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Report to the Secretary of Defense:

United States Government Accountability Office:

GAO:

February 2005:

CONTRACT MANAGEMENT:

The Air Force Should Improve How It Purchases AWACS Spare Parts:

GAO-05-169:

GAO Highlights:

Highlights of GAO-05-169, a report to the Secretary of Defense

Why GAO Did This Study:

Over the past several years, the Air Force has negotiated and awarded 
more than $23 million in contracts to the Boeing Corporation for the 
purchase of certain spare parts for its Airborne Warning and Control 
System (AWACS) aircraft. Since they first became operational in March 
1977, AWACS aircraft have provided U.S. and allied defense forces with 
the ability to detect, identify, and track airborne threats.

In March 2003, GAO received allegations that the Air Force was 
overpaying Boeing for AWACS spare parts. This report provides the 
findings of GAO’s review into these allegations. Specifically, GAO 
identified spare parts price increases and determined whether the Air 
Force obtained and evaluated sufficient information to ensure the 
prices were fair and reasonable. GAO also determined the extent to 
which competition was used to purchase the spare parts.

What GAO Found:

Since late 2001, the Air Force has spent about $1.4 million to purchase 
three ailerons (wing components that stabilize the aircraft during 
flight), $7.9 million for 24 cowlings (metal engine coverings), and 
about $5.9 million for 3 radomes (protective coverings for the radar 
antennae). The unit prices for the ailerons and cowlings increased by 
442 percent and 354 percent, respectively, since they were last 
purchased in 1986. The unit price of the radomes, purchased under two 
contracts, nearly doubled from September 2001 to September 2003. 
Although some of the price increases can be attributed to inflation, 
other factors, such as re-establishing production processes and 
procuring limited quantities of the parts, contributed more 
significantly to the increases. In addition, the 2001 radome contract 
included about $8.1 million for Boeing to relocate equipment and 
establish a manufacturing capability at a new location.

The Federal Acquisition Regulation (FAR) requires contracting officers 
to evaluate certain information when purchasing supplies and services 
to ensure fair and reasonable prices. However, Air Force contracting 
officers did not evaluate pricing information that would have provided 
a sound basis for negotiating fair and reasonable prices for the spare 
parts. Moreover, the Air Force did not adequately consider Defense 
Contract Audit Agency (DCAA) and DCMA analyses of these purchases, 
which would have allowed the Air Force to better assess the 
contractor’s proposals. For example, when purchasing ailerons, the Air 
Force did not obtain sales information for the aileron or similar items 
to justify Boeing’s proposed price and did not consider DCMA analyses 
that showed a much lower price was warranted. Instead, the contracting 
officer relied on a Boeing analysis.

None of the spare parts contracts cited in the allegations were 
competitively awarded—despite a DCMA recommendation that the cowlings 
be competed to help establish fair and reasonable prices. The Air Force 
did not develop alternate sources for competing the purchase of the 
cowlings because it believed it lacked access to technical drawings and 
data that would allow it to compete the purchase. Yet the Air Force has 
a contract with Boeing that could allow the Air Force to order 
technical drawings and data specifically for the purpose of purchasing 
replenishment spare parts.

E-3 Sentry AWACS Aircraft: 

[See PDF for image]

[End of figure]

What GAO Recommends:

GAO recommends that the Secretary of Defense direct the Secretary of 
the Air Force to take action to ensure that contracting officers obtain 
and evaluate data needed to determine spare parts prices are fair and 
reasonable, develop a strategy to promote competition to the maximum 
extent possible in future spare parts purchases, and clarify the Air 
Force’s access to AWACS technical data and drawings. DOD concurred with 
GAO’s recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-05-169.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David E. Cooper at (202) 
512-4125 or cooperd@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Recent AWACS Parts Prices Are Significantly Higher Than Prior Purchase 
Prices:

Air Force Did Not Obtain and Evaluate Information Needed to Negotiate 
Fair and Reasonable Prices:

No Competition Used for AWACS Spare Parts Purchases:

Conclusions:

Recommendations for Executive Action:

Agency and Company Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Comments from the Department of Defense:

Appendix III: Comments from The Boeing Company:

Table:

Table 1: Summary of Contract Prices for Ailerons, Cowlings, and 
Radomes:

Figures:

Figure 1: E-3 Sentry AWACS Aircraft:

Figure 2: Unit Price Increases for Ailerons, Cowlings, and Radomes:

Abbreviations:

AWACS: Airborne Warning and Control System:

DCAA: Defense Contract Audit Agency:

DCMA: Defense Contract Management Agency:

FAR: Federal Acquisition Regulation:

IFF: identification friend-or-foe:

United States Government Accountability Office:

Washington, DC 20548:

February 15, 2005:

The Honorable Donald H. Rumsfeld: 
Secretary of Defense: 
Washington, D.C.

Dear Secretary Rumsfeld:

For more than 25 years, the Air Force's Airborne Warning and Control 
System (AWACS) aircraft have provided U.S. and allied defense forces 
with the ability to detect, identify, and track enemy threats. The E-3 
Sentry AWACS airplanes, with their large rotating radar domes, have 
provided critical surveillance information for carrying out military 
and peacekeeping operations. Over the past several years, the Air Force 
has negotiated and awarded more than $23 million in contracts to the 
Boeing Corporation for the purchase of certain spare parts to maintain 
the Air Force's AWACS fleet.

In March 2003, we received allegations that the Air Force was 
overpaying the Boeing Corporation for AWACS spare parts.[Footnote 1] 
This report provides the findings of our review into these allegations. 
Specifically, we (1) identified the price increases associated with the 
ailerons, cowlings, and radomes; (2) determined whether the Air Force 
obtained and evaluated sufficient information to ensure that the spare 
parts prices were fair and reasonable;[Footnote 2] and (3) determined 
the extent to which competition was used to purchase the parts.

To conduct our review, we examined contract files and met with Air 
Force and Boeing representatives. We also reviewed analyses and 
information provided to the Air Force by the Defense Contract 
Management Agency (DCMA), the Defense Contract Audit Agency (DCAA), and 
Boeing. We conducted our review from August 2003 to November 2004 in 
accordance with generally accepted government auditing standards. A 
more detailed discussion of our scope and methodology is in appendix I.

