Yes, Virginia, A $2.98 Hammer REALLY Costs Our Government $100
It's not just a good idea, it's the law!
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When criticizing government plans to take over health care on the spurious basis that government control will make it more efficient, Scragged has often referred to the government paying $100 for a $2.98 hammer or $600 for an ordinary toilet seat. It occurred to us that some of our readers wouldn't have read about these matters - after all, it's been years since the Lamestream Media spoke in such vivid terms about government waste. Given their dislike of the Bush administration and the way the public reacted so eagerly to their earlier stories about $100 hammers, they'd have written up such incidents if they'd found any.
We thought it might be worthwhile to explain how $100 hammers came about and what happened to them.
Selling a $2.98 Hammer for $100
I worked for a conglomerate called Gould way back in the 1980s. The boss' name had far too many y's and z's for me to pronounce it with confidence, so I called him "Chairman Bill." Mao tze Tung had added so much glory to the title "Chairman" that everybody knew I meant the Chairman of the Board. Chairman Bill was a skilled deal maker; he bought and sold divisions more often than lesser beings buy and sell cars.
Shortly after he bought a division which made good profits from government contracts, the media reported that his division had been paid more than $100 for a hammer which could be bought in a hardware store for $2.98. It wasn't as bad as the $600 toilet seat or the $3,000 coffee maker which were in the news at the time, but Chairman Bill's golf buddies teased him unmercifully about how they, too, could show as much profit as he did if only they, too, could charge $100 for a $2.98 hammer. "Nice work if you can get it," as the saying goes.
Their ribbing eventually got under his skin. Chairman Bill summoned his accounting firm and told them, "I don't care what it costs. If we robbed the government, I want to know. If we didn't rob the government, I want you to sign a formal accountant's letter saying we didn't cheat the government."
Having heard the magic words, "I don't care what it costs," the accountants swarmed into the military products division like Sherman marching through Georgia.
Accountants don't often use words like "shock," "amaze," or "astound," but they made it clear that they were quite surprised by government-required accounting principles. They found more than 20 cost categories associated with the hammer - marketing, travel, training, cleaning, general administration, facilities, and other overhead items that were allocated to the hammer by formulas defined in the contract.
The smallest line item I remember was about $.23, the biggest was $4.50 or so, but these items added up to precisely the price the government had been charged. Since military contract boilerplate said that the accounting principles called for in the contract were matters of law, it would have been against the law to charge a penny less.
How Did We Get There?
We all know that government processes can be completely bizarre, but how did procurement regulations get so messed up that a $2.98 hammer could end up costing the government $100?
Like all things governmental, it got that way one foul-up at a time.
Bureaucrats hate being embarrassed nearly as much as they hate having their budgets cut. Thus, whenever anything embarrasses a bureaucracy, the first response is to write more rules so it won't happen again.
Government procurement goes back a long, long way. The earliest detailed account of the terms and conditions of a public solicitation to enter into a contract between a government and an individual defense contractor of which I'm aware was when David was contracted by King Saul to slay Goliath in return for being able to marry the king's daughter and have his family freed from tax obligations for a while (I Samuel 17:23-26).
When we read on, we find out that even though David performed expeditiously per the terms of the contract exactly as stated, he didn't get to marry the princess until he'd fulfilled another extra-contractual (and equally risky) solicitation some years later (I Samuel 18:25-27).
Even though "the people" were well aware of the terms and conditions of the government's contract with David, nobody was surprised when he didn't get paid. One suspects that government chicanery and perfidy are as old as government itself.
Firm-Fixed-Price Procurement
Over the centuries, bureaucrats have learned to write more and more regulations telling how contracts are to be performed, managed, and billed. David's contract was "firm-fixed-price."
What David was supposed to do, namely, slay the giant single-handed, was well defined. What he was to receive was equally clear: the princess' hand in marriage and a tax holiday for his family. There were no bonuses for exceptional performance, no penalties for late performance, no progress reports, no partial payment, no forms to fill out, just slay the giant and get paid. And in case of failure, the government was not obligated to pay anything at all.
Only David did slay the giant, but didn't get paid.
