Pick Pocketing The Taxpayer: The Insidious Effects of Acqusition Reform

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

Downsizing Procurement Oversight

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 (DCM)

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.
vBut, 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.

Turning the Junkyard Dogs into Lapdogs

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Current Defense Industry Efforts Against the Taxpayer

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.

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Recommendations

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: