Is the Pentagon getting its moneys worth with the contractors it does business with? It’s obviously an important question that many officials, elected and appointed, would like to find out. Also looking into are organizations like the Project on Government Oversight, or POGO. It’s tasked Dylan Hedtler-Gaudette, government affairs manager with POGO, to study this topic. He joined the Federal Drive with Tom Temin to share what he’s found.

Interview transcript: 

Eric White Dylan, thanks for joining us.

Dylan Hedtler-Gaudette Thank you so much, Eric. I appreciate you having me on.

Eric White Absolutely. So this is a topic that this isn’t the first time we’ve discussed it here on Federal News Network, obviously, and this probably isn’t the first time POGO has looked into this. Why don’t you just kind of lay out for us what the landscape looks like currently? You’ve got a dwindling number of contractors that the Defense Department can even do business with, and that’s going to affect the competitive markup that we may see. What is it about this topic that you have found and got you interested in it?

Dylan Hedtler-Gaudette Sure. So you are correct to point out that the defense industry has seen a fair amount of consolidation in recent years. And so increasingly you’ve just got a few big prime contractors who are doing the vast majority of business with the Department of Defense, and we don’t need to name them. I’m sure you can think about who those big boys probably are. Now, one thing that that does is that definitely crowds out smaller and medium sized companies who may want to be a part of the federal contracting and specifically defense contracting world. But it also I think it increases and tamps down competition, which has a tendency to also drive up costs because a fewer number of individual companies are able to command, you know, prices and price points that they might not otherwise if they actually had to compete on a level playing fields. Well, there are a number of ways that the defense industry is changing. There are a number of ways that the Defense Department is kind of at a disadvantage here when it comes to trying to negotiate the best deals and contracts that it can. And then Congress, of course, is a key player in all of this as Congress is the one who appropriates money to give the Defense Department the budget that it has to work with. So there are a lot of you know, there are a lot of entry points here. There are a lot of pain points here. And so, you know, happy to get into more specifics.

Eric White Just how big of a markup do you think that the Pentagon is facing here? And I’d also like to pick your brain on how you come up with those figures, because as technologies get newer and newer, I mean, who sets those prices and how can you even really determine what a fair and square deal would be for something, you know, such as, you know, artificial intelligence or even service contracts can get kind of nitty gritty.

Dylan Hedtler-Gaudette Sure. So I’ll take that last part here. In the beginning, it is difficult to determine the price if you’re trying to do it sort of artificially. The best way to determine prices would be to allow the market to function competitively and fairly and effectively. But because this is a very closed and very, very idiosyncratic ecosystem here between, you know, the Department of Defense and the broader contracting world and the private sector, you know, it doesn’t function the way typical markets do. So that’s part of why you see strange fluctuations in prices. And that’s part of why you see, you know, in products that are supposed to be helping, you know, troops on the ground or that are supposed to be helping service members and their families aren’t really up to snuff. And, you know, a lot of that does come back to the strange way that market here works and more importantly, doesn’t work. And so specifically, as an example, here, you have a whole contracting and procurement ecosystem around commercial products and commercial services. But the Department of Defense, as you can imagine, needs a lot of things that you could call spare parts or that would otherwise be available on the commercial market. So, you know, hammers and coffeemakers and pens and nails that, you know, whatever it is, you name it, the Department of Defense has to acquire a lot of it because it’s a very large organization. And so in order to try to streamline that process, the commercial item contracting world has been sort of allowed to have fewer and fewer sort of oversight mechanisms in place so that it can happen quicker. The problem is if you remove oversight mechanisms, you get, you know, some unscrupulous actors trying to take advantage of the commercial item contracting world and they try to get products in there that aren’t actually commercial because they don’t have to comply with oversight mechanisms and so on and so on. And so that’s that’s an example of an area where you see things like price gouging happening because they just aren’t required to provide cost and price information in the way they would have to be in other context.

