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Audit of the Defense Logistics Agency’s Sole Source Captains of Industry Strategic Support Contracts (DODIG-2021-053)

Audit

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Publicly Released: February 16, 2021

Objective

The objective of this audit was to determine whether the Defense Logistics Agency’s (DLA) sole source, Captains of Industry (COI) strategic support contracts are achieving cost savings, value, and benefits for the DoD.

Background

COI contracts use performance-based outcomes to provide increased warfighter support by improving the availability of spare parts and the response time for spare parts orders. DLA Aviation has 13 COI contracts, with a total estimated value of $55.6 billion. We reviewed the DLA’s COI contracts with Boeing (SPRPA1-14-D-002U) and Moog (SPE4AX-17-D-9415). The elements of performance-based support on the Boeing COI contract include inventory investment and ownership, material management, forecasting, storage, and transportation. We reviewed three performance-based contract line items (CLINs) on the Boeing COI contract: CLIN 0001, which includes spare parts for multiple weapon systems; CLIN 0004, which provides F-15 support; and CLIN 0026, which provides F/A‑18 support.

Findings

DLA officials expect to achieve improvements in material availability and cost savings under the Boeing COI contract. For the three CLINs we reviewed, material availability improved and the DLA anticipates a 5-year cost savings of $430.1 million. The DLA calculated these savings by conducting a business case analysis (BCA) that compared negotiated prices to a baseline estimate based on the DLA’s management of the same items.

We identified an inconsistency regarding the DLA’s consideration of a cost recovery rate within the BCAs and found that the DLA potentially overstated its estimated cost savings by $127.1 million. During our audit, DLA officials developed a new BCA process that includes an adjustment for the cost recovery rate. Therefore, we are not making a recommendation related to the cost recovery rate in BCAs.

As of December 2020, DLA contracting officials had not validated the CLIN 0001 BCAs with actual performance information to determine whether estimated savings were realized. Validating BCA estimates could improve the estimating and tracking of cost savings and help DLA contracting officials with decisions on whether to proceed with additional performance-based work.

During our audit, we identified that the DLA did not have visibility of actual spare parts prices under the three performance-based CLINs we reviewed. In March 2020, DLA officials developed a simulated pricing approach to develop spare parts prices that represent what the DLA agreed to pay for the parts. Due to the DLA’s actions, we are not making a recommendation regarding spare parts pricing.

In addition, the Boeing COI contract included bundling, which is the consolidation of two or more requirements for supplies or services previously provided by small business under separate contracts into a solicitation for a single contract. However, DLA contracting officials did not plan for bundling on the sole source COI contract. This occurred because DLA contracting officials did not initially consider the F-15 work a bundled requirement. Furthermore, the DLA’s bundling analysis prioritized estimated costs savings and did not evaluate the impact on small businesses or contain correct information about the dollar value of historical DLA contracts or the number of parts provided by small businesses. As a result, DLA contracting officials agreed to set small business participation for the F-15 work at 15.7 percent, which was significantly lower than the previously demonstrated small business participation rate of 43 percent. Therefore, actual small business participation for the 2,550 F-15 parts bundled on the COI contract was reduced by 61 percent, from $52.4 million prior to bundling work on the COI contract in 2017, to $20.7 million as of July 2020. Additionally, DLA officials cannot hold Boeing accountable to the participation because Boeing only reported small business participation at an overall contract level, and not a more detailed CLIN level.

Unlike the Boeing COI contract, the Moog COI contract contains no performance-based metrics. The DLA uses the Moog contract to purchase material; therefore, according to DLA officials, the Moog contract does not lend itself to incentive metrics. However, the DLA monitors Moog’s ability to meet on-time delivery rates. Moog experienced challenges meeting on-time delivery rates in accordance with contract requirements. On‑time delivery rates are a measurement of how often Moog delivers orders on time, expressed as a percentage. Defense Contract Management Agency officials issued a corrective action request in December 2019 because Moog’s on-time delivery rate degraded to a 12-month average of 53 percent, significantly lower than the objective of 90 percent. In January 2021, Defense Contract Management Agency officials reported that Moog’s on-time delivery rate had improved and the corrective action request was closed.

Recommendations

We recommend that the DLA Aviation Commander validate the estimates from the BCA for CLIN 0001 on the Boeing COI contract to identify actual savings, compare the results to the expected cost savings, and determine whether the BCA calculations and assumptions need to be changed in order to improve future estimates.

Additionally, we recommend that the DLA Aviation Commander direct contracting officials to:

  • Set small business goals at levels representative of previous small business participation for future bundled work and exercised options
     
  • Re-evaluate the methodology for determining historical work done in potential bundled areas.

We also recommend that the DLA Aviation Commander develop and implement procedures on all COI contracts to include contract incentives and disincentives for meeting and exceeding small business goals on all future bundled work.

Management Comments and Our Response

The DLA Acquisition Director, responding for the DLA Aviation Commander, agreed with five recommendations and partially agreed with two recommendations. The comments from the Director addressed the intent of all seven recommendations; therefore, four of the recommendations are resolved and open and three are closed. We will close the remaining four recommendations once management provides:

  • documentation to show the cost savings validation for CLIN 0001 on contract SPRPA1-14-D-002U, to include explaining any significant differences between expected and actual cost savings and identifying actions to improve future estimates;
     
  • policy or documented procedures to show how DLA Aviation will implement the Acquisition Value Tracker for COI contracts and share lessons learned regarding BCAs; and
     
  • policy requiring the acquisition team supporting any procurement involving substantial bundling to complete the contract consolidation and bundling training developed by the DLA Office of Small Business Programs.

This report is the result of Proj. No. D2020-D000AU-0015.000