“We Pause for This Commercial…Sale”

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Air Force Photo / Maj. Chad Gibson

A pair of C-130Js like those that were sold to the Pentagon as commercial items so the contractor would not have to disclose certain pricing information to the military

Legislators are fighting over every single dollar in this year’s defense budget, although saving billions could be as simple as changing a few words in a contracting statute. And believe it — or not — the Pentagon is the good guy in this battle.

The Defense Department is circulating a proposal on Capitol Hill that would stop defense contractors from using a contracting loophole to escape oversight and waste taxpayer dollars. Currently, contractors can label certain goods and services as “commercial,” even if the items are never bought by the public. This allows contractors to avoid disclosing information about the costs of creating the product or service. The result? The government ends up paying highly questionable prices for certain items.

Although this proposal didn’t make the cut for the House’s vote last week on amendments to the National Defense Authorization Act , it’s not too late to get it through the Senate. Congress needs to help the Department of Defense put a stop to this oft-abused type of contract, which eseentially lets contractors set their own prices without any economic consequences.

Check out the C-130J cargo airplane, for example. Raise your hand if you know someone who would buy such a massive aircraft, designed to ferry troops into war zones, for personal use. Anyone? Until 2006, the C-130J was labeled a commercial item—a decision the Department of Defense Office of Inspector General criticized in a 2004 report.

Unsurprisingly, only the Air Force bought them. But by using this loophole, Lockheed Martin, the aircraft’s manufacturer, was able to skirt contract-pricing transparency laws designed to protect the taxpayer. And of course, the aircraft wasn’t subjected to the price competition that exists in the real world, because no other company was trying to sell a massive military jet to either the Air Force or consumers.

After the Air Force designated the airplane commercial, the cost of wiring harnesses on the C-130J increased from $91 to $453 each. The Government Accountability Office cited this as a poor example of a commercial product when the market didn’t set the price. But it’s hardly the only case.

A 2006 DoD inspector general report on an $860 million contract for spare parts found that the government paid too much for them because contractor Hamilton Sundstrand refused to supply pricing data—using the “commercial” label as justification.

The government failed to dodge Sundstrand’s bullet, but the C-130J commercial labeling was halted after Senator John McCain (R-Ariz.) held hearings on the program, spurring reform. After the C-130J was brought back under the umbrella of traditional military procurement, taxpayers saved $168 million. But the contracting loophole remained wide open.

The problem has been around since the mid-1990s (POGO has been working to change the wording since 1999). But the good news is that recently, efforts to close the loophole are gaining steam: the Pentagon and a pair of its advisory bodies are all urging that the definition be narrowed.

The current definition is too broad: it includes goods or services “of a type” that are “offered” for sale or lease to the general public. According to the new DoD legislative proposal, changing the definition would “permit the government to acquire commercial items at better prices by ensuring that such items are only those goods or services that actually have been sold, leased, or licensed in comparable quantities in the commercial marketplace.”

Unsurprisingly, contractors oppose the change, arguing that it will curtail government access to new and innovative technologies because small companies will be discouraged from doing business with the government. This argument is a red herring. Such companies are selling the military true commercial items — things that are actually sold in substantial quantities in the commercial marketplace — so the definitional change doesn’t apply to them. In the rare cases where what being is sold is not available in the commercial marketplace, the  only thing that the government is requesting is cost data, which can be waived in appropriate cases.

The Pentagon’s proposal is going to be a hard sell, simply because the issue is wonky — and industry is doing its best to convince lawmakers that it’s a bad idea. But if we can turn a fraction of the attention lavished upon the GSA and Secret Service scandals onto government contract pricing issues — no matter how eye-glazingly boring it sounds—we can make a real difference in cutting the deficit and save billions without hurting troops, taxpayers, or national security.

Dana Liebelson is the Beth Daley Impact Fund Fellow for the Project On Government Oversight. She also covers the presidential election for “The Week” magazine.