WASHINGTON, September 29, 2004 — The war in Iraq, with its urgent agenda of getting the job done and getting it done quickly, relied to an unprecedented degree not only on the soldiers, sailors, airmen and marines who are expected to fight America's wars, but on a second American army: tens of thousands of civilian contractors hired on for the duration. This new, and often dangerous, role for civilians on the battlefield has raised a host of new questions about the role of private contractors in the nation's defense.
One of the biggest contracts awarded in the war in Iraq went to Kellogg Brown & Root, a key subsidiary of Halliburton Co., the firm Vice President Dick Cheney ran as CEO before he stepped into the White House and became one of the prime movers urging the president to invade Iraq. Of the $4.3 billion in defense contracts Halliburton won in fiscal 2003 only about half were awarded based on competitive bidding. Another $1.9 billion in contract dollars was awarded on the basis of "urgency" without bidding and without going to any other contractors.
The connection between Halliburton and the Vice President has led to no end of speculation about how that particular firm was chosen. While this report does not address that issue specifically, it does examine the practice of awarding no-bid contracts to well-connected defense contractors. Indeed, one might pose a new question on the role of contractors in the American military: Was the war in Iraq an example of the Pentagon's new way of doing business, or was it an outgrowth of a way of doing business that has been much longer in duration, albeit conducted off the field of battle without a worldwide—or even any—audience?
To find the answers, the Center began in early 2004 to investigate the patterns of Defense Department contracting. Our prime source was the Pentagon's own procurement databases—public information that had been posted for years on an obscure Defense Department Web site.
The Center examined more than 2.2 million contract actions totaling $900 billion in authorized expenditures over the six-year period from fiscal year 1998 through fiscal 2003 (Oct. 1, 1997-Sept. 30, 2003). Most of the research was focused on the biggest contractors, those that won at least $100 million in prime contracts over the period studied. Some 737 prime contractors, mainly but not exclusively for-profit corporations, fit that criteria, along with several thousand of their subsidiaries and affiliates.
After nine months of research, the Center has found:
– Half of all the Defense Department's budget goes out the door of the Pentagon to private contractors. This percentage has stayed virtually constant over the past six years; as the Pentagon's budget has expanded with the wars in Iraq and Afghanistan, so have the dollars going to contractors.
– Only 40 percent of Pentagon contracts were conducted under what it terms "full and open competition." (That percentage drops to 36 percent if you deduct those "full and open" contracts that attracted only a single bidder). Some 44 percent of contracts were given under "other than full and open competition"—usually as sole source contracts. Another seven percent fell under other categories (most often as small business set-asides), and eight percent gave no competition information at all.
– The Pentagon's contracting force is top-heavy, and growing more so. Out of a total universe numbering tens of thousands of contractors, the biggest 737 collected nearly 80 percent of the Defense Department's procurement dollars. The 50 biggest contractors got more than half of all the money; the top 10 got 38 percent.
– Topping the list was Lockheed Martin, with $94 billion in defense contracts over the six-year period. Boeing was second with almost $82 billion. Well behind those leaders were Raytheon (just under $40 billion), and Northrop Grumman and General Dynamics, with nearly $34 billion apiece. Those five companies tower over all other defense contractors. It's worth noting that they collect additional billions, not included in the figures cited, through joint ventures with other companies.
– Most of the contracts awarded to the very biggest defense contractors were won without what the Pentagon calls "full and open" competition. Of the 10 biggest contractors, only one—Science Applications International Corp. (SAIC)—won more than half its dollars through an open bidding process. Three of the top 10—United Technologies, General Electric and Newport News Shipbuilding (now owned by Northrop Grumman)—collected less than 10 percent of their contract dollars through open bidding.
– Larger contractors were also more likely to win favorable terms on their contracts. One-third of the dollars awarded to the top 737 contractors came in cost-plus contracts that offer little incentive for keeping costs under control. Among smaller companies, only 11 percent of the award dollars were for cost-plus contracts.
– Industry consolidation was another major factor in creating a top-heavy group of Pentagon contractors. Over the six-year period of this study, more than 60 contractors were acquired or merged with even larger contractors. This was true both among companies whose main business is defense, and those in other sectors, particularly energy and telecommunications.
– The list of top contractors includes 43 joint ventures, in which major defense firms partnered together forming new companies to manage specific contracts or weapons systems. Four of these joint ventures collected $1 billion or more in contracts over the six-year period and together they accounted for nearly $19 billion in revenues to their partner companies. Lockheed and Boeing again led all others in revenues from joint ventures; Lockheed collected $2.3 billion from six different joint ventures, Boeing earned almost $2.1 billion from five.
