Buy Lines: Iraq reconstruction: The maze to the money

Stan Soloway

Several hundred companies crowded a recent Industry Day to discuss contracting opportunities for Iraq reconstruction.

With $18 billion to be obligated in short order, such interest is not surprising and will help ensure that significant competition exists. Hopefully, the potential bidders are also fully aware of the unique challenges and pitfalls that await them.

The news is full of reports about problems facing companies doing business in Iraq. The treatment of Kellogg Brown & Root is particularly instructive, as are the lessons being learned by others working in the region.

In KBR's case, a preliminary government audit was leaked and prominently reported by the media, alleging that the Halliburton Co. subsidiary overcharged for fuel.

Such a leak is a stark violation of auditing ethics and law. It involves an audit that is still in process and has not yet undergone the requisite senior-level review and consultation with the contracting agency, in this case the Army Corps of Engineers. Terms such as "price gouging" and "profiteering" have been common, and the company has effectively been tried and convicted.

The facts will emerge when the audit is completed and vetted. But there are already indications that KBR's use of Kuwaiti sources was based on customer requirements.

We also know that, unlike Iraqi-owned trucks, all of KBR's trucks must comply with U.S. Occupational Safety and Health Administration standards, which involve significant incremental costs. KBR must have full liability insurance, which does not even exist in Iraq. Imagine the costs associated with getting liability insurance for fuel deliveries in a war zone.

Further, the Army Corps of Engineers has made public important facts that raise questions about the draft audit findings themselves.

Of course, none of these potentially extenuating facts have gotten much attention.

Whatever the outcome of the final audit, KBR has been pilloried as the result of an unethical leak of a highly confidential, in-process audit. That itself is cause for concern. It also is an example of the kind of microscope under which Iraq Reconstruction contracts operate.

There are practical challenges as well. Iraq is still a cash economy, and credit cards are unheard of. Bank transfers are slowly coming into being, and the banking "system" is arcane at best. Contractors are responsible for their own security and housing for their employees, and both are in short supply.

Employing Iraqi workers and subcontracting to Iraqi companies are priorities, but Iraqis have never faced the exacting cost and performance accountability associated with U.S. government contracts. Nonetheless, the liabilities will, as always, flow back up to the prime contractor.

Workers compensation insurance for deployed employees is difficult to get and expensive. And although the Federal Acquisition Regulation is being applied to all procurements obligating U.S. appropriated funds, a special set of rules and procedures will govern those funded by coalition contributions or Iraq oil revenue.

In short, the challenges and risks of performing an Iraq reconstruction contract are unique and significant. For companies seeking to participate, the bottom line is simple: Beware. This is a new experience for everyone.

With this much money being obligated this fast, problems will arise and mistakes will be made.

Close attention to detail, exceptional performance, following the rules and a commitment to ethics are always important, but in these circumstances they are more essential than ever.

This is a fishbowl with Class 6 rapids.

Stan Soloway is president of the Professional Services Council. He previously served as deputy undersecretary of defense. His e-mail is soloway@pscouncil.org.

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