Why Is It That Contractors Bid Some Programs And Not: Fill & Download for Free

Money.While I was deployed to Iraq in 2003/04 we ran across some Blackwater contractors at the mess hall (run by Kellog, Brown and Root) and myself and some of the guys in my team asked them about their Toyota Land Cruisers that were so shiny and new it made your eyes hurt to look at them. They told me that the contractor bought them for cost, marked them up double, shipped them to Kuwait and they got tacked onto the bill. These are “cost-plus” contracts where the government was to pay whatever the costs incurred plus a guaranteed profit margin.-note- Cost plus contracts should horrify any good government types. Especially how these were done. Little oversight and almost no review or due diligence. This isn’t capitalism, it is a pump for tax money into the hands of war profiteers.The guys also said they were on six figure contracts with all kinds of perks. These guys were a mix of former cops, ex-military and one guy was a truck driver. To my squad of 11B Rakkasans it was like looking thru a window into another world.Nothing special about these guys. Similar resume to what we all had but making five times as much for doing a quarter of the work.So, after we went back home a squadmate got out and a year later is 40 pounds of muscle heavier (Lou Holtz training program) and has a thirty foot boat he is living on in the gulf coast. You do the math. All the brakes are off of you and there isn’t anything to say you can’t re-up if the gravy train runs out.Contractors were living in a fantasy world of big money, loose rules about rules of engagement, little consequence if they screwed up (can’t arrest you if you have been shuttled out of the country five hours after you shoot up a carload of locals) and lots of steroids. I don’t really know if it is any better today. But, it is the case that the US military put itself into a bidding war against itself for Special Operators and other high-speed soldiers.

Oh, she definitely misunderstood the deal.But before anyone begins to feel too smug about that, it’s worth noting that you probably did too.The reason I say this is because I’ve read some 60-70 articles on the whole HQ2-NYC fiasco, and none of them got the details right (if we’re defining “right” by some minimum benchmark for context and thoroughness). While simplistic headlines abounded on why the deal was good or bad, almost all of them mindlessly quoted “$3 billion in incentives” without really breaking down what those incentives were or noting that only one of them was unique to Amazon.To remedy that, a quick summary:Empire State Development Corp’s Excelsior Jobs Program offers credits equivalent to 6.85% of wages per net new job, plus 2% for net new investments (cap of 10 years for both). This meant a max credit of $1.2bn for Amazon (math on final page here), with credits being made available at the end of each tax year based on verified eligible hires/payouts.ESD also offered Amazon a dual set of capital grants consisting of $480m for the HQ2 buildout and $25m for site development and infrastructure upgrades (see page 19 here), which would have been disbursed in annual chunks upon proof of hitting 100% of investments and 85% of projected job creation. (Weirdly enough, Amazon’s blog post announcing the deal put the total value here at $325m instead of the $505m listed in the official MOU signed a day earlier. I have yet to figure out why.)Amazon would have also paid its property taxes (less abatements) to ESD, who would have put 50% or more into a local infrastructure fund, with the balance going into NYC’s general coffers (see page 5 here). Some incorrectly labelled this a tax incentive, even though it wouldn’t have changed Amazon’s actual bill (just a different payee).NYC’s Industrial & Commercial Abatement Program (ICAP) offers property tax abatements for new builds and significant renovations in certain under-developed parts of NYC, which in Amazon’s case was expected to net a max of $386m based on submitted plans.NYC’s Relocation and Employment Assistance Program (REAP) offers “an annual credit of $3,000 for twelve years per eligible employee” for companies relocating employees from either outside Manhattan or south of 96th Street to certain targeted zones elsewhere in NYC. This would have amounted to $897m had Amazon hit all their hiring goals.There were also a bunch of smaller things in the form of special program commitments on each side totaling in the low tens of millions that aren’t really worth getting into here. (Plus that dumb helipad thing.)So, what’s the takeaway from the above?All but either $325 or $505m (whatever that ESD capital grant actually was) of the incentives were through normal/existing programs.That ESD grant (using the higher number) was equivalent to a 14% rebate on real investment dollars, which isn’t exactly extravagant.That ESD grant, while unique to Amazon (to what I can tell), was of the sort that anyone with a large enough project could likely secure for themselves, and definitely wasn’t indicative of NYC prostrating themselves before Bezos in particular.Put another way, at least 83-88% of the total incentives were made using existing programs and didn’t award Amazon any special considerations.But that’s not all:One of the things that was unique to the Amazon deal was their unprecedented commitment to hiring under-privileged contractors and suppliers (15% of contracts to women-owned enterprises, 15% to minority-owned, and 6% to those owned by service-disabled veterans).All these incentives would have cost NYC taxpayers zero in up-front cash.* All were abatements on property improvements, future tax credits based on real spending, and capital grants to be paid out after Amazon began paying contractors (thus generating taxable income). Ergo, this would have been NYC paying back a small share of its winnings.Anyway, on to what AOC got wrong specifically.While it’s true that nothing in the HQ2 proposals or agreements explicitly guaranteed Amazon jobs for existing residents of NYC, HQ2 would have created substantial work for existing New Yorkers, along with a considerable number of local non-Amazon jobs. Estimates ranged from 30,000-65,000 downstream jobs in total, with tens of billions of dollars (at minimum) in economic value.[EDIT: It’s worth noting that all those under-privileged contractors mentioned above — representing over a 1/3rd of total contracts — had to be registered with the State of New York. Maybe some of those would have come from outside NYC itself, but you always want to hire local where you can. The presumption would be lots of bids being awarded to contractors from Queens and Brooklyn.]The point of landing a big fish like Amazon is in what they add to your economy in marginal investment/spending, all of which increases your tax base, improves your neighborhoods, and makes your citizens richer.While I largely appreciate what AOC is up to on a tonal level, her contributions to the HQ2 discussion have been a net negative — as has been most of the “journalism” on the topic. Fairness matters. Infrastructure capacity matters. Gentrification matters (kind of). But these are problems you solve by increasing your tax base, not by chasing money away.* Bonus points to Scott Welch for asking about whether the tax credits were refundable. Some interesting discussion in that thread (link). While it seems unlikely to me that Amazon could have engineered a net refund in any given year (thus technically costing NYC/NYS taxpayers something), the tax aspects of the deal are beyond my powers. (If an accountant with knowledge of the Byzantine market that is NYC wants to weigh in, I’d be grateful.)PS - Just for kicks, here’s a fun comparison: ESD is providing $300m in capital grants to IBM for their new AI Hardware Center at SUNY Poly. For how many new local IBM jobs? 60! (I’m not suggesting this is an especially bad deal. Just pointing out that if you want to pick on ESD for generous payouts relative to expected jobs or incomes, the Amazon deal is a disingenuous and frankly bizarre place to start. But Bezos does make for better headlines, and blindly hating/cheering Amazon is cool now I guess, so that’s the journalism we get.)

