Defense Management: Attention Is Needed to Improve Oversight of
DLA Prime Vendor Program (19-JUN-06, GAO-06-739R).
In fiscal year 2005, prime vendor sales accounted for
approximately $9 billion of the Defense Logistics Agency's (DLA)
total sales and service of $32 billion. Under the prime vendor
concept, the Department of Defense (DOD) relies on a distributor
of a commercial product line, who provides that product line and
incidental services to customers in an assigned region or area of
responsibility. Products or services are to be delivered within a
specified period of time after order placement. Since 1991, we
have identified the use of prime vendors as a best commercial
practice for inventory management. Nonetheless, media reports in
October 2005, and a hearing before the House Armed Services
Committee on November 9, 2005, raised concerns about the use of
the prime vendor concept and the prices that DLA was paying for
items acquired through a prime vendor. The use of prime vendor
contracts is governed by the Federal Acquisition Regulation (FAR)
and the Defense Federal Acquisition Regulation Supplement. DLA
manages the program and the Director of DLA reports to the Under
Secretary of Defense for Acquisition, Technology and Logistics
through the Deputy Under Secretary of Defense for Logistics and
Materiel Readiness. The Defense Supply Center Philadelphia
(DSCP), a field activity of DLA, is the lead center for managing
four major commodities: medical materiel; subsistence/garrison
feeding; construction and equipment; and clothing and textiles.
It is also responsible for managing DOD's prime vendor contracts
within those commodities. In 1992, we identified DOD's contract
management as one of our high-risk areas, and it remains so
today. One of the key reasons the area is high risk is because
DOD does not provide adequate oversight over defense contracts.
One aspect of oversight is to ensure that the government is
obtaining fair and reasonable contract prices through such means
as conducting price reviews. In addition, management oversight
can also assure that steps are taken to determine that prices
agreed to at contract award are fair and reasonable. For the
purposes of this report, we are defining a pricing review as
either a determination of price reasonableness for items added
after the initial contract award, or a postaward verification
that any invoiced price is not in excess of the price stipulated
in the contract. Under the authority of the Comptroller General,
we initiated a review of DOD's prime vendor concept to determine
(1) the extent to which DLA has conducted pricing reviews for
items purchased through a prime vendor, and (2) the extent to
which DLA has addressed the pricing issues identified at the
November 2005 hearing. Under the authority of the Comptroller
General, we initiated a review of DOD's prime vendor concept to
determine (1) the extent to which DLA has conducted pricing
reviews for items purchased through a prime vendor, and (2) the
extent to which DLA has addressed the pricing issues identified
at the November 2005 hearing.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-739R
ACCNO: A55640
TITLE: Defense Management: Attention Is Needed to Improve
Oversight of DLA Prime Vendor Program
DATE: 06/19/2006
SUBJECT: Contract oversight
Defense procurement
Internal controls
Prices and pricing
Prime contracts
Prime vendor
Procurement evaluation
Procurement practices
Program management
Policies and procedures
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GAO-06-739R
* PDF6-Ordering Information.pdf
* Order by Mail or Phone
June 19, 2006
The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United State Senate
The Honorable Duncan L. Hunter
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives
Subject: Defense Management: Attention Is Needed to Improve Oversight of
DLA Prime Vendor Program
In fiscal year 2005, prime vendor sales accounted for approximately $9
billion of the Defense Logistics Agency's (DLA)1 total sales and service
of $32 billion. Under the prime vendor concept, the Department of Defense
(DOD) relies on a distributor of a commercial product line, who provides
that product line and incidental services to customers in an assigned
region or area of responsibility. Products or services are to be delivered
within a specified period of time after order placement. Since 1991, we
have identified the use of prime vendors as a best commercial practice for
inventory management.2 Nonetheless, media reports in October 2005, and a
hearing before the House Armed Services Committee on November 9, 2005,
raised concerns about the use of the prime vendor concept and the prices
that DLA was paying for items acquired through a prime vendor.
