The opinion
ARMED SERVICES BOARD OF CONTRACT APPEALS
Appeal of -- )
)
Kellogg Brown & Root Services, Inc. ) ASBCA No. 58175
)
Under Contract No. DAAA09-02-D-0007 )
APPEARANCES FOR THE APPELLANT: Jason N. Workmaster, Esq.
Raymond B. Biagini, Esq.
Alejandro L. Sarria, Esq.
Patrick J. Stanton, Esq.
Covington & Burling LLP
Washington, DC
APPEARANCES FOR THE GOVERNMENT: E. Michael Chiaparas, Esq.
DCMA Chief Trial Attorney
Carol Matsunaga, Esq.
Senior Trial Attorney
Defense Contract Management Agency
Carson, CA
OPINION BY ADMINISTRATIVE JUDGE SCOTT
Kellogg Brown & Root Services, Inc. (KBR) appealed under the Contract Disputes
Act (CDA), 41 U.S.C. §§ 7101-7109, from the contracting officer's (CO's) final decision
denying its claim for subcontractor costs and asserting an $11,483,487 claim against it for
subcontractor costs the government paid to KBR under a task order (TO) issued under the
subject indefinite-delivery, indefinite-quantity (IDIQ) contract with the U.S. Army for
logistical support. Previously, the Board denied KBR's motion for summary judgment
that the government's claim was time-barred by the CDA's six-year statute of limitations
and we granted the government's cross-motion for summary judgment that its claim was
not time-barred, after a hearing on the motions. Kellogg Brown & Root Services, Inc.,
ASBCA No. 58175, 15-1BCA135,988 (KBR IV). We denied KBR's motion for
reconsideration as untimely. Kellogg Brown & Root Services, Inc., ASBCA No. 58175,
15-1 BCA ,r 36,075. Thereafter, the Board conducted a hearing on entitlement and
quantum. For the reasons that follow, we deny the appeal.
FINDINGS OF FACT
The Contract, Task Order No. 59, and Regulations
1. Effective 14 December 2001, the U.S. Army awarded the subject IDIQ contract to
Brown & Root Services pursuant to the Army's Logistics Civil Augmentation Program
(LOGCAP). The contract (hereafter sometimes the "LOGCAP III" contract) was a negotiated
services type. It required KBR, among other things, to provide combat services support,
including dining facility (DF AC) services, for overseas contingency operations. 1 TOs could
be issued on a firm-fixed-price or cost-reimbursement basis. On 1 August 2003 the contract
was novated to KBR, a subsidiary of Kellogg Brown & Root, Inc. 2 (R4, tab 1 at 1; compl. and
answer 1 103)
2. The contract incorporated by reference the Federal Acquisition Regulation (FAR)
52.216-7, ALLOWABLE COST AND PAYMENT (MAR 2000) clause (R4, tab 1 at 36), which
provides in part:
(a) Invoicing. The Government shall make payments
to the Contractor when requested as work progresses ... in
amounts determined to be allowable by the [CO] in
accordance with Subpart 31.2 of the [FAR] in effect on the
date of this contract[41and the terms of this contract.. ..
(b) Reimbursing costs. (1) For the purpose of
reimbursing allowable costs ... the term "costs" includes
only-
(ii) When the Contractor is not delinquent in paying
costs of contract performance in the ordinary course of
business, costs incurred, but not necessarily paid, for-
(A) Supplies and services purchased directly for the
contract and associated financing payments to subcontractors,
provided payments will be made-
1
A "contingency operation" refers to a military operation as defined in FAR 2.101.
2
The record includes other iterations of the contractor's name. For ease we use "KBR."
3 Support for this and other fact findings, regarding facts the parties have not disputed, is also
found in the parties' motion papers, cited in the Board's Statement of Facts in KBR IV.
Citations to the motion papers are not repeated here.
4
In this decision we apply the regulations in effect upon the date of contract award.
2
( 1) In accordance with the terms and conditions of a
subcontract or invoice ....
3. The referenced FAR Subpart 31.2 provides in part:
31.201-2 Determining allowability.
(a) The factors to be considered in determining whether
a cost is allowable include the following:
( 1) Reasonableness.
(2) Allocability.
(3) Standards promulgated by the CAS [Cost
Accounting Standards] Board, if applicable; otherwise,
generally accepted accounting principles and practices
appropriate to the particular circumstances.
(4) Terms ofthe contract.
(5) Any limitations set forth in this subpart.
(d) A contractor is responsible for accounting for costs
appropriately and for maintaining records, including
supporting documentation, adequate to demonstrate that costs
claimed have been incurred, are allocable to the contract, and
comply with applicable cost principles in this subpart and
agency supplements. The [CO] may disallow all or part of a
claimed cost which is inadequately supported.
31.201-3 Determining reasonableness.
(a) A cost is reasonable if, in its nature and amount, it
does not exceed that which would be incurred by a prudent
person in the conduct of competitive business .... No
presumption of reasonableness shall be attached to the
incurrence of costs by a contractor. If an initial review of the
facts results in a challenge of a specific cost by the [CO] or
3
the [CO' s] representative, the burden of proof shall be upon
the contractor to establish that such cost is reasonable.
(b) What is reasonable depends upon a variety of
considerations and circumstances, including-
( 1) Whether it is the type of cost generally recognized
as ordinary and necessary for the conduct of the contractor's
business or the contract performance;
(2) Generally accepted sound business practices,
arm's-length bargaining, and Federal and State laws and
regulations;
(3) The contractor's responsibilities to the
Government, other customers, the owners of the business,
employees, and the public at large; and
(4) Any significant deviations from the contractor's
established practices.
4. The contract also incorporated by reference the FAR 52.232-17, INTEREST (JUN 1996)
clause (R4, tab 1 at 37), which provides in part:
(a) ... [A]ll amounts that become payable by the
Contractor to the Government under this corttract. .. shall bear
simple interest from the date due until paid unless paid within
30 days of becoming due. The interest rate shall be the
interest rate established by the Secretary of the Treasury as
provided in Section 12 of the [CDA], which is applicable to
the period in which the amount becomes due ... , and then at
the rate applicable for each six-month period as fixed by the
Secretary until the amount is paid.
(b) Amounts shall be due at the earliest of the following
dates:
( 1) The date fixed under this contract.
(2) The date of the first written demand for payment
consistent with this contract.. ..
4
5. The LOGCAP III contract's Statement of Work (SOW), attachment 001 to the
contract, provided under paragraph 7.0, Government Directives and Applicable Documents:
7.1 General. The Contractor is obligated to follow and
adhere to the Governing directives and applicable documents
as listed in the contract and the SOW. Supplements or
amendments to those documents shall be considered to be in
full force and effect upon receipt by the Contractor, except
when such document is deemed to cause an increase or
decrease in the cost of contract performance. In such event,
the Contractor shall inform the [CO] in writing prior to
implementation of such supplement or change. If applicable, a
negotiated change in contract price shall be made to the mutual
satisfaction of both the Contractor and Government prior to
implementation of the change.
(Bd. ex. 1 at 28)
6. Attachment 002 to the contract, section H, Special Contract Requirements-
continued, provides in part at section H-13 Management:
The [CO] is the only authorized official who shall increase,
decrease, or alter the scope of work to be performed, and any
orders or instructions interpreted by the contractor as
impacting the scope or cost of the contract.
The contractor shall comply, and shall ensure that all
deployed employees, subcontractors, subcontractors[']
employees, invitees and agents comply with pertinent Service
and Department of Defense directives, policies and
procedures ....
(Bd. ex. 2 at 1)
7. Effective 13 June 2003 the Army issued cost-plus-award-fee TO No. 59 to KBR,
for logistics and life support services necessary to support Operation Iraqi Freedom (OIF).
The performance period, as extended, expired on 30 April 2005. (R4, tab 2) The procuring
contracting officer (PCO) from the Army's Support Command in Rock Island, Illinois (ASC),
delegated administrative contracting officer (ACO) authority to the Defense Contract
Management Agency's (DCMA's) Command-San Antonio, which sub-delegated the
authority to DCMA Middle East. Under the sub-delegation, the ACO was to be co-located
with the contractor and to be its single point of contact for all contract administration
requirements under the SOW and other mission-related tasks. The delegated authority
5
excluded taking any action that involved changing the TO's value or the contract's
performance period. (Supp. R4, tab 200 at 1, tab 201 at 1)
Site H-3, Subcontracting, Letters of Technical Direction, Modification No. 14
8. SOW, Change 5, incorporated into TO No. 59 by Modification (Mod.) No. 06,
effective 3 October 2003, required KBR to provide DFAC services at over 25 Iraqi sites,
including Qaiyara Mosul West, site H-3. The SOW, paragraph 1.0, provided that services
for each site were specified "in accordance with the site population." (R4, tab 3 at 63) For
site H-3 the SOW specified a minimum of 5,200 personnel. Under SOW paragraph 1.4,
unless otherwise specified, all SOW increases, decreases or modifications were to be
directed by the ACO. (R4, tab 3 at 55, 63, 95, see tab 4 at 106) Under paragraph H.8.1 of
SOW Change 5, KBR was to:
[P]rovide, emplace, operate and maintain food service
facilities, provide food service management operations to
accommodate the base camp population, serving 4 meals per
day IA W applicable Army regulations and the command's
meal cycle for the area.
