The Myth or Truth Behind the $20,000 Wrench
 

I've been trying to find the truth and reasons behind those expensive items that the Government, NASA or the Military has bought. Anybody have any real data as to the breakdown of why items from wrenchs to toilet seats are so expensive (if they really are)?

Ever heard of skunkworks? They have to hide the money spent somehow...

When I worked for the Federal Government, (the USGS) we had to fill out forms for every piece of equipment, and list three manufacturers and their prices. It was hard to get permission to buy anything other than the cheapest item. In short, is was very hard to overspend.

It's probably a Snap-On.

I used to work at a composite R&D fabricator as the business manager and therefore was responsible for billing. Did a lot of DoD work, made some intakes for the stealth bomber, tubes for the Army, towline for the Navy.

After close to a year of learning government cost accounting and regulations, I learned that you can bill the government anything, and if you do it the right way, they will pay anything.

Gave cost+ a new meaning.

Have you ever looked at govt specs? When a toilet seat has 22 pages of specs that you must meet or you wont get paid, the price goes up. Still, the problem is bureaucratic morons. Sometime the contractors score too but not always. The taxpayer always gets shafted.

The government pays certain jobs on a cost plus basis - the cost of the item plus a reasonable markup. The reason the prices are so high is the MFG is being allowed to allocate their depreciation expense for their equipment equally to each item they sell. Therefore a wrench "costs" $500 to make. The rationale behind it is that it is necessary to keep a consistent supply of product manufacturers on line, through good times and bad.

The theory is that if the government relied exclusively on the open market for their product and suddenly had a crisis where they needed more product than the open market manufactured on a regular basis they would be stuck.

Yup. And to you and I, the toilet seat is a toilet seat like we'd get for 11.99 at Home Depot, but there's usually something special about it that can't be explained in a soundbite or a headline.

I paid $40 for a wrench from this site, hard to explain that succinctly either. :D

So far, I've heard three theories on why some things cost the government so much:

1) It's a way to hide secret programs.
2) The government often has unduly complicated requirements.
3) Vendors screw the government (taxpayers, really).

I'm willing to believe that all three are at play in varying degrees on various items. Let's face it:

1) The government has a need to hide certain things that cost a lost of money.
2) A toilet on a nuclear submarine might have some unique requirements. Sometimes bureaucrats like to create complexity to justify their jobs too.
3) There are unscrupulous companies in every business. (Not saying that excuses them.)

The money that needs to be hiddin, is hidden at the beginning of the process. You don't need to create ways like this to hide it. ;)

Where to start.

I am a program manger for the Navy...I procure all Unmanned Air Systems for the Navy and Marine Corps. My budget baseline for all my classified and unclass systems exceeds 3 billion dollars.

I have also been a flight test guy (both operational and developmental), the Chief Pilot for the government at the Sikosky factory in CT., and have managed other large and small scale programs.

So, I have a sense of what is good and bad. With that said, every post in this thread is right.

For manned air vehicles the specifications are amazing and very difficult to meet, hence the $400 dollar toilet seat. Every piece of equipment in a navy aircraft has to be qualed to 20/20/10...meaning 20g loads in two axis, 10g in the lateral axis before a flight clearance will be granted.

Believe it or not, for transport aircraft the entire toilet assembly must be rated to those specs. I don't agree with it, but there it is.

Billing. Shaun is right on the money (pun intended). I am dealing with a case against one of my civilian companies because their fanance guy embezzeled over $1M on an old contract. I order yearly audits by government accountants every year and also requested baseline audits when I took command of my program office 3 1/2 years ago.

Government acquisition regs are horrendous, especially in the contracting realm.

Lastly, outside of the national lab structure, gone are the days when the government paced technology innovation...and the large defense contractors don't either. The hardesst part of my job is maintaining software engineers writing code on my major programs: federal law only allows me to pay a certain wage for certain work...software engineers are so in demand that the gaming industry swoops up all my talent just when they get really good!

I am trying to fix that, we'll see.

I could go on and on. :cool:

Hey, I'm the guy that actually designs those expensive tools used on aircraft. You might be surprised at just how complex I can make a "hammer". The nomenclature we use to describe our tools does anything but; it just fills a spot on the title block. What really describes the tool (and how to use it) is its part number and associated documentation. This may be anything from a single sheet cartoon ("insert tab "A" in slot "B"...) to a several hundred page technical document.

This "tool" may be a simple task-specific wrench to do something like remove an axle nut. Even that will cost you somewhat more than a Snap-On. This "tool" may also be a jig used to support and align the entire front of a 767 as we skillsaw the top off from the leading edge to the cockpit bulkhead when we are converting a passenger aircraft to a freighter. What do you think one of those "tools" might set you back?

