Pick Pocketing The Taxpayer: The Insidious Effects of Acquisition Reform
Table of Contents
Why and How Is This Happening?
Important Procurement Reforms of the 1980s and Their Current Status
Problematic Contract Types
Downsizing Procurement Oversight
Turning the Junkyard Dogs into Lapdogs
The Trouble With Outsourcing
Current Defense Industry Efforts Against Oversight
Spending $200 billion per year, the federal government is the biggest consumer of goods and services in the world. As all consumers, the government relies heavily on free-market forces to ensure fair prices. Simplified, a large number of suppliers coupled with a large number of consumers create a competitive market in which consumers can be confident they are getting a fair deal. But a large portion of federal dollars buy goods and services that are not affected by these market forces. Because the government is often the only consumer of a particular product, and more importantly, because often times only one supplier exists, free market forces cannot regulate prices. This scenario most often plays out in defense spending, where the federal government is, by necessity, the only buyer of weapons systems and military-unique services, and where, due in part to recent mega-mergers, there are very few companies able to provide these goods and services. In these instances, the government must use other tools to guarantee fair pricing, namely, oversight.
It is this oversight, which promotes the responsible spending of taxpayer dollars, that is again under attack in the latest wave of "Acquisition Reform." Spurred on by powerful contractor associations, Members of Congress and the Pentagon are pushing for ever-more relaxation of the regulations and oversight put in place to prevent contractor rip-offs. Under the media-friendly guise of "Acquisition Reform" and "cutting red tape," association lobbying has been successful in its quest for reduced oversight. After a decade of this "Acquisition Reform," the procurement policies are in such a state of disrepair, that defrauding the government has become as easy as it was in the early 1980's, the era of spare parts horror stories.
Recent examples include:
- A United States General Accounting Office (GAO), November 2000 report, "Defense Acquisitions: Price Trends for Defense Logistics Agency's Weapon System Parts," reveals that spare parts prices are skyrocketing, just as in the 1980s. The report revealed that the cost of 2,993 spare parts purchased by the military in 1998 increased by ten times or more in just one year. Ironically, these parts were bought under the much-touted "commercial" price system.
In 64% of the cases, prices originally provided by the contractor were increased later when the parts were purchased. Defense officials told the GAO that discrepancies between estimated and actual prices were often the result of a lack of manpower needed to perform a "thorough price scrub."
The same GAO study also reported that even among commercial parts ordered with "frequent demand," one out of seven spare parts (14%) experienced significant annual price increases of 50% or more in 1998, representing purchases totaling about $193 million. By comparison, in 1995, only one out of twelve (8%) had such price increases.
- Another GAO report, in February 2002, came up with similar problems:
- "We [GAO] found that prices for all Navy-managed aviation parts increased at an average annual rate of 12 percent from 1994 to 1999." GAO also found that higher volume mysteriously lead to higher prices: "However, prices for parts [again for the Navy] with high sales volume increased substantially more, at an average annual rate of 27 percent."
- The Marine Corps experienced similar price spikes for ground system spare parts: "We [GAO] found that the prices for these parts had increased at an average annual rate of about 14 percent from 1995-99."
- Even worse, contractors without competition jacked up prices at twice the rate of contractors facing competition: "DLA [Defense Logistics Agency] reported that, from fiscal year 1993 to 2000, materiel costs grew 10.8 percent for competitively purchased commercial items, but increased more than twice as much for noncompetitive purchases."1
- "We [GAO] found that prices for all Navy-managed aviation parts increased at an average annual rate of 12 percent from 1994 to 1999." GAO also found that higher volume mysteriously lead to higher prices: "However, prices for parts [again for the Navy] with high sales volume increased substantially more, at an average annual rate of 27 percent."
- Another audit revealed that the Department of Defense (DoD) unknowingly paid prices " supplier.2
- The Defense Supply Center in Philadelphia, one of three major Defense Logistics Agency supply centers nationwide, was overcharged an estimated $1.2 million for 9,733 "micropurchases" (i.e. purchases under $2,500 each).3
- The Raytheon Corporation overcharged the Navy by $572,302 on contracts costing about $1.6 million, an overcharge rate of 56%, under an "industrial prime vendor program" (effectively, a monopoly) which was intended to reduce logistics costs, improve financial accountability, streamline the Defense infrastructure, and add value to the Defense supply system, but which, according to the DoD Inspector General (IG), accomplished none of these objectives.4
- Rockwell Collins, Inc. overcharged the Army by $395,316 for radio parts costing $1.3 million. Government contracting officers had examined prior pricing data to determine a fair price, but unfortunately, the DoD IG found that "prior prices were not justified as reasonable."5
- The AM General Corporation overcharged the Army $480,000 on a $4.9 million contract for Hummer diesel engines. The IG commented that "if anything, we would have expected a lower rate because of the increase in quantity from 120 engines to 300 engines on the order."6
- The Army paid $174,675 for a variety of vehicle parts from the Minowitz Manufacturing Co. which the DoD IG determined were truly worth $71,205 - an overcharge rate of 145 percent. The responsible contracting officer had commented, "...their price is so OUTRAGEOUS I cannot possibly find any justification for their offer unless you will support the blank check." Because of acquisition reform, the contract was considered "competitively bid," and therefore exempt from much of the usual oversight, even though competition was nonexistent: "the contract was solicited three times without generating other bidders."7
These, and many other cases like them, are simply tolerated because the laws that regulate acquisition have been so severely weakened. Simply put, "Acquisition Reform" has been a gold mine for defense contractors, allowing them to easily overcharge the government, resulting in the waste of billions of taxpayer dollars.
Among the most detrimental provisions of "Acquisition Reform" are new contracting methods ungoverned by the usual oversight, such as "competitive" one-bid contracting, "commercial items" procurement, Indefinite Delivery Indefinite Quantity contracts, and the proposed "Share-in-Savings" contracting. This form of contracting leaves the government vulnerable to contractor rip-offs.