(R4, tab 3 at 97) SOW Change 6 VI0.2 to TO No. 59, dated 3 November 2003, reflected
headcounts for DFAC purposes at site H-3 at two levels, 4,300 and 2,200, for a total of 6,500
(app. supp. R4, tab 31 at 1522).
9. KBR first subcontracted for DFAC services at site H-3 with The Event Source. In
early 2004, KBR solicited bids for a replacement subcontract. (App. supp. R4, tab 29,
subtabs B, C, see tab 100 at 2477, notes 1, 11) KBR and Gulf Catering Co. (GCC) executed
Subcontract No. SK00425 (SK425) on 8 February 2004. It was dated 5 February 2004 and
effective on 14 February 2004. (R4, tab 4 at 101, 105, tab 17 at 421) Under the subcontract
GCC was to prepare and serve an estimated 5,400 meals per meal period (four per day) at site
H-3. The performance period ended on 13 February 2005. The subcontract had fixed monthly
prices for the DFAC facility, daily labor rates, and monthly prices for equipment at total
estimated not-to-exceed (NTE) prices based upon the 5,400 headcount. (R4, tab 4 at 105-06) If
quantities were to "increase or decrease for a sustained period," the charges could be adjusted
within 10 days' notice by either party (id. at 103). The subcontract stated:
NOTE: [GCC] will invoice and be paid for Actual
Headcount only. The Projected Headcount section on the
"Projected Daily Headcount Sheet and Actual Headcount"
attachment is for planning and preparation purposes only.
6
The incorporated form entitled "Projected Daily Headcount
Sheet and Actual Headcount" MUST be completed on a daily
basis ....
Under a Subsistence Prime Vendor (SPY) program, GCC was to eliminate food costs on
5 April 2004. (Id.)
10. BG Carter Ham, USA, who was the Commander, Headquarters, Task Force
Olympia, Mosul, Iraq, sent a memorandum dated 9 February 2004 to the Commander of the
Combined Joint Task Force 7, BG Scott West, USA, who was the director oflogistics for
the combined task force, with theater-level responsibility for all logistics operations in Iraq.
BG West was responsible for oversight of the LOGCAP planning cell. (R4, tab 5 at 118;
tr. 1/18, see tr. 1/33) BG Ham sought approval to increase headcount-based LOGCAP
services at base camp H-1 and to decrease them at other sites, including H-3, due to
population shifts from OIF 1 to OIF 2 (R4, tab 5 at 118-19). The memorandum included
headcounts that reflected the shifts. Except for H-1, the headcounts at each of the H sites,
including H-3, were reduced. For H-3, the headcount was reduced from 6,500 to 1,422, a
reduction of 5,078-the largest reduction of all of the H sites. 5 The memorandum stated
that the headcount generated by OIF 2 was "still not 100%" (id. at 118), and there could be
adjustments at H-1 and H-2. There was no mention of any anticipated adjustment at H-3.
The memorandum stated that the cost impact would be minimal as the request was to
readjust resources, not to create additional requirements.
11. Effective 4 January 2004, stated to be in conformance with FAR Subpart 1.6,
DCMA Iraq appointed Lt Col Russell J. Blaine, USAF, 6 as a CO, to assume the duties of an
ACO under FAR 42.302 (with an irrelevant exception) and a DCMA Directive (supp. R4,
tab 202). FAR 1.602-l(a), upon which KBR relies, provides that COs may bind the
government only to the extent of their delegated authority. FAR 42.302 lists numerous
contract administration functions of an AC0. 7 As one example, FAR 42.302(a)(67) includes
supporting the program, product and project offices regarding program reviews, program
status and program performance. Lt Col Blaine arrived in Iraq on 4 January 2004. He
served as the ACO and Commander, DCMA Northern Iraq and reported to BG West.
(Tr. 1/17-18)
12. KBR has placed the meaning of contract "value" at issue (see finding 7). In
Lt Col Blaine's experience, the "value" of a contract varies depending upon contract type.
Firm-fixed-price contracts have a stated dollar value; cost-reimbursement contracts have an
5 KBR contended in its claim that, at this time, the number was 5,400, not 6,500 (R4, tab 17 at
421 ), but 6,500 was a combined figure (see finding 8).
6 Lt Col Blaine retired from the Air Force in June 2009 and worked in the private sector as of
the hearing (tr. 1/8, 15).
7 FAR 42.302 refers to a "CAO" (contract administration office). See FAR 42.301.
7
estimated contract value-Le., the estimated cost to perform the work; and negotiated
contracts can be in a negotiated amount plus an award fee. TO No. 59 had a negotiated value
of approximately $3 billion, plus 2 "incremental leaps," while Lt Col Blaine was the ACO.
(Tr. 1/27) We accept Lt Col Blaine's assessment of the "value" of TO No. 59 while he was
the ACO.
13. By email of 17 February 2004, Lt Col Blaine sent "LETTER OF TECHNICAL
DIRECTION 04-59-CJTF7-03, (H Site Planning Figures)" dated 15 February 2004, signed
by him on 17 February (hereafter "February LOTD"), to James Ray, KBR's Director of
Contracting, located at its Regional Support Office in Baghdad, Iraq. The email was copied
to others, including U.S. Army MAJ Ramona McCaa. Under a six-month assignment
beginning in November 2003 MAJ McCaa served as the field ACO for the H sites. She was
stationed at the Mosul Airfield in Iraq (after about a month's introductory period in Kuwait).
(R4, tab 5 at 114; tr. 1/25, 28, 62, 75, 79)
14. The February LOTD referred to the LOGCAP III contract, TO No. 59 and
BG Ham's 9 February 2004 memorandum, which it appended. The LOTD stated that, in
accordance with that memorandum, "KBR is requested to use the following planning figures
for sites Hl through HS until further notice" (R4, tab 5 at 114) (emphasis added). The
figures were the same as those in BG Ham's memorandum, including 1,422 for site H-3.
The LOTD stated that:
The effect of this request is to change H 1 from a site receiving
SOW para 8.20 services to a site entitled to SOW 8.0 services.
Please begin providing para 8.0 level services to Site HI, and
appropriately adjust the levels of population-based service
dedicated to sites H2-H5.l 81
(R4, tab 5 at 114) The February LOTD stated that the government believed it was within
the contract's scope; the cost impact should be minimal as services were "reallocated from
shrinking sites" (id.); and KBR was to submit, within five days, the increase or decrease in
its original estimated cost, a schedule leading to the successful conclusion of the effort,
proposed performance criteria, and suggested changes to the SOW necessitated by the
effort. The LOTD stated that KBR was to contact Lt Col Blaine for contractual questions.
There is no evidence that KBR ever contacted Lt Col Blaine with questions; or suggested
that the February LOTD was not within TO No. 59's scope or changed its value; or that
KBR submitted any increase or decrease in its estimated costs or proposed changes to the
8 The SOW Change 5 did not have a paragraph 8.0 or 8.20. According to Lt Col Blaine, the
information was likely pulled from a planning document that the government had been
working on with KBR (R4, tab 3 at 97-98; tr. 1/48-49). Subsequently, Mod. No. 14
did contain those paragraphs (see finding 36).
8
SOW as a result of the LOTD; or that KBR contemporaneously questioned Lt Col Blaine's
authority to issue the LOTD.
15. LOTDs were the vehicles the government frequently used to provide direction,
including planning data, to KBR for in-scope contract requirements. They were fairly
commonly used under IDIQ contracts to adjust the level of service expected or provided.
