Defense Management
Attention Is Needed to Improve Oversight of DLA Prime Vendor Program Gao ID: GAO-06-739R June 19, 2006In fiscal year 2005, prime vendor sales accounted for approximately $9 billion of the Defense Logistics Agency's (DLA) total sales and service of $32 billion. Under the prime vendor concept, the Department of Defense (DOD) relies on a distributor of a commercial product line, who provides that product line and incidental services to customers in an assigned region or area of responsibility. Products or services are to be delivered within a specified period of time after order placement. Since 1991, we have identified the use of prime vendors as a best commercial practice for inventory management. Nonetheless, media reports in October 2005, and a hearing before the House Armed Services Committee on November 9, 2005, raised concerns about the use of the prime vendor concept and the prices that DLA was paying for items acquired through a prime vendor. The use of prime vendor contracts is governed by the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement. DLA manages the program and the Director of DLA reports to the Under Secretary of Defense for Acquisition, Technology and Logistics through the Deputy Under Secretary of Defense for Logistics and Materiel Readiness. The Defense Supply Center Philadelphia (DSCP), a field activity of DLA, is the lead center for managing four major commodities: medical materiel; subsistence/garrison feeding; construction and equipment; and clothing and textiles. It is also responsible for managing DOD's prime vendor contracts within those commodities. In 1992, we identified DOD's contract management as one of our high-risk areas, and it remains so today. One of the key reasons the area is high risk is because DOD does not provide adequate oversight over defense contracts. One aspect of oversight is to ensure that the government is obtaining fair and reasonable contract prices through such means as conducting price reviews. In addition, management oversight can also assure that steps are taken to determine that prices agreed to at contract award are fair and reasonable. For the purposes of this report, we are defining a pricing review as either a determination of price reasonableness for items added after the initial contract award, or a postaward verification that any invoiced price is not in excess of the price stipulated in the contract. Under the authority of the Comptroller General, we initiated a review of DOD's prime vendor concept to determine (1) the extent to which DLA has conducted pricing reviews for items purchased through a prime vendor, and (2) the extent to which DLA has addressed the pricing issues identified at the November 2005 hearing. Under the authority of the Comptroller General, we initiated a review of DOD's prime vendor concept to determine (1) the extent to which DLA has conducted pricing reviews for items purchased through a prime vendor, and (2) the extent to which DLA has addressed the pricing issues identified at the November 2005 hearing.
Personnel at the Defense Supply Center Philadelphia did not always conduct pricing reviews for all commodities. The medical materiel and food subsistence commodities' contracting personnel reviewed pricing on a regular basis. However, required price reviews were not being conducted for the food service equipment and construction and equipment commodities. For example, the contracts for food service equipment required verification of price increases, but officials from the supply center were unable to provide documentation on why the price of an aircraft refrigerator increased from $13,825 in March 2002 to $32,642 in September 2004. Both logistics agency and supply center officials acknowledged that these problems occurred because management at the agency and supply center level were not providing adequate oversight to ensure that contracting personnel were monitoring prices. The lack of pricing reviews on certain commodities has been a continual problem cited in the logistics agency's internal reviews since 2002. Internal reviews of the prime vendor programs conducted in 2002 and 2003 showed that supply center contracting personnel responsible for the food service equipment and construction and equipment commodities failed at times to properly perform price reviews to determine whether the prices charged by the prime vendors were reasonable. The internal reviews found that contracting personnel either did not have knowledge of, or were disregarding contracting rules and regulations with regard to price reviews. As a result, the internal reviews recommended stronger contract management and oversight to ensure that price reviews were conducted. Management at the supply center agreed to take corrective actions to address the 2002 and 2003 reviews. However, issues with the lack of pricing oversight were identified again in a 2005 internal review. The Defense Logistics Agency has developed corrective actions and has begun to develop a prime vendor contracting policy to address the most recent pricing problems identified in 2005. The agency's recent actions include increasing the number of audits to ensure that the government was not overcharged, revoking some contracting officers' warrants, and establishing additional training for all contracting officers and managers. Some of these corrective actions have resulted in delays in order approval and slowed delivery to some customers. The logistics agency is also in the process of developing a policy to implement regulatory guidance on prime vendor contracting. However, policies and procedures for pricing reviews were in place prior to November 2005, and corrective actions were identified in prior internal reviews. Problems still occurred because of a lack of management oversight by logistics agency and supply center officials to ensure that the policies and procedures were followed and that the corrective actions were implemented. Standards for internal controls in the federal government call for assessing the quality of performance over time and to ensure that the findings of audits and other reviews are promptly resolved.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-739R, Defense Management: Attention Is Needed to Improve Oversight of DLA Prime Vendor Program
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June 19, 2006:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United State Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
Subject: Defense Management: Attention Is Needed to Improve Oversight
of DLA Prime Vendor Program:
In fiscal year 2005, prime vendor sales accounted for approximately $9
billion of the Defense Logistics Agency's (DLA)[Footnote 1] total sales
and service of $32 billion. Under the prime vendor concept, the
Department of Defense (DOD) relies on a distributor of a commercial
product line, who provides that product line and incidental services to
customers in an assigned region or area of responsibility. Products or
services are to be delivered within a specified period of time after
order placement. Since 1991, we have identified the use of prime
vendors as a best commercial practice for inventory
management.[Footnote 2] Nonetheless, media reports in October 2005, and
a hearing before the House Armed Services Committee on November 9,
2005, raised concerns about the use of the prime vendor concept and the
prices that DLA was paying for items acquired through a prime vendor.
