(FORTUNE Magazine) – It took three cruise missiles and a direct hit by a 2,000-pound bomb to obliterate Baghdad's al Mamoun telephone exchange. Putting it back together has proved to be a bit more complicated. Bechtel program manager Steve Beuby now works 14 hours a day, seven days a week, in a warren of makeshift trailers in the shadow of the devastated building, overseeing dozens of U.S. and Iraqi engineers as they painstakingly thread multicolored wires into brand-new switches. "We're almost on our original schedule, which is miraculous," says Beuby, ticking off the challenges he has faced over the past eight months, including roadside bombs that narrowly missed his convoy, an overflowing Tigris River, and the recurring threat that local guards will simply walk off the site because the Iraqi authorities have failed to pay them.

Although Iraqi linemen are still taking bribes to hook customers back up, and Beuby frets about what could happen if those security guards ever do walk, he is making progress. The $34 million program to rebuild 12 exchanges destroyed in the war should be finished this month, giving 250,000 Baghdad residents a dial tone again. "This project gets them back to prewar capacity," says Beuby, a lanky white-haired engineer who spent 20 years in the Navy before joining Bechtel. But when Bechtel's engineers and American soldiers leave al Mamoun in a few months, he says, "I worry about an attack and the possibility that what we've worked so hard to repair could be destroyed."

Beuby is a commander in the campaign to rebuild Iraq, the biggest undertaking of its kind by the U.S. government since the Marshall Plan helped Europe recover from the devastation of World War II. Unlike the Marshall Plan, though, this effort is taking place in what is still a war zone--at least 17 foreign contractors have been killed since major combat ended last spring, along with dozens of Iraqis working for international companies. Indeed, the foot soldiers in this project are civilians working for big American companies like Halliburton, Bechtel, and Washington Group, and the fate of their efforts will largely determine whether the war to remove Saddam Hussein and remake Iraq as a stable, Arab democracy ultimately proves successful.

Yet little attention has been paid to the progress on the ground or to what life is like for the thousands of American civilians working in Iraq. Some, like Beuby, live in the relative comfort and security of Baghdad's green zone, the campus-like enclave that is home to the Coalition Provisional Authority (CPA) and is sealed off from the rest of the city by U.S. forces. Bechtel's main camp covers the equivalent of a city block, with neat footpaths between the sandbag-protected trailers. It has a rec center with a pool table, a bar, and a TV tuned to CNN. On Thursday evenings everyone gathers for a Texas-style barbecue. Other contractors live and work in more dangerous parts of the country, their movements restricted to makeshift compounds surrounded by barbed-wire fences and oil-filled ditches. Even in remote places hours from Baghdad, you can find men and women from companies like GE and Fluor living onsite.

Although Bechtel's private guards have been able to protect its employees from bullets and bombs, the company has been less successful at escaping bureaucratic sniping and infighting. Bechtel was stung by reports in the U.S. press that its project to restore 1,239 Iraqi schools failed to improve conditions at some of them. And officials from the CPA, the Army Corps of Engineers, and the Iraqi Electricity Ministry complain that even though Iraqis are growing increasingly frustrated with daily blackouts, Bechtel's work on Iraq's hard-hit power grid is only inching along.

Halliburton, headed by Dick Cheney before he became Vice President, has found itself in the middle of repeated controversies over how much it has charged the U.S. government for everything from the gasoline it ships into Iraq to the meals it serves to soldiers. In mid-February the company announced it would hold off on billing the Pentagon $175 million for meals until auditors can determine exactly how much is owed. A month earlier two Halliburton employees in Kuwait were fired for allegedly accepting kickbacks from local subcontractors. The heat is certain to continue--congressional Democrats are calling for hearings on Halliburton's work, and Democratic presidential front-runner John Kerry recently declared, "Halliburton is guilty of shameful war-profiteering, and they need to be held accountable."

Regardless of who wins in November, Halliburton, Bechtel, and other companies are likely to be in Iraq for years to come. Retired admiral David Nash, who runs the office administering the $18.4 billion in aid for Iraq approved last year by Congress, expects the U.S.-led rebuilding effort to continue for another four years. At the same time, Bechtel and Halliburton's KBR unit hope their work will open the door to billions more in commitments from Iraqi politicians once U.S. control ends this summer. That's one reason these companies are willing to accept the relatively low 2% to 7% profit margins set by the U.S. government under the contracts.