Lt Col Blaine testified that, as ACO, he was authorized to issue LOTDs. (Tr. 1/26, 31) He
could issue direction within the contract's scope but could not modify that scope. Formal
modifications had to come from the PCO. (Tr. 1/47, 67)
16. Once Lt Col Blaine issued an LOTD, his ACOs in the field "worked these
issues" for him (tr. 1/34 ). His expectation was that an LOTD would be carried out, unless
there were questions. As he described it, "that was the precedent. That was the way that we
worked. In order to achieve a lot of the things we were achieving that was the structure that
we used." (Tr. 1/35) The LOTD would issue and it would be executed unless there were
questions. If there were questions or challenges, he was in almost daily contact with his
ACOs, including MAJ McCaa, and believed he would have heard something through the
LOGCAP cell or the ACO involved. He also had very close daily contact with KBR,
including with James Ray, Craig McGuiness, and John Reddy. He did not recall anyone
from KBR asking him about the implementation of the February LOTD. (Tr. 1/35-36,
67-68, 82-83)
17. As Lt Col Blaine described:
We also had a KBR planning cell, a leadership echelon,
at Camp Victory who we met with daily. Mr. James Ray,
Mr. Craig McGuiness, we met with them daily and had many,
many discussion[s] on ... the issues, the challenges of
performing the work that was on contract, as well as the
emerging requirements that we were reviewing, primarily
driven from the transition from [OIF 1 to OIF 2].
(Tr. 1/25) There was a lot of concern about the transition from OIF 1 to OIF 2. According to
Lt Col Blaine, BG West had mentioned that it was "likely to be the most challenging logistical
maneuver in military history" (tr. 1/28). In Lt Col Blaine's view,
[The February LOTD] would not have caught [KBR]
cold. This would have been provided to likely James Ray
based upon what was weeks, perhaps months, of preparatory
discussions about this.
And it would have [been] shared with them that, based
upon the likelihood bed-down concept of the incoming unit,
9
there would be some increases in feeding data at certain sites
and some decrement at others.
(Tr. 1/30)
18. MAJ McCaa testified that when she received the February LOTD, she gave a
copy to Gerald Warner, who was KBR's project manager for the Mosul area (see, e.g., R4,
tab 17 at 44 7; tr. 1/84, 88, 2/62). MAJ McCaa discussed food quality at the DFAC sites with
Mr. Warner but never discussed headcounts with him. She visited site H-3 but not too often
due to the dangers of travelling in the violent conditions then prevalent in Iraq. (See tr. 1/82)
19. Executing LOTDs was Mr. Warner's "number one priority" (tr. 2/65). His
testimony about whether he received the February LOTD was equivocal, but he ultimately
testified that he was sure that he had received it (tr. 2/65-66, 69). This is supported by
MAJ McCaa's testimony that he asked her when the LOTD was to become effective-i.e.,
when the headcounts were going to decrease or increase-and that she believes she told him
that "we have to wait until we get further clarification [from Lt Col Blaine]" (tr. 1/86).
Mr. Warner testified that she did not get back to him on this issue before he left in
May 2004. There is no testimony or other evidence that Mr. Warner ever attempted to
follow up with MAJ McCaa or that he inquired of Lt Col Blaine about the February LOTD,
as it directed regarding questions.
20. KBR's DFAC operations team used a requisition package to transmit headcount
information pertaining to subcontract requirements. It would include the subcontract scope
of work, which would include the headcount requirement. (Tr. 2/95) Mr. Warner was not
aware of any KBR requisition package issued to its procurement department directing them
to use the 1,422 figure for site H-3 (tr. 2/67-68). Mr. Warner was not involved with KBR's
subcontracts but he attributed the lack of a requisition package from KBR to its still being
in the process of determining what path to take. In testimony apparently based upon
hearsay, which weakened its import, he stated that there were a lot of different sources of
information about the status of site H-3, once listed as an enduring site, and who would be
located there. This involved different changing numbers, including the new number 1,422.
(Tr. 2/68-71)
21. Mr. Warner had no question about the validity of the February LOTD. He just
sought clarification. He never received any direction from the government to provide for a
different headcount at site H-3 than 1,422. (Tr. 2/70-71) When asked by government
counsel whether KBR "could simply disregard the direction of the LOTD without
consulting with the government," Mr. Warner responded: "No, ma'am, absolutely not"
(tr. 2/73).
10
22. By email of 22 February 2004, Roy I. Maggard II, identified as "Area Operations
Manager, H Sites" for KBR's LOGCAP III contract9 and located at the same Mosul Airfield
as MAJ Mccaa until July 2004 (tr. 1/93, 2/76-77), asked her:
[C]an you send me the LTD's from Dec till now or just any
that are outstanding. With that I will start tracking on [them
and] ensuring they get accomplished and will keep you more
informed of the status on each.
(R4, tab 17 at 444) MAJ McCaa testified that she gave Mr. Maggard "the LOTDS that I had,"
but she did not provide him with the February LOTD (tr. 1/92). Her alleged reasoning was:
A I did not give him [the February LOTD] because in
my opinion they already had it.
Q And why did you think they already had it?
A Because from the email I had .. .James Ray was on
there.
Q And who is James Ray?
A ... He works for KBR. So, he would give things
down to Gerald Warner.
And Gerald would discuss it and say, well, I received
this. Is this true?
(Tr. 1/92-93) In context, we infer that the email MAJ McCaa referred to was Lt Col Blaine's
February LOTD to Mr. Ray and others. MAJ McCaa's testimony concerning her reason for
not providing the February LOTD to Mr. Maggard in response to his request for outstanding
LOTDs was not particularly persuasive and differs from her prior testimony that she gave the
February LOTD to Mr. Warner directly (finding 18). Regardless, she also pointed out that
she had referenced the February LOTD in LOTDs she had issued herself, such as a
23 February 2004 LOTD to Mr. Warner (finding 24; app. supp. R4, tab 43 at 1896; tr. 1/99).
23. Mr. Maggard'sjob as KBR's operations manager for the H sites was to track
KBR's requirements and services. He had no responsibility for subcontracts. His job did not
relate specifically to headcounts but he received headcount information from time to time,
including from any type of government change that issued and from working with the camp
mayor. (Tr. 2/77-78, 82, 84) The term "mayor" referred to a camp's commander. Camp
9
Mr. Maggard had a "Halliburton.com" email address.
11
commanders were not COs and had no authority to modify contract requirements or to direct
KBR. (Tr. 1/32, 41-43, 100-01) Mr. Maggard acknowledged contemporaneous receipt of
the February LOTD, albeit apparently not from MAJ McCaa (tr. 2/79, 81). Thereafter, on a
routine site visit to H-3 with MAJ McCaa and others, while there was no discussion about
specific headcounts, Mr. Maggard recalled, in testimony reflecting double hearsay, to which
we give little weight, that some government personnel told the camp mayor that they had
heard that headcounts were increasing rather than decreasing (tr. 2/79-80). Like Mr. Warner,
Mr. Maggard was not aware of any KBR requisition package issued to its procurement
department directing them to use the 1,422 figure for site H-3. He never asked MAJ McCaa
if the February LOTD had been rescinded. Although he did not recall discussing the matter
with her, Mr. Maggard did not recall having any concerns about whether the February LOTD
should be followed regarding revising the headcounts at the H sites. While he was in Mosul,
no KBR official mentioned to him that there was any question about whether the February
LOTD was defective. (Tr. 2/82-83, 85)
24. MAJ McCaa issued a subsequent LOTD dated 23 February 2004 to Mr. Warner
providing that, in accordance with Lt Col Blaine's February LOTD, KBR was to use the
stated planning figures for site H-1 until further notice (app. supp. R4, tab 43 at 1896). The
figures were the same as in the February LOTD. MAJ McCaa's LOTD added that
"[s]pecifically, KBR is authorized to provide, install and operate and maintain an additional
food service facility for Hl" (id.). MAJ McCaa did not intend for this LOTD to rescind the
February LOTD. It was to clarify the February LOTD. Mr. Warner never inquired of her
about her 23 February 2004 LOTD. (Tr. 1/87)
25. DCAA's Iraq Branch Office (IBO) issued a Memorandum for Distribution dated
25 February 2004 on the subject "Early Alert on [KBR] DFAC Subcontracting Practices
Relating to [LOGCAP III]." The distribution list covered several DCMA and other offices,
and included Lt Col Blaine. The memorandum's focus was upon KBR's use of fixed-price
subcontracts and billing methodologies that might not be in the government's best interests.
(App. supp. R4, tab 44)
26. In response to DCAA's concerns about subcontract pricing (below), in early 2004
KBR sent Charles Carr, a subcontract administrator and supply chain manager, among other
things, to Kuwait to head up a "DFAC Tiger Team" to review KBR's subcontracts for DFAC
services in Iraq and Kuwait (tr. 2/87, 88-89, 91-92). KBR tried to arrive at a pricing
structure that would accommodate the ability to change the headcount for which the
subcontractor would get paid. The team developed a new subcontract format involving
pricing bands and different pricing categories within the bands, which it discussed with the
PCO and DCAA by conference call in about March 2004. (Tr. 2/92-93) Mr. Carr was not
aware of the Tiger Team's ever receiving a KBR requisition to change the headcount at
site H-3 to 1,422. Mr. Carr opined that, although he thought it would be difficult, KBR
might have been able to negotiate with GCC to lower its price to reflect lower headcounts.
He never tried to do so. (Tr. 2/100)
12
27. Regardless of MAJ McCaa's failure to include the February LOTD in response
to Mr. Maggard's request for copies of outstanding LOTDs, KBR does not deny that it
received the LOTD contemporaneously and we find that it did. This is evident from the
hearing testimony cited above and corroborated by the fact that KBR incorporated the
revised headcounts for each of the H sites listed in the February LOTD into revised requests
for proposals, except for site H-3. By 12 March 2004 KBR had awarded subcontracts,
signed by Mr. Carr, for each of the other H sites. They provided for DFAC services for the
camp populations listed in the February LOTD. (R4, tab 5; supp. R4, tabs 203-10)
28. On 8 March 2004 Lt Col Blaine emailed "LOTD 04-59-CJTF7-08, (DFAC
Planning)" (hereafter the "March LOTD") to KBR's Contract Administrator, Troy Vesper,
acting on behalf of Mr. Ray, and to government personnel, including MAJ McCaa (app. supp.
R4, tab 49 at 1954-55; tr. 1/36). The LOTD, which referred to the LOGCAP III contract and
TO No. 59, appended a 1 March 2004 memorandum which included a spreadsheet of "the
new OIF 2 feeding requirement" (app. supp. R4, tab 49 at 1956) at 38 DFAC sites, including
the H sites. The memorandum stated:
1. CJTF-7 population has shifted and requires an evaluation of
current feeding capacities to revise DFAC requirement under
[TO] 59. This review of OIF 2 population for each site will
need to be validated by the MSC G4 and separate S4 staff.
Once validated, adjustment to current LOGCAP services will
be changed to meet the requirements. MSC was tasked to
highlight unit and permanent population count for both
temporary and enduring camps in order to validate feeding
requirement for OIF 2.
2. The following spreadsheet is the new OIF 2 feeding
requirement that resulted from FRAGO 288 and will need
approval prior to issue to change-LOTD.
(App. supp. R4, tab 49 at 1956) The spreadsheet listed the OIF 2 requirement at site H-3 as
1,422, the same as in the February LOTD (id. at 1957). BG West signed the memorandum as
approved (id. at 1956).
29. Lt Col Blaine's March LOTD stated:
1. This memo provides information to assist KBR in
determining DFAC headcount planning. The attached
memo was signed by BG West, CJTF-7 C4. KBR is
requested to acknowledge that the numbers provided are
an estimate, and that KBR's on-site management staff
13
should continue to coordinate closely with camp mayors
to obtain the most accurate current headcount. Only
through close coordination with the mayors can KBR
ensure they have reasonable estimates for meal
preparation, mermite preparation, satellite headcount, and
seating needs.
(R4, tab 49 at 1955) The LOTD added that the government believed the action was within the
contract's scope and that, as the OIF 2 footprint decreased, and with the advent of the SPV
program, the overall estimated contract cost should decrease. The LOTD provided that KBR
was to contact Lt Col Blaine if there were questions or concerns. The March LOTD did not
rescind the February LOTD. (Tr. 1/88-89)
30. Mr. Carr recalls receiving the February LOTD and believes he saw it in
February 2004. He was not concerned whether it should be followed. He did not believe
that the March LOTD had any effect upon the February LOTD. (Tr. 2/102-03, 105)
31. There is no evidence that a camp mayor ever purported to direct KBR to change
the February or March LOTDs' 1,422 headcount for site H-3 or that KBR ever questioned
Lt Col Blaine about the 1,422 headcount for H-3 directed in those LOTDs.
32. The February and March LOTDs did not mention subcontract pricing. Lt Col Blaine
and MAJ McCaa did not know anything about KBR's subcontract pricing at the time of the
LOTDs. (Tr. 1/59-60, 95)
33. On 10 April 2004, KBR and GCC executed Change Order No. 1 to SK425, due to
the SPV program, under which food at DF AC facilities was to be provided by a contractor
under direct contract with the government. The change reduced the NTE value of DF AC
operations at site H-3 by $3,003,518. Among other things, it revised meal prices to reflect
actual days of service and implemented a new pricing structure to correspond with two stated
camp population ranges: 4,501-5,500 and 5,501-6,500, referred to by the parties as
"headbands." Change Order No. 1 did not provide pricing for or refer to the February and
March LOTDs' 1,422 figure for site H-3. The new pricing methodology was applied
retroactively to subcontract inception. (R4, tab 6 at 120, 124; app. supp. R4, tab 29, subtab I
at 876-79)
34. The average headcount at the DFAC at site H-3 during March 2004 was 812;
during April 2004 it was 847; during May 2004 it was 1,119; during June 2004 it was 1,259;
for July 2004 through 13 February 2005 it ranged from 1,278 to 1,844; and for 14 February
2005 through 30 April 2005 it ranged from 1,844 to 2,353. KBR, along with the government
and GCC, signed rosters showing the actual headcount for each meal at site H-3 during these
periods, such that KBR was aware of the actual headcounts. KBR nonetheless paid its
14
subcontractor GCC for a camp population of 5,400 throughout these periods. (Gov't
undisputed proposed fact findings (PFF) Nos. 13, 17, 19, 22, 24 with record citations)
3 5. On or about 24 April 2004 MAJ McCaa and KBR discussed a "Contract
Compliance Analysis H-Sites" schedule. MAJ McCaa did not prepare the schedule and
she was not sure who had. Section 8.0 of the schedule was entitled "BASE CAMP
SUPPORT SERVICES MORE THEN [sic] 1,800 HEAD COUNT." Subsection 8.17
was entitled "DINING FACILITY (DFAC) OPERATIONS: Appendix B." Site H-3 was
identified as "In Compliance." MAJ McCaa informed KBR that she agreed with the
information in the schedule, including the "In Compliance" reference. (R4, tab 17 at
459-60; tr. 1/90-91) However, she testified that her agreement was not based upon
headcounts, but upon food policy. When she was discussing the schedule with KBR,
MAJ McCaa did not question the identification of site H-3 as a camp with more than a
1,800 headcount. She did not know the headcounts at the DFA Cs or the headcounts that
KBR was asking its subcontractors to serve and she did not discuss headcounts with
anyone at KBR at that time. MAJ McCaa never saw a DF AC subcontract, DFAC
subcontract invoice, or KBR invoice. (Tr. 1/91-92, 98)
36. Mod. No. 14, signed and effective on 11 May 2004, 10 incorporated SOW Change 7
V3 into TO No. 59 (R4, tab 7 at 130). Under paragraph 8.17, "DINING FACILITY (DF AC
OPERATIONS)," Change 7 stated:
8.17.1. The contractor shall provide, install, operate and
maintain food service facilities (IA W Appendix B, this SOW)
to accommodate the permanent and transient base camp
populations, serving 4 meals per day IA W applicable Army
regulations and the command's meal cycle for the area.
(Id. at 144) The referenced Appendix B gave a headcount of 1,422 for DFAC services at site
H-3, the same figure as in the February and March LOTDs (id. at 153). Change 7 included a
paragraph 8.0, "BASE CAMP SUPPORT SERVICES," which provided that "[u]nless
otherwise stated within each paragraph below, the contractor shall establish the following
services at all base camps except those that contain permanent party headcounts of less than
1800 personnel (see paragraph 8.20)" (id. at 142). The referenced paragraph 8.20,
"TEMPORARY BASE CAMPS WITH LESS THAN 1800 PERMANENT HEADCOUNT,"
provided that "[t]he following services and service scope applies to Temporary Base Camps
10 The SOW Change 7 incorporated into Mod. No. 14 is dated 14 November 2004 (R4, tab 7 at
138). Lt Col Blaine described this a "disconnect" and believed the 11 May 2004 date
was correct. He recalled working with the LOGCAP planning cell on the changes in
connection with OIF 2 when he was in Iraq. (Tr. 1/54) This is substantiated by the fact
that, prior to being incorporated into Mod. No. 14, SOW Change 7 was dated
14 November 2003 (see app. supp. R4, tab 33).
15
in Iraq with a permanent headcount of less than 1800 personnel" ( id. at 146). The listed
services did not include maintenance of a DF AC. Site H-3 was described as "No Longer
Enduring" (id. at 151). According to Lt Col Blaine the matters contained in Mod. No. 14
were all discussed in planning meetings with all parties involved. He explained that
"enduring camps were those that would get robust facilities and would be beefed up"
(tr. 1/56). Non-enduring camps were not there "for the long haul" but, for cost and service
efficiency reasons, the government did not want to shut down DF A Cs that were already in
existence. An established DF AC would not be tom down but no more "robust services"
would be added to it. (Tr. 1/57)
37. KBR issued more change orders to SK425 between June 2004 and 14 March
2005, to add funding and extend performance to 15 June 2005. It did not adjust the DFAC
services at site H-3 to apply the 1,422 figure called for by the February and March LOTDs
and Mod. No. 14 or adjust or create a headband to accommodate that figure. (R4, tabs 8,
10-11, 13)
38. We find that the weight of the hearing testimony, cited above, not only from
Lt Col Blaine and MAJ McCaa, but from KBR's witnesses Messrs. Warner, Maggard and
Carr, was that LOTDs were directives by the ACOs to be followed by KBR.
