SignOnSanDiego.com > News > Business -- MZM scandal illuminates defense contract tactics

Firm had a prime deal with the government
By Dean Calbreath
August 21, 2005

When Diversa Corp. agreed to buy the assets of scandal-plagued MZM Inc. last week, it picked up a stable of 450 workers, about 85 percent of whom have security clearances – a lucrative asset for a defense-related firm like Diversa.

But what Diversa could not buy was the $250 million "blanket purchase agreement" that helped MZM become one of the Pentagon's top 100 contractors.

That agreement, which allowed MZM to do business with the government without repeatedly undergoing the rigors of competitive bidding, was suspended not long after MZM founder Mitchell Wade became embroiled in the widening scandal involving his real-estate deals and boating arrangements with Rep. Randy "Duke" Cunningham.

At the time, the Pentagon said the suspension had nothing to do with the relationship between Wade and Cunningham, who has been accused of helping MZM gain contracts from the Defense Department.

Regardless of why the agreement was suspended, the incident brought to light some of the little-known methods the Pentagon has used to dole out contracts to favored suppliers.

Only about a third of the $1 trillion or so in prime contracts that the Pentagon has issued since 1997 have been awarded after full and open competition among two or more bidders, according to a study last fall by the Center for Public Integrity, or CPI, a nonpartisan group in Washington, D.C., that conducts investigative research on public policy issues.

A large portion of the Pentagon's purchasing activity has involved "sole source contracts" that shield contractors from competition. In other contracts the Pentagon has relied on "blanket purchase agreements," so its contractors do not have to repeatedly undergo the rigors of a bidding process.

That's despite repeated warnings from government agencies – including the Government Accountability Office, or GAO, and the Pentagon's Inspector General – that the lack of competition for military contracts may be more expensive and less efficient than open bidding.

Without competition, the Inspector General warned in a report last year, the military cannot be sure "that the best contracting solution was provided, that (it) received fair and reasonable prices for the goods and services, or that the contractors performed the work the contract required."

MZM, which won a $5 million sole-source project to provide translators in Iraq, even though it had no previous translation experience, was one of the companies cited in the Inspector General's report.

"The lack of competition ends up costing the taxpayer in the long run," said Scott Amey, general counsel of the Project on Government Oversight, a nonpartisan watchdog group in Washington, D.C. "When you're working without competition, contractors can set whatever prices they want to get from the government."

Despite such warnings, the military continues to hand out noncompetitive contracts – often to companies with ties to congressmen or Pentagon officials – because it is easier to issue a contract without going through a time-consuming bidding process.

"From the point of view of the person issuing the contract, the easiest way to do things is to give the work to someone you know and you've already done business with," said Larry Makinson, who spearheaded the CPI team investigating the contracting practices. "But the contractors understand the game pretty well, and they have different motives for what they're doing than the military does."

Sole-source contracts – which are issued without standard competitive bidding – have long been a part of military contracting. George Washington essentially used sole-source contracts when he handpicked civilian teamsters to haul the Continental Army's provisions during the Revolutionary War.

U.S. law allows federal agencies to issue sole-source contracts if only one source is available for the work or if the work has "such an unusual or compelling urgency that the government would be seriously injured" if competitive procedures were used.

But in recent years, sole-source contracts have become increasingly common at the Pentagon.

Over the past eight years, only 40 percent of military contracts were awarded under the Pentagon's definition of "full and open competition," the CPI study found. That number dropped to 36 percent after excluding contracts that attracted only one bidder.

Roughly 44 percent of the contracts were issued without full and open competition, usually through sole-source contracts. Another 7 percent fell under other categories, mostly as small business set-asides. Eight percent gave no competition information.

Out of the top 10 military contractors, San Diego's Science Applications International Corp., or SAIC, was the only contractor to get the majority of its work – 74 percent – through competitive contracts. The other contractors, ranging from Lockheed Martin to the Carlyle Group, received between 60 and 98 percent of their work through no-bid contracts.

The lack of competition has worried lawmakers for several years.

Shortly before his death in 2000, Rep. Herbert Bateman, a Virginia Republican who chaired the House subcommittee on military readiness, said he was concerned that sole-source contracts might prove costly for the military, especially if there were ever a war in which a large number of contractors were hired to supply the front-line troops.

