Contract Management: Pilot Program Needed to Improve DOD Identification
of Warranty Claims (Letter Report, 10/29/1999, GAO/NSIAD-00-3).

Pursuant to a legislative requirement, GAO provided information on the
Department of Defense's (DOD) plans to develop a pilot program to use
commercial sources to improve the collection of DOD claims under
aircraft engine warranties, focusing on the: (1) benefits obtained by
some private sector users of aircraft engine warranty services; and (2)
efforts DOD has made the evaluate the feasibility of establishing a
pilot program.

GAO noted that: (1) some commercial airlines have benefited from the use
of outside firms to identify failed engine parts and recover the cost of
correcting such parts from manufacturers; (2) officials from the United
Parcel Service, United Airlines, and America West told GAO that their
engine warranty recoveries increased over internally identified
recoveries when they supplemented internal efforts with an outside firm;
(3) in one case, warranty recoveries increased threefold over recoveries
identified internally; (4) to date, DOD has performed a limited review
of the feasibility of establishing a pilot program, but has not
established one; (5) the Army and the Navy made a limited assessment of
a potential pilot program and concluded that it would likely not be
useful to them; (6) they believe any additional claims that may be
identified and amounts recovered would not be worth the anticipated cost
to execute a pilot program; (7) the Air Force sought industry's interest
in a pilot program by synopsizing the program's requirements in the
Commerce Business Daily in November 1998; (8) however, the Air Force did
not issue a request for proposals, in large part because of concerns
that the program could not be executed in the 10 months remaining before
authority to conduct a pilot program was set to expire on September 30,
1999; (9) concerns that contractors would not be paid after that date
was also a factor; (10) experience from the private sector suggests that
contracting for engine warranty administration can improve warranty
recoveries over internal efforts; (11) this includes collecting claims
on past engine repairs even though the warranties are no longer active;
(12) however, it is unknown whether the results achieved by some
commercial airlines can be replicated in DOD since a pilot program has
not been implemented; (13) Congress recently extended the authority for
a pilot program until September 30, 2000; (14) however, the additional
time may still not be sufficient; and (15) this report suggests that
Congress consider expanding the pilot program to test whether DOD could
benefit from using commercial sources to increase recoveries on aircraft
warranties.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-3
     TITLE:  Contract Management: Pilot Program Needed to Improve DOD
	     Identification of Warranty Claims
      DATE:  10/29/1999
   SUBJECT:  Defense cost control
	     Aircraft engines
	     Privatization
	     Private sector practices
	     Repair costs
	     Maintenance costs
	     Cost effectiveness analysis
	     Warranties

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ns00003
A
Report to Congressional Requesters
October 1999 CONTRACT MANAGEMENT
Pilot Program Needed to Improve DOD Identification of Warranty Claims

GAO/NSIAD-00-3

National Security and International Affairs Division
Let ter
B- 282104 October 29, 1999 The Honorable John W. Warner Chairman The Honorable Carl Levin Ranking Minority Member Committee on Armed Services United States Senate
The Honorable Floyd D. Spence Chairman The Honorable Ike Skelton Ranking Minority Member Committee on Armed Services House of Representatives Section 391 of the Fiscal Year 1998 National Defense Authorization Act
(P. L. 105- 85) authorized the Secretary of Defense to carry out a pilot program to use commercial sources to improve the collection of Department of Defense (DOD) claims under aircraft engine warranties. The act required that, if established, the pilot program, and program contracts, terminate on September 30, 1999. However, on October 5, 1999, section 382 of the National Defense Authorization Act for Fiscal Year 2000 (P. L. 106- 65 ) extended the termination date of the pilot program until September 30, 2000. Although authorized, neither act requires a pilot program.
The legislation directs us to review the results of the pilot program. Since DOD has not yet initiated a pilot program, we are providing this interim report that (1) identifies the benefits obtained by some private sector users of aircraft engine warranty services and (2) assesses the efforts DOD has
made to evaluate the feasibility of establishing a pilot program. Generally, a warranty requires that a manufacturer repair or replace defective goods covered by the warranty without cost to the purchaser or pay the purchaser's costs of correcting a defect. Defects or deficiencies may be caused by poor design, faulty manufacturing processes, or the use of materials that do not meet contract specifications.