The use of prime vendor contracts is governed by the Federal
Acquisition Regulation (FAR) and the Defense Federal Acquisition
Regulation Supplement. DLA manages the program and the Director of DLA
reports to the Under Secretary of Defense for Acquisition, Technology
and Logistics through the Deputy Under Secretary of Defense for
Logistics and Materiel Readiness. The Defense Supply Center
Philadelphia (DSCP), a field activity of DLA, is the lead center for
managing four major commodities: medical materiel; subsistence/
garrison feeding; construction and equipment; and clothing and
textiles. It is also responsible for managing DOD's prime vendor
contracts within those commodities.
In 1992, we identified DOD's contract management as one of our high-
risk areas, and it remains so today.[Footnote 3] One of the key reasons
the area is high risk is because DOD does not provide adequate
oversight over defense contracts. One aspect of oversight is to ensure
that the government is obtaining fair and reasonable contract prices
through such means as conducting price reviews. In addition, management
oversight can also assure that steps are taken to determine that prices
agreed to at contract award are fair and reasonable. For the purposes
of this report, we are defining a pricing review as either a
determination of price reasonableness for items added after the initial
contract award, or a postaward verification that any invoiced price is
not in excess of the price stipulated in the contract.
Under the authority of the Comptroller General, we initiated a review
of DOD's prime vendor concept to determine (1) the extent to which DLA
has conducted pricing reviews for items purchased through a prime
vendor, and (2) the extent to which DLA has addressed the pricing
issues identified at the November 2005 hearing. To accomplish the
objectives, we reviewed policies and procedures governing the use of
prime vendors and DLA's adherence to those policies and procedures. In
addition, we reviewed internal and external assessments of DSCP's
procurement management, and prior GAO reports, and we analyzed 16 prime
vendor contracts to determine the requirements for conducting pricing
reviews. We also analyzed two contracts with a manufacturer and four
delivery orders to prime vendors to document the price increase for an
aircraft refrigerator. Further, we interviewed DLA and DSCP officials,
prime vendors, customers, and a manufacturer. We conducted our review
from December 2005 through April 2006 in accordance with generally
accepted government auditing standards. Our scope and methodology are
discussed in further detail at the end of this report.
Results in Brief:
Personnel at the Defense Supply Center Philadelphia did not always
conduct pricing reviews for all commodities. The medical materiel and
food subsistence commodities' contracting personnel reviewed pricing on
a regular basis. However, required price reviews were not being
conducted for the food service equipment and construction and equipment
commodities. For example, the contracts for food service equipment
required verification of price increases, but officials from the supply
center were unable to provide documentation on why the price of an
aircraft refrigerator increased from $13,825 in March 2002 to $32,642
in September 2004. Both logistics agency and supply center officials
acknowledged that these problems occurred because management at the
agency and supply center level were not providing adequate oversight to
ensure that contracting personnel were monitoring prices. The lack of
pricing reviews on certain commodities has been a continual problem
cited in the logistics agency's internal reviews since 2002. Internal
reviews of the prime vendor programs conducted in 2002 and 2003 showed
that supply center contracting personnel responsible for the food
service equipment and construction and equipment commodities failed at
times to properly perform price reviews to determine whether the prices
charged by the prime vendors were reasonable. The internal reviews
found that contracting personnel either did not have knowledge of, or
were disregarding contracting rules and regulations with regard to
price reviews. As a result, the internal reviews recommended stronger
contract management and oversight to ensure that price reviews were
conducted. Management at the supply center agreed to take corrective
actions to address the 2002 and 2003 reviews. However, issues with the
lack of pricing oversight were identified again in a 2005 internal
review.
