such as the contractor's ability to provide proper cost 
estimates, cost tracking, cost avoidance measures, and cost 
reasonableness, all taken in the context of the contingency 
environment.

    8. Senator Kennedy. Secretary Bolton, in your testimony, you stated 
that ``the dynamics of logistics civil augmentation support 
significantly changed from anything we've seen.'' I am concerned that 
this ``significant change'' coupled with the exceptional cost growth 
calls into question the validity of the original competition for the 
contract and arguably amounts to a cardinal change. At any time, did 
the Army discuss this cost growth and the potential need for a new 
competition?
    Mr. Bolton. The growth of LOGCAP support is within the scope of the 
contract, which is tied to the number of major conflicts that could 
occur each year. See the discussion in the response to question #1.

    9. Senator Kennedy. Secretary Bolton, Congress has a clear 
preference for multiple awards when the Government issues Infinite 
Delivery-Infinite Quality (IDIQ) contracts. Cost reimbursement 
contracts are one of the least desirable contract types available. 
Would it negatively impact the Army's mission if Congress prevented the 
use of cost reimbursement task orders under single award IDIQ contracts 
for services valued over $100 million?
    Mr. Bolton. No. Unless specifically authorized by Congress, all 
Army contracts must comply with applicable statutes including those 
involving military construction.
                                 ______
                                 
             Questions Submitted by Senator Robert C. Byrd
                         contract mismanagement
    10. Senator Byrd. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, with the 
pending relocation of Halliburton corporate headquarters to the Middle 
East, have adequate measures been taken to ensure that the records of 
KBR, Inc. will remain available and accessible for current and future 
congressional oversight and other investigations?
    Mr. Reed. Yes, we believe adequate measures are in place to ensure 
access to KBR, Inc. records. Prime contractors are obligated and 
accountable for performing in accordance with the terms and conditions 
of their U.S. Government contracts. The terms and conditions of a 
Department of Defense (DOD) prime contract apply regardless of changes 
to the prime contractor's organization. Corporate reorganizations or 
relocations of corporate headquarters or business units do not affect 
the applicability of the contract's terms or diminish the 
responsibilities of the prime contractor. For example, the contract 
clause that provides the Government with access to records of 
negotiated contracts (FAR 52.215-2, ``Audit and Records-Negotiation'') 
remains applicable.
    The ``Audit and Records-Negotiation'' clause requires the prime 
contractor to maintain records and make them available to the 
Government for examination, audit, or reproduction until 3 years after 
final payment under the contract or any longer period required by 
statute or by other clauses of the contract. This clause provides for 
Government access by not only the Government contracting officer and 
authorized representatives of the contracting officer (normally Defense 
Contract Audit Agency (DCAA)), but also by the Comptroller General of 
the United States or an authorized representative. The Comptroller 
General is given access to and the right to examine any of the 
contractor's directly pertinent records involving transactions related 
to the contract or its subcontractors. The Inspector General also has 
statutory authority to gain access to contractor records under the 
Inspector General Act of 1978, as amended.
    There would be significant impact if Halliburton decides to become 
organized under the laws of Dubai. However, it is our understanding 
that action by the company to merge with or acquire domestic companies 
would be subject to review by the Treasury Department's Committee on 
Foreign Investments in the United States.
    Mr. Ernst. The Halliburton corporate headquarters is not relocating 
to the Middle East. This has been misreported. Halliburton is expanding 
its presence in the Middle East and is relocating certain key 
executives to Dubai to focus on development of the Middle East market. 
This will have no affect on the availability of KBR records.
    Mr. Fitzgerald. To date, we haven't encountered any problems with 
access to KBR records and we don't anticipate future problems with 
access to KBR records as a result of the pending relocation of 
Halliburton corporate headquarters to the Middle East. Our LOGCAP audit 
work focuses on evaluating Army policies, processes, and controls. When 
we need information from KBR we go to the procuring contracting officer 
(forward or rear) to make arrangements to obtain it. This is done under 
the auspices of contract clauses.

    11. Senator Byrd. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, do you 
have any concerns related to Halliburton's divestment of KBR and your 
agencies' continued ability to audit KBR, Inc.'s activities during the 
course of the LOGCAP contract?
    Mr. Reed. Halliburton's divestment of KBR should have no impact on 
our ability to audit KBR, Inc. or the LOGCAP contract. Regardless of 
the divestiture, KBR must maintain all appropriate contractor records 
and make them available to the Government for examination and audit.
    Mr. Ernst. I have no concern with our continued ability to audit 
KBR activities after the divestiture as our access to records should 
improve since only KBR records will now be required for audit. However, 
Halliburton records will still be required for the settlement of costs 
incurred prior to the divestiture of KBR by Halliburton.
    Mr. Fitzgerald. To date, we haven't encountered any problems with 
access to KBR records or personnel and we don't anticipate future 
problems despite Halliburton's divestiture of KBR. Our LOGCAP audit 
work focuses on evaluating Army policies, processes, and controls. When 
we need information from KBR we go to the procuring contracting officer 
(forward or rear) to make arrangements to obtain it. This is done under 
the auspices of contract clauses.

    12. Senator Byrd. Mr. Fitzgerald, when were Army auditors first 
stationed on the ground in Iraq and why were they not in Iraq earlier?
    Mr. Fitzgerald. U.S. Army Audit Agency (USAAA) auditors were first 
permanently stationed on the ground in Iraq in May 2005 to audit LOGCAP 
operations related to Operation Iraqi Freedom. Since May 2005, we have 
had a continuous presence on the ground in Iraq. Intermittently during 
the period June 2002 through August 2003 USAAA personnel operated in 
deployed environments in Uzbekistan, Afghanistan, Turkey, and Kuwait to 
audit LOGCAP operations in support of Operation Enduring Freedom and 
Operation Iraqi Freedom. Additionally, auditors were on the ground in 
Baghdad intermittently during calendar years 2004 and 2005 while 
performing three audits of the Commander's Emergency Response Program/
Quick Response Fund.

    13. Senator Byrd. Mr. Fitzgerald, do policies exist regarding the 
deployment of Army auditors to the field during military engagements 
that involve contractors?
    Mr. Fitzgerald. There are no specific Army policies dealing with 
the deployment of Army auditors during military engagements that 
involve contractors. However, USAAA personnel have historically 
deployed with our troops to audit Army and/or contractor operations 
dating back to the Vietnam War. Currently, USAAA's authority to operate 
in a deployed environment is supported in Army Regulation 36-5 
(Auditing Service in the Department of the Army dated 16 December 
1991). The regulation specifies that USAAA has unrestricted access to 
Army operations. For joint operations, such as Operation Iraqi Freedom, 
we also coordinate our audit coverage of joint activities and non-Army 
DOD activities with the DOD Inspector General's Office.

    14. Senator Byrd. Mr. Fitzgerald, should those policies be reviewed 
in light of the experience with the LOGCAP contract?
    Mr. Fitzgerald. Army Regulation 36-5 has served USAAA's purposes 
over the years with regard to operating in a deployed environment. I 
believe, however, that my staff could deploy more timely and 
efficiently if operation plans recognized the need for audit controls 
and oversight early in contingency operations. We are in the initial 
stages of exploring options as to how this can best be accomplished, to 
include making USAAA part of operation plans for engagements so that 
our deployed role and related logistical support requirements can be 
recognized and addressed from the outset of an engagement. In a similar 
vein, based on our recent experiences with Hurricane Katrina, we are 
working with the Army Corps of Engineers to enhance our ability to 
deploy rapidly in the event of a natural disaster.

    15. Senator Byrd. Mr. Reed and Mr. Ernst, does the DCAA have 
sufficient auditors to provide detailed oversight of the billions of 
dollars in contracts across the DOD?
    Mr. Reed. Yes, DCAA has sufficient auditors to fulfill our contract 
audit mission for the Department. While it is true that the volume of 
contracts for which we have responsibility has grown, DCAA has made 
good use of new technologies (i.e., automated working papers, enhanced 
communications infrastructure) to increase auditor productivity.
    Mr. Ernst. Defense Contract Management Agency (DCMA) believes that 
DCAA has sufficient auditors to accomplish their mission.

    16. Senator Byrd. Mr. Reed and Mr. Ernst, do your auditors have 
sufficient authority to receive all of the support they require?
    Mr. Reed. Yes, DCAA has sufficient authority to obtain the access 
to required contractor books and records. The FAR clause at 52.215-2 
provides our auditors with the primary authority for access to 
contractor records. This clause must be inserted in all negotiated 
contracts except those: (i) not exceeding the simplified acquisition 
threshold; (ii) for commercial items; or (iii) for utility services. 
This clause provides the contracting officer's representative with the 
authority to examine and audit contractors' books, records, documents 
and other evidence and accounting procedures and practices, regardless 
of form (e.g., machine readable media such as disk, tape, et cetera) or 
type (e.g., data bases, application software, data base management 
software, utilities, et cetera), sufficient to reflect properly all 
costs claimed to have been incurred or anticipated to be incurred in 
performing cost-reimbursement, incentive, time-and-material, labor-
hour, or price-redeterminable contracts. For the most part, contractors 
are cooperative and support the Agency's audit efforts. However, the 
Agency does have procedures in place to pursue instances where 
contractors deny or unreasonably delay our access to records.
    Mr. Ernst. Current Federal Acquisition Regulations provide 
sufficient authority to auditors.

