While the Army has pushed to change the LOGCAP III pricing structure to a firm, fixed-price basis, KBR has sued to keep the closeout work under the existing cost-reimbursable arrangement.

The company says the cost-reimbursable model is better because neither the company nor the Army can estimate the scope or duration of closeout work.

“Legal, administrative, compliance, audit response, vendor issues, subcontract close-out and dispute resolution, to name a few, are all unknowns,” the company told the Army in a letter last summer.

In a statement to Federal Times, KBR spokesman John Elolf added, “We have explained the issue in detail to the Army and have asked that we continue with the cost reimbursement style contract that has been historically used by the Army for this type of work.”

Fixed-price contracts and task orders are seen as less risky and less expensive than cost-reimbursable contracts. The Obama administration made it a reform priority to use more firm, fixed-price contracts and fewer cost-reimbursable contracts.

Awarded to KBR in 2001, LOGCAP III — the Logistics Civil Augmentation Program III — has resulted in 160 task orders for everything from dining services for U.S. troops to in-theater delivery of housing.

In a redacted pleading made public last week, the Justice Department, which represents the Army in the contract dispute, said contracting officials hadn’t decided whether to change to a fixed-fee arrangement but rather were only exploring the possibility.

Government lawyers also argued the closeout itself was part of the contract, not a new solicitation, as KBR argues.

They said closeout isn’t a new service the government must procure, nor does the work need to take place during the performance of the contract.

If KBR gets its way in court, the impact would be felt in contracting offices across government, the Justice Department said.

“KBR does not deign to address the implication of its position: if the Court accepts KBR’s novel theory, literally tens of thousands of government contracts will be affected, creating enormous uncertainty for the government and contractors alike,” Justice Department lawyers wrote.

In explaining the potential impact, lawyers speculated that if closeout activities had to be performed during the performance period of a contract, then the government could be forced to end deliveries to accommodate the closeout.

“For example, if an existing contract was about five years of performance, and closeout is estimated at one year, the government would need to direct the contractor to cease deliveries by year four to ensure that sufficient time exists to perform closeout,” the Justice Department filing stated.

Government lawyers also said KBR already invoiced the Army for LOGCAP III closeout work totaling nearly $25 million from 2012 through April 4, 2013, which was the same day the company filed its complaint.

The company’s invoicing raised separate concerns for government lawyers.

“If KBR truly believes that it lacked a contract, then its submission of tens of millions of dollars in invoices may require consideration of the False Claims Act because KBR may have submitted claims for reimbursement … for which it knew it was not entitled,” Justice Department lawyers wrote.

But KBR lawyers argue that LOGCAP III ended in December 2011 without any provisions to close out the contract.

When the Army requested a proposal in 2013 for closeout activities under a firm fixed-price basis, the request was “unquestionably a solicitation for a new contract,” KBR argued.

The pleadings from both sides come as government lawyers ask Judge Victor Wolski to toss the case. He was expected to issue a ruling after hearing from KBR and Army attorneys in arguments scheduled by telephone for May 30.

, an official in the Defense Department inspector general’s office said. "This has to be one of the prime poster childs for a government contract spun out of control," Rep. John Mica, R-Fla., said last week.

Mica and other members of the House Oversight and Governmental Reform Subcommittee on National Security expressed outrage at a hearing last week about the Pentagon’s handling of the deal, especially two contract extensions awarded amid a dispute between the government and the company over as much as $1 billion.

The criticism was bipartisan, and it also targeted the Swiss-based private contractor, Supreme Food service GmbH, which had previously supplied British troops in Afghanistan, Iraq and other hot spots.
The panel’s hearing, the first focused solely on the food contract, was convened to hear from agency and company officials about how a straightforward deal in 2005 to supply food and water to troops ballooned into a still-unresolved dispute with so much money at stake.

