The Boeing Company made around $13 million in windfall profits off of selling grossly overpriced spare parts to the Army for its AH-64 Apache and Ch-47 Chinook helicopters, according to a 142-page leaked “For Official Use Only” audit conducted by the Department of Defense Office of Inspector General (DoD OIG). Of $23 million Boeing charged and the Army paid for 18 mostly small spare parts — ranging sleeve bushings to small little gears – only $10 million would have been “fair and reasonable” for Boeing to charge (including a 34 percent markup for Boeing administrative costs and profit on top of the price of the parts).
The Project On Government Oversight, or POGO, which is where I work, released the audit yesterday. Did Boeing open up and admit the error of its ways? In response to news queries on the audit, Boeing has been highly misleading. While I’m not surprised by their spin, more should be expected of the nation’s second largest defense contractor that both has an ethically checkered recent past and is particularly close to President Barack Obama.
Here’s what Boeing told Government Executive magazine:
[Robert Algarotti, rotorcraft support communications manager for Boeing in St. Louis] pointed to rapidly changing requirements during a time of war. “In a period of about three years during wartime at the Corpus Christi Army Depot, we contracted for nearly 8,000 individual parts,” he said. “The handful of errors cited by the IG’s initial report represents an extremely small part of our outstanding support to our U.S. Army customer. Boeing voluntarily reimbursed the government for the items cited and already improved our process, which will prevent reoccurrence of these errors.”
He added that the Corpus Christi logistics contract is performance-based. “During the time when the performance metric was repair turnaround time,” he said, “we improved this measurement by 43 percent.”
Not so fast. The DoD OIG report is bit like three reports in one. While one section of the report focuses on the 18 spare parts, another section explores how the vast DoD inventory of spare parts that could often meet the needs of the Army for less money. Boeing’s Algarotti in his comment to Government Executive ignores a key finding in the audit report on the ability of the Defense Logistics Agency (DLA) to meet spare parts needs for less money. The Army’s sole-source follow-on contract to Boeing to continue supplying the Army was awarded despite the fact that the DLA “had sufficient inventory to satisfy annual contract requirements for 1,635 parts on the follow-on contract,” according to the audit report, “and the Boeing contract price for those items was $8.0 million, or 51.2 percent, higher than the DLA price.” The audit report’s findings deal with more than the 18 parts, but more broadly with how the DoD buys spare parts, which become a significant part of the cost of a weapon system over its life span.
The other main issue with Boeing’s statement to Government Executive is the exaggeration of Boeing’s repair turnaround time improvement. Algarotti says Boeing improved by 43 percent. Even the 3-page public “results in brief” version of the DoD OIG audit report, has said estimates of repair turnaround time improvement have been overstated — leading to some $6 million to nearly $11 million in overpayments to Boeing — and are actually between 26 percent and 37 percent.
Boeing, in a comment to Defense News, also said this:
“The handful of errors cited by the IG’s initial report represents an extremely small part of our outstanding support to our U.S. Army customer,” said Bob Algarotti, a Boeing spokesman. “Boeing voluntarily reimbursed the government for the items cited and already improved our process, which will prevent reoccurrence of these errors.”
While Boeing did refund around $1.6 million (of which roughly $325,000 was a “credit” to the Army), the DoD OIG said the Army should seek refunds of approximately $13 million. The Army, in comments to the DoD OIG, has balked at seeking millions of dollars worth of refunds that the DoD OIG recommended. For instance, one of the IG’s recommendations was that the Army should request a $6 million refund from Boeing for charging the Army for higher subcontractor prices even though Boeing negotiated lower prices from those subcontractors. In response, the Army said that “there is no justification to request a refund.” But I’ll save a dedicated post on the Army’s resistance to recommendations by DoD OIG and other oversight agencies for another day.