Department of Homeland Security 

U.S. Coast Guard’s Maritime Patrol Aircraft 

OIG-12-73 (Revised) August 2012 
August 31, 2012
 
Washington, DC 20528 

August 31, 2012

Office of Inspector General 

U.S. Department of Homeland Security 

 

Preface 

The Department of Homeland Security (DHS) Office of Inspector General (OIG) was 

established by the Homeland Security Act of 2002 (Public Law 107-296) by amendment 

to the Inspector General Act of 1978. This is one of a series of audit, inspection, and 

special reports prepared as part of our oversight responsibilities to promote economy, 

efficiency, and effectiveness within the Department. 

This report addresses whether the United States Coast Guard effectively awarded the 

2010 Ocean Sentry Maritime Patrol contract. It is based on interviews with employees 

and officials of relevant agencies and institutions, direct observations, and a review of 

applicable documents. 

The recommendation herein has been developed to the best knowledge available to our 

office, and has been discussed in draft with those responsible for implementation. We 

trust this report will result in more effective, efficient, and economical operations. We 

express our appreciation to all of those who contributed to the preparation of this report. 

Anne L. Richards 

Assistant Inspector General for Audits 
Table of Contents/Abbreviations 

Executive Summary .............................................................................................................1
 

Background..........................................................................................................................2
 

Results of Audit ...................................................................................................................3
 

Additional Follow up Needed on Prior Subcontractor Deficiencies .............................3 


Other Reportable Matters.....................................................................................................5
 

Delay in Initiating Equipment Modification ..................................................................5 


Guidance for One-Bid Contracts ...................................................................................6 


Recommendation .................................................................................................................7
 

Management Comments and OIG Analysis ........................................................................7 


Appendices 

Appendix A: Purpose, Scope, and Methodology.........................................................9 


Appendix B: Management Comments to the Draft Report .......................................11 


Appendix C: Major Contributors to this Report........................................................13 


Appendix D: Report Distribution ..............................................................................14 


Abbreviations 

DCAA Defense Contract Audit Agency 


DHS Department of Homeland Security 


EADS CASA European Aeronautic Defense and Space Company/ 


Construcciones Aeronáuticas Sociedad Anónima 

EADS NA European Aeronautic Defense and Space Company North America 

Company
 

FAR Federal Acquisition Regulation
 

FY fiscal year 


HC-144A Ocean Sentry Maritime Patrol Aircraft 


OIG Office of Inspector General 


USCG United States Coast Guard 

OIG
 

Department of Homeland Security 

Office of Inspector General 

Executive Summary 

The Ocean Sentry Maritime Patrol Aircraft is a medium-range 

surveillance aircraft purchased by the United States Coast Guard to 

replace its aging HU-25 Falcon fleet. In July 2010, the United 

States Coast Guard awarded its latest contract to the European 

Aeronautic Defense and Space Company North America for three 

aircraft with a value of about $117 million, excluding any option 

periods. The United States Coast Guard has taken delivery of 13 

HC-144A aircraft since the program began in 2003. We performed 

this audit to determine whether the United States Coast Guard 

effectively awarded the 2010 Ocean Sentry Maritime Patrol 

Aircraft contract. 

The United States Coast Guard generally awarded the Ocean 

Sentry Maritime Patrol Aircraft contract effectively. However, it 

could have improved its oversight of the contract. The United 

States Coast Guard was aware of extensive work and conclusions 

made by the Defense Contract Audit Agency regarding the 

presence of non-chargeable costs and noncompliance with the 

Federal Acquisition Regulation by the subcontractor, European 

Aeronautic Defense and Space Company/Construcciones 

Aeronáuticas Sociedad Anónima. Despite this knowledge, United 

States Coast Guard personnel did not follow up with the 

subcontractor to ensure that it had implemented recommendations 

made by the Defense Contract Audit Agency and did not obtain 

sufficient support to ensure the exclusion of non-chargeable costs 

when awarding the current contract. The Coast Guard partially 

concurred with our recommendation to improve the award and 

oversight of this acquisition and future acquisitions. 

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Background 

In 2003, the United States Coast Guard (USCG) contracted with 

Integrated Coast Guard Systems to procure the initial Ocean Sentry 

Maritime Patrol Aircraft (HC-144A). Originally, as part of the 

Integrated Deepwater Program, the USCG procured the HC-144A 

to replace its aging HU-25 Falcon aircraft with 36 aircraft by 2025. 

