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Service contracting has risen dramatically in the last decade

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Government contracting has always been a complex matter, thick with legal wrangling and bureaucracy, but the last decade has seen a radical change in how the U.S. government purchases goods and services.

At one time, federal agencies constructed buildings, built machines and cleaned offices themselves, or found another agency to do it. Today, the U.S. government spends some $200 billion a year buying everything from information technology services to pencils to advanced weapons systems from the private sector.

The Defense Department alone accounts for 75 percent of that spending. Following a series of scandals in the 1980s, where the Pentagon was revealed to have paid outrageous sums for commercially available products, Congress decided to overhaul government procurement. The result was the Federal Acquisition Streamlining Act of 1994, which simplified the maze of procurement regulations to make it easier for federal agencies to buy products from the private sector.

The new law dovetailed with former Vice President Al Gore's "Reinventing Government" initiative, which aimed to trim the federal workforce, and matched the realities of the Pentagon's shrinking budget. As a result, where the federal workforce has shrunk, the contractor workforce has grown. Paul Light, a scholar at the Brookings Institution, calls this workforce the "shadow government," and estimated its size in 1999 at 5.6 million.

More than half of all government contracting today is spent on services—an increase of about 24 percent since 1990—making it the largest spending category. "Twenty years ago, (the government) contracted for supplies, construction and services, in that order. Now it's services, supplies and construction, but services are what's driving the train," says Steven Schooner, associate professor and co-director of the government Procurement Law Program at George Washington University.

However, many contract acquisition and oversight staff were eliminated in the rush to cut back the federal workforce—a 2003 General Accounting Office report found that the Defense Department's acquisition workforce was reduced by more than 50 percent between 1990 and 2001, while the department's contracting workload increased by more than 12 percent. Since service contracts are more difficult to write than an order for a commercial item or construction job, the result is more ambiguity and less oversight, says Schooner.

Government contracts generally fall into one of three categories:

  • fixed-price, where the government and contractor decide on a price to which the contractor is bound even if costs run over;
  • time-and-materials, where the government and contractor agree on an hourly rate that includes labor, materials and overhead; and,
  • cost-reimbursement, where the government reimburses the contractor for costs incurred in providing a service.

Congress and the General Accounting Office have expressed strong reservations about cost-reimbursement contracts, which make up the highest value of those awarded in the last two years for reconstruction in Iraq and Afghanistan. Such contracts allow the government to respond to changing conditions, such as international conflicts, and to call on the contractor to deliver by issuing a "task order," a sort of mini-contract which lays out specific work requirements. The U.S. Army's Logistics Civil Augmentation Program, or LOGCAP, held by Halliburton subsidiary Kellogg, Brown & Root, is one such contract.

Under cost-reimbursement contracts—which one former Washington government lawyer jokingly referred to as "defraud me please" contracts—companies decide how much a service will cost to perform. These contracts are also known as "cost-plus" contracts because the contractor's profit comes from fees paid by the government beyond the cost of the service, which are calculated using one of several fee arrangements. One common arrangement is award fees, in which the contractor receives a base fee plus an additional fee based on performance. The additional fee is often calculated as a percentage—typically less than 10 percent, according to Schooner—of the service's cost. Critics say this structure gives contractors an incentive to bill the government at a premium so that they will make a correspondingly fat fee. Fixed fees—in which the government agrees to pay a certain fee regardless of performance—are also fairly common. However, this arrangement has also been sharply criticized for not providing any incentive for contractors to do a good job or control costs. "[Cost-plus contracts] are notoriously prone to abuse," Rep. Henry Waxman, the California Democrat who's been the administration's fiercest critic on the contracting front, said in October.

Several of the contracts in Iraq and Afghanistan are also described as "indefinite delivery/indefinite quantity" or ID/IQ contracts. This means that, at the time the contract was awarded, the government did not know how many services or products it wanted or when it wanted them. A contract can be either indefinite-delivery or indefinite-quantity or both. For example, if a contractor agrees to provide the government with all the tires it needs at $40 per tire in six months, that's a fixed-price indefinite-quantity contract, but if it agrees to provide 200 tires at $40 per tire whenever the government needs them, that's a fixed-price indefinite-delivery contract. If it agrees to provide all the tires needed at $40 per tire whenever the government needs them, that would be a fixed-price indefinite-delivery/indefinite-quantity contract.

ID/IQ contracts are generally given to several companies at once so that they can compete to fill each task order and give the government the best price. However, Waxman has criticized the ID/IQ contracts administered in Iraq for going to one contractor only, giving companies like Halliburton and Bechtel a monopoly. "This is great for the companies, but terrible for the taxpayer," Waxman said.