Regulatory controls as barriers to entry in government procurement

Policy Sciences 25: 29-42, 1992. �9 1992 KluwerAcademic Publishers. Printed in the Netherlands.

Regulatory controls as barriers to entry in government procurement*

WILLIAM E. KOVACIC 1 Associate Professor, George Mason University School of Law, Arlington, Virginia 22201, U.S.A.

Introduction

Until a decade ago, attorneys expert in government contracts occupied a somewhat sleepy backwater in the landscape of legal practice in the United States. 'Procurement law' was largely the province of relatively obscure legal boutiques. Elite firms of the private bar commonly regarded government contracts matters as arcane annoyances to be shunned rather than promising business opportunities to be grasped. Prestigious careers in corporate deal- making lured the best students in America's leading law schools. By contrast, few law review editors showed an abiding desire to spend a professional life- time navigating companies through the labyrinth of federal procurement statutes and regulations.

Today it is exceptional to find a major law firm without a government contracts department. 2 Although many areas of federal regulatory practice such as antitrust enforcement waned in the 1980s, government contracts became a lucrative boom town of counselling and litigation. Membership in the Ameri- can Bar Association's Section of Antitrust Law fell by almost one-third from 1980 to 1990, but the ABA's Section of Public Contract Law grew by over 50 percent. Headhunters scoured the legal community for lawyers who could claim to have once read a government contract. Despite a general slump in current demand for lawyers skilled in corporate and commercial law, efforts by private law firms and government agencies to recruit procurement law specialists are thoroughly robust.

The modern transformation of the government contracts legal practice stems from a stunning expansion in the 1980s of the regulatory controls by which Congress and major federal purchasing agencies seek to oversee the conduct of government contractors. Virtually every year of the past decade has yielded dramatic adjustments in the federal procurement regulatory scheme, particularly in public governance structures designed to motivate suppliers of goods and services for national defense? Most striking of all, the regulatory upheaval has featured extraordinary, unprecedented emphasis

* Prepared for the Twelfth Annual Research Conference of the Association for Public Policy Analysis and Management, San Francisco, California, October 18-20, 1990. Revised February 1991.

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upon criminal sanctions to deter and punish perceived instances of contractor misconduct. 4 Even the most casual observation of daily news accounts makes apparent the formidable, expanding role of criminal law enforcement investigations and prosecutions in the public contracting arena. 5

A central assumption underlying the growth of the federal procurement apparatus is that the imposition of more extensive controls and sanctions is a purely unmixed blessing. 6 Perhaps most important, congressional discussion of procurement regulation seldom accounts for the possibility that existing and contemplated controls can generate significant c o s t s . 7 In legislative delib- erations concerning procurement policy, hiring more government investigators, starting more fraud prosecutions, broadening contractor reporting requirements, and strengthening sanctions are treated as self-evident solu- tions to episodes of poor performance or contractor misconduct. The type of cost-benefit analysis common to other regulatory schemes occurs infrequent- ly, if at all, when new regulatory measures are proposed.

This paper identifies one species of cost associated with the growth of procurement-related controls. It considers the regulatory system's impact on the willingness and ability of firms to compete for opportunities to supply goods and services to government purchasing agencies. A major goal of the federal procurement system has been to increase competition for public contract awards by expanding the universe of potential suppliers. 8 Removing impediments to participation in the procurement process has been an important aim of federal acquisition policy in the 1 9 8 0 s . 9 This paper suggests how the expansion of regulatory controls can frustrate the goals of stimulating entry into public procurement markets and increasing rivalry for government contract awards.

The paper treats this topic in three parts. It begins by describing several of the most important trends in the evolution of the modern government contracts regulatory system. The second part identifies the principal efficiency- related benefits that often are presumed to flow from more expanded regulatory controls. The third section describes the possible impact of regulatory controls in inhibiting entry by potentially attractive suppliers or inducing exit by existing firms. The paper concludes by emphasizing that a proper assessment of costs is essential to reaching sensible conclusions about the desirabil- ity of adopting new regulatory measures.

Public contracts regulation: major trends

Since World War II, public contracting has been distinctive for the scope and complexity of the regulatory system that controls the government's suppliers, m Throughout the postwar period, many special commissions and individual commentators have concluded that the procurement system's complexity adds needless, considerable cost to transactions between private contractors and government agencies, n Though some aspects of recent experi-

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ence are hardly novel, the regulatory initiatives of the 1980s constitute a qualitatively significant departure from past regulatory practice. The noteworthy features of the regulatory growth of the past decade are described below.