Ten min. ago I got off the phone with someone who makes sure the gov't. gets less for the taxpayers' dollar. A major gov't. agency we've all heard of is a big client of mine. BUT they don't ever pay their own bills directly to us. Instead, they have a "contractor" get our bills, submit them to the gov't. agency for payment, they pay the contractor and the contractor pays us. As far as I can tell, this contractor does nothing except pass bills and checks between us and this gov't. agency. From what I can tell, this contractor is one-man shop and most likely some kind of minority set-aside or affirmative action thing. He takes our bills, marks them up by XX% and keeps the difference. A lot of PR firms do this too, but they usually offer some kind of service for the money, like writing the press releases for the client or fielding media calls. This contractor does none of that. Sound scandalous? I bet it'd be a lot more scandalous if this gov't. agency tried to cut out the middleman.

I think one thing is the level of people involved. When you take a look at all the various types of costs that contibute to the price of something it is really amazing how little stuff really does cost the average consumer. Of course there is the scale of economy to consider.

Those special wrenches and so forth that the gov and Mil buy are limited quantity. Many folks do not relize that things like bolts, screws, glue, paint and tools and even toilet seats have to meet certain specifications. You just can't (or shouldn't) use an Allen bolt from Home Depot on an F-18. The metallergy, tolerences and so forth are not tight enough.

Granted, there may be things that could work in many applications, but tall the hands involved have to be accounted for. In industry, much of the indirect costs are unknown or hidden.

BTDT, here's one possible scenario rthat may shed some light on how it works:
You will be playing the part of the government, I'll be the contractor.

Suppose you are working on a large project and need a toilet seat. Not just any toilet seat, a special one that has to be a custom size and has to meet hundreds of different specifications with stacks of forms and documentation.
You go to my company and ask us to supply that special toilet seat for you.

my company assigns an engineer to design it and he determines it can be purchaed at the local home depot. he tells you this but you don't want to hear it, you want my company to supply it as you don't have an account at home depot and don't feel like sending the next 6 hours filing out the documentation and forms yourself.
So, the engineer contacts the manufacturer and requests the specifications, weight, exact size, weight capacity, etc. All the information he will need to submit to you for your forms. It all meets the specifications you laid out.
He then fills out a requitition form and gives it to purchasing. They contact home depot and get a formal quotation, the issue a PO, and the toilet seat is delivered. the bill is paid, end of story, right?
No.
The engineer has spent at least 6 hours of billable time on your duma$$ request. The purchasing agent has spent at least a half hour processing getting the qoute and the PO and processing the shipping costs. The warehouse guy spends 15 minutes recieving the seat, putting it on the recieving station, and calling the engineer to ask what he's suppose to do with it. Then he spends 20 minutes packaging it up (in the special packaging you require) and ships it to you. The accounts payable clerk has another hour of billable time processing the check, entering the expenses in the log, and then billing YOU for all the costs incurred.
In the end, that toilet seat has actually cost my company about $800 in billable time, but I pencil whip it down to $600 and end up eating ther extra cost, because I don't want to upset you or lose you as a customer.
Then the press gets ahold of it and incites an entire nation of uininformed, knee-jerkers to call for my head on a platter for supplying something to you at a loss.

If you had just went down to the home depot yourself, and if you had gotten rid of most of your ridiculous red-tape and paperwork, this whole mess could have been avoided.

My father spend the early part of his career designing new types of explosives for the government, and was a pioneer in the science of shape charges.
He changed direction later and focused on rocket propellants, because it was safer (yea right).
Eventually he started designing rocket motors and specialized in rocket nozzles. Almost every single rocket nozzle in use today by our military (and most others as well) incorporates at least one of his patents, in some cases many patents.

He tells me stories you wouldn't believe. he has bid on projects before and the government came back and said "your bid is too low, you must increase it by 250% before we can award you the contract".

After the challenger shuttle disaster he submitted a white paper (an unsolicited engineering study intended to create potential future business) to NASA, the US military, and morton thyocol detailing a proposed fix, a specially woven and impregnated graphite composite clamp.
The government contacted him and rejected his white paper. They then put out a formal bid request for the engineering study. My fathers' company bid very low because they had already done the work. the government said they can't bid that low, they would have to increase the bid before it would be acceptable.
The doubled it and re-submitted it, again it was too low. they increased it again, they won the contract, and gave them the same white paper they already had. That was exactly what they wanted.
Then they put the actual clamp out for bid. My father's company did not win that bid, one of their competitors did. Then the government contracted my father's company to oversee the design and manufacturing of the clamp, at their competitor's company.
So basically my father went to work for the competition and his company leased him out for 4 months.

So, they ended up paying hundreds of thousands to get an engineering paper they already had for free, then they paid twice as much for the clamp as they would have if they just let my father's company build it. Note that this was one of about 4 or 5 different "fixes" NASA was pursuing.

And we (well--some of us) expect the government to manage healthcare? People will die before they fill out all the forms.

Danny,
Where did you find this quote?

Mike - one thing that I didn't see mentioned above is the way profit is added. Sometimes, instead of adding a % profit to cost, a govt. contractor will just take every item in an assembly and add a fixed amount of the profit to it. e.g instead of adding 22% profit to a 20 cent washer, they will add $500 to each item, generating a $500.20 washer (on paper).

