Let's talk about that a little bit. Why is it cheaper?
Well, when you start taking a look, the training base that supports that soldier, you take a look at the family that he or she may have. When you take a look at the deployment of that individual into a different theater -- into Germany, for example -- when you start rolling up all those costs, then you compare them to what it takes to give it to a civilian contract, it's very much cheaper. It's a very cost-effective way of doing business.
But that's not immediately evident to somebody listening to you, because they're going to see that a truck driver, for instance, who is brought over here from the States [is] paid much more than anybody who was driving a truck for the armed services in the past was getting. How is it cheaper?
Because we increased the number of soldiers who can go out on patrol. And when you look at the cost of that soldier and a lifecycle environment, the dollars just show up. It's more cost-effective to outsource some of those activities, those functions, outside of the military. I didn't do the numbers, but I'm telling you, it's cheaper.
But when we're outsourcing what used to be done by military, we're paying the new private contractors more than we paid the soldiers to do the same job.
Well, I can't stand here and give you that analysis. I didn't do it. That's a DOD analysis, and they came up with the conclusion it's cheaper to outsource. So they outsource to KBR [Halliburton subsidiary Kellogg, Brown & Root]. And we got the contract. We do what they ask us to do. So if you're asking me to do the business case and give you the puts and takes on it, I can't do that. I can just tell you its overall context. Having been in the military and seeing the military downsize and know what we were doing putting contractors on the battlefield, it's cheaper.
But you're convinced it's cheaper.
I am convinced it's cheaper.
Even though we're paying people more money.
Well, wait a minute now. You're paying some people more money. You're talking about expatriates that come over here. There's an American truck driver who gets more money, but you don't take into account the third-country nationals we hired at less wage, because they can come over here and do it cheaper.
They don't have deployment issues that they have to contend with. They don't have mobilization issues that's on their nickel. We use subcontractors from around the area so you don't have to mobilize them. They take care of their own living conditions and what have you. So when you're talking about the number of people that are on LOGCAP [Logistics Civil Augmentation Program] -- about 48,000 people -- only about 13,000 of them are Americans. So when you start adding up those costs, it's obviously cheaper. ...
But let me give you the other piece of it, the piece that is never taken into consideration. When a soldier comes inside the wire -- soldier, airman, Marine -- when they come inside the wire, we provide a building for them; we provide a safe environment, because they take care of the force protection around the base camp that they're in.
We provide dining facilities that are very attractive and give them all the nourishment they need. We give them MRW [morale, recreation and welfare] facilities so they can work out, see movies, etc. And we get their mind straight so when they go outside the wire to do their military job, they're sharp.
There's a lot to be said about bringing an individual inside the wire and providing them these amenities that don't have to be provided by soldiers. I spent my entire career watching soldiers pull KP in the kitchen. Why do we have to do that with soldiers? Why can't we outsource that mission? And so when you take that all into context, what we're trying to do is assist the war fighter and get him prepared to go do the mission with a proper attitude in a proper environment.
Has there been controversy in the Pentagon over the decision to outsource so much?
Well, I'm sure there has. The size of this contract, as I said, went from supporting 25,000 to supporting 200,000, so it was obviously a large outsource. Understand that KBR is not the only company that has outsource contracts. There are contingency contracts all over this theater by other contractors that fulfill the same mission, that are done locally, on the ground.
KBR gets very good marks for its work in the Balkans. Contrast, if you would, the experience in the Balkans with the experience here in Iraq.
Well, the experience in the Balkans were small-camp, isolated-type processes. In other words, when you go into Kosovo, you see two main camps. They were able to be supported, kept in one location. Over time, what they did became better and better, and it moved toward what we call sustainment. In other words, they study state operation. So they had eight years to build up those contracts and to work off of the lessons learned to make it better.
When you came into this particular situation, you started in October of '02 in the desert of Kuwait, bringing forces in to get them ready to go across the border. As that buildup started, and they punched across the border, within three months we found ourselves at locations all over the country. And the same type of support that we wanted to put into those camps that were provided in the Balkans meant that you were spread in a lot of different directions, and so it became an effort to get everything forward, get it on the ground so we could support the soldiers as fast as we could.
Now, in doing that, you're working in an environment that one, it's a hostile environment; two, does not have all the connectivity with links back to the States; three, requires you to bring supplies in from supply systems that have to be oriented toward the country, in order to get them upcountry, bringing them through Kuwait, etc.