The HC-144A is the largest aircraft acquisition program in the 

USCG’s Acquisition Directorate. The USCG received its first 

HC-144A in December 2006 and to date has accepted delivery of 

13 aircraft. 

Following multiple congressional hearings, audit reports, and 

investigations, the USCG ended its contractual relationship with 

Integrated Coast Guard Systems and became the lead systems 

integrator for the HC-144A program in January 2011. The USCG 

issued the current firm fixed-price HC-144A contract to European 

Aeronautic Defense and Space Company North America (EADS 

NA) in July 2010 for aircraft numbers 12, 13, and 14. EADS NA 

issued a subcontract to European Aeronautic Defense and Space 

Company/Construcciones Aeronáuticas Sociedad Anónima (EADS 

CASA), the original equipment manufacturer. 

Photo of a HC-144A. Source: USCG. 

The USCG’s Acquisition, Construction, and Improvements budget 

was about $1.3 billion for fiscal year (FY) 2010. The USCG 

budgeted about $299 million for its aviation department, and about 

$138.5 million for the HC-144A program. The USCG awarded the 

2010 HC-144A base contract, excluding any option periods, for 

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about $117 million. According to the USCG’s FY 2012 

Congressional Justification, the total cost for the HC-144A 

program, through aircraft number 11, was about $795.1 million. 

We conducted this audit to determine whether the USCG 

effectively awarded the 2010 HC-144A contract. 

Results of Audit 

The USCG generally awarded the HC-144A contract effectively. It followed 

federal regulation, Department, and USCG guidance when awarding the 2010 

HC-144A contract. With one proposal received for the HC-144A solicitation, the 

USCG worked to ensure that the proposal went through the award process 

correctly. It standardized the HC-144A fleet to meet mission needs, appointed a 

source selection organization to oversee and approve the process, and obtained 

Department-level approval for its actions when required. 

However, the USCG could have improved the oversight of the 2010 HC-144A 

contract. It was aware of extensive work and conclusions by the Defense 

Contract Audit Agency (DCAA) regarding the presence of non-chargeable costs 

and non-compliance with the Federal Acquisition Regulation (FAR) by EADS 

CASA. Despite this knowledge, USCG personnel did not follow up with EADS 

CASA to ensure that it had implemented recommendations made by DCAA and 

did not obtain sufficient support to ensure that non-chargeable costs were 

excluded when awarding the current HC-144A contract. 

Additional Follow up Needed on Prior Subcontractor Deficiencies 

The USCG should have conducted more follow up on deficiencies noted 

by the DCAA relating to EADS CASA and its accounting systems. The 

contract file did not contain sufficient documentation for USCG personnel 

to ensure that the subcontractor calculated all costs correctly. However, 

USCG personnel determined that the contractor’s price proposal met the 

requirements of the proposal evaluation plan and that price risk was not an 

evaluation factor. Although the USCG performed additional steps 

regarding price risk, such as comparison of proposed prices to historical 

prices, USCG personnel determined that the risk identified was not 

significant. USCG personnel could have followed up with DCAA on the 

status of prior report recommendations regarding noncompliance with the 

FAR. 

We reviewed eight reports issued by DCAA between February 2004 and 

April 2010 on EADS CASA. The multiple DCAA reports identify 

numerous instances between 2004 and 2010 where EADS CASA included 

non-chargeable costs and costs that did not comply with FAR Part 31 in its 

cancellation and price proposals. FAR Part 31.205 identifies 18 costs that 

are generally non-chargeable in federal government contracts, such as 

U.S. Coast Guard’s Maritime Patrol Aircraft 

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interest, costs for bad debts, and advertising. Non-compliance with FAR 

Part 31 occurs when contractors do not follow its guidelines when 

determining whether costs are allowable, reasonable, and allocable when 

calculating costs. 

DCAA provided detailed analyses and conclusions in its audit reports. 

Table 1 summarizes the non-chargeable costs and costs not in compliance 

with FAR Part 31, as identified in DCAA audit reports. 

