Outsourcing the Pentagon

Introduction

One of the biggest contracts awarded in the war in Iraq went to Kellogg Brown & Root, a key subsidiary of Halliburton Co., the firm Vice President Dick Cheney ran as CEO before he stepped into the White House and became one of the prime movers urging the president to invade Iraq. Of the $4.3 billion in defense contracts Halliburton won in fiscal 2003 only about half were awarded based on competitive bidding. Another $1.9 billion in contract dollars was awarded on the basis of “urgency” without bidding and without going to any other contractors.

The connection between Halliburton and the Vice President has led to no end of speculation about how that particular firm was chosen. While this report does not address that issue specifically, it does examine the practice of awarding no-bid contracts to well-connected defense contractors. Indeed, one might pose a new question on the role of contractors in the American military: Was the war in Iraq an example of the Pentagon’s new way of doing business, or was it an outgrowth of a way of doing business that has been much longer in duration, albeit conducted off the field of battle without a worldwide—or even any—audience?

To find the answers, the Center began in early 2004 to investigate the patterns of Defense Department contracting. Our prime source was the Pentagon’s own procurement databases—public information that had been posted for years on an obscure Defense Department Web site.

The Center examined more than 2.2 million contract actions totaling $900 billion in authorized expenditures over the six-year period from fiscal year 1998 through fiscal 2003 (Oct. 1, 1997-Sept. 30, 2003). Most of the research was focused on the biggest contractors, those that won at least $100 million in prime contracts over the period studied. Some 737 prime contractors, mainly but not exclusively for-profit corporations, fit that criteria, along with several thousand of their subsidiaries and affiliates.

After nine months of research, the Center has found:

• Half of all the Defense Department’s budget goes out the door of the Pentagon to private contractors. This percentage has stayed virtually constant over the past six years; as the Pentagon’s budget has expanded with the wars in Iraq and Afghanistan, so have the dollars going to contractors.
• Only 40 percent of Pentagon contracts were conducted under what it terms “full and open competition.” (That percentage drops to 36 percent if you deduct those “full and open” contracts that attracted only a single bidder). Some 44 percent of contracts were given under “other than full and open competition”—usually as sole source contracts. Another seven percent fell under other categories (most often as small business set-asides), and eight percent gave no competition information at all.
• The Pentagon’s contracting force is top-heavy, and growing more so. Out of a total universe numbering tens of thousands of contractors, the biggest 737 collected nearly 80 percent of the Defense Department’s procurement dollars. The 50 biggest contractors got more than half of all the money; the top 10 got 38 percent.
• Topping the list was Lockheed Martin, with $94 billion in defense contracts over the six-year period. Boeing was second with almost $82 billion. Well behind those leaders were Raytheon (just under $40 billion), and Northrop Grumman and General Dynamics, with nearly $34 billion apiece. Those five companies tower over all other defense contractors. It’s worth noting that they collect additional billions, not included in the figures cited, through joint ventures with other companies.
• Most of the contracts awarded to the very biggest defense contractors were won without what the Pentagon calls “full and open” competition. Of the 10 biggest contractors, only one—Science Applications International Corp. (SAIC)—won more than half its dollars through an open bidding process. Three of the top 10—United Technologies, General Electric and Newport News Shipbuilding (now owned by Northrop Grumman)—collected less than 10 percent of their contract dollars through open bidding.
• Larger contractors were also more likely to win favorable terms on their contracts. One-third of the dollars awarded to the top 737 contractors came in cost-plus contracts that offer little incentive for keeping costs under control. Among smaller companies, only 11 percent of the award dollars were for cost-plus contracts.
• Industry consolidation was another major factor in creating a top-heavy group of Pentagon contractors. Over the six-year period of this study, more than 60 contractors were acquired or merged with even larger contractors. This was true both among companies whose main business is defense, and those in other sectors, particularly energy and telecommunications.
• The list of top contractors includes 43 joint ventures, in which major defense firms partnered together forming new companies to manage specific contracts or weapons systems. Four of these joint ventures collected $1 billion or more in contracts over the six-year period and together they accounted for nearly $19 billion in revenues to their partner companies. Lockheed and Boeing again led all others in revenues from joint ventures; Lockheed collected $2.3 billion from six different joint ventures, Boeing earned almost $2.1 billion from five.
• While most of the top 737 Pentagon contractors were American corporations, nearly 100 were foreign-owned. Included on the list were the governments of Canada, Germany and Japan, as well as the Italian Post, Telephone & Telegraph Ministry. The leading foreign corporations were British-based BAE Systems, BP and Rolls-Royce; and Maersk Inc., a Danish shipping giant.
• Political influence, as measured through lobbying expenses and campaign contributions, was a major undertaking by many of the largest Pentagon contractors. But a surprising number of companies on the top contractor list gave little or nothing to political candidates and parties, and chose not to invest in Capitol Hill lobbyists. Indeed, those contractors that spent the most on contributions and lobbying were from business sectors other than defense. The three leaders in political contributions between 1998 and 2003 were AT&T ($9.9 million), SBC Communications ($9.2 million) and FedEx ($8.0 million). Only two of the 10 biggest political contributors among the group were primarily defense companies—Lockheed Martin and Boeing. Nearly a quarter of the top Pentagon contractors made no political contributions whatsoever during the six-year period, and only 202 of the 737 gave $100,000 or more in contributions, either through PACs, soft money, or individual donations from their executives, employees and families. Overall, the top contractors gave nearly $214 million in campaign contributions, two-thirds to Republicans.
• The story was much the same in lobbying expenditures, though the dollar amounts were far higher. Just under half the leading defense contractors reported spending money on Washington lobbyists, but those that did spent a total of $1.9 billion in the effort. Again, the biggest spenders were not primarily defense companies, though the biggest of the Pentagon’s contractors did rank near the top. Leading the list was Altria Group (the former Philip Morris), with just under $94 million in lobby expenditures. General Electric was second, with $88.4 million. AT&T was third ($71.6 million), followed by Lockheed Martin ($71.5 million), Boeing ($64.4 million) and Northrop Grumman ($61.2 million).
• President George W. Bush received more than $4.5 million in campaign contributions from the 737 leading defense contractors during the six-year period of this study; his Democratic challenger Sen. John Kerry collected just $332,000. In 2004, however, the proportions switched dramatically. Kerry collected twice as much as Bush between Jan. 1, 2004 and the end of July—$1.6 million versus $824,000 for the president. Including that late money, Bush received nearly $5.4 million from the leading defense contractors; Kerry drew just under $2.0 million.
• Small business contractors are given special preference at the Defense Department, as they are in other federal agencies, since Congress set informal quotas encouraging the government to do more business with smaller companies. Surprisingly, however, the list of “small businesses” includes many dozens of companies with more than $100 million in defense contracts over the past six years. Some 189 of the leading contractors had at least half their contract dollars designated as going to small businesses. For 127 companies, at least 90 percent of their money was classified that way. Leading them all was Chugach Alaska Corp., whose status as an Alaska Native corporation classifies it as a small, disadvantaged business eligible not only for preferences in bidding but for small business set-aside contracts. Taking full advantage of its status, Chugach Alaska won $1.4 billion in defense contracts between fiscal 1998 and 2003. The biggest non-minority small business contractor was GTSI Corp., which retained its small business status despite having long since grown out of it. The company collected nearly $1.2 billion in small business contracts over the past six years—72 percent of their overall total.
• A lucrative loophole in the small business rules has enabled contractors to retain their small business status through the life of each contract—even if they’ve grown or been acquired by a much larger company. Titan Corp., a San Diego-based defense electronics firm, with a long string of acquisitions over the past six years (and nearly $2.4 billion in defense contracts), won nearly $550 million of contracts under the small business classification. Other companies have done the same, prompting calls that the small business status be reviewed on a much more frequent basis than it has been. Regulations to require that, at least on a limited scale, are due to take effect later this year.
• The Pentagon’s shopping list has undergone a gradual, and largely unnoticed, transformation in the past two decades. In 1984, almost two-thirds of its contracting budget went for products rather than services. By the early 1990s, the ratio between the two had evened out. By fiscal 2003, 56 percent of Defense Department contracts paid for services rather than goods. Many of these were for routine jobs—like KP duty or building maintenance—that used to be done by low-ranking military personnel. But the Pentagon also contracts for services that are highly sophisticated, strategic in nature, and closely approaching core functions that for good reason the government used to do on its own. The Pentagon has even hired contractors to advise it on hiring contractors.
• The accuracy of the Defense Department’s records—particularly regarding the corporate ownership of its largest contractors—leaves much to be desired. The Center found more than $35 billion in contracts where the ultimate corporate parent was misidentified. In some cases this led to major discrepancies between the amount of contracts actually won by major corporations and the totals reported publicly by the Pentagon.

