U.S. Army Europe has increased its reliance on
for logistics support in the Balkans while reducing its costs.
A leaner military force means increased reliance on contracted
logistics support, and greater use of contractors inevitably
leads to out-of-control costs. Right? Not necessarily. Whether
keeping the peace in the Balkans or, more recently, fighting
terrorists in Afghanistan and Iraq, today’s streamlined
forces increasingly depend on contracted logistics support.
However, that support requires careful stewardship of resources,
particularly since contractor services and their costs are
subject to intense scrutiny by Congress.
U.S. Army Europe (USAREUR) has employed contractor support
in the Balkans since the United States began operations there
in 1995. In the intervening decade, USAREUR’s leaders
have taken significant steps to ensure proper stewardship
of limited resources. Even with these efforts, the Government
Accountability Office (GAO) reported in September 2000 that
the Army needed to do more to control Balkans contract costs.
That report identified several shortcomings, ranging from allowing
the contractor to maintain 100 percent redundancy of power-generation
capabilities (when only critical operations, such as the command
center and the hospital, required uninterrupted power) to
allowing the contractor to maintain an overly large workforce
of local nationals. USAREUR took immediate action in response
to that GAO report. By the time GAO issued a second report
in June 2003, it was able to report, “USAREUR’s
efforts should be a benchmark for other major contracts.”
How did USAREUR improve contract oversight and get contract
costs under control? The answers to that question may serve
as lessons learned for other commands and organizations faced
with increased reliance on contracted logistics support.
replace brakes on an M978 heavy, expanded-mobility,
tactical truck. Local nationals work with the Kosovo
Force to keep vehicles and equipment operational.
The Players and the Contract
In December 1995, U.S. troops deployed to Bosnia as part of
a multilateral coalition under North Atlantic Treaty Organization
(NATO) command to help implement the Dayton Peace Accords.
In June 1999, the United States began providing additional
troops for the NATO-led Kosovo Force to assist with peace
enforcement in Kosovo.
Headquarters USAREUR was—and still is—responsible
for supporting troops deployed to the Balkans. The command
turned to a contractor to house, feed, and provide services
to the Bosnia and Kosovo task forces. USAREUR chose the Army
Corps of Engineers Transatlantic Program Center (CETAC) to
award the contract. The current Balkans support contract was
awarded competitively to Halliburton KBR in February 1999 and
became effective that May.
CETAC is responsible for administering the contract on behalf
of USAREUR. The Defense Contract Management Agency (DCMA) and
the Defense Contract Audit Agency (DCAA) support CETAC with
contract administration and oversight. The CETAC principal
contracting officer assigns contract administration functions
to DCMA as delineated in a “delegation matrix.” Under
this delegation, DCMA provides quality assurance specialists,
property administrators, and contract specialists to monitor
the performance and costs of services incurred under the contract.
DCAA validates the accuracy and completeness of the contractor’s
cost accounting system and performs audits of incurred costs.
For its services, CETAC charges USAREUR a percentage of the
ongoing contract cost; DCMA and DCAA charge no fee for their
While CETAC and DCMA play large roles in contract award and
administration, they do not have ultimate responsibility for
resource management and operational cost control. CETAC and
DCMA ensure contractor quality performance and adherence to
the terms of the contract. Through contracting actions, they
administer theater-defined mission support functions included
under the Balkans support contract.
Once USAREUR and the Bosnia and Kosovo task forces have determined
their operational requirements and required support services,
CETAC and DCMA ensure that those requirements and services
are covered in the contract. Operational planning is not the
job of CETAC and DCMA. However, requirements and planning are
essential elements of controlling contract costs. In terms
of managing costs under the contract, the main players are
the consumers of the services (the task forces), the provider
of the services (KBR), and the bill payer (USAREUR).
The Impetus to Reduce Costs
Because the cost of Balkan operations comes out of USAREUR’s
contingency operations (CONOPS) funding, USAREUR has a clear
incentive to reduce costs. This was not always the case. Initially,
USAREUR focused on supporting the mission—getting essential
services in place to support Soldiers in a hostile environment.
As the situation in the Balkans stabilized, however, the focus
began to shift to controlling costs.
