An Introduction to our

1
Report of Agreed Upon Procedures for the
International Advisory and Monitoring
Board Regarding the Task Force Restore Iraqi
Oil Contract Settlement between the U.S. Army
Corps of Engineers and Kellogg, Brown, Root
October 30, 2006
An Introduction to our Forensic Services
Practice
2
Summary of Agreed-Upon Procedures Report

• Report of Agreed-Upon Procedures regarding
• The Contract Settlement between
• the U.S. Army Corps of Engineers
• and Kellogg, Brown Root
• related to the
• Task Force Restore Iraqi Oil Project
• for
• U.S. Defense Reconstruction Support Office
• and
• International Advisory and Monitoring Board
• By
• Crowe Chizek and Company LLC
• October 20, 2006

3
The KBR contract with theUS Corps of Engineers
(USACE)

• Contract number DACA63-03-D-0005
• Task Force Restore Iraqi Oil (TF RIO) contract
• Awarded to KBR on March 8, 2003
• Contracting Agency Southwestern Division of
  USACE
• Cost-plus-award-fee contract
• Period of Performance Base period of 2 years,
  plus 3 one-year options
• Base Fee 2 Award Fee Up to 5
• Ten Task Orders (T.O.s)
• T.O.s 1 - 4 and part of 5 funded from U.S.
  appropriations
• T.O.s 6 - 10 and most (82) of 5 funded from
  DFI funds
• T.O.s 5 - 10 closed out as of December 31, 2005

4
Task Orders under the KBR TF RIO contract

• Training/advice for oil spill response equipment
  pre-positioning
• Design and specifications for quick repair of
  critical oil facilities
• Safe shutdown and damage assessment oil well
  fire fighting and repairs
• Base camp facilities (3) and life support for TF
  RIO and KBR personnel
• Funded by DFI
• Import and distribute refined fuel products
• Restore essential oil infrastructure
• Import and distribute refined fuel products
• Import and distribute refined fuel products
• Import and distribute refined fuel products
• Import and distribute refined fuel products

5
The Environment of Contract Performance (March
2003 August 2004)

• War-time conditions throughout Iraq
• Exposure of fuel truck convoys to ambush, sniper
  fire, roadside bombs, and rocket-propelled
  grenades
• Difficulty in obtaining military escorts for
  convoys from Kuwait
• Refusal of Turkish drivers to deliver fuel to
  Baghdad
• 85 casualties among KBR employees and contractors
  including 21 fatalities
• Hazardous job-site conditions at Al-Fatah Bridge
  crossing of Tigris River
• Hazardous job-site conditions at canal crossings
  (Kirkuk, Riyadh, Zegeton)

6
Environment (continued) Task Orders 5, 7-10 -
Humanitarian Fuel Mission

• Utmost urgency to supply refined fuel products
• Absence of long-term commitments in fuel supply
  mission due to
• Uncertain requirements and duration of fuel
  supply mission
• (Initial requirement for only 21 days supply)
• Sporadic and uncertain funding of fuel supply
  mission
• (21 modifications to Task Order 5)
• Insurgent activity
• Only one fuel supplier in Kuwait (Altanmia)
  authorized by Kuwait Petroleum Company (KPC)
• Insufficient number of fuel trucks in Kuwait

7
Environment (continued) - Task Order 6 Oil
infrastructure projects

• Urgency to restore oil infrastructure as quickly
  as possible to supply
• Crude oil for export to generate revenue
• Refined product for domestic consumption
• Lack of construction site base camp at Al-Fatah
  Bridge to commence work
• Dangerous security situation at Al-Fatah and
  three canal crossings
• Geological complexities at Al-Fatah Bridge site
  hampering HDD drilling, particularly for large
  boreholes
• Unstable electrical power - demand for back-up
  power generation

