Defense Acquisitions
Sound Practices Critical to Ensuring Value for the Defense Logistics Agency's Acquisitions Gao ID: GAO-09-1040T September 24, 2009The nation's ability to project and sustain military power depends on effective logistics. As the Department of Defense's (DOD) largest combat support agency, providing worldwide logistics support in both peacetime and wartime, the Defense Logistics Agency (DLA) supplies almost every consumable item the military services need to operate, from Meals Ready-to Eat to jet fuel. Given current budgetary pressures and the crucial role DLA plays in supporting the military service in the United States and overseas, it is vital that DOD ensure DLA is getting value for the commodities and services it acquires. The committee asked GAO to identify the challenges DOD faces in ensuring DLA gets value for the taxpayer's dollar and obtains quality commodities in a cost-efficient and effective manner. This testimony focuses on sound practices GAO has identified regarding obtaining value when contracting and how they can also apply to DLA's acquisition of commodities. GAO has made numerous recommendations aimed at improving DOD's management and oversight of contractors, and DOD has concurred with many of them. GAO is not making any new recommendations in this testimony.
DOD faces challenges ensuring DLA gets value for the taxpayer's dollar and obtains quality commodities in a cost-efficient and effective manner. GAO's previous testimonies before this committee on weapons system acquisition and service contracts highlighted how essential it is that DOD employ sound practices when using contractors to support its missions or operations to ensure the department receives value regardless of the type of product or service involved. These practices include clearly defining its requirements, using the appropriate contract type, and effectively overseeing contractors. With regard to DLA, GAO's prior work has identified the following challenge areas: (1) Accurate Requirements Definition - Without a good understanding of customers' projected needs, DLA is not assured it is buying the right items in the right quantities at the right time. GAO's prior work has identified instances where problems in properly defining requirements can lead to ineffective or inefficient management of commodities. For example, GAO reported in 2005 that while DLA had a model to forecast supply requirements for contingencies, this model did not produce an accurate demand forecast for all items, including Meals Ready-to-Eat. As a result, the demand for these items was underestimated and some combat support units came within a day or two of exhausting their Meals Ready-to-Eat rations. (2) Sound Business Arrangements - Selecting the appropriate type is important because certain contracting arrangements may increase the government's cost risk where others transfer some of that cost risk to the contractor. For example, GAO noted in 2007 that DLA's Defense Energy Support Center was able to purchase fuel and supply products for the forces in Iraq more cheaply than an Army Corps of Engineers contractor because DLA was able to sign long-term contracts with the fuel suppliers. (3) Proper Contract Oversight and Management - Failure to provide adequate contract oversight and management hinders DOD's ability to address poor contractor performance and avoid negative financial and operation impacts. For example, in June 2006, GAO found that DLA officials were not conducting required price reviews for the prime vendor contracts for food service equipment and construction and equipment commodities. Agency 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. DLA has taken some actions to address these challenges. For example, DLA has begun adjusting acquisition strategies to reassign programs to a best procurement approach. DLA has also established contracting officer's representative training requirements to ensure these individuals are properly trained to carry out their responsibilities.
GAO-09-1040T, Defense Acquisitions: Sound Practices Critical to Ensuring Value for the Defense Logistics Agency's Acquisitions
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Testimony:
Before the Defense Acquisition Reform Panel, Committee on Armed
Services, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 9:30 a.m. EDT:
Thursday, September 24, 2009:
Defense Acquisitions:
Sound Practices Critical to Ensuring Value for the Defense Logistics
Agency's Acquisitions:
Statement of William M. Solis, Director: Defense Capabilities and
Management:
GAO-09-1040T:
GAO Highlights:
Highlights of GAO-09-1040T, a testimony before the Defense Acquisition
Reform Panel, Committee on Armed Services, House of Representatives.
