POGO provides additional information to the panel reviewing the government's buying system

Ms. Laura Auletta, DFO

c/o General Services Administration

1800 F Street, N.W., Room 4006

Washington, D.C. 20405

Dear Ms. Auletta:

In response to the Acquisition Advisory Panel's (the "Panel") request for additional information, I present the following materials for the Panel's review of federal acquisition laws and regulations. I am fully aware of the daunting task and the accelerated schedule that are mandated in the Panel's Charter and I genuinely hope that the information and materials presented herein are a help to the Panel's efforts.

I. Overview

On May 17, 2005, the Project On Government Oversight ("POGO") testified before the Panel, highlighting concerns in five areas that have been the target of contractor-driven "reforms". I recommended that the Panel should strengthen federal government contracting laws and regulations in the following areas:

1. Negotiations - To make every effort to get the best value for the taxpayer, the government must promote aggressive arm's - length negotiations with contractors;

2. Competition - To better evaluate goods and services and get the best value, the government must encourage "competition" so that it can correct the current trend of entering into non-competitive contracts in nearly 50 percent of government purchases;

3. Accountability - To ensure that taxpayer dollars are being spent responsibly, the government must regularly monitor and audit contracts after they are awarded;

4. Transparency - To regain public faith in the contracting system, the government must ensure that the contracting process is open to the public, including contractor data and contracting officers' decisions and justifications; and

5. Contracting Vehicles - To prevent abuse, the government must ensure that certain contract types that have been abused in the past (including performance-based contracts, interagency contracts, time & material contracts, share-in-savings contracts, purchase card transactions, commercial item purchases, and other transaction authority) are used in limited circumstances and are accompanied by audit and oversight controls.

There are a number of examples of contracting abuses, including Air Force contracts with Boeing that were administered by Darleen Druyun; the misuse of government credit cards; unjustified Iraq sole source reconstruction contracts; the misclassification of the C-130J as a "commercial item" - a designation that removes most, if not all, government oversight and contractor accountability; and changes or amendments that fall outside the scope of the initial contract. All of those instances resulted from reforms that were intended to "cut red tape." As a result of those "contractor-friendly" initiatives, the current buying system is plagued with illegally awarded, out-of-scope, and overpriced contracts, and contracts that are awarded on a non-competitive basis.

II. Recent Events

Since POGO's May testimony before the Panel, there has been much activity in the government contracting area. For instance, GAO published a report detailing the lack of use of share-in-savings ("SIS") contracts for multiple reasons, including:

• Lack of implementing regulations;
• Difficulty determining baseline costs;
• A belief that the return on investment using share-in-savings contracts is insufficient;
• Concerns among agency officials that they still would have to obtain funding for cancellation and termination liability, which can be a significant sum; and
• Too few acquisition employees who have been trained to use the share-in-savings contracting technique.[1]

The GAO issued another report highlighting concerns with Energy Savings Performance Contracts ("ESPC").[2] Those contracts have been cited by proponents as a significant performance-based contracting success. Despite those claims, in this report the GAO stated that it was concerned that ESPC savings are not covering costs and that a lack of competition "could lead to higher costs."[3] Asthe Panel members may recall, GAO stated last year that six ESPC projects "cost 8 to 56 percent more than had the projects been funded at the same time with upfront funds." [4]

Another recent report was the GAO's study of the Defense Department's ("DoD") use of GovWorks and FedSource - two of the franchise funds that the DoD relies upon to buy good and services. [5] In its report "Interagency Contracting: Franchise Funds Provide Convenience, but Value to DoD is Not Demonstrated," [6] the GAO concluded that DoD reliance on franchise funds has "not always ensured fair and reasonable prices while purchasing goods and services. The franchise funds also may have missed opportunities to achieve savings from millions of dollars in purchases, including engineering, telecommunications, or construction services." [7] The report also stated that FedSource generally did not ensure competition for work, did not conduct price analyses, and sometimes paid contractors higher prices for services than established in contracts with no justification provided in the contract files.[8]

