GAO-06-739R Defense Management 

United States Government Accountability Office

Washington, DC 20548 

June 19, 2006 

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member 

Committee on Armed Services 

United State Senate 

The Honorable Duncan L. Hunter 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member 

Committee on Armed Services 

House of Representatives 

Subject: 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)1

 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.2

 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 

 

1

DLA is DOD’s largest combat support agency, providing worldwide logistics support in both 

peacetime and wartime to the military services as well as several civilian agencies and foreign 

countries. 

2

GAO, Defense Inventory: Opportunities Exist to Expand the Use of Defense Logistics Agency Best 

Practices, GAO/NSIAD-00-30 (Washington, D.C.: Jan. 26, 2000). A best commercial inventory practice 

is defined in The National Defense Authorization for Fiscal Year 1998 as a practice that enables the 

agency to reduce inventory levels and holding costs while improving the responsiveness of the supply 

system to user needs. 
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.3

 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. To 

accomplish the objectives, we reviewed policies and procedures governing the use of 

prime vendors and DLA’s adherence to those policies and procedures. In addition, 

we reviewed internal and external assessments of DSCP’s procurement management, 

and prior GAO reports, and we analyzed 16 prime vendor contracts to determine the 

requirements for conducting pricing reviews. We also analyzed two contracts with a 

manufacturer and four delivery orders to prime vendors to document the price 

increase for an aircraft refrigerator. Further, we interviewed DLA and DSCP officials, 

prime vendors, customers, and a manufacturer. We conducted our review from 

December 2005 through April 2006 in accordance with generally accepted 

government auditing standards. Our scope and methodology are discussed in further 

detail at the end of this report. 

Results in Brief 

Personnel at the Defense Supply Center Philadelphia did not always conduct pricing 

reviews for all commodities. The medical materiel and food subsistence commodities’ 

contracting personnel reviewed pricing on a regular basis. However, required price 

reviews were not being conducted for the food service equipment and construction 

and equipment commodities. For example, the contracts for food service equipment 

required verification of price increases, but officials from the supply center were 

unable to provide documentation on why the price of an aircraft refrigerator 

increased from $13,825 in March 2002 to $32,642 in September 2004. Both logistics 

agency and supply center officials acknowledged that these problems occurred 

because management at the agency and supply center level were not providing 

 3

GAO, Defense Contract Pricing, GAO/HR-93-8 (Washington, D.C.: Dec. 1, 1992), High-Risk Series: An

Update, GAO/05-207 (Washington, D.C.: January 2005).

Page 2 GAO-06-739R Defense Management 
adequate oversight to ensure that contracting personnel were monitoring prices. The 

lack of pricing reviews on certain commodities has been a continual problem cited in 

the logistics agency’s internal reviews since 2002. Internal reviews of the prime 

vendor programs conducted in 2002 and 2003 showed that supply center contracting 

personnel responsible for the food service equipment and construction and 

equipment commodities failed at times to properly perform price reviews to 

determine whether the prices charged by the prime vendors were reasonable. The 

internal reviews found that contracting personnel either did not have knowledge of, 

or were disregarding contracting rules and regulations with regard to price reviews. 

As a result, the internal reviews recommended stronger contract management and 

oversight to ensure that price reviews were conducted. Management at the supply 

center agreed to take corrective actions to address the 2002 and 2003 reviews. 

However, issues with the lack of pricing oversight were identified again in a 2005 

internal review. 

The Defense Logistics Agency has developed corrective actions and has begun to 

develop a prime vendor contracting policy to address the most recent pricing 

problems identified in 2005. The agency’s recent actions include increasing the 

number of audits to ensure that the government was not overcharged, revoking some 

contracting officers’ warrants, and establishing additional training for all contracting 

officers and managers. Some of these corrective actions have resulted in delays in 

order approval and slowed delivery to some customers. The logistics agency is also in 

the process of developing a policy to implement regulatory guidance on prime vendor 

contracting. However, policies and procedures for pricing reviews were in place 

prior to November 2005, and corrective actions were identified in prior internal 

reviews. Problems still occurred because of a lack of management oversight by 

logistics agency and supply center officials to ensure that the policies and procedures 

were followed and that the corrective actions were implemented. Standards for 

internal controls in the federal government call for assessing the quality of 

performance over time and to ensure that the findings of audits and other reviews are 

promptly resolved.4

 

We are recommending that the Secretary of Defense ensure that the Director of the 

Defense Logistics Agency provide continual management oversight of the corrective 

actions to address pricing problems in the agency’s prime vendor program. In 

commenting on a draft of our report, DOD concurred with our recommendation. We 

discuss DOD’s comments and our evaluation of them later in this correspondence. 

