Increased Risks for Battlefield Contractors. BY Raymond S.E. Pushkar and

Transcription

1 Increased Risks for Battlefield Contractors There are more than security risks for contractors on the battle space with costs questioned, audits and investigations are on the rise and must be addressed. BY Raymond S.E. Pushkar and Phillip Carter 72 Contract Management June 2010

2 As the armed conflicts in Iraq and Afghanistan wage on, contractors continue to provide approximately half of the total manpower and force structure for the U.S. government in Iraq and Afghanistan. Most public attention is paid to the security risks borne by these contractors and their personnel, and the potential problems involving their use of force. However, for contractors, the less visible risks relating to costs, subcontracting, and possible audits or investigations loom even larger, creating risks that may continue to affect their companies long after their last employees return home from the battlefield. Nearly any reasonable observer would look at the battlefields in Iraq and Afghanistan and see varying amounts of chaos, affecting everything from the security of roads to the ability of businesses to function. However, despite this chaos, and the general exigencies of combat operations, the U.S. government has taken the position that conventional government contracts law applies in Iraq and Afghanistan. Accordingly, government audit agencies such as the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA), and others have conducted audits of contracts and rates relating to work in those two theaters, and have questioned significant percentages of costs incurred by contractors. Likewise, contracting officers have accepted some of these findings and required government contractors to comply with applicable Cost Accounting Standards (CAS) and Federal Acquisition Regulation (FAR) rules regarding costs and pricing. A number of cases have been decided, or are currently pending, that involve cost and pricing issues arising out of these two theaters. Unfortunately, many of the same tensions from conventional government contracts law (such as disputes between DCAA and contracting officers) are spilling over into Iraq and Afghanistan, and there is little coherence to how the law of battlefield government contracting is shaping up. For example, in a recent case decided October 16, 2009, the government initially sought to disallow costs for personal security and support services, as well as hazardous duty and danger pay, for services rendered to the U.S. Agency for International Development (USAID) in Iraq from August 2003 to mid-february The government sought to disallow these costs on both allocability and allowability grounds. The matter eventually made its way to the Armed Services Board of Contract Appeals (ASBCA), where the board decided in October 2009 to sustain BearingPoint s appeal in part (with respect to the security and support services), while denying its other appeals. However, the important thing to note here is the application of conventional government contracts cost principles and rules to an extremely unconventional situation in Iraq and the extent to which the government would go to disallow reasonable costs relating to security during the early, chaotic days of the war. In another recent case, the government similarly sought to apply conventional government contracts law to a multibillion-dollar prime contract for the provision of food and supplies to the U.S. military. 2 In its contract, Public Warehousing Company (PWC) was required to procure and supply billions of dollars of food to the U.S. military in Iraq using a distribution network that included convoys running throughout the war-torn country. Notwithstanding PWC s battlefield performance, the government maintained the position that conventional government contracts law applied to the contract. During performance, a dispute arose between PWC and the government regarding the prompt payment clause of PWC s prime contract, which arguably required PWC to pass on to the government the discounts it received for prompt payment. The parties first took the dispute to the ASBCA, where the matter was stayed for more than two years as the government conducted a related civil and criminal investigation into PWC. In September 2009, the ASBCA dismissed PWC s appeal without prejudice, partly because of the pending Justice Department inquiries. On November 9, 2009, the Justice Department filed a criminal indictment against PWC, alleging six counts of conspiracy, major fraud against the United States, aiding and abetting major fraud, wire fraud, and aiding and abetting wire fraud. At the same time, Contract Management June

3 Increased Risks for Battlefield Contractors a civil False Claims Act suit was unsealed against PWC. There have been reports of settlement negotiations between PWC and the government; however, for now, these cases remain pending before the U.S. District Court in Atlanta. Together, the PWC matters show the willingness of the government to apply conventional government contracts clauses in the context of large battlefield support contracts and to use criminal indictments where it believes a company has gone too far. Such allegations are generally disputed. Recently, the government brought a civil False Claims Act suit against KBR for what is essentially a dispute over cost allowability under KBR s government contract for logistics support in Iraq. The Justice Department alleges that KBR violated the terms of the Logistics Civil Augmentation Program (LOGCAP) III contract from 2003 through 2006 by subcontracting for security services without the government s express permission. According to the suit, KBR awarded subcontracts for its own security, and also awarded additional subcontracts to more than 30 other companies that employed their own private armed security. Additionally, the suit claims that KBR deployed four of its own employees as armed security to protect some of its executives without government approval. In public statements since the suit was filed, KBR has asserted that the U.S. Army was aware it had hired private security and, furthermore, that the costs incurred and actions taken by the company and its subcontractors to provide support and to protect its employees and subcontractors were reasonable, necessary, and appropriate under the contractual arrangement between KBR and the army. Facts of the dispute aside, the government s allegations against KBR show its willingness to invoke conventional government contracts law on the battlefield, even where doing so may deprive contractors of security services in the middle of a combat zone. The matter remains pending in federal court. With the government taking the position that government contracts should operate under a business as usual model in Iraq and Afghanistan, contractors should assume throughout their performance that they will be held to the same standards of cost accounting, subcontracting, and compliance as they would in the United States in peacetime. Even where contractors can show that battlefield exigencies forced them to make a particular decision such as the sole-source selection of a subcontractor in an area with impoverished infrastructure due to the war contractors can expect to be second-guessed by successive waves of auditors, investigators, and reporters. Consequently, contractors must consider continuing and/or developing the same robust compliance, procurement, and contracting systems in Iraq and Afghanistan that they use in the United States, no matter the exigencies of war. All of these issues take on outsized importance when prime contractors or subcontractors hire armed security contractors to provide 74 Contract Management June 2010

