| A Boeing AH-64 Apache Helicopter and a Boeing CH-47 Chinook Helicopter. Credit: Petty Officer 3rd Class Shawn Hussong, U.S. Navy. |
$644.75 for a small gear smaller than a dime that sells for $12.51: more than a 5,100 percent increase in price. $1,678.61 for another tiny part, also smaller than a dime, that could have been bought within DoD for $7.71: a 21,000 percent increase. $71.01 for a straight, thin metal pin that DoD had on hand, unused by the tens of thousands, for 4 cents: an increase of over 177,000 percent.
Taxpayers were massively overcharged in dozens of transactions between the Army and Boeing for helicopter spare parts, according to a full, unredacted Department of Defense Office of Inspector General (DoD OIG) audit that POGO is making public for the first time. The overcharges range from 33.3 percent to 177,475 percent for mundane parts, resulting in millions of dollars in overspending.
CLICK HERE TO GO TO THE FULL UNREDACTED DoD OIG REPORT
The May 3, 2011, unclassified “For Official Use Only” report is 142 pages. Prior to POGO’s publication of the full report, the only publicly available version was a 3-page “results in brief” on the DoD OIG’s website, first reported by Bloomberg News. The findings in the results in brief, while shocking on their own, pale in comparison to the detail contained within the full report. The DoD OIG scrutinized Army Aviation and Missile Life Cycle Management Command (AMCOM) transactions with Boeing that were in support of the Corpus Christi Army Depot (CCAD) in Texas. The audit focused on 24 “high-dollar” parts. Boeing had won two sole-source contracts (the second was a follow-on contract awarded last year) to provide the Army with logistics support—one of those support functions meant Boeing would help buy and/or make spare parts for the Army—for two weapons systems: the Boeing AH-64 Apache and Boeing CH-47 Chinook helicopters.
Overall, for 18 of 24 parts reviewed, the DoD OIG found that the Army should have only paid $10 million instead of the nearly $23 million it paid to Boeing for these parts—overall, taxpayers were overpaying 131.5 percent above “fair and reasonable” prices. The audit says Boeing needs to refund approximately $13 million Boeing overcharged for the 18 parts. Boeing had, as of the issuance of the audit, refunded approximately $1.3 million after the DoD OIG issued the draft version of its report. Boeing also provided a “credit” to the Army for another part for $324,616. The Army has resisted obtaining refunds worth several million dollars on some of the overpriced spare parts, in opposition to the DoD IG's recommendations. For instance, one of the IG's recommendations was that the Army should request a $6 million refund from Boeing for charging the Army for higher subcontractor prices even though Boeing negotiated lower prices from those subcontractors. In response, the Army said that "there is no justification to request a refund."
In calculating what it says the Army should have paid, the DoD OIG assumed Boeing reasonably should charge a 34 percent surcharge fee for overhead, general and administrative costs, and profit, according to the audit report.
Above and beyond what the DoD OIG viewed as fair and reasonable (including the 34 percent surcharge), Boeing’s average overcharges to the Army for these 18 parts range from 33.3 percent to as much as 5,434 percent, based on the DoD OIG’s analysis.
What is even more shocking is the difference in prices the Army would have paid if it procured many of these parts directly from the Defense Logistics Agency (DLA) and from the Army’s own procurement offices, the audit shows. The largest percentage differences cited in the DoD OIG report—such as the 177,475 percent example (which is not among the 18 parts the report focuses on)—compare DLA unit prices to Boeing unit prices.
CLICK HERE TO JUMP TO THE EXAMPLES OF SPARE PARTS RIPOFFS BELOW
The Overcharges Add Up
The individual transactions of tens of thousands to millions of dollars examined by the DoD OIG may at first appear to be small potatoes against an annual DoD budget of more than $700 billion, including the costs of the wars. But when viewed over the cost of a weapon system’s lifespan, the total cost of spare parts—including simple components such as ball bearings, retainers for nuts and bolts, sleeve bushings (basically just a metal cylinder), and straight metal pins—can be significant. The cost to buy a weapon system out of the factory, such as the AH-64 helicopter, usually is less than the cost to operate and maintain the weapon over its life. Parts on a weapon have to be replaced at varying intervals and, similar to how the human body replaces most cells in the body in less than a decade, a major weapon system with a long-enough life span may eventually be largely rebuilt with new spare parts. Hence the expression that aircraft are nothing but “spare parts flying in close formation.”
The audit report raises significant questions about what the DoD is paying to maintain and operate major weapons. For instance, the estimated “sustainment” price tag for the Lockheed F-35 Joint Strike Fighter is $1 trillion over the next 50 years. The cost of spare parts makes up a portion of that $1 trillion figure. Spare parts overcharges become quite significant when you add up individual overcharges over time, over a number of weapon systems.
