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Mr. KASICH. Thank you, Mr. Chairman.
Mr. NICHOLS. Mr. Lally.
Mr. LALLY. Thank you, Mr. Chairman.

Secretary Lehman, I understood you to say that the famous 4cent diode that was purchased for $110 was purchased by DLA.

Mr. LEHMAN. That's right; yes.

Mr. LALLY. Well, I'll read to you, Mr. Secretary, from the Inspector General Report of May 9, 1983. And on page 2 it says, “we found that NTEC” which I believe is Naval Training Equipment Command, failed to determine the most economical method for acquiring the spare parts listed in ISIL No. 5. “NTEC purchased all repair parts listed on ISIL No. 5 from Sperry, even though 348 of the 483 items on this ISIL were available through the Federal supply system at considerably lower cost.”

And he goes on then to give examples of six items including the famous 4-cent diode at $110, another item, which was available through DLA at 5 cents, for $100, and the second one at 5 cents for which $100 was paid. Another one at 24 cents through DLA for which $75 was paid. And then there were two items, one available through DLA at $11.10 for which $243 was paid. And the last one was $15.41 through DLA for which $241 was paid. So, according to the Defense Inspector General Report, Mr. Secretary, all of the items were purchased from Sperry by NTEC.

Mr. LEHMAN. Yes; but what they left out was that they were purchased by DLA through DCASMA.

Mr. LALLY. No; that is not correct, Mr. Secretary.

Mr. LEHMAN. No; it is correct, Mr. Lally, and I'll be happy toyeah, I know you read it, and what they left out-

Mr. LALLY. Let me read another paragraph of the report.
Mr. LEHMAN. Carry on.
Mr. LALLY. All right.

"The modification established a ‘not to exceed'"-NTEC's procurement activity issued a contract modification authorizing Sperry to procure all parts on the ISIL. The modification established a “not to exceed” cost for the parts, and provided that the parts would be negotiated by DCASMA-B. "Negotiations between Sperry and the DCASMA-B resulted in a definitized purchase order on January 18, 1983. As a result, all items were acquired through the prime contractor in lieu of the DOD supply system or source manufacturer.”

DEPARTMENT OF DEFENSE INSPECTOR GENERAL
OFFICE OF THE ASSISTANT INSPECTOR GENERAL FOR AUDITING

1300 WILSON BOULEVARD, 12th FLOOR

ARLINGTON, VIRGINIA 22209

REPORT
NO. 83-121

May 9,

1983

MEMORANDUM POR DEPUTY UNDER SECRETARY OF THE NAVY (FM)

SUBJECT:

Quick-Reaction Report - Audit of Alleged Over payments for Selected Spare Parts for F/A-18 Flight Simulators (Project 31G-002)

Introduction

This report is in response to a congressional inquiry dated March 16, 1983, containing an allegation of overpayments for F/A-18 flight simulator spare parts procured from Sperry Systems Management, Sperry Corporation, Reston, Virginia, by the Navy Training Equipment Center (NTEC), Orlando, Florida. Our objective was to determine is the prices paid for the spare parts in question were excessive and ir So, to evaluate related procurement policies and procedures that led to this situation.

We reviewed contracts and other documentation supporting the spare parts procurements from Sperry during calendar years 1982 and 1983, as well as NTEC's overall system for procuring parts. We also reviewed the negotiation process between the Defense Contract Administration Services Management Area Baltimore (DCASMA-B) and Sperry, which led to the definitized fixed price delivery order. Our audit was made in accordance with generally accepted government audit standards and included such tests of NTEC and DCASMA-B records

deemed necessary under the circumstances. The audit was conducted in April 1983. Background

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NTEC contracted with Sperry for the development of Operational Flight Trainer (OFT) for the F/A-18 aircraft. As part of the contract, Sperry was required to furnish NTEC Interim Support Items Lists (ISILs) consisting of parts believed to be necessary to support the OFT. The ISIL provided recommended part numbers, manufacturer, National Stock Number (NSN) if one has been assigned and the contractor's estimated price to supply the item. Stated another way, the Navy pays the contractor to tell the Navy whether the item is available through the Government's supply system. As of April 29, 1983, 8 ISILs were submitted by the contractor. ISIL Number 5 was questioned in a congressional inquiry that alleged excessive pricing for the parts.

