A new report by the Department of Defense Inspector General (DoD IG) paints a troubling picture of the Pentagon’s decades-long relationship with one of its top contractors, United Technologies. At best, it indicates some fine-tuning is needed in defense contract management and auditing practices. At worst, it suggests DoD has a less-than-arm’s-length relationship with one of its key providers of goods and services.
The DoD IG investigation was prompted by a whistleblower hotline tip regarding a June 2006 settlement agreement between DoD and United Technologies’ Pratt & Whitney (P&W) division. P&W paid $283 million to settle allegations that it had not complied with cost accounting standards on its aircraft engine contracts from 1984 to 2004, resulting in significant overpayments by the government.
The dispute began in 1991, when the Defense Contract Audit Agency (DCAA) found that P&W had not complied with cost accounting standards involving its collaboration agreements with foreign parts suppliers. In 1996, the Defense Contract Management Agency (DCMA) issued P&W a demand for payment in the amount of $260 million to recover the increased costs the government had paid since 1984.
A ten-year court battle ensued. In the meantime, the government’s damage claim grew. In 2003, DCMA issued P&W an updated demand for $755 million to recover increased costs through 2002. But three years later, the case settled for roughly one-third of that amount. The whistleblower alleged that unnamed senior officials at DCAA and DCMA exerted pressure to settle the case for an amount that was agreeable to P&W rather than what was fair to taxpayers.
After a nearly four-year investigation, DoD IG found no evidence of pressure from senior officials to settle the case in P&W’s favor. However, it found other irregularities in the way DCAA and DCMA handled the settlement. For example, the government negotiated without obtaining sufficient cost documentation from P&W, in violation of federal procurement regulations. In fact, there had been considerable discord and disorganization on the government’s side of the negotiations, according to the report.
The most serious finding is that DCMA allowed a former United Technologies employee to represent the government at the settlement table. In April and May of 2006, one of the two DCMA employees negotiating on behalf of the government was a former employee of United Technologies’ Sikorsky Aircraft unit. That employee, who supervised the other DCMA negotiator, had left Sikorsky just a few months earlier. Prior to working at Sikorsky, the DCMA employee was a Lieutenant Colonel in the U.S. Air Force where he served as the commander of DCMA’s P&W contract office.
Potential conflicts of interest like this shouldn’t be surprising given the rapidly spinning revolving door between the Pentagon and United Technologies. In our 2004 report, The Politics of Contracting, the Project On Government Oversight found 11 current and former senior government officials who worked for United Technologies between 1997 and 2004 as executives, directors, or lobbyists. Among them were three Pentagon heavyweights: former Air Force Under Secretary Antonia Chayes, former DoD General Counsel Jamie Gorelick, and former Defense Secretary William Perry. Since then, the company has added former Chairman of the Joint Chiefs of Staff Richard Myers to its board of directors. Current Air Force Secretary Deborah Lee James was a vice president at United Technologies from 1999 to 2000.
Finally, DoD IG found that P&W is still not in compliance with cost accounting standards, which means the government could still be paying inflated costs. In fact, the report notes that on the very day the 2006 settlement was signed, the DCMA contract management office approved P&W’s use of a non-compliant cost accounting practice. DCMA is now demanding that P&W repay the government $211 million. P&W took the matter to court.
Here we go again.