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DEFENSE LOGISTICS AGENCY PROCUREMENTSFROM FEDERAL PRISON INDUSTRIES, INC.

Report No. 99-001 October 5, 1998

Office of the Inspector GeneralDepartment of Defense

DISTRIBUTION STATEMENT AApproved for Public Release

Distribution Unlimited

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To obtain additional copies of this audit report, contact the Secondary ReportsDistribution Unit of the Analysis, Planning, and Technical Support Directorate at(703) 604-8937 (DSN 664-8937) or FAX (703) 604-8932 or visit the InspectorGeneral, DoD Home Page at: WWW.DODIG.OSD.MIL.

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To suggest ideas for or to request future audits, contact the Planning andCoordination Branch of the Analysis, Planning, and Technical Support Directorateat (703) 604-8908 (DSN 664-8908) or FAX (703) 604-8932. Ideas and requestscan also be mailed to:

OAIG-AUD (ATTN: APTS Audit Suggestions)Inspector General, Department of Defense400 Army Navy Drive (Room 801)Arlington, Virginia 22202-2884

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Acronyms

DLA Defense Logistics AgencyDSC Defense Supply CenterFAR Federal Acquisition RegulationFPI Federal Prison Industries, Inc.NSN National Stock NumberPQDR Product Quality Deficiency Report

INSPECTOR GENERALDEPARTMENT OF DEFENSE. 400 ARMY NAVY DRIVE

ARIJNGTON. VI:RGINA 22202

October 5, 1998

MEMORANDUM FOR DIRECTOR, DEFENSE PROCUREMENTDIRECTOR, DEFENSE LOGISTICS AGENCY

SUBJECT: Audit Report of Defense Logistics Agency Procurements from Federal PrisonIndustries, Inc. (Report No. 99-001)

We are providing this report for review and comment. We conducted the audit inresponse to a congressional request. Comments provided by the Director, DefenseProcurement and the Director, Defense Logistics Agency to the draft report report wereconsidered in preparing this final report.

DoD Directive 7650.3 requires that audit recommendations be resolved promptly.The Director, Defense Procurement comments were partially responsive. We requestadditional comments on Recommendation B. The Defense Logistics Agency commentswere partially responsive. We request additional comments on Recommendation A2.c.All additional comments should be provided by December 7, 1998.

We appreciate the courtesies extended to the audit staff. Questions on the auditshould be directed to Mr. Terry L. McKinney at (703) 604-9288 (DSN 664-9288) orMr. Michael H. Claypool at (703) 604-9291 (DSN 664-9291). If management requests,we will provide a formal briefng on the audit results. See Appendix I for the reportdistribution.

Robert I LiebertianAssistant Inspector General

for Auditing

Office of the Inspector General, DoD

Audit Report No. 99-001 October 5, 1998(ProQ e No. 7CF-5054)

Defense Logistics Agency ProcurementsFrom Federal Prison Industries, Inc.

Executive Summary

Introduction. We initiated the audit as a result of a letter from Senator Carl Levinrequesting a review of supplies and services procured by DoD from Federal PrisonIndustries, Inc.

Audit Objectives. The overall objective of the audit was to assess whether DoDprocedures ensured that Federal Prison Industries, Inc. supplies were of appropriate"quality, character and suitability" and were purchased at "not to exceed current marketprices" as required by law. We also determined whether contracting officials wererequesting waivers of the mandatory requirement to purchase from Federal PrisonIndustries, Inc. when appropriate. We did not review Federal Prison Industries, Inc.services because they are not a mandatory source for the Federal Government and theymust compete with the commercial sector for customer sales.

Results. Answers to Senator Levin's questions are in Appendix C. The Defense LogisticsAgency has adequate procedures to ensure that Federal Prison Industries, Inc. suppfies areof the appropriate quality, character, and suitability. Supplies were generally purchased atprices equal to, or better than, current market prices. However, the Federal AcquisitionRegulation subpart 8.6, "Acquisition from Federal Prison Industries, Inc.," does notprovide clear puidance on determining the current market price for purchases of suppliesor the arbitration of disputes regarding price, quality, character, or suitability of supplies.DoD does not have Department-wide procedures for obtaining waivers from pur .asingFederal Prison Industries, Inc. products, and the Department does not maintain waiverdata. We identified three conditions requiring management action.

The statutory process and regulatory procedures for resolving disputes and appealingwaiver denials are unworkable and are not being used by Federal Prison Industries, Inc. orGovernment customers. The FPI Ombudsman is the preferred option for disputeresolution, but this is not clear to DoD customers. As a remst, DoD lacks effective meansfor initiating or appealing waiver requests and for resolving disputes regarding the price,quality, character, or suitability of Federal Prison Industries, Inc. supplies (Finding A).

Defense Supply Center (DSC), Richmond contracting officers paid higher prices thannecessary for supplies purchased from both Federal Prison Industries, Inc. and commercialvendors. As a result, buyers missed opportunities to reduce the cost of suppfies whenpurchasing items manufctured by both Federal Prison Industries, Inc. and commercialvendors. In contrast, DSC, Philadelphia used cost or price analysis and successfhllynegotiated more reasonable prices (Finding B).

Defense supply centers did not always obtain replacements for defective suppliesmanufactured by the Federal Prison Industries, Inc. As a result, the Defense supplycenters missed the opportunity to replace about $127,000 in defective items at no cost toDefense Logistics Agency (Finding C).

Summary of Recommendations. We recommend that the Director, DefenseProcurement initiate revisions to Federal Acquisition Regulation subpart 8.6,"Acquisitions from Federal Prison Industries, Inc." We recommend that the Director,Defense Logistics Agency revise Defense Logistics Agency Directive 4105.1- "DefenseLogistics Acquisition Directive," procedures for Federal Prison Industries Inc. disputeresolution. We recommend that the Commander, Defense Supply Center, Richmondestablish additional training requirements for contracting officers and buyers who purchasesupplies from Federal Prison Industries, Inc. We also recommend that the Director reviseDefense Logistics Agency Manual 4155.2, 4-6, "Customer/Depot Complaints(CDCs)/Product Quality Deficiency Reports (PQDRs)," to indicate that the Federal PrisonIndustries, Inc. lifetime warranty applies to all of its supplies. We also recommend thatthe Commanders, Defense Supply Center Richmond and Philadelphia request FederalPrison Industries, Inc. to replace their defective supply items reported on the productquality deficiency reports.

Management Comments. The Director, Defense Procurement agreed that theOmbudsman is currently the primary adjudicator of disputes with Federal PrisonIndustries, Inc.; however, the Director stated that it is premature to revise FederalAcquisition Regulation subpart 8.6 until after a new arbitration board developsprocedures, including its relationship with the Ombudsman. The Director agreed that"waiver should be substituted for the term "clearance" for clarification in the regulation.The Director deferred recommending a revision to Federal Acquisition Regulation subpart8.6 until a DoD report to Congress addressing the statutory, regulatory, and proceduralframework governing the way DoD does business with Federal Prison Industries, Inc. isfinalized. The Director did not agree that Federal Acqusition Regulation subpart 8.6should be revised to include a definition of fair market price and how to determine fairmarket price for mandatory Federal Prison Industries, Inc. products. The Director statedthat the Federal Acquisition Regulation is adequate and there is no need for furtherdefinition.

The Defense Logistics Agency agreed to revise Defense Logistics Agency Directive4105.1, subpart 8.6, to refer to the Omudsman waiverprocess. The Defense LogisticsAgency Supply Center Richmond has established new long-term contracts which focus onimprovednpncin. Agency guidance will be revised to state that Federal Prison Industries,Inc. provides a life time warranty for all their products. Defense Logistics Agency alsostated that it is premature to establish agency guidance on criteria for waiver requests orfor appealing waiver denials until the results of the mandated DoD report is submitted toCongress. See Part I for a discussion of management comments, and Part HI for acomplete text of management comments.

Audit Response. The Director of Defense Procurement and Defense Logisitics Agency'sresponses are partially responsive to the recommendations. We agree on deferringrevisions to Federal Acquisition Regulation subpart 8.6 and to Defense Logistics Agencyguidance until after the mandated DoD report is issued to Congress. In response to thefinal report, we request that the Director of Defense Procurement reconsider her positionon revising the Federal Acquisition Regulation subpart 8.6 to include a definition ofcurrent market price. We also request that Defense Logistics Agency reconsider therecommendation to revise Defense Logistics Agency Directive 4105.1, subpart 8.6, toinclude criteria for requesting and appealing waivers to Federal Prison Industries, Inc. Werequest that the Director of Defense Procurement and the Defense Logistics Agencyprovide comments by December 7, 1998.

