Contract Management: The Air Force Should Improve How It	 
Purchases AWACS Spare Parts (15-FEB-05, GAO-05-169).		 
                                                                 
Over the past several years, the Air Force has negotiated and	 
awarded more than $23 million in contracts to the Boeing	 
Corporation for the purchase of certain spare parts for its	 
Airborne Warning and Control System (AWACS) aircraft. Since they 
first became operational in March 1977, AWACS aircraft have	 
provided U.S. and allied defense forces with the ability to	 
detect, identify, and track airborne threats. In March 2003, GAO 
received allegations that the Air Force was overpaying Boeing for
AWACS spare parts. This report provides the findings of GAO's	 
review into these allegations. Specifically, GAO identified spare
parts price increases and determined whether the Air Force	 
obtained and evaluated sufficient information to ensure the	 
prices were fair and reasonable. GAO also determined the extent  
to which competition was used to purchase the spare parts.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-169 					        
    ACCNO:   A17696						        
  TITLE:     Contract Management: The Air Force Should Improve How It 
Purchases AWACS Spare Parts					 
     DATE:   02/15/2005 
  SUBJECT:   Air Force procurement				 
	     Aircraft components				 
	     Competitive procurement				 
	     Equipment contracts				 
	     Overpayments					 
	     Prices and pricing 				 
	     Spare parts					 
	     Airborne Warning and Control System		 
	     Sentry Aircraft					 
	     E-3 Aircraft					 

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GAO-05-169

                 United States Government Accountability Office

                     GAO Report to the Secretary of Defense

February 2005

CONTRACT MANAGEMENT

        The Air Force Should Improve How It Purchases AWACS Spare Parts

                                       a

GAO-05-169

[IMG]

February 2005

CONTRACT MANAGEMENT

The Air Force Should Improve How It Purchases AWACS Spare Parts

  What GAO Found

Since late 2001, the Air Force has spent about $1.4 million to purchase
three ailerons (wing components that stabilize the aircraft during
flight), $7.9 million for 24 cowlings (metal engine coverings), and about
$5.9 million for 3 radomes (protective coverings for the radar antennae).
The unit prices for the ailerons and cowlings increased by 442 percent and
354 percent, respectively, since they were last purchased in 1986. The
unit price of the radomes, purchased under two contracts, nearly doubled
from September 2001 to September 2003. Although some of the price
increases can be attributed to inflation, other factors, such as
re-establishing production processes and procuring limited quantities of
the parts, contributed more significantly to the increases. In addition,
the 2001 radome contract included about $8.1 million for Boeing to
relocate equipment and establish a manufacturing capability at a new
location.

The Federal Acquisition Regulation (FAR) requires contracting officers to
evaluate certain information when purchasing supplies and services to
ensure fair and reasonable prices. However, Air Force contracting officers
did not evaluate pricing information that would have provided a sound
basis for negotiating fair and reasonable prices for the spare parts.
Moreover, the Air Force did not adequately consider Defense Contract Audit
Agency (DCAA) and DCMA analyses of these purchases, which would have
allowed the Air Force to better assess the contractor's proposals. For
example, when purchasing ailerons, the Air Force did not obtain sales
information for the aileron or similar items to justify Boeing's proposed
price and did not consider DCMA analyses that showed a much lower price
was warranted. Instead, the contracting officer relied on a Boeing
analysis.

None of the spare parts contracts cited in the allegations were
competitively awarded-despite a DCMA recommendation that the cowlings be
competed to help establish fair and reasonable prices. The Air Force did
not develop alternate sources for competing the purchase of the cowlings
because it believed it lacked access to technical drawings and data that
would allow it to compete the purchase. Yet the Air Force has a contract
with Boeing that could allow the Air Force to order technical drawings and
data specifically for the purpose of purchasing replenishment spare parts.

E-3 Sentry AWACS Aircraft

Source: Boeing Corporation.