The use of prime vendor contracts is governed by the Federal Acquisition
Regulation (FAR) and the Defense Federal Acquisition Regulation
Supplement. DLA manages the program and the Director of DLA reports to the
Under Secretary of Defense for Acquisition, Technology and Logistics
through the Deputy Under Secretary of Defense for Logistics and Materiel
Readiness. The Defense Supply Center Philadelphia (DSCP), a field activity
of DLA, is the lead center for managing four major commodities: medical
materiel; subsistence/garrison feeding; construction and equipment; and
clothing and textiles. It is also responsible for managing DOD's prime
vendor contracts within those commodities.
1DLA is DOD's largest combat support agency, providing worldwide logistics
support in both peacetime and wartime to the military services as well as
several civilian agencies and foreign countries.
2GAO, Defense Inventory: Opportunities Exist to Expand the Use of Defense
Logistics Agency Best Practices, GAO/NSIAD-00-30 (Washington, D.C.: Jan.
26, 2000). A best commercial inventory practice is defined in The National
Defense Authorization for Fiscal Year 1998 as a practice that enables the
agency to reduce inventory levels and holding costs while improving the
responsiveness of the supply system to user needs.
In 1992, we identified DOD's contract management as one of our high-risk
areas, and it remains so today.3 One of the key reasons the area is high
risk is because DOD does not provide adequate oversight over defense
contracts. One aspect of oversight is to ensure that the government is
obtaining fair and reasonable contract prices through such means as
conducting price reviews. In addition, management oversight can also
assure that steps are taken to determine that prices agreed to at contract
award are fair and reasonable. For the purposes of this report, we are
defining a pricing review as either a determination of price
reasonableness for items added after the initial contract award, or a
postaward verification that any invoiced price is not in excess of the
price stipulated in the contract.
Under the authority of the Comptroller General, we initiated a review of
DOD's prime vendor concept to determine (1) the extent to which DLA has
conducted pricing reviews for items purchased through a prime vendor, and
(2) the extent to which DLA has addressed the pricing issues identified at
the November 2005 hearing. To accomplish the objectives, we reviewed
policies and procedures governing the use of prime vendors and DLA's
adherence to those policies and procedures. In addition, we reviewed
internal and external assessments of DSCP's procurement management, and
prior GAO reports, and we analyzed 16 prime vendor contracts to determine
the requirements for conducting pricing reviews. We also analyzed two
contracts with a manufacturer and four delivery orders to prime vendors to
document the price increase for an aircraft refrigerator. Further, we
interviewed DLA and DSCP officials, prime vendors, customers, and a
manufacturer. We conducted our review from December 2005 through April
2006 in accordance with generally accepted government auditing standards.
Our scope and methodology are discussed in further detail at the end of
this report.
Results in Brief
Personnel at the Defense Supply Center Philadelphia did not always conduct
pricing reviews for all commodities. The medical materiel and food
subsistence commodities' contracting personnel reviewed pricing on a
regular basis. However, required price reviews were not being conducted
for the food service equipment and construction and equipment commodities.
For example, the contracts for food service equipment required
verification of price increases, but officials from the supply center were
unable to provide documentation on why the price of an aircraft
refrigerator increased from $13,825 in March 2002 to $32,642 in September
2004. Both logistics agency and supply center officials acknowledged that
these problems occurred because management at the agency and supply center
level were not providing adequate oversight to ensure that contracting
personnel were monitoring prices. The lack of pricing reviews on certain
commodities has been a continual problem cited in the logistics agency's
internal reviews since 2002. Internal reviews of the prime vendor programs
conducted in 2002 and 2003 showed that supply center contracting personnel
responsible for the food service equipment and construction and equipment
commodities failed at times to properly perform price reviews to determine
whether the prices charged by the prime vendors were reasonable. The
internal reviews found that contracting personnel either did not have
knowledge of, or were disregarding contracting rules and regulations with
regard to price reviews. As a result, the internal reviews recommended
stronger contract management and oversight to ensure that price reviews
were conducted. Management at the supply center agreed to take corrective
actions to address the 2002 and 2003 reviews. However, issues with the
lack of pricing oversight were identified again in a 2005 internal review.
