Outsourcing the Pentagon from The Center for Public Integrity

The sincerest form of flattery

2011-11-17T16:49:11-05:00

Following the extraordinary success of the Washington-based Carlyle Group, which has built a private equity empire that's earned billions for its investors, a number of firms have lined up rosters of former government officials and high ranking military officers as they pursue companies that are in the national security business.

Carlyle, which ranked as the ninth largest Pentagon contractor from 1998 to 2003, has made billions of dollars by investing in the defense sector. A team of high-powered former Washington insiders, including Frank Carlucci, who served as secretary of defense in the Reagan administration, and James Baker, who served as George H. W. Bush's secretary of state, led its pursuit of defense deals. (See related report, "Investing in War.")

More than a half dozen companies are now following in the footsteps of Carlyle by signing up former high-ranking government and military officials as they try to make inroads into the Pentagon and the newly-created Homeland Security contracting business.

The blue-chip political talent these private equity firms have lured include five of the past nine defense secretaries, two secretaries of state, two national security chiefs, two CIA directors and dozens of distinguished retired military officials.

Veritas Capital Management is the 41st largest defense contractor and second only to the Carlyle Group among private equity firms. Though Veritas doesn't have any marquee former politicians in its ranks, its roster includes Adm. Joseph W. Prueher, ex-commander-in-chief of the U.S. Pacific Command and former U.S. ambassador to China; Gulf War I veteran and former U.S. Southern Command chief Gen. Barry R. McCaffrey; former commander-in-chief of Allied Forces in Southern Europe Admiral Leighton W. ("Snuffy") Smith; former commander-in-chief of the U.S. Central Command Gen. Anthony C. Zinni; and Gen. Richard E. Hawley, former commander of Air Combat Command at Langley Air Force Base, Va.

The companies it has invested in have been very successful in bagging defense contracts, with nine of them winning Pentagon deals since 1998. More than 70 percent of the firm's contracts were brought in by Vertex Aerospace (formerly Raytheon Aerospace, part of the Raytheon Corp.), which provides aviation and aerospace technical services to the Pentagon and other branches of the U.S. government. Veritas sold Vertex in December 2003.

Unlike the Carlyle Group, which has reduced its investments in the defense sector, Veritas is still investing heavily. Last July it bought a majority stake in Springfield, Va.-based McNeil Technologies, which provides translation services to the Defense Department and intelligence agencies, among others. Primarily catering to the national security market, the bulk of McNeil's more than 1,000 employees have security clearances.

New entrants

In the past three months alone, two new venture partnerships have been formed, with hundreds of millions in funds, to invest in the national security market. Former Pentagon leaders, both civilian and uniformed, are at the center of both efforts.

Last August, former Defense Secretary William Cohen disclosed his plan to form a merchant banking firm, TCG Financial Partners, to invest in defense companies. Cohen, who heads The Cohen Group, a consultancy in Washington, D.C., hired a top investment banker from Bank of America to head the new private equity firm, which aims to raise $300 million. According to news reports, the ex-Pentagon chief will also employ Gen. Joseph Ralston, Supreme Allied Commander in Europe until last year, and former NATO Secretary General George Robertson.

In September, Bear Stearns Merchant Banking, the private equity arm of investment banking and securities trader Bear Stearns, entered into an alliance with GlobeSecNine, a little-known private equity group headquartered just a few miles from the Pentagon in Arlington, Va.

Bear Stearns Merchant Banking, which manages $1.5 billion, has earmarked $300 million to invest in national security-related companies, while GlobeSecNine has connections to the country's defense and national security establishment. David C. Miller Jr., one of GlobeSecNine's founders, was a special assistant to President George H.W. Bush for counter-terrorism and counter-narcotics. Gregory S. Newbold, another founding member of the firm, served as director of operations for the Joint Chiefs of Staff before he retired in 2002.

GlobeSecNine's board of directors includes John Lawn, Drug Enforcement Administration chief under Presidents Reagan and the first Bush, and Gen. Al Gray, a former commandant of the Marine Corps and former member of the Joint Chiefs of Staff. And Brent Scowcroft, who served as national security advisor for Presidents Gerald Ford and George H.W. Bush, is the chairman of GlobeSecNine's advisory board.

In announcing their deal, GlobeSecNine and Bear Stearns Merchant Banking drew attention to another partnership the latter had formed for investing in the defense sector. In July 2003, Bear Stearns Merchant Banking teamed up with Giuliani Partners LLC, a consulting firm founded by former New York City Mayor Rudy Giuliani, along with his ex-police, fire and emergency management commissioners.

Growth industry

The homeland security industry is currently the fastest growing sector of the U.S. economy, predicted to grow from a $5 billion industry in 2000 to $130 billion in 2010, according to the Homeland Security Research Corporation, a private California think tank.

"[T]he war on terrorism and possible confrontation with Iraq have focused investors' attention on defense and homeland defense," Bob Grady and Jay Koh, members of Carlyle Venture Partners, wrote in a February 2003 article in the Venture Capital Journal. "The events of Sept. 11 have drawn many new investors into the sector, spawned a host of new companies and redefined some old companies."

Among the private equities that have focused their efforts on the emerging homeland security contracting, trying to replicate Carlyle's success with defense contracting, are Paladin Capital Partners, Arlington Capital Partners, and Behrman Capital.

Like Carlyle, Paladin and Arlington Capital Partners have enlisted several former political and military leaders.

"The advantage of having former politicians is that they give you perspective, they give you potential access to getting additional business," Bob Knibb, a partner of Arlington Capital, told the Center.

Paladin's roster of ex-officials includes former CIA Director James Woolsey and former National Security Agency director Kenneth A. Minihan, both principals of the Washington-based firm. Last December, Paladin entered into an alliance with homeland security consultancy Civitas Group LLC, also in Washington, D.C. President Clinton's National Security Advisor Samuel R. Berger and Republican strategist Charles R. Black, Jr. work for Civitas.

Paladin created a "Homeland Security Fund" immediately after 9/11 to invest in homeland security firms. Boeing Co., the second largest Pentagon contractor, was an early investor in the firm.

Paladin has made at least three investments in companies that do business with the Department of Homeland Security. It invested more than $10 million in AgION Technologies Inc., a Wakefield, Mass.-based company that makes anti-bioterrorism products. Paladin also bought stakes in ClearCube Technology Inc., which developed a computer-security system, and SafeView Inc., a Santa Clara, Calif.-based firm that provides personnel screening technology.

Arlington Capital Partners, a $450 million private equity, acquired two top federal contractors, ITS Services in April 2003 and Science & Engineering Associates Inc. in January 2004. The firm combined the two, and named the new company Apogen Technologies, which provides "technology solutions" to the departments of Defense and the Homeland Security, as well as other branches of the government. Apogen ranks among the top 10 Department of Homeland Security contractors.

The chairman of Apogen's board of directors is Phil Odeen, who served as an aide to Henry Kissinger when the latter was national security advisor. Odeen also served as chairman of the National Defense Panel and vice president of the Defense Science Board. Vice Admiral Daniel T. Oliver, a former chief of naval personnel and deputy chief of naval operations for manpower and personnel, heads the national security sector division.

Another major investor in the national security market is Behrman Capital, which acquired two defense and homeland security contractors in the past two years. The New York and San Francisco-based firm bought Hunter Defense Technologies, Inc., last January. It acquired majority stakes in ILC Industries, Inc., a defense, aerospace and industrial products provider, last year. The firm owned Condor Systems, Inc., a defense electronic firm, in the late 1990s.

Behrman, however, does not presently feature any prominent former civilian or military officials.

That's an exception among those private equity firms vying for companies in the national security market—where having political and military insiders for their boardrooms and executive suites is the norm.

Career opportunities

Five of the past nine defense secretaries, excluding those who are in the current administration, have ties to private equities. Of the remaining four, two are serving in the current administration (Donald Rumsfeld was the defense secretary in the Ford administration; Dick Cheney served George H.W. Bush's administration), one (Les Aspin) is deceased, and the other, Caspar W. Weinberger, is the chairman of the company that owns Forbes magazine. Every other defense secretary since Elliot Richardson held the post in 1973 has ties to a private equity firm:

Bill Cohen, the last defense secretary, entered the private equity market with his own firm, TCG Financial Partners.
Cohen's immediate predecessor at the Pentagon, William Perry, founded Global Technology Partners to help equity firms invest in defense, aerospace and technology companies, after he left office. The group advises Donaldson, Lufkin and Jenrette's Merchant Banking Partners.
James R. Schlesinger, defense secretary in the Nixon and Ford administrations, is an advisor to the Lehman Brothers investment banking firm.
Harold Brown, defense secretary in the Carter administration, is a partner at Warburg Pincus, an investment firm with holdings in approximately 490 companies worldwide.
Frank Carlucci, defense secretary during Ronald Reagan's second term, was the first Pentagon chief to make his mark as an investment banker.

A number of senior Pentagon officials who served these secretaries also work for private equities. Perry has three of his former deputies as his partners at Global Technology Partners. John White was a deputy secretary of defense under Perry, Paul Kaminski supervised Pentagon's acquisitions as an undersecretary at Defense, and Ashton Carter was an assistant secretary of Defense. Perry's founding partner was former CIA director John Deutch.

John F. Lehman, who served as Secretary of the Navy from 1981 to 1987 and was also a member of the 9/11 Commission, runs his own eponymous private equity firm, J.F. Lehman and Company. The firm's targeted markets include aerospace and defense. Gen. Paul X. Kelley, who served as a member of the Joint Chiefs of Staff, is a limited partner of the firm.

Also doing their parts in helping private equity firms to invest in the national security market are some members of the Defense Policy Board, an influential body that advises the defense secretary. Schlesinger and Woolsey are members of the board. Another member, Gerald Hillman, founded Trireme Partners along with Richard Perle, who once headed the board and was a member until he resigned in February.

Kissinger, another Defense Policy Board member who served as secretary of state and national security advisor to Presidents Nixon and Ford, is an advisor to the private equity firm Hicks, Muse, Tate & Furst. His firm, Kissinger McLarty Associates, also had a private equity unit, the Kissinger McLarty Capital Group. A spokesman from the company told the Center that the capital firm did not invest in any companies and has since folded.

Letter of the law

Watchdogs have long criticized the "revolving-door" between government and the private sector, particularly when former officials join businesses that they regulated while in office.

Ex-officials are subject to federal regulations enacted in the 1970s that require a one-year "cooling off" period before they can lobby their old agency; these former officials can, however, register to lobby immediately, provided they refrain from contacting their old colleagues.

Carlyle spokesman Chris Ullman says all former government officials working with the firm meticulously follow the regulations. "If someone serves their government and then leaves, and then abides by all of the conflict of interests rules related to lobbying former colleagues for a year," he said, "they abide by all those rules, and then they join a private sector job and don't lobby those officials, but share the expertise that they have and it happens to be the same as within the sector, the area they worked in, defense for example, that's a conflict?"

Some are more troubled by the revolving door.

"I think that this is a much more important issue than what has been legislated," says Dan Briody, an outspoken critic of Carlyle's business practices. "I think it is very detrimental to public's confidence in both the political structure and the business structure in the country."

On the other hand, those in the private equity business, such as Arlington Capital Partners' Knibb, see nothing wrong in the collaboration of private investment firms and former public officials. "Private equity as an entity is not necessarily a wrong one," he said. "There's a lot of credibility a gentleman like Odeen [who chairs the board of Arlington-owned Apogen] would bring to businesses."

Some Washington observers say that there's nothing "inherently unethical" about retired Defense Department officials working for private equities. "I wouldn't assume because someone is coming out of a revolving door-type situation, therefore, it's unseemly," said Michael Levy, a professor of public policy and business ethics at Georgetown University's McDonough School of Business. "It is not necessarily in any way shape or form wrong. There are pretty strict rules about speaking to your former agencies… It may be troubling, but it is not in itself a form of corruption."

According to Briody, author of The Iron Triangle: Inside the Secret World of the Carlyle Group, there's something ominous about Carlyle's success. "What's dangerous about the success of Carlyle is that other companies are beginning to understand that this is the way to make a killing," he told the Center. "These former politicians are coming out of office and they are in heavy demand. How far this goes is what I fear. I already feel that it has gone too far."

Researcher Sheetal Doshi contributed to this report.

Investing in war

2011-09-16T14:53:37-04:00

A dozen companies in which Carlyle had a controlling interest netted more than $9.3 billion in contracts.

Overall, six private investment firms, including Carlyle, received nearly $14 billion in Pentagon deals between 1998 and 2003. (See related report, "The Sincerest Form of Flattery.")

From its founding in 1987, the Carlyle Group has pioneered investing in the defense and national security markets, and through its takeover of companies with billions of dollars in defense contracts became one of the U.S. military's top vendors, ranking among better known defense firms like Lockheed Martin, Boeing Co., Raytheon Co., Northrop Grumman and General Dynamics.

Unlike those firms, however, the Carlyle Group itself is not a manufacturer. It offers no services directly to the Pentagon, and has no defense contracts. Rather, it manages investments—some $18.4 billion from 600 individuals and entities in 55 countries, according to its Web site. The firm's business is making money for these investors, the vast majority of whose identities are not disclosed to the Securities and Exchange Commission or other government bodies.

