Every part of Washington, DC, is scrambling to find some way to balance the budget and reduce the deficit. Even in tough times, it is rare for the powers in Washington to consider looking to any part of the Department of Defense (DOD) budget to cut, especially during wartime. But the DoD budget has risen dramatically since 2001, and some in Congress are looking for fraud, waste and abuse in the DoD budget to weed out.
The Pentagon finances are a mess and the DoD has not passed an independent audit in 20 years, one of the few departments in the federal government that has failed to do so. After investigating the DoD for 30 years and living through many attempts to try to get control of the DoD spending, it appears to be a task too big for any Congress or president to conquer. I am launching this new “Solutions” column to find small, achievable and realistic slices of government reform, therefore, fixing the Pentagon finances and costs seems like a strange way to start. However, I have a modest solution that could possibly be the first step to a many-mile journey of finally getting a handle on out-of-control costs.
To understand how weapons and other costs keep overrunning and growing exponentially with each new generation of weapons, you have to first understand how the DoD looks at costs – what they paid for in the past and how they calculate what is reasonable to spend in the future. For much of the past 40 years, the DoD has used historical cost pricing to see what is reasonable to pay for future systems. In other words, the DoD looks at how much it costs to produce planes, ships and tanks and uses that as a baseline to calculate what the new plane, ship and tank will cost, plus more money on top for new technology.
The problem with this system is that the DoD has tolerated so much fraud, waste and fat in each weapons program, with only a few of the contracts scrubbed for inflated costs. This has resulted in generations of fraud and fat, which have become part of the new baseline on historic costs. According to the Government Accountability Office (GAO), right now, major weapons programs are overrunning by $300 billion. What will happen with most of these programs is that the DoD will pay for these weapons with their overruns anyway, and then those overruns will become part of the new baseline for new programs for new weapons. Essentially, this process magnifies the waste and makes it grow exponentially with every new weapons system.
The best way to really understand the problem is to look at the costs of items that the public can understand. The DoD has the advantage of confusing the public and most of the members of Congress because it is hard for the public to decide what a tank or fighter plane should cost. But in the 1980s, I helped expose overpriced spare parts in the DOD. Many people still remember the $436 hammer, the $600 toilet seat and $7,622 coffee brewer. The public was so outraged over the high prices on parts that both chambers of Congress passed an unprecedented one-year defense budget freeze in the mid 1980s, in the middle of the cold war, and under President Ronald Reagan.
What we were able to show is that the overpriced hammers and coffee brewers were priced by the same bloated pricing formulas used for weapons. As Air Force whistleblower Ernest Fitzgerald said at the time, “Those Air Forces planes you see flying in the sky are actually overpriced spare parts flying in close formation.”
But as time went by and despite serious efforts by the Congress in the 1980s, the DoD kept marching along using historic costs, with all the waste, as the baseline for determining future purchase prices.
The $436 hammer was one of the best illustrative cases. After Congressman Berkley Bedell (D-Iowa) found this overpriced hammer in the Navy procurement system, he asked the Navy auditors to audit the costs and show where the fraud and waste were located. The Navy dutifully audited the hammer costs based on approved cost formulas and found that the costs on the hammer were “exorbitant but legal.” In other words, the markup on the hammer by the contractor was outrageous, but the Navy had approved the markups, thereby institutionally legalizing these ridiculously high prices for the baseline in the future.
The following chart, taken from Navy documents, demonstrates how a $7 hammer, purchased by Gould Corporation in the 1980s, grew to cost the Navy $436.
Remember, these are markups and time billed for every hammer.
Gould, Simulated Systems Division
· Spares/Repair Dept.
· Program Support/Admin.
· Program Management
Subtotal: 2.6 hours Engr. Support $37.00
Engr. O/H [Overhead] @ 110% 41.00
|· Mechanical Sub-assembly||0.3 hours|
|· Quality Control||0.9 hours|
|· Operations Program Mgt.||1.5 hours|
|· Program Planning||4.0 hours|
|· Mfg. Project Engr.||1.0 hours|
|· Q.A. (quality assurance)||0.1 hours|
Subtotal: 7.8 hrs Mfg. Support 93.00
Mfg O/H @ 110% 102.00
TOTAL PRICE $ 436.00
The Navy, after facing embarrassment and ridicule in the media and in the public, attempted to recover some of the costs, but declared a big victory when they were only able to recover 10 percent of the costs. That means that almost 90 percent was passed on to the historic costs of that program and became the new normal, the new baseline price for future hammer purchases.
The DoD has been using this historic pricing baseline for generations of weapons, which has led to fewer and fewer planes, ships and tanks at higher and higher prices. It has led to the classic case of “more bucks for less bang,” which can be crippling to our national defense. For more on this depressing problem, see a recent report on how historical pricing is jeopardizing our national defense. (For more on how overpricing is jeopardizing our national defense, see this report sent to the Deficit Commission in November 2010.)
Trying to tackle the historic cost-pricing system in all these weapons is a daunting task, especially since the DOD, in many cases, doesn't know what they actually paid for many programs because the internal auditing is in such disarray. Without a decent accounting, any attempt to look at costs could be a fool's errand because the input of defective costs is a “garbage in, garbage out” dilemma. So, we have a huge problem in DoD costs that would take a mind-boggling set of solutions with very little political will to do this in the Pentagon and in the Congress.
But we should not just throw up our hands and let these bloated costs continue to multiply year after year. There is an important new area where huge costs have not solidified and progress could be made to keep a realistic baseline of costs for future contracts – the contractor support costs of the Iraq and Afghanistan wars.