The Defense Logistics Agency has developed corrective actions and has
begun to develop a prime vendor contracting policy to address the most
recent pricing problems identified in 2005. The agency's recent actions
include increasing the number of audits to ensure that the government
was not overcharged, revoking some contracting officers' warrants, and
establishing additional training for all contracting officers and
managers. Some of these corrective actions have resulted in delays in
order approval and slowed delivery to some customers. The logistics
agency is also in the process of developing a policy to implement
regulatory guidance on prime vendor contracting. However, policies and
procedures for pricing reviews were in place prior to November 2005,
and corrective actions were identified in prior internal reviews.
Problems still occurred because of a lack of management oversight by
logistics agency and supply center officials to ensure that the
policies and procedures were followed and that the corrective actions
were implemented. Standards for internal controls in the federal
government call for assessing the quality of performance over time and
to ensure that the findings of audits and other reviews are promptly
resolved.[Footnote 4]
We are recommending that the Secretary of Defense ensure that the
Director of the Defense Logistics Agency provide continual management
oversight of the corrective actions to address pricing problems in the
agency's prime vendor program. In commenting on a draft of our report,
DOD concurred with our recommendation. We discuss DOD's comments and
our evaluation of them later in this correspondence.
Background:
DOD operates a worldwide supply system, with the vast majority of the
items being managed by DLA. A DLA prime vendor arrangement is one in
which a distributor of a commercial product line provides those
products and related services to all of DLA's customers in an assigned
region within a specified period of time after order placement. The
prime vendor either provides the product at the cost to the prime
vendor to obtain it, or at a price agreed upon in advance with DLA.
The process for using a prime vendor described below is generic, and
different commodities may vary from this process. Under the prime
vendor process, a single vendor buys items from a variety of
manufacturers and the inventory is stored in commercial warehouses. A
customer orders the items from the prime vendor using electronic
ordering systems. For some commodities prices are pre-negotiated by DLA
as part of the contract award process. The negotiated price includes
the prime vendor's handling fee. The prime vendor (or the customer)
sends a copy of the order to DSCP. Depending on the commodity, DSCP may
need to approve the order before the prime vendor can process it
further. Once DSCP approves the order, the prime vendor fills, ships,
and tracks the order through final acceptance. The prime vendor then
submits an invoice to DSCP, which matches it with the order and receipt
from the customer and authorizes the Defense Financial Accounting
Service to make payment. DSCP then bills the customer for the cost of
the order plus DSCP's cost recovery fee.
DOD awarded its first prime vendor contract in 1993 for pharmaceutical
items, such as aspirin and antibiotics. This was followed by a contract
for medical supplies, such as syringes and surgical gloves. In 1994,
DOD expanded the use of the prime vendor concept to include providing
food for military dining facilities. DOD subsequently expanded the use
of the prime vendor concept to include construction and equipment as
well as clothing and textiles. Since the first contracts were awarded,
DLA has refined its use of the prime vendor concept and incorporated
changes into successive generations of contracts.
DSCP is responsible for managing prime vendor programs for medical
materiel, subsistence, and construction and equipment. Medical materiel
includes pharmaceutical and medical/surgical items. Subsistence
includes food for troop feeding and food service equipment (products
associated with the receipt and storage of food, serving, presentation
and preservation of food, and clean up or maintenance). Construction
and equipment includes several commodities such as maintenance, repair
and operations (MRO),[Footnote 5] lumber, and metals. There are no
prime vendor contracts for the clothing and textile commodity.
According to DLA, the benefits of prime vendor contracts include
improved access to a wide range of high-quality commercial products,
rapid and predictable delivery from a single vendor at the time and in
the manner most conducive to the customer's needs, and reduced overhead
charges. Other benefits of prime vendor contracts include significant
reductions in the manpower needed to manage these items at DLA,
elimination of any DLA inventory investment, reduction of the
infrastructure and related costs associated with warehousing that
inventory, and reduced transportation costs via multiple-item prime
vendor deliveries to the customer rather than transportation from
vendors to the military depots for subsequent transportation to the
ultimate customer. In addition, prime vendor contracts provide for
surge and broader mobilization capabilities, and worldwide customer
support.