Though Carlyle itself has won no contracts, the companies it has owned or controlled have done billions of dollars worth of business with the Pentagon. The Carlyle unit that brought in the largest share—$5.8 billion—was United Defense Inc., which manufactures combat vehicles, artillery, naval guns, missile launchers and precision munitions. United Defense also owns the country's largest non-nuclear ship repair, modernization, overhaul and conversion company, United States Marine Repair Inc. Its most famous product may well be the Bradley fighting vehicle. United Defense brought in more than 60 percent of Carlyle's defense business.

Carlyle took United Defense public in 2001; by April 2004 it had sold all its shares in the company.

Lear Siegler Services, a leading contractor in aircraft logistics support, maintenance, pilot training and ground support, received contracts worth more than $1 billion. Carlyle sold the company in August 2002.

Southwest Marine Inc. also received contracts worth more than $1 billion since 1998, and Norfolk Shipbuilding & Drydock received contracts worth $827 million. In 1998, Carlyle merged these two companies into United States Marine Repair.

Vought Aircraft Industries, a large subcontractor doing work for military cargo planes, bombers, and fighters, received contracts worth $85 million. Vought is among the few defense contractors that the Carlyle Group has not sold.

Among other private equity firms, New York-based Veritas Capital Management firm that employs many former high-ranking military officials received Pentagon contracts to the tune of more than $2.2 billion. Veritas is the 41st ranked defense contractor.

Companies under the ownership of Vectura Holding Co., another New York-based group, got deals to the tune of $1 billion, while companies controlled by Berkshire Hathaway, led by billionaire investor Warren Buffett, won contracts worth $688 million. Companies owned by Green Equity Investors II LP ($275 million) and Gores Technology Group ($153 million) also received substantial defense money.

New market

Private equity firms did not have any significant presence in the defense industry until the end of the Cold War. Traditionally, the Defense Department depended on mega contractors such as Boeing Corp., Lockheed Martin and Raytheon for weapons and services. But since the 1990s, the military has increasingly outsourced to private contractors a variety of jobs and services, ranging from planning of operations to the supply of linguistic services. A U.S. government decision in the 1990s to encourage small-business participation in contracts also contributed to the expansion of the market for smaller, privately-owned companies.

The Carlyle Group acquired controlling interests in several underperforming defense contractors, installed its own management teams and revitalized the companies, in part by landing big Pentagon contracts. Then, they sold the contractors to other investors for a large profit.

"There have always been [private equities] that went in with management and bankrolled management," said Stuart McCutchan, editor of Defense Mergers & Acquisitions. "What Carlyle has done differently is they have taken it to a new level both in terms of size and in terms of being committed to an entire sector."

"Carlyle is the biggest single success in Washington of a venture capital firm," Dr. Loren B. Thompson Jr., a national security expert at the libertarian Lexington Institute, said.

In 1997, for example, the group made a 650-percent profit when it sold BDM International Inc., a McLean, Va., defense contractor. And in December 2001, Carlyle sold off the majority of its holdings in United Defense Inc. Altogether, Carlyle earned $1 billion in profit from the United Defense investment.

A windfall of war

The group cashed out many of its investments when the stock of defense companies rose dramatically in the aftermath of September 11 and the buildups to the Afghanistan and Iraq wars.

"Defense properties are too expensive these days," explained Carlyle spokesman Chris Ullman.

In 1997, Carlyle liked the price of United Defense, and beat out General Dynamics and Alliant Techsystems, which also coveted the underperforming artillery firm. General Dynamics bid more than Carlyle offered for the company, but potentially faced a lengthy, drawn out antitrust battle if it acquired United Defense. Carlyle ended up winning the bid.

Carlyle finally sold its stakes in United after taking it public in the aftermath of the September 11 attacks. The Washington Post called the hugely successful public offering "one of the most successful single venture investments of recent years."

But United did not seem all that lucrative before September 11.

"They [Carlyle] were really kind of in a pickle with United Defense," McCutchan said. "They wanted to cash out on the equity. There wasn't much money to be made... When 9/11 happened and the defense budget took off, suddenly they had a winner on their hands."

Even Carlyle, which typically does not disclose its financial and operational details, crowed over the sale.

"It was one of Carlyle's best investments," Carlyle's Ullman told the Center. "We did make more than a billion dollars on that deal, and we are very pleased that we served our investors quite well."

The reason Carlyle's defense portfolio is lean at the moment is the high value of defense firms, thanks in part to the ongoing U.S. wars. "If there comes a time when defense properties are priced in a way that we think makes sense for private equity investors, then we will certainly consider investing more of our dollars in that sector," Ullman told the Center.

Investment expertise

Carlyle has a diversified portfolio, focusing its investments in sectors that have heavy government regulation and contracting—defense, telecommunications and banking. Carlyle has matched its investments with the expertise of high ranking government officials, whom the firm has courted almost from its inception.

It was under the leadership of former Defense Secretary Frank Carlucci—first as a managing director, from 1989 to 1993, and as chairman from 1993 to 2003—that Carlyle grew from a small private equity to a global investment giant, and became a major player among defense contractors.

Other former government officials who have recent or current ties to the firm include former British Prime Minister John Major and former Philippines President Fidel Ramos; former Office of Management and Budget director Richard Darman; former Clinton chief of staff Thomas F. "Mack" McLarty; former Securities and Exchange Commission chairman Arthur Levitt and former Federal Communications Commission chairman William E. Kennard. Former Secretary of State James Baker works for the firm, as did his former boss, President George H.W. Bush, who was an adviser for the firm's Asian investment funds until he left Carlyle in 2003.

Critics have long denounced Carlyle's practice of recruiting former high-ranking government officials at the same time as it invests in companies regulated by their former agencies, dubbing it "access capitalism." For example, Kennard, who served as Bill Clinton's FCC chairman, is now managing director for Carlyle's global telecommunications and media group, directing the firm's business investments in companies he regulated.

"Carlyle would never have gotten to the level that it is at today had it not been for this premeditated commingling of business and politics," said Dan Briody, author of The Iron Triangle: Inside the Secret World of the Carlyle Group, a book that takes a critical look at the rise of the firm.

One of Carlyle's most controversial hirings was of former president Bush to serve as a senior adviser for its "Asia advisory board."

"The fact that George H.W. Bush was working for them while his son was president, while his son, in fact, was dramatically increasing defense spending—that seems to me one of the most blatant conflicts of interests in history," Briody said.

Bush—who joined Carlyle in 1998, before his son, George W. Bush, became president—ended his relationship with the firm in October 2003, Ullman told the Center. But that hasn't stopped the former president from continuing to give speeches for Carlyle, which he did at a Shanghai event sponsored by the firm in April 2004.

Ullman refused to disclose the remuneration Bush received for his services. "That's not information that we disclose," he said. "That's his personal business. You are certainly welcome to ask him."

Bush's office did not respond to the Center's request for an interview. Written questions faxed to the former president's Houston office, at an aide's request, did not elicit any response.

Though none are placed as closely as the president's father, Carlyle's other Washington insiders have ties to current Bush administration officials. Current Defense Secretary Donald Rumsfeld and Carlucci went to college together, for example, and Secretary of State Colin Powell was Carlucci's deputy on the National Security Council in the mid-1980s.

The continued presence of Baker and Carlucci riles critics such as Briody. "If you look at the relationship that Frank Carlucci still maintains with Don Rumsfeld and Colin Powell and the reach that he has to those folks—and he has in fact used that reach in the past and tried to influence decisions those folks were making, decisions that could directly or indirectly affect Carlyle's fortune," Briody said.

Carlyle dismisses the notion that Carlucci or any other former government or military leader on its payroll has any conflicts of interest. "Are you aware of any solicitations from [Carlucci] to Secretary Rumsfeld to ask for any particular benefits to United Defense or any of our other portfolio companies?" Ullman said. "All they [Carlyle critics] do is, they say: 'Oh, Carlucci used to work in the government and he went to college with Donald Rumsfeld, and Carlyle has defense investments, and now Secretary Rumsfeld is secretary of defense. Therefore, there is a conflict of interest.'"

Despite Ullman's assertions, media accounts have noted occasions when former government officials working for Carlyle have approached the Pentagon brass. For example, Fortune magazine reported in March 2002 that Carlucci had contacted at least two senior Pentagon officials, though Carlyle claimed these contacts did not constitute lobbying.

Ullman added that all former government officials working for Carlyle abide by "all of the conflict of interests rules related to lobbying former colleagues for a year." He pointed out that the Pentagon had cancelled the Crusader artillery system, produced by United Defense, adding, "So if we are as powerful as everyone thinks, why did they cancel it?"

Rumsfeld announced in May 2002 the termination of the artillery system; until then, the Pentagon had paid United Defense some $2 billion to develop the Crusader.

Researcher Sheetal Doshi contributed to this report.

Outsourcing the Pentagon

2011-09-16T14:49:52-04:00

One of the biggest contracts awarded in the war in Iraq went to Kellogg Brown & Root, a key subsidiary of Halliburton Co., the firm Vice President Dick Cheney ran as CEO before he stepped into the White House and became one of the prime movers urging the president to invade Iraq. Of the $4.3 billion in defense contracts Halliburton won in fiscal 2003 only about half were awarded based on competitive bidding. Another $1.9 billion in contract dollars was awarded on the basis of "urgency" without bidding and without going to any other contractors.

The connection between Halliburton and the Vice President has led to no end of speculation about how that particular firm was chosen. While this report does not address that issue specifically, it does examine the practice of awarding no-bid contracts to well-connected defense contractors. Indeed, one might pose a new question on the role of contractors in the American military: Was the war in Iraq an example of the Pentagon's new way of doing business, or was it an outgrowth of a way of doing business that has been much longer in duration, albeit conducted off the field of battle without a worldwide—or even any—audience?

To find the answers, the Center began in early 2004 to investigate the patterns of Defense Department contracting. Our prime source was the Pentagon's own procurement databases—public information that had been posted for years on an obscure Defense Department Web site.

The Center examined more than 2.2 million contract actions totaling $900 billion in authorized expenditures over the six-year period from fiscal year 1998 through fiscal 2003 (Oct. 1, 1997-Sept. 30, 2003). Most of the research was focused on the biggest contractors, those that won at least $100 million in prime contracts over the period studied. Some 737 prime contractors, mainly but not exclusively for-profit corporations, fit that criteria, along with several thousand of their subsidiaries and affiliates.

After nine months of research, the Center has found:

Half of all the Defense Department's budget goes out the door of the Pentagon to private contractors. This percentage has stayed virtually constant over the past six years; as the Pentagon's budget has expanded with the wars in Iraq and Afghanistan, so have the dollars going to contractors.
Only 40 percent of Pentagon contracts were conducted under what it terms "full and open competition." (That percentage drops to 36 percent if you deduct those "full and open" contracts that attracted only a single bidder). Some 44 percent of contracts were given under "other than full and open competition"—usually as sole source contracts. Another seven percent fell under other categories (most often as small business set-asides), and eight percent gave no competition information at all.
The Pentagon's contracting force is top-heavy, and growing more so. Out of a total universe numbering tens of thousands of contractors, the biggest 737 collected nearly 80 percent of the Defense Department's procurement dollars. The 50 biggest contractors got more than half of all the money; the top 10 got 38 percent.
Topping the list was Lockheed Martin, with $94 billion in defense contracts over the six-year period. Boeing was second with almost $82 billion. Well behind those leaders were Raytheon (just under $40 billion), and Northrop Grumman and General Dynamics, with nearly $34 billion apiece. Those five companies tower over all other defense contractors. It's worth noting that they collect additional billions, not included in the figures cited, through joint ventures with other companies.
Most of the contracts awarded to the very biggest defense contractors were won without what the Pentagon calls "full and open" competition. Of the 10 biggest contractors, only one—Science Applications International Corp. (SAIC)—won more than half its dollars through an open bidding process. Three of the top 10—United Technologies, General Electric and Newport News Shipbuilding (now owned by Northrop Grumman)—collected less than 10 percent of their contract dollars through open bidding.
Larger contractors were also more likely to win favorable terms on their contracts. One-third of the dollars awarded to the top 737 contractors came in cost-plus contracts that offer little incentive for keeping costs under control. Among smaller companies, only 11 percent of the award dollars were for cost-plus contracts.
Industry consolidation was another major factor in creating a top-heavy group of Pentagon contractors. Over the six-year period of this study, more than 60 contractors were acquired or merged with even larger contractors. This was true both among companies whose main business is defense, and those in other sectors, particularly energy and telecommunications.
The list of top contractors includes 43 joint ventures, in which major defense firms partnered together forming new companies to manage specific contracts or weapons systems. Four of these joint ventures collected $1 billion or more in contracts over the six-year period and together they accounted for nearly $19 billion in revenues to their partner companies. Lockheed and Boeing again led all others in revenues from joint ventures; Lockheed collected $2.3 billion from six different joint ventures, Boeing earned almost $2.1 billion from five.
While most of the top 737 Pentagon contractors were American corporations, nearly 100 were foreign-owned. Included on the list were the governments of Canada, Germany and Japan, as well as the Italian Post, Telephone & Telegraph Ministry. The leading foreign corporations were British-based BAE Systems, BP and Rolls-Royce; and Maersk Inc., a Danish shipping giant.
Political influence, as measured through lobbying expenses and campaign contributions, was a major undertaking by many of the largest Pentagon contractors. But a surprising number of companies on the top contractor list gave little or nothing to political candidates and parties, and chose not to invest in Capitol Hill lobbyists. Indeed, those contractors that spent the most on contributions and lobbying were from business sectors other than defense. The three leaders in political contributions between 1998 and 2003 were AT&T ($9.9 million), SBC Communications ($9.2 million) and FedEx ($8.0 million). Only two of the 10 biggest political contributors among the group were primarily defense companies—Lockheed Martin and Boeing. Nearly a quarter of the top Pentagon contractors made no political contributions whatsoever during the six-year period, and only 202 of the 737 gave $100,000 or more in contributions, either through PACs, soft money, or individual donations from their executives, employees and families. Overall, the top contractors gave nearly $214 million in campaign contributions, two-thirds to Republicans.
The story was much the same in lobbying expenditures, though the dollar amounts were far higher. Just under half the leading defense contractors reported spending money on Washington lobbyists, but those that did spent a total of $1.9 billion in the effort. Again, the biggest spenders were not primarily defense companies, though the biggest of the Pentagon's contractors did rank near the top. Leading the list was Altria Group (the former Philip Morris), with just under $94 million in lobby expenditures. General Electric was second, with $88.4 million. AT&T was third ($71.6 million), followed by Lockheed Martin ($71.5 million), Boeing ($64.4 million) and Northrop Grumman ($61.2 million).
President George W. Bush received more than $4.5 million in campaign contributions from the 737 leading defense contractors during the six-year period of this study; his Democratic challenger Sen. John Kerry collected just $332,000. In 2004, however, the proportions switched dramatically. Kerry collected twice as much as Bush between Jan. 1, 2004 and the end of July—$1.6 million versus $824,000 for the president. Including that late money, Bush received nearly $5.4 million from the leading defense contractors; Kerry drew just under $2.0 million.
Small business contractors are given special preference at the Defense Department, as they are in other federal agencies, since Congress set informal quotas encouraging the government to do more business with smaller companies. Surprisingly, however, the list of "small businesses" includes many dozens of companies with more than $100 million in defense contracts over the past six years. Some 189 of the leading contractors had at least half their contract dollars designated as going to small businesses. For 127 companies, at least 90 percent of their money was classified that way. Leading them all was Chugach Alaska Corp., whose status as an Alaska Native corporation classifies it as a small, disadvantaged business eligible not only for preferences in bidding but for small business set-aside contracts. Taking full advantage of its status, Chugach Alaska won $1.4 billion in defense contracts between fiscal 1998 and 2003. The biggest non-minority small business contractor was GTSI Corp., which retained its small business status despite having long since grown out of it. The company collected nearly $1.2 billion in small business contracts over the past six years—72 percent of their overall total.
A lucrative loophole in the small business rules has enabled contractors to retain their small business status through the life of each contract—even if they've grown or been acquired by a much larger company. Titan Corp., a San Diego-based defense electronics firm, with a long string of acquisitions over the past six years (and nearly $2.4 billion in defense contracts), won nearly $550 million of contracts under the small business classification. Other companies have done the same, prompting calls that the small business status be reviewed on a much more frequent basis than it has been. Regulations to require that, at least on a limited scale, are due to take effect later this year.
The Pentagon's shopping list has undergone a gradual, and largely unnoticed, transformation in the past two decades. In 1984, almost two-thirds of its contracting budget went for products rather than services. By the early 1990s, the ratio between the two had evened out. By fiscal 2003, 56 percent of Defense Department contracts paid for services rather than goods. Many of these were for routine jobs—like KP duty or building maintenance—that used to be done by low-ranking military personnel. But the Pentagon also contracts for services that are highly sophisticated, strategic in nature, and closely approaching core functions that for good reason the government used to do on its own. The Pentagon has even hired contractors to advise it on hiring contractors.
The accuracy of the Defense Department's records—particularly regarding the corporate ownership of its largest contractors—leaves much to be desired. The Center found more than $35 billion in contracts where the ultimate corporate parent was misidentified. In some cases this led to major discrepancies between the amount of contracts actually won by major corporations and the totals reported publicly by the Pentagon.

More details on these findings can be found in the sections that follow. In addition, the report includes detailed statistical contracting profiles for each of the 737 largest prime contractors—the companies that won $100 million or more in defense contracts over the past six years. The profiles include breakdowns of each company's total contract dollars, the types of contracts they won, the competition they faced, a list of their key subsidiaries, breakdowns of their lobbying and campaign contributions, and a list of the chief products and services they sold to the Pentagon.

After nine months of research, however, this report may raise more questions than it answers. It brings to the surface for the first time the patterns of the Pentagon's contracting practices and many details of the $900 billion in taxpayer money the Defense Department paid out to its private suppliers. Both this report and the detailed profiles are designed to provide an important new body of research materials for a new wave of informed reporting about the ever- more-expensive, and profitable, business of defending America.

The pages that follow offer analyses of Pentagon spending habits from the following perspectives:

The Biggest Contractors
Competition
Cost-Plus Contracts
Joint Ventures
Foreign Contractors
Political Influence I: Campaign Contributions
Political Influence II: Lobbying
Small Business: Bigger Than You Think
What the Pentagon Buys
The Rise in Service Contracts
Accuracy in Pentagon Reporting

The Biggest Contractors

Competition

A glance at the list of the Pentagon's top suppliers shows that nation's biggest defense firms won the bulk of their contracts without going through the competitive process. Of the 10 biggest defense contractors over the six year period of this study, only one—Science Applications International Corp. (SAIC)—won more than half its contracts through full and open competition.

To cite one example, Raytheon is the third largest contractor and the third largest recipient of no bid contracts. Company spokesman Dave Shea said Raytheon's sole source contracts "are for systems that are unique, where Raytheon is the only one capable of providing those systems to the Department of Defense."

Boeing spokesman Doug Kennett said the Pentagon negotiates sole-source contracts "when the Defense Department believes it's in their best interest."

Here are the details on how the 20 biggest contractors won their contracts, 1998-2003:

Name	Total Contracts	Full & Open	Not Full & Open	Other	No Info
Lockheed Martin	$94,056,641,059	25%	74%	1%	0%
Boeing Co	$81,645,655,400	40%	60%	0%	0%
Raytheon Co	$39,904,717,897	31%	67%	1%	1%
Northrop Grumman	$33,829,847,656	33%	59%	2%	6%
General Dynamics	$33,280,959,821	30%	69%	0%	0%
United Technologies	$17,953,516,117	3%	95%	2%	0%
General Electric	$10,600,007,101	9%	88%	1%	2%
Science Applications Intl Corp (SAIC)	$10,598,835,883	74%	6%	7%	12%
Carlyle Group	$9,334,962,462	38%	60%	0%	2%
Newport News Shipbuilding	$8,852,781,214	2%	98%	0%	0%
TRW Inc	$8,725,744,602	70%	24%	2%	3%
CLASSIFIED CONTRACTOR	$8,267,851,367	16%	82%	0%	2%
Computer Sciences Corp	$6,789,832,719	75%	10%	1%	13%
Halliburton Co	$6,768,728,331	65%	34%	1%	0%
Textron Inc	$6,629,835,387	5%	95%	0%	0%
Litton Industries	$6,478,824,475	38%	56%	1%	6%
Honeywell International	$6,135,622,361	31%	62%	4%	3%
Health Net Inc	$6,111,054,478	99%	0%	1%	0%
Humana Inc	$5,683,896,585	87%	13%	0%	0%
L-3 Communications	$5,233,392,435	34%	54%	4%	8%
NOTE: Totals in this and all other charts naming defense contractors include both the corporate parent and their subsidiaries and affiliates.

Looking at the entire universe of defense contracts over the past six years, some 40 percent of contracts were awarded through "full and open competition"—a process involving either sealed bids, competitive proposals, or a combination of the two.

Even within that 40 percent slice of the Pentagon pie, not all the dollars were given to the most competitive bidder. Ten percent of the "full and open" contracts—and 4 percent of overall defense spending—went to contracts were only one bidder responded.

The biggest slice of the pie went to contracts classified by the Pentagon as "other than full and open competition." Most of these (about two-thirds) were awarded because there was only one source for the product or service the Pentagon was buying.

Levels of competition varied widely depending on the industry of the contractor and the type of products or services the Pentagon was buying. Some categories—like construction and medical services—were very competitive, while others were not competitive at all. Here are the categories at both extremes where the Pentagon spent at least $1 billion:

Least Competitive Categories

Category	Total	Less than Full & Open Competition
Guided Missiles	$22,747,653,356	96%
Fire Control Equipment	$4,121,932,856	87%
Engines, Turbines and Components	$23,254,881,284	85%
Aircraft Components and Accessories	$14,875,527,520	84%
Trucks, Trailers, Ground Assault & Other Motor Vehicles	$14,892,149,100	80%
Ships, Small Craft, Pontoons and Floating Docks	$31,231,838,029	80%
Weapons	$7,484,413,528	79%
Quality Control, Testing and Inspection Services	$4,398,926,543	78%
Aircraft and Airframe Structural Components	$86,530,378,638	77%
Engine Accessories	$2,518,265,449	75%
Lease or Rental of Facilities	$2,668,382,442	74%
Miscellaneous Products	$10,542,274,617	71%
Ammunition and Explosives	$13,165,716,488	70%
Ship and Marine Equipment	$1,464,987,161	65%
Vehicular Equipment Components	$2,997,653,029	61%
Electrical and Electronic Equipment Components	$11,964,285,604	59%
Food and Beverages	$11,785,260,160	58%
Communications and Detection Equipment	$28,317,777,970	55%
Instruments and Laboratory Equipment	$6,496,703,459	51%

Most Competitive Categories

Category	Total	Full & Open w/multiple bidders
Fuels, Oils & Lubricants	$24,450,584,124	81%
Medical, Dental and Veterinary Equipment & Supplies	$7,810,113,138	80%
Chemicals and Chemical Products	$2,634,514,879	80%
Space Vehicles	$2,867,529,030	78%
Medical Services	$24,563,339,971	78%
Construction of Structures and Facilities	$42,396,893,851	76%
Operation of Government-Owned Facilities	$11,218,471,798	66%
Hazardous Substance and Natural Resources Management	$9,234,078,017	64%
Technical Representative Services	$6,253,625,480	64%
Maintenance & Repair of Real Property	$34,430,112,159	61%
Lease or Rental of Equipment	$2,021,813,249	51%
Materials Handling Equipment	$1,745,198,018	51%
Equipment Maintenance, Repair & Rebuilding	$42,372,061,870	50%

Cost-Plus Contracts

There's a significant difference in the types of contracts won by the biggest contractors versus smaller ones. Among the Pentagon's 737 biggest contractors, 33 percent of the contract dollars were awarded on a cost-plus basis, meaning the government would make up the difference for overruns and contractors had little incentive to control costs. Among smaller contractors, only 11 percent of the contract dollars came through cost-plus contracts.

The progression is gradual, as seen in the following chart

And here are the details on the types of contracts won by the 20 biggest contractors:

Name	Total Contracts	Cost-Plus	Fixed Price	Time & Materials	Other	No Info
Lockheed Martin	$94,056,641,059	50%	47%	2%	1%	0%
Boeing Co	$81,645,655,400	27%	70%	2%	0%	0%
Raytheon Co	$39,904,717,897	38%	58%	3%	1%	0%
Northrop Grumman	$33,829,847,656	42%	50%	2%	2%	4%
General Dynamics	$33,280,959,821	39%	60%	0%	0%	0%
United Technologies	$17,953,516,117	22%	77%	0%	0%	0%
General Electric	$10,600,007,101	10%	88%	0%	0%	1%
Science Applications Intl Corp (SAIC)	$10,598,835,883	52%	21%	15%	2%	11%
Carlyle Group	$9,334,962,462	44%	46%	9%	0%	1%
Newport News Shipbuilding	$8,852,781,214	78%	22%	0%	0%	0%
TRW Inc	$8,725,744,602	71%	23%	2%	0%	3%
CLASSIFIED CONTRACTOR	$8,267,851,367	11%	9%	1%	79%	0%
Computer Sciences Corp	$6,789,832,719	41%	26%	24%	1%	8%
Halliburton Co	$6,768,728,331	63%	34%	0%	3%	0%
Textron Inc	$6,629,835,387	51%	48%	1%	0%	0%
Litton Industries	$6,478,824,475	36%	56%	2%	2%	5%
Honeywell International	$6,135,622,361	22%	72%	3%	3%	0%
Health Net Inc	$6,111,054,478	1%	99%	0%	0%	0%
Humana Inc	$5,683,896,585	0%	100%	0%	0%	0%
L-3 Communications	$5,233,392,435	38%	49%	7%	1%	5%

Deidre Lee, the Pentagon's chief of procurement, defends the policy of cost-plus contracting and maintains that it may actually cost the government less in the long run. If contractors were required to give a firm price for risky new defense systems, she argues, the bids would be sky high to protect the companies' risk. "What we don't want is to put someone in a financial position in which they cannot perform," she says.

Others disagree, among them Rep. Henry Waxman (D-Calif.), an outspoken critic of the government's contracting practices, who has called cost-plus contracts "notoriously prone to abuse."