Results in Brief:

Since late 2001, the Air Force has purchased three ailerons for about 
$1.4 million, 24 cowlings for about $7.9 million, and three radomes 
(under two contracts) for about $5.9 million. The unit prices for the 
ailerons and cowlings increased by 442 percent and 354 percent, 
respectively, since they were last purchased in 1986. The unit price of 
the radomes also increased significantly. The unit price of the radome 
nearly doubled from a purchase in September 2001 to a purchase in 
September 2003. Several factors, such as re-establishing production 
processes and procuring limited quantities of the parts, contributed to 
the price increases. Although a portion of the price increases could be 
attributed to inflation, this portion was small. The Air Force paid an 
additional $8.1 million in costs as part of the September 2001 radome 
contract to move equipment and establish manufacturing capabilities in 
a new location.

Although some price increases could be expected, contracting officers 
did not take appropriate steps to ensure that the prices paid for the 
ailerons, cowlings, and radomes were fair and reasonable. Specifically, 
the Federal Acquisition Regulation (FAR) requires contracting officers 
to obtain and evaluate information when purchasing supplies and 
services to ensure that prices are fair and reasonable. We found that 
Air Force contracting officers did not obtain and evaluate appropriate 
pricing information that would have provided a sound basis for 
negotiating fair and reasonable prices for the spare parts. Moreover, 
the Air Force did not adequately consider DCAA and DCMA analyses of 
these purchases, which would have allowed the Air Force to better 
assess the contractor's proposals. For example, when purchasing 
ailerons, the Air Force contracting officer did not obtain sales 
information for the aileron or similar items to justify Boeing's 
proposed price; this type of information would normally be obtained 
because the ailerons were considered a commercial item. In addition, 
the contracting officer did not act on DCMA analyses that showed a much 
lower price was warranted. Instead, the contracting officer relied on a 
Boeing judgmental analysis to support Boeing's proposed price. In 
another case, the contracting officer for the purchase of the two 
radomes did not consider the price of a recently acquired radome, nor 
did the contracting officer obtain and evaluate information from Boeing 
that supported the company's proposed price or obtain analysis from 
DCMA.

None of the spare parts covered by the allegations were purchased 
competitively. According to Air Force documents, Boeing was the sole 
source for the spare parts. However, DCMA's analysis recommended that 
the cowlings be competed because Boeing's proposed price was not fair 
and reasonable and a subcontractor had provided the part under the 
original production contracts. Despite the recommendation, the Air 
Force did not attempt to develop alternate sources for competing the 
purchase of the cowlings because it believed it lacked the required 
information to do so. From the outset, Air Force documents stated that 
the Air Force did not have access to drawings and technical data that 
would allow it to compete the purchase. The Air Force and Boeing have 
entered into a contract, which could allow the Air Force to order 
drawings for the purpose of purchasing replenishment spare parts. 
Boeing has not always delivered such data based on uncertainties 
concerning the Air Force's rights to the data.

We are making recommendations to ensure appropriate information 
and analyses are obtained and evaluated to help ensure that fair and 
reasonable prices are negotiated in non-competitive procurements and 
to promote competition to the maximum extent practicable in future 
purchases of spare parts. DOD and The Boeing Company commented 
on a draft of this report. In its comments, DOD agreed with GAO's 
recommendations and identified actions it plans to take to implement 
the recommendations. In its comments, The Boeing Company provided 
information that augments the information in the report and provides 
its perspective on the AWACS purchases.

Background:

The AWACS aircraft first became operational in March 1977, and as of 
November 2004, the U.S. AWACS fleet was comprised of 33 aircraft. The 
aircraft provides surveillance, command, control, and communications of 
airborne aircraft to commanders of air defense forces. The onboard 
radar, combined with a friend-or-foe identification subsystem, can 
detect, identify, and track in all weather conditions enemy and 
friendly aircraft at lower altitudes and present broad and detailed 
battlefield information.

The AWACS airplane is a modified Boeing 707 commercial airframe with a 
rotating radar dome (see fig. 1). The ailerons and cowlings are similar 
to commercial 707 parts but were modified for special 
requirements.[Footnote 3] The AWACS radome is the covering that 
provides housing for the airplane's radar and friend-or-foe (IFF) 
identification system. Half of the radome covers the radar and half 
covers the IFF system and each has a different make-up in its 
composition. The Air Force purchased only the IFF section of the radome 
in the two separate purchases.

In the past, the Air Force has generally repaired, rather than 
purchased, the ailerons, cowlings, and radomes but recently had to 
purchase new parts to meet operational requirements. Prior to the 
recent spare parts purchases, the ailerons and cowlings had not been 
purchased since the mid-1980s, and the last radome unit had not been 
purchased since 1998.

Figure 1: E-3 Sentry AWACS Aircraft:

[See PDF for image]

[End of figure]

All of the spare parts were purchased as noncompetitive negotiated 
procurements. The Federal Acquisition Regulation (FAR) provides 
guidance for the analysis of negotiated procurements with the ultimate 
goal of establishing fair and reasonable prices for both the government 
and contractor. For a noncompetitive purchase,[Footnote 4] the contract 
price is negotiated between the contractor and government and price 
reasonableness is established based primarily on cost data submitted by 
the contractor. The ailerons were also purchased as a commercial item. 
For a commercial item,[Footnote 5] price reasonableness is established 
based on an analysis of prices and sales data for the same or similar 
commercial items.

For the AWACS spare parts purchases we reviewed, DCMA provided 
technical assistance to the Air Force by analyzing labor hours, 
material and overhead costs, and contract prices.[Footnote 6] DCAA 
provided auditing and cost accounting services. DCMA and DCAA analyses 
were submitted to the Air Force prior to contract negotiations for the 
respective purchases.

Recent AWACS Parts Prices Are Significantly Higher Than Prior Purchase 
Prices:

Since late 2001, the Air Force has negotiated and awarded contracts to 
Boeing for the purchase of outboard ailerons, cowlings, and radomes 
totaling over $23 million. Specifically, the Air Force purchased three 
ailerons for about $1.4 million, 12 right-hand cowlings and 12 left-
hand cowlings for about $7.9 million, and three radomes for about 
$5.9 million. The Air Force paid an additional $8.1 million in costs as 
part of the initial radome contract to move equipment and establish 
manufacturing capabilities in a new location (see table 1).

Table 1: Summary of Contract Prices for Ailerons, Cowlings, and 
Radomes:

Spare part: Ailerons; 
Contract award[A]: April 2003; 
Quantity: 3; Unit price: $464,133; 
Other costs: 0; 
Total contract price: $1,392,399.

Spare part: Cowlings[B]; 
Contract award[A]: Sept 2003; 
Quantity: 24; 
Unit price: $329,203; 
Other costs: 0; 
Total contract price: $7,900,881.

Spare part: Radomes[C]; 
Contract award[A]: Sept. 2001 
Quantity: 1; 
Unit price: $1,200,000; 
Other costs: $8,100,546; 
Total contract price: $9,300,546. 

