This article continues the story of KBR and its DFAC subcontractor, Tamimi, in support of contingency operations at Camp Anaconda, Iraq. In a recent legal decision, KBR lost out on roughly $30 million in payments to Tamimi, because it was unable to show that those payments were based on prices that were fair and reasonable. This is Part 2 in a series of articles exploring that legal decision.

In the previous article, we told you that KBR and Tamimi had a complex and tempestuous relationship. Tamimi reimbursed travel expenses for certain KBR employees, and even offered some extra funds on the side to help with recreational activities ancillary to the ostensible purpose for the business-related travel. At least one KBR employee bribed several Army contracting officer personnel to help ensure that work kept going to certain contractors. But the KBR/Tamimi relationship had its difficulties, as we will relate today.

Tamimi was one of several “master subcontract” holders that received subcontracted work from KBR. KBR decided to award work to an individual subcontractor based on various factors, which included more than simply the bid price. Thus, the subcontractor that was awarded work was not always the low bidder. Judge Miller, writing for the Court of Federal Claims, found that—

… while pricing for specific contracts was a factor to be considered, it was not the only criterion governing the decisions. … Not uncommonly, work release awards were made to the master agreement holders that were not actually the lowest bidders for the work. In those cases the rationale was that geographic and other logistical considerations weighed in favor of the higher-priced vendor thereby making it the ‘best value’ to the Army.

After a multiplicity of changed requirements and in somewhat murky circumstances, Tamimi began supporting DFAC services at Camp Anaconda. The Court noted that, “in the rush to stand up DFACs … at the time Tamimi began operating the DFACs at Anaconda under KBR supervision, it did so despite the fact that KBR officials had yet to approve the payment of any money to Tamimi for its efforts.” KBR officials had concerns with Tamimi’s pricing and did not sign-off on the necessary procurement approvals that would permit Tamimi to have its invoices processed by KBR Accounts Payable. Tamimi’s problems getting KBR to pay its invoices in full, on time, would continue to trouble the relationship between the two entities. And yet the two continued to work together, trying to make their partnership work out.

When the Army directed KBR to increase DFAC operations and to construct more permanent facilities at Camp Anaconda, KBR and Tamimi turned to another subcontractor (PPI), who began construction “without a contract or a SOW.” But the notion that KBR would undertake construction of permanent facilities under a contract scoped for support services (and not, we assume, construction) caused problems. The cognizant ACO objected to KBRs plans. In response to the contract scope issues raised by the ACO, KBR personnel “devised a solution whereby … Tamimi would take on PPI as Tamimi’s subcontractor and pay PPI for the new DFAC facilities and then work the costs of the buildings into the PPPD rates that Tamimi was charging KBR at Anaconda.”

Despite payment problems, Tamimi agreed to KBR’s “solution” and further agreed to undertake construction and management of PPI. And PPI, you may remember, had neither a contract nor a SOW. This situation later would prove problematic for KBR in terms of analyzing the reasonableness of Tamimi’s pricing.

In the more immediate near-term, KBR’s decision to have Tamimi construct the permanent facilities would prove to be unwise because, subsequently, the Army changed its “corporate mind” and directed KBR to acquire the facilities from Tamimi. In other words, after everything was said and done, the Army decided to hell with the LOCAP contract scope issues: its support contractor should provide required support. But that decision came too late. Tamimi (quite reasonably) figured that it owned the facilities it had “contracted” with PPI to construct, and expected to make a profit on any sale to KBR. (We assume KBR’s notions of performing cost analysis on Tamimi’s and PPI’s actual costs of construction struck Tamimi as sadly naïve.) Suffice to say, when KBR tried to unwind the complex “solution” it had worked out with Tamimi and PPI, its negotiations with Tamimi proved to be a challenge. In the meantime, Tamimi continued to support DFAC operations at Anaconda.

As these two strings of events unwound, internal KBR procurement personnel had identified “serious violations” of KBR’s procurement system, with respect to subcontracting with Tamimi. As the Court found, “Although Tamimi had been operating as a KBR subcontractor since September 1, 2003, at Anaconda, the Operations personnel still had not generated a [purchase] requisition for the DFAC services by the end of October 2003.” No Purchase Requisition, no contract. No contract, no invoice approval. Accordingly, KBR continued to have Tamimi perform services for which the subcontractor was not receiving payment. As you might imagine, this situation created some friction and made negotiating the sale of the permanent DFAC facilities more difficult than they otherwise might have been.

(Note to contractors: If you want your subcontractor to work with you and support your changing needs, it’s usually a good idea to pay them.)

When a requisition was finally generated, Tamimi submitted an official proposal in response to KBR’s request. The Tamimi proposed price was “almost identical to the amount stated in the requisition form from [KBR] Operations.” That fact raised suspicions.

The Court related the subsequent chain of events as follows—

On November 26, 2003, the Food Service personnel … signed a Justification for Other Than Full and Open Competition justifying the sole source-selection of Tamimi for the Anaconda work. … By December 6, 2003, Mr. Petsche had completed the … paperwork—superseding the [work order] issued on August 25—awarding Tamimi the work at all four DFACs at Anaconda. … By this date WR 3 contemplated a period of performance backdated from September 1, 2003, through March 1, 2004, and it had been signed by Shabbir Khan of Tamimi. However, Mr. Petsche refused to sign WR 3 without the proper authorization from his superiors. … In a December 8, 2003 e-mail to various KBR personnel, Mr. Petsche stated that, aside from WR 3's being beyond his signature authority, even at this date no SOW existed for WR 3—a responsibility of Food Service—thereby making the finalization of a contract impossible. … Mr. Petsche later expressed uncertainty about his ability to justify the high cost of this contract at the time, opining that he ‘could not present it with the data and support [he] had,’ … and foreshadowed the inevitable examination of this chaotic effort by the Defense Contract Auditing Agency (“DCAA”).