Joint Ventures

Another example of the concentration of defense contractors is the major role played by joint ventures—organizations formed by multiple partners to manage specific contracts or produce weapons systems. While rival defense companies may often be fierce competitors, they are also frequent partners in these joint ventures. Lockheed Martin and Northrop Grumman jointly formed Longbow LLC, which manufactures the Longbow Hellfire missile system. Boeing and Sikorsky Aircraft (a subsidiary of United Technologies) developed the Comanche helicopter until the Army cancelled the project in February 2004.

The list goes on and on, and a total of 43 joint ventures earned at least $100 million each in defense contracts over the past six years. Four of them earned more than a billion apiece, and the partners in those four ventures are an echo of the top independent contractors: Lockheed Martin, Northrop Grumman, Boeing, General Dynamics, General Motors, United Technologies and Raytheon.

When compiling contract totals, the Pentagon treats these joint ventures separately from their partners, and so does this report. But the chart below gives a sense of their important role in supplementing the bottom lines of the companies that run them. Here are the revenue figures for the 20 biggest beneficiaries of joint venture contracts. The totals are based on each company's share of ownership.

Rank	Joint Venture Partner	Total Share	No of JVs
1	Lockheed Martin	$2,270,866,941	6
2	Boeing Co	$2,074,007,386	5
3	Raytheon Co	$1,834,994,679	4
4	United Technologies	$1,495,634,029	2
5	Northrop Grumman	$1,365,727,709	3
6	General Dynamics	$1,019,471,331	3
7	General Motors	$759,018,643	1
8	ChevronTexaco Corp	$525,804,320	2
9	Royal Dutch Shell	$523,626,795	1
10	Textron Inc	$493,489,235	1
11	BAE Systems	$322,128,066	2
12	Computer Sciences Corp	$314,947,399	1
13	AECOM Technology Corp	$285,125,810	1
14	Day & Zimmermann Inc	$260,452,688	2
15	General Electric	$221,844,482	1
16	DynCorp	$209,225,175	2
17	Thales	$207,073,905	2
18	Parsons Corp	$157,091,765	1
19	Rockwell Collins Inc	$147,289,256	1
20	Halliburton Co	$140,495,373	1

Foreign Contractors

It may come as a surprise to people who've always assumed that America's defense is in the hands of Americans to learn that the list of top Pentagon contractors includes 95 companies, or in some cases government agencies, with headquarters in foreign countries. Three foreign governments made the list—Canada, Germany and Japan—as did the Italian Post, Telephone and Telegraph Service.

The German and Japanese contracts primarily pay for costs associated with U.S. bases located in those countries. The Canadian contracts are all through the Canadian Commercial Corp., a government-owned agency that handles contracts from Canadian exporters, and according to its own description "wraps the Canadian flag around their proposal, providing a government-backed guarantee of contract performance."

But most of the Pentagon's foreign suppliers are corporations—many with U.S. subsidiaries. The biggest supplier by far is the United Kingdom, whose companies earned more than $14 billion in defense contracts. Germany is second with $5.9 billion (including the contracts with the government itself). Next are the Netherlands, France, Canada, Denmark, Japan, Bermuda and South Korea—all with contracts exceeding $1 billion between 1998 and 2003.

Some of the companies are multinationals—like DaimlerChrysler or Royal Dutch Shell—that have a considerable U.S. presence. Others have U.S. subsidiaries, or, like Japan's Sumitomo Heavy Industries, they provide products and services used by U.S. forces overseas.

The list of foreign companies also includes Tyco International., which operates mainly in the United States, though the company is actually incorporated in Bermuda. (Bermuda is also home to the consulting firm Accenture). And the roster includes a contractor listed as "European Utility Companies" that refers not to a single firm, but a whole category of utilities suppliers based throughout Europe.

Here's the list of countries whose governments or corporations have received major Defense Department contracts over the past six years:

Country	Total Contracts	No of Contractors
England	$14,467,558,907	19
Germany	$5,875,778,292	11
Netherlands	$2,898,934,824	7
France	$2,793,612,113	7
Canada	$2,207,393,181	1
Denmark	$1,913,819,561	1
Japan	$1,888,060,336	8
Bermuda	$1,641,013,751	2
South Korea	$1,505,901,909	8
Saudi Arabia	$915,458,201	2
Greece	$744,127,512	1
Sweden	$672,661,339	3
Kuwait	$651,366,569	1
United Arab Emirates	$506,285,005	2
Italy	$440,520,415	3
Belgium	$422,022,106	2
Bahrain	$419,219,209	2
Qatar	$399,636,545	1
Singapore	$358,651,458	1
Spain	$308,251,413	1
Switzerland	$284,346,086	2
Greenland	$258,745,272	1
Luxembourg	$144,833,745	1
Netherlands Antilles	$144,424,966	1
New Zealand	$128,625,559	1
Israel	$127,402,358	1

Political Influence I: Campaign Contributions

All told, the 737 biggest defense contractors spent nearly $214 million in campaign contributions to federal candidates, parties and leadership PACs during calendar years 1998 to 2003. The money came from PACs, soft money donations (before they were banned by the Bipartisan Campaign Reform Act of 2002) and individual contributions from company executives, employees and their families. Two thirds of the total went to Republicans.

President George W. Bush received more than $4.5 million during that six-year period; his Democratic challenger Sen. John Kerry collected just $332,000. The top 10 contractors alone gave Bush $444,000, versus $56,000 to Kerry.

During 2004, however, it was a different story. Between January and the end of July, Kerry collected twice as much as Bush—$1.6 million versus $824,000 for the president. When those figures are added, Kerry drew just under $2.0 million in campaign contributions from major defense contractors since 1998; President Bush received nearly $5.4 million.

While the top 10 defense contractors were all major political donors, the biggest contributors among the wider group of 737 major defense contractors were not defense companies per se, but those from other industries that are hugely dependent on regulatory, tax and other decisions made in Congress. Only two of the top 10 contributors, and five of the top 20, were defense companies.

Telecommunications and energy firms were prominent on the top donor list, as were two accounting firms. All of them provide goods or services to the Pentagon, but their main business interests—and likely their main motivations for making political contributions—lie outside the defense sector. Here are the 20 biggest contributors among the top defense contractors:

Top Contributors Among Major Defense Contractors

Name	98-03 Contributions	Dems	Repubs	Sector
AT&T Corp	$9,860,460	42%	58%	Communications/Electronics
SBC Communications	$9,160,163	41%	59%	Communications/Electronics
FedEx Corp	$8,017,939	31%	69%	Air Transport
Lockheed Martin	$6,625,986	38%	61%	Defense
Verizon Communications	$5,412,571	35%	65%	Communications/Electronics
Boeing Co	$5,313,529	41%	59%	Defense
PriceWaterhouseCoopers	$5,277,168	23%	76%	Accountants
General Electric	$4,885,867	41%	59%	Misc Manufacturing
KPMG LLP	$4,763,127	22%	77%	Accountants
Southern Co	$4,585,519	29%	71%	Electric Utilities
WorldCom Inc	$4,373,051	36%	64%	Telecommunications
General Dynamics	$4,367,384	40%	60%	Defense
Northrop Grumman	$3,715,150	34%	66%	Defense
Bell Atlantic Corp	$3,356,856	38%	61%	Telecommunications
CSX Corp	$3,329,960	20%	79%	Railroads
Raytheon Co	$3,226,729	41%	59%	Defense Electronics
DaimlerChrysler	$2,797,639	34%	64%	Automotive
BP	$2,607,565	29%	71%	Oil & Gas
Pepsico Inc	$2,535,039	19%	80%	Food Processing & Sales
FPL Group	$2,506,708	11%	89%	Electric Utilities

On the other hand, the 10 biggest defense industry contractors—that is, those companies that make aircraft, ships, munitions and so on—were all generous contributors, with total contributions ranging from $1.6 million to $6.6 million. All gave a majority of their dollars to Republicans.

Contributions by the 10 Biggest Defense Industry Contractors

Name	98-03 Contributions	Dems	Repubs
Lockheed Martin	$6,625,986	38%	61%
Boeing Co	$5,313,529	41%	59%
Raytheon Co	$3,226,729	41%	59%
Northrop Grumman	$3,715,150	34%	66%
General Dynamics	$4,367,384	40%	60%
United Technologies	$2,238,693	42%	58%
General Electric	$4,885,867	41%	59%
Science Applications Intl Corp (SAIC)	$2,117,163	37%	63%
Carlyle Group	$1,640,945	31%	69%
Newport News Shipbuilding	$1,593,104	28%	72%

Chris Ullman, a spokesman for the Carlyle Group, took exception with any characterizations that campaign contributions come from the company itself. "The Carlyle Group has never given any contributions to politicians or political organizations. Individuals who work here are free to do so, but it has nothing to do with the company," he said.

The study found that many companies that won substantial defense contracts were only minor players in the political arena, or even stayed out of it altogether. Some 171 of the top contractors—nearly a quarter of the total—gave no contributions whatever between 1998 and 2003. Another 181 gave less than $10,000—an amount so small it barely registers on the political Richter scale. Only 202 contractors gave $100,000 or more during the six-year period of this study.

Who Got the Money

The top 737 defense contractors gave $61.6 million in campaign contributions to Republican Party committees and $26.4 million to Democratic Party committees. The rest of their contributions went directly to candidates, or to the "leadership PACs" they operate. The overwhelming majority of dollars went to incumbent office holders.

Here were the top recipients of direct contributions to their campaign committees, between 1998 and 2003:

Top Recipients to Candidate Campaign Committees

Recipient	To Candidate	To Leadership PAC	Total
President George W Bush (R)	$4,546,679	$0	$4,546,679
Sen Ted Stevens (R-AK)	$939,165	$28,500	$967,665
Rep John P Murtha (D-PA)	$932,224	$0	$932,224
Sen Richard C Shelby (R-AL)	$928,518	$95,400	$1,023,918
Rep Tom DeLay (R-TX)	$873,074	$21,625	$894,699
Sen John McCain (R-AZ)	$850,585	$64,100	$914,685
Sen Trent Lott (R-MS)	$835,052	$50,910	$885,962
Rep Duncan Hunter (R-CA)	$812,652	$36,750	$849,402
Rep W J "Billy" Tauzin (R-LA)	$733,396	$6,000	$739,396
Sen Don Nickles (R-OK)	$696,748	$51,200	$747,948
Rep Heather Wilson (R-NM)	$688,502	$0	$688,502
Rep James P Moran (D-VA)	$683,222	$14,000	$697,222
Rep Tom Davis (R-VA)	$673,922	$83,975	$757,897
Rep Henry Bonilla (R-TX)	$664,571	$30,200	$694,771
Sen Rick Santorum (R-PA)	$659,407	$15,350	$674,757
Rep Michael G Oxley (R-OH)	$653,900	$11,800	$665,700
Sen Spencer Abraham (R-MI)	$648,326	$15,000	$663,326
Rep Roy Blunt (R-MO)	$646,481	$9,650	$656,131
Sen Christopher S Bond (R-MO)	$632,845	$0	$632,845
Al Gore (D)	$626,264	$45,200	$671,464

Not surprisingly, the list is top heavy with members of the House and Senate Defense Appropriations Subcommittees—the panels that supply the money for the Pentagon's budget. But giving money directly to lawmakers is not the only way to win their gratitude. Many members of Congress operate "leadership PACs" that they use to deliver much appreciated dollars to other members and to up-and- coming candidates seeking a seat in Congress for the first time. Raising money for those leadership PACs has become an art form on Capitol Hill, and defense contractors, as the following chart illustrates, have been generous supporters. Here are the members of Congress whose personal PACs collected the most from the top defense contractors:

Top Recipients to Leadership PACs

Recipient	To Leadership PAC	To Candidate	Total
Rep J Dennis Hastert (R-IL)	$1,100,173	$46,200	$1,146,373
Rep Jerry Lewis (R-CA)	$1,002,199	$54,750	$1,056,949
Rep Richard A Gephardt (D-MO)	$620,550	$68,950	$689,500
Rep Joe Barton (R-TX)	$565,172	$20,200	$585,372
Rep Don Young (R-AK)	$497,870	$66,350	$564,220
Rep Martin Frost (D-TX)	$489,644	$39,450	$529,094
Sen Tom Daschle (D-SD)	$471,170	$68,775	$539,945
Rep David Dreier (R-CA)	$397,750	$14,000	$411,750
Sen Mitch McConnell (R-KY)	$376,482	$75,052	$451,534
Sen John B Breaux (D-LA)	$364,273	$23,950	$388,223
Sen John Ashcroft (R-MO)	$359,306	$94,585	$453,891
Sen James M Inhofe (R-OK)	$356,697	$56,550	$413,247
Sen Larry E Craig (R-ID)	$310,790	$32,250	$343,040
Rep Deborah Pryce (R-OH)	$284,493	$9,900	$294,393
Rep Charles B Rangel (D-NY)	$265,750	$24,700	$290,450
Rep John S Tanner (D-TN)	$246,041	$1,800	$247,841
Rep Jim Nussle (R-IA)	$242,250	$26,844	$269,094
Rep Mark Foley (R-FL)	$214,603	$7,500	$222,103
Rep Frederick Upton (R-MI)	$210,694	$6,250	$216,944
Rep John R Kasich (R-OH)	$207,450	$48,550	$256,000

Political Influence II: Lobbying

As with campaign contributions, the top defense contractors were of many different minds when it came to spending money on Washington lobbyists. Only half the top 737 contractors filed lobby reports with Congress indicating they'd spent at least $10,000 in their lobbying efforts. Many contractors reported spending only nominal amounts, while the biggest reported spending tens of millions. In all, the leading defense contractors spent nearly $1.9 billion on Washington lobbyists between 1998 and 2003.