Results in Brief Some commercial airlines have benefited from the use of outside firms to identify failed engine parts and recover the cost of correcting such parts from manufacturers. Officials from United Parcel Service, United Airlines, and America West told us that their engine warranty recoveries increased over internally identified recoveries when they supplemented internal efforts with an outside firm. In one case, warranty recoveries increased threefold over recoveries identified internally.
To date, DOD has performed a limited review of the feasibility of establishing a pilot program, but has not established one. The Army and the Navy made a limited assessment of a potential pilot program and concluded that it would likely not be useful to them. They believe any additional claims that may be identified and amounts recovered would not be worth the anticipated cost to execute a pilot program. The Air Force sought industry's interest in a pilot program by synopsizing the program's requirements in the Commerce Business Daily in November 1998. However, the Air Force did not issue a request for proposals, in large part because of concerns that the program could not be executed in the 10 months
remaining before authority to conduct a pilot program was set to expire on September 30, 1999. Concerns that contractors would not be paid after that date was also a factor. Experience from the private sector suggests that contracting for engine warranty administration can improve warranty recoveries over internal efforts. This includes collecting claims on past engine repairs even though the warranties are no longer active. However, it is unknown whether the results achieved by some commercial airlines can be replicated in DOD since a pilot program has not been implemented. The Congress recently extended the authority for a pilot program until September 30, 2000. However, the additional time may still not be sufficient. This report suggests that the Congress consider expanding the pilot program to test whether DOD could benefit from using commercial sources to increase recoveries on aircraft warranties.
Background In December 1997, a firm submitted an unsolicited proposal to the Air Force to provide warranty recovery services for aircraft engines. The firm currently provides services to commercial airlines and operates under a contingency contract, receiving a fee based on net collected funds. Therefore, its customers incur no financial burden. Hourly rates or other
related costs, such as equipment, staffing, and data processing, are not associated with a contingency fee contract. The Air Force rejected the unsolicited proposal because it failed to meet the first criterion of a valid unsolicited proposal, as defined by the Federal Acquisition Regulation. The Federal Acquisition Regulation states that a
valid unsolicited proposal must be innovative and unique. According to the Air Force, the proposal merely offered services the Air Force already had and was not innovative and unique. The Senate Committee on Armed Services, in its report accompanying the Fiscal Year 1998 National Defense Authorization Act, expressed concern that DOD was not receiving appropriate refunds for repair of systems
covered by warranties. In June 1996, 1 we reported that warranties on weapon systems returned only about 5 cents for every dollar spent on the warranty. One cause for the low return was the low rate of claims submitted on warranted items. Both the fiscal year 1998 and the 2000 authorization acts allow the Secretary of Defense to enter into contracts under a pilot program to provide for the following services:  Collecting on warranty claims.  Determining the amounts owed DOD for repairs of aircraft engines covered by warranties.
 Identifying and locating information sources relevant to collecting claims under aircraft engine warranties.  Suggesting training programs to improve DOD's collection of warranty
related information needed to process warranty claims. The legislation requires that a contractor be paid a percentage of any amounts recovered as deemed appropriate by the Secretary of Defense.
Private Sector Finds United Parcel Service, United Airlines, and America West contracted with a private firm 2 that provides aircraft engine warranty services. United Parcel
Value in Contracting Service and United Airlines officials said they hired this firm because it for Warranty Services offered a no- cost service to determine if their warranty administration 1 Weapons Acquisitions: Warranty Law Should Be Repealed (GAO/ NSIAD- 96- 88, June 28, 1996). 2 This is the same firm that submitted the unsolicited proposal to the Air Force.
departments were identifying all defective warranted parts and then recovering the cost to fix such parts from the manufacturer. America West contracted with this same firm because its aircraft engine warranty department was backlogged.
Each of the airlines found that this firm increased engine warranty recoveries over recoveries found internally.
 At United Parcel Service, this firm increased warranty recoveries more than threefold, from June 1998 through March 1999. As a result, the company decided to contract its engine warranty administration to this firm.  At United Airlines, the firm increased warranty recoveries just under 2 percent, or approximately $500,000, from June 1998 to February 1999. United decided to continue contracting with this firm. United believes the combined efforts of its warranty administrators and this outside firm maximizes the identification and recovery of warranty claims.  At America West, this firm increased warranty recoveries, but officials would not quantify the increase because their company policy is not to discuss their supplier relationships with third parties. America West
contracted with this firm from July 1997 through July 1998 but decided not to continue contracting with any engine warranty recovery company. It would not provide a reason but America West officials did state that currently about 71 percent of their 276 engines are maintained by engine manufacturers under a power- by- the- hour program. This program precludes the need for warranty coverage because, for a fixed
price, the engine manufacturer provides engine maintenance. Airline officials told us that, initially, the outside firm needed time to learn where company engine maintenance data was stored and how to retrieve it. After the initial learning period, the firm's activities were transparent and not disruptive to normal company operations. They also confirmed that the
firm was successful in getting manufacturers to pay claims on past engine repairs and overhauls even though engine warranties were no longer active. The collection process, they said, was not contentious.