Background 

DOD operates a worldwide supply system, with the vast majority of the items being 

managed by DLA. A DLA prime vendor arrangement is one in which a distributor of a 

commercial product line provides those products and related services to all of DLA’s 

customers in an assigned region within a specified period of time after order 

placement. The prime vendor either provides the product at the cost to the prime 

vendor to obtain it, or at a price agreed upon in advance with DLA. 

 4

GAO, Standards for Internal Control in the Federal Government, AIMD-00-21.3.1 (Washington, D.C.: 

Nov. 1999).

Page 3 GAO-06-739R Defense Management 
The process for using a prime vendor described below is generic, and different 

commodities may vary from this process. Under the prime vendor process, a single 

vendor buys items from a variety of manufacturers and the inventory is stored in 

commercial warehouses. A customer orders the items from the prime vendor using 

electronic ordering systems. For some commodities prices are pre-negotiated by 

DLA as part of the contract award process. The negotiated price includes the prime 

vendor’s handling fee. The prime vendor (or the customer) sends a copy of the order 

to DSCP. Depending on the commodity, DSCP may need to approve the order before 

the prime vendor can process it further. Once DSCP approves the order, the prime 

vendor fills, ships, and tracks the order through final acceptance. The prime vendor 

then submits an invoice to DSCP, which matches it with the order and receipt from 

the customer and authorizes the Defense Financial Accounting Service to make

payment. DSCP then bills the customer for the cost of the order plus DSCP’s cost 

recovery fee. 

DOD awarded its first prime vendor contract in 1993 for pharmaceutical items, such 

as aspirin and antibiotics. This was followed by a contract for medical supplies, such 

as syringes and surgical gloves. In 1994, DOD expanded the use of the prime vendor 

concept to include providing food for military dining facilities. DOD subsequently 

expanded the use of the prime vendor concept to include construction and equipment 

as well as clothing and textiles. Since the first contracts were awarded, DLA has 

refined its use of the prime vendor concept and incorporated changes into successive 

generations of contracts. 

DSCP is responsible for managing prime vendor programs for medical materiel, 

subsistence, and construction and equipment. Medical materiel includes 

pharmaceutical and medical/surgical items. Subsistence includes food for troop 

feeding and food service equipment (products associated with the receipt and storage 

of food, serving, presentation and preservation of food, and clean up or 

maintenance). Construction and equipment includes several commodities such as 

maintenance, repair and operations (MRO),5

 lumber, and metals. There are no prime 

vendor contracts for the clothing and textile commodity. 

According to DLA, the benefits of prime vendor contracts include improved access to 

a wide range of high-quality commercial products, rapid and predictable delivery 

from a single vendor at the time and in the manner most conducive to the customer’s 

needs, and reduced overhead charges. Other benefits of prime vendor contracts 

include significant reductions in the manpower needed to manage these items at 

DLA, elimination of any DLA inventory investment, reduction of the infrastructure 

and related costs associated with warehousing that inventory, and reduced 

transportation costs via multiple-item prime vendor deliveries to the customer rather 

than transportation from vendors to the military depots for subsequent transportation 

to the ultimate customer. In addition, prime vendor contracts provide for surge and 

broader mobilization capabilities, and worldwide customer support. 

 5

The MRO category is further broken out between supplies and services, with separate prime vendor 

contracts for each.

