Defense Management: Attention Is Needed to Improve Oversight of DLA Prime Vendor Program.

GAO-06-739R June 19, 2006

In 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.