– While most of the top 737 Pentagon contractors were American corporations, nearly 100 were foreign-owned. Included on the list were the governments of Canada, Germany and Japan, as well as the Italian Post, Telephone & Telegraph Ministry. The leading foreign corporations were British-based BAE Systems, BP and Rolls-Royce; and Maersk Inc., a Danish shipping giant.
– Political influence, as measured through lobbying expenses and campaign contributions, was a major undertaking by many of the largest Pentagon contractors. But a surprising number of companies on the top contractor list gave little or nothing to political candidates and parties, and chose not to invest in Capitol Hill lobbyists. Indeed, those contractors that spent the most on contributions and lobbying were from business sectors other than defense. The three leaders in political contributions between 1998 and 2003 were AT&T ($9.9 million), SBC Communications ($9.2 million) and FedEx ($8.0 million). Only two of the 10 biggest political contributors among the group were primarily defense companies—Lockheed Martin and Boeing. Nearly a quarter of the top Pentagon contractors made no political contributions whatsoever during the six-year period, and only 202 of the 737 gave $100,000 or more in contributions, either through PACs, soft money, or individual donations from their executives, employees and families. Overall, the top contractors gave nearly $214 million in campaign contributions, two-thirds to Republicans.
– The story was much the same in lobbying expenditures, though the dollar amounts were far higher. Just under half the leading defense contractors reported spending money on Washington lobbyists, but those that did spent a total of $1.9 billion in the effort. Again, the biggest spenders were not primarily defense companies, though the biggest of the Pentagon's contractors did rank near the top. Leading the list was Altria Group (the former Philip Morris), with just under $94 million in lobby expenditures. General Electric was second, with $88.4 million. AT&T was third ($71.6 million), followed by Lockheed Martin ($71.5 million), Boeing ($64.4 million) and Northrop Grumman ($61.2 million).
– President George W. Bush received more than $4.5 million in campaign contributions from the 737 leading defense contractors during the six-year period of this study; his Democratic challenger Sen. John Kerry collected just $332,000. In 2004, however, the proportions switched dramatically. Kerry collected twice as much as Bush between Jan. 1, 2004 and the end of July—$1.6 million versus $824,000 for the president. Including that late money, Bush received nearly $5.4 million from the leading defense contractors; Kerry drew just under $2.0 million.
– Small business contractors are given special preference at the Defense Department, as they are in other federal agencies, since Congress set informal quotas encouraging the government to do more business with smaller companies. Surprisingly, however, the list of "small businesses" includes many dozens of companies with more than $100 million in defense contracts over the past six years. Some 189 of the leading contractors had at least half their contract dollars designated as going to small businesses. For 127 companies, at least 90 percent of their money was classified that way. Leading them all was Chugach Alaska Corp., whose status as an Alaska Native corporation classifies it as a small, disadvantaged business eligible not only for preferences in bidding but for small business set-aside contracts. Taking full advantage of its status, Chugach Alaska won $1.4 billion in defense contracts between fiscal 1998 and 2003. The biggest non-minority small business contractor was GTSI Corp., which retained its small business status despite having long since grown out of it. The company collected nearly $1.2 billion in small business contracts over the past six years—72 percent of their overall total.
– A lucrative loophole in the small business rules has enabled contractors to retain their small business status through the life of each contract—even if they've grown or been acquired by a much larger company. Titan Corp., a San Diego-based defense electronics firm, with a long string of acquisitions over the past six years (and nearly $2.4 billion in defense contracts), won nearly $550 million of contracts under the small business classification. Other companies have done the same, prompting calls that the small business status be reviewed on a much more frequent basis than it has been. Regulations to require that, at least on a limited scale, are due to take effect later this year.
– The Pentagon's shopping list has undergone a gradual, and largely unnoticed, transformation in the past two decades. In 1984, almost two-thirds of its contracting budget went for products rather than services. By the early 1990s, the ratio between the two had evened out. By fiscal 2003, 56 percent of Defense Department contracts paid for services rather than goods. Many of these were for routine jobs—like KP duty or building maintenance—that used to be done by low-ranking military personnel. But the Pentagon also contracts for services that are highly sophisticated, strategic in nature, and closely approaching core functions that for good reason the government used to do on its own. The Pentagon has even hired contractors to advise it on hiring contractors.
– The accuracy of the Defense Department's records—particularly regarding the corporate ownership of its largest contractors—leaves much to be desired. The Center found more than $35 billion in contracts where the ultimate corporate parent was misidentified. In some cases this led to major discrepancies between the amount of contracts actually won by major corporations and the totals reported publicly by the Pentagon.
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