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Table of Contents

Executive Summary

Part I - Audit Results

Audit Background 2Audit Objectives 3Finding A. Dispute Resolution 4Finding B. Negotiated Prices for Mandatory Supplies 11Finding C. Exercising Federal Prison Industries, Inc. Warranty 20

Part II - Additional Information

Appendix A. Audit ProcessScope 24Methodology 25Audit Period and Standards 25Use of Computer-Processed Data 25

Appendix B. Prior Audits and Other Reviews 26Appendix C. Senator Levin's Questions 27Appendix D. Department of Justice Opinion 35Appendix E. FAR Guidance for Commercial Contracts 47Appendix F. Comparison of Federal Prison Industries, Inc. and

Commercial Vendor Unit Prices 50Appendix 0. Item Description of Product Quality Deficiency Reports 51Appendix H. Comparison of Delinquent Federal Prison Industries, Inc.

and Commercial Deliveries 52Appendix I. Report Distnibution 54

Part III- Management Comments

Office of the Under Secretary of Defense Comments 58Defense Logistics Agency Comments 61

Part I - Audit Results

Audit Background

In his July 1997 letter, Senator Carl Levin wanted to know whether DoD hasimproved its procedures for purchasing supplies and services from Federal PrisonIndustries, Inc. (FPI) since the last Inspector General, DoD audit in 1991. InOctober 1991, the Inspector General, DoD reported that, in 48 of 54 audited FPIcontracts, prices paid for electronics and electrical cables purchased from FPIexceeded costs and profits negotiated in the contracts. These contracts wereoverpriced by an average of 15 percent because FPI actual contract costs were lessthan its negotiated costs and profits. See Appendix C for Senator Levin'squestions and answers determined during our audit.

Statute. FPI is a self-supporting, wholly-owned Government corporation createdin 1934 by 18 United States Code (U.S.C.), Sections 4121-4128 (the statute) andby an Executive Order. FPI operates by a statutory mandate to "provideemployment for the greatest number of those inmates in the U.S. penal andcorrectional institutions who are eligible to work as is reasonably possible..Usin. paid inmate labor, FPI makes a variety of supplies such as fiuniture, militaryclothing and textiles, electrical cables and connectors, metal signs, andGovernment publications and graphics.

While FPI is prohibited from selling supplies to the public in competition withprivate sector enterprises, it has been granted a preference in product sales toUnited States Government activities. The statute requires Federal departments,agencies, and institutions to "purchase at not-to-exceed current market prices suchproducts of the industries [FPI] authorized by this chaper as meet theirrequirements and may be available." The statute requires that all disputes aboutprice, quality, character, or suitability of FPI supplies be resolved by an arbitrationboard. The decision of the arbitration board is "final and binding upon all parties."

Department of Justice Opinion. Because of the Inspector General, DoD Reportissued in October 1991, the Director, Federal Bureau of Prisons requested that theUnited States Department of Justice provide an opinion on whether certain Federalprocurement statutes and provisions of the Federal Acquisition Regulation (FAR)apply to FPI. In September 1993, the Department of Justice replied to theDirector and Commissioner, Federal Prison Industries, Inc., stating "theprovisions of the FAR governing the submission of certified cost or pricinginformation, the calculation of a 'reasonable price' other than market price, and thegeneral FAR procedures for resolving pricing dispute do not apply to FPI." Noopinion was provided on the FPI method for determining current market price ofits supplies by reference to the actual price of the same or similar suppliespurchased in the past. However, it was opined that FPI may use any method thatreliably estimates current market prices.

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The mandatory prelerence granted FPI is an exception to the rules thatnormally gem t*e way goods ar procured by the United Stas.Typically, Federa procurement is governed by FAR 48 CYIR,Subsection 1.000-51.205, a detail set of procedures and formspiomulgated pursuant to the Office of Federal Procurement Policy Actof 1974 r Act), 41 United States Code, Section 401-424.The Procurement Act embodies a number of policy goals, including

nfuA and open c i ... promotig the developmentof uimplifed uniform procurement processes; [and] promoting fairdealings and equitable relationships with the private sector.

Appendix D has the complete text of the Department of Justice opinion.

Federal Acquisition Regulation. Federal Acquisition Regulation (FAR) subpart8.6 - "Acquisition from Federal Prison Industries, Inc." is the implementingregulation to Federal procurement law and contains special provisions relating toacquisitions from FPI, including procedures resolving disputes about the price,quality, and character of supplies. Section 8.602, "Policy," provides that:

Agencies shiall purchase required supplies for the classes listed in theSchedule of Products made in Federal Penal and CorrectionalInMti at prices not to excwed current market prices, using thep roacePdures of this subpart

Except for FAR subpart 8.6, FAR policies and guidance do not apply to purchasesfrom FPI. The Federal procurement statutes goals of increasing competition andfacilitating purchase of commercial sup pplies cannot be promoted because suppliesmust be purchased from FPI by Fede Government customers.

Audit Objectives

The primary audit objective was to determine whether DoD has procedures toensure that FPI products and services are of appropriate "quality, character andsuitability" and are purchased at "not-to-exceed current market prices" as requiredby public law. We also evaluated the reasonableness of prices, quality, andtimeliness of delivery of FPI products and services compared to products andservices that are purchased from the commercial sector. Senator Levin asked thatwe determine if contracting officials are requesting a waiver of the requirements topurchase products and services from FPI whm products and services are over-priced or unsuitable for DoD use. See Appendix A for a discussion of the auditprocess. Appendix B has a summary of prior audit coverage related to the auditobjectives.

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Finding A. Dispute ResolutionThe statutory prcess and regulatory procedures for resolving disputes andappealing waiver' denials are unworkable and are not being used by FederalPrison Industries, Inc. or Government customers. This condition existsbecause FAR subpart 8.6, "Acquisition from Federal Prison Industries,Inc." guidance does not clearly establish procedures for processing waiversand resolving disputes between FPI and its customers. As a result, DoDlacks effective means for initiating or appealing waiver requests and forresolving disputes regarding the price, quality, character, or suitability ofFPI supplies.

Guidance

Current guidance for resolving disputes that arise between FPI and its customers isembodied in law, a Department of Justice Memorandum, the FAR, an FPI lettercommenting on a FAR case, and in a Defense Logistics Acquisition Directive. Theintent of this collection of policy and procedural guidance is to provide an orderlyprocess for resolving disputes between FPI and its customers. To the contrary, wefound the guidance confusin& impractical, and often subject to conflictinginterpretation.

Statute. 1i U.S.C. 4124 (b) "Purchases of prison-made products by FederalDepartments," provides guidance on resolving disputes between FPI and itscustomers.

Disputes as to price, quality, character, or suitability of such productsshall be arbitrated by a board consisting of the Attorney General, theAdminisator of General Services, and the President, or theirrepresentative&

This statutory provision for resolving disputes is not practical. First, the board hasnot functioned since the 1930s and the three primary members have not evendesignated represeatfives. Second, only an especially persistent contractingofficer would assume that the dispute was of such importance that it should beresolved by the President, Attorney General and Administrator of GSA.

Justice Department Memorandum. Normally, the general provisions of the lawrelating to procurement policy and procedures are augmented by the FAR. TheFAR includes provisions in subpart 33.2 for resolving disputes. However, the

t By common consensus the term 'waiver" rather than "clearances" is used to describe relief from the

requirement to purchase the supplies from FPI.

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Finding A. Dispute Resolution

Frovisions in subpart 33.2 cannot be used for resolving disputes between FPI andts mers according to a Department of Justice memorandum.

In a September 13, 1993 Department of Justice memorandum the Acting AssistantAttorney General offered the following legal opinion.

The pertinent aMoy and regulatory framework treats FPItansactions uqrarately from those with pnrvate sector enities withrespect to dispute rMulutioa Subpat 33.2 of the FAR sets outregulation =pvrnm Disputes and Appeols" accordne wth theContract Disputes Act of 1978. In conrast, FPI's authorizingklgation expressly com ts all disutes as to the "price, quahty,charact or retability" of FPI products to a special arbitration board,and makes the finfg of tat board "binding upon an parties." Inrecognition of this law, subart 8.6 of the FAR. conains provisonsthat expressly preserve FPrs dispute resolution procedmu.

. . . we believe the correct reading of the relevant statutes andregulations, taken as a whole, is that FPI is not covered by the FAR'sSandard ms, and instea FPI mus be reated specially unde itsauthorizing legislation and FAR subpat 8.6.