"Commercial items" procurement is equally permissive and troubled. Under the "Acquisition Reform" definition of "commercial items," goods such as C-130J military cargo planes qualify. Regardless of the fact that these military-specific goods have no demand in the civilian market and, likewise, have never been sold to any consumer except the military, they can be called "commercial" merely because they have been offered for sale. Due to such a tortured definition of commercial, these items are not being regulated by the government.
Also troubles exist with Indefinite Delivery Indefinite Quantity contracts, which include Government-Wide Acquisition contracts (GWACs) and Multiple Award contracts. Under these contracts, the government does not specify exactly which products or services it wants, but asks the contractor to be available to perform services or manufacture products if called upon - basically the equivalent of a hunting license. Such contracts, stifle small business competition by providing perfect opportunities for large contractors to monopolize entire market segments and thereby liberally overcharge the government. A recent DoD Inspector General report states, "The underlying goal of multiple award contracting was to obtain the best value while sustaining competition throughout the contract period. . . . However, the large percentage of sole-source orders demonstrates that most DoD contracting organizations continued to be increasing the risk to the Government and losing the benefits of price competition."8
"Share-in-Savings" (SIS) contracting is the latest proposed contracting loophole making its way through Congress. As part of the proposed Services Acquisition Reform Act (SARA), Share-in-Savings contracting would allow agencies to outsource government projects that have not received Congressional approval, thereby avoiding the Constitutional system of checks and balances. While the intent of SIS contracting is to encourage savings and efficiency, the lack of proven benchmarks to calculate such savings leaves the process entirely subjective and leaves the government open to manipulation and endless lawsuits by contractors. Projected contractor profits from this program are far more likely than projected savings.
DoD Contract Management has been cited as a "High-Risk area" since 1992 by the General Accounting Office (GAO). Last year the GAO reported that, "DOD . . . continues to experience significant challenges related to improving oversight and accountability in the acquisition of services."9 With defense spending set to sharply increase under the Bush Administration's latest budget, the "Acquisition Reform" that has taken place over the past decade has put the government in a dangerously vulnerable position where it is not only possible for contractors to get away with defrauding the government, but very likely.
In the 1990s, the defense industry mounted an offensive against what it saw as overbearing procurement reforms of the 1980s. Most of those reforms, however, were useful protections for the taxpayer against contractors that had been defrauding the government in the 1980s. A Department of Defense (DoD) Inspector General report notes that the reforms "resulted in dramatic increases in reported competitive procurements and savings from 1985 to 1988."10
Former DoD Inspector General Eleanor Hill noted the dangers of rolling back these reforms:
"We remain concerned about suggestions to limit or repeal controls that have proven effective over time, such as the False Claims Act, the Cost Accounting Standards, the statute that prohibits contractors from charging unallowable costs, and the Defense Contract Audit Agency. We believe that these controls have been critical to maintaining the Government's ability to adequately protect its interests in the acquisition area."11
|Competition in Contracting Act||Requires contracts to be fairly competed.||New legislation has created numerous loopholes.|
|Cost Accounting Standards (CAS) Board||Sets accounting rules for contractors.||Weakened by recent legislation.|
|False Claims Act (FCA) Strengthened||Allows citizens to come forward and sue fraudulent contractors on behalf of the government.||Under industry assault.|
|Penalties Increased for Disallowed Costs||Increased fines for contractor fraud.||Under industry assault.|
|Procurement Integrity Statute||Prohibits government contracting officers from revealing bid information to competing bidders.||No significant change.|
|Truth in Negotiation Act (TINA) Emphasis||Requires contractors to submit accurate cost or pricing data.||Weakened by 1990s legislation.|
The Competition in Contracting Act of 1984
The Competition in Contracting Act of 1984 arose in response to findings revealed in an influential GAO report that concluded that only a small share of contracts were being competed, and noted that competition brought down contract prices sharply. The act opened up competition by requiring contracts to be "fully and openly competed."
This act has since been weakened. Technically, full and open competition is still in place, but now only to the extent that it is "consistent with efficiency." In many cases, the competition requirement is satisfied even if only one bid is received, as long as there is a belief by the contracting officer that other contractors may bid.
The Cost Accounting Standards Board (CAS Board)
The Office of Federal Procurement Policy Act amendments also reestablished the Cost Accounting Standards Board, which had been abolished in 1980. The CAS Board sets accounting rules for noncommercial contracts which are designed to achieve uniformity and consistency in contractors' accounting practices. Such rules are especially crucial to prevent the use of accounting gimmicks in an often noncompetitive environment.
Since its reestablishment, the Board has been facing a relentless onslaught by the defense industry and sympathetic lawmakers, even though, on average, it saves taxpayers a 5% margin on expenditures - about $7 billion a year.12
A report, "Future Role of the Cost Accounting Standards Board," was issued in April 1999 by a review panel comprised largely of industry representatives. Predictably, the panel recommended weakening the CAS Board by stripping it out of the Office of Management and Budget, and increasing the monetary threshold for full CAS monitoring from $25 million to $50 million per year. (Appendix A) Congress adopted the recommendation through the National Defense Authorization Act of 2000. The defense industry continues to promote further legislation which would undermine the structure and authority of the CAS Board.
The False Claims Act (FCA)
The False Claims Act was originally passed in 1863 at the urging of President Lincoln, who was attempting to halt the Civil War profiteering which was crippling the Union Army. Amendments to the Act in 1986, championed by Senator Charles Grassley (R-IA), increased the penalties for fraud and encouraged private citizens to come forward if they were aware of corporations defrauding the government.
Today, the Act is under heavy assault by defense industry representatives, who argue that "innocent disagreements" are being prosecuted as fraud, and complain that companies are deterred from doing business with the government for fear of alleged excess vulnerability to fraud lawsuits. Their ire is easily explained: annual monetary recoveries from lawsuits filed under the False Claims Act have jumped from $200,000 in 198713 to $1.2 billion in 2001.14
The DoD is warming to the industry's viewpoint. In January 2000, Deputy Secretary of Defense John Hamre initiated an 18-month-long FCA ("Qui Tam") Review Panel, claiming that the act "has already driven some firms out of government contracting," and that it may be "a major obstacle to acquisition reform."15
The Justice Department, in fact, has strongly rebutted the notion that the False Claims Act is burdensome and needs amending. For example, it stated that there is "no support beyond mere assertion for the proposition that the False Claims Act liability has any substantial effect on defense industry profits or on the industry's relationship with the DoD. Moreover, analysis of the data available to us shows no such effect."16
Penalties Increased For Disallowed Costs
Various increased penalties for disallowed costs have also been instrumental in cutting down on waste. Most notably, the 1985 Department of Defense Authorization Act increased the penalties for costs submitted for reimbursement by contractors that the government determines are not valid claims.
