The Pentagon and the company that supplies U.S. troops in Afghanistan with food and water are locked in a billion-dollar billing dispute that illustrates the flawed management of contracts for battlefield support, according to documents released Thursday by a House oversight subcommittee investigating the arrangement.
The Defense Logistics Agency, which supervises the food supply contract, is demanding that Supreme Foodservice of Ziegelbrucke, Switzerland, return more than $750 million in overpayments made by the government. But the company has refused, claiming it is owed $1 billion more than the $5.5 billion it has already been paid. Despite the clash, Supreme is among the contenders for a new food-service contract in Afghanistan that will be worth upwards of $10 billion.
With the Obama administration pushing for a speedy exit from Afghanistan, the conflict between the logistics agency and Supreme is a vivid reminder of the risks of the government's reliance on private sector help in war zones. The independent Commission on Wartime Contracting estimated last year that at least $31 billion and possibly as much as $60 billion have been lost over the past decade due to lax oversight of contractors, poorly defined work requirements, inadequate competition, and corruption.
In separate letters to senior executives at Supreme and the top military officer at the logistics agency, leaders of the House Oversight and Government Reform national security subcommittee said the agency and the contractor never agreed on pricing terms, even as the scope of the deal expanded rapidly with the arrival of thousands more U.S. forces to combat a Taliban surge.
When the contract was awarded in 2005, Supreme was required to get supplies to four locations in Afghanistan, a mountainous country roughly the size of Texas. The list of sites would grow to 64 within the first few months. Now, the company is responsible for more than 250 sites and many of those are forward-operating bases in difficult-to-reach locations, according to the letters from Reps. Jason Chaffetz of Utah and John Tierney of Massachusetts.
"It is outrageous that (the logistics agency) could ever be in the position of possibly overpaying any vendor by three quarters of a billion dollars _ especially at a time when troop levels are being scaled back because funding is tight," Chaffetz, the subcommittee's Republican chairman, said in a statement.
The subcommittee has asked the logistics agency and Supreme to provide by June 4 documents and other information, including all communications about the expansion of the contract. Tierney said U.S. taxpayers "refuse to accept a government contractor that bills more than $750 million in unsubstantiated charges."
Victoria Frost, a spokeswoman for Supreme, said disagreements are not uncommon in complex contracts and the company is confident a "satisfactory resolution" will be reached. "In the meantime we continue to work well with DLA, performing the contract to extremely high standards," she said in an email.
The logistics agency did not immediately respond to a request for comment.
After performing the contract for six months, Supreme sent the agency bills with proposed rates for the costs of transporting food and water to the additional sites, Chaffetz and Tierney wrote. But the agency didn't think Supreme could justify the charges and paid the company less than it was asking.
Audits by the Defense Contract Audit Agency in 2008 and 2011 found that Supreme couldn't provide basic information to prove it should get the fees it wanted. The 2011 audit said Supreme refused to provide or did not have information to support its claims. Truck manifests, which are the only documents that affirm a trip was actually made, were missing and so were vendor invoices and flight plans, according to the audit.
The auditors also questioned the "integrity" of documents Supreme provided electronically and said the company's data on fuel costs didn't add up. "The variance was in the millions of U.S. dollars," the auditors wrote. "As a result, the data was returned in its entirety as unreliable."
After repeated and failed attempts to negotiate fees with Supreme, the logistics agency unilaterally set the rates on what it determined to be "actual costs and reasonable profit," according to Chaffetz and Tierney. Based on these rates, the agency determined in December that it had overpaid Supreme by $757 million. But Supreme rejected that calculation and said it is actually owed an additional $1 billion.
The company filed an appeal with the Armed Services Board of Contract Appeals, an independent forum that resolves contract disputes. The board has not yet ruled. In February, however, the logistics agency took the rare step of docking nearly $22 million from Supreme's monthly payment of $150 million.
Tierney called for the investigation of Supreme's contract in a Dec. 15 letter to Chaffetz that came a week after the subcommittee heard testimony from then-Pentagon inspector general Gordon Heddell. The contract was not well designed or well thought out, Heddell said.
"This is an example of just about how bad it can get," he said. "Imagine that. A contract created in 2005 and now in December of 2011 we are just now determining what should have been the reasonable and fair prices to pay."
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