Red Tape Threatens Supply Pipeline to Gulf War : Defense: Some firms rushed to get equipment to troops in the gulf, but now they’re waiting to be paid. Many don’t want to take orders until they get a final contract for the goods.

When the Army issued a desperate order for 22 special generators to power Patriot missile systems in Saudi Arabia, Jim Vallely agreed to begin producing the equipment around the clock--and without a final contract.

Over the Christmas holidays, Vallely, owner of Temecula, Calif.-based Central Power, was busy loading the generators onto a C-141 transport for a direct flight to the Middle East.

Now, more than a month later, Vallely is left wondering when the Army will get around to paying him. Before that happens, he faces the kind of regulatory thicket that is the small-business owner’s worst nightmare.

“We are going nuts,” Vallely said. “We have a million dollars in purchase orders outstanding, and they (the Army) have no way to pay us, because we have no contract.”

The Pentagon’s vast procurement apparatus--a system so complex that universities give graduate degrees in its regulations--will be tested by the Persian Gulf War, much like the equipment and troops deployed at the front.

Although the Gulf War has not triggered a large-scale industrial mobilization, the Pentagon is rushing orders for special equipment, food, clothing and other wartime essentials. Some experts say there are signs that the complexity and volume of regulations enacted during peacetime will bottle up the pipeline or leave contractors such as Vallely in the lurch.

“The system does not work well,” said James Southerland, president of Contract Advisory Services, a Torrance consulting firm that helps small defense contractors cope with regulations. “If we fail to get products to the field, it will be the paperwork that is causing the delays. It is very seldom that a manufacturer cannot get the work done.”

A virtual library of regulations and specifications were enacted during the 1980s in several successive waves of reform designed to improve the procurement system. Today, the Pentagon has 24,000 employees to administer contracts and another 23,000 auditors, inspectors and investigators to police the contracting apparatus--a total federal force nearly the size of three Army divisions.

War may already be having a bracing effect on that bureaucracy.

“They get tangled up in their own underwear up there (in Washington), but it will work,” said Branson McRae, owner of McRae Industries, a North Carolina supplier of combat boots. “It is hard to get through the bureaucracy, but with this Desert Storm operation, they are waking up.”

Indeed, Defense Department officials say in interviews that they have waived some regulations to speed up the procurement system. And although they note that they cannot waive requirements imposed under law, they say the system is nonetheless working.

Peg Janes, chief of the policy branch for contracting at the Defense Logistics Agency, said her organization has reduced regulations in three key areas at its six supply centers:

* It has waived the requirement for supply centers to submit contracts for review by agency headquarters at Camron Station, Va.

* It has suspended the requirement for the independent cost reviews of contracts.

* It is permitting supply centers to issue letter contracts--typically allowing work to start before the government decides how much it will pay--without prior authorization from headquarters.

“We are doing everything possible to let these contracts as quickly as possible,” Janes said. “We have tried to relieve contract officers of any administrative burden that would hold up the issuance of contracts.”

Although that may be great news for the Pentagon, the agency has not relieved contractors of any part of the regulatory burden that falls on them.

Vallely, the Temecula generator maker, found himself caught in a regulatory morass this month.

In an effort to help the Army get the Patriot missile generators as quickly as possible, Vallely took a letter contract.

He believed that it would be a simple matter to negotiate a price shortly after he began to produce the generators. But he was wrong. Central Power was already delivering generators before the Army would agree to a price.

What Vallely discovered was that federal regulations simply aren’t designed for fast turnaround on purchases. Under the rules, the Defense Contract Audit Agency--the Pentagon’s bookkeeper--must conduct a formal audit of a defense firm’s “cost and price data” before a price can be negotiated.

And the DCAA may be backed up on such reviews. Southerland, the contracting adviser, says the agency is backed up six months in conducting routine audits. Agency spokesman Phil Rogers disputes that assertion. Since Desert Storm began, the audit agency has reduced the time needed to do an audit from six weeks to four weeks, he said.

Meanwhile, Vallely is waiting.

“This is a two-edged sword,” Vallely said. “If we are busting our chops to help you guys, I think you can bust your chops to help us. I am a patriot, but is there a point where I have to shut my company down. I can’t afford to take any more.”