SammyG,
Your Home Depot scenario makes sense if the govt. is only purchasing a single toilet seat from your company. Does your company repeat that scenario for each item in a quantity order or for repeat orders?

and from Rick:
"Ten min. ago I got off the phone with someone who makes sure the gov't. gets less for the taxpayers' dollar. A major gov't. agency we've all heard of is a big client of mine. BUT they don't ever pay their own bills directly to us. Instead, they have a "contractor" get our bills, submit them to the gov't. agency for payment, they pay the contractor and the contractor pays us. As far as I can tell, this contractor does nothing except pass bills and checks between us and this gov't. agency. From what I can tell, this contractor is one-man shop and most likely some kind of minority set-aside or affirmative action thing. He takes our bills, marks them up by XX% and keeps the difference. A lot of PR firms do this too, but they usually offer some kind of service for the money, like writing the press releases for the client or fielding media calls. This contractor does none of that. Sound scandalous? I bet it'd be a lot more scandalous if this gov't. agency tried to cut out the middleman."

Rick,
Sounds like the contract was awarded to this "minority" contractor and your company was selected to be his partner or sub-contractor. Without the "correct" front man, your company may not have been eligible to bid directly or provide the manufacturing services. Who knows how he landed the contract.

However, I don't think that's in the spirit (or the law) of what the govt. had in mind to allow bidding available to a wider segment of the society. If the front man is a one-man operation, his "business" is either a shill to bypass govt. regs. or he found it necessary to find a vendor/partner to wade through the requisite labyrinth of bureaucratic paperwork. Whatever, it's a waste.

In many of the examples described in this thread, the common denominator is
that certain individuals/companies are getting rich on the taxpayer's dime. At a minimum, it's a tremendous amount of waste. Unfortunately, many people are resigned to this system. Halliburton's cost plus program is the ultimate example of the "govt. contract". We get what we vote for.

Sherwood

From what you can tell, he's a minority set-aside or affirmative actions thing?

Can you please explain that?

I don't know how much your company pays this intermediary, but you may want to let your C-level staff know that for $200K fully loaded annually, they could have a true government cost accountant and software, most likely Deltek, handle your billing.

I've never met the guy. I just took the account over from the previous sales rep. who had met the guy and told me that. We don't pay the billing contractor anything. We just send him the bills that the gov't. agency racks up, he tacks on xx%, probably 30% as most PR firms do, sends his bill to the gov't. agency, they pay him, he keeps his cut and then pays our bill to us. Again, as far as I can tell, he does nothing else for this gov't. agency. What private or public company would ever hire such a middleman just to spend more money? This kind of stuff can only exist with the government, which, by law, has to give a certain percentage of their business to minority or women-owned businesses.... or non-profits.

My wife works for a non-profit that has so much money, they have to look for new ways to piss it away - 35 hr. work week for full time pay, 403b matching to 10%, even if you contribute nothing, unlimited sick days and it's not even counted if it's less than 5 hours, they sponsor H-1B visas for all who need it, etc. When you have people who've been working there for 35 yrs., you know they are a gravy train.

Rick,
If they got $$$, I know of a way to get rid of it!

:rolleyes:

It was strictly a hypothetical situation to demonstrate how screwed up the bureaucracy is.
There are so many silly rules that common sense has absolutely nothing to do with it.
But to answer your question, no. In that scenario where the bid is cost plus, the price per piece should go down dramatically as the number of units goes up.
But, if the governemtn buys one toilet seat for 4600 and then later that same year needs 100 more, they may go back to that company and order all 100 for $600 each, as that is the price that is set and accepted so it must be right. it happens. Now if that toilet seat went out for competitive bid and someone bid $50, it would probably be rejected because it is too low. They already know what one costs, $600. so the system will not allow a bid to come in so far under that price.

there are types of bids (hard money bids) where the government decides beforehand approximately how much a unit should cost and will not accept a bid that is drastically higher or lower no matter what.
In some cases they also will reject a bid that is more than a set percentage below the competing bids and they think that if it's that low it can't be right.

Suppose there are you three companies who are requested to bid on a job.
They are all busy, full up with orders or the job is a major pain or whatever and they really don't want to take on this job so they all bid exceptionally high in order to NOT get the contract.
Guess what? it is awarded as long as all three bids are fairly equal, even if the price is ridiculously high.
The rules are set up in a way that completely takes logic and judgement out of the picture. They don't trust people to use good judgement so they don't allow them to use any judgement at all.

"It was strictly a hypothetical situation to demonstrate how screwed up the bureaucracy is. ...."

No wonder the US is doing so well in the global economy. We're pissing our money and resources down the drain (or to others more fortunately connected). Doesn't matter. In the end, we're all collectively disadvantaged.

We all have a vested interest in making our system a win-win situation. Some folks have the attitude that the government is them. No, it's us.

Sherwood

Hey, look at the bright side. Yes, the gov't. pisses billions down the drain, overpays for everything and gets little for it. But that money does often go to American businesses which pays part of it back in taxes. So it's not a total waste.

Circle jerk

Red - I just looked at my notes from months ago. I have down that you were gonna send me a lil sump'n sump'n via PowerPoint. Do you remember?