Again, many of the biggest spenders on lobbying were companies—like Altria Group (the former Philip Morris)—whose main interests lie outside defense. But as with campaign contributions, the top 10 defense contractors all ran top-dollar lobbying efforts.

Top Lobbying Spenders Among Major Defense Contractors

Name	1998-2003 Lobby Totals	Sector
Altria Group Inc	$87.9 million	Agribusiness
General Electric Co.	$76.9 million	Misc Business
Verizon Communications Inc.	$72.7	Communications/Electronics
Northrop Grumman Corp.	$70.8 million	Defense
ExxonMobil Corp.	$51.9 million	Energy & Natural Resources
SBC Communications Inc.	$51.1 million	Communications/Electronics
Boeing Co.	$49 million	Defense
Lockheed Martin	$48 million	Defense
Sprint Corp.	$45.5 million	Communications/Electronics
AT&T Corp.	$44.4 million	Communications/Electronics
General Motors Corp.	$39.7 million	Transportation
IBM Corp.	$31.3 million	Communications/Electronics
General Dynamics Corp.	$29.4 million	Defense
DaimlerChrysler Corp.	$29.3 million	Transportation
Motorola Inc.	$28.6 million	Communications/Electronics
Textron Inc.	$27.9 million	Defense
ChevronTexaco	$27.6 million	Energy & Natural Resources
Shell Oil Co.	$25.6 million	Energy & Natural Resources
BP p.l.c. (BP Amoco)	$24.5 million	Energy & Natural Resources
Southern Co.	$23.4 million	Energy & Natural Resources

Lobbyist Spending by the 10 Biggest Defense Contractors

Name	98-03 Lobby Spending
Lockheed Martin	$48 million
Boeing Co	$49 million
Raytheon Co	$15.3 million
Northrop Grumman	$71 million
General Dynamics	$29.4 million
United Technologies	$22.6 million
General Electric	$76.8 million
Science Applications Intl Corp (SAIC)	$12.5 million
Carlyle Group	specific lobbying data for defense properties unavailable
Newport News Shipbuilding	included with Northrop Gumman

Small Business: Bigger than you think

For decades, the federal government has gone out of its way to help small businesses make inroads into the vast federal purchasing market, giving preference to small companies that compete for federal contracts. Under an informal quota system set by Congress, federal agencies are encouraged—though not legally required—to farm out 23 percent of their procurement dollars to small businesses.

While most people's conception of "small business" may conjure images of small retail establishments, professional offices, or family-run factories, the government's definition extends much more widely. Indeed, some 189 of the Pentagon's biggest contractors—those winning at least $100 million in prime contracts over the past six years—showed at least half their contract dollars as going to small businesses. Of those, 127 companies got at least 90 percent of their contracts under the small business designation.

The biggest "small business" was Chugach Alaska Corp., considered a disadvantaged small business since its owners are Alaska Natives who enjoy minority status. Chugach Alaska won nearly $1.4 billion in defense contracts between 1998 and 2003; some 95 percent of that total was marked as going to small disadvantaged businesses. The biggest non-minority "small business" was GTSI Inc., a Virginia-based supplier of computer equipment. Some $1.2 billion of the firm's total $1.6 billion in contracts were designated as having gone to small businesses. Six other corporations earned half a billion dollars or more in small business contracts over the six-year period.

The government's rules defining what constitutes a small business vary widely by industry. Companies wholesaling goods to the government must have fewer than 500 employees to qualify. Certain industries—from phone companies to airlines to small arms manufacturers—may have as many as 1,500 employees and still be classified as small in the eyes of the government. Others are designated small businesses based on their annual revenues.

But some companies that are large by anyone's definition have taken advantage of the government's interest in helping small business by acquiring companies that have won contracts thanks to their small business status. Under rules which have prevailed for years, a company can retain its small business status throughout the life of the contract—even if the company is no longer small. Since some government contracts may last as long as 20 years, critics have complained that this loophole is actually helping companies it wasn't meant to, and that more frequent reappraisals of a company's small business status should be required.

In December, the Small Business Administration is scheduled to adopt a new regulation that will require all small businesses contracting with the government to recertify their small business status every five years. In 2002 the General Services Administration adopted a similar requirement for those businesses that sell goods or services through the GSA Schedule—a fast-track ordering system that lets federal employees choose items off a list of pre- approved suppliers.

But neither of those rules have yet had much effect on big defense contractors, and the table below shows how much money the leading "small businesses" collected in Pentagon contracts between 1998 and 2003. (Set-aside contracts, shown in the chart below, are those that can only be awarded to small businesses.)

Name	Small Business Contracts	Total Contracts	Small Pct	Set-Aside Pct
Chugach Alaska Corp	$1,317,304,425	$1,377,589,626	96%	88%
GTSI Corp	$1,170,934,893	$1,619,414,562	72%	3%
CLASSIFIED CONTRACTOR	$852,966,582	$8,267,851,367	10%	0%
Ocean Shipholdings Inc	$816,091,394	$1,094,875,569	75%	0%
Metro Machine Corp	$654,996,983	$660,195,544	99%	0%
L-3 Communications	$581,947,903	$5,233,392,435	11%	3%
Wornick Co	$561,372,502	$607,488,496	92%	0%
Titan Corp	$549,537,387	$2,389,803,664	23%	10%
Engineered Support Systems Inc	$522,233,418	$1,573,708,929	33%	21%
Todd Pacific Shipyards Corp	$457,257,838	$464,206,666	99%	1%
Ameriqual Group	$440,118,830	$440,118,830	100%	0%
Paramount Petroleum Corp	$432,191,289	$432,191,289	100%	77%
Digital System Resources Inc	$429,655,087	$460,235,430	93%	13%
Holly Corp	$423,826,222	$514,203,000	82%	80%
Spectrum Astro Inc	$423,027,650	$423,727,650	100%	0%
Sparta Inc	$410,448,703	$425,508,397	96%	41%
Dynetics Inc	$409,567,922	$435,244,949	94%	40%
NLX Corp	$395,071,192	$395,169,661	100%	33%
Earl Industries	$391,544,499	$391,900,184	100%	0%
CAS Inc	$388,010,361	$420,512,551	92%	33%

What the Pentagon buys

Aircraft, ships, tanks, missiles, bombs and ammunition—these are the nuts and bolts of a modern military, but they're only the beginning of the Pentagon's ever-growing shopping list. Twenty years ago, nearly two-thirds of the Defense Department's procurement budget went for products; these days a majority of the dollars pay for services. The transition came in the early 1990s and it hasn't reversed since. In 2003, 56 percent of the U.S. military's contracting dollars went for services. Here's a chart showing the transition:

Still, the generals and admirals do buy a good bit of hardware—especially hardware that flies. Out of more than 2,200 detailed budget categories that describe what the Pentagon bought, fixed-wing aircraft was by far the single most expensive item, totaling $68.6 billion between 1998 and 2003. That was also the top category in every single fiscal year going back at least as far as 1984.

But the aircraft themselves are just the beginning. When the many additional categories are added in—for such items as helicopters, aircraft engines, research and development, maintenance, components and the like—the cost escalates to $157 billion over the past six years.

Aggregating the detailed budget categories—for both products and services—into larger groups, here are the top 20 items the Pentagon contracted out from 1998 to 2003:

Rank	Category	Total
1	Research & Development	$140,206,855,854
2	Aircraft and Airframe Structural Components	$86,530,378,638
3	Professional, Administrative & Mgmt Support Services	$73,583,447,989
4	Construction of Structures and Facilities	$42,396,893,851
5	Equipment Maintenance, Repair & Rebuilding	$42,372,061,870
6	Maintenance & Repair of Real Property	$34,430,112,159
7	Data Processing and Telecommunication Services	$33,010,309,515
8	Ships, Small Craft, Pontoons and Floating Docks	$31,231,653,405
9	Communications and Detection Equipment	$28,317,777,970
10	Medical Services	$24,563,339,971
11	Fuels, Oils & Lubricants	$24,450,584,124
12	Engines, Turbines and Components	$23,254,881,284
13	Guided Missiles	$22,747,653,356
14	Utilities, Food Service, Janitorial & Housekeeping Services	$22,604,076,518
15	Transportation, Travel and Relocation Services	$18,096,765,679
16	Data Processing Equipment, Software & Supplies	$17,394,506,239
17	Trucks, Trailers, Ground Assault & Other Motor Vehicles	$14,892,149,100
18	Aircraft Components and Accessories	$14,875,527,520
19	Ammunition and Explosives	$13,165,716,488
20	Architect and Engineering Services - Construction	$12,195,567,488

The research and development component has always been a huge budget item at the Defense Department, and Pentagon contractors are paid to study everything from weapons systems to employment growth & productivity. Broken down into more detail, here are the main subjects they were researching and developing:

Research & Development Category	Total
Ammunition	$1,963,914,225
Defense Aircraft	$27,936,525,895
Defense Electronics & Communications Equipment	$17,280,934,955
Defense Missile & Space Systems	$21,844,945,949
Defense Ships	$3,779,334,874
Defense Tank & Automotive	$1,737,942,398
General Science & Technology	$1,592,345,867
Space	$7,372,810,325
Weapons	$7,896,155,075

The Rise in Service Contracts

The rising importance of outside contractors in providing services to the Pentagon is of more than academic interest. As explored in the accompanying Shadow Pentagon report, it has major implications not just for contracting but for national security. When the normal functioning of defense operations becomes so dependent on contractors that the thought of running a war without them becomes unthinkable – as it has in Iraq – basic questions naturally arise about missing links in the military's overall command and control.

In that respect, what's happening in the Pentagon is a mirror of what's been happening throughout the federal government. The "Reinventing Government" initiatives of the Clinton administration have given way to new moves during the Bush administration to reduce the government payroll by having private contractors compete with the federal workforce for a huge array of jobs.

Angela Styles was the new administration's point person for following through on President Bush's campaign promise to open up 450,000 federal jobs to competition with the private sector. As Administrator for Federal Procurement Policy in the Office of Management and Budget, Styles was the top government official dealing with federal contractors. She saw firsthand the extent to which the government has come to rely on private contractors. "There is no question, without the contractors, you can't be on the battlefield," Styles told the Center for Public Integrity. "These people prepare all the equipment they have. They really are walking behind the tanks in Iraq."

Styles, who left the Bush administration in 2003, argues that the widespread growth of contracting for services has expanded beyond the ability of government to oversee it. "I don't know of any function within the government that would actually operate without contractors at this point," she said. "I mean it's a partnership that maybe we stumbled into," she said. "You walk into a government building, you've got a federal employee working next to a contractor, they may have the exact same duties, they may have precisely the same duties, they interact with the public, they make decisions." And yet, she adds, the public employee falls under government rules; the outside contractor answers to their private employer.

Given the dependence of the government on its private, rented workforce, that lack of management troubles Styles. "I don't have a problem with the model where there are 10 percent employees and 90 percent contractors; as long as you recognize what the problems are and make it work," she said. "But that is not what is happening now. You have this 50-50 mix, you've done something with human capital in the federal government where there are no incentives to stay. And they are buying things they don't understand, which is the problem on the front end because you are buying something where you can't understand the pricing, you can't understand what you are buying, you can't compare the people you are buying from. You are not going to manage that contract."

Adding to the problem has been the federal government's expanding reliance on streamlining procurement by ordering items – and services – not through the traditional bidding process, but from a catalog or "schedule" maintained by the General Services Administration. "The theory behind schedules was probably a nice idea in the fist place," Styles said. "It was supplies, it was commodities. It was things that lower level officials could figure out whether they were getting a good price for. It was pens and pencils. It was basic computers. But over time, the problem is that this has evolved to services."

Being a giant organization, the Defense Department also buys a lot of the same things everyone else buys, only more so. The Pentagon's electric bill, for instance, came to $3.7 billion over the six-year period. They paid $3.8 billion for fuel oil, $2.8 billion for dairy foods and eggs, $2.6 billion for family housing facilities, and $2.3 billion for custodial and janitorial services. Like a lot of us, the Pentagon even has a "miscellaneous items" category—only theirs amounted to $10 billion over the past six years.

Some of the other things the Pentagon spent money on over the past six years:

Pharmaceuticals	$5.6 billion
Nuclear Reactors	$3.6 billion
Bombs	$3.1 billion
Advertising	$2 billion
Dentistry services	$1.2 billion
Guard services	$1 billion
Personal armor	$991 million
Landscaping/groundskeeping services	$989 million
Men's outerwear	$973 million
Batteries (chargeable and non-rechargeable)	$961 million
Trash/garbage collection	$910 million
Men's footwear	$886 million
Rivets	$359 million
Expert witnesses	$219 million
Women's outerwear	$168 million
Intelligence services	$141 million
Badges and insignia	$46 million
Insect and rodent control services	$40 million
Debt collection services	$25 million
Flags and pennants	$17 million
Tobacco products	$11 million

Accuracy in Pentagon reporting

Combing through six years of Pentagon databases is both a revealing and a frustrating experience. Since conclusions about the patterns in defense contracting are only as good as the data they rely on, much of the Center's time in the research was spent double-checking the accuracy of the databases. Since one of our most important goals was compiling a list of the top contractors, much of the research was aimed at assuring that all the subsidiaries and affiliates were connected to the right corporate parent.

