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. 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.
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, 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, 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. 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).
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. Figure 2  shows the unit price increases, including adjustments for inflation, for  ailerons, cowlings, and radomes.
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. 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.

	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.
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. 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.
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. 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.

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.

Appendix II: Comments from the Department of Defense

Appendix III: Comments from The Boeing Company

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Summary:
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.