United States Government Accountability Office

Contents

Letter

Results in Brief
Background
Recent AWACS Parts Prices Are Significantly Higher Than Prior

Purchase Prices Air Force Did Not Obtain and Evaluate Information Needed
to

Negotiate Fair and Reasonable Prices No Competition Used for AWACS Spare
Parts Purchases Conclusions Recommendations for Executive Action Agency
and Company Comments and Our Evaluation 1

2 3

5

8 11 13 13 13

Appendix I Scope and Methodology

Appendix II Comments from the Department of Defense

Appendix III Comments from The Boeing Company

Table

Table 1: Summary of Contract Prices for Ailerons, Cowlings, and Radomes

Figures

Figure 1: E-3 Sentry AWACS Aircraft 4 Figure 2: Unit Price Increases for
Ailerons, Cowlings, and Radomes 7

Abbreviations EUR

AWACS Airborne Warning and Control System
DCAA Defense Contract Audit Agency
DCMA Defense Contract Management Agency
FAR Federal Acquisition Regulation
IFF identification friend-or-foe

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office Washington, DC 20548

February 15, 2005

The Honorable Donald H. Rumsfeld Secretary of Defense

Dear Mr. Secretary:

For more than 25 years, the Air Force's Airborne Warning and Control
System (AWACS) aircraft have provided U.S. and allied defense forces with
the ability to detect, identify, and track enemy threats. The E-3 Sentry
AWACS airplanes, with their large rotating radar domes, have provided
critical surveillance information for carrying out military and
peacekeeping operations. Over the past several years, the Air Force has
negotiated and awarded more than $23 million in contracts to the Boeing
Corporation for the purchase of certain spare parts to maintain the Air
Force's AWACS fleet.

In March 2003, we received allegations that the Air Force was overpaying
the Boeing Corporation for AWACS spare parts.1 This report provides the
findings of our review into these allegations. Specifically, we (1)
identified the price increases associated with the ailerons, cowlings, and
radomes; (2) determined whether the Air Force obtained and evaluated
sufficient information to ensure that the spare parts prices were fair and
reasonable;2 and (3) determined the extent to which competition was used
to purchase the parts.

To conduct our review, we examined contract files and met with Air Force
and Boeing representatives. We also reviewed analyses and information
provided to the Air Force by the Defense Contract Management Agency
(DCMA), the Defense Contract Audit Agency (DCAA), and Boeing. We

1 GAO received allegations regarding the Air Force's purchases of cowlings
(metal engine coverings) and outboard ailerons (wing assembly components
that stabilize the aircraft during flight). We also reviewed the Air
Force's purchases of radomes (coverings that protect radar antennae)
because, during our review, we became aware of a similar allegation
concerning overpricing of a radome.

2 The pricing policy in the Federal Acquisition Regulation (FAR) provides
that the contracting officers must purchase supplies and services from
responsible sources at fair and reasonable prices [FAR Subpart 15.4].

  Results in Brief

conducted our review from August 2003 to November 2004 in accordance with
generally accepted government auditing standards. A more detailed
discussion of our scope and methodology is in appendix I.

Since late 2001, the Air Force has purchased three ailerons for about $1.4
million, 24 cowlings for about $7.9 million, and three radomes (under two
contracts) for about $5.9 million. The unit prices for the ailerons and
cowlings increased by 442 percent and 354 percent, respectively, since
they were last purchased in 1986. The unit price of the radomes also
increased significantly. The unit price of the radome nearly doubled from
a purchase in September 2001 to a purchase in September 2003. Several
factors, such as re-establishing production processes and procuring
limited quantities of the parts, contributed to the price increases.
Although a portion of the price increases could be attributed to
inflation, this portion was small. The Air Force paid an additional $8.1
million in costs as part of the September 2001 radome contract to move
equipment and establish manufacturing capabilities in a new location.

Although some price increases could be expected, contracting officers did
not take appropriate steps to ensure that the prices paid for the
ailerons, cowlings, and radomes were fair and reasonable. Specifically,
the Federal Acquisition Regulation (FAR) requires contracting officers to
obtain and evaluate information when purchasing supplies and services to
ensure that prices are fair and reasonable. We found that Air Force
contracting officers did not obtain and evaluate appropriate pricing
information that would have provided a sound basis for negotiating fair
and reasonable prices for the spare parts. Moreover, the Air Force did not
adequately consider DCAA and DCMA analyses of these purchases, which would
have allowed the Air Force to better assess the contractor's proposals.
For example, when purchasing ailerons, the Air Force contracting officer
did not obtain sales information for the aileron or similar items to
justify Boeing's proposed price; this type of information would normally
be obtained because the ailerons were considered a commercial item. In
addition, the contracting officer did not act on DCMA analyses that showed
a much lower price was warranted. Instead, the contracting officer relied
on a Boeing judgmental analysis to support Boeing's proposed price. In
another case, the contracting officer for the purchase of the two radomes
did not consider the price of a recently acquired radome, nor did the
contracting officer obtain and evaluate information from Boeing that
supported the company's proposed price or obtain analysis from DCMA.

