Report | May 29, 2013

Release of Final Report on Complaint Regarding Tinker Air Force Base Agreement to Pay an Unallowable Markup on a Foreign Military Sales Contract

DODIG-2013-086

Results in Brief:

Complaint Regarding Tinker Air Force Base Agreement to Pay an Unallowable Markup on a Foreign Military Sales Contract

Objective

We reviewed a complaint alleging that a Tinker Air Force Base contracting officer agreed to pay a 22-percent unallowable markup on a foreign military sales contract. The 22-percent markup issue involves a Foreign Military Sales base contract that was negotiated in 2004, and option years that were negotiated in 2006 and 2007. Although the contract was negotiated several years ago, we elected to review the complaint and make appropriate recommendations because Tinker Air Force Base could be allowing similar unallowable costs on current DoD and Foreign Military Sales contracts.

Findings

A Tinker Air Force Base contracting officer inappropriately agreed to pay a 22-percent markup factor on materials transferred between affiliated contractors. As a result, a contractor received an estimated $18.3 million in additional profit under the foreign military sales contract that was unallowable. According to Federal Acquisition Regulation 31.205-26 (e), “Material Costs,” materials transferred between affiliated companies must be based on costs incurred, excluding profit. The contracting officer allowed the markup factor even though a Defense Contract Audit Agency auditor and a Defense Contract Management Agency attorney recommended that the contracting officer disallow it. The contracting officer failed to adequately explain in the price negotiation memorandum why he did not adopt the auditor and attorney recommendations.

Recommendations

We recommend the Deputy Assistant Secretary for Contracting, Office of the Assistant Secretary of the Air Force for Acquisition improve the quality assurance procedures to help ensure that Tinker Air Force Base contracting officers 1) limit negotiated material costs transferred to the costs incurred, 2) document adequate rationale in the price negotiation memorandum when they do not adopt the specialist recommendations, and 3) take all practicable steps to obtain recoupment of the $18.3 million profit that the contracting officer had no authority to pay the DoD contractor.

Comments

The Deputy Assistant Secretary for Contracting agreed with the findings and the planned actions met the intent of the recommendations. Therefore, no additional management comments are required.