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Pentagon Overpaid Supplier With Exclusive Contract By As Much As 85%

In honor of tomorrow being Halloween here is another horror story from the black hole of Pentagon financing. According to a report by Department of Defense’s Inspector General, the Defense Logistics Agency exceeded their prices targets by as much as 85% when servicing a contract from a vendor who had exclusive rights to provide replacement aircraft parts.

The contract for replacement aircraft parts was with Ontic Engineering a unit of BBA Aviation Plc. Ontic was given an exclusive deal to provide those parts which should have, in theory, meant that procurement officers at the Pentagon could have locked in reasonable prices in exchange for giving Ontic the benefit of exclusivity. But there was apparently no such deal to save money, instead DoD officers wildly overpaid for a equipment they could have gotten from a competitive bid.

The Defense Logistics Agency “did not conduct sufficient analysis to establish the reasonableness” of Ontic’s proposed prices compared with those paid in the past, according to the report dated Sept. 15 and marked “For Official Use Only.” It said the agency “paid approximately $8 million more than is fair and reasonable for 21 sole-source parts” that were reviewed and should seek return of that money…

After four months of talks ending in February 2012 “attempting to negotiate a fair and reasonable price with Ontic,” the agency “was compelled to agree to” the price “to prevent the grounding of” helicopters, the audit found. CH-53 parts were $5,241.41 each, 86 percent higher than the $2,821.23 target — “the best attainable” because further delays “jeopardized the readiness levels,” according to the report… Adjusting for inflation, it was still more than an eightfold increase, according to the report.

They were compelled to agree? In what twisted world is a government agency that has literally trillions of dollars going through it in the weak bargaining position on a procurement contract? The Department of Defense has an annual appropriation of around $600 billion, the idea that in the big scheme of things a unit within a defense company is in the superior bargaining position and therefore DoD is compelled to overpay by up to 85% is ridiculous.

The Pentagon has tremendous bargaining power if it would only use it. Officers at the Defense Logistics Agency could easily have told Ontic that if Ontic refused to accept their price levels then they would lose the contract and/or lose any future contracts. What defense company can really afford to lose access to the Pentagon? It’s the biggest game anywhere.

While overpaying a defense contractor $8 million is not the crime of the century it is indicative of a broken procurement process at the Pentagon that has led to unprecedented taxpayer loses from waste, fraud, and abuse. The “unauditable” finances of the Department of Defense make stories like these inevitable and much too common.

Photo by David B. Gleason under Creative Commons license

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Dan Wright

Dan Wright

Daniel Wright is a longtime blogger and currently writes for Shadowproof. He lives in New Jersey, by choice.