New Rules Chafe Defense Industry

Jen DiMascio, Politico

Early in the Bush administration, as the country ramped up for ground wars in Afghanistan and Iraq and a “global war on terror,” the U.S. defense industry enjoyed vast spending increases and little oversight.

Then wartime contractual abuses and major cost overruns on defense weapons systems caught congressional and public attention, and lawmakers gradually began forcing reforms on the industry.

When President Barack Obama took office, the momentum was behind him, and he vowed to do even more, culminating this year in major changes — including outright cancellations — to more than 50 weapons programs and a pledge to dramatically curtail the Pentagon’s widespread use of contractors.

Now, the very experts who pressed for change two years ago are joining defense industry officials in complaining that reforms are being implemented without enough leadership and follow-through to make them stick. And they warn that competition and innovation could suffer.

“I’m concerned there’s a lot of destructive activity out there in the name of accountability and efficiency,” said Alan Chvotkin, vice president of the Professional Services Council trade group, which represents scores of defense contractors.

Jacques Gansler, the Pentagon weapons buyer under President Bill Clinton, wrote a report for the Army two years ago titled “Urgent Reform Required.” On Tuesday, Gansler called the current environment a “global war on contractors.”

Speaking at a forum put on by the industry-friendly Lexington Institute and joined by other longtime government hands such as Robert Burton, a federal procurement attorney for Venable, Gansler said it was too easy for politicians to score political points by targeting contractors.

Burton, who was deputy administrator for federal procurement policy under President George W. Bush, said the current climate discourages technology companies from selling to the federal government, often because “the rules are becoming more onerous.”

The defense industry is beginning to fear the pendulum’s swing, said David Berteau, director of the defense industrial initiatives group at the Center for Strategic and International Studies. “I don’t know how you tell if it’s gone too far,” he said. “When you no longer get qualified bidders on solicitations … then it’s too late.”

But Mandy Smithberger, an investigator for the Project on Government Oversight, said the rules were put in place for a reason. Innovations such as establishing the website to track government contracts, establishing a revolving-door database and trying to rein in conflicts of interest are all part of a culture of change that the government is pushing on behalf of taxpayers, she said.

“Anytime you’re talking about a culture change, it takes time to implement,” Smithberger said. “I think you can never move slowly enough for the bureaucracy.”

One prime example of a rule the defense industry thinks may turn out to be particularly odious comes up for a public review next week. Defense industry officials will turn out to comment on a provision in the Weapon Systems Acquisition Reform Act, passed earlier this year, that aims to stop what’s known as “organizational conflicts of interest.” The Pentagon is supposed to publish regulations for the rule in mid-February. “It’s such a difficult issue. You’ve got such a limited pool of contractors and such complicated systems,” said Jeff Green, president of the defense lobbying and contracting firm J.A. Green & Co., referring to the consolidation that has whittled down the defense industry’s top contractors. Generally, that list includes Lockheed Martin, Boeing, Northrop Grumman, Raytheon, General Dynamics and BAE Systems.

In passing the legislation, lawmakers and their staffs were trying to address the problem of one contractor having oversight authority over another or even its own company, according to Green. That practice reached its height during the Bush administration, when the Pentagon lacked in-house systems expertise and hired contractors as the “lead systems integrators” to manage other contractors.

Industry sources point to the Army’s $100 billion Future Combat Systems, which was so large that the Army needed outside help and hired Boeing to manage the project. But Boeing was also a subcontractor on one of the program’s most important pieces — the computer software — and therefore ended up overseeing itself.

Members of Congress, including Arizona Sen. John McCain, the ranking Republican on the Armed Services Committee, saw the practice as a conflict of interest and moved to outlaw it for future contracts. The rule hasn’t been implemented yet, but it’s already making waves.

Ron Sugar, chairman and chief executive officer of Northrop Grumman, pointed to the rule when his company announced the sale of its TASC advisory services business to an investor group last month for $1.65 billion.

“It reflects Northrop Grumman’s desire to align quickly with the government’s new organizational conflict-of-interest standards while preserving TASC’s unique organizational culture and its status as the advisory services employer of choice,” Sugar said.

With all of the defense industry consolidation, that kind of divestiture might create more competition, Smithberger argued. “It’s not necessarily a bad deal for taxpayers,” she said.

At this point, industry is wrestling with how to comply with the rule because no one has explained how it will be implemented, said Berteau, the defense expert at CSIS.

“Will it be tighter? How will you know? How will it be measured? What does it mean for the rest of the federal government?” Berteau asked. “No one knows.”

In the absence of the decision, however, agencies are beginning to write their own rules into individual contracts, which “makes it very difficult for industry to set up an internal procedure to comply with the rules,” Berteau said. “It really puts [the industry] in a quandary.”