Defense Inventory: DOD and Prime Contractors Adhered to 	 
Requirements in Selected Contracts for Overseeing Spare Parts	 
Quality (20-DEC-04, GAO-05-73). 				 
                                                                 
In the 2004 Defense Appropriations Act, Congress mandated that	 
GAO examine and report on the oversight of prime contractors by  
the Department of Defense (DOD) and the oversight of		 
subcontractors by the prime contractors. Contract quality	 
assurance oversight is intended to assess whether contractors are
capable of and are providing supplies or services that meet	 
contract quality and technical requirements. Providing effective 
oversight is challenging. DCMA recognizes that the risk of	 
nonconforming parts reaching end users exists, given the	 
diversity of contracts, parts, and products used to meet weapon  
systems requirements and uses a risk management process to guide 
its efforts. For fiscal year 2003, government quality assurance  
oversight was required for approximately 273,000 contracts. GAO  
determined (1) whether DOD provided quality assurance oversight  
and enforcement over its spare parts prime contractors, (2) if	 
prime contractors provided quality assurance oversight over their
subcontractors, and (3) how DOD held prime contractors		 
accountable for overseeing the subcontractors' work. To address  
these objectives, GAO judgmentally selected and reviewed 15	 
contracts awarded to 11 prime contractors by the services and the
Defense Logistics Agency. In commenting on a draft of this	 
report, DOD provided one technical comment, which GAO		 
incorporated as appropriate.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-73						        
    ACCNO:   A14658						        
  TITLE:     Defense Inventory: DOD and Prime Contractors Adhered to  
Requirements in Selected Contracts for Overseeing Spare Parts	 
Quality 							 
     DATE:   12/20/2004 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Contract oversight 				 
	     Department of Defense contractors			 
	     Prime contractors					 
	     Quality assurance					 
	     Reporting requirements				 
	     Subcontractors					 
	     Spare parts					 

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GAO-05-73

     

     * Results in Brief
     * Background
          * DOD's Quality Assurance Oversight for Contracts I
     * DCMA Provided Quality Assurance Oversight and Enforcement over
       Contractors
          * DCMA Used Three Types of Inspections to Perform Quality Assurance
            Oversight over Contractors
          * DCMA Adhered to the Federal Acquisition Regulatio
          * Enforcement of Spare Parts Quality and Safety du
     * Prime Contractors Adhered to Industry Standards i
     * DCMA Held Prime Contractors Accountable by Requir
     * Concluding Observations
     * Agency Comments and Our Evaluation
     * Appendix I: Scope and Methodology
     * Appendix II: DCMA Offices and Contractors Reviewed
     * Appendix III: Comments from the Department of Defense
     * Appendix IV: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Acknowledgments
               * Order by Mail or Phone
     * cover4.pdf
          * http://www.gao.gov

                 United States Government Accountability Office

Report to the Senate and House Subcommittees on Defense, Committees on
Appropriations

December 2004

DEFENSE INVENTORY

  DOD and Prime Contractors Adhered to Requirements in Selected Contracts for
                         Overseeing Spare Parts Quality

                                       a

GAO-05-73

DEFENSE INVENTORY

DOD and Prime Contractors Adhered to Requirements in Selected Contracts
for Overseeing Spare Parts Quality

  What GAO Found

GAO's review of the 15 contracts showed that quality assurance personnel
within the Defense Contract Management Agency (DCMA)-DOD's primary
organization for providing quality assurance oversight-generally followed
established policies, guidance, regulations, and contract requirements in
performing oversight and enforcement over spare parts prime contractors.
This oversight ranged from conducting physical inspection of parts, such
as testing the measurements and functions of a part to evaluating
contractor production processes to observing the outer appearance and
counting the number of parts for compliance with contract requirements.
When one of the prime contractor's processes and another contractor's
parts did not meet contract requirements, DCMA used its enforcement system
by issuing requests for corrective action by the prime contractors.

GAO found that the 11 prime contractors reviewed provided quality
assurance oversight over their subcontractors' work in accordance with
industry standards and contract requirements. The contractors used at
least two and up to four methods in providing quality assurance oversight
over their subcontractors. These methods included evaluating potential
subcontractors for placement on an Approved Supplier List, requiring
certifications of parts and processes, testing parts and processes, and
tracking and monitoring subcontractor's performance. The primary methods
of oversight were evaluating subcontractors for placement on an Approved
Supplier List and requiring certifications that parts and processes
conform to contractual specifications. Establishing an Approved Supplier
List served to identify subcontractors capable of producing needed parts
or processes in accordance with industry standards and contractual
specifications.

In GAO's review of the 15 contracts, DCMA held prime contractors
accountable for their subcontractors' work by requiring that the prime
contractors adhere to contract clauses concerning oversight
responsibility. Most of the contracts included either clauses stating that
the prime contractor shall provide supplies that conform to contract
requirements or clauses related to other quality requirements. When
nonconformance was reported, DCMA quality assurance personnel and the
prime contractor determined if the deficiency was due to contractor
nonconformance and assigned responsibility for corrective action. GAO
identified one deficiency from the 15 contracts that the prime contractor
was responsible for and DCMA held the prime contractor accountable for the
part.

While GAO did not identify any major deficiencies from the contracts and
practices it reviewed, GAO recognizes that the risk of nonconforming spare
parts reaching end users exists. Compliance by contractors, DCMA, and
other DOD agencies with established internal controls helps mitigate
against this risk.

