Defense Waste

SECRETARY McNamara has lulled most of the press to sleep with chants of "cost effectiveness" and "buying at the lowest sound price," but behind this jargon lurks a behemoth of waste. Senator William Proxmire, chairman of the Joint Economic Committee, placed the figure at "maybe billions and billions" of dollars following testimony last May by officials of the General Accounting Office (GAO).

The most recent report of the GAO--Congress's financial watchdog--has received the most publicity. Published in November, it established that 23 defense contractors, including Boeing Company, Sikorsky Aircraft, and Sperry Gyroscope Company, have violated a series of government regulations on the use of defense equipment. These 23 contractors hold $1 billion in government property, in addition to special tooling and special test equipment valued at $347 million. Both the GAO and the Joint Economic Committee say that the conduct of the 23 contractors is "representative" of the 5,500 contractors holding $15 billion in government property.

The contractors have widely ignored a DOD regulation requiring them to keep official records of government property in their possession. The GAO also found that some contractors have so much government-owned industrial equipment that it is either little used or used extensively for commercial work. Contractors frequently disregard regulations requiring advanced approval from the Office of Emergency Planning before using government-owned machine tools for commercial purposes more than 25 per cent of the time. One Cleveland corporation was lent a $1.4 million steel press at low rentals and subsequently used the press more than three-quarters of the time for commercial work.

The GAO report also charged that the DOD fails to apply rental rates uniformly and to collect all it is owed. In one case where the Defense Department charged a contractor $226,400 for rent, the GAO calculated that $809,000 should have been collected.

BUT by far the biggest leak in the Defense Budget comes from another source: the process of procuring goods and services, which cost $44 billion this year. This process involves two stages: Pre-awarding of contracts, and Post-awarding of contract.

In the pre-award stage the Defense Department determines the type of contract and the process of entering it. The Defense Department has a Fixed Price type of contract, in which it pays a predetermined fixed price, and a Cost type of contract, in which it pays the cost of fulfilling the contract.

The DOD can enter these contracts [Fixed Price contracts form the -overwhelming majority] either through a formally advertised competitive process, in which specifications are sent out and sealed bids are received, or through a negotiated process with the contractor. Formally advertised competition represents only 13.4 per cent of the total procurement.

Competitively bid contracts offer tremendous savings over negotiated contracts, but the complexity of modern weapons has placed a ceiling on the amount of competition. Few companies have the capability to build a Polaris submarine or an intercontinental missile.

Therefore the great majority--perhaps 85 per cent--of defense contracts are negotiated. If the Defense Department is not going to be victimized by overcharging, it must have accurate, up-to-date cost data. A little-known law called the "Truth in Negotiations Law" of 1962 protects the government against overcharging. The law aims only at contracts over $100,000, requires contractors to present accurate, up-to-date cost data, and provides for contract adjustment if the data are incorect.

According to Senator Proxmire, however, the Defense Department acts "as if the law is something that they can take or leave, and decided to leave it." He's probably right. A GAO survey of 242 firms conducted from April 1965 to June 1966 found only 20 in full compliance. The reason is the Defense Department had never sent the correct forms requesting the cost information. They were gathering dust in a warehouse.

The Joint Economic Committee, headed by Senator Proxmire, also learned that the price estimates the DOD had been accepting with no proof were made without reuquiring the contractors to establish formal cost estimating systems. The DOD's own auditors have pleaded for 10 years to put an end to such guesswork. Contractors ignored them until the GAO started putting on the heat early last year.

THE abysmal failure to implement the "Truth in Negotiations Law" causes the greatest runoff in defense funds. From minimal spot-checking over a ten-year period, the GAO has turned up some $130 million in overcharges to the government. Senator Proxmire attributes "billions of dollars" to this failure. The absence of many Defense cost records and the shoddiness of others makes it impossible to calculate the exact amount of wastage, but every indication points toward a multi-billion dollar sum.

Because of the sloppiness and negligence of the pre-award stage, the last safeguard for the Defense Department is a post-audit. The DOD, however, generally neglects to post-audit any of its contracts, and has purposely avoided post-auditing Firm Fixed Price (FFP) contracts. (FFP contracts account for $22 billion in procurement!) In the past DOD failed to post-audit FFP contracts not because it didn't have the authority--the Truth in Negotiations Law gave them the authority--but because there were no internal regulations requiring it. Under intense Congressional pressure, McNamara finally established such regulations last October. Whether they will be enforced remains to be seen.

It is known, however, that post-auditing at the Internal Revenue Service brings $10 for every dollar that it costs. The Joint Economic Committee estimates that the ratio would be many times higher in the Defense Department.

Why has the Defense Department permitted such sloth? Defense apologists contend that waste is inherent in a fortress as vast as the Pentagon, especially when it is at war. Warmakers are interested in military results first and bookkeeping second. They are satisfied as long as their contractors are good, prompt, effective suppliers--which defense contractors usually are. Another reason is bureaucratic inertia. The DOD has always conducted business like this.

A more compelling explanation is offered by Sanford Watzman, whose articles about Defense waste in the Cleveland Plain Dealer were inserted in the Congressional Record last fall. Watzman attributes the runoff in defense funds and profiteering by the contractors to the "symbiotic relationship" of the "military-industrial complex." One lives off the other and vice-versa. As the result, the public is fleeced.

Incredibly sloppy bookkeeping and lackadaisical enforcement of regulations are solidly entrenched at the Defense Department. The GAO revelations offered a glimpse of the vast waste at the DOD, but only more prolonged and intense publicity can drive off the behemoth.