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Jun 10

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War Exit Strategy in the Middle East vs. Government Contracting Practices

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The largest US government contract is coming to an end, and not without a requisite pass through the US court system. To some, it might be surprising that the dispute is not one involving allegations of false claims under the Federal False Claims Act, but instead over the terms of the contract closeout. The $38 billion Logistics Civil Augmentation Program (LOGCAP) III contract between the US Army and KBR Inc., which covers US military logistics, was initially a cost-plus type of contract; however, the army is demanding to amend the arrangement to a firm fixed price covering all remaining work. Consequently, KBR Inc. filed a lawsuit.

A cost-plus contract reimburses the contractor for certain agreed-upon expenses and provides a predetermined fee; whereas, as the name implies, a firm fixed fee contract outlines certain work to be performed for a single fixed fee.

Although the war in Iraq is officially over and the war in Afghanistan is simmering to a close, it would be a risky proposition for KBR to agree to a broad fixed fee amendment unless the government is capable of forecasting and presenting to KBR exactly the logistics services it still requires. In a competitive bidding processes, fixed fee arrangements usually work well when the work is clearly defined and transparent. President Obama has advised the executive departments and agencies of the following:

“…there shall be a preference for fixed-price type contracts. Cost-reimbursement contracts shall be used only when circumstances do not allow the agency to define its requirements sufficiently [emphasis added] to allow for a fixed-price type contract.” [1]

In response to the Army’s contracting officer, Robert Egan’s, demand for an “FFP deliverable,” [2] (in other words, a firm fixed price bid), KBR’s senior contracts manager, Mary Wade, replied with the following:

“LOGCAP III close-out activity does not lend itself to a firm fixed-price arrangement…Currently, there is no way to accurately define the scope or duration of work. There is no detailed statement of work because no one knows what is going to be done, when it will be done and how long long it will take to complete…We see no need to change it” [2]

Since the closeout work required by the LOGCAP III contract does not appear clearly defined, the uncertainty caused by factors such as the future political landscape, amount of time to fully exit the Afghanistan war, required materials to render service, potential need to sub-contract certain servicing capacities, troop draw-down rates and future troop levels, among many others, can compound a forecast of costs and lead to an incorrect bid on a fixed-price contract. In the case of KBR, a fixed fee arrangement does not seem like a good fit for the unknown scope of service they will be asked to perform.

 

[1] http://www.gpo.gov/fdsys/pkg/FR-2009-03-06/pdf/E9-4938.pdf

[2] http://www.federaltimes.com/article/20130505/ACQUISITION03/305050005/KBR-vs-Army-largest-services-contract-things-gotten-very-nasty-

About the author

Maksim Dvorkin

Maksim Dvorkin is a consultant at Fulcrum Inquiry, an accounting, finance and economic consulting firm specializing in complex litigation, forensic investigations and appraisal issues across a broad spectrum of industries.

Permanent link to this article: http://betweenthenumbers.net/2013/06/war-exit-strategy-in-the-middle-east-vs-government-contracting-practices/

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