Table 1 

DCAA Report Analysis 

# 1 # 2 # 3 # 4 # 5 # 6 # 7 # 8 FAR Reference 

Feb-04 Nov-06 Oct-07 Aug-09 *Jan-10 Aug-09 *Jan-09 Apr-10 

Non-chargeable

Cost 

Advertising costs x FAR 31.205-1 

Bad Debts x FAR 31.205-3 

Independent Research x x FAR 31.205-18(d) 

Interest x FAR 31.205-20 

Travel Costs (in excess) x x x x x x FAR 31.205-46(b) 

Non Complaince with FAR 31 

Determining Allowability x x x x x x FAR 31.201-2 

Determining Reasonableness x x x FAR 31.201-3 

Determining Allocability x x x FAR 31.201-4 

Credits x x x FAR 31.201-5 

Accounting for Unallowable 

Costs x x x x x x FAR 31.201-6 

Direct Costs x x x x FAR 31.202 

Indirect Costs x FAR 31.203 

Cost of Money x x x FAR 31.205-10 

Precontract Costs x x x FAR 31.205-32 

Professional and Consultant 

Service Costs x x x x x FAR 31.205-33 

Costs related to Legal and 

Other Proceedings x x x FAR 31.205-47 

Source: DHS OIG. 


*Supplemental Report.
 

In one audit report,1 DCAA concluded that about $11,019,750 of the total 

$154,884,795 proposal costs were questionable and about $269,129 were 

unsupported. In another audit report,2

 DCAA noted deficiencies with 

timekeeping, living expenses, travel costs, cost of money, and the 

inclusion of other non-chargeable costs. In that report, DCAA also 

detailed that Airbus Military, a business unit of EADS CASA, incorrectly 

included costs in its proposals. For example, employees’ timesheet entries 

recorded amounts greater than a normal working day because of EADS 

CASA’s inadequate internal controls over its timekeeping system. One 

employee charged what appeared to be 1 full week (45.08 hours) to 1 day. 

DCAA determined that there was a significant risk of potential labor 

overcharges because employees may work on multiple contracts and 

1

 DCAA Report 2191-2006F21000003, EADS CASA Subcontract Proposal for Aircraft 4 and 5 on the 


Deepwater Program, dated November 2006.
 2

 DCAA Report 2191-2009H24020001, Estimating System Deficiencies Disclosed During Evaluation of 


Termination Settlement Proposals Dated May 22, 2009, dated April 2010. 


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projects, but do not record the labor hours on a daily basis. EADS CASA 

had policies and procedures to address daily timekeeping; however, EADS 

CASA stated that it never implemented them. 

DCAA recommended that the management of EADS CASA take 

immediate action to ensure that future comprehensive price proposals 

comply with FAR Part 31. EADS CASA concurred with the report’s 

conclusions and acknowledged certain deficiencies in its estimating and 

accounting systems. However, according to DCAA, EADS CASA’s audit 

response was not fully responsive to the report’s recommendations. 

DCAA stated that EADS CASA’s decision not to implement timekeeping 

procedures until the award of a cost-based contract with the U.S. 

government would continue to prevent the determination of the validity 

and reliability of recorded labor hours used as a basis for future labor 

estimates. 

USCG personnel acknowledged EADS CASA’s response to the DCAA 

findings in their contract file documentation; however, there was no 

documentation to show that USCG personnel took the necessary steps to 

ensure that EADS CASA implemented any corrective action. With only 

2 months between the issuance of DCAA’s audit report and the award of 

the current HC-144A contract, EADS CASA did not have enough time to 

make the recommended changes before entering into another U.S. 

government contract. 

The multiple DCAA reports demonstrate that EADS CASA included nonchargeable costs and costs not calculated in accordance with federal 

regulation in prior contracts. The USCG could have conducted additional 

follow up, such as verifying that the subcontractor addressed the DCAA 

report recommendations, which would have provided the USCG more 

assurance that the contractor and subcontractor did not include costs not 

allowed per the FAR. 

Other Reportable Matters 

Delay in Initiating Equipment Modification 

The USCG awarded the current HC-144A contract with equipment known 

not to meet operational requirements, such as launch and arrival time, 

radar detection capability, and sensor performance. USCG personnel were 

aware of the equipment problems at least 14 months before they awarded 

the 2010 HC-144A contract. 

Operational Assessments identify system enhancements and significant 

areas of risk to the program’s successful completion. The Operational 

Assessment dated May 2009 revealed operational problems with certain 

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equipment on the HC-144A. In December 2009, the sponsoring unit for 

the HC-144A made a recommendation to the USCG’s Acquisition 

Directorate to stop further purchase of the equipment and perform 

additional analysis. In March 2010, the program manager also 

recommended that the USCG stop purchase of the equipment. Despite 

these recommendations, USCG personnel stated they could not make any 

changes without the Executive Oversight Council’s approval. The USCG 

continued to follow its existing procedures by issuing the solicitation in 

April 2010 and awarding the contract with this equipment in July 2010. 