The statutes are still currently in effect, but have come under heavy industry criticism since the industry feels that these increased penalties excessively "criminalize" what they see as "civil" violations.
The Procurement Integrity Statute
The Procurement Integrity Statute was created in 1988 through amendments to the Office of Federal Procurement Policy Act. The law attempted to prevent the types of corruption that were exposed by "Operation Ill Wind." The scandal revealed that contracting officials were selling source selection information - the strengths and weaknesses of competing bids based on the proposals under review - so that favored contractors could strengthen their own proposals when they went into negotiations. This statute prohibited revealing such information to contractors and required that contractor employees sign statements saying they were aware of the integrity laws.
The Truth in Negotiations Act (TINA)
The Truth in Negotiations Act requires contractor cost and pricing data submitted to the government to be current, accurate, and complete. Enforcement and emphasis on TINA were boosted in the 1980s - a sensible measure, since the DoD's purchasing environment often lacks the competition found in a true free market. Congress kept a close eye on the issue, and the GAO published many reports that emphasized the importance of TINA.
However, this progress was seriously undermined by the Federal Acquisition Streamlining Act (FASA) and Clinger-Cohen Act also known as the Federal Acquisition Reform Act (FARA), which exempted so-called "commercial items" and "competitive" one-bid contracts from TINA. But, many of these "commercial items" are actually only sold to the military. In addition, Congress is concerned that DoD improperly grants TINA waivers, even when no price competition is present.17
The following legislation, passed within the last decade, represents the industry's most successful efforts to change acquisition practices for the worse.
|Federal Acquisition Streamlining Act of 1994 (FASA)||Reduced oversight on a large number of government purchases, in part by undermining the Truth in Negotiations Act (TINA).|
|Clinger-Cohen Act (Federal Acquisition Reform Act of 1996)||Further relaxed acquisition oversight and expanded the definition of, and exemptions available to, so-called "commercial items."|
|Proposed Services Acquisition Reform Act (SARA)||Proposes to remove most of the remaining taxpayer pricing protections on government service contracts by creating oversight loopholes.|
The Federal Acquisition Streamlining Act (FASA)
The Federal Acquisition Streamlining Act, enacted in 1994, was intended to make federal agencies "more responsive and accountable to the public/customers relative to achieving program results," and required a 90% success rate for all established goals.18 However, along with these reasonable demands, the Act also allows the use of uncertified information about cost or pricing that "need not be current, accurate, and complete." This uncertified data is now called "information other than cost or pricing data." In addition, the Act loosened the definition of "commercial" (i.e. commercially available) items to include items with military-specific modifications, allowing such items to be purchased with scant oversight. FASA also exempted many sole-source contracts (e.g. "competitive" one-bid contracts) from the careful monitoring stipulated by the Truth in Negotiations Act, and raised the "Simplified Acquisition Threshold"--under which contracts are not fully monitored--from $25,000 to $100,000 per contract.19
The Clinger-Cohen Act
The Federal Acquisition Reform Act of 1996, also known as the Clinger-Cohen Act, took FASA's statutes a step further. It increased the "Simplified Acquisition Threshold" for so-called "commercial items" from $100,000 to $5 million, and lifted various other oversight thresholds by similar degrees. Additionally, the Act further undermined the government's ability to monitor "commercial parts" acquisition.
Proposed Services Acquisition Reform Act (SARA)
The latest acquisition reform proposal is Representative Tom Davis' SARA bill. Picking up where the Federal Acquisition Streamlining Act (FASA) and the Clinger-Cohen Act left off, SARA proposes to apply additional acquisition reforms to product and service contracting. SARA promotes:
- Increased thresholds from $2,500 to $25,000 for "micropurchases" on federal credit cards which don't receive the normal oversight (Further explained on p. 14);
- Share-in-Savings contracting which emphasizes outsourcing but has unclear and hard-to-audit benchmarks for savings, leaving taxpayers at risk (Further explained on p. 15);
- "Commercial-Business Entities" which creates a new class of government contractors. If 85% or more of a company's overall business is commercial - including companies such as United Technologies & General Electric - its government contracts would not be subject to the normal oversight of TINA, CAS, or post-award audits, regardless of whether those contracts qualified as "commercial"; and
- "Time and material" and "labor hour" contracts for acquisition of "commercial items" in other words, paying for hours spent rather than for performance or results. This is in direct conflict with earlier provisions in the bill that suggest that all acquisition activities will be evaluated using performance measures. Bush-appointed Administrator of the Office of Federal Procurement Policy Angela Styles warns, "before we...endorse use of labor-hour and time-and-material contracts - we must challenge ourselves to demonstrate that the tools which would serve as a surrogate for the safeguards provided today will adequately protect the public fisc."20
Interestingly, the draft SARA bill appears to have been literally written by contractors. Copies that have circulated contain actual drafting notes that mention specific contractor lobbyists, by name, as well as ARWG, or the Acquisition Reform Working Group, which includes ten major contractor associations, and has been at the forefront of "Acquisition Reform" lobbying. (Appendix B)
SARA is so extreme that even the normally business-friendly Bush Administration's Office of Federal Procurement Policy Administrator has expressed strong reservations about the bill.
