Steve Kelman: Obsessed with POGO

I think that POGO should be flattered. It's been brought to our attention that Harvard professor and erstwhile contractor lobbyist Steve Kelman has become obsessed with us. He has written several blog posts directed at us and now a column begging us to pay attention to him. It's kind of weird -- doesn't he realize we're busy?

Anyway, I should let it be known that I cut my teeth in Washington as an intern researching and drafting a response to an article he wrote in the mid-80's entitled "The Myth of the $436 hammer" or something like that. He had come up with this convoluted theory that he called the "equal allocation of overhead" that explained away overpriced spare parts by claiming the hammer was only, say $5, but $431 in overhead had been spread across every part.

So, in other words, according to his theory, a $25,000 jet engine compressor would be priced at $25,431 because it had the "same" $431 in overhead allocated to it. Each item, regardless of its base price – whether it was $5 or $25,000 -- had the exact same dollar amount of overhead added to its price. He argued, then, that there really weren’t any overpriced spare parts, only reasonably-priced parts with big overhead amounts allocated to them.

I guess it would have made sense if it were true. We actually had the pricing sheet that showed the prices of dozens of parts on the C-5 cargo plane -- and a number of bolts and screws were less than $1.  For Kelman's theory to have been correct, the base price before overhead allocation for parts costing less than $431 would have to have been a negative number. I remember checking Kelman’s footnotes and finding that cited himself as his source. Maybe they let you do that at Harvard, but they wouldn't have let me get away with that at my alma mater. The point is, I've always known Kelman to be fast and loose with the facts.

In this recent round, Kelman’s response to my post "Buying Blind" (June 15, 2007) twists my description of the Truth in Negotiations Act (TINA) exemptions for commercial items as being created by the passage of the Federal Acquisition Streamlining Act (FASA). In my post, I summarized the "old" (i.e., pre-"acquisition reform") rules regarding exemptions from cost or pricing data when the government purchases commercial items. The TINA exemptions I described were all in effect prior to the advent of "acquisition reform," and specifically, prior to the passage of the Professor's vaunted FASA.

To repeat, the FAR, prior to FASA, already exempted from TINA commercial items where goods or services were sold "based on established catalog or market prices." It also exempted contracts from TINA (regardless of whether a commercial item was being purchased) if two or more priced proposals for the contract award were received. In other words, the only time that the government could request cost or pricing data was when the acquired item was purchased on a sole source basis AND no market price could otherwise be established.

FASA went a step further by exempting all “commercial” items from TINA regardless of whether a market price for the item could be established as long as the item could be labeled "commercial" under a broad definition that included items not actually sold to the public, but were merely of a “type” sold to the public.

However, this discussion is ultimately academic and largely irrelevant because the rapacious "acquisition reformers," ever eager to jettison the common-sense taxpayers protections afforded by TINA, were quick to overturn even the FASA exemption for “commercial” items.   As a result, a little over a year after passage of FASA, Congress enacted the Federal Acquisition Reform Act (FARA) (also known as the Clinger-Cohen Act), which completely exempts all so-called "commercial item" contracts from TINA regardless of whether the item had any real commercial function or whether it was purchased on a sole source basis. Worse, FARA actually prohibits contracting officers from obtaining cost or pricing data for so-called "commercial items" under any and all circumstances.

That’s where we’re left today - a ridiculously broad definition of "commercial items" coupled with the inability of contracting officers to obtain cost or pricing data for those items. It’s no wonder then why government agencies routinely overpay for goods and services or, in the parlance of government contracting, don’t pay “fair and reasonable prices.” 

So to answer your question Professor Kelman, no, I don’t agree with you that acquisition reform legislation created useful TINA exemptions. And yes, I do believe that that provision of FASA, along with the subsequent provision in FARA regarding TINA, should be reversed.

We may have some small points of agreement on the understaffed federal acquisition workforce, but there is little else to discuss until you take an honest look at the procurement system (much like the Acquisition Advisory Panel), instead of bashing Senator Grassley for his good work, and admit that the taxpayer benefits from genuine competition and oversight.

-- Danielle Brian

Comments

[Melvin de Gross]

Cunnie the Countractor,

My, you were around when procurement was invented, it sounds like. Maybe in government for awhile, hmmm? My artificial database is currently scanning all possibilities to achieve a positive ID.

Now you are living the good life, we can see. Buddy Jeff seems to want to set up Kelmann for public disparagement, while others want to consider him over the hill. Just, please, remember, SK is only a human bean, one of god's children, who deserves everlasting respect, or, until we get our way in Iraq, whichever comes first.

Just what is YOUR solution to fixing the broken procurement system.? What would create meaningful reform? I want to know your deep-thing answer and see you share the value of the deep experience you must have. I await your pronunciamento., before I reach the next intersection of my dementia.

M deG

[Connie the Contractor]

On Jerry Walz outstanding web site, www.pubklaw.com, he has posted a link to Danielle’s recent blog posting “Steve Kelman: Obsessed with POGO”. One of the commentators there responding to Danielle’s comment is Leroy Haugh, an outstanding procurement professional. Unfortunately, Leroy attacks Danielle and POGO on the “equal allocation of overhead” issue and claims that Kelman is correct, and that conversely Danielle is wrong.

