Sikorsky Made Excess Profit on Pentagon Parts Sold to Army

Sikorsky Aircraft Corp. made excess profit selling the U.S. Army helicopter parts that it bought at a lower price from the Pentagon’s primary supply agency, the Defense Department’s inspector general says.

Sikorsky, a unit of Hartford, Connecticut-based United Technologies Corp. (UTX), charged the Army $2,510.06 apiece for six UH-60 Black Hawk seat assemblies it bought from the Defense Logistics Agency for $143.26 each -- a mark-up of $14,201 or 1,652 percent, according to a 66-page audit.

“The excessive prices charged have no relationship to Sikorksy’s standard markup,” said the audit obtained by Bloomberg News. The report was sent to congressional committees yesterday. A two-page summary is scheduled to be released today.

“A more cost-effective, commonsense procurement strategy is needed,” said the audit, signed by Bruce Burton, deputy assistant inspector general for acquisition.

Sikorsky “continues to disagree with the vast majority of the IG’s subjective conclusions and recommendations,” said company spokesman Paul Jackson.

The audit was based on an examination of 332 parts that constituted about 80 percent of the total value of items Sikorsky was contracted to furnish from 2009-2012. The IG compared these to parts in Defense Logistics Agency inventories.

Second Audit

The audit is the second this year to examine overpricing and Army management of Sikorsky’s 9-year-old, $1.4 billion Black Hawk maintenance and a technical support contract at its Corpus Christi, Texas, depot. The Army Aviation and Missile Life Cycle Management Command, or AMCOM, runs the contract.

The inspector general also found overpricing and excess inventory issues with a Boeing Co. (BA) contract.

Defense Secretary Leon Panetta has told Congress he plans to wring additional efficiencies from Pentagon management of weapons contracts and support. The audit indicates potential savings areas, using millions of dollars of excess inventory in Pentagon warehouses instead of buying from the contractor.

“It is a waste of DoD funds to procure the same items from Sikorsky at much higher prices when DLA has sufficient existing inventory to meet requirements,” the audit said. “This is not the first time we identified unused inventory relating to contractor logistics support contracts.”

Pentagon press secretary George Little today said Panetta was aware of the report.

‘Hard Look’

“Any time there is overcharging in the procurement process, that’s an issue,” Little told reporters. “Efficiencies have been a priority and we need to take a hard look at where we can achieve additional” savings, he said. “We need to take all steps to ensure we’re not wasting money.”

Senator Tom Carper, a Delaware Democrat who’s pushed for improved bookkeeping, said in a statement today the report “details even more troubling and disappointing examples of wasteful spending” that “we simply can’t afford.”

The report, entitled “Changes Are Needed to the Army Contract With Sikorsky,” discloses not only the excess profits but also as much as $58.7 million in “excess inventory that could be used” on Black Hawk maintenance.

“The DLA had sufficient inventory to satisfy annual contract requirements for 3,267 items and the Sikorsky contract price was $7.6 million, or 85.1 percent higher than the DLA price,” it said.

Procedures Faulted

The inspector general discovered that the Army planned to buy from Sikorsky for $276.7 million items in the Pentagon agency’s inventory it valued at $205.9 million.

In one example, the Army’s 2010 contract called for buying from Sikorsky two lenses to cover a light. The agency has 3,532 in stock costing $49.98 apiece; the Army contract called for paying $628.13 apiece, or 1,156.8 percent higher, the audit said.

The IG concluded the Army already paid Sikorsky $230.7 million for 1,676 items valued at $46.8 million it could have used from DLA inventories.

Army officials “did not develop procedures to fully use existing DLA inventory before procuring the same items from Sikorsky,” the report said.

Army Comment

The Army, DLA and Sikorsky “used different systems to manage inventory and no system provides total asset visibility” to match requirements, it said.

Army spokesman Dan O’Boyle, in an e-mail, said the service “appreciates and acknowledges there are areas that require improvement, specifically in the areas of developing economic quantities, more in-depth price analysis and inventory management.”

O’Boyle defended the Sikorsky contract, noting “it’s important to bear in mind that we now have a validated 10 percent readiness rate increase and a current 94 percent parts availability rate compared to the 40 percent rate before the partnerships began.”

“Put simply, we’re getting transmissions and engines out to soldiers when they need them,” he said.

The command “looked at the total number of parts to make sure the overall deal was reasonable and we found the deal was reasonable. More than 1,900 of those parts were under the historical price as compared to the DLA prices.”

‘Unjustified’ Payment

Still, the audit concluded AMCOM mismanaged a “material cost reduction clause” intended to lower expenditures and “made an unjustified incentive payment” to Sikorsky because IG calculations showed depot costs increased by $29.3 million.

“Sikorsky operates under a culture of full compliance and continuous improvement,” Jackson said. “We have been cooperating fully with the DoD IG and AMCOM throughout the process. We recognize the DoD IG periodically examines the contracts of many companies and that this contract is one of a series under review.”

“We negotiated this contract, in good faith with the goal to provide unparalleled service levels at a reasonable price,” he said. “We believe we have demonstrated our value to the Army customer in our performance under this contract.”

The IG concluded from a sample of parts resold between 2008 and 2010 to the Army from the DLA that Sikorsky “was allowed to make excessive profit of about $930,760.”

Sikorsky made about $57,847 on 2010 sales, which included a full mark-up of 28.9 percent, including 17.3 percent profit, said the audit.

The Army since has negotiated $217,842 in lower 2010 prices for 29 items and is reviewing the contract, the IG said.

Still, “We question the appropriateness of paying the DLA price -- cost plus markup to cover overhead expenses -- plus a full markup of 28.9 percent to Sikorsky to obtain material from DLA warehouses.”

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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