                 United States Government Accountability Office

Contents

  Letter 1

Results in Brief 4 Background 6 DCMA Provided Quality Assurance Oversight
and Enforcement

over Contractors 7 Prime Contractors Adhered to Industry Standards in
Providing

Quality Assurance Oversight over Subcontractors 12 DCMA Held Prime
Contractors Accountable by Requiring

Adherence to Contract Clauses 14 Concluding Observations 16 Agency
Comments and Our Evaluation 17

Appendix I Scope and Methodology

Appendix II DCMA Offices and Contractors Reviewed

Appendix III Comments from the Department of Defense

Appendix IV GAO Contact and Staff Acknowledgments

  Tables

Table 1: Types of Inspections Performed by DCMA Quality Assurance
Specialists for the Contractors We Reviewed 8 Table 2: Methods of Quality
Assurance Oversight over Subcontractors Provided by the Prime Contractors
We Reviewed 12

Abbreviations

DCMA                                    Defense Contract Management Agency 
DLA                    Defense Logistics Agency                            
DOD                    Department of Defense                               

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
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separately.

United States Government Accountability Office Washington, DC 20548

December 20, 2004

The Honorable Ted Stevens Chairman The Honorable Daniel Inouye Ranking
Minority Member Subcommittee on Defense Committee on Appropriations United
States Senate

The Honorable Jerry Lewis Chairman The Honorable John Murtha Ranking
Minority Member Subcommittee on Defense Committee on Appropriations House
of Representatives

Military personnel rely upon weapon systems such as aircraft and tanks to
successfully perform their missions on the battlefield. These systems
contain numerous individual parts and assemblies produced by many
different contractors and subcontractors. For example, an engine for an
F-15 aircraft has approximately 16,000 parts and 1,600 different part
numbers. 1 Although there is one prime contractor responsible for
producing this engine, there are numerous subcontractors supplying the
parts and assemblies required to build the engine under numerous
contracts, and quality assurance is required throughout the production
process. While the military services' contracting offices oversee a small
percentage of the Department of Defense's (DOD) contracts for acquiring
the parts, the Defense Contract Management Agency (DCMA), through its
quality assurance specialists, provides quality assurance oversight over
the majority of these contracts. Quality assurance oversight is defined as
the various functions, including inspections, performed to determine
whether a contractor has fulfilled the contractual obligations related to
quality and quantity. This oversight is intended to assess whether
contractors are

1

A part number is a combination of numbers, letters, and symbols assigned
by a designer and used by a manufacturer or vendor to identify a specific
part or item of material.

    Page 1 GAO-05-73 Defense Inventory

capable of and are providing supplies or services that meet contract
quality and technical requirements.

Providing effective oversight is challenging, and DCMA recognizes that the
risk of nonconforming parts reaching end users exists, given the diversity
of contracts, parts, and products used to meet weapon systems
requirements. For fiscal year 2003, DCMA was responsible for performing
government quality assurance oversight over approximately 273,000 contract
actions. 2 To help mitigate risks inherent with spare parts acquisitions,
DOD developed a risk management guide that discusses risk and risk
management, examines risk management concepts, and provides a practical
reference for dealing with acquisition risk. DCMA used this guide in
developing its Risk Assessment and Management Program that is used to
assess the risk of a contractor providing nonconforming parts. According
to DCMA officials, for the majority of spare parts prime contractors that
had contracts requiring oversight by DCMA and used subcontractors in
providing the parts, DCMA relied upon the prime contractors to oversee
their subcontractors. In accordance with the Federal Acquisition
Regulation, DCMA is only responsible for providing quality assurance
oversight over subcontractors when required to do so in the government's
interest. When DCMA provides quality assurance oversight over
subcontractors, the prime contractor is not relieved of any quality
assurance oversight responsibilities under the contract.

This report responds to the mandate in section 8143 of the 2004 Defense
Appropriations Act that GAO examine and report on the oversight of prime
contractors by DOD and the oversight of subcontractors by prime
contractors. 3 Our review focused on whether DCMA and spare parts prime

2

Contract actions include issuing new contracts, purchase orders, or basic
ordering agreements; modifying existing contracts; and issuing orders for
parts included in existing contracts. In this report, we refer to all of
these actions as contracts.

3

The act (Pub. L. No. 108-87, S: 8143 (2003)) also mandated that the
Secretary of Defense report by March 31, 2004, on (1) how to implement a
system for tracking safety-critical parts so that parts discovered to be
defective can be identified and found; (2) appropriate standards and
procedures to ensure timely notification of contracting agencies and
contractors about safety issues including parts that may be defective, and
whether the Government Industry Data Exchange Program should be made
mandatory; (3) efforts to find and test airplane parts that have been
heat-treated by companies alleged to have done so improperly; and (4)
whether contracting agencies and contractors have been notified about
alleged improper heat treatment of airplane parts. The Secretary's report
was submitted on June 30, 2004, and included numerous actions DOD had
taken or plans to take to address the issues included in the mandate.

contractors are fulfilling their quality assurance oversight
responsibilities as required by regulations, policies, procedures, and
contract provisions. Specifically, our objectives were to determine
whether:

 1. DCMA provided quality assurance oversight and enforcement over its
       spare parts prime contractors in accordance with established policies,
       procedures, and guidance; and
 2. prime contractors provided quality assurance oversight over their
       subcontractors' work related to producing spare parts in accordance
       with industry standards and contract requirements.

We also reviewed how DCMA held prime contractors accountable for
overseeing their subcontractors' work.

To address our objectives, we reviewed regulations, policies, and
procedures related to the quality assurance oversight over spare parts
contractors provided by DCMA and prime contractors and the enforcement
actions available to assure compliance. In addition, we reviewed 15
contracts awarded to 11 prime contractors and any reports on product
quality deficiency for these contracts. 4 Specifically:

     o To assess whether DCMA provided quality assurance oversight over the
       prime contractors, we compared the quality assurance provisions
       included in the 15 contracts to oversight actions performed by DCMA
       quality assurance specialists. 5 In assessing whether DCMA used
       enforcement actions, we looked for instances of spare parts
       nonconformance related to these contracts and determined if DCMA
       levied any enforcement actions against the prime contractors.
     o To assess prime contractors' oversight of their subcontractors, we
       interviewed representatives from the 11 prime contractors and
       determined if the prime contractors used subcontractors. For those
       that used subcontractors, we held discussions with prime contractor
       personnel related to the level of quality assurance oversight they
       performed over the subcontractors and reviewed their processes for
       managing suppliers and subcontractors. We also gathered documentation
       from the prime contractors on test results of parts produced by
       subcontractors.

