The Defense Department Office of Inspector General found that the Defense Logistics Agency has been paying Textron’s [TXT] Bell Helicopter millions of dollars more than it ought to in a sole-source contract for spare parts and could continue doing so on future orders over the next year.
According to a summary of the report, the contracting officer “accepted Bell’s market-based pricing strategy in a noncompetitive environment without performing a sufficient sales analysis. As a result, the contracting officer did not obtain cost data to perform cost analysis, and DLA potentially overpaid Bell about $9 million on 33 of 35 sole-source commercial spare parts reviewed. In addition, DLA may overpay as much as $2.6 million over the next 12 months on future orders under this contract.”
More specifically, Rep. Jackie Speier (D-Calif.) said during a House Armed Services Committee hearing on acquisition reform July 10 that one type of spare part “should cost about $409 and we paid about $3500 per part for this, and we got 116 of them, costing us $367,000” above what the parts should have cost.
Pentagon acquisition chief Frank Kendall, who was testifying at the hearing and said he had just seen the summary of the DoD IG report right before the hearing started, said that his initial impression is, “I think what you described is basically fraud: someone who’s charging us 10 times what something costs.”
Kendall tried to put the problem into context, saying essentially the workforce is too small to verify every single market-based price a company presents to DoD. The Pentagon and DLA set standard costs for some items, but for commercial and commercial-type products, the standard practice is typically to “rely on commercially established prices for commercial products, for commercial-type products. But if there’s a question about that price then we can ask for anything up to certified cost and price data, which is a very high requirement,” Kendall said, saying that many companies will walk away from government business altogether if asked to provide certified cost and price data because it is such a cumbersome process.
But Speier was not satisfied with his response.
“Here’s the problem: it’s fraud, and we’ll continue to do business with Bell Helicopter, and they’ll continue to rip us off, correct?”
“What we have to do is hold them accountable for the thing you just described, and they can pay a penalty that’s appropriate for that,” Kendall replied. “There will be audits based on–I just got the report, but based on the report that I have, we will be auditing an awful lot of what they do to us to see how widespread this is. If it’s an isolated case, that’s one thing, but if it’s systemic that’s a much bigger deal.”
Highlighting the complexity of monitoring market-based prices, Rep. Duncan Hunter (R-Calif.) asked later on in the hearing about companies that offer a brand new product, or have improved an existing product to be more efficient. In those cases, the government has no way of conducting its own cost estimates, and when DoD requires certified cost and pricing data, then the company is effectively shut out of doing business with the Pentagon.
Kendall acknowledged the practice cuts both ways; when the government does insist on verifying market prices, some companies are unable to comply and lose business. But when it doesn’t, situations like the Bell Helicopter one arise.
“When one of those occurs, it’s a very public event the Department is chastised for,” he said. “We’ve got to strike the right balance between relying on…commercial prices and doing due diligence to make sure we’re getting a fair and reasonable price.”
The DoD IG report summary includes several recommendations. The director of defense pricing “should issue guidance to establish a percentage of commercial sales that is sufficient to determine fair and reasonable prices when items are being acquired on a sole-source contract and market-based prices are used.”
The report also suggests the DLA director should establish quality assurance processes that review whether contracting officers verify and document that sufficient analysis took place; require that contracting officers establish pricing for commercial parts under Bell Helicopter’s existing contract and future sole-source contracts with the company by performing adequate reviews of historical prices, sales data and more; and request a voluntary refund from Bell for identified overpayments.