None of the spare parts covered by the allegations were purchased
competitively. According to Air Force documents, Boeing was the sole
source for the spare parts. However, DCMA's analysis recommended that the
cowlings be competed because Boeing's proposed price was not fair and
reasonable and a subcontractor had provided the part under the original
production contracts. Despite the recommendation, the Air Force did not
attempt to develop alternate sources for competing the purchase of the
cowlings because it believed it lacked the required information to do so.
From the outset, Air Force documents stated that the Air Force did not
have access to drawings and technical data that would allow it to compete
the purchase. The Air Force and Boeing have entered into a contract, which
could allow the Air Force to order drawings for the purpose of purchasing
replenishment spare parts. Boeing has not always delivered such data based
on uncertainties concerning the Air Force's rights to the data.

We are making recommendations to ensure appropriate information and
analyses are obtained and evaluated to help ensure that fair and
reasonable prices are negotiated in non-competitive procurements and to
promote competition to the maximum extent practicable in future purchases
of spare parts. DOD and The Boeing Company commented on a draft of this
report. In its comments, DOD agreed with GAO's recommendations and
identified actions it plans to take to implement the recommendations. In
its comments, The Boeing Company provided information that augments the
information in the report and provides its perspective on the AWACS
purchases.

Background 	The AWACS aircraft first became operational in March 1977, and
as of November 2004, the U.S. AWACS fleet was comprised of 33 aircraft.
The aircraft provides surveillance, command, control, and communications
of airborne aircraft to commanders of air defense forces. The onboard
radar, combined with a friend-or-foe identification subsystem, can detect,
identify, and track in all weather conditions enemy and friendly aircraft
at lower altitudes and present broad and detailed battlefield information.

The AWACS airplane is a modified Boeing 707 commercial airframe with a
rotating radar dome (see fig. 1). The ailerons and cowlings are similar to

commercial 707 parts but were modified for special requirements.3 The
AWACS radome is the covering that provides housing for the airplane's
radar and friend-or-foe (IFF) identification system. Half of the radome
covers the radar and half covers the IFF system and each has a different
make-up in its composition. The Air Force purchased only the IFF section
of the radome in the two separate purchases.

In the past, the Air Force has generally repaired, rather than purchased,
the ailerons, cowlings, and radomes but recently had to purchase new parts
to meet operational requirements. Prior to the recent spare parts
purchases, the ailerons and cowlings had not been purchased since the
mid-1980s, and the last radome unit had not been purchased since 1998.

                      Figure 1: E-3 Sentry AWACS Aircraft

                          Source: Boeing Corporation.

All of the spare parts were purchased as noncompetitive negotiated
procurements. The Federal Acquisition Regulation (FAR) provides guidance
for the analysis of negotiated procurements with the ultimate

3 The cowlings were modified to accommodate AWACS' engines, which have a
special gearbox that drives two electrical generators instead of one-the
standard configuration for the 707. The AWACS' ailerons have differences
in the paint as well as hardness requirements for certain fasteners.

goal of establishing fair and reasonable prices for both the government
and contractor. For a noncompetitive purchase,4 the contract price is
negotiated between the contractor and government and price reasonableness
is established based primarily on cost data submitted by the contractor.
The ailerons were also purchased as a commercial item. For a commercial
item,5 price reasonableness is established based on an analysis of prices
and sales data for the same or similar commercial items.

For the AWACS spare parts purchases we reviewed, DCMA provided technical
assistance to the Air Force by analyzing labor hours, material and
overhead costs, and contract prices.6 DCAA provided auditing and cost
accounting services. DCMA and DCAA analyses were submitted to the Air
Force prior to contract negotiations for the respective purchases.