In terms of both manpower and money, the scale of the private corporate presence in Iraq is huge. Roughly 2,300 construction projects will be funded by the $18.4 billion, and $13 billion more is pouring in from international donors. That equals about $1,300 for every Iraqi man, woman, and child--half the typical Iraqi's annual income. "Per capita, more is being spent in Iraq than in the Marshall Plan," says Andrew Natsios, administrator of the U.S. Agency for International Development, which oversees a substantial part of the work. "We've never had this much money, and never on this scale."

The $1.8 billion award to Bechtel by USAID in January is the single largest contract in the agency's 43-year history. That money--plus an earlier $1.1 billion that Bechtel won last April--is due to be spent by the end of next year, which means the private San Francisco--based construction company is spending at a rate of about $200 million a month. To provide logistical services like food and laundry and mail to the 140,000-strong American military force, KBR has brought 3,500 to 4,000 workers from the U.S. and elsewhere to Iraq. "We had no idea it would be this big," says project manager Robert "Butch" Gatlin. "The plan was to take over the country, be here six months, and go home. It just didn't happen that way."

Indeed, little of the effort to rebuild Iraq has gone according to plan. Just as the U.S. government failed to anticipate the looting that accompanied the fall of Saddam's regime and the insurgency that followed, private companies never expected their workers might be targets. Bechtel's initial contract assumed Iraq would be a "permissive environment" and budgeted just $500,000 for security, notes Clifford Mumm, Bechtel's Iraq program manager. That's a tiny fraction of what Bechtel's security effort now costs. Each of its armored SUVs runs about $135,000--$100,000 more than a standard model--and whenever Bechtel employees leave the safety of the green zone, they must move in convoys protected by teams of private armed guards, known as shooters. Mumm estimates that security adds up to about 6% of Bechtel's costs, potentially more than $150 million over the life of its contracts. Although the expense of protecting its workers is passed on to the U.S. government under the terms of the contract, the net effect is that for each dollar spent on security, one less is available for reconstruction work, because the overall value of the contract is fixed.

That's just one of the many hazards of working in Iraq. "People think, 'Oh, my God, the security,'" says Mumm. "The real challenge is managing expectations. The list of stakeholders is long--Iraqis, the press, the American public, USAID, the CPA, and the military--and the players keep changing."

Nobody forced Bill Riedel to come to Iraq, but then again, he didn't exactly volunteer. Riedel has worked on construction jobs all over the world, but when his employer, Washington Group International, a Boise construction and engineering giant, asked him last year to help get Iraq's Bayji power plant running again, he really couldn't say no. "At the time it [the job] was all they had," says Riedel, a 55-year-old Kansan who speaks in a slow, deliberate voice deepened by the two packs of Viceroys he burns through every day. "I was waiting at home for an assignment." So now Riedel makes his home in a ten-foot-long trailer, with only the hulking plant and its six smokestacks for a view. Seven days a week, from 6:30 A.M. until after dark, Riedel and 18 other Americans, backed up by roughly 30 Iraqi engineers, struggle to coax power from Bayji's damaged turbines.

Even by the grim standards of postwar Iraq, Bayji is a bleak place. It lies in the heart of Iraq's Sunni triangle, where resistance to America's presence in Iraq is fiercest, and is only a short drive from where Saddam Hussein was pulled out of a hole in the ground. But Riedel doesn't have time to check out Saddam's old haunts. "You really can't go anywhere," he says between drags. "The hostilities have escalated, and there's a lot more emphasis on security than when I arrived in September. There is no distraction other than the project."

Most Washington Group employees get a bonus equaling 100% of their salary for working in Iraq, and site managers like Riedel can make $100,000 a year. After working 75 days, employees get two weeks off, but that doesn't make getting through each day in Bayji any easier. "If someone wants to go to his room for a couple of hours during the day," Riedel explains, "nothing is said."

Probably the hardest aspect of the job is the separation from Linda, his wife of 32 years. He keeps the watch that dangles from his jacket set to U.S. Central Time "so I know what my darling gray-haired wife is doing." Riedel says he calls every two to three days, "but you run out of things to say."