Why GAO Did This Study:
The nation‘s ability to project and sustain military power depends on
effective logistics. As the Department of Defense‘s (DOD) largest
combat support agency, providing worldwide logistics support in both
peacetime and wartime, the Defense Logistics Agency (DLA) supplies
almost every consumable item the military services need to operate,
from Meals Ready-to-Eat to jet fuel. Given current budgetary pressures
and the crucial role DLA plays in supporting the military service in
the United States and overseas, it is vital that DOD ensure DLA is
getting value for the commodities and services it acquires.
The committee asked GAO to identify the challenges DOD faces in
ensuring DLA gets value for the taxpayer‘s dollar and obtains quality
commodities in a cost-efficient and effective manner. This testimony
focuses on sound practices GAO has identified regarding obtaining value
when contracting and how they can also apply to DLA‘s acquisition of
commodities.
GAO has made numerous recommendations aimed at improving DOD‘s
management and oversight of contractors, and DOD has concurred with
many of them. GAO is not making any new recommendations in this
testimony.
What GAO Found:
DOD faces challenges ensuring DLA gets value for the taxpayer‘s dollar
and obtains quality commodities in a cost-efficient and effective
manner. GAO‘s previous testimonies before this committee on weapons
system acquisition and service contracts highlighted how essential it
is that DOD employ sound practices when using contractors to support
its missions or operations to ensure the department receives value
regardless of the type of product or service involved. These practices
include clearly defining its requirements, using the appropriate
contract type, and effectively overseeing contractors. With regard to
DLA, GAO‘s prior work has identified the following challenge areas:
* Accurate Requirements Definition – Without a good understanding of
customers‘ projected needs, DLA is not assured it is buying the right
items in the right quantities at the right time. GAO‘s prior work has
identified instances where problems in properly defining requirements
can lead to ineffective or inefficient management of commodities. For
example, GAO reported in 2005 that while DLA had a model to forecast
supply requirements for contingencies, this model did not produce an
accurate demand forecast for all items, including Meals Ready-to-Eat.
As a result, the demand for these items was underestimated and some
combat support units came within a day or two of exhausting their Meals
Ready-to-Eat rations.
* Sound Business Arrangements – Selecting the appropriate type is
important because certain contracting arrangements may increase the
government‘s cost risk where others transfer some of that cost risk to
the contractor. For example, GAO noted in 2007 that DLA‘s Defense
Energy Support Center was able to purchase fuel and supply products for
the forces in Iraq more cheaply than an Army Corps of Engineers
contractor because DLA was able to sign long-term contracts with the
fuel suppliers.
* Proper Contract Oversight and Management – Failure to provide
adequate contract oversight and management hinders DOD‘s ability to
address poor contractor performance and avoid negative financial and
operation impacts. For example, in June 2006, GAO found that DLA
officials were not conducting required price reviews for the prime
vendor contracts for food service equipment and construction and
equipment commodities. Agency 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.
DLA has taken some actions to address these challenges. For example,
DLA has begun adjusting acquisition strategies to reassign programs to
a best procurement approach. DLA has also established contracting
officer‘s representative training requirements to ensure these
individuals are properly trained to carry out their responsibilities.
View [hyperlink, http://www.gao.gov/products/GAO-09-1040T] or key
components. For more information, contact William M. Solis at (202) 512-
8365 or solisw@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss challenges the Department of
Defense (DOD) faces to ensure the Defense Logistics Agency (DLA) gets
value for the taxpayer's dollar and obtains quality commodities in a
cost-efficient and effective manner. The nation's ability to project
and sustain military power depends on effective logistics. As the
department's largest combat support agency, providing worldwide
logistics support in both peacetime and wartime, DLA supplies almost
every consumable item the military services need to operate, from Meals-
Ready-to Eat to jet fuel. In fiscal year 2008, DLA provided more than
$42 billion in goods and services to all military services worldwide,
including significant support to both Operation Enduring Freedom and
Operation Iraqi Freedom. The Secretary of Defense has noted that with
two major ongoing campaigns, the economic crisis and resulting budget
pressures will force hard choices on DOD, including hard choices
regarding defense acquisitions. He further identified defense
acquisition as the chief institutional challenge facing the department.