More details on these findings can be found in the sections that follow. In addition, the report includes detailed statistical contracting profiles for each of the 737 largest prime contractors—the companies that won $100 million or more in defense contracts over the past six years. The profiles include breakdowns of each company’s total contract dollars, the types of contracts they won, the competition they faced, a list of their key subsidiaries, breakdowns of their lobbying and campaign contributions, and a list of the chief products and services they sold to the Pentagon.

After nine months of research, however, this report may raise more questions than it answers. It brings to the surface for the first time the patterns of the Pentagon’s contracting practices and many details of the $900 billion in taxpayer money the Defense Department paid out to its private suppliers. Both this report and the detailed profiles are designed to provide an important new body of research materials for a new wave of informed reporting about the ever- more-expensive, and profitable, business of defending America.

The pages that follow offer analyses of Pentagon spending habits from the following perspectives:

The Biggest Contractors
Competition
Cost-Plus Contracts
Joint Ventures
Foreign Contractors
Political Influence I: Campaign Contributions
Political Influence II: Lobbying
Small Business: Bigger Than You Think
What the Pentagon Buys
The Rise in Service Contracts
Accuracy in Pentagon Reporting

The Biggest Contractors

Competition

A glance at the list of the Pentagon’s top suppliers shows that nation’s biggest defense firms won the bulk of their contracts without going through the competitive process. Of the 10 biggest defense contractors over the six year period of this study, only one—Science Applications International Corp. (SAIC)—won more than half its contracts through full and open competition.

To cite one example, Raytheon is the third largest contractor and the third largest recipient of no bid contracts. Company spokesman Dave Shea said Raytheon’s sole source contracts “are for systems that are unique, where Raytheon is the only one capable of providing those systems to the Department of Defense.”

Boeing spokesman Doug Kennett said the Pentagon negotiates sole-source contracts “when the Defense Department believes it’s in their best interest.”

Here are the details on how the 20 biggest contractors won their contracts, 1998-2003:

Name	Total Contracts	Full & Open	Not Full & Open	Other	No Info
Lockheed Martin	$94,056,641,059	25%	74%	1%	0%
Boeing Co	$81,645,655,400	40%	60%	0%	0%
Raytheon Co	$39,904,717,897	31%	67%	1%	1%
Northrop Grumman	$33,829,847,656	33%	59%	2%	6%
General Dynamics	$33,280,959,821	30%	69%	0%	0%
United Technologies	$17,953,516,117	3%	95%	2%	0%
General Electric	$10,600,007,101	9%	88%	1%	2%
Science Applications Intl Corp (SAIC)	$10,598,835,883	74%	6%	7%	12%
Carlyle Group	$9,334,962,462	38%	60%	0%	2%
Newport News Shipbuilding	$8,852,781,214	2%	98%	0%	0%
TRW Inc	$8,725,744,602	70%	24%	2%	3%
CLASSIFIED CONTRACTOR	$8,267,851,367	16%	82%	0%	2%
Computer Sciences Corp	$6,789,832,719	75%	10%	1%	13%
Halliburton Co	$6,768,728,331	65%	34%	1%	0%
Textron Inc	$6,629,835,387	5%	95%	0%	0%
Litton Industries	$6,478,824,475	38%	56%	1%	6%
Honeywell International	$6,135,622,361	31%	62%	4%	3%
Health Net Inc	$6,111,054,478	99%	0%	1%	0%
Humana Inc	$5,683,896,585	87%	13%	0%	0%
L-3 Communications	$5,233,392,435	34%	54%	4%	8%
NOTE: Totals in this and all other charts naming defense contractors include both the corporate parent and their subsidiaries and affiliates.

