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Thornberry Buying Industry Commercial-Item Policies

The Project On Government Oversight has received documents showing that some of the proposed changes to commercial-items pricing policies in the House Armed Services’ committees National Defense Authorization Act come at the behest of industry. And if history is any guide, the policy changes proposed by Chairman Mac Thornberry (R-Texas) and Ranking Member Adam Smith (D-Wash.) will force the Department of Defense (DoD) and taxpayers to eat the costs of the new “efficiencies.” In fact, the contractors are actually trying to make commercial item buying less friendly to the government and taxpayers by gutting nearly all contract oversight protections and the release of some cost or pricing data which often results in paying excessive prices.

Everyone wants to see the government reform the way it buys things, including POGO, and some of the proposals in new legislation will improve acquisitions and save taxpayers money. But other proposed “reforms” might place the government at greater risk of bad deals. One such reform is a change to the way the government buys “commercial items.” Classifying an item as commercial reduces the government’s ability to ask for information to determine whether prices are fair or reasonable, based on the assumption that these prices would be shaped by market forces. Since changes in procurement laws in the 1990s, contractors seem to want all items, as well as the entities that sell (see Recommendation B-18) these items, to be listed as commercial. Contractors push for items to be labeled as commercial so they can avoid nearly all oversight and transparency requirements, which often results in the government buying blindly.

Definitions are already so broad that the Air Force inappropriately tried to buy the C-130J cargo plane as a commercial item.

Global technology contractor Honeywell lobbied House Armed Services Committee Chairman Thornberry to further broaden the definition of commercial items to include an item previously treated as commercial and to lock the government into previous prices paid, which could lock the government into buying a $435 hammer forever. This proposal would be good for contractors, but bad for taxpayers. Replying to POGO’s request for comment and information about its legislative recommendations, Honeywell stated in an email that its lobbying effort was a response “to a request from the House Armed Services Committee to provide input on acquisition reform.”

Honeywell admits in its recommendations 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.” Yet, the company wants to continue selling those products to the government without having to prove that its prices are still reasonable.

Honeywell further exposes the absurdity of its proposal by arguing that commercial buying is often slowed down by requests for pricing information, yet it wants to burden the government with conducting its own market research, an even slower process compared to getting pricing information directly from the contractor. Honeywell ends with a list of defense and aviation systems that will be reviewed to “’recertify’ commerciality,” so its lobbying effort is a big attempt to protect its own bottom line.

Honeywell is lobbying to change the definition of commercial items while the company is under investigation by the DoD Inspector General (IG) for whether the company charged the Defense Logistics Agency—essentially the government’s provider of everything military forces need to operate, including food, fuel, uniforms, medical supplies, and construction material—is purchasing sole-source spare parts at fair and reasonable prices from Honeywell. If Honeywell’s proposal to lock in previous prices paid is put into law, the government—and taxpayers—could be stuck overpaying for goods and services even after those prices have been questioned by the DoD IG.

The DoD IG is well aware of the agency’s history of bad commercial item deals. The IG’s reports about overcharges resulted in DoD suggesting improvements to commercial buying, which the industry opposed. The Project On Government Oversight has supported those improvements, but we would like the agency to go a step further and require contractors to turn over cost or pricing information on all sole source commercial items.

Chairman Thornberry has incorporated a number of commercial item proposals into his acquisition reform bill, which is called the “Agile Acquisition to Retain Technological Edge Act” (H.R. 1735), which has been further incorporated into the mark HASC will consider tomorrow. Section 815 of the bill appears to adopt the industry rhetoric about requiring the government to conduct robust market research, which sounds like a good thing, unless that is the only tool government employees have to check on prices. POGO supports the government doing its homework, but it makes no sense to force the government to invest so much time and so many resources into finding pricing data rather than requiring the industry to turn over cost or pricing information.

Section 804 would designate DoD personnel to make commercial item designations. POGO supports this reform and thinks that having experts involved early in the commercial item buying process will add consistency and allow for more independent judgments. Furthermore, POGO would support merging the commercial designation office with DoD’s existing cost and pricing offices to ensure consistent application of commercial item designations and pricing. Not surprisingly, the contracting industry doesn’t support this and would rather continue to claim items are commercial even when they are not. The Professional Services Council, a service contracting lobbying group, would rather see more work for government contracting officials, a piecemeal approach to labeling items as commercial, and pricing which has no uniformity and leads to questionable commercial deals. Simply stated, the contractors are seeking a system that leads to bad deals for the government and large profits for themselves.

Thornberry’s mark, however, includes one new provision that was not included in his original bill (H.R. 1597). Nearly identical to the Honeywell lobbying materials, Thornberry included in Sec. 804, a requirement that previous commercial item determination can be presumed commercial “for subsequent procurements of such item.” This clause will essentially lock the government into buying items that may no longer be commercial or that should not have been purchased as such, as commercial.

Section 842 would essentially lock the government into “recent purchase prices paid.” We don’t support the effort to carry over previous commercial prices, which is an industry-led effort to continue to charge excessive prices. Old prices do not indicate that the government received a fair deal or account for any price reduction that might have occurred in the marketplace. Other than no bid contracts, there isn’t much that is more anti-commercial and anti-free market than locking the government into old prices, especially for goods or services that were purchased without competition or that have no commercial market.

POGO also opposes continued contractor efforts to conceal cost or pricing data from the government so that it is nearly impossible to determine fair and reasonable prices, especially when there are no commercial sales. This is especially true in a sole-source commercial item procurement, where there is no competition and no commercial baseline or data to which costs or prices can be compared. Without any cost or pricing data, the government buys blindly and is sometimes placed in the unenviable position of having to subpoena such information as a last recourse—commercial item pricing is an ongoing problem for DoD.

DoD isn’t just sitting back in the commercial-item debate. The Department has proposed its own Better Buying Power 3.0 plan to “develop a draft legislative proposal to revise the definition of the term ‘commercial item’ to eliminate items and services merely offered for sale, lease, or license by September 2015.” The industry is opposing DoD’s proposed changes, saying the government will miss out on “leading edge capabilities that are being developed for the commercial market but could also have enormous value to the department.” DoD’s legislative recommendation is one POGO is pleased to support. The DoD can’t continue to classify items that are merely “offered for sale” as commercial—but not actually ever sold in commercial quantities—because the prices of items with little or no market availability are not set by the commercial market.

Shay Assad, DoD’s director of the Defense Procurement, Acquisition Policy and Strategic Sourcing office, has been critical of commercial buying. He’s even on record saying that contractors use the commercial item process to overcharge the government, and he had promoted internal pricing systems. But we are still seeing examples of bad commercial item purchases, so POGO is still pushing for the government to improve its ability to access contractor cost or pricing data to ensure that overcharging doesn’t continue. The House Armed Services Committee Panel On Defense Acquisition Reform might have been right in 2010 when it made the case for DoD to use “more sophisticated data analysis tools” to avoid paying inflated costs or prices.

Although commercial buying isn’t a hot topic for the general public, it is one of the hotly debated issues in federal contract spending. Thornberry’s bill doesn’t totally cave to the industry, but it clearly opposes the DoD’s recommendations to alter the status quo and avoid instances of wasteful commercial item spending. Thornberry and Congress should be very careful when listening to contractors that are trying to sell a lot of high-priced items—and a lot of bad policies—to the government.

Update: Politico digs deeper into the influence of industry