DOD Has Performed a The services performed a limited review of the feasibility of a pilot Limited Review of Pilot program. The Army and the Navy made a limited assessment of a potential
pilot program and concluded that it would likely not be useful to them. Program Feasibility They believe any additional claims that may be identified and amounts recovered would not be worth the anticipated cost to execute a pilot
program. Army and Navy officials stated that although the pilot program is intended to be a no- cost effort, costs would be incurred in the form of  issuing and evaluating a request for proposals,  awarding a contract, and  supporting a contractor in the contractor's effort to (1) understand how engine maintenance data is maintained and then (2) collect the data for the contractor's review. This support, these officials said, would be labor intensive because much of the data is in both paper and electronic files and is located at military bases
throughout the world. In addition, Navy officials emphasized that DOD and commercial warranties differ. For example, DOD warranties often have a time limit for filing claims. These officials also pointed out that the military environment is less predictable than the commercial environment and may lead the military to operate engines at performance levels that could invalidate warranties. In October 1998, the Army and the Navy gave their views on establishing
pilot programs in a memorandum to the Director of Defense Procurement. The Army stated it had no need to participate in a pilot program because it had no outstanding warranty claims. As noted previously, the legislation was not restricted to collection services, and a specific purpose of the legislation is the identification of potential claims. The Navy stated it could not identify any engines to use in a pilot program, but it was continuing to
explore possible opportunities. No Navy engines have yet been identified, and Navy officials told us they believe a pilot program covering commercial equivalent engines, such as those bought by the Air Force for cargo and transport aircraft, would be more likely to succeed. Air Force officials also expressed concern about the differences between
DOD and commercial warranties and questioned whether the anticipated cost to execute a pilot program would exceed the amounts recovered. However, the Air Force decided to further explore the feasibility of a pilot program and synopsized the requirements of the pilot program in the Commerce Business Daily. The Commerce Business Daily announcement was a request for information to obtain industry's input and concerns and to determine if there was enough interest in a pilot program given its requirements.
Four firms responded to the request for information and, although interested, believed the proposed requirements presented a high- risk program. For example, one firm questioned whether the program could be executed because the period for implementation was so short. The synopsis was published on November 26, 1998, and the authority to conduct a pilot program was set to expire 10 months later, on September 30, 1999. During the 10- month period, the Air Force would have to issue a request for proposal, select a contractor, and execute the program. The contractor would have to become familiar with Air Force electronic databases and document filing systems, identify and document warranty claims, collect amounts due, and then be paid. Another firm responded that the pilot program was high risk because the
potential base for warranty recoveries was small. The Air Force selected only one engine with an active warranty for the program, precluding coverage of other engines and of engines whose warranties had expired. This firm claimed the basis of its success is its ability to obtain higher warranty recoveries than its customers recover through their own efforts, including validating claims on past engine repairs after a warranty has
expired. The other two firms expressed concern about recovery of their fees after the program terminated. The request for information advised that contractors were to be paid from amounts recovered only until the
expiration of the pilot. Therefore, any funds recovered later would be returned to the Treasury. In January 1999, the Air Force Materiel Command concluded a warranty claims recovery pilot program would be impractical and recommended that the Air Force not pursue a contract. Conclusions The time needed for DOD to award a contract and for a contractor to become familiar with DOD records suggests the need for a longer implementation period for the pilot program than the additional 1 year provided by the fiscal year 2000 act. Additional authority is also needed to clearly allow contractors to be paid for claims outstanding at the end of the pilot program (once collections have occurred). Also, private sector experience has shown that warrantors will pay claims on past engine
repairs and overhauls, even though engine warranties are no longer active.
