Section A
Introduction
Why and How Is This Happening?
Important Procurement Reforms of the 1980s and Their Current Status
"Acquisition Reforms"

Section B
Problematic Contract Types
Downsizing Procurement Oversight
Turning the Junkyard Dogs into Lapdogs
The Trouble With Outsourcing
Current Defense Industry Efforts Against Oversight
Recommendations
Footnotes
Appendices

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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.
  

  Examples include:

  Hub		initial estimate $ 35;		actual price $14,529
  Self-locking nut		initial estimate $ 3;		actual price $ 2,185
  Radio transformer		initial estimate $683;		actual price $11,701
  Thermal insulation		initial estimate $ 1;		actual price $ 3,390

  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
    
    
• Another audit revealed that the Department of Defense (DoD) unknowingly paid prices "280 percent higher than fair and reasonable" for a variety of spare parts costing $6.1 million from one unnamed 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
  

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

Important Procurement Reforms of the 1980s and Their Current Status

Summary:

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

"Acquisition Reforms"

The following legislation, passed within the last decade, represents the industry’s most successful efforts to change acquisition practices for the worse.

Summary:

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