The Miracle of Procurement Debunked Again: The Air Force Finally Got Tired of Getting Screwed (Literally)

Update: The Project on Government Oversight (POGO) has just released the DoD Inspector General report on the overcharging of spare parts by Boeing for an Army helicopter. This is the same scandal I address in the first part of this column and part of the same ill conceived Performance Based Logistics that has lead to many overrun weapons. In my column, I suggest several other problems that contribute to this climate of failure and suggest solutions. POGO has done a great service in obtaining and releasing the full IG report to the public.

Just posted from our friends at POGO:

Leaked Audit: Boeing Overcharged Army Up to 177,000 Percent on Helicopter Spare Parts

-Dina Rasor, Solutions Editor

Boeing has just been caught spending $37 dollars for nut and bolt retainers for the Army's CH-47 helicopter, but charging the Army an average of $381.78, according to a recent Department of Defense's (DoD) inspector general's (IG) report. The IG's office won't comment on the report because it is “For Official Use Only,” but Bloomberg News got a hold of the report and wrote a story on May 24 about how the DoD IG recommends that Boeing refund the government at least $6 million. If the Army had used the traditional way of getting the parts for this helicopter, through the Defense Logistics Agency (DLA), they could have paid $6.77 each; there were, as of last December, 734 of the bolt and retainer sets in the DLA stocks.

This story could be just another illustration to show that the DoD has not gotten its act together on overpriced spare parts and many of you may be flashbacking to the overpriced toilet seats and coffee brewers of the 1980s and 1990s. Having been one of the people who exposed many overpriced spare parts in the 1980s, I know that the DoD still does not have a decent pricing and accounting system and is paying too much for spare parts and weapons overall. But this recent mess is because of a new experimental way of doing the logistics for weapons that was introduced during the Bush administration. It is called Performance Based Logistics (PBL) and it is just another scheme to push DoD money at contractors and then go hands off and let them make all the decisions.

With the traditional route of providing logistical support to our weapon systems, the military service would either send a broken part to a supplier (not necessarily the main manufacturer) and the supplier would bill the military service for the cost plus profit (which really encouraged the supplier to charge as much as he could get away with to increase his profit.) Or the part or weapon would go to a government-owned depot, which have been around since World War II. The depot would fix the part or order a new one, and because government workers did the work, there was no profit or loss sheet. Depots are popular with members of Congress, especially when it is in their district or state because it is a steady source of jobs.

In the 1980s, when I was investigating hundreds of overpriced spare parts, we found that the depot or even the military flight line could repair or manufacture many parts at a much lower rate than could be bought through a Lockheed or Boeing or one of their subcontractors. The funniest example was discovered by the famous whistleblower, Ernest Fitzgerald, when he was investigating the toilet pan that slide under the toilet on the C-5 cargo plane to keep airmen with bad aim from corroding the toilet. The toilet pan supplied by Lockheed was just a bigger version of a fiberglass cafeteria tray, but Lockheed priced it at $642.35. Fitzgerald found that the depot that served C-5s could make it for a few dollars. Once the ridiculous price was discovered by the powerful House Energy and Commerce Committee, run by a tough John Dingell, Lockheed began to wilt and repriced the toilet pan at a “policy price” of $325.00, then the generals overseeing this project were proud that they were able, with “tough” negotiations, to get the price down to $286.75. Though later, the Air Force analysts admitted that they made up the cost numbers. Finally, after much exposure and many late-night TV jokes, Lockheed relented and had a “clearance price” of $1. I have no doubt Lockheed raised prices enough on other parts, that have not yet been exposed, to make up their loss of profit on the toilet pan. They were also desperate not to have the part made by the depot and ruin their complicated pricing strategies with someone else making the pan and charging what it should actually cost. (“The Pentagonists,” by A. Ernest Fitzgerald, pp. 218-220.)

And there are still problems with these traditional systems of logistics support with the military allowing contractors to overcharge on spare parts using the same pricing formulas that are making our weapons overrun their budgets. As I laid out in last week's column, there are not enough oversight people to prevent such overcharges and many of the program managers don't care if there are overruns as long as it isn't caught on their watch because they can get lucrative industry jobs if they don't hold the contractors' feet to the fire. However, it is heartening to know that the DLA was able to buy the $381.78 nut and bolt retainer for $6.77; it shows that someone in the government was watching out for the taxpayers while Boeing was trying to rip off the system.

