Report | Nov. 16, 2015

Improvements Needed in the Defense Logistics Agency's Evaluation of Fair and Reasonable Prices for C-130 Aircraft Spare Parts (Redacted)

DODIG-2016-023

Objective

Our objective was to determine whether the Defense Logistics Agency (DLA) made cost-effective material purchases to support the C-130 Hercules aircraft through multiple contracts.

This is the second of two reports on DLA Aviation material purchases supporting the C -130. The first report addressed whether DLA Aviation cost effectively managed spare-part inventory for the C-130. In this report, we addressed whether DLA Aviation paid a fair and reasonable price for inventory unique to the C-130.

Findings

The support services and spare parts we reviewed were purchased from United Technologies Aerospace System (UTAS) and SupplyCore on commercial contracts to support the C-130 hub and blade (propeller). We determined that DLA Aviation contracting officers did not perform adequate proposal analysis to determine fair and reasonable prices for supply-support services and selected spare parts. This occurred because the DLA Aviation contracting officers did not:

  • adequately justify a commercial item determination, which exempted UTAS from the certified-cost or pricing-data requirement;
  • effectively and efficiently obtain sufficient data-other-than-certified cost or pricing data from the offerer or Government sources to perform a sufficient cost analysis of UTAS-proposed commercial-item prices;
  • perform sufficient cost analysis of UTAS service fees and materials;
  • include an economic price-adjustment clause in the contract to permit DLA Aviation savings when SupplyCore received supplier price reductions during contract performance; and
  • establish adequate performance criteria to pay delivery-based incentives.

We performed a cost analysis of the UTAS service fee and calculated that DLA Aviation will overpay (Redacted) in service fees to UTAS during the 3-year contract base period. If the remaining 2 option years are exercised, DLA Aviation will overpay (Redacted) over the entire 5 years of the UTAS contract that could be put to better use. Additionally, we reviewed a nonstatistical sample of 20 commercial spare parts, including 17 sole-source parts awarded to UTAS, and three parts competitively awarded to SupplyCore. DLA Aviation will overpay (Redacted) to UTAS for 6 of 17 sole-source parts during the 3-year base period and (Redacted) over the entire 5-year contract that could be put to better use. Also, DLA Aviation will not receive lower prices when SupplyCore benefits from reduced costs in supplier material for two of three parts reviewed on the SupplyCore contract.

DLA Aviation contracting officers did not adequately support fair and reasonable price determinations for C-130 parts purchased on 23 of 26 Lockheed Martin delivery orders related to our nonstatistical sample of 20 spare parts. This occurred because DLA Aviation contracting officers performed an insufficient analysis that they presented as cost analysis. Contracting officers did not evaluate the reasonableness of proposed cost elements. Further, the DLA Aviation contracting officers applied outdated average industry rates. As a result, DLA Aviation paid increased prices for 18 C-130 spare parts, totaling $2.5 million, without assurance that the prices were fair and reasonable. Additionally, DLA Aviation will risk overpaying for the same parts if those prices are used to determine whether future proposed prices are fair and reasonable.

Recommendations

Among other recommendations, we recommend the Director, DLA, perform appropriate market research in accordance with Federal Acquisition Regulation Part 10 and Defense Logistics Agency Directive Subpart 12.1, determine whether to include the Federal Acquisition Regulation 52.215-20 Alternate IV clause in solicitations for the supply of commercial items when it is expected that data other than certified cost or pricing data will be required, request field-pricing assistance from a DCMA cost-and-pricing analyst once it is determined that the data is insufficient to determine a fair and reasonable price, and evaluate all cost components when determining price reasonableness.

Management Comments and Our Response

Comments from the Director, Defense Logistics Agency, were responsive to Recommendations A.1.a, A.1.f, and B.1. However, the Director did not address all specifics of Recommendations A.1.b, A.1.c, A.2.a, A.2.b, B.2.a and B.2.b to include requirements for contracting officers to request field pricing assistance and consideration for inclusion of alternate FAR clauses in future contracts.

In addition, the Director did not address Recommendations A.1.d and A.1.e regarding evaluation of service cost components as part of cost analysis when determining a fair and reasonable price in future sole-source commercial supply support contracts, or the reevaluation of the subcontractor costs paid by Derco on the UTAS contract. Therefore, we request additional comments to the final report by December 15, 2015.