Besides the loneliness, the occasional mortar attacks, and the challenge of getting a broken-down plant to work again, Riedel also has Col. Todd Semonite of the Army Corps of Engineers to worry about. A blunt West Point grad, Semonite is the point man for the Army Corps' Task Force RIE (Restore Iraqi Electricity), which hired Washington Group and two other contractors as part of an emergency effort to fix the system. "Our mission isn't to do what we're told, it's to get power on the grid by June," Semonite says. "Everybody's got excuses. The contractors said this job would take nine to 12 months. Bull, do it in three months. So we've got our boot in their butt 24/7." Told that Riedel considers his schedule tough, Semonite shoots back that he's not bothered if Riedel feels he's under pressure. "Good, we should be demanding," says Semonite, as he scans the highway back to Baghdad for roadside bombs. "We are pushing very hard, no doubt about it. The people need power now." For all his bluster, Semonite is pleased at the progress Washington Group is making at Bayji, as well as on the 150 miles of fresh lines it's stringing from new pylons stretching north along the highway from Baghdad. By early March the first two of Bayji's eight turbines should be running again, and Riedel hopes to get the rest online by May. That could add 184 megawatts to Iraq's grid, upping the country's total power capacity by nearly 5%. "If we can get this plant running," says Semonite, "all of Iraq could get another half-hour of power."

Even 30 minutes' more electricity would be a major achievement, both for the contractors and for the American authorities. If there is one complaint ordinary Iraqis have, it's that a year after the invasion the lights in Baghdad and many other places are rarely on for more than 12 hours a day and sometimes fail to flicker to life at all. Initially Bechtel was given responsibility for restoring Iraq's electric grid, but by last fall generating capacity had barely budged from prewar levels and U.S. Central Command was frustrated with the pace of the work. Privately officials grumbled that Bechtel was doing things in the company's typically deliberate style, when a very different approach was needed. "Bechtel's plans are excellent, but they want to build a Cadillac," says Iraq's Electricity Minister, Ayham al-Samarrai. "There's no time for that--the people need electricity, and a Volkswagen would be good enough." CPA power advisor Robyn McGuckin barely hides her frustration. "The Army Corps has gone above and beyond--Bechtel has adhered to the terms of the contract," she says. "Nothing more, nothing less."

So last fall Task Force RIE was set up by the Army Corps of Engineers, which in turn hired Washington Group, Perini, and Fluor to fix over 600 miles of power lines, 720 downed towers, and 14 generating stations. By the time temperatures soar past 100 degrees in June, the $1 billion RIE program is expected to have increased Iraq's generation capacity by nearly one-quarter.

Bechtel officials like Mumm and Mike Robinson insist they are moving as quickly as possible, given the condition of the equipment and the security situation. Robinson is typical of Bechtel's team in Iraq. An engineer by training, he graduated from Berkeley in 1968 but had little interest in the protests roiling the campus. He joined buttoned-down Bechtel and has been with the company ever since. "We didn't have a clue when we came in," Robinson says in a voice so quiet you have to lean in to get every word. "We figured on minor damage from bombing." Instead, turbines and other machines were falling apart, devastated by 20 years of war, sanctions, and almost no maintenance. "I was shocked. I've been all over the world, and this is the worst I've ever seen."

The Army Corps' electricity task force is moving more quickly than Bechtel. (But it's working in some of Iraq's most dangerous cities, and progress has come at a high price. Fifty-six civilians working for the Army Corps have been killed or wounded, including two South Koreans and one American who were attacked as they traveled between sites.) Bechtel and the three contractors hired by the Corps should have substantial new generating capacity online by summer. But the long-term problem is looters, who pull down pylons and steal power lines to sell the valuable aluminum and copper cable. In poorer Baghdad neighborhoods, spools of stolen wire are piled up, waiting for the rubber to be burned off and the metal extracted.

If the looting continues and the lines stay down, warns the CPA's McGuckin, the power won't get from power plants like Bayji to all those Iraqis now in the dark. "Power, security, fuel--it's a big loop," she says. "We need all three as we head into summer and hope for a good transition." But the 3,000-strong Iraqi force that works for the Ministry of Electricity is overwhelmed having to guard nearly 7,000 miles of cable. Despite requests from McGuckin, the military hasn't provided enough soldiers to guard the lines. "We get messages from coalition soldiers asking where the power is for the Iraqi people." McGuckin says. "What we don't get from the coalition forces is security for the lines." Delivering adequate power is essential if the U.S. is going to win over ordinary Iraqis and improve the security situation, warns McGuckin, but it's not at all clear whether that will happen before the CPA hands control back to the Iraqis on June 30.