4

Details about our selection of the contracts are included in the scope and
methodology section of this report.

5

DCMA has issued broad guidance, referred to as the One Book, to assist
quality assurance specialists in executing their oversight
responsibilities.

Page 3 GAO-05-73 Defense Inventory

o  To assess how DCMA held prime contractors accountable for the work of
their subcontractors, we reviewed the 15 contracts to determine if they
included clauses holding the prime contractor responsible for the spare
parts provided to the government. For the instances of nonconforming parts
reported against these contracts, we reviewed how DCMA handled the
reported nonconformance and whether DCMA held the prime contractor
responsible for correcting the nonconformance. More detailed information
about our scope and methodology is contained in appendix I.

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

                                Results in Brief

In our review of the 15 contracts, DCMA quality assurance specialists
followed established policies, procedures, and guidance in performing
quality assurance oversight and enforcement over the spare parts prime
contractors. DCMA's oversight was provided through inspections that
included: (1) physical inspection of parts such as testing the
measurements and functions of parts, (2) evaluation of the prime
contractors' processes to determine compliance with established contract
requirements and production procedures, and (3) observation of the outer
appearance of spare parts and taking a physical count of the parts to
ensure that the proper number of parts are being shipped to the end user.
When one of the prime contractor's processes and another contractor's
parts did not meet contract requirements, DCMA used an enforcement system
that involved issuing requests for corrective action by the prime
contractors. Corrective actions involved requiring the prime contractor to
make corrections or changes to the production process and demonstrating
how processes would be improved to prevent further instances of
nonconformance. According to DCMA, it was not necessary to levy severe
enforcement actions such as penalties and debarment from conducting
business with the federal government against any of the contractors that
we reviewed.

The prime contractors we reviewed provided quality assurance oversight
over their subcontractors' work related to producing spare parts in
accordance with accepted industry standards and contract requirements.
Based on industry standards, prime contractors used at least two and up to
four methods in providing quality assurance oversight over their
subcontractors' work. These methods included (1) evaluating and visiting
potential subcontractors for placement on a list of approved suppliers for
a particular part, (2) requiring certifications from the subcontractors
that the parts or processes were produced in accordance with established
industry standards and contract requirements, (3) performing periodic
testing of parts produced by subcontractors, and (4) tracking and
monitoring approved subcontractors' past performance. The primary methods
of oversight used were evaluating subcontractors for placement on the
prime contractor's Approved Supplier List and requiring certifications
that their parts and processes conform to contractual specifications.
Establishing an Approved Supplier List served to identify qualified
subcontractors capable of producing needed parts or processes in
accordance with industry standards and contractual specifications.
Industry standards, developed and voted upon by a group of technical
experts representing standards organizations such as Aerospace Standards
and International Organization of Standardization, allowed prime
contractors flexibility in providing quality assurance oversight over
subcontractors considering the type and size of the organization and the
product(s) produced.

In our review of the 15 contracts, DCMA held prime contractors accountable
for overseeing their subcontractors' work by requiring that the prime
contractors adhere to contract clauses concerning oversight
responsibility. Most of the contracts we reviewed included either the
Federal Acquisition Regulation clause stating that the prime contractor
shall tender to the government for acceptance only supplies that conform
with contract requirements or other clauses related to quality assurance
requirements. When instances of product quality deficiency were reported,
the DCMA quality assurance specialist and the prime contractor determined
if the deficiency was due to contractor nonconformance and assigned
responsibility for corrective action. For the 15 contracts we reviewed, we
identified one deficiency that was determined to be the responsibility of
the prime contractor and DCMA held the prime contractor accountable for
the part. DCMA also performed reviews of subcontractors' certifications to
the prime contractor that the parts and processes produced by the
subcontractor were manufactured in accordance with the contract
requirements. These reviews served as a check by DCMA to determine whether
the prime contractors' quality assurance systems were adequate for
oversight of their subcontractors' work. During our review, service
officials provided us with examples of other contracts in which
nonconforming parts reached end users. DCMA followed its procedures for
evaluating the causes of these nonconforming parts. The reasons for the
nonconformance varied for each part.

We are not making any recommendations in this report. While we did not
identify any major deficiencies from the contracts and practices we
reviewed, we recognize that the risk of nonconforming spare parts

                                   Background

reaching end users exists. Compliance by contractors, DCMA, and other DOD
agencies with established internal controls helps mitigate against this
risk.

In written comments on a draft of this report, DOD provided one technical
comment, which we incorporated as appropriate. The department's comments
and our evaluation are on page 17 of this report.

The Federal Acquisition Regulation is the primary regulation for use by
all federal agencies in acquiring supplies and services. Sections 46 and
52, which discuss and set forth quality assurance and contract clauses,
respectively, provide guidance in determining quality assurance
responsibilities. According to the Federal Acquisition Regulation,
government contract quality assurance is defined as the various functions,
including inspections, performed by the government to determine whether a
contractor has fulfilled the contract obligations pertaining to quality
and quantity. These inspections can either be conducted at the
contractor's place of manufacture and production (source) or at the
receiving location for the parts (destination).