The GAO's report coincides with a DoD Inspector General ("IG") report also reviewing the federal supply schedules which found that General Services Administration ("GSA") and DoD officials "did not comply with the U.S. Constitution, appropriations law, and the Federal Acquisition Regulation when making purchases through the General Services Administration."[9] The IG's review of 75 purchases found that:

• 68 purchases lacked acquisition planning to determine that contracting through GSA was the best alternative available;
• 74 purchases had inadequate interagency agreements outlining the terms and conditions of the purchases;
• 38 purchases were funded improperly; the requesting DoD organization either did not have a bona fide need for the requirement in the year of the appropriation or did not use the correct appropriation to fund the requirement;
• 44 purchases were unsupported by an adequate audit trail; and
• The mismanagement of funds and lack of acquisition planning for the funds transferred to GSA over the last 5 years has caused between $1 billion and $2 billion of DoD funds to either expire or otherwise be unavailable to support DoD operations.[10]

Additionally, on July 26, 2005, GAO's David Cooper testified before the Senate Subcommittee on Federal Financial Management, Government Information, and International Security of the Committee on Homeland Security and Governmental Affairs (the "Subcommittee") about GSA's schedules and fees.[11] Cooper's written testimony stated: "In February 2005, we completed our most recent review of the multiple award schedules program and found that pricing problems persist and that the number of pre-award audits continued to decline. We concluded that GSA was continuing to miss opportunities to save hundreds of millions of dollars."[12] Cooper added:

In summary, GSA has used these two key price negotiation tools [pre-award and postaward audits] on a limited basis. When GSA has used pre-award and postaward audits, it has been able to avoid or recover hundreds of millions of dollars in overcharges. In recent years, however, the use of these pricing tools has declined dramatically - despite dramatic increases in program sales. Consequently, GSA has less assurance that vendor'supplied pricing information is accurate, complete, and current, and its ability to deter overpricing and recover overcharges has been minimized. By delaying action to address its contract pricing problems, GSA continues to miss opportunities to minimize prices paid for goods and services and save significant sums of federal dollars.[13] (Emphasis added.)

It is not surprising that the contracting world wants to keep out postaward audits from the government's contract oversight tool box. Kathleen S. Tighe, Counsel to the GSA Inspector General, confirmed the GAO's recovery figures. Tighe testified before the Subcommittee that, "[i]n the three-year period prior to the 1997 rule that eliminated postaward audits, fully 84% of postaward audits contained findings of defective pricing," recovering "over $110 million in civil fraud penalties in the eight years prior to the rule change."[14] Both Cooper and Tighe urged GSA to reinstate postaward audit rights for the government.

John Ames, Director of the Contract Review and Evaluation Division of the Office of Inspector General, Department of Veterans Affairs, testified before the Subcommittee that 240 pre-award audits have resulted in the "better use" of $2.2 billion.[15] Ames added that "238 post-award audits were conducted, resulting in approximately $319 million in recoveries for the VA."[16]

The July hearing before the Subcommittee, which was chaired by Senator Tom Coburn (R-OK), brought out two interesting revelations. The first revelation came from David Cooper when he testified that GSA contracting officials spend more time working on awarding contracts than obtaining the best deals for the government. As POGO testified before the Panel, contract monitoring has taken a back seat to quickly awarding government contracts. Cooper's statement highlights the fact that aggressive negotiations as well as genuine contract oversight are lacking in the current system. It also shows the inherent conflict of interest that interagency contract fees create because there is no incentive for GSA to negotiate the lowest price. In other words, GSA makes more money from other agencies by promoting a quantity over quality theory of interagency contracting.

