Department of Justice Warns of Fallout in Army vs. KBR Contract Dispute

Post Date: June 5, 2013 | Category: Justice Abroad

Professional Overseas Contractors

The outcome of a court battle between the Army and KBR over the final stages of LOGCAP III, the largest government services contract in U.S. history, could affect tens of thousands of federal contracts while creating “enormous uncertainty” for vendors and the government alike, according to the Justice Department.

The warning, delivered in the footnote of a recent U.S. Court of Federal Claims pleading, marks the latest development in a dispute to decide how to close out the 12-year-old, $38 billion military logistics contract supporting military operations in Iraq.

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.

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