Looking at the entire universe of defense contracts over the past six years, some 40 percent of contracts were awarded through “full and open competition”—a process involving either sealed bids, competitive proposals, or a combination of the two.

Even within that 40 percent slice of the Pentagon pie, not all the dollars were given to the most competitive bidder. Ten percent of the “full and open” contracts—and 4 percent of overall defense spending—went to contracts were only one bidder responded.

The biggest slice of the pie went to contracts classified by the Pentagon as “other than full and open competition.” Most of these (about two-thirds) were awarded because there was only one source for the product or service the Pentagon was buying.

Levels of competition varied widely depending on the industry of the contractor and the type of products or services the Pentagon was buying. Some categories—like construction and medical services—were very competitive, while others were not competitive at all. Here are the categories at both extremes where the Pentagon spent at least $1 billion:

Least Competitive Categories

Category	Total	Less than Full & Open Competition
Guided Missiles	$22,747,653,356	96%
Fire Control Equipment	$4,121,932,856	87%
Engines, Turbines and Components	$23,254,881,284	85%
Aircraft Components and Accessories	$14,875,527,520	84%
Trucks, Trailers, Ground Assault & Other Motor Vehicles	$14,892,149,100	80%
Ships, Small Craft, Pontoons and Floating Docks	$31,231,838,029	80%
Weapons	$7,484,413,528	79%
Quality Control, Testing and Inspection Services	$4,398,926,543	78%
Aircraft and Airframe Structural Components	$86,530,378,638	77%
Engine Accessories	$2,518,265,449	75%
Lease or Rental of Facilities	$2,668,382,442	74%
Miscellaneous Products	$10,542,274,617	71%
Ammunition and Explosives	$13,165,716,488	70%
Ship and Marine Equipment	$1,464,987,161	65%
Vehicular Equipment Components	$2,997,653,029	61%
Electrical and Electronic Equipment Components	$11,964,285,604	59%
Food and Beverages	$11,785,260,160	58%
Communications and Detection Equipment	$28,317,777,970	55%
Instruments and Laboratory Equipment	$6,496,703,459	51%

Most Competitive Categories

Category	Total	Full & Open w/multiple bidders
Fuels, Oils & Lubricants	$24,450,584,124	81%
Medical, Dental and Veterinary Equipment & Supplies	$7,810,113,138	80%
Chemicals and Chemical Products	$2,634,514,879	80%
Space Vehicles	$2,867,529,030	78%
Medical Services	$24,563,339,971	78%
Construction of Structures and Facilities	$42,396,893,851	76%
Operation of Government-Owned Facilities	$11,218,471,798	66%
Hazardous Substance and Natural Resources Management	$9,234,078,017	64%
Technical Representative Services	$6,253,625,480	64%
Maintenance & Repair of Real Property	$34,430,112,159	61%
Lease or Rental of Equipment	$2,021,813,249	51%
Materials Handling Equipment	$1,745,198,018	51%
Equipment Maintenance, Repair & Rebuilding	$42,372,061,870	50%

Cost-Plus Contracts

There’s a significant difference in the types of contracts won by the biggest contractors versus smaller ones. Among the Pentagon’s 737 biggest contractors, 33 percent of the contract dollars were awarded on a cost-plus basis, meaning the government would make up the difference for overruns and contractors had little incentive to control costs. Among smaller contractors, only 11 percent of the contract dollars came through cost-plus contracts.

The progression is gradual, as seen in the following chart

And here are the details on the types of contracts won by the 20 biggest contractors:

Name	Total Contracts	Cost-Plus	Fixed Price	Time & Materials	Other	No Info
Lockheed Martin	$94,056,641,059	50%	47%	2%	1%	0%
Boeing Co	$81,645,655,400	27%	70%	2%	0%	0%
Raytheon Co	$39,904,717,897	38%	58%	3%	1%	0%
Northrop Grumman	$33,829,847,656	42%	50%	2%	2%	4%
General Dynamics	$33,280,959,821	39%	60%	0%	0%	0%
United Technologies	$17,953,516,117	22%	77%	0%	0%	0%
General Electric	$10,600,007,101	10%	88%	0%	0%	1%
Science Applications Intl Corp (SAIC)	$10,598,835,883	52%	21%	15%	2%	11%
Carlyle Group	$9,334,962,462	44%	46%	9%	0%	1%
Newport News Shipbuilding	$8,852,781,214	78%	22%	0%	0%	0%
TRW Inc	$8,725,744,602	71%	23%	2%	0%	3%
CLASSIFIED CONTRACTOR	$8,267,851,367	11%	9%	1%	79%	0%
Computer Sciences Corp	$6,789,832,719	41%	26%	24%	1%	8%
Halliburton Co	$6,768,728,331	63%	34%	0%	3%	0%
Textron Inc	$6,629,835,387	51%	48%	1%	0%	0%
Litton Industries	$6,478,824,475	36%	56%	2%	2%	5%
Honeywell International	$6,135,622,361	22%	72%	3%	3%	0%
Health Net Inc	$6,111,054,478	1%	99%	0%	0%	0%
Humana Inc	$5,683,896,585	0%	100%	0%	0%	0%
L-3 Communications	$5,233,392,435	38%	49%	7%	1%	5%

Deidre Lee, the Pentagon’s chief of procurement, defends the policy of cost-plus contracting and maintains that it may actually cost the government less in the long run. If contractors were required to give a firm price for risky new defense systems, she argues, the bids would be sky high to protect the companies’ risk. “What we don’t want is to put someone in a financial position in which they cannot perform,” she says.

Others disagree, among them Rep. Henry Waxman (D-Calif.), an outspoken critic of the government’s contracting practices, who has called cost-plus contracts “notoriously prone to abuse.”

Joint Ventures

Another example of the concentration of defense contractors is the major role played by joint ventures—organizations formed by multiple partners to manage specific contracts or produce weapons systems. While rival defense companies may often be fierce competitors, they are also frequent partners in these joint ventures. Lockheed Martin and Northrop Grumman jointly formed Longbow LLC, which manufactures the Longbow Hellfire missile system. Boeing and Sikorsky Aircraft (a subsidiary of United Technologies) developed the Comanche helicopter until the Army cancelled the project in February 2004.

