Defense Management: DLA Has Made Progress in Improving Prime	 
Vendor Program, but Has Not Yet Completed All Corrective Actions 
(26-FEB-07, GAO-07-396R).					 
                                                                 
The Department of Defense (DOD) operates a worldwide supply	 
system, with the vast majority of the items being managed by the 
Defense Logistics Agency (DLA). Media reports in October 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, and the House Armed Services Committee held a hearing on 
the matter on November 9, 2005. As a result of the hearing, DLA  
officials recognized the need to improve management oversight and
internal controls over the program, and they proposed a series of
corrective actions. Under the prime vendor concept, 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. The prime vendor provides the product either at the	 
cost paid to obtain it or at a price agreed upon in advance with 
DLA plus a handling fee. 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 
prime vendor contracts for three major supply chains: medical	 
materiel, subsistence/garrison feeding, and construction and	 
equipment. In June 2006, we summarized the main findings of DLA  
internal reviews, and an external review conducted by the Defense
Contract Management Agency at DLA's request, of DLA's prime	 
vendor programs. The findings highlighted five deficiencies, as  
follows: (1) management metrics that were too narrowly focused on
sales; (2) a prime vendor concept that was not suitable for all  
commodities; (3) a lack of management oversight; (4) inadequate  
pricing reviews; (5) a lack of knowledge or skills in the	 
workforce. We also reported that DLA had experienced persistent  
problems in overseeing prime vendor contracts, despite the	 
existence of oversight policies and procedures and the		 
identification of corrective actions prior to November 2005.	 
Those problems persisted because DLA and DSCP management had not 
provided the oversight needed to ensure that the policies,	 
procedures, and corrective actions were implemented. We therefore
recommended that the Secretary of Defense ensure that the	 
Director of the DLA provide continual management oversight of the
corrective actions DLA was taking to address the problems in its 
prime vendor program. A House Armed Services Committee report	 
accompanying the fiscal year 2007 Defense Authorization bill	 
directed GAO to review DLA's actions and submit a report to the  
defense committees no later than March 1, 2007. Our objective was
to determine the extent to which DLA's corrective actions have	 
addressed the main deficiencies in the prime vendor program.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-396R					        
    ACCNO:   A66244						        
  TITLE:     Defense Management: DLA Has Made Progress in Improving   
Prime Vendor Program, but Has Not Yet Completed All Corrective	 
Actions 							 
     DATE:   02/26/2007 
  SUBJECT:   Contract oversight 				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Federal regulations				 
	     Federal supply systems				 
	     Human capital management				 
	     Internal controls					 
	     Prime vendor					 
	     Program evaluation 				 
	     Program management 				 
	     Supply chain management				 
	     Corrective action					 
	     Executive agency oversight 			 
	     Policies and procedures				 
	     DOD Prime Vendor Program				 

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GAO-07-396R

   

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February 26, 2007

The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Ike Skelton
Chairman
The Honorable Duncan L. Hunter
Ranking Minority Member
Committee on Armed Services
House of Representatives

Subject: Defense Management: DLA Has Made Progress in Improving Prime
Vendor Program, but Has Not Yet Completed All Corrective Actions

The Department of Defense (DOD) operates a worldwide supply system, with
the vast majority of the items being managed by the Defense Logistics
Agency (DLA).^1  Media reports in October 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, and the House Armed Services
Committee held a hearing on the matter on November 9, 2005.^2 As a result
of the hearing, DLA officials recognized the need to improve management
oversight and internal controls over the program, and they proposed a
series of corrective actions.

Under the prime vendor concept, 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. The prime vendor provides the product either at the
cost paid to obtain it or at a price agreed upon in advance with DLA plus
a handling fee. In fiscal year 2006, prime vendor sales accounted for
approximately $7.25 billion, or 20 percent, of DLA's total sales and
service of $36 billion.

^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.

^2The prime vendor program uses a contractual arrangement with one or more
commercial vendors to supply a wide range of commercial off-the-shelf
material directly to military customers on a just-in-time basis.

