GAO

United States General Accounting Office

Report to Congressional Requesters

October 1999 CONTRACT 

MANAGEMENT

Pilot Program Needed 

to Improve DOD 

Identification of 

Warranty Claims

GAO/NSIAD-00-3

Page 1 GAO/NSIAD-00-3 Contract Management

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-282104 Leter

October 29, 1999

The Honorable John W. Warner

Chairman

The Honorable Carl Levin

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Floyd D. Spence

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on Armed Services

House of Representatives 

Section 391 of the Fiscal Year 1998 National Defense Authorization Act

(P.L. 105-85) authorized the Secretary of Defense to carry out a pilot 

program to use commercial sources to improve the collection of 

Department of Defense (DOD) claims under aircraft engine warranties. The 

act required that, if established, the pilot program, and program contracts, 

terminate on September 30, 1999. However, on October 5, 1999, section 382 

of the National Defense Authorization Act for Fiscal Year 2000 (P.L. 106-65 ) 

extended the termination date of the pilot program until September 30, 

2000. Although authorized, neither act requires a pilot program.

The legislation directs us to review the results of the pilot program. Since 

DOD has not yet initiated a pilot program, we are providing this interim 

report that (1) identifies the benefits obtained by some private sector users 

of aircraft engine warranty services and (2) assesses the efforts DOD has 

made to evaluate the feasibility of establishing a pilot program.

Generally, a warranty requires that a manufacturer repair or replace 

defective goods covered by the warranty without cost to the purchaser or 

pay the purchaser’s costs of correcting a defect. Defects or deficiencies 

may be caused by poor design, faulty manufacturing processes, or the use 

of materials that do not meet contract specifications. 
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Results in Brief Some commercial airlines have benefited from the use of outside firms to 

identify failed engine parts and recover the cost of correcting such parts 

from manufacturers. Officials from United Parcel Service, United Airlines, 

and America West told us that their engine warranty recoveries increased 

over internally identified recoveries when they supplemented internal 

efforts with an outside firm. In one case, warranty recoveries increased 

threefold over recoveries identified internally.

To date, DOD has performed a limited review of the feasibility of 

establishing a pilot program, but has not established one. The Army and the 

Navy made a limited assessment of a potential pilot program and 

concluded that it would likely not be useful to them. They believe any 

additional claims that may be identified and amounts recovered would not 

be worth the anticipated cost to execute a pilot program. The Air Force 

sought industry’s interest in a pilot program by synopsizing the program’s 

requirements in the Commerce Business Daily in November 1998. However, 

the Air Force did not issue a request for proposals, in large part because of 

concerns that the program could not be executed in the 10 months 

remaining before authority to conduct a pilot program was set to expire on 

September 30, 1999. Concerns that contractors would not be paid after that 

date was also a factor. 

Experience from the private sector suggests that contracting for engine 

warranty administration can improve warranty recoveries over internal 

efforts. This includes collecting claims on past engine repairs even though 

the warranties are no longer active. However, it is unknown whether the 

results achieved by some commercial airlines can be replicated in DOD 

since a pilot program has not been implemented. The Congress recently 

extended the authority for a pilot program until September 30, 2000. 

However, the additional time may still not be sufficient. This report 

suggests that the Congress consider expanding the pilot program to test 

whether DOD could benefit from using commercial sources to increase 

recoveries on aircraft warranties.

Background In December 1997, a firm submitted an unsolicited proposal to the Air 

Force to provide warranty recovery services for aircraft engines. The firm 

currently provides services to commercial airlines and operates under a 

contingency contract, receiving a fee based on net collected funds. 

Therefore, its customers incur no financial burden. Hourly rates or other 
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related costs, such as equipment, staffing, and data processing, are not 

associated with a contingency fee contract.

The Air Force rejected the unsolicited proposal because it failed to meet 

the first criterion of a valid unsolicited proposal, as defined by the Federal 

Acquisition Regulation. The Federal Acquisition Regulation states that a 

valid unsolicited proposal must be innovative and unique. According to the 

Air Force, the proposal merely offered services the Air Force already had 

and was not innovative and unique.