Imposition of broad, ill-defined regulatory commands

Public contracting regulatory change is a predictable, automatic response to allegations of scandal concerning private contractors or government buyersJ 2 In the 1980s there was no shortage of disturbing revelations about the performance of the procurement system, particularly the acquisition activities of the Department of Defense (DOD). Disclosures concerning exorbitant pricing for spare parts, bribery and corruption of public purchasing officials, mischarging of lalSor hours, and falsification of test results repeatedly focused the attention of congressional policymakers on the procurement system. 13 Accounts of fraud or ineptitude in major defense programs drew especially harsh scrutiny, as Congress in the 1980s had committed itself to the largest program of peacetime expenditures for defense in the country's history) 4 Each series of unfavorable revelations created new and powerful impulses to augment the existing regulatory structure with new commands.

In several noteworthy instances, the legislative response to reports of misconduct or unsatisfactory performance has taken the form of hastily con- ceived regulatory controls. The perceived imperative to embrace immediate statutory cures for apparent deficiencies in the 1980s inspired several enact- ments of sweeping scope and questionable draftsmanship. Thus, nothing remotely resembling careful, deliberate consideration of potential costs or alternative approaches accompanied enactment of farreaching measures such as the Drug-Free Workplace provisions of the Anti-Drug Abuse Act of 198815 and the procurement integrity provisions of the Office of Federal Procurement Policy Authorization Act of 1988.16 Once adopted, such enact- ments typically resist subsequent retrenchment, as any suggested ex post weakening of requirements usually is successfully attacked by advocates of the original legislation as an unwarranted dilution of congressional efforts to discourage fraud and otherwise improve procurement performance. There is, in effect, an upward statutory ratchet in procurement regulation that ensures that regulatory commands become ever more restrictive. 17

Expanded certification and recordkeeping requirements"

An increasingly popular regulatory technique is to require contractors to sign certificates warranting that they have complied with stated regulatory requirements. The signing of such a certificate is an important event. The government's discovery that the representations underlying the certificate are incor-

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rect can (and increasingly does) elicit a criminal investigation. ~8 In recent years, statutes imposing new regulatory commands routinely have required that high contractor officials certify compliance with the stated requirements? 9 Ensuring that certifications are indeed truthful ordinarily entails a nontrivial expansion of the contractor's internal monitoring and recordkeeping mechanism, as greater care must be taken to canvass all levels of the organization to verify the soundness of factual representations whose validity the firm must certify.

Expanded monitoring and sanctions

The most important change in the public contracts system in the 1980s has been a substantially greater emphasis upon criminal prosecution to punish and deter departures from regulatory requirements. In the defense acquisition arena, both DOD and the Department of Justice have significantly increased the number of personnel assigned to procurement fraud investigations. 2~ Criminal prosecution is ever more common for certain types of conduct (for example, alleged failures to comply with mandated cost accounting conven- tions or cost disclosure obligations) that once were channelled almost exclu- sively through civil dispute resolution procedures. The possibility that a contractor's conduct could become the focus of a preliminary criminal investigation, a grand jury proceeding, or a criminal trial is unmistakeably and substantially greater today than it was in 1980.

Congress has supplemented the criminal enforcement machinery by giving private citizens (notably, contractor employees) powerful incentives to bring 'qui tam' lawsuits on behalf of the United States to redress contractor misconduct. 21 In 1986, Congress amended the 'qui tam' mechanism of the False Claims Act to provide substantial bounties to individuals (called 'relators') who are the source of evidence that contractors have presented the government with false claims for payment. 22 The statute also allows successful relators to recover their attorney's fees - a provision that has created a flour- ishing qui tam practice within the private bar. 23 Since 1986, the prospect of massive recoveries and the availability of attorney's fees have combined to generate numerous qui tam lawsuits against major government contractors. 24 It is a rare major defense contractor today that is not the subject of one or more qui tam actions.

Goals of recent regulatory change: efficiency concerns identified

The regulatory measures described above enable members of Congress to achieve a variety of goals. Some of these goals have little to do with improving the performance of the procurement process. Some regulatory restrictions serve important reelection objectives by transfering wealth to favored con-

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stituencies who in turn will supply valuable electoral resources to the spon- soring legislator. 25 Enacting new remedial legislation also permits individual legislators to attain reelection by claiming credit for cracking down on cor- rupt contractors or slothful bureaucrats. By demanding expanded criminal prosecution or demanding that procurement officials impose administrative sanctions more broadly, legislators likewise can position themselves as pro- tectors of the public fisc. This latter impulse for creditclaiming explains a considerable part of the timing, content, and method of recent procurement legislation.