The second revelation came during Senator Coburn's inquiry into the government's ability to take full advantage of its massive buying leverage. The Office of Management and Budget's Administrator for Federal Procurement Policy David Savafian responded that the government does not have a system in place to allow it to determine what goods or services it buys on a yearly basis. It was shocking that the government, as the largest consumer in the world, does not have a system in place to leverage its massive buying power. Senator Coburn then requested that the government create a system to make informed buying decisions.

In addition to the comments above, I urge the Panel to consider another important government contracting issue that is costing the government hundreds of millions of dollars each year. The issue involves prime contractors who bill the government at their own labor rate(s) rather than the rate that they pay their subcontractors on Time and Material or Labor Hour ("T&M/LH") contracts. In other words, the government is "paying for subcontract hours at the negotiated [prime contractor] rates rather than at subcontract prices."[17]

The Washington Post recently reported that $20-an-hour subcontract workers were billed by the prime contractors to the government at $48 per hour.[18] Contractor representatives claim that those increased hourly rates include "risk and overhead."[19] That assertion is erroneous because the prime contractors can already add overhead, general and administrative expenses, and profit to their subcontract costs. The primes are misrepresenting their subcontract costs by submitting bills to the government claiming that the rates they are paying subcontractors are the same as their own prime contract rates. In fact, what the primes are doing is shopping their hourly rate(s) to the lowest cost subcontractor they can find. Then, for each hour the subcontractor works, the prime contractor bills its own labor rate, not the subcontractor's actual billed costs to the prime. The federal government should not enter into T&M/LH contracts that allow prime contractors to bill the agency for subcontracted or purchased labor or material at an amount in excess of the prime contractor's actual costs for acquiring the subcontracted or purchased labor or material.[20] The industry's over billing of the government is nothing more that an attempt at increasing prime contractors' profit margins. The problem is the government is not getting what it contracted for; instead the government is paying high labor rates to have middleman. The fact that some agencies are willing to accept higher hourly rates strongly suggests that something is wrong with the government's buying system.

As the Panel is also looking at conflict of interest and ethics issues, you may find POGO's report The Politics of Contracting of interest. (See Attachment A) In that report, POGO examined the revolving door between the government and large private contractors. After interviewing government officials and reviewing revolving door statutes, POGO concluded that federal conflict of interest and ethics laws are a tangled mess. As a result, conflicts of interest seem to be the rule rather than the exception. Government employees struggle with a decentralized system of ethics laws and regulations; a multiple-layer system so convoluted that ethics officers and specially-trained lawyers hired to enforce them have pushed for a more simplified system.

POGO's report provided thirteen recommendations that would correct other revolving door weaknesses. A full copy of POGO's report is included with this letter. (See Attachment A) In addition, I have included an excerpted copy of the report, which I hope will be provided to Panel members. (See Attachment B)

III. Recommendations

My concern is that new contracting vehicles, degraded oversight controls, and the lack of technical training for contract officers and administrators will waste taxpayer money. The spare parts horror stories of the 1980s and 1990s (including the outrageously overpriced military spending such as the $7,600 coffee maker and the $436 hammer, which POGO fought to correct twenty years ago) will be reborn in tomorrow's service acquisition rip-offs if controls are not introduced or reintroduced to the system. That prediction is based on the fact that federal spending on services has exploded in recent years and comparable weaknesses that caused the 1980's overcharges are being replicated in services contracting today.

The above referenced GAO reports, congressional testimony, revelations, and press stories highlight many concerns with the current government purchasing system. There are genuine problems that need to be corrected in contracting vehicles that were born from the reinventing and streamlining government movement. GSA is pushing share-in-savings contracts when few contracting officers are qualified to administer such contracts and contractors are not willing to accept the risks that they create. Interagency contracting vehicles are not protecting taxpayer interests -- specifically, those contracting vehicles lack aggressive negotiations and full and open competition and therefore result in higher costs. Additionally, the lack of accountability and a system that is fully open to the public hinders the government's ability to hold contractors accountable.

