by David Phinney

Dec. 17. 2006 — I have a curious one-page memo, “Blanket Insurance Waiver,” which apparently allows Halliburton/KBR to waive insurance requirements — read cut “costs” — to potential subcontractors working under Halliburton’s sweeping military logistics contract, known as LOGCAP.

Four top-level KRR managers approved this internal memo November 26, 2002, while the Bush administration’s Global War on Terror was in full swing in Afghanistan and poised to expand in Iraq.

The memo grants sweeping discretion to KBR contract officers in the field, i.e., Iraq. Among them is the freedom to ignore insurance requirements when subcontractors claim they can’t find a suitable insurance carrier. That insurance requirement covers general liability, automobile liability, and the statutory amount for worker’s compensation and employer’s liability.

One contracting insider believes that KBR’s contracting officers routinely used the waiver to help non-US businesses be more competitive when bidding on multi-million dollar contracts under the logistics deal. (In other words, KBR personnel allegedly lowered the threshold on costs during the bidding process for select firms in Kuwait, Saudi Arabia, Jordan and other countries, says the source.)

“It appears that waivers were routinely handed out, but only to non-US businesses, ” he asserts.

This insider claims that because insurance coverage for workers is mandatory on Pentagon contracts, the waiver grants a very liberal license to a contracting officer who waives the requirement.

“In 2004-2005, coverage was running from $27 to $35 per $100 of wages. Essentially, providing a waiver to foreign firms gives them an automatic 27 to 35 percent price advantage on Labor Contracts over honest American entities,” the insider says.

Halliburton/KBR spokesperson Kathy Mann explains the waiver this way:

“KBR’s standard commercial terms and conditions for subcontracts include a requirement to demonstrate that the vendor maintains appropriate commercial insurance. Understandably, most standard insurance policies contain war risk exclusions. Accordingly, due to the war-zone conditions in Iraq at the time, most insurance carriers would not extend coverage under their insurance policies to cover the work of the subcontractors in Iraq. In accordance with our established procurement procedures, KBR needed to waive this requirement to award the subcontracts to support the troops. “(Update 12.20.06)

According to the US Labor Department, which oversees Defense Base Act insurance requirements, there are four major insurance carriers currently providing DBA coverage in Iraq: AIG, ACE-USA,
CNA, and Chubb. And there are others. There’s more on DBA requirements in Iraq here.

So does this waiver affect DBA requirements by the Labor Department? I am still checking.

This is what Labor has to say about DBA, which is related to the Longshore and Harbor Workers’ Compensation Act (LHWCA):

“The insurance requirements under the DBA are identical to those found in the LHWCA (Longshore and Harbor Workers’ Compensation Act). The Longshore Act requires every employer (including contractors and subcontractors) either to secure insurance for the payment of workers’ compensation benefits provided under the Act or to be permissibly self-insured. If a subcontractor fails to secure the payment of compensation, the contractor will be liable and will be required to secure the payment of such benefits.”

The real question, though, is whether LogCAP requires subcontractor insurance, not whether KBR’s “standard commercial terms” do.

A prominent attorney working on Iraq contract fraud tells me that this memorandum may be cause for crying foul on perhaps hundreds of contracts.

“There is a potential False Claims Act claim here. It’s would be a little difficult to pin down the Government’s damages, but clearly, if KBR must require subcontractors to obtain insurance, and it’s not doing so, then every invoice certifying contract compliance is a false claim.” (See qualifying analysis below.)

Another prominent government attorney tells me he’s not so sure, but regardless of the blanket legal interpretations, allowing a private contract officer the personal discretion to waive insurance requirements opens the door for some handy favoritism that could potentially be rewarded with generous kickbacks.

That’s one reason why the special inspector general charged with investigating Iraq contracting is looking hard at the hidden layers of subcontractors working underneath Halliburton/KBR, according to a number of sources talking to me.

Halliburton/KBR has now billed $16 billion since the war on terror began largely from its business in coordinating camp construction and maintenance, food services and supply convoys in Iraq and Afghanistan. (That’s my rough estimate on the Pentagon’s tab.)

Much of that work has been handed out to subcontractors, while KBR tacks on a percentage surcharge for awarding and coordinating the contracts. (Imagine a pyramid of contractors with Houston-based KBR sitting at the top.)

The four KBR managers who signed the memo are:
— Tod E. Nickels, senior procurement and materials manager
— John Downey, project general manager (LOGCAP) project
— Bob Herndon, vice president, operations maintenance and logistics
— Tom Crum, chief operating officer.

As far as the waiver is concerned, read on:

Here’s what the attorney says about the insurance memo:

“This raises several legal issues. The main ones are: (1) what one has to do to waive a requirement like this, and (2) who has to do it.

The insurance requirements for federal subcontractors are rather heavily regulated. This is particularly in the area of construction (which is supposed to be KBR’s specialty). It’s not simply a function of what the LogCAP contract says, but also a function of regulations and statutes. Some of these requirements simply cannot be waived.

Others can be waived only by a notice of proposed rulemaking (NPRM) in the Federal Register.

Still others require approval at a level higher than the contracting officer, e.g., the head of the contracting activity. I sincerely doubt that the only insurance requirement is whatever requirement that KBR chooses to impose in its form subcontract.

As to the first issue, i.e., how to waive a requirement like this, I don’t have enough information to know in which category the LogCAP subcontractor insurance requirement falls, but it’s very, very unlikely that a one-paragraph memorandum is sufficient. The minimum conceivable requirement is a formal contract modification, and this memorandum just isn’t one. As I said, it’s quite possible that even a formal contract modification wouldn’t suffice. For instance, a modification can’t waive a mandatory statutory requirement.

Then there is the issue of who has the authority to do something like this. Again, the minimum conceivable requirement is something signed by the administrative contracting officer for the contracting activity in question. (In the case of LogCAP, that’s an Army Command at Rock Island, IL.) I don’t see anyone signing this memorandum who fits the description. Conveniently for KBR, it’s not on any stationery, and the signatories’ employer is not identified. It looks to me, however, that all of the signatories might be KBR employees. The idea that KBR itself would have the authority to waive its own insurance requirements under the LogCAP prime contract is almost laughable, but with KBR, anything is possible.

If one wanted to know exactly what provisions were being violated here, one would have to review the LogCAP Request for Proposals, and possibly (but not necessarily) the task orders and formal contract mods. As you know, the task orders are notoriously difficult to obtain through FOIA.

There is a potential False Claims Act claim here. It’s would be a little difficult to pin down the Government’s damages, but clearly, if KBR must require subcontractors to obtain insurance, and it’s not doing so, then every invoice certifying contract compliance is a false claim.”

Update 12/29/06: One informed observer notes in an email:

…..bastards …take my word for it, they are required to carry DBA, are criminally liable if they don’t AND KBR’s responsibility for it flows — even criminally — down to the lowest sub of a sub of a sub. They can get a waiver from the Labor Dept., but they did not get any waivers for Iraq. Don’t have those files anymore, but I believe the guy you want is Jack Martone of the Labor Department (he was about to retire 1.5+ years ago, but was pretty helpful). You can also look at GAOs attempt to look at the DBA question, which was really, really lame. Their interest, of course, was not in whether benefits were being illegally denied to workers, but how much DBA was costing taxpayers given the extensive use of contractors in Iraq. My recollection is they basically threw up their hands and said, “We have no fucking clue, since no one even knows how many contractors there.”