[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 111-94]
THE DEPARTMENT OF DEFENSE AND
INDUSTRY: DOES DOD EFFECTIVELY
MANAGE ITS INDUSTRIAL BASE AND
MATCH ITS ACQUISITION STRATEGIES
TO THE MARKETPLACE?
__________
HEARING
BEFORE THE
PANEL ON DEFENSE ACQUISITION REFORM
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 17, 2009
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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PANEL ON DEFENSE ACQUISITION REFORM
ROBERT ANDREWS, New Jersey, Chairman
JIM COOPER, Tennessee K. MICHAEL CONAWAY, Texas
BRAD ELLSWORTH, Indiana DUNCAN HUNTER, California
JOE SESTAK, Pennsylvania MIKE COFFMAN, Colorado
Andrew Hunter, Professional Staff Member
John Wason, Professional Staff Member
Alicia Haley, Staff Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2009
Page
Hearing:
Thursday, September 17, 2009, The Department of Defense and
Industry: Does DOD Effectively Manage Its Industrial Base and
Match Its Acquisition Strategies to the Marketplace?........... 1
Appendix:
Thursday, September 17, 2009..................................... 31
----------
THURSDAY, SEPTEMBER 17, 2009
THE DEPARTMENT OF DEFENSE AND INDUSTRY: DOES DOD EFFECTIVELY MANAGE ITS
INDUSTRIAL BASE AND MATCH ITS ACQUISITION STRATEGIES TO THE
MARKETPLACE?
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Andrews, Hon. Robert, a Representative from New Jersey, Chairman,
Panel on Defense Acquisition Reform............................ 1
Conaway, Hon. K. Michael, a Representative from Texas, Ranking
Member, Panel on Defense Acquisition Reform.................... 3
WITNESSES
Gutridge, Robin ``Pug,'' President, Cherokee Information
Services, Chairman, TechAmerica................................ 11
Madland, Dr. David, Director, American Worker Project, Center for
American Progress Action Fund.................................. 13
Soloway, Stan Z., President and CEO, Professional Services
Council........................................................ 5
Sylvester, Richard K., Vice President of Acquisition Policy,
Aerospace Industries Association............................... 9
APPENDIX
Prepared Statements:
Gutridge, Robin ``Pug''...................................... 68
Madland, Dr. David........................................... 75
Soloway, Stan Z.............................................. 35
Sylvester, Richard K......................................... 49
Documents Submitted for the Record:
KBR Statement................................................ 89
Witness Responses to Questions Asked During the Hearing:
Mr. Andrews.................................................. 97
Questions Submitted by Members Post Hearing:
[There were no Questions submitted post hearing.]
THE DEPARTMENT OF DEFENSE AND INDUSTRY: DOES DOD EFFECTIVELY MANAGE ITS
INDUSTRIAL BASE AND MATCH ITS ACQUISITION STRATEGIES TO THE
MARKETPLACE?
----------
House of Representatives,
Committee on Armed Services,
Panel on Defense Acquisition Reform,
Washington, DC, Thursday, September 17, 2009.
The panel met, pursuant to call, at 8:00 a.m., in room
2237, Rayburn House Office Building, Hon. Robert Andrews
(chairman of the panel) presiding.
OPENING STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM
NEW JERSEY, CHAIRMAN, PANEL ON DEFENSE ACQUISITION REFORM
Mr. Andrews. Good morning, ladies and gentlemen. The panel
will come to order.
We welcome our witnesses and members of the public to
another in our series of hearings.
I would like to welcome our colleagues back from what I am
sure was an eventful district work period in August. We are
happy to be rejoining our mission here.
We began the work of the panel with a series of
propositions that we wanted to pursue. The first of those
propositions was to explore whether there are measurements that
properly explore the difference between the cost that taxpayers
are paying and the value that we are receiving for goods and
services in the defense budget. We had a series of discussions
about how to measure that difference, if any.
We then proceeded to a series of hearings that raise
hypotheses about the reason for the gap between what we pay and
what we receive.
This morning's hearing is another in those series of
hypotheses. We have looked at a number of hypotheses before
this. For example, we have looked at the fact that the rapid
pace of development in the information technology field does
not fit the procurement systems of the Department of Defense
(DOD) at all, and, therefore, that misfit is leading to part of
the problem. We looked at a number of other issues, as well. We
looked at the development, or the lack thereof, of our
workforce in procurement and so forth.
This morning, we are exploring the hypothesis that problems
in the management of our industrial base lead to deficiencies
or lead to gaps between what the taxpayer pays and what value
those in uniform and the taxpayers receive.
Now, I will define the term ``industrial base'' to mean the
enterprises which supply goods and services to the Department
of Defense where the Department of Defense is a major customer,
if not an exclusive customer, of that enterprise. It is a
loosely defined term, but that is what we are going to mean
when we say ``industrial base.''
The problem raised in the industrial base is, frankly, the
opposite problem that we often grapple with in public policy
considerations here. Much of the health care discussion, for
example, is now centered around the issue of how do you deal
with a marketplace where there are many, many, many purchasers
but perhaps only one or two providers? It is a classic monopoly
or oligopoly situation.
The problem raised in the defense procurement field for
goods and services is the opposite. Perhaps it might be
described as a monopsony problem, which, as a non-economist, I
understand to mean a situation where there are a relatively
high number of providers but only one purchaser. And that is,
of course, the situation that we have here. By definition, a
member of the industrial base, a company or enterprise that is
in the defense industrial base is living in a world where his
or her only customer, or major customer, is the United States
Department of Defense.
Now, this raises a lot of problems. One problem is that if
we don't demonstrate some long-term commitment to a contract,
the enterprise in the industrial base doesn't have the security
and the cash flow to sustain its physical plant and its
workforce. If you are not sure from year to year whether you
are going to get the work, you can't maintain the industrial
base. On the other hand, if we do not induce the kind of
competition that we want so there are many potential sellers to
the monopsony buyer, you run into a situation where you lose
value, you lose efficiency, and perhaps you lose quality, as
well. So it is a classic problem.
I want to say from the outset, the premise of this hearing
is not that the Department of Defense has done a poor job
managing the defense industrial base. That is, in some ways,
the question, not the conclusion.
And I also want to recognize the fact that this is a very
difficult problem that is not easily managed. We don't want to
split the Defense Department into several units and so we have
many more buyers than one. That doesn't make any sense on a lot
of levels. It is a difficult problem.
And so the purpose of this morning's hearing is to hear
from some very experienced witnesses who know these issues to
discuss for us their views on how we might better manage the
defense industrial base, what the criteria for that better
management are, what kind of solutions that we have seen
employed in the past and what kind of problems that we have
seen raised in the past.
We are going to look at workforce quality issues and
workforce fairness issues. We are going to look at issues of
technology. We are going to look at a number of different
issues that fit this.
But suffice it to say, I am sure this will be an ongoing
problem, to find that proper balance between a predictable set
of expectations for enterprises in the marketplace but a
sufficient level of competition among those enterprises so that
the uniform personnel get the very best quality product and the
taxpayer gets the best deal. And that is the premise on which
we are approaching this morning.
At this point, I would like to turn to my friend and
colleague, the senior Republican member of the panel, Mr.
Conaway, for his remarks.
STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE FROM
TEXAS, RANKING MEMBER, PANEL ON DEFENSE ACQUISITION REFORM
Mr. Conaway. Well, thank you, Mr. Chairman. I appreciate
it.
Good morning, gentlemen. Thank you for being here this
morning. I appreciate that.
We had asked Kellog, Brown, and Root (KBR), another
provider, to actually come and testify this morning. They are
unable to be with us, so I would ask unanimous consent to
submit their written testimony for the record.
Mr. Andrews. Without objection.
[The information referred to can be found in the Appendix
on page 89.]
Mr. Conaway. As the chairman said, this is a very important
subject. One of the issues that concerns me is that the
Department seems to operate under the assumption that we will
always have an industrial base that can meet their changing
requirements. This is particularly an issue in a budget-
constrained environment.
And although Secretary Gates is quoted as saying that the
industrial base concerns played no role in his 2010 budget
decisions, the new Under Secretary of Defense for Acquisition,
Technology, and Logistics, Dr. Carter, has indicated that he
intends to elevate industrial base concerns within the
Department of Defense.
This is reassuring because there is no doubt that defense
strategy has a significant impact on the industrial base. It is
one of the reasons, I believe, that we need to carefully look
at the pending Quadrennial Defense Review to ensure we minimize
any potential consequences of undermining or impairing the
defense industrial base's ability to meet the future needs of
the Department.
I am puzzled on the word ``manage,'' Mr. Chairman, that you
had used, that it is actually the role of the Department of
Defense to manage the industrial base. I am going to chew on
that one. ``Manage'' typically means you have total control
over it and you are managing those resources. And I have to
think about that one.
My other concern, which the chairman has appropriately
highlighted in the past and this morning, is in regards to the
aging workforce, particularly in the field of engineering. We
have the most modernized industrial base in the world, but
without the properly trained workforce, we are not going to be
able to produce much.
I look forward to our witnesses' testimony, and I look
forward to our discussions on these issues.
Thank you, Mr. Chairman.
Mr. Andrews. I thank my friend.