Page 4 GAO-06-739R Defense Management 
We have previously identified the use of prime vendors as a best commercial practice 

for inventory management.6

 In a series of reports, we reported on the benefits of 

using a prime vendor for medical and food inventories.7

 

In October 2005, media reports raised concerns that DLA had been overcharged for 

certain food service equipment items such as ice cube trays, refrigerators, and coffeemakers. The reports resulted in a congressional hearing on November 9, 2005 to 

discuss DLA’s prime vendor program.8

 

Pricing Reviews of Prime Vendor Commodities Were Not Always Conducted 

DSCP personnel did not always conduct pricing reviews for all commodities. The 

medical materiel and food subsistence commodities’ contracting personnel reviewed 

prices on a regular basis. Prices for food service equipment and construction and 

equipment commodities were not being reviewed for price reasonableness before 

orders were approved for new items. This lack of oversight was identified by internal 

DLA reviews, known as procurement management reviews, as early as 2002 and 2003. 

These reviews found that some prime vendor contracts were not being executed and 

managed properly and made recommendations that required an increase in 

management oversight and in some cases, additional training. Even though DSCP 

management concurred with the recommendations, the problems recurred in the 

next reviews conducted in 2005. 

Some Prime Vendor Programs Review Prices 

During the course of our review, we found that contracting officials responsible for 

medical materiel and food subsistence commodities were routinely reviewing prices. 

These officials used information systems to track pricing and to flag price increases. 

For example, the prices for medical materiel and food subsistence items are generally 

set by national pricing agreements.9

 Customers order from pre-priced catalogs and 

the vendor only gets paid the current catalog price. In addition, DSCP uses 

automated tools to match the prime vendor’s sales data with pricing data for 

pharmaceutical items. For food subsistence items, the contracting officer and 

customer liaison specialists monitor price changes and audit orders. The electronic 

ordering system for food subsistence also flags price changes that are more than 

10 percent. 

Pricing Reviews Were Lacking for Some Commodities

Pricing reviews were lacking for some commodities. In addition to price review 

concerns, a Defense Contract Management Agency (DCMA) review, conducted 

 6

GAO, NSIAD-00-30. 7

DOD Medical Inventory: Reductions Can Be Made Through the Use of Commercial Practices 

GAO/NSIAD-92-58 (Washington, D.C.: Dec. 5, 1991); DOD Food Inventory: Using Private Sector

Practices Can Reduce Costs and Eliminate Problems, GAO/NSIAD-93-110 (Washington, D.C.: June 4,

1993). 8

House Armed Services Committee Hearing on Prime Vendor Program of Defense Logistics Agency

(Nov. 9, 2005). 9

A pricing agreement is a manufacturer’s or distributor’s agreement with DSCP to provide products at

a specified price or discount. 

Page 5 GAO-06-739R Defense Management 
between December 2005 to January 2006, found concerns with the evaluation of 

prices at contract award for food service equipment.10 Based on our discussions with 

DLA officials, the first food service equipment vendor contracts awarded in June 1999 

used a market basket evaluation tool to help evaluate contract prices before 

contracts were awarded. A market basket evaluation is a tool used during proposal 

evaluation that samples a percentage of items anticipated to be purchased in a given 

commodity to use as a measure of all prices for items offered under contract. The 

prices of items obtained for the market basket became the baseline price for those 

items. However, according to the DCMA report and senior DLA officials, DSCP was 

not sampling a high enough percentage of food service equipment items to make sure 

that fair and reasonable prices were being paid.11 On average only 18 percent of the 

first generation food service equipment items were being sampled; for the second 

generation contracts awarded in June 2005, the average rose to 24 percent. While the 

sample size for the recompeted food service equipment prime vendor contracts was 

larger, the DCMA report noted that it was still small compared to the total number of 

items under the food service equipment contract.

In addition, while the contracting officers were required to document price increases 

in the contract files for food service equipment, we found that this was not being 

done. For example, we reviewed contract prices DSCP paid for an aircraft 

refrigerator and determined that the contract price had increased from $13,825 in 

March 2002 to $32,642 in September 2004. DSCP officials were unable to explain why 

the price of the aircraft refrigerator had more than doubled during the time period. 

These officials also stated that there was no documentation in the contract file to 

support the increase as required. Additionally, the officials could not explain why 

two different prices were paid for the same aircraft refrigerator on the same date. 