The Senate Committee on Armed Services, in its report accompanying the 

Fiscal Year 1998 National Defense Authorization Act, expressed concern 

that DOD was not receiving appropriate refunds for repair of systems 

covered by warranties. In June 1996,1

 we reported that warranties on 

weapon systems returned only about 5 cents for every dollar spent on the 

warranty. One cause for the low return was the low rate of claims 

submitted on warranted items. Both the fiscal year 1998 and the 2000 

authorization acts allow the Secretary of Defense to enter into contracts 

under a pilot program to provide for the following services:

• Collecting on warranty claims.

• Determining the amounts owed DOD for repairs of aircraft engines 

covered by warranties.

• Identifying and locating information sources relevant to collecting 

claims under aircraft engine warranties.

• Suggesting training programs to improve DOD’s collection of warranty 

related information needed to process warranty claims.

The legislation requires that a contractor be paid a percentage of any 

amounts recovered as deemed appropriate by the Secretary of Defense.

Private Sector Finds 

Value in Contracting 

for Warranty Services

United Parcel Service, United Airlines, and America West contracted with a 

private firm2

 that provides aircraft engine warranty services. United Parcel 

Service and United Airlines officials said they hired this firm because it 

offered a no-cost service to determine if their warranty administration 

1 Weapons Acquisitions: Warranty Law Should Be Repealed (GAO/NSIAD-96-88, June 28, 

1996).

2 This is the same firm that submitted the unsolicited proposal to the Air Force. 
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departments were identifying all defective warranted parts and then 

recovering the cost to fix such parts from the manufacturer. America West 

contracted with this same firm because its aircraft engine warranty 

department was backlogged.

Each of the airlines found that this firm increased engine warranty 

recoveries over recoveries found internally.

• At United Parcel Service, this firm increased warranty recoveries more 

than threefold, from June 1998 through March 1999. As a result, the 

company decided to contract its engine warranty administration to this 

firm. 

• At United Airlines, the firm increased warranty recoveries just under

2 percent, or approximately $500,000, from June 1998 to February 1999. 

United decided to continue contracting with this firm. United believes 

the combined efforts of its warranty administrators and this outside firm 

maximizes the identification and recovery of warranty claims. 

• At America West, this firm increased warranty recoveries, but officials 

would not quantify the increase because their company policy is not to 

discuss their supplier relationships with third parties. America West 

contracted with this firm from July 1997 through July 1998 but decided 

not to continue contracting with any engine warranty recovery 

company. It would not provide a reason but America West officials did 

state that currently about 71 percent of their 276 engines are maintained 

by engine manufacturers under a power-by-the-hour program. This 

program precludes the need for warranty coverage because, for a fixed 

price, the engine manufacturer provides engine maintenance.

Airline officials told us that, initially, the outside firm needed time to learn 

where company engine maintenance data was stored and how to retrieve it. 

After the initial learning period, the firm’s activities were transparent and 

not disruptive to normal company operations. They also confirmed that the 

firm was successful in getting manufacturers to pay claims on past engine 

repairs and overhauls even though engine warranties were no longer 

active. The collection process, they said, was not contentious.

DOD Has Performed a 

Limited Review of Pilot 

Program Feasibility 

The services performed a limited review of the feasibility of a pilot 

program. The Army and the Navy made a limited assessment of a potential 

pilot program and concluded that it would likely not be useful to them. 

They believe any additional claims that may be identified and amounts 

recovered would not be worth the anticipated cost to execute a pilot 
B-282104

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program. Army and Navy officials stated that although the pilot program is 

intended to be a no-cost effort, costs would be incurred in the form of

• issuing and evaluating a request for proposals,

• awarding a contract, and 

• supporting a contractor in the contractor’s effort to (1) understand how 

engine maintenance data is maintained and then (2) collect the data for 

the contractor’s review. 

This support, these officials said, would be labor intensive because much of 

the data is in both paper and electronic files and is located at military bases 

throughout the world.

In addition, Navy officials emphasized that DOD and commercial 

warranties differ. For example, DOD warranties often have a time limit for 

filing claims. These officials also pointed out that the military environment 

is less predictable than the commercial environment and may lead the 

military to operate engines at performance levels that could invalidate 

warranties. 

