Don’t go overboard banning military contractors

By Steven Shaw
August 8, 2012

During the 15 years that I led the Air Force’s contractor responsibility and fraud missions, we debarred and suspended nearly 5,000 contractors – more than any other government agency. But what is far more important than the statistics is the greater protection we were able to provide the government by exercising these powers fairly and with balance, through the careful exercise of discretion. But that is coming to an end. We are now seeing a disturbing trend: new rules and outside pressures that would limit, and even eliminate, the ability of officials like me to exercise that discretion. Companies are being “blacklisted” – often for lengthy periods, sometimes automatically without due process, and often based solely upon the actions of a few rogue employees, with little consideration of whether such action is needed or fair.

The debarment regime is important for the government, and frankly makes sense. Most of us would not hire a plumber whom we knew did faulty work on a neighbor’s pipes. Given that, why would we put up with the serious fraud being committed today, particularly where it may affect our troops in multiple war zones? We can and should work only with responsible contractors. To do that, the government sets standards for contractor eligibility, and each agency has a suspension and debarment (S&D) official empowered to administer those standards. But in administering those standards those officials must always be mindful that the S&D system is not intended as a tool for punishment. While punishing fraud is important, it properly belongs in the criminal justice system, not with procuring agencies.

Not every act of misconduct should result in a company being blacklisted. Even the best companies have employees who cross legal and ethical lines. The important point is how a company’s leaders encourage proper conduct, identify and mitigate compliance risk, respond to the misconduct of their employees, and accept responsibility for good corporate governance. In most cases the government is not threatened by continuing to deal with a contractor whose employees engaged in isolated misconduct but whose management corrected the problem and is now acting responsibly. Regrettably, the current political atmosphere is straining this delicate balance in three notable respects. And there is a lot at stake: The U.S. Government is the world’s largest purchaser of goods and services, with approximately one out of every six dollars of federal government spending awarded to contractors.

First, some public officials are seeking to score political sound bites by making S&D mandatory – that is, imposing it automatically following a triggering event such as an allegation of wrongdoing, an indictment or a conviction.  The Consolidated Appropriations Act of 2012, for example, prohibits certain agencies, including the Department of Defense, from funding contracts for corporations convicted of any federal felony within the preceding 24 months, unless each agency that deals with that contractor makes a separate affirmative determination that such action is not necessary to protect that agency’s interests. Other proposed legislation would go even further to provide for the automatic suspension of a contractor when the government merely alleges fraud against a contractor in any civil or criminal proceeding related to a federal contract.

Such approaches are ill-advised. Automatic debarment prevents agency officials from proactively encouraging contractors to mitigate fraud risk prior to any misconduct occurring. And it also limits the government’s ability, after misconduct is discovered, to structure resolutions that influence and motivate positive corporate behavior – or to take no action at all.

If a single rogue employee, in a company of 10,000 individuals, engaged in misconduct, should the entire company always be suspended? Furthermore, automatic suspensions give contractors every incentive to stonewall rather than cooperate with the government in identifying and fixing problems. Congress should allow agency officials to exercise discretion to strengthen contractors for the benefit of the government, rather than imposing “one strike and you’re out” policies. Removing discretion from agency S&D officials strips them of one of the government’s greatest tools in the fight against contractor fraud, thereby essentially allowing fraud against the government to increase.

Second, some congressional leaders, as well as the Commission on Wartime Contracting in Iraq and Afghanistan, have legitimately criticized some agencies for dealing with contractors too leniently in contingency environments and elsewhere. Some agency officials – particularly those with less mature programs – have responded by seeking to increase their S&D statistics to show that they are tough with contractors, with little consideration of the contractor’s present responsibility or the need to debar it. This submission to perceived political pressure is unfortunate. Given that S&D decisions cannot be appealed within the executive branch and can be overruled by a court only where there is an abuse of discretion, it is incumbent upon agency officials to exercise their authority more thoughtfully and responsibly.

S&D officials must consider the facts of each case and devise appropriate solutions. This may include the increased use of administrative agreements that require improvements to an organization’s ethics and compliance systems and independent monitoring to provide an outside verification tool for the government. Such approaches serve as both the “carrot” by providing the contractor with an incentive to avoid debarment by improving its ethical culture, and the “stick” by identifying the consequences for failure to do so.

Third, contractors must accept that S&D is a powerful, legitimate tool for protecting taxpayer dollars. If they wish to remain eligible to receive federal funds, their leaders must be vigilant in setting high standards for ethics and compliance. Failure to do so can have devastating collateral consequences for investors and employees alike – as well as for the government, which risks losing essential goods and services needed for our national defense. There is no crisis for a contractor equal to that of losing its only customer, and more than one CEO or board chairman has lost his or her job by failing to lead in this area.