8
Total Payments under Task Orders 5 - 10
Task Order Reimbursed Direct Costs Indirect Costs Base Fee Award Fee Total
5 812,146,070 16,632,274 15,683,246 26,661,519 871,123,109
6 196,429,125 4,511,831 3,880,000 388,000 205,208,956
7 298,028,401 6,829,623 5,741,741 9,760,959 320,360,724
8 164,092,535 3,760,353 3,071,573 5,221,673 176,146,134
9 50,562,450 1,158,709 758,285 1,289,086 53,768,530
10 25,356,608 581,082 320,952 545,618 26,804,260
Total 1,546,615,189 33,473,872 29,455,797 43,866,855 1,653,411,713
As of Total 94 2 2 3 100
9
Total Payments for Task Orders 5 -10 funded by DFI
Task Order Reimbursed Direct Costs Indirect Costs Base Fee Award Fee Total
5 667,151,571 13,662,872 12,883,277 21,901,570 715,599,290
6 196,429,125 4,511,831 3,880,000 388,000 205,208,956
7 298,028,401 6,829,623 5,741,741 9,760,959 320,360,724
8 164,092,535 3,760,353 3,071,573 5,221,673 176,146,134
9 50,562,450 1,158,709 758,285 1,289,086 53,768,530
10 25,356,608 581,082 320,952 545,618 26,804,260
Total 1,401,620,690 30,504,470 26,655,828 39,106,906 1,497,887,894
As of Total 94 2 2 3 100
10
Snapshot of Completion Status

• Oil supply mission (T.O. 5, 7-10)
• Mission completed (May 2003 March 2004)
• Fuel supply commitment transferred to DESC in
  April 2004
• Oil infrastructure mission (T.O. 6)
• HDD drilling of 15 pipelines at Al-Fatah
• KBR completed 6 pipelines (28 of throughput)
  across Tigris River
• PIJV completed remainder up-stream (U.S.
  appropriations)
• Canal crossings completed by PIJV (U.S.
  appropriations)
• Back-up Power Generators all delivered and
  installed
• 12 GE TM500 gas turbine generators
• One Pratt Whitney FT8 Twin-Pak gas turbine
  generator
• 42 diesel generators for SOC and other locations

11
Snapshot of Completion Status (continued)

• Settlement negotiations concluded on December 22,
  2005
• DCAA questioned 208 million of incurred costs,
  but no recommendation to withhold reimbursement
  of questioned costs
• Disallowed 3.8 million of costs related to
  diesel fuel transportation from Kuwait
• KBR waived claim for 5.4 million in interest
• Excluded 108 million (52) of 208 million in
  questioned costs from fee pool (37 million
  impact on potential award fee)

12
A Follow-on Procedure to SIGIR Engagement

• SIGIR Agreed-upon Procedure Report September 30,
  2005
• Major Findings in SIGIR report
• The non-competitive award to KBR was properly
  justified
• T.O. 5 costs were definitized and determined to
  be fair and reasonable
• T.O.s 6 10 had not yet been definitized
• Appropriate justification for the contract
  (signed by the
• Assistant Secretary of the Army)
• Goods and services received and paid for with DFI
  funds were provided for in contract
• Total amount of DFI funds disbursed did not
  exceed the amount obligated for the contract

13
Our Scope of Work

• Focus on Task Orders 5 10 of the KBR contract
• (i) Review the Settlement between KBR and
  USACE
• Review the Work Performed by DCAA
• Confirm Physical Existence of Deliverables
  under
• Task Order 6

14
Scope of Work Detailed Procedures

• (i) Review Settlement between KBR and USACE
• Provide a summary of the salient terms of the
  settlement, including the disposition of costs
  previously questioned by the DCAA and summarized
  in the September 2005 SIGIR report.
• Comment on the reasonableness and basis for the
  settlement.
• Compare the processes and procedures for contract
  reconciliation and settlement of
  non-competitively awarded KBR RIO contract
  actions using DFI funds with the processes and
  procedures for contract reconciliation and
  settlement of non-competitively awarded KBR RIO
  contract actions using U.S. appropriated funds.
• Document the procedures undertaken by the USACE
  contracting officer to establish that goods were
  delivered and services were rendered for each of
  the six task orders of the KBR RIO contract.
• Show how the management and performance award
  commission fees were calculated.
• Obtain and summarize the terms for indirect
  costs, including overheads.