Fixed-price contracting makes sense for building roads and bridges where contractors have enough prior experience to know how much the job will cost. There's room for chicanery when a contractor can make a deal with an inspector who'll let him supply substandard, and therefore cheaper, cement. We've seen this sort of thing in New York City recently and it's said that some of the wire used for the Brooklyn Bridge was substandard, but fixed-price procurement works, sort of, for things we know how to do.
What happens when a President says, "Man on the moon by the end of the decade," which nobody's done before? Nobody has a clue how to do any of it, so how can anyone submit a fixed-price bid?
Cost-Plus Contracting
Enter the "cost-plus" contract. The government hires, say, Boeing, to build something exotic like a centrifuge to train astronauts how to deal with acceleration when rockets lift off. A "cost-plus" contract says the government will pay Boeing whatever it costs Boeing to build the centrifuge, plus something extra for their pains.
You're a section manager on the contract. You think it would improve productivity and thereby save the government money if your group could have a two-week off-site meeting in, say, Tahiti. If your accountants think they can charge the government for the trip, why not? It makes the troops happy at no cost.
It's even better if the contract is "cost plus incentive fee" where the company not only gets paid its costs, it gets paid a percentage of those costs as profit. Going to Tahiti makes more money for the company! What a no-brainer!
Up to a point, bureaucrats go along because the more money they spend the more they can ask for next year. When the newspapers start whining about junkets, however, they have to change the rules. That's why there are yards and yards of fine print about what you can and can't charge to a government contract - every time a contractor figures out a new way to stick it to the government, the government comes back with more fine print.
It's All in the Allocation
That's how we got to $100 hammers. When regulations specify what can be charged to the government, contractors do their best to load up those cost categories so they'll be reimbursed. They're pretty good at it, too, it takes real skill and golden-tongued eloquence to argue that it's legitimate to allocate nearly $100 worth of overhead and other costs to a hammer which cost $2.98.
The overhead is nearly 30 times the actual cost! What does that tell you about how government procurement really works?
What happened? Why haven't we heard about $100 hammers recently? Did the bureaucracy tighten things up enough that the government can buy a $2.98 hammer for $2.98? Of course not, cutting costs would reduce budgets and we can't have that.
The solution, of course, is to change the allocation formula so that costs are allocated disproportionately to large items. We the People still pay $100 for $2.98 hammers, but the accounting regulations make hammer-related overhead charges instead appear next to some other item so that the hammer doesn't seem so expensive. How do you the voter really know the difference between a $200 million fighter jet vs. one that's only $100 million?
One reason military equipment is so expensive is that each big item carries the overhead which should rightfully be allocated to smaller items. Honest allocations get the bureaucracy criticized, however, so they changed the accounting system to hide the costs.
We see the same sort of allocation chicanery in the way the House of Representatives and the Senate account for travel costs. Rep. Pelosi travels to and from her California district each week in a large plane which can make the trip without having to stop. This costs several hundred thousand dollars per week and generates huge amounts of carbon, but the cost doesn't show up on the House travel budget. Mrs. Pelosi commandeers a military jet, so the cost of her travel is buried in the billions spent defending the country.
As with many other such expensive items which benefit the plutocracy, the costs are still there, but they're buried so deeply that nobody will ever find them.
Think about this - if the overhead charges make a $2.98 hammer cost $100, what do the regulations do to the costs of more expensive items? Not to mention the upcoming costs of paying $100 for $2.98 bed pans in government-controlled "health" facilities.
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What does Chinese history have to teach America that Joe Biden doesn't know?
I recently found out that after I left Gould, they managed to sell $7 hammers for a lot more than they sold $2.98 hammers. You ought to read the entire article.
http://www.truth-out.org/historical-hell-how-pentagon-continues-overpay-everything65772
The $436 hammer was one of the best illustrative cases. After Congressman Berkley Bedell (D-Iowa) found this overpriced hammer in the Navy procurement system, he asked the Navy auditors to audit the costs and show where the fraud and waste were located. The Navy dutifully audited the hammer costs based on approved cost formulas and found that the costs on the hammer were "exorbitant but legal." In other words, the markup on the hammer by the contractor was outrageous, but the Navy had approved the markups, thereby institutionally legalizing these ridiculously high prices for the baseline in the future.
