How regulatory ambiguity frustrates defense contractors.

• Author: Hoshower, Leon B.
• Position: Corporate Reporting

How regulatory ambiguity frustrates defense contractors News reports of $500 toilet seats and $50 hammers have reinforced the widely held belief that American defense contractors feather their own nests at the taxpayer's expense, and, indeed, the defense industry provides an easy target for headline seekers. Meanwhile, the flip side of this highly publicized phenomenon, which is itself another golden Fleece, escapes public notice. It is the almost unmanageable burden the governmental bureaucracy imposes upon defense contractors. It involves waste on a truly grand scale.

Defense firms typically face an arrya of 44,000 specifications when selling a product to the government. In fact, the instruction book on procurement runs 32 volumes and takes up six feet of shelf space. Some 50 percent of small high-technology defense contractors drop out of competition for government contracts or go out of business completely due largely to bureaucratic regulations, according to a June 30, 1989, article in The Wall Street Journal. Moreover, according to a study by the Pentagon's logistics commanders, these regulations account for one-third of procurement costs, a figure corroborated by officials at Martin Marietta Corporation and Hughes Aircraft Company.

The burden of this voluminous, meticulous recordkeeping is compounded by the uncertainty about which regulations apply and how those regulations should be interpreted in different situations. The problem of choosing between overlapping regulations is illustrated by one contractor's dispute over the policy on "banked vacation" (BV), the practice of allowing employees to save all or a portion of their vacation time for a future date.

But these same problems can apply to a variety of activities regulated by the government, such as nuclear energy and tax laws. The regulatory process involved in licensing a nuclear power plant has become so protracted and the outcome of the process so uncertain that no new licenses for nuclear power plants were initiated this decade. The sheer magnitude and expense of the regulatory process, along with the uncertainty, are the primary deterrents to the development of nuclear energy, rather than any conscious decision by society.

As for the current tax code, much of the wording of the 1986 and the 1987 Tax Reform Acts is imprecise. It was Congress' apparent intent to allow the Treasury Department to clarify the new tax law through regulatory pronouncements. The problem is that many of these interpretations are still forthcoming. Therefore, tax strategists and estate planners are operating currently with an income set of rules. When the rules are finally established, however, they may then be applied retroactively.

The example of banked vacations was chosen because of the complex issues that arise out of this common, presumably simple practice of many corporations. BV policies often contain such additional terms as time limitations (a BV can be accrued for only one year, five years, seven years, etc.); quantity limitations (an employee can accrue vacation time of only two weeks, 60 days, 90 days, etc.); and a provision that pays an employee for unused vacation time upon termination or retirement. The amount paid to an employee generally reflects his salary at the time of the vacation, not the salary that was in effect when the employee set the time aside.

Since...