3GAO, Defense Contract Pricing, GAO/ HR-93-8 (Washington, D.C.: Dec. 1,
1992), High-Risk Series: An Update, GAO/05-207 (Washington, D.C.: January
2005).
The Defense Logistics Agency has developed corrective actions and has
begun to develop a prime vendor contracting policy to address the most
recent pricing problems identified in 2005. The agency's recent actions
include increasing the number of audits to ensure that the government was
not overcharged, revoking some contracting officers' warrants, and
establishing additional training for all contracting officers and
managers. Some of these corrective actions have resulted in delays in
order approval and slowed delivery to some customers. The logistics agency
is also in the process of developing a policy to implement regulatory
guidance on prime vendor contracting. However, policies and procedures for
pricing reviews were in place prior to November 2005, and corrective
actions were identified in prior internal reviews. Problems still occurred
because of a lack of management oversight by logistics agency and supply
center officials to ensure that the policies and procedures were followed
and that the corrective actions were implemented. Standards for internal
controls in the federal government call for assessing the quality of
performance over time and to ensure that the findings of audits and other
reviews are promptly resolved.4
We are recommending that the Secretary of Defense ensure that the Director
of the Defense Logistics Agency provide continual management oversight of
the corrective actions to address pricing problems in the agency's prime
vendor program. In commenting on a draft of our report, DOD concurred with
our recommendation. We discuss DOD's comments and our evaluation of them
later in this correspondence.
Background
DOD operates a worldwide supply system, with the vast majority of the
items being managed by DLA. A DLA prime vendor arrangement is one in which
a distributor of a commercial product line provides those products and
related services to all of DLA's customers in an assigned region within a
specified period of time after order placement. The prime vendor either
provides the product at the cost to the prime vendor to obtain it, or at a
price agreed upon in advance with DLA.
4GAO, Standards for Internal Control in the Federal Government,
AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999).
The process for using a prime vendor described below is generic, and
different commodities may vary from this process. Under the prime vendor
process, a single vendor buys items from a variety of manufacturers and
the inventory is stored in commercial warehouses. A customer orders the
items from the prime vendor using electronic ordering systems. For some
commodities prices are pre-negotiated by DLA as part of the contract award
process. The negotiated price includes the prime vendor's handling fee.
The prime vendor (or the customer) sends a copy of the order to DSCP.
Depending on the commodity, DSCP may need to approve the order before the
prime vendor can process it further. Once DSCP approves the order, the
prime vendor fills, ships, and tracks the order through final acceptance.
The prime vendor then submits an invoice to DSCP, which matches it with
the order and receipt from the customer and authorizes the Defense
Financial Accounting Service to make payment. DSCP then bills the customer
for the cost of the order plus DSCP's cost recovery fee.
DOD awarded its first prime vendor contract in 1993 for pharmaceutical
items, such as aspirin and antibiotics. This was followed by a contract
for medical supplies, such as syringes and surgical gloves. In 1994, DOD
expanded the use of the prime vendor concept to include providing food for
military dining facilities. DOD subsequently expanded the use of the prime
vendor concept to include construction and equipment as well as clothing
and textiles. Since the first contracts were awarded, DLA has refined its
use of the prime vendor concept and incorporated changes into successive
generations of contracts.
DSCP is responsible for managing prime vendor programs for medical
materiel, subsistence, and construction and equipment. Medical materiel
includes pharmaceutical and medical/surgical items. Subsistence includes
food for troop feeding and food service equipment (products associated
with the receipt and storage of food, serving, presentation and
preservation of food, and clean up or maintenance). Construction and
equipment includes several commodities such as maintenance, repair and
operations (MRO),5 lumber, and metals. There are no prime vendor contracts
for the clothing and textile commodity.
According to DLA, the benefits of prime vendor contracts include improved
access to a wide range of high-quality commercial products, rapid and
predictable delivery from a single vendor at the time and in the manner
most conducive to the customer's needs, and reduced overhead charges.