15
Scope of Work Detailed Procedures (continued)

• (ii) Review Work Performed by DCAA
• Obtain the contract files and review for
  completeness.
• Obtain evidence that the contracting procedures
  were followed.
• Perform a review of the reasonableness of the
  price of imported fuel products compared to other
  sources, for example, the prices charged to the
  CPA or U.S. forces in Iraq at that time.
• Where no comparable price is available, assess
  the markup taking into account the wartime
  conditions.
• Obtain evidence that the goods were delivered and
  the services were rendered in terms of quality
  and quantity in accordance with the terms of the
  relevant task order under the KBR RIO contract.
• Determine by review of the agreement with the
  contractor that payments were properly justified.

16
Scope of Work Detailed Procedures (continued)

• (iii) Confirm Physical Existence of Deliverables
  under Task Order 6.

17
Primary Sources of Information

• From US Army Corps of Engineers (USACE)
• KBR contracts and subcontracts
• Task Orders and modifications
• Price Negotiation Memoranda (PNM) prepared by the
  Corps
• Administrative Contracting Officer
• Procurement and accounting documentation
• Interviews of USACE staff
• Written statements of USACE staff
• Correspondence and other materials

18
Primary Sources of Information (continued)

• From Defense Contract Audit Agency (DCAA)
• DCAA Audit Reports on each Task Order
• Audit Workpapers
• Financial analyses in support of contract
  negotiations by the USACE contracting officer
• DCAA audit manuals
• Interviews of DCAA staff
• Correspondence and other materials

19
Primary Sources of Information (continued)

• From Special Inspector General for Iraq
  Reconstruction (SIGIR)
• SIGIR audit reports and special assessment
  reports
• Workpapers in support of reports
• Interviews of SIGIR staff

20
Primary Sources of Information (continued)

• From Defense Energy Support Center (DESC)
• Refined product pricing data
• Interviews of DESC staff

21
Primary Sources of Information (continued)

• From Kellogg, Brown Root (KBR)
• KBR project accounting documentation
• Correspondence pertaining to contract and task
  orders
• Fuel supply data and correspondence
• Horizontal Directional Drilling (HDD) subcontract
  information
• Back-up generator information
• Interviews of KBR staff

22
Results of Procedures

1. Review Settlement between KBR and USACE
2. Review Work Performed by DCAA
3. Confirm Physical Existence of Task Order 6
   Deliverables

23
Results (i) Review Settlement between KBR and
USACE

• Reviewed the terms of settlements for Task Orders
  5 through 10
• Evaluated the basis and reasonableness of
  settlement based on
• Negotiated terms of these settlements (costs and
  fees)
• Related supporting documentation, including Price
  Negotiation Memoranda
• Procedures followed by USACE and its Award Fee
  Evaluation Board
• DCAA audit reports and procedures undertaken in
  auditing prices and costs as contained in work
  papers
• Interviews with cognizant USACE, DCAA, SIGIR,
  DESC, and KBR personnel
• Determined that the settlements were reasonable

24
Results (i) Review Settlement between KBR and
USACE(continued)

• Reviewed documentation regarding determination of
  base and award fees including review of
  procedures followed by DCAA, the USACE
  contracting officer and the USACE Award Fee
  Evaluation Board
• Recomputed base and award fees
• Reviewed documentation regarding the terms for
  indirect costs, including overhead and GA
• Recomputed indirect costs based on contractual
  overhead and GA rates

25
Results (ii) Review Work Performed by DCAA

• Determined that contract files were complete and
  that contracting procedures were followed
• Reviewed DCAA audit reports, audit procedures,
  supporting work papers and memoranda to USACE.
  Interviewed DCAA, USACE and KBR personnel
  regarding DCAA procedures.
• Reviewed price of imported fuel products, and
  transportation, in the context of wartime
  conditions and assessed comparability to costs
  incurred by DESC commencing April 2004
• Reviewed process of obtaining bids from qualified
  vendors
• Reviewed evidence that goods were delivered and
  services rendered in accordance with the terms of
  task orders
• Determined that payments were properly justified.