    17. Senator Byrd. Mr. Reed and Mr. Ernst, do audits that uncover 
fraud or mismanagement receive the attention and action from the 
Service Chiefs that they deserve?
    Mr. Reed. DCAA has in place standard procedures for reporting 
potential fraud and mismanagement. To date, DCAA has made more than 20 
referrals related to Iraq reconstruction effort to the appropriate 
investigative agencies. To the best of our knowledge, the investigative 
agencies have taken these referrals seriously, and the referrals are 
actively being worked.
    Mr. Ernst. DCMA believes these audits receive the attention and 
action from the Service Chiefs that they deserve.

    18. Senator Byrd. Secretary Bolton, in light of some of the issues 
that have been raised at today's hearing, what problems or challenges 
do you see with the increasing reliance upon civilian contractors to 
provide essential support services to the U.S. military, particularly 
to those units and personnel deployed overseas?
    Mr. Bolton. Contractors have played a vital role in supporting U.S. 
Forces since the Revolutionary War. The highest number was during World 
War II when an estimated 734,000 contractors supported the warfight. 
While the U.S. Army is less than 40 percent of its size of 35 years 
ago, the sustained strategic demand is unprecedented. The use of 
contractors is a force multiplier enabling the U.S. Army to keep 
soldiers engaged in core U.S. Army missions.
    The Army is working tirelessly to balance the need to use 
contractors to provide needed services while using soldiers and Army 
civilians to perform inherently governmental functions. I see three 
primary challenges with the Army's increasing reliance on civilian 
contractors:

          (1) The perception that we pay unreasonable and unallowable 
        costs. We do not. All incurred costs are reviewed prior to 
        payment and all costs are audited;
          (2) The perception that contract fraud is prevalent overseas. 
        It is not. For example, the Special Inspector General for Iraq 
        Reconstruction (SIGIR) testified before a Subcommittee of the 
        House Judiciary Committee that contracting fraud in Iraq is a 
        relatively small component of the overall multi-million dollar 
        financial investment in the reconstruction of Iraq; and,
          (3) The belief that that there are insufficient Government 
        personnel to perform proper contract administration and to 
        monitor contract performance. The Army has been stretched 
        beyond its capacity to support current contingency deployment 
        demands. The Army supports contingency operations with only 285 
        military contracting officers and civilian volunteers. To 
        address the military support we have designed deployable 
        modular contracting brigades. We are looking at recruitment 
        bonuses and retention bonuses to increase our cadre of 
        deployable civilians.

    19. Senator Byrd. Secretary Bolton, how should procedures be 
revised considering the U.S. military's experience with contractors in 
Iraq?
    Mr. Bolton. Considering the U.S. military's experience with 
contractors in Iraq, we need to collectively recognize the role and 
importance of Government contracting personnel to execute, administer, 
and oversee contracts for contractor support services and 
reconstruction. Procedures for training the operational and Big ``A'' 
Army in acquisition (from requirements generation to contractor 
performance for sustainment) must become a staple of military education 
and operational planning. Lessons learned in Iraq and future conflicts 
must be captured, and we are in the process of capturing and 
documenting these lessons in order to form future operational plans and 
to include contracting in training exercises. We go to war with 
logistics capability and we must doctrinally and procedurally recognize 
that we must also go to war with the business side of soldier support.
    The Army is in the final stages of staffing of two guides for 
contingency contracting--an OCONUS Contingency Contracting Guide and a 
CONUS Guide for Supporting Emergencies within the United States. 
Additionally, documenting systems and processes in the development of 
Joint Publication 4-10, Contracting and Contractor Management in Joint 
Operations, and the updating of Army Regulation 715-9, Contractors 
Accompanying the Force, will be useful tools for contracting officers.
                                 ______
                                 
             Questions Submitted by Senator Daniel K. Akaka
                           army audit agency
    20. Senator Akaka. Secretary Bolton, in April 2006, the Army Audit 
Agency (AAA) reported that DOD remains insufficiently staffed and 
inadequately organized to provide effective oversight for the LOGCAP 
contract. The AAA report states:

          ``[T]he current management structure over LOGCAP operations 
        in the Iraq area of operations isn't conducive to ensuring the 
        program is managed in the most effective and efficient manner. 
        . . . Specifically, contracting activities in the theater have 
        been fragmented and too understaffed. . . . [O]perational 
        fragmentation among the key management offices, along with the 
        dispersed location and high turnover of personnel responsible 
        for managing work under the contract, make it difficult to 
        ensure new requirements are fully necessary or being obtained 
        in the most cost-efficient manner. . . .''

    During the hearing, we discussed the shortage of contract oversight 
personnel in the DOD. Please provide your plans to address this 
shortage, as well as the potential loss of significant numbers of 
additional acquisition personnel due to retirement in the upcoming 
years. If the current fiscal year 2008 DOD budget request does not 
provide sufficient resources for you to address shortages of 
acquisition personnel, please indicate what level of resources is 
needed.
    Mr. Bolton. The Army does not have a sufficient number of 
contracting officers and contract administrators. Currently, there are 
5,563 1102s (contract specialist/contracting officer) within the Army. 
This number is expected to decrease by 38 percent to 3,472 by 2011. 
This projected loss is due to both retirement, and attrition (migration 
to private industry, BRAC actions, regional hiring difficulties due to 
lack of PCS funding, et cetera). Since 1995, the workforce numbers have 
decreased by 53 percent, while the workload actions have increased by 
278 percent. The decrease in 1102s has resulted in a lack of contract 
administration (which has been validated by several outside audits), 
and a lack of contract planning. New hires (1102s) of 418 per year 
would result in 0 percent growth over the next 5 years and new hires 
(1102s) of 529 per year would result in 10 percent growth over the next 
5 years. The shortage is particularly severe for the Army's population 
of 285 military contracting officers who support operations in Iraq and 
Afghanistan. The Army, along with the other military services, has been 
unable to provide the total number of Level II and III certified 
military contracting officers requested by commanders in Iraq and 
Afghanistan. This shortage is also evident within the DCMA which, on a 
few occasions, was forced to turn down requests from the Army for the 
administration for theater support contracts citing a lack of 
resources.
    Over recent years the size of the contracting workforce has been a 
flat line while our workload has increased, in some cases as much as 
200 percent or more. We are working within the Army to determine how to 
resource our personnel requirements. We are also looking at our 
civilian intern programs, and at our civilian recruitment and retention 
practices. As the Army increases its strength, I have tasked my 
Director, Acquisition Career Management, and Deputy Assistant Secretary 
of the Army for Policy and Procurement to examine the manning 
requirements in order to increase our 285 military contingency 
contracting officers and our deployable civilian workforce. Last, I am 
reexamining our utilization of CORs. The Army has already taken steps 
to improve oversight of contract services by requiring trained CORs and 
a Quality Assurance Surveillance Plan on service contracts greater than 
$2,500.

    21. Senator Akaka. Secretary Bolton, regarding the work environment 
that contract oversight people in Iraq must deal with, and the 
difficulty with sending civilian personnel into that environment, I 
have serious concerns regarding the problems DOD is experiencing. 
Specifically, the Department is relying heavily on auditors to find 
contracting problems after the fact rather than direct oversight by the 
contracting officer's technical representatives (COTRs). In my opinion, 
it is inefficient to wait until an audit finds a problem to deal with 
contractor performance problems because the audit is performed too late 
to ensure that the contractor meets the needs of the commanders in the 
field. Because of this, should the Department consider having a cadre 
of Active-Duty military COTRs who can handle oversight of contracts 
supporting our troops in combat zones?
    Mr. Bolton. I agree that we must have the ability to provide 
``real-time'' oversight of contractors supporting our troops in combat 
zones. The Army has maintained a proactive approach in identifying and 
rectifying contract discrepancies and does not rely solely on audits to 
discover problems. In addition to military who are COTRs, we work 
closely with the DCMA and the DCAA reviewing contractor performance as 
it occurs and auditing vouchers at the time of submission. We have a 
cadre of Contingency Contracting Teams and we are developing a new 
approach to form and sustain a cadre of emergency essential Department 
of the Army civilians to provide contracting and oversight in combat 
zones. We are also assessing our practices to identify, train, and 
utilize our COTRs.

                         contract mismanagement
    22. Senator Akaka. Secretary Bolton, a cost-plus award fee contract 
removes all risk from the contractor, and places it on the Government. 
The only incentive for the contractor to control costs is supposed to 
be the award fee. However, since the award fee is a percentage of the 
contract costs, the contractor really does not have any incentive to 
control costs, especially if the contractor gets the maximum fees 
regardless of their performance. The only defense for the Government is 
diligent contract oversight. It is pretty clear from the numerous audit 
findings of AAA and the DCAA that diligent oversight has been lacking. 
Why did the Army not use a fixed-fee type contract for LOGCAP?
    Mr. Bolton. The LOGCAP III contract has multiple contract types, 
including firm fixed price, that can be used when there are firm 
requirements that are not susceptible to changes in scope, quantity, or 
schedule. Since the predominant effort under LOGCAP III has involved 
supporting contingency operations which are subject to continuous 
changes in requirements, it is unrealistic to negotiate firm fixed 
prices for this type of effort. As a result, the Government must bear 
some of the risk through the use of a cost-type contract. We use 
incentives such as award fee or incentive fee to encourage better 
performance or cost control on larger dollar orders. For smaller dollar 
orders, we can use cost plus fixed fee to avoid the administrative 
burden associated with collecting information and evaluating 
performance IAW established fee criteria, as well as holding boards to 
determine award fee amounts. In those cases the administrative costs 
far outweigh the amount of a fixed fee. To clarify: fee is paid on 
negotiated costs, not actual costs and the contractor's efforts to 
control costs will be reflected in award fee decisions and past 
performance ratings. As a result, the contractor has little incentive 
to run up costs. For cost plus award fee actions, a portion of fee 
related to cost control can be withheld if it is shown they did not 
reasonably control costs.
    Furthermore, the contractor is not entitled to recover certain 
types of costs (those identified as ``unallowable'' under the FAR), and 
the contractor can only recover costs that are deemed ``reasonable'' 
under the circumstances.