  Recent AWACS Parts Prices Are Significantly Higher Than Prior Purchase Prices

Since late 2001, the Air Force has negotiated and awarded contracts to
Boeing for the purchase of outboard ailerons, cowlings, and radomes
totaling over $23 million. Specifically, the Air Force purchased three
ailerons for about $1.4 million, 12 right-hand cowlings and 12 left-hand
cowlings for about $7.9 million, and three radomes for about $5.9 million.
The Air Force paid an additional $8.1 million in costs as part of the
initial radome contract to move equipment and establish manufacturing
capabilities in a new location (see table 1).

4 FAR Subpart 15.4 provides policies and procedures for negotiating
noncompetitive procurements. Under a negotiated procurement, the
contractor submits a proposal to the government with its proposed costs
and profit as well as cost or pricing data that support its proposed
price. The government and contractor negotiate costs and profit (to
determine the overall price) based on the contractor's full disclosure of
data supporting the proposed price.

5 FAR Part 12 relates to the procurement of commercial items and refers to
FAR Subpart 15.4, which provides contracting officers with guidance for
performing a price analysis to compare the contractor's price with its
commercial prices for the same or similar items, also referred to as a
commercial item equivalent. If the contracting officer cannot determine
whether an offered price is fair and reasonable, then the contracting
officer must require the contractor to submit other information to support
further analysis.

6 During the negotiations, the Air Force was represented by negotiation
teams, which generally included a contracting officer, negotiator, and
price analyst.

Table 1: Summary of Contract Prices for Ailerons, Cowlings, and Radomes

                       Contract                Unit      Other Total contract 
         Spare part      awarda Quantity      price      costs          price 
           Ailerons  April 2003         3  $464,133          0     $1,392,399 
          bCowlings   Sept 2003        24   329,203          0      7,900,881 
           cRadomes Sept. 2001          1 1,200,000 $8,100,546      9,300,546 
                    Sept. 2003          2 2,342,500          0      4,685,000 

Source: GAO analysis of Air Force data.

aThe ailerons, cowlings, and September 2003 radome contracts were
firm-fixed-price contracts. The September 2001 radome contract was a
cost-plus-fixed-fee contract, which is a cost reimbursable contract that
provides for the payment to the contractor of a negotiated fee fixed at
the inception of the contract.

bThe unit price represents the average unit price for the left hand and
right hand cowlings. The 12 right hand cowlings were purchased at a unit
price of $321,743 and 12 left hand cowlings were purchased at $336,664.

cThe unit price for the September 2001 radome represents the contracting
officer's estimated price for the radome.

The most recent per unit cost of each part represents a substantial
increase from prior purchases. The overall unit cost of the ailerons and
cowlings increased by 442 percent and 354 percent, respectively, since
they were last purchased in 1986. The unit price for the one radome
purchased under the September 2001 contract increased by 38 percent since
it was last purchased in 1998, and the unit price nearly doubled two years
later under the September 2003 contract. Overall, only a small portion of
the price increases could be attributed to inflation.7 Figure 2 shows the
unit price increases, including adjustments for inflation, for ailerons,
cowlings, and radomes.

7 A portion of the price increases can be attributed to inflation-the
effects of which would be greatest for the ailerons and cowlings, last
purchased in 1986. Based on published escalation factors for the aircraft
equipment industry, the 1986 prices for the ailerons and cowlings could
have increased by about 46 percent by 2003, yet the unit cost of the
ailerons and cowlings increased by 442 percent and 354 percent,
respectively. Based on escalation factors, the 1998 price for the radomes
could have increased by about 4 percent; yet, the unit cost for the radome
under the September 2001 contract increased by 38 percent. The escalation
from 2001 to 2003, when the next radome contract was awarded, was only 1
percent, but the unit price nearly doubled.

       Figure 2: Unit Price Increases for Ailerons, Cowlings, and Radomes

In thousands 2,500

2,000

1,500

1,000 500 0

                      Aileron Cowlings FirstRadome Radome

Price paid over escalated price

Escalated amount

Prior purchase price

Source: GAO analysis of AIr Force data.