And I appreciate his comment on the word ``manage.'' It
probably is an inartful word. The meaning I was wanting to
convey was to put in place a set of policies that achieve the
twin goals that I talked about, of stability for the
enterprises and quality and best value for the taxpayer. I
think your improvement is a correct one.
I do want to note that we are joined this morning by a
member of the full committee who is not a member of the panel
but, as all members of the full committee, is welcome to join
us. That is Congressman Patrick Murphy from Pennsylvania, who,
several months ago, suggested that the panel focus on issues of
the quality of the workforce and the fairness to the workforce,
which I think are intertwined, and we have some discussion on
that this morning.
So thank you, Patrick, for your participation.
I want to proceed by introducing our four witnesses.
I think you are all veterans of this process, but I would
remind you that your written statements, without objection, are
being made a part of the record of the hearing. We would ask
you to synopsize those written statements in about five
minutes. And we would ask you to stick to that five minutes so
we can then have questions-and-answer time with the panel,
which I think we find is the most productive part of the
hearing.
I am going to start with--I am going to read each of the
biographies. And when I have completed each of them, we will
start, Mr. Soloway, with your testimony.
Stan Z. Soloway is the president and Chief Executive
Officer (CEO) of the Professional Services Council (PSC), the
principal national trade association of the government
professional and technical services industry. PSC is widely
known for its leadership on the full range of government
acquisition, procurement, and outsourcing and privatization
issues.
Mr. Soloway assumed the presidency in January of 2001. PSC
has a membership of over 330 companies of all sizes performing
services of all kinds for virtually every agency of our
government.
In recognition of his leadership while he served in the
Department of Defense in his illustrious career, Mr. Soloway
was awarded both the Secretary of Defense Medal for Outstanding
Public Service and the Secretary of Defense Medal for
Distinguished Public Service while serving at the DOD.
Mr. Soloway earned his degree in political science from
Denison University, where he was elected to the national men's
journalism, national men's leadership, and national political
science honorary societies.
Welcome, Mr. Soloway. It is great to have you with us.
We are joined this morning by Richard K. Sylvester, who is
the vice president for acquisition policy of the Aerospace
Industries Association (AIA).
Mr. Sylvester joined the Aerospace Industries Association
in August of this year. He is heading AIA's Procurement and
Finance Division, responsible for directing the development and
coordination of the association's positions on proposed
procurement-related legislation, regulations and their
implementation.
Mr. Sylvester served in the Department of Defense in a
number of capacities for 35 years, prior to joining the AIA,
most recently as Deputy Director of the Acquisition Resources
and Analysis for Acquisition Management in the Office of the
Under Secretary of Defense for Acquisition.
You must have a very large business card.
Mr. Sylvester graduated from the University of Michigan--so
he must be happy with last weekend's football results--with a
Bachelor of Arts (BA) in political science and economics.
Welcome, Mr. Sylvester. We are glad that you are with us.
We have with us Mr. Robin ``Pug'' Gutridge. As president of
Cherokee Information Services, Mr. Gutridge oversees a highly
successful information technology and management services
company that supports the government and private sector.
Mr. Gutridge came to Cherokee in 1998 after a successful
career in the United States Coast Guard, where he graduated
from the U.S. Coast Guard Academy and served as a helicopter
pilot, engineer, and acquisition professional.
He is also active in various organizations such as the
United States Chamber of Commerce, TechAmerica, and the
Association for Corporate Growth. In these organizations he
serves on a number of committees, all related to improving the
manner in which business is conducted and services are
provided.
Mr. Gutridge, thank you and welcome.
And, finally, Dr. David Madland is the director of the
American Worker Project at the Center for American Progress. He
has written academic articles, books, op-eds, and commentaries
on a range of economic issues, primarily focused on retirement,
jobs, and public opinion.
He has a Doctor of Philosophy (Ph.D.) in government from
Georgetown University and received his Bachelor of Science (BS)
from the University of California at Berkeley.
Prior to joining American Progress, David helped lead a
range of advocacy campaigns as a consultant to labor unions and
environmental organizations. He worked for Congressman George
Miller, now chairman of the Committee on Education and Labor,
on which I serve.
And we are very happy to welcome David to be with us here
this morning.
So, gentlemen, we are going to ask if you would begin your
testimony. As I said, your written statements have been
accepted as part of the record.
Mr. Soloway, we will begin with you.
STATEMENT OF STAN Z. SOLOWAY, PRESIDENT AND CEO, PROFESSIONAL
SERVICES COUNCIL
Mr. Soloway. Thank you, Mr. Chairman, members of the panel.
It is really an honor to be here. And I do want to say that the
focus of this hearing and the topic you have chosen is a very
important one. I think you have captured--both you and Mr.
Conaway--captured very well the importance of the discussion
that has to take place.
Let me start by suggesting that we don't have an industrial
base; we have multiple industrial bases. And even represented
at this table you have two separate bases. Where I am going to
focus my conversation, you have the industrial base that is
primarily responsible for the manufacture and development of
major weapons systems on the hardware side, and then there is a
services industry, a professional services, technology services
industry. And while they are very much integrated in many ways,
they also are very separate and have very different dynamics.
And I will address some of that in my testimony, and a little
bit more detail, of course, is contained in my written
statement.
In fact, the Defense Department has for a long time focused
on impacts on the defense industrial base of many of its
actions. There is an Office of Industrial Affairs that is
primarily set up to do that in the Defense Department.
At the same time, the Department spent over $180 billion
last year on services, 40 percent or more of its total contract
spending, yet it has invested relatively little time in really
understanding and developing a keen awareness of the dynamics
and structure of the services industrial base on which it so
significantly relies.
In other words, even as we have been trying, appropriately
so, to build better oversight of services contracts and
services contracting in the Department, our insight into the
supplier base that are performing on those contracts at the
Department level remains limited.
With regard to the base itself, the services industrial
base, in 2006, the Center for Strategic and International
Studies (CSIS), with the strong support of PSC, undertook the
first-ever analysis of the federal professional services
industry. This had actually never been done before. The CSIS
study is available on our website. I believe we have some
copies here with us today. But there are several key insights
that they found that I want to share.
Number one, the services sector is incredibly diverse, both
in terms of size and in terms of capability.
Second, more than 70 percent of the contracts in the
services sector in the Federal Government are competitively
awarded; that is, competitive to the extent that there are at
least two, if not more, bidders on each of those procurements.
Third, the growing use of large multiple award contracts,
under which companies must compete to get on the contracts and
then compete again to get task orders under which the actual
work is performed, has driven up transaction costs for
everybody in the marketplace, with a particular impact on small
and mid-tier firms for whom those costs are particularly
precious.
And, finally, for a variety of reasons, there has been real
pressure placed on the mid-tier of the marketplace. If you have
a natural market cycle of small, mid-tier, and large, the mid-
tier of the services market is under pressure. In some
segments, particularly IT services, the market share reductions
have been as much as 40 percent.
The Defense Department did utilize the CSIS study to do
some internal analysis of its own share of the professional
services market, but, to date, not much has been done with
those analyses. Yet the Department and, to some extent,
Congress continues to promulgate new policies, regulations, and
laws that will impact that industrial base, absent that
detailed understanding of those impacts. And we believe that
ought to come--the cart before the horse.
On the policy side and actions taking place within the
Defense Department, there are really three things that I want
to very briefly touch on.
Number one, small and mid-tier business. The government has
a presumption in all government procurement that says you are
either small or other than small. That is the only distinction
drawn in federal procurement as to the size of companies. Yet,
as the CSIS study told us, as Mr. Gutridge's company is a good
example of, there are multiple tiers within the services sector
in each size category. So just this binary view immediately
starts you from a presumption that does not reflect the reality
of the market.
Second, some people, increasing numbers of people in small
businesses, particularly entrepreneurial technology-based
companies, mid-tier companies, are beginning to question the
premise of our small-business programs. Not that they disagree
with them, but what is the goal? Is it to create small
businesses? Or is it to create sustainable small businesses
that have the ability to grow to the extent of their
capabilities and ambitions?
That actually may sound like a fine distinctions, but it is
a very critical distinction, because our focus has been on the
former, which is to create businesses, and less on the latter,
what are we doing to foster growth and development beyond the
size standards as they exist.
Mr. Chairman, you mentioned the workforce issues as a very
critical element of understanding the dynamics of the industry.
Because the fact is that industrial-based issues principally
revolve around as, in any business relationship, risk and risk
management. What are the risks? What are the predictable
elements? What are the nonpredictable elements? And how do I
manage those? And, as a customer, you have to understand how
your supplier base defines, manages, and identifies risk. That
is not a core component of the acquisition training in the
Defense Department today for people doing services acquisition,
and we think it should be a core component of that training.
Finally, there is a number of specific policy initiatives
under way today that bear some discussion. And in my written
statement I mention three: in-sourcing, organizational
conflicts of interest, and fixed-price contracting--three very
disparate kinds of policy issues in how we think they actually
have an industrial base effect. In the interest of time, what I
would like to do is just touch on one, and that is the in-
sourcing question.
In-sourcing is very much an issue of industrial base
concern. And, Mr. Chairman, I think you captured it very well
in your opening statement when you talked about predictability
in competition. We have a marketplace in services that is
highly competitive. But in-sourcing, if it is done wrong,
completely destroys that competitive base because we are no
longer competing; the government is acting in a monopoly
manner, just taking work. And, second, it destroys the
predictability in the marketplace. It creates risk, it creates
uncertainty. It breaks down partnership trust and
relationships. So it is an industrial base issue.