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 prime vendor contracts for three
major supply chains: medical materiel, subsistence/garrison feeding, and
construction and equipment. Medical materiel includes pharmaceutical and
medical/surgical items. Subsistence includes food for troop feeding. The
construction and equipment supply chain comprises several commodities,
including maintenance, repair, and operations (MRO),^3 lumber, and metals.
DSCP is also the lead center for the clothing and textiles supply chain,
which does not include any prime vendor contracts.

In June 2006, we summarized the main findings of DLA internal reviews, and
an external review conducted by the Defense Contract Management Agency at
DLA's request, of DLA's prime vendor programs.^4 The findings highlighted
five deficiencies, as follows:

           o management metrics that were too narrowly focused on sales,
           o a prime vendor concept that was not suitable for all
           commodities,
           o a lack of management oversight,
           o inadequate pricing reviews,^5 and
           o a lack of knowledge or skills in the workforce.

We also reported that DLA had experienced persistent problems in
overseeing prime vendor contracts, despite the existence of oversight
policies and procedures and the identification of corrective actions prior
to November 2005. Those problems persisted because DLA and DSCP management
had not provided the oversight needed to ensure that the policies,
procedures, and corrective actions were implemented. We therefore
recommended that the Secretary of Defense ensure that the Director of the
DLA provide continual management oversight of the corrective actions DLA
was taking to address the problems in its prime vendor program.

^3The MRO category is further broken out between supplies and services,
with separate prime vendor contracts for each.

^4GAO, Defense Management: Attention Is Needed to Improve Oversight of DLA
Prime Vendor Program,  GAO-06-739R (Washington, D.C.: June 19, 2006).

^5The term "pricing review" was used in our June 2006 report to refer to a
review for price reasonableness. For purposes of this report and in light
of newly revised and clarified DLA policies, we use the term "price
reasonableness determination" to refer to the contracting function of
determining fair and reasonable pricing. We use the term "price review" to
refer to the oversight function of auditing the contracting officer's
price reasonableness determination.

A House Armed Services Committee report accompanying the fiscal year 2007
Defense Authorization bill directed GAO to review DLA's actions and submit
a report to the defense committees no later than March 1, 2007. Our
objective was to determine the extent to which DLA's corrective actions
have addressed the main deficiencies in the prime vendor program. To
accomplish this objective, we reviewed the actions DLA and DSCP have
taken. We also reviewed a new DLA policy that governs the use of prime
vendor contracts and DSCP's adherence to that policy and implementing
procedures. In addition, we reviewed internal assessments of DLA's and
DSCP's management of prime vendor contracts, as well as prior GAO reports.
Further, we interviewed DLA and DSCP officials, as well as officials in
the Office of the Deputy Under Secretary of Defense for Logistics and
Materiel Readiness. We conducted our review between August 2006 and
January 2007, 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

DLA has made progress in identifying and implementing a series of
corrective actions to address the five main deficiencies we indicated
earlier in the management of its prime vendor program, but it has not yet
completed all the actions, and some deficiencies remain. Until DLA
completes all the actions, we cannot fully assess whether they will be
effective in correcting all the deficiencies and sustaining the
improvements. DLA has effectively rectified two of the deficiencies by
completing actions to broaden its management metrics and adjust its
acquisition strategy for commodities that were not suitable for the prime
vendor concept. However, it is still in the process of implementing
corrective actions to remedy the three remaining deficiencies noted in our
June 2006 report--those relating to management oversight, pricing reviews,
and workforce knowledge and skills.^6 To address these three deficiencies,
DLA has issued a new policy and DSCP has developed implementing procedures
that prescribe oversight for prime vendor contractors; authorized
additional positions to enhance oversight and developed training
requirements for its staff; and introduced specific requirements for
supply chains to conduct price reasonableness determinations and more
price reviews. Nevertheless, these improvements are still a work in
progress. For example, a new division at DSCP, established to ensure that
supply chains are following procedures, is still in the process of hiring
and training staff and has recently revised its procedures. Further,
personnel responsible for one commodity within the construction and
equipment supply chain had not conducted price reasonableness
determinations as required by the new policy, resulting in a backlog of
11,260 items that needed review, representing an estimated value of $96
million. As of January 2007, DSCP personnel had reduced the backlog to 480
items that needed additional research. Finally, some supply chains have
not yet been able to meet their staffing requirements. The shortage of
personnel in the supply chains has led to heavier workloads for current
staff as well as to delays in completing contract actions. Until DLA
completes all the corrective actions that are still in process, it remains
at risk of being overcharged for the products it is purchasing. DLA faces
further challenges in sustaining the improvements it has made because of
impending leadership changes and by virtue of its history of not following
through on correcting deficiencies. Our prior work has shown that one of
the elements needed for sustaining management improvement initiatives is
demonstrated leadership commitment.^7 While the current leadership at DLA
and DSCP have demonstrated their commitment to implementing the corrective
actions, personnel turnover can be expected in a large organization such
as DLA--for example, the Commander of DSCP will reach the end of his
2-year term in mid-2007--and future leaders may not necessarily complete
the corrective actions. DLA's history reflects the vulnerability of the
prime vendor program to systemic pricing problems, because management has
not always provided the oversight necessary to ensure that corrective
actions were implemented. Because of these factors, and to mitigate its
risk of being overcharged for its purchased products, DLA needs to ensure
that the course of corrective actions is completed and the actions are
working as intended and the improvements in oversight are sustained.

^6GAO-06-739R.

We are recommending that the Secretary of Defense require the Director of
the Defense Logistics Agency to determine whether all the corrective
actions in DLA's prime vendor program have been completed and are
producing the intended results. The results of the determination should be
communicated in writing to the Under Secretary of Defense, Acquisition,
Technology, and Logistics within 6 months of the issuance of this report.
In commenting on a draft of our report, DOD concurred with our
recommendation. We discuss DOD's comments later in this correspondence.

Background

Under the prime vendor concept, DOD relies on a distributor who provides a
commercial product line (such as electrical and plumbing equipment) 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.^8

In 1992, we identified DOD's contract management as one of our high-risk
areas, and it remains so today.^9 One of the key reasons why the area is
high risk is that DOD does not provide adequate oversight of defense
contracts. One aspect of oversight is to ensure that the government is
obtaining fair and reasonable contract prices.

^7GAO, Management Reform: Elements of Successful Improvement Initiatives,
GAO/T-GGD-00-26 (Washington, D.C.: Oct. 15, 1999).

^8GAO, 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 Act 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.

^9GAO, Defense Contract Pricing, GAO/ [3]HR-93-8 (Washington, D.C.: Dec.
1, 1992), and High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007).

Our prior work on federal management issues suggests that certain elements
are particularly important in implementing and sustaining management
improvement initiatives that genuinely take root and eventually resolve
the problems they are intended to fix.^10 These elements include:
demonstrated leadership commitment; integration of improvement initiatives
into the day-to-day activities of the organization; thoughtful and
rigorous planning to guide decisions, particularly to address human
capital (and technology) issues; and organizational realignment to
streamline operations and clarify accountability. According to the
Standards for Internal Control in the Federal Government, effective
management of an organization's workforce--its human capital--is essential
to achieving results and is an important part of internal control.^11
Management should ensure that skill needs are continually assessed and
that the organization is able to obtain a workforce that has the required
skills necessary to achieve organizational goals. As a part of its human
capital planning, management should also consider how best to retain
valuable employees, plan for their eventual succession, and ensure
continuity of needed skills and abilities.