Given these budgetary pressures and the crucial role DLA plays in
supporting the military service in the United States and overseas, it
is vital that DOD ensure DLA is getting value for the commodities and
services it acquires.
Earlier this year we testified before this committee that significant
improvement in DOD's acquisition of weapons systems is possible and
that the ability to measure knowledge, processes, and outcomes is
critical to achieving such improvements.[Footnote 1] We also testified
that DOD continues to face challenges in employing sound practices when
contracting for and managing service contracts.[Footnote 2] While DOD's
acquisition of commodities differs from weapons system and service
contract acquisitions, our body of work demonstrates how essential it
is that DOD employ sound practices when using contractors to support
its missions or operations to ensure the department receives value
regardless of the type of product or service involved. The practices
include clearly defining its requirements, using the appropriate
contract type, and effectively overseeing contractors. We have made
recommendations on all of these practices, and DOD has concurred with
many of them. My statement today will focus on these sound practices
and how they can also apply to DLA's acquisition of commodities. Our
statement is based on work we have completed over the past decade,
which demonstrates ongoing weaknesses in DOD's management of contracts.
Our work was conducted in accordance with generally accepted government
auditing standards.[Footnote 3]
Background:
DOD operates a worldwide supply system to buy, store, and distribute
inventory items. Through this system, DOD manages several million types
of consumable items, most of which are managed by DLA. DLA is DOD's
largest combat support agency, providing worldwide logistics support in
both peacetime and wartime to the military services as well as civilian
agencies and foreign countries. DLA supplies almost every consumable
item the military services need to operate. To do this, DLA operates
three supply centers, including the Defense Supply Center in
Philadelphia, Pennsylvania which is responsible for procuring nearly
all the food, clothing, and medical supplies used by the military. In
addition, DLA has supply centers in Richmond, Virginia and Columbus,
Ohio. The Defense Distribution Center operates a worldwide network of
25 distribution depots that receive, store, and issue supplies. In
addition, DLA's Defense Energy Support Center has the mission of
purchasing fuel for the military service and other defense agencies.
DLA also helps dispose of excess or unusable materiel and equipment
through its Defense Reutilization and Marketing Service.
To meet its mission, DLA relies on contractors as suppliers of the
commodities and as providers of services including the acquisition and
distribution of certain commodities. Traditionally, DLA buys consumable
items in large quantities, stores them in distribution depots until
they are requested by the military services, and then ships them to a
service facility where they are used. For example, DLA procures
military uniforms through competitive contracts. Defense Supply Center-
Philadelphia's Clothing and Textile Directorate procures commodities
such as battle dress uniforms, footwear, and body armor directly from
contractors and stores them until they are needed by the services.
DLA also relies on service contractors to help with the acquisition,
management, and distribution of commodities. For example, DLA has a
prime vendor arrangement 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. 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. Once the Defense Supply Center-Philadelphia approves the order,
the prime vendor fills, ships, and tracks the order through final
acceptance. The prime vendor then submits an invoice to Defense Supply
Center-Philadelphia, which authorizes payment to the prime vendor and
bills the customer. According to DLA, the benefits of prime vendor
contracts include improved access to a wide range of high-quality
products, rapid and predictable delivery, and reduced overhead charges.
Other benefits of prime vendor contracts include significant reductions
in the manpower needed to manage and warehouse these items at DLA and
reduced transportation costs. In addition, prime vendor contracts
provide for surge and broader mobilization capabilities, and worldwide
customer support.
DLA also uses service contractors to provide services other than the
acquisition of commodities. For example, the Defense Reutilization and
Marketing Service uses contractors to support the disposal of
government equipment and supplies considered surplus or unnecessary to
DOD's mission. Similarly, DLA uses service contractors to provide
oversight, audit, and verification procedures for the destruction of
DOD scrap property; operate Defense Reutilization and Marketing Office
locations around the world including sites in Kuwait, Iraq, and
Afghanistan; and run the Defense Distribution Center, Kuwait, Southwest
Asia which provides distribution services and surge capability to all
four service components to support the warfighters operating in the
region. Current commodities distributed by the center are repair parts,
barrier/construction materiel, clothing, textiles, and tents. The
center also provides consolidated shipment and containerization
services, as well as, routine logistic support to the military
community in the U.S. Central Command's theater of operations.