    DOD's Quality Assurance Oversight for Contracts Is Provided Primarily by
    DCMA

DCMA is DOD's primary organization for performing quality assurance
oversight for contracts and this oversight responsibility typically only
covers prime contractors. DCMA's execution of its quality assurance
responsibility is primarily through its source inspection program. Source
inspections are defined as inspections at the point where goods are
manufactured or assembled. There are three types of source inspections:
physical inspection; contractor process reviews; and kind, count, and
condition. Physical inspection involves inspecting parts by comparing the
parts to a specification, drawing, or other instruction. Contractor
process reviews are inspections of processes and procedures for
establishing confidence that the procured parts will produce a desired
outcome. Inspections involving kind, count, and condition are inspections
intended to visually identify and verify the quantity and exterior
appearance of a part to determine if it visually meets contract
specifications.

During fiscal year 2003, DCMA was responsible for government source
inspection for approximately 273,000 contracts. The Federal Acquisition
Regulation requires that contracts include inspection and other quality
requirements that will protect the interest of the government. It also
provides guidance in establishing which clauses to include in the various
types of contracts. The clauses included in each contract dictate the type

  DCMA Provided Quality Assurance Oversight and Enforcement over Contractors

and level of quality assurance oversight to be performed. DCMA quality
assurance specialists are expected to follow the inspection and acceptance
provisions in each contract in determining whether they are required to
perform quality assurance oversight. If the contract states that
inspection and acceptance will be at destination, then DCMA does not
perform any quality assurance oversight. End users within military units,
such as Army battalions and Air Force squadrons, perform inspection and
acceptance for these contracts.

Questions have been raised about the efficiency of DCMA's quality
assurance oversight program. In October 2003, the DOD Inspector General
reported that of the 518 contracts requiring DCMA source inspection that
they reviewed, at least 172 of the inspections provided either nominal or
no value to the DOD quality assurance process. 6 The DOD Inspector General
also pointed out concerns in the DOD quality assurance program, including
(1) ambiguity in the level and extent of requested source inspections; (2)
inconsistent and unclear application of items defined as critical or
having a critical application; (3) inconsistent implementation of
inspection procedures for items considered commercial, off-the-shelf; and

(4) arbitrary and inconsistent inspection procedures for items purchased
from distributors.

In our review of 15 contracts awarded to 11 contractors, DCMA provided
quality assurance oversight and enforcement over these spare parts prime
contractors. DCMA used three types of inspections to perform quality
assurance oversight over the contractors. DCMA adhered to the Federal
Acquisition Regulation, contract quality requirements, and DCMA guidance
in providing quality assurance oversight over these prime contractors.
Federal Acquisition Regulation clauses included in the contracts guide
whether or not DCMA would perform quality assurance oversight. DCMA
provides oversight for those contracts requiring inspection at the place
of manufacture of the parts. Enforcement of spare parts quality and safety
during the production process was achieved through the issuance of
corrective action requests.

6

ACQUISITION: Government Source Inspections (D-2004-011) October 15, 2003.

    DCMA Used Three Types of Inspections to Perform Quality Assurance Oversight
    over Contractors

DCMA quality assurance specialists followed established policies,
procedures, and guidance in performing their oversight over the spare
parts prime contractors in our review. As shown in table 1, the quality
assurance specialists performed one or a combination of three types of
inspections over prime contractors. The three types of inspections
include: physical inspection to measure the dimensions of parts or to test
the parts; process reviews; or an observation of the kind, count, and
condition of the parts. At 7 of the 11 contractor locations , DCMA quality
assurance specialists performed both process reviews and physical
inspections.

 Table 1: Types of Inspections Performed by DCMA Quality Assurance Specialists
                        for the Contractors We Reviewed

 Prime contractor Physical inspection Process reviews Kind, count, & condition

Contractor A X X

Contractor B X X

Contractor C X X

Contractor D X X

a

Contractor E

Contractor F X X X

Contractor G X

Contractor H X X

Contractor I X

b

10 Contractor J

                              11 Contractor K X X

Source: GAO analysis.

a

Various types of inspections were performed at subsidiaries of this
contractor.

b

This contractor is a distributor of parts made by other manufacturers.

For physical inspection of spare parts, the quality assurance specialist
selects a sample of the parts from various production runs and inspects
them by comparing the parts to a specification, drawing, or other
instruction. For example, at one location, the prime contractor had
procured the part from a subcontractor and required the subcontractor to
provide test data related to the part. The quality assurance specialist
reviewed the test data and compared it to the part specifications. Also,
the quality assurance specialist inspected the number imprinted on the
parts, exterior painting, and workmanship of the received parts to ensure
they complied with contract specifications.

The second type of inspection involves evaluating the prime contractors'
processes to determine compliance with established contract

    DCMA Adhered to the Federal Acquisition Regulation, Contract Quality
    Requirements, and DCMA Guidance in Providing Quality Assurance Oversight
    over Prime Contractors

requirements and production procedures. During these inspections the
quality assurance specialist assesses the prime contractor's processes and
production line procedures in relation to established industry practices
and provides the contractor an early opportunity to make corrections or
improvements, if necessary. For example, at one prime contractor location,
the quality assurance specialist monitored the prime contractor's key
processes during the production, including the cleaning, painting,
welding, and final quality inspection of the product. To help ensure a
comprehensive quality assurance check, the quality assurance specialist
performed his daily quality checks at different phases of the production
process. Also, the quality assurance specialist reviewed the prime
contractor's procedures for selecting its subcontractors to determine if
the subcontractors were certified in accordance with the applicable
industry standards.

The third type of inspection consists of observing the kind, count, and
condition of the parts. Observation of the kind of part includes visual
identification of at least one part for each different part being procured
under the contract and verifying the part number against the number
required in the contract. Counting the parts involves visual confirmation
of the contents of one package per line item and counting the number of
packages received. The quality assurance specialists verify the physical
appearance of the parts to assess their condition. For example, at one
location, the quality assurance specialist performed a kind, count, and
condition inspection to confirm that the contractor had the correct part
by verifying the part number, checking to ensure the contractor had the
proper quantity of parts, and inspecting the outward appearance of the
parts.

