Soaring Security Costs Burden Iraq Reconstruction Efforts

The rising cost of security is hobbling the effort to rebuild Iraq, resulting in cutbacks to projects, delays in construction and fewer benefits for the Iraqi people, according to industry executives and government officials.

As Iraqi insurgents have increasingly targeted civilian contractors, companies have responded by enhancing private security forces and moving more cautiously in dangerous areas.

At the same time, the U.S. government has stepped up efforts to ensure that companies follow long-existing laws requiring insurance coverage for all employees, both American and non-American, working in war zones.

The two trends have made the cost of working in Iraq far higher than Congress envisioned when it passed an $18.4-billion package that was supposed to jump-start the shattered Iraqi economy.

As a result, industry insiders and officials with the U.S.-led Coalition Provisional Authority now fear that the economic stimulus will have less of an effect than anticipated at a time when unemployed Iraqis have become the ground troops for uprisings by Shiite and Sunni Muslims.

“Security concerns are now going to fundamentally shape what [the reconstruction] will look like,” said Stuart W. Bowen Jr., the CPA’s recently appointed inspector-general. “We’re in this big gray area right now about how security concerns will affect construction timelines.”

For some companies, security costs now amount to 20% of the total contract price, double the standard 10% estimate that industry groups and government contracting officials quoted six months ago. As much as $4 billion may wind up going to security, Bowen said.

The spiraling costs have led to fears on Capitol Hill that the White House will have to ask Congress for still more money for Iraq -- on top of the $87-billion supplemental spending bill for that nation and Afghanistan passed last year.

“Nobody planned for the level of security needed,” said Steven L. Schooner, a contracting expert at George Washington University Law School. “Everybody is spending more.”

In extreme cases, such as operations around the restive town of Fallouja in central Iraq, contractors have hired two security guards for each employee. Four security guards employed by North Carolina-based Blackwater USA were brutally killed last week while escorting a food convoy through Fallouja.

Washington Group International, an Idaho construction and engineering firm, at one point had 350 employees setting up power lines around Fallouja -- and more than 700 security personnel.

The company, which recently won an additional $1.1 billion in contracts with joint-venture partners for continued work on Iraq’s electrical and water systems, now forbids employees to venture outside the desert camps where they live.

The workers spend their nights in spartan quarters occasionally listening to mortar rounds sailing overhead and bullets whizzing by, said Jack Herrmann, a company spokesman.

“We assess our tactics and the threat every day,” Herrmann said. “It’s a product of the nature of the work we’re doing. We’re in a hot area.”

It is not known how many contractors have been killed in Iraq, though estimates range from several dozen to more than 100, including Iraqis and other non-Americans. Many firms refuse to release figures and no government agency has done so.

Security industry representatives estimate that up to 50 security guards -- many of whom were former special operations soldiers -- have been killed out of an estimated 15,000 to 20,000 security contractors in Iraq.

Texas-based Halliburton Inc., the largest contractor in the region with more than 24,000 workers in Iraq and Kuwait, reported recently that it had lost more than 30 employees in the last year.

“We are all concerned about the recent incidents in Iraq, and when hostilities intensify we revise and step up our security efforts,” said Cathy Gist, a Halliburton spokeswoman.

Robert Band, the president of Perini Corp., said his company had worked in hot zones from Angola to Pakistan to Bosnia. The Massachusetts construction firm, which went to Iraq in September, won a $500-million contract last month to repair the electrical system.

“It’s the most dangerous work zone that we’ve ever encountered,” Band said. “It changes every day over there. It’s very serious.”

The recent surge in violence -- with contractors slain and uprisings in previously calm areas -- has further slowed construction efforts. In recent days, CPA officials have issued “lockdown” orders to contractors in Baghdad, confining them to their quarters for safety reasons and preventing them from working.

In addition, the CPA has asked Congress to transfer $184 million from water projects to operating costs for the coalition. The request is believed to be related to spiraling security costs. But providing clean water is the sort of work than can build goodwill and improve health in a country where polluted drinking water has contributed to one of the highest infant mortality rates in the Middle East.

Costs are rising as the Labor Department quickens its campaign to make contractors aware of their responsibility, under the Defense Base Act, to provide insurance for all of their employees in war zones. The law, which dates from World War II, has been expanded over the years to require employers to cover direct employees and subcontractors who are paid with public funds.

A Labor Department official said some companies had failed to provide adequate coverage or to inform Iraqis that they were entitled to death or injury benefits while working for U.S. firms.

Such coverage, however, can be enormously expensive. Although typical insurance policies range from $4 to $10 for every $100 in payroll costs, some companies in Iraq have had to pay as much as $25 per $100, officials and executives say.

Although there are few signs that the security situation is driving companies out of Iraq, some firms have decided against bidding on work. In recent interviews, several executives said they weren’t interested in Iraq because of the danger.

Fewer companies mean less competition for contracts to help drive down prices. And the risks raise the possibility of attracting fly-by-night firms that aren’t concerned about security issues or employee safety.

“Security is bound to hamper the reconstruction effort,” said Sam Kubba, chairman of the American Iraqi Chamber of Commerce. “It’s a bad omen.”