The Iraq war is getting too expensive, according to Defense Department auditors, and KBR is part of the problem. The contractor faces close to $200 million in penalties for keeping too many bodies on its payroll in Iraq, and it is being pressured to cut back.

For six years, KBR has increased its staff, even as troop levels have declined. "Each day that passes without taking action results in continued overstaffing and inefficiency," says a report from the Defense Contract Audit Agency quoted by The Associated Press. On the other side of the issue, though, is a $33.8 billion, 10-year contract with KBR signed in 2001.

The recent flare-up over billing and management practices isn't new. KBR and Defense Department auditors have battled over billions for several years, with critics of the contractor claiming its inefficiency has risen to the level of price-gouging and even fraud.

KBR reviewed the audit findings before they were finalized, and the company's response has been included in the final report. Unsurprisingly, KBR disagrees with many of the audit's conclusions, claiming it has planned to cut its 17,000-employee workforce in Iraq. A statement to by KBR spokeswoman Heather Browne said the company is reviewing the final audit and is engaged in the military's workforce reduction planning for civilian contractors.

An employee supplied DailyFinance with KBR memoranda from April and June 2009 supporting this claim. A "Personnel and Alignment Reduction" memo from April 14, 2009, states, "General Raymond Odierno, Commanding General of Multi-National Forces – Iraq, has challenged contractors to begin reducing their workforce by 5-percent each quarter."

It continues, "So, what does that mean for the KBR workforce? In a nutshell, it will result in some realignment and drawdown of our workforce. That should come as no surprise given what is currently being reported in the news." The memo references the planned drawdown of combat troops through the end of 2010. "That does not mean all troops will leave Iraq, but troop-levels will be significantly lower."

A June 1, 2009 "Personnel and Alignment Reduction" memo explains, "The Personnel Alignment and Reduction (PAR) will be implemented across Iraq starting 2 June 2009. This is a difficult time for all of our employees as we lose some of our friends and co-workers who are departing the project."

Neither memo specifies the number of KBR employees actually being cut.

Troop Levels Dropped, KBR's Levels Didn't

A source in Iraq tells DailyFinance, "The actual reduction in force was basically completed in August, but the realignment [of employees following the cuts] is continuing. They continue to bring new hires through Houston every week, so there's still plenty of hiring going on. Overall, though, the numbers are coming down over time." The situation is fluid, particularly because some areas are under-strength, while others have sustained larger cuts.

Through the summer, the source says, the looming layoffs led to some strain among employees, as they positioned themselves to keep their jobs -- a situation that you'd find in any company about to experience workforce reductions. A bit of this remains, the employee says, "Some of the urgency about potential job losses has faded, although there are always backstabbers present."

The situation varies by location, of course. The source, who wouldn't allow his location to be revealed, says that the situation is different for each base -- and for each contractor operating in Iraq.

As of January 2008, the audit reports, KBR had 17,034 employees in Iraq, with the military's presence at around 160,000. By Sept. 1, 2009, KBR's staffing level was 17,095, while troop levels had fallen to 130,000 and bases had been closed. Under the current drawdown plan, U.S. troop levels are expected to fall to 50,000 by August 2010, and all American forces will depart Iraq by the end of 2011.

The audit report gives KBR until Jan. 1, 2010 to implement a plan to cut 2,857 employees who were identified as "excess" by the audit. Each of these full-time employees earns an average of $8,425 per month in salary and benefits, so the reduction would save approximately $193 million in labor costs through August 2010, the report claims.

The final decision on whether to implement the recommendations – and withhold payment to KBR – belongs to the Army Sustainment Command's contract managers, who haven't completed their analysis of the audit yet.


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