The most famous item in the running controversy about spare parts pricing is a little plastic end cap. It goes on the le of a navigator’s stool on the E-3A AWACS and, in 1981; the Defense Logistics Agency bought three of them for the Air Force at $916.55 each.
Little notice was taken, however, until earlier this year when SSgt. Charles R. Kessler, Jr., an AWACS crew chief at Tinker AFB, Okla., contested the $1,118.26 price—$916.55 for the part, plus a Defense Logistic Agency surcharge for acquiring it—on replacement caps he had ordered for his airplane. He squawked to the Zero Overprice monitor in base supply. The parts were returned, but the ensuing inquiry was picked up and played big in the news media.
The stool cap was one of numerous small items that received cursory attention when the huge provisioning list for AWACS was put together in 1979. The E-3A contractor, Boeing, estimated that the caps would cost $219.18 each, and the Air force accepted that. The overall provisioning package price appeared reasonable in light of experience on previous packages. Such minutiae as stool caps wee not assessed in detail.
When DLA bought the three in 1981, Boeing had to tool up to make them and the actual price turned out to be more than four times the estimate, DLA had only sketchy data on the part and did not understand exactly what it was buying.
The price was outrageous, of course, but Boeing had considerable expenses in preparing to produce the tiny order. On observer likens it to asking General Motors to custom build a door handle for a 1933 Chevrolet. It might be possible, but at the knee-bending price.
The proper approach on the stool cap would have been to go to a firm that specializes in the economical manufacture of such items.
When the story broke, Boeing was as horrified as the Air Force was. It won’t happen again, at least not with this particular part. Everyone in the loop now knows a great deal about plastic stool caps, and DLA figures it can go to vendors that specialize in such work and deliver the part for under $10, including surcharge.
The stool cap is a bit player, although a spectacular one, in the raging flap about cost escalation of spare parts. Pentagon insiders say the Air Force is getting more than its share of the heat because the USAF parts management information system is better than those of the other services, so the data trail is easier to follow. Those sources also say that key elements of the story have had scant attention in the press.
The $1,118 end cap purchase, for example, was discovered and stopped because the Air Force had a Zero Overprice mechanism in place. The program has made other catches of a similar nature. It led to Ogden Air Logistics Center’s reverse engineering a UD template for the F-16 fighter, originally priced at $1,270 by the manufacturer. Ogden will make the templates itself for $67.27 each. Some connector assemblies will be bought for $100 because of a challenge at Keesler AFB, Miss., to the $279 quoted price. An E-5 at Randolph AFB, Tex., triggered the system on a computer disk pack listed at $644.84, and the Air Force is now getting disk packs at $67 each.
If anything, the Air Force is more concerned about spare parts prices than its harshest critics are, and it’s determined to improve the integrity of the spares acquisition process. But people who work the problem on a daily basis say that solutions will not come as easily as casual observers seem to think.
As one veteran participant puts it, an airplane is 300,000 parts flying in formation. Forecasting the replacement price of each part is one of many actions during acquisition of a new system. In a perfect world, each part would get full individual scrutiny and the price would be right on target. In the real world, there aren’t enough people to do that, and they’re pressed for time. They give their primary attention to the high-dollar parts and sometimes go with guesstimates on the smaller ones. When this provisioning estimate is low, it gets plenty of notice. Old hands say that roughly an equal number of estimates turn out to be high, and thus never make the newspapers.
Later on, the Air Force begins to buy the part and a real price is established. That, too, may escalate later, and for several reasons. The production line may have shut down, and there is big expense to reopen it (see p. 58. A particular material used may have become scarce. Part of the price increase may be attributable to inflation. Or a particular contractor, knowing the Air Force has to buy from him if it buys at all, may indeed b gouging the government.
A good solution to this would be to start out with good data, have multiple sources of supply, and buy from them on a fixed price contract. That is not easy to arrange.
Lloyd K. Moseman, Deputy Assistant Secretary of the Air Force for Logistics and Communications, testifying in Congress in April, said that it is costly to get data so Air Force engineers can determine whether an item can be procured competitively. In the case of the F-16 program, he said that data to make a determination costs a little under $50 an item for parts manufactured by the prime contractor and about $1,000 per item on parts from subcontractors and suppliers.
Even when the data is available, analysis is time-consuming. Mr. Moseman said it too General Accounting Office (GAO) auditors more than two years to complete an investigation on seventy-three parts. “We do not have the manpower available to sustain such a level of effort,” he said.
The industrial base having shrunk over the years, alternate sources may not be available. Even if they are, the government may have to fight the prime contractor over what he considers proprietary data rights, or trade secrets, on the process to make the part. Successful challenges to such claims take manpower. In the real world, Moseman said, it often pits a GS-9 from one of the Air Logistics Centers against a $500-an-hour lawyer from industry.
The Air Force’s contracting work force has not grown in proportion to increasing workload, and it is difficult to keep well-qualified people because job positions are not graded high enough. “To compound the problem,” Mr. Moseman said, “OPM has issued tentative classification standards which will serve to further downgrade these positions.”
Cost escalation often occurs on fixed-price redeterminable contracts. On these, the price can be recomputed later on or such reasons as high technical risk by the contractor or fluctuating costs for strategic materials. Unless the government bears down hard, this arrangement can become virtually a cost-plus-profit contract. In recent years, fixed-price redeterminable contracts have led to high cost growth because there is little incentive for the contractor to hold down costs.
Again, in the real world, the Air Force has not always gone after unit price integrity to the extent it might have in theory, but instead sought buy lot integrity. Taken as a whole, prices on a big package of individual spares ought to balance out and be about right.
Nobody knows for sure whether it would be cost-effective to try to police the price on every thirty-nine cent item in the total spares package.
Taking spares acquisition away from the services and letting the Defense Logistics Agency handle it does not appear to be much of a solution, either. DLA’s systems digest the $916 stool cap procurement in 1981 without a burp. The Air Force’s Zero Overprice system caught it in 1983, and that’s how DLA first learned of the problem.
After all is said and done, though, insiders acknowledge that the Air Force must give the spare parts pricing problem more attention. Curtailment in use of fixed-price redeterminable contracts is likely. Provisioning prices will be scrubbed down better than they have been in the past. Where it is at all feasible, spare parts will be broken out from the prime system contract and bought on competitive procurement.
The Air Force’s Zero Overprice program is still in effect also, and more people know about it now. There will be sharp eyes watching for any cousins of the $916 stool cap that may be lurking around.
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