    23. Senator Akaka. Secretary Bolton, why did the Army not select 
more than one contractor, in order to create competition?
    Mr. Bolton. In late 2000 and early 2001, the Army was developing 
the acquisition approach to award the next LOGCAP III contract in late 
2001. There was discussion about the number of contracts to award on 
LOGCAP III. Multiple awards were considered. However, through almost 4 
years of LOGCAP II at that time, there had been sporadic small 
operations requiring LOGCAP support, resulting in workload that did not 
support more than one LOGCAP contractor. Based on that limited workload 
experienced at that time, the decision was made to award and maintain 
only one LOGCAP III contractor, and not pay to sustain multiple 
contractors. The LOGCAP III contract was competitively awarded.

    24. Senator Akaka. Secretary Bolton, why is one contract used for 
all logistical support work, instead of breaking it down into smaller 
contracts, some of which could probably be fixed-price contracts?
    Mr. Bolton. As noted in the answer to the previous question, the 
low activity on the LOGCAP II contract did not indicate a need for 
multiple contracts on LOGCAP III. The concept of a contingency contract 
at that time was to have a single contractor quickly respond to 
requirements and be responsible for overall management of all the 
logistics support work. LOGCAP support was envisioned to be for short 
periods of time, not for long, drawn out conflicts.
    The Army has examined LOGCAP requirements to determine if they can 
be broken into smaller contracts, and in some cases, tasks were removed 
from the LOGCAP contract and awarded through other contracts. Due to 
the fluid and changing operational environments in Iraq and 
Afghanistan, it has been difficult to identify requirements that could 
be structured in smaller tasks and awarded on a fixed-price basis. 
Furthermore, operational commanders find it even more difficult to deal 
with multiple contractors in the area of conflict and they highly 
desire having one ``belly-button'' to turn to.

      logcap funds for both military construction and procurement
    25. Senator Akaka. Secretary Bolton, last year the Army informally 
proposed language to the congressional defense committees to 
retroactively authorize the use of LOGCAP funds for both military 
construction and procurement during the four previous fiscal years, 
2003 through 2006. The committees did not support or enact such 
legislative relief. Does the Army support such a proposal today, to 
retroactively authorize actions that may be under Anti-Deficiency Act 
(ADA) or other investigations?
    Mr. Bolton. No, the Army does not support such a proposal today. 
Since last year, the Army has worked with Central Command (CENTCOM) and 
Office of the Secretary of Defense Comptroller to document and request 
contingency construction authority for all construction projects that 
exceeded the threshold for use of operation and maintenance (O&M) 
funds. The Army has also put into place more stringent policies and 
procedures on the use of O&M funds for military construction projects 
and the procurement of equipment to prevent exceeding the expense/
investment threshold. Army funds for construction using the LOGCAP 
contracting vehicle is approved only if the total project cost is 
within the threshold of $750,000 or $1.5 million if the project is in 
support of life, health, and safety. If the project exceeds this 
threshold the scope of work is reduced to ensure the project does not 
exceed the statutory limitation, or the requirement is processed as a 
Contingency Construction Authority (CCA) request (if applicable), or 
the project is cancelled for LOGCAP and forwarded to the U.S. Army 
Corps of Engineers for processing. Also, equipment purchases required 
to provide services under LOGCAP contracts that require procurement 
funding are identified and the contractor must obtain approval prior to 
commitment of any expenditure for any equipment that requires 
procurement funding. Additionally, we have provided clarifying guidance 
on the funding of leases of equipment.

    26. Senator Akaka. Secretary Bolton, does the Army believe the use 
of a LOGCAP contract as an acquisition method circumvents other 
statutes applicable to military construction?
    Mr. Bolton. No. Unless specifically authorized by Congress, all 
Army contracts must comply with applicable statutes including those 
involving military construction.

                          contractor oversight
    27. Senator Akaka. Secretary Bolton, in your statement, you discuss 
the large numbers of contractor personnel supporting our troops under 
this contract. Numerous potential problems with the contract have been 
identified due to the lack of adequate contractor oversight. A large 
number of security contractors are also supporting operations in Iraq, 
although I believe you indicated that it was under other contracts. 
However, contractor security personnel do not operate under the 
military's rules of engagement, and therefore, pose a potential risk to 
our counterinsurgency operations since they could potentially take 
actions that could inflame tensions. Given the problems with contractor 
oversight for security personnel, what is the DOD doing about this 
problem?
    Mr. Bolton. We address contractor oversight of personnel, including 
security personnel by requiring contractors to abide by the terms and 
conditions in their contracts. DOD contracts in Iraq, Afghanistan, and 
Kuwait require contractors and their subcontractors, authorized to 
accompany U.S. Armed Forces deployed to those regions; to comply with 
all applicable U.S., host nation, and third country national laws. They 
are also required to comply with policies and directives of the 
Combatant Commander.
    DOD contractors, to include private security contractors, are 
required to comply with the rules for use of force, which have been 
established by the U.S. CENTCOM. Private security contractors in Iraq 
must also observe U.S. CENTCOM arming policies and host nation 
licensing and registration requirements. The performance work statement 
and terms and conditions of private security contracts specifically 
prohibit the contractor from engaging in any offensive operations, such 
as military combat maneuvers and counterinsurgency operations. Private 
security contractors are limited to defensive actions to protect 
persons and/or property identified in their contracts.

                        army oversight of logcap
    28. Senator Akaka. Mr. Fitzgerald, in your prepared statement, you 
stated that the Army is adequately managing the LOGCAP contract. This 
finding is somewhat difficult for me to understand given all of the 
problems that have been identified with this contract. The AAA reported 
on April 25, 2006, that ``Overall, we concluded that the current 
management structure over LOGCAP operations in the Iraq area of 
operations isn't conducive to ensuring the program is managed in the 
most effective and efficient manner.'' Both the AAA and the DCAA have 
identified hundreds of millions of dollars of overcharges and potential 
fraud in this contract. Please explain what criteria is being used to 
determine the adequacy of the Army's management of this contract.
    Mr. Fitzgerald. Our criteria for evaluating how well the Army 
managed the LOGCAP contract hasn't changed. However, the two referenced 
conclusions we drew were based on a different body of evidence and 
different timeframes. In our summary report A-2006-0022-ALL, dated 28 
November 2005, we concluded that ``Overall, the Army's management of 
the LOGCAP contract was adequate.'' This conclusion, which was 
referenced in my prepared testimony, was based on our body of field 
work and tests we conducted during June 2002-February 2004 in the 
United States and in Turkey, Uzbekistan, Kuwait, and Afghanistan. 
During this timeframe, the scope of LOGCAP operations was much smaller 
than it grew to be during March 2004 and beyond. Notwithstanding our 
overall conclusion, our summary report and the six preceding supporting 
reports contained numerous recommendations to improve management of 
LOGCAP operations. In report A-2006-0099-ALL, dated 25 April 2006, we 
concluded that ``. . . the current management structure over LOGCAP 
operations in the Iraq area of operations isn't conducive to ensuring 
the program is managed in the most effective and efficient manner.'' 
Unlike the prior conclusion, this conclusion was based exclusively on 
field work conducted in Iraq. The fieldwork and tests supporting this 
conclusion were completed during May-July 2005.

