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Contractor Goody Bag Legislation Rears Its Ugly Head

April 8, 2003 


The federal government would turn a blind eye to ripoffs by defense and technology contractors under legislation to be proposed by Representative Tom Davis, who is chairman of the House Government Reform Committee and the most recent head Republican fundraiser in the House of Representatives. The Associated Press reported on the provisions which are part of Representative Davis' Services Acquisition Reform Act (Click here for the AP story).

The Davis legislation is part of a larger industry-driven effort to unravel statutes that protect the federal government and taxpayers from being cheated by contractors. The Project On Government Oversight (POGO) has documented this effort in its report "Pickpocketing the Taxpayer: The Insidious Effects of Acquisition Reform".

"This goody bag for contractors is an insult to the taxpayers," said Danielle Brian, Executive Director of POGO. Three major provisions are of concern in the Davis legislation:

1) Time and Material and Labor Hour Contracts. The bill encourages use of time and material and labor hour contracts which allow contractors to engage in almost unlimited billing of the government without producing a product. These contracts require the government to pay for time and expenses rather than for milestones reached or work completed. "This is tantamount to hiring a house painter, telling him no matter how long he takes or how much he spends on paint, his bill will be paid," said Danielle Brian, Executive Director of POGO. The proposed legislation would even prohibit government auditors from reviewing contractors' costs.

2) Share-in-Savings Contracts. The bill also would expand use of speculative and unproven financing schemes known as share-in-savings contracts. According to law professor and acquisition expert Charles Tiefer, share-in-savings contracts "could propagate problems similar to those that accompanied deregulation of government-insured savings-and-loans institutions or procurement of defense spare parts in the 1980s by sole-source contracts."

Under share-in-saving contracts, contractors provide upfront capital financing for projects such as computer system upgrades in exchange for receiving funds down the line that are saved as a result of the upgrade. However, developing baselines to estimate savings are virtually impossible in the technology arena. Contractors frequently claim share-in-savings programs save money. However, White House procurement chief Angela Styles testified last year in hearings overseen by Representative Davis: "we have seen no savings."

3) Truth in Negotiations Act (TINA) & Cost Accounting Standards (CAS). The legislation would also exempt a dramatically larger number of government contracts from TINA and CAS requirements. Contractors have been seeking the weakening of these requirements for years.

CAS are the accounting principles that defense contractors must follow when pricing their products and seeking government payment of their costs. Establishment of uniform cost accounting standards and the Board that sets them was initiated by Admiral Hyman Rickover and Senator William Proxmire in the 1960s. Then, it was regarded simply as good business practice for the government. If Davis succeeds in weakening the standards, taxpayers are likely to be paying billions of dollars more every year for the goods the Defense Department and other agencies buy. The contractor accounting games that led to the need for the CAS Board in the 1970s added an estimated 5% to government contract costs. The equivalent today would now amount to well over $6 billion a year. Click here to learn more about POGO's work defending the CAS Board.

TINA requires contractors (mostly companies selling defense goods) to disclose their cost or pricing data -- the basis upon which government auditors and negotiators use to determine that prices for weapons and specialized government products are fair and reasonable.

The proposed legislation would raise the requirements for TINA and CAS application from the current $550,000 and $7.5 million, respectively, to $200 million in the case of fixed-price contracts awarded to certain "commercial companies." Restricting TINA and CAS application when negotiating contract prices in a sole-source environment is like asking the government to put blinders on, and would lead to outrageous contract overpricing and wasteful spending.


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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