At least as a matter of form, modern procurement legislation also has sought to improve the efficiency of the procurement process. The 'efficiency' goal has essentially two dimensions. The first is to attain the best possible mix of goods and services for a given level of public expenditures. In procurement settings in which market forces supply weak incentives for contractors to per- form skillfully (e.g., for certain major weapon systems), regulatory controls are necessary to avoid monopolistic rent extraction or underprovision of quality. 26 The second efficiency aim is to persuade the public that agencies and contractors are using tax revenues to satisfy genuine public needs such as national security. By signalling the integrity of the defense acquisition process, Congress seeks to sustain public support for costly outlays on important defense programs. 27 Enacting new statutory safeguards against fraud, waste, and abuse is one way to reassure the public that revelations of corruption or blundering do not warrant abandonment of or draconian cuts in important expenditure programs. 2~

To the extent that modern regulatory controls seek to ensure more efficient procurement outcomes, Congress has established them with little evident concern for the costs associated with the specific regulatory techniques it has adopted. Even if one assumes that recently enacted controls generate genuine efficiency benefits, a sensible assessment of their net effect requires consideration of their costs. For example, in seeking to signal the integrity of the procurement process, one presumably would prefer to identify the least costly method of persuading taxpayers that their money is being spent wisely. At a minimum, one would at least ask whether the cost associated with attaining the next increment of integrity is acceptable. Nonetheless, the enactment of recent controls has proceded as though the cost of implementing new restrictions is trivial or virtually nonexistant. To state the proposition even more strongly, implementation costs sometimes are seen as irrelevant. Increasing integrity at any cost is deemed a worthy end. 29

In practice, the application of new controls is costless to neither the purchasing agencies nor affected contractors. Most obviously, compliance with regulatory commands requires expenditures for administration that become real costs of transacting individual contracts. Government agencies and contractors must hire employees to interpret and implement statutes and regulations, and operational personel must devote part of their time to ensuring that requirements are fulfilled. Not only are government bureaus enlarged with

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administrators responsible for regulatory compliance, but the contractor's compliance costs are charged to the government either as direct costs of individual contracts or indirectly through the allocation of overhead expenses? ~ Thus, the price tag for every airplane, missile, or tank that rolls out of an American factory today includes a significant cost increment attributable to the implementation of and compliance with procurement regulatory commands.

Regulatory requirements as impediments to entry

Implementation expenses, by themselves, are not the only costs associated with public contracts regulation. The prospect of complying with regulatory requirements can affect the ability or willingness of firms to do business with federal agencies. A straightforward illustration of regulatory barriers to participation in procurement markets are statutory restrictions that deny eligibili- ty to foreign firms seeking to supply goods and services to federal agencies. 31 Less obvious but potentially significant is the tendency of regulatory controls to discourage otherwise eligible firms from taking risks and bearing costs uniquely associated with regulatory compliance in public contracting. The latter consequence is addressed below.

Risk of criminal exposure

Changes in procurement statutes and government enforcement policy have increased the possibility that firms engaged in supplying federal agencies may become the subjects of a criminal inquiry or prosecution? 2 Among other sources, this risk inheres in expanded requirements that contractors certify their compliance with regulatory controls. Major examples of such requirements include duties to certify compliance with cost disclosure obligations, quality control regimes, prohibitions on charging government agencies with certain categories of costs, restrictions on the recruitment and employment of former government employees, and adherence to limits governing the receipt of inside information from government purchasing agencies. 33

As noted above, 34 certifications that are knowingly or recklessly false can be prosecuted criminally under various sections of the United States Code. The expanded emphasis on criminal enforcement has led federal investigators and auditors to scrutinize instances in which information subject to certification proves to be incorrect. Errors attributable to inadvertence or good faith judgments about the significance of factual data related to the certificate are not criminally culpable, but a contractor and its employees may be compelled to expend considerable resources to demonstrate that such flaws were benign and not deliberate. In the current procurement environment, contractors are unlikely to enjoy the benefit of the doubt when government investigators review ambiguous conduct.

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To the firm contemplating participation in a federal contract competition, the operation of the existing criminal enforcement mechanism has at least three discouraging features. First, ensuring compliance with certification obligations requires additional institutional safeguards to guarantee that representations to government agencies are in fact true. Among other effects, this forces the potential supplier to install and monitor special accounting systems to segregate costs and determine that required cost disclosure obligations have been fulfilled. Although most costs associated with installing and operating these internal controls ultimately can be charged to the government, the act of establishing and operating such safeguards can render the firm's overall procedures and operations more rigid and less amenable to efforts to respond swiftly to developments in commercial markets.