Theoretically, PBL is supposed to work in a new way and save money. The contractor or the contractor who is overseeing the subcontractors who are making the parts (called a product support integrator) promises to maintain a weapon to a certain performance level, i.e. to keep a certain percent of aircraft flying or tanks running, and are supposed to be paid for that performance. So, the military hands the maintenance of a weapon over to a contractor for a set price to keep it running and then keeps their hands off the buying of the parts needed and the labor to keep it going. The contractor, supposedly “unburdened” by government oversight, then manages the weapon and keeps it running. Besides the problems of cost and performance issues that have arisen, I wonder how a company can plan to keep a weapon going when they don't know if it is during war or peace. Surely, weapons that were maintained during peacetime had a whole different requirement for parts and maintenance than when the DoD decided to use them for war, with little warning, such as in Libya.

But PBL became the rage in 2005 right when the defense budget was going sky high. There are all types of white papers in the military world on how it would be the best new thing and keep weapons at a high state of readiness while saving taxpayer money. This was the mindset of the Bush administration, believing that industry could do anything better than government. The Pentagon was outsourced to such a ridiculous extent that contractors were performing oversight roles over other DoD contractors and working inside the Pentagon right next to the greatly diminished and much maligned government workers. Until recent events, it was hard to find anyone to criticize this new miracle of procurement.

This handing everything over to a company with minimal oversight is not new. For decades, various “miracles of procurement” were tried, including one of the worst examples in the late 1960s where the original C-5 cargo plane (which seems to have a rich history of failure to learn from at every level) contract gave Lockheed an unprecedented free hand with little oversight. Lockheed went hog wild on running up costs to make a profit, especially since their commercial jets were failing, and it led to huge overruns that required the Air Force to massively bail them out so they would not fail, yet Lockheed still had to go the federal government for another huge taxpayer bailout because of their commercial failures.

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Usually Wikipedia has articles on various DoD procurement schemes that are written in glowing terms with little dissention, but someone who clearly understands the PBL system went on the page for PBL and committed some truth with unusual straight talk:

Many times the results in employing a PBL strategy have resulted in either increased system performance issues and cost or sometimes both. Examples include the C17 PBL, FIRST, and PBtH. Ideally, the provider has more control over constituent elements that are used to generate the performance results. In reality, things don't always work out as planned. It has been said that PBL saves DOD 30, 40, even 50 billion per year which is many times the operating budgets for some of the services. The acronym “PBL” also can be applied synonymously to the term “Pretty Bad Logistics.” For expensive U.S. Department of Defense (DoD) sustainment programs, the PBL approach is finally being discouraged in favor of less expensive organic options. Once the acquisition programs money runs out the PBLs tend to collapse under their own weight.

I have been researching PBL for several weeks trying to figure out how the Army would have to pay that much for parts when Boeing was supposed to be given a sum of negotiated money to keep the system going and lose it if they bought too much of one part or didn't keep the planes going. One of my best sources in procurement law and contracting told me that I was overthinking the problem, trying to have it make sense based on what PBL was purported to be. He explained why in an email where I will keep his name anonymous to protect him from the wrath of the DoD. He wrote:

There is no relationship between the cost of the parts and the price charged based on PBL (if there is a relationship, I can't find it). For example, if the Army agreed that with zero hours of failure for a helicopter fleet it would pay a $1 million for a washer that cost 12 cents, that would be okay because the Army is paying for logistics readiness not the cost of the part per se. Obviously, this gets crazy because the definition of mission failure is usually related to the contractor having parts and support on hand (whether or not needed), not actual weapons systems readiness in terms of operational readiness, but rather logistics readiness.

The DoD has recently backed up the PBL system. Ashton B. Carter, under secretary of defense for acquisition, technology and logistics, signed a report in 2009 that supports the PBL procurement strategy. The report states, “there remains a strong consensus that an outcome-based, performance-oriented product support strategy is a worthy objective …”

So, even in the face of the IG investigation, it seems that the military services are hanging on to this newest procurement mess. The Army even told the DoD IG that they didn't think that Boeing should have to refund the six million dollars that the IG wanted back for overcharging on the spare parts.

But, surprisingly, the Air Force is bucking the DoD and the other services and wants out of the PBL system. According to two well-sourced articles in Flightglobal, the Air Force is yanking Boeing's PBL contract on the C-17 cargo plane and Lockheed Martin's PBL contract on the F-22 fighter. In the first article, Lockheed and Boeing are in shock and howling that they can't guarantee these planes will be able to stay in the air. But the article shows that PBLs are negotiated for several years at a time, which takes control of the logistics of the plane away from the Air Force, which is then at the mercy of the contractor, even in war. This smacks of the same problems the Army has had in the Iraq and Afghanistan wars with logistics contractors such as KBR, which took over troops logistics from traditional Army units. (If you are interested, I wrote a book about that.)