Spare part: Radomes[C]; 
Contract award[A]: Sept. 2003;
Quantity: 2 
Unit price: $2,342,500;
Other costs: $0
Total contract price: $4,685,000.

Source: GAO analysis of Air Force data.

[A] The ailerons, cowlings, and September 2003 radome contracts were 
firm-fixed-price contracts. The September 2001 radome contract was a 
cost-plus-fixed-fee contract, which is a cost reimbursable contract 
that provides for the payment to the contractor of a negotiated fee 
fixed at the inception of the contract.

[B] The unit price represents the average unit price for the left hand 
and right hand cowlings. The 12 right hand cowlings were purchased at a 
unit price of $321,743 and 12 left hand cowlings were purchased at 
$336,664.

[C] The unit price for the September 2001 radome represents the 
contracting officer's estimated price for the radome.

[End of table]

The most recent per unit cost of each part represents a substantial 
increase from prior purchases. The overall unit cost of the ailerons 
and cowlings increased by 442 percent and 354 percent, respectively, 
since they were last purchased in 1986. The unit price for the one 
radome purchased under the September 2001 contract increased by 
38 percent since it was last purchased in 1998, and the unit price 
nearly doubled two years later under the September 2003 contract. 
Overall, only a small portion of the price increases could be 
attributed to inflation.[Footnote 7] Figure 2 shows the unit price 
increases, including adjustments for inflation, for 
ailerons, cowlings, and radomes.

Figure 2: Unit Price Increases for Ailerons, Cowlings, and Radomes:

[See PDF for image]

[End of figure]

The Air Force and Boeing cited a number of additional factors that may 
have contributed to higher prices. For all the parts, the Air Force 
purchased limited quantities, which generally results in higher unit 
prices. For the ailerons, which had not been purchased since 1986, 
Boeing officials told us that some of the price increase was 
attributable to production inefficiencies that would result from 
working with older technical drawings, developing prototype 
manufacturing methods, and using different materials in the 
manufacturing process. The unit price of the cowlings included costs 
for the purchase of new tools required to manufacture the cowlings in-
house--which Boeing decided to do rather than have vendors manufacture 
the cowlings, as had been done in the past. The new tools included 
items such as large production jigs, used to shape and fabricate sheet 
metal.[Footnote 8] Regarding radomes, the Air Force paid Boeing to 
relocate tooling and equipment from Seattle, Washington, to Tulsa, 
Oklahoma, and develop manufacturing capabilities at the Tulsa facility 
to produce and repair radomes. Boeing had initially decided to 
discontinue radome production and repair at its Seattle location due to 
low demand for these parts but, after further consideration of the Air 
Force's requirements, decided to relocate the capability in Tulsa. The 
first radome contract the Air Force awarded Boeing included over 
$8.1 million to relocate the tooling and equipment and set up the 
manufacturing process. The remaining $1.2 million was the estimated 
production cost of the one radome.[Footnote 9]

Air Force Did Not Obtain and Evaluate Information Needed to Negotiate 
Fair and Reasonable Prices:

In negotiating contracts for the outboard ailerons, cowlings, and 
radomes, the Air Force did not obtain and evaluate information needed 
to knowledgeably assess Boeing's proposals and ensure that the spare 
parts prices were fair and reasonable. In general, the Air Force did 
not obtain sufficient pricing information for a part designated a 
commercial item, adequately consider DCAA and DCMA analyses of aspects 
of contractor proposals, or seek other pricing information that would 
allow it to not only determine the fairness and reasonableness of the 
prices but improve its position for negotiating the price.

Pricing Information Not Sought for Commercial Item to Ailerons:

Boeing asserted that the aileron assembly was a commercial item. Under 
such circumstances, fair and reasonable prices should be established 
through a price analysis, which compares the contractor's proposed 
price with commercial sales prices for the same or similar items. 
However, when purchasing the ailerons, the Air Force did not seek 
commercial sales information to justify the proposed price. Instead, 
the Air Force relied on a judgmental analysis prepared by Boeing, which 
was not based on the commercial sales of the same or similar 
aileron.[Footnote 10]

In reviewing the contractor's submissions of data to the government, 
both DCMA and DCAA found Boeing's proposal inadequate for the Air Force 
to negotiate a fair and reasonable price. DCMA performed a series of 
analyses on the purchase of the aileron assembly, each of which 
indicated that Boeing's proposed unit price was too high. Boeing 
proposed in November 2002 to sell three aileron assemblies for $514,472 
each. Subsequently, DCMA performed three separate price analyses, which 
indicated that Boeing's price should be in the $200,000 to $233,000 
range. However, the Air Force negotiation team did not discuss these 
analyses with Boeing during negotiations or include them as part of the 
Air Force's price negotiation documentation.[Footnote 11] In January 
2003, DCAA reported that the proposed price was "unsupported" and that 
Boeing did not comply with the Boeing Estimating System Manual, which 
requires support for commercial item prices. Further, the report said 
that Boeing must submit cost information and supporting documentation. 
The Air Force never addressed DCAA's concerns. Instead, the Air Force 
relied on the analysis prepared by Boeing and paid $464,133 per unit.

The price analyst involved with the negotiation said that, in 
retrospect, the Air Force should have sought commercial sales 
information from Boeing, citing this purchase as his first experience 
with a commercial item. We asked Boeing to provide historical sales 
information of the same or commercial equivalent item to use as a 
general benchmark on price reasonableness of the ailerons purchased by 
the Air Force. According to Boeing representatives, the requested data 
were not available because the military version of the ailerons had not 
been produced for over 20 years. Boeing representatives agreed that the 
Boeing analysis was subjective, but they said the analysis represented 
the best estimate based on their assumptions and limitations.

Air Force Did Not Act on DCMA's Recommendation to Investigate the Use 
of Existing Tools for Cowlings:

When negotiating the purchase price for the cowlings, the Air Force 
again did not use information provided by DCMA or address DCMA's 
recommendation that it determine the availability and potential use of 
existing tools to manufacture the cowlings. Included in the 
$7.9 million contract for cowlings, Boeing proposed and the Air Force 
awarded about $1.1 million for the purchase of new tools, such as large 
production jigs, associated with the manufacture of the cowlings. 
However, DCMA had recommended in its initial evaluation of Boeing's 
proposal that the Air Force give qualified offerors an opportunity to 
inspect the condition of cowling tools used in prior manufacturing for 
their applicability and use in fabricating the cowlings. DCMA pointed 
out that the tools were located at Davis-Monthan Air Force Base in 
Arizona, where government-owned tooling is often stored when no longer 
needed for production. However, the Air Force did not accurately 
determine the existence and condition of the tools.[Footnote 12]

Subsequent to the contract award, Boeing--not the Air Force--determined 
that extensive government-owned tooling was available at Davis-Monthan 
and got approval, in May 2004, to use the tools in manufacturing the 
cowlings. As a result, the cowlings contract included unnecessary tool 
purchase costs when it was awarded. Air Force and Boeing officials 
anticipated a contract modification would be submitted to reduce the 
price as a result of using the existing tools.

