Russia-Lithuania Contractors Face U.S. Suspension Threat

Russian Contractor Team Faces U.S. Army Suspension After Audit
The U.S. provides the medium-lift Mi-17 helicopters to countries including Pakistan, Afghanistan and Iraq that are familiar with the Russian aircraft. Source: U.S. Air Force via Bloomberg

U.S. Army officials will review a Lithuanian-Russian team for possible suspension or debarment from American military work over delays and cost increases on a contract to overhaul helicopters.

The move comes after the Pentagon’s inspector general found that AviaBaltika Aviation Ltd. based in Kaunas, Lithuania, and Saint Petersburg Aircraft Repair Co., based in the Russian city of the same name, failed to comply with terms of an Army contract to upgrade 10 Russian-made Mi-17 helicopters within six months, including a refusal to provide access to quality-control personnel.

Eight of the aircraft were for the Pakistani Air Force and two were for the U.S. Army, which uses them for training at Fort Rucker, Alabama. The planned six-month overhauls took as long as 19 months for the Pakistanis, leaving its military without the choppers in August 2010 during the country’s worst-ever flooding. The U.S. aircraft took 26 months to overhaul.

“Our report contains enough information to initiate consideration of suspension and debarment,” according to the audit dated Sept. 27 and signed by Jacqueline Wicecarver, the Defense Department’s assistant inspector general for acquisition and contract management. The 151-page audit, marked “For Official Use Only,” was obtained by Bloomberg News.

AviaBaltika’s attorney, Robert Burton of Venable LLP in Washington, said his client denied any wrongdoing.

“We have not seen the full report, but the summary and its recommendations are inaccurate and we plan to fully rebut them,” Burton said in an e-mail.

Information about any delays on the contract is incorrect, Alexander Gruzdev, chief engineer for Saint Petersburg Aircraft Repair Co., said in a phone interview. He declined further comment, saying details of the contract are private.

‘Unnecessary’ Costs

The U.S. provides the medium-lift Mi-17 to countries including Pakistan, Afghanistan and Iraq that have experience with the Russian aircraft. The two companies, acting as subcontractors to Northrop Grumman Corp., are performing the overhauls in Russia.

What began as a $37.7 million job has increased to $64.2 million and may cost as much as $76.8 million, more than double the original estimate, if the Army pays the subcontractors’ pending claim for $12.6 million. The increase included about $12.9 million for the purchase of unauthorized parts in a pattern of “unquestioned, unnecessary additional costs,” the audit found.

Lax Oversight Found

The Pentagon audit found that lax oversight by Army contracting officials at Redstone Arsenal in Huntsville, Alabama, let aircraft parts be overpriced by as much as double a U.S. supplier’s quotes.

While the Lithuanian and Russian companies repeatedly blocked Pentagon and contractor quality-control specialists from inspecting the overhauls, Army contracting personnel kept paying them, according to the audit.

The contracting personnel “did not perform adequate oversight and management,” including not consistently supporting Falls Church, Virginia-based Northrop and another contractor, Flight Test Aerospace Inc., in managing the overhauls, the audit said.

Flight Test Aerospace, based in Chantilly, Virginia, working under Northrop, hired AviaBaltika to perform the overhauls. It subsequently joined with Saint Petersburg Aircraft Repair to do the work in Russia. The aircraft arrived from September to November 2009.

“Instead of issuing a stop-work order” in the face of the delays and blocked access, Army contracting personnel continued to pay the foreign contractors $26 million, allowed “excessive parts mark-up and did not determine fair and reasonable prices” for millions of dollars in contract modifications, according to the audit.

Replacement Parts

The 10 helicopters were accepted “without verifying whether the aircraft were overhauled in accordance with contract quality requirements,” it said.

Officials with the Lithuanian and Russian contractors “did not perform in accordance with the terms” of the contract when they denied access to Pentagon and U.S. contractor personnel or “when they insisted on purchasing and installing replacement parts when not contractually authorized,” according to the audit.

The lack of access also prevented the Army from catching “unsanctioned parts that affected flight worthiness” in the eight Pakistani helicopters, the audit found. Four choppers in Pakistan still contain parts that “could lead to aircraft malfunctions and endanger the life and safety of the crew” if they aren’t replaced, it said.

The auditors “concluded that indications of criminal activity were present” and referred them to the inspector general’s investigations unit for review.

Fraud Review

The Army’s Legal Services Agency “will review all evidence of fraud or other evidence indicating a lack of contractor responsibility” as it assesses whether to initiate suspension or debarment actions, Brigadier General Flora Darpino, who was at the time director of the agency, wrote in an April 16 letter contained in the audit.

Army Deputy Assistant Secretary for Procurement Kim Denver wrote in a May 7 letter to the inspector general that the Army Contracting Command would review contract personnel performance and identify “administration actions as appropriate.”

Burton, the lawyer for AviaBaltika, faulted the Department of Defense inspector general’s findings.

“For example, the report is founded on the DoD IG’s incorrect conclusion” that the company “is responsible for costly program delays -- a conclusion which is contradicted by a court ruling,” he said. “We deny any wrongdoing and stand behind our pricing and performance, which are consistent with our contracts.”

‘Cost Consistent’

Randy Belote, a spokesman for Northrop, said that while the company is aware of the inspector general’s findings, it hasn’t fully reviewed the audit. He declined to comment further.

Army Lieutenant Colonel James Gregory, a Pentagon spokesman, said the “cost was consistent with the overhaul cost conducted by three other companies/subcontractors.”

“Total cost per overhaul varies based on aircraft condition and current market conditions regarding Mi-17 parts,” Gregory said in an e-mail. These overhauls “were more extensive than most, and the overall cost is in line with other aircraft overhauled by other companies that were in similar condition.”

Claim Questioned

The Army is evaluating the pending $12.6 million “equitable adjustment” claim that the Russian and Lithuanian companies filed last year to recover additional expenditures they allege were caused by Flight Test Aerospace actions.

The Army inspector general recommended that the money not be repaid. Northrop Grumman, which stands to earn a fee on the $12.6 million, also advised Army contracting officials not to pay the claim.

The claim includes hourly labor rates of as much as $500 per hour for the Lithuanian-Russian team’s general director, financial director, senior manager and chief accountant. These translate into yearly salaries of as much as $1.35 million, the audit found.

“These labor rates are not reasonable,” the audit said. “Compared to General Services Administration contracts for accounting services, the $500 per hour rate for the chief economist in Russia or Lithuania is higher than the rates charged in the U.S.” by domestic accounting firms.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE