What is appalling about this is that the people negotiating these contracts know better. When structuring a contract you have to look at where the incentives are for each party and then make sure that the arrangement is providing incentives for both parties to have congruent goals.

The goal for KBR is to make money. The goal for us (the United States) is for our troops to have what they need. The decision to outsource comes from not wanting to focus effort outside of your core competencies with the understanding that experts can do it more cost effectively. It never makes sense to outsource when you can do it cheaper and better yourself. So another goal of the US in this contract is for it to be better and cheaper than they could do it themselves.

With a cost plus contract the vendor has no risk. This might make sense when the customer feels they might not be able to complete the objective successfully without the help of the vendor (DARPA research projects would be a good example). Supply chain projects are not rocket science and should be structured on a cost analysis.

So, had I negotiated the contract I would have been identified what it would have taken for us to do it and what gains efficiency gains I would expect from a 3rd party expert. The contract would have been structured so that I pay (cost it would take to do it in house) - (base expected efficiency gains vendor can provide). Then the incentive for KBR would be to use their expertise to increase their profit margins (a reasonable expectation for someone who we are using due to their expertise).

If I, a lowly Business Intelligence consultant understand this, what is wrong with our Government? We can’t be faulted for assuming either kickbacks or cronyism are the cause for such a poorly negotiated contract.

Intersting timing, since I just posted about the government-industry revolving door today.

Well, they’re just planning for their futures. After all, if they can bring in millions of dollars to their old (or prospective) employers, just think how much more valuable they will be when they’re out of work and looking for a job. Do you have any idea how expensive it is for their chauffeurs to fill up a limo?

Jim Voorhies:

There was a piece on NPR last week (I would have to do some research to get the particulars) about a young man (early 20’s) who together with his partner (a masseuse) managed to land a contract for $300M to supply munitions to the Afghan army. It seems this young fellows “expertise” had nothing to do with arms or munitions but rather with organizing. He was able to work with some pretty shady characters to arrange to have munitions that were of Chinese manufacture (and in some cases over 50 years old) shipped from their Albanian repositories to the Afghans.

Apparently many of the munitions were in deplorable condition and were essentially hazmat. So, the Afghan army is, on paper at least, well stocked with munitions for small arms. Meanwhile the U.S. Army is destroying many, many millions of dollars worth of perfectly serviceable munitions of the same type (AK 47’s, RPG’s–that sort of thing) that they confiscate in Iraq. Win–win!!