How can Halliburton make so little money on government contracting?

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I shared my views on Halliburton and Dubai over in the Swampland comments section, and one reader asked:

How is that possible? As I understand it, they are working on cost-plus contracts, which means their profit is built in. Now whether it is skimmed off for bribery and malfeasance is another question, but if they purport they are not making a profit, maybe some hot-shot reporter (ahem) should look into that.

Hot-shot reporter Peter Elkind did look into this a couple of years ago, in the Fortune article I cited. I’d advise reading the whole article if you’re really interested, but the skinny on Halliburton’s Iraq contracting work appears to be this: The bulk of the work is done in the auspices of something called the Logistics Civil Augmentation Program, or LOGCAP. To quote Peter:

Halliburton began supporting the Army’s deployments in 1992, when it beat out 36 other bidders to win the five-year contract now known as LOGCAP I. LOGCAP started out small, as a $3.9 million contract whose first task was to plan how a private company would feed and house up to 20,000 troops in various military hot spots for 180 days. Brown & Root would be reimbursed for its costs and receive 1% profit as well as a performance fee, set by a Pentagon review board, of as much as 8%. … Deployments quickly followed: Somalia in 1992; Haiti, Rwanda, and Kuwait in 1994; the Balkans in 1995. …

In 1997, LOGCAP was rebid–and Brown & Root lost the work to a company called DynCorp. But the Clinton-era Pentagon allowed the Halliburton subsidiary to hang on to the biggest piece of LOGCAP work, in the Balkans, reasoning that a transition there would be disruptive.

As it turned out, Halliburton made decent money on government work during the Cheney years. The Balkans deployment alone generated $2.2 billion in revenues through 2000, and Halliburton always received at least 98% of the maximum award fee. The military was clearly delighted with Halliburton. As described by a GAO report, one Balkans project–the construction of a 5,000-man base camp–“required the Army and [KBR] to build the equivalent of a small town in a wheat field in a few months.” Gone were the days of sleeping in foxholes and eating out of tin cans; the KBR-backed Army slept on cots and ate three hot squares in mess halls. …

In 2001, the LOGCAP contract came up for bid again, this time for a ten-year term. Randy Harl, a company veteran then in charge of the restructured KBR division that included government work, was eager to reclaim the business. So were others at the company: LOGCAP was seen as a magnet for other, higher-margin contracts. So KBR bid a price that was shockingly low. In addition to being reimbursed for what it spent, Halliburton would get a base fee of 1% and a maximum performance award of just 2%. A former Halliburton executive involved in the bidding still winces at the deal. Between litigation expense and the amounts that the government might disallow in Iraq, he says, “LOGCAP could be the first cost-plus contract in history that’s lost money.”