“Blacklist Bad Contractors” fits nicely onto a bumper sticker, as one politician recently told me.  The politicization of federal contracting is unlikely to subside anytime soon. Leaders on all sides must act responsibly or risk further damage to this delicate but necessary interdependency.

PHOTO: Tanks are seen on display during a tour of the Joint Systems Manufacturing Center, Lima Army Tank Plant, in Lima, Ohio, April 23, 2012. REUTERS/Matt Sullivan

23 comments

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Good to see you’re doing your job, Mr. Shaw.:

“In April 2010, The Hill newspaper reported that Xe Services, formerly known as Blackwater Worldwide, hired Covington & Burling to lobby on “government contracts,” according to a lobbying disclosure filing.”

http://en.wikipedia.org/wiki/Covington_% 26_Burling

Posted by clearance42 | Report as abusive

We did not win World War II with contractors. Had we left it to Halliburton, we’d still be fighting Japan and receiving a monthly bill for ‘logistics.’ Contractors simply do not have the same financial incentives for winning and ending a war that the public has. If we really need private services for war, comandeer the services or temporarily nationalize them. That’s what we did in World War II.

Posted by AlkalineState | Report as abusive

A lobbyist telling us not to blacklist his clients? You can do better than this Reuters. Or was this one of those paid for articles?

Posted by tmc | Report as abusive

Might this be a paid advertisement/representative for the highly profitable military industrial complex who wants to keep the party going?

Posted by TheUSofA | Report as abusive

So the AF debarred (actually got quite tired of reading that word) 5000 companies, does that mean the other 50000 were allowed to keep overcharging and bilking us taxpayers, so clowns like the author could have a job after warming that 10K chair until retirement.

Posted by mutt3003 | Report as abusive

Mr. Shaw’s message is “trust us”.

That’s hard for taxpayers to do, given the breathtaking financial waste of taxpayer dollars and failures by peacetime procurement management that continue to come to light. More than a few of our administrative government bureaucrats are either incompetent bunglers or bag men for special interests.

Checks and balances are more illusion than fact. These people have not even mandated a paper trail with which wrongdoers can be identified and prosecuted, even in hindsight after-the fact.

There is always a reasonable “premium” to be paid when something big needs to be done overseas in places without American experience and resources. In WW II, that’s where the CBs (or SeaBees) came in. Those men did amazing things with very little, did it well and fast and at minimum cost (considering conditions and available alternatives).

The American people can simply no longer afford Mr. Shaw and his “business as usual” mind set (if they ever could). He and his ilk have overseen some epic “fail”s for which responsibility cannot be clearly ascertained.

That, alone, is enough to immediately fire these people without delay! “Our” government has been utterly clueless as to monetary priorities, tolerating or fostering a culture of failed administrative oversight and records, and production goals for far too long.

Posted by OneOfTheSheep | Report as abusive

What’s the matter? Think you’re too big to fail?

Posted by borisjimbo | Report as abusive

Let’s start with this: Taken as a whole, defense contractors are the largest source of illicit political funding. When a contractor receives federal money, it comes with a liability. The contractor is expected to “ante up” and grease the palm of the politician and or political party that secured the contract. This money is often laundered to hide the identity of the payer. Even worse, these kickbacks sometimes take the form of payment for professional services rendered with the recepient being a bogus political front company. In these cases, no services are received, but the contractor gets a tax deduction for his “contribution” and maintains his anonimity. This is felony tax fraud. It is commonplace but is almost never prosecuted. Even the IRS knows not to bite the hand that feeds. There are many other scams involving defense contractors. They are a veritable money machine for crooked politicians. Like so many things involving government, it isn’t about ethics or competence, it’s all about the cash.

Posted by gordo53 | Report as abusive

Frequently, significant damage is done by “rogue employees” who are managers. In fact, a lack of control of management is usually where contractors go wrong. In America we tolerate management incompetence and corruption far, far to much. An organization caught indulging managers’ wrongdoing should indeed by blacklisted. If they get caught once or twice it indicates a bad company culture.

Such companies are certainly not national assets.

Posted by usagadfly | Report as abusive

An eloquent defense of the pigs at the public trough. Bravo!

Cut DoD to the OECD average. And then keep cutting.

Posted by upstater | Report as abusive

Contracting out defense sounds like licensing pirates. Unless they are under direct military command, military law and rules of engagement, one lost control their actions. Make no mistake, making war is murder which should justified. Licensing people to do it should limited to those under direct military control and military law.

