Senator Claims Excessive Profits are Norm in Service Contracting

An amendment offered by Senator Carl Levin (D-MI) to stop what he claims are prime contractors “gaming the system” to earn excessive profits was adopted late Monday night during the Senate’s floor debate on the FY06 National Defense Authorization bill.  Debate was short and quick – Senator Levin was the only speaker; the amendment was adopted with minor modifications.

CSA and its industry colleagues pulled out the stops as soon as knowledge of the amendment surfaced.  Unfortunately, an article in the Washington Post citing two examples carried the day over rational voices about the detrimental impact the amendment will have on Federal contractors pursuing Time & Material contracts, especially small and mid-sized businesses working as subcontractors.

The Government uses Time & Material contracts when outcomes are open ended and, therefore, difficult to price accurately.   The Levin amendment requires prime contractors to "pass through" subcontractor rates to the government, with no allowance for risk or overhead.

In its letter to all Senators, CSA noted that NO prime (no matter the size) will accept the work of subcontractors if they cannot properly price risk, while still being held accountable for total performance.  Larger firms will opt to self-perform rather than subcontract for labor, which will serve to reduce subcontract opportunities.  In the final analysis, it is the small and medium companies that will be particularly impacted.

It appears that, in the view of Senator Levin, effectively overseeing subcontractors on behalf of an agency customer, ensuring performance, finding and managing a team of effective skill-specific subcontractors, and accepting all contract risk – and charging a rate for doing that – is just a way for contractors to “game the system” rather than understanding that the very purpose of the prime is to manage the operational details for the Government.

The Defense Acquisition Regulatory Council (DAR) is considering a proposed rule similar to Senator Levin’s amendment – but at least, that proposal would go through the regular public comment process and industry would have an ability to provide its views on the proposal.  The General Services Administration also is trying to tackle the issue.

Another expected amendment to watch out for, but we have not yet seen, is a proposal from Senator Ted Kennedy (D-MA) that would limit contractor profits. In his words, "You don't have to take a lot of time on that issue, but I would think the American taxpayers, when they see these hundreds of billions of dollars of windfall profits that are going to so many defense contractors, would have to say that this amendment is warranted.”