39. There is no contemporaneous written explanation for why KBR did not
implement the February LOTD regarding site H-3, which was binding upon it. Even if the
LOTD had not been binding, there is no contemporaneous documentary or other evidence
that KBR applied reasonable business judgment in failing to follow the LOTD. Well
after-the-fact hearing testimony from KBR witnesses Mr. Warner and Mr. Maggard about
the allegedly changing status of site H-3, which was diminished by its hearsay nature, was
unpersuasive, especially given that KBR did not inquire of Lt Col Blaine about the issue
(findings 19-20, 23, 50). We find that KBR's costs incurred in excess of the amount it would
have incurred had it complied with the February LOTD were unreasonable.
40. Effective 1 May 2005, ASC issued cost-plus-award-fee TO No. 89, in the
amount of $4,972,882,216, to KBR, with performance through 30 April 2006, for DF AC
services at several sites, including H-3, where the headcount was listed at 5,000 (R4, tab 12
at 255-56, 290-91).
41. On 10 June 2005 KBR and GCC executed Change Order No. 8 to SK425,
which, inter alia, funded additional reefer (refrigerator (tr. 2/28)) storage and revised the
subcontract's pricing structure, providing monthly rates for a single headcount band of
4,500 to 5,501 (app. supp. R4, tab 29, subtab G at 593-94).
42. KBR paid GCC a total of $33,234,684.74 in SK425 costs; the government paid
KBR for all of those costs (R4, tab 15 at 397-98; app. supp. R4, tab 29, subtab I at 774; gov't
PFF No. 30).
16
43. KBR acknowledged in KBR IV that it "did not reduce costs to correspond with
the reduced headcount planning figure for Site H-3"; fixed pricing for categories and
headcount ranges continued through the life of the subcontract; and "SK425's pricing was
never based on actual headcounts or the 1422 planning figure of the February 17, 2004
e-mail" (the LOTD). KBR IV, 15-1 BCA ,i 35,988 at 175,816 (Statement of Fact (SOF) ,i 7).
DCAA Audits
44. Beginning in or around 2004 the Army, DCMA and DCAA became concerned
with KBR's DFAC-related subcontract pricing methodology, including subcontractors'
alleged overbilling for headcounts that substantially exceeded the actual populations served.
Auditing matters and reports continued into 2011. See KBR IV, 15-1 BCA ,i 35,988 at
175,816 et seq.
45. By letter of 12 October 2007, U.S. Senator Claire McCaskill asked the
Department of Defense's Chief Financial Officer to respond to concerns expressed to the
Senator by James Ransburg. Mr. Ransburg had formerly worked for a consulting company
hired by KBR. Beginning in May 2005, he had performed contract analysis and closeout in
connection with KBR's OIF work. He alleged that, by the time he departed in August 2005,
he had examined a portion ofKBR's FY 2004 expired DFAC subcontracts and had found
that about 85% of them had been mismanaged, resulting in excess of $50 million in
overpayments and funding. He was concerned that this was a systematic problem occurring
throughout the DFAC subcontracts for FYs 2003-2006. (App. R4 hearing supp., tab A-11)
See KBR IV, 15-1 BCA ,i 35,988 at 175,820, SOF ,i 33.
46. KBR alleges that DCAA was unduly influenced by Senator McCaskill's letter;
was concerned with impressing Mr. Ransburg; and rushed to respond to the issues raised,
thus sacrificing independence and impartiality (app. br. at 35-36). We have reviewed the
record as a whole, including the portions cited by KBR, and we find that its allegations are
not supported by substantial evidence.
47. George Duggan, a senior DCAA auditor, went to Iraq in February 2007 to work
on open DF AC audits. He began an audit of SK425 after learning in March 2007 about
potential overbilling under another subcontract from a KBR subcontract manager who
referred him to Mr. Ransburg. See KBR IV, 15-1 BCA ,i 35,988 at 175,820, SOF ,i 33. By
email of 5 November 2007 to DCAA IBO auditor James Minic, Mr. Duggan stated that
Mr. Minic needed to look out for LOTDs in KBR's subcontract files "because if the
government directs [KBR] to adjust its SOW headcounts down and they do not, then there
exists a good chance that the subcontractor over-billed" (app. R4 hearing supp., tab A-25 at
5602). Mr. Duggan also noted that he had asked DCAA management in May 2007 to get
the DCMA Commander at Camp Victory "to explain more completely what an LOTD
means - is it suggestive or mandatory?" but he had not yet had a response (id.).
17
48. On 16 November 2007 DCAA's IBO issued a draft Statement of Condition and
Recommendation (SOCAR) to KBR, which reported that KBR had overbilled the
government for SK425 under TO No. 59, in 2004 and 2005 in the total amount of
$11,990,181, contrary to the Allowable Cost and Payment clause and FAR 31.201-3,
Determining reasonableness (R4, tab 14 at 388). The draft SOCAR stated in part:
Actual average monthly headcounts recorded for
DFAC services from the beginning of the subcontract, in
February 2004, through June 2005 were all below the [SOW]
headcount of 5,000, with the highest count at 2,647 and the
lowest at 812. For all but two of the seventeen months of the
subcontract period of performance the subcontract pricing
table did not include lower headcount bands that would have
accommodated the actual lower monthly headcounts. Nor did
[KBR] revise the subcontract pricing tables until subcontract
change order no. 6, dated March 15, 2005. Yet, according to
[consultant Ransburg], as stated in his subcontract analysis
memorandum, dated June 19, 2006, [the February LOTD]
directed [KBR] to use 1,422 as the average headcount for this
subcontract.
[KBR] should comply with the FAR cites identified
above and issue a credit to the government for the amounts of
unreasonable costs explicated above and detailed in the
attached schedules.
(R4, tab 14 at 3 89) DCAA IBO calculated the questioned costs by using two
government-created headcount bands of 500 to 1,500 and 1,501 to 2,500 (id.; app.
undisputed PFF No. 37). The reported average headcounts from 14 February 2004 through
April 2005, prior to TO No. 89, ranged from 812 to 2,339 (R4, tab 14 at 390-94).
49. By letter of9 July 2008, KBR notified Kristan Mendoza, PCO at ASC, of a
billing adjustment under SK425, affecting TO Nos. 59 and 89 and resulting in a
$9,406,108.34 credit to the government. KBR reported that it had billed $33,234,684.74 to
the government, when it should have billed $23,828,576.40 in light of the February LOTD.
(R4, tab 15 at 396-97) Of the $9,406,108.34 credit, $8,953,783.34 applied to TO No. 59 and
$452,325.00 applied to TO No. 89 (id. at 401). KBR's letter and attachments contained
billing and credit calculations. KBR stated that it had advised ASC, DCMA and DCAA in
late 2007 that it had initiated a review of DFAC subcontracts in Iraq due to questions DCAA
18
had raised in various requests and reports and the credit was the result ofKBR's analysis
(id. at 397). KBR explained and qualified the credit as follows:
On February 17, 2004, DCMA Northern Iraq issued [an
LOTD] that reduced the estimated headcount (HC) for dining
facility services at site H-3 .... KBR inadvertently did not
consider the impact [of] this LOTD in the context of unique
language in [SK425], which allowed KBR to reduce the
monthly price for labor and equipment when a sustained HC
reduction occurred. Similarly, KBR negotiated prices for
consumables and support services (sewage and garbage),
which were added to [SK425] after the LOTD had been
issued, based upon the initial HC estimate. The adjustment in
billings equals what [SK425] prices should have been for
labor, equipment, consumables and support services as a
result of the LOTD.
KBR's review to date supports the appropriateness of a
credit in the amount identified above. KBR, however, has
not completed its review of all relevant facts. Should the
review uncover facts that reveal that no credit is required or
that the amount identified above is too high or too low,
KBR reserves the right to either eliminate the credit or to
adjust the amount of the credit.