The following chart, taken from Navy documents, demonstrates how a $7 hammer, purchased by Gould Corporation in the 1980s, grew to cost the Navy $436.
Remember, these are markups and time billed for every hammer.
Gould, Simulated Systems Division
Purchased Item
Item – hammer, hand, sledge – Qty – 1 each
Direct Material $ 7.00
Material Packaging 1.00
Material Handling Overhead @ 19.8% 2.00
· Spares/Repair Dept.
1.0 hours
· Program Support/Admin.
0.4 hours
· Program Management
1.0 hours
· Secretarial
0.2 hours
_____________________________________________
Subtotal: 2.6 hours Engr. Support $37.00
Engr. O/H [Overhead] @ 110% 41.00
· Mechanical Sub-assembly 0.3 hours
· Quality Control 0.9 hours
· Operations Program Mgt. 1.5 hours
· Program Planning 4.0 hours
· Mfg. Project Engr. 1.0 hours
· Q.A. (quality assurance) 0.1 hours
_____________________________________________
Subtotal: 7.8 hrs Mfg. Support 93.00
Mfg O/H @ 110% 102.00
___________
$ 283.00
G & A [General & Administrative]@ 31.8% 90.00
___________
$373.00
Fee [profit] 56.00
Facilities Capital Cost of Money 7.00
__________
TOTAL PRICE $ 436.00
The Navy, after facing embarrassment and ridicule in the media and in the public, attempted to recover some of the costs, but declared a big victory when they were only able to recover 10 percent of the costs. That means that almost 90 percent was passed on to the historic costs of that program and became the new normal, the new baseline price for future hammer purchases.
It is not entirely the military's fault. When I was in the Army, we were not allowed to just go downtown and by a hammer. Congress set up laws restricting procurement to protect various political groups. So now there is a list of required sources: small business, minority, economically depressed areas, etc. The other problem is that there is a long history of the military being swindled by private business. As far back as the American Revolution, businesses were selling shoddy products (rations) to the military. So as a result, the military created this byzantine procurement system to spell out every detail.
It isn't "government" that is wasteful.It is cronyism and corporate bribery that bought our military industrial complex.What do you think buying a statesman is all about.If not for profiteering! Through lobbying and special interest.It has everything to do with the "deformation of governing" tody. And nothing to do with the common good and honest living of republicanism.
So lest increase military spending. And cut off those evil entitlements That really belong to our children. Because the common good and law biding citizen of today. Is defined as a lazy bum. And wants something for nothing. As extreme wealth bribes for total deregulation and another tax break.
But I guess its' all the fault of the Black Guy. That Ohio, Wisconsin,Pa. and many other state are fighting to protect their liberty and Inalienable rights.You know "republicanism". The right to vote.
That's not really how it works and somebody has been giving you a lot BS. First google Republican Harold Rogers and $17 thousand dollar oil drip pans and then see if you can still make these claims. Second we all know that these contracts are usually given out to a hand full of contractors who then give them to other contractors who then give them to other contractors and by the time each one puts his profit into the deal he price goes up. It's still graft anyway you look at it. We're in a recession and the US is borrowing a lot of money. We spend over a trillion dollars on our national defense. That's four times more then any other country. China only spends a quarter of that amount and they're communist and communists are suppose to be biggest of big government. But haven't you wondered why one party wants to raise the national defense by $2 trillion dollars while the cut food stamps for seven million American children? Go google the $17 thousaned dollar oil drip pans for Black Hawk Helicopters and you'll start to see the naked truth.
@Lets be truthful - you are correct, we are indeed being ripped off, but it is non-partisan. Both parties earmark lots of money for their friends and get some of it back as campaign contributions. The legislature has tacitly agreed not to question the executive branch spending money on their friends so along as the executive lets the legislature spend money on theirs.
You summed up the situation about defense. For another example, the UAW was rewarded for helping elect Obama with a multi-billion dollar chunk of stock in GM while the real owners were shafted.
