The Absurdity of Government Contracting
I take no joy in writing this article, but it is a desperate plea for improvement.
From 1995-2001, I worked for the Department of the Army as a contract specialist procuring advanced communications and electronics systems, equipment and services.
The first contract I ever negotiated was valued at over $3 million opposite an emerging company from Massachusetts. I had just finished my four-week Contracts 101 training in Virginia, and I was eager to put my newfound knowledge of the Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), and Army Federal Acquisition Regulation Supplement (AFARS) to work on behalf of the Army and the American taxpayer. Then reality set in. Despite being armed with this new knowledge and skill, I was hamstrung by a procurement system so vast, complex and rigid it would make Kafka blush.
Throughout the course of my next seven years with the Army, we were promised acquisition reform, enhanced efficiencies, paperless transactions and less red tape, particularly in connection with the procurement of commercial items and services.
Since leaving the Army, I have focused my practice primarily on commercial contracts in a variety of industries, ranging from media and entertainment to digital advertising and technology. Increasingly, however, I have been handling more government contracting issues for our clients, including negotiating contracts for prime and subcontractors and handling diligence and regulatory issues in connection with mergers and acquisitions. It never ceases to amaze and disappoint me how different these commercial contracts are to federal contracts. The commercial process is still so much faster and efficient; the contracts are generally much shorter and less complex; and the parties are able to navigate contentious issues through negotiations rather than having to abide by a panoply of opaque and largely wasteful regulations.
To illustrate, a client of ours provides its customers access to its hosted marketing platform via a standard nine-page contract. The company has been offering this product on a Software-as-a-Service (SaaS) basis for years to its commercial customers. It typically negotiates all of its contracts using its in-house counsel. It has—due to the onerous and largely unnecessarily complex requirements and restrictions of becoming a government contractor—refused to do direct deals with the federal government. Instead, it uses resellers to do business indirectly with the government.
In its most recent acquisition, the prime contractor had a massive marketing and advertising deal worth hundreds of millions of dollars with the Army. The prime contractor engaged a subcontractor to provide certain products and services. And this subcontractor, in turn, engaged our client to provide its SaaS offering. Our client was slated to make approximately $1 million dollars a year on this transaction, which for the company was meaningful, but certainly not its largest contract.
Aside from the fact that this transaction required no fewer than three separate contracts—the Army with the prime, the prime with the subcontractor and the subcontractor with our client—the Army certainly paid more than if it had procured the SaaS offering directly from our client. Additionally, each of the other parties had to draft and negotiate its contract with its respective counterparties.
Although this cumbersome process would be true in many transactions involving multiple tiers of contractors, the problems were greatly exacerbated by the inefficiencies inherent in the government contracting process. First, there are simply too many regulations. The series of transactions, which were for the ultimate benefit of the Army, involved literally hundreds of contract clauses incorporated either in full or by reference from the FAR, DFARS, AFARS and local procurement regulations.
Second, many of the over 50 FAR and DFARS clauses that were slated to “flow down” to our client (i.e., clauses that were included in the prime contract that flowed down to the subcontractor that flowed down to our client) were simply inapplicable. Our client is a small business and the transaction was a fixed-price, commercial item contract under FAR Part 12. Notwithstanding, the contract included a host of clauses not applicable to commercial items or small businesses. Of the remaining clauses that were required, by regulation, to be included in our contract, most should not be required in these types of contracts.
For example, although it is a laudable goal for all companies to create, maintain and enforce a robust anti-kickback policy, is it really necessary to impose such a requirement on a small business providing a SaaS offering? The FAR says it is.
Third, and interrelated, our client had no interaction, or opportunity to interact, with the government contracting officer. So, when we rightfully objected to many of the over 50 ridiculous government contract clauses being imposed on us, all questions/requests/communications had to be with the subcontractor, which then routed them to the prime contractor, which then routed them to the contracting officer, who offered the perfunctory, “It’s required by the FAR.” Again, keep in mind that our transaction was for a commercial item that our client had been licensing to nongovernment customers for years using a subscription agreement of only nine pages. FAR Part 12 was drafted specifically to resolve this madness.
By the time our negotiations were over, it had taken our client several weeks, thousands of dollars in outside legal fees and extensive internal resources to finalize a deal of over 50 pages that should have taken an afternoon with no out-of-pocket expenditures. Moreover, our client, in an effort to close the deal, ultimately agreed to provisions it would never agree to in a typical commercial agreement. Despite the lucrative contract, the inefficient process reaffirmed and cemented our client’s decision not to do business directly with the federal government.
In an era where the Chinese, Russian, and other foreign governments simply take technology from their domestic companies, doing business with the U.S. federal government is comparatively benign. Nonetheless, as evidenced by the recent $4.8 trillion budget for fiscal year 2021 with massive increases in spending for artificial intelligence, quantum computing and military research and development, government procurements involving cutting-edge technology are critical to the safety, security, and well-being of our country.
There is simply no excuse for our antiquated, byzantine procurement process. How much of that $4.8 trillion dollars is wasted through inefficient procurement processes and procedures? How many wonderful companies refuse to do business with our government because of that? What technologies will the government never have access to because of this administrative morass? These are deficiencies that the government was promising to resolve back in 1995 when I first started as a civil servant, and they have not gotten any better. How long must we wait?
It is high time that the government do a comprehensive review of our procurement system from top to bottom and not only reduce or eliminate many of the myriad statutes, regulations, rules and policies, but also simplify the entire acquisition process to incentivize all companies to do business with our government.
Matt Savare is a partner at Lowenstein Sandler, counseling clients on a range of matters involving government contracting, intellectual property, media, and entertainment issues. He previously worked as a contract specialist for the Department of the Army.