The Secretary has set a goal, the Secretary of Defense, of
realigning and rebuilding critical skills in the Defense
Department. That is one stream of in-sourcing we have heard a
lot about. We are very supportive of that initiative. While we
may disagree on the specific elements of how it is done, it is
an initiative that is important. We all recognize that there
has been a falloff in skill sets, particularly in acquisition.
So we do not object conceptually and, in fact, would support
strategic looks at how we can rebuild that workforce.
But the other in-sourcing that has taken place in the
Department, or beginning to emerge in the Department, some of
it driven by legislation which instructed the Department to
consider in-sourcing a variety of functions--not a mandate, but
to consider--and then budget bogies that have been given to the
military services are driving an entirely less strategic and, I
think, less beneficial behavior.
For example, on the legislative side, Office of Management
& Budget (OMB) has put out a memo on July 29th directing how to
implement congressional direction and does a very good job of
defining the term ``consider.'' Makes it clear this is a
source-neutral decision, that this should part of your
thinking, should we perform the work in-house or should we
perform it by contract, and then lays out a number of decision
levels that you have to go through to make that decision.
That discipline, at this point, does not appear to be
taking place within the Department. I am not blaming this on
the secretariat, because they have been primarily focused on
the workforce rebuilding part, which is a whole different
decision. That is a strategic human capital initiative.
But as you have this in-sourcing taking place in the field,
where people perceive it either to be a mandate or not doing
full-cost analysis where they really look at what is the
cradle-to-grave cost to the government. Across the board, not
just your own personnel line or your own benefits line, but
what are the infrastructure costs that somebody else is
absorbing? Who is paying for the lifetime health care? Who is
paying for workforce development? How do I know I am getting
the right skill at the right place? It might be slightly less
expensive, but maybe I need actually a higher level of skill,
for which the marketplace has determined there is a higher
value to that skill and so forth. Those analyses, to the best
of our knowledge, have not been done.
In fact, what is happening in many services is they have
declared outright that for every position that the service in-
sources, the service is taking a 30 to 40 percent savings per
position. And our question is, based on what? If I have a
contract--and Mr. Gutridge could speak to this much better than
I since he has this situation--if I have a contract and I have
75 people performing on that contract, and you look at that
cost and then say, ``Well, by person by person, here is what I
think I could save by in-sourcing it,'' I have immediately
walked away from the fundamental premise of business, which is
competition. What if I said to the marketplace, ``I need to
reduce my costs here. What is the marketplace adjustment going
to be?'' I could maybe do it--my person by person costs might
be higher, but I might be doing it with fewer people, with
better technology, more agility, on a performance basis where I
can actually move people around.
So there are all of these factors that go into a good
business decision that have huge impacts on the industrial
base's ability to do business with the Defense Department which
we are concerned the current in-sourcing trend is stepping away
from. And there are fundamental premises that I think we ought
to focus our attention on.
Final point--I apologize--one last point on the in-sourcing
is there is great concern amongst many companies about the
degree to which the government is today overtly targeting and
soliciting contractor employees.
And let me be very clear: There are a lot of people in
government who have suggested for years that contractors hire
government employees and simply bill them back to the
government, sometimes at higher rates. I am not sure the extent
to which that actually happens, but I can tell you from an
organizational perspective, all 350 member companies, we would
agree that that is inappropriate in that case, and it is
inappropriate when you do it with our folks.
Where there is a direct business relationship, where you
have me under contract or I have you under contract, we should
not be soliciting each other's employees. In the private
sector, that is anathema. There are nonsolicitation,
nonpoaching clauses routinely across private-sector
relationships to protect the integrity of the relationship.
But, nonetheless, what we see is a very aggressive effort
on the part of the government to do just that. And we find that
both high-cost to companies, unfair interference with employee-
employer relationships. And, frankly, it raises real questions
about the merit system's hiring process and whether they are
actually circumventing established rules which this full
committee has made clear to the Department they expect them to
follow.
So I think that is another stream here that is important to
address and does have impacts on companies like Mr. Gutridge's,
bigger companies, and even smaller companies.
So, Mr. Chairman, thank you again very much for the
opportunity. And I look forward to the questions when we get
finished.
[The prepared statement of Mr. Soloway can be found in the
Appendix on page 35.]
Mr. Andrews. Thank you, Mr. Soloway.
Mr. Sylvester, welcome to the committee.
STATEMENT OF RICHARD K. SYLVESTER, VICE PRESIDENT OF
ACQUISITION POLICY, AEROSPACE INDUSTRIES ASSOCIATION
Mr. Sylvester. Thank you very much. Chairman Andrews,
Congressman Conaway, members of the panel, on behalf of
Aerospace Industries Association, our 300 manufacturers and
suppliers of defense aerospace equipment and supplies and our
over 800,000 workers, I appreciate the opportunity to come
before you today and talk to you about some issues that we
think are very significant.
My written statement contains a lot of information about
some of the things we are considering. I just want to make a
few key points this morning.
AIA is supportive of major acquisition reform initiatives
that advance the stability of programs and requirements, expand
workforce skills and experience, and provide better contract
incentives to reward good performance, enable firms to attract
capital and earn fair returns on contracts.
By institutionalizing such changes and obtaining more
affordable and predictable acquisition outcomes, the
acquisition system will become more transparent, predictable,
and cost-effective. To that end, the recently passed ``Weapons
Systems Acquisition Reform Act,'' which your panel was part of
creating, was a step in the right direction.
AIA also believes that a dedicated effort should be made to
encourage more, not less, dialogue between DOD, industry, and
Congress on acquisition industrial base matters.
Furthermore, the government should resist the creation of
new barriers to the employment of qualified acquisition
personnel, many of whom come from industry and understand the
many challenges and opportunities to implement improved
acquisition procedures. Flexible rules that preserve program
integrity, while allowing for the recruitment and retention of
a well-trained and experienced acquisition workforce, should be
our common goal.
Although there are multiple areas in which defense
acquisition could be improved in coming years, AIA recommends
that the government focus primarily on three overarching goals.
The first goal is to promote stability and fairness in
contracting and financial policies. In order to maintain a
competitive industrial base that effectively supports the
warfighter and the Nation, AIA urges the government to promote
contracting and financial policies that offer the opportunity
for reasonable returns and cash flow in the industry's
performance of government contracts.
Such reform should be based on good performance.
Contracting and financial policies that offer the opportunities
for reasonable returns for good performance would: one, make
companies more likely to invest in independent research and
development and make capital expenditures; two, provide for
reasonable base fees and hire available award and incentive
fees, giving industry a reasonable chance of earning a fair
return; and, three, prohibit fixed-price options before design
reaches an acceptable level of maturity and stability.
The second goal is to reform the major elements of the
defense acquisition system. Government and industry agree,
there is a major disconnect in the defense acquisition process
between requirements, programs, and budgets. This critical
element of the defense acquisition process must be repaired.
Former Under Secretary of Defense for Acquisition,
Technology and Logistics John Young reviewed major defense
acquisition programs and identified three key contributors to
the problem: inaccurate cost estimates at the beginning of the
program; requirement instability during the development of the
program; and budget instability through the development and
acquisition process.
These three areas must be effectively addressed to further
restore confidence in DOD's acquisition system. Again, the
recently passed ``Weapons System Acquisition Reform Act''
addressed stability for budgets, cost realism, and requirement
stability, but there is more work that needs to be done there.
The third and final goal is to promote the competitiveness
and efficiency of the aerospace and defense industry. The
defense business is increasingly taking on a global character.
Competitiveness and efficiency should be promoted within this
market by ensuring access to the best sources in the global
supplier base. We are the best at what we do, and we do not
fear competition with other nations. This is demonstrated by
the $60 billion trade surplus which our industry enjoys, a
trade surplus surpassing any other manufacturing industry.
Government policies designed to correct perceived deficiencies
in the contracting process or protect specific U.S. sources
could undermine that competitiveness and diminish our
industrial base.
AIA is also concerned with recently enacted tax provisions,
such as the 3 percent tax withholding on every government
payment to contractors, which the DOD itself estimates would
cost the American taxpayer $17 billion over 5 years.
Other items that hinder efficiency and effectiveness in
competition include barriers to the commercial marketplace such
as demands for detailed cost data from commercial item
suppliers and expert controller regime that punishes our allies
and drives technology development overseas.
The requirements for our national security have not
changed. The threats from many sources remain, along with the
need to modernize, recapitalize, and reset our equipment. In
order to maintain a competitive industrial base that
effectively supports the warfighter and the Nation, the
government must promote balanced, stable, and fair contracting
and financial policies that offer the opportunity for
reasonable returns and cash flow in the industry's performance
of government contracts.
Industry acknowledges that such reforms should be based on
good performance. In today's resource-strapped environment,
industry takes its role to be a responsible acquisition partner
seriously.
Thank you, and I would be happy to answer your questions.
[The prepared statement of Mr. Sylvester can be found in
the Appendix on page 49.]
Mr. Andrews. Mr. Sylvester, thank you very much.
Mr. Gutridge, welcome this morning.