Sound Practices Vital to Ensuring DLA Receives Value When Acquiring
Commodities:
Proper Requirements Definition Is Essential to Obtaining Value:
DLA determines what and how many items it buys based on requirements
from its military service customers. Without a good understanding of
customers' projected needs, DLA is not assured it is buying the right
items in the right quantities at the right time. Properly defined
requirements are therefore fundamental to obtaining good value for
contracts administered through DLA. As with any contracting decision, a
prerequisite to good outcomes is a match between well-defined
requirements and available resources. Our previous testimonies before
this committee on weapons system acquisition and service contracts have
highlighted several cases where poorly defined and changing
requirements have contributed to increased costs, as well as services
that did not meet the department's needs.[Footnote 4] We also noted
that the absence of well-defined requirements and clearly understood
objectives complicates efforts to hold DOD and contractors accountable
for poor acquisitions outcomes. In addition, requirements which are
based on unrealistic assumptions make it impossible to execute programs
that are within established cost, schedule, and performance targets.
Our prior work has identified instances where problems in properly
defining requirements can lead to ineffective or inefficient management
of commodities.
* Inaccurate demand forecasting may result in inventory that does not
match demand. The military services and DLA manage the acquisition and
distribution of spare parts for defense weapon systems. Whereas the
military services manage their own reparable spare parts, DLA provides
the services with most of their consumable parts--that is, items of
supply that are normally expended or intended to be used up beyond
recovery. In prior work, we have reported that the Air Force, the Navy,
and the Army had acquired billions of dollars of spare parts in excess
to their current requirements.[Footnote 5] For example, for fiscal
years 2004 to 2007, the Army had on average about $3.6 billion of spare
parts inventory that exceeded current requirements, while also having
inventory deficits that averaged about $3.5 billion. During that same
time period, the Navy had secondary inventory that exceeded current
requirements by an average of $7.5 billion dollars, or 40 percent of
total inventory. Mismatches between inventory levels and current
requirements were caused in part by inaccurate demand forecasting. In
our Navy work, for example, we noted that requirements frequently
changed after purchase decisions had been made and that the Navy had
not adjusted certain inventory management practices to account for the
unpredictability in demand. The military services' difficulty in
forecasting demand for spare parts is among the reasons we have placed
DOD's supply chain management on our high-risk series since 1990.
[Footnote 6] In addition, we are currently reviewing DLA's management
of consumable spare parts for its service customers. We are evaluating
(1) the extent that DLA's spare parts inventory reflects the amounts
needed to support current requirements and (2) the factors that have
contributed to DLA having any excesses or deficits in secondary
inventory. As part of our review, we expect to report on how demand
forecasting may affect inventory levels compared with requirements and
what actions DLA is taking to understand and mitigate problems with
demand forecasting.
* Inaccurate requirements and supply forecasts can affect the
availability of critical supplies and inventory for the military,
which, in turn, can result in a diminished operational capability and
increased risk to troops. For example, as we reported in 2005, the
Army's failure to conduct an annual update of its war reserve
requirements for spare parts since 1999, as well the Army's continued
decisions to not fully fund war reserve spare parts, resulted in the
inventory for some critical items being insufficient to meet initial
wartime demand during Operation Iraqi Freedom.[Footnote 7] These items
included lithium batteries, armored vehicle track shoes, and tires for
5-ton trucks, where demand exceeded supply by over 18 times the amount
on hand. Similarly, while DLA had a model to forecast supply
requirements for contingencies, this model did not produce an accurate
demand forecast for all items, including Meals Ready-to-Eat.[Footnote
8] Therefore, Army officials had to manually develop forecasts for
Operation Iraqi Freedom, but did not always have sufficient or timely
information needed to forecast accurate supply requirements. As a
result, they underestimated the demand for some items. For example,
demand for Meals Ready-to-Eat exceeded supply in February, March, and
April 2003, when monthly demand peaked at 1.8 million cases, while the
inventory was only 500,000 cases. Some combat support units came within
a day or two of exhausting their Meals Ready-to-Eat rations, putting
Army and Marine Corps units at risk of running out of food if the
supply distribution chain was interrupted.
