July 13 (Bloomberg) -- The Army is weighing changes in General Dynamics Corp.’s contract to maintain Stryker armored combat vehicles after the Pentagon’s inspector general found the terms led to excess spending of as much as $336 million, or 23 percent.
The no-bid contract resulted in “little, if any, cost risk for the contractor or incentive to control costs,” the inspector general said in an audit. The Army responded by starting a “business case analysis” of potential changes, according to Ashley Givens, spokeswoman for the service’s Ground Combat Systems.
Under contracts that began in 2002 and were awarded without competition, General Dynamics is paid to perform maintenance and to buy, store and issue spare parts for the Army’s 2,576 Stryker vehicles, which were built by the company.
The 19-ton, eight-wheeled vehicles have driven an estimated 40 million miles (64 million kilometers) during the Iraq and Afghan wars. Seventy-seven Strykers have been destroyed in battle since 2002, and 435 were damaged.
Since the first contract in May 2002, Army officials “have made no progress in converting the high-risk cost-reimbursable contract or portions to a preferred lower risk, firm-fixed contract,” the audit, dated June 18, found. “As a result, the Stryker contract was at a higher risk of misuse, waste and inadequate accountability.”
Contracts promising to reimburse costs plus a fixed fee provide “the least incentive for the contractor to control cost and perform in an efficient manner,” according to the inspector general, echoing past criticism of such deals by Congress, President Barack Obama and the Army’s own auditors.
The Army has issued three such contracts to Falls Church, Virginia-based General Dynamics, including the current six-year award in 2006 that is set to expire in February.
General Dynamics spokesman Kendall Pease referred a request for comment to the Army, saying in an e-mail that the audit reflects a “contracting philosophy debate” between the Army and the Defense Department.
Givens, the Army spokeswoman, said in an e-mail that the inspector general’s recommendations “represent acquisition and contracting practices that will improve logistics support strategy, plans and execution moving forward.”
Army officials said in comments in the inspector general’s report that the type of contract used was necessary to keep Strykers in Iraq and Afghanistan at high readiness levels.
General Dynamics’ fee was tied directly to that sole goal of readiness, encouraging the company to spend freely on spare parts even if they exceeded demand, the inspector general’s report found. The company purchased some of the excess parts from itself and others from suppliers, according to the audit.
The Army contracted with General Dynamics to spend through February “about $1.453 billion but we calculated the operational support costs at about $1.117 billion for the first five years, resulting in about $335.9 million” of excess spending “that could have been put to better use,” the audit found.
General Dynamics has been paid $1.1 billion so far for the first four years of the current contract, including all of its potential fee of $99.9 million.
The inspector general questioned whether General Dynamics should have received the entire fee because the contract’s metrics were vague and it “had no means to measure the efficiency of the contractor’s cost performance or actual overruns or under-runs in relation to the fixed fee.”
The fifth year’s $317 million payment hasn’t been made. The Army has yet to obligate funds for the sixth year valued at $341.2 million, including the fee.
The Army’s use of the “cost-plus” contracts for Stryker maintenance has been criticized by the service’s Audit Agency, which warned in December 2005 that the approach “provided minimal incentive for the contractor to control costs” and recommended fixed-price deals instead.
Such contracts have also been criticized more broadly. Congress urged the Pentagon in 2006 to use more fixed-price clauses in development, production and service work.
Obama issued a government-wide memo in March 2009 urging limits on the use of cost-plus contracts that are “wasteful, inefficient, subject to misuse or otherwise not well-designed to serve the interests of the American taxpayer.”
To contact the reporter on this story: Tony Capaccio in Washington at email@example.com
To contact the editor responsible for this story: John Walcott at firstname.lastname@example.org