THE BLOG
09/02/2010 07:30 am ET | Updated May 25, 2011

Shadow Elite : Selling Out Uncle Sam: Government Contracting -- A Free Market Farce

By Janine Wedel and Linda Keenan

This is the fifth of a Shadow Elite series, investigating the game-changing effects of government contracting on the most vital government functions.

As an outrage-generator, an example of gross abuse of government contracting dollars, Exhibit A is David H. Brooks, CEO of body armor manufacturer DHB, accused of using company (taxpayer) dollars to buy, as reported in the New York Times:

.....university textbooks for his daughter, pornographic videos for his son, plastic surgery for his wife, a burial plot for his mother, prostitutes for his employees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sapphires and diamonds.

But while it makes for good copy (page 1 of the Times, no less), the outrage may be misplaced. The deeper scandal of government contracting goes far beyond the actions of a handful of bad actors and products that can seen and touched. It is systemic, insidious, potentially damaging to national security - and perfectly legal. Moreover, the way government work is frequently awarded in our supposedly capitalist system is in clear defiance of free-market principles: a select group of mostly well-entrenched and connected companies often win work, with little or no competitive bidding. Janine investigated this troubling phenomenon in her book Shadow Elite and in a follow-on study (supported by the Ford Foundation), Selling Out Uncle Sam: How the Myth of Small Government Undermines National Security, just released last month.
 
A widely held belief is that contracting out is motivated by efficiency and that contracts are awarded through competitive processes. A look at the reforms instituted during the Clinton White House helps explain how this often is not the case.
 
Under the rubric of "reinventing government" and deregulation, the Clinton administration transformed contracting rules with regard to oversight, competition, and transparency. Industry associations worked to make government purchasing faster for the agencies and "friendlier" for contractors.
 
The industry-energized reforms removed many of the traditional competition and oversight mechanisms that had been in place for decades and provided the statutory basis for new kinds of mega contracts, such as the "Multiple Award" Indefinite Delivery/Indefinite Quantity (IDIQ) system, under which an estimated 40 percent of all federal government contracts are now awarded in areas ranging from computer support to analysis of intelligence. Like the euphemisms of politicians obscuring their intentions, the language of these awards is telling: "contracts" that aren't really contracts; "competitions" without real competition; "task" orders that may sound like small potatoes but can net billions of dollars for the contractor.
 
The stated intention of the "reforms" was a streamlined procurement process that would reduce the time, costs, and bureaucracy incurred in separate purchases and make contracting more efficient. As a result, over the past decade and a half, small contracts often have been replaced by bigger, and frequently open-ended, multiyear, multimillion-, and even billion-dollar and potentially much more lucrative (IDIQ) contracts with a "limited pool of contractors," as the Acquisition Advisory Panel - a government-mandated, typically contractor-friendly task force acknowledged. The changes may, in part, have simplified bureaucracy, but with players on this terrain personalizing bureaucracy, they also reinvented it and helped bring about new institutional forms of governing in which government and business cozily intertwine. The IDIQ contracting system substantially removes public information and transparency from the contracting process and creates conditions that encourage network-based awarding of contracts, off-record deal making, and convoluted lines of authority--all ingredients in the personalization of bureaucracy.
 
Legally, IDIQ contenders engage in "full and open competition." But IDIQ contracts are not traditional contracts; they are agreements to do business in the future, with the price and scope of work to be determined. "Competitions" for open-ended contracts preapprove contractors for almost indeterminate periods of time (five to ten years, for instance) and money ranging into billions. When so anointed, contractors' names appear on a list maintained by a government agency. That agency, and usually other agencies, can turn to the chosen contractors, who now possess what has been called a "hunting license," to purchase everything from pens to services. The old system required publicly announcing--each solicitation for government work over $25,000 --- and then allowing companies to compete for it. Under today's IDIQ system, only competitions for hunting licenses are required to be announced in advance (by posting on a government Web site).
 
What comes next--after the award of a mega contract--takes place behind closed doors and constitutes a virtual revolution in government procurement. Under the old system, overseers could document the amount of the contract because the amount was, more or less, clear when the contract was awarded. Under the current system, services are contracted in the form of "task orders," mini contracts that specify particular work assignments. There is no public posting of task orders, so the ability to obtain sub rosa information is crucial to success. Issuances of task orders occur on an ad hoc basis without prior announcement. For instance, in 2007, the government awarded a telecommunications IDIQ contract worth $50 billion to twenty-nine companies. Such awards are only the beginning of the day at the hunt. No open bidding will divvy up those billions. With competition off the books, rather than through bureaucratically monitored processes, the deciders are afforded more discretion and are subject to less oversight than in the past. Who you know and who you owe are more likely to be decisive.  All of this exists mostly out of public view.
 
Although IDIQ contracts help maintain the façade of government efficiency, the reality is that favored contractors sometimes make the list because they have personal connections with government officials. For instance, huge, noncompeted awards, justified on national security grounds, have been granted for work in Iraq. Defense companies linked to senior members of the Bush administration's inner circles were the beneficiaries of some of these awards.

In 2006, the Washington Post reported that audits of 49 deals conducted by the inspectors general for the departments of Defense and Interior found that more than half of the contracts inspected were granted without competition or without checking to see that the prices were sensible.

And in the aftermath of hurricanes Katrina and Rita, FEMA initially contracted with four large companies to provide housing by using noncompetitive procedures. Some government procurement specialists have also argued that the supposedly cost-saving IDIQ system has often kept government contracting officials from getting good deals for their agencies. In fact, in the few cases in which government agencies have insourced, they have done so after calculating they would save significant amounts of money. So much for competition and the free market.   The Obama administration has acknowledged the increase in the number of sole source contracts over the past decade.  A 2009 White House Memo states:

Since 2001, spending on government contracts has more than doubled, reaching over $500 billion in 2008. During this same period, there has been a significant increase in the dollars awarded without full and open competition and an increase in the dollars obligated through cost-reimbursement contracts.

To address this problem, the administration has directed agencies to take steps to shrink the share of dollars obligated through new contracts where there is little or no competition, according to a July 2010 statement issued by the White House.

Acronyms like IDIQ and phrases like "sole source contract" don't pack the visceral punch that the jewel-encrusted belt buckle does, in conveying abuse of funds or more fundamentally, flouting of the free market. But readers would be advised to fight the glaze factor. While the belt-buckle might have wasted a hundred thousand taxpayer dollars, the pervasive, anti-competitive practices run amok throughout government contracting might be costing us hundreds of millions or even billions. That's more than enough punch.