Auditors Swamped : Cost of Parts: Achilles Heel for Pentagon

Purchase order F-88369 is a mere speck in the multibillion-dollar world of defense contracts.

Dated Jan. 7, 1982, the $9,100 order was issued by Pratt & Whitney Aircraft Group for 5,000 baseball caps bearing the company’s emblem. According to government documents, the company, which last year received $1.2 billion from the Defense Department to manufacture military jet engines, subsequently billed the government for the full $9,100.

Insignificant as $9,100 may seem when the Pentagon is spending nearly $400 million a day under 15 million contracts, the pending bill for the blue baseball caps illustrates how defense contractors routinely ask the government to pay for a huge range of costs, some of them scarcely related to the business of maintaining the nation’s security.

Questionable Claims Honored

The procurement system, plagued by loopholes, inconsistencies and ambiguities, is producing hundreds of millions of dollars a year in questionable claims by defense contractors--claims that, as often as not, are honored.

And it is proving a political embarrassment to the Reagan Administration and pro-defense members of Congress as they try to sell the public on the need to spend still more money on the nation’s defenses.

In response to the furor, Defense Secretary Caspar W. Weinberger announced with fanfare earlier this spring that his department would institute tougher procedures, including a requirement that executives of defense contractors swear under oath that their claims for overhead costs--the routine expenses of doing business--meet all federal procurement regulations.

In Congress, Pentagon supporters expect sniping from all sides when the $313.7-billion defense authorization bill for fiscal 1986 reaches the House floor, which it is expected to do this week. In anticipation of fresh demands for reform, they have drafted legislation to impose financial penalties on offending companies.

‘Extremely Embarrassing’

“It’s extremely embarrassing to me,” Rep. Bill Nichols (D-Ala.), chairman of the House Armed Services subcommittee on investigations, said. “My part of the country is strongly defense-minded and, when I go home, when I go to Sunday school or stop to drink a cup of coffee, I’m always asked: ‘Can’t you do something about it?’ I hear that more and more.”

Many of the disclosures troubling Nichols’ constituents have been small--$155, for example, for boarding Fursten, a General Dynamics Corp. executive’s dog.

But the sum of the parts can be huge--from General Dynamics alone, for example, the Pentagon this year moved to recover $244 million that its auditors said the company had billed improperly for administrative costs on contracts dating to 1973. The Defense Department estimates that, of the $148 billion that it will pay to contractors this year, $50 billion will cover overhead costs.

Government auditors and congressional investigators say that even their random samplings of contract billings have yielded ample instances of questionable charges:

--Besides baseball caps, contractors sought reimbursement for such giveaways as 265 clocks ($5,880), 200 dozen golf balls ($3,400), 200 key rings ($3,200), 300 gold pen and pencil sets ($10,170) and 3,500 tie tacks ($886).

--Entertainment costs billed to Pentagon contracts include $2,280 for a Halloween party, $43,672 for a reception and dinner dance, $1,300 for eight strolling musicians at another party and $1,255 for taking foreign military attaches on a sports fishing trip.

--In the name of improving employee morale, contractors submitted such charges as $12,333 for season tickets at the Los Angeles Forum, $558 for passes to a professional golf tournament in Georgia and $2,460 for season tickets at a Florida dinner theater.

3% ‘Questionable’

Nichols said he had hoped that his subcommittee’s auditors would find such instances to be rare exceptions, but their investigation of $3.2 billion in overhead billings found that 3%--about $100 million--belonged in the “questionable” category. “It was very disappointing to me to find that every indication is that these charges are widespread and seem to be an industrywide practice,” he said.

Rep. John D. Dingell (D-Mich.), chairman of a House Energy and Commerce subcommittee whose investigators have spent months delving into overhead payments, reached a similar conclusion. Dingell said that, contrary to Weinberger’s contention that the General Dynamics case represented an aberration, “the company was just one of the gang. False reports and claims, incomplete records and an attitude of ‘catch me if you can’ seem to be standard operating procedures for major defense contractors.”

Unless changes are made, pro-defense members of Dingell’s subcommittee expect trouble for President Reagan’s eight-year, $2.3-trillion defense buildup. Rep. Jim Slattery (D-Kan.) said that, if the “rather astonishing record of government inability to effectively monitor this whole contracting process . . . is not corrected very quickly, we are going to have a serious problem maintaining the political consensus that we need to continue the commitment to a strong national defense.”

Defense Freeze Bid

Sen. Charles E. Grassley (R-Iowa) illustrates Slattery’s point. Grassley said his effort to freeze next year’s defense budget at this year’s level is prompted in part by disclosure of questionable billings.

“We’ve been appropriating more money than they can spend,” Grassley said. “There’s been no pressure to weed out these problems.”