DCMA's quality assurance oversight over the 11 spare parts prime
contractors in our review was in accordance with the Federal Acquisition
Regulation, contract quality requirements, and DCMA's One Book guidance.
Each contract we reviewed designated the location of inspection and
acceptance by contract line item. Contracts that were designated for
inspection and acceptance at the contractor's place of manufacture and
production received DCMA quality assurance oversight. When contracts are
designated for inspection and acceptance at the receiving location for the
parts, the end user is responsible for inspecting the procured part and
the DCMA quality assurance specialist typically does not get involved with
the contract.

    Enforcement of Spare Parts Quality and Safety during the Production Process
    Was Achieved through Corrective Action Requests

Of the 15 contracts we reviewed, DCMA provided quality assurance oversight
for the 13 contracts that were designated for inspection and acceptance at
source. The other two contracts were designated for inspection and
acceptance at destination and did not require DCMA quality assurance
oversight. In accordance with the One Book guidance, quality assurance
specialists performed inspections and acceptance for its customers to
ensure supplies were in compliance with contract requirements. According
to a DCMA official, this guidance allows DCMA quality assurance
specialists flexibility in providing quality assurance oversight over
prime contractors. For example, the guidance does not include standard
requirements for the number of tests, site visits, or inspections that the
DCMA quality assurance specialists should perform while providing quality
assurance oversight. When contracts were designated for inspection and
acceptance at source, quality assurance specialists typically reviewed
contract requirements, assessed the contractor's risks of producing
nonconforming parts, determined what needed to be done to mitigate the
risks, and applied quality assurance oversight, including inspections,
based on the contractor's risk level.

During the production process, when a prime contractor's processes or
spare parts did not meet contract requirements, DCMA used an enforcement
system that involved issuing requests for corrective action by the prime
contractor. According to the Federal Acquisition Regulation, contractors
must be given an opportunity to correct or replace nonconforming supplies.
Contractors are notified about nonconformance through corrective action
requests issued by DCMA or product quality deficiency reports issued by
the end user. When there is contractual nonconformance during the
production process, DCMA may issue the prime contractor a corrective
action request to formally communicate the deficiency and request
corrective action on the part of the prime contractor. When the prime
contractor does not take corrective actions, contractual remedies
available to procuring contracting officers include suspension of progress
payments, termination for default, and penalties such as suspension or
debarment from holding contracts with the government.

Only 2 of the 11 prime contractors that we reviewed received corrective
action requests related to the contracts in our review. According to DCMA
officials, the remaining contractors did not warrant corrective action
requests related to the contracts we reviewed. Our review of DCMA files
related to these contractors also did not identify any need for corrective
actions by the prime contractors. Corrective actions identified by the two
contractors involved the prime contractor making corrections or changes to
its production processes and demonstrating how processes would be improved
to prevent further instances of nonconformance. For example, DCMA issued a
corrective action request to a prime contractor identifying loose
insulation, an inactive gear, poor painting quality, and parts that did
not meet surface finish specification requirements as nonconforming items.
The prime contractor corrected the nonconformance and DCMA accepted the
product. To prevent reoccurrence of the deficiencies, the prime contractor
reported that it had taken the following actions:

(1)
           discontinued the use of material that caused the loose insulation,

(2)
           instructed operators to ensure that gears were properly adjusted,

(3)
           arranged a meeting with all contractor paint personnel advising
           them on the importance of attention to detail, and (4) agreed to
           provide their quality assurance representatives with acceptable
           and unacceptable finish samples as visual standards to meet
           customer expectations.

For the other prime contractor, DCMA issued a corrective action request
because the contractor used the wrong procedure to receive approval for a
major waiver from contract requirements. 7 The request for major waiver
was supposed to go through an array of signatures and DCMA approvals,
whereas a minor waiver could be submitted and approved electronically,
requiring fewer signatures and approvals. However, the prime contractor
downgraded the waiver request from major to minor without the appropriate
concurrence and approval of DCMA and submitted the request through the
electronic system. According to the prime contractor, their personnel had
conflicting procedures describing how to process waivers. To prevent
reoccurrence of incorrect processing of major waivers, the contractor
planned to review its current procedures for processing waivers. Also, the
contractor planned to train its quality assurance staff to ensure they
understand the correct procedures for processing waivers.

 A waiver is a deviation from contract requirements and can be considered major
                                   or minor.

                      Page 11 GAO-05-73 Defense Inventory

  Prime Contractors Adhered to Industry Standards in Providing Quality Assurance
  Oversight over Subcontractors

The prime contractors in our review adhered to industry standards in
providing quality assurance oversight over their subcontractors' work.
Based on industry standards, prime contractors performed at least two or
up to four methods to provide quality assurance oversight over their
subcontractors, as shown in table 2. The primary methods of oversight used
were evaluating subcontractors for placement on an Approved Supplier List
and requiring certifications of parts and processes. Industry standards,
such as the International Organization for Standardization 9001 and
Aerospace Standards 9100, require that an organization have a quality
management system in place to ensure that it will produce high quality
products that will serve their intended purpose. The standards are broad
and are intended to be applicable to all organizations, regardless of
type, size, and product provided.

Table 2: Methods of Quality Assurance Oversight over Subcontractors Provided by
                       the Prime Contractors We Reviewed

Evaluated potential Prime subcontractors for their Required contractor
approved supplier list certifications Tested parts Tracked and monitored
and processes subcontractors' produced performance

Contractor A X X X

Contractor B X X X

Contractor C X X X

Contractor D X X X

Contractor E X X X X

Contractor F X X X X

Contractor G X X X X

Contractor H X X X X

Contractor I X X X X

                              10 Contractor J X X

                             11 Contractor K X X X

Source: GAO analysis.