Matters for In order to fully test the concept of using the private sector to increase Congressional warranty recoveries, the Congress may want to Consideration
 require that the Department of Defense undertake a pilot program;  authorize a 2- year pilot program;  authorize contractors to be paid, at least in part, for claims identified but not recovered by the end of the pilot program (once those recoveries are
made); and  direct that the program be structured to allow the review of both active
and expired aircraft engine warranties. Agency Comments and
In commenting on a draft of this report, DOD stated that (1) evidence Our Evaluation
presented by the draft report showed that only one of three private firms benefited significantly from the use of third- party warranty services; (2) the report does not fully address differences in the operational requirements, warranty provisions, warranty administration practices, and operational environment (including the location of deployed equipment at sea or in combat zones) and does not substantiate that DOD would benefit from such services; and (3) the report does not address fully the costs of
obtaining third- party warranty services because the unsolicited proposal included a separate payment in addition to the contingency fee. DOD disagreed with the desirability of allowing contractors to be paid, at least in part, for claims identified but not yet recovered by the end of the contract
period, saying that contractors should be paid for recoveries, not claims. DOD also disagreed with our suggestion that the pilot program should cover expired as well as active warranties because it would increase the administrative burden. (DOD's comments are reprinted in app. I.)
The point of a pilot program is to test the costs and benefits of a practice that has been successful in the private sector. We believe the evidence provided in this report supports establishing a pilot program and we modified the matters for congressional consideration to suggest that the
Congress require DOD to implement a pilot program. The report demonstrates that a similar program provided benefits when used in the private sector. The benefits in the form of increased recoveries were significant enough for commercial airlines that two of the three airlines discussed continued the third- party warranty recovery program. While the third airline did not continue the program, it did indicate that recoveries increased and stated that 71 percent of its engines are maintained under a power- by- the- hour program, precluding the need for warranty coverage.
While there are differences in the environment in which DOD operates, the purpose of the pilot program is to test the significance of these differences. And while aircraft are deployed worldwide, the bulk of maintenance work for a specific aircraft takes place at particular depots and particular bases, making the worldwide deployment of DOD aircraft less of an obstacle than portrayed by DOD. The unsolicited proposal received by the Air Force did include a separate payment for performance of recovery work. We were told by the firm that submitted the proposal that Air Force officials suggested that a separate payment be included because it was difficult to price a contingency fee contract without the special authority provided by the pilot program. Air Force officials confirmed this statement. We agree with DOD that contractors should be paid for recoveries, not claims. DOD misinterpreted our recommendation. We are recommending that authority be provided so that contractors can be paid (on claims identified during the pilot program) for recoveries that occur after the pilot program has ended. We have modified our recommendation to clarify this point.
Finally, we believe that the pilot program should include coverage of expired warranties based on the experience of commercial airlines. At commercial firms, claims were identified and collected for both active and expired warranties. We believe the purpose of a pilot program is to test the
value of different approaches so a more informed program design can be developed. Scope and
To assess DOD's efforts to evaluate the feasibility of establishing a pilot Methodology program, we obtained information on the process the Office of the Secretary of Defense and the military departments went through to assess feasibility. We also interviewed responsible officials to obtain their views on the merits of the proposed pilot. To examine private sector experience
with warranty recovery, we interviewed officials from a firm specializing in aircraft warranty recoveries and three of its customers United Parcel Service, United Airlines, and America West. We performed our review from February 1999 through August 1999, in accordance with generally accepted government auditing standards.
We are sending copies of this report to the Honorable William Cohen, Secretary of Defense; the Honorable F. Whitten Peters, Secretary of the Air Force; the Honorable Louis Caldera, Secretary of the Army; the Honorable Richard Danzig, Secretary of the Navy; Lieutenant General Henry T. Glisson, Director of the Defense Logistics Agency; the Honorable Jacob
Lew, Director of the Office of Management and Budget; and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512- 4587, if you or your staff have any questions concerning this report. Key contributors to this report were Charles W. Thompson, Karen S. Zuckerstein, and Daniel J. Hauser.
David E. Cooper Associate Director Defense Acquisitions
Appendi I x Comments From the Department of Defense Note: GAO's comment supplementing those in the report text appear at the end of this appendix.
See comment 1. Now on p. 7.
The following is GAO's comment on the Department of Defense's (DOD) letter dated October 8, 1999.
GAO Comment 1. While the data is several years old, DOD did not make updated data available to us. We are not aware of any information that suggests that the situation is significantly different.