This opinion makes it clear that only FAR subpart 8.6 (FAR 8.6) applies to FPIacquisitions. Other parts of the FAR provisions for waivers, disputes, cost andprie analysis, and contract negotiations are not applicable to FPI. Appendix Dhas the complete text of the Department of Justice Opinion.

Disputes Resolution

FAR 8.6 guidance has not been revised to clearly establish procedures forprocessing waivers and resolving disputes between FPI and its customers. Becausethe Justice Department determined that standard FAR provisions concerningdisputes do not apply to purchases from FPJ, any disputes between FPI and itscustomers must rely on FAR 8.6 and 18 U.S.C. 4124 guidance.

FAR 8.6 does not contain provisions on how disputes between FPI and itscustomers are to be resolved, but simply makes reference to and restates the law.Furthermore, FAR 8.6, as written, incorrectly descrbes the membership of thearbitration board, namng the Comptroller General of the United States instead ofthe Attorney General as one of the three members.

Ombudsman. The Ombudsman method for resolving customer disputes is notmentioned in either FAR 8.6 or the law. Although the authority of theOmbudsman to act in this capacity is not clear, this is the customer disputesprocess currently being used along with other informal processes, such asappealing customer disputes to FPI senior management for resolution.

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Recognizing that the statutory procedures for resolving disputes is impractical, theFPI General Counsel, in a November 1997 letter to the Civilian AgencyAcquisition Council, "FAR Case 96-608," said:

PRegarding the Ombudsman. we appre•ate your concurrence with ourrecommendadon that a reference be placed in the FAR indicating thatthe Ombudsman is the approved method of resolving disputes. Wesngges that the proposed lauge at FAR 8.605(c) read that"agencies should [rather than 'may'] address disputes to the FMOmbudsmm."

The FPI General Counsel also stated:

[The] statutory process is so impractical and so unwieldy that it hasnot been used since the 1930s and thus, for all practical purposes, isnon edistent. Therefore, purchasing offices should be encouraged touse the Ombudsman process to resolve disputes concerning vrers tothe geatest etend possible

The general counsel also recommended that the term "clearance" in FAR 8.6 berevised to "waiver" as more appropriate terminology related to customer disputes.

DoD Guidance. Except for the Defense Logistics Agency, the Department andthe Services have not issued guidance concerning transactions with FPI. WhileDLA has published guidance, its guidance almost exclusively concerns issuesrelated to price determination and negotiation. DLA Directive 4105. 1,"DefenseLogistics Acquisition Directive," sub part 8.6 "Acquisition from Federal PrisonIndustries, Inc.," provides policy, ordering procedures, and waiver guidance forFPI supplies. DLA's subpart 8.605 - "Clearances" states:

The guidance at IDLAD] 8.706, 8.790, and 8.791 also applies, ingeneral to items that are proposed for inclusion on the FPI Schedule ofProducts. Where the coveage refs to JWOD2 (NIB/NISH)3 agenciesor the Committe, the term is substituted threfore. Where it refers tothe Procurement List, the term Schedule of Products will besubstituted. To expedite the determination of FIP's [sic FPI's]capability and capacity to produce an item, a cooperative intefaceshould be established between FFI's staff and Center technical staff

This guidance is not applicable to the FPI waiver and disputes process. DLADsubpart 8.7 - "Acquisitions from Nonprofit Agencies Employing People Who AreBlind or Disabled, refers to guidance for Government customers to receivepermission through a waiver to purchase mandatory supplies from the privatesector rather than purchases from FPI.

2 Javits-Waner-O'Day Act.

3 National Industries for the Blind (NIB)/Nafional Industries for the Severely Handicapped (NISH).

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Waivers and Disputes

DoD lacks effective procedures for initiating waiver requests and for resolvingdisputes regarding the price, quality, character, or suitability of FPI supplies. Eventhough current guidance is impractical, general and, at best, subject to variousinterpretations; FPI customers are requesting waivers and disputes are beingresolved by an Ombudsman process.

Since FAR 8.6 makes no reference to the Ombudsman process, contractingofficers may not be fMly aware of the current waiver and disputes resolutionprocess being used by FPI. We believe that the number of DoD customer waiverrequests and appeals of denied waiver requests would be greater if clear, writtenprocedures existed.

DoD Waivers. We relied on FPI waiver data statistics because DoD doesnot maintain a waiver data base. For FY 1997 DoD Departments and Servicessubmitted 9,174 waiver requests estimated at $230 million with 7,633 waiverrequests approved by FPI. The waiver approvals were primarily granted on thebasis of FPI prices, delivery timeliness, and specifications that did not meet thecustomers' requirements. FPI denied 1,541 waiver requests or 16.82 percent ofthe DoD waiver requests, which had an estimated value of $39.2 million. DoDcustomers appealed 189 of the waiver denials to the Ombudsman, representingabout 12 percent of the denied waivers. DLA appealed only one waiver denial forthis period.

Waiver Appeals. According to the FY 1996 FPI Annual Reports, civilianand DoD customers appealed 172 waiver denials estimated at $38.4 million to theOmbudsman Of the $38.4 million in waiver appeals, the Ombudsman approved$27 million which allowed Federal customers to purchase the supplies from thecommercial sector. During FY 1997, customers appealed 249 waiver denialsestimated at $22.5 million and 72 percent of the denied waivers were overturnedby the Ombudsman and customers were permitted to purchase the supplies fromthe commercial sector. DoD customers initiated 189 of the 249 appeals submittedduring FY 1997.

Conclusion

FAR 8.6 should be revised to ensure that effective procedures are in place forinitiating waivers and resolving disputes to include:

* Reference to the Ombudsman as the person to whom disputes betweenFPI and its customer should be referred.

e Criteria for when a waivershould be requested, for example, when theproposed FP1 price is significantly higher than the current market price, or the FPIdelivery schedule does not meet Department needs.

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0 "Waiver' instead ofthe term "clearance" to reflect the terminologyactually being used by FPI and its customers.

We recognize that a FAR revision often requires a lengthy administrativecoordination process that affects many different Government organizations.Accordingly, we believe that DLA should immediately revise DLAD 4105.1,subpart 8.6 "Acquisition from Federal Prison Industries, Inc." to provide guidanceto contracting officers and buyers for resolving disputes, requesting waivers, andappealing waiver denials with FPL

Recommendations, Management Comments, and AuditResponse

A.1. We recommend that the Director, Defense Procurement initiaterevisions to the Federal Acquisition Regulation subpart 8.6 "Acquisitionfrom Federal Prison Industries, Inc." that:

a. Refers buyers to the Ombudsman as the approved method ofresolving disputes pertaining to price, quality, suitability, and character ofFPI products, and

b. Uses the word "clearance" instead of "waivers" to relate theterminology used with customer disputes.

A.2. We recommend the Director, Defense Logistics Agency revise DefenseLogistics Agency Directive 4105.1- "Defense Logistic Acquisition Directive,"subpart 8.6 "Acquisition from Federal Prison Industries, Inc." to:

a. Comply with Federal Acquisition Regulation subpart 8.6 and the1993 Department of Justice Legal Opinion pertaining to Federal PrisonIndustries, Inc.

b. Refer buyers to the Ombudsman as the approved method ofresolving disputes pertaining to price, quality, suitability, and character ofFFPI products.

c. Include criteria determining when to request a waiver to purchaseFederal Prison Industries, Inc. mandatory products from commercialvendors and also the criteria for appealing a waiver denial

Director, Defense Procurement. The Director partially concurred withRecommendations A. .a. and A.l.b., agreeing that the FPI Ombudsman iscurrently the primary adjudicator of disputes with FPI. However, because a newarbitration board referred to in FAR 8.605(c) is being established for disputeresolution it is premature to make changes to FAR 8.6 until the new board

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develops procedures, including its relationship with regards to the FPIOmbudsman. The Director agrees that "waiver" should be substituted for the term"clearance" for clarification.

Audit Response. The Director's comments were responsive. We agree that itwould be premature to revise FAR 8.6 until the new arbitration board developsprocedures for dispute resolution. However, we believe that the Ombudsman willstill be needed due to the number of Government customer waiver denial appealsreceived recently. During FY 1996 and FY1997, DoD customers appealed 361waiver denials to the Ombudsman for adjudication. The new arbitration board willnot be able to adjudicate hundreds of waiver appeals in an expeditious manner asrequired by FPI customers. We believe the current FPI waiver bureaucracy is animpediment to acquisition streamlining and clear procedures should be establishedas soon as practicable.