The Air Force and Boeing cited a number of additional factors that may
have contributed to higher prices. For all the parts, the Air Force
purchased limited quantities, which generally results in higher unit
prices. For the ailerons, which had not been purchased since 1986, Boeing
officials told us that some of the price increase was attributable to
production inefficiencies that would result from working with older
technical drawings, developing prototype manufacturing methods, and using
different materials in the manufacturing process. The unit price of the
cowlings included costs for the purchase of new tools required to
manufacture the cowlings in-house-which Boeing decided to do rather than
have vendors manufacture the cowlings, as had been done in the

past. The new tools included items such as large production jigs, used to
shape and fabricate sheet metal.8 Regarding radomes, the Air Force paid
Boeing to relocate tooling and equipment from Seattle, Washington, to
Tulsa, Oklahoma, and develop manufacturing capabilities at the Tulsa
facility to produce and repair radomes. Boeing had initially decided to
discontinue radome production and repair at its Seattle location due to
low demand for these parts but, after further consideration of the Air
Force's requirements, decided to relocate the capability in Tulsa. The
first radome contract the Air Force awarded Boeing included over $8.1
million to relocate the tooling and equipment and set up the manufacturing
process. The remaining $1.2 million was the estimated production cost of
the one radome.9

In negotiating contracts for the outboard ailerons, cowlings, and radomes,
the Air Force did not obtain and evaluate information needed to
knowledgeably assess Boeing's proposals and ensure that the spare parts
prices were fair and reasonable. In general, the Air Force did not obtain
sufficient pricing information for a part designated a commercial item,
adequately consider DCAA and DCMA analyses of aspects of contractor
proposals, or seek other pricing information that would allow it to not
only determine the fairness and reasonableness of the prices but improve
its position for negotiating the price.

  Air Force Did Not Obtain and Evaluate Information Needed to Negotiate Fair and
  Reasonable Prices

    Pricing Information Not Sought for Commercial Item to Ailerons

Boeing asserted that the aileron assembly was a commercial item. Under
such circumstances, fair and reasonable prices should be established
through a price analysis, which compares the contractor's proposed price
with commercial sales prices for the same or similar items. However, when
purchasing the ailerons, the Air Force did not seek commercial sales
information to justify the proposed price. Instead, the Air Force relied
on a

8 After the contract was awarded, the purchase of new tooling was not
necessary because Boeing located tooling used in the initial production of
the cowlings. See the discussion of this issue on page 10.

9 The contract included only one line item that covered costs for (1)
producing the radome and (2) relocating equipment and establishing a
manufacturing capability. Therefore, the contract did not include a
separate estimate of the production cost of the radome. The$1.2 million
estimate was included in documentation provided by the Air Force
contracting officer who negotiated the contract.

judgmental analysis prepared by Boeing, which was not based on the
commercial sales of the same or similar aileron.10

In reviewing the contractor's submissions of data to the government, both
DCMA and DCAA found Boeing's proposal inadequate for the Air Force to
negotiate a fair and reasonable price. DCMA performed a series of analyses
on the purchase of the aileron assembly, each of which indicated that
Boeing's proposed unit price was too high. Boeing proposed in November
2002 to sell three aileron assemblies for $514,472 each. Subsequently,
DCMA performed three separate price analyses, which indicated that
Boeing's price should be in the $200,000 to $233,000 range. However, the
Air Force negotiation team did not discuss these analyses with Boeing
during negotiations or include them as part of the Air Force's price
negotiation documentation.11 In January 2003, DCAA reported that the
proposed price was "unsupported" and that Boeing did not comply with the
Boeing Estimating System Manual, which requires support for commercial
item prices. Further, the report said that Boeing must submit cost
information and supporting documentation. The Air Force never addressed
DCAA's concerns. Instead, the Air Force relied on the analysis prepared by
Boeing and paid $464,133 per unit.

The price analyst involved with the negotiation said that, in retrospect,
the Air Force should have sought commercial sales information from Boeing,
citing this purchase as his first experience with a commercial item. We
asked Boeing to provide historical sales information of the same or
commercial equivalent item to use as a general benchmark on price
reasonableness of the ailerons purchased by the Air Force. According to
Boeing representatives, the requested data were not available because the
military version of the ailerons had not been produced for over 20 years.