* Unrealistic time frames for acquisition and delivery of commodities
can also have negative impacts on obtaining value. We previously
testified that the Army's decision to issue black berets to all of its
forces in just 8 months placed enormous demands on DOD's procurement
system.[Footnote 9] Due to the extremely short time frame for delivery
of the berets to the Army, DLA contracting officials took a number of
actions to expedite award of the contracts, including undertaking
contract actions without providing for "full and open" competition as
required by the Competition in Contracting Act of 1984. According to
contract documents, the contract actions were not competed because of
an "unusual and compelling urgency," one of the circumstances
permitting other than full and open competition. Despite these actions,
DLA was unable to meet its deadline due to quality and delivery
problems and had to terminate several contracts because the contractors
could not meet delivery requirements.
Sound Business Arrangements Are Essential to Reducing the Government's
Risks:
When contracting for commodities or services, DLA has a number of
choices regarding the contracting arrangements to use. Selecting the
appropriate type is important because certain contracting arrangements
may increase the government's cost risk whereas others transfer some of
that cost risk to the contractor. We have previously testified before
this committee that once the decision has been made to use contractors
to support DOD's missions or operations, it is essential that DOD
clearly defines its requirements and employs sound business practices,
such as using appropriate contracting vehicles.[Footnote 10] For
example, we testified that we had found numerous issues with DOD's use
of time-and-materials contracts that increased the government's risks.
These contracts are appropriate when specific circumstances justify the
risks, but our findings indicate that they are often used as a default
for a variety of reasons--ease, speed, and flexibility when
requirements or funding are uncertain. Time-and-materials contracts are
considered high risk for the government because they provide no
positive profit incentive to the contractor for cost control or labor
efficiency and their use is supposed to be limited to cases where no
other contract type is suitable.
With regard to commodities, it is equally important that DLA use the
appropriate contracting arrangements to result in the best value and
lowest risk to the government. Our prior work over the past 10 years
and the work of others has identified instances where using the wrong
contracting arrangement led to the ineffective or inefficient
acquisition of commodities. For example, as discussed above, when DLA
was tasked to purchase black berets for the Army, the extremely short
time frame placed DOD in a high-risk contracting situation. In their
eagerness to serve the customer, DLA contracting officials shortcut
normal contracting procedures to expedite awarding the contracts,
allowing little time to plan for the purchase of the berets and little
room to respond to production problems. In awarding a contract to one
foreign firm, using other than full and open competition, the DLA
contracting officer was confronted with a price that was 14 percent
higher than the price of the domestic supplier. However, the
contracting officer performed a price analysis and determined the price
was fair and reasonable, explaining that given the deadline, there was
no time to obtain detailed cost or pricing data, analyze those data,
develop a negotiation position, negotiate with a firm, and then finally
make the award. When competition was introduced into the process at a
later date, prices declined. As another example of higher costs
resulting from using a particular contract type to acquire commodities,
we reported in July 2004 that the Air Force had used the Air Force
Contract Augmentation Program contract to supply commodities for its
heavy construction squadrons.[Footnote 11] While contractually
permitted, the use of a cost-plus-award-fee contract as a supply
contract may not be cost-effective. Under such contracts, the
government reimburses the contractors' costs and pays an award fee that
may be higher than warranted given the contractors' low level of risk
when performing such tasks. Air Force officials recognized that the use
of a cost-plus-award-fee contract to buy commodities may not be cost-
effective and under the current contract commodities may be obtained
using a variety of contracting arrangements. Similarly we noted in a
2007 report on the Army Corps of Engineers Restore Iraqi Oil Contract
that DLA's Defense Energy Support Center was able to purchase fuel and
supply products for the forces in Iraq more cheaply than the contractor
because the Defense Energy Support Center was able to sign long-term
contracts with the fuel suppliers, an acquisition strategy the
contractor did not pursue because of the incremental funding provided
by the Army.[Footnote 12] In addition, in 2008, the DOD Inspector
General found that DLA was unable to effectively negotiate prices or
obtain best value for noncompetitive spare parts when it contracted
with an exclusive distributor--a company that represents parts
suppliers to the U.S. government.[Footnote 13] Furthermore, the DOD
Inspector General concluded that the exclusive distributor model was
not a viable procurement alternative for DOD in part because of
excessive pass-through charges, increased lead times to DOD, and an
unnecessary layer of redundancy and cost.