Although Vallely’s case may be extreme--a larger, more savvy military contractor might have planned for payment delays--other contractors have developed a similar dislike for letter contracts.

One Southern California defense executive, who declined to speak for attribution, said his small company flatly refused an Army request to take a letter contract for equipment needed in Saudi Arabia.

“The government says we want to buy your product but we aren’t going to tell you what we’ll pay until after you deliver,” he said. “The banks would pull our lines of credit. Our vendors would pull out. If you are a small company and you do it for patriotic reasons, you could lose your company.”

Southerland, the contract consultant, said he strictly advises his clients to refuse to accept letter contracts.

“The reason they want to issue letter contracts is that they don’t have the tools to get contracts out fast,” Southerland said. “What it allows is the government to (take advantage of) the contractor royally.”

Under Pentagon regulations, for example, profit rate is calculated partly on the risk associated with a contract. If goods have already been delivered under a letter contract, the Pentagon reasons that there is no risk and the profit should be reduced, Southerland said.

McRae, the boot maker in North Carolina, is cautious about letter contracts.

“I will take a letter contract, but I don’t like it,” McRae said. “I think we ought to agree on a price. If you double and triple the orders, you have to get new people and go to overtime. You don’t know what it will cost you. Now, these procurement people will look at it and say McRae is raising his price. Well, sure.”

McRae ramped up his production quickly and met Army schedules for producing desert boots for troops in Saudi Arabia. But at one point when he had boots waiting to be shipped, the Army could not tell him where to ship them.

“They have problems too,” McRae said. “We had to hold those boots and we didn’t get paid until we shipped them. It cost me some extra. I could handle it financially, but a lot of people couldn’t.”

In any event, there has been little reduction in the Army’s lengthy specifications for boots, McRae said:

“It is almost like a specification for a battleship. They tell you how to tan the leather. The steel shank has to be a certain temper. It is complicated but the ultimate result is that you get a good boot.

“They may pay $425 for hammers, but not for these boots,” McRae added. “The government is getting a bargain.”

Even in peacetime, the Pentagon has been unable to cope with the weight of its own regulations.

In 1989, the Pentagon was delinquent on 12,000 payments to defense contractors in the West and undertook a national reorganization to help untangle the mess.

By January, 1990, a new Pentagon payment center in Columbus, Ohio--set up to help solve the problem--was delinquent on 32% of all of the invoices submitted by contractors from around the nation.

Another reorganization ensued during late 1990, and the new agency that emerged--the Defense Finance and Accounting Service--has “improved” the situation to the point that the Pentagon is now delinquent on only 9% of its invoices, a spokeswoman said.

Some experts think that history may provide some lessons about how to operate the procurement system during war.

“In World War I and World War II there were special commissions formed to cut through the red tape,” said Paul Weisend, a professor who teaches federal contracting at Cal Poly Pomona. “The easiest way to lose a war is to put your suppliers out of business.” MIDEAST UPDATE General Motors said it will extend the corporation’s special military leave pay policy covering employee reservists to six months from one month. Reports last week indicated that Japanese car makers in the United States were offering more generous benefits to reservists than were the U.S. manufacturers.

Oil company officials doubted that the expanding oil slick in the Persian Gulf would adversely affect tanker shipments. Shipping brokers saw no decline in tanker activity.

Thirty-six companies have submitted bids for 33.75 million barrels of oil to be released from the U.S. Strategic Petroleum Reserve. Winning bidders will be able to pick up the oil between Feb. 15 and March 31.

Defense analysts said the successes of U.S. warplanes may boost the prospects for the Advanced Tactical Fighter, the Air Force’s next-generation fighter. The service is expected to name a winner by April 30 in the contest between Northrop and Lockheed for building the plane.

Short supplies of so-called bunker oil in Singapore--the world’s biggest port for ship refueling--are expected to ease by mid-February, when supplies on route from the Mideast are expected to arrive. Bunker prices, about $90 a ton before the war have settled at about $150.

American consumers, normally prone to top off gasoline and heating oil tanks when supplies appear threatened, seem to be controlling the urge to hoard. Analysts say lower gasoline prices are helping to reassure consumers.

Sabena, the national airline of Belgium, said it has cut its Brussels-New York service from to seven from 11 flights weekly, because the war has dried up travel.