Putting it mildly, this was not an easy job. Many defense contractors, like corporations in other business sectors, have in recent years accelerated the pace of buying and selling subsidiaries, linking together through mergers, divesting themselves of unwanted properties, sometimes even changing their names. Keeping up all this is a major undertaking, especially over a six-year period. (Had Google not been invented, it would probably have been nearly impossible.)

In the process of compiling the data, it quickly became clear that the Pentagon's database of contractors was rife with errors concerning the corporate parentage of contractors. The database includes three IDs (derived from Dun & Bradstreet code numbers): one for the contractor, one for their corporate headquarters, and one for the ultimate parent. While some smaller companies were easy to track, and had a single, consistent ID for all three fields, many others had duplicate IDs and outdated or incorrect information about their corporate parentage.

These errors are serious, since without accurate data, compiling a list of leading contractors is simply not possible.

Some of the Pentagon's errors in matching companies to their correct corporate parents is understandable, given the obscure nature of the company names. It's not immediately obvious, for instance, that Braintree II Maritime Corp (or Braintree III and Braintree IV, which are also contractors) are subsidiaries of General Dynamics, and the Pentagon database sometimes lumps them correctly and sometimes doesn't.

One of the most baffling examples was a series of contracts written to five companies with similar names and a common address in Norfolk, VA—Expander Transport Corp., Expediter Transport Corp., Exporter Transport Corp., Expresser Transport Corp., and Extender Transport Corp. In fact, all five are subsidiaries of Maersk Inc., a Danish shipping company that operates out of the same office. Those five companies earned a combined $780 million in Pentagon contracts between 1998 and 2003, but only $260 million of the total was correctly affiliated with Maersk. In all, Maersk shows up in the Defense Department database as collecting just under $967 million in contracts during the six year period. In fact, the company's awards totaled $1.9 billion. The Center found dozens of similar examples.

And then there are the cases of outright mistaken identity. According to the DOD database, NewTech Inc., a small roofing contractor in South Carolina, was on the receiving end of some $245 million in defense contracts between 1998 and 2003. The company is listed by Dun & Bradstreet as having 15 employees. Its office address, on Hilton Head Island, is no longer correct and the company telephone has been disconnected. More perplexing, the contracts were all for weapons testing and evaluation at the White Sands Missile Range in New Mexico. In fact, the $245 million in contracts went to a New Mexico company with a similar name—a mistake the Pentagon database has still not caught up with after at least six years.

It should be noted that these were not cases of the dollars themselves being routed to the wrong company, but rather of the Pentagon's misreporting of where the money went in its procurement database. (Though it should also be noted that details on where the money actually did go are not publicly available.)

In all, the Center found that the 737 biggest contractors were identified in the database under a total of 1,612 different "ultimate parent" IDs. The total of incorrectly listed parents came to some $35 billion. The Center did not attempt to standardize IDs for smaller contractors, but a quick glance at the database shows that the problem there is similar.

Given all the inaccuracies in the Defense Department's database, it is always possible that other errors remain to be discovered. If and when they are, the Center's rankings, profiles and reports will be updated accordingly.

Note to readers: This story has been reposted. Since the report was originally released, the Center for Public Integrity has changed the way it calculates lobbying expenditures to reflect a more stringent methodology for determining the total amounts. The change was made to correct the potential overstatement of totals. Figures or relevant text that have been changed are indicated with asterisks. (3/31/2006)

The big business of small business

2011-09-16T14:56:14-04:00

Titan is not alone. Thirty percent of all defense contract money reported as going to small businesses and special minority-owned businesses has ended up in the hands of the top defense companies, the Center for Public Integrity has found.

Between 1998 and 2003, the Pentagon awarded more than $47 billion in contracts designated for small businesses to companies that have each earned more than $100 million from Defense Department contracts alone during that six year period.

More than half of the top 100 defense contractors—55 of them in all—received at least $10 million in contracts with small business designations over the past six years. All told, the small business contracts won by the largest defense firms amounted to $9.3 billion, the Center found.

Titan, the 34th largest defense contractor, has received more than half a billion dollars in preferential small business contracts by absorbing smaller companies and continuing to win awards on their small business contracts. This large amount accounted for 23 percent of the $2.39 billion in defense contracts the company received from 1998 to 2003.

Nearly 45 percent of Titan's small business awards came in the form of small business set asides, which not only carry a preferential classification for government contracting, but are exclusively reserved for small companies. Nearly 80 percent of the $176 million Titan received from 2000 to 2003 through awards on contracts SenCom Corp. won were recorded as funds set-aside to go to small businesses.

"We have no problem with the government procurement systems and how they handle these things," Titan spokesperson Ralph 'Wil' Williams told the Center.

According to current regulations, if a business is awarded a contract while it is classified as small, the business is considered small for the life of the contract. This allows millions of small business dollars to go to big companies when a small firm outgrows the classification or is acquired, as noted in a General Accounting Office investigation last year.

"In fact there is a lot of change going on with the small business awards" said Deidre Lee the Director of Defense Procurement and Acquisition Policy at the Department of Defense. "If it is truly a buy … we should novate the contract, which would change the name, which would change the status. That is what should happen."

Contracting expert Charles Tiefer called the percent of contracts classified as going to small business that actually go to top companies "disheartening." He said government agencies have an incentive to award contracts to small businesses.

"Whether by goals or quotas departments are obliged to make sure that small businesses are taking contracts," said Tiefer, a professor of government contracting at the University of Baltimore law school.

According to government-wide goals set by Congress, 23 percent of prime contract dollars are supposed to be awarded to small businesses annually. The Small Business Administration reported that the Defense Department exceeded that goal by 2.4 percent in 2003.

L-3 Communications, which the Center found received $5.15 billion in contracts during 1998-2003, collected 11 percent–or $582 million–of its total contracts as those classified as going to small businesses. More than $219 million of those contracts come from the management and technical services company EER Systems, which L-3 Communications acquired in 2001 to become part of its Government Services division.

Other top contractors receiving small business dollars include the military equipment support services company, Engineered Support Systems Inc.. More than one third of the company's $1.57 billion in contracts during 1998 to 2003 came from contracts classified as going to small business.

Engineered Support Systems received $188 million in small business dollars through Keco Industries, which it acquired in 1998. Radian Inc. also brought in $162 million in small business dollars since Engineered Support Systems acquired the company in 2002.

'Get it right'

The Small Business Administration recently made changes to its regulations, set to go into effect December 2004, that would require companies to re-certify themselves as small businesses after they have been acquired by another company, said Gary Jackson, the assistant administrator for size standards at the SBA.

"The problem came up that a company may grow or be bought out but still gets recorded as small for the purposes of that contract," Jackson said. "In December we will look at situations when the contract is bought. The company would have to certify if the company is still a small business."

Jackson noted that the new regulations would not deny a company work on a contract previously won, but would remove the preferential classification for government reporting. He said the acquisition problem arose over the past five years after the government developed contracts that can last up to 20 years — plenty of time to grow out of a small business or be acquired by a larger company.

Tiefer said he was cautious about the Small Business Administration's introduction of certification regulations.

"[The regulation] sounds like a great idea, but many more promises are made about protecting the small business community, especially before an election," Tiefer said.

The GSA has already been requiring recertification of small businesses that win contracts through its schedules said David Drabkin, the deputy chief acquisition officer at the General Services Administration. "Under current regulations if you are small you remain small for the life of the contract, there is no requirement in regulation or law to investigate the size because of the SBA rule," Drabkin said.

But beginning in 2002, Drabkin said, General Services Administration contract officers were required to ask for recertification of small business size after the base period of the contract had ended, which is usually five years, to "keep in the spirit of what we are trying to do" with the small business program.

Drabkin said the General Services Administration's new "Get It Right" campaign, launched to re-educate federal contracting employees about proper contracting methods, will include a review to see if contracting officers have been making the inquiry into business size.

The Pentagon's $200 million shingle

2011-09-16T14:58:54-04:00

Beltz Newtech specializes in roofing, exterior commercial painting and even does some waterproofing. Beltz said he started the company 30 years ago after working as a school teacher and operates it with his wife, Karen, who is the company's vice president.

Beltz told the Center for Public Integrity he was unaware that the Pentagon reports his company as the recipient of a $245 million, cost plus contract that calls for working on large blast thermal simulators while providing "nuclear effects services" at White Sands Missile Range in New Mexico.

"I guess they made some type of mistake," Beltz told the Center. "Either that or they got me mixed up with another company."

Beltz's contract listing by the Department of Defense is indeed a case of mistaken identity—one of hundreds of errors the Center found while going through the Pentagon's database of awarded contracts.

A Center analysis of the Defense contracts database found there have been more than 2.2 million records entered during the past six years detailing more than $900 billion in Pentagon spending. But these records often have minor errors that are attributable to the Defense Department's antiquated system that was set up decades ago.

In the case of Beltz's company, the Pentagon confused the small roofing contractor with the New Mexico Technology Group, LLC, which is located on an Army base in White Sands, N.M., rather than in a house near a golf course in Hilton Head, S.C. But both companies do share similar shortened company names: Newtech and Newtec, respectively.

The case of mistaken identity was repeated 100 times during the course of four years, and the Pentagon listed Beltz Newtech, rather than New Mexico Technology Group, as winning more than $200 million of contracts.

"That's a lot of roofing," quipped Deidre Lee, Director of Defense Procurement & Acquisition, about the mistaken listings. Lee, though surprised by the case, said that she is aware that some mistakes occasionally get inputted. But she said she is confident Defense's data is an accurate reflection of the more than $150 billion that is spent through Pentagon contracts per year.

"The data is just as good as the people that put it in," Lee said about the tens of millions of transactions that her department documents. "Are there going to be data entry errors – absolutely. But the data is a pretty good reflection of what we are doing."

Among these records the Center found almost $35 billion in contracts where Defense personnel misidentified the correct parent company. Out of the $715 billion worth of contracts identified for the project, the mistakes amounted to an error rate of approximately five percent.

For instance, more than $700 million in contracts with Westinghouse Electric were mistakenly connected with National Amusements Inc. — a movie theater chain – instead of Bechtel Group and British Nuclear Fuels Ltd.

Lee believes that many of the mistakes in the Pentagon's contract database occur because of its decentralization. Currently, the data is provided by the person writing the contract, which is then sent to their larger organization, then to another, and then it is sent to Defense's Washington Headquarters Services, which then feeds the information into the Federal Procurement Data System.

The General Services Administration plans to implement a new system for contracting in 2005 that will consist of a direct feed from the person writing the contract with the data into the Federal Procurement Data System, Lee said.

Lee believes that the new system will decrease the number of mistakes and allow the data to have a more fluid process.

"That is pretty direct," Lee said. "Can I guarantee you that all the 20,000 people in the field inputting data are never going to make a mistake? No. But they know it is important."

Statement of Charles Lewis, Executive Director

2011-09-16T15:02:22-04:00

Good morning. The Center for Public Integrity is a nonprofit, nonpartisan organization that does investigative reporting and research on public policy issues in the United States and around the world. Since 1990 the Center has produced more than 250 investigative reports and 13 books. In the past seven years, the Center's work has been honored 26 times by the Society of Professional Journalists, Investigative Reporters and Editors, and other respected organizations.

The Center is funded by foundations and individuals and the sale of our publications. We do not accept advertising or contributions from companies, labor unions, governments or political parties. We do not take positions or lobby on specific policy or legislative matters. The names of our major donors and other information about the Center are available on our award-winning Web site, www.publicintegrity.org. We gratefully acknowledge support for this project today from the Town Creek Foundation, the New York Community Trust—Everett Philanthropic Fund, and Vincent Ryan.

Late last year, after utilizing 20 researchers, writers and editors over six months, filing 73 Freedom of Information Act requests and even suing the Army and the State Department, we issued a report entitled Windfalls of War, which chronicled and posted online all of the available major Pentagon and State Department contracts in Afghanistan and Iraq. The report, since updated four times, won the prestigious George Polk award. Substantively, it placed the large, controversial contracts won by Halliburton and its subsidiaries in overall context, definitively revealing that Vice President Dick Cheney's former company has been awarded by far the most taxpayer money in Iraq and Afghanistan, sometimes with no bidding. The report also documented how Halliburton and all of the top 10 Iraq/Afghanistan U.S. contractors have also been major political influence players in Washington, spending millions of dollars on campaign contributions and lobbying.

Tracking the Iraq and Afghanistan contracts whetted our appetite to go both broader and deeper, which brings us to this morning. Today we are releasing an exhaustive, unprecedented Center report entitled, Outsourcing the Pentagon: Who's Winning the Big Contracts. For the past nine months, a team of 23 researchers, writers and editors, led by project manager and respected author Larry Makinson, has examined more than 2.2 million contract actions totaling $900 billion in authorized expenditures over the six-year period from fiscal year 1998 through fiscal 2003 (Oct. 1, 1997—Sept. 30, 2003). Our prime source was the Pentagon's own publicly available but obscure procurement databases.

