Race to the Bottom

In the fall of 1998, long before the wars in Iraq or Afghanistan began, an altogether unmemorable amendment was inserted into the 1999 omnibus appropriations bill regarding how the State Department contracts for security guard services overseas.

The provision, all of 115 words, was rarely discussed. But more than a decade later, the language has resurfaced-and might be at the source of one the most colossal embarrassments in wartime contracting in recent memory.

Typically, agencies pick a contractor based on a best value formula that involves price, past performance, expertise and a host of other criteria. But the 1998 amendment-the source of which is still a mystery-mandates that when State awards contracts for guards to protect overseas buildings, it should choose "the technically acceptable firm offering the lowest evaluated price." In other words, if all the bidding companies are qualified to perform the work, then State must go with the cheapest option.

"One [company] may have proposed a better way of doing it, but if their price is higher we are unable to accept their better way of doing it," explained Patrick F. Kennedy, undersecretary of State for management at a Sept. 14 hearing of the congressionally chartered Commission on Wartime Contracting.

Contracting observers argue that the lowest-price technically acceptable evaluation technique makes sense when the government is purchasing standard products like office supplies or routine services such as custodial work, in which the risk associated with unsuccessful performance is low. But applied to multimillion-dollar contracts to protect some of the nation's most important overseas buildings, the clause can have unexpected results.

Take the case of ArmorGroup North America, the McLean, Va., security company that in March 2007 won a $189 million contract to protect the U.S. Embassy in Kabul, Afghanistan. The company made headlines in September when photos surfaced of drunk and disorderly AGNA guards carousing in various states of undress and allegedly hazing new employees.

Some say red flags should have been raised much earlier about the company's competence to perform the work. According to an Oct. 1 report by the commission, AGNA's bid was $110 million lower than that of Wackenhut Services Inc., one of the industry's most experienced security contractors. Wackenhut has since purchased AGNA.

The report suggested that AGNA might have significantly underbid its competition to win the contract. Later, it began cutting costs by hiring underqualified workers who did not speak English, failing to hire enough security staff, and skimping on uniforms and training. Since 2007, State has found more than two dozen deficiencies with AGNA's contract performance, including repeated reprimands for staffing shortages.

"In certain cases, [the clause] leads companies to buy in with unrealistically low prices," says Robert B. Dickson, executive director of the commission. "There is then an incentive to cut every corner and trim services, which leads to unsatisfactory performance."

The lowest price clause, which was described by the chief executive officer of one security firm in the commission's report as "a race to the bottom," can have other unintended consequences. Preeminent firms whose services are likely to be expensive but rated highly in a best-value competition could choose not to compete, assuming they will be underbid by other firms. Such de facto contract restrictions might have been in play with the embassy contract, in which only two "technically acceptable" offers were received. Six other bidders were determined to be incapable of performing the work.

A State Department senior acquisition official says the number of bids on the embassy contract was adequate. The source will not speculate whether AGNA would have won the contract if not for the lowest price clause. The official argues, however, that State has successfully used the lowest price evaluation on more than 100 security contracts across the globe, generally without incident. "For the most part we are satisfied with our local guard contracts," the official says.

Nonetheless, State would benefit from greater source selection flexibility, according to the official. Department officials say they are working with lawmakers to revise the 1998 amendment to allow contracting officials to make best value judgments on all contracts. The State official warns, however, that "best value is not a magic wand that fixes everything."

Critics say it's unfair to finger the lowest price clause as the cause of the AGNA fiasco. Danielle Brian, executive director of the Project on Government Oversight, the watchdog group that exposed the scandal, attributes much of the blame to a symptomatic lack of contract oversight at State. She notes that unless the department begins setting-and enforcing- a higher level of minimum acceptability criteria from its contractors, it will not matter how the source selection was made.

"It's a mistake to be tying the State Department's hands with this clause," Brian says. "And, we would not oppose [changing the rule]. But I worry that it's only a 10 percent solution."

With the Baghdad embassy contract up for renewal next year and State still evaluating its options with AGNA, Dickson said time is of the essence to terminate the outdated lowest price clause. If not, he said, "History will repeat itself."