All of the prime contractors that we reviewed evaluated potential
subcontractors prior to the contract award for placement on their Approved
Supplier List. The purpose of establishing an Approved Supplier List is to
identify qualified subcontractors capable of producing needed parts or
processes in accordance with industry standards and contractual
specifications. When evaluating a potential subcontractor for inclusion on
their Approved Supplier List, some prime contractors periodically visited
their subcontractors' production facilities, requested that subcontractors
complete surveys containing questions regarding the subcontractors'
capabilities and qualifications necessary to produce parts and processes,
or examined information about the technical skills and qualifications of
subcontractor personnel, past performance for producing similar products,
and applicable certifications related to the subcontractors' operations.
Six of the 11 prime contractors said they periodically visited potential
subcontractors prior to contract award.

All of the prime contractors that we reviewed required certifications such
as independent, third-party certifications or certificates of conformance
from their subcontractors to certify that their parts and processes are in
accordance with contract requirements and industry standards. 8
Independent, third-party certifications and certificates of conformance
served as verification that the subcontractors could produce parts and
processes that conformed to contractual specifications. Prime contractors
required certifications from their subcontractors for different phases of
the production process. For example, one contractor used steel to
fabricate parts and required a certification from the steel subcontractor
that the steel had been produced according to specifications. In this
instance, the prime contractor did not use the steel provided by the
subcontractor until they received the certificate of conformance verifying
that the product was in accordance with industry standards and contractual
requirements.

Eight of the 11 prime contractors we reviewed periodically tested parts or
processes produced by their subcontractors. Prime contractors tested the
subcontractors' parts or processes at either the manufacturing site or the
receiving point to determine whether products or processes met contractual
specifications. For example, one prime contractor performed mechanical and
electrical tests on all materials received from subcontractors to ensure
that the materials met contract specifications. If the materials did not
meet contract specifications, the prime contractor's review board, which
included the government quality assurance specialist, made a determination
concerning the disposition of the materials. Disposition options included
using the material "as is" or scrapping it.

Seven of the prime contractors that we reviewed tracked and monitored the
performance of their subcontractors by establishing performance goals,
assessing and rating the subcontractors' performance, or

Third-party certification is performed by a registered external auditing
organization and provides verification and assurance that products or
processes are consistent with established standards.

Page 13 GAO-05-73 Defense Inventory

  DCMA Held Prime Contractors Accountable by Requiring Adherence to Contract
  Clauses

recommending corrective and preventive actions when subcontractors
produced nonconforming parts. The seven prime contractors established
performance goals and rated their subcontractors on a routine and periodic
basis using various performance metrics, such as product quality and
on-time deliveries. For example, one contractor kept track of the number
of nonconforming parts provided by each subcontractor in relation to the
total number of parts provided. When a subcontractor's nonconformance rate
exceeded the prime contractor's acceptable goal, the prime contractor
placed the subcontractor on probation.

In our review of the 15 contracts, DCMA held prime contractors accountable
for overseeing their subcontractors' work by requiring that prime
contractors adhered to contract clauses concerning oversight
responsibility. When instances of nonconformance were reported through
product quality deficiency reports, the DCMA quality assurance personnel
and the prime contractor determined if the deficiency was due to
contractor nonconformance and assigned responsibility for corrective
action. For the 15 contracts we reviewed, one deficiency was determined to
be the responsibility of the prime contractor and DCMA held the prime
contractor accountable for the part. During our review, service officials
provided us with examples of other contracts in which nonconforming parts
reached end users. DCMA followed its procedures for evaluating the causes
of these nonconforming parts. The reasons for the nonconformance varied
for each part.

Most of the 15 contracts we reviewed included Federal Acquisition
Regulation clause 52.246-2, Inspection of Supplies-Fixed Price, which
states that the prime contractor shall tender to the government for
acceptance only supplies that have been inspected in accordance with the
inspection system and found by the contractor to be in conformity with
contract requirements. This contract clause also states that the
contractor is not relieved of its oversight responsibility when government
quality assurance over subcontractors is required. The remaining contracts
included other quality clauses or did not specify quality requirements
because the contractors had quality systems that had been previously
approved by the procuring contracting officers.

DCMA also performed reviews of subcontractors' certifications to the prime
contractor that the parts and processes produced by the subcontractor were
manufactured in accordance with the contract requirements. DCMA quality
assurance specialists periodically reviewed third-party certifications and
contractors' documents related to site visits, receiving inspections, and
other oversight of subcontractors. These reviews provided a technique for
DCMA to determine whether the contractors' quality assurance systems were
adequate for oversight of subcontractors. For example, at one contractor
location, the quality assurance specialist obtained copies of
certifications that steel was produced and heat-treated in accordance with
standards. The specialist also reviewed copies of test records maintained
by the contractor during the production process.

After parts are provided to end users within military units, such as Army
battalions and Air Force squadrons, instances of nonconforming parts are
reported through product quality deficiency reports. End users issue
product quality deficiency reports to identify deficiencies in parts that
may indicate nonconformance with contractual or specification
requirements. When the end user identifies a nonconforming product, the
user issues a product quality deficiency report that is sent to the
applicable DCMA contract management office and distributed to the quality
assurance specialist responsible for overseeing the contractor that
produced the item. The quality assurance specialist notifies the
contractor of the report. The contractor may request that the part be
returned to its facility for testing to determine whether the problem that
has been identified by the user can be duplicated. The DCMA quality
assurance specialist and the prime contractor also determine if the
deficiency was due to contractor nonconformance with contract requirements
and assign responsibility for corrective action. DCMA writes the final
disposition of the product quality deficiency report based on the results
of the tests completed by the contractor and the assessment of who was
responsible for the deficiency. In those cases where the deficiency was
determined to be the responsibility of the prime contractor, DCMA held the
prime contractor accountable for the part. If the cause of the deficiency
was tied back to a subcontractor, DCMA held the prime contractor
responsible for correcting the deficiency and ensuring that the
subcontractor's processes were modified to correct the cause of the
nonconformance.