Cost Information from Recent Radome Purchase Not Considered:

A significant portion of the September 2001 cost-plus-fixed fee 
contract that the Air Force awarded to Boeing to purchase one radome 
unit involved relocating tools and equipment and establishing a 
manufacturing process at Tulsa. Specifically, over $8.1 million of the 
contract, which was valued at about $9.3 million, was spent to move 
equipment and establish a manufacturing process at the Tulsa facility; 
the price of producing the one radome unit was about $1.2 million. 
About 19 months later, in April 2003, at the Air Force's request, 
Boeing provided a proposal to produce two additional radomes at the 
Tulsa facility, and in September 2003, the Air Force awarded a contract 
to Boeing to produce the two radomes at over $2.3 million per unit--
almost twice the 2001 unit price.

Based on our analysis, the Air Force did not obtain adequate data to 
negotiate a fair and reasonable price for the second radome contract. 
First, the Air Force requested a DCMA analysis of Boeing's proposal, 
but, in late June 2003, DCMA told the Air Force price analyst that, for 
an unexplained reason, DCMA did not receive the request for assistance; 
the price analyst then determined that he would waive the technical 
evaluation, which would forego the benefit of DCMA's technical 
expertise. Second, and most importantly, the Air Force did not consider 
Boeing's costs under the September 2001 contract, which would have 
provided important information to help the Air Force determine if it 
was obtaining a fair and reasonable price for the radomes.

No Competition Used for AWACS Spare Parts Purchases:

In addition to encouraging innovation, competition among contractors 
can enable agencies to compare offers and thereby establish fair and 
reasonable prices and maximize the use of available funds. The Air 
Force determined that Boeing was the sole source for the parts and did 
not seek competition. However, a DCMA analysis had determined that 
Boeing's proposed price for the engine cowlings was not fair and 
reasonable and, because a subcontractor provided the part in support of 
the original production contracts, recommended that the cowlings be 
competed among contractors.

From the outset of the cowlings purchase, Air Force documents said that 
the Air Force did not have access to information needed to compete the 
part. However, the Air Force has a contract with Boeing that could 
allow the Air Force to order drawings and technical data for the AWACS 
and other programs for the purpose of competitively purchasing 
replenishment spare parts.[Footnote 13] Nevertheless, Boeing has not 
always delivered AWACS data based on uncertainties over the Air Force's 
rights to the data. Based on discussions with Air Force 
representatives, Boeing has been reluctant to provide data and drawings 
in the past, making it difficult for the Air Force to obtain them. 
Moreover, Boeing maintains that it owns the rights to the technical 
data and drawings and the Air Force could not use the drawings to 
compete the buy without Boeing's approval.

It is unclear if the AWACS program office had placed a priority on 
fostering competition for the cowlings and other spare parts. 
Representatives of the AWACS spare parts program office at Tinker Air 
Force Base cited a number of concerns in purchasing the spare parts 
from vendors other than Boeing. First, they said that the need for 
these spare parts had become urgent and noted that other vendors would 
have to pass certain testing requirements, which could be a lengthy 
process, and that, even with this testing, performance risks and 
delivery delays were more likely to occur. An overriding concern was 
that the Air Force establish a good relationship with reliable parts 
providers, such as Boeing. Program office officials told us that the 
Air Force would likely be better served in the long run by staying with 
a reliable supplier rather than competing the parts.

In contrast, senior contracting officials at Tinker--who have oversight 
responsibilities for the contracting activities that support the AWACS 
program--have a different point of view. These officials were concerned 
about the large price increases on AWACS spare parts and the lack of 
competition. They stated that the Air Force is a "captured customer" of 
Boeing because the company is the only source for many of the parts 
needed to support aircraft manufactured by Boeing, such as the AWACS. 
According to these senior contracting officials, during the last 
several years Boeing has become more aggressive in seeking higher 
profits regardless of the risk involved with the purchase. For example, 
they told us that, even when the risk to the company is very low, the 
company is seeking at least a 3-to 5-percent higher fee than in the 
past. As a result, contracting officers have had to elevate some 
negotiations to higher management levels within the Air Force. They 
also said that, without the ability to compete spare parts purchases, 
the Air Force is in a vulnerable position in pricing such contracts. 
Earlier in 2004, Boeing and the senior Air Force contracting officials 
involved with the aircraft programs managed at Tinker began a joint 
initiative to work on various contracting issues. Concerning data 
rights, these contracting officials told us that in future weapon 
systems buys, the Air Force must ensure that it obtains data rights so 
that it can protect the capability to later compete procurements of 
spare parts.

Conclusions:

The Air Force needs to be more vigilant in its purchases of spare 
parts. The AWACS parts purchases we reviewed illustrate the difficulty 
of buying parts for aircraft that are no longer being produced as well 
as buying them under non-competitive conditions. A key problem was that 
the Air Force did not take appropriate steps to ensure that the prices 
paid were fair and reasonable. It did not obtain and evaluate 
information that either should have been available or was available to 
improve its negotiating position. It did not attempt to develop other 
sources to purchase the spare parts and promote competition. And, it 
did not have a clear understanding of its rights to technical data and 
drawings, which are necessary to carry out competitive procurements. As 
the AWACS aircraft--like other Air Force weapon systems--continue to 
age, additional spare parts will likely be needed to keep them 
operational. Given the significant price increases for the 
ailerons, cowlings, and radomes, the Air Force needs to look for 
opportunities to strengthen its negotiating position and minimize price 
increases. Clearly, competition is one way to do this. Unless the Air 
Force obtains and evaluates pricing or cost information and/or 
maximizes the use of competition, it will be at risk of paying more 
than fair and reasonable prices for future purchases of spare parts.

Recommendations for Executive Action:

To improve purchasing of AWACS spare parts, we recommend that the 
Secretary of Defense direct the Secretary of the Air Force to:

* ensure that contracting officers obtain and evaluate available 
information, including analyses provided by DCAA and DCMA, and other 
data needed to negotiate fair and reasonable prices;

* develop a strategy that promotes competition, where practicable, in 
the purchase of AWACS spare parts; and:

* clarify the Air Force's access to AWACS drawings and technical data 
including the Air Force's and Boeing's rights to the data.

