Skip to Main Content
 

 

 

 

Acquisition DeForm: A Study In Hasty Deregulation

October 27, 1997 

 

Internal Defense Department documents obtained by the Project On Government Oversight (POGO) reveal that the Administration's contractor-driven acquisition "reforms" may be making it easier, rather than harder, for defense contractors to overcharge the government - in this case apparently overcharging by several hundred percent.

A Pentagon procurement reform official admits in the documents that, "In all but a few cases we paid substantially more for the parts than we paid previously and there didn't appear to be any justification for the higher prices."

"These documents confirm our worst fears that acquisition reform was really a deal for defense contractors, and not for taxpayers as it was portrayed," said Danielle Brian, Executive Director of the Project On Government Oversight. The documents include draft Department of Defense (DOD) Inspector General reports confirming overcharging by Boeing for 707 aircraft parts. Military versions of 707 aircraft include KC-135 tankers, E-3 AWACS airborne control aircraft, and E-8 JSTARS reconnaissance aircraft. The reports also found overcharging by Sundstrand Aerospace for so-called commercial parts.

Another revealing document is a memo from David Drabkin, Assistant Deputy Under Secretary of Defense for Acquisition Reform (see attached). The acquisition reform office seems as concerned about the appearance of the issue as about solving the problem causing it. Drabkin says in the memo, "Unless we jump on this quickly it could prove to be another $700 hammer story." Defense contractor gross overpricing of coffee makers, pliers, hammers, and many other parts was exposed by POGO, then known as the Project On Military Procurement, in the 1980s. These revelations sparked acquisition reform efforts to increase supervision of irresponsible contractors, not what seem to be current efforts to loosen it.

The problems are caused by changes to acquisition regulations, most notably in the Federal Acquisition Streamlining Act of 1994 and the Administration's "reinventing government" campaign. These reforms broadened the definition of "commercial" products. For such "off-the-shelf" products, contractors are exempt from requirements to prove that their prices are fair by supplying their cost data. Not surprisingly, contractors are claiming that military items they sell to DOD are commercial even when the government is the only purchaser, or the principal one.

The Defense Department documents reveal that:

The "reform" of allowing contractors to claim items are "commercial" and to avoid justifying their prices is not working. The Inspector General (IG) report reveals that "Sundstrand charged DoD 'market-based' prices for sole-source commercial items that were significantly higher than the cost-based prices previously charged by Sundstrand." [Emphasis added.] The Defense Logistics Agency was also paying more for spare parts procured sole-source from Boeing than had previously been paid for the parts when they were procured competitively by the Air Force.

The audit shows that contractors are claiming commercial status for items that are not commercial. It noted there was: "No commercial market to establish prices by the forces of supply and demand. Sundstrand is the sole-source contractor and controls the tech data."

The IG discovered a lack of competition: "The Defense Logistics Agency (DLA) was using 'corporate' and other sole-source contracts with The Boeing Company (Boeing) to procure commercial and other items that were not as effective as using competitive procedures."

Apart from the improper use of sole-source contracts, the IG found "There were also other problems with the Boeing prices for commercial items." Boeing's pricing practice meant that "when DoD purchases 300 of the items it pays a price based on Boeing manufacturing 3 tems. Basically this means DoD would pay the Boeing set-up costs 100 times."

The Defense Logistics Agency was found to have poor procedures in place: "Items which the Air Force had coded as competitive that transferred to DLA were coded as noncompetitive by DLA." Similarly, the IG found that "DLA contracting officers did not perform adequate cost analysis of Sundstrand proposals where cost or pricing data was submitted, including verification of proposed labor and material costs by DCMC [the Defense Contract Management Command]."

Recent acquisition reforms were enacted in the name of streamlining the process in order to reduce regulation of contractors and obtain better prices for the government. Unfortunately the "reforms" that were enacted make it harder for government contract-negotiating officers to know how much to spend on an item - because they no longer have access to the cost or pricing data. At the same time, these reforms allow contractors to avoid competing for contracts by claiming the product is commercial. The IG documents show that this exception has been badly abused, and that contractors have been claiming a product is commercial even if the "government is the major or only purchaser."

Recommendations:

If a centerpiece of Defense Department "acquisition reform" is to buy items in a commercial manner, then oversight is required to ensure that:

  • competition rather than sole-source is still used even when items are "commercial,"
  • the allegedly-commercial items really are commercial items that have prices set in a free
    market, and
  • the contractors prove, by making cost and pricing data available as they were required to before the "reform," that their prices are fair and they are not using the fig leaf of "commercial prices" to hide price gouging of the government and the taxpayer.

 


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

# # #