Specifically, on September 24, 2005, two different orders were awarded with prices of 

$32,642 and $29,975. Senior officials from DLA and DSCP acknowledged that these 

particular problems resulted from contracting personnel not doing their jobs and 

from a lack of management oversight. 

Since 2002 DLA Internal Reviews Cited Lack of Pricing Reviews

DLA’s periodic reviews of its contracting activities identified weaknesses in contract 

management and execution of some prime vendor contracts that are managed by 

DSCP. DLA periodically conducts reviews of its contracting activities to improve the 

operational efficiency and effectiveness of contracting operations and evaluate the 

integrity of the procurement process.12 In 2002, DLA conducted an internal review for 

the Subsistence Directorate, and in 2003, a review of the Construction and Equipment 

Directorate. These reviews identified weaknesses in contract management and 

execution as some prime vendor contracts were not being managed properly and 

 10Department of Defense Procurement Management, December 12, 2005 – January 25, 2006, Defense 

Contract Management Agency. 11Items and quantities selected for inclusion in a market basket have not been consistent among the 

various commodities, according to DLA officials. For example, in subsistence (food and food service 

equipment), the samples have ranged from a low of 18 percent of the items to be purchased to a high

of 75 percent. DLA is currently developing policy that will require that market baskets must represent 

75 percent of the anticipated dollar value of the planned acquisition. 12These reviews considered whether contracting officials met all requirements of law, executive orders, 

regulations, and other procedures when contracting for supplies and services for the government. 

Page 6 GAO-06-739R Defense Management 
there was no evidence in the contract file that prices had been reviewed for price 

reasonableness. These reviews found that the integrity of the procurement process 

needed to be strengthened in the Subsistence and the Construction and Equipment 

Directorates. 

The 2002 internal review found that oversight of the Subsistence Directorate contract 

actions needed to be enhanced to better manage the risk associated with subsistence 

contracting. For example, DLA’s review found that the Subsistence Directorate 

needed to improve its methodology for verifying the prices for food service 

equipment by expanding the number of pricing reviews being conducted. 

Specifically, the Directorate allowed food service equipment prime vendors to add 

new items to the contracts without an up-front price review, relying instead on 

postaward delivery order price reviews performed by contracting personnel in the 

buying section. However, DLA’s 2002 internal review found that the postaward 

delivery order price reviews occurred infrequently. For example, in fiscal year 2001, 

4,487 orders were issued, of which only 25 to 50 were reviewed. In fiscal year 2002, 

4,401 orders were issued. At the time of the 2002 assessment, no price reviews had 

taken place. 

The 2003 internal review of the Construction and Equipment Directorate reported 

that many of the deficiencies identified revolved around a failure to comply with 

fundamental contracting requirements that are designed to preserve the integrity of 

the procurement process. In addition, the review team found pricing problems where 

purchases were made at unreasonably high prices or contracting personnel failed to 

perform any price reviews to determine price reasonableness. For example, a sample 

of 30 items reviewed found that 14 items were priced at least 25 percent over the 

estimated fair market price and none of the items in the sample had a price 

reasonableness determination completed at the time of purchase. The report stated, 

“It appears that these deficiencies stem from the fact that many contracting 

personnel and several supervisors . . . have not gained the basic skills to execute 

government contracts or have blatantly disregarded procurement policy and 

procedures. The situation presents high risks to the Agency and calls for more rigid 

enforcement of review and oversight.” 

The 2002 and 2003 reviews made recommendations requiring an increase in price 

verification reviews, management oversight, and in some cases, additional training. 

Although DSCP management concurred with the findings and agreed to take the 

recommended actions, some of the problems recurred in the next DLA review 

conducted in January and May 2005. For example, this review found that postaward 

pricing reviews for the food service equipment prime vendor contracts were not 

being conducted as required. In addition, the 2005 review noted that increased 

management attention and procurement oversight was needed to eliminate the 

shortcomings regarding contracting rules and regulations. Specifically, the review 

found significant deficiencies in the application of fundamental contracting rules in 

the Construction and Equipment Directorate. The findings related to, among other 

things, the proper use and exercise of options in that most contract files did not 

indicate that options had been properly justified prior to the government exercising 

Page 7 GAO-06-739R Defense Management 
them;13 compliance with requirements for best value source selection; compliance 

with requirements for negotiated acquisitions; and compliance with procurement 

oversight policies and procedures. The review noted that the findings related to the 

basic principles of contracting and were not symptoms of the complexity of prime 

vendor contracting. 