Second, the mere fact of doing business with federal agencies may be seen as increasing the chances of running afoul of the criminal enforcement process. The additional exposure may not be great in an absolute sense, but relatively small increases in the risk of facing a criminal investigation or prosecution nonetheless may be unpalatable. Coping with even the most preliminary and ultimately fruitless criminal investigation can be extremely disruptive for the company as a whole and for its individual employees. Firms considering whether to contract with a federal agency (particularly DOD) could easily decide that the additional risk of criminal exposure is unacceptable.

Third, the proliferation of certification requirements bespeaks a presumption that contractor employees cannot be trusted to do their jobs honestly. Recurring commands that employees attest to fulfillment of specific contractual obligations can undermine morale and reduce the firm's productivity. The implicit presumption of untrustworthiness, coupled with awareness of the hazards flowing from incorrect certifications, can create an environment that frustrates efforts to recruit and retain skilled professionals. 35 By themselves, concerns about sustaining the quality and morale of the firm's employees may weigh against entering the federal procurement arena.

Risk of exposure to whistleblower suits

By accepting a federal contract, a firm in effect converts each of its employees into a potential qui tam whistleblower. As mentioned above, 36 the False Claims Act affords strong incentives for contractor employees to file lawsuits challenging contractor conduct that results in overcharging the federal government. The statute's provision for reimbursing attorney's fees gives the private bar an attractive inducement to file cases on behalf of individual employees, and the qui tam mechanism contains relatively weak disincentives to initiate unmeritorious actions. 37 In addition, whistleblowing employees who invoke the qui tam machinery enjoy significant protection from employer retaliation. 38 It is hardly surprising that qui tam litigation has become one of the fasting growing fields of private legal practice.

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Firms accustomed to working solely within commercial markets must consider the virtual likelihood that they will become the target of a qui tam suit in connection with their performance of a federal government contract. In par- ticular, the availability of qui tam actions can provide employees a formidable tool for opportunistically extracting more favorable contractual terms from employers or for discouraging legitimate managerial activities, including discipline. For this reason, potential contractors might be concerning about the effect of possible qui tam liability on existing management procedures and philosophies. For example, a firm that emphasized free-flowing internal debate and discussion about its strengths and shortcomings would be forced to consider whether such information flows would be wise in a qui tam environment. As with the greater possibility for criminal enforcement scrutiny, a successful commercial company could properly ask whether the benefits of dealing with the government merit the additional burden.

Inability to exploit regulatory compliance scale economies

Smaller firms may find it more difficult to cope with federal regulatory requirements than their larger counterparts. The sheer volume and complexity of public contracting controls create compliance scale economies for firms with large volumes of government contracts. A large government contractor ordinarily creates a substantial compliance infrastructure to address the government's regulatory concerns and fulfill regulatory obligations. Incre- mental additions to the regulatory burden are more easily absorbed in these organizations than they are in smaller companies for whom satisfaction of new paperwork requirements may be disproportionately burdensome. 39 Compared to a new entrant, the incumbent government supplier with a large volume of government contracts can allocate compliance-related overhead costs over a larger base of government work and can include a smaller increment for regulatory overhead in each bid for new contracts.Thus, for a variety of reasons, smaller commercial firms with promising ideas may be deterred from making the infrastructure investment needed to comply with the government's regulatory commands. 4~

Impact on firm flexibility

The public contracts regulatory regime does not encourage flexibility and improvisation, traits that often characterize success in commercial markets. Instead, efforts to fulfill regulatory requirements tend to introduce rigidity into the contractor's operations. This rigidity is pronounced when the potential sanctions for noncompliance - notably, criminal prosecution - are severe. To avoid liability for a faulty certification, for example, contractors are wise to adopt careful, time-consuming internal safeguards to ensure that representa-

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tions to government agencies are truthful. Consequently, the government contracts divisions of firms that do business in both public and private sales arenas begin to look eerily like the comparatively ponderous public purchasing organizations with which they deal.

There is a danger that efforts to comply with public procurement regulatory requirements will begin to influence the contractor's organization in ways that undermine its prospects for success in commercial markets. For example, procurement integrity and accounting restrictions may come to dictate the manner in which the firm performs its commercial work. Adaptation to federal purchasing requirements may diminish flexibility, responsiveness, and risktaking, thus gradually reducing the firm's ability to compete successfully in commercial markets. A company that wants to preserve its competitive acumen in commercial markets would be wise to think twice before exposing itself to a regulatory system whose requirements could deaden instincts necessary for survival in the commercial arena. 41

Conclusion

Additions to the federal procurement regulatory scheme in the past decade frequently have rested upon myopic assumptions about the net effect of imposing new controls. Anticipated benefits - improving efficiency, reducing fraud, maintaining taxpayer confidence in the value of expenditures for important public programs - receive overwhelming emphasis in the legislative calculus, but costs associated with executing new regulatory commands are often slighted or entirely ignored. A frequently omitted cost-related criterion is the effect of new controls upon the willingness of firms to do business with public agencies. Particularly by expanding monitoring requirements and resorting more extensively to criminal sanctions for apparent episodes of contractor misconduct, Congress has imbued federal procurement with distinctive, increasingly formidable risks that may discourage firms from entering the public contracts arena.

