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Parts Are Parts, But Pentagon Pays Inflated Price Aircraft Parts Purchased From Boeing Cost Many Times More Than Necessary, Study Concludes

Thu., March 19, 1998, midnight

The U.S. Defense Department paid “significantly” more than necessary for Boeing Co. aircraft spare parts because it failed to offer smaller competitors a chance to supply cheaper parts, the Pentagon’s Inspector General said.

The parts included nuts, washers, bolts, structural panels, and fittings. For example, the Pentagon paid $75.60 apiece for a special kind of small aircraft screw called a setscrew - 13,163 percent more than the 57 cents the Air Force paid for them, according to a March 11 audit obtained by Bloomberg News.

The Pentagon’s aircraft parts purchases were “poorly conceived” and “badly coordinated,” Inspector General Eleanor Hill said in Senate testimony. Not only did the Pentagon skip competitive bidding, it also didn’t challenge Boeing aggressively, the audit said.

Compared with previous purchases after competitive bidding, the Pentagon “paid an average of about 172 percent, or $3.2 million more than the fair and reasonable prices,” for 86 orders of Boeing parts worth a total of $5 million between 1994 and 1996, the audit found.

The Boeing audit is the second to examine spare parts practices since the Pentagon put in place new rules designed to streamline weapons buying and encourage widespread use of commercial parts. An earlier audit of other aircraft spare parts contracts found the Pentagon paid “significantly higher” prices for parts made by Sundstrand Corp.

The audits say neither Boeing nor Sundstrand broke the rules. Instead, the Inspector General’s review suggests that in these two cases Pentagon officials aren’t negotiating prices effectively under the new partsbuying system.

The rules encourage wholesale purchase of commercial spare parts straight from dealer catalogs without requiring contractors to submit cost and pricing data on each item.

“If the government is going to be a player in the commercial marketplace, the government should be a lot smarter and tougher player at the bargaining table,” Hill told the Senate Armed Services acquisition subcommittee Wednesday. “It was us against one contractor. We did not fare very well.”

Hill gave examples of prices she said were “particularly high.” In one case, the Pentagon paid $5.41 each for 1,844 screws that previously were bought for 29 cents. She didn’t specify which company sold the screws.

Boeing spokesman Dick Dalton said the company was studying the audit and would respond formally by April 10.

“The report in no way suggests Boeing did anything improper,” Dalton said. “The majority of the report deals with internal government activity and the need to improve the government’s use of commercial practices.”

The audits disclosed “isolated errors,” Undersecretary for Acquisition Jacques Gansler told the acquisition subcommittee in prepared testimony. “We failed to take advantage of our buying power and we failed to understand what we were buying and what was included in the prices,” he said.

In most cases, however, “using commercial practices and buying commercial items has paid huge dividends in savings, responsiveness and quality,” he said.

Higher commercial prices may be widespread, officials for the General Accounting Office testified. “Our review of selected sole-source contracts indicates that some contractors are now offering commercial prices significantly higher” than the Pentagon paid in the past, said Louis Rodrigues, the GAO’s director of defense acquisition issues.

The GAO is conducting a governmentwide review. Rodrigues said some Pentagon contracting officials “are struggling with how to determine whether commercial prices offered by contractors for sole-source items are fair and reasonable.”

At the very least, said Sen. Tom Harkin, an Iowa Democrat, the Boeing study shows “there are still a lot of kinks in the acquisition reform process.

“Just because a company calls a product ‘commercial’ does not mean it is necessarily being sold at the best price,” Harkin said.

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