We found that another factor that could be influencing the lack of pricing reviews in 

these commodities is the emphasis DLA management has traditionally placed on

increasing sales to customers rather than on the prices the prime vendors charge for 

items. Both the DCMA review and a DLA internal review noted the undue emphasis 

placed on sales data. DLA senior officials also acknowledged that this could be an 

issue. As noted in the following section, DLA is changing the metrics it reviews to 

include pricing as well as sales data. 

DLA Is Instituting Corrective Actions 

and Developing Policy Guidance for 

Prime Vendor Contracting 

DLA has developed corrective actions and has begun to implement some of these 

corrective actions such as increasing the number of audits and establishing additional 

training requirements for contracting officers and managers. However, some of the 

corrective actions DLA is taking have delayed order approval and delivery times for 

customers. In addition to the corrective actions it is implementing, DLA is also 

developing a policy to implement regulatory guidance for prime vendor contracting. 

DLA Has Initiated Corrective Actions

Senior DLA officials acknowledged that weaknesses in oversight led to the pricing 

problems highlighted in the media reports and at the congressional hearing and 

stated that they are instituting corrective actions. DLA has since conducted internal 

reviews and requested an external review by the Defense Contract Management 

Agency, which has been completed.14 In addition, DLA has requested the Defense 

Contract Audit Agency to perform audits under the food service equipment prime 

vendor program, which are expected to be completed by June 2006. As a result of the 

completed reviews, since December 2005 DLA has initiated several actions aimed at 

strengthening oversight, such as modifying contracts to change the price verification 

process and establishing additional training for contracting officers and managers. 

Because DLA is still in the process of implementing these actions, we did not evaluate 

them at this time. 

We summarized the main findings of the reviews and DLA actions to address these 

findings in table 1. 

 13FAR 17.207(c) requires that the contracting officer exercise options only after determining that 

(1) funds are available; (2) the requirement covered by the option fulfills an existing government need; 

(3) the exercise of the option is the most advantageous method of fulfilling that need, price, and other 

factors considered; and (4) that the option was synopsized in accordance with FAR Part 5 or properly 

exempted. 14Department of Defense Procurement Management Review, December 12, 2005 – January 25, 2006, 

Defense Contract Management Agency. 

Page 8 GAO-06-739R Defense Management 
Table 1: Summary of Main DLA and DCMA Findings and DLA Actions 

Finding/observation DLA actions

• Lack of management oversight. • Monthly briefings to DSCP Command on

pricing reviews and audits. 

• Annual procurement management reviews 

on prime vendor contracts. 

• All prime vendor contracts will be approved

by DLA headquarters. 

• Reorganizing the Procurement Directorate 

to provide more independent oversight of 

the supply chains. 

• Inadequate pricing reviews being 

conducted. 

• Ensuring prime vendor contracts comply 

with an established prime vendor pricing 

model. 

• Contracting officers documenting fair and 

reasonableness price determinations for 

orders over certain thresholds.

• Increasing the number of audits to ensure 

the government was not overcharged. 

• Modifying contracts to change the price 

verification process. 

• Requesting a price audit by DCAA. 

• Lack of knowledge or skills of 

contracting personnel, or a disregard 

for the contracting rules and 

regulations. 

• Establishing additional training for 

contracting officers and managers. 

• Reorganizing the Subsistence Directorate 

and revoking some contracting officers’ 

warrants. 

• Management metrics may be too 

narrowly focused on sales, fill rates 

and customer satisfaction. 

• Acquisition management metrics 

developed with a Monthly Command 

review. Now look at price as well as sales. 

• Prime vendor concept may not be 

suitable for all commodities. 

