Report | July 9, 2020

Audit of Purchases of Ammonium Perchlorate Through Subcontracts With a Single Department of Defense-Approved Domestic Supplier (DODIG-2020-095)

Audit

Publicly Released: July 13, 2020

 

Objective

The objective of this audit was to determine whether DoD subcontractors properly evaluated the commercial item determination and whether DoD contracting officers properly evaluated fair and reasonable pricing determinations for ammonium perchlorate.

 

Background

Ammonium perchlorate, grade 1 (AP1), is an oxidizer chemical used in solid rocket propellants that is sold as a commercial product. The only DoD-approved domestic AP1 supplier is the American Pacific Corporation (AMPAC). AMPAC’s status as the only DoD-approved domestic source for AP1 presents a unique challenge to contracting officers who must consider both a reduced industrial supplier base and a non-competitive contracting environment. The Military Services and DoD agencies manage multiple weapons systems that use AP in solid rocket motor propellants.

For this audit, we reviewed procurements of AP1 made in support of the Army’s Guided Multiple Launch Rocket System (GMLRS), the Navy’s Standard Missile and Trident II D5 Missile programs. The DoD does not purchase AP1 directly from AMPAC; instead, the solid rocket motor subcontractors, ATK Launch Systems Incorporated and Aerojet Rocketdyne, purchase AP1 to support the weapon systems’ prime contracts. The subcontractors’ costs for AP1 are a nominal portion of the GMLRS, Standard Missile, and Trident II D5 Missile prime production contracts; however, AP1 is critical for the functionality of the weapon systems.

 

Findings

ATK Launch Systems Incorporated and Aerojet Rocketdyne, first-tier rocket motor subcontractors, followed procedures and properly determined that AP1 was a commercial item. In addition, the Army and Navy contracting officers appropriately relied on the subcontractors’ price analysis to determine that proposed AP1 prices supporting the GMLRS, Standard Missile, and Trident II D5 programs were fair and reasonable in accordance with the Federal Acquisition Regulation.

Army and Navy contracting officers did not evaluate the reasonableness of the AP1 subcontract cost as an individual cost element because AP1 represented a small portion of the prime production contracts and the Federal Acquisition Regulation does not require the contracting officer to evaluate every cost element of the prime contract price.

Although less expensive AP1 sources exist in the foreign marketplace, AMPAC is the only DoD-approved AP1 source.

Based on our analysis of AP1 prices subcontractors paid, with the exception of a purchase for an unplanned requirement in 2017, AP1 prices were stable from FYs 2014 to 2018. However, relying on previous prices alone presents a risk of paying excessive prices to a single supplier if the previous prices have not been substantiated through competition.

 

Recommendations

The Deputy Assistant Secretary of Defense for Industrial Policy (DASD [IP]) should monitor and assess the AP1 industrial base to identify cost-effective AP1 alternative sources and assist the Military Services and Defense agencies on strategies related to AP1 pricing, capability, and capacity.

The Executive Director of the Army Contracting Command-Redstone, Commander of the Naval Sea Systems Command, and the Director of the Navy Strategic Systems Programs should require all contracting officers who negotiate a prime production contract for weapon systems involving AMPAC subcontracts that provide AP1 under Government prime contracts to request uncertified cost data and perform a cost analysis of AP1 subcontract price unless adequate pricing information is available to establish that the price for AP1 included in the prime contractor’s proposal is fair and reasonable.

 

Management Comments and Our Response

The DASD (IP) did not agree or disagree with the recommendation to identify and consider cost-effective AP1 alternative sources to ensure fair and reasonable long-term pricing but stated that the recommendation should not be assigned to the DASD (IP) office because they are not responsible for purchasing AP1. The DASD (IP) recommended that we redirect the recommendation to DoD program offices that use ammonium perchlorate in their systems.

We disagree that the recommendation should be redirected. We revised the recommendation for DASD (IP) to monitor and assess the AP1 industrial base to identify cost-effective AP1 alternative sources and assist the Military Services and Defense agencies on strategies related to AP1 pricing, capability, and capacity, which aligns with their role in monitoring the Defense industrial base. Therefore, the recommendation is unresolved. We request that the DASD (IP) provide comments to the final report on the actions she will take to implement the revised recommendation.

The Deputy Assistant Secretary of the Army (Procurement) responding for the the Army Contracting Command– Redstone Executive Director, Commander of the Naval Sea Systems Command, and the Navy Strategic Systems Program Director, disagreed with the recommendations to require all contracting officers who negotiate a prime production contract for weapon systems involving AMPAC subcontracts to request uncertified cost data. The Deputy Assistant Secretary, Commander, and Director, stated that the subcontract price of AP1 represented a small portion of the prime contract price and submission of uncertified cost and pricing data would unlikely result in subcontract savings.

We agree that AP1 represents a small cost when compared to the total contract price; however, we disagree that the submission of uncertified cost and pricing data would have unlikely resulted in subcontract savings. As noted in the report, Army and Navy contracting officers did not analyze the reasonableness of the AP1 subcontract costs as an individual cost element. Instead, Army and Navy contracting officers relied on subcontractor price analysis to determine whether proposed AP1 subcontract prices were fair and reasonable. Relying on price analysis of previous prices alone for AP1 may result in the DoD paying excessive prices because AMPAC’s previous prices have not been substantiated through competition or comparable sales data to establish a valid price baseline. Therefore, the recommendations are unresolved. We request that the Deputy Assistant Secretary, Commander, and Director provide comments on the final report that address the actions they will take to implement the recommendations.

 

This report is the product of Proj. No. D2017-D000AH-0163.000