In 2001, money for the Balkans was integrated into USAREUR’s
CONOPS funding, and USAREUR’s level of interest in Balkans
spending became even more acute. The emphasis on reducing contract
costs not only was driven by limited resources but also was
directed from the top. The Deputy Commanding General of USAREUR
emphasized the importance of controlling costs and assigned
responsibility for contract accountability to the G–4
(Logistics) section on the USAREUR staff.
Since most of the ongoing contract costs were for recurring
services, the agency responsible for ongoing logistics support—the
USAREUR G–4—was an
appropriate choice. While he delegated cost-control responsibility,
the USAREUR Deputy Commanding General maintained his involvement
and oversight throughout the process.
Three-Pronged Approach to Reducing Costs
Because the task force commanders in Bosnia and Kosovo are
the main consumers of contract services, KBR provides those
services, and the USAREUR G–4 pays the bills and oversees
contract support, all three main players have to engage in
and support the effort in order to reduce costs.
The three groups initially had divergent interests. The task
forces and other supported personnel are stationed in the Balkans
for 1 year (formerly only 6 months) at a time and have a relatively
short-term view of the operation. They naturally wish to obtain
the best quality of life they can in a harsh environment.
However, commanders often were not aware of the cost ramifications
of their decisions. Extended dining facility hours, less crowded
quarters, and faster laundry service are all desirable—especially
when someone else is paying the bill.
Initially, KBR determined the quality and level of services
to be provided under the contract and negotiated these services
directly with the task forces. As a for-profit company, KBR
was willing to provide any increased services the consumer
was willing to pay for. The increased services meant increased
estimates at completion and, potentially, larger base fees
and award fees paid to the contractor.
The challenge for USAREUR was to motivate the task forces and
the contractor to help control costs. USAREUR’s approach
was three-pronged: provide a financial incentive for the contractor
to reduce costs; set service-level expectations for the task
forces and give them a budget; and take a hard look at the
contract and USAREUR’s own internal procedures.
Motivating the Contractor
How did USAREUR motivate the contractor to control costs? The
Balkans contract is cost-reimbursable and performance-based
and gives the contractor considerable flexibility in determining
how best to provide the requested services. The contract sets
two categories of tasks: recurring services and new work. Any
activity performed on a continuing basis, such as food service,
is defined as “recurring services” and requires
no further approval once initiated. Any task not previously
authorized or that is termed a one-time service, such as constructing
a base camp, is referred to as “new work.”
Under the contract, the Army reimburses KBR for costs incurred.
KBR makes a profit from a base fee of 1 percent of the estimated
cost of the work performed and an award fee of up to 8 percent
of the estimated cost of the work performed. The estimated
cost of the work performed is agreed to by the Government
and KBR, based on the estimated cost of recurring services
for the year plus the estimated cost of new work begun during
Eight percent of this aggregate of estimated costs is commonly
referred to as the award fee pool. The award fee board, which
meets three times a year, reviews the contractor’s performance
for the most recently completed award fee period and recommends
an award fee percentage to the award fee determining official.
That official determines and announces the award fee percentage
to be awarded for the last completed 4-month award fee period.
The contractor’s performance is rated in three areas:
cost control and financial management; performance; and coordination,
flexibility, and responsiveness. The G–4 tied a portion
of the award fee determination to cost reductions and required
the contractor to demonstrate real cost savings to merit the
highest rating. Excellent performance under the contract then
was capped at 95 percent of the award fee pool. The contractor
had to demonstrate new savings or improvements to receive
the remaining 5 percent of the award fee pool and the corresponding
rating of “outstanding.” USAREUR also made cost
control the highest-weighted element in contractor evaluations,
increasing its weighting from 30 percent to 40 percent. To
compensate, the weighting given to both performance and flexibility
was reduced from 35 percent to 30 percent.
Before these changes took effect in October 2001, KBR had been
receiving an average award fee of 98.5 percent of the available
pool. After USAREUR implemented cost-control weightings, the
percentage dipped to 95 percent. It fell still further, until
the contractor understood the seriousness of the Army’s
intent. It was not until May 2003 that KBR received an award
fee of more than 95 percent, and that was 95.5 percent.
With its award fee now partially contingent on reducing costs,
KBR began identifying opportunities for savings. For example,
the contractor instituted a training program that converted
positions from expatriate (Americans living outside the United
States) positions to host-country national positions and
reduced the number of overtime hours worked. In fiscal year
2003 alone, this saved USAREUR $33.8 million in contractor
Motivating the Consumers
How did USAREUR get U.S. military units deployed to the Balkans
to help in reducing costs? Since KBR formerly had determined
the quality and level of services provided under the contract,
the USAREUR staff, in conjunction with Balkans military personnel,
developed and enforced contingency quality-of-life standards
to help in containing the cost of those services.