The changing federal acquisition environment has given rise to a number of new types of contracts, as well as the increased use of certain existing types. Several have been promoted enthusiastically by defense contractors as efficient and fair. Unfortunately, most have been problematic in practice, contributing to increased waste in defense spending. Some examples:
- "Competitive" One-Bid Contracting. As authorized by the Federal Acquisition Streamlining Act (FASA), a contract can be labeled "competitive" and therefore free of TINA-related oversight even when only one potential contractor bids on a contract and wins it by default. Such contracts have clearly proven wasteful: a May 2001 DoD IG audit of 145 sole-source and "competitive" one-bid contracts discovered that overpricing had occurred in more than 1/3 of the contracts, totaling $23.1 million. In the vast majority of remaining cases, the DoD IG was unable to determine whether overpricing had occurred, due to inadequate data. In fact, the various contractors were found to have provided inaccurate or incomplete pricing data in 86% of the 145 cases examined. Staffing shortages and "pressure to award contracts quickly" were also cited as key causes of the waste.21
- "Commercial Items" Procurement. Through the Federal Acquisition Streamlining Act (FASA) and the Clinger-Cohen Act, "commercially available" items were exempted from much procurement oversight, such as TINA regulations. To encourage such deregulation, contractors argued that a commercial market ensures reasonable pricing. Unfortunately, the current definition of "commercial" is almost absurdly loose. As stated by Angela Styles, the Bush-appointed Administrator of the Office of Federal Procurement Policy, "While proponents of statutory change may suggest otherwise, make no mistake: the framework Congress gave us for buying commercial items is broad and accommodating." As outlined by Styles, parts and items may be labeled "commercial" as long as they are merely "of a type" offered for sale to the general public, even if no such sale ever occurs.22 For instance, C-130J military transport aircraft have been offered for commercial sale in the past, and while not a single sale was ever made to civilians, oversight was loosened. Similar attempts are being made to classify the C-17 cargo plane. By thus categorizing the airlifter, the Air Force would be allowed to bypass important pricing oversight which is only intended to be lifted for items which are truly commercial and whose prices are set by free market forces. A $232 million outsize cargo carrier with 173,300 lbs. capacity is clearly not a mass-market item which is sufficiently affected by the free market. Many other "commercial items" are purchased by the public, but with such low frequency that prices are by no means determined by the free market.
- Indefinite Delivery Indefinite Quantity Contracts, which include Government-Wide Acquisition Contracts (GWACs) and Multiple Award Contracts (though they originate from different statutory authorities), are not actual contracts for specific work, but rather agreements by the government to award an unspecified amount of future work to approved contractors - the federal acquisition equivalent of a hunting license. Requirements for competition on such contracts are extremely weak, effectively allowing for billions of dollars worth of noncompetitive contracting. New legislation mandated that DoD service contracts - and only DoD service contracts - must receive a minimum of three bids, but the regulations have yet to be drafted, let alone implemented. Although using such contracts frequently reduces the length of the acquisition process by as much as 90 percent, they actually stifle competition. Steven Kelman, the former administrator of the Office of Federal Procurement Policy and the architect of "Acquisition Reform," admits that GWACs cause "many task orders [to become] de facto sole-source awards," because they often create a bidding environment in which "vendors assume that if they weren't first to get to a customer on a requirement, they shouldn't bother bidding." There is also "evidence that GWACs are... making it harder for qualified small firms to get business,"23 who are unable to provide such a wide array of goods and services. It is only logical to conclude that such contracts often provide perfect opportunities for large contractors to monopolize entire market segments and thereby liberally overcharge the government.
The DoD Inspector General's office has commented that "the broad scope of these contracts makes it very difficult to establish accurate pricing..." - a troubling fact considering such individual contracts are frequently worth hundreds of millions of dollars. According to a DoD IG audit of 124 randomly-chosen multiple-award contracts, nearly half of the contracts studied were sole-sourced (i.e. awarded without competition) "without providing the other contractors a fair opportunity to be considered." Moreover, only 8 of the 66 sole-sourced contracts had valid justification for sole-source award.24 In 2001, the DoD IG updated its study, finding: "Contracting organizations continued to direct awards to selected sources without providing all multiple award contractors a fair opportunity to be considered. We found that 304 of 423 task orders (72 percent) were awarded on a sole-source or directed-source basis of which 264 were improperly supported. As a result, DoD was not obtaining the benefits of sustained competition and the reduced costs envisioned when Congress provided the authority for multiple award contracts."25
- Service Contracting. This type of contracting has increasingly been used in the past decade, topping $96.5 billion in FY 1999 - an incredible 69% of the annual defense procurement budget, more than was spent on supplies and equipment.26 There is nothing inherently wrong with service contracting, but it has recently proven very problematic. The DoD IG conducted an audit of 105 service contracts valued at $6.7 billion. Major problems were found in each and every contract, such as poor government cost estimates (81 contracts), inadequate competition (63 contracts), and inadequate contract surveillance (56 contracts), among others. The Assistant IG commented, "In nearly ten years of managing the audit office at the IG, DoD, I do not ever recall finding problems in every item in that large a sample of transactions, programs, or data."27
- Purchase Cards. Many Defense Department employees are now permitted to use credit cards to complete "small purchases," also known as "micropurchases" (i.e. under $2,500 each). More than 10 million such purchases were made in FY 2000, valued at $5.5 billion.28 This arrangement allows government purchases to be made without a formal contract and with essentially no oversight. According to Senator Chuck Grassley (R-IA), a longtime advocate of ending wasteful defense spending, "issuing credit cards to Pentagon employees without proper checks and balances is like giving people keys to the federal treasury."29
A GAO study of these credit cards revealed that purchase cards have been used for "fraudulent [personal business] transactions for pizza, jewelry, phone calls, tires, and flowers." The Fayetteville (NC) Observer-Times shed some light on this issue: it performed an independent audit of 100 military credit card purchases, and found major problems with 34% of the purchases, such as missing receipts, improper record-keeping, and misuse.30 Perhaps the most telling example is that of one cardholder indicted for making over $17,000 in fraudulent personal transactions who "commented that illegal use of the card was 'too easy' and that she was the sole authorizer of the card purchases."31
Representative Steve Horn (R-CA), the Chairman of the House Subcommittee on Government Efficiency, held hearings on the subject last year. In his opening statement he pointed out, "This credit card program was designed to save money by eliminating the bureaucracy and paperwork associated with making 'small' purchases. . . . Those benefits, however, do not consider the cost of fraudulent or improper use of the cards for personal expenses. And . . . they fail to consider the cost of proper oversight and management of the programs. . . . the cost of this program may far outweigh its benefits."32
Additionally, whether using purchase cards or not, micropurchases pave the way for contractors to overcharge due to the lack of competition and virtually nonexistent purchase monitoring. A recent DoD IG audit found that overcharging occurred on no fewer than 42% of the audit sample. Not surprisingly, the DoD IG recommended "replacing [i.e. eliminating] the electronic commerce interface" or, at the very least, "improv[ing] management controls on micro-purchases."33
The proposed SARA legislation would increase the maximum allowable size of credit card purchases from $2,500 to $25,000.
