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Project on Government Oversight

Testimony of POGO's Danielle Brian, before the House Government Reform Subcommittee on Technology and Procurement Policy Hearing on "Moving Forward with Services Acquisition Reform: A Legislative Approach to Utilizing Commercial Best Practices"

Related Content: Wasteful Defense Spending
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November 1, 2001 | By: Danielle Brian

The Project On Government Oversight (POGO) investigates, exposes, and seeks to remedy systemic abuses of power, mismanagement, and subservience by the federal government to powerful special interests. Founded in 1981, POGO is a politically-independent, nonprofit watchdog that strives to promote a government that is accountable to the citizenry.

Thank you for allowing me the opportunity to challenge the misconceptions held by those Members of the Subcommittee who believe that Acquisition Reform benefits more than just the private sector. The outline of the legislation before the Subcommittee, replete with notations from industry lobbyists, would allow industry to repeatedly reach into the taxpayer's pocket for treats for themselves while the rest of the country is focused on defending our homeland.

In 1999, the Project On Government Oversight released a report containing the results of a lengthy study of the impact of Acquisition Reform during the Clinton Administration. The study found that acquisition reforms actually caused prices to balloon by up to fifteen times (or 1,532%) on spare parts for weapons produced by contractors like Boeing and Allied Signal, who were taking advantage of lax accounting and oversight. (Follow the link for POGO's full report, "Defense Waste & Fraud Camouflaged As Reinventing Government")

The General Accounting Office (GAO) reported last November that the much-touted "commercial" pricing system promoted in this legislation caused spare parts prices to increase by 1,000% or more in just one year.. The GAO also found that 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. By comparison, only one out of twelve spare parts (8%) had such price increases in 1995.

Our fears about the use of commercial best practices were again validated when we began to receive streams of documents relating to the Air Force's pretense that Boeing's C-17 airlifter was in fact "commercial." 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 are therefore regulated 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.

In the draft Memorandum of Agreement between the government and Boeing was Appendix “H-XXX”, which was entitled "Reduced Government Oversight Role." This Appendix states, "This clause is intended to summarize the government's reduced oversight role on Lots 13-15 and the transition to greater reliance on contractor self-assessment and third party process certification. . . . The government shall be granted access to contractor generated data required for the performance of this contract in a format selected by the contractor, unless specifically stipulated otherwise in the contract. The government shall have the ability to review the contractor's accounting system solely for purposes of assessing contractor initiated Cost Accounting Disclosure Statement changes." This language would severely restrict the ability of relevant agencies to audit the records of a contractor.

In the "For Official Use Only" Program Overview, the intent of industry is even more specific: "The mandatory clauses of FAR Parts 12 and 15, the Cost Accounting Standards of FAR Part 31(sic). . . necessitate costs and procedures that commercial entities will find objectionable, overbearing, and unreasonable." The government should not waive regulations that require truth in negotiations, competition in contracting, and cost accounting standards simply because a contractor doesn't like them. If the contractor can't meet these basic requirements, the government should - and can - go elsewhere with its business. These regulations are the front line defense for taxpayers, and they must not be tossed aside. Claims that potential government contractors have chosen not to sell to the government due to these basic transparency rules are unsubstantiated.

The greatest concerns created by the proposed legislation as described in the "Section by Section Analysis" are:

Section 301. Revisions to "Shared Savings" Initiatives:

This section allows a contractor to share in the potential savings realized by its proposed cost-cutting initiatives. Projected contractor profits from this program are far more concrete than projected savings. Modifications to the Share-in-Savings provisions addressing for the GAO concerns will be critically important. Of particular concern will be how benchmarks will be established to prove that "savings" have in fact been realized.

Section 302. Authorize Longer Contract Terms:

This section would provide agencies the authority to grant long-term contracts, even up to 10 years. This anti-competitive provision seems particularly short-sighted in the field of IT, where companies and technologies are rapidly changing.

Section 303. Encourage Award Term Contracts:

This section would allow an existing contract to be extended without going through the normal competitive bidding process. This anti-competitive provision would allow favored vendors to have an unfair advantage over new capable contractors.

Section 401. Preference for Performance Based Acquisition:

While the concept of performance-based acquisition could be a great idea, in practice it primarily serves to allow for the removal of government oversight of contractors. In a case such as airport security, it is crucial that the top standards are adhered to at all times, for reasons of national security, regardless of the cost. By making a contract such as this performance-based, a contractor could decide that it is more cost efficient to cut corners on security and forego the performance bonus. Such substandard performance on highly important and complex functions could lead to disastrous outcomes. The highest standards need to be followed at all times, regardless of the outcome of a cost-benefit analysis by a contractor. It is unlikely that any performance/cost trade-off would ever be acceptable to the American public.

Section 404. Designation of Commercial Business Segments:

Perhaps the most troublesome provision in this act is the broadening of the already ridiculous definition of "commercial." The original legislation was intended to allow the government to bypass oversight for the acquisition of truly commercial items such as computers, office equipment or automobiles, where the forces of a free market are sufficient to ensure a fair price. However, even the current law does not require actual, but merely potential, sales of items to the public, nor does it require sales in a large free market. Section 404 would go so far as to make the products or services themselves irrelevant to their "commercial" status, but would simply *** whether the contractor has largely sold any product or service to non-U.S. government entities or has done business with the U.S. government under contorted definitions of "commercial" status. The bottom line? Little to no government oversight over pricing.

Section 602. Revisions to the Service Contract Act; part (c):

We agree with this provision if it means that other civil statutes would be strengthened to conform with the penalties and debarment clauses of the Service Contract Act. Alas, it is clearly more likely that the reverse is the intent. In fact, industry would like to make it even harder to be penalized or debarred for poor performance.

We are currently updating our 1999 report on the assault of Acquisition Reform on taxpayers, and will gladly provide it to the Subcommittee when it is completed.

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