Other benefits of prime vendor contracts include significant reductions in
the manpower needed to manage these items at DLA, elimination of any DLA
inventory investment, reduction of the infrastructure and related costs
associated with warehousing that inventory, and reduced transportation
costs via multiple-item prime vendor deliveries to the customer rather
than transportation from vendors to the military depots for subsequent
transportation to the ultimate customer. In addition, prime vendor
contracts provide for surge and broader mobilization capabilities, and
worldwide customer support.
5The MRO category is further broken out between supplies and services,
with separate prime vendor contracts for each.
We have previously identified the use of prime vendors as a best
commercial practice for inventory management.6 In a series of reports, we
reported on the benefits of using a prime vendor for medical and food
inventories.7
In October 2005, media reports raised concerns that DLA had been
overcharged for certain food service equipment items such as ice cube
trays, refrigerators, and coffee-makers. The reports resulted in a
congressional hearing on November 9, 2005 to discuss DLA's prime vendor
program.8
Pricing Reviews of Prime Vendor Commodities Were Not Always Conducted
DSCP personnel did not always conduct pricing reviews for all commodities.
The medical materiel and food subsistence commodities' contracting
personnel reviewed prices on a regular basis. Prices for food service
equipment and construction and equipment commodities were not being
reviewed for price reasonableness before orders were approved for new
items. This lack of oversight was identified by internal DLA reviews,
known as procurement management reviews, as early as 2002 and 2003. These
reviews found that some prime vendor contracts were not being executed and
managed properly and made recommendations that required an increase in
management oversight and in some cases, additional training. Even though
DSCP management concurred with the recommendations, the problems recurred
in the next reviews conducted in 2005.
Some Prime Vendor Programs Review Prices
During the course of our review, we found that contracting officials
responsible for medical materiel and food subsistence commodities were
routinely reviewing prices. These officials used information systems to
track pricing and to flag price increases. For example, the prices for
medical materiel and food subsistence items are generally set by national
pricing agreements.9 Customers order from pre-priced catalogs and the
vendor only gets paid the current catalog price. In addition, DSCP uses
automated tools to match the prime vendor's sales data with pricing data
for pharmaceutical items. For food subsistence items, the contracting
officer and customer liaison specialists monitor price changes and audit
orders. The electronic ordering system for food subsistence also flags
price changes that are more than 10 percent.
Pricing Reviews Were Lacking for Some Commodities
Pricing reviews were lacking for some commodities. In addition to price
review concerns, a Defense Contract Management Agency (DCMA) review,
conducted between December 2005 to January 2006, found concerns with the
evaluation of prices at contract award for food service equipment.10 Based
on our discussions with DLA officials, the first food service equipment
vendor contracts awarded in June 1999 used a market basket evaluation tool
to help evaluate contract prices before contracts were awarded. A market
basket evaluation is a tool used during proposal evaluation that samples a
percentage of items anticipated to be purchased in a given commodity to
use as a measure of all prices for items offered under contract. The
prices of items obtained for the market basket became the baseline price
for those items. However, according to the DCMA report and senior DLA
officials, DSCP was not sampling a high enough percentage of food service
equipment items to make sure that fair and reasonable prices were being
paid.11 On average only 18 percent of the first generation food service
equipment items were being sampled; for the second generation contracts
awarded in June 2005, the average rose to 24 percent. While the sample
size for the recompeted food service equipment prime vendor contracts was
larger, the DCMA report noted that it was still small compared to the
total number of items under the food service equipment contract.
6GAO, NSIAD-00-30.
7DOD Medical Inventory: Reductions Can Be Made Through the Use of
Commercial Practices GAO/NSIAD-92-58 (Washington, D.C.: Dec. 5, 1991); DOD
Food Inventory: Using Private Sector Practices Can Reduce Costs and
Eliminate Problems, GAO/NSIAD-93-110 (Washington, D.C.: June 4, 1993).
8House Armed Services Committee Hearing on Prime Vendor Program of Defense
Logistics Agency (Nov. 9, 2005).
