Pentagon Madhouse : Paper Rules Swell Cost of Defense

A 329-page stack of military documents arrived on the desk of Richard L. Cisco last year, asking that his small aerospace firm bid on a contract for aircraft fuel valves.

Elaborate Pentagon requirements were laid out, asking for detailed breakdowns of labor costs, materials, tools, overhead and scrap. It sought waivers of legal rights, engineering analysis and warranty provisions. It even demanded that Cisco certify that he did not keep racially segregated drinking fountains.

Cisco, president of Kaiser Eckel Valve in Chatsworth, figured that fulfilling the demand for paper work would have added $5,000 to the cost of producing the parts. The absurdity was that the contract promised sales of only two simple parts worth a total of about $100.

Bureaucracy Run Amok

To Cisco it seemed like another instance of the Pentagon bureaucracy run amok. He tossed the binder of documents off his desk and never bothered to submit a bid.

In defense plants and government offices throughout the country, there is a growing recognition that the military procurement system is laboring under an ever-greater volume of regulatory paper work and government supervision.

Billions of dollars are wasted on purchases of weapons because of a bureaucratic system that has become bloated with unnecessary requirements, defeating even honest and efficient contractors. In its battle against waste and fraud, the Pentagon system has itself become a key part of the problem of runaway costs.

Donald A. Hicks, former undersecretary of defense, estimated that over-regulation represents nearly 30% of the cost of defense procurement. Other experts put the cost far higher, based on decades of experience with the Federal Acquisition Regulations, the Bible of the defense bureaucracy.

‘65% for Nonsense’

“In the dollars spent in any government contract today, 65% of it is (for) nonsense requirements imposed by the government for paper work and politics,” said John Williams, a defense industry consultant. “It is a madhouse. It is totally out of control.”

Such exhortations may seem breathless, but the defense procurement system has undergone a historic transformation in the 1980s that has seriously affected its ability to function. In the last six years alone, Congress has enacted eight major reforms of the system, resulting in hundreds of new rules and regulations that workers in both government and private industry must try to follow.

Meanwhile, the Pentagon has lacked adequate resources to keep abreast of the volume and complexity of the new rules. In some areas, the workload on government bureaucrats as measured by contract volume has increased five times faster than employment.

Morale is sagging as government workers defect. In Los Angeles, the largest defense contracting center in the nation, Pentagon business offices are plagued by personnel turnover of 20% to 40% annually, seriously eroding experience levels and leaving gaping holes in areas of responsibility.

“The frustrations are just tremendous,” said William Lisec, former director of contracts for the Defense Contract Administration Service in Los Angeles. “You don’t have enough people to do the job, and you don’t have enough qualified people to do the job. It blows the thing completely apart.”

The result is that administrative actions are taking longer to accomplish, paper work often gets lost, contracts are being held up, small companies do not get paid on time and defense firms say that their overhead costs are growing as they attempt to deal with an increasingly inefficient government system.

To General Dynamics President Herbert Rogers, America’s arsenal of democracy has degenerated into what he snidely refers to as “this wonderful world of people sitting around in cubicles and offices.”

He added: “My primary concern about the bureaucracy is that we generate a lot of data . . . which relatively few people look at--intelligently, that is. It is data that covers up the world, fills up rooms, causing people on both sides to spend an enormous number of man-hours.”

Not an Exaggeration

If that seems like an exaggeration, it is not. For instance, General Dynamics has leased a warehouse the size of a football field in Ft. Worth, Tex., just to store 92,000 large boxes of documents for one Air Force program.

“It is a warehouse the government pays for because it is their data,” Rogers said. “I have delivered it to them and I am just storing it for them, because they don’t have any place to put it. We lease it and pass the lease costs on to the contract. It is not a big cost, but you don’t save dollars if you don’t save nickels.”

Like the General Dynamics warehouse, most of the cost of regulation is an expense the government not only pays for but to which it adds a profit--out of the pockets of taxpayers. As a result, fulfilling rules and regulations has itself become a major source of business activity by defense contractors.