(707404) Let er t
GAO United States General Accounting Office
Page 1 GAO/ NSIAD- 00- 3 Contract Management United States General Accounting Office
Washington, D. C. 20548
B- 282104 Page 2 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 3 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 4 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 5 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 6 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 7 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 8 GAO/ NSIAD- 00- 3 Contract Management
B- 282104 Page 9 GAO/ NSIAD- 00- 3 Contract Management
Page 10 GAO/ NSIAD- 00- 3 Contract Management
Appendix I
Appendix I Comments From the Department of Defense
Page 11 GAO/ NSIAD- 00- 3 Contract Management
Appendix I Comments From the Department of Defense
Page 12 GAO/ NSIAD- 00- 3 Contract Management
Appendix I Comments From the Department of Defense
Page 13 GAO/ NSIAD- 00- 3 Contract Management
Appendix I Comments From the Department of Defense
Page 14 GAO/ NSIAD- 00- 3 Contract Management
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ns00003 A Report to Congressional Requesters October 1999 CONTRACT
MANAGEMENT Pilot Program Needed to Improve DOD Identification of
Warranty Claims   GAO/NSIAD-00-3  National Security and
International Affairs Division Let ter B-282104 October 29, 1999
The Honorable John W. Warner Chairman The Honorable Carl Levin
Ranking Minority Member Committee on Armed Services United States
Senate The Honorable Floyd D. Spence Chairman The Honorable Ike
Skelton Ranking Minority Member Committee on Armed Services House
of Representatives Section 391 of the Fiscal Year 1998 National
Defense Authorization Act (P. L. 105- 85) authorized the Secretary
of Defense to carry out a pilot program to use commercial sources
to improve the collection of Department of Defense (DOD) claims
under aircraft engine warranties. The act required that, if
established, the pilot program, and program contracts, terminate
on September 30, 1999. However, on October 5, 1999, section 382 of
the National Defense Authorization Act for Fiscal Year 2000 (P. L.
106- 65 ) extended the termination date of the pilot program until
September 30, 2000. Although authorized, neither act requires a
pilot program. The legislation directs us to review the results of
the pilot program. Since DOD has not yet initiated a pilot
program, we are providing this interim report that (1) identifies
the benefits obtained by some private sector users of aircraft
engine warranty services and (2) assesses the efforts DOD has made
to evaluate the feasibility of establishing a pilot program.
Generally, a warranty requires that a manufacturer repair or
replace defective goods covered by the warranty without cost to
the purchaser or pay the purchaser's costs of correcting a defect.
Defects or deficiencies may be caused by poor design, faulty
manufacturing processes, or the use of materials that do not meet
contract specifications. Results in Brief Some commercial airlines
have benefited from the use of outside firms to identify failed
engine parts and recover the cost of correcting such parts from
manufacturers. Officials from United Parcel Service, United
Airlines, and America West told us that their engine warranty
recoveries increased over internally identified recoveries when
they supplemented internal efforts with an outside firm. In one
case, warranty recoveries increased threefold over recoveries
identified internally. To date, DOD has performed a limited review
of the feasibility of establishing a pilot program, but has not
established one. The Army and the Navy made a limited assessment
of a potential pilot program and concluded that it would likely
not be useful to them. They believe any additional claims that may
be identified and amounts recovered would not be worth the
anticipated cost to execute a pilot program. The Air Force sought
industry's interest in a pilot program by synopsizing the
program's requirements in the Commerce Business Daily in November
1998. However, the Air Force did not issue a request for
proposals, in large part because of concerns that the program
could not be executed in the 10 months remaining before authority
to conduct a pilot program was set to expire on September 30,
1999. Concerns that contractors would not be paid after that date
was also a factor. Experience from the private sector suggests
that contracting for engine warranty administration can improve
warranty recoveries over internal efforts. This includes
collecting claims on past engine repairs even though the
warranties are no longer active. However, it is unknown whether
the results achieved by some commercial airlines can be replicated
in DOD since a pilot program has not been implemented. The
Congress recently extended the authority for a pilot program until
September 30, 2000. However, the additional time may still not be
sufficient. This report suggests that the Congress consider
expanding the pilot program to test whether DOD could benefit from
using commercial sources to increase recoveries on aircraft
warranties. Background In December 1997, a firm submitted an
unsolicited proposal to the Air Force to provide warranty recovery
services for aircraft engines. The firm currently provides
services to commercial airlines and operates under a contingency
contract, receiving a fee based on net collected funds. Therefore,
its customers incur no financial burden. Hourly rates or other
related costs, such as equipment, staffing, and data processing,
are not associated with a contingency fee contract. The Air Force
rejected the unsolicited proposal because it failed to meet the
first criterion of a valid unsolicited proposal, as defined by the
Federal Acquisition Regulation. The Federal Acquisition Regulation
states that a valid unsolicited proposal must be innovative and
unique. According to the Air Force, the proposal merely offered
services the Air Force already had and was not innovative and
unique. The Senate Committee on Armed Services, in its report
accompanying the Fiscal Year 1998 National Defense Authorization
Act, expressed concern that DOD was not receiving appropriate
refunds for repair of systems covered by warranties. In June 1996,
1 we reported that warranties on weapon systems returned only
about 5 cents for every dollar spent on the warranty. One cause
for the low return was the low rate of claims submitted on
warranted items. Both the fiscal year 1998 and the 2000
authorization acts allow the Secretary of Defense to enter into
contracts under a pilot program to provide for the following
services:  Collecting on warranty claims.  Determining the amounts
owed DOD for repairs of aircraft engines covered by warranties.
