Examining Halliburton's 'Sweetheart' Deal in Iraq

Experts Say Lucrative Contracts Yield Razor-Thin Profit Margins

A U.S. Army contractor with KBR directs Iraqi workers clearing debris on the grounds of a former pre

A U.S. Army contractor with KBR (Kellogg, Brown & Root) directs Iraqi workers clearing debris on the grounds of a former presidential palace in Iraq. Benjamin Lowy/Corbis hide caption

itoggle caption Benjamin Lowy/Corbis
KBR building

A KBR sign adorns the Halliburton corporate headquarters near downtown Houston. John Burnett, NPR News hide caption

itoggle caption John Burnett, NPR News

Oil services company Halliburton has come under intense scrutiny over its multi-billion-dollar contracts with the U.S. military in Iraq. Congressional critics want to know if the company is engaging in gold-plating contracts — inflating costs and pocketing the difference. Other critics charge that Halliburton has seemingly become another branch of the U.S. military, while the company's former chief executive officer, Dick Cheney, is now the vice president.

In the first of a three-part series looking at the complex relationship between the defense contractor and the federal government, NPR's John Burnett examines the scope of contracts in Iraq held by Halliburton subsidiary Kellogg, Brown & Root, better known as KBR.

America's war on terrorism has created a windfall for KBR. Since Sept. 11, 2001, the company has constructed base camps at more than 60 locations throughout the Middle East and South Asia. Under its deal with the Pentagon — known as a "Logcap" contract — KBR is the go-to company to provide troops in Iraq with everything from portable toilets to Internet cafes.

According to KBR's latest quarterly report, the profit margin on military services is 3.8 percent. (Typical defense contracts yield profit margins of 7 percent.) With a profit margin that razor thin, the company has to be efficient, says Jim Wicklund, an energy industry analyst for Bank of America Securities.

"Razor-thin margins don't lend forgiveness to operational screw-ups," Wicklund says.

Still, Iraq has become an important profit center — contracts there netted the company $900 million for the quarter, 15 percent of its operating budget. The Iraq contracts are cost-plus: the government reimburses the company for its costs, then adds on a profit of 2 percent to 7 percent. Critics say this creates a perverse incentive: the more you spend, the more you make. The Pentagon says this type of flexible contract is necessary in a war zone.

In the past, critics have faulted the government for failing to supervise private contractors. In the mid-1990s, a whistleblower revealed that the company, then known as Brown & Root, had overcharged the government on a contract to convert military bases to civilian uses. Halliburton subsidiary Brown & Root agreed to pay a $2 million dollar fine, but admitted no wrongdoing.

Despite the current controversy, Halliburton does not have a reputation of defrauding the government, says Jim Moorman, president of Taxpayers Against Fraud.

"You might think of Columbia/HCA or you might think of Lockheed-Martin, but you're not going to think of Brown & Root, and certainly not Halliburton," Moorman says. "I mean, they don't have to commit fraud. If you've got a sweetheart contract, why do you have to cheat?"

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