- "Share-In-Savings" (SIS) Contracts. "Share-In-Savings" means that the government hires a contractor to take over an in-house function in hopes of increasing monetary efficiency, and the contractor is paid a certain percentage of whatever savings it generates. While the intent of SIS contracting is to encourage savings and efficiency, the lack of proven benchmarks to calculate such savings, leaves the process entirely subjective and leaves the government open to manipulation and endless lawsuits by contractors. Furthermore, share-in-savings contracts undermine Congressional appropriations and oversight by going elsewhere for capital - to the contractor. But this capital is not a free gift and these contracts ensure that the contractor will be paid regardless of Congressional project approval. In addition, this borrowing of capital occurs outside the normal bounds of government procedures creating off-the-books debt at a higher private interest rate, rather than the government's more favorable interest rate. Charles Tiefer, a professor of government contract law at the University of Baltimore, stated that, "SIS contracts could turn out to be sweetheart deals on an unsound off-the-books basis for politically-favored contractors."34
These new developments in contracting have made government work more appealing than ever for private industry. Calling such work a "new hot market," the Federal Times reports that "government progress at making purchases faster and easier has prompted many contractors to seek revenue growth in the federal marketplace, according to a new contractor survey." And the executive director of the Coalition for Government Procurement, which represents many major contractors, contentedly reports that "the procurement laws are easier to negotiate, and the government market is more accessible."35
Another major cause of the egregious waste has been massive budget and staff cutbacks in governmental contract oversight, achieved in part through lobbying by defense contractors and a sympathetic Congress. Incredibly, some of the biggest cuts have been imposed upon contract oversight agencies which consistently save taxpayers far more money than they themselves cost to run.
An analysis by the Department of Defense Inspector General of audit coverage for defense weapons systems found that "there were 2,531 acquisition programs with estimated costs of $1.4 trillion. Our survey indicated that 58 audit reports addressed 129 of those programs between October 1999 and March 2001. Nineteen of the reports were from the General Accounting Office, 22 from the OIG DoD, and 17 from the Service audit organizations. Nearly all of the audits dealt with selected aspects of programs and were not intended to be comprehensive reviews. It is particularly significant that only 14 of the largest 906 programs (2 percent) received evaluations of all significant program elements."36
Robert Lieberman, the DoD Deputy Inspector General, testified to Congress that "in recent years our oversight of Defense acquisition has been severely constrained by resource shortfalls and conflicting priorities....Audit coverage has been inadequate in nearly all Defense management sectors that we and the General Accounting Office have identified as high risk areas." Indeed, the DoD IG worries that cuts are "reducing the [oversight] workforce past the point where it can effectively handle its workload."37
In a later report to Congress he added: "Audit reports during the period identified continued problems in purchasing supplies and spare parts due to combinations of procurement personnel cuts, poorly designed purchasing systems, and inadequate oversight. To restore credibility to the DoD procurement process, the Department needs a more serious effort to avoid overpriced items, such as those we identified during the reporting period. Those included for example, $409 sinks that should have cost $39, $2.10 screws worth $.48, and $.25 dust plugs worth $.03."38
DoD Inspector General (DoD IG)
The DoD Inspector General, which investigates and prosecutes procurement fraud (among other useful services), reported in March 2000 that its budget level had been cut by 26% since 1995 and that further cuts are likely. During 2001, the DoD Inspector General identified $3.7 billion in potential savings from audits. Despite these cuts, the oversight workload has by no means decreased: in fiscal year 1999, the Department of Defense purchased about $140 billion in goods and services, a figure which is expected to grow rapidly in the coming years.
Defense Criminal Investigative Service (DCIS)
The Defense Criminal Investigative Service (DCIS), part of the DoD Inspector General's office, detects, investigates, and prevents fraud, waste, abuse, and other improper acts in the Defense Department. Investigative recoveries by the DCIS totaled $810 million in FY 2000,39 while the annual budget was only $59.7 million,40 meaning that the DCIS produced nearly $14 in savings for every dollar spent in 2000. DCIS staffing level has been cut by 11% between 1996 and 2001.41 The yearly combined number of suspensions and debarments resulting from DCIS cases has fallen from 417 in FY 1994 to 183 in FY 2000, a 56% drop. (Appendix C)
Defense Contract Management Agency (DCMA)
The Defense Contract Management Agency (DCMA) manages defense contracts, including analysis, review, fraud investigation, and quality assurance assessments of contracts. DCMA staffing levels have been cut from about 26,000 in 1990 to about 12,500 in 2001. Moreover, there are plans to further cut this number to 11,000 over the next several years. (Appendix D)
According to Daniel McGinty, DCMA's Director of Congressional and Public Affairs, because of the reductions, "it would [now] be impossible to maintain the same level of oversight we had [in the 1980s]." It is fair to assume that the reduced oversight allows for greater overcharging and increases the risk of inferior products. As McGinty puts it, "Eventually, what you find is that you incur more risk. We cannot [look at contracts with] the same amount of intensity as we did before, and it's going to get worse."42
Defense Contract Audit Agency (DCAA)
The Defense Contract Audit Agency (DCAA) conducts audits of Department of Defense contracts. DCAA staffing levels fell from 5,616 to 4,256 between FY 1993 and FY 2000 (Appendix E), and its annual budget was cut from approximately $452 million to $364 million between FY 1997 and FY 2000 - adjusted for inflation, this represents a budget cut of 41%.43,44 As a result, the number of audits conducted by the DCAA also fell drastically over that period from 72,287 in FY1993 to 41,722 in FY2000 (Appendix E). The DoD IG similarly reported that the number of case referrals from DCAA also dropped over the same time period: The DoD IG received 88 referrals from DCAA in 1991, but received only 30 in 2000 (Appendix E).
