Controversy erupted a few weeks ago when it was exposed that Whitefish Energy, a small company in Montana, was awarded a huge contract to restore electricity in hurricane-ravaged Puerto Rico. The controversy stemmed from a number of factors: it was a $300 million sole-source deal, the federal government was not consulted, the contract had a no-audit-or-review-of-labor-rates provision, and the company had connections to a hometown friend, Interior Secretary Ryan Zinke. Many contracting experts and Members of Congress raised questions at the time, and the contract was eventually cancelled. While all of those factors don’t seem to be best practices or in the interest of the citizens of Puerto Rico or the rest of the U.S., as the Project On Government Oversight wrote at the time, the “commercial item” contracts on which the federal government spends billions of dollars each year operate the same way. Allow us to explain.
Since the 1990s and the passage of so-called federal acquisition reform laws, the federal government has had a statutory preference to buy commercial items. Congress restated that preference in the 2018 National Defense Authorization Act bills (H.R. 2810, Sections 854 [Senate version] and 866 [House version]). This preference seems like a no-brainer, but commercial item contracts strip oversight protections and restrict the government’s access to cost or pricing data; as a result, these contracts frequently lead to Uncle Sam being overcharged. Unfortunately, commercial item contracts are increasingly being used. According to the federal system that tracks government contracts, these contracts accounted for 25 percent of federal contract spending in 2016 (more than $118 billion out of the $474 billion spent on goods and services).
To ensure the government keeps using this particular contract type, the large federal contractors and their lobbying shops convinced Congress that the commercial market ensures fair and reasonable pricing. We don’t disagree, but that is NOT how the system works. Those same contractors and lobbyists also duped Congress into basing commercial costs or prices on prices previously paid by the government, not cost or prices actually found in the commercial marketplace, which means taxpayers are paying government prices and will likely be overpaying for years to come.
Those same influence-peddlers also swayed Congress to reject the Department of Defense’s proposed changes to the current definition of “commercial,” which is absurdly over-broad. In fact, a “commercial item” may have no commercial market at all, but can still be called “commercial” as long as the item is merely “offered for sale” to the general public or “of a type” of items sold to the general public. Definitions are already so broad that the Air Force inappropriately tried to buy the C-130J cargo plane as a commercial item. When the contract was corrected, the Air Force concluded that taxpayers saved $167.7 million.
The industry has fiercely lobbied to preserve the current definition of commercial item because it gives contractors the upper hand in negotiations. In a commercial item acquisition, the contractor is not required to provide the government cost or pricing data even when the contract is non-competitive (i.e. sole-source or no-bid). The commercial item provision should more accurately have been called the “Sole-Source Contracting Without Knowing Costs or Prices” provision. Congress would be smart to at least require sharing of certified cost or pricing data when the government is acquiring goods or service on a sole-source basis even if the awarded contract contains no flexible pricing provisions. Without such data, there is no assurance that prices are fair and reasonable. But exceptions to providing certified cost or pricing data have become the rule, and contractors often refuse to turn over other data that help the government evaluate prices.
Compounding the problem of buying goods and services that have no commercial market and no sticker price attached, certain commercial item procurements are exempt from Cost Accounting Standards and audits (see here and here). The only check and balance for commercial item purchases is a provision within FAR that allows the Government Accountability Office, Congress’ investigative department, to examine records related to a contract. That provision, however, does not include broad audit rights or provide the same examination rights to the agency that awarded the contract. As a result, it makes it extremely difficult for the government to hold contractors accountable and recover overcharges. The Whitefish Energy contract contained similar provisions, and such accountability restrictions are not new.
Through the years, statutes and policies have severely limited the government’s ability to audit federal contracts: forward pricing audits (pre-award audits to prevent wasteful spending) generally are not performed unless the contract amount is extremely high—and audit eligibility thresholds are constantly being increased, even for risky sole-source contracts.
Audits can be performed for certain contract types (see, for example, here and here), but fixed-priced contracts are generally not subject to audit requirements. Additionally, contract close-out audits on flexibly priced contracts can take years to conduct, and therefore even many cost-reimbursement contracts are closed out without an actual examination of a contractor’s claimed costs.
During a recent hearing, Senator Mike Lee (R-UT) spoke out about corruption in hurricane recovery efforts in Puerto Rico and the U.S. Virgin Islands. He stated that “a lot of people might be tempted to look at this and think that the story somehow starts and ends with Whitefish. Whitefish is of course important, it’s significant….But it doesn’t take a biologist to see that a Whitefish doesn’t swim alone.” Senator Lee’s comments also apply to far too many federal contracts and the accountability shortcomings that mirror those in the Whitefish Energy incident. If the Whitefish contract was concerning, there should be utter panic over the more than $100 billion in federal contracts that are negotiated each year without adequate cost or pricing data and are not subject to audits. The public should be outraged by wasteful contract spending across the board—especially commercial item contracts—and call for reforms that result in good deals for taxpayers.