Agency and Company Comments and Our Evaluation:

We received written comments on a draft of this report from DOD and 
The Boeing Company.

In its comments, DOD concurred with GAO's recommendations and 
identified actions it plans to take to implement the recommendations. 
DOD's comments are included in appendix II. DOD also provided technical 
comments, which we incorporated into the report as appropriate.

In its comments The Boeing Company provided information that augments 
the information in the report and provides the company's perspective on 
the AWACS purchases. With respect to the prices the Air Force paid for 
the spare parts, Boeing provided more detailed information to explain 
the costs associated with each part. However, the information Boeing 
provided did not change our conclusion that the Air Force did not 
obtain and evaluate sufficient information to establish fair and 
reasonable prices. The company also noted that it has worked with Air 
Force representatives to address issues associated with higher profits 
and, as of January 2005, was working with the Air Force to address 
issues associated with access to AWACS technical drawings and data. The 
Boeing Company's comments are included in appendix III.

We are sending copies of this report to the Secretaries of the Air 
Force, the Army, and the Navy; appropriate congressional committees; 
and other interested parties. We will also provide copies to others on 
request. In addition, the report will be available at no charge on the 
GAO Web site at http://www.gao.gov.

If you or your staff has questions concerning this report, please 
contact me at (202) 512-4841 or by e-mail at cooperd@gao.gov, or James 
Fuquay at (937) 258-7963. Key contributors to this report were Ken 
Graffam, Karen Sloan, Paul Williams, and Marie Ahearn.

Sincerely yours,

Signed by: 

David E. Cooper: 
Director: 
Acquisition and Sourcing Management:

[End of section]

Appendix I: Scope and Methodology:

To identify price increases associated with the ailerons, cowlings, and 
radomes, we reviewed Air Force contracting files and we held 
discussions with members of the Air Force involved in each purchase, 
which included contracting officers, negotiators, and price analysts. 
These officials were located at Tinker Air Force Base, Oklahoma, the 
location of the Airborne Warning and Control System (AWACS) spare parts 
program office--the E3 Systems Support Management Office. To account 
for the impact of inflation, we used published escalation factors for 
aircraft parts and auxiliary equipment to escalate prices previously 
paid for the parts to a price that would have been expected to be paid 
if the prices considered the effects of inflation.

To determine whether the Air Force contracting officers obtained and 
evaluated sufficient information to ensure that Boeing's prices were 
fair and reasonable, we held discussions with the Defense Contract 
Management Agency (DCMA) representatives and obtained copies of reports 
and analyses prepared by DCMA and Defense Contract Audit Agency (DCAA). 
We reviewed Air Force contracting files and held discussions with Air 
Force officials that negotiated the respective purchases, which 
included contracting officers, negotiators, and price analysts. We also 
held discussions with representatives of Boeing and visited Boeing 
production facilities in Tulsa, Oklahoma. The Boeing officials 
represented several Boeing divisions involved in the purchases 
including Boeing's military division (Boeing Aircraft and Missiles, 
Large Aircraft Spares and Repairs), which had responsibility for 
negotiating all of the spare parts purchases. Boeing Aerospace 
Operations, Midwest City, Oklahoma, had contract management 
responsibility for the purchases.

To determine the extent that competition was used to purchase the 
parts, we reviewed Air Force contracting files and held discussions 
with members of the Air Force involved in each purchase, which included 
contracting officers, negotiators, and price analysts. We also held 
discussions with representatives of the AWACS spare parts program 
office and senior contracting officials responsible for overseeing 
contracting activities at Tinker Air Force Base, Oklahoma.

We conducted our review from August 2003 to November 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Comments from the Department of Defense:

OFFICE OF THE UNDER SECRETARY OF DEFENSE: 
ACQUISITION, TECHNOLOGY AND LOGISTICS:
3000 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3000:

JAN 25 2005 

Mr. David E. Cooper:
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office:
441 G Street, N.W.: 
Washington, D.C. 20548:

Dear Mr. Cooper:

Enclosed is the Department of Defense (DoD) response to the GAO draft 
report, "CONTRACT MANAGEMENT: The Air Force Can Improve How It 
Purchases AWACS Spare Parts," dated December 21, 2004 (GAO Code 120325/
GAO-05-169).

My point of contact for this report is Mr. Michael Canales, (703) 695-
8571 or via e-mail, michael.canales@osd.mil. We appreciate the 
opportunity to review and comment on your findings.

Sincerely,

Signed for: 

Diedre A. Lee:

Director, Defense Procurement and Acquisition Policy:

Enclosures: As stated:

Draft Report Dated December 21, 2004:

GAO CODE 120325/GAO-05-169 "CONTRACT MANAGEMENT: The Air Force Can 
Improve How It Purchases AWACS Spare Parts"

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense 
direct the Air Force to ensure that contracting officers obtain and 
evaluate available information, including analyses provided by DCAA and 
DCMA, and other data needed to negotiate prices. (p. 13/GAO Draft 
Report):

DOD RESPONSE: Concur. Pursuant to FAR 15.406, it is incumbent upon the 
Contracting Officer and all members of the Air Force Negotiating Team 
to obtain, evaluate, and analyze available information as appropriate. 
This includes but is not limited to reports prepared by DCAA and DCMA. 
OUSD(AT&L)DPAP will issue a memorandum to the Air Force highlighting 
this requirement.

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
direct the Air Force to develop a strategy that promotes competition, 
where practicable, in the purchase of AWACS spare parts. (p. 13/GAO 
Draft Report):

DOD RESPONSE: Concur. Pursuant to FAR Part 6, competition is the 
preferred method of acquisition and should be used whenever possible. 
Exceptions to competition should be well documented and well supported. 
Consistent with current regulations, OUSD(AT&L)DPAP will ask the Air 
Force to develop a strategy that promotes competition, where 
practicable, in the purchase of AWACS spare parts.

RECOMMENDATION 3: The GAO recommended that the Secretary of Defense 
direct the Air Force to clarify the Air Force's access to AWACS 
drawings and technical data including the Air Force's and Boeing's 
rights to the data. (p.13/GAO Draft Report):

DOD RESPONSE: Concur. There is an ongoing disagreement between the Air 
Force and Boeing as to who has the actual data rights to many of the 
spare parts for the AWACS program. OUSD(AT&L)DPAP will request the Air 
Force clarify their access to AWACS drawings and technical data, 
including the Air Force's and Boeing's rights to data.