USAREUR developed Red, Blue and Green Books to set respective
service-level standards for facilities, base camp operations,
and resource management in contractor-provided services as
diverse as ammunition supply, transportation, laundry, power
generation, and space allocations for living quarters. All
USAREUR staff elements, along with supported personnel, contributed
to the books, which now set the level of expectation for services
provided in the Balkans and give clear guidance to the contractor
on services authorized. These contingency service standards
are reviewed periodically.
It also is imperative that the task forces be given a contracting
budget for the year—the earlier in the operation, the
better. This ensures that commanders understand how their
actions drive costs and affect over-all resource stewardship.
Any additional services they request, whether purchased from
KBR or from other contractors, are charged to this budget.
USAREUR then decided to examine the request guidelines. An
existing joint acquisition review board reviewed contracting
actions paid for by either USAREUR or a task force. The board
also lowered dollar thresholds for approval. Originally, contracting
actions under $100,000 could be approved by the task force,
while USAREUR staff elements could approve expenditures under
$500,000. Actions exceeding those amounts required review by
the USAREUR Deputy Commanding General. The review board lowered
these dollar thresholds to $50,000 and $200,000 respectively,
giving USAREUR better visibility of Balkans purchases. A review
of the standards, now underway, is expected to reduce those
dollar amounts even further.
Along with lowering dollar thresholds, USAREUR now requires
preparation of independent Government estimates on requests
exceeding the thresholds. This requirement helps reinforce
discipline in cost measurement.
Doing a Better Job Internally
USAREUR also carefully examined how it was doing business under
the Balkans support contract and set out to improve its internal
actions. Early on, the USAREUR G–4 had only one civilian
working part-time to oversee the contract. However, it was
soon realized that more logistics support requirements increased
contract costs and created a critical need for more contract
oversight manpower. So the G–4 office hired a Balkans
program manager with contracting expertise and engaged four
program analysts to form a contract management cell.
These hiring actions provided a group of dedicated staff members
to manage the contract. This team is largely responsible for
supporting and implementing cost-control actions. The G–4
also added an on-site CETAC liaison, and later an on-site KBR
liaison, to help with planning.
This contract management cell improved the G–4’s
visibility over contractor actions in the areas of sub-contracting,
incidental construction and services, and property purchases.
The cell issued technical directions that required the contractor
to obtain consent from DCMA for subcontracting costs over $100,000.
For added visibility of temporary construction incidental
to providing services, the cell developed a process that required
the contractor to provide prior notice and obtain approval
for all work estimated to cost over $25,000. This procedure
allows for systematic review and improved Government visibility.
Government consent for property purchases was enhanced by a
modification requiring the contractor to provide written notification
for any purchase greater than $5,000 and increasing the notification
time from 5 to 10 days. This gave USAREUR greater visibility
of and control over items that the contractor was purchasing
to support operations and over incidental construction efforts.
USAREUR began reviewing bills with increased knowledge of what
was happening on the ground and found items such as unrealistically
high hotel room costs for truck drivers and numbers of hotel
bills exceeding the numbers of drivers. All discrepancies were
relocates a container at Camp Bondsteel, Kosovo.
The containers are used to store Army supplies and
equipment and are consolidated to improve access.
USAREUR also fully recognizes the importance of an outside
look at how it does business and often has relied extensively
on organizations such as the Army Audit Agency and USAREUR’s
Internal Review and Compliance Office to review various aspects
of the operation. GAO’s role also cannot be underestimated.
Regular GAO visits and follow-on audit recommendations provided
momentum to efforts to control costs and independent monitoring
that helped USAREUR judge the success of its efforts.
As stated earlier, KBR earns a base profit of 1 percent of
the negotiated estimated cost of work performed and an award
fee of up to 8 percent of that amount. The negotiated estimated
cost is the basis for both the base fee and the award fee
pool and directly affects the amount of money the contractor
earn. If the negotiated estimated cost is inflated, the Government
pays more than necessary; if it is understated, the contractor
receives less compensation than merited.
