Hope that the unexpectedly successful Iraqi elections on Jan. 30 might signal a change in the insurgent terrorism that has dogged reconstruction was dampened by a rocket attack the day before in Baghdad’s Green Zone that landed in part of the U.S. Embassy that houses the reconstruction effort’s Project and Contracting Office (PCO). The attack killed a naval officer and a civilian official tied to rebuilding and wounded five others. Some suspect the PCO was deliberately targeted.

At ENR press time, the dead sailor was identified as U.S. Navy Lt. Cmdr. Keith E. Taylor of Irvine, Calif., who served as contracting chief for the transportation and communication sector. He dealt with contracts for roadbuilding, water treatment plants and schools and had five weeks left on a six-month deployment. The civilian was identified as Barbara C. Heald, of Falls Church, Va., a U.S. Defense Dept. contract negotiator. Missile Kills Two U.S. Reconstruction Workers On Election Eve in Baghdad

The escalating violence has left some firms unwilling to even confirm their presence in Iraq, let alone the location and status of projects. "It’s not just the people in Iraq who are at risk," says a top executive of one U.S. program manager. "We worry about other locations overseas." He claims the 2004 terror attack in Madrid "affected our office there. We want to maintain the lowest profile."

Some observers caution that the election result should not be seen as a security panacea for reconstruction. "Americans think there will be a big change, but it is still going to be a slog," says retired Navy Rear Adm. David J. Nash, who ran reconstruction efforts until last fall, and now is an executive at BE&K Inc. "The election will not be a grand watershed."

"Immediately, I do not see a change in the way I will do business," says Col. Joe Schweitzer, director of the reconstruction operations center, the security and logistics hub for all federally run efforts. "By last week’s count, we had 1,673 projects under way, all in a very difficult environment against an enemy that desires that number to be zero."

As of the end of January, the total projects "turning dirt" was 1,714, according to the PCO. Schweitzer admits this is less than the 1,800 expected in January. "This has been a very tough month," he says. "The spike in incidents went very high. Security and reconstruction still are very much hand-in-hand in this environment."

Reconstruction officials, particularly the array of major engineers, contractors and design-build firms tasked to execute projects, also are getting more accustomed to having Iraqi firms and labor at their side. Some participants see the shift as a natural step in nationbuilding and a way to possibly reduce insurgent violence directed at U.S. operatives. But others say the shift of more construction in smaller packages directly to Iraqis is a cost-cutting move rooted in Bush administration politics to showcase "Iraqi-ization" to an American public anxious to see signs that U.S. involvement there will end.

The trend clearly worries large U.S. engineers and contractors that have geared up to handle major infrastructure projects. "There is a sea-change going on here," says one program management joint-venture official. "Instead of building infrastructure, it’s turned into a public works employment program."

Firms are concerned that contract task orders are slowing to a crawl, leaving some firms overstaffed for the major work they had expected. "We were expecting to hire lots of Iraqis, but now the government is doing that," says a U.S. PM firm executive. "It’s a jobs program they weren’t taking full advantage of."

Firms are waiting for the next shoe to drop as reconstruction officials weigh changes in the civilian force. One executive speculates that some firms may be sent home, including those managing the six program sectors, such as electric, public works, oil and buildings. Contract decisions could happen as early as March. While military officials are not speculating on changes, some executives believe PCO will be "shrunk," with most work managed by the Corps of Engineers’ Gulf Region Division in Baghdad. Charles Hess, PCO’s current civilian director, has said he will leave his position next month, sources say.

U.S. firms operating in the reconstruction zone, particularly those that must stretch security and other overhead over smaller projects, already have had a cost impact. One executive claims that security, once pegged at 7% of project cost, now can reach as high as 60%.

PCO says it "mutually" agreed with Arlington, Va.-based Contrack International Inc., which was leading a transportation-related joint venture, to "demobilize" work last October when it was decided that Iraqis could do it for less. "My scope of work was $325 million, Fluor’s is $1 billion, but the cost of our security was the same," says Karim Camel-Toueg, Contrack CEO. "The work completely changed for us."

PCO officials, and even some U.S. firms, claim that Iraqi contractors are rising to the occasion. "The most significant change today is that we have more ca-pacity in the Iraqi engineering and construction community than most people thought," says Hess.

Labor. Some firms say politics is pushing more work to Iraqis, but others say they work hard. others say. (Photo courtesy of Berger)

Others agree. "The story not being told is how good the Iraqi craftsmen are," says Paul Parker, director of the Air Force Center for Environmental Excellence. AFCEE, whose stable of vetted U.S. contractors propelled reconstruction work in 2003, set up its first permanent Iraq office Jan. 2. Bechtel Group Inc., whose work falls under the U.S. Agency for International Development, is using "three or four Iraqi engineers for every expat," says Cliff Mumm, Bechtel’s Iraq project director. He says 82% of its subcontracts go to Iraqi firms.

Security costs remain a critical issue. "The biggest challenge is balancing security with business opportunity," says Sandy Cuttino, president of federal business for Earth Tech, Long Beach, Calif., which has contracts with AFCEE and PCO. But some are more sanguine. "It’s one more challenge," says Michel Jichlinski, COO of Louis Berger, which has three sector management contracts.

Some firms say they will take the current risks to gain a foothold in longer term construction in Iraq and elsewhere in the region. "The government will place high priority on wherever we can provide infrastructure improvements to help countries build stronger economies," Cuttino says.

Even with current risks and future uncertainties, U.S. firms in Iraq claim staff is staying put. Morgan Samuels, a Beverly Hills, Calif., headhunter, says that of 25 client firms interviewed, at least 18 reported plenty of volunteers. The extra financial incentives, which can double one’s salary, are appealing.

But Craig Johnson, managing director of a Stanley Consultants Inc. joint venture there says, "Our role makes a difference."