9A pricing agreement is a manufacturer's or distributor's agreement with
DSCP to provide products at a specified price or discount.
In addition, while the contracting officers were required to document
price increases in the contract files for food service equipment, we found
that this was not being done. For example, we reviewed contract prices
DSCP paid for an aircraft refrigerator and determined that the contract
price had increased from $13,825 in March 2002 to $32,642 in September
2004. DSCP officials were unable to explain why the price of the aircraft
refrigerator had more than doubled during the time period. These officials
also stated that there was no documentation in the contract file to
support the increase as required. Additionally, the officials could not
explain why two different prices were paid for the same aircraft
refrigerator on the same date. Specifically, on September 24, 2005, two
different orders were awarded with prices of $32,642 and $29,975. Senior
officials from DLA and DSCP acknowledged that these particular problems
resulted from contracting personnel not doing their jobs and from a lack
of management oversight.
Since 2002 DLA Internal Reviews Cited Lack of Pricing Reviews
DLA's periodic reviews of its contracting activities identified weaknesses
in contract management and execution of some prime vendor contracts that
are managed by DSCP. DLA periodically conducts reviews of its contracting
activities to improve the operational efficiency and effectiveness of
contracting operations and evaluate the integrity of the procurement
process.12 In 2002, DLA conducted an internal review for the Subsistence
Directorate, and in 2003, a review of the Construction and Equipment
Directorate. These reviews identified weaknesses in contract management
and execution as some prime vendor contracts were not being managed
properly and there was no evidence in the contract file that prices had
been reviewed for price reasonableness. These reviews found that the
integrity of the procurement process needed to be strengthened in the
Subsistence and the Construction and Equipment Directorates.
10Department of Defense Procurement Management, December 12, 2005 -
January 25, 2006, Defense Contract Management Agency.
11Items and quantities selected for inclusion in a market basket have not
been consistent among the various commodities, according to DLA officials.
For example, in subsistence (food and food service equipment), the samples
have ranged from a low of 18 percent of the items to be purchased to a
high of 75 percent. DLA is currently developing policy that will require
that market baskets must represent 75 percent of the anticipated dollar
value of the planned acquisition.
12These reviews considered whether contracting officials met all
requirements of law, executive orders, regulations, and other procedures
when contracting for supplies and services for the government.
The 2002 internal review found that oversight of the Subsistence
Directorate contract actions needed to be enhanced to better manage the
risk associated with subsistence contracting. For example, DLA's review
found that the Subsistence Directorate needed to improve its methodology
for verifying the prices for food service equipment by expanding the
number of pricing reviews being conducted. Specifically, the Directorate
allowed food service equipment prime vendors to add new items to the
contracts without an up-front price review, relying instead on postaward
delivery order price reviews performed by contracting personnel in the
buying section. However, DLA's 2002 internal review found that the
postaward delivery order price reviews occurred infrequently. For example,
in fiscal year 2001, 4,487 orders were issued, of which only 25 to 50 were
reviewed. In fiscal year 2002, 4,401 orders were issued. At the time of
the 2002 assessment, no price reviews had taken place.
The 2003 internal review of the Construction and Equipment Directorate
reported that many of the deficiencies identified revolved around a
failure to comply with fundamental contracting requirements that are
designed to preserve the integrity of the procurement process. In
addition, the review team found pricing problems where purchases were made
at unreasonably high prices or contracting personnel failed to perform any
price reviews to determine price reasonableness. For example, a sample of
30 items reviewed found that 14 items were priced at least 25 percent over
the estimated fair market price and none of the items in the sample had a
price reasonableness determination completed at the time of purchase. The
report stated, "It appears that these deficiencies stem from the fact that
many contracting personnel and several supervisors . . . have not gained
the basic skills to execute government contracts or have blatantly
disregarded procurement policy and procedures. The situation presents high
risks to the Agency and calls for more rigid enforcement of review and
oversight."