The list goes on and on, and a total of 43 joint ventures earned at least $100 million each in defense contracts over the past six years. Four of them earned more than a billion apiece, and the partners in those four ventures are an echo of the top independent contractors: Lockheed Martin, Northrop Grumman, Boeing, General Dynamics, General Motors, United Technologies and Raytheon.

When compiling contract totals, the Pentagon treats these joint ventures separately from their partners, and so does this report. But the chart below gives a sense of their important role in supplementing the bottom lines of the companies that run them. Here are the revenue figures for the 20 biggest beneficiaries of joint venture contracts. The totals are based on each company’s share of ownership.

Rank	Joint Venture Partner	Total Share	No of JVs
1	Lockheed Martin	$2,270,866,941	6
2	Boeing Co	$2,074,007,386	5
3	Raytheon Co	$1,834,994,679	4
4	United Technologies	$1,495,634,029	2
5	Northrop Grumman	$1,365,727,709	3
6	General Dynamics	$1,019,471,331	3
7	General Motors	$759,018,643	1
8	ChevronTexaco Corp	$525,804,320	2
9	Royal Dutch Shell	$523,626,795	1
10	Textron Inc	$493,489,235	1
11	BAE Systems	$322,128,066	2
12	Computer Sciences Corp	$314,947,399	1
13	AECOM Technology Corp	$285,125,810	1
14	Day & Zimmermann Inc	$260,452,688	2
15	General Electric	$221,844,482	1
16	DynCorp	$209,225,175	2
17	Thales	$207,073,905	2
18	Parsons Corp	$157,091,765	1
19	Rockwell Collins Inc	$147,289,256	1
20	Halliburton Co	$140,495,373	1

Foreign Contractors

It may come as a surprise to people who’ve always assumed that America’s defense is in the hands of Americans to learn that the list of top Pentagon contractors includes 95 companies, or in some cases government agencies, with headquarters in foreign countries. Three foreign governments made the list—Canada, Germany and Japan—as did the Italian Post, Telephone and Telegraph Service.

The German and Japanese contracts primarily pay for costs associated with U.S. bases located in those countries. The Canadian contracts are all through the Canadian Commercial Corp., a government-owned agency that handles contracts from Canadian exporters, and according to its own description “wraps the Canadian flag around their proposal, providing a government-backed guarantee of contract performance.”

But most of the Pentagon’s foreign suppliers are corporations—many with U.S. subsidiaries. The biggest supplier by far is the United Kingdom, whose companies earned more than $14 billion in defense contracts. Germany is second with $5.9 billion (including the contracts with the government itself). Next are the Netherlands, France, Canada, Denmark, Japan, Bermuda and South Korea—all with contracts exceeding $1 billion between 1998 and 2003.

Some of the companies are multinationals—like DaimlerChrysler or Royal Dutch Shell—that have a considerable U.S. presence. Others have U.S. subsidiaries, or, like Japan’s Sumitomo Heavy Industries, they provide products and services used by U.S. forces overseas.

The list of foreign companies also includes Tyco International., which operates mainly in the United States, though the company is actually incorporated in Bermuda. (Bermuda is also home to the consulting firm Accenture). And the roster includes a contractor listed as “European Utility Companies” that refers not to a single firm, but a whole category of utilities suppliers based throughout Europe.

Here’s the list of countries whose governments or corporations have received major Defense Department contracts over the past six years:

Country	Total Contracts	No of Contractors
England	$14,467,558,907	19
Germany	$5,875,778,292	11
Netherlands	$2,898,934,824	7
France	$2,793,612,113	7
Canada	$2,207,393,181	1
Denmark	$1,913,819,561	1
Japan	$1,888,060,336	8
Bermuda	$1,641,013,751	2
South Korea	$1,505,901,909	8
Saudi Arabia	$915,458,201	2
Greece	$744,127,512	1
Sweden	$672,661,339	3
Kuwait	$651,366,569	1
United Arab Emirates	$506,285,005	2
Italy	$440,520,415	3
Belgium	$422,022,106	2
Bahrain	$419,219,209	2
Qatar	$399,636,545	1
Singapore	$358,651,458	1
Spain	$308,251,413	1
Switzerland	$284,346,086	2
Greenland	$258,745,272	1
Luxembourg	$144,833,745	1
Netherlands Antilles	$144,424,966	1
New Zealand	$128,625,559	1
Israel	$127,402,358	1

Political Influence I: Campaign Contributions

All told, the 737 biggest defense contractors spent nearly $214 million in campaign contributions to federal candidates, parties and leadership PACs during calendar years 1998 to 2003. The money came from PACs, soft money donations (before they were banned by the Bipartisan Campaign Reform Act of 2002) and individual contributions from company executives, employees and their families. Two thirds of the total went to Republicans.

President George W. Bush received more than $4.5 million during that six-year period; his Democratic challenger Sen. John Kerry collected just $332,000. The top 10 contractors alone gave Bush $444,000, versus $56,000 to Kerry.

During 2004, however, it was a different story. Between January and the end of July, Kerry collected twice as much as Bush—$1.6 million versus $824,000 for the president. When those figures are added, Kerry drew just under $2.0 million in campaign contributions from major defense contractors since 1998; President Bush received nearly $5.4 million.

While the top 10 defense contractors were all major political donors, the biggest contributors among the wider group of 737 major defense contractors were not defense companies per se, but those from other industries that are hugely dependent on regulatory, tax and other decisions made in Congress. Only two of the top 10 contributors, and five of the top 20, were defense companies.