We have previously identified the use of prime vendors as a best
commercial practice for inventory management.[Footnote 6] In a series
of reports, we reported on the benefits of using a prime vendor for
medical and food inventories.[Footnote 7]
In October 2005, media reports raised concerns that DLA had been
overcharged for certain food service equipment items such as ice cube
trays, refrigerators, and coffee-makers. The reports resulted in a
congressional hearing on November 9, 2005 to discuss DLA's prime vendor
program.[Footnote 8]
Pricing Reviews of Prime Vendor Commodities Were Not Always Conducted:
DSCP personnel did not always conduct pricing reviews for all
commodities. The medical materiel and food subsistence commodities'
contracting personnel reviewed prices on a regular basis. Prices for
food service equipment and construction and equipment commodities were
not being reviewed for price reasonableness before orders were approved
for new items. This lack of oversight was identified by internal DLA
reviews, known as procurement management reviews, as early as 2002 and
2003. These reviews found that some prime vendor contracts were not
being executed and managed properly and made recommendations that
required an increase in management oversight and in some cases,
additional training. Even though DSCP management concurred with the
recommendations, the problems recurred in the next reviews conducted in
2005.
Some Prime Vendor Programs Review Prices:
During the course of our review, we found that contracting officials
responsible for medical materiel and food subsistence commodities were
routinely reviewing prices. These officials used information systems to
track pricing and to flag price increases. For example, the prices for
medical materiel and food subsistence items are generally set by
national pricing agreements.[Footnote 9] Customers order from pre-
priced catalogs and the vendor only gets paid the current catalog
price. In addition, DSCP uses automated tools to match the prime
vendor's sales data with pricing data for pharmaceutical items. For
food subsistence items, the contracting officer and customer liaison
specialists monitor price changes and audit orders. The electronic
ordering system for food subsistence also flags price changes that are
more than 10 percent.
Pricing Reviews Were Lacking for Some Commodities:
Pricing reviews were lacking for some commodities. In addition to price
review concerns, a Defense Contract Management Agency (DCMA) review,
conducted between December 2005 to January 2006, found concerns with
the evaluation of prices at contract award for food service
equipment.[Footnote 10] Based on our discussions with DLA officials,
the first food service equipment vendor contracts awarded in June 1999
used a market basket evaluation tool to help evaluate contract prices
before contracts were awarded. A market basket evaluation is a tool
used during proposal evaluation that samples a percentage of items
anticipated to be purchased in a given commodity to use as a measure of
all prices for items offered under contract. The prices of items
obtained for the market basket became the baseline price for those
items. However, according to the DCMA report and senior DLA officials,
DSCP was not sampling a high enough percentage of food service
equipment items to make sure that fair and reasonable prices were being
paid.[Footnote 11] On average only 18 percent of the first generation
food service equipment items were being sampled;
for the second generation contracts awarded in June 2005, the average
rose to 24 percent. While the sample size for the recompeted food
service equipment prime vendor contracts was larger, the DCMA report
noted that it was still small compared to the total number of items
under the food service equipment contract.
In addition, while the contracting officers were required to document
price increases in the contract files for food service equipment, we
found that this was not being done. For example, we reviewed contract
prices DSCP paid for an aircraft refrigerator and determined that the
contract price had increased from $13,825 in March 2002 to $32,642 in
September 2004. DSCP officials were unable to explain why the price of
the aircraft refrigerator had more than doubled during the time period.
These officials also stated that there was no documentation in the
contract file to support the increase as required. Additionally, the
officials could not explain why two different prices were paid for the
same aircraft refrigerator on the same date. Specifically, on September
24, 2005, two different orders were awarded with prices of $32,642 and
$29,975. Senior officials from DLA and DSCP acknowledged that these
particular problems resulted from contracting personnel not doing their
jobs and from a lack of management oversight.
Since 2002 DLA Internal Reviews Cited Lack of Pricing Reviews:
DLA's periodic reviews of its contracting activities identified
weaknesses in contract management and execution of some prime vendor
contracts that are managed by DSCP. DLA periodically conducts reviews
of its contracting activities to improve the operational efficiency and
effectiveness of contracting operations and evaluate the integrity of
the procurement process.[Footnote 12] In 2002, DLA conducted an
internal review for the Subsistence Directorate, and in 2003, a review
of the Construction and Equipment Directorate. These reviews identified
weaknesses in contract management and execution as some prime vendor
contracts were not being managed properly and there was no evidence in
the contract file that prices had been reviewed for price
reasonableness. These reviews found that the integrity of the
procurement process needed to be strengthened in the Subsistence and
the Construction and Equipment Directorates.
The 2002 internal review found that oversight of the Subsistence
Directorate contract actions needed to be enhanced to better manage the
risk associated with subsistence contracting. For example, DLA's review
found that the Subsistence Directorate needed to improve its
methodology for verifying the prices for food service equipment by
expanding the number of pricing reviews being conducted. Specifically,
the Directorate allowed food service equipment prime vendors to add new
items to the contracts without an up-front price review, relying
instead on postaward delivery order price reviews performed by
contracting personnel in the buying section. However, DLA's 2002
internal review found that the postaward delivery order price reviews
occurred infrequently. For example, in fiscal year 2001, 4,487 orders
were issued, of which only 25 to 50 were reviewed. In fiscal year 2002,
4,401 orders were issued. At the time of the 2002 assessment, no price
reviews had taken place.