    29. Senator Akaka. Mr. Fitzgerald, it is clear that the Army is 
relying on auditors to identify contract problems after the fact, 
rather than direct oversight by COTRs to manage the contract. 
Management of contracts through the audit process does not seem to be 
an effective management process. At what point would the Army's 
management of the contract be evaluated as inadequate?
    Mr. Fitzgerald. The Army is using USAAA's audit work as one of the 
tools it has to help improve the management and internal control 
structure of the LOGCAP contract. All recommendations we made dealing 
with the LOGCAP contract for both Operation Enduring Freedom and 
Operation Iraqi Freedom were designed to improve both current and 
future operations, processes, and controls. We view our work as 
complementary to the work performed by COTRs and other contracting and 
resource management officials who are working on various aspects of the 
LOGCAP contract.

       investigations of potential anti-deficiency act violations
    30. Senator Akaka. Secretary Bolton and Mr. Fitzgerald, for over a 
year now, the Army and the Office of the Secretary of Defense 
Comptroller have been conducting investigations of potential ADA 
violations concerning the use of operations and maintenance funds for 
military construction and procurement activities through the LOGCAP in 
Iraq. These investigations are in part resultant from a memo from the 
DOD Office of General Counsel dated March 7, 2006, to the Office of the 
Legal Counsel to the Chairman, Joint Chiefs of Staff. This committee 
was briefed last October that up to $600 million in operations and 
maintenance funds may have been carried out through LOGCAP for 
unauthorized and illegal investment items and leases. In the Army's 
internal review and investigation, at what organization or level of 
contracting review did the failure to conform to Federal Acquisition 
Regulations occur?
    Mr. Bolton and Mr. Fitzgerald. Since the committee was briefed in 
October 2006, the Army's Office of the ASA (FM&C) has been conducting 
an investigation into potential ADA violations concerning the use of 
operations and maintenance funds for military construction and 
procurement activities. While our investigations are nearing 
completion, no ADA violations have been identified to date (see 
question #32 for status). To improve our overall funds controls 
concerning the expenditure of O&M, thus minimizing and/or eliminating 
the potential for future ADA violations, we have taken several 
proactive measures.
    First, all LOGCAP construction requirements are reviewed in 
accordance with DA PAM 420-11, Project Definition and Work 
Classification, by the Multi-National Corps-Iraq (MNC-I) Joint 
Facilities Review Board to ensure proper funding has been allocated to 
the project. The LOGCAP Support Officer is responsible for ensuring all 
construction projects incidental to services performed by the LOGCAP 
contractor are reviewed and approved by the MNC-I Joint Facilities 
Utilization Board (JFUB) in accordance with applicable Multi-National 
Forces-Iraq and MNC-I Fragmentary Orders and requirements management 
guidance. If the total cost of the construction project exceeds 
$750,000, ($1.5 million for construction in support of life, health, 
and safety) the construction project is not approved for LOGCAP. When 
this is the case, one of three courses of action will be taken by MNC-
I:

         Reduce the scope of work to ensure total project will not 
        exceed the statutory limitation.
         Hold the requirement and process a request for CCA.
         Cancel the project for LOGCAP and forward package to the U.S. 
        Army Corps of Engineers for processing.

    Second, the ASA (FM&C) has issued a funding memorandum that 
provides guidance to ARCENT activities to determine the type of funding 
used for specified in-theater service contracts that involve capital 
assets. Two major leasing actions were addressed: Prime Power 
Generation Equipment and Dining Facilities. The intent of the 
memorandum was to assist resource managers, contracting officers, and 
contractors alike in making better use of O&M funding for procurement 
actions particularly as they relate to LOGCAP. It provides a detailed 
discussion and analysis of the regulatory guidance impacting these 
leasing actions.
    Lastly, the ASA (FM&C) is finalizing a second memorandom that will 
provide guidance regarding the type of funding to be used for specified 
in-theater service contracts for leasing non-tactical vehicles.
    Together, the above actions significantly improve the Army's 
ability to effectively manage, account for, and control the use of O&M 
funds for which it has been authorized and appropriated by Congress for 
use in the current theater of operations.

    31. Senator Akaka. Secretary Bolton and Mr. Fitzgerald, how has the 
Army changed its policies and review processes for LOGCAP delivery 
orders to ensure the proper authority is available for the use of 
various fund sources?
    Mr. Bolton and Mr. Fitzgerald.
Acquisition Review Boards (JARB, CARB, SUPERCARB)
    In Kuwait, Iraq, and Afghanistan, the leadership maintains a strict 
approval process for all requirements, to include those executed under 
the LOGCAP contract. Every new requirement that exceeds $50,000 must be 
validated by an Acquisition Review Board (JARB and CARB) and approved 
by a general officer. This approval process also includes internal 
purchases or actions executed by KBR. Requirements that exceed $10 
million must go through further scrutiny (SUPERCARB) and be approved by 
a centralized review board in Kuwait. No requirement is funded unless 
Commands gain the recommendation of these boards and final approval at 
the general officer level. While not a funding process, these review 
boards review the proposed funds to ensure they are appropriate for the 
type of work to be awarded.
    Joint Acquisition Review Board
          The JARB is a requirements validation process held in Iraq 
        that reviews CS/CSS requirements for supported units. The board 
        ensures the requirements are consistent with and necessary to 
        support operations.
    Coalition Acquisition Review Board
          The CARB is fundamentally the same as the JARB but reviews 
        requirements associated with acquisitions for Kuwait/
        Afghanistan.
    Super-Coalition Acquisition Review Board
          If a cost estimate associated with a requirement is over $10 
        million for Iraq, Kuwait, or Afghanistan, the packet must go to 
        CFLCC for the ``SUPERCARB'' review and approval, basically a 
        JARB process at a higher level of command.
    Joint Facilities Utilization Board
          To control and manage construction, all commands have 
        established a JFUB. These boards evaluate and reconcile 
        requirements for real estate, use of existing facilities, and 
        ensure all potential construction is in line with established 
        master plans. Funding type and thresholds are also reviewed to 
        ensure that no fiscal violations occur.
    Material Requisition Review Process
          Subsequent to the review of the Acquisition Review Board 
        Approval, every requisition for supplies or services submitted 
        by KBR over $25,000 is personally reviewed and approved by the 
        Government Administrative Contracting Officer. In Iraq, those 
        requisitions that exceed $250,000 are reviewed and approved by 
        the Command Comptroller before KBR is authorized to execute the 
        procurement. Funding type and thresholds are reviewed to ensure 
        that no fiscal violations occur.

    32. Senator Akaka. Secretary Bolton, what is the status of each 
investigation?
    Mr. Bolton. Army opened five investigations. Three are now closed; 
two are still open.

    33. Senator Akaka. Secretary Bolton, when are the investigations 
expected to be completed?
    Mr. Bolton. Army expects to complete the two remaining ADA 
investigations by 30 December 2007.

    34. Senator Akaka. Secretary Bolton, what results of the 
investigation can you share with us, and what personnel actions have 
been taken as a result of these investigations?
    Mr. Bolton. Three of the five cases have been closed as ``No ADA''. 
The funding was either determined appropriate (e.g., within the $1.5 
million limitation for life, health, and safety) or the proper funding 
was obtained.

    35. Senator Akaka. Mr. Fitzgerald, were you asked to take part in 
these investigations? If so, can you describe your role and any 
findings or observations you may have about the investigations?
    Mr. Fitzgerald. I wasn't asked to take part, and USAAA didn't 
participate in the referenced investigations.

                             recompetition
    36. Senator Akaka. Mr. Ernst, it appears that the contract has been 
used beyond its intended scope of two regional conflicts of up to 
25,000 troops each. Does DOD have a policy that requires recompetition 
of a contract when the scope has been exceeded? If so, under what 
conditions does the Department require the contract to undergo a new 
competition?
    Mr. Ernst. Recompetition of the contract is not a function 
delegated to DCMA. This question would be more appropriately addressed 
to the Army Sustainment Command.

    37. Senator Akaka. Mr. Ernst, was that threshold exceeded in this 
case, and if so, why did the contract not undergo recompetition?
    Mr. Ernst. Recompetition of the contract is not a function 
delegated to DCMA. This question would be more appropriately addressed 
to the Army Sustainment Command

                               award fees
    38. Senator Akaka. General Johnson, the Army has awarded 88 percent 
of the available award fees to KBR, Inc. This level of award fees is 
particularly surprising considering that technical performance is only 
a basis for 30 percent of the fee. Contractor management is also 30 
percent, and cost performance is 40 percent.
    How is it that the Army has awarded KBR, Inc. 88 percent of the 
available award fee despite numerous audit findings of overcharges 
totaling hundreds of millions of dollars, inadequate accounting and 
estimating systems, inadequate cost justifications, and KBR, Inc.'s 
reluctance to provide appropriate supporting documentation and 
information? Please provide a detailed and specific justification of 
how the contractor was evaluated at this level of award fee.
    General Johnson. The purpose of the award fee process is twofold: 
One is to evaluate the contractor's performance and determine how much 
fee to award; the second is to provide feedback to the contractor on 
areas of strength the Government would like the contractor performance 
to continue, and to identify areas the Government would like to see 
improvement.
    The award fee board and award fee determining official take all of 
the contractor's performance, both positive and negative, into 
consideration. The contractor's performance, above the minimum required 
by the contract, is assessed for earning award fee. Weaknesses noted 
during performance are balanced with the total effort performed by the 
contractor to arrive at the overall rating, and award fee amount in 
accordance with the award fee plan. Any areas for improvement are 
described in the award fee letter so the contractor recognizes where 
they must do better to earn a higher percentage of fee.
    The 88 percent of award fee paid is the total of award fee paid on 
over 150 individual task orders. It does not relate to any single task 
order. Contractors generally start off receiving a lower percent of 
their award fee and get better over time as they focus on the areas 
noted for improvement during the award fee boards. KBR has not earned 
award fee at the 88 percentage at every award fee board. The four award 
fee boards conducted earlier in the life of the contract (2005) 
resulted in award fees of 81 percent to approximately 83 percent. 
Specific areas noted for improvement during that timeframe were KBR 
business systems, relationship with DCAA, cost reporting, quality 
control, and subcontractor management. Strengths reported were 
outstanding technical performance considering the hostile and ever 
changing environment of operations, teaming relationship with 
Government personnel (KBR worked shoulder to shoulder with the 
soldiers), identification and resolution of problems, cost avoidance 
measures, emphasis on safety and reduction of accidents (resulting in 
decrease to DBA insurance rates), and inventory accountability.
    The award fee board noted that improvements were occurring during 
this timeframe in the cost reporting/recording system. Also DCMA and 
DCAA were working closely with KBR on their business systems. Since 
early in 2007, all KBR business systems have been determined acceptable 
by DCMA.
    Any contract overcharge is a concern to the U.S. Government. Due to 
some instances where DCAA has identified overcharges, KBR has not yet 
been authorized to direct bill even though their billing system has 
been approved. DCAA continues to be responsible for reviewing every 
cost voucher submitted by KBR to ensure that costs billed are 
allocable, allowable, and reasonable prior to payment. The contractor 
error rate on previous submissions was tracked so any trends could be 
analyzed. The error rate of 2-3 percent is very low and not indicative 
of major systemic problems.
    The inadequate cost justifications relate to DCAA audit of KBR 
initial proposals. The challenge in a contingency environment is that 
proposals are required to be prepared very quickly, and the contractor 
may not have enough information to fully develop the rationale to 
support costs. This is unlike the normal CONUS contracting process 
where a contractor would have 30 to 60 days to gather information to 
support their proposal. The purpose of the DCAA review is to note any 
questioned or unsupported portions of a proposal. The DCAA findings are 
brought to the contractor's attention and, during negotiations are 
either supported with more information and accepted, or not accepted as 
part of the definitized price. The questioned costs noted in the DCAA 
review are tools used by the contracting officer during the negotiation 
process. As noted by DCAA, over $600 million has been ``saved'' during 
this process, proving that the process is working.