Telecommunications and energy firms were prominent on the top donor list, as were two accounting firms. All of them provide goods or services to the Pentagon, but their main business interests—and likely their main motivations for making political contributions—lie outside the defense sector. Here are the 20 biggest contributors among the top defense contractors:

Top Contributors Among Major Defense Contractors

Name	98-03 Contributions	Dems	Repubs	Sector
AT&T Corp	$9,860,460	42%	58%	Communications/Electronics
SBC Communications	$9,160,163	41%	59%	Communications/Electronics
FedEx Corp	$8,017,939	31%	69%	Air Transport
Lockheed Martin	$6,625,986	38%	61%	Defense
Verizon Communications	$5,412,571	35%	65%	Communications/Electronics
Boeing Co	$5,313,529	41%	59%	Defense
PriceWaterhouseCoopers	$5,277,168	23%	76%	Accountants
General Electric	$4,885,867	41%	59%	Misc Manufacturing
KPMG LLP	$4,763,127	22%	77%	Accountants
Southern Co	$4,585,519	29%	71%	Electric Utilities
WorldCom Inc	$4,373,051	36%	64%	Telecommunications
General Dynamics	$4,367,384	40%	60%	Defense
Northrop Grumman	$3,715,150	34%	66%	Defense
Bell Atlantic Corp	$3,356,856	38%	61%	Telecommunications
CSX Corp	$3,329,960	20%	79%	Railroads
Raytheon Co	$3,226,729	41%	59%	Defense Electronics
DaimlerChrysler	$2,797,639	34%	64%	Automotive
BP	$2,607,565	29%	71%	Oil & Gas
Pepsico Inc	$2,535,039	19%	80%	Food Processing & Sales
FPL Group	$2,506,708	11%	89%	Electric Utilities

On the other hand, the 10 biggest defense industry contractors—that is, those companies that make aircraft, ships, munitions and so on—were all generous contributors, with total contributions ranging from $1.6 million to $6.6 million. All gave a majority of their dollars to Republicans.

Contributions by the 10 Biggest Defense Industry Contractors

Name	98-03 Contributions	Dems	Repubs
Lockheed Martin	$6,625,986	38%	61%
Boeing Co	$5,313,529	41%	59%
Raytheon Co	$3,226,729	41%	59%
Northrop Grumman	$3,715,150	34%	66%
General Dynamics	$4,367,384	40%	60%
United Technologies	$2,238,693	42%	58%
General Electric	$4,885,867	41%	59%
Science Applications Intl Corp (SAIC)	$2,117,163	37%	63%
Carlyle Group	$1,640,945	31%	69%
Newport News Shipbuilding	$1,593,104	28%	72%

Chris Ullman, a spokesman for the Carlyle Group, took exception with any characterizations that campaign contributions come from the company itself. “The Carlyle Group has never given any contributions to politicians or political organizations. Individuals who work here are free to do so, but it has nothing to do with the company,” he said.

The study found that many companies that won substantial defense contracts were only minor players in the political arena, or even stayed out of it altogether. Some 171 of the top contractors—nearly a quarter of the total—gave no contributions whatever between 1998 and 2003. Another 181 gave less than $10,000—an amount so small it barely registers on the political Richter scale. Only 202 contractors gave $100,000 or more during the six-year period of this study.

Who Got the Money

The top 737 defense contractors gave $61.6 million in campaign contributions to Republican Party committees and $26.4 million to Democratic Party committees. The rest of their contributions went directly to candidates, or to the “leadership PACs” they operate. The overwhelming majority of dollars went to incumbent office holders.

Here were the top recipients of direct contributions to their campaign committees, between 1998 and 2003:

Top Recipients to Candidate Campaign Committees

Recipient	To Candidate	To Leadership PAC	Total
President George W Bush (R)	$4,546,679	$0	$4,546,679
Sen Ted Stevens (R-AK)	$939,165	$28,500	$967,665
Rep John P Murtha (D-PA)	$932,224	$0	$932,224
Sen Richard C Shelby (R-AL)	$928,518	$95,400	$1,023,918
Rep Tom DeLay (R-TX)	$873,074	$21,625	$894,699
Sen John McCain (R-AZ)	$850,585	$64,100	$914,685
Sen Trent Lott (R-MS)	$835,052	$50,910	$885,962
Rep Duncan Hunter (R-CA)	$812,652	$36,750	$849,402
Rep W J “Billy” Tauzin (R-LA)	$733,396	$6,000	$739,396
Sen Don Nickles (R-OK)	$696,748	$51,200	$747,948
Rep Heather Wilson (R-NM)	$688,502	$0	$688,502
Rep James P Moran (D-VA)	$683,222	$14,000	$697,222
Rep Tom Davis (R-VA)	$673,922	$83,975	$757,897
Rep Henry Bonilla (R-TX)	$664,571	$30,200	$694,771
Sen Rick Santorum (R-PA)	$659,407	$15,350	$674,757
Rep Michael G Oxley (R-OH)	$653,900	$11,800	$665,700
Sen Spencer Abraham (R-MI)	$648,326	$15,000	$663,326
Rep Roy Blunt (R-MO)	$646,481	$9,650	$656,131
Sen Christopher S Bond (R-MO)	$632,845	$0	$632,845
Al Gore (D)	$626,264	$45,200	$671,464

Not surprisingly, the list is top heavy with members of the House and Senate Defense Appropriations Subcommittees—the panels that supply the money for the Pentagon’s budget. But giving money directly to lawmakers is not the only way to win their gratitude. Many members of Congress operate “leadership PACs” that they use to deliver much appreciated dollars to other members and to up-and- coming candidates seeking a seat in Congress for the first time. Raising money for those leadership PACs has become an art form on Capitol Hill, and defense contractors, as the following chart illustrates, have been generous supporters. Here are the members of Congress whose personal PACs collected the most from the top defense contractors:

