The Ugly End to the Largest Service Contract In U.S History

May 14, 2013 by · Comment
Filed under: KBR, logistics, Syndicated Industry News 

Dealings between KBR and the Army have gotten “very nasty” as the two try to close out the largest government services contract in U.S. history, according to an article in Federal Times. The dispute is over whether the remaining work in the $38...

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KBR Receives Further Iraq Contract

President Obama may have announced that the U.S. will be withdrawing all of its troops from Iraq by the end of this year but that does not mean the U.S. is leaving the country that it invaded almost 9 years ago. The State Department and other Government agencies will still maintain a presence and provide support to the Iraqi Government.

This means that those entities will still require logistical support themselves. Under the existing Logistics Civil Augmentation Program (LOGCAP) IV run by the U.S. Army a task order was awarded to KBR (KBR) to provide housekeeping services for that personnel. The TO has a value of over $500 million for its two years if both are executed.

The size of the award indicates that the U.S. Government will need a great deal of support during those two years. KBR will provide basic services such as facilities, utilities, food service, laundry, transport as well as other types of support.

The LOGCAP contracts have been controversial as they have had billing problems and issues since their inception. They have had the ability though to allow the U.S. to get the necessary services they need to support thousands of troops and other personnel across Iraq in very trying conditions. They are omnibus service contracts allowing what type of support needed to be bought.

Because of the nature of the U.S. armed forces today and their structure they are now reliant on contracted support for most housekeeping services and contracts like LOGCAP are inevitable. Combined with the fast changing nature of requirements in Iraq which quickly went from invasion to stabilization to counter insurgency operations the LOGCAP needed to be awarded quickly and executed.

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House Begins to Cut Defense Budget

The House Armed Services Committee (HASC) approved by a 60 to 1 vote their version of the 2012 Defense Budget. This is basically similar to what was requested by the Obama Administration and reflects the first real reduction to U.S. defense spending since the attacks of 9/11.

As in previous budgets it was split into three parts: first, the base budget which funds the U.S. military and its investment, production, training and support activities; second, the cost of “Overseas Contingency Operations” (OCO) which used to be called the Global War on Terror (GWOT) which are the costs associated with operations in Iraq and Afghanistan and finally it also includes money for the Department of Energy (DOE) support to the U.S. military which is primarily related to nuclear weapons.

The base budget was about $535 billion which was a slight increase on the $533.8 billion programmed in 2010 for such activities. Due to the fact that no 2011 budget was officially passed by Congress until late in the year the Department of Defense relied on continuing resolution which restricted spending to 2010 levels. When the final budget deal was struck funding the rest of the year total planned spending remained consistent with 2010 levels. The Obama Administration had requested $548 billion with almost $160 billion for OCO. This amount was not approved or provided.

The HASC bill approved amounts to a reduction as the OCO funding was reduced to only $119 billion from the $130 billion in 2010 and the $160 billion proposed in 2011. Total spending in 2012 based on the HASC will be $690 billion including the DOE funding of $18 billion. This is a net increase over 2010 but almost $20 billion less then the planned spending in 2011.

What does this all mean for defense contractors? If the House totals hold, and after the work with the Appropriations Committee and the Senate there may be many changes in what the money is spent on, it will be the first net reduction in U.S. defense spending in 10 years. This will mean that some contracts won’t get funded and some companies will see their revenue and earnings reduced.

The cuts to OCO mean those companies heavily involved in providing support and equipment for Iraq and Afghanistan will see the first cuts. The Army’s LOGCAP IV contract provides much of this support for deployed forces and companies like DynCorp International, Fluor and KBR have received large contracts as part of it. The reduction to OCO may affect LOGCAP and those companies involved in it.

It will also mean less bullets, beans and gas will be bought to support the troops in Iraq especially. Suppliers of basic items may see reductions in the amount of items purchased from them. This includes ATK who make ammunition as well as the various gasoline refiners and providers. As the fighting in Iraq and Afghanistan winds down the DoD will be concentrating on making new weapon systems and repairing and refitting the equipment used by the military in those operations.

If and when all of the U.S. and Allied forces return from the fight there will be no need for OCO funding at all. This seems to indicate that the base U.S. defense budget will sink to about $500 – $600 billion a year. This will provide opportunities for those companies providing new, advanced weapons as well as supporting the U.S. military in its bases in the U.S., Asia and Europe. The next round of cuts though will be to this base budget. That will affect the entire U.S. defense industry and may lead to reductions in the number of contractors either through M&A or just moving to other business lines.

Defense spending has been a major prop to the U.S. economy as a whole as it supports businesses and jobs across all of the states. If the civil market has not recovered sufficiently cuts to this money will have a negative effect on many local economies across the U.S. already being experienced as some contracts are eliminated or reduced.
This HASC vote may be the first step into a period like the Nineties which saw wholesale changes to the U.S. defense industry and the countries’ industrial base as a whole.

Photo from David Paul Ohmer’s Flickr Photostream.

Article first published as House Begins to Cut Defense Budget on Technorati.

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Defense Earnings Continue Good News (ITT, KBR, COL, OSK)

As the latest reports of earning and profits have been coming in the last week defense contractors have reported decent growth in revenue and earnings. To date only Lockheed Martin (LMT) which saw a decline has been the only major company to report negatively. The latest reports from ITT Corporation (ITT), KBR (KBR), Rockwell Collins (COL) and Oshkosh (OSK) saw improvement.

At the same time most companies are being cautious in their future views due to concerns of future U.S. defense spending.

