Defense contracts don't always add up

It sounded like a windfall.

In January 2008, Virginia Beach-based ADS Tactical Inc. announced it had won defense contracts worth up to $4 billion to provide firefighting and emergency equipment to military installations across the country.

"This contract will double the size of our company in the next two years and allow us to greatly expand our employee base in the Virginia Beach area," Luke Hillier, the company's CEO, said at the time.

So far, however, the reality has been much more modest.

As of Dec. 16, the contracts had generated $177 million in business for ADS.

How can the government set a contract ceiling apparently so out of whack with the business generated?

To answer that question is to enter a maze-like world where the differences in how government agencies and contractors interpret a contract can be measured in billions of dollars. Contract ceilings exist only on paper - projected numbers that don't require the government to reserve or spend any money until goods or services actually are provided.

"It's good news when you win a contract that has a large ceiling, because it gives you opportunity," Hillier said. "It's something you want your employees and your customers and the community to know."

The contracts' wording is clear, Hillier said. ADS won five contracts, one in each of five geographical regions, each with a maximum value of $800 million.

Yet the Defense Logistics Agency, which awarded the original fire-and-emergency contracts on Dec. 28, 2007, says the total maximum value for all of the contracts combined was $800 million, not $4 billion. DLA has about 26,000 employees. The agency's headquarters is at Fort Belvoir in Northern Virginia.

"I have seen others get confused by the way that the contract announcement comes out," said Stacey Hajdak, an agency spokeswoman, citing the program ceiling amounts listed for each vendor. "I think the inclination is just to add those up and, you know, assume that's what the total of the program is."

It is not unusual for the agency's ceiling on contracts to be much higher than the amount of business generated, to allow for contingencies and surges, Hajdak said.

But the confusion has prompted the agency to review how its contract announcements are written to ensure everyone is on the same page.

Such "indefinite-delivery, indefinite-quantity" contracts are advantageous for the government "when they do not have a clear understanding of just how much of something they're going to need over a period of time," said Craig Quigley, executive director of the Hampton Roads Military and Federal Facilities Alliance, a local advocacy group.

In many cases, the maximum-dollar ceilings aren't met, he said, and in many others they are.

"Think of it as a line of credit," Quigley said.

ADS isn't the only company that interpreted the fire-and-emergency services contracts as a billion-dollar-plus opportunity.

"That was the way we understood it," said Charles Radcliffe, vice president at Safeware Inc. in Landover, Md., which won two contracts, for the Southeast and Northeast regions.

The 2007 contract announcements specified a maximum value of $800 million for each contract, so he assumed his firm had a $1.6 billion opportunity. He didn't necessarily expect, however, that Safeware would get that kind of business, he said.

W.S. Darley & Co., based in Itasca, Ill., was the only contractor other than ADS to win awards in all five regions.

Paul Darley, the company's president, said he, too, understood from the wording of the contracts that each had a ceiling of $800 million, though he expected something more in the range of $35 million a year in business from each region over a five-year period.

Darley's lower estimate of the value of the contract wasn't pulled out of thin air.

"We took the total estimated value of the five contracts, which was $158.6 million over the first two years of the contract, and then adjusted it based on historical awards under previous contracts," he said.

The government's estimate of the value of the contracts for his company and for ADS were about the same, Darley said.

ADS said that for the two-year base period, the government-estimated values on its five fire-and-emergency services contracts ranged from $15 million to $40 million. Spread over five years, those values would add up to business worth between $37.5 million and $100 million, depending on the region.

"There are government-estimated values associated with many of our DLA contracts and, historically, the ceiling has been a more accurate indicator of the contract value," Chris Philbrick, vice president/marketing at ADS, wrote in an email.

"In the case of this particular contract we have not approached the ceiling yet but it has certainly contributed to doubling the size of our company and has given us a mechanism to broaden our product offerings and solutions to our customers."

The fire-and-emergency services package was followed by another big Defense Logistics Agency contract for ADS.

In January 2009, the Defense Department announced that the company had won an open-ended contract to support Special Operations.

The agency confirmed that the contract, one of four awarded for up to five years, could be worth as much as $5.7 billion in business for each vendor.

And last year, in regulatory filings for a planned initial public stock offering it eventually withdrew because of poor market conditions, ADS reported that the Special Ops contract represented 44 percent of its $1.67 billion of net sales for 2010 and the first quarter of 2011.

Hillier defended describing the fire-and-emergency services contract as an opportunity of similar magnitude. The use of the $4 billion figure, he said, is consistent with the language in the contracts.

"That's what we could capture through those contracts; that's what's in the contract," he said. "How else am I to understand it?"

Robert McCabe, (757) 446-2327, robert.mccabe@pilotonline.com