Windfalls of war: Taxpayers get hammered by Pentagon attempts to “one-stop-shop”

Introduction

Not long after the terrorist attacks of 9/11, the Air Force went looking for a new fleet of aircraft.

More precisely, it went straight to the dealer—without shopping around. The service drew up a plan to lease 100 aerial refueling tankers from Boeing, saying it had an urgent need to replace its aging, Eisenhower-era KC-135 aircraft. The Air Force planned to award the multi-billion-dollar contract for a new tanker based on the Boeing 767 as a “sole source,” meaning there would be no opportunity for a formal competition.

The unusual lease-to-own deal was approved by the Defense Department and three Congressional oversight committees, despite criticism from budget analysts who contended that the sole-source lease/buy option would cost the Defense Department approximately $37 billion.

But the tanker lease contract never went through.

The deal was derailed after it came to light that Darleen Druyun, a senior Air Force official involved with the tanker negotiations, had also conducted job talks with Boeing’s then-chief financial officer, breaking federal conflict-of-interest laws. Druyun, who pleaded guilty and was later sentenced to nine-months in prison, also admitted to allowing Boeing to negotiate an inflated price as part of the deal. The Air Force did eventually settle on a replacement for the KC-135, after a long competition that was won by Boeing in 2011.

In another example of military largesse at the taxpayers’ expense, Air Force officials pushed to sole-source the purchase of new helicopters to patrol its nuclear missile fields, replacing aging UH-1 Hueys. “I can use an existing contract to purchase helicopters,” said Lt. Gen. James Kowalski, the head of Global Strike Command, according to Flight International, a trade publication.

Kowalski argued that the Air Force’s “urgent and compelling need” for new helicopters justified a sole-source contract reportedly worth $1 billion, even as he acknowledged the need for the new helicopters had existed since the mid-1990s. After complaints from other companies, however, the Air Force rolled over and said it would hold a competition to buy the new helicopters.

Despite the rhetoric about competitive contracting and increasing efficiencies, one thing is clear, at least from the public data: the Pentagon does not, on the whole, appear to be awarding contracts more competitively now than in the past. According to federal data, the Pentagon’s competed contracts, based on dollar figures, fell to 55 percent in the first two quarters of 2011.

Not everyone agrees the numbers on their own are that damning, however. “The vast majority of the dollars on sole source contracts are simply follow-ons to large contracts,” said Jacques Gansler, who served as undersecretary of defense for acquisition, technology and logistics from 1997 to 2001.

Gansler, now at University of Maryland’s School of Public Affairs, said it’s important to look at the contracts as a whole, and not just at the dollars. However, an iWatch News review of data revealed those numbers are even worse, showing that only 40 percent of all “actions” were competed from 2008 to 2010.

Gansler is a critic of certain contracting activities, like the indefinite delivery/indefinite quantity contracts that have become widespread, and can end up costing the government more than bidding individual contracts. He also said there are opportunities for increasing competition by breaking up large contracts for major weapons. He argued, for example, that the Pentagon could have re-competed the tanker aircraft purchase every few years, rather than awarding the entire contract to Boeing, as an incentive to curb costs.

Other outside analysts are less charitable about the Pentagon’s record. There simply hasn’t been much improvement in the Pentagon’s record of competition, according to Steven Schooner, a professor of government procurement law at George Washington University School of Law. He said any improvement—“slight as it may be”— doesn’t necessarily translate to meaningful competition.

While it’s hard to measure the costs of lost opportunities — tax dollars that would have been saved if contracts were competed openly — the congressionally established Commission on Wartime Contracting in Iraq and Afghanistan cited cases where there was clear evidence that opening contracts to multiple vendors saved money. In one example, an Army cost analyst told the commission in May 2010 that moving to LOGCAP IV, the successor to LOGCAP III, was going to save 8.1 percent in costs. However, that same month the Army announced it would extend the existing “concierge” contract with KBR, rather than moving work to LOGCAP IV, which would have put other contractors in the mix.

In its final report issued Wednesday, the commission underscored the importance of competitive bidding. “Competition that is merely illusory undermines the U.S. government’s ability to obtain the best value for taxpayers’ money and to foster excellent contractor productivity and performance innovation,” the report said.

Competition helps in myriad ways, from price to quality, according to Scott Amey, general counsel for the Project on Government Oversight (POGO). “If you know somebody else can step in, it acts as an incentive for the incumbent to do good because the next contract could be awarded to someone else,” he said. “To play the skeptic, if you know no one else is out there, will the contractor be performing at 110 percent?”

One example of costs savings is the Air Force tanker. It was one of the first large proposed — albeit thwarted — sole-source contracts to emerge in the post-9/11 era. While some may lament the nearly decade-long battle between EADS, a European company, and Boeing, the benefits for taxpayers were apparent. According to EADS, the competition saved the Air Force $16 billion by driving down Boeing’s offer price. The Air Force, for its part, says that it got a 20 percent cost reduction from Boeing by having a competition, which still places the savings in the billions of dollars.

If Gansler, the former chief Pentagon acquisition official, is correct, breaking that award into multiple competitions might have resulted in even more savings.

For Charles Tiefer, a member of the Wartime Contracting Commission, the failure to instill more competition in DOD contracting is a series of disappointments that followed a promising beginning by the Obama administration. “At the time it looked very real,” said Tiefer, “[Obama] was saying the same things he said in his campaign.”

Yet despite memos on competition from Obama in 2009, and from the Pentagon acquisition chief in 2010, nothing appears to have changed.

“It’s 2011 now. Where is it?” Tiefer asked. “Where’s the follow-up? Where’s the implementation? Where’s the policy?”

Next: The Pentagon doesn’t compare well with other federal agencies that dole out big contracts