Global Policy Forum

By John Hendren

The Army on Tuesday abruptly reversed itself and decided to pay all of Halliburton Co.'s fees to house and feed U.S. troops in Iraq and Kuwait after the company threatened to legally challenge the effort to penalize it. The Houston oil services company announced early Tuesday that the Army had decided to pay 85% of the bill for services in the war zone after a dispute over how the company calculated its bills.

Hours later, a spokeswoman for the Army Field Support Command in Rock Island, Ill., said the 15% penalty for the company's KBR subsidiary — amounting to an estimated $60 million a month — would not be levied. "I just got a phone call putting on hold the 15% withhold clause implementation, and I don't know why or any of the particulars," Linda Theis, spokeswoman for the Army Field Support Command, told Reuters news service.

Halliburton, run from 1995 through 2000 by Vice President Dick Cheney, said earlier in the day that it would challenge the decision in court because there was "no legal justification" for withholding the money. The penalty would have withheld 15% of future payments on Iraq-related contracts valued at up to $18 billion. An audit by the Defense Contract Auditing Agency found that the company's system for generating cost estimates used in negotiations with the government was "inadequate."

In response to the promised penalty, the company said in a statement that it would cut some payments to its many subcontractors in Iraq and Kuwait by 15%. Under the contract to feed and house U.S. troops and deliver oil and mail to them, Halliburton is paid expenses plus 2%. Although the Army usually pays only 85% of ongoing costs before it makes a final accounting, the nation's oldest military service waived that provision for Halliburton.

The initial decision that was reversed Tuesday would have ended the waiver. The cost estimate system criticized by the military is used to come up with a price the government agrees to pay as Halliburton performs work in Iraq. Later, auditors try to reconcile the estimates with actual costs and determine whether the government has paid too much or too little. "Generally, when the government makes 'progress' or partial payments on a contract, they only pay 85 cents on the dollar anyway," said Steven Schooner, co-director of the Government Procurement Law Program at George Washington University. "That's the normal payment progress rate.

"And that's so the government doesn't overpay on a contract…. Because we depend so much on the KBR contract, we have waived the withholding rate so far."

The company's billing practices have come under scrutiny at the Pentagon and on Capitol Hill, where Democrats have suggested Halliburton has benefited from its ties to the vice president. Pentagon auditors found that Halliburton could not properly document more than $1.8 billion of work in Iraq and Kuwait. Halliburton faces numerous other investigations, including an FBI inquiry into whether two of its employees received up to $6.3 million in kickbacks and whether the company improperly billed for $186 million in meals never served at dining halls in Iraq.

The company recently agreed to pay a $7.5-million fine to the Securities and Exchange Commission to settle an investigation into an accounting practice that appeared to boost the company's revenue while Cheney was chief executive. And a federal grand jury in Texas has launched an inquiry into whether Halliburton violated U.S. sanctions against doing business in Iran by working through a foreign-owned subsidiary registered in the Cayman Islands.