General Accounting Office (GAO)
The General Accounting Office (GAO) audits, investigates, and assesses expenditures related to defense and other government programs. The GAO currently saves taxpayers approximately $61 for every dollar spent - about $23 billion in total savings in FY 2000. Yet, despite these savings, its annual budget was cut from $438 million to $378 million between FY 1992 and FY 2000. Adjusted for inflation, this represents a 30% cut. Staff levels were reduced from 5,062 to 3,275 staff years in the same time period, a 35% cut. Since these cuts, the annual monetary benefit to American taxpayers has dropped from $36.2 billion to $23.2 billion between FY 1992 and FY 2000. Adjusted for inflation, this represents a 48% drop.45,46
It does not make sense to cut back on such highly profitable activities. Drastically cutting oversight personnel robs the government of good, effective oversight of tens of billions of dollars in contracts each year. This serves only to make the government and the taxpayer highly vulnerable to exploitation.
But, contract oversight personnel find themselves singled out by Congress for special "separate downsizing emphasis" above and beyond the general downsizing of the federal government that has occurred over the course of the past decade.47 Unfortunately, "Acquisition Reform" advocates, including former Vice President Al Gore, regard these essential oversight personnel as part of the problem:
"As we pare down the systems of overcontrol and micromanagement in government, we must also pare down the structures that go with them: the oversized headquarters, multiple layers of supervisors and auditors, and offices specializing in the arcane rules of budgeting, personnel, procurement, and finance."48
But auditors, investigators, and other oversight personnel do not constitute a bloated bureaucracy; they produce large net savings for the taxpayer. The situation is made all the more dire by the increasing demands being put on oversight agencies, such as:
- Increases in the number and value of procurement contracts.
- New contract types, which take oversight personnel time to learn to monitor effectively.
- Expanded outsourcing of work formerly performed by the government, which is increasing the number of contracts, and hence management and oversight requirements.
- A hampering of competition by the recent wave of defense mega-mergers. Competition used to be a silent ally in keeping contractors from bending the rules.
By all accounts, procurement oversight personnel are being stretched very thin - so much so that they have become unable to carefully monitor contractors and prevent overcharging and fraud.
But why would Congress initiate such seemingly ill-advised cutbacks? The simple answer: defense industry lobbying. As discussed later in the section entitled "Current Defense Industry Efforts Against Oversight," these well-funded interests are constantly pressing for reduced contract monitoring, hoping to further overcharge the taxpayer and increase their profit margin.
"...there aren't any inspectors around anymore. Because we're 'working with industry.' ... That's part of the problem: where will it unfold and how will it unfold if you've got the government almost in concert with the contractor?"
--William Dupree, former head of the Defense Criminal Investigative Service49
In addition to budget and staffing cuts, procurement oversight personnel are quietly but forcefully being told not to carefully root out waste and fraud, and not to strictly remedy these violations.
In January 1994, all 61 federal Inspectors General adopted a brand-new "Vision Statement," in response to "criticisms of their style and focus" by Vice President Gore's "National Partnership for Reinventing Government" campaign. While the text of the statement itself is convoluted and vague (Appendix F), an internal Office of Management and Budget memorandum sheds some light on its true purpose: "To put it simply, the IGs have pledged to focus more on whether Federal programs are working (the 'big picture') and less on identifying individual, minor infractions of procedures (the 'gotchas')." (Appendix G)
This shift marked a major and unprecedented departure from the Inspectors General's original mission. Much of the work that the IGs were designed to do is specific and focused, such as gathering evidence of fraudulent contracting to build a legal case.
Defense contractors, along with many Members of Congress, have long advocated for the outsourcing of government jobs under the guise of streamlining and saving money. This practice, accomplished through what are called A-76 job competitions, has been enthusiastically championed by the Bush administration, which plans to privatize 425,000 federal jobs over the course of the next several years.50 Unfortunately, outsourcing has proven to be a highly flawed initiative which continues despite overwhelming evidence gathered by the military that "the A-76 process has not generated anything near the results expected," that "the savings are at best marginal," and that "cost-driven outsourcing strategies are undermining the DoD." In one survey of military installation commanders, for example, 79% disagreed with the statement, "Outsourcing has improved my mission performance."51
According to the think tank Reason Public Policy Institute (which supports outsourcing in principle but sees the current system as flawed), the competitions often "take years to complete at a high cost per position studied," and furthermore, "inadequate cost accounting systems... make cost comparisons suspect at best." (Appendix H)
Even as DoD is frequently forced to outsource work, it is generally unable to determine whether the work is being done competently and efficiently. No law currently mandates collecting careful data on contracted work, and contractors generally refuse to disclose any such data when not required to do so.
A reported contracting workforce of 737,000, in fact, marks "the first acknowledgment by the department that the contractor work force has grown larger than its own civilian work force, which numbers 672,000." The American Federation of Government Employees has observed that "DoD's workforce has not gotten smaller; it's merely been reconfigured" through abundant outsourcing.52 The Federal Times also recently voiced concerns that:
"There is nothing efficient in developing a shadow government of underpaid second-class employees. ... Far too often these jobs are merely stripped of the benefits federal employees have earned, and bid out to the lowest bidder. ... It has resulted in less information, less innovation, less communication and less empowerment. ... As such, outsourcing becomes an extremely inefficient and wasteful use of... taxpayer funds."53
Several powerful associations of defense contractors are in the midst of lobbying hard to loosen contracting regulations even further. The Acquisition Reform Working Group (ARWG), a lobbying group which is comprised of ten major contractor associations, includes the Aerospace Industries Association, the National Defense Industrial Association, the Professional Services Council, and the U.S. Chamber of Commerce, among others. They generally claim that they fight for "Acquisition Reform" which will "cut red tape" and save the taxpayer money, but their recommendations have historically led to increased waste and fraud.