Our prior work reported that DLA has taken some steps to determine if
the appropriate contracting arrangement is being used or if contractors
should be used at all. As we reported in 2006, DLA has recognized that
the prime vendor concept may not be suitable for all commodities and
has begun adjusting acquisition strategies to reassign programs to a
best procurement approach.[Footnote 14] For example, DLA evaluated the
acquisition of food service equipment and determined not to continue
acquiring food service equipment through a prime vendor. Instead, DLA
decided to develop a new acquisition strategy that will require the
development of a contractual relationship primarily with manufacturers
or their representatives for equipment and incidental services. DLA has
also 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.
In addition, DLA has taken some steps to determine whether contractors
are the most efficient means to meet certain requirements. For example,
in 2005, DLA conducted a public-private competition for warehousing
functions at 68 sites used for disposing of surplus or unnecessary
government equipment and supplies. DLA ultimately determined that it
was more cost effective to retain the government employees at these
sites than convert to contractor performance.
Proper Contract Oversight and Management Key to Obtaining Value:
In addition to ensuring requirements for contracts awarded through DLA
have been properly defined and the appropriate type of contract has
been put in place, proper contract oversight and management is
essential to ensure DOD gets value for taxpayers' dollars and obtains
quality commodities or services in a cost-efficient and effective
manner. Failure to provide adequate oversight hinders the department's
ability to address poor contractor performance and avoid negative
financial and operational impacts. In previous testimony before this
committee, we noted that we have reported on numerous occasions that
DOD did not adequately manage and assess contractor performance to
ensure that its business arrangements were properly executed.[Footnote
15] Managing and assessing post award performance entails various
activities to ensure that the delivery of services meets the terms of
the contract and requires adequate surveillance resources, proper
incentives, and a capable workforce for overseeing contracting
activities. If surveillance is not conducted, is insufficient, or not
well documented, DOD is at risk of being unable to identify and correct
poor contractor performance in a timely manner.
As an agency responsible for billions of dollars of contracts for
commodities and services, it is important that DLA ensure effective
contract oversight and management and thereby obtain those commodities
and services in an economic and efficient manner. However, we have
identified several long-standing challenges that hinder DOD's effective
management of contractors, including the need to ensure adequate
personnel are in place to oversee and manage contractors, the
importance of training, and the need to collect and share lessons
learned. Our prior work has found while these challenges have affected
DLA's ability to obtain value, in some cases DLA has also taken actions
to address these challenges.
First, having the right people with the right skills to oversee
contractor performance is critical to ensuring the best value for the
billions of dollars spent each year on contractor support. DOD's
difficulty in ensuring appropriate oversight of contractors exists is
among the reasons DOD contract management has been on GAO's high-risk
series since 1992.[Footnote 16] While much of our work on contract
management has been focused on weapons system acquisition and service
contractors, we have found similar challenges with DOD's acquisition of
commodities.
* In June 2006, we found that DLA officials were not conducting
required price reviews for the prime vendor contracts for food service
equipment and construction and equipment commodities.[Footnote 17] 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.
* We also found poor contract management can cause lapses in contract
support and can lead to operational challenges, safety hazards and
waste. For example, in 2007 DLA was given the responsibility to
contract for services to de-gas, store, and refill gas cylinders in
Kuwait. Warfighters use gas cylinders for a variety of purposes
including, but not limited to, caring for those who are hospitalized,
equipment maintenance, and construction. However, as of July 2009, DLA
has yet to compete and execute this contract. As a result, instead of
receiving refilled cylinders from Kuwait, warfighters are continually
buying full gas cylinders from local markets in the Middle East. This
may lead to operational challenges and waste as warfighters must make
efforts to purchase gases in Iraq while cylinders that could be
refilled remain idle in Kuwait.