This is not to say that a proper cost/benefit assessment of new regulatory requirements invariably will weigh against embracing additional restrictions. It does indicate, however, the value of properly identifying and assessing regulatory costs, including those related to the effect upon entry by new suppliers. The importance of such a calculation for responsible policymaking is obvious if net anticipated regulatory benefits are to be measured correctly. For the longer term, failure to consider the entry-impeding characteristics will do more than discourage entry by new offerors. Many of the government's current suppliers have substantial commercial divisions in addition to departments devoted to addressing the requirements of public entities. Some of the most capable of the longstanding suppliers to government agencies may gradually reposition themselves to exit the public procurement arena and focus entirely on commercial sales. It is conceivable that public procurement increasingly

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will become the province of firms whose distinguishing trait is not superior capability in production or service, but skill in comprehending and respond- ing to the government's regulatory commands.

The combination of reduced entry and increased exit will make it increasingly difficult for purchasing agencies to realize satisfactory procurement outcomes. 42 Among other effects, by shrinking the pool of contract-seekers, an ever-expanding body of regulatory requirements will deny government agencies the benefits of aggressive rivalry among suppliers. 43 The contraction of the supplier base will frustrate the attainment of the procurement system's competition-oriented objectives. Where supplier rivalry sags, government buyers may experience greater opportunism and weaker performance by the remaining suppliers. Over time, regulatory approaches that significantly reduce the possibility of effective challenge by new entrants are unlikely to improve either the performance or the integrity of firms that continue to participate in the government procurement arena.

Notes

1. Associate Professor, George Mason University School of Law. The author thanks Patrick Larkey, Jim Leitzel, and Lilian Regelson for many useful comments and suggestions and thanks Joseph Miller for his research assistance. The author also gratefully acknowledges the support of the Sarah Scaife Foundation in the preparation of this paper.

2. See, e.g., Simchak, 'Looking Into the Crystal Ball: Practicing Government Contract Law in the 1990s,' 53 Fed. Cont. Rep. (BNA), No. 16, at 553, 557 (Apr. 16, 1990) (predicting that 'the practice of government contract law will continue to become less insular and paro- chial' in the 1990s and that '[t] he specialty "boutique" practices will have to watch government contracts' work go to the large, general corporate law firms who have existing corporate, labor or general litigation clients who also are government contractors').

3. These adjustments are discussed in Kovacic, 'The Sorcerer's Apprentice: Public Regula- tion of the Weapons Acquisition Process,' in Arms, Politics, and the Economy 104 (R. Higgs ed. 1990); Whelan, 'Reflections on Government Contracts and Government Policy on the Occasion of the Twenty-Fifth Anniversary of the Public Contract Law Section,' 20 Pub. Cont. L..1". 1, 6-10 (1990).

4. See B. Elmer, J.-E Swennen & R. Beizer, Government Contract Fraud 2-6 to 2-8 (1985); P. Trueger, Accounting Guide for Government Contracts 1111-48 (8th Ed. 1988); Falling, 'A Layman's Guide to the Federal Fraud Laws,' 23 Natl Cont. Mgmt J. 37 (1989); Overly, 'Government Contractors Beware: Civil and Criminal Penalties Abound for Defective Pricing,' 20 Loyola L.A.L. Rev. 597 (1987).

5. See, e.g., Moore, 'Northrop Seeks to Correct "Flaws and Failures,"' Wash. Post, Oct. 13, 1990, at A6, col. 1 (recounting congressional concern about performance shortcomings and misconduct by Northrop Corporation in connection with major weapons programs, including the B-2 bomber, the air launched cruise missile, and the AV-8B Harrier fighter aircraft).

6. For a representative statement of this view, see Berman & Grassley, 'Defense Procurement: Exposing Crime Pays,' Wall St. J., Sept. 6, 1988, at 30, col. 4 (op ed column by Congress- man Howard Berman and Senator Charles Grassley).

7. For a rare expression of legislative concern to the contrary, see 134 Cong. Rec. H10640- 41 (daily ed. Oct. 20, 1988) (remarks of Rep. Coats) ('[I]n our zeal to get at needed reforms and get at the fraud that occurs I would hope that we do not overstep our bounds

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and impose regulations on defense contractors that bring about nothing but inefficiency, ineffectiveness and a higher cost for the weapons they produce.').

8. See Burnett & Kovacic, 'Reform of United States Weapons Acquisition Policy: Competi- tion, Teaming Agreements, and Dual-Sourcing,' 6 YaleJ. on Reg. 249 (1989).

9. The most important modern policy command favoring competition in public procurement is the Competition in Contracting Act of 1984 (CICA). Pub. L. No. 98-369, 1984 Cong. Code & Admin. News (98 Stat.) 1175 (codified as amended in scattered sections of 10, 31 & 41 U.S.C.). CICA compels federal purchasing officials to use 'full and open competition' through the use of competitive purchasing procedures. 10 U.S.C. Sec. 2301 (a) (5). CICA required each executive agency to establish a 'competition advocate' to promote the use of competitive purchasing techniques. 41 U.S.C. Sec. 418 (a). The competition advocate is responsible for 'promoting full and open competition' and for 'challenging barriers to such competition.' 48 C.ER. Sec. 6.502 (1990). Finally, CICA substantially increased the ability of disappointed offerors to challenge apparent departures by government purchasing officials from mandated competition requirements. See American Bar Association, Section of Public Contract Law, The Bid Protest Experience Under the Competition in Contracting Act (Aug. 5, 1989); Marshall, Meurer & Richard, 'Incentive-Based Procurement Oversight by Protest' (March 1990: mimeo).

10. This is especia•ly true f•r the acquisiti•n •f weap•n systems. See• e.g.• J. Gans•er• A••rding Defense 150-54 (1989); Center for Strategic and International Studies, U.S. Defense Acquisition: A Process in Trouble 29-30 (1987); Davis, 'Convoluted U.S. Purchasing Sys- tem Is Blamed For Bad Habits of the $200 Billion-a-Year Buyer,' WaIlSt. J., Sept. 2, 1988, at 34, col. 1. Weapons acquisition, however, is a special case only in degree. The governance structures and contractual approaches that public bodies use to buy conventional, 'off-the-shelf' goods and services are considerably more complex than those used by the purchasing departments of private companies. See Marvel & Marvel, 'Contracting Prob- lems and Public Sector Organization' (Sept. 1990: mimeo).

11. See, e.g., Commission on Government Procurement, I Report of the Commission on Government Procurement 31 (1972) (noting existence of 'a burdensome mass and maze of procurement and procurement-related regulations'); President's Blue Ribbon Commission on Defense Management, A Formula for Action: A Report to the President on Defense Acquisition 18 (Apr. 1986) (observing that 'the legal regime for defense acquisition is today impossibly cumbersome'); T. McNaugher, New Weapons Old Politics - America's Military Procurement Muddle 174 (1989) ('[M]uch of the fat [of defense acquisition] must be attributed to the complicated, bureaucratically encrusted way the ~ nation buys weapons.'); J. Nagle, Federal Procurement Regulations: Policy, Practice and Procedures 532 (1987) (federal procurement regulations 'are a mine-studded labyrinth bewildering and dangerous to Government and contractors alike'); Kovacic, 'Blue Ribbon Defense Com- missions: The Acquisition of Major Weapon Systems,' in Arms, Politics, and the Economy." Historical and Contemporary Perspectives 61, 67-68, 74-75, 78 (R. Higgs ed. 1990) (recounting criticism of regulatory complexity by blue ribbon defense commissions since World War II).

12. Steven Kelman correctly observes that '[w]henever a procurement scandal occurs the reflexive reaction is to tighten the regulations? S. Kelman, Procurement and Public Man- agement: The Fear of Discretion and the Quality of Government Performance 14 (1990).

13. See, e.g., T. McNaugher, supra note 11, at 82-84 (describing reaction to spare parts scandals); Rosenbaum, 'Pentagon Fraud Inquiry: What Is Known to Date,' N. Y. Times, July 7, 1988, at A1, col. 3 (describing Justice Department's 'Operation Ill Wind' inquiry into allegations of bribery and corruption of government purchasing officials).

14. See W. Kaufmann & L. Korb, The 1990 Defense Budget 8-19 (1989) (discussing patterns of defense expenditures in 1980s); W. Kaufmann, A Reasonable Defense 18-30 (1986) (same).