(Id.) KBR explained in support of its credit that it had awarded SK425 to GCC on
8 February 2004 based upon an estimated headcount of 5,400 at site H-3. The subcontract
provided that labor and equipment prices were subject to adjustment for a "sustained
increase or decrease" in headcount, but after DCMA issued the February LOTD reducing
the headcount for site H-3 to 1,422, KBR did not exercise its contractual right to reduce
those prices. Moreover, when it negotiated Change Order No. 1 to the subcontract,
effective 10 April 2004, new provisions for consumable and support services were priced
based upon the original 5,400 headcount and not the LOTD's 1,422 headcount. KBR stated
that it had not substantiated that its lack of adjustment to the February LOTD was in accord
with "reasonable business judgment" and, until it did, it was crediting the government with
any amounts that could not be justified. (Id. at 398)
50. Despite KBR's use of the term "inadvertent" in its credit letter to the
government, KBR never substantiated that its failure to follow the February LOTD was a
mistake. It also never substantiated that it was an exercise in reasonable business judgment.
The after-the-fact hearsay testimony of Messrs. Warner and Maggard implied that KBR
decided not to follow the February LOTD based upon the government's alleged shifting
considerations regarding site H-3. We give this testimony, uncorroborated by any
19
contemporaneous or documented evidence, little weight. While we recognize that
populations at various sites did shift during the wartime environment, which was
challenging, after the February LOTD issued, the government repeatedly gave 1,422 as the
population figure KBR was to use regarding that site (findings 28-29, 36). Further, KBR
never inquired of Lt Col Blaine about the February LOTD, which the LOTD had directed it
to do in case of questions (findings 14, 39).
51. DCAA's IBO issued an assist audit report on 29 September 2008 on KBR's
FYs 2004 and 2005 DFAC procurements under LOGCAP III, TO Nos. 59 and 89, and
SK425. It found that some subcontract costs were billed, and KBR paid, for headcounts
exceeding actual headcounts that used DFAC services. (R4, tab 16 at 402-03) The stated
significant issues with subcontract billings were that (1) KBR overpaid for DFAC
services because GCC billed using prices and headcount bands that did not comport with
the actual number of personnel using the DFAC services and (2) KBR did not include
headcount bands in its DF AC subcontract pricing schedules that would have covered the
lower monthly headcounts actually experienced (id. at 403-04). DCAA found that KBR
was billed $12,202,051 for SK425 costs that were not billed in accordance with
subcontract terms, as required by FAR 31.201-2, Determining allowability, and for other
costs that were unreasonable, as defined in FAR 31.201-3, Determining reasonableness.
DCAA stated that "[o]ur review of the contractor's methodology to compute the
[$9,406,108 credit to the government] disclosed that it uses the same basic methodology
that we used and essentially confirms the majority of our questioned cost." (Id. at 405)
DCAA concluded that the major difference between KBR's $9.4 million credit and
DCAA's $12.2 million computation was that KBR developed new headcount bands
solely for the purpose of computing the credit, but that actual billings had been based
upon multiplying the unit price for the particular cost category (e.g., labor, equipment,
etc.) by the highest headcount in the applicable range in the subcontract's pricing
schedule, 4,501-5,500, regardless of the actual headcount (id. at 405,408). DCAA also
questioned consumable and sewage/garbage prices as unreasonable because KBR paid
the prices for a headband of 4,501-5,500 despite lower average headcounts (id. at 409,
412-13). For consumables, power generation, reefers, and sewage and garbage, DCAA
applied "regression analysis" using SK425's pricing tables to determine what it
considered to be a more representative headcount band range (id. at 409, 414-15; app. R4
hearing supp., tab A-28 at 5829-51, 5884; tr. 2/23-26; see R4, tab 6 at 124). The audit
report did not address potential GCC demobilization costs that KBR might have incurred
had the scope of SK425 been reduced in the spring of 2004. Those costs were charged
separately by GCC. (Tr. 2/52)
52. The 2008 assist audit report did not rely upon or mention the February or March
LOTDs. According to DCAA regional audit manager Joann Niebruegge, who signed the
report, at the time the report was issued her audit team did not have an LOTD. The audit
does not address the requirements of TO Nos. 59 and 89. (R4, tab 16 at 416; tr. 2/8, 30)
20
53. By letter to CO Mendoza dated 11 February 2010 on the first page and
19 February 2010 on all subsequent pages, KBR submitted a CDA claim, certified on
19 February 2010, to recover its $9,406,108.34 credit, plus interest (R4, tab 17 at 420-32). It
asserted that it was entitled to reimbursement for its reasonable, allowable, and allocable
LOGCAP III costs under the contract's Allowable Cost and Payment clause. KBR
contended that, upon further review, its failure to reduce the headcount capacity at site H-3
under its subcontract was consistent with reasonable business judgment. KBR stated that,
when SK425 was awarded, the SOW then in force specified a headcount at site H-3 of 6,500
plus a satellite DFAC for 800 and that, under TO No. 59, KBR had to be ready to meet
headcount surges. KBR contended that, while Change Order No. 1 to SK425 was effective
on 10 April 2004, which was after the February LOTD, the LOTD had described the 1,422
headcount as a planning figure. KBR alleged that, during the transition from OIF 1 to OIF 2,
the government had issued conflicting directions regarding headcount requirements at Iraqi
sites; the March LOTD effectively rescinded the February LOTD; and KBR was now
directed to obtain its DF AC headcounts from camp mayors. (R4, tab 17 at 422) KBR stated
that there had been no formal change to TO No. 59's headcount as of 10 April 2004 causing
an uncertainty that required KBR to exercise business judgment and rendering SK425's
Change Order No. 1 price reasonable. KBR claimed that, as of 24 April 2004, the H site
ACO (MAJ McCaa) had confirmed that it was providing DF AC services in accordance with
TO No. 59's SOW. The contractor further alleged that, beginning in March 2004 and
continuing through the end of SK425, site H-3 's maximum average daily headcount grew
from 812 in March 2004 to 2,647 in June 2005 and that, as of April 2005, TO No. 89's SOW
contained a headcount of 5,000. Thus, the trend was upward despite the February LOTD.
KBR also raised a number of alleged problems with modifying its subcontract and contended
that there would be little practical or cost benefit to the government in doing so. Lastly,
KBR alleged that its subcontractor costs were reasonable because they did not result from
gross disregard of its requirements under the LOGCAP III contract. Rather, even if the H-3
headcount and SK425 price should have been adjusted downward, KBR's subcontract
administrators had simply made a mistake in failing to do so.
54. By letter to KBR of 18 June 2010, ACO Antonio James stated that KBR had
advised him that it intended to bill for the claimed amount. He stated that he concurred with
this process, it should resolve the claim, and he would defer issuing a final decision. (App.
supp. R4, tab 78 at 2352) On 29 July 2010 KBR submitted vouchers for the amount of the
withdrawn credit, which the government approved on about 10 August 2010. It applied the
amount against alleged KBR debts to the government. (See R4, tabs 19-20)
55. On 26 August 2010 KBR advised the ACO that it was treating the government's
acceptance of its vouchers as a final determination that it was entitled to the $9,406,108.34
claimed amount and, if its understanding were correct, it would forego its interest claim (R4,
tab 20). On 6 October 2010 the ACO responded that the government had made no
determination regarding the allowability of SK425 costs submitted; it disavowed any
representation that payment of KBR' s interim voucher was a final determination that it was
21
entitled to the amount paid; and "[s]ubject to ... completion of audits and reviews," the
government believed that payment of that amount resolved KBR' s request for interim
payment (R4, tab 21 ).
56. On 28 April 2011 DCAA's KBR Resident Office in Houston, Texas, issued an
audit report on costs incurred under SK425, and TO Nos. 59 and 89, for FYs 2004-06,
which incorporated the IBO's assist audit report's findings. DCAA questioned a total of
$12,202,051. Of that amount, DCAA questioned $11,636,551 as unreasonable on the
ground that KBR billed using headcount band pricing that did not represent actual
headcounts. For consumables, sewage and garbage, DCAA used regression analysis to
determine a reasonable estimate for pricing actual headcounts. It stated that KBR had not
incorporated into SK425 lower headcount bands proposed by GCC for the initial period,
which better represented the actual headcount served. DCAA also questioned $565,500 as
unallowable because GCC was paid monthly costs at a higher amount than the subcontract
specified. (R4, tab 23 at 499-500, 503-04; tr. 2/23-27) The auditors stated:
[KBR] contends its actions in not reducing headcount
capacity under the subcontract were consistent with
reasonable business judgment. We disagree with [KBR's]
position based on the contractor being directed in [the
February LOTD] by the Government to adjust its level of
service based on the reduction of headcounts. This
instruction was ignored which resulted in the Government
being overbilled.
