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Project on Government Oversight

Testimony of POGO's Danielle Brian on "Contractor Debarment and Suspension: A Broken System," before the George Washington Law School

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November 20, 2003

The Government's system for debarring and/or suspending contractors is broken. It has been broken for a long time. However, continuing consolidation of the defense industry has only begun to illustrate clearly just how broken the system is.

The Project on Government Oversight (POGO) maintains a database of over 640 instances of misconduct committed by the largest federal contractors. This database, Federal Contractor Misconduct Database, can be found on our website at pogoarchive.pub30.convio.net. Now mind you, we are not talking about allegations stemming from mere disgruntled employees, or mere assertions. We are talking about actual civil judgments or settlements that have resulted in millions, tens of millions, and sometimes even hundreds of millions of dollars in fines and penalties being assessed against contractors. In some cases, we are even talking about criminal convictions -- in fact we have 29 criminal convictions by the government's top contractors in our database.

Until this year, it appeared that large federal contractors had been immune to being suspended or debarred. In fact, when POGO issued our report on the subject last year, "Federal Contractor Misconduct: Failures of the Suspension and Debarment System," not one major contractor had been suspended or debarred in a decade – despite all the misconduct that fills our database. Why is it that the government continues to do the bulk of its business with companies that have in last three years repeatedly violated the Arms Export Control Act by selling defense technology to countries such as Malaysia, Pakistan and China; or knowingly supplied defective helicopter parts to the government, that have resulted in the deaths of service men and women; or falsified tests on the cruise missile?

We applauded the Air Force decision to suspend Boeing this year after they allegedly hired former Lockheed-Martin employees who brought thousands of internal documents with them. But why is that worse than the crimes committed above? All could be considered unethical behavior based on current regulations. Does it take a public outcry to give enough political cover for a bureaucracy to protect the taxpayers' interest and debar a major contractor? Looking at the GSA List of Excluded Parties, it appears reasonably easy to protect taxpayers from unethical small businesses, but takes front page headlines over a sustained period to apply the same standards to major contractors. This year's suspensions of Andersen, Enron, and Worldcom sent an interesting message. These were companies without much in the way of federal contracting business, but who were attracting much attention in the media for their misconduct.

We have included all misconduct committed by federal contractors in POGO's database, whether during the course of doing business with the government or not, because we believe a company's actions are relevant whether working on public or private contracts. We would be happy, however, if the government started to apply suspension and debarment on large contractors more frequently simply for misconduct in government contracting. That would go a long way to providing a meaningful deterrent to future poor practices. On the other hand, when Boeing's suspension was lifted twice to allow it to receive new contracts within days of having been suspended, the deterrent effect is seriously eroded.

Some would argue that you have to expect some level of misconduct from a large federal contractor with far flung operations and multi-billion dollar contracts. However, on the front page of our database, we list 13 companies who had qualified to be on our list, but for whom we could find no incidents of misconduct.

Now I know a lot has been said in the last decade about using "commercial practices" in government contracting, and while I think much of that is a canard, I would ask you: What commercial company would consistently return to the same suppliers, when it had sued those suppliers for enormous sums of money, or sometimes even had the suppliers criminally charged? I think you know the answer.

Therefore, I would strongly argue that if the government had a strong D&S system, that many of the largest contractors would long ago have been debarred, suspended, or perhaps, might even have cleaned up their act! The fact that the D&S system is rarely used to protect taxpayers from these contractors may be one reason why the contractors have such open contempt for the system. It is meaningless as applied to them.

Currently, the government gives an offending contracto "get out of jail free" card by having or setting up an ethics compliance program. While there is nothing wrong per se with having such a program, there is no empirical evidence that these programs truly alter the culture of the company. All of the most serious recidivist companies in our database have been members of the Defense Industry Initiative, and have had internal ethics programs in operation for years. As a parent, I know that you give one warning and then you punish the child for breaking the rules. In the case of government/contractor relations, the government has lost all credibility in this regard.

Now some of you may argue that the Government has no choice but to return to these same contractors who so often violate the law, pay stiff fines, or on occasion plead guilty. You may be right. Sadly, our procurement policies in the last decade have led to the drastic consolidation of the defense industry, which in some cases has placed contractors in a sole source environment, or at the least, in a very strong negotiating position in dealing with the Government. We are not neophytes at POGO. We recognize that sole source suppliers oftentimes have the advantage. That is why we so strongly advocate for increased oversight where government contractors are concerned.

For those of you who believe that the Government should be moving towards a commercial model, I say why doesn't the Government do what commercial firms do in dealing with their suppliers? If a commercial firm finds out that it has been defrauded or taken advantage of, it almost always cuts the supplier off. If this isn't possible, it looks to foster new sources of supply. That's why when a supplier is in a sole source environment, the Government needs to put the strictest of oversight regimes into place.

Ultimately, it is the government's responsibility to protect the taxpayer's interests. Unfortunately, by encouraging consolidation of the defense industry, it has boxed itself into a corner. I have a few suggestions for change however:

Some Suggestions for Change

Contract Unbundling

As you have already surmised, POGO believes that Government contractors, and particularly those that operate in an effective sole source environment must be subject to stricter oversight. Nevertheless, sole source suppliers have the advantage. While it is true that the Government occasionally suspends such suppliers for relatively brief periods of time, this can be self-defeating behavior from a buyer's perspective. So the issue is: What can be done? POGO has noted the trend toward significant consolidation of contract requirements during the past decade -- a trend referred to as "contract bundling." Contract bundling is often espoused with favor by "acquisition reformers," because they believe it spurs contract administration efficiency. Large businesses favor contract bundling because such contracts can often be performed only by larger firms, and they tend to reduce competition by cutting smaller firms out of the bidding pool.