At Kaiser Eckel Valve, an estimated 55% of the firm’s costs come from generating contract data and only 45% from producing hardware.

“We don’t mind selling the data, because we add our profit and overhead to it, but it seems to us to be a waste of taxpayers’ money,” said Larry Mittell, the firm’s chief engineer.

Designed to Cut Waste

Ironically, the justification for this system was to prevent defense waste. In recent years the public has been inundated with stories about the Pentagon paying $659 for an ashtray, $7,600 for a coffee pot, $749 for pliers, $640 for a toilet seat and $435 for a hammer.

The wholesale waste of taxpayers’ money--or at least the appearance of waste--led Congress to respond with a torrent of new laws to make sure that such mistakes were never made again.

A study by the American Bar Assn. last year found that congressionally “mandated actions” on the Pentagon shot up 1,022% between 1970 and 1985. And yet, congressional leaders believe the increase is justified.

“These things don’t come out of a vacuum,” said Rep. Les Aspin (D-Wis.), House Armed Services Committee chairman. “They come because of some problem that agitates people to do something. If there are no horror stories, there is no agitation for change.

“The consumer only has one military. There aren’t competing armies,” he added.

But inside the system, the congressional reaction to horror stories has fueled a paranoia, as a result of which bureaucrats go to any length to avoid making personal judgments that could be found in error. The result is a mechanical system that attempts to make every decision by rigid rules.

Impedes Judgment

“We don’t need a new rule and a new law to correct every problem in the system, because each new rule and each new law tends to curb the judgment-making ability of our contracting officers,” said Deputy Assistant Defense Secretary Eleanor R. Spector. “I argue strenuously against that. Yet that has been the tendency over the last few years. It is a concern.”

It is not just Congress; Pentagon leaders also have vastly increased their own rules and regulations.

“A lot of it has been driven by the legislative side, but then the Department of Defense and the Army have made these things more complex,” acknowledged Brig. Gen. Harry G. Karegeannes, the Army’s director of contracting. “There is some rationale for the things we have and there are some other things that we wish we didn’t have.”

When the Army wanted to buy sugar cookies a few years ago, it issued a 10-page list of instructions on how to bake such a cookie--possibly the longest cookie recipe in history.

“Why do we do things like this, because we’re stupid?” asked Maj. Philip E. Soucy, an Army spokesman. “No, because we have paid for something called a sugar cookie in the past and what we got was trash.”

‘License to Print Money’

Echoing a widely held belief among military officers, he added: “There is an attitude in this country that having a government contract is a license to print money. It’s almost like owning a dry-cleaning company or a parking lot.”

Such perceptions virtually guarantee constant growth in regulations. Although the new defense procurement laws are called “reform acts,” each piece of legislation is actually an addition, tacked onto the thousands of existing rules.

There are government instructions, procedures, directives, certifications, standards and specifications--among myriad other categories of rules and regulations that require armies of bureaucrats to administer.

Just about the time bureaucrats understand and begin to implement the changes in procedures, another reform takes place that swings the system into a U-turn and requires a new education effort.

“Until this last year, the rate was so fast you could hardly keep up with the changes,” admitted Assistant Air Force Secretary John J. Welch Jr. “It takes more than a year to catch up with the changes in legislation and implement it down through the services.”

Does an About-Face

The Navy, for example, instituted a policy several years ago requiring its various weapons offices to issue fixed price contracts for research and development work. Just about the time that such contracts became the practice, the service did an about-face and decided that such contracts were harmful and should seldom be issued.

The bureaucrats at the bottom of the system are kept busy just trying to keep abreast of the deluge of new policies and rules coming from Washington.

“I have to go down to the library every week just to keep up with the newest regulations,” said Lisec, the former contracting director in Los Angeles, who now teaches the subject at a local technical college. Even doing that, he complained, the Pentagon’s profit policy has been changed so often that he cannot keep up. “I am still trying to get the current changes so I can teach it,” he said.