The company has denied wrongdoing. But several lawmakers at the hearing also accused it of trying to bill taxpayers improperly for a $58 million warehouse and charging $12 million to deliver food from that warehouse across the street to Camp Leatherneck in Helmand province.

“Despite all these concerns [over overbilling and undocumented costs], the government continued to contract with Supreme, and it even exercised options to extend the contract,” said Subcommittee Chairman Jason Chaffetz, R-Utah. “We have well-established contracting procedures. If we're not going to use them, why have them?”

“It took DLA six years to demand that Supreme reimburse the government for more than $750 million in what it believed were overpayments — that's an astounding amount of money,” said Rep. John Tierney of Massachusetts, the subcommittee’s ranking Democrat.

According to Tierney, DLA realized nearly a year after it expanded the scope of the contract to include many more delivery points — through verbal arrangements with Supreme — that its rates for transportation and storage costs were unreasonable. But the agency spent the next five and a half years trying unsuccessfully to negotiate fair and reasonable rates.The House subcommittee, which launched a probe of the contract last spring, found that the defense agency already had paid Supreme $1.38 billion for distributing food to additional locations when it determined it had overpaid the firm by $756.9 million.

“Despite all of these problems, the agency failed to rebid the contract after the contract expired [in 2010] and decided to grant Supreme a no-bid extension of the contract that ended up lasting two more years,” Tierney said.

Matthew Beebe, DLA’s deputy director for acquisition, told the panel that his agency has recouped $283 million — over a third of the $757 million in overpayments — by withholding nearly $22 million a month from Supreme, which is still supplying food and water to U.S. troops and NATO forces. The withholding, which began on March 2012, followed unsuccessful negotiations and audits in 2008 and 2011 to determine “whether Supreme’s rates were fair and reasonable,” Beebe said.

The company claims it is owed $1 billion more than the $5.5 billion it already has been paid over the life of the contract. It claims the initial contract allowed prices to be adjusted as the work expanded, and has appealed the refund demands to special government board.

Michael Schuster, Supreme Foodservice’s managing director for logistics, told the panel the audits were flawed. As its work progressed, Supreme had “to change fundamentally the way it executes its responsibilities and to develop and operate a network of airplanes, helicopters, and trucks able to reach isolated regions of Afghanistan,” Schuster said.

He added that DLA’s original solicitation said that only “remnants” of the Taliban were still active in areas of Afghanistan where his company would be operating. But as its mission expanded from four locations to 120 in remote areas, “312 of our subcontractors” lost their lives while delivering food to troops, he said. “Supreme had to build this network in an active war zone,” Schuster said.
At the hearing, Daniel R. Blair, the Pentagon’s deputy inspector general for auditing, told lawmakers however that the contract was expanded improperly through orders that were not written down promptly. The DLA contracting officer “did not provide sufficient oversight,” by failing to set appropriate rates and promptly modify the written contract.

Beebe confirmed that DLA extended the contract for two more years in 2010, even though a 2008 review of the contract by the Defense Contract Audit Agency found possible double-billing by the company for the cost of delivering food to the forward operating bases. DLA officials did not seek competition because Supreme “was the only source able to provide the required support within the required timeframe,” he said.

Last summer, Beebe added, the agency issued a follow-on interim contract to Supreme that expires Dec. 12, 2013. That, too, was not competed, he said.

When questioned by Rep. Jackie Speier, D-Calif., about the warehouse the company built in southern Afghanistan, Schuster said it was necessary because of the surge in U.S. troop strength there in 2010 and 2011. Speier then raised the $12 million delivery cost for transporting food from the warehouse across the street. “So whether it costs you $12 million or not, it was a great way to soak the federal government, it sounds like?” she asked.

“No, it wasn't,” Schuster said.

Mica said he concluded that “we need to get out of Afghanistan sooner rather than later and put this whole wasteful episode behind us and, again, in a time of national deficits and the United States economic and national security being threatened by our fiscal situation.”