From that, we identified and have profiled online the biggest Defense Department contractors—all 737 of them, including several thousand of their subsidiaries and affiliates—who have received at least $100 million in contracts over the past six years, with breakdowns of each company's total contract dollars, the types of contracts they won, the competition they faced, a list of their key subsidiaries, analysis of their lobbying and campaign contributions, and a list of the chief products and services they sold to the Pentagon. We have then cross-meshed this information with at least two other massive federal data sets, campaign contribution records and lobby disclosure documents, in addition to interviewing dozens of people and filing more than a dozen Freedom of Information Act requests. Again, our Web site is www.publicintegrity.org or this massive study can be accessed directly through www.pentagonspending.org.

Center report finds $362 billion in no-bid contracts at the Pentagon since 1998

2011-11-17T16:49:11-05:00

No-bid contracts have accounted for more than 40 percent of Pentagon contracting since 1998, the Center for Public Integrity revealed today in an exhaustive report on Defense Department contracting.

Over the past six years, the Pentagon has awarded some $362 billion to companies without competitive bidding. In fact, of the top ten contractors, only one, SAIC, won more than half its dollars through full and open competition. All the others won a majority of their dollars through sole source and other no-bid contracts.

The report, which covers the period 1998-2003, also documents the extent to which the Defense Department has become dependent on outside contractors, finding that every annual increase in defense spending has been matched by an equal increase in contracting. Fully half the Defense Department budget—some $900 billion since 1998—has gone out the door to contractors rather than paying for direct costs such as payrolls for the uniformed armed services.

And yet the Pentagon lacks the most basic information on its service contract workforce, including the number of contract employees it uses. When, in 2002, the Secretary of the Army declared that the Army lacked "visibility" over its service contract workforce, he called for its collection. By mid-2004 the data gathering had still not begun. The Defense Department, which during the 1990s reduced by almost half the number of officials who oversee procurements, ended up hiring firms like Booz Allen Hamilton, Jefferson Solutions and the Rand Corporation to help manage its contractors.

Some 737 contractors won $100 million or more in contracts during the six year period, the study found. Many were generous political donors, and President George W. Bush was by far the top beneficiary of their giving. Bush has received $5.4 million from those top contractors since 1998. Sen. John Kerry, his Democratic opponent, collected just under $2 million—the great majority of that coming in 2004.

Among the major findings of this unprecedented study:

80 percent of all defense contracting dollars were won by 1 percent of defense contractors (737 out of nearly 100,000 contractors).
The 50 biggest contractors got more than half of all the money; the top ten got 38 percent.
Lockheed Martin topped the list at $94 billion over six years; Boeing was second with $81 billion; Raytheon was third (just under $40 billion); then Northrop Grumman and General Dynamics with nearly $34 billion each. Those totals do not include the extra billions these companies collected as partners in joint ventures.
One-third of the dollars awarded to the top 737 contractors came in cost-plus contracts – three times the proportion awarded to smaller contractors.
Nearly 100 of the top 737 contractors are foreign entities.
The 10 biggest defense contractors all spent heavily on both campaign contributions (a combined $35.7 million) and lobbying ($414.6 million). But the return on their investment was staggering: $340 billion in contracts.
Despite winning at least $100 million in Pentagon contracts over the past six years, some 189 of the top contractors were classified as small businesses. Some companies continued to win small business contracting dollars even after they'd been acquired by much larger companies.
While the Pentagon still buys plenty of expensive hardware, it now spends more money for services than products, a dramatic turnaround from 20 years ago, when almost two-thirds of the Pentagon's contracting budget went for products. By 2003, some 56 percent of Defense Department contracts paid for services rather than goods.
Defense Department contracting records are not always accurate: the ultimate corporate parent was misidentified in more than $35 billion worth of contracts that the Center examined.

In all, the Center's study reviewed more than 2.2 million contract actions over the past six years. Every company collecting more than $100 million in contracts is profiled in detail on the Center's Web site, with breakdowns of each company's total contract dollars, the types of contracts they won, the competition they faced, a list of their key subsidiaries, analysis of their lobbying and campaign contributions, and a list of the chief products and services they sold to the Pentagon.

The massive study also gives an in-depth accounting of how contracts are awarded, how many and which kinds of contracts are competitively bid, and the discrepancy between contracts for the largest contractors and all the others. The report also breaks down the various categories of the Pentagon procurement budget, enumerates lobbying expenses and discusses the way that some companies use the small business loopholes in contracting procedures.

This is the Center's second major report in less than a year examining the Pentagon contracting process. Last October the Center published the first ever report on contractors for Iraq and Afghanistan.

Outsourcing the Pentagon

2011-11-17T17:02:46-05:00

The starting point and primary source material for this project was a collection of the Defense Department's annual Contract Action Data Files from fiscal years 1998-2003. These databases, totaling a combined 2.2 million records, document all activities concerning contracts with values exceeding $25,000. Each record includes a wealth of detail, based on the Pentagon's DD Form 350, which must be filled out every time a contract action takes place.

All the data refers only to contracts authorized to the prime contractor. Subcontractor information is not publicly released.

All references to "contracts" throughout the report refer to the dollar amount of the contracts, rather than the number of contracts. For instance, a statement that a particular company got two-thirds of its contracts through sole-source bidding would mean two thirds of the contract dollars were won through sole-source bidding.

The Defense Department has been compiling this data since 1966, and all the databases are available for downloading on the web at www.dior.whs.mil/PEIDHOME/guide/procoper.htm.

Among the data include in those records are the prime contractor's name, address, Dun & Bradstreet ID number, corporate parent ID (unfortunately, not always accurate), the contracting office, the dollar amount of the new or amended contract, the location where the work was performed, a description of the product or service provided, and detailed information about the type of contract, whether it was competitively bid or not, whether it went to a small or large business—even how many bidders responded.

Databases from earlier years, as far back as fiscal 1984, were also used to track long-term shifts in the goods and services the Pentagon bought.

Our primary goal was to identify and profile the Pentagon's top overall contractors during this six year period, a span that included two administrations and periods both of peace and war. While the Pentagon publishes annual lists of the 100 biggest contractors, we wanted to dig more deeply and profile every contractor that won $100 million or more in Defense Department contracts between 1998 and 2003. By the time we were done, some 737 contractors met that threshold and their profiles appear elsewhere in this report.

Companies that merged or were bought by other companies during the period of this study are listed on their own if they collected $100 million or more in contracts while they were still independent. After the merger or acquisition, their contracts are included in the totals of the new company. For instance, Exxon Corp. is profiled for the contracts it received between 1998 and 1999. The profile for its successor, Exxon Mobil, begins in 2000.

Once we'd determined the universe of contractors, we researched their campaign contribution records from the Federal Election Commission and lobbying reports filed with the U.S. Senate's Office of Public Records.

By far, the most difficult and time-consuming part of the project was standardizing and verifying the names of companies that met the $100 million threshold. We discovered very early that the DoD database was rife with errors – that literally thousands of records had incorrect or outdated IDs for the contractor's ultimate parent. Because of that, we examined contract data for many companies well below the $100 million threshold, to ensure that a company would not be kept off the list due to miscoding of their ID by the Pentagon.

To clean the data, we spent months combing corporate websites, annual reports, filings with the Securities and Exchange Commission, news articles, and the online business directory Hoovers.com. This job would have taken years instead of months—if it could have been done at all—were it not for the internet and particularly the extraordinary search capacities of Google.com, which time after time helped us locate thousands of obscure facts culled from around the World Wide Web.

Given all the inaccuracies the Defense Department's database, it is always possible that other errors remain to be discovered. If and when they are, the Center's rankings, profiles and reports will be updated accordingly.

A large measure of gratitude is also due to Ray Morris, the recently-retired civilian employee of the Defense Department's Directorate for Information Operations and Reports, whose job it was to compile these annual databases since 1966, and who over the years helped countless journalists and researchers in locating and interpreting the data.

The shadow Pentagon

Iraq — 2011-11-17T16:49:11-05:00

As war fighting came to dominate the news in the wake of the Sept. 11, 2001, terrorist attacks, names like Halliburton and Bechtel became as familiar to the average American as the names of any general, division or soldier in the field. Fallujah first attracted wide public attention when insurgents killed and crowds mutilated the remains of four employees of Blackwater Security Consulting. Employees of CACI International and Titan were accused of taking part in the abuse of prisoners at Abu Ghraib. That the use of contractors on the battlefield and in nation building in Iraq and Afghanistan is front page news comes as a surprise to many, but it is a consequence of a decades-long policy to keep government smaller by relying on the private sector.

What the War on Terror has shown is the extent to which private contractors have become part and parcel of Pentagon operations. Where once contracts went to build ships, planes, tanks and missiles, today the majority of contract dollars buy services—the time of people—and information technology. Increasingly the private workforce works alongside officials, in Pentagon meeting rooms as well as on Iraqi battlefields, performing what citizens consider the stuff of government: planning, policy writing, budgeting, intelligence gathering, nation building.

In March 2002, a year before the start of the Iraq war, then-Secretary of the Army Thomas White told top Defense Department officials that reductions in Army civilian and military personnel, carried out over the previous 11 years, had been accompanied by an increased reliance on private contractors about whose very dimensions the Pentagon knew too little. "Currently," he wrote, "Army planners and programmers lack visibility at the Departmental level into the labor and costs associated with the contract work force and of the organizations and missions supported by them."

In April, the Army told Congress that its best guess was that the Army had between 124,000 and 605,000 service contract workers. In October, the Army announced that it would permit contractors to compete for "non-core" positions held by 154,910 civilian workers (more than half of the Army's civilian workforce) and 58,727 military personnel. It should have been no surprise, then, when contractors were needed to meet the surge of wartime reconstruction, that the Pentagon itself was hard-pressed to estimate the numbers of its contract employees in Iraq.

The inability to keep a count of contractors is only the most obvious of the problems the Pentagon faces. It has been longstanding bipartisan White House policy that "inherently governmental" work—the basic and most sensitive work of government—must be performed by government officials. Yet in Iraq, at Abu Ghraib, where contractors were involved in interrogations and collecting intelligence, this rule was not only violated, but apparently violated without notice to the Commander in Chief in time of war.

Government by contract

The onslaught of service contracting challenges oversight on multiple counts. The Defense Department, along with other government agencies, keeps precise count of the numbers of those employed as officials—civil servants, political appointees, servicemen and women. But Defense itself lacks the most basic information on its contract workforce. When, in 2002, the Secretary of the Army declared that the Army lacked "visibility" over its service contract workforce, he called for its collection. By mid-2004 the data gathering had yet to begin. As the General Accounting Office, the watch dog arm of Congress, observed, "there is only limited visibility or control at the DOD or military department level, and information systems that provide reliable data and are capable of being used as a management tool are lacking."

Poor data goes hand in hand with inadequate management. In a 2003 report, the GAO noted that "our work, and the work of DOD's Inspector General, has found that spending on services is not being managed effectively. Too often, requirements are not clearly defined, alternatives are not fully considered, vigorous price analyses are not performed, and contractors are not adequately overseen."

Many service contracts buy commercial services—maintenance and laundry services, for example. But a significant amount of the Pentagon's procurement budget goes to purchase a core government workforce—contract employees, consultants, and other service workers. The third largest category of Pentagon spending, the Center found, following research and development and aircraft, is "professional, administrative and management support services." In the decade from FY 1994 to FY 2003, expenditures on these workers increased from $7.3 billion to $17.1 billion.

Defense's Inspector General has repeatedly found Pentagon control of this contracting deficient. In 2003, the IG reported that out of 113 service contract actions reviewed (with an estimated value of $17.8 billion), at least 98 had one or more problems, including inadequate competition, lack of surveillance, or inadequate price reasonableness determinations.

Defense does not know the numbers of contractors performing basic government work—that is, drafting rules, policies, budgets, and other official documents. But a measure of its increasingly commonplace nature can be found on the Web sites of the department's contractors. Private companies announce that they're hiring analysts to prepare the Defense Department's budget, or boast of having written the Army Field Manuals on Contractors on the Battlefield.

For insiders in the corridors of the Pentagon, the pervasive role of contractors in the replacement of civil servants is a given. Government Executive reports that the Undersecretary of Defense for Personnel and Readiness—the senior official responsible for the official workforce "acknowledges that he often attends meetings in which he is the only civil servant in a room full of contractors."

But the role of contractors in the Department's basic work remains largely and effectively out of public view. For example, in late 2002, the Department's Total Information Awareness data mining project provoked great (and bipartisan) outcry; government as "Big Brother" was threatening the privacy of untold citizens. Largely unnoted was that the program was being run by contractors, with a thin layer of official oversight. If the program really had been operated by Big Brother, Bill of Rights privacy protections would have limited their work; but it is much less clear how Constitutional provisions govern contractors.

The oversight challenge is not simply one of fewer officials managing more contractors. It also lies in the possibility that in two critical respects—knowledge of information technology (IT) and capability to bridge organizational chart barriers—contractors are not simply the shadow government, but may become the primary government.