The Court spent many pages relating KBR’s internal efforts to justify the reasonableness of Tamimi’s subcontract price. Among the many issues, the Court found that, “Regarding the new DFACs … while KBR had instructed Tamimi to pay PPI for the structures, it had not instructed Tamimi to manage the PPI SOW, effectively meaning that there was no SOW for PPI. … The result was that neither KBR nor Tamimi could justify the $5 million cost of the new DFAC structures at Anaconda.” The procurement files were incomplete in this regard—a not uncommon occurrence for contingency contractors operating in a war zone. Nonetheless, since the files were lacking, KBR tried to develop an “after the fact” price justification for Tamimi. Eventually, the pricing was approved by KBR executives, who accepted the after the fact determination that Tamimi’s pricing was fair and reasonable.

The Court reported—

Despite the … approval for WR 3, the prices that Tamimi were invoicing to KBR for DFAC services throughout Iraq came under scrutiny due in large part to the Army’s and DCAA’s growing objections to the costs. … DCAA had taken particular interest in the Tamimi subcontracts because Tamimi was billing on a PPPD based on either projected or actual headcount, whichever was higher. … When informed by KBR that the Government was questioning the amounts being billed, rather than attempt to work toward a resolution, Tamimi indicated that it would not sign any new [Change Orders] or submit new pricing to KBR, instead preferring to continue billing under the old pricing structure, which was highly favorable to Tamimi.

Eventually KBR and Tamimi were able to negotiate new, lower, pricing. However, the Court noted that KBR’s “attempt to justify the [new] prices, however, was, at best, confused.” Within KBR, certain executives were unsatisfied that Tamimi had offered reasonable pricing; Tamimi invoices continued to not be paid because it was felt their prices were still unreasonable. Eventually, KBR relented and began to pay roughly 50 cents on the Tamimi invoiced dollar. The Judge found that—

These partial payments were computed using the actual headcounts at the site and the average [PPPD] rate paid by KBR to its subcontractors.’ [Sic] However, KBR recognized that ‘[o]n average, these partial payment[s] represent about half of what the subcontractor has requested in payment for the invoices covered.’ … In other words, KBR was still holding a substantial amount of money that Tamimi had billed for its services. According to Mr. Jonas, these ‘slow rolling payments’ were effected in order to give KBR leverage over Tamimi in future negotiations for price reductions.

(Note to contractors: Issuing partial payments to legitimate subcontractor invoices, simply to gain negotiating leverage, is not a best practice, in our view.)

Meanwhile, negotiations continued on DFAC facility ownership and a “host of disputed issues” between KBR and Tamimi. Unfortunately, KBR’s lead negotiator (at this point in time) did not impress the Judge, who wrote—

The court found that the enthusiastic endorsement of Ms. Hayes by Mr. Jonas and plaintiff’s counsel was borne out by neither her testimony nor the record of her negotiations that she included in her Negotiation Memorandum dated March 29, 2005. … Her testimony was in the nature of summations on the topics, flavored with anecdotes. Ms. Hayes’s considerable experience with Air Force procurements before her retirement in 2001 at the rank of Master Sergeant after twenty-three-and-one-half years of service, coupled with a decade in contract-management positions with plaintiff, did not inform her testimony. This was a witness in whom plaintiff reposed enormous confidence and upon whose shoulders plaintiff laid one of its core arguments—that the CO 9 settlement would support the reasonableness of the costs passed on to the Army. As will be examined further, Ms. Hayes was more general than specific, did not appreciate or use KBR’s leverage, fundamentally misunderstood some important facts, and stood up to Shabbir Khan’s posturing, but could not explain what she accomplished other than in overall monetary terms. The court was impressed with this witness as a person, but Ms. Hayes did not convey that she was informed about the history of KBR-Tamimi-Anaconda or savvy about the parties’ respective negotiating leverage. Her Negotiation Memorandum was discounted by defendant’s surgical cross-examination, as well as by the key DCAA auditor, George W. Duggan (“the most senior working level auditor in Iraq” … who testified by deposition. …

Ms. Hayes had only a general sense of Ms. Pettibone’s analysis…. Ms. Hayes could not explain the information that was in her negotiating arsenal other than generalized comments about the type of document she consulted. … (‘Well, the problem was I didn’t know how change order 6 was even allocated, how they came about with the numbers that they allocated.’). She did not relate that she drew on her experience with the Anaconda DFACs. In these circumstances it was unfortunate for the record and in contravention of KBR’s procurement policies … that Ms. Hayes did not prepare a pre-negotiation memorandum, although she was sure about her objectives going into the negotiation. … Ms. Hayes explained that her objectives were to lower the overall price of the Tamimi Seven, with particular emphasis on lowering the price for the work at Anaconda and to resolve the DFAC ownership issue at Anaconda.

[Footnote: As a further inconvenience, Ms. Hayes kept only limited notes from her negotiations with Mr. Khan. … Thus, the following account of the negotiations, at which she was the only KBR member present, is based on her recollection. Her later Negotiation Memorandum contained erroneous information about the history of the contract, although the court credits its recitation of her involvement in the negotiations. But see Tr. at 751 … (testifying that her Negotiation Memorandum does not reflect the actual progress of negotiations, such as from where she started).]

Though KBR and Tamimi eventually reached (a third) agreement on the contentious issues that included another retroactive price discount, DCAA was getting more and more suspicious regarding DFAC billings.

In Part 3 of this series, we’ll look at DCAA’s allegations and what the Judge decided.

End of Part 2