HomeReportsAll DoD OIG Reports

The Air Force Did Not Adequately Determine or Document Fair and Reasonable Prices for Lot 7 Sole-Source Initial Spare Partsfor the C-5 Aircraft (Redacted)

DODIG-2017-053

PRINT  |  E-MAIL

Feb. 7, 2017 — Objective

We determined whether the Air Force Life Cycle Management Center (AFLCMC) purchased sole-source C-5 Reliability Enhancement and Re-Engining Program spare parts from Lockheed Martin Aeronautics Company (LM Aero) at fair and reasonable prices.  Specifically, we evaluated whether the AFLCMC obtained fair and reasonable prices for Lot 7 initial spare parts.1

Background

Lockheed designed and manufactured the C-5, one of the largest aircraft in the world and the largest cargo aircraft in the Air Force inventory.  The Air Force invested in an Avionics Modernization Program and Reliability Enhancement and Re-Engining Program to reduce operating costs, improve reliability, upgrade communication and aircraft operating systems, and extend the C-5 service life until 2040.2

On April 30, 2007, the AFLCMC awarded LM Aero a sole-source, noncommercial contract for the C-5 Reliability Enhancement and Re-Engining Program.  The contract upgraded 49 aircraft through 7 lots.  In Lot 7, the Air Force upgraded 11 aircraft at a cost of over $1 billion, including the cost of spare parts.

We identified that AFLCMC awarded three contract modifications for Lot 7 spare parts.  We nonstatistically selected 80 percent of the total dollar value of the three contract modifications, which represented 18 of 532 spare parts.  All 18 sampled parts were included in one modification.  The AFLCMC awarded this modification on May 2, 2014, for commercial and noncommercial Lot 7 initial spare parts, valued at $91.9 million.

Our preliminary review found that of the 18 spare parts in our sample, 7 noncommercial spare parts, valued at $8.9 million, were supported by required cost or pricing data.  Specifically, for five of the noncommercial spare parts, the Lot 7 contract prices decreased from the previous contract prices.  For the remaining two noncommercial spare parts, LM Aero performed a cost and price analysis of the subcontractor’s prices that supported LM Aero’s proposed prices.  Because our preliminary review found that the seven noncommercial spare parts were supported by required cost or pricing data, we focused on the 11 commercial spare parts, valued at $67 million.

Findings

The AFLCMC contracting officer did not adequately determine fair and reasonable prices for the 11 commercial spare parts that we selected, which were purchased from LM Aero on Lot 7.  This occurred because the contracting officer did not obtain sufficient commercial sales data for the commercial parts, in accordance with Federal and Defense acquisition guidance.  As a result, the AFLCMC contracting officer may not have purchased the 11 commercial spare parts, valued at $58.8 million, from LM Aero at fair and reasonable prices.3

In addition, the AFLCMC contracting officer did not sufficiently document the fair and reasonable price determination for Lot 7 initial spare parts.  Specifically, the contracting officer included inaccurate information in the price negotiation memorandum and did not maintain the price analysis in the contract file.  This occurred because the AFLCMC did not have internal policy or controls to ensure the contracting officer reviewed the price negotiation memorandum for factual accuracy and followed the Federal requirement to maintain support for the price analysis in the contract file.  As a result, AFLCMC contracting officials could not support their determination that Lot 7 initial spare part prices for the C-5 were fair and reasonable.

Recommendations

We recommend the Commander, Air Force Life Cycle Management Center:

  • require contracting officers to obtain sufficient commercial sales data when evaluating the prices of sole-source commercial items, and request other-than-certified cost or pricing data when commercial sales data are not sufficient, in accordance with the Federal Acquisition Regulation (FAR) and the Defense FAR Supplement Procedures, Guidance, and Information;
  • require the contracting officer to assess and determine whether it is appropriate to request a $5.3 million voluntary refund from LM Aero for potential excess payments on contract FA8625-07-C-6471, in accordance with the Defense FAR Supplement;
  • establish policy and standard operating procedures to ensure that the contracting officer validates the accuracy of the price analysis documented in the price negotiation memorandum; and
  • implement policy and procedures to ensure that the contracting officer follows the FAR to maintain price analysis results and supporting rationale for the determination of a fair and reasonable price in the contract file.

Management Comments and Our Response

The Commander, Air Force Life Cycle Management Center, as well as the Executive Program Officer and the Director of Contracting, disagreed with both findings but concurred with all recommendations.  However, the Commander did not fully address the specifics of the recommendations because the management comments did not detail the:

  • actions that the AFLCMC will take to require contracting officers to obtain sufficient commercial sales data and request other-than-certified cost or pricing data when commercial sales data are not sufficient;
  • validity of the methodology the AFLCMC used to assess and determine whether it was appropriate to request a voluntary refund from LM Aero for potential excess payments on contract FA8625-07-C-6471;
  • policy and standard operating procedures that the AFLCMC will establish, or identify the AFLCMC existing policies and procedures and how it will use them to ensure that contracting officers validate the accuracy of the price analysis documented in the price negotiation memorandum; or
  • policy and procedures that the AFLCMC will implement, or identify existing policies and procedures and how the AFLCMC will ensure that the contracting officer follows the FAR to maintain price analysis results and supporting rationale for the determination of a fair and reasonable price in the contract file.

We request additional comments on the final report by March 9, 2017.  We will close the recommendations once we analyze and determine whether or not the actions AFLCMC takes fully address them.


1    A lot is a quantity of material manufactured under identical conditions and assigned an identifying lot number. Initial spare parts are parts that support new weapon systems during the beginning phase of operation.

2    The Avionics Modernization Program upgraded the electronic systems of the C-5, and the Reliability Enhancement and Re-Engining Program upgraded the engines of the C-5.

3    The $58.8 million includes only material costs.