A second long-term challenge for DOD's contract oversight and
management is training. We have made multiple recommendations over the
last decade that DOD improve the training of contract oversight
personnel. We have found that DLA has recognized the need to improve
training.
* As discussed above, our June 2006 report found that DLA officials
were not conducting required price reviews for some prime vendor
contracts.[Footnote 18] Senior DLA officials acknowledged that
weaknesses in oversight led to pricing problems and stated that they
were instituting corrective actions. Among the weaknesses were the lack
of knowledge or skills of contracting personnel and a disregard for the
contracting rules and regulations. To address this weakness, DLA has
established additional training for contracting officers and managers.
In addition, DOD concurred with our recommendation that the Director,
DLA provide continual management oversight of the corrective actions
taken to address pricing problems.
* DLA has also taken some actions to help ensure that contracting
officer's representatives are properly trained. For example, DLA's
Defense Reutilization and Marketing Service has recognized that
performance-based contracts will only be effective if contracting
officer's representatives accurately report contractor performance and
contracting officers take appropriate actions. DLA has established
contracting officer's representative training requirements to ensure
these individuals are properly trained to carry out their
responsibilities. These requirements increase for contracts that are
more complex or present higher risks to the government. While we have
not evaluated the performance of DLA contracting officer's
representatives, our previous work shows that when contracting
officer's representatives are properly trained, they can better ensure
that contractors provide services and supplies more efficiently and
effectively.[Footnote 19] In addition, a working group from DOD's panel
on contracting integrity in September 2008 recognized the importance of
more in-depth contracting officer's representative training for more
complex contracts or contracts that pose a greater risk to DOD.
* In February 2009, we reported that businesses and individuals that
had been excluded from receiving federal contracts for egregious
offenses continued to be awarded contracts.[Footnote 20] Our work
demonstrated that most of the improper contracts and payments
identified can be attributed to ineffective management of the
governmentwide database which tracks excluded contractor information or
to control weaknesses at both the agency which excluded the contractor
and the contracting agency. Specifically, our work showed that excluded
businesses continued to receive federal contracts from a number of
agencies, including DLA, because officials (including contracting
officers) at some agencies failed to enter complete information in the
database in a timely manner or failed to check the database prior to
making contract awards. In addition, some agencies like DLA used
automated purchasing systems which did not interface with the database.
In commenting on our report agency officials stated that most of the
issues we identified could be solved through improved training.
A third long-term challenge for DOD's contract oversight and management
is the need to collect and share institutional knowledge on the use of
contractors, including lessons learned and best practices. Our prior
work has found that DLA has taken some actions to improve the
collection as well as the application of lessons learned. For example,
in January 2000, we identified DLA's prime vendor program as an example
of DLA adopting a best commercial practice for inventory management.
[Footnote 21] Our work found that DLA was developing a policy to
establish the basis for lessons learned from the reviews of prime
vendor programs.[Footnote 22] 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. However, because this policy was still in draft form at the time
of our review, we did not evaluate it.
In closing, Mr. Chairman, DLA has a key role in supporting the
warfighter by providing a vast array of logistics support. In providing
this support, DLA depends on contractors and as such must ensure that
it is obtaining good value for the billions of dollars it spends every
year. Regardless of whether DLA is buying commodities or services, well-
defined requirements, appropriate contract types, and proper contract
oversight and management are critical to ensuring that DLA gets what it
pays for.
Mr. Chairman and members of the committee, this concludes my testimony.
I would be happy to answer any questions you might have.
Contributors and Acknowledgements:
For further information about this testimony, please contact William
Solis, Director, Defense Capabilities and Management, on (202) 512-8365
or solisw@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
testimony. Other key contributors to this testimony include Carole
Coffey, Lionel Cooper, Laurier Fish, Thomas Gosling, Melissa Hermes,
James A. Reynolds, Cary Russell, Michael Shaughnessy, and Marilyn
Wasleski.