Defense Logistics Agency, Comments. DLA concurred with RecommendationA.2.a. and A.2.b., stating that DLA Directive 4105.1, subpart 8.6 is being revised,and reference to subpart 8.7 has been removed via PROCLTR 97-34. DLA statedthat the FPI Ombudsman procedure seems such a simple, universally-recognizedsolution that its treatment seems appropriate and this procedure will be part of thecomplete revision of DLAD 4105.1, subpart 8.6. DLA nonconcurred withRecommendation A.2.c., stating that the current DoD/FPI study underway couldhave an impact on the DLA and DoD business relationships with FPI The FY1998 National Defense Authorization Act mandated a joint DoD/FPI study toaddress the statutory, regulatory, and procedural framework governing the DoDrelationship with FPI. Until the results of the study group is published andsubmitted to Congress, it would be premature for DLA to establish criteria forwaiver submission or for appealing waiver denials.

Although not required to comment on Finding A, DLA nonconcurred with thefinding, stating that whatever the process for resolving disputes and appealingwaiver denials, the solution is not to revise FAR guidance. The FAR governscontractual relationships between the Government and private-sector contractors.FAR 8.6 puts contracting officers and contractors on notice that, by statutorymandate, the Government is obligated to contract with FPL Procedural guidanceregarding the FPI waiver appeal process belongs elsewhere in the Code of FederalRegulations and in Departmental instructions.

Audit Response. DLA comments to Recommendations A.2a. and A.2b. wereresponsive. Regarding Recommendation A.2.c., in discussons with DLA SupplyCenter procurement personnel about FPI mandatory purchase requirements it wasevident that the waiver criteria pertaining to price, quality, and timeliness was notcearly understood within the framework of FAR 8.6 and DLA 4105.1 guidance.Regardless of the results of the joint DoD/FPI study, DLA contracting officers willalways need to know the acceptable criteria for requesting and appealing waiversfrom purchasing FlI products.

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We disagree with DLA that the FAR is inappropriate for providing guidance onFPI purchases. We believe revising FAR 8.6 to include the FPI Ombudsmanreflects a currently accepted procedure and clarifies the ambiguites regarding thewaiver appeals process. In comments to the Civilian Agency Acquisition Councilon FAR Case 96-608, the FPI General Counsel recommended that language beadded to FAR 8.6 to indicate the Ombudsman is the approved alternative methodof resolving disputes. We agree with the General Counsel's recommendation.

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Finding B. Negotiating Prices forMandatory SuppliesDefense Supply Center (DSC), Richmond contracting officers paid higherprices than necessary for supplies purchased from both FPI and commercialvendors. Contracting officers at DSC, Richmond did not always use priceanalysis to evaluate proposals or negotiate prices, when the proposed pricewas above the current market price. As a result, buyers missedopportunities to reduce the cost of supplies when purchasing itemsmamufactured by both Federal Prison Industries, Inc. and commercialvendors. In contrast, DSC, Philadelphia used cost or price analysis andsuccessfully negotiated more reasonable prices.

Laws and Regulations

18 U.S.C. 4124 "Purchases of prison-made products by Federal Departments,"provides guidance on purchases of supplies from prison industries.

(a). The sevesl Federal Departments and agencies and all otherGovernment institutions of the United States shall purchse at not toexeed current market prices, such products of the indusriesauthorized by this chaper as meet their requxements and may beavailable.

FAR 8.602 "Policy," requires

(a). Agencies shall purchase required supplies of the dasses listed inthe Schedule of ProduAct made in Federal Penal and CrectionalInstitutions (referred to in the sublpat as 'the Schedule') at prices notto exceed cuent mare prices using the procedures in this subpart

While Federal law and FAR subpart 8.6 require Federal departments to purchasesupplies from FPI at prices not-to-exceed the current market price, neither thestatute nor the subpart define current market price or how the purchase officeshould determine the current market price for FPI purchases. FAR provisionsrelating to purchases of supplies from commercial vendors are included inAppendix E. While not applicable to purchases from FPI, FAR 15.402, "Pricingpolicy," provides guidance for contracting officers to purchase supplies andservices at fair and reasonable prices. We believe that such procedures offervaluable techniques for contracting officers to adapt for purchases from FPI

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Finding B. Negotiated Prices for Mandatory Supplies

Price Comparisons

The Defense Logistics Agency contracting oce purchased supplies that couldhave been purchased at a lower price from either FPI or commercial vendors.

Using procurement data provided by 3 DLA centers, we made 1,352 pricecomparisons valued at $324 million by matching commercial and FPI contracts foridentical supplies. We compared contracts or modifications of earlier contractsdated after September 30, 1995.

Figure I shows the percentage of FPI price comparisons for which the unit price islower, the same, and higher than the commercial prices.

Figure 1. FPI Prices Compared to CommercialVendor Prices

100%

00 [FPI Lowero%--- FPI Same

- FPI Higher

0%-----

sW-ycmtm P Ma Rsc Coknbhm

In 1,352 comparisons 20 percent of the FPI unit prices were higher than thecomparable commercial prices. Another 78 percent of the supplies were boughtfrom contractors at higher prices than FPI unit prices. The remaining 2 percent ofthe price comparisons were the same.

Price Analysis and Negotiations

The use of price analysis to evaluate proposals, or negotiate prices when theproposed price was above the current market price, varied between the DLAbuying centers.

A buyer's analysis of a price proposal should have two primary objectives. Thefirst is to establish that the proposed price is fair and reasonable and consistent

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with the current fair market price. The second is to provide a basis for negotiatinga lower price, if the offered price is unreasonable and in excess of the currentmarket price.

We selected 27 FPI and commercial contracts to determine the reason forvariations in unit prices for identical supplies. While our primary focus was todetermine why a higher price was paid to FPI, we also examined contracts withhi~her commercial unit prices to determine why the higher commercial prices werepaid.

The contracts we selected had been awarded by DLA centers in either Richmondor Philadelphia. We did not review contracts for the Coluinbus Center because thevalues of the variations at that Center were not material. The Richmond Centerwas permitted to purchase supplies from commercial vendors because FPI grantedthe Center an automatic waiver for purchases under $3,500. A similararrangement was not in existence at the other Centers.

Buyers were using three primary methods to determine price reasonableness. Themethod used varied by contract. Buyers used price analysis, cost analysis, andcomparison of price quotations with unsolicited price quotations from commercialvendors. Price analysis generally uses the last price paid for the supplies andadjusts that price to a present value using the Department of Labor's ProducerPrice Index. Cost analysis is the review and evaluation of the separate costelements and profit in an offer's proposal. This methodology is generly similar tothe procedures in FAR 15.404-1, "Proposed Analysis Techniques," that are usedfor commercial vendor proposal analysis.

Defense Supply Center, Richmond. At the Richmond Center, buyerswere not adequately performing price analysis or negotiating prices with FPL Weexamined eight FPI contracts with FPI unit prices higher than the comparablecommercial contract. The average value of the FPI contracts was $125,260. Thepercentage by which the FPI price exceeded the commercial price ranged from 10to 153 percent. At the same time we examined seven commercial contracts forwhich the unit price was higher than the comparable FPI unit price.

Analysis of FP1 contracts. For the eight FP1 contracts awarded bythe Richmond Center, FPI provided an Estimated Cost Breakdown for material,labor, overhead, and profit to support its price proposal. However, buyers madelittle use of the cost breakdown for these contracts. For five of the eight FPIcontracts, the buyers did not do price analyses using the last valid purchase price.Buyers primarily relied on Richmond's electronic spreadsheet to calculate thecurrent market price ('m lieu of performing a price analysis) based on the last validunit price for buying the mspplies. This resulted in excessive prices being paid.Only one of the five buyers requested waivers. Both waiver requests were basedon the FF1 price exceeding the current market price and FPI denied both requests.The requests were not appealed and the buyer ultimately purchased the suppliesfrom FPI.

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For example, a contract was awarded to FPI on December 19, 1996, at a unit priceof $70.90. The contract file included two commercial quotations dated November1996. The commercial unit prices, in the quotations were $40.49 and $41.90. Thecommercial comparison contract, awarded May 27, 1997, was awarded at a unitprice of $37.40. Clearly, the $70.90 unit price was excessive when compared withthe commercial quotations and actual subsequent award to a commercial vendor.Had Richmond purchased the supplies from FFI at $37.40 the total cost wouldhave been nearly $25,000 less.

Adequate training on the use of cost and price analysis and on price negotiationwould have provided the buyers with skills to negotiate lower unit prices forcontracts. The results of price analysis and successful negotiations with FPI werevisible from the results of negotiating long term contracts with FPI and theoutcome of negotiations by the more experienced buyers at the PhiladelphiaCenter. Richmond should provide training and require its buyers to perform priceanalysis before purchasing supplies from FPI or commercial vendors. When theanalysis shows that the FPI price significantly exceeds the current market price,and a lower price cannot be negotiated, the buyer should request a waiver fromFPI. The benefits of such analyses have historically paid good dividends. Forexample, extensive negotiations between the Richmond Center and FPI for a5 year contract for approximately 200 national stock numbers resulted in acontract being awarded to FPI with a total contract value $3.4 million lower thanFPI's initial proposed prices, a 12 percent price reduction.