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5 Increased Risks for Battlefield Contractors NCMA Corporate Sponsors enhance their industry image as premier businesses in the contract management community. Learn how your company can take advantage of our growing resources by becoming a corporate sponsor. Contact: CHRIS MARTIN cmartin@networkmediapartners.com -OR BRUCE TACKETT btackett@networkmediapartners.com Sponsors Advanced Contracting Strategies Bechtel Corporation The Boeing Company Defense Acquisition University Department of Veterans Affairs Center for Acquisition Innovation FedBid Kellogg Brown & Root KPMG NASA SEWP ProPricer Technical and Project Engineering (TAPE) LLC Wolters Kluwer Law & Business Join Our Industry s Leaders Today. security for them in Iraq and Afghanistan. In any subcontracts for security, the purchasing contractor must ensure that appropriate clauses are flowed down to their subcontractors, particularly those relating to the acceptance of risk for use of weapons, compliance with applicable laws (including the laws of war), and responsibility for coordination with specific government entities such as battlefield command posts. Moreover, contractors purchasing private security should ensure their prime contracts or subcontracts specifically authorize the procurement of security services, and explicitly allow incurred costs for security. It should be noted here that under Defense FAR Supplement (DFARS) , DFARS , and FAR , armed contractor personnel must meet certain requirements in order to carry and use their weapons. The contractor bears the burden for ensuring its personnel meet these requirements. First, a contractor must seek permission from the combatant commander the U.S. Central Command (CENTCOM) commander or his designee for its personnel to carry weapons. Second, such personnel must be trained and certified to carry weapons in accordance with standards established by the contracting officer or customer. Third, the contractor has a duty of due diligence to ensure its personnel may lawfully carry weapons and are not barred by law, 3 which precludes those convicted of domestic violence from carrying a firearm. Fourth, contractors must ensure that their personnel and their subcontractors carry weapons in accordance with applicable laws, regulations, and directives, including the published Rules for the Use of Force or Rules of Engagement or both. Fifth, according to the DFARS, all liability for the use of any weapon by contractor personnel rests solely with the contractor and the contractor employee using such weapon. 4 Accordingly, contractors operating on the battlefield should exercise extreme caution with respect to the use of weapons by their personnel (and subcontractor personnel), because all liability for uses of force will rest with the contractor. In Iraq, U.S. forces plan to draw down over the next several months until approximately 50,000 military and civilian personnel remain in-country. In Afghanistan, the current surge of personnel will last until late 2010, at which time the force size will return to its presurge levels of approximately 75,000 military and civilian personnel. Contractors will continue to play a central role in both countries, supporting U.S. military and civilian personnel in a variety of ways. However, despite the critical role they play, contractors may also continue to face increasing scrutiny of their activities, including cost and subcontracting scrutiny of the type previously described. As an example of this scrutiny, the Commission on Wartime Contracting (CWC) has heavily criticized the army and government contractors on issues ranging from lack of oversight to risk of waste, fraud, abuse, and undermining of national objectives. According to the CWC, contracts for logistical support, translation, maintenance, security, and other services are estimated to total $80 billion over the past five years in Iraq and Afghanistan. Services contracts for the majority of effort are mostly managed by the U.S. Army. 76 Contract Management June 2010

6 Increased Risks for Battlefield Contractors Notwithstanding these criticisms, however, many defense leaders continue to support contractors and the critical role they play on the battlefield. The 2010 Quadrennial Defense Review includes contractors in its mix of personnel who comprise the total defense workforce, and argues that [t]he services provided by contractors will continue to be valued as part of a balanced approach that properly considers both mission requirements and overall return. And, in a recent report from the influential Center for a New American Security, titled The New Reality about U.S. Contractors, Dr. John Nagl and Richard Fontaine conclude, Not a single mission in Iraq or Afghanistan has failed because of contractor non-performance. Most private contractors appear to make a positive contribution, and to be honest, patriotic, and dedicated to the mission at hand. CM ABOUT THE AUTHORS RAYMOND S.E. PUSHKAR is a senior counsel with McKenna, Long & Aldridge, LLP and a vice-chair of the ABA Section of Public Contract Law s Battle Space and Contingency Procurements Committee. PHILLIP CARTER is an associate with McKenna, Long & Aldridge, LLP, a former U.S. Army officer and Iraq veteran, and former deputy assistant secretary of defense. Send comments about this article to cm@ncmahq.org. To discuss this article with your peers online, go to org/cm0610/pushkar and click on Join Discussion. Endnotes 1. BearingPoint, Inc., ASBCA Nos and Public Warehousing Company, K.S.C., ASBCA No Such as the Lautenberg Amendment (18 U.S.C. 922(g)(9). 4. See DFARS (j)(4). Contract Management June