As a Government Accountability Office (GAO) report last year stated, “Weapon systems are costly to sustain in part because they often incorporate a technologically complex array of subsystems and components and need expensive spare parts and logistics support to meet required readiness levels.” However, many spare parts need not be so expensive. Better “acquisition of spare parts and components [can] reduce sustainment costs,” according to another GAO report.
Audit May Add to Debate Over Insourcing
The report may also add fuel to the intense debate over the role of contractors and whether more jobs need to be insourced—that is, converted from functions that are currently contracted out to government positions. The DoD OIG found that the Army had issued a sole-source contract to Boeing to do what the DLA is supposed to do for the entire DoD—obtain parts and materials (“DLA reportedly supplies 84 percent of the military’s spare parts”).
The audit report is somewhat vague on why the Army decided to rely on Boeing. The report states that the Army contracted with Boeing “in an effort to streamline its logistic infrastructure.” The intent was “to implement the most successful business practices that would result in reductions in Apache and Chinook weapon systems repair turnaround time, lower required inventory levels, improved readiness, increased depot capacity, and reduction in total cost.” However, the intended goals of the Army’s contracts with Boeing may not have been met. The DoD OIG found that the Army “overstated repair turnaround time improvements” by Boeing. Boeing benefited from these overstated improvements because the Army “overpaid incentives for the repair turnaround time improvements, and Boeing owes the Army a refund of $6.3 million to $10.9 million,” according to the report. Boeing also supplied parts that were “potentially nonconforming” to required specifications, some of which were “not usable.”
Furthermore, in case after case examined by the DoD OIG, the Army was buying parts for much more money from Boeing that DLA already had in its inventory at significantly lower prices. In some cases, Boeing bought parts from DLA (one part of DoD) and resold them at a higher price to the Army (another part of DoD). From 2007 to 2009, Boeing bought $3.1 million in parts from DLA and sold them to the Army for $4.2 million. “[B]ased on the data Boeing provided us, Boeing made a 35 percent profit on the parts that it bought from DLA,” the audit report states.
In sum, “[t]he Army paid significantly higher prices to Boeing than if it would have procured the same parts from DLA,” according to the audit report. Specifically, Army “officials did not effectively use $339.7 million of existing DoD inventory before procuring the same parts from Boeing,” the audit report says, “because DoD had inadequate policies and procedures addressing inventory use.” There was about $243 million to $278 million in DLA’s excess inventory—an inventory taxpayers have already paid for—that is not being used. Yet, the Army is paying Boeing for overpriced parts.
The Army’s sole-source follow-on contract to Boeing to continue supplying the Corpus Christi Army Depot was also awarded despite the fact that the DLA “had sufficient inventory to satisfy annual contract requirements for 1,635 parts on the follow-on contract,” according to the audit report, “and the Boeing contract price for those items was $8.0 million, or 51.2 percent, higher than the DLA price.” These parts are for smaller dollar amount transactions than the 24 “high dollar” spare parts that the DoD OIG focused on, of which 18 were significantly overpriced. There were another 431 parts where it was cheaper to procure from DLA, but DLA had insufficient inventory, and 757 parts in which purchasing from the contractor was cheaper than procuring from DLA.
Another part of the report states that the Army’s contracts with Boeing are part of a wider trend: “The Services also appear to be moving supply operations and material management functions for consumable items from DLA to the private sector.”
DLA needs to be “the first source of supply when cost effective and practical,” the audit report recommends.
Systemic Problem
The DoD OIG audit has received some high-level attention within the DoD. “The policy question we are looking at is: are these isolated instances or is it a systemic problem?” Deputy Secretary of Defense William Lynn said in an interviewwith Bloomberg News. “A systemic problem would suggest we need to take policy steps,” Lynn added.
There are strong reasons to believe the problems are rampant and systemic. “This is not the first time we identified unused DoD inventory,” the DoD OIG audit report says. “During our review of the Air Force Secondary Power Logistics Solution Contract, we identified about $70 million of unused DoD inventory because the Air Force was buying the same parts from a private contractor through a performance-based logistics arrangement.” If changes do “not happen, hundreds of millions of dollars will be wasted as the inventory sits in DLA warehouses, and DoD pays private contractors to provide the same parts.”
Additionally, in 2006, the DoD OIG identified rampant overpricing of spare parts in a DoD sole-source contract with Hamilton Sundstrand, a subsidiary of the United Technologies Corporation. POGO wrote in a letter to Congress, describing some of those DoD OIG findings (many of which had been partially redacted in the publicly available version of their audit report), that there were overcharges of up to 900 percent on the spare parts provided by Sundstrand. POGO also made headlines exposing excessively overpriced spare parts such as the $436 hammer and $640 toilet seat in the 1980s.
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