Shay Assad assumed the role of Director of Defense Pricing in June 2011, and since then, contractors and Congress have worked together to oppose his pro-taxpayer initiatives. Assad previously worked as an executive at Raytheon. Ordinarily, switches from industry to government would raise revolving door concerns here at POGO, but we’re happy to see that Assad’s move has proved an exception: he has put his knowledge of industry to good work on behalf of taxpayers. At DoD he has been concerned that the Department of Defense (DoD) is being overcharged for military purchases. A 2015 Inspector General (IG) report exploring military overpayments offers alarming examples that substantiate his concerns.
Despite the ample evidence of overpayments that ought to legitimate Assad’s pro-taxpayer efforts, contractors’ moves to impede his progress through congressional action have worked: contractors successfully lobbied Congress to pass laws that prevent Assad and DoD from getting better deals when buying commercial items. Not only has he been prevented from accomplishing laudable goals, Assad has been personally maligned. According to Politico, Assad is the most hated man inside the Pentagon.
Assad has also tried to make the commercial procurement process more transparent. Contractors are required to hand over very little pricing information regarding commercial items because of the presumption that their prices have been set by the open market. Unlike any other kinds of military purchases, commercial items are exempt from the Truth in Negotiations Act that would require companies to provide cost or pricing data to ensure taxpayers aren’t getting gouged. Contractors take advantage of this exemption, and often pass off customized military items lacking any market history outside the DoD as “commercial” so they don’t have to justify their prices. Unfortunately, DoD often rubber stamps items labeled by contractors as commercial without questioning whether they are truly commercial and without questioning prices. POGO has long documented overpayment in commercial deals, and even the DoD IG stated that as the transactions now stand, “major loopholes” exist for vendors to charge unreasonable prices. When commercial deals are closely examined, the savings for taxpayers can be significant. For example, when the C-130J aircraft was converted its contract from commercial item procurement to a traditional contract, DoD repriced the aircraft and saved $168 million.
To put an end to these opaque transactions for customized military items, Assad and DoD proposed narrowing the definition of “commercial” in the 2013 National Defense Authorization Act (NDAA) to items actually sold in the commercial market. Industry said the idea was “radical” and would create “insurmountable barriers to competition,” and Congress listened—the proposal didn’t make it into the bill.
Contractors successfully lobbied Congress again last year. The 2016 NDAA became law with provisions that deems an item once labeled as commercial as almost always commercial. (see S. 1356, Sections 851 and 856) Congress not only made it more difficult to revisit commercial item determinations, it essentially locked DoD into paying previous prices, which might not reflect price decreases that would save tax payers money. So if the military overpaid for an item once, they may be required by law to overpay in every future acquisition of that item. Assad disagrees with industry’s push for price locking—let’s not pay what it was worth, Assad says, let’s pay what it is worth.
Honeywell, the defense contractor that promoted pro-industry commercial item changes, admitted that DoD is “now the only buyer” of many commercial items, and that DoD buys spare parts “no longer sold in the commercial marketplace simply because the commercial marketplace has moved to other alternatives and no longer has requirements for those parts.” Despite that admission, the DoD is handcuffed.
Unable to strengthen the laws to better protect taxpayers, Assad has taken a number of administrative steps to strengthen contract oversight. To help contracting officers determine the commerciality of an item, and fair prices if the item is deemed commercial, Assad teamed up with the Defense Contract Management Agency (DCMA) to create Centers of Excellence—rapid research teams looking at commerciality and pricing. He has also expanded the Contract Business Analysis Repository database, a database where contracting officers enter information about their transactions with contractors, so contracting officers can see what prices their peers negotiated for similar items. He hosts an annual pricing conference, the Department of Defense acquisition consortium, where military and agency members can put their heads together on pricing solutions.
Not surprisingly, contractors wrote a letter to the Under Secretary of Defense Frank Kendall, voicing concerns regarding the Centers of Excellence—arguing that commerciality and pricing advising should not be done by the same center. The Project On Government Oversight thinks their real discomfort stems from the fear that releasing price information might lead to repricing embarrassments like the C-130J, add fuel to Inspector General criticisms that DoD is being overcharged, and ultimately lead to taxpayers paying fair prices. Fortunately, Congress hasn’t acted to legislate against these Centers, but who knows what will be included in the forthcoming NDAA.
Assad again helped propose new rules regarding commercial buying last year, which POGO supported, to standardize commercial item buying and assist contracting officers in obtaining needed cost or pricing data that would ensure the government pays fair prices. For commercial items with a market history beyond just government buyers, the rule instructed contracting officials not to ask for any additional pricing information; only when items have no market history outside the DoD, the rules instruct, may officers ask for additional pricing information. Predictably, contractors disliked this rule as well, stating that it would create barriers to innovation and keep out newcomers. Congress threw its weight in with industry over Assad and the DoD, expressing disapproval of the rule. As a result, DoD pulled the rule, and Assad’s efforts were prevented from bearing fruit for the taxpayer.
One member of Congress who is supporting Assad’s efforts is Representative Jackie Speier (D-CA). Speier has proposed an amendment to the FY 2017 defense authorization bill that would require certified cost or pricing data for commercial items when the government is buying without competition. Based on previous history, we don’t expect this amendment to make the final bill, but Speier is paying attention to the issue and trying to do right thing.
Most contractors have no problem providing additional pricing information when it is requested. Only about 20 major industry players, Assad says, refuse to give additional information. He believes that complaints about the burden of providing pricing information is a “smokescreen.” DoD would be less likely to accept unreasonable cost or prices if it had more data to inform its negotiations. The curtailment of lucrative DoD overpayments is what industry is truly upset about, especially those large contractors that are often cited in DoD IG reports. They have put up the biggest fight because they have the most to lose. It is these contractors that should draw the most oversight when engaged in commercial-item negotiations.
We applaud Assad for his efforts to reform commercial item buying, and wish he had more support inside the Pentagon and in Congress to stand up to contractors that are only protecting their own financial interests at the expense of taxpayers’.