Pentagon computer system leads to cost overruns

The Pentagon may never have bought a $600 hammer, but it did spend $409 on a sink worth just $39, according to a blistering new audit by the Defense Department inspector general. The report found that an automated system used to make small "micro-purchases," procurements of $2,500 or less, at the Defense Supply Center in Philadelphia routinely accepts unnecessarily high bids from vendors, costing the government $1.2 million in excess payments. The Pentagon's legendary $600 hammer became an icon of procurement waste in the 1980s and was later borrowed for Vice President Al Gore's "hammer awards" to symbolize government waste-cutting. The hammer's costly price tag was actually the result of an accounting method that gave the same value to several parts purchased from a contractor. Auditors surveyed about one-fifth of the micro-purchase orders processed at a division within the Defense Supply Center from April 1999 through March 2000. Both the automated system and the Pentagon's method for identifying overcharges are so flawed that vendors can obtain huge markups without consequence, they found. "Probably every vendor knows they can mark up a purchase by 25 percent over the highest previous price paid before the Defense Logistics Agency does a theoretical manual review," the report stated. "It is now time to change the process." The automated system makes micro-purchases of supplies through blanket purchase agreements with vendors. Designed to give procurement officers more flexibility and choice in the acquisition of routine supplies, blanket purchase agreements are akin to a charge account established with vendors.

But the supply center's automated system does not check with multiple vendors to get the best price, the Pentagon IG found. Instead, it selects the vendor at the top of a rotating list and only notifies procurement officers when a price is more than 25 percent higher than the last price paid for the same item. The blanket purchase agreement used by the supply center allows vendors a 30 percent markup. The audit also took issue with the method used by the Defense Logistics Agency to identify overcharges. The agency looks at whether the total orders placed with a vendor surpass the 30 percent markup limit, rather than identifying specific orders that exceed the limit. This provides no incentive for vendors to submit bids with less than a 30 percent markup, according to the report. "The methodology used… gave no credit to vendors for purchase orders that had less than a 30 percent markup," the IG report said. DLA intends to add a competitive feature to the automated system so it automatically selects the best price offered by vendors. Still, the agency defended its method for tracking overcharges in its comments on the report. "While we are sometimes overcharged on individual low-dollar value awards, [the tracking program] provides a fair and effective means of protecting the government's interests, obtaining refunds when appropriate, and removing contractors who repeatedly attempt to abuse the system," wrote Frank Lotts, deputy director of the Defense Logistics Agency. The agency also disputed the audit's methodology for computing overcharges and statistical sampling. The Pentagon IG called on DLA to make the automated system competitive and to create a training guide so procurement officers are better able to catch overcharges, among other recommendations.