Sen. William V. Roth Jr. (R-Del.) has introduced legislation designed to provide defense contractors with a firm set of guidelines to curb abuses while ensuring them a fair profit.

But, while Republicans such as Roth are scrambling to limit the damage, some Democrats regard the “procurement mess” as a rare political opportunity. “It may well have been a mess before, but now it’s a mess on Ronald Reagan’s watch,” House Armed Services Committee Chairman Les Aspin (D-Wis.) said. “This Administration let the procurement issue get away from it politically.”

The procurement system is huge: More than 50,000 civilian employees and military officers supervise Pentagon purchases under rules spanning 7,500 pages. But, for all the fine print, experts say that the Federal Acquisition Regulations contain many ambiguities.

One section of the regulations, said Frank C. Conahan, director of the congressional General Accounting Office’s national security division, disallows “costs of amusement, diversion, social activities and any directly associated costs such as tickets to shows or sports events.” But another section allows similar costs if they are intended to improve employee morale. Thus, he said, there is “a wide avenue where costs are unallowable” under one section but “can be argued to be allowable under this other category of costs--and frequently are.”

For many contracts--those labeled cost reimbursement as opposed to those reached through competitive bidding--the system actually gives contractors an incentive to bill the government for all possible overhead expenses with the expectation that at least some will eventually be paid. As Sen. William Proxmire (D-Wis.) noted, “the higher the cost, the higher the profit.”

Overhead costs are reviewed by the Defense Contract Audit Agency. However, because the claims are so voluminous--General Dynamics alone submitted 44 million items in the last few years--agency auditors often employ random sampling methods, picking every 20th item, for instance, for closer scrutiny.

Even when the auditors find questionable billings, they lack the authority to disallow them. Their recommendations go to the Defense Department’s contract officers, who negotiate with the companies to settle the disputed charges.

Auditors are often overruled when they question companies’ claims for reimbursement. When the GAO reviewed the billings of 12 contractors last year, it found that Pentagon auditors had challenged $31 million in costs. But, in negotiations with the companies, the report showed, contracting officers agreed to lump-sum settlements of $16.5 million, thus collecting only 53% of the challenged costs.

Sometimes, the GAO found, “contracting officers took widely disparate views in settling these costs, ranging from total allowance to total disallowance” of similar claims. Conahan said one contracting officer allowed General Dynamics to be paid the $28,000 that it claimed for exhibits at the Paris Air Show, but another contracting officer disallowed $388,000 that Raytheon claimed for expenses at the same show.

Rather than haggle over individual bills, contracting officers who negotiate disputed claims with company representatives usually settle on a lump sum.

“All the questionable bills earmarked by the auditors are thrown into a big pot to be negotiated between the contractor and the service,” Rep. Charles E. Bennett (D-Fla.), chairman of the House Armed Services subcommittee on sea power, said. “The bigger the pot, the more the contractor is likely to get.”

Conahan said that his agency found both contractors and government contracting officers to be reluctant to negotiate on an item-by-item basis for fear that any expense, once agreed on as unacceptable, would have to be excluded from all future billings.

“Contractors can continue year after year to keep these costs in the overhead proposal for bottom-line negotiation,” Conahan said. “Since these negotiations are on a total basis, a 50-50 split is generally the rule rather than the exception.”

One congressional investigator cited the case of a $12,333 bill for two tickets to all events for a single year at the Forum, where Los Angeles’ professional basketball and hockey teams play their home games and rock concerts are staged. The investigator said that the company, which he refused to identify, withdrew the bill when government auditors questioned it. But the company submitted identical billings for each of two subsequent years, he said, and no final decision has been made on these two claims.

Further limiting the Defense Department’s ability to reject contractors’ overhead bills are the “progress payments” that the companies receive in the course of performing their work. Contractors collect up to 90% of their claimed costs before they ever negotiate the bottom line with contracting officers.

“Auditors are flooded with work,” Nichols noted, and negotiations sometimes do not begin until years after the progress payments are made. “If the contractor gets caught, the worst that can happen is that he must repay the funds in question. But he’s had use of the money in the meantime; it’s sort of a free loan.”

The system has embittered some government auditors. George R. Spanton, who retired as resident auditor at Pratt & Whitney’s plant in West Palm Beach, Fla., after a series of disputes with Air Force procurement officers, said: “In the current climate, those who want to save money are punished; those who want to spend it are rewarded.”

Spanton said that, after his staff questioned such expenses as “tuxedo rentals, baby sitters, shipping crates for ski clothes, custom duties, firewood, basketball and football tickets, softball league registrations, trophy presentations, travel costs for business guests and travel to balls, receptions, reunions, picnics, exhibitions and trade shows,” an Air Force procurement officer called him in “for a friendly chat.”

Spanton said the officer told him: “It’s the system, George. You can’t change it.”