Top Recipients to Leadership PACs

Recipient	To Leadership PAC	To Candidate	Total
Rep J Dennis Hastert (R-IL)	$1,100,173	$46,200	$1,146,373
Rep Jerry Lewis (R-CA)	$1,002,199	$54,750	$1,056,949
Rep Richard A Gephardt (D-MO)	$620,550	$68,950	$689,500
Rep Joe Barton (R-TX)	$565,172	$20,200	$585,372
Rep Don Young (R-AK)	$497,870	$66,350	$564,220
Rep Martin Frost (D-TX)	$489,644	$39,450	$529,094
Sen Tom Daschle (D-SD)	$471,170	$68,775	$539,945
Rep David Dreier (R-CA)	$397,750	$14,000	$411,750
Sen Mitch McConnell (R-KY)	$376,482	$75,052	$451,534
Sen John B Breaux (D-LA)	$364,273	$23,950	$388,223
Sen John Ashcroft (R-MO)	$359,306	$94,585	$453,891
Sen James M Inhofe (R-OK)	$356,697	$56,550	$413,247
Sen Larry E Craig (R-ID)	$310,790	$32,250	$343,040
Rep Deborah Pryce (R-OH)	$284,493	$9,900	$294,393
Rep Charles B Rangel (D-NY)	$265,750	$24,700	$290,450
Rep John S Tanner (D-TN)	$246,041	$1,800	$247,841
Rep Jim Nussle (R-IA)	$242,250	$26,844	$269,094
Rep Mark Foley (R-FL)	$214,603	$7,500	$222,103
Rep Frederick Upton (R-MI)	$210,694	$6,250	$216,944
Rep John R Kasich (R-OH)	$207,450	$48,550	$256,000

Political Influence II: Lobbying

As with campaign contributions, the top defense contractors were of many different minds when it came to spending money on Washington lobbyists. Only half the top 737 contractors filed lobby reports with Congress indicating they’d spent at least $10,000 in their lobbying efforts. Many contractors reported spending only nominal amounts, while the biggest reported spending tens of millions. In all, the leading defense contractors spent nearly $1.9 billion on Washington lobbyists between 1998 and 2003.

Again, many of the biggest spenders on lobbying were companies—like Altria Group (the former Philip Morris)—whose main interests lie outside defense. But as with campaign contributions, the top 10 defense contractors all ran top-dollar lobbying efforts.

Top Lobbying Spenders Among Major Defense Contractors

Name	1998-2003 Lobby Totals	Sector
Altria Group Inc	$87.9 million	Agribusiness
General Electric Co.	$76.9 million	Misc Business
Verizon Communications Inc.	$72.7	Communications/Electronics
Northrop Grumman Corp.	$70.8 million	Defense
ExxonMobil Corp.	$51.9 million	Energy & Natural Resources
SBC Communications Inc.	$51.1 million	Communications/Electronics
Boeing Co.	$49 million	Defense
Lockheed Martin	$48 million	Defense
Sprint Corp.	$45.5 million	Communications/Electronics
AT&T Corp.	$44.4 million	Communications/Electronics
General Motors Corp.	$39.7 million	Transportation
IBM Corp.	$31.3 million	Communications/Electronics
General Dynamics Corp.	$29.4 million	Defense
DaimlerChrysler Corp.	$29.3 million	Transportation
Motorola Inc.	$28.6 million	Communications/Electronics
Textron Inc.	$27.9 million	Defense
ChevronTexaco	$27.6 million	Energy & Natural Resources
Shell Oil Co.	$25.6 million	Energy & Natural Resources
BP p.l.c. (BP Amoco)	$24.5 million	Energy & Natural Resources
Southern Co.	$23.4 million	Energy & Natural Resources

Lobbyist Spending by the 10 Biggest Defense Contractors

Name	98-03 Lobby Spending
Lockheed Martin	$48 million
Boeing Co	$49 million
Raytheon Co	$15.3 million
Northrop Grumman	$71 million
General Dynamics	$29.4 million
United Technologies	$22.6 million
General Electric	$76.8 million
Science Applications Intl Corp (SAIC)	$12.5 million
Carlyle Group	specific lobbying data for defense properties unavailable
Newport News Shipbuilding	included with Northrop Gumman

Small Business: Bigger than you think

For decades, the federal government has gone out of its way to help small businesses make inroads into the vast federal purchasing market, giving preference to small companies that compete for federal contracts. Under an informal quota system set by Congress, federal agencies are encouraged—though not legally required—to farm out 23 percent of their procurement dollars to small businesses.

While most people’s conception of “small business” may conjure images of small retail establishments, professional offices, or family-run factories, the government’s definition extends much more widely. Indeed, some 189 of the Pentagon’s biggest contractors—those winning at least $100 million in prime contracts over the past six years—showed at least half their contract dollars as going to small businesses. Of those, 127 companies got at least 90 percent of their contracts under the small business designation.

The biggest “small business” was Chugach Alaska Corp., considered a disadvantaged small business since its owners are Alaska Natives who enjoy minority status. Chugach Alaska won nearly $1.4 billion in defense contracts between 1998 and 2003; some 95 percent of that total was marked as going to small disadvantaged businesses. The biggest non-minority “small business” was GTSI Inc., a Virginia-based supplier of computer equipment. Some $1.2 billion of the firm’s total $1.6 billion in contracts were designated as having gone to small businesses. Six other corporations earned half a billion dollars or more in small business contracts over the six-year period.

The government’s rules defining what constitutes a small business vary widely by industry. Companies wholesaling goods to the government must have fewer than 500 employees to qualify. Certain industries—from phone companies to airlines to small arms manufacturers—may have as many as 1,500 employees and still be classified as small in the eyes of the government. Others are designated small businesses based on their annual revenues.

But some companies that are large by anyone’s definition have taken advantage of the government’s interest in helping small business by acquiring companies that have won contracts thanks to their small business status. Under rules which have prevailed for years, a company can retain its small business status throughout the life of the contract—even if the company is no longer small. Since some government contracts may last as long as 20 years, critics have complained that this loophole is actually helping companies it wasn’t meant to, and that more frequent reappraisals of a company’s small business status should be required.

In December, the Small Business Administration is scheduled to adopt a new regulation that will require all small businesses contracting with the government to recertify their small business status every five years. In 2002 the General Services Administration adopted a similar requirement for those businesses that sell goods or services through the GSA Schedule—a fast-track ordering system that lets federal employees choose items off a list of pre- approved suppliers.

But neither of those rules have yet had much effect on big defense contractors, and the table below shows how much money the leading “small businesses” collected in Pentagon contracts between 1998 and 2003. (Set-aside contracts, shown in the chart below, are those that can only be awarded to small businesses.)

