Windfalls of war: Pentagon’s no-bid contracts triple in 10 years of war

Introduction

As U.S. military deaths and injuries from roadside bombs escalated after the invasion of Iraq, the Pentagon rushed to find solutions.

Competition is normally the cornerstone of better prices and better products, but the urgency of dealing with improvised explosive devices, or IEDs, has been cited to justify a number of sole-source contracts to companies promising quick solutions over a decade of war.

One such company was Tucson-based Applied Energetics, which markets a futuristic weapon that shoots beams of lightning to detonate roadside bombs. The company won over $50 million in military contracts for their lightning weapon, all without full and open competition, even though there was another company marketing similar technology. Despite test failures, the company, in part thanks to congressional support, continued to get funding.

In August, the Marine Corps, which was on the verge of awarding the company yet another sole-source contract for the lightning weapon, cancelled the latest $3 million deal after the commander of the unit in Afghanistan decided it didn’t meet their needs.

In the meantime, a competitor, called Xtreme Alternative Defense Systems, an Indiana-based firm with its own lightning-based counter-bomb technology, says it’s had good results with only a fraction of the federal funding that Applied Energetics has received—$1.5 million. The company is preparing to test its technology at a military range. “We did our own development based on state grants” and federal funds, says Pete Bitar, the head of the company. “I cashed out my 401(k).”

The bomb fighting contract is a small example of a problem that’s been exacerbated by 10 years of war: awarding contracts without competition. While the Pentagon says its overall level of competition has remained steady over the past 10 years, publicly available data shows that Defense Department dollars flowing into non-competitive contracts have almost tripled since the terrorist attacks of 9/11. According to analysis by the Center for Public Integrity’s iWatch News, the data shows that the value of Pentagon contracts awarded without competition topped $140 billion in 2010, up from $50 billion in 2001.

And despite repeated pledges to reform the process, non-competitive contracts are a hard habit to break. According to federal data, the Pentagon’s competed contracts, based on dollar figures, fell to 55 percent in the first two quarters of 2011, a number lower than any point in the last 10 years since the terrorist attacks of 9/11.

There are a number of legal loopholes that allow the Defense Department, as well as other federal agencies, to avoid competition and to select a single company to provide the desired goods and services. In some cases, there may be only one legitimate supplier of needed goods, or the government can argue that it has “an unusual and compelling urgency,” and that holding a competition would have a detrimental impact on government operations or national security.

But those exceptions have become increasingly abused, according to numerous studies. In fact, an analysis of over a dozen government reports and investigations, and interviews with eight former government officials and experts, found a number of concerns about DOD competition practices — attributable in large part to the past 10 years of war. Those include:

• The use of large umbrella contracts to purchase goods and services that could be competed individually, thus resulting in lower price;
• Justifying sole source contracts by citing an “urgent and compelling need,” when in fact the urgency stemmed from the agency’s lack of planning for requirements that have been known for years.
• Extending large contracts as a “bridge,” rather than re-competing them.
• An overall failure to utilize competition in cases that could result in cost savings and better performance.

These alarming trends have not gone unnoticed. Sole-source and other noncompetitive contracting practices at the Pentagon have been the subject of numerous investigations by the Government Accountability Office, the Defense Department’s Inspector General, and the Commission on Wartime Contracting, among other government watchdogs.

The consequence, according to those investigative agencies and commissions: wasted dollars, lower quality goods and services, and in some cases, outright fraud.

Reports of limited and no-bid contracting, particularly in Iraq and Afghanistan, captured headlines in the early days of the Coalition Provisional Authority in Iraq, when companies like Custer Battles, later convicted of fraud , were given sole-source security contracts for security and reconstruction, including one worth $16.5 million to provide security at Baghdad International Airport. Among the accusations eventually levied against the company, which had no prior track record, was that it charged grossly inflated prices, in part by using fictitious companies to “lease” equipment to the government.

In his 2008 presidential campaign, candidate Barack Obama railed against such contracts, accusing them of wasting taxpayer dollars, and promised to rein in such spending.