10 Normally the Air Force would conduct its own price analysis. However,
in January 2003, Boeing prepared an analysis for the Air Force. Boeing's
price analysis showed "significantly higher" prices than those included in
Boeing's final proposal. In our view, Boeing's analysis was not reasonably
supported. For example, the price of the item purchased in 1986 ($85,602)
was (1) escalated using escalation factors to arrive at a 2003 value
($196,200), (2) adjusted for a quantity of three aileron assemblies, and
(3) adjusted again for production inefficiencies. For these
inefficiencies, Boeing used a factor of 3.5 to account for having to work
with older drawings, planning prototype manufacturing methods, dealing
with material differences, and adjusting for other non-production
conditions. Boeing was not able to provide a sound basis for the 3.5
adjustment factor.

11 FAR 15.405 concerning price negotiation provides that when significant
auditor or other specialist recommendations are not adopted, the
contracting officer should provide rationale that supports the negotiation
result in the price negotiation documentation.

Boeing representatives agreed that the Boeing analysis was subjective, but
they said the analysis represented the best estimate based on their
assumptions and limitations.

    Air Force Did Not Act on DCMA's Recommendation to Investigate the Use of
    Existing Tools for Cowlings

When negotiating the purchase price for the cowlings, the Air Force again
did not use information provided by DCMA or address DCMA's recommendation
that it determine the availability and potential use of existing tools to
manufacture the cowlings. Included in the $7.9 million contract for
cowlings, Boeing proposed and the Air Force awarded about $1.1 million for
the purchase of new tools, such as large production jigs, associated with
the manufacture of the cowlings. However, DCMA had recommended in its
initial evaluation of Boeing's proposal that the Air Force give qualified
offerors an opportunity to inspect the condition of cowling tools used in
prior manufacturing for their applicability and use in fabricating the
cowlings. DCMA pointed out that the tools were located at Davis-Monthan
Air Force Base in Arizona, where government-owned tooling is often stored
when no longer needed for production. However, the Air Force did not
accurately determine the existence and condition of the tools.12

Subsequent to the contract award, Boeing-not the Air Force- determined
that extensive government-owned tooling was available at Davis-Monthan and
got approval, in May 2004, to use the tools in manufacturing the cowlings.
As a result, the cowlings contract included unnecessary tool purchase
costs when it was awarded. Air Force and Boeing officials anticipated a
contract modification would be submitted to reduce the price as a result
of using the existing tools.

Cost Information from A significant portion of the September 2001
cost-plus-fixed fee contract
Recent Radome Purchase that the Air Force awarded to Boeing to purchase
one radome unit
Not Considered involved relocating tools and equipment and establishing a
manufacturing

process at Tulsa. Specifically, over $8.1 million of the contract, which
was valued at about $9.3 million, was spent to move equipment and
establish a manufacturing process at the Tulsa facility; the price of
producing the

12 Air Force price negotiation documents said that the Air Force had
reviewed the availability of government-owned equipment. The documents
said that the tools had deteriorated and were no longer serviceable, and
the cost of refurbishment was considered comparable to current proposed
estimates for new tools. However, the information in the negotiation
documents was inaccurate.

one radome unit was about $1.2 million. About 19 months later, in
April 2003, at the Air Force's request, Boeing provided a proposal to
produce two additional radomes at the Tulsa facility, and in
September 2003, the Air Force awarded a contract to Boeing to produce
the two radomes at over $2.3 million per unit-almost twice the 2001
unit price.

Based on our analysis, the Air Force did not obtain adequate data to
negotiate a fair and reasonable price for the second radome contract.
First, the Air Force requested a DCMA analysis of Boeing's proposal, but,
in late June 2003, DCMA told the Air Force price analyst that, for an
unexplained reason, DCMA did not receive the request for assistance; the
price analyst then determined that he would waive the technical
evaluation, which would forego the benefit of DCMA's technical expertise.
Second, and most importantly, the Air Force did not consider Boeing's
costs under the September 2001 contract, which would have provided
important information to help the Air Force determine if it was obtaining
a
fair and reasonable price for the radomes.