USCG personnel did not take action to stop the purchase of the equipment 

or remove this equipment until October 2010. The USCG’s Executive 

Oversight Council did not approve the removal of this equipment until 

later in October 2010. 

Although the USCG identified these issues early in the acquisition 

process, it did not take the necessary steps to ensure that the contract 

excluded this equipment. The USCG has now amended the contract twice 

to address this equipment problem. Removing the equipment will 

decrease the cost by about $400,000 per aircraft, or a total of about 

$1.2 million for aircrafts 12, 13, and 14. However, according to USCG 

personnel, the USCG will incur additional costs for updating the technical 

designs, reconfiguration costs, aircraft recertification costs, and about 

$57,000 for labor costs just to remove this equipment. Until the USCG 

selects a replacement for this equipment, the total financial impact to the 

HC-144A program cannot be determined. 

Guidance for One-Bid Contracts 

DHS has issued additional procedures to promote full and open 

competition when the Department and its components award contracts 

based on receipt of only one proposal for a competitively issued 

solicitation. DHS’ Chief Procurement Officer issued a memorandum, 

Procedures for Improved Competition, dated February 2011, which 

provides historical data and additional procedures for awarding one-bid 

contracts over $700,000. 

The USCG issued a Chief of Contracting Office Alert, 11-20, New DHS 

Procedures for competitive negotiated contacts where only one offer is 

received, dated February 23, 2011, to communicate the Department’s 

process change requirements and direct immediate adherence to the 

procedures. As of October 2011, the USCG has not created any 

component-level guidance to follow when awarding a contract that 

receives only one proposal. During the audit, USCG personnel stated that 

they were in the process of creating USCG-level guidance to address this 

area. However, at the end of the audit, USCG personnel informed us that 

U.S. Coast Guard’s Maritime Patrol Aircraft 

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the Chief of Contracting Office Alert, 11-20, is the only guidance USCG 

will issue. 

We believe that it may be beneficial for the USCG to issue additional 

specific component-level guidance for its contracting officers to follow 

when awarding contracts for which only one proposal is received. 

Recommendation 

We recommend that the Assistant Commandant for Acquisitions, 

USCG: 

Recommendation #1: Ensure that the subcontractor has 

satisfactorily addressed and implemented DCAA report 

recommendations. 

Management Comments and OIG Analysis 

The USCG provided comments on the draft of this report. A copy 

of the comments in their entirety is included in appendix B. The 

USCG also provided technical comments and suggested revisions 

to our report in a separate document. We reviewed the USCG’s 

technical comments and made changes throughout our report 

where appropriate, but have not included the actual comments in 

this report. 

Management Comments to Recommendation #1 

Partially Concur. The USCG agreed with the spirit of the 

recommendation. The USCG agreed that for sole source contract 

actions, it is imperative that the USCG give full consideration to 

the findings in the DCAA audit report. However, the USCG 

maintains that actions taken to award the initial HC-144A contract 

were in accordance with applicable regulations. 

The USCG maintains that it was not required to, and therefore did 

not, obtain certified cost or pricing data and did not perform cost 

analysis in accordance with FAR 15.404-1(a). The Scope of FAR 

Part 31 contains cost principles and procedures for the pricing of 

contracts, subcontracts, and modifications to contracts and 

subcontracts whenever cost analysis is performed. Therefore, the 

DCAA audit findings were not relevant to award of this contract or 

to the exercising of options 2, 3, or 4 for contract HSCC23-10-C2DA020. 

U.S. Coast Guard’s Maritime Patrol Aircraft 

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OIG Analysis. As discussed in our report, the USCG was aware 

of extensive work conducted and conclusions made by the DCAA 

regarding the presence of non-chargeable costs and noncompliance with the FAR by EADS CASA. Whether a contract is 

sole source or competed should not determine whether USCG 

personnel give full consideration to previous report findings 

regarding the inclusion of non-chargeable costs by EADS CASA. 

FAR Part 15.403-1(b) allows the contracting officer to require data 

other than certified cost or pricing data, which include types of 

data identical to certified cost or pricing data without the 

certification. Therefore, the USCG could have obtained 

information to ensure that the subcontractor calculated all costs 

correctly. 

