Catch-23

Washington claims that it wants private industry to do more of the Pentagon's work. So why do the rules for outsourcing help keep it in government hands?

After DynCorp’s bid on a $40 million contract to maintain the C-141 cargo plane at Oklahoma’s Altus Air Force Base was turned down (along with several other competitors’) by the Department of Defense last year, president and CEO Paul Lombardi could hardly conceal his disgust. “It left a bad taste,” he says.

In the two-year competition between $1.3 billion (in revenues) DynCorp, a Reston, Virginia-based high-tech professional and services firm, and a local Defense Department bidder, the department had no choice but to stick with its own. Lombardi claims the government was able to come up with a lower bid because it didn’t have to count all the employees involved. At the same time, the Source Selection Evaluation Board, a government entity, was telling the defense contractor it needed to hire additional workers for the job. “We had to jack our costs up because we were told we needed more labor, while the government bid had less,” Lombardi recalls.

DynCorp’s experience is not uncommon in the Byzantine world of government outsourcing. And Lombardi, for one, is reluctant to enter the fray again. “The bid for Altus cost me $400,000 to $500,000 to put together, and if the deck is stacked against you, there’s no point in doing it.”

The DynCorp incident appears to belie the Clinton Administration’s much-ballyhooed effort to “reinvent” government, which aims not only to emulate best practices in the private sector but also to make use of that sector’s services — through outsourcing or asset sales — whenever and wherever appropriate. And no place seems more appropriate than at the Department of Defense, which is estimated to account for half of discretionary spending by the federal government — that is, outlays other than entitlement spending on such programs as Medicare and Social Security, which are set by Congress.

The stakes for private industry are huge, with the Pentagon’s budget totaling $256 billion for the current fiscal year. Everything from weapons maintenance to housing, accounting, and computer systems is on the table.

The department plans to sell off, or privatize, such assets as utility systems on bases and family-housing construction for military personnel. But in large part, the zeal for privatization was quelled in 1995 as a result of the controversial selling off of two Air Force bases in Texas and California. With a Presidential election approaching, the Administration proved unwilling to confront the powerful government unions whose members’ jobs were at stake, and Congress has since resisted other asset sales.

Now, instead of getting out of many businesses altogether, the Department of Defense has decided to have private industry bid against government entities for contracts to perform services currently being handled by the Pentagon. But as the DynCorp case shows, the rules for these competitions allow government entities to appear more efficient than they really are (see “How Public-Private Competitions Work,” at the end of this article).

And the obstacles for private industry don’t end there. Indeed, DynCorp’s rival might have won the Altus competition even without the ability to understate its head count. The reason: Government entities can take advantage of old-fashioned accounting standards that allow them to exclude the cost of senior executives’ salaries, along with other overhead costs, such as insurance and retirement benefits. What’s more, the rules say that government entities win the contests even if their bids are 10 percent higher than a private company’s.

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