DoD Cost Analysis is like Pin the Tail on the Donkey

In a sensationally titled piece, “Pentagon Pricing Zealots Put the Screws to Pratt & Whitney,” Loren Thompson makes the argument that the Department of Defense Inspector General (DoD IG) is unfairly targeting the company for ripping off taxpayers in its contract to support the C-17 fleet’s F117 engines. Thompson, who discloses that his think tank receives funding from Pratt & Whitney, has defended the company’s interests on other issues before. In this case, without seeing the report, he alleges that the company has proven to the Air Force that it is offering “comparable” prices to what it offers its commercial customers.

But in actually reading the DoD IG’s report, first reported by Tony Capaccio at Bloomberg and released in its entirety to POGO, it reveals that the DoD IG found “Pratt and Whitney’s unwillingness to provide requested sales data and cost data exploited the sole-source situation.” In lieu of providing commercial sales data to verify that the prices were actually comparable to commercial sales, the company provided a series of unknown redacted invoices and other information on a different engine’s sustainment services. Unable to make a decision about price reasonableness, senior Air Force and DoD leadership got involved and received a tentative agreement from Pratt & Whitney to provide the information. The fact that Pratt & Whitney didn’t provide the information, the DoD IG writes, “may cause one to question whether Pratt and Whitney acted in accordance with the FAR [Federal Acquisition Regulations] which requires DoD and its contractors to conduct business with integrity, fairness, and openness.”

Without any commercial pricing data, the Air Force doesn’t know whether the $1.54 billion already spent on this contract —or the estimated $3.76 billion that it will spend supporting this engine for the next seven years—is actually fair and reasonable.

It appears Pratt & Whitney has so far refused to comply with DoD IG’s subpoena to provide the critical cost data the Air Force and the DoD IG need to perform this assessment. Thompson argues that the subpoena wasn’t necessary because Pratt & Whitney already provided 5,500 files. However, according to the IG, the company has provided only minimal information on one commercial customer for engine services and even more limited data on maintenance services. They also asked the DoD IG to wait to publish any of this information until after they concluded negotiations with the Air Force, suggesting that the prices offered to this commercial customer deviates significantly from what the company is charging the government.

If Pratt & Whitney continues to refuse to provide information to show that the services are truly similar to what it charges on the commercial market, the DoD IG recommended, “the AF should only contract or subcontract with Pratt and Whitney as a last resort and should prepare a written plan that allows for the development of a competitive market for F117 sustainment.”

The Air Force’s “high risk of paying too much” has not escaped the notice of Congress. In this year’s National Defense Authorization Act report, the House Armed Services Committee expressed concerns about the ballooning sustainment costs for the F117 engine:

The committee notes that the Department of the Air Force has struggled to reign in F117 engine MRO costs. The committee is concerned that the Secretary of the Air Force cannot sufficiently determine whether the Department is paying a fair and reasonable cost for F117 MRO because of limited performance and cost data available to the Department as a result of the F117 MRO contract structure and administration.

Due to these concerns, the bill prohibited the Secretary of the Air Force from entering into a new contract for the sustainment, maintenance, repair, and overhaul of the F117 engine (Sec. 341) until the Under Secretary of Defense for Acquisition, Technology, and Logistics certifies that they have sufficient data to determine that they are paying fair and reasonable prices. It’s unclear whether this will be enough to protect taxpayers, however, since it allows for a vague national security waiver to be issued by the Secretary of the Air Force.

Determining the fairness of these costs is important because the Air Force plans to keep the C-17 in its fleet until 2040. For now, the Air Force seems to be taking these concerns seriously, including requiring a Defense Contract Management Agency assessment of the commerciality of the engine support requirements.

If Congress is serious about reforming the defense procurement system, it has to rethink the current landscape of commercial item contracts. This contracting mechanism was created so the federal government could buy commercial items without needless red tape. But in this case, and the case of Bell Helicopter s spare parts, the government is negotiating blind as companies refuse to provide genuine commercial pricing data. To determine if the government is being charged fair and reasonable prices, the contracting officials then have to perform their own cost analysis, and the IG can only extract this information from the companies by issuing a subpoena. That process is a recipe for disaster. In short, commercial item contracting is creating loads of unnecessary work for an overworked contract workforce and wasting millions of taxpayer dollars. If Congress doesn’t act, it might be time for DoD to protect itself and require that commercial cost or pricing data be supplied on all sole source commercial item contracts to ensure that it is paying fair and reasonable prices.

There may be more bad news to come as well, since this is only the first in a planned series of reports by the DoD IG to assess the F117 engine sustainment contract.

Update: Pratt and Whitney has offered the following explanation for their compliance with the DoD IG's subpoena:

We are devoting substantial effort to gather the information requested by the DOD IG. We started providing requested information relative to the DOD IG audit in July, and have been providing additional information in response to the subpoena (which we received at the end of October), even while we have been in discussions with the IG to clarify the subpoena requests and while we await its response to our questions. The F117 is a complex commercial program and is not designed to track data in the way the DOD IG has sought it. The data sought is voluminous and not immediately accessible for a commercial, fixed-price service, and some data requires us to seek third-party agreement prior to release.