Bloomberg News

Boeing Told to Repay Pentagon After Charging $2,286 for $10 Part

June 19, 2013

Boeing Told to Repay Pentagon After Charging $2,286 for $10 Part

A logo sits on a pilot's seat in the cockpit of a Boeing aircraft on the first day of the Paris Air Show on June 17, 2013. Photographer: Chris Ratcliffe/Bloomberg

The Pentagon’s purchasing agency says Boeing Co. (BA:US) must refund $13.7 million in excessive prices charged on spare parts, including a $10 device for which the defense contractor charged $2,286 apiece.

The Defense Logistics Agency “is seeking a refund from Boeing,” spokeswoman Michelle McCaskill said in an e-mailed statement. “The refund will be for the full $13.7 million identified” and will be requested by July 31, she said.

The agency overpaid about $1.3 million for 573 of the aluminum “bearing sleeves” used on an aircraft’s main landing-gear door that should have cost $10 each, the Pentagon’s inspector general said in an audit labeled “For Official Use Only.”

Wasteful spending resulted from agency personnel failing to negotiate good deals or to perform adequate oversight, and from Boeing’s failure to pass on savings it won from subcontractors, according to the complete audit report. A summary of the findings was reported by Bloomberg News on June 7.

Boeing “has been working with the Defense Logistics Agency” and the inspector general “throughout the audit process,” Ellen Buhr, a spokeswoman for Boeing’s Global Services and Support unit, said in an e-mailed statement. “We are working with DLA to review the official report and to understand the issues identified.”

Second Time

The audit marks the second time in two years that the inspector general has cited excessive parts pricing by Chicago-based Boeing, the Pentagon’s second-biggest contractor after Lockheed Martin Corp. (LMT:US) A May 2011 inspector general’s audit of two Boeing contracts for an Army depot in Corpus Christi, Texas, found about $13 million in overcharges on $23 million in orders.

The Pentagon has recovered $2.67 million in that case, according to Bridget Serchak, a spokeswoman for the inspector general’s office. The Defense Contract Audit Agency is reviewing the contract to see if more refunds are in order, another spokeswoman, Army Lieutenant Colonel Elizabeth Robbins, said in an e-mailed statement.

In the more recent audit, the inspector general took what it described as a “nonstatistical sample” of 60 spare parts on 2,659 delivery orders valued at about $81.1 million and found issues involving prices for parts on 1,469 orders valued at $27.2 million.

The sample was part of almost 3,400 spare parts valued at about $142 million that the agency had purchased.

Aircraft Parts

The excessive prices were found on a sample of parts requested under a 2009 “basic ordering agreement” for components and assemblies used on B-1B and B-52 bombers, E-3 surveillance aircraft, KC-135 tankers, Minuteman nuclear missiles and AC-130U gunships.

Boeing overcharged the Defense Logistics Agency’s aviation unit the $13.7 million on 1,469 delivery orders after government personnel failed to negotiate “fair and reasonable prices,” according to the inspector general’s audit.

“If prices are not corrected, DLA Aviation will continue to overpay on future sole-source spare parts procured from Boeing,” it said.

Boeing “did not maintain complete cost and pricing data for 20 delivery orders valued at $3.4 million” because of inadequate agency oversight, the inspector general found. The company issued internal guidance in December emphasizing the need to maintain adequate documentation, it said.

In addition, inspectors found cases in which Boeing failed to pass on savings it obtained.

Negotiating Prices

“Boeing either negotiated for lower prices from its suppliers or obtained spare parts at lower prices from different suppliers,” the audit found. The company “is not required to notify” the agency “when the subcontractor changes its prices, and Boeing did not pass on any cost savings.”

In one example cited, Boeing in February 2008 cited a price of $8,474 each for a “control surface part kit” that attaches to an aircraft’s left elevator.

Auditors obtained Boeing purchase orders indicating it paid about $4,080 for the kit, “resulting in an overpayment of approximately” $4,394 per kit -- or about $1.2 million for 273 of them.

Boeing charged the defense agency $17,628 apiece for a “channel” engine structural support on the AC-130U gunship that company documents showed cost about $1,354 each, or an overpayment of more than $16,000, according to the audit.

The logistics agency overpaid about $22,600 for two metal tube assemblies that cover aircraft engine struts. The Defense Logistics Agency accepted as “fair and reasonable” Boeing’s proposed price of $12,467 each.

“Based on our review of Boeing’s purchase order,” the agency “should have paid a unit price of approximately $1,167,” according to the audit.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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Companies Mentioned

  • BA
    (Boeing Co/The)
    • $132.78 USD
    • 1.08
    • 0.81%
  • LMT
    (Lockheed Martin Corp)
    • $187.93 USD
    • 2.37
    • 1.26%
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