The 2002 and 2003 reviews made recommendations requiring an increase in
price verification reviews, management oversight, and in some cases,
additional training. Although DSCP management concurred with the findings
and agreed to take the recommended actions, some of the problems recurred
in the next DLA review conducted in January and May 2005. For example,
this review found that postaward pricing reviews for the food service
equipment prime vendor contracts were not being conducted as required. In
addition, the 2005 review noted that increased management attention and
procurement oversight was needed to eliminate the shortcomings regarding
contracting rules and regulations. Specifically, the review found
significant deficiencies in the application of fundamental contracting
rules in the Construction and Equipment Directorate. The findings related
to, among other things, the proper use and exercise of options in that
most contract files did not indicate that options had been properly
justified prior to the government exercising them;13 compliance with
requirements for best value source selection; compliance with requirements
for negotiated acquisitions; and compliance with procurement oversight
policies and procedures. The review noted that the findings related to the
basic principles of contracting and were not symptoms of the complexity of
prime vendor contracting.
We found that another factor that could be influencing the lack of pricing
reviews in these commodities is the emphasis DLA management has
traditionally placed on increasing sales to customers rather than on the
prices the prime vendors charge for items. Both the DCMA review and a DLA
internal review noted the undue emphasis placed on sales data. DLA senior
officials also acknowledged that this could be an issue. As noted in the
following section, DLA is changing the metrics it reviews to include
pricing as well as sales data.
DLA Is Instituting Corrective Actions and Developing Policy Guidance for
Prime Vendor Contracting
DLA has developed corrective actions and has begun to implement some of
these corrective actions such as increasing the number of audits and
establishing additional training requirements for contracting officers and
managers. However, some of the corrective actions DLA is taking have
delayed order approval and delivery times for customers. In addition to
the corrective actions it is implementing, DLA is also developing a policy
to implement regulatory guidance for prime vendor contracting.
DLA Has Initiated Corrective Actions
Senior DLA officials acknowledged that weaknesses in oversight led to the
pricing problems highlighted in the media reports and at the congressional
hearing and stated that they are instituting corrective actions. DLA has
since conducted internal reviews and requested an external review by the
Defense Contract Management Agency, which has been completed.14 In
addition, DLA has requested the Defense Contract Audit Agency to perform
audits under the food service equipment prime vendor program, which are
expected to be completed by June 2006. As a result of the completed
reviews, since December 2005 DLA has initiated several actions aimed at
strengthening oversight, such as modifying contracts to change the price
verification process and establishing additional training for contracting
officers and managers. Because DLA is still in the process of implementing
these actions, we did not evaluate them at this time.
We summarized the main findings of the reviews and DLA actions to address
these findings in table 1.
13FAR 17.207(c) requires that the contracting officer exercise options
only after determining that (1) funds are available; (2) the requirement
covered by the option fulfills an existing government need; (3) the
exercise of the option is the most advantageous method of fulfilling that
need, price, and other factors considered; and (4) that the option was
synopsized in accordance with FAR Part 5 or properly exempted.
14Department of Defense Procurement Management Review, December 12, 2005 -
January 25, 2006, Defense Contract Management Agency.
Table 1: Summary of Main DLA and DCMA Findings and DLA Actions
Finding/observation DLA actions
o Lack of management oversight. o Monthly briefings to DSCP
Command on pricing reviews and
audits.
o Annual procurement management
reviews on prime vendor
contracts.
o All prime vendor contracts
will be approved by DLA
headquarters.
o Reorganizing the Procurement
Directorate to provide more
independent oversight of the
supply chains.
o Inadequate pricing reviews o Ensuring prime vendor
being conducted. contracts comply with an
established prime vendor pricing
model.
o Contracting officers
documenting fair and
reasonableness price
determinations for orders over
certain thresholds.
o Increasing the number of
audits to ensure the government
was not overcharged.
o Modifying contracts to change
the price verification process.
o Requesting a price audit by
DCAA.
o Lack of knowledge or skills of o Establishing additional
contracting personnel, or a training for contracting officers
disregard for the contracting and managers.
rules and regulations. o Reorganizing the Subsistence
Directorate and revoking some
contracting officers' warrants.
