Spare parts an opportunity for Pentagon to spend more efficiently

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Defense policy will forever be debated, but nearly everyone agrees it’s possible for the Pentagon to spend more wisely. One potential for savings comes from the prices for spare parts, which came up recently in Congressional hearings. The Project on Government Oversight’s Mandy Smithberger testified, and she joined Federal Drive with Tom Temin to talk more.

Interview transcript:

Tom Temin: Mandy, good to have you back.

Mandy Smithberger: Thank you so much for having me.

Tom Temin: And this issue of spare parts prices is as old as the hills, really, for the military. And what is it you told Congress, the appropriators and what’s the fundamental issue here with what it costs for spare parts?

Mandy Smithberger: Right. So the fundamental issue here is that there have been a lot of laws put in place that make it that much harder for the government to negotiate fair and reasonable prices, they have to jump through a number of hoops to be able to get certified cost or pricing information to determine if something is actually being offered for a fair price. And one of the biggest loopholes we have found is really misuse of what is called commercial items. Now, in a commercial environment, you actually have a market that’s determining that a price is fair and reasonable. But for the government, in a lot of these cases, so-called commercial items, are actually sole source. So you only have one person you’re buying from, and it’s really difficult to determine if you’re getting a fair deal, and certainly the government questions if they’re getting a fair deal when a price goes up 50% or 100% in a year.

Tom Temin: So there are parts and pieces and sustainment items that the military needs that can be commercial. I mean, if you have a part for a fighter that is only for that particular plane, that’s one thing. But I guess they have lots of vehicles and platforms and weapons systems, at least parts of weapons systems, where there are commercial counterparts and the same part could be a lot less money?

Mandy Smithberger: No, so the issue is that in a number of those cases, even though the government is the only customer, and the contractor will argue that some of these parts are actually commercial because they’re similar enough to something that is offered on the commercial market. And so it makes it that much more difficult for the government to get the kind of cost or pricing information that they would normally be entitled to, to negotiate their prices. So in a number of cases, the Department of Defense inspector general has actually looked at some of these spare parts and found even though this is labeled commercial, actually, the government’s the only customer. We have really have no instances of seeing that there are other customers to make sure that these prices are fair.

Tom Temin: So how can you determine if it’s fair, because if the government’s the only customer, and it’s exclusive to something that’s military, is there a way to get some reasonable level of what the government should pay for those things?

Mandy Smithberger: Absolutely. The companies could be required to provide the government certified cost or pricing information. And so we think, particularly when you’re talking about the sole source environment, that that is information that the government should be entitled to to be able to negotiate those fair prices.

Tom Temin: Give us some recent examples where you’ve seen this kind of thing.

Mandy Smithberger: Absolutely. So we’ve seen this with everything from small kinds of pins, where it’s been charged, where the cost is significantly higher bevels, all kinds of little small parts. And in some cases, there’s been an upcharge of 4,000% for a spare part, in one case, there was an engine that had not been deemed commercial before they changed the definition of what commercial was, and then suddenly the price went up.

Tom Temin: Interesting. Yeah, things like pins and bevels, small maintenance items. Could it be that the government itself is causing, in some ways that kind of pricing because of the process required to acquire them, that costs the contractor more? I mean, what drives the price, versus simply contractors feel they can get it, because they are the sole source?

Mandy Smithberger: So I think in a number of instances, you do find that companies think that they are able to, use their advantage, and honestly, they have an obligation to their shareholders to do as much as they can to make profits. So I think that can be the problem in some instances, but I think it’s also on the government where they haven’t really been thinking about what are the long-term sustainment costs of maintaining these weapons systems? How are we making sure that the aftermarket for these different kinds of parts aren’t going to put the government in a bad position where companies can buy sole source suppliers and really have the government being very weak market position to negotiate fair prices?