Identifying and locating information sources relevant to
collecting claims under aircraft engine warranties.  Suggesting
training programs to improve DOD's collection of warranty related
information needed to process warranty claims. The legislation
requires that a contractor be paid a percentage of any amounts
recovered as deemed appropriate by the Secretary of Defense.
Private Sector Finds United Parcel Service, United Airlines, and
America West contracted with a private firm 2 that provides
aircraft engine warranty services. United Parcel Value in
Contracting Service and United Airlines officials said they hired
this firm because it for Warranty Services offered a no- cost
service to determine if their warranty administration 1 Weapons
Acquisitions: Warranty Law Should Be Repealed (GAO/NSIAD-96-88,
June 28, 1996). 2 This is the same firm that submitted the
unsolicited proposal to the Air Force. departments were
identifying all defective warranted parts and then recovering the
cost to fix such parts from the manufacturer. America West
contracted with this same firm because its aircraft engine
warranty department was backlogged. Each of the airlines found
that this firm increased engine warranty recoveries over
recoveries found internally.  At United Parcel Service, this firm
increased warranty recoveries more than threefold, from June 1998
through March 1999. As a result, the company decided to contract
its engine warranty administration to this firm.  At United
Airlines, the firm increased warranty recoveries just under 2
percent, or approximately $500,000, from June 1998 to February
1999. United decided to continue contracting with this firm.
United believes the combined efforts of its warranty
administrators and this outside firm maximizes the identification
and recovery of warranty claims.  At America West, this firm
increased warranty recoveries, but officials would not quantify
the increase because their company policy is not to discuss their
supplier relationships with third parties. America West contracted
with this firm from July 1997 through July 1998 but decided not to
continue contracting with any engine warranty recovery company. It
would not provide a reason but America West officials did state
that currently about 71 percent of their 276 engines are
maintained by engine manufacturers under a power- by- the- hour
program. This program precludes the need for warranty coverage
because, for a fixed price, the engine manufacturer provides
engine maintenance. Airline officials told us that, initially, the
outside firm needed time to learn where company engine maintenance
data was stored and how to retrieve it. After the initial learning
period, the firm's activities were transparent and not disruptive
to normal company operations. They also confirmed that the firm
was successful in getting manufacturers to pay claims on past
engine repairs and overhauls even though engine warranties were no
longer active. The collection process, they said, was not
contentious. DOD Has Performed a The services performed a limited
review of the feasibility of a pilot Limited Review of Pilot
program. The Army and the Navy made a limited assessment of a
potential pilot program and concluded that it would likely not be
useful to them. Program Feasibility They believe any additional
claims that may be identified and amounts recovered would not be
worth the anticipated cost to execute a pilot program. Army and
Navy officials stated that although the pilot program is intended
to be a no- cost effort, costs would be incurred in the form of
issuing and evaluating a request for proposals,  awarding a
contract, and  supporting a contractor in the contractor's effort
to (1) understand how engine maintenance data is maintained and
then (2) collect the data for the contractor's review. This
support, these officials said, would be labor intensive because
much of the data is in both paper and electronic files and is
located at military bases throughout the world. In addition, Navy
officials emphasized that DOD and commercial warranties differ.