26
Results (iii) Confirm Physical Existence of
T.O. 6 Deliverables

• Key Task Order 6 deliverables
• HDD pipeline crossing at Al-Fatah Bridge over the
  Tigris River
• Pipeline crossings at three canals (Kirkuk,
  Riyadh and Zegeton)
• Back-up gas turbine and diesel generators
• Conducted interviews with personnel and reviewed
  extensive documentation from
• USACE
• DCAA
• SIGIR
• KBR
• U.S. State Dept.
• Reviewed accounting documentation confirming
  delivery
• Reviewed photographic evidence confirming
  delivery

27
Determining Reasonableness (per FAR 31.2013)

• (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 . . .
• (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 contractors business or the
  contract performance
• (2) Generally accepted sound business practices,
  arms-length bargaining, and Federal and State
  laws and regulations
• (3) The contractors responsibilities to the
  Government, other customers, the owners of the
  business, employees, and the public at large and
• (4) Any significant deviations from the
  contractors established practices.

28
Factors supporting reasonableness of payments for
Task Orders 5, 7-10

• The contracting process by USACE was consistent
  with US government contracting procedures for
  cost reimbursement contracts
• The DCAA followed its standard audit procedures
• Reviewed interim payment vouchers from KBR
  (together with USACE)
• Provided provisional approval for payments
  subject to later audit
• Sought additional information from KBR
• Audited incurred costs
• Audited indirect costs based on negotiated
  contractual rates
• Prepared audit reports
• Provided advice to contracting agency (USACE) in
  settling contract

29
Factors supporting reasonableness of payments for
Task Orders 5, 7-10 (continued)

• Certain costs were questioned by the DCAA (176
  million for fuel supply task orders 32 million
  for T.O. 6 )
• Questioned costs were incurred for the benefit of
  the mission
• Questioned costs are not necessarily disallowable
  costs
• Questioned costs are costs incurred by a
  contractor that DCAA recommends for further
  consideration by the contracting officer
• Neither the DCAA proposal audits nor its
  financial advice to the contracting officer
  included not reimbursing KBRS for the large
  majority of the costs it had incurred in
  executing the mission. DCAA did not issue a Form
  1, Notice of Costs Suspended and/or Disapproved
  under Cost Reimbursement Contracts

30
Factors supporting reasonableness of payments for
Task Orders 5, 7-10 (continued)

• The prices of fuel products and related
  costs of transportation into Iraq in these
  wartime conditions were a reflection of existing
  market conditions.
• Multiple bids received on May 5, 2003 from Kuwait
  vendors
• Altanmia, Maar Specialties, and Elafco General
  Trading
• Altanmia was the low bidder and offered best
  terms and
• plan for fuel delivery
• Additional bids sought on May 7, 2003
• Altanmia, Jassim Transport and Stevedoring
  Company,
• Mohammed Al-Mojil Group, American United and
  SABA
• Altanmia again offered best terms
• Altanmia had exclusive right from KPC to purchase
  and distribute fuel

31
Factors supporting reasonableness of payments for
Task Orders 5, 7-10 (continued)

• DCAA proposed comparison to DESC for
  transportation costs as a reliable benchmark for
  assessing Altanmias costs
• Both USACE Contracting Officer and DESC
  disagreed
• DESC was funded for 3 months up-front, making it
  easier for contract negotiation
• DESC benefited from KBR experience and lessons
  learned
• Contractors had trucks in place when DESC took
  over. Start-up costs were covered
• KPC dealt directly with DESC (as a U.S.
  government entity)
• Producer relationships in place with DESC to
  support military requirements. KBR lacked DESCs
  expertise in contracting for fuels
• Expense of insurance coverage not required for
  DESC contractors
• DESC used economic price adjustment in contracts

32
Factors supporting reasonableness of payments for
Task Orders 5, 7-10 (continued)

• USACE determined prices and transportation costs
  to be reasonable (from PNM for T.O. 5)
• The government will not refuse to pay KBRS the
  actual incurred costs that have been questioned
  in DCAA audits based on
• A comparison of prices paid for transportation of
  fuel from Kuwait to prices paid for fuel from
  Turkey or
• A comparison of prices paid for transportation of
  fuel and the prices paid by DESC
• Costs incurred for fuel and its transportation
  were not found to be
• In violation of FAR cost principles
• In violation of Cost Accounting Standard (CAS)
• In violation of any prime contract term
• In violation of any Task Order term
• Fraudulent
• The result of willful management misconduct