In the short term, POGO urges the Panel to endorse a buying system that will:

1. Prohibit noncompetitive contracting, absent a publicly available written justification;

2. Require aggressive negotiations by providing incentives to get the best price and value that takes full advantage if the government's massive buying power;

3. Closely monitor contracting vehicles that place taxpayer dollars at risk;

4. Hire additional auditors, contracting officers, contract administrators, procurement and cost/price analysts, and market researchers;

5. Reinstate postaward audits (whether or not they are used by the private sector);

6. Mandate the increased use of pre-award and compliance audits;

7. Consolidate the schedule system B 54 schedules prevents leveraging of buying power;

8. Prevent prime contractors from billing an agency for inflated subcontracted or purchased labor or material on T&M contracts; and

9. Close loopholes in conflict of interest and ethics laws:

A. Prohibit, for a specified period of time, political appointees and Senior Executive Service policymakers (people who develop rules and determine requirements) from being allowed to seek employment with contractors who significantly benefited from the policies formulated by the government employee.

B. Close the loophole allowing former government employees to work for a department or division of a contractor different from the division or department they oversaw as a government employee. That loophole allowed Darleen Druyun to land a well-paid position at Boeing after currying favor with the company for many years in her capacity as a Pentagon procurement official.

This fall, POGO will be authoring two reports that may be of interest to the Panel. The first report will detail a government buying system more adept at protecting taxpayers' interests. Contractors are at the forefront of proposing reforms that place their interests above those of the taxpayer; it is time for others to propose a fair, effective, efficient, and accountable government buying system. The second report will investigate the declining status of inherently governmental functions within the federal government and propose specific jobs that should be performed by career civil servants rather than contractor employees. POGO is gathering agency job inventories and inherently governmental function justifications to determine if such jobs have been contracted out. I will keep the Panel updated on the progress of those forthcoming reports.

IV. Requested Materials

During the course of my testimony, I referenced a web site that I consult to learn what contracting experts are saying about proposed legislation and new and improved contracting vehicles. That web site is "Where in Federal Contracting?"[21] (See Attachment C) The web site offers government contracting materials as well as summaries and opinions on contracting topics from current and retired contracting officials. Panel members may want to review the issues raised therein and invite some of the regular "posters" to appear before the panel to discuss the current contracting system.

Furthermore, I highly recommend that the Panel review a lecture by Judge Stephen M. Daniels, Chairman of the General Services Board of Contract Appeals. (See Attachment D) With the permission of Judge Daniels, I have included a copy of his remarks titled "An Assessment of Today's Federal Procurement System." (A copy of the lecture can be found at http://www.pogoarchives.org/m/cp/cp-daniels2002.pdf) Judge Daniels's August 2002 lecture remains relevant to the Panel's mission and is current in scope. In fact, Judge Daniels's lecture highlighted four guiding principles to improve the way the government buys goods and services: (1) open competition; (2) a fair system of evaluating offers; (3) awarding contracts that are in the "best overall interest of the taxpayers"; and (4) transparency so that "participants and taxpayers understand how it is being operated and can hold agencies accountable for their actions." I urge the Panel to review Judge Daniels's remarks and to invite him to testify before the Panel prior to the end of the investigatory phase of its review.

During POGO's testimony before the Panel, questions were raised about POGO's funding sources. To provide a more detailing accounting to the inquiry, I have included POGO's fiscal year 2004 list of foundations and individual donors who support POGO and POGO's 2003 Annual Report, which details the organizations funding sources on pages 14-15. (See Attachment E)

If the Panel has any additional questions or requires further information, please contact me. Thank you for the openness that the Panel has provided and best wishes in its efforts.

