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Wednesday, March 29, 2006

Don't Prosecute, Renegotiate

William_kovacic Steven_schooner_3 There are no contract relationships more "relational," perhaps, than those between the U.S. military and the contractors who supply it.  The parties collaborate at every stage of the contracting process, from drawing up specifications to making modifications in the field.  An elaborate array of regulations specifies the obligations and duties of each party in ways that depart significantly from classical contract law.

Yet it's that very closeness and interdependence that -- many people believe -- can lead to waste, fraud, and abuse by contractors.  So one of the parties, the Government, spends vast amounts of time and effort policing the other, using not merely contract law but criminal sanctions.  In A Modest Proposal to Enhance Civil/Military Integration: Rethinking the Renegotiation Regime as a Regulatory Mechanism to Decriminalize Cost, Pricing, and Profit Policy, William E. Kovacic and Steven L. Schooner (Geo. Washington) suggest that fewer criminal actions and more renegotiation -- a hallmark of relational dealing -- might be in everyone's interest.  Here's the abstract:

Neither Congress, the procuring agencies, the media, nor the public will condone government contractors reaping what are perceived as excessive profits. Accordingly, the procurement process employs an unduly complex, burdensome, risk-laden, and ineffective mechanism that erects significant barriers to civil/military integration. The paper examines certain policy implications associated with the Truth In Negotiations Act (TINA), the existing audit regime, and the use of criminal and civil anti-fraud measures to scrutinize deviations from these complex cost, pricing, and profit policies and controls. It re-visits the long-extinct Renegotiation Act and finds it less troubling than the existing quagmire. It analogizes to recent experience in the public utilities industry, which employs a sharing mechanism as an explicit, transparent means for addressing excessive profits. The paper proposes to simplify and decriminalize Federal procurement pricing and profit policy by drawing from the historical renegotiation experience. A transparent renegotiation regime (1) could be one less burdensome or complex element of a regulatory scheme that presents suppliers with a menu of regulatory options; (2) would allow contractors to select the approach that best corresponds to their own assessment of which contractual rules will minimize their costs; and (3) could permit the Government to share, directly or indirectly, in these increased efficiencies and savings.

[Frank Snyder]

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