In October 1998, the Army and the Navy gave their views on establishing 

pilot programs in a memorandum to the Director of Defense Procurement. 

The Army stated it had no need to participate in a pilot program because it 

had no outstanding warranty claims. As noted previously, the legislation 

was not restricted to collection services, and a specific purpose of the 

legislation is the identification of potential claims. The Navy stated it could 

not identify any engines to use in a pilot program, but it was continuing to 

explore possible opportunities. No Navy engines have yet been identified, 

and Navy officials told us they believe a pilot program covering commercial 

equivalent engines, such as those bought by the Air Force for cargo and 

transport aircraft, would be more likely to succeed. 

Air Force officials also expressed concern about the differences between 

DOD and commercial warranties and questioned whether the anticipated 

cost to execute a pilot program would exceed the amounts recovered. 

However, the Air Force decided to further explore the feasibility of a pilot 

program and synopsized the requirements of the pilot program in the 

Commerce Business Daily. The Commerce Business Daily announcement 

was a request for information to obtain industry’s input and concerns and 

to determine if there was enough interest in a pilot program given its 

requirements. 
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Four firms responded to the request for information and, although 

interested, believed the proposed requirements presented a high-risk 

program. For example, one firm questioned whether the program could be 

executed because the period for implementation was so short. The 

synopsis was published on November 26, 1998, and the authority to 

conduct a pilot program was set to expire 10 months later, on

September 30, 1999. During the 10-month period, the Air Force would have 

to issue a request for proposal, select a contractor, and execute the 

program. The contractor would have to become familiar with Air Force 

electronic databases and document filing systems, identify and document 

warranty claims, collect amounts due, and then be paid. 

Another firm responded that the pilot program was high risk because the 

potential base for warranty recoveries was small. The Air Force selected 

only one engine with an active warranty for the program, precluding 

coverage of other engines and of engines whose warranties had expired. 

This firm claimed the basis of its success is its ability to obtain higher 

warranty recoveries than its customers recover through their own efforts, 

including validating claims on past engine repairs after a warranty has 

expired.

The other two firms expressed concern about recovery of their fees after 

the program terminated. The request for information advised that 

contractors were to be paid from amounts recovered only until the 

expiration of the pilot. Therefore, any funds recovered later would be 

returned to the Treasury. 

In January 1999, the Air Force Materiel Command concluded a warranty 

claims recovery pilot program would be impractical and recommended that 

the Air Force not pursue a contract. 

Conclusions The time needed for DOD to award a contract and for a contractor to 

become familiar with DOD records suggests the need for a longer 

implementation period for the pilot program than the additional 1 year 

provided by the fiscal year 2000 act. Additional authority is also needed to 

clearly allow contractors to be paid for claims outstanding at the end of the 

pilot program (once collections have occurred). Also, private sector 

experience has shown that warrantors will pay claims on past engine 

repairs and overhauls, even though engine warranties are no longer active. 
B-282104

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Matters for 

Congressional 

Consideration

In order to fully test the concept of using the private sector to increase 

warranty recoveries, the Congress may want to

• require that the Department of Defense undertake a pilot program;

• authorize a 2-year pilot program;

• authorize contractors to be paid, at least in part, for claims identified but 

not recovered by the end of the pilot program (once those recoveries are 

made); and

• direct that the program be structured to allow the review of both active 

and expired aircraft engine warranties.

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, DOD stated that (1) evidence 

presented by the draft report showed that only one of three private firms 

benefited significantly from the use of third-party warranty services; (2) the 

report does not fully address differences in the operational requirements, 

warranty provisions, warranty administration practices, and operational 

environment (including the location of deployed equipment at sea or in 

combat zones) and does not substantiate that DOD would benefit from 

such services; and (3) the report does not address fully the costs of 

obtaining third-party warranty services because the unsolicited proposal 

included a separate payment in addition to the contingency fee. DOD 

disagreed with the desirability of allowing contractors to be paid, at least in 

part, for claims identified but not yet recovered by the end of the contract 

period, saying that contractors should be paid for recoveries, not claims. 

DOD also disagreed with our suggestion that the pilot program should 

cover expired as well as active warranties because it would increase the 

administrative burden. (DOD’s comments are reprinted in app. I.)