Progress Has Been Made, but Some Deficiencies Remain in DLA's Prime Vendor
Program Because All Actions Have Not Been Completed

DLA has made progress in implementing the corrective actions to address
the problems identified in our June 2006 report; however, it has not yet
completed all the actions, and some program deficiencies remain. Until DLA
completes all the actions, we cannot fully assess whether they will be
effective in correcting all the deficiencies. DLA's actions have corrected
two of the main deficiencies identified in our June 2006
report--management metrics that were too narrowly focused on sales, and a
prime vendor concept that was not suitable for all commodities. DLA is now
reviewing a broader range of prime vendor contracting metrics, and it has
adjusted its acquisition strategy for commodities that were not suitable
for the prime vendor concept. Deficiencies remain, however, in the areas
of management oversight, the process of conducting price reasonableness
determinations for one commodity, and the shortage of staff with required
skills. DLA is continuing its work to address these three areas. However,
DSCP's Compliance Division had not, at the time of our review, been able
to complete all the oversight reviews called for by current DSCP
procedures. Contracting personnel responsible for one commodity, MRO
Supplies, had not completed price reasonableness determinations, as
required by DLA policy, which led to a backlog of around 11,260 items that
needed to be reviewed. The estimated value of these items was around $96
million. Further, DSCP has had difficulty in finding qualified personnel
to perform contracting and oversight functions. Finally, DSCP will
experience changes in leadership, which could affect the implementation of
the corrective actions.

^10GAO/T-GGD-00-26.

^11GAO, Standards for Internal Control in the Federal Government,
AIMD-00-21.3.1 (Washington, D.C.: November 1999).

DLA Has Remedied Deficiencies Regarding Metrics and the Use of the Prime
Vendor Concept

DLA's management oversight has traditionally focused on performance
metrics such as sales, fill rates, and customer satisfaction. Our June
2006 report^12 noted that one factor that could have influenced the lack
of pricing reviews in some commodities was the emphasis that DLA
management had traditionally placed on increasing sales to customers,
rather than on the prices prime vendors charge for items. In response to
this finding, DLA and DSCP management are now reviewing a much broader
range of metrics to assess the prime vendor programs. DLA has established
a headquarters-level quarterly acquisition integrity review process in
order to provide more oversight for all its field activity centers. The
quarterly acquisition integrity review assesses risk across all field
activity centers (including DSCP), and it contains updates on specific DLA
oversight programs, such as procurement management reviews, contract
reviews, and integrated acquisition review boards. The quarterly
assessment also includes data on field-specific oversight programs, such
as price reviews and compliance reviews. In addition to metrics on sales
data and fill rates, DSCP management, now on a monthly basis, reviews
pricing and contracting metrics such as price reasonableness
determinations, price changes, pricing history, and refund data. DLA has
also developed automated tools to assist in gathering and tracking these
metrics. Among other things, these tools track price change, price
exception, and price history data that are reviewed by DSCP management.

The prime vendor concept has also been reevaluated by DLA. Prime vendor
arrangements generally are chosen for the purchase of commercial
off-the-shelf items, not military-unique items. While the purpose of the
prime vendor concept has not changed, its application over time has
expanded to include more commodities. DLA has recognized that certain
commodities are better suited than others for the prime vendor concept,
and it has adjusted its acquisition strategy accordingly. For example, DLA
did not renew the prime vendor contracts for food service equipment when
they expired in June 2006, and will use long-term contracts to acquire
that commodity.^13 DSCP management has conducted analyses of its prime
vendor programs and concluded that multiple award, long-term contracts,
which compete orders among vendors, are more suitable for some commodities
than for others.^14 As a result, the number of prime vendor programs has
decreased from 15 to 7. Table 1 lists the current acquisition strategies
for the various commodities.

^12GAO-06-739R.

^13According to DLA, a long-term contract is defined as an
indefinite-delivery contract in excess of 1 year (including options).

^14Similar to the prime vendor program, DSCP will award multiple award
long-term contracts on a regional basis. DSCP will select several
contractors within each region, and then compete orders among these
contractors. According to DSCP officials, competing the orders will reduce
the need to conduct price reasonableness determinations for each order,
and the need to maintain price lists or catalogues, as in the prime vendor
program.

