Oh those efficient contractors
The US Government regularly awards lucrative contracts to do things the Government is unable to do, such as acquire goods and services for the various branches of our military. Unfortunately, often these contracts turn into expensive boondoggles with vast profits being made by private companies while the services are delivered late, over cost or not at all. In today’s NY Times is a story about cost over runs and other problems as the Navy attempts to build a new class of warships which serves as a case study in the pitfalls of dependence on the military industrial complex.
The biggest reason why the government contracts out projects is to save money. There is a theory that private enterprises complete work most cost efficiently because they are competing for contracts. As we have previously noted, the notion of efficiency in the private sector is something of a fallacy as the free market really is only truly efficient at generating profit.
That issue would not be so large a problem were it not for clauses inserted into contracts which stipulate that cost over runs will be paid for by the government. These contracts set a guaranteed profit for the contractors despite inefficiencies, creating no incentive to do the work in a timely or cost effective manner.
Even as spending on new (military) projects has risen to its highest point since the Reagan years, being over budget and behind schedule have become the norm: a recent Government Accountability Office audit found that 95 projects — warships, helicopters and satellites — were delayed 21 months on average and cost 26 percent more than initially projected, a bill of $295 billion.
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Lockheed had virtually no shipbuilding experience. But in keeping with a Pentagon policy that called for letting big military contractors run complex projects with minimal government supervision, the Navy made the companies primarily responsible for all phases of development — from concept studies to detailed design and construction.
In theory, the contractors’ business and technological acumen would save taxpayer dollars. But the Navy agreed to reimburse the companies for cost overruns rather than setting a fixed price, leaving little incentive to hold down costs.
If the reason for outsourcing military contracting is to save costs, produce a better quality product and do so in a timely fashion, we are failing on all counts under the current system. Without financial incentives to live up to initial cost estimates we will continue to see cost over runs. Without financial incentives to finish projects on time, we will continue to see projects finish late. Without oversight by qualified individuals we will continue to see projects awarded to companies with no experience run late and over cost.
One Response to “Oh those efficient contractors”
Cost-overrun by government-subsidized corporations (like Lockheed) is certainly not a new scenario, particularly during the Bush administration’s privatization drive. During the Iraq occupation, companies hired by the government (in secrecy, no less) to provide logistical and engineering support (such as KBR, a subsidiary of Halliburton) routinely overcharged (exceeding their initial estimates) for services rendered.
In 2005, Pentagon audits concluded that $1 billion of Halliburton’s bill was inflated. Abuses, such as charging the government for twice as many meals as needed, purchasing unnecessary heavy equipment, and duplicate billing were revealed as commonplace. Halliburton was unapologetic, claiming “that it performed well and honestly in Iraq and that any billing disputes were part of the routine give-and-take of government contracting.” Unsurprising. Halliburton, a corporate entity motivated by profit, realized it could use cost overruns to its advantage since, “under the contract, the company is reimbursed for its actual costs and then paid a premium of 1 percent to 3 percent, depending on performance.”
(see: Eckholm, Erik. “Democrats Step Up Criticism of Halliburton Billing in Iraq” NYTimes 28 Jun. 2005.)
It’s nice that the GAO recognizes these corporate abuses of government trust. However, the continuation of these wasteful practices is an indication of how firmly entrenched Big Business is in Washington, DC.
Comment made on April 25th, 2008 at 1:08 pmLeave a Comment