In 2009, President Obama followed up those campaign promises with a memo directing a broad overhaul of government contracting, including limits to sole-source and non-competitive contracting. “Excessive reliance by executive agencies on sole-source contracts (or contracts with a limited number of sources) and cost-reimbursement contracts creates a risk that taxpayer funds will be spent on contracts that are wasteful, inefficient, subject to misuse, or otherwise not well designed to serve the needs of the Federal Government or the interests of the American taxpayer,” the president wrote in the 2009 memorandum, citing reports by multiple government agencies. Moving back to full and open competition, the memo continued, could save the government billions of dollars. But in two-and-half years, the Obama administration has made no progress in competing military contracts.

Even the Pentagon’s senior leadership has acknowledged the problem: a 2010 memo by Undersecretary Ashton Carter, the Pentagon’s senior procurement official, called for greater competition, along the lines of the earlier Obama memo, and promised the Pentagon would make its contracting process more open to competitive bidding. “Maximize the use of multiple-source, continuously competitive contracts,” a briefing accompanying the memo states.

However, campaign pledges and memos have made little headway in combating the problem. “The lack of competition in the Defense Department is a scandal,” said Charles Tiefer, a professor at the University of Baltimore School of Law and a member of the congressionally mandated Commission on Wartime Contracting in Iraq and Afghanistan.

The ultimate question is whether non-competitive contracts are due to trends beyond the Pentagon’s control, such as the lack of qualified competitors and the urgency of wartime contracting, or whether they are the result of poor policies and procedures. The Pentagon maintains that its competition rates are lower because of the nature of the things it buys: large weapons and major systems that then have large follow-on contracts that must, by their nature, go to the original supplier. “These high-dollar non-competitive procurements significantly impact the Department’s overall level of competition to produce the 61.7 percent competition rate for FY2010,” says Cheryl Irwin, a Pentagon spokeswoman.

The GAO, in multiple decisions, has said that “failure to plan” for a procurement that results in an urgent need does not constitute a basis for a sole source competition, and has, on a number of occasions, sided with protesting companies that argue the only urgency was an agency’s failure to conduct a timely competitive procurement.

One report commissioned by the Pentagon’s Office of Industrial Policy and conducted by the federally-funded Institute for Defense Analyses appears to suggest it’s a systemic problem. “We found that the use of short-term contracts and modifications to fill the gap in services between the end of one contract and the beginning of the next is a significant source of sole source contracts,” the report concluded.

The study, which looked specifically at contracts for services, found that there wasn’t a lack of qualified companies; rather, nearly a quarter of the sole-source awards were justified based on “bridge contracts” that extended existing contracts without competition. “For sole source contracts there does appear to be a problem, not with the industrial base or with competition, but with DOD practices and policies,” the report concluded.

Noncompetitive, sole-source contracts are by no means unique to the Pentagon. Other agencies have been accused of giving short shrift to competition, such as the Federal Emergency Management Agency, which awarded over half of its immediate post-Hurricane Katrina contracts without full competition, according to one congressional report. But based on total dollars, the Pentagon, according to publicly available data analyzed by iWatch News, lags behind all other major departments in competitive contracting. The Pentagon’s competition rate of about 61 percent places it will below other agencies. The State Department in 2010 competed almost 75 percent of its contract dollars, the Department of Homeland Security competed almost 77 percent, and the Energy Department competed 94 percent.

Nevertheless, sole source contracts, ranging from training to equipment, continue to be handed out on a near daily basis, often with little explanation beyond a stated “urgent requirement.” On July 18 of this year, DRS Technical Services of Herndon, Va., received a contract worth nearly $20 million for training and mentoring Afghan police.It was the only bid solicited for the contract, according to the Pentagon.

A spokesperson for Army Contracting Command said the sole source contract, which was actually for fielding communications equipment to Afghan police, was due to an “urgent requirement that necessitated an award to the incumbent DRS pending competition.” That same contract was also the subject of a 2009 DOD Inspector General investigation, which criticized the contractor’s and the Army’s inventory controls.

Next: After a decade of war, KBR’s “concierge” contract tops $37 billion