STATEMENT OF ROBIN ``PUG'' GUTRIDGE, PRESIDENT, CHEROKEE
INFORMATION SERVICES, CHAIRMAN, TECHAMERICA
Mr. Gutridge. Thank you, Mr. Chairman.
Good morning, Chairman Andrews and Ranking Member Conaway,
members of the panel. I am honored to be here today
representing TechAmerica and provide you with our thoughts on a
little bit more focused area, and that is on the acquisition of
technology at the Department of Defense.
The most important point I want to make to you today is
that the Department of Defense and the rest of the U.S.
Government, for that matter, seems to have moved away from the
tenets Congress adopted in the last 10 to 15 years: to make
acquisition of commercial and cost items easier and more
affordable.
Now, agencies are moving towards an environment that
requires government-unique items in both the requirements
placed on the products and services being acquired and in the
terms and conditions under which the acquisitions can occur.
We believe, if we continue down this path, the government
will find it increasingly difficult to attract and retain
commercial IT and technology providers and, subsequently, to
unearth and utilize the kinds of innovation we see in the
commercial market today.
One of the main reasons for this is because the DOD role in
the global Information Technology (IT) marketplace is
diminishing, which leads to decreased competition. Currently,
it accounts for less than one-tenth of 1 percent. So
incorporating the government-unique requirements I mentioned
previously will only make it more difficult for a company to
enter the DOD or government market to support and sustain a
presence.
Another reason is because DOD acquisition of technology
takes a significantly longer time period than the commercial
product lifecycle and is vastly different from the commercial
buying process. Because technology refreshes at a minimum of
every 18 to 24 months, a commercial acquisition best practice
is to identify the products and/or services by them and deploy
them in less than 24 months. The time frame is feasible because
market research, due diligence, and presolicitation processes
are much more open to dialogue and establishing trusted
relationships than in the federal acquisition process.
The current buying practices of the Department also
disguise its presence in the commercial marketplace. Although
DOD spends a considerable amount of its budget on IT, the
average contract action size is reduced from nearly $2.5
million in 2000 to $204,000 in 2007. So this fragmented buying
practice, coupled with the increased risk for commercial
companies and the rising cost of winning and sustaining
contracts, has diminished the attractiveness of the DOD market
space.
We also have significant concerns that the erosion of the
acquisition workforce is making the DOD less able to keep pace
and deploy innovative solutions. We have seen an increasing
ratio of contract transaction numbers and size to the number of
employees. But, as Stan pointed out, the CSIS study talks about
that. And we see a significant increase, almost a trebling, in
the number of transactions per the number of employees.
But we have also seen a significant decline in the numbers
of that workforce who had the adequate skills to understand
complex information systems. Attracting the best and brightest
workforce is crucial to the development of adequate
requirements, which leads to the creation of effective systems
and enterprise-wide solutions.
The last point I wanted to note is the increasingly risk-
adverse environment under which we are currently operating,
which only leads to decisions based largely on avoiding risk.
Instead, we believe that the acquisition practices should be
aligned to reward actions to acquire IT services or products in
a timely, cost-effective matter. We must find a way back to a
more open environment that creates incentives and rewards for
the acquisition workforce and the contracting community to
produce outcomes based upon best value for the warfighter and
the taxpayer.
Thank you again for the opportunity to provide our
perspective, and I look forward to answering any questions.
[The prepared statement of Mr. Gutridge can be found in the
Appendix on page 68.]
Mr. Andrews. Mr. Gutridge, thank you. And thank you for
your service to our country.
Dr. Madland, welcome.
STATEMENT OF DR. DAVID MADLAND, DIRECTOR, AMERICAN WORKER
PROJECT, CENTER FOR AMERICAN PROGRESS ACTION FUND
Dr. Madland. Chairman Andrews, Ranking Member Conaway,
thank you very much for having me. I am David Madland, Director
of the American Worker Project at the Center for American
Progress Action Fund. I am pleased to be a part of this panel
and applaud your ongoing efforts to ensure that taxpayers
receive good value for their federal contracting money.
While the center has advocated a range of reforms to
achieve these goals, including increased competition,
strengthening the acquisition workforce, and preventing the
contracting out of essential government functions----
Mr. Andrews. Mr. Madland, I am sorry. I think your
microphone may not be on.
Dr. Madland. The light----
Mr. Andrews. Okay. I wonder what procurement process we
used to buy the microphone. Okay. I just want to be sure the
members and the audience can hear you.
Dr. Madland. All right. We are back.
I want to focus on a less well-known but equally critical
issue: the pay, benefits, and working conditions of the low-
wage contracted workforce.
In my testimony, I want to make three main points. First,
many federally contracted workers have low-quality jobs. The
workers I am talking about sew military uniforms, rebuild Army
bases, provide security for secure facilities. And, second,
while poor treatment of workers is an important problem in its
own right, much more to the point of this panel: limited
benefits, low pay, poor working conditions can impose costs on
the government and taxpayers and make it hard for high-road
companies to compete. Third, promoting higher labor standards
can be part of a strategy for ensuring better value in
contracting. Let me elaborate on each of those points.
First, the scope of the problem. I want to emphasize that
the data are rough because the Federal Government doesn't keep
or make publicly available quality data, but all the evidence
points in the same direction. For example, estimates from the
Economic Policy Institute indicate that about 20 percent of all
federally contracted workers earn poverty-level wages. This
means one out of five workers on a Federal contract do not earn
enough to keep a family of four out of poverty. And low wages
and inadequate benefits are much more common in some contracted
industries, according to Paul Light, a professor at New York
University (NYU).
Not only is pay quite low for many contracted workers, but
working conditions are often of low quality, with contracting
companies frequently violating labor laws.
Second, these kind of working conditions can cause
taxpayers to receive less than full value. When workers are
poorly compensated on the front end, taxpayers often bear
additional costs on the back end, such as for Medicaid, Earned-
Income Tax Credit, and food stamps. Furthermore, research finds
that when contractors cut corners to their workers, they often
cut corners in the final products they deliver to taxpayers,
which imposes additional costs.
Third, promoting good workplace practices can be a good
value for taxpayers. Not only can they reduce these
unintentional subsidies, but it can also promote increased
competition and reduce the likelihood that companies will
operate in a wasteful fashion.
Let me just give you one example. The State of Maryland
implemented a living-wage standard recently, and the
Legislative Analyst's Office did this study. And they found
that the average number of bids for contracts in the State
increased nearly 30 percent, from 3.7 to 4.7 bidders per
contract.
They went out and surveyed the companies. Nearly half of
contracting companies interviewed by the State said that the
new labor standards encouraged them to bid because it leveled
the playing field. Several of the companies commented that in
the future they will only bid on these kinds of contracts with
the higher standards. And one contractor noted that her current
contract was the first that she had ever bid on with the State
because she explained that, without strong labor standards,
quote, ``The bids are a race to the bottom. That is not the
relationship we want to have with our employees.''
Now, over the past decade, state and local governments have
been leading the way to promote higher standards for the
treatment of contracted workers, as an excellent report by the
National Employment Law Project makes clear. To build on these
models and improve the treatment of the contracted workforce
and promote better value for the taxpayers, there are many
steps Congress can take, but I want to just highlight two of
the most important.
First, to limit the number of contracts that are awarded to
low-road companies, the Federal Government should ensure that
it only does business with responsible companies by doing a
better job of screening companies based on their overall
regulatory record, including their compliance with labor laws.
And, second, the contracting process should promote higher
labor standards by evaluating proposals based in part on the
quality of jobs they provide for workers.
These kind of reforms would be the right thing to do for
workers, but they will also improve accountability and increase
transparency, while limiting wasteful contracting and helping
ensure good value for taxpayers.
I want to thank the panel for its time and consideration
and express my willingness to work with you on these reforms.
[The prepared statement of Dr. Madland can be found in the
Appendix on page 75.]
Mr. Andrews. Dr. Madland, thank you very much.
I would like to thank all the witnesses. And we will begin
with the question time.
Mr. Soloway, you made reference to the additional costs
that we incur with multiple award task order contracts. And,
certainly, the more transactions that have to take place in the
procurement process, the greater cost that is added.
What about the benefits of it, though? Isn't it accurate
that, if companies not only have to compete for the right to
provide the services but the actual provision of the services
from time to time, that that adds more value than it subtracts?
Mr. Soloway. It is certainly correct that it can. And I
didn't mean to suggest that multiple award vehicles are the
wrong kind of vehicle. I think maybe if I were to recast my
comment, it would be: For many years, we have been moving in
this direction of getting a group of companies to compete to
get on the contract, and then as each requirement comes up they
compete again. And it has been generally accepted as a good,
competitive model and enables the government to buy more
incrementally rather than always buying one large package at
the same time. So it has had some great benefit.
What has happened in recent years, at least amongst our
membership which includes a lot of IT and IT services firms and
others, is the dramatic growth in these vehicles and some real
questions of how much redundancy we are going to have in this
system. How many times do I have to compete to offer the same
capability to the government, 30 times, 40 times? Each agency
wants its own contracts to do everything.
And so it is an additive issue, not the fact of the
multiple award vehicles, if that makes sense. It is that the
number of them has grown so greatly, it has now created some
real cost and price pressures on everybody and questions of
diminishing returns, I think, as well.