    39. Senator Akaka. General Johnson, does the Army not consider 
numerous cases of overcharges as characteristic not only of poor cost 
performance, but of poor contractor management?
    General Johnson. The Army is always concerned about overcharges. It 
also recognizes many factors come into play, including the environment 
where the support is provided, the urgency, and the magnitude of the 
requirement. Because of the operational tempo and rapid growth of the 
LOGCAP, KBR's estimating system and available proposal preparation 
resources were stressed. This resulted in poorly prepared and supported 
proposals for the initial task orders support OIF and OEF. Overall 
proposals and estimating systems have improved with the assistance and 
oversight of the DCAA and the DCMA. It is not unusual for DCAA to 
question costs on initial proposals. When we require quick turn around 
proposals where frequent changes of requirements exist it is also not 
unusual to have even more costs questioned. In the end, the contractor 
must provide support for their proposed costs. Government negotiators 
address all the DCAA questioned and unsupported costs in coming to a 
final negotiated agreement.

                           logcap evaluation
    40. Senator Akaka. General Johnson, during the hearing you stated 
that you believe that the KBR, Inc. contract is cost effective relative 
to a military infrastructure that provides the same services. Has a 
detailed evaluation been performed based on the actual costs 
encountered with the LOGCAP contract? If so, please provide that 
evaluation.
    If not, please provide your basis for saying that it is cost 
effective. In addition, please provide a breakdown of the contract 
costs to date, including how much of the costs were overhead, labor, 
profit, and equipment/materiel. Please also provide in addition the 
Army's costs to issue and oversee the contract, including costs of the 
associated audits.
    General Johnson. A Congressional Budget Office study dated October 
2005, Logistics Support for Deployed Military Forces, was prepared for 
the Senate Armed Services Committee. It looked at the cost of 
contracted services on LOGCAP Task Order 59 and compared it to the CBO 
estimate for military units to provide the same services. Task Order 59 
was the task order to provide LOGCAP support to Army units in most of 
Iraq. The CBO report states on page 89 of the report that ``In all of 
the alternative combinations, the total cost of using Army units, 
including the cost of units in the rotation base, was higher than the 
costs incurred under the LOGCAP contract.'' And the last paragraph on 
the same page, ``CBO concluded that the overall result of this 
analysis--that total costs for acquiring logistics support from the 
LOGCAP contractor would be lower than the cost of providing those 
services using Army units--would be unlikely to change if the split 
between recurring and non-recurring costs differed from the weighted 
average for the 10 sites.''
                                 ______
                                 
                Questions Submitted by Senator Jim Webb
                   cost to contract out food services
    41. Senator Webb. Secretary Bolton, the purpose of these questions 
is to obtain a better understanding of the real cost to contract out 
food services and other logistical measures as part of the Army's 
LOGCAP. During the hearing, you stated that the cost of a soldier's 
meal served by KBR under its contract was $3.05. What is the total cost 
to provide such contracted messing (per soldier, per day) when all 
costs under the food-services element of the contract with KBR are 
considered (e.g., construction of mess hall, contracted cooks and other 
personnel, shipping of pre-packaged food, et cetera)--in other words, 
what is the real cost to feed a soldier each day?
    Mr. Bolton. LOGCAP services include providing the dining facility, 
and preparation and service of food. It does not include purchasing, 
shipping, or transporting the food; this is a function of the Defense 
Logistics Agency.
    In 2006, for CENTCOM AOR, the average cost for LOGCAP III to 
prepare and serve a meal was $3.36. This includes all costs associated 
with providing food services; i.e. labor, materials, procuring 
services, equipment, leasing dining facilities, property management, 
and travel to mobilize/demobilize personnel.

    42. Senator Webb. Secretary Bolton, what has been the total cost of 
laundry services, using similar accounting methods?
    Mr. Bolton. The cost of laundry services under LOGCAP III, since 
inception to July 6, 2007, against 148 task orders, is $380,993,968. 
This includes all costs associated with providing laundry services; 
i.e. labor, materials, procuring services, equipment, property 
management, and travel to mobilize/demobilize personnel.

    43. Senator Webb. Secretary Bolton, how much funding was obligated 
last year for food services and laundry services in the CENTCOM area of 
responsibility under the provisions of this contract? How much is 
funded this year?
    Mr. Bolton. The 2006 cost paid for laundry services was $77,323,652 
and for food services was $595,392,194.
    The 2007 estimated cost (as of July 6, 2007) for laundry services 
is $75,614,455 and for food services is $620,587,085. This includes 
actual costs to date and projections for the balance of 2007.
    This includes costs associated with providing laundry and food 
services; i.e. labor, materials, procuring services, equipment, leasing 
dining facilities, property management, and travel to mobilize/
demobilize personnel. However, for food services, this does not include 
purchasing, shipping, or transporting the food; this is a function of 
the Defense Logistics Agency.

    44. Senator Webb. Secretary Bolton, how many military 
servicemembers and U.S. Government civilian employees were fed last 
year under this contract? What is the estimate this year?
    Mr. Bolton. During calendar year 2006, LOGCAP provided 177,751,199 
meals. LOGCAP provides support to 93 dining facilities across Iraq, 
Afghanistan, and Djibouti feeding approximately 221,000 personnel which 
includes all military Services, coalition forces, and civilians. With 
the plus up of 20,000 military and required support personnel, the 
number of meals will also increase by approximately 10 percent during 
2007.
    The U.S. military is responsible for counting the number of 
personnel that eat in the DFACs from which the contractor identifies 
the number of meals served.

    45. Senator Webb. Secretary Bolton, how does the cost identified in 
response to questions 39 and 40 compare to other historical examples 
for the Active component (e.g., Vietnam, U.S. European Command during 
the Cold War, et cetera); please normalize for ``then-year'' dollars?
    Mr. Bolton. There is no way to accurately compare the cost of food 
and laundry services in Iraq to historical costs in Vietnam and during 
the Cold War. One complicating factor is the fact that the costs paid 
under LOGCAP do not represent the total cost for food or laundry 
services. For example, the cost of food services does not include the 
direct cost of the food, which is provided under a separate DLA 
contract, or facilities, which are paid for in a separate task order. 
When other indirect costs, such as transportation, are considered, the 
complexity of the cost comparison becomes daunting. This is 
particularly true when one attempts to compare the cost of contracted 
services, such as LOGCAP, to services which were provided by organic 
combat support units during Vietnam and the Cold War.
    A more accurate assessment of current and historical costs can be 
made by comparing specific elements of cost over time. Since labor is 
the largest cost driver in a service environment, a reasonable 
comparison can be made by estimating the incremental cost of replacing 
contracted support with combat support/combat service support units. An 
exhaustive study of this nature was published by the Congressional 
Budget Office in May 2005. In the report, titled ``Options for 
Restructuring the Army,'' the CBO concluded that increasing the force 
structure is clearly more expensive than using contracted support over 
time.
                                 ______
                                 
               Questions Submitted by Senator John McCain
                         contract mismanagement
    46. Senator McCain. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, late 
last year, in a written report, the Office of the SIGIR complained that 
KBR, Inc. refused to provide it with information such as the amount of 
people fed each day in its dining facilities and the amount of fuel 
delivered to foreign embassies in Iraq, claiming that the data was 
proprietary. This is information that KBR, Inc. keeps in support of the 
LOGCAP contract. Reportedly, last year the Army Sustainment Command 
represented that it had implemented corrective actions on this issue. 
Has KBR, Inc. provided all the information your offices have requested 
to enable you to perform your work relating to the LOGCAP contract? If 
not, on what basis has KBR, Inc. refused to supply information and how 
has it impeded your oversight and management efforts?
    Mr. Reed. DCAA has experienced mixed results. Cooperation has been 
inconsistent over time, resulting in inadequate proposals or claims, 
delays in responding to DCAA document requests, and qualified audit 
reports. Initially we gave the company the benefit of the doubt due to 
its admission of inexperienced personnel and weak business processes. 
While these were contributing factors, it is also evident that KBR 
Government compliance representatives, who are the day-to-day interface 
with DCAA auditors, have not always facilitated the audit process. We 
believe they attempt to control the flow of documents and information 
to DCAA as a means of managing the audit process and outcomes. DCAA has 
challenged this practice and generally obtained the requested 
information or a statement that the records are incomplete or missing. 
If the contractor does not provide the required information, DCAA will 
take exception to the related costs when processing contractor 
billings, and in audit reports on contractor proposals and incurred 
cost submissions.
    Mr. Ernst. To my knowledge, KBR has not refused to provide 
information to DCMA on this basis. Occasionally, KBR personnel at lower 
levels will mistakenly refuse to provide data, but once this is 
elevated to higher management levels, the refusal is revoked. I am 
aware that KBR does not always provide requested information, claiming 
difficulty in locating specific records. I do not consider this as a 
refusal and eventually most of the records are located, although the 
response is not timely and therefore it impedes the Government's 
evaluation of incurred costs.
    Mr. Fitzgerald. KBR, Inc. has provided USAAA with all the 
information and data we requested relative to the LOGCAP contract. We 
haven't encountered problems in obtaining the information needed to 
perform our audits.