Lisec should not feel alone. It took Spector, the deputy assistant defense secretary, five minutes of rummaging through her Pentagon office during a recent interview to locate a current profit-computation form.

When she finally located a profit form labeled “current,” she said: “No, that’s not current. Current means old. Current means that was current before we changed it.”

Complexity Mind-Boggling

Even more than their volume, the complexity of the regulations is mind-boggling, even to those who must deal with them on a routine basis.

“I don’t care how good your imagination is, it is not good enough to imagine how complex this system has become,” consultant Williams said. “It is so complex that in some cases if you think the regulations say one thing, I can find another regulation that says just the opposite. I don’t know how it can get any more complex than that.”

The complexity has fueled a growing business for defense contracting consultants and major accounting firms, who offer to help contractors figure out the system. Of course, the cost of such help is paid for by the Pentagon--in effect, the taxpayer.

“Some of these manuals are so complicated that the people in a machine shop can’t even begin to understand it,” said James Southerland, president of Contract Advisory Services, a Torrance consulting firm. “It is frustrating for these people (contractors). Their No. 1 problem is just getting paid.”

Even a bare-bones listing of the requirements shows their awesome breadth.

For example, a minuscule $25,000 contract can require the submission and later auditing of cost and pricing data, detailing all the factors that “could be reasonably expected to affect your costs,” Southerland said.

For contracts of $100,000 or more, the Pentagon imposes additional “cost-accounting standards.” The accounting standards are far more detailed than most firms have for commercial purposes, covering in exacting detail the allocation of various costs that occur under a defense contract.

A $500,000 contract additionally compels a firm to submit a plan for subcontracting with small and disadvantaged (minority-owned) businesses.

At the $10-million threshold, the regulations dramatically expand and include requirements for a purchasing system for supplies--a set of written procedures for awarding subcontracts.

Major multimillion-dollar prime contracts require “cost and schedule control system criteria,” a huge undertaking in which a weapons program is administratively broken down to a set of separate work packages with rigid budget controls placed on each package. It theoretically predicts whether programs are on schedule and within budget--but it has failed in the past to find even multibillion-dollar overruns.

Most of the rules and regulations seem to make sense on an individual basis, but taken together they represent an awesome load, Southerland said. Moreover, many rules are aimed at social goals, such as environmental, racial and small-business policies, rather than at sound procurement practice.

One telling indication of how bad the situation has gotten is that some foreign countries buying U.S. weapons are declining to deal through the Pentagon’s Foreign Military Sales program, preferring instead to deal directly with U.S. industry.

Some Deal Directly

When a foreign government deals through the Pentagon’s sales program, it must accept and work through the Pentagon rules and regulations. In a direct deal, the contractor and the customer agree to requirements in a contract.

When the Greek air force decided to buy American F-16 fighter jets, for example, it declined to buy them through the Air Force, in large measure to avoid having to deal with the U.S. bureaucracy. The Greeks eventually bought the jets directly from the Ft. Worth Division of General Dynamics.

The problem with excessive regulation is at its worst when the government lacks resources to operate its own system, a situation that is occurring with disturbing frequency owing to high turnover and shrinking budgets for contract administration.

The turnover in many offices is so rapid that 10% to 20% of staff positions are often vacant at any given time. Eidetics, a small aerospace contractor in Los Angeles, said it went for six months without any Pentagon administrative officer assigned to its contracts.

The problem is not an abstract one, because sometimes work does not get done as a result.

Lengthy Delays

“I can show you contracts involving hundreds of millions of dollars, if not billions of dollars,” Rogers said, “where we have submitted the major proposal four and five times before it was ever addressed on the part of the government people, because they could not get to it.”

Worse yet, at the turnover rate of 37%, which occurred in the Air Force plant office at TRW in El Segundo last year, the average level of employee experience is less than two years.