Mr. Andrews. So perhaps a procurement regime where there is
more jointness, where each agency does one set of procurement
actions rather than multiple, would solve the problem.
Mr. Soloway. Well, that might help. I think more, kind of,
the shared services approach that started a few years ago has
some benefit.
But we also have to be very careful, because the other
impact of multiple award contracts, which is really a
management issue for the Department--I am not sure that we in
the industry have all the answers, or the Congress or what have
you--is that, very often, these large contracts have 15 or 20
different capabilities you have to demonstrate to get on the
master contract.
Well, for small and mid-tier firms, many of them have four
or five terrific capabilities, but they don't have 15 or 17, so
they might not even qualify to get on the initial vehicle. So
balancing that out becomes a real issue.
Mr. Andrews. I see. Thank you.
Mr. Sylvester, you testified a concern about--which I think
it is self-evident--of having a reasonable rate of return for
companies so they can attract capital in fixing the price of
these contracts.
Is there any evidence that companies in the defense
manufacturing field are having trouble raising capital?
Mr. Sylvester. There are a number of cases that we have
seen that have come out of DOD that have decreased payments of
fees and where work needs to be done or certain things need to
be done after the actual manufacturing work has been done. So
that becomes a cash-flow problem for us, which reduces our
rates of return. And that becomes an issue as you look at the
capital markets.
Mr. Andrews. I certainly understand that an unexpected
cash-flow problem makes a company less profitable, which
therefore makes it less attractive. But are there generic
trends in the equity markets or the bond markets that say it is
harder for these firms to attract capital?
Mr. Sylvester. I don't believe that that is the case,
although the rates of return that we are seeing, as you look
over the time frame, you will see that there are smaller rates
of return on a lot of these companies.
Mr. Andrews. Do you know off the top of your head--I
wouldn't expect you to, but if you could supplement the record,
I would appreciate it--how many of your members are closely
held and how many are publicly traded? Do you know?
Mr. Sylvester. I don't know, but I can give you that
figure.
[The information referred to can be found in the Appendix
on page 97.]
Mr. Andrews. Is it mostly publicly traded?
Mr. Sylvester. A lot of the larger companies are certainly
publicly traded.
Mr. Andrews. Okay. If you could just supplement the record,
I would like to know.
Mr. Gutridge, I think you made a compelling case about how
a very tiny portion of the global market becomes the tail
wagging the dog, right? So that if most of the marketplace you
are working is not DOD procurement but you have a set of what I
think you called government-specific requirements, that makes
it unattractive to bid on those jobs.
What are some of the government-specific requirements you
are talking about that you think make the bid unattractive?
Mr. Gutridge. I think two right now are causing a lot of
uneasiness. One is certainly the security requirements. And,
again, we believe that there needs to be particular attention
paid to the overall security issue. But, again, making that----
Mr. Andrews. Do you mean background checks on employees, or
do you mean security where the product is handled?
Mr. Gutridge. Security of the product itself. So a piece of
technology has a certain capability or it doesn't have a
certain feature. So that is one particular area.
Mr. Andrews. Don't you think that is kind of inevitable,
though, I mean, given the nature of the work that we are doing
here?
Mr. Gutridge. Well, we think it is. And, again, we think,
in many cases, that is kind of application-specific, if you
will. And we would encourage that, that those types of measures
continue in that area.
The second area has to do with the origin of the particular
technology, kind of gets wrapped into the Buy America Act. And,
again, it kind of is subtly introduced into the whole notion of
security--malicious code, backdoors, those types of things
being written into the software.
So, again, for large global companies that basically see
this as a huge cost driver, they see this, again, as an
increased cost into a marketplace that has more and more
uncertainty and appears to be a lower, lower portion of their
potential revenues going forward.
Mr. Andrews. I understand.
Dr. Madland, I will conclude with you. If we were to be
more aggressive in debarment of contractors that were violating
labor laws and other type regulations, where should the
standard be set for a violation that results in debarment? You
know, putting it in layperson's term, you don't put a person in
prison for jaywalking, but you do put someone in prison for
rape or murder. Where is the line between jaywalking and rape
or murder?
Let me just play devil's advocate. It is fairly easy to
have an Occupational Safety & Health Administration (OSHA)
violation if you put the wrong form on a bulletin board. I
think most of us would agree that there is no way that should
disqualify a company from consideration. However, if you have
had several fatalities because of careless or reckless
practices, that is debarment.
Where should the line be drawn?
Dr. Madland. I think you are asking a very good question,
but, first, let me be clear: I am not advocating for a
different kind of debarment process. Certainly, what I am
advocating for are two things.
First is a better screening process. This is for
responsible contractors; the law is that we are supposed to
only do business with responsible contractors and supposed to
look at their track record. Labor law is usually not--it could
be part of that evaluation process, but it is usually not. The
database that is going to go online is a big part of that. And
that is something that contractors will look through and
evaluate.
There is clearly no black-line standard you can make
because, also, for different kinds of contracts, it is going to
be different. You know, for example, if you are having security
guards guarding a kind of facility, if they are repeatedly
hiring people with criminal records or something like that,
that is going to be a more significant kind of problem than if
they had one OSHA violation.
Mr. Andrews. So you are saying you think the standard is
clear, but we are not doing a very good job evaluating?
Dr. Madland. No, the standard is actually not clear. The
contracting officers could definitely benefit with increased
clarity. And they could also benefit with better tools with
which to make the determination.
So, for example, the database that is going to go online
will not capture most labor law violations, for many reasons,
but the two most important are that the fines for most labor
laws, like the violation of minimum wage or the right to
organize, are not fines that are high enough to reach the
threshold of the database. They are also often settled without
a finding a fault, and finding a fault is necessary to be part
of the database.
And then the second thing, to be clear, that I am
advocating for is, once a company is bidding for--so they have
been found responsible, they are bidding on a contract, I think
we should evaluate the wages and benefits they pay their
contracted workers. And, again, that is on a sliding scale, not
a black line.
Mr. Andrews. Okay. Thank you.
I am going to turn to Mr. Conaway for his questions.
Mr. Soloway. Mr. Chairman, is it appropriate to make a
comment?
Mr. Andrews. Briefly, if you would. I want to make sure we
get to the other members.
Mr. Soloway. Thank you. I just want to make two quick
comments because I think the issue here is really a very
complex one.
You touched on one critical issue, which is how do you make
the judgment of where the line is. And we are going to have a
database online at some point that is supposed to have a
company's entire record of behavior with regard to Federal law.
And contracting officers are going to be asked to make
decisions that are exactly the kind of decisions--are you
responsible--if you have had nine labor law violations in a
company with 40,000 employees over 4 years versus a company
that had a tax violation 3 years ago and so forth. So the line
is a very critical one.
But the point that was missed here and I think is really
important is that--I mentioned earlier separating out the
different elements of the industry. In construction and in
services, there are prevailing wage laws that govern the wages,
set by the Department of Labor, that tell contractors what they
must pay and what their health and welfare benefits must be.
And the penalties for violating the law are actually fairly
significant.
The second thing is, both are so complicated. Both the
Department of Labor and industry will tell you they are
incredibly complicated. We put hundreds of people a year
through training programs that we run to help them comply with
the Service Contract Act, that violations of the act are most
often completely unintentional, yet they go into the record as
a violation.
So I think Dr. Madland's overarching point of responsible
contractors paying good wages and good benefits is the absolute
right one, but I don't think we can have that discussion
without looking at the underpinnings of current law that guide
that, with regard particularly with services and construction.
Mr. Andrews. Understood. Thank you.
Mr. Conaway.
Mr. Conaway. Thank you.
Let's look at the defense acquisition system itself. Can
you look at it from two perspectives? What are the top three
problems with the system? And then what are the top three
problems the system causes those of you that are trying to deal
with the Federal Government? And it may be the same question,
but just take a shot at it. What are the top three things you
would fix?
Mr. Soloway. I think--and I suspect I am speaking for all
our colleagues here--that number one is the workforce issue.
There is no question that the Defense Department has
experienced substantial workforce atrophy over the last decade
and a half.
I had some responsibility for the acquisition workforce
when I was in the Pentagon. I worked with Rick on the issues
for many years. The workforce----
Mr. Conaway. Is that because of that system, though, or is
that just----
Mr. Soloway. I am sorry?
Mr. Conaway. The workforce atrophy, has that been caused by
the system? Or is that just the fact that the baby-boomer bulge
that came through the entire defense industrial complex is
now----
Mr. Soloway. I think part of it is the demography, just
what you said. But I think the other issue is that, as the
Department of Defense was downsizing in the early to mid-
1990s--we had a 38 percent reduction in workforce across the
Department of Defense, and the acquisition workforce took a
substantial reduction as well. What was not foreseen, and those
of us who were there and those who have been there since did
not adequately address, was the fact that the mission was
actually still growing even though we were reducing the number
of bases and so forth. So there was not an alignment of
resources, skills, and capabilities to the mission. It was a
kind of an across-the-board reduction.
The second thing is--and Mr. Gutridge touched on this--the
workforce has never been invested in adequately, both from an
acquisition perspective in acquisition skills, particularly in
services, I would argue, in our field, but also in terms of
technology. So how do I implement and integrate cutting-edge
technologies into a Defense Department requirement? And that
requires me to get other outside help to help me figure that
out, because I don't have the capabilities internally.
