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Who is the real culprit?

This article, originally titled Speaking Out In Defense of Contractors, " first appeared in Me July 1989 issue of Contract Management, published by the National Contract Management Association. Reprinted with permission.

AMID ALL THE PRESS coverage in the fall of 1988 about the investigation of defense contractor fraud, The Washington Post ran an article (October 23, 1988) that to me typifies much of what's wrong with the layman's perception of this problem. I tacked it to my wall, where its presence goaded me into expressing some things that have been left unsaid for too long.

The article, titled "Penalties for Contractor Scams Getting Stiffer," discussed at considerable length how defense contractors are taking the government to the cleaners. The reporter cited the example of a million-dollar engineering contract that had been awarded to Sundstrand Corporation for $100,000.

The Defense Contract Audit Agency, the reporter wrote, had discovered Sundstrand had bid low to win the job and then had fraudulently charged the overruns to overhead accounts. She also noted--and I especially loved this part--that government investigators had determined that close to a thousand" Pentagon officials had accepted free meals from Sundstrand ! I have no connection with Sundstrand, and this is by no means an apology for defense contractor fraud, waste, or abuse. But what concerns me about articles like this is their consistent failure to point out two great truths for our time: You can't cheat an honest man, and you get what you pay for.

Though I know it runs counter to conventional wisdom, someone needs to point out to the taxpayer that defense contractor dishonesty is only half of the problem, and that the actions or inactions of government procurement professionals have played a very large role in fostering and abetting procurement abuse.

To begin with, the problem is clearly not only the contractor's when "close to a thousand" Pentagon officials accepted free meals from Sundstrand. I also know, though the Post reporter and many of my brethren on the government side apparently do not, that you usually can't get something for nothing.

Defense Department cost and price analysts, in many cases aided by the larger accounting firms and other private sector specialists, support die ranks of contracting officers entrusted with the disposal of our annual defense budget. Before the solicitation even hits the street you can bet your green eyeshade that the contracting officer who awards contracts to Sundstrand and other firms has a pretty good idea what it should cost a contractor to deliver the required product or service.

The crucial question the Post neglected to ask is, why was a million-dollar contract awarded to Sundstrand for a tenth of its estimated price? The answer is, of course, that the Pentagon is literally (recall the feeding of the one thousand) and figuratively looking for that old free lunch-Corvette performance at a Chevette price.

In an effort to correct the former practice of too many sole-source awards, the new emphasis on competition in contracting has overshot the mark and has been transformed into an alarmingly exclusive focus on the bottom line, heedless of evaluation criteria or technical quality.

Confronted with a nonresponsive bid, we all know that the government is justified in rejecting as technically suspect any bidder that failed to familiarize itself well with the requirement.

It certainly should reject as irresponsible any bid that purported to conform fully to the requirement at, say, half the government's cost estimate without clear and compelling evidence of a new performance technique, engineering breakthrough, or child labor (for example, $7-an-hour "engineers") that could account for such dramatic cost savings. However, such rejections happen so infrequently as to render the competitive range concept academic.

While federal prosecutors continue their hunt for big contractor game, it's ironic that Department of Defense (DoD) contracting officers continue to award contracts at prices that, without doubt, they know to be unrealistically low. Since they get paid to obligate federal funds in a responsible manner, I would call such behavior dereliction of duty.

When a lowball contractor either defaults performance or racks up serious overruns attributable to such defective pricing, who is more to blame - the contractor that sees growing amounts of government business awarded solely on the basis of increasingly fanciful cost proposals and takes the hint, or the contracting officer who winks at creative pricing and patently ridiculous cost estimates?

Why blame the fool who quoted an unrealistic price and absolve the fool who agreed to pay it? Where is the voice of reason asking whether the technical needs of the DoD-yes, and perhaps even the nation - are being satisfied by such specious contracting practices.

Regrettably, defense contractor fraud was alive and well in the 1980s. But any of us with a few years of contractor experience can cite numerous examples where the indisputable $25 million job was awarded for $ 10 million. Some of us have had the small satisfaction of watching the performance thus purchased degrade to default, while more frequently we've watched the contracting officer salvage the situation with some fortuitously timed modifications.

Examples abound of false economies spawned by the DoD's new narrow focus on the bottom line. In 1988 a well-known contractor lost a major engineering-support contract, which it had fulfilled very successfully for five years, to a challenger whose face bid was about I percent cheaper. The DoD customer then was forced to issue the incumbent/ loser a bridge modification worth several times the putative savings in price, until the winner could mobilize to assume the work load.

The incumbent/loser, naturally, was already in place and able to continue performance without letup. Technical qualifications were considered a wash.

The sad result of the growing tendency to award contracts on the basis of what I call face-value-least-price is die fact that ethical, highly competent contractors with lengthy corporate resumes and a seasoned, stable work force are-in certain quarters of the DoD marketplace - already a dying species. They are being replaced by a welter of largely inconsequential and untried 8(a) firms and lesser-ranked contractors willing to slash employee benefits or chance the creative pricing game in the hopes of retaining some amount of DoD business.

In the market for Navy program support, for example, any would-be contractor that does not dilute its hourly bid rates by proposing substantial quantities of uncompensated overtime is dooming its chances of a win.

Requiring employees to work 50- or 60-hour weeks while paying them for 40 is becoming a standard practice in Crystal City (home of the Navy Department). It's interesting to contemplate how Navy Department civil servants would react to such a work-hour requirement. Yet, they have blithely awarded contracts that imposed it on thousands of contractor employees, who were forced to accept it as the price of retaining their jobs.

In fairness to contracting officers, I believe that the flaw in the system is the pressure government program managers exert on the acquisition apparatus to depart from procedure and accept lowball bids in the hope that the laws of economics will be repealed and they will get something for nothing.

Apart from the negative effect on the industrial base and the contractor work force, current procurement practices have instilled a pernicious cynicism on the contractor side. This cynicism in the long term cannot be good for a national security dependent on the presumption of goodwill within the military-industrial complex.

A widespread view is that stated evaluation criteria are meaningless and that most awards will be made on cost grounds irrespective of technical requirements. Another tenet gaining ground holds that only losers scrupulously reflect data-deliverable costs in their price.

Such perceptions risk creating a general climate of adversary contracting, where "changes houses" submit low bids they know to be unrealistic. They count on protecting themselves during performance by wearing down the contracting officer with a barrage of change claims for anything past the first paragraph of the SOW.

It's fine to root out contractor fraud, but let's recognize the other half of the problem. This nation would be well served by a return to a rational procurement system, where evaluation criteria are fully and fairly applied by officials lacking a hidden agenda, where unrealistic bids are rejected instead of being awarded by greedy officials, and where pricing gimmicks that come out of the hide of the contractor work force are banned as archaic and dangerously bad for morale. * About the Author . . . David A. Dustin is manager of Contracts Administration for VBR (a joint venture of Vinnell Corporation and Brown & Root Services Inc.), which operates and maintains all DoD installations in Turkey under a contract with the US Air Force. VBR is located in Ankara, Turkey. Dustin has worked as an industry consultant and has previous experience in contracts and program management for other US defense contractors.
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Title Annotation:waste & fraud in defense contracting can be blamed in part on government procurers
Author:Dustin, David A.
Publication:Security Management
Article Type:column
Date:Jun 1, 1990
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