Not only is ARWG cited in the drafting notes of a copy of the Services Acquisition Reform Act, as mentioned earlier (Appendix B), but ARWG's 2002 legislative recommendations start by saying, "We greatly appreciate the action taken on our proposals and stand ready to continue to work with the Members and staff." (Appendix I) It is fair to assume that the current legislation is being unduly influenced by industry's views.
Defense contractors spent $53.1 million lobbying Congress in 1999, along with $13.7 million in 2000 campaign contributions.54 Indeed, these defense contractor associations wield considerable influence, and meet with frequent successes, despite their transparent desire to increase their own profits at the expense of taxpayers. For example:
- The Aerospace Industries Association, a contractor lobbying agency, has by their own account been fighting for several years to eliminate statutes which require contractors to provide fair and accurate pricing data,55 such as the Truth In Negotiations Act.
- The Contract Services Association of America, which represents over 330 contractors, advocates "broadening the available contract types to include standard commercial-type contract vehicles," (Appendix J) - contracts - including "time and material" and "labor hour" type contracts - that would allow contractors to be paid according to how much time and manpower they invest in a project, regardless of performance, likely opening up a federal money sinkhole.
- The Acquisition Reform Working Group, composed of 10 industry associations, has proposed legislative changes which would allow defense contractors to define entire business segments as "commercial" and thereby exempt them from a large amount of oversight. These regulations would apply even when 25% of a segment's contracts (by dollar amount) are noncommercial. (Appendices K & J)
- The Aerospace Industries Association and the U.S. Chamber of Commerce have questioned the constitutionality of the False Claims Act. Using misleading logic, they claim that whistleblowers should lack legal standing.56 In 1999, the U.S. Supreme Court ruled unanimously against such claims. Every year, there are new industry attacks on this law.
Clearly, these contractor associations - among others - are eager to undermine many vital regulations that protect the government from procurement waste and fraud.
As discussed above, the new "Acquisition Reform" has nothing to do with its stated purpose of cutting bureaucratic red tape. To the contrary, it has focused on weakening or bypassing protections, and on unraveling the free market forces that protect the taxpayer. Policies should be revised to encourage contractor competition through the free market where possible, while strengthening important contracting and accounting procedures that aid the government in negotiating with large, powerful defense contractors when no free market exists. The following proposals, including suggestions for legislative changes, could help ensure that newer reforms do not come at the cost of crippling previous reforms:
- Restore common-sense definitions for two key procurement-related terms:
1) Restore the definition of "commercial items" to those actually sold to the general public in significant quantities, rather than the current loosened definition: an item not necessarily sold to the public, but merely "offered for sale," or "of a type" offered for sale. Today, many "commercial items" never actually experience sales to the public, allowing the defense contractors that produce them to charge exorbitant amounts while pretending that a competitive commercial market is keeping prices in line. Such items should not be exempt from the usual oversight.
2) Restore the definition of "competitive bidding" to require at least two bidders. The current definition stipulates that there is "competition" even if there is only one bid, as long as others could have bid. The idea of "competitive" one-bid is a blatant oxymoron - competitive oversight exemptions should not apply when the supplier has a monopoly.
- Protect and restore 1980s-era procurement laws, discussed earlier in this report, which provide effective protections against contractor fraud:
1) Eliminate new loopholes created in the Competition in Contracting Act of 1984 to ensure that as many contracts as possible are fully competed. Such competition helps ensure that the government gets a good deal.
2) Reverse the recent weakening of the Cost Accounting Standards Board (CAS Board), require increased CAS enforcement, and lower the CAS "trigger contract" (the contract that first initiates CAS oversight) threshold from $7.5 million to $500,000.
3) Defend the False Claims Act (FCA) against industry assaults. Since false claims recoveries now total well over $1 billion per year, it continues to be a target of industry lobbying. Furthermore, false claims whistleblowers must be given adequate legal protections.
4) Restore applicability of the Truth in Negotiations Act (TINA) to its former level. Under the Federal Acquisition Streamlining Act of 1994 (FASA) and the Clinger-Cohen Act, so-called "commercial items" are exempt from TINA, even though many such items have no real commercial market. Requiring contractors to provide accurate, up-to-date cost data will promote fairer pricing.
- Modify procurement practices that include wasteful or corrupt loopholes, specifically including, but not limited to, those outlined earlier in this report:
1) Government-wide Acquisition contracts (GWACs), as well as Multiple Award Indefinite Delivery Indefinite Quantity contracts, which allow large contractors to monopolize entire market segments and stifle small contractors particularly with regard to service contracting, which is not inherently misguided, but currently lacks adequate oversight and is a significant source of waste;
2) Purchase cards, which allow government purchases to be made with virtually no oversight; and
3) Share-in-Savings contracts, which create a high risk for "sweetheart deals on an unsound off-the-books basis for politically favored contractors."
- Restore funding for contract oversight. Many of the oversight agencies save us far more money than they cost, and they prevent a great deal of contractor fraud and waste when properly funded and staffed. Contractors and their friends in Congress consider oversight as unnecessary "red tape," but these agencies have consistently proven themselves to be very effective, and indeed very necessary. In short, to keep cutting back on oversight is to throw away money.
- Revise federal outsourcing policies. Outsourcing must only be undertaken when there is a clear possibility of increased performance or efficiency. The A-76 Initiative should be modified to discourage purely cost-driven outsourcing which generally fails to benefit the government or the taxpayer. Furthermore, as long as contractors are doing so much formerly-governmental work, it seems only fair to require them to provide detailed performance and results data. In this way, competence can be monitored, and poorly-performing outsourcing programs can be remedied or eliminated.
2. Statement of Robert J. Lieberman, Assistant Inspector General for Auditing, Dept. of Defense, before the Subcommittee on Government, Management, Information, and Technology, House Committee on Government Reform and Defense Acquisition Reform on Defense Acquisition Management. DoD IG Report No. D-2000-106, March 16, 2000.
