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618% Overpricing: Pentagon Bypasses Waste Fixes

January 28, 1999 


A Defense Department January 1999 report reveals that defense money continues to be wasted on spare parts, just as it was in the 1980s. The irony is that these parts were bought under the much- touted "commercial" price system favored by the Administration. In this report, AlliedSignal corporation was found to have overcharged the government for spare parts by as much as 618%. The government overpaid on the overall contract with AlliedSignal by 54.5%.

According to the investigation by the Defense Department's Inspector General:

  • The government "paid Allied prices that were higher than fair and reasonable in FYs [Fiscal Years] 1996 and 1997 when compared to the noncommercial prices paid to Allied in previous years." The parts included items such as gearshafts, wheels, nuts, bearings, seals, filters, and valves.

  • The Defense Department "paid a 54.5 percent premium for commercial parts from Allied."

  • For parts that AlliedSignal did not even make itself, but merely bought from original manufacturers or dealers and then sold to the government, some items were marked up by as much as 294%, 325%, and 618%.

  • The Defense Department paid an even higher average markup in Fiscal Year 1997 (60.1%) than it did in FY 1996 (45.8%) - there appears to have been no "learning curve."

  • Defenders of the acquisition system and contractors may argue that the government paid higher prices because the prices included more stocking services - but the Defense Department failed to use the services.

The Defense Department report blacks out the names of specific spare parts that were grossly overpriced. Project On Government Oversight Executive Director Danielle Brian asks,

    "Why are they hiding the names of the items from the public that paid for them? Are they afraid of more toilet seat and hammer stories that would undercut support for the Administration's unnecessary defense spending increase?"

The report on AlliedSignal followed up on investigations in 1998 of overcharging under "commercial" contracts with Boeing and Sundstrand corporations. The earlier reports found that:

  • A contractor charged $76 for 57¢ screws.
  • Another contractor charged $714 for a bell.
  • Prices were inflated by more than 1,000 percent on a variety of spare parts.
  • The government was billed $6.1 million for parts that were worth $1.6 million.

POGO's Brian notes,

    "We've seen these horror stories before. This time they may be worse because the Administration claims to be fixing the problem through 'Acquisition Reform,' but is actually contributing to it. Acquisition Reform turns out to be old wine in new canteens."

The much-touted "Acquisition Reform" initiatives emphasize buying more products for the government on a "commercial" basis. "Commercial item" purchases bypass many of the protections and oversight put in place to prevent the infamous overcharging by defense contractors that occurred during the defense spending increases of the 1980s. The reforms included tougher Truth in Negotiations Act enforcement, re-establishment of the Cost Accounting Standards Board, strengthening of the False Claims Act, and the Competition in Contracting Act.

The report on AlliedSignal provides yet more examples of the government paying more for spare parts under the new "commercial" rules than it paid before. According to the Inspector General, the government "paid higher prices for commercial spare parts on the Allied corporate contract when compared to previous noncommercial prices for the same items."

In a rare official suggestion that Acquisition Reform may have gone too far, the Inspector General notes that if the government can't make commercial buying work as intended, it "will need to revert back to the previous buying practice of negotiating better prices for the spare parts ...."

Before adding billions more dollars to military spending, the Clinton Administration should make sure that the reforms it is implementing actually curb waste rather than encourage it. Otherwise we may see even more of the spare parts horror stories than we saw during the defense spending spree of the 1980s.

Related information:

  • Commercial Spare Parts Purchased on a Corporate Contract, Report No. 99-026, DOD Inspector General, January 13, 1999.
  • "Acquisition Deform: A Study in Hasty Deregulation," POGO Alert, October 1997.
  • "Reforms Need Reforming: Commercial Acquisition Fails to Cure Overpricing," op-ed in Defense News, July 13-19, 1998.
  • "Outraged by the Return of $76 Screws? Here's What You Can Do About It," POGO memorandum, April 1998.  

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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