Name	Small Business Contracts	Total Contracts	Small Pct	Set-Aside Pct
Chugach Alaska Corp	$1,317,304,425	$1,377,589,626	96%	88%
GTSI Corp	$1,170,934,893	$1,619,414,562	72%	3%
CLASSIFIED CONTRACTOR	$852,966,582	$8,267,851,367	10%	0%
Ocean Shipholdings Inc	$816,091,394	$1,094,875,569	75%	0%
Metro Machine Corp	$654,996,983	$660,195,544	99%	0%
L-3 Communications	$581,947,903	$5,233,392,435	11%	3%
Wornick Co	$561,372,502	$607,488,496	92%	0%
Titan Corp	$549,537,387	$2,389,803,664	23%	10%
Engineered Support Systems Inc	$522,233,418	$1,573,708,929	33%	21%
Todd Pacific Shipyards Corp	$457,257,838	$464,206,666	99%	1%
Ameriqual Group	$440,118,830	$440,118,830	100%	0%
Paramount Petroleum Corp	$432,191,289	$432,191,289	100%	77%
Digital System Resources Inc	$429,655,087	$460,235,430	93%	13%
Holly Corp	$423,826,222	$514,203,000	82%	80%
Spectrum Astro Inc	$423,027,650	$423,727,650	100%	0%
Sparta Inc	$410,448,703	$425,508,397	96%	41%
Dynetics Inc	$409,567,922	$435,244,949	94%	40%
NLX Corp	$395,071,192	$395,169,661	100%	33%
Earl Industries	$391,544,499	$391,900,184	100%	0%
CAS Inc	$388,010,361	$420,512,551	92%	33%

What the Pentagon buys

Aircraft, ships, tanks, missiles, bombs and ammunition—these are the nuts and bolts of a modern military, but they’re only the beginning of the Pentagon’s ever-growing shopping list. Twenty years ago, nearly two-thirds of the Defense Department’s procurement budget went for products; these days a majority of the dollars pay for services. The transition came in the early 1990s and it hasn’t reversed since. In 2003, 56 percent of the U.S. military’s contracting dollars went for services. Here’s a chart showing the transition:

Still, the generals and admirals do buy a good bit of hardware—especially hardware that flies. Out of more than 2,200 detailed budget categories that describe what the Pentagon bought, fixed-wing aircraft was by far the single most expensive item, totaling $68.6 billion between 1998 and 2003. That was also the top category in every single fiscal year going back at least as far as 1984.

But the aircraft themselves are just the beginning. When the many additional categories are added in—for such items as helicopters, aircraft engines, research and development, maintenance, components and the like—the cost escalates to $157 billion over the past six years.

Aggregating the detailed budget categories—for both products and services—into larger groups, here are the top 20 items the Pentagon contracted out from 1998 to 2003:

Rank	Category	Total
1	Research & Development	$140,206,855,854
2	Aircraft and Airframe Structural Components	$86,530,378,638
3	Professional, Administrative & Mgmt Support Services	$73,583,447,989
4	Construction of Structures and Facilities	$42,396,893,851
5	Equipment Maintenance, Repair & Rebuilding	$42,372,061,870
6	Maintenance & Repair of Real Property	$34,430,112,159
7	Data Processing and Telecommunication Services	$33,010,309,515
8	Ships, Small Craft, Pontoons and Floating Docks	$31,231,653,405
9	Communications and Detection Equipment	$28,317,777,970
10	Medical Services	$24,563,339,971
11	Fuels, Oils & Lubricants	$24,450,584,124
12	Engines, Turbines and Components	$23,254,881,284
13	Guided Missiles	$22,747,653,356
14	Utilities, Food Service, Janitorial & Housekeeping Services	$22,604,076,518
15	Transportation, Travel and Relocation Services	$18,096,765,679
16	Data Processing Equipment, Software & Supplies	$17,394,506,239
17	Trucks, Trailers, Ground Assault & Other Motor Vehicles	$14,892,149,100
18	Aircraft Components and Accessories	$14,875,527,520
19	Ammunition and Explosives	$13,165,716,488
20	Architect and Engineering Services – Construction	$12,195,567,488

The research and development component has always been a huge budget item at the Defense Department, and Pentagon contractors are paid to study everything from weapons systems to employment growth & productivity. Broken down into more detail, here are the main subjects they were researching and developing:

Research & Development Category	Total
Ammunition	$1,963,914,225
Defense Aircraft	$27,936,525,895
Defense Electronics & Communications Equipment	$17,280,934,955
Defense Missile & Space Systems	$21,844,945,949
Defense Ships	$3,779,334,874
Defense Tank & Automotive	$1,737,942,398
General Science & Technology	$1,592,345,867
Space	$7,372,810,325
Weapons	$7,896,155,075

The Rise in Service Contracts

The rising importance of outside contractors in providing services to the Pentagon is of more than academic interest. As explored in the accompanying Shadow Pentagon report, it has major implications not just for contracting but for national security. When the normal functioning of defense operations becomes so dependent on contractors that the thought of running a war without them becomes unthinkable – as it has in Iraq – basic questions naturally arise about missing links in the military’s overall command and control.

In that respect, what’s happening in the Pentagon is a mirror of what’s been happening throughout the federal government. The “Reinventing Government” initiatives of the Clinton administration have given way to new moves during the Bush administration to reduce the government payroll by having private contractors compete with the federal workforce for a huge array of jobs.

Angela Styles was the new administration’s point person for following through on President Bush’s campaign promise to open up 450,000 federal jobs to competition with the private sector. As Administrator for Federal Procurement Policy in the Office of Management and Budget, Styles was the top government official dealing with federal contractors. She saw firsthand the extent to which the government has come to rely on private contractors. “There is no question, without the contractors, you can’t be on the battlefield,” Styles told the Center for Public Integrity. “These people prepare all the equipment they have. They really are walking behind the tanks in Iraq.”

Styles, who left the Bush administration in 2003, argues that the widespread growth of contracting for services has expanded beyond the ability of government to oversee it. “I don’t know of any function within the government that would actually operate without contractors at this point,” she said. “I mean it’s a partnership that maybe we stumbled into,” she said. “You walk into a government building, you’ve got a federal employee working next to a contractor, they may have the exact same duties, they may have precisely the same duties, they interact with the public, they make decisions.” And yet, she adds, the public employee falls under government rules; the outside contractor answers to their private employer.