As it has been reported in the media and in my book, “Betraying Our Troops: the Destructive Results of Privatizing War,” these two wars have used more contractors near and in the battlefield to service the troops than any wars before them. Part of the reason that so many contractors came into the battlefield to replace logistics troops to feed, supply and house the soldiers was that in the beginning of the war, then Secretary Donald Rumsfeld put a troop cap on how many troops could be deployed to Iraq. This also included troops that supplied the logistics for the troops, so, in desperation, Gen. Paul Kern and others responsible for supplying the troops dusted off and expanded a troop support contract given to Kellogg, Brown & Root (KBR), a branch of the Halliburton company at that time.
This contract, which was supposed to supply logistics to various bases around the world for $60 million dollars a year, was exploded and multiplied thousands of times over to handle the logistics of two complicated wars. There were other contractors which were also involved early in the war, but KBR was the 800-pound gorilla, and their contract, known as LOGCAP III, worth over $40 billion, and still growing, as they continue to supply the troops and other government functions in Iraq.
KBR and others realized that they would have little oversight during the beginning of the war, and used common contractor tricks and devices to run up the early costs, inflated numbers which would then be used constantly for the duration of the contract. KBR and other companies charged 12 hours a day, seven days a week in labor costs, regardless of how much work was accomplished, not just at the beginning of the war, but continuing on to the present. Since much of KBR's work is not connected to the manufacturing of weapons, but more of a war-service industry, labor costs are the majority of the overall costs. Even adding overhead, General & Administrative (G&A), and other costs, it still boggles the mind that KBR could run up a contract to over $40 billion for driving trucks, maintaining barracks, doing laundry and slinging hash.
KBR has been protected from oversight because of their cozy relationship with the Army. Because they've been allowed to inflate costs since the beginning, they have laid down an enormously bloated, wasteful and fraudulent baseline for every contract of this type in the future.
This is especially true since KBR and other contractors have taken over large areas of support that the Army used to do for itself, and the Army has allowed the ability to support itself in some areas to atrophy. Future military missions will continue to be supplied by contractors. These costs will continue to soar because this baseline has been allowed to include so much fraud.
But there is still a chance to do something about these historical costs before they solidify into a permanent baseline. Many of these war contracts have not yet been definitized, i.e. been finalized as to actual costs and price. The Army has been unwilling to significantly audit and control these contractors' costs for several reasons. The Army is not a good organization to discipline these contractors because the contractors have literally become their partners on the battlefield and they don't want to have adversarial relationship while working with them in very dangerous conditions. Also, many former Army personnel have gone to work for these contractors once they retired from the Army, at much higher and inflated wages, thereby becoming part of the run-up of the costs, and many of the military brass want a post-retirement job with the contractor for themselves or their family. KBR was jokingly known as Kinfolk, Brothers and Relatives in Iraq.
So, What Is a Possible Solution?
I believe that getting control of and rolling back these contractor war costs before they become the new normal is so vital, the Secretary of Defense should set up a separate “Tiger Team,” a specialized team that the military has traditionally set up to tackle hard tasks. This team should report directly to the secretary and consist of the toughest current and retired DoD auditors and investigators. This team would go back to all the paperwork that exists since the beginning of the wars and scrub each contract for excessive costs, fraud and fat. They should then make sure that, before these contracts are completed and/or definitized, that the historic costs represent reasonable costs, not inflated labor costs with the unbelievable scenario of workers charging for 12 hours a day, seven days a week, year after year (even God rested on the seventh day.) It would be very unwise to use auditors from any of the private auditing firms, because they would not have the understanding of the service tasks or the political will to go after these influential companies. There are incredibly competent auditors and investigators in government service who are ready willing and able to do this job right – I know of a dozen myself who would jump at the chance to go after these contracts as long as the political will existed.
Unless the current and then the new secretary of defense and the White House commit to this concept of an independent Tiger Team to report directly to the top of the bureaucracy, this effort could easily sink into political infighting and bureaucratic territory battles – as so many such efforts have in the past. However, if this new audit team was able to successfully scrub the war costs and only pay reasonable prices, it could be a test case to try to tackle the larger and more entrenched parts of the DoD bureaucracy.
There is also another way to determine costs that could save billions of dollars, but it is a much more daunting reform that I may explore in a series of future columns.
There are some people in Congress and the DoD who might have the political will to make this happen. Secretary Gates has given many speeches in favor of trying to control costs. He could run this effort directly out of his office and set it up for his replacement to seriously follow through in order to get control of the war contractor costs. The Congress could also help guarantee that this is a serious effort by passing an amendment in the DoD budget legislation mandating that the audit is done. Since there is so much money at stake, Congress would also need to commit to oversight hearings while the auditing was taking place to make sure that outside and internal pressures were not at work to sabotage the effort. The Congressional committees could also put on more pressure by investigating KBR and other contractors to expose more waste and fraud. The secretary of defense would need the full and strong backing of the White House, so that parts of the entrenched and threatened bureaucracies would not try to slow down the effort and hope to wait it out for a new administration.
Despite the obstacles to this reform, the country must have the will to get control of the raging contractor war costs before they become another part of the historical pricing hell in the DoD that is hurting the defense of our country and draining our national treasury. The concern over the debt and deficits makes this a unique time to get serious about finally, step by step, regaining control of at least one part of DoD spending. All the so-called deficit hawks in Congress and in the administration have a chance to show that they are serious, and the public needs to push them into serious action. Whoever in Washington has the political will to tackle this problem bravely will see a great return of public popularity. In the 1980s, both then Congresswoman Barbara Boxer and Sen. Chuck Grassley became very popular politicians in their states by taking on defense fraud and waste problems, including the spare parts scandals. It will be interesting to see who is now willing to step up to the task. My solution is a first step on a long road to serious DoD cost reform and someone needs to take it.