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PENTAGON SUSPENDS HALLIBURTON CONTRACT

18 May 04. THE WALL STREET JOURNAL reported that the Pentagon says it has suspended nearly $160 million in payments to Halliburton Co. as part of a lingering dispute over the charge for feeding U.S. troops and other personnel in Iraq.

The suspension, which Defense Department officials said was necessary “to protect the Army’s financial interests,” could complicate the provisioning of troops in Iraq if it disrupts payments to Halliburton’s many subcontractors who cook and serve about 300,000 meals a day.

Some Defense officials suggested the financial cost to Halliburton’s Kellogg Brown & Root unit could increase substantially as the two sides feud over the bills for feeding U.S. personnel. KBR has billed the U.S. nearly $800 million for food charges going back to late 2002 at more than 50 dining facilities in Iraq and Kuwait. KBR has been paid for most of it.

KBR was notified of the suspension Thursday, the day before Pentagon auditors deemed the company’s billing system for all its Iraq-related contracts “inadequate” in an audit. KBR has a 10-year, multibillion-dollar contract to provide a host of logistical and support services to the military, including feeding the soldiers, washing their clothes and setting up military bases.

The audit, which hasn’t previously been released, criticizes KBR for “deficiencies” that resulted in billings “not prepared in accordance with applicable law and regulations and contract terms.” In one of its more stinging rebukes, the Defense Contract Audit Agency said KBR had “no documented mechanism” for assuring that its many subcontractors billed properly and kept to their contract terms. The audit agency also said that despite months of work, it still couldn’t determine the “adequacy” of KBR’s own internal auditing abilities.

In a written statement, a Halliburton spokeswoman said the Houston company was working with the Army to resolve “outstanding issues” and said the company believes it will “ultimately be reimbursed for these costs.” The auditors’ analysis was a “flawed interpretation,” according to the company. The statement also said that if the company isn’t paid, it would withhold payments from the subcontractors that actually run the dining halls.

The dispute over food bills goes back to early this year, when Pentagon auditors first alleged that KBR had billed for substantially more meals in the first half of 2003 than were actually served. In March, KBR submitted more documents and argued heatedly that its bills were “proper and reasonable” and should be paid in full.

Last week, in an in-house Defense Department memo, one of the Pentagon’s top auditors concluded that KBR had failed to provide adequate documentation for its food billing. The Pentagon continued to believe the number of meals billed “significantly exceeds the actual head count served since October 2002,” the memo said.

If Pentagon auditors stand by that assessment, the next move would be to disapprove payment, meaning KBR would have to write off at least $160 million. Auditors expect to make that determination by the end of June, at which point the Army Field Support Command would have the final decision. Pentagon officials cautioned that the final sum could be substantially higher once the auditors complete their work.

The auditors said KBR appeared to base its billings on classified estimates of the number of troops that needed to be fed that couldn’t be verified. In a written response to the auditors, KBR said this conclusion was “not only unsubstantiated but also premature.”

In the last two quarters, Halliburton recorded $76 million of profit on Iraq-related work on $4.3 billion in revenue. On its Army support contract, Halliburton earns a 1% profit on allowable expenses and then could get an additional 2% performance award.

The continued billing dispute appears likely to sow further unrest among KBR’s subcontractors, many of whom have had to skimp for long stretches. Paul Morrell, presi

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