So you have a major supply/distribution issue to contend with, and at the same time, you're moving soldiers into a fighting environment. So when you look at KBR being right behind the forces as they move forward in the aftermath, when we look back, there were a lot of things that probably, for example, hadn't been done on the paperwork side of the house. But we came back, and we fixed that over time. ...
The questions have not been around whether or not you failed the mission. The questions have been around whether it costs too much, whether everything that was charged was delivered. You know the charges.
It's a reasonable question. That's why you've got the Defense Contract Audit Agency [DCAA] looking at it. But at the same time I think there has to be a little bit of realism introduced into this. This contract was designed with Federal Acquisition Regulations [FAR] that orient to a peace environment. This is a contingency environment.
It is different from Bosnia and the Balkans, because the hostilities in this environment are much more severe. And we're losing people. We're having people killed. We didn't have that in the Balkans and Bosnia. When you look at it from the standpoint of the types of regulations that you're held to -- in the dining facilities, for example, they are asking us to be held to the same type of regulations that you would do in a stateside dining facility. Now, I think that's a little difficult to imagine when you're three months into an operation in Anaconda, one of our base camps, trying to adhere to stateside regulations when you don't have control over the food that's brought to the facility. It's delivered by somebody else on another contract, and you're expected to go through stateside regulations in order to be audited.
Now, do I think that you ought to be audited? Absolutely. I don't have any problem with that at all. None whatsoever. But I think when you start taking a look at the fact that we have been accused of overcharging for food, OK -- when the military moved forward, the government said to us, "Prepare to feed at locations 5,000 at a meal." If 3,000 showed up, we're still prepared or bought food for 5,000. The government came back with the audit agency and said, "No, you pay for boots through the door." Now, you as a civilian, if you had a daughter and you married that daughter off, and you'd hired a catering hall and hired it for 500 people and only 450 showed up, how many would you pay for?
So the bottom line is, when you're told in a contingency operation, "Be prepared," you're prepared. You're not going to turn away a brigade at the door because you only plan for 3,500 and they brought 5,000 through the door when they told you to prepare for 5,000.
Is it fair to say that you've done a lot more subcontracting, [because of] the size of the project, than you did in the Balkans?
Oh, absolutely. It's just because of the immensity of the project, sure.
What's the consequence of that in terms of control?
Well, the consequence is that you have to affect more systems for the control. You have to spread them into other areas. Initially those were run as single entities, like they were in the Balkans, and then eventually [in] time, we brought it under one umbrella, so that we were getting a broader view over the entire operation. And in doing that, you get economies [of] scale. You can get better control over what you're buying, what you're paying for.
Approximately how many subcontracts have been let off of the prime contract with LOGCAP?
I can't tell you. I don't know.
We're talking tens of contracts or hundreds of contracts?
Oh, hundreds of contracts, absolutely, sure.
Subcontractors. And those subcontractors in turn I presume also let contracts.
Sure. Second and third tier, absolutely.
Second, third, even fourth tier, in some cases, correct? So what does that do to the ability to keep to the terms of the prime contract? When you have four levels down, doesn't it get a little unruly?
Well, it doesn't get unruly; it gets difficult to manage. But at the same time, in the end game, you manage the product and the deliverables. And if the prime-tier subcontractor is not delivering what he's supposed to, then they give him a tier notice, and you start working down through the chain. But if the third-tier subcontractor is not doing their job, we hold the first tier responsible. And it's what you see visible in the end game is what you're looking at. What are the deliverables?
So are you responsible, then, for what work gets done three, four tiers down?
Sure, we are. Why wouldn't we be? We let the contract. The government told us to do a job. Wouldn't you hold us responsible? It's the same if you were a general contractor building a house and you hired a plumber. Wouldn't the owner hold you responsible for what the plumber did?
That's a subcontract, two tiers down. There's nothing different from what we're doing that you wouldn't do at a stateside operation. ...
If you want a contrast to it, go back and do some historical review of what happened during the first Gulf War when we arrived over here and started letting contracts, and there was no mechanism other than people going out on the ground and talking to people about getting contracts. At least now we have a process that follows the Federal Acquisition Regulations under one umbrella, with LOGCAP.
So have we moved forward? Absolutely. Tremendously forward. The military knows where to go. They've got one bellybutton to punch.
It all raises the bigger questions, though, of whether or not it wasn't better under the old system, when you had the military in charge of the whole kit and caboodle.