    47. Senator McCain. Mr. Reed, Mr. Ernst, and Mr. Fitzgerald, has 
KBR, Inc. labeled any information proprietary that, in your view, was 
not proprietary? If so, was this a widespread practice, or isolated 
occurrences?
    Mr. Reed. DCAA does not normally review contractor information to 
ensure the proprietary markings are correct. As a matter of standard 
business practice, contractors make available proprietary information 
to DCAA to perform our contract audit function. In response, DCAA 
protects this information from any unauthorized disclosure.
    Mr. Ernst. Prior to the corrective action taken by ASC, the 
proprietary markings by KBR were too liberal and the use of the 
markings was widespread. Since the corrective action, I am unaware of 
any inappropriate markings.
    Mr. Fitzgerald. USAAA hasn't encountered problems with KBR Inc. 
withholding information because it was ``proprietary.''

    48. Senator McCain. General Johnson, what corrective actions did 
the Army implement to prevent the practice of KBR, Inc. improperly 
labeling data as proprietary?
    General Johnson. A SIGIR interim report titled ``Interim Audit 
Report on Inappropriate Use of Proprietary Data Markings by the LOGCAP 
Contract'' SIGIR-06-035 was issued on October 26, 2006. The report 
noted the SIGIR's difficulty in obtaining information from KBR due to 
the inappropriate use of markings on data. As the interim audit report 
identified, KBR was in fact inappropriately marking data as 
proprietary. The problem was brought to the attention of the LOGCAP 
Director prior to issuance of the report and the Procuring Contracting 
Officer (PCO) took immediate action to correct the problem. On 
September 20, 2006, the PCO provided written direction to KBR 
instructing them to release data requested by SIGIR that was 
inappropriately marked as proprietary. The PCO then issued a contract 
modification on October 30, 2006, directing KBR to adhere to proper 
marking requirements of law, regulation, and the contract, and 
clarified the Contracting Officer's right and intent to challenge 
improper markings. To preclude similar occurrences in the future, the 
PCO has also incorporated this language into LOGCAP IV solicitation.
    On 14 Dec 06, subsequent to the above actions, the PCO issued KBR a 
letter requesting their corporate policy and implementation plan for 
marking data with proprietary legends. This letter referenced the SIGIR 
interim audit 06-035, as well as the aforementioned modification to the 
basic contract. KBR responded on 7 Jun 07 with a copy of their latest 
procedural documents and those are undergoing careful review. Any 
inconsistencies with the contract or DOD policy will be addressed by 
the PCO.

    49. Senator McCain. General Johnson, is KBR, Inc. following the 
Army's policy? If not, what does the Army intend to do about this 
practice?
    General Johnson. On 14 Dec 06 the PCO issued KBR a letter 
requesting their corporate policy and implementation plan for marking 
data with proprietary legends. This letter referenced the SIGIR interim 
audit 06-035, as well as the modification which added new language 
addressing proprietary markings to the basic contract. KBR responded on 
7 Jun 07 with a copy of their latest procedural documents and those are 
undergoing careful review. Any inconsistencies with the contract or DOD 
policy will be addressed by the PCO. There have been no instances of 
improper markings brought to the attention of the PCO since the SIGIR 
audit report.

    50. Senator McCain. Secretary Bolton, is this practice of 
contractors improperly labeling information proprietary a larger 
problem within the defense industry?
    Mr. Bolton. No. This problem has been isolated.

    51. Senator McCain. Secretary Bolton, what is the DOD doing broadly 
to check such an unacceptable practice?
    Mr. Bolton. This problem has been isolated and has been addressed 
with the contractor on a case-by-case basis.

    52. Senator McCain. Secretary Bolton and General Johnson, according 
to a February 16, 2007, News Release from U.S. Army Sustainment 
Command, the U.S. Army awarded a $225 million planning and support 
contract for the LOGCAP IV contract. The Release further states that 
the Army will award the contracts for the actual performance of the 
combat support/combat service support services later this year.
    Under this planning and support contract, the contractor will, 
among things, develop scopes of work, prepare independent cost 
estimates, analyze the performance contractors' costs, and measure the 
other contractors' performance.
    It appears the contractor will be performing acquisition functions 
closely associated with inherently Government functions. I am concerned 
that this arrangement is or will become in the field of services 
acquisitions the equivalent of the lead systems integrator in major 
defense acquisition programs. Why did the Army decide to task a 
contractor with these activities?
    Mr. Bolton and General Johnson. It is not the intent of the program 
to have the support contractor function as a lead integrator. All 
discretionary decisions on program management remain the responsibility 
of Government officials. The support contractor will only assist 
Government staff in generating the documents you mentioned. The 
Government will review all documents to ensure they reflect the 
Government's need and determine if and how the documents will be used, 
not the contractor. The support contractor is working to assist and 
augment the Government staff. In that regard they are like support 
contractors on other large programs who assist the program office in 
various locations, but do not direct actions. It was decided that the 
program and the supported units would be better served by a single 
support contractor who understood all aspects of the program. The use 
of contractor support to a core Government staff will make it easier to 
flex the workforce as LOGCAP requirements fluctuate.
    The functions that the contractor will be performing have been 
determined to be non-governmental IAW FAR Sub-Part 7.5.
    The contract Scope of Work (paragraph 1.3) states ``It is not the 
intent of this contract to have the contractor perform inherently 
governmental functions, or to have the contractor make discretionary 
decisions for the Government relating to the program or contracted 
support. The contractor will primarily provide advice, analysis, and 
draft document submissions for Government approval.''
    The contractor has also been directed that when attending meetings, 
answering Government telephones, and working in other situations where 
their contractor status is not obvious to third parties they will 
identify themselves as contractors to avoid creating an impression that 
contract personnel are Government employees, or official 
representatives of a Governmental organization.

    53. Senator McCain. Secretary Bolton and General Johnson, did the 
Army make a written determination that appropriate military and 
civilian DOD personnel cannot reasonably be made available to perform 
the functions? Please provide the relevant written determination(s).
    Mr. Bolton and General Johnson. A specific written determination 
was not made, but the LOGCAP IV acquisition strategy clearly 
articulated the need to hire contractor support to assist and augment 
the LOGCAP Government staff. The Army does not have sufficient 
personnel available to perform the functions the LOGCAP support 
contractor will perform. For those inherently governmental positions, 
such as the LOGCAP Deputy Program Directors for Afghanistan, Iraq, and 
Kuwait, the Army has hired additional Government personnel. There is a 
requirement on services contracts to make a determination that the 
services being procured are nonpersonal. That determination, dated July 
6, 2006 and signed by the Contracting Officer, is attached. The use of 
contractor personnel in lieu of military and civilian DOD personnel for 
non-inherently governmental functions allows us to meet mission 
requirements.
      
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    54. Senator McCain. Secretary Bolton and General Johnson, how has 
the Army dealt with potential conflicts of interests? For example, if 
the planning and support contractor has a pre-existing business 
relationship with a performance contractor, how will that be dealt 
with?
    Mr. Bolton and General Johnson. The ASC legal office anticipated 
these concerns and carefully drafted extensive conflict of interest 
provisions for the support contract. This clause prohibits any 
financial interest in the performance contractors which might cause or 
give the appearance of a conflict of interest. The entire clause is 
included in answer #55, but paragraph C of that clause is included here 
as it specifically addresses this question. The support contractor is 
required to flow this clause down to their subcontractors.
    Clause H-4, Business Integrity and Organizational Conflict of 
Interest: Paragraph C. The planning/support contractor (including its 
key personnel) cannot have any actual or pending financial interest in 
the LOGCAP IV performance contractors for the period of this contract 
which might cause, or give the appearance of, a conflict with the 
performance of the requirements under this contract. Clear mitigation 
of any potential conflict must be presented to the satisfaction of the 
contracting officer. The planning/support contractor is specifically 
prohibited from performing under any of the LOGCAP IV contracts 
(resulting from solicitation W52P1J-06-R-0049) as a LOGCAP IV prime 
contractor, subsidiary, subcontractor-at any tier, vendor, supplier, 
joint venture and/or any in any other business capacity that might 
result in an OCI.

