TO: All KBR employees
FROM: Andy Lane, president and CEO, KBR
SUBJECT: Update on our work in Iraq & Our Unsung Heroes
Last week I visited our KBR teams on the ground in Iraq and Kuwait, and I'd
like to take this opportunity to update you on the issues we face in the
Middle East.
The U.S. military casualties in the war are approaching 1,000. As a civilian
company, we have paid an extremely high price in human terms. We've
experienced the devastating loss of 45 of our colleagues who have died in
the Iraq war, 121 have been wounded, and we are very concerned for the two
who remain missing. We have more than 30,000 employees and contractors in
Iraq and Kuwait, and they truly are unsung heroes for the jobs they are
doing. Our convoy drivers face some of the harshest and most dangerous
conditions possible in fulfilling their mission. Our employees assigned to
military and civilian bases also face significant dangers as they are
subject to frequent hostile attacks.
When the U.S. Army decided to outsource its logistics support and we won the
Logistics Civil Augmentation Program (LOGCAP) contract in 2001, we became an
integral component of these military efforts. Several front line generals
and base commanders told me what an important job we are doing and how well
we are doing it.
Initially, the contingency contract required us to support between 25,000
and 50,000 troops at multiple bases. The scope of work changed dramatically
and today we are supporting approximately 210,000 U.S. and coalition troops
and civilians at more than 60 camps in Iraq and Kuwait.
This mission is unprecedented. Both the military and contractors are facing
a unique set of logistical and security challenges, and it is important to
remember where we began. When we took on the mission, phone communications
and power were virtually nonexistent. Employees slept in makeshift
accommodations, sometimes on abandoned building rooftops. There was no
potable water, no logistical supply transport system and virtually no other
infrastructure.
Given these conditions, KBR did everything possible to get systems up and
running in an ever-changing situation. We have repeatedly acknowledged that,
given the environment in which we operate and our ever-changing role in
support of the military operation, our systems have been stretched. Where we
have identified problems with our systems, we have taken actions to fix them
and we will continue to closely monitor and adjust them as needed.
In a recent edition of This Week, Dave Lesar described the great job KBR
employees did when they appeared before the U.S. House Committee on
Government Reform in Washington, D.C. The hearing provided KBR with the
opportunity to highlight the facts about our accomplishments in Kuwait and
Iraq and discuss the challenges we face as we manage the largest civilian
force ever assembled to support the military. I'd like to update you on
several of these issues.
ONGOING GOVERNMENT AUDITS
The government audits you read about in the newspaper are part of a lengthy,
but routine, process of working for the government, and there are several
organizations involved. Part of the oversight responsibility for our work
resides with the Defense Contract Audit Agency (DCAA). It is our customers
and the Defense Contract Management Agency (DCMA) who make final judgments
and decisions about our work.
Oversight of the public's money is important. KBR's responsibility is
supplying the best services and value at the best prices possible -- often
under incredible pressure. We know that our work will continue to be the
subject of intense scrutiny, but that doesn't make it any easier.
In the end, all we ask for is a fair assessment of KBR's performance under
the difficult and challenging circumstances of operating in a war zone. With
the services we provide in the locations we're required to operate, we are a
company faced with all the risks of war.
15% WITHHOLDING ON PAYMENTS
Our customers believe they have the right to withhold 15% of our future
billings on the LOGCAP, RIO and Project and Contracting Office (PCO) Oil
contracts until we have definitized our outstanding cost proposals. KBR
disagrees with this position, because we feel the Army is misinterpreting
the Federal Acquisition Regulation (FAR) clause that pertains to
withholding. That said, we are continuing to work with our customers to
resolve this issue.
The size and scope of our tasks in Iraq are unprecedented and the process is
complex and constantly changing. We are working with our LOGCAP client, the
Army Materiel Command (AMC), to reach a definitization schedule, and we will
continue to meet the requested timeframe. We expect to work through all
remaining issues in a cooperative manner with the AMC.
On the RIO contract, we have submitted the required definitization proposals
on our task orders, and on the PCO Oil contract we are current in the
submission of cost estimates. The Army Corps of Engineers and the PCO, our
clients, have begun withholding payments to KBR on invoices related to the
undefinitized portion of the contract. We continue to work with our clients
and the DCAA to finalize this process, so the temporary withhold can be
lifted.
DINING FACILITIES (DFACs)
During my visit to Iraq I had several meals in our DFACs, and the food and
service were excellent. Many soldiers I talked to said that the food and the
DFACs were the best they had ever experienced.
The current DFAC issue we are facing stems from a fundamental disagreement
with the DCAA on how we should be allowed to bill for food service we
provide the military in Kuwait and Iraq. The DCAA contends that the only
acceptable counting method is "boots through the door," or the number of
patrons served in the facility at every meal, even though the Army has used
a counting method comparable to KBR's on past DFAC contracts. We believe
this "boots through the door" methodology fails to take into consideration
the fact that KBR's contract with the Army required us to provide a
turn-key, fully operational dining facility for a minimum number of
personnel. The Army also wants the flexibility to move troops and to have
food almost on a "whenever and wherever" basis. We are directed to meet
their needs for flexibility, not have portion controls or limits on carry
outs, and to serve hearty meals every day.
Until this issue can be resolved, AMC is withholding an average of 19% of
KBR's DFAC payments. KBR has continued to provide the DCAA, DCMA, and AMC
with all relevant documentation regarding DFACs, and we are confident that
we will ultimately be reimbursed for the costs that have been incurred to
meet their needs.
HUMANITARIAN FUEL OVERCHARGING ALLEGATIONS
I met several LOGCAP drivers and the mechanics who support their missions at
the Theatre Transportation Center (TTC) in Kuwait. They remain very positive
about their jobs and realistic about the risks they face every day. I have
such respect for these individuals and the courage they are displaying. An
August 29, 2004 article in the Los Angeles Times by T. Christian Miller --
"The Conflict in Iraq; 'Road Warriors' Deliver the Goods; the lure of a big
payday keeps civilian truckers going despite bombs, bullets and ambushes" --
is a very good account of what our convoy drivers face daily. If you haven't
yet seen this article, you can read it at
http://www.halliburton.com/news/archive/04/article_082904.jsp.
KBR was also responsible for another major transportation mission in Iraq.
The results of a preliminary audit by the DCAA in December 2003 alleged that
KBR overcharged the government by $61 million on a humanitarian mission to
purchase and import fuel for Iraqi civilians under the RIO contract. The
Corps of Engineers has since concluded that we obtained a fair price for the
fuel; however, Department of Defense officials have referred the matter to
the agency's inspector general and an investigation is under way.
SUMMARY
As I saw first-hand last week, KBR has an incredible record of
accomplishments in Iraq. Each day we serve nearly a half million meals,
provide two million gallons of clean water, wash thousands of bundles of
laundry, dispatch nearly 700 trucks on the roads throughout Kuwait and Iraq,
and a lot more. We are managing all this in a hostile environment -- an
environment that is both difficult and dangerous, and unlike any that a
contractor has worked in before. This is a war, and despite the fact that
the U.S. Army's needs change by the minute, KBR employees continue to
deliver.
KBR has a strong history over more than 60 years of service to our country
and our country's soldiers. We do this work because it is our business, yes
-- but we also do it because as a company we can, and do, make a difference
in the soldiers' lives. I am extremely proud of the work that each and every
KBR employee is doing to support the soldiers and fulfill our LOGCAP
commitment not only in Iraq and Kuwait, but also in Afghanistan, Uzbekistan,
Djibouti and the Republic of Georgia.
This is a complex and complicated mission, and sometimes the facts get
bogged down in controversy. Rest assured, though, that we will stay the
course. We will continue to work closely with our client and with the
government to resolve any and all issues. However, we will stand up for our
position if we have to.
The story of our work in the Middle East is an important one, and I want to
make sure you have the correct information about the issues we face. I am
committed to keeping you informed about the news surrounding our company and
I hope you will join me in supporting our unsung heroes who are
demonstrating unparalleled dedication and hard work during these challenging
times.
As I look back and think about the bullet-ridden truck cabs and the job our
mechanics are doing to repair these vehicles, and the employees who have
reclaimed over $370 million in ammunition through the ammunition retrograde
operation, it is clear to me. When I flew in the Black Hawk helicopter --
wearing my flak jacket and helmet -- to three very remote bases where our
employees live and work, and where mortars landed just hours after we left,
it was clear to me. As I listened to the two-hour exchange of hostile fire
during the night in the Baghdad base camp where many of our employees live,
it was clear to me. When we left the "Green Zone" and traveled at high risk
through Baghdad's "Red Zone" to attend meetings, it was clear to me. While
we are not war fighters, we are clearly a civil company at war. Our
employees who live this reality every day need our full support. They all
have my respect and they truly are unsung heroes.
If you are interested in reading more about our work in the Middle East, I
encourage you to visit the NEWS section of
www.halliburton.com, which
includes press releases and media statements about our work in Iraq.
For details about the government committee hearings mentioned earlier,
including the testimonies presented by KBR employees, go to:
http://www.halliburton.com/news/archive/2004/kbrnws_072204.jsp.
Best regards,
Andy