Costs would go up. Whether quality would go up or down is anybody's guess.The first thing to realise is that NASA already subcontracts as much as it can. It doesn't build rockets or satellites - they are built for it by contractors. Some of these are the big Aerospace companies such as Boeing and Lpckheed Martin, others specialist small companies such as SpaceX. And, of course, it is subcontracting its manned launches to the Russian space authority.But when you subcontract a complex item to somebody, you need to supervise it. So when you see a load of white suited crew crawling over some new satellite, probably three quarters of them are contractor staff building it, and one quarter are NASA staff checking on them. You would have to have a considerable organisation between Congress that authorises programs and the contractors who build the stuff. They need to plan future missions, prepare specifications, negotiate contracts, and check on delivery. A lot of what NASA does is concerned with this. You can't just go to a contractor and give them a billion dollars to build something spacey.The bits NASA does not subcontract are where it is a monopsonist - the only possible customer. Nobody else has a use for a launchpad big enough for manned missions. If it sold it off to a contractor, that contractor would have NASA over a barrel. If the suddenly say costs have doubled, so they need to charge twice as much (plus profit), what is NASA to do? It would take years and hundreds of millions to build another launchpad. And why would any commercial organisation do so when the original buyers could undercut them any time they wanted?Astronauts are another item whose costs would rise. Astronauts are paid civil service wages - not very much. A 747 pilot gets much, much more for flying a much les complex craft in far less danger - and far less training. A rookie astronaut probably has five years of training, a commander fifteen. Make a commercial marketplace for their skills, and they will will be able to demand to be paid like top sportsmen. Contractors would bid for their skills (millions of dollars of investment) and pass the bill to NASA.Even without the intent to gouge, a monopoly supplier has no motivation to keep costs down. NASAs costs are overseen by federal accountants; a suppliers costs are commercially confidential. Just as in healthcare, doctors are motivated to do extra tests just to be sure, a monopoly supplier is motivated to increase costs to be trebly safe - because more costs mean more profits. Within NASA, that can be openly argued; a monopoly supplier cannot be ordered not to do excessive checking.There may be individual points where more could be subcontracted. No organisation is perfect. But less could be sold off than, I guess, you think. And there is not much reason to believe there would be gains if it were.