Even as he shows off KBR's sites in the green zone --a laundry for soldiers and CPA personnel, a cafeteria, a lot where statues of Saddam rust on the ground--Butch Gatlin seems wary. It's not that he's nervous about security. The green zone is an American island, where just about everyone has an SUV, and joggers abound on the broad boulevards where the Republican Guard once marched. It's more likely that Gatlin, like other KBR managers, is shell-shocked by the controversies that have dogged Halliburton since before the war in Iraq began. Halliburton has emerged as a political pinata not only because Dick Cheney once ran the company but also because of years of controversy over what Halliburton has charged the Pentagon to perform noncombat tasks like mail, KP duty, and laundry.

Although outsourcing has freed up soldiers for what the Pentagon calls "warfighting" and allowed the military to shrink by a third since the end of the Cold War, it has become a billion-dollar business. Halliburton's KBR unit has a ten-year contract known as Logcap to provide overseas logistical support to the military. In the second half of 2003, Iraq-related work generated $3.1 billion in revenue and $78 million in profits for the company. The crusty Gatlin is quick to point out that Halliburton's maximum profit margin is 3% under Logcap's terms and that every expenditure has to be approved by the government. "The cost of this is determined by what the Army wants," says Gatlin, standing next to one of the Saddam heads that used to grace the ramparts of the Republican Palace. "That's been totally lost in the coverage."

Maybe that's because the revelations just keep coming. Like the two Halliburton employees in Kuwait fired for allegedly taking kickbacks. Since that incident, Gatlin says, the company has tightened regulations that govern who deals with subcontractors. Even so, in mid-February a new controversy erupted over how much the Pentagon owes the company for meals. And a former Halliburton buyer in Kuwait testified before Senate Democrats that his bosses routinely bent the rules to avoid seeking competitive bids. Halliburton could certainly do a better job monitoring expenses, but the Pentagon needs to get more auditors on the Iraq case. Currently there are five in Iraq looking at how $18.4 billion in reconstruction money is being spent, with another nine on the way. That's $1.3 billion for each auditor.

For all the hostile fire Halliburton is taking, it has made steady progress resuscitating Iraq's battered oil sector. Devastated by a decade of sanctions and looting after the war, Iraq's oil production was near zero last spring. Today Iraq is pumping roughly two million barrels a day, and Iraqi oil officials predict that the figure will rise to three million by the end of the year. At current prices, that generates nearly $2 billion a month for Iraq's economy and will provide Iraq's future government with money to continue rebuilding.

The oilfields work hasn't come cheap. The U.S. government has allocated $2.4 billion for Halliburton's oil work to date, and the company recently won another $1.2 billion contract to continue the restoration work in Iraq's southern oilfields for two years. But even Iraqi officials, who often complain about the slow pace of contractors like Bechtel, say they are satisfied with Halliburton's efforts. Standing amid the thrumming tanks and pipes of the Az Zubayr pumping station outside Basra, Halliburton area superintendent Alton Braudaway describes what conditions were like when his team arrived last spring. "Nothing was working," says Braudaway. "No electricity, no oil pumping. This was pretty well looted. And what they couldn't steal was broken." Braudaway and most of the 250 Halliburton employees who work in southern Iraq don't sleep there--they stay in hotels in Kuwait, leaving before dawn and returning by dark. That adds up to six hours of commuting a day. Now that security is improving in the south, some Halliburton workers will begin living onsite this month.

It's still too early to predict whether other reconstruction projects will go as well. As the looting that bedevils the country's electric grid shows, the campaign to rebuild Iraq is far from won. And the stakes are getting higher. This month the U.S. government will award $5 billion in contracts, with another $5 billion to follow by summer. So even as U.S. troops gradually pull out, and the CPA prepares to hand control back to Iraqis, the private corporate army that stretches from Kirkuk to Basra will continue to grow. More and more, the battle for the future of Iraq will be their fight, not the military's, with people like Steve Beuby and Bill Riedel on the front lines for years to come. "This is a battle for hearts and minds," says Riedel, echoing a phrase he remembers well from his time as an infantryman in Vietnam. "It's not just about electricity. We're dealing with the people who go back to their homes and villages each night. It could still go either way, but I have a feeling we will be successful."

FEEDBACK nschwartz@fortunemail.com