15. Pub. L. No. 100-690, 1988 U.S. Code Cong. & Admin News (102 Stat.) 4181. This measure

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imposes broad obligations upon government contractors to maintain a drug-flee environment in contractor facilities. See Johnson, 'The Government Contractor's Role in the War on Drugs,' in American Bar Association, Section of Public Contract Law, Grapes of Wrath: A Good or Bad Year for Employee Rights ? Tab E (Nov. 2, 1990).

16. Pub. L. No. 100-679, 1988 U.S. Code Cong. & Admin. News (102 Stat.) 1918. Among other steps, the procurement integrity provisions bar contractors from engaging in employment discussions with certain procurement officials; prohibit certain gratuities; and restrict dissemination to contractors of certain forms of source selection information, gee Wallick, Wellington & Howe, Jr., 'Procurement Integrity: Pondering Some Imponderables,' 19 Pub. Cont. L.J. 349 (1990).

17. Two current developments in the procurement field promise to test this ratchet hypothesis. First, Congress is considering whether to reimpose certain of the sweeping procurement integrity requirements it established in 1988 and later suspended for a period ending on May 31, 1991. Second, Congress is negotiating with DOD to conduct an experiment through which the Department would earmark a limited group of weapons acquisition programs that would be exempt from selected regulatory controls.

18. Among other sanctions, knowingly or recklessly false declarations to federal agencies can be prosecuted criminally under the false statements provision of the criminal code. 18 U.S.C. Sec. 1001.

19. See Cavanaugh, 'Can Procurement Ethics Be Cost Effective?,' in American Bar Associa- tion, Section of Public Contract Law, Changing Times/Changing Ethical Relationships: What's Acceptable and What's Not Tab D (Aug. 7, 1990).

20. See, e.g., Cox, 'Agency Investigations of Anticompetitive Conduct,' 57 Antitrust L.J. 579 (1988). By one estimate, the total number of DOD auditors, inspectors, and investigators has grown from 17,000 in 1982 to 22,000 in 1989. Milton L. Lohr, 'Perspective on De- fense Procurement and Its Impact on Industry' (Washington, D.C.: May 10, 1989) (Presen- tation at the Brookings Institution Leadership Seminar for Corporate and Government Executives on 'Restructuring the Defense Industry: By Design or Chance?').

21. The origin and content of the qui tam mechanism are described in Caminker, 'The Consti- tutionality of Qui Tam Actions,' 99 Yale L.J. 341 (1989).

22. Pub. L. No. 99-562, 100 Stat. 3153 (codified at 31 U.S.C. Secs. 3729-33). The relator's bounty ranges from between 15 to 30 percent of funds ultimately recovered, depending on whether the Justice Department chooses to join the suit.

23. See Moore, 'Citizen Prosecutors,' National Journal 2006 (Aug. 18, 1990). 24. See Strasser, 'When the Big Whistle Blows...,' National Law Journal 1 (May 8, 1989);

Sugawara, 'Blowing The Whistle Gets Louder,' Wash. Post, Mar. 19, 1990, at A1, col. 1. 25. Annual appropriations and authorization measures routinely contain provisions designed

to channel benefits to specific legislative districts. See, e.g., Higgs, 'Hard Coals Make Bad Law: Congressional Parochialism versus National Defense,' 8 Cato J. 79 (Spring/Summer 1988); H.R. 3072, 'Department of Defense Appropriations Act for Fiscal Year 1990,' Sec. 9051 (Nov. 21, 1989) (providing that 'None of the funds in this Act may be available for the purchase by the Department of Defense ... of welded shipboard anchor and mooring chain 4 inches in diameter and under manufactured outside the United States.'). Generic procurement legislation and specific funding bills also require government purchasing agencies to allocate contract dollars to a variety of specific interest groups, including small businesses, minority-owned enterprises, women-owned firms, companies owned by Native Americans, firms located in rural areas, and organized labor. See J. Cibinic, Jr. & R. Nash, Jr., Formation of Government Contracts 944-68 (2d ed. 1986).

26. Formal models of government procurement often treat purchaser/supplier relationships in a principal-agent framework. See, e.g., Baron, 'Defense Procurement: Politics, Management, and Incentives' (Sept. 1989: mimeo); Baron & Besanko, 'Monitoring, Moral Hazard, Asym- metric Information, and Risk Sharing in Procurement Contracting,' 18 RAND J. Econ. 509 (1987); McAfee & McMillan, 'Bidding for Contracts: A Principal Agent Analysis; 17 RAND

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J. Econ. 326 (1986). Where market forces supply only weak constraints upon contractor discretion concerning pricing and quality, procurement regulatory controls are designed in part to ensure that contractors (the agents) faithfully execute the directions of government purchasing authorities (the principals).