[End of section]
Footnotes:
[1] GAO, Defense Acquisitions: Measuring the Value of DOD's Weapon
Programs Requires Starting with Realistic Baselines, [hyperlink,
http://www.gao.gov/products/GAO-09-543T] (Washington, D.C.: Apr. 1,
2009).
[2] GAO, Defense Acquisitions: Actions Needed to Ensure Value for
Service Contracts, [hyperlink, http://www.gao.gov/products/GAO-09-643T]
(Washington, D.C.: Apr. 23, 2009).
[3] Generally accepted government auditing standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
[4] [hyperlink, http://www.gao.gov/products/GAO-09-543T] and
[hyperlink, http://www.gao.gov/products/GAO-09-643T].
[5] GAO, Defense Inventory: Army Needs to Evaluate Impact of Recent
Actions to Improve Demand Forecasts for Spare Parts, [hyperlink,
http://www.gao.gov/products/GAO-09-199] (Washington, D.C.: Jan. 12,
2009); GAO, Defense Inventory: Management Actions Needed to Improve the
Cost Efficiency of the Navy's Spare Parts Inventory,[hyperlink,
http://www.gao.gov/products/GAO-09-103] (Washington, D.C.: Dec. 12,
2008); and GAO, Defense Inventory: Opportunities Exist to Save Billions
by Reducing Air Force's Unneeded Spare Parts Inventory, [hyperlink,
http://www.gao.gov/products/GAO-07-232] (Washington, D.C.: Apr. 27,
2007).
[6] GAO, High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January
2009).
[7] GAO, Defense Logistics: Actions Needed to Improve the Availability
of Critical Items during Current and Future Operations, [hyperlink,
http://www.gao.gov/products/GAO-05-275] (Washington, D.C.: Apr. 8,
2005).
[8] DLA is the item and supply manager for Meals Ready-to-Eat.
[9] GAO, Contract Management: Purchase of Army Black Berets,
[hyperlink, http://www.gao.gov/products/GAO-01-695T] (Washington, D.C.:
May 2, 2001).
[10] GAO-09-643T.
[11] GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, [hyperlink,
http://www.gao.gov/products/GAO-04-854] (Washington, D.C.: July 19,
2004).
[12] GAO, Defense Contract Management: DOD's Lack of Adherence to Key
Contracting Principles on Iraqi Oil Contract Put Government Interests
at Risk, [hyperlink, http://www.gao.gov/products/GAO-07-839]
(Washington, D.C.: July 31, 2007).
[13] Department of Defense Inspector General, Procuring Noncompetitive
Spare Parts Through an Exclusive Distributor, Report Number D-2008-048
(Arlington, VA: February 6, 2008).
[14] GAO, Defense Management: Attention Is Needed to Improve Oversight
of DLA Prime Vendor Program, [hyperlink,
http://www.gao.gov/products/GAO-06-739R] (Washington, D.C.: June 19,
2006).
[15] [hyperlink, http://www.gao.gov/products/GAO-09-643T].
[16] [hyperlink, http://www.gao.gov/products/GAO-09-271].
[17] [hyperlink, http://www.gao.gov/products/GAO-06-739R].
[18] [hyperlink, http://www.gao.gov/products/GAO-06-739R].
[19] [hyperlink, http://www.gao.gov/products/GAO-07-145].
[20] GAO, Excluded Parties List System: Suspended and Debarred
Businesses and Individuals
Improperly Receive Federal Funds, [hyperlink,
http://www.gao.gov/products/GAO-09-174] (Washington, D.C.: Feb. 25,
2009).
[21] GAO, Defense Inventory: Opportunities Exist to Expand the Use of
Defense Logistics Agency Best Practices, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD-00-30] (Washington, D.C.: Jan.
26, 2000).
[22] [hyperlink, http://www.gao.gov/products/GAO-06-739R].
[End of section]
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