C-17 Aircraft

GAO reviewed the pricing of spare parts for the C-17 aircraft and found that the Air Force paid higher prices for these items than was justified. GAO focused on a limited number of spare parts that experienced significant price increases when McDonnell Douglas decided to manufacture the parts at its St. Louis plant rather than buy them from outside vendors. For 33 selected spare parts formerly procured under subcontracts, the costs were from four to 56 times higher after McDonnell Douglas moved the work in-house. For example, McDonnell Douglas paid an outside vender $389 to machine a door hook that it later machined in-house at an estimated cost of $8,842. Costs for some spare parts were higher than justified because McDonnell Douglas used outdated pricing data that overstated its proposed prices. In developing the proposed costs of spare parts, McDonnell Douglas used outdated labor variance factors, which resulted in prices being overstated by 34 percent for 37 parts. Also, the profits awarded on some orders under contract-2109 appeared to be higher than warranted.

GAO found that: (1) GAO's review indicates that the Air Force paid higher prices for spare parts than is justified; (2) for 33 selected spare parts formerly procured under subcontracts, costs are from 4 to 56 times higher after McDonnell Douglas moved the work in-house; (3) for example, McDonnell Douglas paid an outside vendor $389 to machine a door hook that it subsequently machined in-house at its St. Louis Division at an estimated cost of $8,842; (4) costs for some spare parts are higher than justified because McDonnell Douglas used outdated pricing data that overstated its proposed prices; (5) in developing the proposed costs of selected spare parts, McDonnell Douglas used outdated labor variance factors, which resulted in prices being overstated by 34 percent ($117,000) for 37 parts; (6) the profits awarded on some orders under contract-2109 appear higher than warranted; (7) the contracting officer used Defense Federal Acquisition Regulation Supplement guidelines to calculate profit objectives and negotiate profit rates with the contractor that are documented in a memorandum of agreement; (8) the contracting officer developed the government's objectives based on the risks of a fixed-price contract; (9) however, most costs were known when the order prices were negotiated; therefore, the contractor's risks were lower than in a fixed-price environment; (10) also, the contracting officer used a higher performance risk factor than appears appropriate when McDonnell Douglas is buying spare parts from subcontractors; and (11) based on profit rates that GAO's calculations suggest could have been justified, McDonnell Douglas would have received less profit. GAO also found that: (1) as GAO discussed its findings with Department of Defense (DOD) officials during GAO's review, they began taking actions to address those findings; (2) for example, the Defense Contract Management Command's Defense Plant Representative Office at McDonnell Douglas calculated that the overpricing of spare parts was $182,000 and recovered that amount from McDonnell Douglas in December 1995; and (3) DOD stated that other actions are being taken to prevent these overpricing problems on other spare parts.