Well, now you're asking for an opinion. I grew up in the military where we did all that for ourselves. I spent 30 years looking over the fence in Europe, being prepared to go to war. And we carried everything with us. So was I comfortable with that environment? Absolutely. Do I understand what the changes are in the political environment, the economic environment? Sure. I have no problem. ...
[Instead of having KBR use subcontractors, why doesn't the military just let several contracts?]
Essentially standards. Because we have an overview of all the dining facilities in the country, we hold them to the same standard. And even though different subcontractors will bid those contracts, we hold them all to the same standard. And you can find that no matter where you go in the country, you will find that the dining facilities meet standards across the board.
It's an economy of scale. Why should you have individual contracts that you have to go and monitor in terms of quality and standards when you can have one contract and have somebody do it in an overall sense?
Because by layering and tiering subcontracts, each company along the way is making a certain amount of overhead and fee profit. That's what these companies are in business for.
So the more tiers you have, the more people along the way are taking profit. It seems inefficient.
Yeah. But this is a contingency operation; you're trying to gather together enough people to do the job. Contingency operations eventually move into sustainment. When they move into sustainment, you go into a self-deployed-type operation. You do it yourself. And so over time, the military will move all of these to a sustainment-type operation, and you'll get the economies of scale that you're talking about. But remember, this is a contingency operation. This is rapid-moving, respond, get it done, and get it done as fast as you can get it done.
And so you don't get the economies of scale in the early stages?
We go out and get the workforce necessary to do the job ... with a fair price, because we do go through a contractual process. It is a contractual bidding process that they go through. So ESS and anybody else who bids a contract has to be evaluated in our procurement channels to give us the best value.
Are all those contracts competitively bid?
Even in the rush of war?
Well, there are some contracts, for example, that we have to justify sole source for an extension because of a changeover or moving a unit or what have you. So if we have to do any type of sole-source justification on the ground, it has to be adequately documented to prove to the administrative contracting officer that this is the right thing to do.
Understand that our entire oversight is done not by the DCAA in an audit sense, but we are managed by the Defense Contract Management Agency [DCMA]. Every single requisition over $2,500 that's let in this theater must be approved by an administrative contracting officer before we can put it out for procurement -- every single one over $2,500.
It's an enormously complicated system.
It seems almost an impossible task.
No, it isn't. We've done it. ...
You've got at least four vigorous investigations going on. Other big companies have operated in this theater -- Bechtel/Parsons, the oil sector, and reconstruction, DynCorp and LOGCAP II. They haven't attracted as much attention. However, KBR gets singled out as a particular target. Why?
I don't know. If I knew the answer to that, I'd probably be in politics or religion.
Well, you must have --
I'm being facetious, naturally, but I have some feelings about it. First of all, we're the biggest contract on the street. Secondly, when it comes time to look at mission accomplishment, we have done very well. But when you look at the way we were evaluated for what we have done, it becomes a very difficult process to try to win the award visa to put on the table.
When you start any of the political dimension into it, in terms of things like overcharging, just the allegation that we were overcharg[ing for] anything would bring about a government agency looking at us. That's part of the process. And so we have to fight through that. The only thing we can do is stand up and give a true and honest evaluation of what we've done, show the documentation and why we arrived at those conclusions, and let whoever is making the assessment make the assessment.
We are not afraid of that process. We are not afraid of that process at all. I welcome it, because I'm a taxpayer, too, and one thing I try to be constantly on the lookout for is fraud, waste and abuse.
You had some employees that have been charged with fraud --
Sure, they have. When you have a contract this size, I don't care what company you are, you still run the same potential when you run a contingency. We need to do it fast. You'll run that potential. And by the way, this is the Mideast, and part of it is cultural also. ...
At the beginning of this conversation, we talked about the scope of your work. Who are these people who do this work?
Well, essentially they're Americans that have one or two different motivations for coming. You've already mentioned the fact that they come to earn money. Well, that's true; many of them do, for good, sufficient reason[s]. You take a truck driver who comes over here and wants to drive because he gets a good wage, but at the same time he might know that the money he makes in this year will be able to pay for his rig back in the States, and he puts himself on an economical base that's good for his family and his future. So why wouldn't he do that? That's what our society is all about.
So there's that piece of it. I've been told that well over 60 percent of our people are former military. Those people do it for more than just the money. They do it for motivation. They want to remain close to the military.