Waivers for Price. The FAR, as currently written, serves to discourage waiverrequests for reasons of price. FAR 8.605(b) states:

Purchases from other sources becus of a lower price are not normallymuthrinzd, and clearances [waiversl will not be issued on this basisexcept as a result of action tke to resolve questions of price unde8.604(c).

Subpart 8.604(c) states:

When the contracting officer believes that the FPI price wxceds themarket price, the mae may be referred to the cognizant productdivision identified in the Schedule or to the FPI Washington office forresolution,

FPI relies on this FAR language for resolution of price disputes as can beascertained from an FPI letter to a Defense Supply Center Richmond contractingofficer that stated:

I am writing in response to DGSC [sic DSC Richmond] continuingprcing request regarding DLAR 8.6-90(c)(2) and DGSCAPs.604(cX3Xu) as they relate to disputes concerning Current MarktPrice dtderminatons. Federal Prison Induftis, Inc. (FPI) does notagree with the provisions of the DLAR and DOSCAP, insofar as they

14


suggest that a contracting officer can unilaterally overnule FMI'sdetermination as to what constitues 'curnmt market price.' In fact theDLAR may be in conflict with the FAR section 8.605 Clearance (b)"Purchases from other sources because of a lower price are notnormally aztho4fed, and clearance will not be issued on this

From our examination of Richmond contract files and discussions with buyers, weconclude that waivers that should have been submitted on the basis of price werenot always submitted. The FAR 8.605(b) language should be changed to requirethe buyers to request a waiver when the FPI proposed price significantly exceedsthe current market price.

Analysis of Commercial contracts. Wejudgementally selectedseven commercial contracts with unit prices higher than the comparable FPI unitprice. The value of each contract was less than $25,000. We compared the sevencontracts with the associated FPI contracts for identical supplies. Figure 3presents the comparisons by national stock number.

Fogure 3. Commercial Vendor Prices Compared to MFI Prices

Commercial FPI Unit PriceNSN Unit Price Quantity Unit Price Quatit7 Difference

5995-01-380-3901 $609.00 40 $4.59 185 13167.97%5995-01-386-1646 $588.00 10 $219.09 10 168.38%6150-00-051-4868 $1,180.00 4 $356.40 4 231.09%6150-01-046-9800 $212.03 42 $127.17 19 66.73%6150-01-383-0806 $1,077. 7 $138.59 15 677.10%6150-01-383-0806 $1,085.85 9 $138.59 15 683.50%6150-01-383-0806 $1,201.21 3 $138.59 15 766.74%

We recopize that it may not be realistic for all commercial vendors to be as pricecompetitive as FPL However, the large percentage of differences found at theRichmond Center cearly demonstrates a need for better price analysis andnegotiation.

Buyers at the Richmond Center had not performed a price analysis for the sevencommercial contracts, relying eclusively on solicited and unsolicited pricequotations from commercial vendors. Further, the contract files did not includeany explanation of why the supplies were not purchased from FPI when thecommercial prices for these supplies were higher. While FPI has provided theRichmond Center a blanket waiver for supplies costing under $3,500, the

15


application of this waiver should not be such that buyers overlook FPI as a sourcewhen FPI can provide the supplies at a lower unit price. To overlook FPI undersuch circumstances is not appropriate.

Defense Supply Center, Philadelphia. At the Philadelphia Center buyersperformed cost and price analysis to establish that the price was fair andreasonable. We reviewed 12 FPI clothing and textile contracts for which the pricepaid to FPI was higher than the price paid to a commercial vendor for identicalsupplies. Each contract file included a Center cost and price analysis. We notedonly one instance where the most recent commercial price had not been used in ananalysis.

The Philadelphia Center's use of cost and price analysis clearly shows FPI iswilling to negotiate prices. Such negotiations have pernitted DoD to obtain morereasonable prices for supplies. Negotiations by the Philadelphia Center resulted in8 of the 12 clothing and textile contracts awarded to FPI costing $3.5 million lessthan originally proposed, a 9 p decrease in FPI's prices. Figure 4 comparesthe unit prices initially off eand theinegotiated final unit price.

Figure 4. Results of Philadelphia Price Negotiations

Initital Contract Final Contract PrceVtContact pime Cost Price Cost Saved

SPO10096DCA03 $9.9" $2,939,697 $9.05 $2,663,089 9.41%SPO10096DCB62 $3.07 $4,353,751 $3.03 $4,297,025 1.30%SPOI0096FCB03 $8.99 $601,539 $8.90 $595,517 1.00%SP010096FCB20 $9.00 $272,052 $8.19 $247,567 9.00%SP010097DCB10 $24.45 $2,494,291 $23.20 $2,366,771 5.11%SPOI0097DCB11 $24.75 $4,743,833 $21.20 $4,063,404 14.34%

SPOI0097FEAO1 $402. $17,733,384 $349.40 $15,401,552 13.15%SP010098DCAOI $9.77 $402,368 $9.11 $375,186 6.76%TOTALS $39,1•,463 1 35,728,659 8.99%

The most successful negotiations were for contract SPO10097DCB 1I (desertcamouflage coat (14.34 percent saved]) and contract SPO10097FEAO1 (bodyarmor fragmentation vest [13.15 percent saved]).

Lower Cost

DLA buyers and contracting officers at the Defense Supply Center, Richmondcould have purchased the supplies in our comparisons at a lower price if its buyers

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had purchased or been able to purchase the supplies at the lower of the FPI orcommercial price. We recognize that not all of the supplies included in ourcomparison could have been purchased at the lower unit price because ofconsiderations related to FPI m capacity and maintenance of theindustrial base. Nevertheless the success of buyers when they negotiated pricespersuaded us that there are opportunities to purchase supplies at less cost. For the20 percent of the supplies that matched, FPI prices were higher than commercialsector prices. Had DLA been authorized to purchase these supplies at the lower ofcommercial unit prices or negotiated a comparable price with FPI, DLA couldhave reduced its costs by $2.6 million.

We determined this savings by multiplying the difference in price between the'higher FPI prices and the comparable commercial price by the number of itemspurchased from FPI and summed the results, which totaled $2.6 million. Similarlyfor 78 percent of the comparisons, the commercial prices were higher than the FPIprices. IfDLA could have purchased the supplies at the FPI price rather than theactualcommercia price it could have reduced its costs by as much as $10 million.Since all the supplies in our comparisons were included on the FPI schedule, DLAwas required to obtain waivers from FPI before purchasing the suppliescommercially. This was done and FPI granted waivers for the purchases.


B.1. We recommend that the Director, Defense Procurement propose arevision to the FAR to eliminate the language in Subpart 8.605(b), whichstates that price will not normally be the basis for a waiver and insert:

a. A definition of current market price and how to determine currentmarket price when:

(1) The supplies being purchased are of the kind generallybought and sold on the commercial market.

(2) The supplies are manufactured In accordance withGovernment specifications.

b. A requirement that waivers should be requested when theproposed Federal Prison Industries, Inc. price significantly exceeds thecurrent mkarket price.

B.2 We recommend that the Commander, Defense Supply CenterRichmond establish additional training requirements for buyers andcontracting offiacers purchasing from Federal Prison Industries, Inc. Thetraining should include:

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a. Cost and price analysis techniques and reemphasize of therequirements to perform price analysis to complement cost or other analysis;

b. Negotiating procedures when analysis shows that either FederalPrison Industries, Inc. or commercial suppliers quote prices substantiallygreater than the current market price; and

c. The conditions for requesting a waiver from Federal PrisonIndustries, Inc. and what action to take if they deny the waiver.

Director, Defense Procurement, Comments. The Director deferred deletingFederal Acquisition Regulation 8.6 language which states that price will notnormally be the basis for a waiver. The FY 1998 National Defense Authorizationmandated report that is being prepared for Congress will address a number ofissues concerning FPI. The Director prefers to negotiate any proposed FARchanges emanating from this report and the change the Inspector Generalrecommends will be considered. Regarding Recommendations B. La. and B. L.b.,the Director nonconcurred, stating that FAR 19.001,"Definitions," has a definitionof the term "fair market price," and FAR 19.807, "Fair Market Price," has anexplanation of how to determine fair market price. In addition, FAR 15.404-l,"Proposal Analysis Techniques," contains information on how to conduct a priceanalysis. This information is taught to contracting personnel as part of theirrequired training. It would be redundant to repeat this information in FAR subpart8.6. In addition, FAR 8.604(c) allows contracting officers to refer FPI pricesexceeding the market price to cognizant FPI Headquarters personnel. This givescontracting officers enough flexibility to determine when to request a waiver if FPIwill not reduce its proposed price. It is unnecessary to mandate that a waiver berequested if the FPI prices significantly exceed the current market price for thesame or similar item.