So some of it was system, and some of it was other factors.
Mr. Conaway. All right.
Comments from the other witnesses?
Mr. Sylvester. I have a couple of comments.
On the issue of workforce, one of the problems that DOD has
had over time is a continuing education process. Everyone that
is in the acquisition workforce has to be certified up to a
particular level that is identified with their position.
There aren't really capabilities within the Department to
have continuing education as that process changes. So as we go
to things like more use of commercial products or we go to
things like changes in the way we manage services, there isn't
a push to get people who have already been certified back in to
be retrained and reeducated in those areas. And that causes
some problems in the system.
The other thing I would make a comment on is the whole
factor of stability. I mentioned that in my statement. One of
the problems the Department has continuously is, requirements
change through the life of the contract, which causes rework
and causes people to have to go back and redesign things as new
requirements pop up.
Now, some of that makes sense. As you learn new things, you
have to do some of that. But some of it is just a factor of, we
want something different now. Couple that with instability in
the program budgeting process and the funding process and the
yearly look at all of the programs and changing dollars, which
causes a tremendous impact on costs and variability.
Mr. Conaway. All right.
Mr. Gutridge.
Mr. Gutridge. From my opening remarks, I made a couple of
points. I just want to elaborate on it.
Number one is the issue of transparency in that early
dialogue prior to the presolicitation. Again, that is an area
that I think we can really make some tremendous strides in.
That will help us to better understand what our customer
requirements are.
But the other one, I think the Defense Science Board report
hit it pretty well, especially in the area of IT. It is just a
long, cumbersome, difficult, challenging, complex process to
buy big stuff. And so if there were some ways, especially from
an IT and services perspective, to start to look at how do you
do that a little differently, maybe do it more in an
evolutionary approach, there might be some benefit, in terms of
reducing risk as well as speeding up the process.
Mr. Conaway. Okay.
Anything, Dr. Madland.
Dr. Madland. I think to the chairman I responded with the
two main things.
Mr. Conaway. All right. I thank the witness, and I yield
back.
Mr. Andrews. Thank you, Mr. Conaway.
The Chair recognizes Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
In view of the shortness of time, I would like to yield my
time to Mr. Murphy.
Mr. Andrews. Mr. Murphy is recognized.
Mr. Murphy. Thanks, Mr. Chairman.
Thank you, Mr. Cooper.
I want to first thank the panel of guests today but also to
Congressman Andrews and the entire Defense Acquisition Reform
Panel for holding this incredibly important hearing to shed
light on the problems with our government procurement process.
Congressman Andrews and this team have been tenacious in
working to improve our acquisition system so that it provides
the best for our men and women in uniform. And I truly thank
all of you for that.
My question is, every year, billions of federal dollars go
to companies with a history of labor and workplace safety
violations. Aside from the major concern about the mistreatment
of employees, it seems to me that some companies are double-
dipping the taxpayer: first, obviously, the cost of the
contract; but, second, for the cost of the benefits that their
poorly compensated workers qualify for, such as Medicaid and
food stamps. And, Dr. Madland, I wrote ``one in five,''
according to your testimony today.
Last year, for an example, Alle Processing Corporation's
employees claimed that the company used intimidation tactics,
including bribery and threats of deportation, during a union
organizing campaign. The company was even photographed with a
banner that read, ``Obama says unions are a bad deal for
workers today. Save your job and vote `no union.' '' According
to news accounts, workers at Alle, quote, ``were paid only
minimum wage, and none were given paid vacation, sick leave, or
health care,'' end quote. In the first couple of months of
2009, Alle has already received over $350,000 in federal
contracts.
In 2002, Tyson Foods were fined the maximum criminal
penalty on top of a fine from OSHA after a worker was poisoned
by exposure to hydrogen sulfate gas, a toxic byproduct of their
facility, and yet nothing was done. The company failed to take
sufficient steps to implement controls and protective equipment
to reduce exposure to this gas, and their negligence led to
tragedy. Just 1 year after that 2002 incident, the same, exact
thing happened. A worker was exposed to this toxic gas, except
this time the man died. His name was Jason Kelly. Again, Tyson
Foods, they paid a fine. And despite this record, they received
$1.3 billion in Department of Defense-related contracts since
the 2002 tragedy.
So my question to the panel and, first, to Dr. Madland, can
you quantify the cost to taxpayers of awarding contracts to
contractors like these who poorly compensate and poorly treat
their employees? And how are factors such as pay, benefits, and
treatment of employees currently taken into account before
awarding a contract? And how can we improve the process?
I know El Paso, Texas, for example, has implemented a
scoring system, weighing whether companies provide certain
benefits to their employees. And are these ideas that we should
consider as a panel?
Dr. Madland. Thank you very much for that question. I think
there were two key pieces there, questions, sort of how do you
quantify these costs that we were talking about in the second,
and how do you reform the process.
The first, how can you or can you quantify, well there are
a couple of different kinds of costs. The first kind is the
cost such as Medicaid, food stamps, earned income tax credit
can definitely be quantified. Studies in many states and
localities have quantified these kinds of hidden costs for
providing public assistance to low-wage workers. It has not
been done at the federal level. Now, it would have to be an
extrapolation because we do not exactly know how many federally
contracted workers there are, but I think you could make some
reasonable estimates and come up with a good number. In
California they have done this and they estimate about $10
billion a year in state subsidies for full-time workers who
earn near the minimum wage, so I think you could do something
similar at the federal level.
But the kinds of costs that are much harder to capture but
are real are the kinds of quality, the connection between bad
workplace practices and quality. Just to give you an example of
some of these kinds of relationships, there was a Department of
Housing & Urban Development (HUD) audit found a direct
correlation between labor law violations and poor-quality
construction. New York City survey of construction contractors
found that those with workplace law violations were over five
times as likely to have poor performance ratings. I can list
others, but those kind of costs are much harder to quantify. I
think, for example, if you asked Government Accountability
Office (GAO) to look at both kinds that would be a good step.
So what do we do about this? I started to talk to Chairman
Andrews--you asked actually how does the government evaluate
these kinds of things; does it consider labor standards? It
legally could, and it occasionally does, but very often it does
not.
So there are two primary ways that I think this panel could
look at, and the first, as I said, was better screening for
whether a company is responsible. And I think that this better
screening requires two things. This is clarifying the
standards--this gets to the point that Chairman Andrews was
asking about--clarify the standards for evaluating whether a
better--that demonstrates a satisfactory record of integrity
and business ethics. For example, you know, how many
violations, et cetera.
And then second, you need to create better tools to help
contracting officers make this determination. The database, as
we talked about, is a big first step, but it does not capture
many of the important violations.
And the second key step is almost all federal contracts
that are competitively bid are awarded on a best value approach
in which the government considers both price and other non-cost
factors, past performance, small business subcontracting plan,
technical approach, managerial capacity. We recommend that one
of those non-cost factors that are used to evaluate contractors
may be the pay in benefits that they provide their workers. You
mentioned El Paso. That is exactly what El Paso has done for
health care benefits. And they give a score for the quality of
health benefits they provide, and that is one of the factors in
determining whether the bidder receives the award.
Mr. Andrews. The gentleman's time has expired. Thank you,
Mr. Murphy and Mr. Cooper.
The Chair recognizes Mr. Coffman.
Mr. Coffman. Thank you, Mr. Chairman.
Just a question on this insourcing. I think, Mr. Soloway,
you raised it, and I think, Mr. Gutridge, you also, I think,
touched on it: Where is that appropriate balance? One thing we
did not hear, I think, prior to the legislation that was passed
was, I think, from--we certainly heard from the public sector
that there was a deficit or a lack of qualified acquisition
personnel, and we needed to do more insourcing of that. But I
think until today we never really heard of the consequences to
the private sector. So where, in your mind, is the appropriate
balance?
Mr. Soloway. Mr. Coffman, I think that I would answer your
question by pointing to the July 29th memorandum that the
Administration issued, guidance to implement the insourcing
legislation, which actually did a very good job of letting out
kind of a hierarchy of how you think about federal functions
and positions and the various decisions you can make associated
with each.
So, very briefly, they basically get four categories. One
is inherently governmental functions that we all agree
absolutely have to be performed by government employees.
The second were functions of--actually positions that an
organization determined were absolutely essential to its
ability to control and oversee its own mission. They might not
be technically inherently governmental, but it is in any
organization you would want that as an in-house capability.
Then there were other fairly significant positions for
which you would make a decision. You have some flexibility.
Where are the greatest skills, the greatest benefits and so
forth.
And then the final category, very routine functions, base-
operating support services, commercial functions and so forth,
where it is kind of a classic make-buy decision.
I think the issue for the Department is how do you actually
do a broad strategic human capital plan that accurately
captures kind of those four different pieces and looks at them
in a truly strategic manner? It will vary from organization to
organization. One organization may need more engineers in-house
because of what they do than others, which may be able to rely
more on outside engineering support, for example.
So I think it is a strategic human capital process. I think
that the OMB memo that came out on July 29th actually does a
pretty good job of laying out kind of the structure. It has
only been 6 weeks since it came out, so it is too early to say
whether it is having an effect, but even before it goes into
effect, and even before the Department of Defense has come out
with its actual cost guidance internally, assumptions have
already been built into the budget to the, quote, ``benefit''
of insourcing. I think it is kind of a ``cart before the
horse'' situation.