I spent 34 years in the military. I came over here last year to look at putting the Iraqi army back to work. I can't explain it other than I love soldiers and I love to support them. And the only plausible reason I've been able to run into is from my wife, who says it's in my DNA. And so consequently there are people who are motivated to do a good job over here, and they're drawn to do the job in the area that they've been trained to do it in.
If you have been a traffic dispatcher in the military, there may not be a whole lot of job opportunities back in the States, but you come over here and do the same job. They're interfacing with the people that they've worked with all their lives. So it's more than just coming to get the money. ...
Where do you draw the line between what should be performed by the private sector and what should remain with the military?
I would put it in terms of what used to be a three-tier definition for military forces. One was combat forces -- infantry, armor, artillery and such; one's combat support forces, which essentially were MPs [military police] and other activities that supported the war fighter; and then the third one is combat service support forces, which is the tails. And so the tail lends itself to contracting; there's no question about it.
But it's still vital?
It's a mission-critical function when you're supplying food for troops. Without full bellies, they can't fight.
Well, let me put it in a different context. We feel in Iraq, in the Iraq theater and the Kuwait theater, that we support the military with an equivalent of over 30 battalions' worth of support. That's a lot. Thirty battalions' worth of support will give you almost a division and a half to two divisions. ...
You've got to understand that when you have a division context behind a division, you have a core support element. That core support element has service support people, and then behind that is theater support. And so what the contracting side of the house has done is picked up a large part of the theater support and some of the core support. And so when you take that in its total context, it has to be integrated with what I would call the rear for the deployed forces.
And as a percentage of the overall [operation], what have you taken on?
You can't talk about it [as] the overall military; you have to talk about deployed force. And so what we've deployed just in the Iraqi theater alone, we would estimate that we're probably -- of the rear, not the deployed fighters -- of the rear, we're about 35 percent of its support, with the military supporting the rest of it via the core support commands and the other activities that they have going on, and Reserve forces. ...
There are people in the Pentagon and retired military [who] say: "Our soldiers don't need three flavors of ice cream; they don't need lobster," or, "They don't need cordon bleu. What they need is a safe, secure environment." And they say that basically once you create such a big tail, you create security problems. Once you subcontract under the dining facilities, you create security breaches potentially. What's your reaction to that?
Well, first of all, the American soldier loves milk and ice cream, and so if that makes him feel better, why shouldn't you provide it? Secondly, what's the difference in cost between three flavors or one flavor? You've still got the same volume of ice cream going through the cooler. So if you can provide three flavors at the same cost, why not do that? Thirdly, there's a 21-day menu that's approved by the military. The military defines the menu. They define exactly what types of foods will be on it.
All the dining facilities do is use that as an ordering guide when they look for the number of people that they have to serve. KBR is not responsible for delivering that food to the dining facility. That's another contract that's been let by the Defense Logistics Agency [DLA] with one of their subsidiaries that has brought on a company who delivers the food out of Kuwait, essentially, to all the dining facilities in the theater. They drive it up to the back door, our people unload it, and they prepare it based on a 21-day menu. ...
[What about] the idea of transferring so much of the functions of the military to the private sector?
Well, I would tell you that even at the immensity and the size of this contract, there is no question in my mind who is running the military part of the operation. We are still contractors; we still have to meet the regulations that they put down for us to follow. We are still subject to audits, which are exactly what they need to do in order to ensure that we're doing the things that the regulations call for. We have a contract management agency that's run by the Department of Defense that reports to the people in the theater that tells them whether or not we're doing the right thing.
We are not introduced to all the secret aspects of what's going to happen down the road, except at very few levels so that we can plan. So I would tell you that my feeling is that the military still is able to execute its mission providing the military support that's needed without any undue pressure from the civilian part of the private sector. ...
What are you going to take away from this experience? What's moved you the most?
A tremendous amount of satisfaction and pride [at] having been a part of a contracting organization, a civilian firm who has been willing to go to war to take the good and the bad, to include the casualties we've taken, the reorientation of "Why did my dad die driving a truck in the war zone?" But probably more than that, a satisfaction that in helping this firm do it right. And that's what we all hope: when we leave a job, that we'll leave it in better shape than it was before we got there -- that the contribution we have made to the United States' move to bring democracy to Iraq has been a contributor to the overall process, and we're going to see success down the read.
Now, that may be a very altruistic statement, but I'll tell you, I really believe it. I believe we have made a contribution. I believe that every single KBR employee ought to stand tall on what they've done. And they do. ...