o Management metrics may be too o Acquisition management metrics
narrowly focused on sales, fill developed with a Monthly Command
rates and customer satisfaction. review. Now look at price as well
as sales.
o Prime vendor concept may not be o Adjusting acquisition
suitable for all commodities. strategies to reassign programs
to best procurement approach.a
Source: GAO analysis of DLA and DCMA data.
aFor example, DLA has evaluated the acquisition of food service equipment
and has determined not to continue acquiring food service equipment
through a prime vendor. A new acquisition strategy is under development
that will require the development of a contractual relationship primarily
with manufacturers or their representatives for equipment and incidental
services.
Based on the Standards for Internal Controls in the Federal Government, a
key internal control element is the monitoring of the quality and
performance over time and ensuring that the findings of audits and other
reviews are promptly resolved.15 Internal control should generally be
designed to assure that ongoing monitoring occurs in the course of normal
operations, is performed continually, and is ingrained in the agency's
operations. It includes regular management and supervisory activities,
comparisons, reconciliations, and other actions people take in performing
their duties. However, DLA officials have acknowledged that a lack of
management oversight led to the pricing problems noted in 2002, 2003, and
again in 2005.
15GAO/AIMD-00-21.3.1.
DLA's Corrective Actions Have Resulted in Delays for Some Customers
The requirements for additional price verification and approval
implemented by DSCP have resulted in delays in order approval and slowed
delivery to some customers and resulted in additional resource
requirements for DSCP. The delays and additional requirements have already
led to some refinements being made in the verification requirements. For
example, in January 2006, the maintenance, repair and operations
(MRO)-Supplies commodity within the Construction and Equipment Directorate
was initially required to perform a fair and reasonable price
determination on all orders over $2,500 before the prime vendor could
process the order. The average number of orders with a value of more than
$2,500 received each month for this commodity is about 40,000, and each
order contains, on average, 5 line items. Thus, the average number of
lines that required price determinations was approximately 200,000 per
month. All orders under $2,500 were to be reviewed by a statistical sample
on a post-order basis. To assist in fulfilling this requirement, 12 staff
have been added since January 2006. In spite of the additional staff, the
turnaround time to complete an order has risen from around 2 days to about
10, as approximately 8 days are required to perform the price
determination. According to a manager in the Construction and Equipment
Directorate, some customers are pulling back from using the prime vendor
because of the delay. Some prime vendors have also reported a decrease in
sales.
Because of the delay and increase in resource requirements, the criteria
for performing the fair and reasonable price determination were refined in
February 2006. MRO-Supplies management changed its policy of reviewing
every order of $2,500 or more for a fair and reasonable price
determination prior to the prime vendor processing the order to reviewing
30 percent of the orders with a value of $2,500 to $24,999 on a pre-order
basis and the remaining 70 percent done post-order.16 However,
MRO-Supplies is still reviewing all orders with a value greater than
$25,000 prior to the order being processed. In addition, a statistical
sample of orders with a value of less than $2,500 will still be reviewed
for a fair and reasonable price, some pre-order and some post-order,
whereas previously, the entire sample was reviewed post-order.
DLA is Developing New Policy
Guidance for Prime Vendor Contracting
In addition to the corrective actions being carried out, DLA is also
developing a policy to implement regulatory guidance for prime vendor
contracting. According to a DLA acquisition official, the policy will also
establish the basis for lessons learned from the reviews of prime vendor
programs. Key points of the policy include: specific requirements for
management oversight such as pricing and compliance audits; requiring all
prime vendor contracts to comply with an established prime vendor pricing
model; annual procurement management reviews for all prime vendor
contracts; and requiring advance approval by headquarters for all prime
vendor contracts, regardless of dollar value. Because this policy was
still in draft form at the time of our review, we did not evaluate it.
16We note that the FAR generally requires a price determination on orders
over $2,500 - FAR 2.101, FAR 13.106-3 and FAR 16.505(b)(3).