Enclosure 1:

[End of section]

Appendix III: Comments from The Boeing Company:

27 January 2005:

Mr. David E. Cooper Director:
Acquisition and Sourcing Management:
United States Government Accountability Office: 
Washington, DC 20548:

Dear Mr. Cooper,

On behalf of The Boeing Company I wish to acknowledge receipt of your 
draft GAO audit BOEING entitled "The Air Force Can Improve How it 
Purchases AWACS Spare Parts" forwarded by your letter dated 21 December 
2004. 1 wish to assure you at the outset that Boeing takes such audits 
quite seriously and that it has received the attention of Boeing senior 
management. In your letter forwarding the draft audit you solicited 
Boeing's written or oral comments for inclusion in the final audit 
report. This letter provides such comments, and it is our intention to 
correct, clarify, or provide Boeing's perspective regarding certain 
aspects of the audit report.

Since the receipt of your request, we have gathered pertinent 
information to address several key points raised in the audit, 
conducted various meetings, and developed our assessment relative to 
the draft's findings, conclusions and recommendations. Subsequent to 
receipt of the draft audit Boeing representatives discussed and 
clarified with you and other government representatives our findings. 
Boeing greatly appreciates that opportunity and believes it to be 
mutually beneficial.

The following are Boeing's comments regarding our assessment of the 
information included in the draft audit you forwarded.

1) The audit states that the Air Force Contracting Officer did not 
obtain sales information for the Aileron or similar items to justify 
Boeing's proposed price. Our records indicate that the Contracting 
Officer did in fact solicit such information, but since the Aileron is 
not normally procured as a "Spare", but rather is a "Repairable item" 
Boeing advised the Contracting Officer (CO) that such history and 
pricing was not available. The solicitation also was issued as a FAR 
Part 15 action. However, Boeing submitted its proposal as a commercial 
item under the provisions of FAR Part 12 - since its application was to 
a military derivative of a Boeing 707 commercial airframe and the item 
was only available from our BCA Operating Group on a commercial FFP 
basis. Accordingly, Boeing performed and provided a price analysis to 
support the price reasonableness of this commercial item which the 
draft audit referred to as a "judgmental analysis". This price 
reasonableness analysis included comparison of this item to 
commercially available similar items and considered other factors 
associated with out of production aircraft assemblies.

2) The audit also states (on page 9) that DCAA reported that the 
Aileron 
Assembly proposed price was unsupported and that Boeing did not comply 
with the Boeing Estimating System Manual (BESM) procedures. While it is 
accurate that Boeing did not provide adequate price analysis support 
for the Aileron pricing with our initial proposal, we did however 
provide supplemental data providing such support within approximately 
45 days of proposal submittal and in time to support fact finding and 
negotiation of the proposal. This is supported by the audit finding 
that the CO utilized this data as the basis of justifying his price 
analysis and negotiation position. In this case the procurement of a 
non-traditional item as a "Spare" posed unique challenges for our team 
and made submittal concurrent with the proposal difficult. 
Additionally, at the time of this proposal submittal in December 2002, 
the BESM did not require a Price Reasonableness Determination (PRD) be 
provided with the initial proposal submittal. This requirement was 
added in January 2004. Boeing believes it met its obligation to submit 
supporting data to assist the government CO in determining price 
reasonableness.

During subsequent discussions with GAO the government clarified that 
its critique in this area was primarily focused on the government 
Contracting Officer's actions, and felt the CO should have obtained 
additional price comparative data from other sources in addition to the 
analysis provided by Boeing.

3) On page 12 and later in GAO's audit "Recommendations for Executive 
Action" the audit report makes several statements regarding AWACS 
drawings and technical data (ie: Intellectual Property). First, it 
states that the government has a right to order such data and that 
Boeing in the past has been reluctant or unwilling to provide the 
government such data. Secondly, that the government should utilize this 
data to actively foster competition for all future procurement of AWACS 
spare parts. Since the early 1970's Boeing has maintained the Rights 
Guard Contract (F34601-02-D-0082 and its predecessors) with the Air 
Force as a means of coordinating the provisioning of technical data and 
drawings for support of Military Derivatives of Boeing 707 and other 
specified aircraft. Under this contract for "Other Aircraft Parts and 
Auxiliary Equipment Manufacturing", the Air Force may request such data 
be provided. However, the contract clearly states, under Section H, 
entitled Limited Rights Technical Data subparagraph (a) (2), "If 
contractor, in its sole discretion, determines in response to a request 
from the Government that it cannot or will not consent to the 
Government's use of limited rights technical data, it shall so notify 
the Government in writing. Contractor shall have no obligation under 
Clause B-1(a) of this contract to deliver copies to the Government of 
any such limited rights technical data for which consent of use is not 
granted." Hence the GAO draft report's assertion that all AWACS related 
data is accessible to procurement agencies via the Rights Guard 
contract is not supported by the contract. This contractual 
discretionary prerogative recognizes that the design and development of 
the aircraft and corresponding data was done at private expense (and is 
therefore Proprietary) and that the Air Force in most cases did not 
historically procure these data rights, thereby avoiding such 
acquisition costs. It further recognizes that Boeing will assess such 
requests on a case by case basis to determine the potential adverse 
impact for future domestic and international business. It should also 
be recognized that the current Rights Guard contract has been extended 
through 31 March 2005, but is anticipated to terminate at that time. 
For several months Boeing representatives have been working jointly 
with OC/ALC and DLA Senior Acquisition representatives to develop a new 
approach involving developing Licensing Agreements with the Air Force 
and with our Supplier network. This proactive effort seeks to enhance 
the government's ability to control and protect technical data while 
developing more sources to participate in U.S. Government competitive 
procurements, as recommended by the audit. The end result of these 
initiatives may be lower overall program costs, and it is Boeing's 
intention to increase the participation by small and small 
disadvantaged businesses.