Table 1: Acquisition Strategy for DLA Prime Vendor Programs

Commodities originally acquired   Current acquisition strategy             
                                                                              
through DLA prime vendor programs                                          
1. MRO Supplies^a                 Prime vendor program                     
2. MRO Services                   Prime vendor program                     
3. Special Operations             Prime vendor program                     
4. Subsistence (Garrison Feeding) Prime vendor program                     
5. Pharmaceutical                 Prime vendor program                     
6. Medical/Surgical               Prime vendor program                     
7. Metals                         Prime vendor program^b                   
8. Food Service Equipment         Will be long-term indefinite-delivery    
                                     contracts                                
9. Fire & Emergency Services      Long-term indefinite-delivery contracts  
10. Lumber                        Long-term indefinite-delivery contracts  
11. Pallets                       Long-term indefinite-delivery contracts  
12. Ecclesiastical                Long-term indefinite-delivery contracts  
13. Container Drums               Long-term indefinite-delivery contracts  
14. Material Handling Equipment   Will be long-term indefinite-delivery    
                                     contracts                                
15. Administrative Products       Blanket Purchase Agreement canceled      

Source: GAO analysis of DLA and DSCP data.

^aThis commodity has separate contracts for Central Command supplies and
non-Central Command supplies.

^bCurrently prime vendor, but acquisition strategy being developed.

In addition to adjusting the acquisition strategies for some prime vendor
programs, in November 2006, DLA hired a contractor to conduct analyses to
determine the cost savings, cost avoidance, and customer benefits from
each of the prime vendor programs. The contractor is expected to complete
the analyses by the end of March 2007.

Deficiencies Remain in Oversight, Price Reasonableness Determinations for
One Commodity, and Staffing

DLA has taken actions to remedy deficiencies in the areas of management
oversight, the process of conducting price reasonableness determinations
for one commodity, and the shortage of staff with the required skills.
Nevertheless, these improvements are still a work in progress.

Management Oversight Guidance Has Not Been Fully Implemented

To improve its management oversight of the prime vendor program, DLA has
issued a new policy that increased the level of oversight required for
prime vendor contracts. DSCP, also, has updated its procedures to
implement this new policy. However, a new division established at DSCP to
ensure that supply chains are following procedures has not been able to
conduct all the assessments required by the new policy and procedures.

Among the management oversight problems we identified in 2006 was pricing,
and one of the actions DLA took to address it was the promulgation of a
new policy in June 2006 to implement regulatory guidance for prime vendor
contracts. The key points of the June policy included

           o specific requirements for management oversight, such as pricing
           and compliance audits;
           o requiring all prime vendor contracts to comply with an
           established prime vendor pricing model;
           o annual local procurement management reviews for all prime vendor
           contracts; and
           o requiring approval by headquarters for all prime vendor
           contracts, regardless of dollar value.

We found in our present review of the June 2006 policy that some of the
examples of commodities used to illustrate various prime vendor
arrangements were not associated with the correct pricing model. We
discussed the apparent discrepancy with DLA officials, and subsequent to
our discussions, DLA clarified the model and issued a revised policy in
November 2006. The revised policy, among other things, also addressed
management oversight, acquisition planning, and acquisition workforce
training.^15

DLA and DSCP management have taken a series of steps to improve oversight
of prime vendor programs. These include setting up a Compliance Division
within the Procurement Directorate at DSCP to ensure that prime vendor
contracts are being executed and administered in accordance with
applicable rules and regulations; increasing the number of price reviews
conducted by supply chains; and requiring that all prime vendor contracts
be approved by DLA headquarters. In addition, the DLA Director provides
updates on prime vendor program issues, as needed, to the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness, as part of
their regularly scheduled meetings to discuss DLA matters. Further, DLA is
establishing a new Acquisition Management Directorate at the headquarters
level to emphasize the importance of the entire acquisition workforce, and
to enhance oversight. Another step that DSCP management took to improve
oversight was to require all supply chains to use a standardized mechanism
to track repeat findings from procurement management reviews. This
mechanism allows management to determine the cause of a repeat finding.

