Report | July 21, 2022

Audit of Sole-Source Depot Maintenance Contracts (DODIG-2022-104)

Audit

Publicly Released: July 25, 2022

 

Objective

The objective of this audit was to determine whether the Military Services and Defense agencies negotiated fair and reasonable prices for sole‑source depot maintenance contracts performed at contractor facilities.

This audit was in response to a reporting requirement included in House Report 116‑333, the conference report to accompany Public Law 116‑92, the “National Defense Authorization Act for Fiscal Year 2020,” December 20, 2019. The conference report required the DoD Office of Inspector General to audit each Military Service and Defense agency to determine whether there had been any excess cost escalation for sole‑source depot maintenance contracts.

 

Background

The DoD assigns different levels of maintenance to repair parts depending on the skill level, tooling, and facilities needed to execute the repairs. Depot‑level repair is the most sophisticated level of maintenance. Depot‑level repair consists of repairing a major end item, such as an aircraft or ship, by performing repairs and replacing parts on the system.

To accomplish depot maintenance, the DoD has 17 Government‑owned, Government‑operated depot maintenance facilities to repair aircraft, ships, electronics and communications equipment, missiles, and other weapon systems. When the DoD does not have the capacity or technical expertise to perform depot maintenance, it contracts the work to contractor‑owned and contractor‑operated depots. Due to the complexity and extensive level of work required for depot maintenance, these contracts are often sole‑source contracts.

Sole‑source contracts are contracts for the purchase of supplies or services that are entered into or proposed to be entered into by an agency after soliciting and negotiating with only one source. Justifications for sole‑source acquisitions include unusual or compelling urgency, only one responsible source is available to meet the Government’s needs, or national security.

According to the Federal Acquisition Regulation, only one responsible source is available if:

  • an award to any other source would result in substantial duplication of cost to the Government;
  • the acquisition will be conducted under a follow‑on contract for the continued development or production of a major system or highly specialized equipment; or
  • the services are available from only one source or a limited number of sources.

Similarly, single‑source contracts occur when multiple companies can provide the supply or service, but only one company bids on the contract. We included both sole‑source and single‑source contracts in our sample because Federal and Defense acquisition regulations require contracting officials to follow similar procedures for sole‑source and single‑source contracts.

 

Findings

DoD contracting officials negotiated fair and reasonable prices for 13 of 34 sole‑source and single‑source depot maintenance contracts we reviewed, valued at $1.7 billion, by complying with Federal and DoD acquisition regulations, and implementing sole‑source pricing best practices during contract planning, proposal evaluation, and negotiations.

However, DoD contracting officials may not have negotiated fair and reasonable prices for 21 of 34 sole‑source and single‑source depot maintenance contracts we reviewed, valued at $4.6 billion, because DoD officials did not provide well‑defined requirements, in accordance with Federal and DoD acquisition regulations. In addition, factors beyond the control of the DoD contracting officials limited their ability to negotiate fair and reasonable prices. For example:

  • the nature of sole‑source contracting led to DoD contracting officials accepting late or incomplete proposals, which added pressure on DoD contracting officials to meet award date deadlines and accept higher prices;
  • Federal and Defense acquisition policies limited the amount of cost or pricing data that DoD contracting officials could obtain for commercial contracts;
  • contractor direct and indirect labor and overhead rates increased beyond industry inflation; and
  • aging weapon systems required more frequent and unexpected repairs, and the parts needed became scarce or obsolete, which resulted in increased costs.

Although the DoD realized cost reductions of at least $12.0 million, and cost escalation of less than 1 percent for 13 of the 34 contracts, the DoD paid at least $71.9 million in cost escalation for 21 of 34 contracts and experienced schedule delays that impacted the ability of the Military Services to meet their mission and affected DoD readiness worldwide.

In addition, although Naval Sea Systems Command (NAVSEA) contracting officials solicited dry‑dock ship repair contracts using competitive procedures in accordance with Federal and Defense acquisition regulations, NAVSEA contracting officials awarded 17 of 49 contracts as single‑source contracts from FY 2017 through FY 2021. According to major defense ship contractor officials, they did not bid on ship maintenance contracts because they did not have available dry docks. In addition, officials from major defense ship contractors stated that they did not bid on ship maintenance contracts because of NAVSEA’s contracting procedures, which included applying additional fees for costs incurred and not meeting contract award timelines. As a result, single‑source contracts increased the risk of higher costs and contributed to schedule delays. Any schedule delays in returning ships to the Navy’s fleet could affect the Navy’s readiness worldwide.

 

Recommendations

Among other recommendations, we recommend that the Executive Director of the Army Contracting Command (ACC)–Redstone Arsenal and the Commanders of the Air Force Life Cycle Management Center (AFLCMC) and Naval Supply Systems Command (NAVSUP) require the contracting officials responsible for specific contracts in our sample to work with program offices to determine whether the existing processes can be improved.

In addition, we recommend that the Commander of the Air Force Sustainment Center (AFSC) and the ACC Commanding General require contracting officers to request uncertified cost and pricing data that is sufficient to support the contracting officers’ determination of fair and reasonable prices when negotiating sole‑source commercial contracts. In addition, we recommend that the AFSC Commander and the ACC Commanding General require contracting officers to document the contractor’s response to the request, and report any refusals of data to the Principal Director of Defense Pricing and Contracting, in accordance with the Defense acquisition regulations.

Furthermore, we recommend that the NAVSEA Commander and the Commander of the Navy Regional Maintenance Center:

  • collaborate with major defense contractors to continue to discuss and document potential initiatives to increase the number of contractor‑owned dry docks;
  • review the policies and procedures for developing requirements for ship repair maintenance to identify best ways to reduce the number of change orders issued; and
  • review work item packages to develop clear requirements for routine depot maintenance tasks.

 

Management Comments and Our Response

The Procurement/Insight Oversight Director, on behalf of the Assistant Secretary of the Army (Acquisition, Logistics, and Technology); the Air Force Materiel Command Executive Director, responding for the AFSC and AFLCMC Commanders; the NAVSUP Weapon Systems Support Commander, responding for the NAVSUP Commander; and the NAVSEA Commander agreed with our 13 recommendations and provided comments and corrective actions to address the recommendations. Therefore, the recommendations are resolved but remain open. We will close the 13 recommendations when we verify that the information provided and agreed‑upon actions fully address the recommendations.

As a result of management comments, we redirected one recommendation to the Commanding General of the U.S. Army Aviation and Missile Command. We request that the Commanding General provide comments in response to this recommendation.

 

This report is the result of Project No. D2020-D000AH-0139.000.