Audit Response. We agree that it would be premature to revise FAR subpart 8.6language but we do not agree that a FAR change is unneeded. We believe theDirector misunderstood the intent of our recomimendation, which is to clarify theterm "fair market price" for mandatory supply items in relation to the minimumguidance provided by FAR 8.6 and the 1993 Department of Justice legal opinionthat concluded FPI is not covered by the FAR standard terms when doing businesswith Government customers. Because FPI is not required to submit certified oruncertified cost or pricing data for contract proposals, the contracting officer orbuyer is generally limited to comparative or alternative pricing methods todetermine the fair market value of an FPI supply item. Comparative pricing haslimited application for noncommercial military specification iters, such as aircraftwiring harness, for which FPI has been the sole source producer in recent years.We believe the recommendation to revise FAR 8.6 language would provide clearparameters for contracting officers, minini disagreements based on price issues,and support the DoD acquisition streamlining policy to minimize procurementbureaucracy. We disagree that FAR 8.604(c) provides contracting officersflexibility in addressing FPI supply prices that significantly exceed current marketprice. Frequently, the FPI Headquarters division or commodity manager that the

18


pricing issue is referred to is the same individual who either approves ordisapproves the waiver request based on a pricing dispute. FAR 8.6 ambiguouslanguage and the procedure for settling price dis utes is a pmy reason that theFPI Ombudsman was established to independently assess e merits of appealedwaivers. We request that the Director reconsider the nonconcurrence andcomment on the final report.

Defense Logistics Agency, Comments. DLA concurred with RecommendationsB.2.a., B.2.b., and B.2.c., stating that the Defense Supply Center Richmond is inthe process of establishing new long term contracts which focus on improvedpricing with FPI. The supply center will also provide training for buyers and,contracting officers on purchasng mandatory supply items from FPI. The trainingwill include cost and price analysis techniques with emphasis on performing priceanalysis to complement cost or an alternative analysis. During FY 1999, thesupply center has scheduled training on the waiver process. Because the waiverprocess is cumbersome and slow, the center will review and make changes tostreamline the process to expedite buying decisions. Action is to be completed byDecember 1998.

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Finding C. Exercising Federal PrisonIndustries, Inc. WarrantyDefense supply centers did not always obtain replacements for defectivesupplies manaured by FPL This occurred because Defense supplycenters did not notify FPI about the defective supplies in order to exercisethe warranty. Defense Logistics Agency guidance is incomplete pertainingto the lifetime warranty provided by FPL As a result, the Defense supplycenters missed the opportunity to replace about $127,000 in defectiveitems at no cost to Defense Logistics Agency.

The FPI Escape-Proof Warranty

The FPI warranty guarantees the repair or replacement of any item at no cost tothe buyer. The warranty is stated as follows:

We are committed to your complete and continual sadsctioan IM; atany tnie, an item we have provided does not entirely meet yourexpectations, we wil cheed y and promptly repi or mplace it,entirely at ofr expene.

Product Quality Deficiency Report. During October 1, 1994 throughSeptember 30, 1997, DLA received 337 Product Quality Deficiency Reports(PQDR) for deficiencies of supply items purchased from FPL. The 337 PQDRsreported 24,915 defective supply items. DLA did not always notify FPI aboutPQDRs.

Defense Supply Center Philadelphia. DSC Philadelphia received 296 PQDRsfor 24,185 defective items such as T-shirts, camouflage trousers, and woman'sutility shirts. The value for the 24,185 defective items reported is $125,390.24.The supply center did not notify the FPI of the deficiencies in order to receivereplacements for the defective items.

Defense Supply Center Columbus. DSC Columbus received 10 PQDRs for 153defective electrical supply items. The value for the 153 defective items reported is$2,132.07. Of the 10 PQDRs. only 3 were referred to Defense ContractManagement Command for investigation and one PQDR had two defective supplyitems. The center has not received FPI replacements for the remaining 7 PQDRswith 121 defective items valued at $1,696.30. DSC should request replacementsfor the defective items.

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Finding C. Exercising Federal Prison Industries Warranty

Defense Supply Center Richmond. The supply center received 31 PQDRs for577 defective electrical items. The value for the 577 defective electrical itemsreported is $46,222.34. The supply center contacted the FPI about the PQDRs.By FPI direction, the DoD customers returned the defective items for replacement.FPI paid for the shipping costs of the items returned.

Item Replacements

The Defense supply centers did not always notify FPI about the defective suppliesto exercise the warranty. The Inventory Control Point is responsible fordetermining if an item is under warranty and contacting FPI to inform them of thedeficiency, according to Defense Logistics Agency Directive 4155.2, "QualityAssurance Program for DLA Inventory Control Points." The Directive states:

"Ile ICP Action Point shall determine the corrective action to correctthe deficiency. The Action Point shall make recommendations tocontracting officers an contractual warranty enforcem-en- action toobtain conmractor repair, replacement, or ramuwmnt ofnonconforming materiel by the contractor ....

Knowledge of Warranty. The DSC Philadelphia officials said they were notaware of the lifetime warranty that FPI offers on its clothing and textile supplies.Two factors contribute to this:

* DLA procedures that require Defense supply centers to exercise FPIwarranty provisions are inadequate, and

* DLA guidance is incomplete pertaining to the lifetime warranty providedby the FPI.

DLA Manual 4155.2, 4-6, "Customer/Depot Complaints (CDCs)/Product QualityDeficiency Reports (PQDRs)," states that FPI has a lifetime warranty on itselectronic supplies. However, the FPI warranty applies to all of its products.

Opportunity to Replace Defective Items

Because the Defense supply centers did not exercise FPI warranty provisions, theymissed the opportunity to replace about $127,000 in defective supply items at nocost to Defense Logistics Agency.

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Finding C. Exercising Federal Prison Industries Warranty


C.1. We recommend that the Headquarters, Defense Logistics Agency:

a. Revise Defense Logistics Agency Manual 4155.2,4-,"Customer/Depot Complaints (CDCs)/ Product Quality Deficiency Reports(PQDRs)," to state that the Federal Prison Industries, Inc. lifetime warrantyapplies to all of its supplies.

b. Require Defense supply centers to exercise the Federal PrisonIndustries Inc. warranty provisions for their products.

C.2. We recommend that the Commander, Defense Supply CenterPhiladelphia request Federal Prison Industries, Inc. to replace supply itemsassociated with the 296 Product Quality Deficiency Reports that wereviewed.

C.3. We recommend that the Commander, Defense Supply CenterColumbus request Federal Prison Industries, Inc. to replace supply itemsassociated with the 7 Product Quality Deficiency Reports that we reviewed.

Defense Logistics Agency, Comments. DLA concurred with all of therecommendations, stating that the Inventory Control Points will be required tofollow DLA Directive 4155.2, "Quality Assurance Program for DLA inventorycontrol points," that requires FPI to be notified about deective items reported onPQDRs. Agency guidance in DLA Instruction 4155.2, -Quality AssuranceProgram Instruction for DLA Inventory Control Points," will be amended to statethat FPr s lifetime warranty applies to all FPI products. DLA Supply CentersColumbus and Philadelphia have initiated action to have FPI replace defectivesupply items if they caused the deficiency. Action is to be completed byDecember 1998.

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Part H - Additional Information

Appendix A. Audit Process

Scope

DoD Components purchase supplies and services from FPIL however, we focusedour review to include only DLA purchases from FPI during fiscal years 1996 and1997. We reviewed data related to quality, price, and timeliness of suppliespurchased by DLA. We also reviewed the DLA procedures used to request awaiver of the requirements to purchase mandatory supplies from FPI whensupplies are overpriced or unsuitable for DoD use.

For October 1, 1995 through September 30, 1997, we reviewed 1,786 contracts inthe DLA procurement data base to compare unit prices of FPI and commercialvendors' products of the same supply national stock number.

We reviewed the Customer Depot Complaints system for PQDRs for FPI suppliesthat had a recorded deficiency during October 1, 1994 through September 30,1997.