“As your workload increases, you have that high turnover rate,” acknowledged Darlene A. Druyun, a senior Air Force official in charge of contracting. “It’s tough to train people and get them to a certain level of competence. What we’ve seen is a steady decrease in the number of years of experience that people have.”

If there was ever a thankless job, it may be the defense bureaucrat’s. They are often highly educated, but their jobs leave them with little authority or responsibility. Almost everybody agrees that they are grossly underpaid.

The typical “administrative contracting officer”--whose signature can obligate the federal government to multibillion-dollar commitments--is a college graduate with postgraduate education who earns about $35,000. Counterparts in private industry earn up to twice that much.

Dilapidated Quarters

The work environment is not a pretty one. Department of Defense business offices are often dilapidated, located in buildings hastily constructed during World War II. In Hartford, Conn., for example, the Pentagon’s local business office is a former warehouse, situated between a sewage treatment plant and a trash incinerator.

A study by the American Bar Assn. found that increased rules and regulations have left contracting officers in a “position of diminished significance.”

“Contracting actions become mechanical; imagination, judgment and common sense dry up,” the report found. “This is one of the most inefficient and costly aspects of the (Department of Defense) acquisition process.”

It was not supposed to be this way. Under the Reagan Administration, the Pentagon was supposed to push the defense industry to adopt commercial practices. Competition was given top priority.

Ironically, the effort to heighten competition has increased, rather than reduced, the amount of paper work the government and companies must handle. The competition in defense markets is not free-market competition but regulated competition.

Offers Training

For instance, if a military service cannot locate enough qualified bidders for a contract, it sometimes offers technical training to incompetent firms so that they can make a bid. Such practices infuriate small contractors, who suspect that the military leaks their technology. In any event, such methods represent a bizarre concept of capitalist enterprise.

“We do deal with an awful lot of regulation, probably more than we need to do the job right,” said Rear Adm. Robert M. Moore, the Navy’s competition advocate for contracts. “We have a body of regulation that is, I forget how many pages, but it is enormous.”

Despite broad agreement that the regulatory load is onerous and continuing to grow, it is difficult to know how much it really costs taxpayers. Some procurement experts question whether the cost of regulation is as high as some critics suggest.

RAND Corp.’s National Defense Research Institute is currently examining how much defense regulations cost. “It is unambiguous that the amount of regulation and oversight has increased, but to try to quantitatively link that to the cost of weapons is very, very difficult,” RAND Vice President Michael Rich said.

Spector, the deputy assistant defense secretary, said the Pentagon has worked to reduce bureaucracy where possible and has eliminated some reporting requirements. She cites an effort to examine 18 areas of duplication in the system and 36 “pilot activities” to waive rules and regulations. But such cutbacks in rules will go only so far.

Must Comply With Rules

“Effectively, if they want to do business with us, they have to comply with our rules, whether they like it or not,” she said, invoking the ultimate power of the Pentagon bureaucracy. “That is the choice they make when they do business with us. It is incumbent on us to be fair, reasonable and not ask for more than we need.”

But at Kaiser Eckel Valve, the situation seems to be getting worse. Cisco noted that he recently was asked to bid on a “Star Wars” contract that required videotaped progress reports on a quarterly basis.

“It was pages and pages on how to make a video,” Cisco recalled. “It got into things like zooming in on parts and zooming out.”

So, Kaiser Eckel found a producer of industrial videos and learned that it would cost taxpayers $52,000 for the eight video reports required. That represented 10% of the total cost of the $500,000 program.

“We bid it,” Cisco said.

DEFENSE REFORMS Major reforms of the defense procurement system enacted by Congress in this decade. 1983 Amending the Small Business Act 1984 Competition in Contracting Act

Defense Procurement Reform Act

Small Business and Federal Procurement Competition Enhancement Act

1985 Defense Procurement Improvement Act 1986 Department of Defense Reorganization Act

Defense Acquisition Improvement Act 1987 Defense Appropriation Act