Each party has different friends. The only difference is who benefits when they steal from us. That is why there's so much money being poured into politics. Buying politicians gives you a 1000% return on investment, and yo don't have to make the investment until after you get the return.
The founders assumed that dividing government would give each branch an incentive to keep each other honest. Now that they've conspired t work together to rip us off, we're in a world of hurt.
I was an electronics tech in the Navy in the early 1980's and I can attest to the outrageous prices we had to pay going through the Navy supply system. We could do an open purchase and buy something at a store for much less, but open purchases were only supposed to be used in emergency situations only, i.e. we needed the part right away to be able to get the ship out to sea on schedule. But there were times that the price was just so high that we would actually defy supply statutes and essentially lie that a certain part was vital to our mission right now so that we could do an open purchase. The only thing we got out of it was the satisfaction of saving taxpayers some money, but of course it was just a drop in the bucket compared to all of the money wasted on exorbitant costs...
the author is an idiot. This is not how government contracting and cost accounting works. The hammer story is bs. He doesn't know what he is talking about.
Hey Dean
Care to illuminate the rest of us? Telling a person or people that they're stupid doesn't really help the problem or ignorance after all.
Thanks!
Why not shut down corporate lobbing given big government contracts.
Don’t go blaming our government! For what the stealing and siphoning off that big corporation continue to do through the chamber of commerce. In creating the lobbing of government contracts and bleeding off our tax dollars for profiteering. In using your tax dollars too pay “you an income”. Then tripling the price and selling it back to Our Government or you as the “consumer”.
As special interest out sourced our jobs and manufacturing base: through our tax dollars, tax breaks and subsidies. As it Set the Globalization of Cheap Labor in the devaluation of Our American Family. Over the past 30 years of deregulation. The by whatever means necessary: of private equity and venture capital. It’s the corporate threat and chock hold laid upon the “integrity of governing” today!
The United States Chamber of Commerce (USCC) is an American lobbying group representing the interests of many businesses and trade associations and Banks. IT IS “NOT” AN AGENCY OF THE UNITED STATES GOVERNMENT.
If Big Corporation want to do business with “We the People”. Stop the funding through government contract. And let them spend their own money for Product Development and Research. As it should be! Then sell it to our government as a consumer. And not as an Investor that doesn’t profit from it. We would save trillions of dollars in the process. Here is the list of the first 16 states.
Government Contractors States with the Highest Federal Spending in FY09
The following charts have been put together based upon fiscal year 2009 data reported on the Federal Procurement Data System (FPDS). Total dollars are defined as the total dollar amount of federal contracts awarded by place of performance.
Fiscal Year 2009 Federal Contract
Spending by Place of Performance
State/Territory Total Dollars
1. California $55,562,326,567
2. Virginia $54,788,772,847
3. Texas $31,165,007,109
4. Maryland $27,122,130,315
5. District of Columbia $20,349,103,019
6. Pennsylvania $17,955,604,032
7. Florida $16,845,081,961
8. Massachusetts$16,214,879,477
9. Arizona $13,802,031,640
10. New York $12,763,610,508
11. Missouri $12,621,559,953
12. Connecticut $12,273,040,320
13. Washington $11,390,380,759
14. Alabama $11,079,779,289
15. Georgia $10,858,338,722
16. Illinois $10,428,720,895
"In October 2013, a rule against members of Congress traveling on expensive military aircraft was waived for a delegation of thirty House members, including Boehner and Minority Leader Nancy Pelosi, to attend the funeral of longtime Florida Congressman Bill Young.[21] The flight time cost was estimated at $10,000 per hour. A spokesman for Boehner told the Washington Post, "Given Rep. Young’s long and distinguished service to his congressional district, and especially to the men and women of our Armed Forces, the rule against military aircraft is waived for this funeral."[21] The rule was also waived for two other funerals earlier this year."
http://ballotpedia.org/John_Boehner#Travel
The forced sequestration forced by partisan politics in 2012 is the reason Speaker Boehner overrode the above-mentioned rule.
http://politicalticker.blogs.cnn.com/2013/02/27/spending-cuts-mean-congress-is-grounded-from-military-planes/comment-page-1/#comments
I Believe that we will win
North Korea that is
JK
To be fair to Pelosi, I've seen her flying commercial several times (with IAD as my home airport, it's not uncommon to share the "moon buggy" shuttles to the terminal with politicians). Yes, she was met with a security detail as soon as she deplaned. But no, she got no special car and took the shuttle with the rest of us, and was on a commercial United flight from San Francisco. And she was happy to talk with passengers.