Information technologies are the lifeblood of 21st century military command and control. The Pentagon (and taxpayers) paid for the creation of the Internet, and much else that undergirds today's cyber world. But it paid contractors to learn about the new technology, and did not pay to train and retain a sufficient, official IT workforce. As Government Executive noted,

"Even before the current push to outsource, contractors were doing at least three-quarters of the federal government's IT work, according to the market research firm INPUT in Chantilly, Va."

Contractors managing contractors

At the end of the Cold War, the Pentagon downsized civilian and military workforces. By the mid-1990's it became apparent that the workforce needed to oversee contractors had been disproportionately downsized. As a 2000 Defense Department Inspector General Audit report recorded: "DoD reduced its acquisition workforce from 460,516 to 230,556 personnel, about 50 percent, from the end of FY 1990 to the end of FY 1999; however, the workload has not been reduced proportionately." Though there was a slight (3 percent) decrease in the dollar value of Defense procurement over the period, "the number of procurement actions increased from about 13.2 million to about 14.8 million, about 12 percent."

The end result is that, increasingly, contractors must manage one another.

The Pentagon now relies on contractors themselves to collect and analyze basic data on contracting—including data on the dimensions of its service contracts ("spend analyses" performed by Pentagon mainstay Booz Allen Hamilton) and data on the dimensions of the official procurement workforce (Jefferson Solutions).

Defense's stable of contract procurement advisors includes the Rand Corporation—a private nonprofit that the Pentagon created and funded to act as a think tank. Rand (and its alumni in the department) was central to Cold War defense contracting, famously associated with Secretary of Defense McNamara's efforts to bring service buying under central control. From 1998 to 2004, Rand received $474 million in noncompetitive contracts from the Pentagon.

But much of this work is done today by private, profit-making companies. And recent efforts to streamline government have accelerated the process. Where once the Pentagon had to go through time consuming, competitive procedures to hire contractors to manage contracting, 1990's procurement "streamlining" permits it to purchase "off the shelf" "outsourcing" and "privatization" assistance. Booz Allen Hamilton's Web site illustrates the "soup to nuts" contract management easily procured from contractors:

Acquisition Program Management. In the context of acquisition program management, Booz Allen Hamilton has experience in all dimensions of support for major government acquisition programs…. Booz Allen will assist the Government in developing and establishing acquisition program objectives, strategies, plans, and schedules that will help the acquisition program through the various stages of the life cycle and its associated review process.

"Inherently governmental functions"

As contractors expand their role both on the battlefield and within the walls of government, one might well ask what sorts of things they're not doing. This was a concern from the very beginnings of government by contract. In the mid-20th century, when White House officials grew concerned that contracting out might go too far, the principle was established that "inherently governmental functions" should never be performed by anyone outside government. The principle has been embraced by every Administration since then. It was most recently reiterated by the Bush Administration in a May 2003 revision of Circular A-76, which declares that, "agencies shall…Perform inherently governmental functions with government personnel."

Today, that principle may be more fig leaf than bulwark. Decades of personnel ceilings necessarily meant that work was contracted out without regard for whether it was inherently governmental.

In 1998, Congress passed the FAIR Act, which required agencies to inventory civil service work, and identify specific jobs as "commercial" (which may be contracted out) or inherently governmental (which may not be). Iraq shows the workings of the framework established by White House policy and the FAIR Act. The Army not only identified jobs as inherently governmental (or not), but provided reasoning for its determinations.

In December 2000 the Army determined that intelligence work—such as that assigned to contract employee interrogators at Abu Ghraib—is inherently governmental. A memo by the Assistant Secretary of the Army for Manpower and Reserve Affairs explained why sensitive intelligence work must be performed only by government officials:

"Private contractors may be acquired by foreign interests, acquire and maintain interests in foreign countries, and provide support to foreign customers. The contract administration oversight exerted over contractors is very different from the command and control exerted over military and civilian employees. Therefore, reliance on private contractors poses risks to maintaining adequate civilian oversight over intelligence operations."

The Army memo directed that the rule barring contractors from intelligence work be added to the next edition of the Army Contractors on the Battlefield Field Manual. The volume, which was itself written by an Army contractor, did not include the determination.

In Iraq, the Army engaged contractor employees for interrogation work at Abu Ghraib, disregarding its own determination that outsourcing such work poses risks to national security. As the story of the involvement of contractors in the Iraqi prison abuse scandal unfolded, it became evident that the contract for interrogators (with CACI International Inc.) illustrated the way in which reforms designed to simplify contracting had given way to broad and ready abuse.

The CACI contract was an offshoot of an agreement between CACI (actually a company acquired by CACI) and the General Service Administration (GSA) under what the government calls a supply schedule arrangement. GSA supply schedule contracts are a product of the 1990's reforms that reinvented government. At their best, they are a (cyber) catalog of services that can be bought by agencies government-wide with limited time wasted. In theory, the initial agreement with GSA is obtained through competition, so the contractor is permitted to sell services under the schedule to other agencies with little or no further competition required. When the Defense Department found itself in urgent need of person power in Iraq, it turned to GSA schedules with a vengeance.

The CACI interrogators were purchased under a supply service contract which, according to the GSA schedule, was to provide for Information Technology services. Not surprisingly, the underlying agreement with GSA did not provide for "interrogator services." Moreover, GSA had turned over the agreement to the Department of Interior to administer (for a fee), so the Army contract to purchase interrogators for Iraq ran through the agency in charge of the national park service. On July 16, 2004 the Department of Interior's Inspector General reported that six orders placed with CACI "were issued predominantly for interrogation, intelligence, and security services in Iraq. Neither the GSA nor our review could find any existing schedule that provided for these services."

Prior to calling on CACI to provide interrogation under the GSA agreement, evidently no one in GSA or Interior or the Army checked to determine whether the new work was permitted under the GSA schedule. (As a technical matter, an attempt to buy services outside the scope of a GSA schedule violates requirements that opportunity for competition be provided.) Nor, it appears, did GSA or Interior— legally responsible for the contract and receiving fees for its administration—feel obliged to monitor the use to which the contract was put in Iraq. Nor, it appears, did GSA, Interior, or the Army check to see if the work had been determined to be inherently governmental and, therefore, something that the Army could not outsource to the employees of a private company.

The misuse of supply service contracts shown by the CACI contract was not unique, but of a piece with many other Iraq contracts, and many further contracts entered into well before the war.

In fact, Defense's Inspector General noted—in a March 2004 report on 24 contracts awarded for the Coalition Provisional Authority between February and August 2003, by the Department of Defense Contracting Command-Washington—that 18 of the 24 contracts were awarded through use of GSA supply schedules.

The IG reported that Defense contracting officers "misused" the GSA schedules in awarding 10 of the 18 schedule related contracts. The IG portrayed a pattern of abuse, even lawlessness. The IG found that in calling on contractors to provide services under the schedules, Defense contracting officers themselves did not review the GSA schedules, but took the word of contractors as to whether the service called for by the Pentagon was within the scope of the GSA schedule. The IG further found that in 10 instances, Defense was using contractors to buy "personal services" –in essence, buying workers to serve as part of the official workforce, a practice contrary to procurement rules. The IG concluded that of the 24 contracts, 13 did not have adequate surveillance.

Nor was Iraq the first instance of reported abuse of the supply schedules. In 2003, GAO explained that "since early 2000, both the Inspector General and we have found continuing problems with DOD's use of the General Services Administration's Federal Supply Schedule program… in September, 2001 the DOD Inspector General concluded that 304 of the 423—or 72 percent—task orders it had reviewed were awarded on a sole-source or directed-source basis and 264 were improperly supported."

A question of oversight

Throughout the growth of contracting, separate bodies of law applied to officials (and soldiers) and contractors. American governmental bodies reflect a long tradition of laws enacted to prevent abuse of power by government officials. These laws begin with the Constitution, which defines and limits the conduct of officials, but not necessarily of third parties, even where they may act on the government's behalf.

The official workforce is also governed by a dense web of statutory provisions that do not apply to third parties. The Freedom of Information Act applies to "agency" records. Contractors, in this context, are not "agencies," even where they perform decisional roles. Similarly, government officials are subject to a body of conflict of interest provisions, pay caps, limits on political activity, and labor rules that do not similarly constrain contractors who perform similar, even the same, work.

The use of "contractors on the battlefield" in Iraq provides dramatic illustration of different rules applied to similarly situated government and contractor employees (although the differences primarily involve rules governing soldiers, not civilian officials). Contract employees may avoid risky combat zone work – and, ultimately, quit – with no fear that their absence will subject them to penalties under the Uniform Code of Military Justice . The differing rules may also disadvantage contractor employees. For example, daunting questions loom regarding how the protections accorded by international law to state combatants apply to battlefield contractors.

More than two centuries of law have been enacted to protect Americans against Big Government. These laws begin with the Constitution and the Bill of Rights, and include ethics and transparency laws, restrictions on the political conduct of officials, limits on official pay, and the uniform military code of justice. These laws apply to officials, not contractors, on the presumption that officials are in control. The rules do not apply—or protect the public—when, as is increasingly the case, contractors are doing the basic work of government, and government lacks the expertise and experience to control the contractor workforce.

These rules do not contemplate a reality where contractors advertise that they will be writing the President's Defense Budget, where they routinely write official documents including Army Contractors on the Battlefield Field Manuals, or where they are deployed, in violation of the Army's own rule, to perform sensitive intelligence work in wartime.

Dan Guttman, a Fellow at Johns Hopkins University, is a government contracting expert who serves as a consultant to the Center for Public Integrity. He is a co-author of The Shadow Government.

The Pentagon's stealth rainmaker

2011-11-17T16:49:11-05:00

With scores of revolving door connections, more than $1 million in campaign contributions and clients that receive most of their contracts from the Pentagon without competition, only one defense lobbying firm can claim to give its clients "an inside track to business opportunities with the federal government."

The PMA Group, a lobbying firm that specializes in defense contracting, has reported receiving $21.7 million in lobbying fees since 1998 from large defense companies—the most paid to any defense lobbying firm, according to a study by the Center for Public Integrity.

A PMA spokesman said he would not comment on the Center's report.

The fees paid to PMA appear to have paid off for these 41 defense contractors and their parent companies, who collectively won $266 billion in contracts from the Pentagon during the last six years. That amounts to almost 30 percent of the dollar value of all contracts awarded by the Department of Defense.

Though these companies spent another $121 million employing in-house lobbyists and occasionally other lobbying firms, PMA clients' total lobbying versus contracts works out to a ratio of almost $1,859 in contracts for every dollar spent on lobbying.

Of the $266 billion that PMA clients and their parents received in defense contracts, $167 billion—nearly two out of three dollars—were received from contracts that were awarded without "full and open" competition. In fact, PMA clients account for 47 percent of all such non-competitive contracts handed out by the Pentagon since 1998.

Lobby firms like PMA have become a staple of political influence. In all, defense contractors have reported spending $537 million on outside lobbying firms like PMA during the last six years, while they have spent $1.4 billion on in-house lobbying.

PMA's has cultivated a closeness to the Pentagon and to Washington power brokers. PMA's lobbyists routinely make large donations to the lawmakers they lobby, and many at the firm have revolving door connections to Congress and defense agencies that authorize and maintain the contracts of their clients.

'Revolving Doors' keep money flowing inward

Take Paul Magliocchetti, the president and owner of PMA Group. Magliocchetti worked 10 years as senior staff member of the Committee on Appropriations of the U.S. House of Representatives where decisions are made about how much to spend on defense contractors. He also spent nine years working for the Defense Subcommittee during his tenure in the House where he worked on oversight of the $30 billion annual Navy procurement budget. He has also showered $56,000 in campaign contributions since 1998 on members of Congress and leadership committees.

Magliocchetti is hardly an exception at PMA, where almost every one of the lobbying firm's listed employees has passed through this proverbial revolving door, meaning that they have either worked for the Pentagon or Congress and in some cases both.

In fact, the Center found that 30 of the 31 upper-level employees that PMA lists on its Web site have prior employment with some branch of the armed forces or with the House and Senate.

PMA's lobbyists have connections to decision makers at almost every stage of the procurement process.

Recommendations for defense contracting and financial needs come from the Pentagon and branches of the Armed Services, where 16 PMA employees used to work. These recommendations and governmental actions are negotiated through the Defense Department's legislative liaisons offices, where at least 11 PMA lobbyists used to work. The House and the Senate, where 14 PMA employees used to work, vote on bills authorizing the amounts and designations for defense contracting. Many of the core decisions about what is included in each of these bills are made by the Appropriations committees, where six PMA employees used to work.

A key to PMA's success has been deploying lobbyists who remain largely focused on just a few large appropriations bills that are approved every session. In fact, the four bills that drew most of the group's attention during 2003 were appropriations measures totaling more than $65 billion.

Campaign Contributions Sweeten the Pot

Another way that lobbyists stay familiar in the minds of the lawmakers they lobby is by giving hundreds of thousands to congressional election campaigns.

PMA is one of the few lobbying firms that maintains a sizable Political Action Committee. The PMA PAC has given more than $975,000 to 340 House and Senate lawmakers.

In addition to these donations, the PMA employees that have registered to lobby have made more than $271,000 in donations to congressional campaigns, leadership and party committees, the Center found. More than 80 members of Congress were the recipients of these donations and many of the largest donations went to members of the House and the Senate who serve on key committees such as Appropriations.