Selling Out Uncle Sam: Government Contracting — A Free Market Farce

As an outrage-generator, an exam­ple of gross abuse of gov­ern­ment con­tract­ing dol­lars, Exhibit A is David H. Brooks, CEO of body armor man­u­fac­turer DHB, accused of using com­pany (tax­payer) dol­lars to buy, as reported in the New York Times:

.….uni­ver­sity text­books for his daugh­ter, porno­graphic videos for his son, plas­tic surgery for his wife, a bur­ial plot for his mother, pros­ti­tutes for his employ­ees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sap­phires and diamonds.

But while it makes for good copy (page 1 of the Times, no less), the out­rage may be mis­placed. The deeper scan­dal of gov­ern­ment con­tract­ing goes far beyond the actions of a hand­ful of bad actors and prod­ucts that can seen and touched. It is sys­temic, insid­i­ous, poten­tially dam­ag­ing to national secu­rity — and per­fectly legal. More­over, the way gov­ern­ment work is fre­quently awarded in our sup­pos­edly cap­i­tal­ist sys­tem is in clear defi­ance of free-market prin­ci­ples: a select group of mostly well-entrenched and con­nected com­pa­nies often win work, with lit­tle or no com­pet­i­tive bid­ding. Janine inves­ti­gated this trou­bling phe­nom­e­non in her book Shadow Elite and in a follow-on study (sup­ported by the Ford Foun­da­tion), Sell­ing Out Uncle Sam: How the Myth of Small Gov­ern­ment Under­mines National Secu­rity, just released last month.

A widely held belief is that con­tract­ing out is moti­vated by effi­ciency and that con­tracts are awarded through com­pet­i­tive processes. A look at the reforms insti­tuted dur­ing the Clin­ton White House helps explain how this often is not the case.

Under the rubric of “rein­vent­ing gov­ern­ment” and dereg­u­la­tion, the Clin­ton admin­is­tra­tion trans­formed con­tract­ing rules with regard to over­sight, com­pe­ti­tion, and trans­parency. Indus­try asso­ci­a­tions worked to make gov­ern­ment pur­chas­ing faster for the agen­cies and “friend­lier” for contractors.

The industry-energized reforms removed many of the tra­di­tional com­pe­ti­tion and over­sight mech­a­nisms that had been in place for decades and pro­vided the statu­tory basis for new kinds of mega con­tracts, such as the “Mul­ti­ple Award” Indef­i­nite Delivery/Indefinite Quan­tity (IDIQ) sys­tem, under which an esti­mated 40 per­cent of all fed­eral gov­ern­ment con­tracts are now awarded in areas rang­ing from com­puter sup­port to analy­sis of intel­li­gence. Like the euphemisms of politi­cians obscur­ing their inten­tions, the lan­guage of these awards is telling: “con­tracts” that aren’t really con­tracts; “com­pe­ti­tions” with­out real com­pe­ti­tion; “task” orders that may sound like small pota­toes but can net bil­lions of dol­lars for the contractor.

The stated inten­tion of the “reforms” was a stream­lined pro­cure­ment process that would reduce the time, costs, and bureau­cracy incurred in sep­a­rate pur­chases and make con­tract­ing more effi­cient. As a result, over the past decade and a half, small con­tracts often have been replaced by big­ger, and fre­quently open-ended, mul­ti­year, multimillion-, and even billion-dollar and poten­tially much more lucra­tive (IDIQ) con­tracts with a “lim­ited pool of con­trac­tors,” as the Acqui­si­tion Advi­sory Panel — a government-mandated, typ­i­cally contractor-friendly task force acknowl­edged. The changes may, in part, have sim­pli­fied bureau­cracy, but with play­ers on this ter­rain per­son­al­iz­ing bureau­cracy, they also rein­vented it and helped bring about new insti­tu­tional forms of gov­ern­ing in which gov­ern­ment and busi­ness cozily inter­twine. The IDIQ con­tract­ing sys­tem sub­stan­tially removes pub­lic infor­ma­tion and trans­parency from the con­tract­ing process and cre­ates con­di­tions that encour­age network-based award­ing of con­tracts, off-record deal mak­ing, and con­vo­luted lines of authority–all ingre­di­ents in the per­son­al­iza­tion of bureaucracy.