Civilian courts do not have jurisdiction in far way places we fight.

If they are under direct military control and law they are just solders costing more than the normal solders.

Posted by Samrch | Report as abusive

When worked on military design contracts for various firms. One thing stud out we where compelled by rules to use the lowest const subcontractors, even when did substandard work.

I did structural calculations to ensure products can pass qualification tests. If welds or casting are allowed no way will the products be structurally reliable, good proceedure and qualified personnel are used. There is no limit on how bad a weld can be. This problem limited the use of welding and casting. If we had to deal with corner cutters, either we had to require excessive tests or maximize the use of bolts and rivets. Both of which have reliable strength classes that they tested stamped on the head.

Posted by Samrch | Report as abusive

Having worked on aircraft structures and various military structures I can say both civilian and military manned air craft have higher quality controls than most other structures. They have to because the aircraft has to be as light as possible and take air hitting it at hundreds of miles an hour. Unmanned air craft and rockets most of the time are not held to such high standards and the chief reason they are cost effective.

Since manned aircraft and combat equipment are dealing with life and death expect high quality costs.

Posted by Samrch | Report as abusive

Having worked on aircraft structures and various military structures I can say both civilian and military manned air craft have higher quality controls than most other structures. They have to because the aircraft has to be as light as possible and take air hitting it at hundreds of miles an hour. Unmanned air craft and rockets most of the time are not held to such high standards and the chief reason they are cost effective.

Since manned aircraft and combat equipment are dealing with life and death expect high quality costs.

Posted by Samrch | Report as abusive

Just curious — out of the numerous cases that the anti-fraud efforts must have undertaken to ban 5,000 contractors, how many resulted in a criminal prosecution?

Posted by vinlander | Report as abusive

Two Words for Stephen Shaw. Darlene Dryun.

What Shaw and his ilk don’t like is not being able to “influence” contractors that they invariably go to work for after building up a fat government pension. You give people like Shaw discretion to “overlook” contractor fraud and then you see them going to work for the crooked contractors they used “executive discretion” to give a pass to or a slap on the wrist.

Not only no, but hell no. As a government contractor, I can tell you that corruption that is major fraud NEVER occurs in a vacuum. Look at Boeing 10 years ago when they got busted for recruiting Ms. Dryun while she was still in the DoD AFTER hiring her relatives first.

Three strikes and they’re out. One strike for the Civil Servants and they go to prison.

Posted by LiarsandCrooks | Report as abusive

[...] without due process and, at times, solely on the basis of the actions of rogue employees. [Reuters]. Share this:EmailLike this:LikeBe the first to like this. Filed Under: Latest News « [...]

Good to have commentary from someone who actually understands federal contracting and the value it brings to U.S. policies. Also worth noting is the damage caused by ‘Lowest Price, Technically Acceptable’ (LPTA), which drives down quality and ties the hands of procurement officers.

Posted by Hoosier84 | Report as abusive

If the problem is a ‘few rogue employees,’ then quit hiring such dumb schitz. I have worked alongside many KBR employees who act like they barely made it out of the 8th grade. In general, it is an under-educated, over-juiced bunch of troglodytes who could not cut it in the real military. And I don’t care what the lobbyist-author says, when Blackwater gets caught on camera shooting up a block of unarmed civilians on the street in downtown Baghdad, they do compromise the entire U.S. mission. They can change their name to Xe, they can pinky-promise to not do it again. But they’re a bunch of screw-ups.

Posted by AlkalineState | Report as abusive

@clearance42

Thank you very much for showing this startling connection!

Posted by RexMax46 | Report as abusive

Hoosier84 swoons: “Good to have commentary from someone who actually understands federal contracting and the value it brings to U.S. policies. Also worth noting is the damage caused by ‘Lowest Price, Technically Acceptable’ (LPTA), which drives down quality and ties the hands of procurement officers.”

So you prefer the F-35 contracting approach of ‘Cost-Redundant-Ascendant-Price’ (CRAP)  :)

Posted by AlkalineState | Report as abusive

Ban all of them. The leeches, the scum of society who profit out of people’s death should be eliminated. Just like the pimps who stay under cover while others do the dirty job. Even worse – they take your tax money to use it for their immoral endeavors.

Posted by Renox | Report as abusive

Hey Reuters, you didn’t sell like a month of time to this … lobbyist.. did you? How long do we have to see this spin on the site taking up room?

Posted by tmc | Report as abusive

Steve Shaw is the kind of guy who spent his life in contractor meetings getting stroked. He apparently mistook that for authority. The only thing this guy is an authority on, is being a tool. What a disgrace to the United States.

Posted by AlkalineState | Report as abusive