Sincerely,

Scott H. Amey

General Counsel

[email protected]

Attachments

cc: Sen. Collins

Sen. Lieberman

Sen. Coburn

Sen. McCain

Sen. Levin

Sen. Byrd

Sen. Durbin

Rep. Davis

Rep. Waxman

Judge Stephen M. Daniels

1. Government Accountability Office, "Federal Contracting: Share-in-Savings Initiative Not Yet Tested," GAO-05-736, July 2005, pp. i. Available at http://www.gao.gov/new.items/d05736.pdf.

2. Government Accountability Office, "Energy Savings: Performance Contracts Offer Benefits, but Vigilance Is Needed to Protect Government Interests," GAO-05-340, June 2005. Available at http://www.gao.gov/new.items/d05340.pdf.

3. Id. at 56.

4. Government Accountability Office, "Capital Financing: Partnerships and Energy Savings Performance Contracts Raise Budgeting and Monitoring Concerns," GAO-05-55, December 2004, p. 7. Available at http://www.gao.gov/new.items/d0555.pdf.

5. "Franchise funds" are governmentrun fee for-service organizations that provide common administrative support services, including contracting services, to other government agencies. In other words, franchise funds handle government buying from start to finish (i.e., conducting contract competitions, making a contract award, administering the award, and closing out when the contract ends). The franchise fund agencies establish fees (a percentage of the total contract value) to cover their total estimated costs for providing the services. The fees awarded on those interagency contracting vehicles provide little or no incentive to keep costs down.

6. Government Accountability Office, "Interagency Contracting: Franchise Funds Provide Convenience, but Value to DoD is Not Demonstrated," GAO-05-456, July 2005. Available at http://www.gao.gov/new.items/d05456.pdf.

7. Id. at i.

8. Id.

9. Department of Defense Office of the Inspector General, Audit, "DoD Purchases Made Through the General Services Administration," Report No. D-2005-096, Project No. D2004-D000CF-0238.000, July 29, 2005, p. i. Available at http://www.dodig.osd.mil/audit/reports/FY05/05096sum.htm.

10. Id. at pp. i-ii.

11. Government Accountability Office, "Contract Management: Opportunities Continue for GSA to Improve Pricing of Multiple Award Schedules Contracts," GAO-05-911T, July 26, 2005. Available at http://www.gao.gov/new.items/d05911t.pdf.

12. Id. at i.

13. Id. at 1-2.

14. Statement of Kathleen S. Tighe, Counsel to the Inspector General, United States General Services Administration, Before the Subcommittee on Federal Financial Management, Government Information, and International Security of the Committee on Homeland Security and Governmental Affairs, "GSA - Is the Taxpayer Getting the Best Deal?", July 26, 2005, p. 5. Available at http://hsgac.senate.gov/_files/072605Tighe.pdf.

15. Statement of John B. Ames, Director of the Contract Review and Evaluation Division Office of Inspector General, Department of Veterans Affairs, Before the Subcommittee on Federal Financial Management, Government Information, and International Security of the Committee on Homeland Security and Governmental Affairs, "GSA - Is the Taxpayer Getting the Best Deal?", July 26, 2005, p. 2. Available at http://hsgac.senate.gov/_files/072605Ames.pdf.

16. Id.

17. The Nash & Cibinic Report, Vol. 17, No. 10, October 2003, p. 146.

18. Scott Highman and Robert O'Harrow Jr., "The High Cost of a Rush to Security," The Washington Post, June 30, 2005, p. A01.

19. The Information Technology Association of America, Contract Services Association, and the Professional Services Council issued press releases justifying subcontract billing practices. See http://www.itaa.org, http://www.csa-dc.org, and http://www.pscouncil.org for more information.

20. On July 25, 2005, Senator Levin (MI) sponsored Senate Amendment 1497 to the National Defense Authorization Act for Fiscal Year 2006 (S. 1042). The amendment places restrictions on subcontractor hourly rates that prime contractors can bill to the federal government on time and materials and labor hour contracts. Available at

http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=2005_record&page=S8856&position=all.

21. Available at http://www.wifcon.com/.