33
Fuel truck staging at Habur border in Turkey
34
Fuel truck staging at Habur border in Turkey
35
Task Order 6 and the Crossing at the Al-Fatah
Bridge

• Bridge destroyed during combat operations in
  April 2003
• Severed all flow of petroleum products across the
  Tigris River
• Bridge again attacked on October 18, 2005 when
  insurgents bombed temporary pipelines strung
  across bridge

36
Al-Fatah Bridge after aerial bombing
37
Task Order 6 Deliverables excerpts from contract

• The Al-Fatah Bridge crossing
• The task envisioned under this task order
  is to construct a new, pipeline-only bridge
  across the river or to tunnel under the river.
  The deciding factors for this decision will be
  time in as much as the economic impact is
  stated above.
• The three canal crossings
• . The effort under this task order consists
  of design and construction of three horizontal,
  directionally drilled crossings at the Kirkuk
  Irrigation Canal, the Riyadh Access Road and
  Irrigation Canal and the Zegeton River crossing.
  
• The Emergency Back-up Generators
• . . . coordinate with MOO and ACO to
  develop a plan to procure and install emergency
  back up generation capacity at designated key
  infrastructure locations as directed by the ACO.

38
Task Order 6 (continued) The Crossing at
Al-Fatah

• Decision to tunnel under the river using HDD made
  by senior oil advisors to CPA and Iraq Ministry
  of Oil
• HDD drilling of tunnels for 15 pipelines selected
  because of
• Speed
• Security
• Permanence
• Cost
• Successfully installed only six pipelines (out of
  15) (28 of desired throughput)
• 26-inch crude oil pipeline
• 24-inch dry gas pipeline
• 14-inch LPG (sour gas) pipeline
• 12-inch refined product pipeline
• 16-inch fuel gas line
• 8-inch natural gas line

39
Task Order 6 (continued) The Crossing at
Al-Fatah

• Project completed by PIJV using U.S.
  appropriations
• Constructed by excavating trench across the
  river, installing the pipeline (encased in
  concrete coating), and covering it with gravel.
• Nine large diameter pipelines installed
• 14-inch LPG line
• 20-inch crude oil line
• 30-inch crude oil line
• 32-inch crude oil line
• 40-inch crude oil line
• four spare pipelines (8-inch, 12-inch, 16-inch
  and 20-inch)

40
Task Order 6 (continued) Canal Crossings

• KBR scope of work for canal crossings terminated
  in August 2004
• Project awarded by PCO to PIJV in November 2004
  using U.S. appropriations
• Kirkuk canal crossing completed by PIJV
• Zegeton and Riyadh canal crossings completed by
  subcontractor from the Republic of Georgia,
  TriQuest International Group, Ltd.
• All canal crossings require weld testing before
  being placed into operation.
• Remaining work to be completed on 40-inch
  pipeline includes inspection and repair (as
  necessary) of 14 welds, cleaning and testing, at
  which time it will be commissioned

41
Task Order 6 (continued) Back-up Generators

• 10 GE 18 MW TM500 gas turbine generators
• 2 GE 10 MW gas turbine generator
• 1 Pratt Whitney FT8 TwinPak gas turbine
  generator
• 34 miscellaneous diesel generators (1 MW) for SOC
• 6 diesel generators, switchgear and day tanks
  installed at Um Qasar and Al Nasiryah.
• 2 diesel generators leased and installed at Az
  Zubair and Al Fao.

42
North Rumaila CPS 1, 2 3 TM-2500
CPS 1 TM-2500
CPS 2 TM-2500
CPS 3 TM-2500
43
South Rumaila CPS 6, 7, 8 9 TM-2500
CPS 7 TM-2500
CPS 6 TM-2500
CPS 9 TM-2500
CPS 8 TM-2500
TM-2500 Jeep
44
Qarmat Ali 2 ea. TM-2500
45

• Questions ?