'Plan for the worst'

Insurance, security costs stabilize for Iraqi reconstruction, but threats persist

Before doing business in Iraq ...

INSURANCE: For companies working on a U.S.-funded reconstruction effort, the Defense Base Act requires workers compensation insurance. Insurance also is available for other business activities, such as contracts with an Iraqi ministry or the private sector. Political risk insurance also may be available through the Overseas Private Investment Corp. A contractor also maybe required to offer insurance carriers the names and locations of its employees in Iraq.

BUSINESS: Interested subcontractors should contact the prime contractors directly. In general, companies should be prepared to demonstrate their relevant experience, financial capability, in-country competence, and ability to proceed quickly and to support the Iraq economy through local employment.

CONTRACTS: Review the scope of task-order contracts to ensure the work is within the scope of the contract. Contracts also should be reviewed to ensure appropriate regulations are included, such as the capture and detention clause that allows employees to be compensated if they are abducted or killed. Also, review special rules, regulations and policies that apply to contractors in Iraq, as well as the labor and employment laws.

After more than two years in Iraq, U.S. contractors involved in reconstruction work may have seen the peak of exorbitant costs of insurance and private security, even as insurgents continue their kidnappings, convoy attacks and suicide bombings.

"The environment's been changing a bit, and people seem to think it's better," said Sara Payne, senior vice president of Rutherfoord International Inc., an Alexandria, Va., insurance broker. Rutherfoord offers workers insurance to companies working abroad for the U.S. government.

Insurance can cost about $3.50 per $100 of payroll for contractors doing IT work in Iraq, subject to underwriting guidelines and minimum premiums required by the insurance carriers offering coverage there. The previous high was $10 per $100 of payroll two years ago, Payne said. The rates started decreasing in May.

The Defense Base Act requires companies working overseas on U.S. contracts to provide workers' compensation insurance for employees, including U.S. citizens, workers from other countries and native workers. Benefits include medical treatment, loss of wages reimbursement and death benefits.

As risk managers, insurance companies and contractors "have gotten better at planning to mitigate expected risks. They've been able to level some of the costs, but they're still, by any measure, quite high," said Stan Soloway, president of the Professional Services Council, a national trade association in Washington that represents private contractors in Iraq. The Professional Services Council estimates that its member firms employ roughly 30,000 contractor employees in Iraq, most of them non-U.S. citizens or Iraqis.

As of July 20, 245 non-Iraqi civilian contractors working on military and reconstruction U.S. contracts were killed in Iraq, according to the Brookings Institution, a Washington think tank.

For contractors, Iraqi reconstruction is big business. Between fiscal 2003 and March 2005, about $18 billion in U.S. funds had been set for Iraqi relief and reconstruction. Of that, $9 billion has been disbursed, according to a July Government Accountability Office report. The funds were spent on oil and electrical infrastructures, training, equipping security and law enforcement personnel, and Coalition Provisional Authority and U.S. administrative expenses.

The State Department and the U.S. Agency for International Development guarantee insurance rates to their contractors. The State Department offers Defense Base Act coverage at a fixed rate of $3.87 per $100 payroll for those who work on contracts that it awards for most work in Iraq, and $5 per $100 payroll for construction contractors, which involve greater workers compensation challenges, Payne said. USAID guarantees a worldwide rate of about $2.15 per $100 of payroll for its contractors, he said.

"These rates are more stable than those experienced by companies working under Defense Department or other agency or United Nations contracts in Iraq," Soloway said. But war risk exclusions, even under coverage provided by the State Department and USAID, create coverage gaps that can be expensive to fill, he said.

Moreover, companies working on government contracts for other federal departments routinely pay as much as $25 per $100 in payroll for this coverage, Soloway said.

The costs of insurance can be tied to a company's overall risk management plan, which includes security, personnel, training and policies, Soloway said.

The risks of working in Iraq make the cost for Defense Base Act insurance higher than the usual domestic workers' compensation. The price can vary from place to place, depending on security levels, experts said. The price also will depend on the number of employees deployed and the type of work they're doing.

In addition, some companies offer employees working in Iraq supplemental insurance, including expensive coverage for accidental death and dismemberment and kidnapping and extortion. Under War Hazards Compensation Act coverage, which supplements Defense Base Act coverage, the U.S. government reimburses insurers for costs of combat and terrorist-related deaths and injuries.

"Insurance is a very shifting tide," Soloway said. "At this time next year, if things are much calmer in Iraq and the insurgency is not as great, you may see rates coming down. It's all situational."

As with insurance coverage, security costs for contractors also have leveled off in certain areas of Iraq, said David Nadler, a partner in the government contracts practice of law firm Dickstein Shapiro Morin & Oshinsky LLP in Washington.

"We're at a point where the market for [security] services is more mature, and security costs have been paid for," as companies have bought the armored vehicles, blast walls and other equipment they need, he said.

However, in insurgent strongholds -- the Anbar province in western Iraq and the area around Baghdad -- security costs are increasing, Nadler said. Those prices also depend on the type of activities contractors are performing, he said. One of Nadler's client companies spends least 60 cents of every dollar in Iraq on security costs, he said.

The rise and fall of security costs is linked to insurgent attacks, political events and military efforts by the coalition, said Mark Whyte, director of special operations at Pilgrims Security Services, a U.K. security firm that provides security assessments for media companies and other businesses in Iraq. He spoke at a conference last month in Arlington, Va., on rebuilding Iraq.

The special inspector general for Iraq Reconstruction, the successor to the Coalition Provisional Authority inspector general, estimates that 20 percent of every contract dollar goes to security, but that amount excludes additional costs for security-related work delays or shutdowns, personnel evacuations because of threats, and property losses, Soloway said.

In some cases, indirect security costs drive prices higher, Soloway said. For example, companies whose workers are threatened may have to find new housing, yet they must continue to pay rent on the previous housing because of lease obligations, he said.

Security costs for contractors probably have hit a peak, given that much of the U.S.-funded work they're doing will taper off by the end of this year and in 2006, said Bill Tucker, chairman of Tucker & Associates, a McLean, Va., consultancy specializing in international trade, strategic marketing, government affairs and public relations.

That will cause downsizing at security firms, especially those that sprang up overnight to do business in Iraq and are not top-notch providers, Tucker said. Security costs consume about 25 percent to 30 percent of contracting revenue, he said.

The U.S. military provides security only for contractors assisting the services with projects, leaving most of those working on reconstruction projects to get their own security to protect convoys, compounds and work sites.

Companies can pay between $180,000 and $250,000 a year for a security manager for a reconstruction project, between $630 and $800 a day for a security detail on the ground and $120,000 for an armored 4-by-4, said Pilgrims' Whyte.

At the recent conference on rebuilding Iraq, a Lucent Technologies Inc. employee said that about 30 percent of the telecommunications network manufacturer's contract revenue went for security costs. Lucent is working on a $75 million Defense Department contract to rebuild and modernize Iraq's communications systems.

The Lucent employee's advice to others considering work in the war-torn country: "Plan for the worst."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

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