Republicans, too: I had a flight with Alan Simpson (of Simpson-Bowles), and he was happy to chat with people.
Um. Those additional line items aren't the cost of the hammer per se. They are costs that have been associated with the hammer, but almost certainly couldn't be eliminated. If you, an ordinary American, bought a hammer, the only cost you'd probably record would be the actual price and tax. Line items would not be considered. You simply record the purchase price and that's that, so you write down $3.20 or so in most states.
Of course, we all know that it was a business expense, so you were off work from your job where your employer is paying you $20/hour. That's another $30 right there, but furthermore, they make an additional $40/hour because of the work you're now not doing (this is not unusual. The company almost certainly makes significantly more money from your labor than you do). Add another $60.
And we also need to consider the cost of gas. We'll assume you went 30 miles through city traffic in a company truck that gets 15 MPG. Let's say gas is $3.40/Gallon? Good, so you buy two gallons.
Welp, That's $100 for a hammer on the free market, with no special requirements or usage training or contracts at all.
Incidentally, industry-standard estimates show that the cost of producing the Linux OS in the private sector would be on the order of $100/line of code. This isn't because programmers aren't efficient or that they work for 3 hours straight to produce a line of code. it's because of opportunity costs, refinement, debugging, etc. Linux is fairly complex code that requires optimization and skilled coding.
The other issue is that line items are amortized weirdly. If you bought a bottle of soda ($2), a hammer($3), and a used car ($2995) and had $300 in overhead costs, the reasonable thing to do would be to say that the true cost was 10% higher. $2.20, $3.30, and $3294.50. Unfortunately, it's also legal in government accounting to say that they were each $100 higher. A $102 soda, a $103 hammer, and a $3095 used car. Regardless, this is less because of the stupidity in bureaucracy and the lack of a free market and more because asinine accounting procedures. Rest assured that donating a hammer of the appropriate specifications to the government will not save them $100. It will save them $3.
Mostly its all BS Urban Legend Fuel.. The US Government Buys almost everything at Wholesale Prices.. BTW your not buying a hammer.....for $298 . You might buy a toy hammer but not a real hammer..
Claims about Pelosi using a "large plane" and "per week" seem a bit exaggerated, and are possibly based on a debunked rumor:
https://www.snopes.com/fact-check/pelosi-jet-use/
It's unclear that the story of Goliath isn't simply fiction, but certainly in the original version of the story, it was not David who did so:
https://en.wikipedia.org/wiki/Goliath
Will Offensicht said:
I recently found out that after I left Gould, they managed to sell $7 hammers for a lot more than they sold $2.98 hammers. You ought to read the entire article.
http://www.truth-out.org/historical-hell-how-pentagon-continues-overpay-everything65772
The example given by this poster is beyond BS. No one does cost accounting or posts to ledgers in this manner. I used to work in corporate audit for a multinational conglomerate (more than 25 years ago) and there is no place on Earth that does accounting in this fashion.
The example posted is basically a humorous twisted take on compound interest rates at a retail lending bank.
Yes big companies allocate costs on projects using all kind of convenient accounting line items but MOST PROGRAMS HAVE INTERNAL AUDIT and INTERNAL CONTROLS personnel that review such activities on a monthly and quarterly basis and employees/managers get fired if they game the system too much.
All that said, it does NOT mean the story of the overpriced hammer and shower head are false at NASA and some DOD programs, they are true and most budget overruns are due to contractual issues, big ticket items that require new operating parameters and have to be re-ordered from the factory or rated by a test facility to conform to some new regs.
But the example given here is laughable, this story just keeps getting better and better each time I run into it.