Close window  |  View original article

Yes, Virginia, A $2.98 Hammer REALLY Costs Our Government $100

It's not just a good idea, it's the law!

By Will Offensicht  |  January 15, 2010

When criticizing government plans to take over health care on the spurious basis that government control will make it more efficient, Scragged has often referred to the government paying $100 for a $2.98 hammer or $600 for an ordinary toilet seat.  It occurred to us that some of our readers wouldn't have read about these matters - after all, it's been years since the Lamestream Media spoke in such vivid terms about government waste.  Given their dislike of the Bush administration and the way the public reacted so eagerly to their earlier stories about $100 hammers, they'd have written up such incidents if they'd found any.

We thought it might be worthwhile to explain how $100 hammers came about and what happened to them.

Selling a $2.98 Hammer for $100

I worked for a conglomerate called Gould way back in the 1980s.  The boss' name had far too many y's and z's for me to pronounce it with confidence, so I called him "Chairman Bill."  Mao tze Tung had added so much glory to the title "Chairman" that everybody knew I meant the Chairman of the Board.  Chairman Bill was a skilled deal maker; he bought and sold divisions more often than lesser beings buy and sell cars.

Shortly after he bought a division which made good profits from government contracts, the media reported that his division had been paid more than $100 for a hammer which could be bought in a hardware store for $2.98.  It wasn't as bad as the $600 toilet seat or the $3,000 coffee maker which were in the news at the time, but Chairman Bill's golf buddies teased him unmercifully about how they, too, could show as much profit as he did if only they, too, could charge $100 for a $2.98 hammer.  "Nice work if you can get it," as the saying goes.

Their ribbing eventually got under his skin.  Chairman Bill summoned his accounting firm and told them, "I don't care what it costs.  If we robbed the government, I want to know.  If we didn't rob the government, I want you to sign a formal accountant's letter saying we didn't cheat the government."

Having heard the magic words, "I don't care what it costs," the accountants swarmed into the military products division like Sherman marching through Georgia.

Accountants don't often use words like "shock," "amaze," or "astound," but they made it clear that they were quite surprised by government-required accounting principles.  They found more than 20 cost categories associated with the hammer - marketing, travel, training, cleaning, general administration, facilities, and other overhead items that were allocated to the hammer by formulas defined in the contract.

The smallest line item I remember was about $.23, the biggest was $4.50 or so, but these items added up to precisely the price the government had been charged.  Since military contract boilerplate said that the accounting principles called for in the contract were matters of law, it would have been against the law to charge a penny less.

How Did We Get There?

We all know that government processes can be completely bizarre, but how did procurement regulations get so messed up that a $2.98 hammer could end up costing the government $100?

Like all things governmental, it got that way one foul-up at a time.

Bureaucrats hate being embarrassed nearly as much as they hate having their budgets cut.  Thus, whenever anything embarrasses a bureaucracy, the first response is to write more rules so it won't happen again.

Government procurement goes back a long, long way.  The earliest detailed account of the terms and conditions of a public solicitation to enter into a contract between a government and an individual defense contractor of which I'm aware was when David was contracted by King Saul to slay Goliath in return for being able to marry the king's daughter and have his family freed from tax obligations for a while (I Samuel 17:23-26).

When we read on, we find out that even though David performed expeditiously per the terms of the contract exactly as stated, he didn't get to marry the princess until he'd fulfilled another extra-contractual (and equally risky) solicitation some years later (I Samuel 18:25-27).

Even though "the people" were well aware of the terms and conditions of the government's contract with David, nobody was surprised when he didn't get paid.  One suspects that government chicanery and perfidy are as old as government itself.

Firm-Fixed-Price Procurement

Over the centuries, bureaucrats have learned to write more and more regulations telling how contracts are to be performed, managed, and billed.  David's contract was "firm-fixed-price."