The DCAA report findings show that EADS CASA included nonchargeable costs for more than 5 years, from 2004 to 2010. 

According to a USCG employee, the discounts given for the 2010 

HC-144A contract would have outweighed any non-chargeable 

costs that EADS CASA could have included in its cost. Although 

USCG personnel used price analysis when evaluating the 2010 

HC-144A contract, it did not preclude them from ensuring that 

EADS CASA addressed DCAA’s report recommendations prior to 

contract award. FAR Part 15.403-3(b) states that when there are 

unusual circumstances where it is concluded that additional data 

are necessary to determine the reasonableness of price, the 

contracting officer shall, to the maximum extent practicable, obtain 

additional data from sources other than the offeror. We believe 

that the numerous DCAA reports and findings warranted an 

unusual circumstance that should have caused the contracting 

officer to obtain additional information from sources other than the 

offeror. The price analysis techniques the contracting officer 

applied included information from the offeror to determine price 

reasonableness. 

We modified our recommendation to ensure that the USCG will 

meet its mission needs and not delay further production of the 

HC-144A aircraft in production, but addressing the EADS CASA 

issues noted by DCAA should be a priority. 

U.S. Coast Guard’s Maritime Patrol Aircraft 

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Appendix A 

Purpose, Scope, and Methodology 

We initiated this audit to determine whether the USCG effectively 

awarded the 2010 HC-144A contract. To achieve our objective, 

we reviewed the HSCG23-10-C-2DA020 contract file and its 

supporting documentation. We also reviewed federal regulation, 

DHS policies, DHS USCG FY 2012 Congressional Justification, 

and USCG guidance. We interviewed DHS officials in the Office 

of the Chief Procurement Officer and USCG officials in the 

Acquisition Directorate, Intelligence and Criminal Investigations 

Directorate, Capability Directorate, and the Office of Planning, 

Resources, and Procurement. We conducted onsite work at USCG 

headquarters in Washington, DC. 

We relied on computer-processed data provided by the USCG for 

program costs and one-bid contract data provided by DHS from the 

Federal Procurement Data System-Next Generation. We did not 

perform any internal control testing of this information, as it was 

not the basis for our report findings and recommendations. To 

minimize costs and avoid duplication of work, we did not conduct 

an analysis of accounting and cost documents because those 

documents were located in Barcelona, Spain. 

To accomplish our objective, we relied on the body of work 

already conducted by DCAA, and on the audit findings and 

conclusions in DCAA’s published reports. Two of these reports 

contained modified generally accepted government auditing 

standards statements. We did not review DCAA’s work, audit 

plans, or audit documentation, nor did we perform tests of 

DCAA’s work. 

We conducted this performance audit between May 2011 and 

November 2011 pursuant to the Inspector General Act of 1978, as 

amended, and according to generally accepted government 

auditing standards (GAGAS), except that we identified an 

impairment to our independence in appearance. Following 

completion of our audit, it came to our attention that a family 

member of a senior OIG official was employed by an entity 

associated with this audit. We took steps to re-evaluate the 

evidence supporting our findings and conclusions. In our opinion, 

the impairment to our independence in appearance did not affect 

the findings and conclusions developed during this audit. 

GAGAS requires that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based upon our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for 

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Appendix A 

Purpose, Scope, and Methodology 

our findings and conclusions based upon our audit objectives, and 

that the impairment to our independence in appearance did not 

affect this evidence or any findings and conclusions. 

We appreciate the assistance and cooperation of USCG personnel 

throughout this audit. 

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Appendix B 

Management Comments to the Draft Report 

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Appendix B 

Management Comments to the Draft Report 

U.S. Coast Guard’s Maritime Patrol Aircraft
 

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Appendix C 

Major Contributors to this Report 

Brooke Bebow, Audit Director 

Linda Howard, Audit Director 

LaParacina Williams, Lead Audit Manager 

Andrea Rambow, Audit Manager 

Tiffany Bellinger, Auditor 

Thomas Bobrowski, Program Analyst 

Victoria Phan, Program Analyst 

Cory Upmeyer, Program Analyst 

Marissa Weinshel, Program Analyst 

Maureen Duddy, Referencer 

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Appendix D 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretariat 

Director, GAO/OIG Liaison Office 

Assistant Secretary for Office of Policy 

Assistant Secretary for Office of Public Affairs 

Assistant Secretary for Office of Legislative Affairs 

United States Coast Guard 

Audit Liaison 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as 

appropriate 

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