The originally negotiated estimated cost was set before major
downsizing in the Balkans and did not take into account USAREUR-directed
operational changes that subsequently reduced actual costs.
USAREUR worked with CETAC to review the estimate at the completion
of the award period and, as a result, renegotiated with the
contractor. The estimated cost of the work performed for fiscal
years 2003 and 2004 was revised from approximately $578 million
to approximately $419 million, thus reducing the base and award
fee pools for this period by approximately $13 million.
USAREUR also added more representatives to the award fee
board, which originally was composed of CETAC, DCMA, and
The number of CETAC voting members was reduced and the USAREUR
G–8 (Comptroller) and G–1 (Personnel) were added
to the USAREUR personnel already on the board (the USAREUR
G–4 and Deputy Chief of Staff for Engineering).
USAREUR instituted partnering sessions with the contractor
and a Senior Management Council. These meetings are set to
coincide with meetings of the award fee board and further improve
communications among KBR, CETAC, and USAREUR. The meetings
also involve the contractor in the contingency planning process.
Finally, adding an on-site KBR liaison within the G–4
has provided valuable feedback and allowed USAREUR to make
more cost-effective operational decisions.
Aligning Mission, Troops, and Contract
While USAREUR was reducing contract costs, operational requirements also were
changing. From May 1999 to December 2003, the number of troops in the Balkans
was reduced by 70 percent. One would assume that reducing troops would help to
reduce costs, but the decline in troop strength did not lead to an equivalent
reduction in costs.
As troop levels declined, functions that had previously been performed by Soldiers
shifted to the contractor. The contract originally included such services as
base camp operations and maintenance, food service, laundry, equipment maintenance,
road maintenance, transportation, and environmental services. As troops performing
other missions left, KBR took on those duties, including firefighting, airfield
crash and rescue, snow and ice removal, vehicle maintenance, and supply support
The overall reduction in troop strength and deployments created a need to reduce
the number and geographical spread of facilities and consolidate personnel and
services. Each facility’s closure and dismantling was new work, which
increased the cost of the contract. However, constant synchronization of contract
operations with mission requirements saved money in the long run.
Even though USAREUR asked the contractor to provide more services, consolidate
personnel, and deconstruct camps and facilities, it was able to reduce Balkans
contract costs by 63 percent. From fiscal year 1999 to fiscal year 2003, USAREUR
CONOPS spending dropped from $2.280 billion to $782 million, while Balkans support
costs fell from $579.1 million to $215.8 million. Contract costs remained approximately
25 percent of CONOPS spending in the Balkans during this period, while contracted
services steadily increased. This was a significant accomplishment.
What lessons can be learned from the USAREUR experience with contracted logistics
support in the Balkans? First and foremost, someone must be responsible for
contract management and oversight—in effect, have “ownership” of
the contract. Early on, USAREUR’s Deputy Commanding General established
a clear line of accountability and responsibility for the contract to the USAREUR
G–4 while maintaining his own involvement and oversight throughout the
process. The Army would not buy a weapon system without a program or project
manager to oversee production on an ongoing basis; a service contract also requires
continuous Government oversight and management.
Second, change requires adequate resources. The USAREUR G–4 increased its
contract administration workforce, originally consisting of one part-time employee,
by adding a Balkans program manager and four program analysts.
Third, audit agencies, including GAO, should be considered partners in achieving
effective resource stewardship. USAREUR found over the years that GAO really
could be a friend; its feedback served as the basis for actions to control contract
costs. USAREUR worked to implement GAO findings and used subsequent GAO visits
to assess the success of its efforts.
Finally, partnership works. Controlling costs must be a collaborative effort,
with all of the stakeholders fully committed to the result. Through the award
fee boards, the senior management council, and various process action teams,
the USAREUR G–4 began to partner with KBR, the task forces, CETAC, and
By jointly setting service standards and by providing a financial incentive
for the contractor to control costs, the personnel serving down range and the
KBR personnel became partners with the USAREUR staff in achieving cost-reduction
goals. All the players worked toward the same end: providing excellent, cost-effective
support to our Soldiers deployed to the Balkans. ALOG
Theresa Davis is the Deputy
Chief of the Plans and Operations Division, G–4 (Logistics), U.S. Army
Europe, in Heidelberg, Germany. She holds a bachelor’s degree in art from
Mercyhurst College in Pennsylvania and a master’s degree in computer information
systems from Boston University.