What David was supposed to do, namely, slay the giant single-handed, was well defined.  What he was to receive was equally clear: the princess' hand in marriage and a tax holiday for his family.  There were no bonuses for exceptional performance, no penalties for late performance, no progress reports, no partial payment, no forms to fill out, just slay the giant and get paid. And in case of failure, the government was not obligated to pay anything at all.

Only David did slay the giant, but didn't get paid.

Fixed-price contracting makes sense for building roads and bridges where contractors have enough prior experience to know how much the job will cost.  There's room for chicanery when a contractor can make a deal with an inspector who'll let him supply substandard, and therefore cheaper, cement.  We've seen this sort of thing in New York City recently and it's said that some of the wire used for the Brooklyn Bridge was substandard, but fixed-price procurement works, sort of, for things we know how to do.

What happens when a President says, "Man on the moon by the end of the decade," which nobody's done before?  Nobody has a clue how to do any of it, so how can anyone submit a fixed-price bid?

Cost-Plus Contracting

Enter the "cost-plus" contract.  The government hires, say, Boeing, to build something exotic like a centrifuge to train astronauts how to deal with acceleration when rockets lift off.  A "cost-plus" contract says the government will pay Boeing whatever it costs Boeing to build the centrifuge, plus something extra for their pains.

You're a section manager on the contract.  You think it would improve productivity and thereby save the government money if your group could have a two-week off-site meeting in, say, Tahiti.  If your accountants think they can charge the government for the trip, why not?  It makes the troops happy at no cost.

It's even better if the contract is "cost plus incentive fee" where the company not only gets paid its costs, it gets paid a percentage of those costs as profit.  Going to Tahiti makes more money for the company!  What a no-brainer!

Up to a point, bureaucrats go along because the more money they spend the more they can ask for next year.  When the newspapers start whining about junkets, however, they have to change the rules.  That's why there are yards and yards of fine print about what you can and can't charge to a government contract - every time a contractor figures out a new way to stick it to the government, the government comes back with more fine print.

It's All in the Allocation

That's how we got to $100 hammers.  When regulations specify what can be charged to the government, contractors do their best to load up those cost categories so they'll be reimbursed.  They're pretty good at it, too, it takes real skill and golden-tongued eloquence to argue that it's legitimate to allocate nearly $100 worth of overhead and other costs to a hammer which cost $2.98.

The overhead is nearly 30 times the actual cost!  What does that tell you about how government procurement really works?

What happened?  Why haven't we heard about $100 hammers recently?  Did the bureaucracy tighten things up enough that the government can buy a $2.98 hammer for $2.98?  Of course not, cutting costs would reduce budgets and we can't have that.

The solution, of course, is to change the allocation formula so that costs are allocated disproportionately to large items.  We the People still pay $100 for $2.98 hammers, but the accounting regulations make hammer-related overhead charges instead appear next to some other item so that the hammer doesn't seem so expensive.  How do you the voter really know the difference between a $200 million fighter jet vs. one that's only $100 million?

One reason military equipment is so expensive is that each big item carries the overhead which should rightfully be allocated to smaller items.  Honest allocations get the bureaucracy criticized, however, so they changed the accounting system to hide the costs.

We see the same sort of allocation chicanery in the way the House of Representatives and the Senate account for travel costs.  Rep. Pelosi travels to and from her California district each week in a large plane which can make the trip without having to stop.  This costs several hundred thousand dollars per week and generates huge amounts of carbon, but the cost doesn't show up on the House travel budget.  Mrs. Pelosi commandeers a military jet, so the cost of her travel is buried in the billions spent defending the country.

As with many other such expensive items which benefit the plutocracy, the costs are still there, but they're buried so deeply that nobody will ever find them.

Think about this - if the overhead charges make a $2.98 hammer cost $100, what do the regulations do to the costs of more expensive items?  Not to mention the upcoming costs of paying $100 for $2.98 bed pans in government-controlled "health" facilities.