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

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.