The 2003 internal review of the Construction and Equipment Directorate
reported that many of the deficiencies identified revolved around a
failure to comply with fundamental contracting requirements that are
designed to preserve the integrity of the procurement process. In
addition, the review team found pricing problems where purchases were
made at unreasonably high prices or contracting personnel failed to
perform any price reviews to determine price reasonableness. For
example, a sample of 30 items reviewed found that 14 items were priced
at least 25 percent over the estimated fair market price and none of
the items in the sample had a price reasonableness determination
completed at the time of purchase. The report stated, "It appears that
these deficiencies stem from the fact that many contracting personnel
and several supervisors . . . have not gained the basic skills to
execute government contracts or have blatantly disregarded procurement
policy and procedures. The situation presents high risks to the Agency
and calls for more rigid enforcement of review and oversight."
The 2002 and 2003 reviews made recommendations requiring an increase in
price verification reviews, management oversight, and in some cases,
additional training. Although DSCP management concurred with the
findings and agreed to take the recommended actions, some of the
problems recurred in the next DLA review conducted in January and May
2005. For example, this review found that postaward pricing reviews for
the food service equipment prime vendor contracts were not being
conducted as required. In addition, the 2005 review noted that
increased management attention and procurement oversight was needed to
eliminate the shortcomings regarding contracting rules and regulations.
Specifically, the review found significant deficiencies in the
application of fundamental contracting rules in the Construction and
Equipment Directorate. The findings related to, among other things, the
proper use and exercise of options in that most contract files did not
indicate that options had been properly justified prior to the
government exercising them;[Footnote 13] compliance with requirements
for best value source selection;
compliance with requirements for negotiated acquisitions;
and compliance with procurement oversight policies and procedures. The
review noted that the findings related to the basic principles of
contracting and were not symptoms of the complexity of prime vendor
contracting.
We found that another factor that could be influencing the lack of
pricing reviews in these commodities is the emphasis DLA management has
traditionally placed on increasing sales to customers rather than on
the prices the prime vendors charge for items. Both the DCMA review and
a DLA internal review noted the undue emphasis placed on sales data.
DLA senior officials also acknowledged that this could be an issue. As
noted in the following section, DLA is changing the metrics it reviews
to include pricing as well as sales data.
DLA Is Instituting Corrective Actions and Developing Policy Guidance
for Prime Vendor Contracting:
DLA has developed corrective actions and has begun to implement some of
these corrective actions such as increasing the number of audits and
establishing additional training requirements for contracting officers
and managers. However, some of the corrective actions DLA is taking
have delayed order approval and delivery times for customers. In
addition to the corrective actions it is implementing, DLA is also
developing a policy to implement regulatory guidance for prime vendor
contracting.
DLA Has Initiated Corrective Actions:
Senior DLA officials acknowledged that weaknesses in oversight led to
the pricing problems highlighted in the media reports and at the
congressional hearing and stated that they are instituting corrective
actions. DLA has since conducted internal reviews and requested an
external review by the Defense Contract Management Agency, which has
been completed.[Footnote 14] In addition, DLA has requested the Defense
Contract Audit Agency to perform audits under the food service
equipment prime vendor program, which are expected to be completed by
June 2006. As a result of the completed reviews, since December 2005
DLA has initiated several actions aimed at strengthening oversight,
such as modifying contracts to change the price verification process
and establishing additional training for contracting officers and
managers. Because DLA is still in the process of implementing these
actions, we did not evaluate them at this time.
We summarized the main findings of the reviews and DLA actions to
address these findings in table 1.
Table 1: Summary of Main DLA and DCMA Findings and DLA Actions:
Finding/observation: * Lack of management oversight;
DLA actions:
* Monthly briefings to DSCP Command on pricing reviews and audits;
* Annual procurement management reviews on prime vendor contracts;
* All prime vendor contracts will be approved by DLA headquarters;
* Reorganizing the Procurement Directorate to provide more independent
oversight of the supply chains.
Finding/observation: * Inadequate pricing reviews being conducted;
DLA actions:
* Ensuring prime vendor contracts comply with an established prime
vendor pricing model;
* Contracting officers documenting fair and reasonableness price
determinations for orders over certain thresholds;
* Increasing the number of audits to ensure the government was not
overcharged;
* Modifying contracts to change the price verification process;
* Requesting a price audit by DCAA.
