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Championing Responsible National Security Policy

Defense Waste & Fraud Camouflaged As Reinventing Government

Executive Summary

Overpriced spare parts horror stories from the 1980s taught us how to prevent fraud, and led to useful reforms. By the 1990s, however, defense industry interests dovetailed with Vice President Gore's Reinventing Government campaign, and new policies bypassed some of the earlier reforms.

In the name of adopting "commercial" practices, the Administration's defense Acquisition Reform effort has gone beyond cutting red tape into throwing out important protections against contractor abuse that are needed even in a more commercial environment. For example, a new greatly expanded definition for a "commercial" product has exempted many more purchases from normal oversight.

The problem has predictably begun to appear in the form of more overpriced parts stories:

  • AlliedSignal corporation was found to have overcharged the government for spare parts by as much as 618%. The government overpaid on the overall contract with AlliedSignal by 54.5%.
  • Prices were inflated by more than 1,000 percent on a variety of spare parts. For example, the Boeing price for a commercially-available $24.72 "spoiler actuator sleeve" was $403.39 - a markup of 1,532 percent. Another contractor charged $714 for an electric bell worth $46.68.

The cause - Acquisition Reform's new policies, including drastic staff cuts to oversight agencies:

The AlliedSignal cases provide examples of the government paying more for spare parts under the new "commercial" rules than it paid under the earlier reforms. As the Defense Department's Office of the Inspector General has noted, the loose definition of commercial items "qualifies most items that DoD procures as commercial items"

A Defense Department Inspector General's report indicates how adopting commercial practices has come to mean subservience to contractors and blind acceptance of their claimed costs and prices: "contracting officers shall require information ... when necessary to determine price reasonableness for commercial items, but there is a strong DoD [Department of Defense] preference not to use that mechanism and the Government has not asserted its right to have the data."

Despite highly favorable dollar returns on taxpayer investment in oversight agencies, many of them have been gutted by personnel cuts. For example, the Defense Contract Audit Agency saves almost $10 for each dollar invested, but staff positions have been cut by 19% from Fiscal Year (FY) 1993 to FY 1997. As of 1998 the Administration scheduled it to suffer a total loss of more than 3,000 staffers - a 44% cut - over the period FY 1990 to FY 2002.

The Administration has pushed defense corporate mergers, at a time when Acquisition Reform has failed to create adequate competition, a key requirement for the government to benefit from commercial markets. As a Department of Defense Inspector General noted, "If anything, the risks may be greater today because there is such market dominance by a few very large suppliers. In this environment, getting cost information and maintaining audit rights is a prudent business practice. Failure to do so will be very costly for the Department and ultimately the taxpayer."

The solution lies in making use of what we have already learned about preventing contractor abuse:

  • Restore meaning to the definition of "commercial."
    1. Restore the definition of commercial as actual sale of items to the general public, not just to the government.
    2. Restore the definition of commercial to mean substantial sales in a large free market.
    3. Restore the definition of "competitive bidding" to be at least two bidders.
  • Clarify that the government can and should still negotiate actively for some commercial items.
  • Restore the use of cost or pricing data where prices are not set by a true free market.
  • Preserve funding for the auditors, investigators, and independent rule-setting Boards like the Cost Accounting Standards Board.
  • Defend the False Claims Act against industry assaults.
  • Improve price-based contracting by increasing competition and reversing the trend of mergers leading to fewer competing contractors.

Following Pentagon acknowledgment of "readiness" problems, and after the war in Kosovo, defense budgets - and procurement spending - are being increased sharply. For this reason it is especially imperative for us not to forget what we already know about good acquisition reform - there is no need to re-invent the wheel. If we do forget, the budget surpluses the Defense Department is enjoying will quickly be frittered away on overpriced weapons and parts, and the taxpayers' money will, once again, be wasted.

Click here to read the full report.