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A Triple Play on Improving Oversight for Better Contracting

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Recently the Center for American Progress released a trifecta of reports that anybody interested in military outsourcing and privatization issues should read.

The three CAP reports are:

Insourcing

Better Auditing for Better Contracting

How Sunlight Can Improve Federal Contracting

The reports were written by Pratap Chatterjee, who was a visiting fellow at CAP from 2010 to 2011, which funded the work, where he focused on government procurement reform as part of the "Doing What Works" team.

Chaterjee is not a newcomer to these issues. He has traveled to the Middle East and Central Asia more than a dozen times since September 11, 2001, spending more than 16 months on the ground in the region to investigate military contractors. He has visited Afghanistan and Iraq four times each. He has also embedded with the U.S. military and visited bases in Afghanistan and Iraq, as well as in Kosovo and Kuwait, to research military logistics and police training contracts with KBR and DynCorp.

He has written two books on this subject -- Halliburton's Army and Iraq, Inc. -- as well as numerous articles and reports such as "Outsourcing Intelligence in Iraq," which was produced in collaboration with Amnesty International.

And, in his role as managing editor of CorpWatch, a website tracking corporate malfeasance, he has also commissioned and edited a number of other investigative reports such as "Afghanistan, Inc." on reconstruction in that country.

Thus, just like the old E.F. Hutton commercial, when Chaterjee speaks, and writes, we should listen.

Let's start with the basics. The core argument of all private military and security contractor advocates is that they can do things more cheaply and efficiently than their counterparts in the public sector. And certainly that is true, at least some of the time.

But the problem is that most PMSC advocates assert this all the time, often without evidence. Or, to paraphrase what Ronald Reagan said in 1980, when debating Jimmy Carter, there they go again. It has been repeated so many time that it has gone beyond being a mere tautology or cliché and has morphed into a full blown obsession.

This is rather ironic given that cutting federal expenditures, as in deficit reduction is itself a national obsession, at least for the Republican Party. Because, as Chatterjee notes, if this really is a vital necessity then the solution is both obvious and simple, insource, not outsource.

He finds that in recent years a practice known as "insourcing" -- where government agencies move work back in-house -- has been gaining traction. Insourcing has been successfully embraced by a number of federal agencies, including the Department of Homeland Security, the Internal Revenue Service, and the U.S. Army, reversing a longstanding trend that saw more and more federal work going to private contractors.

Why does it make sense to move some jobs back in-house? According to Chatterjee:

Insourcing saves money. The information technology division of U.S. Customs and Border Protection at the Department of Homeland Security estimated that it saved $27 million in 2010 out of a budget of $400 million by taking 200 private contractors and giving those same individuals government jobs. Likewise, approximately half of the 17,000 jobs that the Department of Defense brought back in-house in 2010 were done simply because the Pentagon was able to save money.

Contractors should not perform some jobs. Contractors are sometimes hired to do work that the government considers an inherent public duty such as making decisions on federal matters. Such jobs should be returned to the public sector. Tax collection is one task that has been ruled inherently governmental because of the potential conflicts of interest, but the task has occasionally been outsourced. Another task with a potential conflict of interest is contractor oversight of other contractors. This often occurs in unexpected and extraordinary situations such as the response in the wake of Hurricane Katrina and the reconstruction effort in Iraq, but it also occurs when there is a freeze in federal hiring. Encouraging federal agencies to hire in-house staff to conduct such key governmental tasks will improve the quality of such work.

Agencies can lose vital in-house skills through outsourcing. When the Bush administration decided to hire contract interrogators during the Iraq war, it spurred trained personnel to quit the military in order to benefit from the higher pay and flexible lifestyles afforded contractor employees. The same was true in other government sectors such as intelligence and foreign policy. Experts are understandably concerned about the long-term impact of this trend. Mark Lowenthal, a former CIA assistant director, told Congress during a 2011 hearing that his agency was now relying on staff with less than five years experience -- "It's the least experienced analytical staff since 1947, and this demographic trend will play out in years to come." Ensuring the right balance of contractors and government personnel in the federal workforce must remain a key federal goal.

How do things get better? Chatterjee calls for strengthening auditing. Of course, this is hardly a novel recommendation. Still, given the enormity of contracts the federal government awards each year makes this a paramount obligation.

Consider that $530 billion in taxpayer money is awarded annually to contractors. The agency with the greatest share of this work is the Defense Contract Audit Agency (DCAA), which despite its name and location within the Pentagon is responsible for the lion's share of auditing government contracts. The DCAA recovered $2.7 billion in 2010, but it could increase this substantially if it was fully and properly staffed and given more funding together with sufficient authority and independence.

