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Spare Parts Horror Stories, Part II: $127 Washer Shows Military Procurement Not Yet Fixed

January 21, 1997 


In the wake of well-advertised deployments to Bosnia, Unmanned Aerial Vehicles (UAV) have become a hot new weapon system on the military shopping list. All UAVs are not created equal, however. The Pioneer UAV has suffered four crashes attributed to engine failures since its July 1996 deployment to Bosnia with the Marines. Pioneer has averaged 18 "mishaps" a year since it was first procured, and the pace has accelerated this year. Recently none of the aircraft at the Pioneer training center were operational, largely because of engine breakdowns.

Despite this atrocious record, Congress recently added money to the FY97 military budget to buy even more of the planes. The Pioneer was supposedly an "interim" program way back in the 1980s, but it is still taking additional procurement money today.

A 1994 Congressional investigation of Pioneer problems came to a halt when the subcommittee in charge was eliminated.

Navy documents obtained by the Project on Government Oversight (POGO) shed some light on why the Pioneer has had such problems: prime contractor Pioneer UAV, Inc. has shown more interest in overcharging the government than in fixing the aircraft's problems properly. According to the documents, Navy logistics and repair units have long known about the Pioneers problems and have tried to have them fixed, to no avail. The units informed other commands in the Navy about the poor performance of the Pioneer contractor, but PUI is still getting money. The documents also reveal that the Navy conducted internal investigations. Despite its own findings of wrongdoing the Naval Inspector General report was surprisingly untroubled about the Pioneer problems.

The overcharging came to light when the Navy was forced to create its own logistics and support unit after squabbling between contractors brought their support to a halt in the early 1990s. A memo from the Navy support unit to the Naval Air Systems Command Inspector General documents "excessive costing and poor quality hardware delivered to the government by the prime contractor." It was found that parts claimed by the contractor as "proprietary" were in fact produced by other companies or owned by the government, and were available for much less than the contractor either charged, or would have charged if the Navy hadn't found other sources after receiving exorbitant contractor price quotes. All the parts were bought by the Navy, but individual prices paid for some of the parts are unknown because the Navy followed the poor practice of letting the contractor sell a large variety of spares together for one price - and let the contractor say what should be in the packages. The Navy support unit found that "in many cases the government has been paying the prime contractor as much as fifty times the cost of hardware that can be procured directly from the original manufacture[r]."

Overpriced parts included:

  • A washer: $127.46 bought from the contractor vs. $10.50 from Hales Engineering.
  • A bolt: bought for $31.56 vs. a better quality one for $0.61 from an industrial supply company, F.G. Wilcox, Inc.
  • A "paw attachment" (an inch-long strip of metal with two holes in it): $110.64 contractor quote vs. $6.50-$9.20 manufactured from scratch.
  • A gas bottle (eight inches long): $1,975.00 contractor quote vs. $103.00 through the government supply system. The contractor marked the part drawings "proprietary" even though it was originally made by another company, which eventually turned the manufacturing data over to the Army.
  • A spark plug connector: $544.09 contractor quote vs. $12.17 from a supply store. The contractor claimed the part was its own, but it was actually made by the large electronics company Bosch.

Other documents show that the Price Fighter Department, a Navy cost investigation office, performed an audit of selected contractor prices. Audit documents obtained by POGO show that the Price Fighters reported gross overcharging - sums in the hundreds of thousands of dollars were found to be variously 63%, 78%, 80%, and 96% higher than they should have been. Two of these cases alone mean that the government overpaid its purchase of around 100 aircraft by $2 million. The estimates of overbilling would likely have been even worse if the audit used standard auditing techniques rather than accepting the contractor's chosen pricing methodology and manufacturing processes. For example the Price Fighters estimated that one part, a dime-sized mounting base, should cost $7.31, not the $28.86 quoted by the contractor. In fact, the part was available from Navy stocks for $0.19.

The Pricefighter recommendation was "meeting with the contractor to discuss these items with the goal of identifying the specific causes of the differences and resolving those differences. This will help the contractor and the government in future procurements." Given that the Pricefighters found the contractors bilking the government for as much as 96% overcharges, the recommendations appears to be strikingly meek.

Pioneer UAV, Inc compounded its profits on these kinds of overcharges by using a high overhead rate: its "General and Administrative" overhead charge on certain parts was an astounding forty-five percent. According to other documents from the Pioneer support unit, maintenance prices and performance were also abysmal:

  • The contractor charged more ($856.64) to estimate its repair charges than it actually cost another company to repair ($775.95) a gas charging system. The contractor's repair cost was $11,964.49 - amounting to more than the $8,280 it would take to buy an entirely new unit.

  • The contractors repeatedly performed slow, costly, and faulty repair jobs. The documents show that in one case supposedly-repaired power supplies were returned to the government after more than half a year and at a cost of $5,254.73 each, but were not fixed. The work was so shoddy that, among other problems, fuses were either missing or of the wrong value. The most basic tests should have revealed those mistakes.