Finding/observation: * Lack of knowledge or skills of contracting
personnel, or a disregard for the contracting rules and regulations;
DLA actions:
* Establishing additional training for contracting officers and
managers;
* Reorganizing the Subsistence Directorate and revoking some
contracting officers' warrants.
Finding/observation: * Management metrics may be too narrowly focused
on sales, fill rates and customer satisfaction;
DLA actions:
* Acquisition management metrics developed with a Monthly Command
review. Now look at price as well as sales.
Finding/observation: * Prime vendor concept may not be suitable for all
commodities;
DLA actions:
* Adjusting acquisition strategies to reassign programs to best
procurement approach.[A].
Source: GAO analysis of DLA and DCMA data.
[A] For example, DLA has evaluated the acquisition of food service
equipment and has determined not to continue acquiring food service
equipment through a prime vendor. A new acquisition strategy is under
development that will require the development of a contractual
relationship primarily with manufacturers or their representatives for
equipment and incidental services.
[End of table]
Based on the Standards for Internal Controls in the Federal Government,
a key internal control element is the monitoring of the quality and
performance over time and ensuring that the findings of audits and
other reviews are promptly resolved.[Footnote 15] Internal control
should generally be designed to assure that ongoing monitoring occurs
in the course of normal operations, is performed continually, and is
ingrained in the agency's operations. It includes regular management
and supervisory activities, comparisons, reconciliations, and other
actions people take in performing their duties. However, DLA officials
have acknowledged that a lack of management oversight led to the
pricing problems noted in 2002, 2003, and again in 2005.
DLA's Corrective Actions Have Resulted in Delays for Some Customers:
The requirements for additional price verification and approval
implemented by DSCP have resulted in delays in order approval and
slowed delivery to some customers and resulted in additional resource
requirements for DSCP. The delays and additional requirements have
already led to some refinements being made in the verification
requirements. For example, in January 2006, the maintenance, repair and
operations (MRO)-Supplies commodity within the Construction and
Equipment Directorate was initially required to perform a fair and
reasonable price determination on all orders over $2,500 before the
prime vendor could process the order. The average number of orders with
a value of more than $2,500 received each month for this commodity is
about 40,000, and each order contains, on average, 5 line items. Thus,
the average number of lines that required price determinations was
approximately 200,000 per month. All orders under $2,500 were to be
reviewed by a statistical sample on a post-order basis. To assist in
fulfilling this requirement, 12 staff have been added since January
2006. In spite of the additional staff, the turnaround time to complete
an order has risen from around 2 days to about 10, as approximately 8
days are required to perform the price determination. According to a
manager in the Construction and Equipment Directorate, some customers
are pulling back from using the prime vendor because of the delay. Some
prime vendors have also reported a decrease in sales.
Because of the delay and increase in resource requirements, the
criteria for performing the fair and reasonable price determination
were refined in February 2006. MRO-Supplies management changed its
policy of reviewing every order of $2,500 or more for a fair and
reasonable price determination prior to the prime vendor processing the
order to reviewing 30 percent of the orders with a value of $2,500 to
$24,999 on a pre-order basis and the remaining 70 percent done post-
order.[Footnote 16] However, MRO-Supplies is still reviewing all orders
with a value greater than $25,000 prior to the order being processed.
In addition, a statistical sample of orders with a value of less than
$2,500 will still be reviewed for a fair and reasonable price, some pre-
order and some post-order, whereas previously, the entire sample was
reviewed post-order.
DLA is Developing New Policy Guidance for Prime Vendor Contracting:
In addition to the corrective actions being carried out, DLA is also
developing a policy to implement regulatory guidance for prime vendor
contracting. According to a DLA acquisition official, the policy will
also establish the basis for lessons learned from the reviews of prime
vendor programs. Key points of the policy include: specific
requirements for management oversight such as pricing and compliance
audits; requiring all prime vendor contracts to comply with an
established prime vendor pricing model; annual procurement management
reviews for all prime vendor contracts; and requiring advance approval
by headquarters for all prime vendor contracts, regardless of dollar
value. Because this policy was still in draft form at the time of our
review, we did not evaluate it.
Conclusions:
The prime vendor concept can be a useful approach to acquiring
commercial goods and services, reducing delivery times, and decreasing
the need for and costs of maintaining government inventory, but until
DOD's prime vendor program receives the level of oversight it has been
lacking, it remains vulnerable to the systemic pricing problems that
have plagued it in the past. DLA's 2002 and 2003 internal reviews
recommended corrective actions and DLA officials agreed to implement
changes to better oversee prices. However, these changes, which
included policies and procedures for pricing reviews, failed to prevent
the problems highlighted in October and November 2005 because of a lack
of management oversight by both logistics agency and supply center
officials. Therefore, the new actions DLA is taking may not be
effective until DLA provides the continual oversight which has been
lacking.
