In January 2018, [USD(AT&L) Ellen] Lord called [DPAP Shay] Assad to her office to vent her frustration with the inconsistent performance of major defense firms. She said she wanted to find a way to get better results from defense companies — a message that was frequently repeated by the president. “I said, ‘Sure, you impact their cash flow, you’ll get their attention to whatever you think is important,’” Assad recalled telling her. “If you tell companies their cash flow is dependent on it, they will respond.”
Assad’s proposal had to do with what are known as progress payments, or periodic payments made to contractors in order to alleviate their operating costs…
Assad explained that his plan would tie progress payments to company performance, rather than stages of production process. The progress payment rate is set at 80 percent of total costs of delivering on a contract, and Assad wanted to reduce that to a base rate of 50 percent…
This plan created a backlash at the higher levels of the DOD to where Shay Assad was given an ultimatum — get demoted or exit. Also involved was Assad’s relentless investigations of contractors overpricing the government, amounting to $900 million from an audited sample of $98 billion. Read the whole story from Yahoo News, “Trump tweeted ‘billions of dollars’ would be saved on military contracts. Then the Pentagon fired the official doing that.” The title is a bit misleading, however, because there’s not much in there about Trump’s connection and seems to mostly be an internal DOD/defense industry matter.
The saga of Shay Assad reminds me of the experiences of Admiral Hyman Rickover and Navy Director of Procurement Clearance and Control Gordon Rule back in the 1960s and 1970s.
Rickover also believed that contractors shouldn’t have access to sweetheart progress payments deals, that they were in fact making tremendous profits off defense work, and were able to hide the fact from the government because of various accounting tricks. Even though the Truth in Negotiations Act had been on the books, contractors could do all sorts of things like subcontract to themselves to earn extra profits (intracompany transfers), charge indirect workers directly to defense contracts, and so forth. Here’s Rickover:
Nobody in government knows what profits are being made by defense contractors. I don’t know it, you don’t know it, Congress doesn’t know it, the Pentagon doesn’t—only the contractors know it.
The Generally Accepted Accounting Principles (GAAP) became “generally accepted as damned meaningless.” Rickover argued for a standard set of cost accounting rules such that production costs could be more easily determined from accounting data (it took a team of auditors and other specialists months to reconstruct books). Over the course of the 1960s, Rickover lobbied for what eventually became the Cost Accounting Standards.
Like Shay Assad, Rickover came under severe attacks. It was his good relations with Congress and the public due to his incredible performance on the Navy’s nuclear program that he survived. But in his fights with General Dynamics in the 1970s over the Los Angeles Class submarine, Rickover was finally ousted. It was discovered that Rickover had been accepting gifts from the contractors, such as repeated use of their company car, as well as a gift of earrings and a jade pendant. Rickover claimed he didn’t want to spend taxpayer funds on a taxi when the contractor had a perfectly good car laying around. For the earrings and jade pendant, he claimed they were justified for all the good he had done fighting prices to benefit the nation.
The ousting rhymes a bit with Shay Assad’s, who racked up over a half-a-million in travel expenses for his arrangement that allowed him to go back and forth between DC and his home in Boston, perhaps over a million it was claimed. The Yahoo article quotes unnamed officials who justified the arrangement of personal travel with the argument that Assad saved the taxpayer much more money, a similar argument many made for Rickover.
Gordon Rule also was a Navy price fighter, and fought interminably with contractors on change order requests, leading to a back log of $1 billion in 1970. This earned him few friends in the Pentagon. Moreover, Mr. Rule oversaw the very first “should cost” study of the TF30 engine production at Pratt and Whitney. The consultants at PTC performing the “should cost” study were soon blackballed by the Pentagon for their efforts.
As for Mr. Rule, he was pushed out of his executive position in the Navy for a training position, which he accepted, but it was during his testimony at a Congressional hearing that he got into real trouble, and was fired. Congress intervened and he was reinstated. Read the whole story on Gordon Rule here.
I think in general, Shay Assad was making the same points that Rickover and Mr. Rule did. It’s not clear that they are necessarily the correct points to be making in an era where intangible asset creation is more important than repetitive manufacturing of known items.
One major difference between Assad and Rickover/Rule is that while Assad called himself a “career civil servant” he was in fact a former VP at Raytheon. On the other hand, Adm. Rickover was in fact a career Navy man from his Academy days and Mr. Rule was a former lawyer unaffiliated with defense to my knowledge.
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