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Wednesday, October 20, 2010

Procurement oversight extends beyond acquisition

Procurement doesn't end with the award and signing of a contract. It involves contract administration through the life of the contract to make sure the government gets what it sought or bargained for.

And it includes collecting information and usable information, and then getting that information to the right person who will actually use it to improve best performance the next go-round. Even in cases where there is no abuse of the system, this is necessary to continually assess and improve the government's purchasing activities.

Military contractors' epic overcharging
There used to be laws in the US to make sure that the government knew what a product cost, so that it could determine reasonable profit margins. The Truth in Negotiations Act (Tina), which was signed into law in 1962, required that companies seeking a negotiated government contract submit "cost and pricing" data.

Unfortunately, Tina did not require cost and pricing data for so-called "commercial" items, which were defined as items sold to the general public in substantial quantities. Government contractors lobbied to have the definition of "commercial" significantly broadened, so that, today, no one really knows how many high margin contracts the government is on the hook for.

BioThrax is considered a "commercial item" – despite the fact that consumers cannot buy it on the open market. Originally developed by military scientists at Fort Detrick, Maryland, in the 1960s, the state of Michigan public health service obtained a licence to produce the vaccine in 1970. At the time, BioThrax was used to help protect mill workers in the textile industry who processed animal hair contaminated with naturally-occurring anthrax. In 1998, the state of Michigan sold off the facility.

Emergent BioSolutions has billed the Pentagon $1.3bn for BioThrax, which one analyst calculates cost the company roughly just $250m to manufacture. Richard C Loeb, a former deputy administrator of the Office of Federal Procurement Policy, whose tenure in that office extended across four presidents, says that he has seen government contracts with even higher gross margins. (By contrast, a 2009 study (pdf) of 6,000 Army and Air Force contracts by the Institute for Defence Analysis found that normal margins on such contracts were typically around 10% of production costs.)

Inferior metal used on Navy subs
The Navy is searching for metal used in submarines that fails to meet military specifications and was supplied by a Pennsylvania contractor who recently pleaded guilty to one count of major fraud against the U.S. government.

In a statement provided to The Day, the Navy called the fraud "calculated and widespread."

The search has so far cost the government more than $1.3 million, and the Navy said it may take years to determine the scope of the problem.

Bristol Alloys Inc. and its president, James Bullick, admitted in court last week to selling metal that had not been heat-treated to be used in Virginia-class submarines to meet the contract's requirements. Heat treatment is used to make metal stronger. The company also admitted that it provided counterfeit certifications that the metal had been treated.

I have heard unsubstantiated similar reports about contractors providing materially nonconforming materials to the Government of Guam, but in those cases the contracting personnel either knowingly or negligently failed to verify that what was ordered under a contract corresponded to what was delivered.

If true, that would constitute a woeful failure of proper procurement. It is as much an unlawful expenditure of government funds to pay, or authorize such a payment, for something that was not ordered as it is to contract under unauthorized procedures in the first place. It is not only costly to the government, but detrimental to safety, and undermines the confidence of other, more scrupulous vendors.

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