4) It is Boeing's position that the pricing table at the top of page 6 
of the audit does not accurately reflect the Unit Pricing of the items 
listed, although the total contract prices are accurate. In addition, 
we feel that the price history analysis in the audit is misleading, as 
it does not consider significant points contributing to the price 
variances addressed. However we provide the following insight and 
clarification relative to the unit prices shown.

a. Ailerons - The total Firm Fixed Price negotiated of $1,392,399 
included Non-Recurring costs of $207,106.02 which is included in the 
average Unit Price shown of $464,133, resulting in an overstated 
Recurring Unit Price vs. the correct Recurring Unit Price of 
$395,097.66 for comparison purposes. Further, the audit states the 
Ailerons and Cowlings had not been purchased since 1986. Boeing notes 
that since the late 1980's, the A/C and components went from an active 
production line to an out of production situation. This necessitated 
changing production locations (moving from Puget Sound, Washington to 
our commercial production facility in Salt Lake City, Utah), incurring 
start-up and loss of leaming inefficiencies, different applicable 
overhead bid plans, and perhaps changing production methods. To reduce 
the overall cost of our products by managing our overhead costs Boeing 
has shut down production lines and other manufacturing activities/
facilities in the Puget Sound, Washington area that did not have 
sufficient demand/ordering history. The comparative Recurring Unit 
Price range of between $200 - $233K assessed by DCMA cited on page 9 of 
the audit was subsequently partially provided to Boeing representatives 
during the conduct of the audit. Based on the data that was shared, 
Boeing was able to confirm with our Boeing Commercial Aircraft (BCA) 
Group that that pricing was associated with the cost of a refurbished 
used Aileron vs. a new production spare, and is therefore not valid for 
a direct comparison. In subsequent discussions between the parties, GAO 
representatives indicated that DCMA also had other pricing data that 
they utilized to develop their pricing range assessment. Boeing does 
not have adequate insight into this other data, and therefore can not 
comment on its reasonableness. However, we can state that the 
aforementioned range is significantly lower than the price that Boeing 
can provide these items under these circumstances. Due to our inter-
component commercial BCA production source, these items are only 
available to our IDS military operating group on a commercial FFP basis 
(without supporting detailed cost element breakdowns), and therefore 
must be procured from Boeing utilizing FAR Part 12 commercial item 
price analysis procedures. Further, while the audit reflects the 
government's estimated "should cost" value range, Boeing is not aware 
of this item actually being procured by the government from an 
alternate source at this price range resulting in delivery of 
acceptable air-worthy parts under comparable circumstances.

b. Cowlings - The total contract price of $7,900,881 is accurate, but 
it includes $2,642,540.90 of Non-Recurring effort associated with 
Tooling and other start-up costs as detailed in our proposal of record. 
The proposed Recurring Unit Price of the Cowlings is $219,086.58 
(average right & left hand) vs. the $329,203 unit value reflected in 
the audit table. Boeing consolidationlcost reduction actions precluded 
this from being produced at our Puget Sound, Washington facilities. 
However, in order to continue support of our product and our Air Force 
customer, Boeing agreed to produce the part at our Tulsa, Oklahoma 
facility. Our proposal assumed that Boeing would be required to provide 
new tooling as none was identified at that time as available for use by 
the Air Force. Subsequent to award of this Fixed Price contract, Boeing 
identified that a significant amount of the required tooling was 
available in storage in an as is condition at Davis Monthan AFB. Boeing 
coordinated with the OCIALC CO to obtain contractual authorization to 
refurbish and use that tooling, which the CO granted. The parties 
subsequently executed a contract modification 009701 on 06 May 2004 
where Boeing agreed to voluntarily negotiate an equitable price 
reduction adjustment recognising the delta between the tooling price 
included at award vs. an estimate of actual tooling refurbishment and 
maintenance related costs with profit when such costs can be reasonably 
assessed. Upon completion of this effort Boeing will propose an 
equitable adjustment in accordance with that contract modification. It 
should also be noted that this requirement was proposed and negotiated 
on a sole source basis in accordance with FAR Par 15 procedures and 
Boeing provided fully auditable detailed supporting estimates at the 
cost element level in support of the proposed price. Therefore, the 
primary basis of government evaluation should be cost analysis not 
price analysis.

c. Radomes - Boeing concurs with the total prices of the 2001 and 2003 
procurements reflected in the audit page 6 table. Relative to the 2001 
procurement, Boeing's proposal did not break out the Non-Recurring 
($7,057,351) and a unit Recurring value of $2,243,195 (subsequently 
estimated by Boeing - see below), vs. the $1,200,000 value reflected in 
the audit table. This variance in the 2001 Recurring unit price was 
subsequently discussed with GAO representatives after Boeing receipt of 
the draft audit. In those clarifying discussions Boeing stated that it 
was unaware of and could not validate what the audit findings reflected 
as the Radome Recurring unit value the audit indicates was documented 
in the CO records, as it was not discretely priced/identified in our 
proposal, during negotiations, or within the awarded 2001 contract. The 
Boeing negotiator recalls that it was agreed, during negotiations, not 
to breakout the Non-Recurring vs. Recurring value, but to establish a 
cumulative Estimated Cost since this was a CPFF contract for a single 
unit. Boeing does not agree that the audit breakout attributed to the 
Air Force CO accurately represents the unit Recurring items value. 
Subsequent to receiving the draft audit and noting this apparent 
disparity in the first Radome Recurring unit price, Boeing tasked our 
estimators to develop the Recurring first unit price only utilizing the 
cost and pricing information included in our 2001 proposal of record 
and supporting data from our contract files. Our assessment supports a 
Recurring unit value of $2,243,195. We have the source documents to 
support how these values were developed in our contracting files and 
can provide them upon request. The 2003 Radome total negotiated Firm 
Fixed Price of $4,685,000 is accurate and includes $236,543.86 Non-
Recurring at price level, and a Recurring unit value for 2 items of 
$2,224,228.07. The second and third Radome Recurring unit values were 
in fact priced less than the single 2001 Recurring unit price (as 
Boeing has estimated it) and were based on actual labor manhours from 
the first unit, and included a higher profit rate, since it was a FFP 
vs. CPFF award. Boeing believes that the utilization of such actuals 
from the first unit to develop the pricing for units 2 and 3 on the 
2003 contract further supports the Boeing estimate of the Recurring 
value of the 2001 Radome order. This item too has been out of 
production since the late 1980's and was moved from Puget Sound to 
Tulsa to be produced at these limited quantities. On page 11 paragraph 
2, the audit states that "the Air Force did not receive cost or pricing 
data from Boeing to support Being's proposed price." Our review 
confirms that Boeing did provide a fully supported proposal with cost 
element price breakdowns included and this requirement was processed in 
accordance with FAR Part 15 procedures. Again, cost analysis not price 
analysis should be the primary evaluation method. Further. the cost 
information from the first Radome CPFF was fully available to the 
Contracting Officer and referenced in our labor estimates used to 
develop our unit 2 and 3 proposal.

d. Regarding the audit comments on page 12 of the draft report citing 
Boeing becoming more aggressive in seeking higher profits, Boeing 
believes the comments made by some senior contracting officials at 
Tinker were unrelated to these AWACS spares orders. However, Boeing has 
in the past raised issues regarding appropriate profit recognition in 
other non-spares contracting activities. These requests by Boeing for 
additional profit consideration stem from what we believed to be 
inequitable and inappropriate government contracting positions. 
Specifically, allowing no earnings on significant material cost content 
in various Contractor Logistic Support (CLS) contracts without other 
consideration, and placing engineering services efforts containing 
significant material content under Time and Material (T&M) contracts. 
Government contracting practices do not allow for profit on material 
procured under T&M contracts, which when used for efforts requiring 
significant material procurement, results in unreasonable total 
contract earnings. Boeing believes it was justified in raising the 
issues of utilization of appropriate contract types and fair profit 
consideration of all elements of cost. It should also be understood 
that Boeing and OC/ALC senior representatives met in 2003 and early 
2004 and addressed these issues which were resolved by reviewing the 
material contents of requirements before placing orders under the T&M 
contract and incorporating new "performance based" earnings incentive 
provisions into new CLS contracts. GAO indicated the time frame of the 
government's remarks was March 2004. Boeing believes that significant 
changes/improvements regarding this issue have been jointly achieved 
since that time.