Tom Temin: We’re speaking with Mandy Smithberger, she’s defense spending analyst at the Project on Government Oversight. Then I guess, you could say this issue backs up further left in the whole supply chain with respect to how these systems are designed. And perhaps they could be designed and built with sustainment in mind in the first place. And maybe some complexity left out in favor of ease of maintenance and low cost and sustainment?

Mandy Smithberger: Absolutely. I think as much as possible we want these systems to be simple to maintain that. We want service members in the field to be able to fix their own equipment to the maximum degree possible so that they’re resilient and flexible.

Tom Temin: Yeah, that’s another issue too, is the fact that very often the government cedes the contracting right to do the maintenance and repairs to the original contractor. And that can be expensive and also a logistics issue?

Mandy Smithberger: Absolutely. I think the department is increasingly understanding that they have been allowing themselves to be at a disadvantage. And so they are initiating initiatives to be able to negotiate more of these intellectual property rights. But, obviously, for a number of systems that we already own, it’s tough once it’s filled out of the bottle to put it back in to make sure that we are controlling costs.

Tom Temin: Yeah, how is it that the ability to maintain something is posited as an intellectual property issue? It’s not as if the government is going to copy the machine and make it themselves in a government, factory and sell it? How does maintenance and repair get tied to intellectual property?

Mandy Smithberger: So some of the things that those companies would argue is that they become concerned that if the government has information about these plans, that they could then compete – give this information to other companies to be able to provide these services, because as you’re saying, it’s not like the government is going to be standing up their own manufacturing. But we would actually like to see more of those opportunities to allow an entrance to allow new small businesses to be able to provide some of these services to the government and for us to see more competition. But that is one of the primary concerns from these larger companies that, where they’re trying to maintain what’s becoming a really profitable line for a lot of them. You’ve seen companies saying that the department going after our intellectual property rights is really going after a lot of our business model. So it’ll be interesting to see how this proceeds.

Tom Temin: Yeah, so legitimate, I guess arguments on both sides. But couldn’t a contract simply say, we have the right to the blueprints and the plans for the purposes of sustainment and repair, and we won’t share it with anyone else in industry? Wouldn’t that be kind of an easy answer?

Mandy Smithberger: Too easy for government work. Yes, we would like to see, I think in a number of these instances, that contracting officials have not felt empowered to be able to negotiate those kinds of rights to make sure that we’re doing what’s in the best interest of our service members in the department.

Tom Temin: All right, and just briefly, what else did you tell Congress with respect to just keeping costs under control in this whole area of repair and sustainment? What other steps could be taken within reason in the next NDAA, for example?

Mandy Smithberger: I think one of the biggest ones is something that was proposed under the Obama administration is changing the definition of commercial items to really be what we think a commercial item is – something that is sold in like quantities on the market. And we would also like to see lower thresholds so that more of these contracts can include providing certified cost or pricing information. So that we are going to get a good deal for this. And then I – as you were talking about largely with sustainment, I think the government needs to be obtaining and making available to the public more information on what are the real costs of service contracting, and rather than having some of these services brought in to government or being done by military personnel.

Tom Temin: And the strange thing is there is a lot of agreement with this on the part of military personnel themselves, too, isn’t there?

Mandy Smithberger: Oh, absolutely. You hear people are probably familiar with the right to repair movement when it’s talking about you know, your phone, or your tractor. But it’s also something that we’re seeing in the military as well, where they want to be able to maintain their own equipment in the field. They don’t want to be dependent on contractors, just as none of us want to be dependent on tech support. In order to be able to proceed with our day, they would like to see these systems be easier to maintain.

Tom Temin: Well, let me tell you something, the first time I paid for an oil change on a motorcycle was the last time I paid for an oil change. I said maybe an old guy, but I’m gonna figure out how to do this myself because 10 times as much as a car oil change. And all you need is a wrench.

Mandy Smithberger: Absolutely. And members of the military want to be able to take care of themselves.

Tom Temin: And we support that. Mandy Smithberger, defense spending analyst at the Project on Government Oversight. As always, thanks so much.

Mandy Smithberger: Thank you for having me.

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