(R4, tab 23 at 509)
57. On 3 May 2011 DCAA issued a Form 1 Notice No. 172 to KBR disapproving
payment of $12,415,060 ($11,835,578 for TO No. 59 and $579,482 for TO No. 89) (R4,
tab 24 at 525). The Form 1 was based upon the disapproved SK425 costs of$12,202,051,
plus indirect costs based upon interim indirect cost rates, less private security costs
disapproved by a separate Form 1, plus fee (id. at 527, 533).
58. By final decision of 22 March 2012, ACO James determined that $12,179,846 in
KBR's billed SK425 DFAC costs at site H-3 were unallowable, citing DCAA's 28 April
2011 audit report and its Form 1. He stated that the decision was "based on KBR's failure
to reduce the H-3 DFAC headcount as directed by the LOTD dated February 17, 2004" and
that "[c]osts incurred for services exceeding the services required by the ACO are
unreasonable, and therefore unallowable." (R4, tab 28 at 542, 544) The decision also stated
that it resolved KBR's 19 February 2010 claim; the government had properly withheld
KBR's voluntary credit; and KBR's claim for interest was denied. The ACO allowed
$235,214 ofDCAA's questioned costs from 13-17 February 2004, based upon the time
22
between "contract inception" 11 and KBR's receipt of the February LOTD, and from
18-27 February 2004, accounting for the 10-day period KBR was allowed under SK425 to
implement changes (id. at 542). The final decision demanded payment by KBR of
$11,483,487.74 (the disallowed $12,179,846 less $696,358.26- previously withheld) (id. at
545). KBR timely appealed to the Board on 19 June 2012.
59. ACO James acknowledged that his final decision was based upon KBR's failure
to follow the February LOTD, thereby incurring unreasonable subcontract costs, whereas
DCAA questioned billed costs versus actual costs. In preparing his final decision,
ACO James did not ask DCAA to quantify the impact ofKBR's failure to follow the
LOTD, i.e., to analyze what KBR's incurred costs would have been had it re-priced SK425
to reflect the February LOTD's headcount figure for site H-3. (Tr. 1/135; app. PFF No. 48)
60. DCMA raised at the hearing, and ACO James testified, that the costs he
disallowed in his final decision that pertained to TO No. 89 should not have been
disallowed, because that TO set services at site H-3 for a headcount of 5,000 (tr. 1/127).
After crediting private security costs, ACO James had disallowed $555,434 in costs, plus
overhead, general and administrative costs, facilities capital cost of money, and base fee,
for a total disallowed amount pertaining to TO No. 89 of $579,482 (R4, tab 28 at 544).
61. DCMA now contends that KBR was overpaid by $11,929,475 ($11,752,671
plus indirect costs and fee). Taking into account the government's withheld amount of
$696,358.26, DCMA now claims that KBR owes the government $11,233,117
($11,929,475 - $696,358.26) for unreasonable and unallowable costs the government paid
to KBR pertaining to SK425, plus CDA interest as of 22 March 2012. (Gov't br. at
48-50; gov't reply br. at 32)
DISCUSSION
The Parties' Contentions
DCMA alleges that KBR has not met its burden to prove that its DF AC costs were
reasonable under FAR 31.201-3(a) (see finding 3). DCMA contends that KBR did not act
as a prudent person in the conduct of competitive business when it incurred subcontract
costs for DFAC services at site H-3 for a camp population of 5,400 after Lt Col Blaine had
directed in the February LOTD that KBR provide DF AC services at that site for a
population of 1,422; KBR in effect ignored the LOTD with regard to site H-3; and it did not
consider the LOTD's impact upon SK425. DCMA denies KBR's allegation (below) that
Lt Col Blaine lacked authority to issue the LOTD. DCMA also contends, contrary to
11 The reference to a 13 February 2004 "contract inception" is unclear. We infer that it
refers to SK425, which was effective on 14 February 2004 (finding 9).
23
KBR's allegation, that the $11,233,117 DCMA seeks represents a disallowance of
unreasonable costs, not damages. DCMA asserts that:
[T]he amount of KBR' s reasonable costs for SK00425 should
be limited to the amount of DF AC costs that KBR would
have incurred if it had adopted the headcount specified in the
February LOTD for Site H-3, or the DFAC costs for
headcounts that were actually served, if higher than the
amount specified in the LOTD. KBR provided no basis for
calculating this amount or, for that matter, any basis for
calculating an alternate amount other than the full costs that it
paid GCC. In that vacuum, the Government's estimation of
the reasonable costs should be adopted.
(Gov't reply br. at 32)
KBR contends that the February and March LOTDs were planning documents, not
binding contract modifications requiring KBR to reprice SK425 using the 1,422 headcount.
If they were intended to be contract modifications, then Lt Col Blaine lacked authority to
issue them. KBR also alleges that the standard for assessing cost reasonableness is flexible
and depends upon the context in which the costs were incurred. It asserts that it reasonably
priced SK425 under the totality of the circumstances, including the wartime environment,
TO No. 59's requirements, conflicting information regarding projected headcounts at site
H-3, DCMA's failure to provide clear guidance regarding that information, and government
pressure for KBR to move to a new pricing structure. KBR alleges that "[f]aced with these
circumstances in April 2004, KBR reasonably established headcount band pricing for SK425
in accordance with the then-existing minimum requirements of [TO No. 59]" (app. br. at 21).
KBR also claims that costs can be reasonable even if incurred due to a contractor's simple
error, absent gross disregard of the contractor's contractual obligations. KBR also alleges
that DCMA has not proved damages with reasonable certainty. KBR contends that the
government's cost calculation is inconsistent with its liability theory as expressed in the
ACO's 22 March 2012 final decision and is based upon flawed DCAA audits that lacked
independence and adequate evidentiary support.
Lt Col Blaine Had Authority to Issue the February and March LOTDs
We begin with KBR's contention that Lt Col Blaine lacked the authority to issue
the February and March LOTDs. The PCO delegated ACO authority to DCMA's
Command-San Antonio, which sub-delegated it to DCMA Middle East. In accordance with
FAR Subpart 1.6 and FAR 42.302, Lt Col Blaine was appointed to be a CO and an ACO on
4 January 2004. He also served as Commander, DCMA Northern Iraq. Under TO No. 59's
SOW paragraph 1.4, unless otherwise specified, all SOW increases, decreases or
modifications were to be directed by the ACO. While Lt Col Blaine's delegated authority
24
excluded taking any action that involved changing TO No. 59's value or the contract's
performance period, the February and March LOTDs stated that the government believed
they were within the contract's scope; the cost impact should be minimal as services were
reallocated from shrinking sites; KBR was to contact Lt Col Blaine for contractual
questions; and KBR was to submit any increase or decrease in its original estimated cost
and any suggested changes to the SOW. There is no evidence that KBR ever contacted
Lt Col Blaine with questions about the LOTDs; or suggested that he did not have authority
to issue them; or that they were not within TO No. 59's scope; or that they changed TO
No. 59's value; or that KBR submitted any increase or decrease in its estimated costs or
proposed changes to the SOW as a result of the LOTDs. (Findings 7-8, 11-12, 14, 19, 50)
The government frequently used LOTDs to provide direction, including planning
data, to KBR for in-scope contract requirements. They were fairly commonly used under
IDIQ contracts to adjust the level of service expected or provided. Lt Col Blaine testified
without contradiction that, as ACO, he was authorized to issue LOTDs. He could issue
directions within the contract's scope but could not modify that scope. Formal modifications
had to come from the PCO. (Finding 15) Indeed, in Kellogg Brown & Root Services, Inc. v.
United States, 107 Fed. Cl. 16, 19 (2012) (KBR I), aff'd, 742 F.3d 967 (Fed. Cir. 2014) (KBR
III), which also involved TO No. 59, the parties stipulated, and the court found, that
Lt Col Blaine had the "requisite delegated authority" to issue the February LOTD, "altering
anticipated camp populations at five H sites."
We find no support for KBR's proposition that Lt Col Blaine lacked the authority to
issue the February and March LOTDs, the evidence is to the contrary, and we conclude that
he did have the requisite authority.
The February LOTD was Binding upon KBR and KBR
Did Not Exercise Reasonable Business Judgment in Failing to Comply with It
Regarding KBR's contention that the February LOTD was merely a planning
document and not binding upon it, in practice KBR treated LOTDs as contractual directives.
