It isn't every day that the nuances of a particular payment and rebate scheme make the front page of the Wall Street Journal. But then again, it's not every day that the Pentagon realizes that suppliers might be bilking it out of tens or hundreds of millions of dollars. According to the above-linked story, "the Pentagon says it intends to impose limits on their ability to collect 'discounts' from suppliers that aren't shared with the government ... the payments, which can add up to millions of dollars, are at the center of a criminal investigation by the Justice Department into the military's main food supplier for U.S. troops in Iraq." Apparently, these discounts aren't the type you would expect in any typical type of contract arrangement. Rather, "military contractors are making deals with their suppliers to receive discounts of 6% or more, and lenient payment terms of up to 90 days." Hmmm ... who wouldn't want an "early discount" of 6% for agreeing to pay within 90 days?
In my view, the Pentagon is right to demand transparency in their supplier agreements. For any type of cost-plus or pass-through program to be effective, there can't be malfeasance on the back-end that results in payments which are out of line with those in the private sector. Fortunately, the Pentagon agrees with this perspective, and recently sent letters to its suppliers putting them on guard to end the absurd early discount terms and rates. According to the Journal, "The letters said such payments must be consistent with commercial practice and applied across the board by a firm to government and private suppliers alike." While news like this is certainly welcome to all those who despise government waste, we should really ask ourselves: How could something like this happen in the first place? Seriously, do you think that Wal-Mart or GE would tolerate such behavior? If they got wind of anything even close to this sort of thing, they would send their suppliers an invoice to cover what was rightly owed them. Let's hope the Feds do the same.
- Jason Busch