From Gulf Coast to Iraq, from IRS to DHS, waste and fraud are contractors’ handiwork

Recent federal-agency reports have identified serious weaknesses in the awarding, structuring and oversight of government contracts and the conduct of associated procurement policies. Congress has begun to scrutinize controversial contract provisions, which may affect how private contractors conduct business with federal departments and agencies.

The administration of President George Bush has presided over a major change in the way the federal government conducts business, shifting many formerly governmental responsibilities away from federal agencies (including the military) in favor of private contractors. The Government Accountability Office (GAO), which audits government policies and functions, in November prepared a report for the incoming Congress that identified government-wide acquisition and contracting issues as one of several high-priority areas in need of increased congressional oversight. The GAO noted that about a quarter of discretionary federal spending in fiscal year 2005, or $388 billion, was spent on the acquisition of goods and services from private contractors.

Wasted government funds?

These GAO concerns have been heightened by recent internal reports (and separate GAO studies) that have identified serious weaknesses in government procurement policies at different federal agencies:

Lost Katrina money. A separate GAO report released in January estimated that the total wasted funds related to Hurricane Katrina relief may top $2 billion, largely as a result of the continuing prevalence of “no-bid” reconstruction contracts. These no-bid contracting practices have persisted despite Federal Emergency Management Agency (FEMA) Director David Paulison’s pledge last year to reopen existing contracts to competitive bidding.

• Interior Department problems. A recent audit of nearly $2 billion in purchases by the Department of Defense (DoD), which were managed by the Interior Department, revealed significant deficiencies. (The Interior Department is allowed to manage other federal-agency contracts in exchange for a fee.) About half the contracts awarded were not made on a competitive basis, and for a roughly similar percentage, there was a failure to verify that prices were reasonable. In addition, more than 90 percent of audited contracts were not monitored, and a similar percentage lacked any independent confirmation that cost estimates were accurate.

Foundering fleet contract. Reports by the GAO and the inspector general of the Department of Homeland Security (DHS) have revealed delays, cost overruns, design inadequacies and operating deficiencies in the largest contract ever awarded by the Coast Guard: the newly inaugurated, $24 billion, 25-year Deepwater project to modernize its fleet. The program was initiated in 2002 and amended in 2005. However, it now appears it will be impossible to meet its objectives, either as to costs, design parameters, timeframe or functionality of refurbished ships.

DHS deficiencies. Recent reports have revealed serious deficiencies in the DHS procurement process, including failure to document procurement decisions appropriately and maintain adequate, accessible procurement files. Congress created the DHS in 2002 to coordinate various homeland-security functions previously conducted in several different agencies; the DHS has failed to implement procurement awarding, oversight and monitoring policies that match those previously in place when functions were scattered across disparate agencies.

IRS contracting woes. The Internal Revenue Service (IRS) has been forced to scale back significantly a previously awarded contract to outsource various data management functions, in favor of continued performance of these activities by IRS employees who hold necessary security clearances.

Problematic policies

Many of the contract provisions that apply to these arrangements have proved controversial, particularly in politically sensitive areas such as the war in Iraq and hurricane reconstruction. In both cases, either national security or exigent circumstances were cited as supporting various controversial contract provisions, including no-bid arrangements and “cost-plus” structures. In theory, the Justice Department is committed to pursuing claims of overbilling by government contractors. Yet while there are several pending cases against military contractors for work conducted in Iraq under the federal False Claims Act, to date none has resulted in any required reimbursement by a contractor to the federal government.

Democratic oversight incentives

During the last Congress, Republican committee chairmen had little incentive to delve closely into arrangements that could potentially embarrass the administration. However, Democratic congressional leaders have made oversight a political priority, for three principal reasons:

Democrats lack the ideological predisposition to assume that a private-sector arrangement is automatically superior to government provision.

The party has a significant political incentive to spotlight areas that can potentially embarrass Republicans, especially when they can do so on seemingly non-partisan, good-governance grounds, in pursuit of rooting out waste, fraud, abuse and corruption.

The Democratic leadership intends to adopt “pay-as-you-go” budget rules. In order to meet budgetary targets, it will be necessary to improve efficiency in the government procurement process.

GAO defined priorities

The GAO has defined certain minimal recommendations that may provide the basis for further scrutiny:

It maintains that Congress should monitor agencies more effectively to ensure that contractors play appropriate roles, and insist that the agency itself retains sufficient staff both to oversee private-sector performance and to verify the quality and costs of goods and services provided. For the last decade, some agencies have outsourced significant proportions of their operations, and scaled back internal monitoring capacity.

The government could amend agency practices to ensure that government contracts are properly structured, so that risk is shared between the government and the private sector, both in terms of performance and outcome. The Bush administration has been extensively criticized for the structure of the contracts it has awarded, by relying on cost-plus structures that provide little incentive to minimize costs.

It should target agencies with the largest acquisition budgets, such as the National Aeronautics and Space Administration (NASA) and the DoD, and make improving their procurement procedures a key priority.

Congress could track agency plans to address high-risk acquisition and contract management areas identified by the GAO, including DoD, NASA and Department of Energy contracting procedures, and interagency contracting practices (including, but not limited to, the practices of the General Services Administration).

Corruption investigations?

Congressional Democrats have begun to initiate corruption investigations, the scope of which may widen significantly as political considerations dictate. The House Oversight and Government Reform Committee, under Chairman Henry Waxman (D-Calif.), conducted hearings last month into contracting abuses in Iraq, and these may lead to further action.

Traditionally, the offices of the Justice Department’s U.S. attorneys have played a leading role in investigating political corruption. U.S. attorneys are nominally non-political actors, and oversee federal criminal and civil legal investigations in various large U.S. cities. However, any such investigations may be hampered by recent Bush administration policies, as eight U.S. attorneys have recently resigned or been replaced, allegedly for performance-related reasons. The administration’s Democratic Party opponents claim that these legal officers have been replaced by Republican loyalists so as to reduce the likelihood of corruption investigations. The Senate Judiciary Committee has promised further hearings into this issue.

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See