The point of a pilot program is to test the costs and benefits of a practice 

that has been successful in the private sector. We believe the evidence 

provided in this report supports establishing a pilot program and we 

modified the matters for congressional consideration to suggest that the 

Congress require DOD to implement a pilot program. The report 

demonstrates that a similar program provided benefits when used in the 

private sector. The benefits in the form of increased recoveries were 

significant enough for commercial airlines that two of the three airlines 

discussed continued the third-party warranty recovery program. While the 

third airline did not continue the program, it did indicate that recoveries 

increased and stated that 71 percent of its engines are maintained under a 

power-by-the-hour program, precluding the need for warranty coverage.
B-282104

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While there are differences in the environment in which DOD operates, the 

purpose of the pilot program is to test the significance of these differences. 

And while aircraft are deployed worldwide, the bulk of maintenance work 

for a specific aircraft takes place at particular depots and particular bases, 

making the worldwide deployment of DOD aircraft less of an obstacle than 

portrayed by DOD. 

The unsolicited proposal received by the Air Force did include a separate 

payment for performance of recovery work. We were told by the firm that 

submitted the proposal that Air Force officials suggested that a separate 

payment be included because it was difficult to price a contingency fee 

contract without the special authority provided by the pilot program. Air 

Force officials confirmed this statement. 

We agree with DOD that contractors should be paid for recoveries, not 

claims. DOD misinterpreted our recommendation. We are recommending 

that authority be provided so that contractors can be paid (on claims 

identified during the pilot program) for recoveries that occur after the pilot 

program has ended. We have modified our recommendation to clarify this 

point.

Finally, we believe that the pilot program should include coverage of 

expired warranties based on the experience of commercial airlines. At 

commercial firms, claims were identified and collected for both active and 

expired warranties. We believe the purpose of a pilot program is to test the 

value of different approaches so a more informed program design can be 

developed. 

Scope and 

Methodology

To assess DOD’s efforts to evaluate the feasibility of establishing a pilot 

program, we obtained information on the process the Office of the 

Secretary of Defense and the military departments went through to assess 

feasibility. We also interviewed responsible officials to obtain their views 

on the merits of the proposed pilot. To examine private sector experience 

with warranty recovery, we interviewed officials from a firm specializing in 

aircraft warranty recoveries and three of its customers—United Parcel 

Service, United Airlines, and America West.

We performed our review from February 1999 through August 1999, in 

accordance with generally accepted government auditing standards.
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We are sending copies of this report to the Honorable William Cohen, 

Secretary of Defense; the Honorable F. Whitten Peters, Secretary of the Air 

Force; the Honorable Louis Caldera, Secretary of the Army; the Honorable 

Richard Danzig, Secretary of the Navy; Lieutenant General Henry T. 

Glisson, Director of the Defense Logistics Agency; the Honorable Jacob 

Lew, Director of the Office of Management and Budget; and other 

interested parties. We will make copies available to others upon request.

Please contact me at (202) 512-4587, if you or your staff have any questions 

concerning this report. Key contributors to this report were Charles W. 

Thompson, Karen S. Zuckerstein, and Daniel J. Hauser.

David E. Cooper

Associate Director

Defense Acquisitions
Page 10 GAO/NSIAD-00-3 Contract Management

Appendix I

Comments From the Department of Defense ApendxIi

Note: GAO’s comment 

supplementing those in the 

report text appear at the 

end of this appendix.
Appendix I

Comments From the Department of Defense

Page 11 GAO/NSIAD-00-3 Contract Management
Appendix I

Comments From the Department of Defense

Page 12 GAO/NSIAD-00-3 Contract Management

See comment 1.

Now on p. 7.
Appendix I

Comments From the Department of Defense

Page 13 GAO/NSIAD-00-3 Contract Management
Appendix I

Comments From the Department of Defense

Page 14 GAO/NSIAD-00-3 Contract Management

The following is GAO’s comment on the Department of Defense’s (DOD) 

letter dated October 8, 1999.

GAO Comment 1. While the data is several years old, DOD did not make updated data 

available to us. We are not aware of any information that suggests that the 

situation is significantly different.

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