In summary, it is Boeing's assessment that the current draft audit 
report appears to contain some information that this Boeing response 
augments, clarifies and puts in an appropriate context. We believe that 
GAO's and the other government representatives' intent is to fairly and 
openly present a correct and accurate analysis, and include this Boeing 
response in its final report to ensure a balanced assessment. Such 
actions are greatly appreciated. During joint discussions after receipt 
of the draft audit, it was clarified that while GAO believes that 
although it may be in the government's interest to pursue competition 
in acquiring these type of items, and that doing so might result in a 
lower price to the government. GAO is not indicating that Boeing 
unfairly or inappropriately priced these items to the government. 
Rather, they are suggesting that had the government chosen to compete 
the acquisition of these items, they may have procured them at a lesser 
price from another source. In our response Boeing has addressed the 
complexities of out of production spares fabrication as well as the 
limitations associated with Intellectual Property data rights. Boeing 
is committed to continue our present joint efforts with government 
representatives to develop a mutually acceptable future approach to 
facilitate government acquisition of these types of items in a cost 
effective manner.

I am available, along with other Boeing representatives, for further 
discussion at your convenience at 314-777-0354, by Email at 
john.t.biciocchi@boeing.com, and by FAX at 314-777-0439.

Sincerely Yours,

The Boeing Company:

Signed by: 

John T. Biciocchi:

Head of Contracts & Pricing: 
Aerospace Support: 
Integrated Defence Systems: 

[End of section]

FOOTNOTES

[1] GAO received allegations regarding the Air Force's purchases 
of cowlings (metal engine coverings) and outboard ailerons (wing 
assembly components that stabilize the aircraft during flight). We also 
reviewed the Air Force's purchases of radomes (coverings that protect 
radar antennae) because, during our review, we became aware of a 
similar allegation concerning overpricing of a radome.

[2] The pricing policy in the Federal Acquisition Regulation (FAR) 
provides that the contracting officers must purchase supplies and 
services from responsible sources at fair and reasonable prices [FAR 
Subpart 15.4].

[3] The cowlings were modified to accommodate AWACS' engines, which 
have a special gearbox that drives two electrical generators instead of 
one--the standard configuration for the 707. The AWACS' ailerons have 
differences in the paint as well as hardness requirements for certain 
fasteners.

[4] FAR Subpart 15.4 provides policies and procedures for negotiating 
noncompetitive procurements. Under a negotiated procurement, the 
contractor submits a proposal to the government with its proposed costs 
and profit as well as cost or pricing data that support its proposed 
price. The government and contractor negotiate costs and profit (to 
determine the overall price) based on the contractor's full disclosure 
of data supporting the proposed price.

[5] FAR Part 12 relates to the procurement of commercial items and 
refers to FAR Subpart 15.4, which provides contracting officers with 
guidance for performing a price analysis to compare the contractor's 
price with its commercial prices for the same or similar items, also 
referred to as a commercial item equivalent. If the contracting officer 
cannot determine whether an offered price is fair and reasonable, then 
the contracting officer must require the contractor to submit other 
information to support further analysis. 

[6] During the negotiations, the Air Force was represented by 
negotiation teams, which generally included a contracting officer, 
negotiator, and price analyst.

[7] A portion of the price increases can be attributed to inflation--
the effects of which would be greatest for the ailerons and cowlings, 
last purchased in 1986. Based on published escalation factors for the 
aircraft equipment industry, the 1986 prices for the ailerons 
and cowlings could have increased by about 46 percent by 2003, yet the 
unit cost of the ailerons and cowlings increased by 442 percent and 
354 percent, respectively. Based on escalation factors, the 1998 price 
for the radomes could have increased by about 4 percent; yet, the unit 
cost for the radome under the September 2001 contract increased by 
38 percent. The escalation from 2001 to 2003, when the next radome 
contract was awarded, was only 1 percent, but the unit price nearly 
doubled.

[8] After the contract was awarded, the purchase of new tooling was not 
necessary because Boeing located tooling used in the initial production 
of the cowlings. See the discussion of this issue on page 10.

[9] The contract included only one line item that covered costs for 
(1) producing the radome and (2) relocating equipment and establishing 
a manufacturing capability. Therefore, the contract did not include a 
separate estimate of the production cost of the radome. The$1.2 million 
estimate was included in documentation provided by the Air Force 
contracting officer who negotiated the contract.

[10] Normally the Air Force would conduct its own price analysis. 
However, in January 2003, Boeing prepared an analysis for the Air 
Force. Boeing's price analysis showed "significantly higher" prices 
than those included in Boeing's final proposal. In our view, Boeing's 
analysis was not reasonably supported. For example, the price of the 
item purchased in 1986 ($85,602) was (1) escalated using escalation 
factors to arrive at a 2003 value ($196,200), (2) adjusted for a 
quantity of three aileron assemblies, and (3) adjusted again for 
production inefficiencies. For these inefficiencies, Boeing used a 
factor of 3.5 to account for having to work with older drawings, 
planning prototype manufacturing methods, dealing with material 
differences, and adjusting for other non-production conditions. Boeing 
was not able to provide a sound basis for the 3.5 adjustment factor. 

[11] FAR 15.405 concerning price negotiation provides that when 
significant auditor or other specialist recommendations are not 
adopted, the contracting officer should provide rationale that supports 
the negotiation result in the price negotiation documentation.

[12] Air Force price negotiation documents said that the Air Force had 
reviewed the availability of government-owned equipment. The documents 
said that the tools had deteriorated and were no longer serviceable, 
and the cost of refurbishment was considered comparable to current 
proposed estimates for new tools. However, the information in the 
negotiation documents was inaccurate. 

[13] Contract No. F34601-02-D-0082, Rights Guard for Other Aircraft 
Parts and Auxiliary Equipment Manufacturing, dated July 1, 2002.

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