Recommendation:
We recommend that the Secretary of Defense direct the Undersecretary of
Defense, Acquisition, Technology and Logistics to ensure that the
Director of the Defense Logistics Agency provide continual management
oversight of the corrective actions to address pricing problems in the
prime vendor program.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness, which is
responsible for DLA oversight, concurred with our recommendation and
identified corrective actions already being taken by DLA. DOD noted
that DLA is committed to implementing the corrective actions and has
assigned additional resources to oversee prime vendor contracts. In
addition, the department stated that DLA will continue to monitor prime
vendor programs to ensure the actions taken will produce the intended
results. We noted that DOD's comments did not address what actions the
Office of the Under Secretary of Defense for Acquisition, Technology,
and Logistics would take to ensure that DLA will provide continual
management oversight and contacted the office to clarify its role in
overseeing DLA's corrective actions. We were told by a senior official
from the Under Secretary's office that the office of the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness will review
the implementation of the corrective actions in its regular management
meetings with DLA. The written comments from the Deputy Under Secretary
of Defense for Logistics and Materiel Readiness are included in
enclosure 1 of this correspondence.
Scope and Methodology:
To determine the extent of pricing reviews conducted by DLA for items
purchased through a prime vendor, we analyzed 16 prime vendor contracts
(10 food service, 1 subsistence, and 5 maintenance, repair and
operation), two contracts with the manufacturer of an aircraft
refrigerator and four delivery orders to prime vendors for the same
refrigerator to determine pricing control and audit requirements, and
reviewed internal and external assessments of DLA's procurement
management. In addition, we reviewed policies and procedures governing
the use of prime vendors and prior GAO reports on the subject. Further,
we discussed the mechanisms used to monitor price with DLA and DSCP
officials; prime vendors located in Columbia and Lexington, South
Carolina; customers located at Fort Jackson, South Carolina, and Fort
Stewart, Georgia; a Naval Sea Systems Command official in Philadelphia,
Pennsylvania; and a manufacturer located in Philadelphia, Pennsylvania.
To determine the extent to which DLA has addressed the pricing issues
identified at the November 2005 hearing we discussed with DSCP and DLA
officials their ongoing and planned actions to rectify the management
oversight weaknesses identified within the DSCP prime vendor programs
and the changes and adjustments made to prime vendor contracts since
they were first awarded. We also discussed with DCMA and DCAA the prime
vendor contract and pricing reviews those agencies were conducting at
DLA's request. Finally, we discussed the impacts of DLA's corrective
actions with DSCP officials and with prime vendors located in Columbia
and Lexington, South Carolina.
We conducted our review from December 2005 through April 2006 in
accordance with generally accepted government auditing standards.
We are sending copies of this report to the Undersecretary of Defense,
Acquisition, Technology and Logistics; the Deputy Undersecretary of
Defense for Logistics and Materiel Readiness; the Director, Defense
Logistics Agency; and interested congressional committees. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
Please contact me at (202) 512-8365 or solisw@gao.gov if you or your
staff have any questions concerning this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report were
Marilyn Wasleski, Assistant Director; Vijay J. Barnabas; John Clary;
Susan Ditto; Aaron Kaminsky; and Kenneth Patton.
Sincerely yours,
Signed by:
William M. Solis, Director:
Defense Capabilities and Management:
Enclosure:
Comments from the Department of Defense:
Deputy Under Secretary Of Defense For Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, D.C. 20301-3500:
June 5, 2006:
Mr. William Solis:
Director, Defense Capabilities and Management:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the GAO draft
report GAO-06-7398, "DEFENSE MANAGEMENT: Attention is Needed to Improve
Oversight of DLA Prime Vendor Program," dated May 24, 2006 (GAO Code
350789). The GAO draft report acknowledges that the DLA is developing
corrective actions to address the prime vendor pricing problems
identified in November 2005 testimony but recommends that continual
management oversight of the corrective actions is needed to ensure the
problems do not continue. The DoD concurs with the recommendation and
identifies actions already being taken by DLA.
Detailed comments on the draft report recommendation are included in
the enclosure. The DoD appreciates the opportunity to comment on the
draft report.
