The lunacy of 'fairness' in government contracting

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As one of the most successful commercial firms in America, Amazon is exactly the kind of nontraditional vendor the federal government should be using to apply its expertise to the government's many procurement problems. If only it were that easy.

Earlier this year, in one of its first forays into government contracting, Amazon was awarded a large cloud-computing contract from the Central Intelligence Agency. However, IBM, one of the losing contractors, protested the award. The lawyers circled the wagons, and the Government Accountability Office overturned the contract award.

What was Amazon's mistake? It had the audacity to propose something better than what the government had originally requested. The CIA, to its credit, recognized the better solution and went for it. Isn't that what the procurement process is supposed to do—get the best solution?

Not in the Mad Hatter world of government contracting, where adherence to rules and "fairness" are valued above all. Value to the taxpayer seems to have been long forgotten. Is it any wonder that sane commercial firms run away from the federal marketplace, or that government employees with procurement and budget expertise such as outgoing Deputy Defense Secretary Ashton Carter end up frustrated in their attempts to reform the system?

As a sad epilogue to the story, Amazon quickly learned that government contracting is not always about getting the best solution, but sometimes about hiring the best lawyers. Amazon took its case to the U.S. Court of Federal Claims, and on Oct. 7 the court ruled in its favor. IBM said it would appeal.

How did we get to the point where it is common to take legal action against your customer? Imagine companies routinely suing their customers upon losing a commercial competition. In the commercial marketplace, they probably wouldn't be invited to work for that company again, but not in the world of government contracting.

The federal procurement system has had a "bid protest" process since the 1920s. While enabling bidders to challenge government procurement decisions has long helped deter corrupt and capricious actions by federal officials, several new factors are undermining its overall benefit.

First was the Obama administration's March 2009 announcement of new procurement policies—just six weeks after the inauguration. These policies, designed to increase oversight and transparency due to a small number of fraud cases in overseas contracting and a history of contract overruns, were well-intentioned and provided an easy political victory. But as we so often see in government reforms, they had unintended consequences.

Contracting officials saw the president's overhyped comments about waste, fraud and abuse as a green light to overturn almost two decades of bipartisan acquisition reforms that had made the system relatively workable, even if not perfect. As a result, the acquisition system has been re-regulated with more red tape.

It gets worse. The bid-protest process exacerbates the impact of these changes by serving as a key mechanism for enforcing procurement rules. Government contractors—who have an inherent incentive to do whatever it takes to win contracts—now have more incentives than ever to protest the procurement process. An increase in rules creates additional reasons for firms to protest.

Moreover, losing contractors are effectively encouraged to overturn an award by finding something missed by government employees. Despite the government's attempt to eliminate any possible discretion by its employees that could be used to question an award, it's virtually inevitable that some slip will have occurred, opening the door to a protest. Paradoxically, this rule-bound system removes any chance of achieving the best value for the taxpayer, since a best-value judgment is in itself an exercise in discretion.

Today, defense contract dollars are down and market pressures have increased, as firms try to use whatever tools are at their disposal, including protests, to maintain their market share. A study published in August by the Congressional Research Service describes "a significant shift in bid protest trends over the last five years." Contract spending is down by 10%, but bid protests are up by 45%.

One cannot fault contractors who have a legal right to protest and are playing by the rules now in place. That is how market incentives work. Nonetheless, if taxpayers are to get the most for the $500 billion in federal contracts awarded each year, the acquisition system must be reformed to allow "best value" solutions like Amazon's without having to endure months of litigation. Until that time, the government will continue to keep getting "least value" solutions.

Mr. Greenwalt is a visiting fellow at the American Enterprise Institute's Marilyn Ware Center for Security Studies. He previously served as a U.S. deputy under secretary of defense for industrial policy.

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