For example, Mr. Carr, head of KBR's DFAC Tiger Team (finding 26), testified in KBR I
that change orders to subcontracts regarding headcount bands would be implemented "once
[KBR] was directed to change the headcount that was contractually required through an
LOTD from the client." 107 Fed. Cl. at 18. Moreover, as reported by the court, KBR also
contended in that case that it did not have the discretion to alter its subcontracted headcount
capacity at a particular site on its own and that "[ o]nly the cognizant ACO possessed the
authority to alter the stated capacity requirement through issuance of an LOTD." Id. at 32.
Although an LOTD is not an agreement, the principle that "the parties'
contemporaneous construction of an agreement, before it has become the subject of a dispute,
is entitled to great weight in its interpretation," Blinderman Construction Co. v. United States,
695 F.2d 552, 558 (Fed. Cir. 1982), is apt by analogy. We found that the weight of the
25
testimony at the hearing, not only from Lt Col Blaine and MAJ McCaa, but from KBR's
witnesses Messrs. Warner, Maggard and Carr, was that LOTDs were directives by the ACOs
to be followed by KBR (finding 38). Until the current litigation, KBR did not assert that the
February LOTD was not binding upon it. Despite MAJ McCaa's failure to include the
February LOTD among those she provided to Mr. Maggard upon his request for outstanding
LOTDs, KBR does not deny that it received the LOTD contemporaneously and we found that
it did (finding 19). KBR's project manager, Mr. Warner, had no question about the February
LOTD's validity and acknowledged that KBR "absolutely" could not simply disregard its
direction without consulting with the government, and that he never received any direction
from the government to provide for a different headcount at site H-3 than 1,422 (finding 21).
MAJ McCaa's 23 February 2004 LOTD and Lt Col Blaine's March LOTD did not rescind the
February LOTD (findings 24, 29).
Further, KBR's initial reaction to DCAA's draft November 2007 SOCAR, which
asserted that KBR's charged costs were unreasonable concerning site H-3, because it did
not comply with the February LOTD's order to reduce the headcount there, was to issue a
credit to the government. On 9 July 2008, KBR notified the PCO of a billing adjustment
under SK425, affecting TO Nos. 59 and 89, which resulted in a $9,406,108.34 credit to the
government. KBR reported that it had billed $33,234,684.74 to the government, when it
should have billed $23,828,576.40 in light of the February LOTD. Of the $9,406,108.34
credit, $8,953,783.34 applied to TO No. 59 and $452,325.00 applied to TO No. 89. KBR
stated that the credit was qualified based upon further fact development; it had inadvertently
failed to consider the February LOTD in the pricing of SK425; it had not billed the
government appropriately; and it had not substantiated that its lack of adjustment to account
for the February LOTD was in accordance with "reasonable business judgment" and, until it
did, it was crediting the government with the amounts that could not be justified.
(Finding 49)
As in KBR III, "[t]he record here is simply devoid of a contemporary justification
supporting a reasonableness finding" regarding KBR's claimed costs. 742 F.3d at 972. There
is no contemporaneous written explanation of record for why KBR did not implement the
February LOTD regarding site H-3, which was binding upon it. We found that KBR never
substantiated that its failure to follow the LOTD was an exercise in reasonable business
judgment or that it was a mistake (finding 50). The United States Court of Appeals for the
Federal Circuit previously rejected KBR's argument that it is entitled to recover its costs
absent gross misconduct on its part. Kellogg Brown & Root Services v. United States, 728
F.3d 1348, 1359 (Fed. Cir. 2013) (KBR II), accord KBR Ill, 742 F.3d at 971. Moreover the
court noted in KBR III that a contractor's "business judgment must still be exercised in a
rational manner, even in wartime." 742 F.3d at 972. We conclude that KBR's billed DFAC
costs for site H-3 that exceeded the amounts that should have been billed had KBR complied
with the February LOTD were not reasonable under the contract's Allowable Cost and
Payment clause, FAR 52.216-7(a), and FAR 3 l.201-2(a)(l) and 3 l.201-3(a) (findings 2-3).
KBR is to reimburse DCMA for those costs, plus interest, as set forth below.
26
Quantum
This appeal encompassed quantum as well as entitlement. Cost reasonableness,
which is at issue, is a question of fact. The standard for assessing reasonableness is flexible,
allowing a tribunal discretion "to consider many fact-intensive and context-specific factors."
KBR II, 728 F.3d at 1360, accord KBR Ill, 742 F.3d at 970. There is no presumption of
reasonableness. KBR bears the burden to prove that the DF AC costs it billed to the
government in connection with site H-3, after KBR's receipt of the February LOTD, were
reasonable. KBR III, 742 F.3d at 970; FAR 3 l-201-3(a). Contrary to KBR's contention,
DCMA does not bear a burden of proof regarding damages, which are not at issue. This
appeal involves a government claim to recover unallowable costs.
"A cost is reasonable if, in its nature and amount, it does not exceed that which
would be incurred by a prudent person in the conduct of competitive business" (finding 3,
FAR 31-201-3(a)). KBR did not have the right to disregard the February LOTD and it
was imprudent to do so. The costs KBR incurred due to its failure to reduce the site H-3
headcount in accordance with the LOTD and billed to the government were unreasonable
(finding 39). Thus, KBR must reimburse the government for those costs.
KBR contends that DCAA's audits were flawed. We found that its allegations that
DCAA was unduly influenced by a letter from Senator McCaskill; DCAA was concerned
with impressing KBR's former consultant, Mr. Ransburg; and DCAA rushed to respond to
the issues raised, sacrificing independence and impartiality, were not supported by
substantial evidence (finding 46). Moreover, while DCAA's assist audit found KBR's
subcontract costs billed to the government to be unreasonable on the ground that KBR billed
using headcount band pricing that did not represent actual headcounts, the 28 April 2011
Resident Office's audit concluded that KBR's ignoring the February LOTD's direction to
adjust its level of service based on reduced headcounts was not consistent with reasonable
business judgment and had resulted in the government being overbilled. (Findings 51, 56)
Similarly, the ACO's final decision on appeal focused upon the difference in costs KBR
would have billed to the government had KBR reduced the site H-3 headcount in accordance
with the February LOTD and the costs it actually billed to the government (finding 58 ).
Regardless, when a CO's final decision is appealed, we conduct de novo proceedings.
Wilner v. United States, 24 F.3d 1397, 1401-02 (Fed. Cir. 1994).
KBR asks the Board to deny the government's claim and rule that KBR is entitled to
the full amount challenged by the government, including the amount the government has
already recouped. KBR disputes DCMA's legal arguments that KBR's SK425 costs in
contention were unreasonable and that the government was entitled to recoup those costs,
and it disputes DCAA's independence and approach. However, KBR made no effort to
challenge the factual basis ofDCMA's quantum calculations and did not advance any
quantum calculation of its own at the hearing. The only quantum calculations from KBR,
27
which it did not elaborate upon at the hearing, are those supporting its initial credit to
DCMA for KBR's failure to follow the February LOTD, which resulted in a $8,953,783.34
credit regarding TO No. 59, the only TO now at issue. DCAA concluded that, with some
exceptions, KBR had followed the same methodology as DCAA in reaching the amount
credited. (Findings 49, 51)
The weight of the evidence on the record before us supports DCMA's quantum
calculations. Moreover, DCMA allowed for an equitable credit to KBR if the actual
population at site H-3 exceeded the February LOTD's figure of 1,422. Therefore, we
conclude that the government is entitled to $11,233,117 (rounded) ($11,929,475.00 less the
$696,358.26 it has already withheld), plus interest as of 22 March 2012, the date of the CO's
final decision demanding payment from KBR, computed in accordance with the contract's
Interest clause (finding 4). 12
DECISION
KBR's appeal is denied. DCMA's claim is sustained. KBR is to remit $11,233,117 to
the government, plus interest as of22 March 2012, computed under the contract's Interest
clause.
Dated: 15 March 2018
Administrative Judge
Armed Services Board
of Contract Appeals
I concur I concur
/)
RICHARD SHACKLEFORD
Administrative Judge
O~ON
Administrative Judge
----
Acting Chairman Vice Chairman
Armed Services Board Armed Services Board
of Contract Appeals of Contract Appeals
12
DCMA sought CDA interest. The CDA does not provide for the payment of interest to the
government. However, interest payable to the government under the contract's Interest
clause is based upon CDA interest.
28
I certify that the foregoing is a true copy of the Opinion and Decision of the Armed
Services Board of Contract Appeals in ASBCA No. 58175, Appeal of Kellogg Brown & Root
Services, Inc., rendered in conformance with the Board's Charter.
Dated:
JEFFREYD. GARDIN
Recorder, Armed Services
Board of Contract Appeals
29