Discussion

We found that NTEC failed to determine the most economical method for acquiring the spare parts listed in ISIL Number 5. NTEC purchased all repair parts listed on ISIL Number 5 from Sperry, even though 348 of the 483 items on this ISIL were available through the Federal Supply System at considerably lower cost. The 348 items purchased from Sperry at a cost of $80,204 would have cost only $3,658 if requisitioned from the Federal Supply System. Most of the items were available from one Defense Logistics Agency supply activity. The following examples show the magnitude of the variances between the cost of items purchased from Sperry and their cost in the Federal Supply System:

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For those items not in the Federal Supply System, additional savings may have been achieved by procuring directly from the source manufacturer, whose prices are normally lower than those of the prime contractor. Sperry was the manufacturer on only 5 of the 483 items.

NTEC stated that it did not have sufficient resources needed to determine if parts being purchased from the prime contractor were available from less costly sources. This process would have taken about 2 to 3 days for 1 to 2 individuals for ISIL Number 5 if done manually. We also reviewed the other ? ISILs and noted that they also contained NSNs which were procured from Sperry.

NTEC's procurement activity issued a contract modification to the basic OFT contract (Contract N61339-79-C-0144) in April 1982, authorizing Sperry to procure all parts the ISIL. This modification established a "not-to-exceed" cost for the parts and provided that the price would be negotiated by the DCASMA-B. Negotiations between Sperry and the DCASMA-B resulted in definitized purchase order on January 18, 1983. As a result, all items were acquired through the prime contractor in lieu of the DOD supply system or source manufacturer. We were advised by DCASMA-B that if the purchase order were amended or cancelled, additional costs would be incurred because Sperry had already aequired or delivered most of the parts on the ISILS.

The Naval Audit Service (NAS) recently reported that NTEC was not adequately screening contractor ISILS (Report Number A41412L Naval Training Equipment Center, Orlando, Florida, February 8, 1983). The NAS report stated that unnecessary costs were being incurred in acquiring support items for training devices because NTEC routinely procured support items from the prime contractor at prices much greater than available through the Federal Supply System, General Services Administration schedules and item manufacturers. The NAS recommended that NTEC implement procedures to screen all procurements for availability in the DoD supply system, ensure that contractors correctly identify manufacturer's part numbers and FSCMs and utilize the most economical procurement methods available. NTEC concurred with these recommendations and stated that action would be completed by September 30, 1983, when implementing procedures were fully in plece.

During our audit we noted that NTEC had initiated efforts to sereen certain support item lists furnished by contractors. Although this was a start, we found that most support item lists were still not being screened, or were only marginally screened, due to a stated lack of personnel. NTEC requested 12 manpower spaces and funds

to

develop an automated system. These requirements were furnished to the Chief, Naval Education and

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Training in the FY 1985 Program Objective Memorandum. Funding for 10 contractor personnel to support the NTEC effort was also requested.

In summary, our analysis confirms the NAS finding that NTEC procurement practices has been resulting in additional costs in excess of

million dollars annually. We believe immediate corrective action is necessary.

During the audit, we found indications that the condition identified in the report may be occurring in other activities, both within the Navy and outside the Navy. Consequently we plan to initiate an interservice audit of this area, and address any problems found on a system-wide basis.

Recommendations

We recommend that the Chief, Naval Education and Training direct the Naval Training Equipment Center to:

1. Determine if net savings can be achieved current procurements, especially on ISILS 7 and 8 on the Sperry contract, and if so, amend or cancel the related procurements.

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2. Immediately assign or detail sufficient personnel perform comprehensive screening of all ISILS.

3. Obtain all items with National Stock Numbers where available, from Defense Logistics Agency and Military Department supply systems.

4. Obtain source manufacturer prices for the items not having National Stock Numbers and procure those items from the Source manufacturer when

the prime contractor's prices are higher.

Because this is a quick-reaction report it is requested that you provide written comments on the actions to be taken on the recommendations within 15 days from the date of this report. If you concur, indicate the specific action(s) taken or planned to be taken and the actual or estimated date(s) of completion. Any nonconcurrences should be fully explained. Please contact Mr. Harold Bloom on 694-8333 if you have any questions concerning this report.

John W. Melchner
Acting Assistant Inspector General

for Auditing

Mr. LEHMAN. DCASMA is part of DLA. Mr. LALLY. They were procured through the prime source rather than

Mr. LEHMAN. By DCASMA. That's what the paragraph says. I would be happy to send the paperwork which I had much too much familiarity with at the time.

Mr. NICHOLS. Will you do that, Mr. Secretary? In the interest of time we need to get away from here. Our staff feels very strongly about the letter.

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