We used the DLA Automated Best Value System, which rates contractor deliveryperformance, to review FPI supply delivery timeliness for a one year period. Wealso reviewed contract records for purchases of clothing and textile supplies fromOctober 1, 1995 through September 30, 1997. We compared FPI and commercialvendor deliveryperformance for like supplies to evaluate delivery timeliness. Weused data from DPSC form 420, Contract Status Record" to compute thedelinquency rate and the average number of days late for mandatory clothing andtextile items.

We reviewed DLA waiver requests submitted to FPI for approval to purchasesupplies from commercial vendors. We also reviewed data on reported DoDwaiver requests, approvals, and denials from the FPI waiver data base. We did notverify FPI waiver data because it was not within the scope or authority of ouraudit.

We did not use statistical sampling procedures for this audit.

DoD-wide Corporate Level Government Performance and Results Act(GPRA) Goals. In response to the GPRA, the DoD has established 6 DoD-widecorporate level performance objectives and 14 goals for meeting these objectives.This report pertains to achievement of the following objective and goal.

. Objective: Fundamentally reengineer the Department and achieve a 21stCentury infrastcture. Goal: Reduce cost while maintaining required militarycapabilities across all DoD mission areas. (DoD-6)

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Appendix A. Audit Process

DoD Functional Area Reform Goals. Most major DoD fimctional areas havealso established performance improvement reform objectives and goals. Thisreport pertains to achievement of the following functional area objective and goal.

* Logistics Functional Area. Objective: Streamline logisticsinfastructure. Goal: Implement most successful business practices (resulting inreductions of minimally required inventory levels). (LOG-3.1).

General Accounting Office High Risk Area. The General Accounting Office(GAO) has identified several high risk areas in DoD. This report providescoverage ofthe Defense Inventory Management high risk area.

Methodology

Specific methodology for each objective is discussed in Appendix C.

Audit Period and Standards

We conducted this economy and efficiency audit from September 1997 throughApril 1998, in accordance with auditing standards issued by the ComptrollerGeneral of the United States, as implemented by the Inspector General, DoD.

Use of Computer-Processed Data

We relied on DLA computer-processed data contained in the Automated BestValue System, Customer Depot Complaints System, and the Standard AutomatedMaterial Management System. We did not establish the reliability of the databecause it was not within the scope of the audit. However, we did examine thecomputer-processed data to verify that the information included in the data fieldsand records we requested. We also determined that the records contained reliableinformation on national stock munber, control number, and contract number.

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Appendix B. Prior Audits and Other Reviews

GAO Report No. 98-118, "Federal Prison Industries, Delivery Performance IsImproving But Problems Remain," June 1998, stated FPI delivery performanceia improving- upward trend in the latter part of FY 1997. However, FederalPrison Industries, Inc. fell short of meeting its goal of 90 percent on time deliveryin FY 1997.

GAO Report No. 98-50, "Federal Prison Industries, Inc. Limited DataAvailable on Customer Satisfaction," March 1998, stated that Federal PrisonIndustries, Inc. lacks sufficient data on how Federal customers view their suppliesand services. Federal Prison Industries, Inc. concurred with the GeneralAccounting Office recommendation to develop a database to measure customersatisfaction.

IG, DoD Report No. 93-066, "Recoupments for Quality Defects," March 10,1993 stated that the DLA supply centers did not perform complete qualityassurance investigations because quality assurance specialists frequently curtailedQuality Deficienc7 Report investigations without validating quality deficienciesthrough the supplier. As a result of the recommendations, DLA issued a policymemorandum requiring quality assurance specialists to meet certain objectives in aquality deficiency investigation. Also, DLA implemented procedures to performlaboratory tests as a means to support a quality deficiency investigation.

IG, DoD Report No. 92-005, "DoD Procurements from Federal PrisonIndustries, Inc.," October 11, 1991 found that prices paid for electronic andelectrical cables from UNICOR often exceeded costs and negotiated profits. As aresult of the recommendations, the Department of the Army requested a voluntaryrefund from UNICOR. The Defense Logistics Agency Directive 4105.1, subpart8.6 "Acquisition from Federal Prison Industries, Inc." was developed assupplemental guidance. The Director of Defense Procurement examined thereasonableness of UNICOR profits on individual contracts.

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Appendix C. Senator Levin's Questions

Question 1. How do the prices of FPI supplies and services compare to theprices for comparable supplies and services purchased from the commercialsector pursuant to competitive procedures?

In a majority of purchases, the price of FPI supplies compares favorably with theprice for the same supplies purchased from the commercial sector pursuant tocompetitive procedures. Based on comparisons of unit prices for the same items,the unit price paid to FPI was greater than the commercial sector unit price20 percent of the time, lower then the commercial sector prices 78 percent of thetime, and the same price 2 percent of the time. Appendix F compares FPI andcommercial vendor unit prices.

Methodology for Price Comparisons. We asked the DLA supply centers toprovide us with selected contract information for each contract awarded to FPI.We asked for the same information about contracts with commercial vendors forthe same supply item. The definition of the "same supply item" compared eitheritems with the same Federal stock number, or clothing and textile items from thesame supply group code. FPI defines a supply item much more broadly,sometimes to mean a supply class or Federal Stock Class. Our definition waslimited to the same item, such as long sleeve shirt, not a class of supply items.

We limited comparisons to contracts awarded after September 30, 1995 [FY 96forward]. We limited the contracts to this period primarily to avoid having toadjust the unit prices for the effects of inflation, and to evaluate currentperformance rather than past performance. The overall producer price index (PPI)for calendar 1996 and 1997 was relatively constant. The PPI is often used bycontracting officers for performing price analysis. While the normal method forprice analysis is to use an industry or commodity index rather than the generalindex, the use of the general index is adequate for our comparisons.

We matched the information by supply item and compared unit prices to determinewhether the price paid to FPI was less or greater than the price paid to commercialsector vendors for the same supply item. After September 1995, not all FPIcontracts awarded had a matching commercial contract and some items hadmultiple awards for either or both FPI and commercial contracts. Since some FPIcontracts did not have a match, while others had more than one match, the countof contracts that match is less than the number of supply item matches becausesome contracts match more than one time. We did not evaluate whether the centerpurchased an item exclusively from FPI at a price that exceeded current marketprice.

Question 2. How do the quality and timeliness of FPI supplies and servicescompare to the quality and timeliness of comparable supplies and servicespurchased from the commercial sector pursuant to competitive procedures?

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The quality of FPI supplies compares favorably to commercial supplies forpurchases made by DLA. In comparing FPI and commercial supplies for likeitems, both had a quality defect rate of less than a tenth of one percent for the totalitems reported on product quality deficiency reports.

All the PQDRs submitted were Category HI quality deficiencies that will not causedeath, injury, severe occupational illness, loss or major damage to a weaponssystem, or result in a production line stoppage. DLA supply centers qualityassurance and contract personnel stated that while FPI supply quality was aproblem in the past, in recent years the FPI supply quality has been good andcompares favorably to like supply items purchased from the commercial sector.The proportion of defective supply items to the total items purchased isapproximately the same for both FPI and the commercial sector for the samesupply items.

Methodology for Quality Review. During October 1, 1994 throughSeptember 30, 1997, DLA received 337 PQDRs for deficiencies of supply itemspurchased from FPI. The 337 PQDRs reported 24,915 defective supply itemsbased on a total of 6.2 million items purchased. This represents less than 1 percentof the items purchased that were reported defective by DLA customers.

Safety &Rescue Electrical

Equipment Equipment1% 12%

Clothing &Tex)iles

87%

Figure C-1. The 337 PQDRs were submitted for these Federal supply classes.

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We grouped the PQDRs by Federal supply class and compared supplies with thesame national stock number that was purchased from FPI and commercial vendors.Based on the comparison, there were 27 PQDRs issued against FPI supplies and82 PQDRs against commercial supplies.

For FPI supplies, the 27 PQDRs reported 46 defective items based on 1.3 millionsupply items purchased. For comnmercial vendor supplies, the 82 PQDRs reported420 defective items based on 12.8 million supply items purchased. In bothinstances, less than I percent of the total supply items purchased were reporteddefective on PQDRs submitted to DLA supply centers. See Appendix G for itemdescriptions for PQDRs reported.

Quality Assurance Represeatative. We contacted Defense ContractManagement Command quality assuranm representatives who perform sourceinspections at prisons that manufacture the supplies reported on the PQDRs. Thequality assurance representatives reported that FPI quality is excellent compared tocommercial vendors who manufacture supplies for DoD. Also, FPI is veryresponsive when a source inspection identifies a material deficiency. The qualityassurance representatives stated that FPI currently has a 2 percent defective rate insource inspection.

