Military Contracting
DynCorp Takes Afghanistan
Nathan Vardi, 07.30.09, 05:24 PM EDT
Increasingly frozen out by the U.S. military, KBR concedes the Afghan battlefront.

DynCorp International, the Falls Church, Va., provider of mission critical services to the U.S. military, got good news Thursday from Houston rival KBR, which said it would not be protesting the recent loss of work supporting American troops in Afghanistan to DynCorp and Fluor Group.

"We recently met with the customer for a debrief of the selection criteria and the decision metrics for the awards," said KBR ( KBR - news - people ) chief William Utt on KBR's Thursday conference call. "After the debrief we decided KBR will not protest the outcome of the awards."

The announcement was excellent news for DynCorp, which has been consistently winning government war-zone work from competitors like Blackwater USA and KBR that have had trouble in Iraq. DynCorp is counting on the expanding war in Afghanistan to provide corporate growth and was bracing for a potential challenge from KBR. It is now likely that within six months DynCorp will begin working on a five-year, $5.9 billion deal awarded in July to logistically support U.S. troops in southern Afghanistan. Fluor ( FLR - news - people ) won the work that will be required in northern Afghanistan.

DynCorp has emerged as one of the big winners of the wars in Iraq and Afghanistan, which now generate 53% of DynCorp's $3.1 billion of annual revenue. The company's revenue grew 45% last year thanks to a 51%-owned joint venture that has a multiyear $4.6 billion contract to supply 9,100 linguists to translate for U.S. soldiers in Iraq.

Last year DynCorp and Fluor, together with KBR, became part of the Logistics Civil Augmentation Program, or Logcap, a huge contract once awarded exclusively to KBR. The three companies now are competitively bidding on various jobs under the wars' biggest contract. In the last six years, Logcap has meant big revenues for KBR, which earned an estimated $700 million of income (before interest and taxes) on $31.4 billion of revenues off of the program, mostly in Iraq, but been dogged by accusations of overbilling and negligence.

In July the Pentagon announced that it planned on having DynCorp and Fluor take over KBR's work in Afghanistan under Logcap, doing everything from providing laundry to food and fuel. The decision came as President Obama sent 20,000 additional U.S. troops to Afghanistan to go after the Taliban in an expanding war. KBR has now accepted the military's contracting switch in Afghanistan and will focus on trying to retain its Logcap work in Iraq, which should be up for bid by the end of this year.

"We all know that there has been a lot of, I think, pressure on the Department of Defense to diversify the contractor base," said KBR chief Utt. "I think the military wanted to get a diversity of contractors."

It is true that Defense Department officials believe bringing a market dynamic to the big Logcap contract would help eliminate some of the war-contracting problems the military has experienced in Iraq. But it also seems like KBR is being frozen out.

On KBR's conference call, Utt said KBR did not win Logcap's new Afghan jobs even though one of the winning bidders submitted a more expensive proposal than his company. Under the reconfigured Logcap, KBR has been unsuccessful at getting the first four new jobs the military has put up for bid.

On the other hand, DynCorp continues to get work from companies that have had public embarrassments. Blackwater USA, now known as Xe Services, got kicked out of Iraq after its employees killed civilians in Baghdad's Nisur Square in 2007. In June the Department of State awarded DynCorp Blackwater's old contract to provide air-support and security for American diplomats in Iraq, worth $915 million over the next five years.

The man who benefits the most from all this is Robert McKeon, DynCorp's chairman and head of private equity firm Veritas Capital, who Forbes recently revealed owns one-quarter of DynCorp. (See: "Wall Street Goes To War.") The company's stock went up 1.6% Thursday, making McKeon's DynCorp shares worth $285 million.

Despite conceding ground in Afghanistan, KBR was still able to report a 40% rise of second quarter profit of $67 million, compared with $48 million in the second quarter of 2008.