Given the dependence of the government on its private, rented workforce, that lack of management troubles Styles. “I don’t have a problem with the model where there are 10 percent employees and 90 percent contractors; as long as you recognize what the problems are and make it work,” she said. “But that is not what is happening now. You have this 50-50 mix, you’ve done something with human capital in the federal government where there are no incentives to stay. And they are buying things they don’t understand, which is the problem on the front end because you are buying something where you can’t understand the pricing, you can’t understand what you are buying, you can’t compare the people you are buying from. You are not going to manage that contract.”

Adding to the problem has been the federal government’s expanding reliance on streamlining procurement by ordering items – and services – not through the traditional bidding process, but from a catalog or “schedule” maintained by the General Services Administration. “The theory behind schedules was probably a nice idea in the fist place,” Styles said. “It was supplies, it was commodities. It was things that lower level officials could figure out whether they were getting a good price for. It was pens and pencils. It was basic computers. But over time, the problem is that this has evolved to services.”

Being a giant organization, the Defense Department also buys a lot of the same things everyone else buys, only more so. The Pentagon’s electric bill, for instance, came to $3.7 billion over the six-year period. They paid $3.8 billion for fuel oil, $2.8 billion for dairy foods and eggs, $2.6 billion for family housing facilities, and $2.3 billion for custodial and janitorial services. Like a lot of us, the Pentagon even has a “miscellaneous items” category—only theirs amounted to $10 billion over the past six years.

Some of the other things the Pentagon spent money on over the past six years:

Pharmaceuticals	$5.6 billion
Nuclear Reactors	$3.6 billion
Bombs	$3.1 billion
Advertising	$2 billion
Dentistry services	$1.2 billion
Guard services	$1 billion
Personal armor	$991 million
Landscaping/groundskeeping services	$989 million
Men’s outerwear	$973 million
Batteries (chargeable and non-rechargeable)	$961 million
Trash/garbage collection	$910 million
Men’s footwear	$886 million
Rivets	$359 million
Expert witnesses	$219 million
Women’s outerwear	$168 million
Intelligence services	$141 million
Badges and insignia	$46 million
Insect and rodent control services	$40 million
Debt collection services	$25 million
Flags and pennants	$17 million
Tobacco products	$11 million

Accuracy in Pentagon reporting

Combing through six years of Pentagon databases is both a revealing and a frustrating experience. Since conclusions about the patterns in defense contracting are only as good as the data they rely on, much of the Center’s time in the research was spent double-checking the accuracy of the databases. Since one of our most important goals was compiling a list of the top contractors, much of the research was aimed at assuring that all the subsidiaries and affiliates were connected to the right corporate parent.

Putting it mildly, this was not an easy job. Many defense contractors, like corporations in other business sectors, have in recent years accelerated the pace of buying and selling subsidiaries, linking together through mergers, divesting themselves of unwanted properties, sometimes even changing their names. Keeping up all this is a major undertaking, especially over a six-year period. (Had Google not been invented, it would probably have been nearly impossible.)

In the process of compiling the data, it quickly became clear that the Pentagon’s database of contractors was rife with errors concerning the corporate parentage of contractors. The database includes three IDs (derived from Dun & Bradstreet code numbers): one for the contractor, one for their corporate headquarters, and one for the ultimate parent. While some smaller companies were easy to track, and had a single, consistent ID for all three fields, many others had duplicate IDs and outdated or incorrect information about their corporate parentage.

These errors are serious, since without accurate data, compiling a list of leading contractors is simply not possible.

Some of the Pentagon’s errors in matching companies to their correct corporate parents is understandable, given the obscure nature of the company names. It’s not immediately obvious, for instance, that Braintree II Maritime Corp (or Braintree III and Braintree IV, which are also contractors) are subsidiaries of General Dynamics, and the Pentagon database sometimes lumps them correctly and sometimes doesn’t.

One of the most baffling examples was a series of contracts written to five companies with similar names and a common address in Norfolk, VA—Expander Transport Corp., Expediter Transport Corp., Exporter Transport Corp., Expresser Transport Corp., and Extender Transport Corp. In fact, all five are subsidiaries of Maersk Inc., a Danish shipping company that operates out of the same office. Those five companies earned a combined $780 million in Pentagon contracts between 1998 and 2003, but only $260 million of the total was correctly affiliated with Maersk. In all, Maersk shows up in the Defense Department database as collecting just under $967 million in contracts during the six year period. In fact, the company’s awards totaled $1.9 billion. The Center found dozens of similar examples.

And then there are the cases of outright mistaken identity. According to the DOD database, NewTech Inc., a small roofing contractor in South Carolina, was on the receiving end of some $245 million in defense contracts between 1998 and 2003. The company is listed by Dun & Bradstreet as having 15 employees. Its office address, on Hilton Head Island, is no longer correct and the company telephone has been disconnected. More perplexing, the contracts were all for weapons testing and evaluation at the White Sands Missile Range in New Mexico. In fact, the $245 million in contracts went to a New Mexico company with a similar name—a mistake the Pentagon database has still not caught up with after at least six years.

It should be noted that these were not cases of the dollars themselves being routed to the wrong company, but rather of the Pentagon’s misreporting of where the money went in its procurement database. (Though it should also be noted that details on where the money actually did go are not publicly available.)

In all, the Center found that the 737 biggest contractors were identified in the database under a total of 1,612 different “ultimate parent” IDs. The total of incorrectly listed parents came to some $35 billion. The Center did not attempt to standardize IDs for smaller contractors, but a quick glance at the database shows that the problem there is similar.

Given all the inaccuracies in the Defense Department’s database, it is always possible that other errors remain to be discovered. If and when they are, the Center’s rankings, profiles and reports will be updated accordingly.

Note to readers: This story has been reposted. Since the report was originally released, the Center for Public Integrity has changed the way it calculates lobbying expenditures to reflect a more stringent methodology for determining the total amounts. The change was made to correct the potential overstatement of totals. Figures or relevant text that have been changed are indicated with asterisks. (3/31/2006)