As someone who was around when this was all going on, I feel I have to clear the record. With apologies to Leroy, who served as Associate Administrator for Policy Development at the Office of Federal Procurement Policy during the spare parts pricing fiasco era, and whose contributions to the field of government contracting have been noteworthy (among the positions he has held, he was a Member of the Section 800 Panel), he is recalling the excuses offered by General Bernie Weiss (AF) and Admiral Joe Sansone (Navy) as the reasons for the overpriced spares parts, rather than the facts. Unfortunately, the excuses offered by Weiss and Sansone and their staffs, could not be supported by the facts as evidenced by the pricing sheets and cost data supplied by Gould. As my papers from that era (almost a quarter century ago) indicate, the hammer was priced at $435. There was also a hand sledge priced at $436. Weiss and Sansone claimed that each of these parts received an “equal dollar allocation” of $385 in “non-hands on support labor” (overhead) regardless of the value of the item. That was sheer nonsense. What Gould did was arbitrarily assign costs to individual spare parts based on alleged direct labor input. There was no rhyme or reason to how this was done, it was just arbitrary (either that or Gould was unusually inefficient in fabricating the hammer).

More importantly, Kelman’s argument that there was an “equal [dollar] allocation” of overhead to each part in accordance with some “quirk” in government accounting rules was outrageous and grossly inaccurate. It was not an overhead, cost allocation or accounting issue at all, but rather a direct labor issue. Gould simply claimed direct labor hours for parts fabrication that amounted to "extortion". I didn’t keep a copy of the direct labor hours assigned by Gould to the hammer, but I did keep the sheet for a pulley that was priced at $8,832. The total engineering, manufacturing and “product management” hours for one pulley added up to 148 hours. At any rate, there was no “equal allocation of overhead” as Kelman claimed, and if he had done his research, rather than rely on second-hand sources (as he all too frequently does), then he would have learned the facts.

Leroy, on a personal note to you, please see Gen. Robert Russ’ memo of 15 January 1985, which explains all this very well. I know you were given a copy. (If you don’t still have it, I do.)

BTW, you note on Jerry Walz’ web site that the $435 hammer should have been purchased as a “commercial item” off of the GSA schedule. That is interesting, and may be correct, but what does that have to do with what actually occurred?

Connie

[Jeff Hamilton]

Oh! You don't often see a bitch slap like this in the procurement world. Please Danielle, don't hurt him. Kelman is an old man and recently if you read his blog he is becoming feeble. You are so much stronger than he is. Maybe for fun you should offer to debate Kelman in a public forum? We could get one of the GW boys to moderate. Kelman, the poor guy would never take up the challenge. He's safe at Harvard . . . or is that Accenture. . . and would never venture out for a whooping. Now get back to work! There are much bigger fish to fry than Kelman.

P.S. Connie, you sound just like Scott Amey. Are you two dating?

[Joe Taxpayer]

Connie the Contractor:

OK, I'll back off a bit on criticism of SARA panel. But if you blend down the good ones with the other-worldly unqualified ones, the weighted average is pretty low. The work was pretty pedestrian. And Madsen seems to be taking credit for any change that is being discussed. by anyone. You say "stellar"? And they pretty much dodged the big issues, which were not barred from being addressed in their charter. That's where the chair, and I suppose the ED, hurt the effort the most--caving in to the old, familiar songs.
We need to ask the big questions about what we are doing with the overall proc system, for example--and only an example: (1) what can we realistically expect from the government workforce in the way of capacity and capability, and how long will it take to build it? (2) will we enforce the regulations and laws, including criminal statutes, or just pussyfoot around with malperforming contractors and negligent government employees as we do today? (3) will we regulate profit for real, e.g., by forcing the right kind of contracts to be used in the right situations? The risk-reward balance is way out of whack.
Given the demonstration of mentally impacted colons that we get on much weightier issues, I have little faith that our elected representatives can drive this reform. It will not happen with the current administration, or course, and it's hard to imagine with almost any candidate of either party. What will it take? Jeez, this is depressing. JT

[Connie the Contractor]

Sorry Joe Taxpayer but you are not completely correct. First, the procurement system limps along on crutches, and when it comes to the high dollar programs, the contracting system is nearly in ruins thanks in no small part to “acquisition reform” (and some really horrible personnel).

Second, the Acquisition Advisory Panel was admittedly a mixed bag of appointees, but your comments on the Chair are not fair at all. Marcia Madsen is an extremely talented, knowledgeable and far-sighted individual. I know I don’t agree with her at every turn, but I would not in any way suggest that she is anything other than “stellar”. There were other fine appointees on the Panel including Marshall Doke, Josh Schwartz, Jon Etherton ands Ty Hughes. So, while the Panel included a lot of bureaucrats and people who probably couldn’t spell procurement, I think it also included some outstanding people, who labored under very difficult circumstances. Also, the Panel's Executive Director, Laura Auletta, deserves a Nobel Peace Prize nomination.

The Panel’s report is hardly earth-shattering, but considering the political conditions under which they worked, their recommendations are almost courageous.

Connie

[Joe Taxpayer]

Danielle,

There you go again--just like the professor, overheating at the other's assertions. You're largely in the right, in terms of a philosophy I can support, but you lost me with your very last sentence re the SARA Acq Advisory Panel. Jeez.

That panel was peopled with nonstellar people, from its chair, to its lame reps from government and industry. And it took so loooonnngg to plow the same ground that's been plowed before. With a tortuous process, and in the end, a stiff-arm to anyone with any comment whatsoever on the soc-alled "draft" final report, which seems to have been the final report. Two years, for a bunch of pedestrian recommendations that could have been dicated by any expert in the field before the study was chartered. There should be a ban on such studies, but please don't call the past ones "honest."

One other thing. I hold no brief for industry, but you constantly want to call the procurement system broken. It does have serious problems, that are widely acknowledged. But it still processes a high volume adequately, with a tiny percentage that are problematical due to bureaucratic stupidity or laziness or contractor greed. We'd be blessed if other processes of government, like national security policy or war planning by our overstuffed and esteemed generals or Indian trust administration or Medicare or student loans were so free of errors. The mistakes stink, yes, but the whole system limps along adequately.

JT