For example, DOD warranties often have a time limit for filing
claims. These officials also pointed out that the military
environment is less predictable than the commercial environment
and may lead the military to operate engines at performance levels
that could invalidate warranties. In October 1998, the Army and
the Navy gave their views on establishing pilot programs in a
memorandum to the Director of Defense Procurement. The Army stated
it had no need to participate in a pilot program because it had no
outstanding warranty claims. As noted previously, the legislation
was not restricted to collection services, and a specific purpose
of the legislation is the identification of potential claims. The
Navy stated it could not identify any engines to use in a pilot
program, but it was continuing to explore possible opportunities.
No Navy engines have yet been identified, and Navy officials told
us they believe a pilot program covering commercial equivalent
engines, such as those bought by the Air Force for cargo and
transport aircraft, would be more likely to succeed. Air Force
officials also expressed concern about the differences between DOD
and commercial warranties and questioned whether the anticipated
cost to execute a pilot program would exceed the amounts
recovered. However, the Air Force decided to further explore the
feasibility of a pilot program and synopsized the requirements of
the pilot program in the Commerce Business Daily. The Commerce
Business Daily announcement was a request for information to
obtain industry's input and concerns and to determine if there was
enough interest in a pilot program given its requirements. Four
firms responded to the request for information and, although
interested, believed the proposed requirements presented a high-
risk program. For example, one firm questioned whether the program
could be executed because the period for implementation was so
short. The synopsis was published on November 26, 1998, and the
authority to conduct a pilot program was set to expire 10 months
later, on September 30, 1999. During the 10- month period, the Air
Force would have to issue a request for proposal, select a
contractor, and execute the program. The contractor would have to
become familiar with Air Force electronic databases and document
filing systems, identify and document warranty claims, collect
amounts due, and then be paid. Another firm responded that the
pilot program was high risk because the potential base for
warranty recoveries was small. The Air Force selected only one
engine with an active warranty for the program, precluding
coverage of other engines and of engines whose warranties had
expired. This firm claimed the basis of its success is its ability
to obtain higher warranty recoveries than its customers recover
through their own efforts, including validating claims on past
engine repairs after a warranty has expired. The other two firms
expressed concern about recovery of their fees after the program
terminated. The request for information advised that contractors
were to be paid from amounts recovered only until the expiration
of the pilot. Therefore, any funds recovered later would be
returned to the Treasury. In January 1999, the Air Force Materiel
Command concluded a warranty claims recovery pilot program would
be impractical and recommended that the Air Force not pursue a
contract. Conclusions The time needed for DOD to award a contract
and for a contractor to become familiar with DOD records suggests
the need for a longer implementation period for the pilot program
than the additional 1 year provided by the fiscal year 2000 act.
Additional authority is also needed to clearly allow contractors
to be paid for claims outstanding at the end of the pilot program
(once collections have occurred). Also, private sector experience
has shown that warrantors will pay claims on past engine repairs
and overhauls, even though engine warranties are no longer active.
Matters for In order to fully test the concept of using the
private sector to increase Congressional warranty recoveries, the
Congress may want to Consideration  require that the Department of
Defense undertake a pilot program;  authorize a 2- year pilot
program;  authorize contractors to be paid, at least in part, for
claims identified but not recovered by the end of the pilot
program (once those recoveries are made); and  direct that the
program be structured to allow the review of both active and
expired aircraft engine warranties. Agency Comments and In
commenting on a draft of this report, DOD stated that (1) evidence
Our Evaluation presented by the draft report showed that only one
of three private firms benefited significantly from the use of
third- party warranty services; (2) the report does not fully
address differences in the operational requirements, warranty
provisions, warranty administration practices, and operational
environment (including the location of deployed equipment at sea
or in combat zones) and does not substantiate that DOD would
benefit from such services; and (3) the report does not address
fully the costs of obtaining third- party warranty services
because the unsolicited proposal included a separate payment in
addition to the contingency fee. DOD disagreed with the
desirability of allowing contractors to be paid, at least in part,
for claims identified but not yet recovered by the end of the
contract period, saying that contractors should be paid for
recoveries, not claims. DOD also disagreed with our suggestion
that the pilot program should cover expired as well as active
warranties because it would increase the administrative burden.
