Report | May 30, 2014

Release of Final Report on Hotline Complaint Regarding the Settlement of the Pratt & Whitney Commercial Engine Cost Accounting Standards Case

DODIG-2014-077

Objective

We conducted an oversight review to determine the validity of a DoD Hotline complaint alleging that (i) management exerted pressure to settle a case in litigation for an amount agreeable to the contractor rather than fair to the taxpayer and (ii) the settlement amount was about $500 million less than an amount consistent with Government procurement regulations.

Findings

We found no evidence to substantiate the allegation that there was pressure from the highest levels of the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) to settle the litigation for an amount that was agreeable to UTC Pratt & Whitney rather than an amount that was fair to the taxpayer. We substantiated that DCMA did not establish a settlement position that was consistent with the Federal Acquisition Regulation (FAR). Therefore, we are not able to provide a reliable estimate for a settlement amount. We also found that DCAA assistance negatively impacted the settlement amount; DCMA legal counsel was unable to influence the decision to settle; and DCMA did not vet one negotiator with a potential conflict of interest. Additionally, we determined that current problems with the DCMA administration of Pratt’s continuing Cost Accounting Standards (CAS) 418 noncompliance may be resulting in increased costs on DoD contracts; therefore, we issued a Notice of Concern to the Director, DCMA, on April 17, 2013.

Recommendations

We recommend that the Director, DCMA:

  • Implement a policy requiring that management determine that the attorney’s litigative position includes sufficient information and data to justify a settlement negotiated in accordance with the FAR;
  • Evaluate the feasibility of requiring that ‘material disagreements’ between a contracting officer and a trial attorney regarding the decision to seek a negotiated settlement with the contractor be elevated to a board of review;
  • Implement best practices wherein general counsel conflict of interest and impartiality reviews are documented in writing real-time; and
  • Take actions to ensure Pratt complies with the CAS when accounting for the actual cost of aircraft engine parts and ensure the U.S. Government recovers any resulting increased costs paid to Pratt since 2005.

We recommend that the Director, DCAA, perform an internal review to assess auditor adherence with the requirements of DCAA Contract Audit Manual 15-506.2, “Support Government Trial Attorney” and take necessary corrective action, where warranted.

Management Comments and Our Response

The Director, DCMA, comments were responsive to the recommendations and identified actions that met the intent of our recommendations.

The Director, DCAA, did not agree that DCAA negatively impacted negotiations and as a result will not implement our recommendation. The Director did not provide new evidence for us to consider or factual support for certain key assertions from their response.Therefore, we request that the Director reconsider the DCAA position or provide additional evidence and/or comments to substantiate the DCAA position. Please see the recommendations table on the following page.