  • Memos to the Commander of the Naval Air Systems Command document numerous repair failures. In one case a supposedly "Ready for Issue" computer monitor was received with its fan missing and the wires cut. In another case, a transmitter was found to be inoperable, twice: "out of approximately 15 months elapsed time, the government has had use of the transmitter for approximately six weeks and now it's down again, for perhaps another nine months. That would equate to six out of 104 weeks use, or six percent." Another document shows that contractor PUI failed to provide specified parts at the contracted delivery date, then supplied incorrect ones when the government ran out of its own stocks. Although power supplies were found to be inoperative upon receipt, subcontractor AAI claimed that the units and other defective equipment were not under warranty and so would not be fixed without further cost to the government.

  • Another internal memorandum complained about the continuing flow of repair work to PUI despite its poor performance. The memo reported findings that to repair UHF transmitters PUI charged $2,083.52 and took 148 days on average, while a competitor cost only $555.54 and took only 65 days

The Navy Inspector General completed a report on Pioneer problems in September 1995, but it seems to have quietly sat on a shelf for a year until a copy was recently obtained through a Freedom of Information Act request. The report responded tamely to various allegations of misconduct against the Pioneer contractors and program office. It said overcharging allegations were "partially substantiated." Despite citing a finding of $90,000-$147,000 worth of overcharging in just one case, the report curiously found "no indication of wrongdoing by the contractor" The report revealed that the Defense Contract Audit Agency had also investigated problems and cited an example of a $4,062 overhead overcharge, but claimed that, "The charges were legal because the Navy approved the costs ... . [The] Navy's only recourse is to solicit the contractor for a voluntary refund." (Emphasis added.)

The report said that allegations of mismanagement in the Pioneer program were partially substantiated, but found that allegations of reprisal against those who brought the allegations, and of conflict of interest by a program manager, to be "unsubstantiated." The credibility of the Navy report's findings is cast into doubt by its last conclusion: it dismissed with no recommendations allegations that the Hunter UAV, a follow-on to Pioneer developed by the same contractors, was experiencing similar problems to the Pioneer. Although the Navy Inspector General found nothing to worry about, shortly after the investigation was concluded the Hunter program was canceled by the Pentagon after it suffered too many crashes, engineering failures, and management problems.

The Inspector General was not the only office to start an investigation, and then drop the ball. A longer list of investigations includes:

  • The Department of Defense Inspector General. (The Navy convinced them to let the Navy handle it).
  • Office of the Assistant Secretary of the Navy for Acquisition. (The investigation apparently petered out after Assistant Secretary Nora Slatkin left).
  • Naval Inspector General. (Was not circulated widely; confirmed some improprieties, denied others; did not recommend taking action against the contractors.)
  • Navy Pricefighters. (Audit performed, overcharging discovered).
  • Naval Investigative Service, Fraud Division. (Nothing further heard).
  • Naval Air Systems Command Inspector General. (Turned the information over to the Pioneer Program Office - the fox guarding the hen house).
  • Pioneer Program Office (Redirected the investigation to focus on the Navy logistics office that had pointed out the problems in the first place).
  • Defense Contract Audit Agency. (Confirmed overcharging).
  • Army CID (Investigation dropped after finding promising evidence).

Most recently, in an August 1996 letter to a Congressman, the Office of the Assistant Secretary of the Navy for Acquisition said that its "preliminary findings have indicated that the allegations are unsupported" - an odd finding given that at least three previous investigations had confirmed overcharging. The Office requested the Naval Air Systems Command Inspector General to conduct (another?) investigation.

The Larger Context

In the 1980s, the Project on Government Oversight released information on many horror stories about overpriced coffee pots, nuts, and other spare parts. The stories led to a new wave of procurement "reform," including most recently a redefinition of procurement reform as loosening the "regulatory burden" on defense contractors. But what has all this reform produced? More horror stories about bolts for $31, sparkplug connectors for $544, washers for $127, overhead markups of 45%, and repair charges higher than brand new cost. It has been said humorously in the past that a military aircraft is a collection of overpriced spare parts flying in close formation. The only difference now appears to be that there is no longer always a pilot in the aircraft to get it out of trouble.

Industry and Pentagon officials have taken the opportunity of the frequent Pioneer crashes in Bosnia to blame lack of funding. The evidence indicates otherwise - the program appears to have suffered from too much funding, which went to pay for contractor overcharging and poor performance, rather than too little. If contractor overcharges expand to fill the available funds, as this and other cases indicate, perhaps the only way to bring real procurement reform is to lower military spending. This would cut out the fat and give the services a true and direct incentive to figure out how to pay only what should be paid for the weapons they buy. Until this is done, POGO will likely be coming back every five years with more documents showing continuing procurement problems.

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.

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