• Adjusting acquisition strategies to 

reassign programs to best procurement 

approach.a

Source: GAO analysis of DLA and DCMA data. 

a

For example, DLA has evaluated the acquisition of food service equipment and has determined not to continue acquiring food 

service equipment through a prime vendor. A new acquisition strategy is under development that will require the development 

of a contractual relationship primarily with manufacturers or their representatives for equipment and incidental services. 

Based on the Standards for Internal Controls in the Federal Government, a key 

internal control element is the monitoring of the quality and performance over time 

and ensuring that the findings of audits and other reviews are promptly resolved.15

 

Internal control should generally be designed to assure that ongoing monitoring

occurs in the course of normal operations, is performed continually, and is ingrained 

in the agency’s operations. It includes regular management and supervisory 

activities, comparisons, reconciliations, and other actions people take in performing 

their duties. However, DLA officials have acknowledged that a lack of management 

oversight led to the pricing problems noted in 2002, 2003, and again in 2005. 

 15GAO/AIMD-00-21.3.1. 

Page 9 GAO-06-739R Defense Management 
DLA’s Corrective Actions Have Resulted in Delays for Some Customers

The requirements for additional price verification and approval implemented by 

DSCP have resulted in delays in order approval and slowed delivery to some 

customers and resulted in additional resource requirements for DSCP. The delays 

and additional requirements have already led to some refinements being made in the 

verification requirements. For example, in January 2006, the maintenance, repair and 

operations (MRO)-Supplies commodity within the Construction and Equipment 

Directorate was initially required to perform a fair and reasonable price 

determination on all orders over $2,500 before the prime vendor could process the 

order. The average number of orders with a value of more than $2,500 received each 

month for this commodity is about 40,000, and each order contains, on average, 5 line 

items. Thus, the average number of lines that required price determinations was 

approximately 200,000 per month. All orders under $2,500 were to be reviewed by a 

statistical sample on a post-order basis. To assist in fulfilling this requirement, 

12 staff have been added since January 2006. In spite of the additional staff, the 

turnaround time to complete an order has risen from around 2 days to about 10, as 

approximately 8 days are required to perform the price determination. According to 

a manager in the Construction and Equipment Directorate, some customers are 

pulling back from using the prime vendor because of the delay. Some prime vendors 

have also reported a decrease in sales. 

Because of the delay and increase in resource requirements, the criteria for 

performing the fair and reasonable price determination were refined in February 

2006. MRO-Supplies management changed its policy of reviewing every order of 

$2,500 or more for a fair and reasonable price determination prior to the prime 

vendor processing the order to reviewing 30 percent of the orders with a value of 

$2,500 to $24,999 on a pre-order basis and the remaining 70 percent done post-order.16

However, MRO-Supplies is still reviewing all orders with a value greater than $25,000 

prior to the order being processed. In addition, a statistical sample of orders with a 

value of less than $2,500 will still be reviewed for a fair and reasonable price, some 

pre-order and some post-order, whereas previously, the entire sample was reviewed 

post-order. 

DLA is Developing New Policy

Guidance for Prime Vendor Contracting

In addition to the corrective actions being carried out, DLA is also developing a policy 

to implement regulatory guidance for prime vendor contracting. According to a DLA 

acquisition official, the policy will also establish the basis for lessons learned from

the reviews of prime vendor programs. Key points of the policy include: specific 

requirements for management oversight such as pricing and compliance audits; 

requiring all prime vendor contracts to comply with an established prime vendor 

pricing model; annual procurement management reviews for all prime vendor 

contracts; and requiring advance approval by headquarters for all prime vendor 

contracts, regardless of dollar value. Because this policy was still in draft form at the 

time of our review, we did not evaluate it. 

 16We note that the FAR generally requires a price determination on orders over $2,500 – FAR 2.101, 

FAR 13.106-3 and FAR 16.505(b)(3). 