DCAA is in charge of auditing all military contracting, about $367 billion or 70 percent of all government contracting in fiscal year 2010. In addition, an astonishing 76 percent of civilian audits were also performed by the agency in 2009.

In the past DCAA has claimed a return on investment as high of $50 for each dollar spent, although that number has gone down over the years to $5.10 per dollar today.

In the past DCAA was criticized for spending too little time on audits but now it is criticized for taking too long. In response to the critical GAO report and Congressional hearings, the agency has attempted to shift its organizational bureaucratic culture over the past three years. However, many believe that these changes have actually lessened oversight of government contractors. In particular, DCAA now seems to be focusing on fewer contracts, and this is clearly not good enough.

Some of Chatteerjee's recommendations to fix this are:

• Giving auditors authority to subpoena contractor records, which they cannot do now
• Naming and shaming companies that do not have adequate financial systems
• Withholding 10 percent of contractor fees if they do not have adequate business systems in place to create a financial incentive to improve accounting systems
• Moving to risk-based audits and random checks rather than excluding certain types of contracts such as limiting proposal audits to fixed-price contracts over $10 million and cost-type contracts over $100 million, as is now the practice
• Completing pricing reviews within a set number of days so that the contracting agencies can issue contracts in a timely manner
• Providing the Defense Contract Audit Agency with its own independent general counsel so that it does not face a conflict of interest by relying on the Pentagon's lawyers

If you think this is just esoteric bookkeeping trivia consider this:

The Defense Contract Audit Agency has already chalked up new failures because of this slowdown. One recent example is Columbus, Ohio-based Mission Essential Personnel, LLC, which was awarded an initial five-year-contract by the Department of Defense's U.S. Intelligence and Security Command (worth up to $414 million to provide 1,691 translators in Afghanistan in September 2007 that was later expanded dramatically to support the tens of thousands of soldiers that the Obama administration was surging into the country.67 The private company employed 6,800 translators in Afghanistan and billed $629 million in revenue in 2010 alone, a dramatic increase from its tiny 2005 revenues of $6.7 million.

In July 2010 the Commission on Wartime Contracting discovered that the Defense Contract Audit Agency had failed to conduct a single business systems audit for Mission Essential Personnel. Asked to explain this failure, DCAA Director Patrick Fitzgerald explained that the contract grew quicker than expected. "Are we behind the curve? Yes. We should have been in there quicker," he told the commissioners at a hearing in Congress. "Our experience has shown that when contractors grow that fast, the procedures, processes, and systems have trouble keeping up with that growth, increases the risk to the U.S. government."

Yet a series of confidential government reports written by contracting officers in Afghanistan in 2009 and 2010 that were later obtained by the Associated Press showed that Mission Essential Personnel's billing systems were already failing.70An AP article quoted the internal reports that alleged that the company had no idea what units the linguists were working with or if they were even showing up for work. "MEP's inability to track their linguists continues to be a problem," a report written in late 2009 claimed. "Despite MEP's acknowledgment of this issue little has been done to correct the problem." Another military report said: "MEP's linguist accountability completely collapsed ... following months of deterioration." It got worse: translators who had returned to the United States continued to be paid according to another report written in late summer of 2010.

Part of the problem was that translators could log into Mission Essential Personnel's computer system from anywhere in the world and submit fake timesheets. "MEP does not have in place an effective, systemic method of insuring that their U.S.-hire linguists are actually at their duty location performing the services they are being contractually paid to do," the report said.

The company says it has since fired the translators that were cheating. In a statement to the Associated Press, Mission Essential Personnel said the military had never alerted the company of "any linguist accountability problems." Yet, the question remains: Had the Defense Contract Audit Agency done a full audit of the company's billing systems and labor management practices between 2005 and 2010, it is possible that this problem could have been caught earlier.

Finally, Chatterjee also calls for a single, streamlined database that tracks fraud, waste, and abuse in federal government contracts.

Doubtlessly some will decry this as just another example of government micromanagement, given that the government today uses dozens of standalone databases to track more than half a million business entities that are eligible to bid on the $536 billion in federal contracting for goods and services.

Yet, Melanie Johnson, a Department of Defense contracting officer, issued in January 2007 a $300 million contract to AEY, Inc., of Florida to provide weapons and ammunition to the Afghan army and police. Seventeen months later, AEY President Efraim Diveroli was indicted for fraud on the very same contract, for selling more-than-40-year-old Chinese ammunition to the government. Later investigations showed that there was plenty of available information on AEY and Diveroli that should have given Johnson pause -- had she known where to look for it.