November 22, 2013

A self-licking procurement ice cream cone

By Phillip Carter

Friday’s Washington Post carries a fascinating article on the company Deltek, which has essentially cornered the market on accounting software for government contractors.  The software essentially automates compliance with the government’s Byzantine system of cost accounting standards, government contracts rules, and accounting requirements.  And in doing so well, Deltek has all-but-gotten the government’s seal of approval, including tacit encouragement from auditors to buy use Deltek’s pricey software:

[One business owner] said that when he started his company in 2006, he was using the cheap and simple accounting software QuickBooks. But he said government auditors urged him to switch to Deltek software, because they told him they were “very comfortable with and trained on Deltek.”

“They said, ‘Everybody around here is kind of using Deltek,’ wink-wink, nod-nod,” he said. “The message was clear enough: You really need to be using this more luxurious brand in order for us to ensure we know exactly what you’re doing.”

Glaros, a former Navy pilot and technology adviser to the defense secretary, said he had “no choice” but to comply with pressure from the government auditors.

“Bureaucracies by their very nature are inherently lazy and they want to have the easiest path to get their job done to comply with policy and law,” he said. “To reduce the friction, we use Deltek.”

Glaros said he spent about $500,000 to buy Deltek’s software and service, as well as to train a half-dozen people at his company how to use it. He said his company expects to do about $20 million worth of government contracting this year, and, all told, using Deltek adds 10 percent or more to his costs.

Unfortunately, the Post article fails to pick up on a very important point hinted at in this last quoted paragraph, which is that the U.S. government is effectively paying for Deltek’s wealth because of how government contracts pricing works.

Government contractors typically charge a mix of direct and indirect costs to the government for the work they do. Direct costs are those directly associated with a contract, like the salaries of those who do the work.  Indirect costs are everything associated with multiple contracts, or a company’s overhead.  Under government accounting rules, the cost of Deltek is an “allowable” cost, and is therefore included by government contractors in their indirect costs that they charge back to the government on top of labor and other items. 

So, to recap: (1) the government creates the need for Deltek by spawning a labyrinth of legal and accounting requirements for contractors; (2) government auditors reportedly encourage contractors to use Deltek with a wink and a nod; and (3) contractors get to charge the government for using this expensive system. 

This is one self-licking ice cream cone that’s ripe for reform as we relook the many deadly sins of our government procurement and management systems.