Legally, IDIQ con­tenders engage in “full and open com­pe­ti­tion.” But IDIQ con­tracts are not tra­di­tional con­tracts; they are agree­ments to do busi­ness in the future, with the price and scope of work to be deter­mined. “Com­pe­ti­tions” for open-ended con­tracts preap­prove con­trac­tors for almost inde­ter­mi­nate peri­ods of time (five to ten years, for instance) and money rang­ing into bil­lions. When so anointed, con­trac­tors’ names appear on a list main­tained by a gov­ern­ment agency. That agency, and usu­ally other agen­cies, can turn to the cho­sen con­trac­tors, who now pos­sess what has been called a “hunt­ing license,” to pur­chase every­thing from pens to ser­vices. The old sys­tem required pub­licly announcing–each solic­i­ta­tion for gov­ern­ment work over $25,000 — and then allow­ing com­pa­nies to com­pete for it. Under today’s IDIQ sys­tem, only com­pe­ti­tions for hunt­ing licenses are required to be announced in advance (by post­ing on a gov­ern­ment Web site).

What comes next–after the award of a mega contract–takes place behind closed doors and con­sti­tutes a vir­tual rev­o­lu­tion in gov­ern­ment pro­cure­ment. Under the old sys­tem, over­seers could doc­u­ment the amount of the con­tract because the amount was, more or less, clear when the con­tract was awarded. Under the cur­rent sys­tem, ser­vices are con­tracted in the form of “task orders,” mini con­tracts that spec­ify par­tic­u­lar work assign­ments. There is no pub­lic post­ing of task orders, so the abil­ity to obtain sub rosa infor­ma­tion is cru­cial to suc­cess. Issuances of task orders occur on an ad hoc basis with­out prior announce­ment. For instance, in 2007, the gov­ern­ment awarded a telecom­mu­ni­ca­tions IDIQ con­tract worth $50 bil­lion to twenty-nine com­pa­nies. Such awards are only the begin­ning of the day at the hunt. No open bid­ding will divvy up those bil­lions. With com­pe­ti­tion off the books, rather than through bureau­crat­i­cally mon­i­tored processes, the deciders are afforded more dis­cre­tion and are sub­ject to less over­sight than in the past. Who you know and who you owe are more likely to be deci­sive.  All of this exists mostly out of pub­lic view.

Although IDIQ con­tracts help main­tain the façade of gov­ern­ment effi­ciency, the real­ity is that favored con­trac­tors some­times make the list because they have per­sonal con­nec­tions with gov­ern­ment offi­cials. For instance, huge, non­com­peted awards, jus­ti­fied on national secu­rity grounds, have been granted for work in Iraq. Defense com­pa­nies linked to senior mem­bers of the Bush administration’s inner cir­cles were the ben­e­fi­cia­ries of some of these awards.

In 2006, the Wash­ing­ton Post reported that audits of 49 deals con­ducted by the inspec­tors gen­eral for the depart­ments of Defense and Inte­rior found that more than half of the con­tracts inspected were granted with­out com­pe­ti­tion or with­out check­ing to see that the prices were sensible.

And in the after­math of hur­ri­canes Kat­rina and Rita, FEMA ini­tially con­tracted with four large com­pa­nies to pro­vide hous­ing by using non­com­pet­i­tive pro­ce­dures. Some gov­ern­ment pro­cure­ment spe­cial­ists have also argued that the sup­pos­edly cost-saving IDIQ sys­tem has often kept gov­ern­ment con­tract­ing offi­cials from get­ting good deals for their agen­cies. In fact, in the few cases in which gov­ern­ment agen­cies have insourced, they have done so after cal­cu­lat­ing they would save sig­nif­i­cant amounts of money. So much for com­pe­ti­tion and the free market.

The Obama admin­is­tra­tion has acknowl­edged the increase in the num­ber of sole source con­tracts over the past decade.  A 2009 White House Memo states:

Since 2001, spend­ing on gov­ern­ment con­tracts has more than dou­bled, reach­ing over $500 bil­lion in 2008. Dur­ing this same period, there has been a sig­nif­i­cant increase in the dol­lars awarded with­out full and open com­pe­ti­tion and an increase in the dol­lars oblig­ated through cost-reimbursement contracts.

To address this prob­lem, the admin­is­tra­tion has directed agen­cies to take steps to shrink the share of dol­lars oblig­ated through new con­tracts where there is lit­tle or no com­pe­ti­tion, accord­ing to a July 2010 state­ment issued by the White House.
Acronyms like IDIQ and phrases like “sole source con­tract” don’t pack the vis­ceral punch that the jewel-encrusted belt buckle does, in con­vey­ing abuse of funds or more fun­da­men­tally, flout­ing of the free mar­ket. But read­ers would be advised to fight the glaze fac­tor. While the belt-buckle might have wasted a hun­dred thou­sand tax­payer dol­lars, the per­va­sive, anti-competitive prac­tices run amok through­out gov­ern­ment con­tract­ing might be cost­ing us hun­dreds of mil­lions or even bil­lions. That’s more than enough punch.

By Janine Wedel and Linda Keenan

Pub­lished in The Huff­in­g­ton Post, Sep­tem­ber 2, 2010.

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