POGO recommends that large business firms be subject to contract "unbundling" when their ethics and business integrity are in question. Debarring or suspending these sole source suppliers is not possible. But, examining contracts and contracting opportunities may lead to the conclusion, especially with respect to service contracts that a good deal of the work can be unbundled and made available for competition among competitors and especially small business firms.

Reviews of large Federal contracts often reveal substantial subcontracting opportunities. What if the subcontractors were to become prime contractors to the Government? Such an approach would have three beneficial effects. First, large businesses that have flouted government contracting ethics would be partially cut-off. This would not be punishment. Rather, it would be a recognition that while the Government must retain some of these sole source contractors in its supplier base, that these same contractors would be utilized to the minimum extent necessary in fulfilling Government requirements. Certainly, effort should be expended to make sure that any competitive aspect of a contract that can be unbundled should be unbundled. A second beneficial effect would be to restore the role of small businesses in government contracting. A sad aspect of moving to larger and larger "umbrella" type contracts is that small business just can't fulfill Government requirements, despite the fact that many individual components of the total scope of work can easily be performed by small business concerns. Finally, the current system of D&S is heavily weighted against small business concerns. The reason for this is simple. Government agencies can easily do without a single errant small business concern. The same, unfortunately, is not that case with large business concerns. A move to unbundle large contracts awarded to large business concerns, when ethical lapses have been identified, could do much to improve things. After all, being barred, even partially, from potential contracting opportunities is a great motivator toward improving ethical compliance.

Debarment and Suspension and Indefinite-Delivery Contracts

Another POGO recommendation is to follow through on former OFPP Administrator Angela Styles April 16, 2002 "Memorandum to Heads of Departments and Agencies." In that memorandum, Ms. Styles addressed a significant "loophole" to debarment and suspension actions that are created by the increasing use of indefinite-delivery contracts (what we at POGO like to call "hunting licenses"). Because orders placed against indefinite delivery contracts are not legally "contracts," but rather "orders," Ms. Styles felt compelled to remind agency officials that:

A contractor that is debarred, suspended, or proposed for debarment under FAR Subpart 9.4 is not presently responsible and is excluded from receiving government contracts. However, under FAR 9.405-1(b), agencies "may continue to place orders against existing contracts, including indefinite-delivery contracts, in the absence of a termination." Because this FAR provision is discretionary in nature, agencies are not prohibited from awarding task orders to contractors that are debarred, suspended, or proposed for debarment. This provision creates a significant risk that the government will not be adequately protected. Accordingly, I am asking the FAR Council to consider revising FAR 9.405-1(b) to address this risk.

Ms. Styles went on her memo to state: "A current Defense FAR Supplement (DFARS) provision may serve as a model for the FAR revision. Under DFARS 209.405-1, Department of Defense (DoD) contracting officers shall not i) place orders exceeding the guaranteed minimum under indefinite-quantity contracts; or ii) place orders against Federal Supply Schedule contracts when the agency is an optional user, unless the agency head makes a written determination that a compelling reason exists to do so."
Whatever happened to the FAR case that Ms. Styles' memo proposed to initiate? Certainly, there is no reason for the FAR not to be changed, especially when DOD, by far the largest of the procuring agencies, has already established this sound policy. For those of you in a position to influence the FAR Council, I say that Ms. Styles suggested FAR change is long overdue.

Contractor Accountability Act

Lastly, POGO strongly supports HR 5292, the "Contractor Accountability Act of 2002," sponsored by Congresswoman Carolyn Maloney of New York with strong bipartisan support. HR 5292 does the following:

  • Establishes a centralized database on actions taken against federal contractors and assistance participants, requiring a description of each of these actions. This will provide debarring officials with the information they need to protect the business interests of the United States.

  • Places the burden of proving responsibility and subsequent eligibility for contracts or assistance on the person seeking contracts or assistance should they have been previously convicted of two exact or similar violations that constitutes a charge for debarment.

  • It improves/clarifies the role of the Interagency Committee on Debarments and Suspension and provides for retention by the prosecuting Federal agency of fines paid by offender for reimbursement of costs associated with suspension and debarment activities.

Setting an Example

If senior management is serious about raising the standards at their company, I have one more suggestion. Perhaps the simplest step to be taken is for the management of a federal contractor to set an example of rewarding an employee who uncovers and exposes waste, fraud, and abuse rather than punish him or her. Of course no contractor has a policy of retaliation, but it regularly happens. Why? Because it is perceived by the mid-and lower- levels of the company that the way to advance in the company is to bring good news up the chain, and never bad news. As a result, tests are falsified and defective parts are delivered. If an employee is brave enough to raise questions, that person should be rewarded in front of his peers. I offer this suggestion with some hesitance, however, as I am not sure management really wants to know the truth, and I don't want to encourage an honest actor to risk retaliation. Perhaps you all could prove my fears unfounded.

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