Pulling Purse Strings

Treasury sought flexibility for bailout contracts, but did Congress give too long a leash?

The management of the $700 billion Troubled Assets Relief Program would seem to require an army, and for the Treasury Department's bailout of the nation's financial system, contractors will make up much of that force. In pitching the program to Congress, Treasury Secretary Henry Paulson convinced lawmakers that the financial meltdown was an emergency that required an extremely flexible, immediate response. Now procurement experts and government watchdogs are expressing concern that the contracting liberties given to Treasury will lead to the kinds of abuse that tainted Iraq war and Hurricane Katrina acquisitions.

The 2008 Emergency Economic Stabilization Act gives the newly established Treasury Office of Financial Stability the authority to waive the Federal Acquisition Regulation "upon a determination that urgent and compelling circumstances make compliance with such provisions contrary to the public interest." This clause is designed to ensure that the department can respond quickly as the economic situation evolves. It essentially allows Treasury to enter into contracts and other agreements with private entities however and whenever it wants. Soon after the bailout bill was passed in October, the department issued a memorandum stating its intent to largely comply with the FAR.

But the memo states that competition for these contracts could be limited for a number of reasons, including small business set-asides and "circumstances of unusual or compelling urgency."

Treasury has used such exceptions to award most of its contracts so far, according to Marcia G. Madsen, chairwoman of the government contracts practice at Washington law firm Mayer Brown and former chair of the Acquisition Advisory Panel. The Government Accountability Office reports that as of Nov. 25, Treasury had entered into seven contracts in support of the bailout, as well as one financial agent. Progress already was being made on three additional contracts ranging from $8,500 to $2.2 million for a budget model, legal services and leased office space.

The department has long had the ability to retain private financial institutions to act as agents of the Treasury, but the new stabilization law broadens that authority. Financial agent agreements with private firms now are allowed for "all reasonable duties related to the act that may be required," and the law "permits the retention of a broad class of financial institutions as agents."

The expanded financial agent authority is not subject to procurement rules, Madsen says. "The definition of financial institution got quite broad, so it's not just banks and credit unions; it includes securities brokers or dealers, insurance companies. It gives Treasury the ability to contract in a much broader capacity without using the acquisition rules," she says.

Madsen and GAO also are concerned about Treasury's almost exclusive use of time-and-materials contracts, in which the government pays contractors based on set labor rates and hours worked, plus the cost of supplies or equipment. This type of acquisition is extremely flexible, but GAO says it also requires more oversight. "Time-and-materials contracts are considered high risk for the government because they provide no positive incentive to the contractor for cost control or labor efficiency," GAO's December report states. "Thus, the onus is on the government to monitor contractors to ensure that they are performing the work efficiently and controlling costs." Madsen adds, "Everyone knows those are abuse-prone vehicles. There are places where those kinds of contracts are necessary, and this is probably one of them. But you don't want to look up two years from now and realize it's still there and it still looks like it did." She says the Office of Financial Stability urgently needs a cadre of experienced acquisition employees to oversee these contracts and transition them to a more cost-efficient model after the bailout.

"What good management would do once the very short-term emergency is over is start looking at what the requirements are and see if they really need to be paid for on a time-and-materials basis, if can they be converted to a type of contract where there's more accountability," she says.

A Treasury procurement official told GAO that time-and-materials pricing for its task orders was necessary because of the uncertain nature of the work required for the bailout program. As standards become more established, Treasury could turn to fixed-price arrangements for future task orders. The official also outlined steps the acquisition office was taking to ensure appropriate management of the time-and-materials contracts, which include assigning additional oversight personnel to the procurements, ensuring that training requirements were met and providing guidance on the tracking of billable costs. But the watchdog agency noted that the department has not yet established a timetable for completing these steps.