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Defense Logistics Agency Aviation Negotiated Fair and Reasonable Prices for F402 Engine Spare Parts, but Pricing Errors and Late Deliveries Occurred (Redacted)

DODIG-2017-050

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Jan. 31, 2017 — Objective

We determined whether the Defense Logistics Agency (DLA) was purchasing sole-source spare parts at fair and reasonable prices for F402 engines in support of the AV-8B Harrier II aircraft.  The Marine Corps uses the Harrier to perform missions, including close air support of ground troops and armed reconnaissance.  We nonstatistically selected 17 of 408 spare parts for review, valued at $55.3 million of $85.1 million, to determine whether F402 engine spare parts prices were fair and reasonable.

Findings

DLA Aviation contracting officials negotiated fair and reasonable prices for 17 noncommercial, sole-source F402 engine spare parts we reviewed, valued at $55.3 million.

However, after DLA Aviation awarded the contract to Rolls-Royce in January 2014, Rolls-Royce identified an error in the contract’s unit prices for 49 F402 engine spare parts and notified DLA Aviation contracting officials in March 2014.  DLA Aviation contracting officials modified the contract in April 2014 to correct the unit prices for the 49 spare parts; however, contracting officials did not modify 45 of 82 delivery orders that were placed from February 2014 through December 2015 for F402 engine spare parts with incorrect unit prices.  This occurred because DLA Aviation contracting officials did not accurately modify unit prices for the 49 F402 engine spare parts in DLA Aviation’s new ordering system; therefore, the ordering system did not contain accurate pricing data.  In addition, DLA Aviation lacked standard operating procedures and internal controls to ensure that the unit prices were accurately entered into the ordering system.  If not corrected, DLA Aviation will pay $407,317 more than necessary for 45 delivery orders with incorrect prices for F402 engine spare parts.

In addition, DLA Aviation contracting officials did not require Rolls-Royce to comply with on-time delivery requirements, as agreed to in the contract, even though DLA Aviation paid Rolls-Royce a service fee for on-time delivery improvements, such as decreasing production lead times, which is the time that occurs between the placement of an order for supplies and receipt of the supplies.  This occurred because DLA Aviation contracting officials did not require Rolls-Royce to establish accurate delivery schedules; accepted Rolls-Royce’s explanations for delivery delays, although we concluded that the delays do not appear to have been excusable; and established a late-delivery disincentive that did not persuade Rolls-Royce to comply with the contract’s delivery schedule.  As a result, DLA Aviation paid Rolls-Royce $2.1 million in service fees for on-time delivery improvements for 328 deliveries that were supplied late.  Also, according to Navy officials, the Navy had to remove serviceable parts from F402 engines and install them on other F402 engines because there was an inadequate supply of F402 engine spare parts.

Management Actions Taken

On November 3, 2016, in response to the discussion draft of this report, DLA Aviation modified 24 delivery orders to correct the unit prices; the corrections total $362,644.  In addition, on July 21, 2016, DLA Aviation modified one delivery order to correct the unit price; the correction totaled $7,350. DLA officials stated that Rolls-Royce would issue refunds for 20 delivery orders with incorrect prices.  However, as of January 6, 2017, DLA Aviation has not requested the refund from Rolls-Royce for 20 delivery orders totaling $37,323.

Recommendations

We recommend that the Director, DLA:

  • establish standard operating procedures and internal controls to ensure that contracting officials enter and maintain accurate unit prices in the ordering system, verify that delivery order unit prices are correct, and proactively determine whether additional delivery orders require correction after a pricing error is identified;
  • direct the contracting officer to determine whether DLA Aviation is entitled to any credits or refunds for payments already made to Rolls-Royce;
  • require Rolls-Royce to establish accurate delivery schedules, and modify the delivery orders, as appropriate, and assess Rolls-Royce’s explanations for future late deliveries to determine whether they are excusable delays; and
  • re-negotiate the contract’s late delivery disincentive to be comparable to the service fees for delivery improvements and revise the process for applying the disincentive to ensure it is not administratively burdensome.

Management Comments and Our Response

Comments from the Director, DLA Acquisition, responding for the Director, DLA, addressed all specifics of the recommendations to establish standard operating procedures and internal controls, determine whether DLA Aviation is entitled to any credits or refunds for payments, and require Rolls-Royce to establish accurate delivery schedules and modify the delivery orders, and no further comments are required.  However, the Director did not address all the specifics of the recommendation to re-negotiate the contract’s late delivery disincentive; therefore, we request additional comments to the final report by March 2, 2017.