DoD’s Latest Attempt To Reign In Procurement Costs Isn’t Just Illegal, It’s Stalinist

In the early 1930s, Joseph Stalin, already the Soviet Union’s dictator, desperately needed funds to support his plan for rapid industrialization. He acquired the needed resources by confiscating the produce of Russia’s farms and selling abroad. This amounted to “stealing low and selling high.” The policy had the added benefit of destroying the class of independent farmers, the Kulaks, thereby promoting the goal of collectivizing agriculture. Oh yes, it also resulted in massive famine and tens of millions of deaths from starvation.

Fast forward eighty years. Today, the Department of Defense is trying to solve the problem of rising costs for defense goods not by reforming the way the Pentagon buys things but by attempting to steal from defense contractors. In a March 2012 memo to all acquisition executives, the Under Secretary of Defense for Acquisition, Technology and Logistics (AT&L) directed them to negotiate labor and overhead rates for current contracts based on what they were in 2010. Since the costs of doing business have not declined, this directive appears to require DoD officials to demand that private contractors sell their products and services below actual costs. Or, I suppose the companies might lower their labor rates by cutting the wages and benefits of their employees, many of whom are union workers with contracts. But either way the government is attempting to get things of value from those who make them at less than their true worth. In my book, that is stealing.

This effort to roll back labor and overhead rates may actually be illegal. Under the Federal Acquisition Regulations Part 15 which governs contracting with DoD, companies are required to formally, accurately and exhaustively report their true costs. It is a crime to propose a price to the government based on inaccurate — or, to use the contracting term, uncertified — data even if that means the government is getting something at below cost. The best that these companies can do is to reduce their profit margins. Since defense companies already have profit margins less than half that of firms in the S&P 500, this is not a solution. So the AT&L memo is in effect asking defense companies to either commit a crime or economic suicide. Great choices.

This attempt to artificially and falsely reduce DoD’s procurement costs smacks of desperation. Having failed to achieve meaningful cost reductions through a series of top down interventions in the defense market place (e.g., insourcing, firm fixed price contracting and mandatory competitions) and unwilling to reverse course and employ more commercial best practices, DoD is now resorting to Stalinist tactics. This approach worked so well in the Soviet Union that it eventually collapsed their entire system.