During our review, service officials provided examples of other contracts
in which nonconforming parts reached end users for various reasons. DCMA
and prime contractors followed their procedures in evaluating causes for
the nonconformance. For example, in March 2004 one prime contractor was
notified that five wiring harnesses, manufactured by one of their approved
subcontractors, were defective. Investigations showed that the prime
contractor's quality oversight system did not detect the problem because
its personnel were unfamiliar with drawings, specifications, or electrical
wiring harness fabrications. After the problem was identified,

  Concluding Observations

the prime contractor provided training related to drawings and proper
manufacturing processes to its quality assurance personnel as well as
subcontractor personnel. However, according to the prime contractor, the
subcontractor still could not produce the wiring harnesses correctly. As a
result, the prime contractor selected another subcontractor to manufacture
the wiring harnesses.

In another case, the contract was for a survival kit that included
critical safety items. The nonconformance related to an O-ring lubricant
that was allowing oxygen pressure to be released prematurely. Based on the
deficiency report, the contractor began using another lubricant for the
O-ring that eliminated the problem. For this contract, DCMA recommended
that government source inspection be added at the subcontractor level
because no prior government source inspection was required.

Yet in another example, an axle component manufactured by a subcontractor
broke on an aircraft landing gear because the dimensions of the axle
component were incorrect. Incorrect dimensions resulted from the
subcontractor's improper grinding process; yet, the subcontractor never
reported the discrepancies to the prime contractor. Since the incident,
the prime contractor has placed the subcontractor on probation within the
prime contractor's quality approval system. The subcontractor will remain
on probation until an audit is performed by the end users of the axle to
verify that all corrective actions are in effect.

DCMA and the prime contractors we reviewed utilized a number of processes
to provide quality assurance oversight over the production of spare parts
for the military. The processes included conducting physical inspections
of parts produced by contractors, reviewing prime contractor's processes,
evaluating potential subcontractors for placement on an Approved Supplier
List, requiring certifications of parts and processes, testing parts and
processes, and tracking and monitoring subcontractor's performance. These
processes are founded upon contractual requirements, DCMA policies, and
industry standards for quality assurance. In addition, there are
enforcement procedures that DCMA uses when nonconforming spare parts reach
end users. However, despite these quality assurance controls, some risk
still exists. For example, while we did not identify any major
deficiencies from the contracts and practices we reviewed, service
officials provided examples of nonconforming parts related to contracts
not included in our review that reached end users for various reasons.
Furthermore, given the vast number of contracts and contractors involved
in providing spare parts to the government, we recognize that the risk of
nonconforming spare parts reaching end users exists. Compliance by
contractors, DCMA, and other DOD agencies with established internal
controls helps mitigate against this risk.

In written comments on a draft of this report, DOD provided one technical
comment, which we incorporated as appropriate. DOD did not provide any and
Our Evaluation additional comments. DOD's written comments are reprinted
in their

entirety in appendix III.

We are sending copies of this report to the Secretary of Defense; the
Secretaries of the Army, the Navy, and the Air Force; the Director of the
Defense Contract Management Agency; the Director of the Defense Logistics
Agency; and other interested parties. We will also make copies available
to others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-8365 if you or your staffs have any
questions concerning this report. Major contributors to this report are
included in appendix IV.

William M. Solis, Director Defense Capabilities and Management

                       Appendix I: Scope and Methodology

To address our objectives, we judgmentally selected for review 11
contracts awarded to 11 prime contractors. During the course of our
review, Defense Contract Management Agency (DCMA) and the prime
contractors provided four additional contracts awarded to some of these
same contractors that had nonconforming parts that reached end users,
bringing the total number of contracts we reviewed to 15. Given the small
number of contracts we reviewed, our results cannot be used to make
inferences about the entire population of contracts requiring government
quality assurance. We included the following kinds of contracts as
candidates for our study: contracts, purchase orders, basic ordering
agreements, delivery orders against existing contracts, and contract
modifications for existing contracts. We included contracts that were
large and small dollar value, from DCMA's East and West regions, and from
the Army, Navy, Air Force, and the Defense Logistics Agency (DLA). Eleven
of these contracts were judgmentally selected: three from information
provided by the Navy and Air Force on nonconforming parts and 8 from DCMA.
To select the eight contracts, we obtained a query from DCMA's
Mechanization of Contract Administration Services system of contracts for
October 1, 1999, through September 30, 2003. Because of the large number
of contracts in the database and because we wished to examine recent
contract quality assurance oversight practices, we sorted the query to
only identify contracts for fiscal year 2003. From this query, we sorted
the contracts into four groups according to whether they were associated
with the Army, the Navy, the Air Force, or the Defense Logistics Agency.
We randomly sampled contracts from each of these four groups. Then, we
judgmentally selected a subset of contracts from our random samples in
such a way to obtain a set of eight contracts that spanned the various
military commands and DCMA's East and West regions. The breakout of the
eight contracts included three Army, two Air Force, two Navy, and one
Defense Logistics Agency.

To assess the reliability of data from DCMA's Mechanization of Contract
Administration Services system we (1) performed electronic testing of
required data elements, (2) reviewed existing information about the data
and the system, and (3) interviewed agency officials knowledgeable about
the data. We determined DCMA's Mechanization of Contract Administration
Services system data to be reliable for the purposes of our review.