"It is difficult to control cost growth in a sole-source environment," David R. Warren, the then-director of defense management issues at the GAO, warned the subcommittee.

Soon afterward came the terrorist attacks of Sept. 11 and the wars in Afghanistan and Iraq, which led to an explosion in sole-source contracts. Sole-source contracts jumped 48 percent from $86.1 billion in 2001 to $127.4 billion in 2003, according the CPI. In comparison, competitive contracts jumped 39 percent from $58.5 billion to $81.6 billion.

"The use of sole-source contracts took off like a rocket after 9/11," said Keith Ashdown, vice president for policy at Taxpayers for Common Sense, a Washington, D.C., budget watchdog group. "The feeling in the military was, 'We can't wait to do the paperwork on these projects. Let's just get the contractors out there. We'll take care of the questions later.' "

Ashdown said it often made sense to issue sole-source contracts. But he added that the contracts needed more oversight.

"These contracts can work if you make sure you run to the letter of the law and dot your i's and cross your t's," he said. "But the required oversight didn't take place. With sole-source contracts, supervision sometimes falls through the cracks."

Critics say the contracts were often given to companies with strong ties to key politicians. Between 1998 and 2003, the military's 10 contractors donated $35.7 million to legislative campaigns, largely supporting members of the House and Senate Appropriations and Armed Services committees.

As a senior member of the defense subcommittee on the House Appropriations Committee, Cunningham received a steady stream of donations. A grand jury is currently investigating whether he improperly helped companies such as MZM and San Diego's ADCS Inc. – which was raided last week – land favorable contracts with the Pentagon.

Like MZM, ADCS had a lucrative blanket purchase agreement with the federal government.

The military's use of sole-source contracts and blanket-purchase agreements has led to some missteps.

Last fall, for instance, a Pentagon contracting official pleaded guilty to assigning sole-source contracts to Boeing to help secure jobs for herself and her daughter and son-in-law at the company. Over Boeing's objections, the Pentagon reopened most of the contracts to competitive bidding.

In other cases, sole-source contracts seem to have been ill-suited to the contractors that won the work.

For instance, SAIC was awarded a sole-source contract in 2003 to run Iraq's TV and radio network, even though it is largely an information technology company with no experience running a news operation. After a year of harsh criticism over its handling of the news, SAIC decided not to rebid for more work on the contract.

MZM's Iraqi translation contract came under the umbrella of its $250 million blanket purchase agreement to provide information technology to the military. Blanket purchase agreements work like a line of credit, letting the government buy specific services up to the amount specified on the contract.

Analysts say there are plenty of legitimate uses for blanket purchase agreements, such as buying a specific dollar amount worth of pencils from a stationery store. But they add that the agreements are often misused.

"Some contracting officers feel that once they've signed a blanket purchase agreement with a contractor, their work is done and they don't need to do any more oversight and they can give the contractor whatever contracts they want," Ashdown said.

The Defense Department's Inspector General found "significant weaknesses" in 22 out of 24 contracts that it randomly reviewed in Iraq in 2003. Among other things, the Inspector General found that the contracting officers had failed to monitor costs and allowed contractors to perform work that was outside the scope of the contracts, including MZM's translation work.

"We understand the urgent conditions under which (the military) awarded the contracts," the Inspector General said. "However, urgency does not permit the contracting officers to abandon the rules."

The glitches in the contracting process prompted Congress to step in.

In 2003, Sen. Ron Wyden, a Democrat from Oregon, wrote a bill requiring that all contracts for rebuilding Iraq must be awarded through full and open competition, unless the Pentagon publicly justifies why the contract should have a sole source or limited bidding process.

"If you're issuing a sole-source contract because of some sort of emergency situation, that's something I can understand," Wyden said recently. "But closed bids have gotten to be more the norm than the exception. It's hard to see a justification for that."

Wyden's proposal eventually passed into law. But it only dealt with Iraq. Wyden said that attempts to write broader restrictions on contracts have been stymied by the defense industry.

"Defense contractors always say the sky is going to fall and that national security is going to be threatened if more contracts are open to competition," Wyden said. "That's just a bunch of eyewash. Our argument is that for reasons of national security that we can't afford all this waste."


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