updated 11/3/2006 6:04:26 PM ET 2006-11-03T23:04:26

A small defense contractor now controlled by a former Bush adminstration cabinet secretary is taking on Halliburton Co. by bidding for one of three Army contracts worth up to $50 billion each to provide food and shelter to U.S. troops in Iraq and Afghanistan.

Within days of former U.S. Treasury Secretary John Snow becoming chairman of the New York hedge fund that owns IAP Worldwide Services Inc., the company submitted its bid for huge Army contracts that will be awarded by year-end.

Cerberus Capital Management LP owns Cape Canaveral, Fla.-based IAP, which is led by former executives from Halliburton subsidiary Kellogg, Brown & Root.

KBR is currently the Army’s sole contractor for providing food and shelter to the military in Iraq and Afghanistan. But the Army now wants multiple contractors for these services and KBR is bidding again. Some defense analysts are predicting both KBR and IAP, which is run by former KBR executives, will each win one of the 10-year deals that start in 2007.

IAP Chief Executive Al Neffgen, who joined the company in December 2004, served as KBR’s chief operating officer of government and infrastructure for the Americas Region, while president Dave Swindle was vice president of KBR’s business acquisition and national security programs before joining IAP in April 2005. Chuck Dominy, a retired Army lieutenant general, joined IAP in July 2005 after serving for years as Halliburton’s chief lobbyist in Washington.

IAP was founded in 1990 by a former Army logistician as the United States was preparing for Operation Desert Storm and now has 5,500 employees. Cerberus became majority owner in May 2004.

IAP, which has smaller logistics and maintenance pacts with the Navy and Air Force, last month said it submitted a proposal for the Army contracts with a team that includes Lockheed Martin Corp. and Electronic Data Systems Corp., as well as Home Depot Inc., Microsoft Corp. and Sodexho Alliance SA of France.

An Army spokeswoman said bids were due Oct. 31, but she declined to provide details about the proposals. An IAP spokeswoman said Swindle, its president, was traveling in the Middle East and unavailable to comment.

Defense industry analysts said other potential bidders on the Army logistics deals include DynCorp International and L-3 Communications Holdings Inc. Representatives from those firms either did not return calls or declined to comment.

A spokesman for White Plains, N.Y.-based ITT Corp., which makes products ranging from wastewater handling systems to electronic warfare technologies for military aircraft, said it would be pursuing a bid as part of team led by Fluor Corp. Representatives from Irving, Texas-based Fluor, a construction and engineering services provider, did not return repeated calls for comment.

The Army also will award a five-year pact worth up to $225 million to oversee the three contracts. The new support pact, which cannot go to a winner of the service deals, is responsible for program management analysis and documenting the performance of the contract awardees, according the Army.

IAP is the only defense contractor among the 36 companies listed on Cerberus’ Web site as being owned by the hedge fund, which has $16.5 billion under management in funds and accounts. Those companies generate about $45 billion in annual revenue. Established in 1992, Cerberus earlier this year announced it was leading a consortium of investors to acquire a majority stake in General Motors Corp.’s GMAC Financial Services for about $7.4 billion in cash.

KBR also submitted a bid for the new Army deals, its chief executive Bill Utt said last week during Halliburton’s third-quarter earnings conference call. KBR, the engineering, services and construction subsidiary of Halliburton, won the existing contract in 2001 and has been paid $17 billion of a potential $19.3 billion, an Army spokeswoman said.

That money has paid for more than 40,000 workers, mostly in Iraq and Kuwait, who have provided nearly 411 million meals, washed more than 21.7 million bundles of laundry, produced 5.85 billion gallons of water, transported more than 648 million gallons of military fuel, delivered nearly 205.7 million pounds of mail, and kept more than 650 trucks on the road daily, according to the Army and KBR.

Halliburton, whose chief executive was Vice President Dick Cheney from 1995 to 2000, has been criticized since the beginning of the Iraq war about its multibillion-dollar government contracts.

Lawmakers and the U.S. inspector general have accused KBR of abusing federal rules in record-keeping on the current contract. But the inspector general’s office that criticized KBR may be terminated under a proposed Republican amendment in Congress, according to a report in Friday’s New York Times.

The Army said the move from a sole-source deal to multiple awards for the Iraq and Afghanistan work would “reduce risk, increase competition, increase business opportunities.”

Loren Thompson, a defense analyst at the Lexington Institute, disagrees: “Bundling these contracts isn’t going to eliminate the controversy. It will actually increase it.”

Thompson said it’s a “near certainty” that both KBR and IAP would win something, but added that “coordinating such complex activities and teams could make KBR’s performance look like a case study in sound management.”

Houston-based Halliburton is spinning off KBR in a public stock offering set for Nov. 15 at a price that values KBR at up to $2.8 billion, or $15 to $17 per share. Halliburton will remain majority stockholder with more than 80 percent of the shares.

In a filing with the Securities and Exchange Commission, KBR said the “current level of government services being provided in the Middle East will not likely continue for an extended period of time, and the current rate of spending has decreased substantially compared to 2005 and 2004.”

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