^15According to a DLA official, there is no specific requirement for
annual local procurement management reviews in the revised policy because
that requirement already exists in field activity guidance; further, the
reviews cover all procurement activities, not just those related to prime
vendors.

Oversight guidance has not been fully implemented, however. According to
the DSCP Guiding Principles for Acquisition, the Compliance Division's
quarterly reviews will include several assessments related to price
reasonableness determinations. As of early December 2006, however, we
found that the two reviews it had completed did not include all the
assessments called for in the DSCP guidance. Procurement Directorate
officials attributed the shortfall to the division's heavy workload and
the fact that it is not yet fully staffed. They further observed that even
if the division were fully staffed, conducting all the assessments listed
in the guidance would not be possible because they are so extensive. The
officials noted that the procedures were determined in a relatively short
time frame by another organization and were not reviewed for
practicability. The Compliance Division has revised its standard operating
procedures for the quarterly reviews to more realistically reflect its
current capabilities. A December 2006 DLA internal review of the
corrective actions in the prime vendor program, requested by DLA
management, expressed concern that the new procedures may weaken
oversight.^16 To address this concern, the Compliance Division now reviews
a sample of contract documentation on a monthly basis to ensure that
contracting officers are conducting price reasonableness determinations.
We believe that until the Compliance Division is fully operational,
management may lack all the information needed to provide proper
oversight.

The two completed quarterly reviews examined contracting officers'
documentation for determining prices to be fair and reasonable, vendors'
compliance with pricing methodology, and contract terms specifying fill
rates. These reviews found that contracting personnel and vendors for most
commodities provided adequate price reasonableness documentation and
complied with pricing methodology and contract terms. However, in a few
cases, either contracting personnel or the vendor did not provide the
price reasonableness documentation. The Compliance Division subsequently
met with contracting personnel in the various commodities to clarify what
documentation is needed to verify their price reasonableness
determinations.

Price Reasonableness Determinations for One Commodity Were Not Done as
Required

To improve its pricing procedures for various commodities, DLA's 2006
policy established pricing models to be used for different types of prime
vendor contracts. The pricing models generally require price
reasonableness determinations to be made for all items priced at $2,500 or
greater. However, for one prime vendor program--MRO Supplies commodity
within the construction and equipment supply chain--price reasonable
determinations are to be done for at least 30 percent of items priced from
$2,500 to $24,999 before the prime vendor can process the order. The price
reasonableness determinations for the remaining 70 percent of such items
are to be done no later than 60 days after an order is issued. DSCP
officials implemented this procedure in February 2006--that is, prior to
the June 2006 issuance of DLA's policy. However, in September 2006, we
found that none of the 70 percent of items priced from $2,500 to $24,999
had been reviewed. As a result, DSCP had accrued a backlog of price
reasonableness determinations to conduct, extending to 11,260 lines, with
an approximate value of $96 million.

^16Defense Logistics Agency, Audit Report on Corrective Actions Taken as a
Result of Identified Deficiencies in the Prime Vendor Program (Fort
Belvoir, Va.: Dec. 21, 2006).

Management at DLA and DSCP had not developed a plan to address this
backlog until we identified the issue. According to DSCP officials,
several factors played into the development of the backlog. First, DSCP
could not easily identify the 70 percent of the items that needed a price
reasonableness determination. This problem has since been addressed with
the advent of a new automated management information system. Second,
according to DSCP officials, they did not have enough personnel to address
the backlog. DSCP officials told us that they are actively working to
address this issue. Finally, they said, the volume of business also played
a role in the growth of the backlog.

After we called their attention to this issue, DSCP officials developed a
plan to conduct the determinations and to prevent this magnitude of
backlog from developing again. DSCP officials reported as of late January
2007 that they had completed an initial review of all 11,260 lines and
price reasonable determinations had been made on 10,780 of these lines.
However, 480 lines required additional research to make the price
reasonableness determination. According to a DSCP official, there is a
possibility that some refunds may be required. We believe that until DSCP
completes the price reasonableness determinations for all the items, there
remains a risk that it was overcharged for some items.