  No Competition Used for AWACS Spare Parts Purchases

In addition to encouraging innovation, competition among contractors can
enable agencies to compare offers and thereby establish fair and
reasonable prices and maximize the use of available funds. The Air Force
determined that Boeing was the sole source for the parts and did not seek
competition. However, a DCMA analysis had determined that Boeing's
proposed price for the engine cowlings was not fair and reasonable and,
because a subcontractor provided the part in support of the original
production contracts, recommended that the cowlings be competed among
contractors.

From the outset of the cowlings purchase, Air Force documents said that
the Air Force did not have access to information needed to compete the
part. However, the Air Force has a contract with Boeing that could allow
the Air Force to order drawings and technical data for the AWACS and other
programs for the purpose of competitively purchasing replenishment spare
parts.13 Nevertheless, Boeing has not always delivered AWACS data based on
uncertainties over the Air Force's rights to the data. Based on
discussions with Air Force representatives, Boeing has been reluctant to

13 Contract No. F34601-02-D-0082, Rights Guard for Other Aircraft Parts
and Auxiliary Equipment Manufacturing, dated July 1, 2002.

provide data and drawings in the past, making it difficult for the Air
Force to obtain them. Moreover, Boeing maintains that it owns the rights
to the technical data and drawings and the Air Force could not use the
drawings to compete the buy without Boeing's approval.

It is unclear if the AWACS program office had placed a priority on
fostering competition for the cowlings and other spare parts.
Representatives of the AWACS spare parts program office at Tinker Air
Force Base cited a number of concerns in purchasing the spare parts from
vendors other than Boeing. First, they said that the need for these spare
parts had become urgent and noted that other vendors would have to pass
certain testing requirements, which could be a lengthy process, and that,
even with this testing, performance risks and delivery delays were more
likely to occur. An overriding concern was that the Air Force establish a
good relationship with reliable parts providers, such as Boeing. Program
office officials told us that the Air Force would likely be better served
in the long run by staying with a reliable supplier rather than competing
the parts.

In contrast, senior contracting officials at Tinker-who have oversight
responsibilities for the contracting activities that support the AWACS
program-have a different point of view. These officials were concerned
about the large price increases on AWACS spare parts and the lack of
competition. They stated that the Air Force is a "captured customer" of
Boeing because the company is the only source for many of the parts needed
to support aircraft manufactured by Boeing, such as the AWACS. According
to these senior contracting officials, during the last several years
Boeing has become more aggressive in seeking higher profits regardless of
the risk involved with the purchase. For example, they told us that, even
when the risk to the company is very low, the company is seeking at least
a 3-to 5-percent higher fee than in the past. As a result, contracting
officers have had to elevate some negotiations to higher management levels
within the Air Force. They also said that, without the ability to compete
spare parts purchases, the Air Force is in a vulnerable position in
pricing such contracts. Earlier in 2004, Boeing and the senior Air Force
contracting officials involved with the aircraft programs managed at
Tinker began a joint initiative to work on various contracting issues.
Concerning data rights, these contracting officials told us that in future
weapon systems buys, the Air Force must ensure that it obtains data rights
so that it can protect the capability to later compete procurements of
spare parts.

Conclusions

Recommendations for Executive Action

The Air Force needs to be more vigilant in its purchases of spare parts.
The AWACS parts purchases we reviewed illustrate the difficulty of buying
parts for aircraft that are no longer being produced as well as buying
them under non-competitive conditions. A key problem was that the Air
Force did not take appropriate steps to ensure that the prices paid were
fair and reasonable. It did not obtain and evaluate information that
either should have been available or was available to improve its
negotiating position. It did not attempt to develop other sources to
purchase the spare parts and promote competition. And, it did not have a
clear understanding of its rights to technical data and drawings, which
are necessary to carry out competitive procurements. As the AWACS
aircraft-like other Air Force weapon systems-continue to age, additional
spare parts will likely be needed to keep them operational. Given the
significant price increases for the ailerons, cowlings, and radomes, the
Air Force needs to look for opportunities to strengthen its negotiating
position and minimize price increases. Clearly, competition is one way to
do this. Unless the Air Force obtains and evaluates pricing or cost
information and/or maximizes the use of competition, it will be at risk of
paying more than fair and reasonable prices for future purchases of spare
parts.