Eric White Yeah, it’s a delicate balance that the Defense Department has to play because as you mentioned, you don’t want these things stuck in, you know, the Death Valley that everybody always is scared of when it comes to development and research. Was it always like this? I want to get a little historical here. Were there always these? Were there ever oversights enough where in the healthy defense industry where it seemed as if everything was kind of flowing smoothly and and then things shifted? Or is it just always been that this is, you know, a constant uphill battle for the Defense Department?

Dylan Hedtler-Gaudette Well, I would say the answer is a little bit of both. It did used to be a little bit better sort of back in the mid-twentieth century. You know. You did. Have things like the truth. The Negotiations Act, for example, which was passed in 1962, and that was meant to provide DOD with some tools at its disposal to make sure that it was getting, you know, accurate and timely information from contractors about cost and prices and contract terms. Right. But slowly over the years, you know, industry has primarily successfully worked to water down and to sort of, you know, strip back some of the provisions in the Truth and Negotiations Act and in other other kind of areas of the law. And so in the 90s, you also saw saw a big push that was titled titled that’s a euphemism. It was called Act acquisition reform. And it certainly did reform acquisition processes. But all it did is, you know, tear back any kind of remaining oversight mechanisms and, you know, accountability and transparency tools that had been in place up to that point. So ever since then, we’ve really been fighting an uphill battle. And Dodd has been fighting an uphill battle, trying to restore some of the more pragmatic common sense oversight and accountability tools that that have been stripped away. But I think you’re right. There is a grand bargain here somewhere that needs to be struck. You know, we need an acquisition and procurement system that allows, you know, industry to operate effectively and to derive a profit so that it can stay in business and allows DOD to get the thing that it needs and that the warfighter ultimately needs. But also that is a responsible process that is that does not unnecessarily and excessively waste hard earned taxpayer dollars. And fortunately, we don’t have any of that right now. So we kind of have the worst of all worlds.

Eric White We’re speaking with Dylan Hedtler-Gaudette from the Project on Government Oversight. So you recently testified to Congress about this topic and issue and you laid out a few recommendations. What can be done on the congressional side as well as on the executive side? Because both are going to have to have a hand in this on a complicated problem.

Dylan Hedtler-Gaudette Absolutely. So this is going to require everyone working in tandem here, all of the relevant stakeholders. So Congress, the Department of Defense itself and industry, in trying to find that grand bargain that I mentioned earlier. But as far as what Congress can do, one thing that it should do is try to remove sort of harmful processes. So kind of outright expression. Yeah, sometimes views as bad budgetary process leads to bad budgetary outcomes. And so we see, for example, how that manifests in, you know, an audit, for example, a failed audit. The audit can’t pass an audit right now. And part of the reason for that, you know, I wouldn’t say the only reason, but part of the reason for that is bad budgetary process on the front end. And one classic example of that is the unfunded priority list, which is an end run extra budgetary process that allows the individual branches of the military so the Army and the Marines and the Navy, etc., as well as combatant commands, individual combatant commander and budgetary request directly to Congress, completely circumventing all of the sort of checks and balances and oversight processes and the budgetary sort of justification process that happens at the department itself. So they get to go around all that and go directly to Congress. And that typically leads to unnecessary, you know, upticks in spending on things that probably shouldn’t be in the budget because they aren’t priorities, because they haven’t been run through all of the kind of scrutiny that happens at the department. So one thing that Congress should absolutely do is repeal the current statutory mandate that actually requires all of the branches and the combatant command to submit unfunded priority list every year. That would be a very good start.

Eric White Dylan Hedtler-Gaudette is director of government affairs with the Project on Government Oversight. Thank you so much for joining us.

Dylan Hedtler-Gaudette I thank you. I appreciate it.

Eric White And you can find this interview along with a link to his testimony that I mentioned at federalnewsnetwork.com/federaldrive. Subscribe to the Federal Drive wherever you get your podcasts.

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