DLA and DSCP officials acknowledged that there was a risk but said that
they had taken action to mitigate it by modifying the prime vendor
contracts to include a purchasing review clause. This clause allows DLA
access to the contractor's records and information pertaining to those
items or services for which the government is relying on the contractor's
purchasing system to determine that competition was obtained, or to
justify that prices are fair and reasonable. In addition, if a purchased
product or service is determined to be unreasonably priced, the contractor
shall refund the government the amount that is in excess of a reasonable
price. DLA and DSCP officials told us that incorporating the purchasing
review clause mitigated the risk of being overcharged. According to a DLA
official, DSCP has completed audits of four prime vendors to ensure
compliance with the clause, but the reports had not been finalized as of
the end of January 2007. Because the clause is relatively new, it remains
to be seen how effective it will be.

Some Supply Chains Have Not Been Able to Meet Their Staffing Requirements

To improve the capability of its workforce, DLA has authorized additional
staffing at DSCP to perform price reasonableness determinations, audits,
and other oversight. DLA has also hired additional personnel at
headquarters to monitor findings from procurement management reviews. One
aspect of oversight is ensuring the presence of a workforce that has the
skills and knowledge needed to oversee contracts. However, DSCP officials
told us that they have been unable to fill all of the newly authorized
positions because of difficulties in finding and hiring qualified
personnel. These positions require highly specialized contracting skills,
which are difficult to find. When a qualified acquisition person is found,
the new staff member must be trained in the nuances of the particular
commodity, as well as in the management of a prime vendor arrangement, in
order to be fully effective. The shortage of personnel in the supply
chains has led to heavier workloads for current staff as well as to
backlogs of contract actions.

Similarly, the Compliance Division does not yet have the skilled workforce
that it needs to perform its oversight function. The division was
authorized to have a staffing level of 17, yet as of December 2006, only
15 slots have been filled. The director of the division told us that the
division was initially staffed by whoever was available. None of those
staff had training in conducting compliance reviews. Currently, only about
half of the personnel in this new division have the training or skills
needed to perform their tasks. DSCP is aware of the inexperience of many
Compliance Division personnel, and has recently developed a training plan
for them.

For their part, DLA and DSCP are exploring different methods of recruiting
qualified acquisition personnel. For example, DSCP established a
standing-register job opportunity announcement for acquisition personnel,
initially open to federal employees in the Philadelphia area and
subsequently broadened to include all federal activities nationwide.
Further, DSCP issued a recruitment bulletin targeted toward separated,
retired, or soon-to-retire military personnel, and it has also used an
Office of Personnel Management announcement designed to recruit from the
private sector. In addition to recruiting qualified acquisition personnel,
DLA and DSCP have established a semiannual recruitment cycle to hire
entry-level acquisition personnel. Until DLA and DSCP are able to fill all
the positions, contract oversight may be inadequate.

DLA May Face Challenges in Sustaining Improvements

Our previous work has shown that demonstrated leadership commitment is an
element of particular importance in implementing and sustaining management
improvement initiatives.^17 The current leadership at DLA and DSCP have
demonstrated their commitment to correcting the oversight problems. For
example, the DLA senior acquisition executive has briefed supply center
staff on the importance of oversight, and the DSCP Commander has made
personnel changes to enhance oversight. DLA management has also authorized
more positions at DSCP and at headquarters to strengthen contracting and
oversight staff. Further, DSCP management has requested approval for a new
acquisition executive position to oversee all procurement activity for the
center, and it has already received DLA approval for a Deputy Director
position for the Procurement Directorate. However, as with most federal
agencies, the leadership is continually changing. The current Director of
DLA took over that position in August 2006. The DSCP Commander will
complete his 2-year term as Commander in mid-2007. A new Deputy Commander
will replace the current one, who is serving in a temporary capacity, in
early 2007. Further, DSCP is continuing to hire acquisition personnel. In
light of the personnel changes occurring at both the management and
operational level, the significant changes in program operating
procedures, and the establishment of new oversight mechanisms, DLA may
face challenges in sustaining the improvements it is implementing in the
prime vendor program. DLA's history reflects the vulnerability of the
prime vendor program to systemic pricing problems. Despite guidance and
reforms to which the agency has committed over time, these issues have
beset DLA for a long time, because management has not always provided the
oversight necessary to ensure that corrective actions were implemented.