To improve purchasing of AWACS spare parts, we recommend that the
Secretary of Defense direct the Secretary of the Air Force to

o  	ensure that contracting officers obtain and evaluate available
information, including analyses provided by DCAA and DCMA, and other data
needed to negotiate fair and reasonable prices;

o  	develop a strategy that promotes competition, where practicable, in
the purchase of AWACS spare parts; and

o  	clarify the Air Force's access to AWACS drawings and technical data
including the Air Force's and Boeing's rights to the data.

  Agency and Company Comments and Our Evaluation

We received written comments on a draft of this report from DOD and The
Boeing Company.

In its comments, DOD concurred with GAO's recommendations and identified
actions it plans to take to implement the recommendations. DOD's comments
are included in appendix II. DOD also provided technical comments, which
we incorporated into the report as appropriate.

In its comments The Boeing Company provided information that augments the
information in the report and provides the company's perspective on

the AWACS purchases. With respect to the prices the Air Force paid for the
spare parts, Boeing provided more detailed information to explain the
costs associated with each part. However, the information Boeing provided
did not change our conclusion that the Air Force did not obtain and
evaluate sufficient information to establish fair and reasonable prices.
The company also noted that it has worked with Air Force representatives
to address issues associated with higher profits and, as of January 2005,
was working with the Air Force to address issues associated with access to
AWACS technical drawings and data. The Boeing Company's comments are
included in appendix III.

We are sending copies of this report to the Secretaries of the Air Force,
the
Army, and the Navy; appropriate congressional committees; and other
interested parties. We will also provide copies to others on request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staff has questions concerning this report, please contact
me
at (202) 512-4841 or by e-mail at [email protected], or James Fuquay at
(937) 258-7963. Key contributors to this report were Ken Graffam, Karen
Sloan, Paul Williams, and Marie Ahearn.

Sincerely yours,

David E. Cooper
Director
Acquisition and Sourcing Management

                       Appendix I: Scope and Methodology

To identify price increases associated with the ailerons, cowlings, and
radomes, we reviewed Air Force contracting files and we held discussions
with members of the Air Force involved in each purchase, which included
contracting officers, negotiators, and price analysts. These officials
were located at Tinker Air Force Base, Oklahoma, the location of the
Airborne Warning and Control System (AWACS) spare parts program office-the
E3 Systems Support Management Office. To account for the impact of
inflation, we used published escalation factors for aircraft parts and
auxiliary equipment to escalate prices previously paid for the parts to a
price that would have been expected to be paid if the prices considered
the effects of inflation.

To determine whether the Air Force contracting officers obtained and
evaluated sufficient information to ensure that Boeing's prices were fair
and reasonable, we held discussions with the Defense Contract Management
Agency (DCMA) representatives and obtained copies of reports and analyses
prepared by DCMA and Defense Contract Audit Agency (DCAA). We reviewed Air
Force contracting files and held discussions with Air Force officials that
negotiated the respective purchases, which included contracting officers,
negotiators, and price analysts. We also held discussions with
representatives of Boeing and visited Boeing production facilities in
Tulsa, Oklahoma. The Boeing officials represented several Boeing divisions
involved in the purchases including Boeing's military division (Boeing
Aircraft and Missiles, Large Aircraft Spares and Repairs), which had
responsibility for negotiating all of the spare parts purchases. Boeing
Aerospace Operations, Midwest City, Oklahoma, had contract management
responsibility for the purchases.

To determine the extent that competition was used to purchase the parts,
we reviewed Air Force contracting files and held discussions with members
of the Air Force involved in each purchase, which included contracting
officers, negotiators, and price analysts. We also held discussions with
representatives of the AWACS spare parts program office and senior
contracting officials responsible for overseeing contracting activities at
Tinker Air Force Base, Oklahoma.

We conducted our review from August 2003 to November 2004 in accordance
with generally accepted government auditing standards.

Appendix II: Comments from the Department of Defense

Appendix II: Comments from the Department of Defense

Appendix III: Comments from The Boeing Company

Appendix III: Comments from The Boeing Company

Appendix III: Comments from The Boeing Company

Appendix III: Comments from The Boeing Company

Appendix III: Comments from The Boeing Company

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