One other point--I am sorry to keep coming back to this in
Dr. Madland's comment--I want to remind Mr. Murphy that we
would not sit here and support companies that behave in the
manner in which you described some of the companies in the
record that you have. But again, it is critical, as we think
about the issue of benefits, and pay, and treatment of
workforce, that we recognize the different standards that
already exist and how they apply in different industry
segments. The Service Contract Act was created to prevent
precisely what you are talking about. So the 20 percent--the
figure that Dr. Madland used, the 20 percent of contract
workers who are getting below poverty-level wages are almost
certainly not working for companies who are doing service
contracts under the Service Contract Act, and if they are,
there are penalties in law today that should be applied. If it
is not being enforced adequately, it ought to be enforced more
effectively.
The second piece is there are a lot of us in the industry
who believe the Service Contract Act wages, the determinations
that the Service Contract Act puts out, are woefully out of
date. And so the government itself is creating a dynamic in the
marketplace by saying, here is the wage you must pay, and that
wage may or may not be an adequate wage in that region because
it has not been updated recently enough. So I would suggest the
first step here to achieve the goal I think we all share in
terms of reasonable and fair treatment of workers is to focus
on whether the Service Contract Act is adequately updated,
modernized, and managed and administered.
Mr. Gutridge. May I respond?
Mr. Coffman. Mr. Gutridge, did you have a comment to one of
my questions?
Mr. Gutridge. Yes, sir, I did. I just wanted to really
underscore Mr. Soloway's comments here. Having been in the
thick of this in that particular industry, dealing with that
particular issue, not just recently, but really for the past
six, seven, eight years, where we have literally lost dozens of
people where we contracted and expanded, contracted and
expanded literally in the tune of hundreds of people per year,
it has caused us significant stress. And our challenge has been
and the benefit to us is it causes us to create muscles that
most companies our size do not have. But the challenge we had
is really trying to guess what the future requirements are
going to be, the lead time for going out and basically
refilling the pipeline once the government has basically hired
those people away from us. It takes several months. You know,
when you are dealing with one or two, it is not so bad. But
when you are dealing with 10, 20, 30, 40, 50, it creates a
significant strain and a significant burden on a company our
size, any company realistically.
So the challenge that we have is it is fine if we had a
more strategic understanding of where they were trying to get
to, how can we help them get there from here, develop an
integrated plan that allows that to happen. And I think
underscoring really trying to decide what is that sweet spot in
terms of the number of these types of critical decisions,
critical skills that the organization needs for future
requirements, and then how do they effectively augment those
with other type, whether it be contract or other types of
services and support. I think that is where the challenge
always is.
Mr. Coffman. Thank you, Mr. Chairman.
Mr. Andrews. Thank you, Mr. Coffman.
The Chair recognizes Mr. Ellsworth.
Mr. Ellsworth. Thank You, Mr. Chairman.
Thank you, gentlemen.
I guess my question would be for Mr. Soloway or Mr.
Sylvester. I have had several calls in my tenure here from
vendors and manufactures in my district mainly that suggest
that they have tried to break into the system, or they have
looked at breaking into the system, and they know they have a
better way or a product they have seen manufactured, and they
can do it cheaper, better, and yet feel the system is designed
to not let them break in to get into the system, or it is
designed for the current vendor to keep the contract, that they
have no chance. Do you see that in yours to be true? Are they
just not having people in place to navigate the procurement
system? That would be my first question, is it a fair and
balanced competitive edge that most companies, if they want to
get in, should be able to.
Mr. Soloway. Mr. Ellsworth, I think it is a great question,
and I think it is a question that came up when we were in your
district with you and a number of your companies a year ago,
some of whom were in the market and some who wanted to get into
the market.
I think it is a very tough question, because the government
does have, as Mr. Gutridge said, a whole set of unique
requirements that make it very difficult for particularly
smaller, purely commercial companies to figure out how to get
in and whether they can afford to get in.
As an organization we have participated in probably a dozen
seminars in various congressional districts around the country
for members who are getting the very same questions from their
constituents and tried to help explain to them, here are the
rules of the road and kind of how you can get into this market,
but it is not an easy market to get into. And a lot of it is
driven by the often appropriate sort of checks and balances
that are in the system, because this is a taxpayer system, not
a purely commercial market, but also by some of the behaviors
of the customer and the incentives that are put out in the
market. So I do think it is a fair question.
I think there are ways for small companies to get into the
market. Many have been creative and found a way. Mr. Gutridge's
company started as a very small company, but it is a challenge,
and I think that for those who are the faint of heart, it may
not be the best market in the world, because the government
does put very heavy burdens on all of its companies that are
doing business. Even if we could argue whether we need more or
less in certain areas, the basic requirements to get into the
system are not simple.
Mr. Ellsworth. Thank you.
Mr. Sylvester, let me change the subject a little bit. We
talked about--let us just call them change orders for the sake
of that. Certainly the safety of our troops is paramount, and
if they need something done to fix a weapon or fix something
that keeps them safer, a vest or helmet, how much--discuss a
little bit about what might go on. Someone sees a better idea,
an idea comes from the field, a manufacturer sees something.
Oh, let us change this strap from this to this, wouldn't that
be better if it were an inch wider, and then can manipulate the
system. Let us change this, charge more, redesign. And do we
get taken advantage of that way in companies changing up orders
on equipment, on small and maybe insignificant and nonuseful
changes, that they could then bill back the government?
Mr. Sylvester. While I am sure that happens from time to
time, I do not think, at least from my experience, that is
really prevalent where we have companies who are making those
small incremental changes and then saying, here we have this
idea, and we are going to charge the government for this. What
I see more is companies that have ideas about things and go
talk to the requirements drafters and say, we can do these
kinds of things if you will change the requirements to allow us
to do that. In some cases those particular requirements have
been demonstrated, and in some cases they have not. And so the
people who are in the requirements process would look at that
and make changes in the contracts. There is a place for that to
have that done.
But again, going back to this idea of stability, once we
beginning a manufacturing process, except for things that are
safety related or those kinds of things, we need some stability
in that process, which goes back to the evolutionary
acquisition idea. If we can have a system that is truly
evolutionary, we can begin to take those new ideas and
introduce them into the system and get them into the
requirements that way, in a logical way that doesn't impact our
manufacturing capability.
Mr. Ellsworth. Mr. Gutridge, you shook your head in the
affirmative. I assume you agree with that, or do you have a
comment?
Mr. Gutridge. Putting my previous life's hat on where I
dealt with this issue on a daily basis with aviation,
engineering change proposals were always a struggle. When you
are buying unique items, when you are buying a lot of them, you
know, we consider those things very carefully. But we control
the process because they were basically producing something for
us.
When we get into the commercial marketplace, it changes the
paradigm entirely, because all of a sudden now producers are
looking at, well, I have got this great big marketplace over
here, and I have got this smaller niche market over there, and
if I did this thing, well, it has this direct benefit to my
bottom line because it increases my sales or whatever.
So part of the challenge that we always struggle with when
we get into buying commercial products is that there is the
recognition and understanding that a bit you give up that
control over that configuration of that end item. And that is a
business decision that the Department makes on a regular basis.
And part of it has do with how long are we going to use it;
what is the total life-cycle cost. And these are all
considerations that are taken into account in that acquisition
process.
Mr. Ellsworth. Mr. Chairman, I do not know how much time I
have left, but if I could yield the balance of my time to Mr.
Murphy. He had another question.
Mr. Andrews. Absolutely. Mr. Murphy is recognized.
Mr. Murphy. Thank you, Mr. Chairman.
Thank you, Mr. Ellsworth.
Mr. Soloway, I know you mentioned about the Service
Contract Act. Do you have any comments? And if Dr. Madland
could comment.
Mr. Soloway. I just wanted to make the point that I think
that the ethic of what Dr. Madland is talking about is
something we could all sign up to, and we actually talked
briefly earlier about sitting down and trying to figure some of
this out.
But I think the issues that Mr. Andrews referenced earlier
about where you draw the line here, and what kind of guidance
and objective criteria you are going to provide to government
contracting officers to make what could be some really
complicated decisions about relative severity of relative kinds
of violations of different laws, the truth is without in any
way defending a company that is a scofflaw, some of the
companies that are referenced in the record and so forth, many
companies have some kind of violation somewhere inadvertently
committed, and how you start making those decisions I think is
an enormously complex issue.
Mr. Murphy. May Dr. Madland comment on that?
Mr. Soloway. Yes, but one last point. The second point I
want to make is we do not, in fact, in government contracting
make these best-value trade-offs the majority of time. In fact,
the majority of government contracts are awarded on a low-bid
basis. Best-value contracting is actually the exception, not
the rule. Now, we have advocated if you use more, I think you
sometimes get what you pay for, if you will. And using all
these other factors in a source-selection decision makes sense,
but the vast majority of government contracts are either a
sealed bid, which is just they simply look at the cost, or what
we call low-priced technically acceptable, which is not a cost
trade-off process.
So I think that the ethic of what Dr. Madland is proposing
is something we can all sign up to. I think that the Service
Contract Act is a leveler. It is designed to try to avoid these
kinds of issues.