27. In some instances, statutes and regulations that signal integrity also might be interpreted as efforts by Congress and purchasing agencies to make a credible commitment to treat offerors fairly and thereby to elicit a larger number of firms to participate in new contract award episodes.

28. This provides one explanation for the tendency of Congress to respond automatically and immediately to allegations of systemic procurement failures by enacting new reform legislation.

29. Statutes and court decisions dealing with public procurement have displayed a longstanding view that the government, as conservator of the public interest, has a special duty to ensure that all of its contractual dealings are wholly beyond reproach. For example, in McMullen v. Hoffrnan, 174 U.S. 639, 651 (1899), the Supreme Court observed that 'Upon general principles it must be apparent that biddings for contracts for public works cannot be surrounded with too many precautions for the purpose of obtaining perfectly fair and bona fide bids.' Such comments reveal no recognition that attaining the next increment of integrity, imposing failsafe ethical requirements, or ensuring complete 'fairness' in the contracting process can be intolerable expensive.

30. See T. McNaugher, supra note 11, at 170-71. 31. See, e.g., 41 U.S.C. Secs, 10a-10d ('Buy American Act') (creating preference for domesti-

cally produced goods). 32. See Sugawara, 'Criminal Indictments: Training Bigger Guns on Corporations,' Wash. Post,

Mar. 2, 1990, at A1, col. 2. 33. Among the most important procurement oversight tools is the Truth in Negotiations Act,

which compels contractors to certify that certain cost and pricing data have been submitted to government negotiators before an agreement on the contract price is reached. 10 U.S.C. Sec. 2306a. This disclosure mechanism is designed to give purchasing agencies stronger means for observing contractor costs and for evaluating reasonableness of pricing proposals submitted by sole-source suppliers. See E Alston, M. Worthington & L. Golds- man, Contracting With the Federal Government 141-87 (2d ed. 1988); C. Kipps, Jr. & J. Rice, Living With TINA: A Practical Guide to the Truth in Negotiations Act (1989).

34. See supra note 18 and accompanying text. 35. Defense and space program contractors no longer have a decided advantage in offering

talented engineers attractive careers in state-of-the-art research and development. Com- panies active in technologically dynamic commercial markets today present equally challenging career opportunities. Losing skilled employees and potential recruits to commercial products firms appears to be an increasingly serious problem for major government contractors. See Wartzman, 'Designer of Stealth Fighter Says U.S. Runs Risk of Losing Technological Edge,' Wall. St. J., Feb. 4, 1991, at A9A, col. 1 (quoting Ben Rich, a designer of the F- 117A Stealth fighter and former head of Lockheed's Advanced Develop- ment Projects plant, as saying that Lockheed's famous 'Skunk Works' is losing engineers to a Walt Disney Co. division because such engineers 'are more challenged there').

36. See supra notes 21-24 and accompanying text. 37. If the government declines to intervene in the qui tam suit and the defendant prevails, the

court may require the qui tam relator to pay the defendant's attorney's fees if the defendant shows that the qui tam suit was 'clearly frivolous, clearly vexatious, or brought primarily for the purposes of harassment: 31 U.S.C. Sec. 3730(d).

38. Employees alleging employer retaliation may sue in federal district court to obtain rein- statement, attorney's fees, and double back pay. 32 U.S.C. Sec. 3730(h).

39. See R. Premus, D. Karns & A. Robinson, Joint Econ. Comm., 98th Cong., 2d Sess., So- cioeconomic Regulations and the Federal Procurement Market 11 (Joint Comm. Print 1985).

42

40. See J. Gansler, supra note 10, at 154-55,258. 41. One empirical study of the impact of federal procurement regulations stated the concern

in the following terms:

Apparently, participation in the Federal contract market and compliance with regulations imposes substantial opportunity costs on firms by diverting managerial and entre- preneurial energy away from other firm functions such as production management, market development, and technological innovations. The reported diversion [of] entre- preneurial and of managerial energy is greatest for research contractors and contractors who consider Federal regulations to be either a great burden or a competitive dis- advantage.

R. Premus, D. Karns & A. Robinson, supra note 39, at 34. See also T. McNaugher, supra note 11, at 165 ('Private firms neither would nor have to put up with most of the strange practices that are standard in the defense business.').

42. Firms that decide to continue to bear the risks associated with supplying government pur- chasers presumably will increase their prices (bids) over time to compensate for the additional risk and uncertainty.

43. See R. Premus, D. Karns & A. Robinson, supra note 39, at 41.

Documents

Regulatory controls as barriers to entry in government procurement