3. "Buying Program of the Standard Automated Materiel Management System Automated Small Purchase System: Defense Supply Center Philadelphia." Office of the Inspector General Department of Defense, Report No. D-2001-077, March 13, 2001.
5. "Contracting Officer Determinations of Price Reasonableness When Cost or Pricing Data Were Not Obtained." Office of the Inspector General Department of Defense, Report No. D-2001-129, May 30, 2001.
11. Statement of Eleanor Hill, Inspector General, Department of Defense, before the Subcommittee on Readiness and Management Support, Senate Committee on Armed Services, on Acquisition Reform in the Department of Defense. Department of Defense Office of the Inspector General, Report No. 99-117, March 17, 1999.
13. The False Claims Act Resource Center, http://www.falseclaimsact.com. Downloaded July 13, 2001.
15. Richard F. Busch II of Faegre and Benson LLP. "Legal Updates." http://www.faegre.com/articles/article_515.asp. Downloaded July 13, 2001.
18. "White Paper Modular Contracting." Prepared by General Services Administration, July 1997. http://www.contracts.ogc.dc.gov/cld/papers/mcwp.html. Downloaded August 1999.
19. "FASA Q & A Knowledge Base." http://www.acq.osd.mil/ar/text/tfasaq&a.htm. Downloaded July 13, 2001.
20. Statement of Angela B. Styles, Administrator for Federal Procurement Policy, Executive Office of the President, before the Subcommittee on Technology and Procurement Policy, House Committee on Government Reform, November 1, 2001.
21. "Contracting Officer Determinations of Price Reasonableness when Cost or Pricing Data Were Not Obtained." Office of the Inspector General, Department of Defense, Report No. D-2001-129, May 30, 2001.
23. Steven Kelman. "Managing GWACs: Procurement reform's biggest challenge." FCW Government Technology Group webpage, http://184.108.40.206/pubs/fcw/1997/1110/fcw-kelman-11-10-1997.html, published November 11, 1997. Downloaded July 13, 2001.
27. Statement of Robert J. Lieberman, Assistant Inspector General for Auditing, Dept. of Defense, before the Subcommittee on Government, Management, Information, and Technology, House Committee on Government Reform and Defense Acquisition Reform on Defense Acquisition Management. DoD IG Report No. D-2000-106, March 16, 2000.
28. "Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse." Statement of Gregory D. Kutz, Director, Financial Management and Assurance, and Robert H. Hast, Managing Director, Office of Special Investigations, before the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform. GAO Report No. 01-995T, July 30, 2001.
29. "Grassley Seeks to Stop Abuse of Pentagon-Issued Credit Cards." Press Release of the Office of U.S. Senator Chuck Grassley, July 30, 2001. http://grassley.senate.gov/releases/2001/p01r7-30.htm.
31. "Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse." Statement of Gregory D. Kutz, Director, Financial Management and Assurance, and Robert H. Hast, Managing Director, Office of Special Investigations, before the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform. GAO Report No. 01-995T, July 30, 2001.
33. "Buying Program of the Standard Automated Material Management System Automated Small Purchase System: Defense Supply Center Philadelphia." Office of the Inspector General, Department of Defense, Report No. D-2001-077, March 13, 2001.
35. Dan Davidson. "Government Is New Hot Market for Contractors." Federal Times, May 7, 2001. http://www.federaltimes.com/issues/iss050701a.html. Downloaded July 13, 2001.
37. Statement of Robert J. Lieberman, Assistant Inspector General for Auditing, Department of Defense, before the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform on Defense Acquisition Management. DoD IG Report No. D-2000-106, March 16, 2000.
43. The Project On Government Oversight. "Defense Waste & Fraud Camouflaged as Reinventing Government", September 1999.
44. Defense Contract Audit Agency webpage, http://www.dcaa.mil/products.htm. Downloaded July 13, 2001.
47. Statement of Robert J. Lieberman, Assistant Inspector General for Auditing, Dept. of Defense, before the Subcommittee on Government, Management, Information, and Technology, House Committee on Government Reform and Defense Acquisition Reform on Defense Acquisition Management. DoD IG Report No. D-2000-106, March 16, 2000.
50. Laurence McQuillan. "Bush puts federal overhaul on hold: Civil service changes to happen over time." USA Today, July 3, 2001. http://www.usatoday.com/news/washdc/july01/2001-07-03-overhaul.htm. Downloaded July 18, 2001.
51. Lt Col. Warren Anderson, LTC John McGuiness, and CDR John Spicer. "From Chaos to Clarity: How Current Cost Based Strategies are Undermining the Department of Defense." Defense Acquisition University, September 2001.
52. Tichakorn Hill. "Contractors Outnumber Employees at Defense." Federal Times, April 2, 2001. http://www.federaltimes.com/issues/iss040201b.html. Downloaded July 13, 2001.
53. Ed Exum and Mimi Johnson. "Outsourcing is Ineffective 'Sleight of Hand.'" Federal Times, June 4, 2001. http://www.federaltimes.com/commentary/com01.html. Downloaded July 13, 2001.
54. Center for Responsive Politics, http://www.opensecrets.org. Downloaded August 1, 2001.
55. Aerospace Industries Association, http://www.aia-aerospace.org/aianews/aiaupdate/u-march98.cfm. Downloaded July 13, 2001.
56. Amici Curiae filed November 1999 by the U.S. Chamber of Commerce and the Aerospace Industries Association of America for U.S. Supreme Court, Case No. 98-1828, Vermont Agency of Natural Resources v. U.S. ex. rel. Stevens.
Appendix C: Excerpts from Assistant Inspector General for Investigations Defense Criminal Investigative Service Annual Report for 2000, Office of the Inspector General, Department of Defense, December 2000.
Appendix G: Memorandum for Program Associate Directors, Deputy Associate Directors, and OMB Branch Chiefs, from Alice Rivlin, Deputy Director of the Office of Management and Budget, regarding Inspectors General Vision Statement, April 11, 1994.
Appendix J: Statement of Mark Wagner, Chairman, Public Policy Council for the Contract Services Association of America, before the Government Reform Subcommittee on Technology and Procurement Policy, May 22, 2001.