Page 10 GAO-06-739R Defense Management 
Conclusions 

The prime vendor concept can be a useful approach to acquiring commercial goods 

and services, reducing delivery times, and decreasing the need for and costs of 

maintaining government inventory, but until DOD’s prime vendor program receives 

the level of oversight it has been lacking, it remains vulnerable to the systemic pricing 

problems that have plagued it in the past. DLA’s 2002 and 2003 internal reviews 

recommended corrective actions and DLA officials agreed to implement changes to 

better oversee prices. However, these changes, which included policies and 

procedures for pricing reviews, failed to prevent the problems highlighted in October 

and November 2005 because of a lack of management oversight by both logistics 

agency and supply center officials. Therefore, the new actions DLA is taking may not 

be effective until DLA provides the continual oversight which has been lacking. 

Recommendation 

We recommend that the Secretary of Defense direct the Undersecretary of Defense, 

Acquisition, Technology and Logistics to ensure that the Director of the Defense 

Logistics Agency provide continual management oversight of the corrective actions 

to address pricing problems in the prime vendor program. 

Agency Comments and Our Evaluation 

In written comments on a draft of this report, the Deputy Under Secretary of Defense 

for Logistics and Materiel Readiness, which is responsible for DLA oversight, 

concurred with our recommendation and identified corrective actions already being 

taken by DLA. DOD noted that DLA is committed to implementing the corrective 

actions and has assigned additional resources to oversee prime vendor contracts. In 

addition, the department stated that DLA will continue to monitor prime vendor 

programs to ensure the actions taken will produce the intended results. We noted 

that DOD’s comments did not address what actions the Office of the Under Secretary 

of Defense for Acquisition, Technology, and Logistics would take to ensure that DLA 

will provide continual management oversight and contacted the office to clarify its 

role in overseeing DLA’s corrective actions. We were told by a senior official from 

the Under Secretary’s office that the office of the Deputy Under Secretary of Defense 

for Logistics and Materiel Readiness will review the implementation of the corrective 

actions in its regular management meetings with DLA. The written comments from 

the Deputy Under Secretary of Defense for Logistics and Materiel Readiness are 

included in enclosure 1 of this correspondence. 

Scope and Methodology 

To determine the extent of pricing reviews conducted by DLA for items purchased 

through a prime vendor, we analyzed 16 prime vendor contracts (10 food service, 

1 subsistence, and 5 maintenance, repair and operation), two contracts with the 

manufacturer of an aircraft refrigerator and four delivery orders to prime vendors for 

the same refrigerator to determine pricing control and audit requirements, and 

reviewed internal and external assessments of DLA’s procurement management. In 

addition, we reviewed policies and procedures governing the use of prime vendors 

Page 11 GAO-06-739R Defense Management 
and prior GAO reports on the subject. Further, we discussed the mechanisms used to 

monitor price with DLA and DSCP officials; prime vendors located in Columbia and 

Lexington, South Carolina; customers located at Fort Jackson, South Carolina, and 

Fort Stewart, Georgia; a Naval Sea Systems Command official in Philadelphia,

Pennsylvania; and a manufacturer located in Philadelphia, Pennsylvania. 

To determine the extent to which DLA has addressed the pricing issues identified at 

the November 2005 hearing we discussed with DSCP and DLA officials their ongoing 

and planned actions to rectify the management oversight weaknesses identified 

within the DSCP prime vendor programs and the changes and adjustments made to 

prime vendor contracts since they were first awarded. We also discussed with DCMA 

and DCAA the prime vendor contract and pricing reviews those agencies were 

conducting at DLA’s request. Finally, we discussed the impacts of DLA’s corrective 

actions with DSCP officials and with prime vendors located in Columbia and 

Lexington, South Carolina. 

We conducted our review from December 2005 through April 2006 in accordance 

with generally accepted government auditing standards. 

We are sending copies of this report to the Undersecretary of Defense, Acquisition, 

Technology and Logistics; the Deputy Undersecretary of Defense for Logistics and 

Materiel Readiness; the Director, Defense Logistics Agency; and interested 

congressional committees. We will also make copies available to others upon request. 

In addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

Please contact me at (202) 512-8365 or solisw@gao.gov if you or your staff have any 

questions concerning this report. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. Key 

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Enclosure 

Page 12 GAO-06-739R Defense Management 
Enclosure 

Comments from the Department of Defense 

Page 13 GAO-06-739R Defense Management 
(350789) 

Page 14 GAO-06-739R Defense Management 
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