    55. Senator McCain. Secretary Bolton and General Johnson, is there 
an organizational conflict of interests clause, included directly or by 
reference, in the planning and support contract? If so, please provide 
a copy of the provision.
    Mr. Bolton and General Johnson. Yes, there is a clause addressing 
this in the LOGCAP IV Support Contract W52P1J-07-D-0010.
H-4 Business Integrity and Organizational Conflict of Interest
    A. It is anticipated that the planning services provided under this 
solicitation will require access to, and knowledge of, the proprietary 
information of the LOGCAP IV performance contractors, non-public 
Government information, pre-solicitation information, and information 
which would impair the planning/support contractors objectivity. It is 
further anticipated that the planning/support contractor will work 
closely with each of the LOGCAP IV performance contractors after 
contract award to implement the Government LOGCAP mission. While the 
planning/support contractor will not engage in any activity that is 
deemed inherently governmental, it is expected by the parties that the 
contractor will be acting in support of, and in a fiduciary 
relationship with, the Army.
    B. To maintain the integrity of the expenditure of public funds, it 
is imperative that the contractor maintain the highest degree of 
integrity and honesty, and have standards of conduct and internal 
control systems provide for:

          (1) A written code of business ethics and conduct and an 
        ethics training program for all employees;
          (2) Periodic reviews of company business practices, 
        procedures, policies, and internal controls for compliance with 
        standards of conduct and the special requirements of Government 
        contracting;
          (3) A mechanism, such as a hotline, by which employees may 
        report suspected instances of improper conduct, and 
        instructions that encourage employees to make such reports;
          (4) Internal and/or external audits, as appropriate;
          (5) Disciplinary action for improper conduct;
          (6) Timely reporting to appropriate Government officials of 
        any suspected or possible violation of law in connection with 
        Government contracts or any other irregularities in connection 
        with such contracts; and
          (7) Full cooperation with any Government agencies responsible 
        for either investigation or corrective actions.

    C. The planning/support contractor (including its key personnel) 
cannot have any actual or pending financial interest in the LOGCAP IV 
performance contractors for the period of this contract which might 
cause, or give the appearance of, a conflict with the performance of 
the requirements under this contract. Clear mitigation of any potential 
conflict must be presented to the satisfaction of the contracting 
officer. The planning/support contractor is specifically prohibited 
from performing under any of the LOGCAP IV contracts (resulting from 
solicitation W52P1J-06-R-0049) as a LOGCAP IV prime contractor, 
subsidiary, subcontractor--at any tier, vendor, supplier, joint 
venture, and/or any in any other business capacity that might result in 
an OCI.
    D. The contractor shall enter into an agreement with the LOGCAP IV 
performance contractors to ensure proper access to, and protection of, 
the LOGCAP IV performance contractors proprietary data (see FAR 9.505-
4(b)) and to establish working relationships, cooperation, and joint 
participation in meeting LOGCAP planning and CS/CSS support needs. The 
agreements shall address, at a minimum, the following:

          (1) Identify the parties and their relationship;
          (2) Identify the program involved and the relevant Government 
        contracts of the parties;
          (3) Describe contractor interfaces by general subject matter;
          (4) Specify categories of information to be exchanged or 
        support to be provided;
          (5) Give expiration date (or event) of the agreement;
          (6) State that if there is a conflict between the relevant 
        Government contract(s) and the agreement, the contract(s) 
        govern(s); and
          (7) Have an agreement to protect proprietary data, including 
        restrictions on employees.

    A copy of this agreement shall be made available to the contracting 
officer. This agreement should be concluded as quickly as possible 
after the contract awards. Failure to have this agreement in place may 
limit the work that may be awarded under this contract until such 
agreement is signed.
    E. Release of non-public information obtained under this contract, 
or use of such non-public information for purposes unrelated to the 
performance of this contract, is prohibited. Contractor shall ensure 
the return of all non-public information obtained under this contract 
prior to contract closeout.
    F. The contractor shall maintain adequate and reasonable ethics 
policies and training procedures consistent with paragraph B above and 
DFARs Part 203.70 to prevent its employees from releasing non-public 
information or gaining any financial or employment interest that may 
create a conflict with their duties under this contract.
    G. All contract personnel attending meetings, answering Government 
telephones, and working in other situations where their contractor 
status is not obvious to third parties are required to identify 
themselves as such to avoid creating the potential for confusion. The 
contractor shall ensure that all employees wear badges (whether issued 
by the Government or a separate badge provided by the company) that 
clearly put others on notice that they are contractor employees. This 
shall be evident from a minimum distance of 10 feet (whether by color, 
large letters, or other means). The contractor must also ensure that 
all documents or reports produced by contractors are suitably marked as 
contractor products or that contractor participation is appropriately 
disclosed.
    H. The intent of this provision is to prevent the improper release 
or disclosure of information, or any actual or perceived personal or 
organizational conflict of interest that might arise in the performance 
of this contract. In addition to other requirements, contractor shall 
bring any potential conflicting relationships or financial interests, 
held by the support contractor, its key employees, or subcontractors to 
the attention of the contracting officer throughout the life of this 
contract. If the contracting officer determines that an unacceptable 
conflict exists, the contractor will take the actions necessary to 
mitigate or eliminate the conflict.
    I. This prohibition will remain in effect throughout the life of 
the planning contract through final payment. Further, the contractor 
shall include this prohibition in all negotiated subcontracts (to 
exclude routine supply and service subcontracts) that it enters into.

    56. Senator McCain. Secretary Bolton and General Johnson, was this 
contract subject to full and open competition? If so, how many 
companies competed for the contract?
    Mr. Bolton and General Johnson. Yes, the LOGCAP IV support contract 
was the result of full and open competition. Two companies provided 
proposals.

    57. Senator McCain. Secretary Bolton and General Johnson, what is 
the contract type and formula for compensation?
    Mr. Bolton and General Johnson. The LOGCAP IV support contract will 
have task orders that can use the contract type that best fits the 
requirement. The contract types used on the support contract are firm 
fixed price, cost plus fixed fee, cost plus award fee, and cost only.
    The formula for compensation is to pay the negotiated firm fixed 
price or, for cost-reimbursable contracts, pay reasonable, allocable, 
and allowable costs and fees. Fees paid are based on a percentage of 
the negotiated estimated costs on cost reimbursable task orders as 
follows:

          Cost plus fixed fee order: fee will not exceed 8 percent of 
        the negotiated estimated cost.
          Cost plus award fee order: total base and award fee combined 
        will not exceed 8 percent of the negotiated estimated cost. The 
        base fee will not exceed 2 percent.

    These fees were proposed by the support contractor and accepted 
during the full and open competition for the LOGCAP IV support 
contract.
    These fee percents are contractor proprietary information and 
protected from release under FOIA and the Trade Secrets Act.

    58. Senator McCain. Secretary Bolton and General Johnson, why does 
the Army intend to limit the number of performance contractors under 
LOGCAP IV to three? Why not more?
    Mr. Bolton and General Johnson. The Army looked at the optimum 
number of contractors to provide LOGCAP performance support. The intent 
was to ensure good competition, but recognize that obtaining and 
evaluating multiple proposals extends the time to award urgent task 
orders. At the same time, the Army needs to maintain the programmatic 
portion of the LOGCAP. One of the features that makes LOGCAP more than 
just a contract is the planning and readiness posture that must be 
maintained by the LOGCAP office and performance contractors. This 
becomes more difficult and cost prohibitive as the number of 
performance contractors increases.
    To ensure competition, the LOGCAP IV performance contract requires 
each contractor to propose on every task order. The Army decided that 
receiving proposals from three very qualified LOGCAP contractors 
provides sufficient competition in this urgent award environment. More 
than three contractors would provide more competition, but the benefits 
would be marginal, if at all, and the drawbacks from delays in awarding 
task orders to provide support could be significant. Additionally, the 
Government must fund a minimum requirement for each IDIQ contract 
awarded. While this might not be a waste of resources during periods of 
high military activity, it would be an unnecessary cost during times of 
limited activity. Additional contractors also complicate issues 
associated with contractors on the battlefield, and increases 
administrative burden upon the Government to manage them.

    59. Senator McCain. Secretary Bolton and General Johnson, has the 
Army made any determination of the number of contractors available to 
perform the work?
    Mr. Bolton and General Johnson. The Army held industry days to 
discuss LOGCAP IV performance contract requirements and potential 
acquisition strategy approaches. Representatives from 80 companies 
attended, made up of both large and small businesses. Some were 
planning to be a prime contractor while others were looking for 
specific subcontract opportunities with prime contractors. Due to the 
potential size of each LOGCAP IV performance contract (up to $5 billion 
per year), the Army anticipated some contractors would team up or have 
large subcontractor teams. The industry days showed at least four to 
six large contractors with the technical and financial capability of 
performing the work. For that reason, we expected good competition for 
LOGCAP IV.