ITT Industries (ITT) who make radars, electronic and night vision systems as well as logistical and technical services for the Pentagon reported over one hundred percent improvement in income per share compared to last year with an increase of $0.46 cents a share. The company has increased their projection for the full year to $4.28 to $4.32 well over the analysts $4.08 to $4.18. Total revenue though was less then predicted at $2.64 billion. ITT also has a significant commercial side with a focus on pumps and water purification to aid them in balancing their defense products which did see a decline this quarter.

KBR Inc. (KBR) a leading provider of logistic and engineering services to the U.S. Defense Department as well as to the oil and construction industry reported an increase in earnings of $24 million. Revenue was reduced mainly due to the loss of the Logistics Civil Augmentation Program (LOGCAP) III contract. The U.S. Army manages the LOGCAP contracts for support in Iraq of military and civil services. KBR had worked on previous LOGCAP contracts but due to concerns expressed by the U.S. government with some of the charges and billings they were unable to bid on the latest iteration. Overall KBR expects to slightly exceed analysts expectations for the year.

Rockwell Collins (COL) who primarily provide avionics and electronic systems in support of defense programs also had a good quarter. The company also provides support to commercial aviation and saw significant business providing spare parts and retrofitting those type of aircraft. The company feels that it will meet predictions for annual earnings. There were some concerns expressed that the delay in awarding the U.S. Air Force’s KC-X new aerial tanker contract expected now to slip from this month to early next year may effect them as they are part of Boeing’s (BA) team.

Oshkosh Corp (OSK) who primarily had made construction and heavy equipment but recently had moved into the defense realm with two major contract wins in the last two years saw a drop in revenues and profit in the most recent quarter. The company had had bad years in 2008 and 2009 due to the decline in the U.S. economy affecting their sales. Recently the production of the MRAP-AT vehicle for use in Afghanistan and the FMTV truck for the Army and Marines had offset this decline in recent months. The company is saying that improved performance of the commercial side of their business will aid the company in the future. Both the MRAP and truck contracts have definitive ends as the military buys out vehicles to rebuild their inventories.

Defense contractors who also have a commercial component of their business seem to be doing the best as the latest results are announced. Boeing, Oshkosh, ITT and Rockwell all were able to strike a balance with these business lines. They may be able to offset future cuts to the U.S. defense spending but if the U.S. economy does not recover soon it may be a rough few years for these companies.

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Contractors Good For Something — Being A Force Mulitplier In Afghanistan

For the last eight years one of the biggest complaints from the American left was that George Bush was in the sway of big government contractors. They did too much of the housekeeping services in Iraq and Afghanistan. Companies like KBR lined their pockets at the expense of the troops and taxpayers. They were doing jobs that green suiters or civil servants should be doing.

Unfortunately due to the small size of the military they had to use contractors for those jobs. This has been a trend going back thirty years. Use contractors to wash clothes, cook food and clean latrines. Then there would be more soldiers freed up to do the fighting. Despite a consistent philosophy on the use of support contractors Bush received holy hell about it. True the scale in Iraq was much larger then it ever had been before and the contracts were in some case let quickly and didn’t have enough oversight but people were trying to get things done.

Now the word is that Obama wants to increase the number of foot soldiers in Afghanistan but without increasing the number of U.S. troops deployed to that country. One way to do this is to reduce the number of soldiers assigned to logistic support units, command headquarters, maintenance and so one and do a one-for-one swap with “trigger pullers”. How do you do this and still provide the enormous tail that U.S. forces need? Use contractors.

It might be possible to assign U.S. civil servants to do this but there have been many issues in the past with getting them to serve in Iraq and Afghanistan. It is too dangerous or not career enhancing. Certainly there is a number of people assigned or who volunteer for these positions but to get the kind of capability that is needed it will have to be contractors. Contractors like KBR or other such companies experienced in logistics and maintenance.

This will not be an easy or quick switch. The ground troops will have to be designated from either those in Iraq or in the U.S. recovering from a recent deployment. Then they will have to be trained and equipped up. A plan will be figured out how to deploy a 1000 support troops and replace them with a battalion of infantry. The support infrastructure will probably have to switch first. Contractors taking over for the rear echelon folks.

Another challenge will be writing and awarding the contracts for this. Unless they plan on expanding existing contracts there will be a several month period of writing the RFP, putting it out and evaluating the proposals. Awards may be protested which could add to the delays. Once awarded the contractors will have to hire their people and get them into place. Expect the almost constant sniping from Congress and the Media about this. See the LOGCAP contract from Iraq for example.

The Obama administration really cannot do anything else. They have reached the fish-or-cut-bait point. Either abandon Afghanistan or pour resources in. At the same time he does not want to “surge” troops there as that will make him and many Democrats look like idiots for opposing the same in Iraq. So he does the next best thing: surge contractors to maximize his troop availability. Good luck to them and the soldiers.

Cross posted at Inane Taskers

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GAO upholds IAP Worldwide Services protest of US Army Iraq logistics contract

According to this story in the Orlando Sentinal, the GAO upheld in October the protest by IAP Worldwide Services and Contingency Management Group of the award to a team headed by KBR to provide long-term logistics support to the US Army in Iraq. This GAO ruling will allow the two companies to rebid on the contract that could be valued at up to $150 Billion. There are three possible protests open to a losing bidder. First, the can protest to the Agency that awarded the contract, here it would be the US Army. Then the Government Accounting Office, and finally to the US Court of Appeals. The protest was upheld because “The GAO said the Army showed unjustifiable favoritism in awarding the troop services deal to KBR and Fluor. It also failed to seriously consider KBR’s past performance and the critical cost issues cited by defense contract auditors,”.

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