Hearing of the House Government Reform Committee on the Complex Task of Coordinating Contracts Amid Chaos - Part I-

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Federal News Service

HEADLINE: HEARING OF THE HOUSE GOVERNMENT REFORM COMMITTEE SUBJECT: THE COMPLEX TASK OF COORDINATING CONTRACTS AMID CHAOS: THE CHALLENGES OF REBUILDING A BROKEN IRAQ

CHAIRED BY: REPRESENTATIVE TOM DAVIS (R-VA)

WITNESSES: MAJOR GENERAL CARL A. STROCK, DIRECTOR OF CIVIL WORKS, U.S. ARMY CORPS OF ENGINEERS, DEPARTMENT OF DEFENSE; GENERAL PAUL J. KERN, COMMANDING GENERAL, U.S. ARMY MATERIAL COMMAND, DEPARTMENT OF DEFENSE; MAJOR GENERAL WADE H. MCMANUS, JR., COMMANDING GENERAL, U.S. ARMY FIELD SUPPORT COMMAND, DEPARTMENT OF DEFENSE; TINA BALLARD, DEPUTY ASSISTANT SECRETARY OF THE ARMY FOR POLICY AND PROCUREMENT, DEPARTMENT OF DEFENSE; LEWIS LUCKE, DEPUTY ASSISTANT ADMINISTRATOR, UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT; DOV S. ZAKHEIM, UNDER SECRETARY OF DEFENSE (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, DEPARTMENT OF DEFENSE; WILLIAM H. REED, DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY, DEPARTMENT OF DEFENSE; REAR ADMIRAL DAVID NASH, USN (RET.), DIRECTOR, Iraq PROGRAM MANAGEMENT OFFICE, COALITION PROVISIONAL AUTHORITY

BODY:
REP. TOM DAVIS (R-VA): A quorum being present the committee will come to order. We meet today to look into the complex task of coordinating contracts amid the chaos and challenges of rebuilding Iraq. Even before the conclusion of major military actions there were plans for a major effort to rebuild Iraq's infrastructure and government.

Emergency supplemental appropriations bills for both FY '03 and FY '04 have provided more than $20 billion to rebuild post-war Iraq. Many federal departments and agencies have already awarded or soon will award contracts for the sustainment and reconstruction efforts. The rebuilding of Iraq is a monumental task. Saddam Hussein spent decades frittering away his nation's vast wealth on himself and his Baath Party cronies, while little to nothing was spent to meet the urgent needs of the Iraqi people.

Decades of neglect and inaction have turned this once great nation into a country where the majority of people live in poverty and despair. However, with Saddam's ouster we're witnessing a rebirth of Iraq. Freedom and liberation have brought a new sense of urgency to the Iraqi people. They understand what is at stake and we, as part of the coalition of the willing, must do our part to sustain freedom by rebuilding their nation.

Twenty days ago I, along with other members of this committee, returned from Iraq where we witnessed the enormity of the reconstruction effort. This was my second trip and in the six months since my last visit to the region I saw significant progress in our reconstruction efforts. The task at hand is enormous. It will be years before we're able to get Iraq running on its own. Yet each day Iraqi's are getting a better life thanks to the dedicated American soldiers and civilians working there.

Our reconstruction efforts are being completed even under life threatening conditions. Our military is nothing short of superb, both ensuring the safety of the country they have become master builders and diplomats. The use of funds for the Commanders Emergency Relief Program paves the way for local and regional stabilization by allowing for small rebuilding projects that have an immediate impact on the local population. For example, we recently met with General Odierno, commander of the 4th Infantry Division, who told us how he used his CERP funds to build a water treatment facility in Tikrit and a sewage treatment facility in Baji. In many ways the Commanders Emergency Relief Program is meeting the immediate needs until our larger construction projects are completed.

The positive offshoots of the Iraqi rebuilding effort are beginning to take shape. Entrepreneur-ism is sprouting and unemployment, which was once a major problem, is coming under control. Our efforts are paying off.

Reconstruction, together with an interim constitution, locally elected leaders and a functioning, better trained security force all add up to a stable and more peaceful Iraq. Today, we meet to specifically discuss the complexity of coordinating the rebuilding of Iraq, primarily as it pertains to larger construction projects and sustainment efforts. Currently, there are many U.S. government agencies working to improve conditions in Iraq.

For example, the Department of Defense, including the U.S. Army Corps of Engineers and the U.S. Agency for International Development are both working to rebuild Iraq. Both DOD and USAID have their own procurement shop, their own management team and their own audit mechanisms. The committee is interested in the efforts made by each agency to manage and coordinate acquisition activities to ensure that taxpayer money is being spent both effectively and efficiently.

In addition, enormous amounts of money have already or are about to be expended in the efforts to rebuild Iraq. We need to make sure that that acquisition rules are being followed. We need to be sure that acqui-Congress has spent years streamlining complex government rules and regulations to make it easier for businesses to sell to the federal government, but did so in a way that carefully balances affordability, accountability and accessibility to make sure taxpayer dollars are protected.

It's our job to make sure that these things are happening in Iraq. We hope to learn today how our acquisition system and the professionals who run it have responded to the challenges raised in Iraq. No one doubts that the circumstances are extremely difficult. I've seen the chaos on the ground there. The security situation is tenuous at best. Or servicemen and women are being killed and wounded. A number of contractor employees have also been killed and wounded.

Large scale procurements are complex and difficult to understand in and of themselves. When it comes to procurement, if you're not confused you're not paying attention. Add in the urgency and inherent dangers of contracting in a war zone and the challenge of acquiring urgently needed goods and services becomes quite daunting.

Through this hearing we hope to separate fact from fiction, truth from rhetoric and in turn help make sure we're coordinating contract processes in Iraq in a way that ensures success and safety. Fortunately our acquisition laws have been carefully crafted by Congress to provide enough flexibility for the government to quickly get the goods and services it needs in emergency situations. There are provisions in the acquisition laws that allow for carefully circumscribed exceptions to our standards for full and open competition to provide for a more limited, less time consuming award of contracts for urgently needed supplies and services.

I frankly can't think of a situation that would better fit within these flexibilities than what we faced on the ground when we came into Iraq. Sometimes we just don't have the time to take our time. I find it ironic that those who were complaining that the government doesn't have sufficient people on the ground to oversee and administer the current contracts in Iraq would foster contracting strategies that would increase substantially the need for contract administration.

For every complex problem there's a simple solution that doesn't work. I recognize that there have been mistakes. The contract oversight process is not always pretty and the decisions made under the pressures of combat are not always as lucid as those made under less threatening conditions.

I commend my ranking member and others who have raised some important questions pertaining to the reconstruction process. Today, I hope we can differentiate between real issues worthy of serious inquiry and those with little or no basis in fact that are raised solely to create a whiff of scandal. There are some who have disagreements with contractors over payments. It should come as no surprise to anybody who is familiar with the administration of complex contracts in difficult circumstances.

These difficulties should be viewed within the context of the wartime environment in Iraq. Many of the disputes that have been made public show that the contract oversight process is, indeed, working. This hearing is part and parcel of a functioning oversight process.

Make no mistake. I have no patience for fraud or abuse. I expect that any such instances that are proven will result in harsh punishment for the perpetrators. I also expect that as the conditions on the ground improve the next generation of contracts will be awarded and administered in accordance with our standard acquisition procedures.

Emergency procedures are for emergencies only. This is a monumental task and there's no room for error. Nor is there room for partisan sniping aimed merely at undermining the overall reconstruction efforts. We're interested in the truth, not rhetorical calisthenics.

We're interested in helping coordinate the many important contracts in place today or planned for the future. In short, we are interested in moving forward with a contracting framework that benefits our reconstruction goals. We're not interested in simply repeating disingenuous sound bites.

Now pursuant to committee rule 14, following the witnesses opening statements, the ranking minority member and myself shall each control 20 minutes in order to permit some important but complex lines of questioning and allow adequate time for full responses. Following the 40 minutes, questions will continue under the five minute rule. Mr. Waxman and I have agreed that we don't expect any votes today at this point. He has asked-the request of us that a number of documents be released from this committee. I understand that DOD has gone on their own volition and that these documents have been released.

We are also joining with him in a request for more documentation from the Department of Defense, reiterating, I think, an earlier request over some of these documents. And we join him in this and if, when we get the responses back it is not adequate, we will then address what further avenues we may wish to pursue. In the interest of time and given the 20 minute block agreement I've reached with Mr. Waxman, I'm limiting opening statement to the ranking minority member and myself, but member's statements will be included in the record and they'll have ten calendar days to do so.

I also want to thank all of our witnesses for appearing before the committee and I look forward to their testimony. And I also want to recognize a new member of the committee, the gentleman from Ohio, Mr. Tiberi. We've had a couple vacancies on this committee and we're very happy to have him here. I understand he's going to be here for the entire hearing and we appreciate it. Thank you.

At this time I'll yield for Mr. Waxman's opening statement.

REP. HENRY A. WAXMAN (D-CA): Thank you very much, Mr. Chairman. I want to thank you for holding this hearing today. The subject we are going to consider, contracting in Iraq, urgently needs congressional oversight. It is an issue that has crucial implications for the success of our efforts in Iraq and for U.S. taxpayers.

Usually I keep my remarks short at committee hearings, but today I'm going to speak at some length in this opening statement. I've been investigating contracting in Iraq for many months and I believe few of my colleagues understand just how big a mess this administration has created. I want to explain to the members of this committee and the public what is going wrong and why.

The problem starts with the procurement strategy that the administration is using in Iraq. It is profoundly flawed. I have a chart that I want to display. It's over there.

The chart shows two numbers. The first, 2,300, is the number of discrete reconstruction projects that the Coalition Provisional Authority is planning to do in Iraq. The second, zero, is the number of projects that will be subject to competitive bidding. Instead of promoting competition the administration is giving contractors monopolies over huge sectors of the reconstruction effort.

One company, Halliburton, gets all work related to oil reconstruction in Southern Iraq. Another company, Parsons, gets all work related to oil reconstruction in Northern Iraq, and they never have to bid against each other for any specific project. The administration has a procurement strategy that intentionally shields contractors from competition.

Think about this. For nearly a year both Halliburton and Bechtel have had enormous operations in Iraq. Both companies can do virtually the same work, but never once have they had to compete against each other for a specific project. Now, this is a great deal for Bechtel and Halliburton, but it's an absolutely horrendous deal for the taxpayers.

These problems are compounded by the fact that many of the contracts that are being issued are cost plus contracts. Under a cost plus contract the more the contractor builds, the more money the contractor makes. That's why cost plus contracts are notoriously prone to abuse. In the absence of competition to discipline the process and to hold down prices, the taxpayer has to rely on contracting officers working for the Defense Department to keep prices reasonable. These officials are supposed to scrutinize the proposals submitted by Halliburton and other contractors and reject those that are loaded up with unnecessary expenses, but they are inexperienced and overworked.

Representative John Dingell and I asked GAO to investigate what kind of job the Defense Department is doing managing the largest contract in Iraq, Halliburton's LOGCAP contract. The contract alone is worth over $4 billion to Halliburton. GAO told us that the Army Central Command in Kuwait has not made cost control a priority. GAO found that the Army does not have the expertise or the personnel in Kuwait needed to ensure that taxpayers are not being overcharged. According to the General Accounting Office, inexperienced Reservists are being sent to Kuwait and given key oversight responsibilities. A two week training course on contract management is the only preparation they receive. GAO told us that in one instance the Army approved a LOGCAP contract worth $587 million to Halliburton in just 10 minutes. The documentation for this mammoth contract was just six pages long.

In essence, this administration's approach to contractors like Halliburton is trust but don't verify. Auditors like the Defense Contract Audit Agency and criminal investigators with the Inspector General and the Justice Department can try to catch waste and fraud and abuse after it occurs, but there are few mechanisms in place to prevent overcharges from occurring in the first place. We are now learning that the administration's approach is an enormous mistake.

This week the committee received two recent audits of Halliburton by DCAA. At the appropriate time-well, I won't need to move to have the committee release these documents publicly because I understand that we have all agreed and the DCAA has agreed to make these documents public, so they will be available. These audits are a scathing indictment of Halliburton. According to DCAA Halliburton's cost accounting system has, quote, "significant deficiencies and the company has repeatedly violated federal acquisition regulations.

Well, anybody who has followed this issue has heard Halliburton say over and over again that any violations or overcharges are isolated occurrences. This is what it said when it was revealed that Halliburton sought fees for millions of meals it never served, and it is what Halliburton said when it disclosed that company procurement officials participated in a $6 million kickback scheme. And this is also what Halliburton said to the DCAA. When the audit agency gave Halliburton a chance to respond to its preliminary findings, Halliburton wrote, quote, "This issue is not a significant estimating system deficiency as stated in the DCAA draft report. Rather, this was a unique situation," end quote.

The problem with Halliburton's response is that it's not true. According to the DCAA, and I quote, "the estimating deficiency is not a one time occurrence, it is systemic." Now, here is a stunning fact that is revealed in the DCAA audit documents. DCAA brought these systemic problems to the attention of the Army Corps of Engineers on January 13. Three days later, on January 16, the Army Corps gave Halliburton another $1.2 billion contract. It was as if the decision makers simply didn't care.

Yesterday I sent my colleagues a briefing memorandum that went through some of these issues in detail and I'd like to ask unanimous consent that it be made part of the hearing record.

REP. DAVIS: Well, really no objection. I would note that there are parts of the briefing memorandum that we take issue with on the factual side, Mr. Waxman, but we'll get to that in our questions. But with that understanding, without objection it will be entered into the record.

REP. WAXMAN: It is not just the government auditors who are complaining about Halliburton's practices. Halliburton's own internal auditors have said that the company procedures are, quote, "antiquated" and that it has, quote, "weak internal controls," end quote. And last month my staff was contacted by two former Halliburton procurement officers. They described company practices that systematically overcharged the taxpayer on hundreds of routine requisitions every day. When they tried to protest, they were ignored. They said that the company's motto was "Don't worry about the price, it's cost plus."

Well, it's very hard to get details from the administration about the specific amount Halliburton is charging for particular projects. The White House, secretary of Defense, USAID all have an aversion to any form of oversight. When Representative Dingel and I wrote letters raising significant issues, they are almost always ignored. But we have been able to penetrate one particular contract: Halliburton's contract to import fuel from Kuwait into Iraq. And what we have learned is that Halliburton and its obscure subcontract Altanmia have been gouging the taxpayer.

I have another chart that I want to show this to everyone here. Halliburton imports gasoline from Kuwait into Iraq for Iraqis to use. The Defense Energy Support Center imports gasoline from Kuwait into Iraq for the military to use. The chart simply compares the prices the government pays with those that Halliburton pays. The differences are astounding. Gasoline in the Middle East is a commodity. Everyone should be able to get it at essentially the same price, but Halliburton is paying over 20 cents more per gallon than the Energy Support Center just to purchase the fuel.

Both Halliburton and the Energy Support Center have to transport the fuel through dangerous conditions into Iraq. Both entities are using private contractors to handle the transportation and both entities receive protection from military convoys, but it costs the Energy Support Center just 36 cents per gallon compared to $1.21 for Halliburton. And then Halliburton adds on a markup for itself of 24 cents per gallon and another category called "other" charge of 2 cents per gallon. The end result is that it costs the taxpayer twice as much when Halliburton imports the fuel as when it costs the government to do it.

Representative Dingel and I first raised this issue on October 15. Since then all I've been hearing from the Army Corps of Engineers, which is the agency responsible for the fuel contract, is a string of denials and platitudes. As recently as February 1 the Corps' spokesman said, quote, "We have our own internal audit process and we haven't turned up any serious wrongdoing or major problems," end quote. And when you get to the bottom of this, that's the real problem. The policymakers in this administration don't seem to care about the pattern of waste, fraud and abuse that is coming to light.

Fifty years ago the CEO of General Motors said, "What is good for the country is good for General Motors, and what is good for General Motors is good for America." Well, I have a message to this administration: what's good for Halliburton is not always good for America. Iraq is a dangerous country. All of us in Congress want to do whatever is necessary to make sure our troops have the equipment and protection they need. And Americans are a generous people. They are willing to spend billions to help Iraqis rebuild their nation and establish democracy. But gouging and profiteering is heinous and should never be tolerated.

I firmly believe that Congress has an important oversight role to play in ensuring the wise expenditure of taxpayers' dollars. Part of the problem that we're experiencing is an added-can be attributed to the lack of vigorous congressional oversight. But I'm encouraged by the recent steps that Chairman Davis has taken. He has joined me in requesting the DCAA audit documents, he's scheduled this hearing and he's promised to hold another hearing hopefully-I hope by the end of April. This is not easy for him to do and I'm sure it will alienate many in the administration, but I commend him for the steps that he is taking even as I will be pressing him to take more.

In closing, let me say that I look forward to today's hearing and the opportunity to hear from and question the distinguished witnesses before us. Thank you, Mr. Chairman.

-BREAK IN TRANSCRIPT-

REP. WAXMAN: Thank you, Mr. Chairman. Earlier, Chairman Davis asked each of you whether anybody was under political pressure to award contracts to particular companies. You all answered no. He also asked whether you are aware of any political pressure on administration officials and again, you all answered no. I wanted to draw your attention to December 15th Wall Street Journal article. The article refers to two letters by an Army Corps contracting officer, Mary Robertson.

Ms. Robertson indicated that she was under political pressure to direct Halliburton to negotiate exclusively with Altanmia, an obscure and inexperienced Kuwaiti firm. Ms. Robertson wrote, quote, "Since the U.S. government is paying for these services, I will not succumb to the political pressures from the government of Kuwait or the U.S. embassy to go against my integrity and pay a higher price for fuel than necessary," end quote. She wrote that to her superiors but then Halliburton went ahead and contracted with Altanmia. And she is not the only one who claims political pressure.

Thomas Crum, a senior Halliburton official, stated, quote, "the concern that the embassy had was expressed clearly and it was the same as the government of Kuwait that we weren't buying enough gasoline from Kuwait." End quote. How do you respond to these two statements from U.S. government employees that they were under political pressure?

MR. ZAKHEIM: Well, in the first place, Congressman, you know, half of what you are discussing is the government of Kuwait not the government of the United States.

REP. WAXMAN: Well, I'm also discussing the U.S. embassy and they work for us.

MR. ZAKHEIM: Yes, but we do not of course-that's a different agency.

And so at least -- (cross talk.)

REP. WAXMAN: Let me ask this from General Strock, because this woman works for him. Were you aware-maybe she even contacted you-that she was under pressure from someone to have Halliburton contract with Altanmia and she urged them not to because she did not feel she ought to give in to political pressure and charge the higher price as a result.

GEN. STROCK: Sir, at the risk of sounding evasive, she didn't work for me. I work for the CPA and I was on loan to the CPA and I happen to be a Corps of Engineers officer there. She worked for Brigadier General Robert Crear from Task Force RIO and I am not aware of anything surrounding that allegation, sir.

REP. WAXMAN: So let's just put it that maybe we can have another hearing. We're going to have another hearing. Maybe we can get to the bottom of that. But it would indicate that maybe none of you were under political pressure but there were two people working for the government that did feel they were under political pressure.

Mr. Reed, I want to ask you about the audit that was done, what's known as the "flash report". So I just want to get some questions answered about it. This flash report found some significant deficiencies in Halliburton's cost estimating practices. Is that correct?

MR. REED: That's correct.

REP. WAXMAN: Can you explain what these deficiencies were?

MR. REED: Well, the largest deficiency was the inadequate support for their subcontract estimates. They simply were not following what we considered reasonable business procedures to solicit bids, evaluate bids and justify the fair and reasonable price for the subcontracts being awarded. At least we couldn't tell that is being done by the documentation in their files. That was certainly very significant. Generally there was-I would characterize the general deficiency as a real problem supplying current, accurate and complete data in support of all their proposed costs, not just subcontract estimates but subcontracts were the most material part of the proposals that we were looking at.

REP. WAXMAN: The flash report also found that Halliburton repeatedly violated the Federal Acquisition Regulations. Is that right?

MR. REED: There is a guideline in the Federal Acquisition Regulations prescribing what the contractor should submit in its proposal to support its proposed cost. They failed to follow those guidelines particularly in the case of subcontracts.

REP. WAXMAN: The report found that Halliburton even violated its own cost estimating manual. Is that right?

MR. REED: That's correct. Their own manual very closely followed the FAR guidelines.

REP. WAXMAN: In a statement yesterday Halliburton claimed they had no opportunity to respond to your findings. They said, quote, "We have not been given a chance to respond to accusations before they are released publicly." End quote. Did Halliburton have an opportunity to review DCAA's flash report before it was issued?

MR. REED: Yes, sir. Our standard practice is to provide a draft report to the contractor for written comments. In this case we did that. Written comments were received and in fact they're attached to our flash report.

REP. WAXMAN: You even mentioned in your report that they had a chance to review it and they responded?

MR. REED: That's correct.

REP. WAXMAN: Yes. Let's turn to one of Halliburton's responses to your audit. You said that DCAA found, quote, "significant deficiencies in Halliburton's estimating system." Did Halliburton agree that these deficiencies were significant?

MR. REED: While agreeing to the deficiencies they argued that they were not significant.

REP. WAXMAN: Yes. And what did DCAA think about Halliburton's claims that these deficiencies were insignificant?

MR. REED: We disagreed and stated that to the contracting officer in our report.

REP. WAXMAN: So you thought there were serious problems. DCAA explicitly concluded the estimating deficiencies was not a one time occurrence, it is systemic?

MR. REED: That is correct, sir. Yes.

REP. WAXMAN: These cost estimate proposals are very important. Once approved. the cost proposals are the basis for under Halliburton's fees, aren't they?

MR. REED: There are many factors that go into the fee setting but it is certainly-the cost is a consideration in setting the fee.

REP. WAXMAN: DCAA found that Halliburton submitted a $2.7 billion proposal that, quote, "Did not contain current accurate and complete data regarding subcontractors costs." Is that right?

MR. REED: That's correct, sir.

REP. WAXMAN: If Halliburton's estimate is too high and is accepted, then Halliburton gets profits for work that is never completed. Is that right?

MR. REED: That's a possibility, yes, sir.

REP. WAXMAN: GAO told us that there were enormous discrepancies between the first proposal that Halliburton submitted in October and a second proposal that Halliburton submitted in December after DCAA rejected their first proposal. According the GAO the first proposal was $700 million higher than the second proposal. Is that correct?

MR. REED: That's correct, sir. And actually it was DCAA who identified that and briefed it to the GAO.

REP. WAXMAN: Now, is this normal to have that kind of $700 million deficiency?

MR. REED: Certainly the materiality of that issue is not normal, no sir.

REP. WAXMAN: In fact I understand that there has still not been a final proposal submitted. GAO told us that DCAA continue to have doubts about the validity of the second proposal and as a result Halliburton withdrew this proposal also. Is that correct?

MR. REED: Yes, sir, that's correct. The company is taking these rejections very seriously. I've had the highest level commitments from the company officials that they're going to get these problems solved and they are hesitant to submit additional proposals until they're sure they can submit current accurate data. We are urging them to do this expeditiously.

REP. WAXMAN: On January, 13 DCAA sent its December audit to the Army Corps and other Defense agencies that are overseeing major Halliburton contracts. The January 13 cover memo from DCAA highlighted the serious nature of the audit findings and concluded with the final explicit warning to the Corps and others, quote, "We recommend that you contact us to ascertain the status of Halliburton's estimating system prior to entering into future negotiations" end quote. Nonetheless three days later the Corps issued a new $1.2 billion contract to Halliburton. I want to ask some questions about this.

Mr. Reed, your January, 13 memo asked the Corps to contact you before it entered into any further contracts with Halliburton. Do you have a recollection of anyone from the Corps contacting you about this matter before it signed a new contract with Halliburton?

MR. REED: No, sir. I have no knowledge of being contacted.

REP. WAXMAN: Were you surprised when your learned Halliburton had just received this new contract worth $1.2 million?

MR. REED: I wouldn't say I was surprised, sir. There are circumstances where contracting officers do have other ways of evaluating price and cost data. We are giving them our advice so that we can explain to them what we saw as the risk in the contractors proposals. If they had read our report and considered those risks and considered as well other data they may have had-I can't say they did not have a sufficient basis to award the contracts.

REP. WAXMAN: But they never talked to you about it?

MR. REED: No, sir. They did not.

REP. WAXMAN: General Strock, Mr. Reed said the Army Corps never contacted DCAA about its audit findings before giving Halliburton another $1.2 billion contract. Do you have any information to contradict this?

GEN. STROCK: No, sir, I do not. I know that the contracting officer did have the DCAA 13 January memo in his hands when he made this and considered it and documented the reasons for his decision.

REP. WAXMAN: Why didn't the Corps follow up with DCAA?

GEN. STROCK: Sir, I can't answer that. I was not in the process.

REP. WAXMAN: I guess I can't understand how the Corps can operate this way. The government auditors just found enormous problems with Halliburton's performance but these were just ignored. We're talking about a contract that will cost the taxpayers over $1.2 billion, yet it didn't even seem that the Corps even bothered to contact the DCAA before issuing the contract.

General Strock, your website says the when the Corps was deciding who to award this contract to, one of the key factors was past performance. Other key factors were Halliburton's management approach and its contract administration plan. I want to ask you how you could possibly have found that there are no problems with Halliburton's past performance or its management approach or its contract administration plan. The DCAA audit in its warning said that the company can't accurately predict its costs. It also found significant deficiencies and systemic problems. That's not a good sign of past performance or good contract management, is it?

GEN. STROCK: Sir, I can't comment on the basis of the decision. I do know that the contract officer had that information available to him and I-generally the position is we make decisions substantiated claims not purely on allegations.

REP. WAXMAN: At the briefing with my staff we asked you to be able to answer these questions but we don't have-are you able to answer them? We don't have the contract officer here. Did you contact the contract officer in anticipation that you were going to be asked these questions?

GEN. STROCK: I did speak with the contracting officer about whether or not they had possession of 13 January memorandum and whether they considered that in their decision and that was the answer I got. It was considered and reviewed and found to be an appropriate outcome.

REP. WAXMAN: And that satisfied you?

GEN. STROCK: Yes, sir.

REP. WAXMAN: At the time the new contract was awarded, Representative Dingell and I had been bringing information to Corps for months that showed Halliburton was charging twice as much for gasoline as it should. DCAA validated these concerns in December. I don't know how these overcharges figured into the assessment of Halliburton's past performance. The day before the contract was awarded Halliburton in fact told the Defense Department that its procurement officers had been involved in a $6 million kick-back scheme. Do you know whether this was factored into the evaluation of Halliburton's past performance?

GEN. STROCK: No, sir, I did not.

REP. WAXMAN: Well, does anybody know that?

MR.. ZAKHEIM: I can't speak to the evaluation. What I can say however is that in fact it was Halliburton that informed us of this and therefore we're taking appropriate action as a result. They came forward. It certainly doesn't seem to me to be the detriment of KBR that they reported on their own people.

REP. WAXMAN: Well, let's look at this thing. They report to you that they had been giving-their own employees were getting kick- backs of $6 million. Your own audit people were telling you that there were systemic problems with Halliburton's handling of this whole business. You have this whole system of problems with Halliburton in the past and so the next day, they give it a $1.2 billion contract and the claim is that they're giving a $1.2 billion contract because of their good past performance. How can they reach that conclusion?

MR. ZAKHEIM: Congressman, in the first place, Halliburton identified two people out of, I believe, 19,000 that are working for KBR right now round the world. So I hardly think that that means that the other 18,998 are in the same boat. They found the people themselves. They reported that. As General Strock said, certainly, I don't have visibility into how the Corps of Engineers makes a decision. But, clearly, the fact that they have identified these people and we have then taken appropriate action doesn't sound to me like being to their detriment.

REP. WAXMAN: Let's go through it. We had the $6 million kickback. We also heard about millions of dollars in meals that were being charged that had not been served. We had an obscure Kuwaiti subcontractor given the gasoline contract and one of the DCA people thought that that was beyond her integrity to have that done. We had a systemic deficiency in accounting practices. They are under investigation by the inspector general and we now also know they are under investigation by the Justice Department.

Now, those investigations by the Justice Department and inspector general and the State Department inspector general, that's not just for overcharging the government. These are criminal investigations. How can you tell us about criminal investigations? That means there is something really wrong, fraud or criminal action on the part of just Halliburton, not just simply overcharging, doesn't it?