To assess whether DCMA provided quality assurance oversight and
enforcement over its spare parts prime contractors in accordance with
established policies, procedures, and guidance, we compared contract
quality assurance provisions and requirements to oversight actions

Appendix I: Scope and Methodology

performed by DCMA for the 15 contracts. Specifically, we reviewed the
Federal Acquisition Regulation, the DCMA One Book, and the contracts to
determine quality assurance oversight responsibilities and enforcement
actions available to assure contractor compliance. We compared these
policies, procedures, and contract requirements to the three types of
inspections performed by DCMA quality assurance specialists to assess if
DCMA provided appropriate oversight. For each of the contracts, we met
with officials at the DCMA contract management offices identified on the
contracts to determine quality assurance oversight actions performed by
DCMA personnel. As part of this assessment, we determined which of the
three types of inspections were performed for each contractor. We sent
letters to officials at the DOD contracting offices to obtain and review
documentation related to the pre-award process, quality assurance
requirements, and the contracting officers' interaction with DCMA prior to
contract award. In assessing whether DCMA used enforcement actions, we
reviewed the product quality deficiency reports included in our review to
determine if DCMA levied enforcement actions against the prime contractor
when necessary. We also reviewed prior DOD and GAO reports related to
DCMA's execution of its quality assurance oversight over prime contractors
and DOD's implementation of its deficiency reporting system.

To assess whether prime contractors provided quality assurance oversight
over their subcontractors' work related to producing spare parts and
followed industry standards and contract requirements, we identified prime
contractor quality assurance oversight actions performed over
subcontractors. We reviewed Aerospace Standard 9100 and prime contractor
quality manuals to determine requirements for establishing contractor
quality management systems and ensuring that their subcontractors are
providing quality parts. 1 We visited and interviewed representatives at
the prime contractor locations as shown in appendix II, and determined
whether the prime contractors used subcontractors. For those that used
subcontractors, we identified the level of quality assurance oversight
performed by these prime contractors over the subcontractors. We discussed
whether the prime contractors performed supplier ratings of their
subcontractors, tested parts or processes provided by their
subcontractors, or conducted site visits at their subcontractors'
facilities. At the prime contractor facilities, we observed the prime
contractors' processes for manufacturing or repairing parts to determine
the quality

Aerospace Standard 9100 includes the International Organization for
Standardization 9001 quality assurance requirements.

Page 19 GAO-05-73 Defense Inventory Appendix I: Scope and Methodology

assurance performed by the prime contractor throughout the production
process.

To assess how DCMA held prime contractors accountable for the work of
their subcontractors, we reviewed the 15 contracts to determine if the
contracts included clauses holding the prime contractor responsible for
the spare parts provided to the government and whether instances of
nonconformance had occurred. For the reported instances of nonconformance,
we looked at whether DCMA held the prime contractor responsible for
correcting the nonconformance and what types of actions were performed by
DCMA. We also reviewed the Federal Acquisition Regulation to determine
contract clauses that require the prime contractor to ensure that parts
furnished to the government conform to contract requirements. We reviewed
the contracts to determine if they included clauses that the prime
contractor was responsible for the spare parts being provided.

We also visited or obtained information from representatives at the
following organizations:

     o U.S. Air Force, Office of the Assistant Secretary, Contracting
       Operations Division, Rosslyn, Va.;
     o U.S. Air Force Materiel Command, Wright Patterson Air Force Base,
       Ohio;
     o U.S. Army Materiel Command Headquarters, Fort Belvoir, Va.;
     o U.S. Army, Aviation and Missile Command, Redstone Arsenal, Redstone,
       Ala;
     o U.S. Army, Communications Electronics Command, Fort Monmouth, NJ;
     o U.S. Army, Research Development and Engineering Command, Armament
       Research, Development and Engineering Center, Rock Island, Ill.;
     o U.S. Army, Research Development and Engineering Command, Edgewood
       Chemical Biological Center, Rock Island, Ill.;
     o U.S. Army, Secretary of the Army for Acquisition, Logistics, and
       Technology, Arlington, Va.;
     o U.S. Army, Tank Automotive and Armaments Command, Warren, Mich.;
     o U.S. Navy, Naval Air Systems Command, Patuxent River Naval Air
       Station, Patuxent River, Md.;
     o U.S. Navy, Office of the Assistant Secretary, Research, Development,
       and Acquisition, Washington, D.C.;
     o U.S. Defense Logistics Agency Headquarters, Fort Belvoir, Va.;
     o U.S. Defense Contract Management Agency Headquarters, Alexandria, Va.;

Appendix I: Scope and Methodology

     o Office of the Under Secretary of Defense for Acquisition, Technology,
       and Logistics, Alexandria, Va.; and
     o Aerospace Industries Association, Arlington, Va.

We performed our review from November 2003 through October 2004 in
accordance with generally accepted government auditing standards.

Appendix II: DCMA Offices and Contractors Reviewed

DCMA Contract Management Offices DCMA District Prime contractor Number of
                                   contracts

                          1 Boston East Contractor K 1

                          2 Dayton East Contractor H 2

                       3 Long Island East Contractor G 1

                         4 Maryland East Contractor C 2

                       5 Philadelphia East Contractor B 3

                       6 Philadelphia East Contractor F 1

                      7 South Florida East Contractor J 1

Total East Region contracts

                        8 Long Beach West Contractor E 1

                       9 Los Angeles West Contractor D 1

                         10 Phoenix West Contractor A 1

                    11 Santa Ana-Irvine West Contractor I 1

  Total West Region contracts

                             Source: GAO analysis.

Appendix III: Comments from the Department of Defense

                      Page 23 GAO-05-73 Defense Inventory

Appendix IV: GAO Contact and Staff Acknowledgments

David A. Schmitt (757) 552-8124

  GAO Contact

In addition to the individual named above, Connie W. Sawyer, Jr.;

Tracy Whitaker; Leslie West; Renee McElveen; Minette Richardson; Kenneth
Patton; Sidney Schwartz; and Douglas Cole made key contributions to this
report.

(350460)

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