Both articles show several reasons the Air Force took such drastic steps. First, the Congress has required that 50 percent of the maintenance in DoD is to be done at government depots, because they like that this creates jobs. (Classic case of doing the right thing for the wrong reason, but we'll take the savings.) The Air Force knows it needs to meet this goal and, according to the second article, has found that using government depots are cheaper.

One of the things that the Air Force found so odious about the PBL system was that Lockheed and Boeing were buying parts from subcontractors and charging “pass through” costs that were way too high, just like the Army parts cited in the beginning of this article. Depots didn't charge high pass-through costs, so the Air Force wants them to buy directly from the vendors in the traditional way. Since the depots don't have to make a profit, but only need to be reimbursed for labor, materials and overhead, they aren't jacking up huge costs just to pass the parts through their system like the main contractors. (They can get a nut and bolt retainer for $6.77 while Boeing was charging $381.78 with their pass-through costs.)

The Boeing Vice President Gus Urzua, who was managing the expensive C-17 PBL, whined to Flightglobal that Boeing actually did something for that pass-through money and his reasoning gives one a glimpse into the contractors' silliness that usually works:

“I don't like the word 'pass-through' because it sounds like there is no value added,” says Gus Urzua, Boeing vice-president and programme manager of the C-17 Globemaster Sustainment Partnership, the name of the PBL deal since 2004. “We integrate, orchestrate. We make sure we don't sub-optimise the weapon system by being the integrator,” he says. “That is a value-added proposition.”

Another industry official, William Begert, vice president of military international programs for Pratt and Whitney Military Engines (they make the C-17 engines), also has cried foul and beelined his way back to the Air Force to try to talk sense to his Air Force general buddies. Why are they his buddies? Because he is a retired Air Force four-star general, who retired in 2005 after being in command of all the Air Force units in the Pacific. But, so far, even the revolving-door buddy system hasn't seemed to stop this change.

Part of this surprising change by the Air Force is because of the Obama administration's “change we want to believe in.” According to Flightglobal :

Last year, the Obama administration rolled out a plan to bring mostly white collar jobs held by contractors in-house, arguing that government employees could do the same work cheaper.

Also last year, Congress passed the Weapon System Acquisition Reform Act, which took particular aim at prime contractors functioning as integrators. The new law created a new role in every programme office called product support manager, ensuring the government retains the ability to integrate its own supply chains.

However, the new law was expected to apply to the development and production phases of the acquisition process, and the air force surprised industry by extending the policy to the sustainment phase.

The best proof I've seen that PBL was costing the government more was that, according to Flight International, the industry was fighting this so hard because eliminating more PBL contracts was “removing a key source for projected profit growth over the next decade.” If PBL was supposed to save the government so much money, why would it increase the contractors' profit?

So, the solution here? Keep going! The Air Force has bucked this system, probably because of pressure from the Congress and the Obama administration. Under Secretary of Defense Carter, the Navy and the Army need to also realize that PBL has all the wrong incentives, could hurt our readiness in wars and is costing us way too much, while the contractors are profiting. Handing contractors large sums of money without hands-on oversight is dumb and unrealistic. If they don't believe it, they should look at Lockheed Martin's corporate motto: “We never forget who we're working for.” Lockheed created that motto to make us think they are referring to the troops and the goals of the United States, but everyone should realize that they are, by law, supposed to be working for the corporate shareholders and maximizing their profits however they can. Anyone who buys into any other motive is unrealistic, silly, jaded or delusional. Most of the people in the Pentagon know what the contractors' end goal is, and they need to change this system, starting with making sure the remaining PBL contracts do their job for the troops and the taxpayers.

Note to readers: I have been doing a long series on DoD solutions because of the interest in cutting the Pentagon budget, getting deep into the weeds of military procurement to try to explain how the system works. I plan to start looking in other areas during the summer that are not as complicated. I'm planning a series on other areas of government as well as government solutions to the plight of our declining oceans. I would appreciate feedback via comments or email at [email protected] to get an idea of whether readers want more DoD stories (I still have a series on costs that I plan to do) or would prefer a summer reprieve from that and a look at other government solutions.