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For Pentagon, the price isn't right

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Bloomberg’s recent reporting that Department of Defense companies like Textron’s Bell Helicopter unit and Boeing charged the Pentagon massively inflated prices for several commercial parts, including aluminum gears and sleeves, round inner caps, bushings and a pin, should not come as a surprise to anyone familiar with the operations of what Sen. John McCain (R-Ariz.) correctly calls “the military industrial congressional complex.”

 However, these revelations make it clear that this complex is out of control and must be reined in.

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 Unfortunately, the Pentagon’s leadership and Congress do not appear to be moving swiftly to deal with these massive overruns for commercial parts. Indeed, the Pentagon may overpay Bell another $2.6 million in the next year. 

 If we pay more than $8,000 for a gear that should normally cost less than $500, more than $2,000 for a $10 aluminum sleeve, almost $500 for a $52 pin, or even $300 for a $26 1-inch bushing, how can we expect to pay the right price for several-billion-dollar systems like the F-35 Joint Strike Fighter and the Littoral Combat Ship (LCS)? 

 The total costs of all of the DOD’s major acquisitions programs have increased by more than $400 billion over the initial cost estimates — hardly sensible defense spending. It is hard for most members of Congress and the public to determine whether it makes sense to pay nearly $400 billion to develop and produce some 2,400 F-35 fighter jets, and another $1 trillion to operate them, but they sure know what a common commercial spare part should cost. This issue is something that the American people can relate to.

 Not surprisingly, the companies involved are fighting back. Bell said that it “does not agree with the findings” of the DOD Inspector General and that it offers the U.S. government the “best price on commercial items.” Boeing did refund the Pentagon $3.2 million — just 23 percent — of the $13.7 million that the IG found Boeing had overcharged the Pentagon, leaving the taxpayers on the hook for “only” the remaining $10.5 million.

 I can tell you from personal experience that we do not have to let the companies get away with such blatant overcharging. Some 30 years ago, as the assistant secretary of Defense for manpower, reserve affairs, installations and logistics, I was put in charge of dealing with the fallout from the Pentagon’s most infamous spare parts scandal, the $640 toilet seat. While it was actually a whole lavatory ensemble for a Navy P-3C Orion plane, trying to justify the cost was a dead end politically. I knew that my boss was going to testify before Congress and face heated questioning about this “golden toilet seat.” 

 Right before the hearing, I called the president of Lockheed, Lawrence Kitchen, and told him that unless he dropped the price significantly, billions of dollars in contracts would be jeopardized. His first offer was to reduce the price by $100, making it a $540 toilet seat, claiming it was a nonissue. After about a half hour of haggling, he finally agreed to reduce it to $100, saving the taxpayers 85 percent over the original price.

 On the Sunday talk shows I never tried to justify the cost.  Instead, I said we needed to use this opportunity to deal with the cost overruns in major programs and other areas where we were wasting money. For example, a military retirement system had an unfunded liability over $500 billion, a procurement system was too rigid and overcomplicated, and there were nearly 40 percent more bases than the services actually needed. 

 In response to this scandal and others, including the infamous $435 hammer, our leaders took prompt, decisive action to fix the roots of the problems. President Reagan appointed a commission chaired by David Packard, a former deputy secretary of Defense, to reform defense acquisitions. Congress created the Base Realignment and Closure process that has resulted in total savings of about $50 billion, and the Pentagon changed its retirement system to work on an accrual basis and cut the standard pension from 50 percent to 40 percent of base pay after 20 years of service.

 Unfortunately, I do not see anyone in the Pentagon or on Capitol Hill using this revelation to deal with the overcharging and contracting problems the DOD has, let alone the massive cost overruns or pork barrel issues that still plague the Pentagon. As Rahm Emmanuel, the current mayor of Chicago and former White House chief of staff, put it, we should never let a crisis go to waste.   

 There are several short-term things the DOD can do to make pricing and contracts more transparent and hold companies to account, as well as deal with other major cost issues. An immediate solution would be for the DOD to refuse to continue to pay Bell and Boeing these inflated amounts for spare parts.

 The DOD also needs to know the real-world prices for common commercial parts so it won’t be an easy mark. In particular, Defense Logistics Agency (DLA) personnel must be adequately trained and funded. The most recent overcharging incident came from the DLA’s failure to perform an accurate price analysis when negotiating the contract. With responsibility for 85 percent of the military’s spare parts, improving the DLA’s staffing and training will pay for itself quickly.

 Moreover, the DOD keeps track of historic cost data for several major weapons systems, but price data on commercial parts is either incomplete or nonexistent — another obvious fix.

 On the commercial end, private companies reluctant to release detailed cost estimates and ranges need to face more pressure to make this information accessible to DLA personnel. Having the tools to perform accurate price verification from the onset would save the DOD time and money upfront. The DOD should also beef up the Defense Contracts Auditing Agency, whose audits should be keeping the companies honest, but which is suffering under a years-long backlog of contracts and inconsistent performance. More competition for contracts, and breaking up large contracts, would also prevent the present abuse and price inflation seen in sole-source deals.

 Over the long term, even this blatant overcharging for spare parts is dwarfed by the amount of money the DOD has committed to flawed big-ticket programs. Pentagon officials should harness this most recent scandal to tackle the harder challenges, such as canceling the Navy variant of the Joint Strike Fighter, reducing the buy of the LCS from 32 to 20, encouraging another round of base realignment and closure, and reforming the military compensation system. Both the Pentagon and the Congress should use this overcharging crisis to make the needed reforms to the DOD’s acquisitions and personnel systems. Simply put, Defense needs to stop paying more and getting less — something American taxpayers can relate to.

 Korb is a senior fellow at the Center for American Progress and a senior adviser to the Center for Defense Information. Genie is a research assistant at CAP.

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