    60. Senator McCain. Secretary Bolton and General Johnson, what will 
be the contract type and the compensation regimes under these 
contracts?
    Mr. Bolton and General Johnson. Like the support contract, the 
LOGCAP IV performance contracts will include task orders that can use 
the contract type that best fits the requirement. The contract types 
available on the performance contract are firm fixed price, cost plus 
fixed fee, cost plus award fee, and cost only.
    The formula for compensation is to pay the negotiated firm fixed 
price or, for cost-reimbursable contracts, pay reasonable, allocable, 
and allowable costs and fees. Fees paid are based on a percentage of 
the negotiated estimated costs on cost reimbursable task orders as 
follows:

          Cost plus fixed fee order: fee will not exceed 10 percent of 
        the negotiated estimated cost.
          Cost plus award fee order: total base and award fee combined 
        will not exceed 10 percent of the negotiated estimated cost. 
        The base fee will not exceed 3 percent.

    These are the maximum fee percentages allowed by the Request for 
Proposal.
    The actual fee percentages will be determined at the time of the 
award of each task order subject to the limitations described above.

    61. Senator McCain. Secretary Bolton, for over a year now, the Army 
and the Office of the Secretary of Defense Comptroller have been 
conducting investigations of potential ADA violations concerning the 
use of operations and maintenance funds for military construction and 
procurement activities through the LOGCAP in Iraq. These investigations 
result, in part, from a March 7, 2006, memorandum from the DOD Office 
of General Counsel to the Office of the Legal Counsel to the Chairman, 
Joint Chiefs of Staff. This committee was briefed last October that up 
to $600 million in operations and maintenance funds may have been 
carried out through LOGCAP for unauthorized and illegal investment 
items and leases. Please provide an update on the status of each 
investigation, to include completion date, the results of the 
investigation, and any personnel actions taken as a result of the 
investigation.
    Mr. Bolton. Three of the five cases initiated thus far have been 
closed as ``No ADA'' and the Army expects to complete the two remaining 
ADA investigations by 30 December 2007. In the three cases that have 
been closed, the funding was either determined appropriate (e.g., 
within the $1.5 million limitation for life, health, and safety) or the 
proper funding was obtained.

    62. Senator McCain. Secretary Bolton, in the Army's internal review 
and investigation, at what organization or level of contracting review 
did the failure to conform to Federal Acquisition Regulations occur?
    Mr. Bolton. We have found no failure to conform to Federal 
Acquisition Regulations. Three of the five cases have been closed as 
``No ADA'' and the Army expects to complete the two remaining ADA 
investigations by 30 December 2007. In the three cases that have been 
closed, the funding was either determined appropriate (e.g., within the 
$1.5 million limitation for life, health, and safety) or the proper 
funding was obtained.

    63. Senator McCain. Secretary Bolton, how has the Army changed its 
policies and review processes for LOGCAP task orders to ensure the 
proper authority is available for the use of various fund sources?
    Mr. Bolton.
Acquisition Review Boards (JARB, CARB, SUPERCARB)
    In Kuwait, Iraq and Afghanistan, the leadership maintains a strict 
approval process for all requirements, to include those executed under 
the LOGCAP contract. Every new requirement that exceeds $50,000 must be 
validated by an Acquisition Review Board (JARB and CARB) and approved 
by a general officer. This approval process also includes internal 
purchases or actions executed by KBR. Requirements that exceed $10 
million must go through further scrutiny (SUPERCARB) and be approved by 
a centralized review board in Kuwait. No requirement is funded unless 
commands gain the recommendation of these boards and final approval at 
the general officer level. While not a funding process, these review 
boards review the proposed funds to ensure they are appropriate for the 
type of work to be awarded.

    Joint Acquisition Review Board
    The JARB is a requirements validation process held in Iraq that 
reviews CS/CSS requirements for supported units. The board ensures the 
requirements are consistent with and necessary to support operations.
    Coalition Acquisition Review Board
    The CARB is fundamentally the same as the JARB but reviews 
requirements associated with acquisitions for Kuwait/Afghanistan.
    Super-Coalition Acquisition Review Board
    If a cost estimate associated with a requirement is over $10 
million for Iraq, Kuwait, or Afghanistan, the packet must go to CFLCC 
for the ``SUPERCARB'' review and approval, basically a JARB process at 
a higher level of command.

Joint Facilities Utilization Board
    To control and manage construction, all commands have established a 
JFUB. These boards evaluate and reconcile requirements for real estate, 
use of existing facilities, and ensure all potential construction is in 
line with established master plans. Funding type and thresholds are 
also reviewed to ensure that no fiscal violations occur.
Material Requisition Review Process
    Subsequent to the review of the Acquisition Review Board Approval, 
every requisition for supplies or services submitted by KBR over 
$25,000 is personally reviewed and approved by the Government 
Administrative Contracting Officer. In Iraq, those requisitions that 
exceed $250,000 are reviewed and approved by the Command Comptroller 
before KBR is authorized to execute the procurement. Funding type and 
thresholds are reviewed to ensure that no fiscal violations occur.

    64. Senator McCain. Mr. Fitzgerald, were you asked to take part in 
these investigations? If so, can you briefly describe your role and any 
findings or observations you may have about the investigations?
    Mr. Fitzgerald. I wasn't asked to take part, and USAAA didn't 
participate in the referenced investigations.

    65. Senator McCain. Mr. Reed, a number of your reports have 
criticized KBR, Inc.'s cost estimating, accounting, and other systems. 
With respect to 2005 and 2006, has KBR, Inc. sufficiently improved its 
systems so that the inadequacies do not materially impact its cost 
control efforts? If not, what problems still remain and if problems 
remain, what is KBR, Inc. doing to remedy the remaining problems?
    Mr. Reed. Yes, our reviews have disclosed a number of estimating 
and accounting system deficiencies. While important, these deficiencies 
impact only a part of KBR's overall business systems. KBR has developed 
corrective action plans to address the system deficiencies. DCAA, in 
coordination with the responsible contracting officer, is monitoring 
the progress of the contractor's corrective action plan, and the 
systems continue to be improved.
    In the meantime, DCAA has established additional audit procedures 
to protect the Government's interest until these corrective actions are 
institutionalized. For example, DCAA performs transaction testing on 
current billings (public vouchers) to ensure the costs are accounted 
for properly (i.e.; the costs are allowable, allocable, and reasonable) 
and comply with KBR's policies and procedures.

    66. Senator McCain. General Johnson, what efforts have the Army and 
the contractor made to move from cost plus subcontracts to fixed-price 
subcontracts?
    General Johnson. KBR has been actively pursuing the use of fixed-
price subcontracts. The Government encourages this where it makes sense 
and requirements can be defined and priced. Many of KBR's subcontracts 
are fixed price with variable quantities. The fixed price is on a unit 
basis so as more, or less, of something is needed, the total price will 
change, but the unit price will not change. The DFAC pricing is an 
example of that.
    The fixed-price method saves on administrative cost oversight since 
costs have been negotiated up front. We do not encourage fixed price 
where costs cannot reasonably be forecast. The result in those cases is 
usually higher prices for higher risk, or aggressive pricing that could 
raise the contractor's risk to deliver services or products if eventual 
costs are significantly underestimated. Additionally, competitively 
awarded fixed-priced subcontracts limit the Government's visibility 
over subcontractor cost data. As such, it becomes more difficult to 
understand the exact make up of certain subcontracted prices when they 
are fixed-priced competitively awarded subcontracts.
    The downside is that there are many modifications to the KBR fixed-
price subcontracts as the scope of work on the prime contract changes 
and exceeds the agreed upon quantity or service parameters on the 
subcontract. This fixed price with variable quantity works better at 
the subcontract level, with very specific, narrow requirements on a 
subcontract, where most elements of cost can be priced and only one 
variable applies, such as quantity. It does not work well in broadly 
defined requirements, where many of the individual elements making up 
the overall cost cannot be estimated.

    67. Senator McCain. General Johnson, when was the move initiated?
    General Johnson. In discussion with DCMA, KBR has been using fixed-
price variable quantity subcontracts early and often on the contract. 
These use fixed unit costs, with the actual costs varying based on the 
quantity of services provided.

    68. Senator McCain. General Johnson, what percentage of KBR, Inc.'s 
subcontractors are now on fixed-price contracts?
    General Johnson. As of December 30, 2006, KBR had 472 active 
subcontracts. Of those, 467 or 98.94 percent, were fixed-price 
subcontracts. As noted in the response in question #66, many of these 
are fixed-price variable cost subcontracts. The fixed price is on a 
unit basis so as units are ordered, the total price will change, but 
the unit price will not change. This fixed price with variable quantity 
works better at the subcontract level, with very specific, narrow 
requirements on a subcontract, where most elements of cost can be 
priced and only one variable, such as quantity, applies.

    69. Senator McCain. General Johnson, how much in cost savings have 
been realized so far by moving to fixed-price contracts?
    General Johnson. At this time we have not calculated cost savings 
by moving to fixed-price contracts. Developing these cost savings will 
require extensive research of all of KBR's fixed-price subcontracts. 
However, even when those are identified, we believe many factors 
contribute to reduced costs, not just converting to a fixed-price 
instrument. The reasons for using a cost reimbursable vehicle is that 
requirements cannot be stabilized, which is usually the case in early 
contingency operations. There are initial inefficiencies and urgent 
actions to establish supply chains into a theater that will drive up 
costs. Once requirements become more stable, costs can be better 
estimated and a fixed-price instrument becomes more viable. There 
should be a difference in costs because the conditions have changed 
from those uncertainties requiring a cost reimbursable instrument.

    [Whereupon, at 1:06 p.m., the committee adjourned.]