Conclusions
The prime vendor concept can be a useful approach to acquiring commercial
goods and services, reducing delivery times, and decreasing the need for
and costs of maintaining government inventory, but until DOD's prime
vendor program receives the level of oversight it has been lacking, it
remains vulnerable to the systemic pricing problems that have plagued it
in the past. DLA's 2002 and 2003 internal reviews recommended corrective
actions and DLA officials agreed to implement changes to better oversee
prices. However, these changes, which included policies and procedures for
pricing reviews, failed to prevent the problems highlighted in October and
November 2005 because of a lack of management oversight by both logistics
agency and supply center officials. Therefore, the new actions DLA is
taking may not be effective until DLA provides the continual oversight
which has been lacking.
Recommendation
We recommend that the Secretary of Defense direct the Undersecretary of
Defense, Acquisition, Technology and Logistics to ensure that the Director
of the Defense Logistics Agency provide continual management oversight of
the corrective actions to address pricing problems in the prime vendor
program.
Agency Comments and Our Evaluation
In written comments on a draft of this report, the Deputy Under Secretary
of Defense for Logistics and Materiel Readiness, which is responsible for
DLA oversight, concurred with our recommendation and identified corrective
actions already being taken by DLA. DOD noted that DLA is committed to
implementing the corrective actions and has assigned additional resources
to oversee prime vendor contracts. In addition, the department stated that
DLA will continue to monitor prime vendor programs to ensure the actions
taken will produce the intended results. We noted that DOD's comments did
not address what actions the Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics would take to ensure that DLA will
provide continual management oversight and contacted the office to clarify
its role in overseeing DLA's corrective actions. We were told by a senior
official from the Under Secretary's office that the office of the Deputy
Under Secretary of Defense for Logistics and Materiel Readiness will
review the implementation of the corrective actions in its regular
management meetings with DLA. The written comments from the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness are included in
enclosure 1 of this correspondence.
Scope and Methodology
To determine the extent of pricing reviews conducted by DLA for items
purchased through a prime vendor, we analyzed 16 prime vendor contracts
(10 food service, 1 subsistence, and 5 maintenance, repair and
operation), two contracts with the manufacturer of an aircraft
refrigerator and four delivery orders to prime vendors for the same
refrigerator to determine pricing control and audit requirements, and
reviewed internal and external assessments of DLA's procurement
management. In addition, we reviewed policies and procedures governing the
use of prime vendors and prior GAO reports on the subject. Further, we
discussed the mechanisms used to monitor price with DLA and DSCP
officials; prime vendors located in Columbia and Lexington, South
Carolina; customers located at Fort Jackson, South Carolina, and Fort
Stewart, Georgia; a Naval Sea Systems Command official in Philadelphia,
Pennsylvania; and a manufacturer located in Philadelphia, Pennsylvania.
To determine the extent to which DLA has addressed the pricing issues
identified at the November 2005 hearing we discussed with DSCP and DLA
officials their ongoing and planned actions to rectify the management
oversight weaknesses identified within the DSCP prime vendor programs and
the changes and adjustments made to prime vendor contracts since they were
first awarded. We also discussed with DCMA and DCAA the prime vendor
contract and pricing reviews those agencies were conducting at DLA's
request. Finally, we discussed the impacts of DLA's corrective actions
with DSCP officials and with prime vendors located in Columbia and
Lexington, South Carolina.
We conducted our review from December 2005 through April 2006 in
accordance with generally accepted government auditing standards.
We are sending copies of this report to the Undersecretary of Defense,
Acquisition, Technology and Logistics; the Deputy Undersecretary of
Defense for Logistics and Materiel Readiness; the Director, Defense
Logistics Agency; and interested congressional committees. 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 or [email protected] if you or your staff
have any questions concerning this report. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report were Marilyn
Wasleski, Assistant Director; Vijay J. Barnabas; John Clary; Susan Ditto;
Aaron Kaminsky; and Kenneth Patton.
Sincerely yours,
William M. Solis, Director
Defense Capabilities and Management
Enclosure
Enclosure
Comments from the Department of Defense
(350789)
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