Bloomberg News

Boeing’s Charges to Pentagon Questioned in Audit for Fourth Time

October 14, 2013

Boeing Helicopters

While used parts were allowed in some circumstances, the July 16 report found that Boeing Co. overcharged the U.S. Army by as much as $16.6 million by exaggerating how many new ones were required while installing refurbished equipment salvaged from old aircraft. Photographer: Andrew Harrer/Bloomberg

Four times in the past five years, the Pentagon’s inspector general has found that Boeing Co. (BA:US) collected excessive or unjustified payments on U.S. defense contracts.

In the latest of four audits since 2008, the watchdog office said the Chicago-based company charged the U.S. Army for new helicopter parts while installing used ones

“Boeing significantly overstated estimates” of new components needed for CH-47F Chinook helicopters and “primarily installed used parts instead” under a $4.4 billion contract awarded in 2008, according to the report, labeled “For Official Use Only” and obtained by Bloomberg News.

While used parts were allowed in some circumstances, the July 16 report found that the company overcharged the U.S. Army by as much as $16.6 million by exaggerating how many new ones were required while installing refurbished equipment salvaged from old aircraft. The report also faults defense agencies and military services for lax negotiations and contract management.

“The bottom line is that using reworked parts rather than new parts increased Boeing’s profit,” Bridget Serchak, a spokeswoman for the inspector general, said of the latest findings. The Army paid Boeing for parts “that were proposed but never installed,” and “is paying for additional parts that they do not need and may not use,” Serchak said in an e-mailed statement.

Boeing is the No. 2 federal contractor after Lockheed Martin Corp. (LMT:US), with more than $30 billion of prime government contracts awarded in fiscal 2012, according to a Bloomberg Government ranking.

While Boeing “recognizes the important work that the Department of Defense inspector general performs” it “disagrees with the IG’s conclusions,” Damien Mills, a company spokesman, said in an e-mailed statement.

‘Fully Compliant’

“We believe we were fully compliant with all government contract policies and guidance applicable to the first CH-47F multiyear contract, and we provided evidence of that to the IG throughout this audit,” Mills said.

The four audits since 2008, which involved different contracts and circumstances, all found that the Army and Pentagon need to bolster their ability to go toe-to-toe with Boeing in complex negotiations, said Henry Kleinknecht, the inspector general’s former director for pricing and logistics, who managed the audits of Boeing parts until he retired last year.

Lacking Expertise

“Unfortunately, the Army does not have a cost/price analysis group, much less an experienced one,” Kleinknecht said in an e-mail. Government and military contracting officials don’t have “the technical expertise in a lot of these complex areas to go in and figure out what the problems are,” he said.

Senator Tom Carper, a Delaware Democrat who heads the Senate Homeland Security and Governmental Affairs Committee, said in an e-mail that he plans a hearing this year to examine the Pentagon’s “spare-parts problems” and “other opportunities to curb wasteful spending.”

The largest overcharge described in the July report was as much as $2.6 million for 142 Chinook engine transmission housings that the inspector general found weren’t needed.

Instead of giving the Army the unneeded parts, Boeing was allowed to keep them for other jobs “even though the Army paid for” the items, the audit found.

While the excessive charges cited by the inspector general amount to rounding errors for Boeing, which reported almost $22 billion of sales (BA:US) in this year’s second quarter, the July report follows a series of government audits challenging amounts paid by the Pentagon under various contracts.

Pentagon Audits

A 2008 audit said Boeing sought $1.9 billion in unjustified payments on military contracts under a formula designed to compensate contractors for rising costs. After negotiations, the amount was cut to $272 million, the inspector general’s report said.

In June, the inspector general said the Defense Logistics Agency paid Boeing $13.7 million more than it should have for spare parts, including $2,286 apiece for an aluminum “bearing sleeve” that should have cost $10.

A May 2011 audit found about $13 million of overcharges on $23 million of orders from a Texas army depot. That report said Boeing charged $644.75 for a plastic motor gear used on Chinook helicopters, which another Pentagon agency purchased for $12.51.

Boeing’s twin-rotor CH-47 Chinook, first used in combat in 1965 during the Vietnam War, is one of the Army’s most versatile transport helicopters. The latest version, the CH-47F, first flew in 2001 and according to Boeing can fly 196 miles per hour (315 kilometers per hour) and carry 24,000 pounds (10,886 kilograms).

Excess Costs

The July audit report cited the transmission housings to illustrate extra costs arising from the use of new versus used parts. While Boeing proposed meeting “the full contract requirement of 232” transmission housings using salvaged parts, the Army also accepted the company’s proposal for 142 new housings that could be used as necessary. “As a result, potential excess costs for the housings were $1.2 million to $2.6 million,” the audit found.

In another example cited in the report, the Army accepted Boeing’s proposal for 65 new aft transmission gears on the remanufactured Chinooks, based on an estimate that new parts would be used 56 percent of the time. Army data showed that only one new gear was installed in the first 50 aircraft, a 2 percent rate. The difference added $1.6 million in costs, the audit found.

Revised Terms

In addition, Boeing could have overcharged the Army as much as $19.1 million on new parts for a $4 billion, multiyear CH-47F production contract awarded in June if the service hadn’t revised its terms based on the inspector general’s emerging findings, according to the report. The June contract calls for Boeing to turn over unused parts to the Army.

The two contracts each called for delivery of as many as 430 new or remanufactured helicopters.

Scott Amey, general counsel for the Project on Government Oversight, a Washington-based advocacy group, said in an e-mail that “the audits show a continued pattern of inventory, pricing and oversight failures” by the Army and “Boeing charging more than fair and reasonable prices.”

“If the partnership is going to work, both parties” must “share current pricing data,” he said. “If something doesn’t give, we’re going to see additional audits and reactive attempts to recover funds.”

‘Significant Adjustments’

The Army Contracting Command, in official responses included in the inspector general’s report, didn’t address issues the report cited about the 2008 contract. The command instead cited actions it took before the award of the second contract in June that improved scrutiny of Boeing’s proposal.

Boeing made “significant adjustments” to its proposal, the audit found.

Dan O’Boyle, spokesman for the Army Aviation and Missile Life Cycle Management Command, which is managing the 2008 contract, didn’t respond to a request for comment.

The CH-47F contract “was not well-written and actually allowed Boeing to determine whether to install a new or reworked part,” said Serchak, the inspector general’s spokeswoman.

“The used parts were salvaged” from remanufactured helicopters and the company “installed significantly more” of them “instead of the proposed” new items, according to the audit.

The inspector general didn’t recommend that the Army seek refunds on the 2008 contract because the Army “did not look at kinds and quantities” of parts in its technical reviews before the contract was signed “and did not define to Boeing what was acceptable and what was unacceptable,” Serchak said.

“Therefore, because this practice is allowable under the contract, it is doubtful that there is a legal basis to seek a refund because of wrongdoing by Boeing,” she said. “However, Boeing could voluntarily refund these amounts.”

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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