Sep 12 2011
Bloomberg - by Tony Capaccio
Sikorsky Aircraft Corp. overcharged the U.S. Army for 28 UH-60 Black Hawk helicopter spare parts, including $2,393.41 for a plastic wiring box cover worth $181.70, according to the office of the Defense Department’s Inspector General.
Sikorsky, a unit of Hartford, Connecticut-based United Technologies Corp. (UTX), charged the Army $7,814.88 for a rotor used to cool radiator oil that cost another Pentagon agency $1,536.65, according to the 65-page audit. Bloomberg News obtained the report, a three-page summary of which the Inspector General made public today.
The audit cited excessively priced parts and costs based on pricing data that wasn’t current, complete or accurate from the latest of three Sikorsky contracts with the Corpus Christi, Texas, Army depot. The contracts were valued cumulatively at about $1.1 billion. The initial contract award was made in December 2002.
Army officials have a “myriad of issues to overcome to ensure that prices are fair and reasonable,” said the audit, which is signed by Bruce Burton, deputy inspector general for acquisition management.
Overall “we calculated that Sikorsky charged the Army $11.8 million, or 51.4 percent more than fair and reasonable prices,” between 2008 and 2010, the audit said. About $158,531 of that excess was paid for the plastic wiring box covers.
“If not corrected Army officials will pay excessive profits of approximately $16.6 million over the remaining two years of the contract,” including $249,986 in future wiring box overcharges, it said.
Sikorsky also charged progressively increased prices for titanium sheath assemblies used to protect Black Hawk rotor blades -- the helicopter’s most expensive item, the audit said.
Sikorsky’s assembly prices increased 114.3 percent to $17,004.39 each in 2008 from $7,936.57 each in 2007. “Sikorsky made a 28.6 percent profit supplying the item in 2010 and the profit will increase annually by 4 percent through 2012 due to the contract clause escalation,” the audit said.
The audit is the second since May to underscore the pricing problems that can occur under contracts in which the Army, the Air Force and the Navy purchase management services and parts from private contractors instead of through the Pentagon’s Defense Logistics Agency.
The Inspector General’s office in a May audit disclosed similar overpricing with Boeing Co. (BA)’s maintenance contract with the Corpus Christi depot, which handles Black Hawks and Boeing CH-47 transport helicopters.
Both the Sikorsky and Boeing reports highlight areas of potential cost savings as the Pentagon seeks to protect funding for personnel and weapons programs from additional budget cuts. Shay Assad, the Pentagon’s new director of pricing, said in an interview he is already reviewing the Boeing audit.
Defense contractor overcharges in the 1980s undercut public confidence in Pentagon management, as Senate committees disclosed overpriced spare parts such as a $37 machine screw, a $435 claw hammer and a $640 toilet cover assembly just as the Reagan administration was starting to increase defense spending.
“It is important to note that of the more than 7,000 parts covered under this contract, only a handful were found to have discrepancies,” said Sikorsky spokesman Paul Jackson.
“Sikorsky operates under a culture of full compliance and continuous improvement,” he said. Sikorsky has agreed to provide $1 million in refunds, including some for the wiring box covers. The Army Aviation and Missile Life Cycle Management Command, which manages the contracts, “needs to correct prices and seek” another $11 million in refunds, the audit said.
The Army also must revise contract clauses to avoid another $21 million in “excessive costs” that would be triggered by escalation clauses, the audit said. Sikorsky’s Jackson said “we have been cooperating fully with the DoD IG and AMCOM throughout the process. We recognize the DoD IG periodically examines the contracts of many companies and that this contract is one of a series under review.”
“We negotiated this contract, worth over S1.1 billion, in good faith with the goal to provide unparalleled service levels at a reasonable price,” he said. “We believe we have demonstrated our value to the Army customer in our performance under this contract.”
Incentive to Charge
The overcharges stem from factors including the incentive for Sikorsky under its firm fixed-price contracts to charge as much as possible without passing on savings, the audit said. Sikorsky repeatedly didn’t adequately negotiate lower costs with its suppliers or pass on savings when it did, the audit found. The Defense Contract Audit Agency since 2006 “has consistently documented that Sikorsky does not perform adequate cost or price analysis” of subcontractor quotes, the audit said.
The Army didn’t adequately analyze Sikorsky’s prices, the audit said. The command didn’t have “adequate procedures to ensure” Sikorsky’s costs were reasonable for use in negotiations, it said. Army Aviation Command official Ronald Chronister in written July 7 comments included in the report said his organization agreed to review the refund request and improve its cost analysis.
“Recognizing the need to focus on the evaluation of proposals and drive efficiencies in our large dollar acquisitions,” the command established a new directorate of cost and price analysis, he said.
Still, the Army Command “does not agree” with the report’s overall thrust that the Sikorsky contract “is ineffective, overly costly or inefficient,” said spokesman Dan O’Boyle in an e-mail statement today. “While AMCOM will appropriately deal with any over-pricing issues -- it is important to note the identified overpriced parts represent about 5 percent of the total materiel cost, and is focused on 28 out of 7,000 parts that are priced in the contract.” “Even though any overpricing is a concern, in a contract of this magnitude it is important to view the total agreement price which is considered reasonable in light of the overall cost and performance,” he said.
“This contract has enabled the Army to significantly decrease repair turnaround times for critical aircraft parts, and significantly increase production rates of both parts and aircraft,” O’Boyle said.
Better Analysis Needed
The Sikorsky and Boeing audits indicate that the Army needs to do a more thorough job of cost and price analysis and examine how prime contractors evaluate subcontractor prices, said IG auditor Henry Kleinknecht in an interview. “It’s the prime contractor’s job to negotiate a fair price,” he said.
“Unfortunately, this latest report is yet another example illustrating the department’s broken and ineffective inventory and accounting systems,” said Senator Tom Carper, a Delaware Democrat who heads a financial management subcommittee.
“While the report’s findings are deeply troubling - particularly as we are struggling with a massive federal debt and deficit -- they are not surprising,” Carper said today in an e-mail. “We have known for years the department is unable to audit its books and is woefully behind in meeting Congress’ requirement that it be audit-ready by 2017.”
Carper said he’d highlight the Sikorsky audit in a Sept. 15 hearing he’s convening.