Mr. Murphy. Dr. Madland, my time----
Mr. Andrews. Well, actually Mr. Murphy, you are entitled to
be recognized for five minutes on your own time. So you are
recognized for five minutes.
Mr. Murphy. Thank you.
Dr. Madland.
Dr. Madland. Thank you.
There were three big issues that I wanted to hit on: Talk
about the Service Contract Act, how you sort of quantify the
standards for whether a company is responsible, and then this
idea of best value.
The service contract, other prevailing wage laws like the
Service Contract Act and Davis-Bacon are very important in
assuring that standards aren't driven down, but they are not
very effective at raising standards. Just to give you a couple
of examples of what the actual prevailing wages are right now,
$8.17 for a janitor in Houston, $9.49 for a security guard in
Tucson, $7.25 for a fast food worker in Chicago, without
benefits. That includes the total package. And these were just
updated a couple months ago.
So these prevailing wage laws are important to ensure that
standards are not driven down totally to the bottom, but they
are not--not sufficient.
The second idea was sort of how you develop the standard
for evaluating whether a company is responsible, how many labor
law violations, et cetera. This is a very important and
difficult question to answer, but I want to emphasize that
many, many states have been doing this for years. California,
Massachusetts, tons of local governments have developed
quantified systems where they evaluate, okay, this many
standards is this many violations is this many points, and you
need to have this many points to be determined responsible. So
it is a determination that, while difficult, it is something
that other procurement systems regularly do.
And then the last idea, my point was about low-cost
technically acceptable--Mr. Soloway claims that I think he was
saying we--the government procurement only evaluates most bids
based on cost. Well, in the low-cost technically acceptable,
they do look at non-cost factors; it is just whether a minimal
threshold is met. Most competitively bid contracts include
those low-cost technically acceptable or the more fully
negotiated process where there is actual trade-offs between
cost and non-cost factors.
Mr. Murphy. Do you want to comment, Mr. Soloway?
Mr. Soloway. This is going to be a long discussion, and I
said that in all due respect. I would just point out that,
again, the threshold issue is a critical issue. In California I
believe if you have four violations of the Davis-Bacon Act, you
get zero points on their scoring system. But if I have
thousands and thousands of workers, I could have four
violations fairly quickly. Whether that is the right or the
wrong standard is another issue, but I think that is a really
important point.
The last point I will make about the Service Contract Act,
Davis-Bacon, and the other prevailing wage laws that exist,
whether they were designed do to do this or not, they have, in
fact, become a floor; they are a minimum. The idea of a
prevailing wage is supposed to be the prevailing wage. What is
the appropriate wage for work in a given district or a given
region of the country, and on top of that you then have to pay
a certain given health and welfare benefit.
So perhaps the discussion should begin with are the
prevailing wage laws, in fact, getting us to prevailing rates
or to the floor that Dr. Madland was talking about. That is a
policy decision for the Congress and the Administration to
make. From an industry perspective, as long as the Congress and
the Administration recognize whatever all of the implications
are for driving wages, whatever level the Congress and
Administration decide is appropriate, that is a different
discussion. From an industry perspective it is a relatively
level field. We are all going to be bidding to the same rules,
if you will. But there is a difference between the minimum and
a prevailing wage, so the question perhaps is whether the
Service Contract Act is prevailing or setting just a floor.
Mr. Murphy. I want to go back to the metrics. You know, we
talked about the database earlier. To give an example, 2008,
Propper International, the largest manufacturer of uniforms for
the United States military, settled a case with the National
Labor Relations Board after employees charge that the company
did not grant legally required paid sick days or vacation days,
and the company violated labor laws by threatening employees
who were trying to organize. So according to the press account
about this company, Defense Logistics Agency (DLA), which had
awarded the contract, offered that, going forward, it would
take labor law violations into account when it reviewed
contractors' performance using a national database that tracks
these violations.
So my question to the panel, and I will start with Dr.
Madland, can you describe to us how the database is currently
utilized by procurement officials and if consulting the data is
generally voluntary as it would seem based on the Propper
International case? And what do we need to do to maximize its
potential and encourage or require potentially officers to
consult prior to awarding a contract?
Dr. Madland. Thank you.
Your question is correct. The database is just being
created. It is supposed to be created by October of this year.
And the proposed rules state that contracting officers shall
consider all the information in the database, which seems like
a pretty strong standard. So that seems like a good thing. And
I am not sure how much further you could go, although you
should be aware that even like in the debarment category where
they must look at it, oftentimes contract officers still don't,
and GAO has done studies and found that.
And so this database is going to be a big, big improvement,
but as I mentioned before, the standards of exactly how it is
applied are not quite clear, and it will miss many labor law
violations. In addition, it does not capture private-sector
compliance, so we are missing half the story or more. It is not
publicly available.
Now, a step is I think defense authorization this year, I
think that is correct, will allow Members of Congress to look
at it. It also, as I said, does not capture settlements without
acknowledgement of fault, and the minimum threshold for fines
is often below the level.
Now, you mentioned the case of Propper International. They
are the largest military uniform manufacturer, and some of
their violations would probably be captured by this database,
and there would be a record on which to judge them. So they had
152--157 health and safety violations over the past 20 years;
58 of those categorized as serious violations, or death, or
serious physical harm could have resulted to workers. The more
recent ones probably would be captured.
Mr. Andrews. I just want to ask if Mr. Soloway would want
to comment, because the gentleman's time is expired. Thank you,
Dr. Madland.
Mr. Soloway. I will just go back to the point Dr. Madland
touched on. The issue here is how we set the standards. I think
there is going to be--it is a very complicated question. The
database is a reality, it is happening. How we set the
standards, they give guidance to the workforce. Number one, the
database should never be made public because there is a lot of
sensitive proprietary information subject to all kinds of
misinterpretation.
How we guide the workforce in terms of how you make a
decision, what is a pattern of abuse versus individual
instances. A company could have had three or four years of
abuses and then completely thrown out all of their management,
changed their business practices and processes, and said, hey,
this is now a good company. How an institution responds to
problems is not an unimportant issue.
So I think all of the issues--and the question of how we
actually guide the workforce towards making reasoned, fair,
transparent decisions. Companies are going to have access to
their own records, so they can see what is in there. But they
will have no access to information as to why they were
determined to be responsive or not, which is essentially
debarment. If you are not responsible, you cannot bid. You have
been effectively barred from the process. So I think this is a
very, very complicated issue.
The last point I will make is I would hope Congress would
not go back and revisit the question of whether we should
include settlements on which there were no findings. From a
perspective of law, if I settle a case with you, and I do not
admit guilt, and you do not admit that I was innocent, that is
why we have settlements. And that is a very dangerous road to
go down to presume that somebody is guilty because they settled
a case. As I think we all know there are a lot of settlements
in which you do it for other reasons. So I think the standards
issue is the critical question.
Mr. Andrews. We thank you, Mr. Murphy, and thank the
members of the panel. As is generally the case, well briefed
and prepared witnesses generate more questions than they
answer, which is good. I mean that as a compliment.
I think what the panel will take away this morning is that
in this process of creating the right environment for a vibrant
and stable set of industrial bases, as Mr. Soloway points out,
we need to do a number of things. From Mr. Soloway we heard
that although multiple-award task order contracts have a
certain value, we need to be sure that they do not add more
costs than they generate benefit, that we carefully evaluate
the use of those vehicles and others.
Mr. Sylvester, certainly we do need to look at the overall
capital-raising environment in which his members are operating.
They are not just competing against other defense companies,
they are competing against tech companies and financial
services companies, a lot of other people.
Mr. Gutridge, one lesson I think we learned from you is
that we do not want to wall ourselves off from the benefit of
the commercial global marketplace because of requirements that
are superfluous or unnecessary. I think we all agree that
security requirements, quality requirements are non-negotiable.
But we may be precluding ourselves from some excellent bidders
because we are having the tail wag the dog.
And finally, Dr. Madland, I think your efforts and Mr.
Murphy's efforts really do point out that the strongest value
for the people in uniform and for the taxpayer comes from a
fair workplace relationship, and where that workplace
relationship is unfair or missing, that is a deficiency in the
whole process that we need to refocus on.
So I appreciate the witnesses and my friends here on the
panel. The committee will continue to explore these issues.
Essentially our work plan, which I discussed with--which we
discussed with the minority staff, is to continue a series of
hearings where we explore hypotheses about the reasons for this
gap between price and value for the balance of the calendar
year. The panel will then convene in the first quarter of 2010,
and the Members will discuss among ourselves recommendations
that we will then want to make to our colleagues in the full
committee with a report that we hope will be the basis for
legislative action in next year's defense authorization bill.
So again, we thank the witnesses for their time and thank
our colleagues. The hearing stands adjourned.
[Whereupon, at 9:25 a.m., the panel was adjourned.]
=======================================================================
A P P E N D I X
September 17, 2009
=======================================================================
PREPARED STATEMENTS SUBMITTED FOR THE RECORD
September 17, 2009
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
DOCUMENTS SUBMITTED FOR THE RECORD
September 17, 2009
=======================================================================
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
September 17, 2009
=======================================================================
RESPONSE TO QUESTION SUBMITTED BY MR. ANDREWS
Mr. Sylvester. Of the 106 regular members of Aerospace Industries
Association, 68 or 64% are publicly traded and 38 or 36% are privately
held. [See page 16.]
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