Friday, October 24th, 2014

The Obameter

Create a system of incentives and penalties for defense contracts


"Enact a program of market incentives and sanctions for Pentagon contractors, just like any other good business client would use, to reward companies that perform well and come in under budget, while punishing firms that fail to perform as originally hired."


Updates

Progress on defense contracts, but still room for improvement

As a candidate, Barack Obama promised to overhaul defense contracting to make it more efficient. In October 2009, the Office of Management and Budget put out a memo, "Increasing Competition and Structuring Contracts for the Best Results," and several steps followed.

In 2010, Secretary of Defense, Robert Gates, launched an effort called Better Buying Power. A Sept. 14 memo from under secretary Ashton Carter told Pentagon buyers that their contracts should emphasize the "tie between profit and performance.” A contractor who kept costs down would be rewarded with higher profits, although not so high as to eat up the cost savings.

Carter's memo gave the example of a key component in the Navy's fleet of destroyers. By using incentives, Carter said the government saved $400 million to repair nine ships.

The number of memos on this general topic is large, and the titles are full of military purchasing jargon. Each captures a step in the tedious process of turning broad policy into new methods used by tens of thousands of bureaucrats.

Alan Chvotkin, executive vice president of the Professional Services Council, a trade group for contractors, said the group has seen a couple of changes at the Pentagon. Chvotkin said it is harder to secure incentive payments. Previously, contracts awarded fees if a firm completed a task by a certain date, but if it failed to deliver, it could "roll over” the award amount and get it later.

"Now, there is no roll over,” Chvotkin said. "The terms are win it or lose it.”

As for penalties and other sanctions for firms that prove unreliable, Chvotkin said the Pentagon now uses past performance as a factor in awarding future contracts. He also said there's been an increase in suspensions and debarments, a measure that bans a firm from getting any new contracts for months or years at a time.

But Charles Tiefer, a specialist in military procurement and law professor at the University of Baltimore School of Law, said suspensions and debarments mean less than one would think. The numbers might be up, Tiefer said, but that's mainly for small firms in Afghanistan.

And even when wrongdoing is confirmed, there can be few consequences. Two senior executives of a construction firm admitted to false billings, a felony offence. But the government "arranged a settlement with them, so they were not suspended or debarred for one single day,” Tiefer said.

Congress shares some of the blame, in Tiefer's view. "A lot of them purport to be unhappy about bad procurement,” Tiefer said, "But they only take baby steps.” Tiefer said no reform bills have emerged from the Republican-controlled House.

The Obama administration has taken a number of steps to use incentives and penalties to get the same results for less money from contractors. The methods are in place but defense officials don't use them as much as they could. We rate this promise a Compromise.

Sources:

Interview with Alan Chvotkin, Executive vice president, Professional Services Council, November 6, 2012

Interview with Charles Tiefer, Professor of Law, University of Baltimore Law School, November 6, 2012

Interview with Scott Amey, General counsel, Project on Government Oversight, November 5, 2012

Department of Defense, Office of Acquisition Technology and Logistics, Memo: Better buying power, September 14, 2010

Administration works toward adding competition for defense contracts

During the campaign, Barack Obama promised to "enact a program of market incentives and sanctions for Pentagon contractors, just like any other good business client would use, to reward companies that perform well and come in under budget, while punishing firms that fail to perform as originally hired."

In May 2009, Obama signed the Weapons Systems Acquisition Reform Act, which issues general directives to the secretary of defense to "ensure competition throughout the life cycle of major defense acquisition programs." The bill does not specifically enact a program, but instead tells the secretary of defense to figure out a way to make the system more competitive.

More recently, in October 2009, the Office of Management and Budget issued a memo titled "Increasing Competition and Structuring Contracts for the Best Results." In the memo are specific guidelines on how to create incentives so defense companies finish their contracts on time without going over budget. No new program is mentioned, however.

It is too early to tell whether these two actions will lead to increased competition in defense contracting, and nothing as formal as a program has been established, but clearly the administration is placing emphasis on the idea. We'll keep an eye on it, but for now we're rating it In the Works.

Sources:

 Barack Obama, "A 21st Century Military for America", accessed on Jan. 13, 2010

OMB, "Increasing Competition and Structuring Contracts for the Best Results", Oct. 27, 2009

Public Act, "‘Weapon Systems Acquisition Reform Act of 2009"", accessed Jan. 13, 2010

President Obama, "Remarks by the President at Signing of the Weapons Systems Acquisition Reform Act", May 22, 2009