(DOD's comments are reprinted in app. I.) The point of a pilot
program is to test the costs and benefits of a practice that has
been successful in the private sector. We believe the evidence
provided in this report supports establishing a pilot program and
we modified the matters for congressional consideration to suggest
that the Congress require DOD to implement a pilot program. The
report demonstrates that a similar program provided benefits when
used in the private sector. The benefits in the form of increased
recoveries were significant enough for commercial airlines that
two of the three airlines discussed continued the third- party
warranty recovery program. While the third airline did not
continue the program, it did indicate that recoveries increased
and stated that 71 percent of its engines are maintained under a
power- by- the- hour program, precluding the need for warranty
coverage. While there are differences in the environment in which
DOD operates, the purpose of the pilot program is to test the
significance of these differences. And while aircraft are deployed
worldwide, the bulk of maintenance work for a specific aircraft
takes place at particular depots and particular bases, making the
worldwide deployment of DOD aircraft less of an obstacle than
portrayed by DOD. The unsolicited proposal received by the Air
Force did include a separate payment for performance of recovery
work. We were told by the firm that submitted the proposal that
Air Force officials suggested that a separate payment be included
because it was difficult to price a contingency fee contract
without the special authority provided by the pilot program. Air
Force officials confirmed this statement. We agree with DOD that
contractors should be paid for recoveries, not claims. DOD
misinterpreted our recommendation. We are recommending that
authority be provided so that contractors can be paid (on claims
identified during the pilot program) for recoveries that occur
after the pilot program has ended. We have modified our
recommendation to clarify this point. Finally, we believe that the
pilot program should include coverage of expired warranties based
on the experience of commercial airlines. At commercial firms,
claims were identified and collected for both active and expired
warranties. We believe the purpose of a pilot program is to test
the value of different approaches so a more informed program
design can be developed. Scope and To assess DOD's efforts to
evaluate the feasibility of establishing a pilot Methodology
program, we obtained information on the process the Office of the
Secretary of Defense and the military departments went through to
assess feasibility. We also interviewed responsible officials to
obtain their views on the merits of the proposed pilot. To examine
private sector experience with warranty recovery, we interviewed
officials from a firm specializing in aircraft warranty recoveries
and three of its customers United Parcel Service, United Airlines,
and America West. We performed our review from February 1999
through August 1999, in accordance with generally accepted
government auditing standards. We are sending copies of this
report to the Honorable William Cohen, Secretary of Defense; the
Honorable F. Whitten Peters, Secretary of the Air Force; the
Honorable Louis Caldera, Secretary of the Army; the Honorable
Richard Danzig, Secretary of the Navy; Lieutenant General Henry T.
Glisson, Director of the Defense Logistics Agency; the Honorable
Jacob Lew, Director of the Office of Management and Budget; and
other interested parties. We will make copies available to others
upon request. Please contact me at (202) 512- 4587, if you or your
staff have any questions concerning this report. Key contributors
to this report were Charles W. Thompson, Karen S. Zuckerstein, and
Daniel J. Hauser. David E. Cooper Associate Director Defense
Acquisitions Appendi I x Comments From the Department of Defense
Note: GAO's comment supplementing those in the report text appear
at the end of this appendix. See comment 1. Now on p. 7. The
following is GAO's comment on the Department of Defense's (DOD)
letter dated October 8, 1999. GAO Comment 1. While the data is
several years old, DOD did not make updated data available to us.
We are not aware of any information that suggests that the
situation is significantly different. (707404) Let er t GAO United
States General Accounting Office Page 1 GAO/NSIAD-00-3 Contract
Management United States General Accounting Office Washington, D.
C. 20548 B-282104 Page 2 GAO/NSIAD-00-3 Contract Management B-
282104 Page 3 GAO/NSIAD-00-3 Contract Management B-282104 Page 4
GAO/NSIAD-00-3 Contract Management B-282104 Page 5 GAO/NSIAD-00-3
Contract Management B-282104 Page 6 GAO/NSIAD-00-3 Contract
Management B-282104 Page 7 GAO/NSIAD-00-3 Contract Management B-
282104 Page 8 GAO/NSIAD-00-3 Contract Management B-282104 Page 9
GAO/NSIAD-00-3 Contract Management Page 10 GAO/NSIAD-00-3 Contract
Management Appendix I Appendix I Comments From the Department of
Defense Page 11 GAO/NSIAD-00-3 Contract Management Appendix I
Comments From the Department of Defense Page 12 GAO/NSIAD-00-3
Contract Management Appendix I Comments From the Department of
Defense Page 13 GAO/NSIAD-00-3 Contract Management Appendix I
Comments From the Department of Defense Page 14 GAO/NSIAD-00-3
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