Signed by:
Jack Bell:
Enclosure: As stated:
GAO DRAFT REPORT - DATED MAY 24, 2006 GAO CODE 350789/GAO-06-739R:
"DEFENSE MANAGEMENT: Attention Is Needed to Improve Oversight of DLA
Prime Vendor Program"
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense for Acquisition, Technology, and
Logistics to ensure that the Director of the Defense Logistics Agency
(DLA) provide continual management oversight of the corrective actions
to address pricing problems in the prime vendor program. (Page 16/GAO
Draft Report):
DOD RESPONSE: Concur. After a November 2005, House Armed Services
Committee hearing regarding pricing inconsistencies in DLA's food
service equipment prime vendor program, DLA initiated an extensive
internal review of the prime vendor process. DLA also engaged the
Defense Contract Management Agency and Defense Contract Audit Agency to
conduct additional reviews of the prime vendor program. Although the
reviews indicate that a vast majority of prime vendor program
expenditures are supporting the war fighter as intended, some
vulnerabilities in business practices were identified and immediate
corrective actions were taken. Processes are in place and have been
reinforced to provide proper planning, execution, and aggressive
oversight for all DLA prime vendor contracts. Improvements include
assigning additional resources and increased emphasis on post award
administration of these contracts. To ensure only fair and reasonable
prices are paid, DLA has established agency standards for prime vendor
pricing methodologies, a thorough review regime, and recurring audit
procedures.
All DLA acquisition and logistics personnel clearly understand
priorities of customer support through appropriate acquisition
strategies. In some cases, acquisition strategies have been adjusted to
reassign programs to the best procurement approach. In addition,
individual actions were taken to assign accountability for the issues
raised with the food service equipment prime vendor program. DLA will
continue to monitor prime vendor programs to ensure actions taken to
date produce the intended results. Additional adjustments to prime
vendor practices and procedures may be made as required to ensure the
integrity of the programs. DLA is committed to ensuring that the prime
vendor program continues to be a best business practice supporting the
warfighter and will provide continual management oversight as
recommended.
(350789):
FOOTNOTES
[1] DLA 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.
[2] GAO, Defense Inventory: Opportunities Exist to Expand the Use of
Defense Logistics Agency Best Practices, GAO/NSIAD-00-30 (Washington,
D.C.: Jan. 26, 2000). A best commercial inventory practice is defined
in The National Defense Authorization for Fiscal Year 1998 as a
practice that enables the agency to reduce inventory levels and holding
costs while improving the responsiveness of the supply system to user
needs.
[3] GAO, Defense Contract Pricing, GAO/HR-93-8 (Washington, D.C.: Dec.
1, 1992), High-Risk Series: An Update, GAO/05-207 (Washington, D.C.:
January 2005).
[4] GAO, Standards for Internal Control in the Federal Government, AIMD-
00-21.3.1 (Washington, D.C.: Nov. 1999).
[5] The MRO category is further broken out between supplies and
services, with separate prime vendor contracts for each.
[6] GAO, NSIAD-00-30.
[7] DOD Medical Inventory: Reductions Can Be Made Through the Use of
Commercial Practices GAO/NSIAD-92-58 (Washington, D.C.: Dec. 5, 1991);
DOD Food Inventory: Using Private Sector Practices Can Reduce Costs and
Eliminate Problems, GAO/NSIAD-93-110 (Washington, D.C.: June 4, 1993).
[8] House Armed Services Committee Hearing on Prime Vendor Program of
Defense Logistics Agency (Nov. 9, 2005).
[9] A pricing agreement is a manufacturer's or distributor's agreement
with DSCP to provide products at a specified price or discount.
[10] Department of Defense Procurement Management, December 12, 2005 -
January 25, 2006, Defense Contract Management Agency.
[11] Items and quantities selected for inclusion in a market basket
have not been consistent among the various commodities, according to
DLA officials. For example, in subsistence (food and food service
equipment), the samples have ranged from a low of 18 percent of the
items to be purchased to a high of 75 percent. DLA is currently
developing policy that will require that market baskets must represent
75 percent of the anticipated dollar value of the planned acquisition.
[12] These reviews considered whether contracting officials met all
requirements of law, executive orders, regulations, and other
procedures when contracting for supplies and services for the
government.
[13] FAR 17.207(c) requires that the contracting officer exercise
options only after determining that (1) funds are available;
(2) the requirement covered by the option fulfills an existing
government need;
(3) the exercise of the option is the most advantageous method of
fulfilling that need, price, and other factors considered;
and (4) that the option was synopsized in accordance with FAR Part 5 or
properly exempted.
[14] Department of Defense Procurement Management Review, December 12,
2005 - January 25, 2006, Defense Contract Management Agency.
[15] GAO/AIMD-00-21.3.1.
[16] We note that the FAR generally requires a price determination on
orders over $2,500 - FAR 2.101, FAR 13.106-3 and FAR 16.505(b)(3).
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