^17GAO/T-GGD-00-26.

Conclusions

DLA's recent progress in implementing actions to improve oversight of the
prime vendor program to date has been promising. However, systemic pricing
problems remain an area of risk for this program. Critical to DLA's
ability to realize substantial improvements in the oversight of the prime
vendor program will be rectifying the program's long-standing problems
described in this report. DLA's ability to address these remaining
problems is dependent on completing procedural improvements and filling
contract oversight positions with qualified staff. Whether this will occur
as intended is not a certainty. DLA's history of problems in overseeing
prime vendor contracts, the expected turnover in leadership and operating
personnel, and the significant changes made to program operating
procedures could pose significant risks to sustaining the improvements
made to program oversight. It is important that DLA and DSCP management
fully implement all the corrective actions and sustain the improvements
over the long term so the intended results are achieved.

Recommendation

We recommend that the Secretary of Defense direct the Under Secretary of
Defense, Acquisition, Technology, and Logistics to require the Director of
DLA to determine whether all the corrective actions in DLA's prime vendor
program have been completed and are producing the intended results. This
determination should identify any remaining or additional actions
necessary to remedy the deficiencies in the prime vendor program. This
determination should also specify a time frame for the completion of these
actions. The results of the determination should be communicated in
writing to the Under Secretary of Defense, Acquisition, Technology, and
Logistics within 6 months of the issuance of this report.

Agency Comments

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 noted that DLA has
made progress in implementing the corrective actions, and is committed to
ensuring that the remaining actions are completed and are producing the
intended results. The written comments from the Deputy Under Secretary of
Defense for Logistics and Materiel Readiness are included in the enclosure
following this report.

Scope and Methodology

To determine the extent to which DLA's corrective actions have addressed
the major deficiencies in the prime vendor program, we discussed the
status of actions taken and results of these actions with DLA and DSCP
officials. Specifically, we discussed the changes to management oversight,
new procedures for price reviews, metrics used to assess the prime vendor
programs, acquisition strategies for commodities originally classified as
prime vendor programs, and efforts to train and recruit personnel. In
addition, we discussed with representatives from the Office of the Deputy
Under Secretary of Defense for Logistics and Materiel Readiness their role
in overseeing the implementation of DLA's corrective actions and reviewed
prime vendor program briefings provided these officials by DLA. We also
reviewed and analyzed a new DLA policy governing the use of prime vendor
contracts, DSCP procedures for implementing the policy, DSCP's adherence
to the policy and procedures, internal assessments of DLA's and DSCP's
management of prime vendor contracts, and prior GAO reports. Further, we
reviewed a judgmental sample of documentation supporting contracting
officers' price reasonableness determinations for two commodities within
the construction and equipment supply chain. Finally, we interviewed
officials from the Deputy Under Secretary of Defense for Acquisition and
Technology, Defense Procurement and Acquisition Policy organization to
discuss their role in assisting DLA with acquisition workforce planning.
We conducted our review from August 2006 through January 2007 in
accordance with generally accepted government auditing standards.

We are sending copies of this report to appropriate congressional
committees; the Secretary of Defense; the Under Secretary of Defense,
Acquisition, Technology and Logistics; the Deputy Under Secretary of
Defense for Logistics and Materiel Readiness; and the Director, Defense
Logistics Agency. 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) 512-5274 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; Janay Sam;
Karen Thornton; and Cheryl Weissman.

John K. Needham, Acting Director
Defense Capabilities and Management

Enclosure

Enclosure: Comments from the Department of Defense

(350893)

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References

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