Cost-Plus Contracts

By

William D. Dannenmaier

A comment by Senator McCain during his first debate was little noticed or examined by media. He said that one way to reduce the government deficit would be to eliminate military cost-plus contracts. Few people realize the hundreds of millions, probably billions, of tax dollars that have been wasted by such contracts.

When I was at WashingtonUniversity, one of my jobs was developing personnel selection programs for business and industry. I would not only evaluate their situation; I would develop a test battery for personnel, conduct the testing and report the results. Occasionally, this included proposing management development programs tailored to the specific business employing us. As part of this latter approach, which always involved senior professors at the university, I would attend the lectures and evaluate their effectiveness. This often included transporting the professor to and from the business concerned. I came to know several nationally respected experts in different fields, not just from listening at the lectures, but from quiet discussions on returning them home. 

My favorite was Dr. Sterling Schoen, an expert on management. One night, returning him home he told me of a study he had recently completed in which the effect of cost-plus contracts with the military had almost ruined a firm.

The company had been awarded a cost-plus contract by the military in 1940. They continued working military contracts until the late 1950’s when they lost their military contract and had to compete on the open market. That is when they began losing money. Bankruptcy threatened. Sterling was hired to evaluate the problem. He told me that he did a very simple study. Beginning with foremen, he asked each person in management to name the people who reported to him, and the people to whom he reported. He said that this procedure revealed six or seven (I’ve forgotten which) management personnel who had no one who reported to them and who reported to no one. In other words, they simply came to work, attended meetings and had no specific duties. 

For years, this had been very profitable for the company. Not just their salaries, but their secretaries’ salaries, their business trips to meetings (including transportation and hotels), their business luncheons and dinners were all part of the “cost.” This not only contributed to the total cost paid by the taxpayers, it greatly increased their profits, because their contract with the military gave them a percentage, perhaps as high as 10%, of the total cost. Now the company, having lost cost-plus contracts, had to pay their salaries and expenses without reward in either productivity or profit.

To the best of my knowledge, after being employed as a researcher by the army for ten years, all military contracts are cost-plus contracts. They contain no incentive for efficiency or economy. On the contrary, they reward inefficiency. Senator McCain must be very aware of cost-plus contracts from his years in the air force following his release from prisoner of war camp. Thus when one reads an occasional article complaining of some multi-million cost over-run, understand, this only increases the company’s profit. Why should they be concerned with keeping a project within the approved budget? 

I mentioned this to one of my sons who maintained an office in WashingtonDC for several years.  

 He assured me that the practice of “cost-plus” contracts was common throughout government.

In effect, we have a system, ignored if not supported, by our administrative branch of government headed by President Bush – and other Presidents before him – and by Congress, Democrats and Republicans alike which leads to the waste of taxpayer dollars. But the system is still worse; leaks of corruption in the oversight of oil contracts in the western states by government officials who would rather party with the company officials they are supposed to be over-seeing and who pay for dinners, drinks and prostitutes than enforce the rules; make one suspicious that such corruption is rampant elsewhere as well.

This is a problem that requires the work of a good, thorough, investigative reporter, but revelations of the so-called investigator reporters of the New York Times, USA Today and a few other newspapers reveals that these people would rather sit in their Beltway offices and telephone informers or simply stay at home and create imaginative articles. I believe the idea of carefully digging into the facts and behavior of government officials is beyond their interest, or their competence.

My hope, which can’t possibly happen, would be to elect an all new Congress and hope that they, in combination with a President who would houseclean the federal bureaucracy, would clean up the mess. To date, however, no one has picked up on McCain’ comment during the first debate that cost-plus contracts are a major budget problem.  If a President McCain did do it, if he could do it, it would be a good reason for electing him.