ILSM on Moral Hazard in Military Contracting

This one is by ILSM…


Divorced one like Bush linked to a woeful tale about a retired major general who could not explain to congress how his company could collect $47 million for delivering nothing of value for a contract to do work for our effort in Iraq.

Some might think it treasonous and not very supportive of the troops to bilk the US government with a terrible terrorist threat, a war going on, the daunting specter of Islamofascists, bin Laden and all.

This retired major general is a true patriot, despite his participation in plundering the US taxpayer and not doing a thing for safeguarding the US.

It is business as usual for the folks taking advantage of the moral hazards of having a huge for profit war machine.

How is it so out of hand? I will attempt to explain in 400 words or less.

There is the federal acquisition regulation (FAR), based on the code of federal regulation (CFR).

In the case of our retired major general we need to go to sub part 16.3/16.301.1 Cost Reimbursement Contracts.

“Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer.”

The important words are “allowable” and “incurred”.

Allowable costs have nothing to do with any performance. The contractor gets a list of the costs the retired major general can bill the government for. Incurred means the allowable resource like labor hours at a hugely inflated hour rate were spent, in the case in Iraq sitting in bunkers because it is too dangerous to be out doing anything. But the cost is incurred, because they did try to look out of the bunker and see if they could build anything.

No one ever asks if the allowable incurred costs were reasonable.

Playing in the huge scan the government guys just say that cost reimbursement contracts only require the contractor provide “best effort”, meaning he hired people and they are getting billed. Best effort is the government guys going along with the con to get good jobs like the major general has.

The government guy who might ask for real work would be blackballed by the retired major general should she/he ever want to get into the retired major general’s game.

There are ‘suggestions’ to use performance based acquisition but performance is hard to describe. And applying such esoteric theory like getting something of value for allowable costs incurred is dangerous in the politically charged revolving door environment.

Your boss may be looking for work with the retired major general.

The root causes are corruption, putting profit and self interest ahead of the public good.

Moral hazard, is there a better example of how a moral hazard unfolds, other than packaging ABCP from sub prime notes?


This one was by ILSM.