Timeliness. For DSC Philadelphia clothing and textile purchases, FPI contractdeliveries were untimely and compared unfavorably with like supply itemspurchased from the commercial sector. For the contracts reviewed, FPI deliverydelinquency rate was 29 percent and the commercial vendors' delivery delinquencyrate was 18 percent for like supply items such as extended cold weather trouser,battle dress uniform, and body armor.

For the DSC Richmond and Columbus Automated Best Value System, wecompared the contract delivery performance of FPI and commercial vendors forFederal supply classes. For DSC Richmond, FPI had an average on time deliveryscore of 51 percent compared to an average on time delivery score of 70 percentfor the center's vendors for all the Federal supply classes. For DSC Columbus FPIhad an average on time delivery score of 76 percent compared to an average ontime delivey score of 69 percent for the center's vendors for all the Federal supplyclasses. A delivery score of 100 percent (50 points) would represent a contractorwith perfect on time delivesy performance.

Methodology for Clothing and Textile Timelines. We reviewed 17 FPIcontracts and 17 commercial contracts awarded during FY 1996 through FY 1997for like supply items. We used data from, "DPSC Form 420, Contract StatusRecord," to compute the delinquency rate and average number of days late. AZsu item is considered delinquent when the contractor did not deliver allspecified items by the end ofthe scheduled delivery month. For example, if theschedule requires the contractor to deliver 25 shirts by the end of the month andthe contractor has delivered 19 shirts at the end of the month, they are delinquent.The delinquency rate is determined by dividing the number of delinquent itemrs bythe total number of items for delivery. A contract supply item is not delinquent if

29


it is caused by a Government delay. Our analysis was based on the methodologyused in the May 1996 Defense Personnel Support Center's, "Analysis of UNICORand MB/NISH Contracting Practices on Clothing and Textiles Readiness."

The 17 FPI contracts had 191 scheduled deliveries. Of the 191 deliveries, FPI wasdelinquent on 11 contracts for 56 deliveries. Each FPI delinquency averaged 17.9days late. The 17 commercial contracts had 184 scheduled deliveries. Of the 184deliveries, commercial vendors were delinquent on 7 contracts for 34 deliveries.Each commercial delinquency averaged 5.3 days late. Appendix H compares thedelinquent FPI and commercial contracts.

Methodology of Using Automated Best Value System rTheliness. Wecompared the delivery performance of 17 FPI facilities and those commercialvendors that man*ufatue 15 Federal supply dases of products for DSCRichmond. We also compared the delivery performance of 4 FPI facilities andthose vendors that manufacture 7 Federal supply classes for DSC Columbus. Weconducted this product comparison using information from the Automated BestValue System.

The Automated Best Value System is an automated system that collects a vendor'spast performance data and translates it into a numeric score. The contractingofficer then uses the scores as an additional evaluation factor when making bestvalue contract award decisions.

The Automated Best Value System assigns a score for performance in eachFederal supply class and for performance in all Federal supply classes at DSCRichnond and Columbus (center score). A contractor has a score for each Federalsupply class that they manufacture, but will have only one center score, which is anaverage of the contractor's Federal supply class scores. The Automated BestValue System scores range from 0 to a perfect score of 100 points, 50 points forquality and 50 points for delivery timeliness.

By comparing the DSC Richmond FPI delivery scores with the overall vendors'scores for Federal supply classes, we concluded that FPI has a lower delivery scorethan the collective score for all vendors. For the 15 Federal supply classes, theaverage delivery score for FPI is 51 percent, while the average center's overallvendors" score is 70 percent for all Federal supply classes. For DSC Columbus,our comparison showed that FPI had a higher on time delivery score than thecollective score for all vendors. For the 7 Federal supply classes, the averagedelivery score for FPI is 76 percent compared to the center's overall vendors scoreof 69 percent for all Federal supply classes. Contractors with high ratingsrepresent a lower performance r.-

DSC Richmond and Columbus use the Automated Best Value System to recordFPI past performance scores for the Federal supply classes. However, contractingofficials do not use the past performance information to award contracts toFPI because of its mandatory source status. FAR 42.15 "Contractor Performance"exempts agencies on evaluating past performance for contracts awarded to FPI.

30


The Automated Best Value System scores are available for FPI to review,however, FPI has not used the data as a customer satisfaction indicator. TheAutomated Best Value System relies on vendors to ensure data integrity in thesystem by reviewing the scores and challenging the data if they believe the scoresare incorrect.

Question 3. Does the Department have appropriate procedures in place todetermine whether FPI supplies and services are of appropriate "quality,character and suitability" and are purchased at "not to exceed currentmarket prices," as required by law?

We found that the DLA does have appropriate procedures to determine if FPIsupplies and services are of appropriate quality, character, and suitability. TheDLA does not have appropriate procedures for ensuring that its purchases fromFPI are at "not to exceed current market prices."

The Defense Contract Management Command quality assurance representativesperform source inspections at the FPI prison facilities to identify quality problemsbefore FPI supplies are shipped to DoD customers.

If the customer receives defective items, DLA has a PQDR program that allowscustomers to report deficiencies and receive consideration (repair, replacement orcredit) for defective items. The PQDR program includes a system foraccumulating supply quality deficiency data. With this system, the DLA canprovide for the initial reportin, cause correction, and status accounting ofindividual supply quality deficiencies and identify problems, trends, and recurringdeficiencies.

Generally, the contracts reviewed were for supplies manufactured to Governmentspecifications. We found that FPI supplies manufactured for DLA are ofappropriate character and suitability because FPI follows the specificationsprovided by the DoD.

The need for additional procedures to ensure that the Department's purchasesfrom FPI are at not to exceed the current market prices is discussed In the re.port'sFinding B. Besides discussing the need for additional procedures in this findigwe also make recommendations concerning what the Department should do toensure that its purchases are made at not to exceed current market prices.

Question 4. Does the Department have appropriate procedures in place toensure that contracting officials seek waiver of the requirement to purchasesupplies and services from FPI in cases where those supplies and services areoverpriced or otherwise unsuitable? As a part of this review, it would beextremely helpful if you would collect basic information on the total numberand dollar value of DoD purchases from FPI; the number and dollar value ofpurchases for which waivers should have been sought, based on applicable

31


standards; the number and dollar value of purchases for which waivers were,in fact, sought; and the number and doflar value of purchases for whichwaivers were granted?

Waiver Procedures. Except for DLA, DoD does not have Department wideguidance that provides procedures for submitting waivers to FPI and appealingwaiver denials. The Defense Logistics Agency Directive, 4105.1, subpart 8.6,"Acquisition From Federal Prison Industries, Inc.," provides minimum guidance onwaiver process procedures with FPL DLA supply centers have supplementedDLAD 4105.1 guidance on waiver processes in which each center's SmallBusiness Office is the focal point for FPI disputes and issues. DLA centers canrequest waivers from FPI via mail, e-mail, facsimile, telephone, and intemet.Waivers are primarily due to:

"* FPI material delivery time;

"* FPI technical specifications and requirements;

"* lower quoted prices from commercial sector vendors;

"* FPI production limitations; and

"* general waivers on electrical, metal, clothing and textile supplies.

DoD Waiver Data. DoD does not have a Department-wide waiver database.DLA centers do not maintain extensive data on the mnuber of waivers requested,approved, and denied and the associated waiver dollar value. DSC Philadelphia'sSmall Business Counseling Office maintains the most extensive waiver database fora DLA center. The database includes the number and sugPly type (clothin&textiles, furniture, medical apparel) of waivers approved y FPI for the center.DSC Richmond and DSC Columbus do not maintain a waiver database but they dohave file copies of the waiver requests but not the disposition of the waiverrequest.

FPI Waiver Data. Because DoD has no Department-wide waiver data, werequested that FPI Headquarters provide waiver data for DoD for FY 1997. InJanuary 1998, the FPI Customer Service Center in Lexington, Kentucky, providedsumnary DoD waiver data. The data shows that FPI granted $191 million waiversand denied $39 million waiver requests for DoD. The data represented theMlitaiy Departments (Army, Navy/Marine Corps, and Air Force) and "DoDOther" (DoD agencies, including DLA).

32


FY 1997 FP1 Dgnhed Waivem rY 1Y7 FP1 Appovd Vh•ivers

($3.2 milglon) ($11.1 millon)

189

06w heDoD

fl Air Force

oNavyi~arlinCorps

Figure C-2. The DoD waiver data is shown by these graphs.

Purchase Information. We did not acquire total Do) purchases of FPI suppliesbecause DoD does not maintain annual purchase data. There is procurement dataon the DD350, "Individual Contracting Action Report;" however, this does notinclude contracts valued at less than $25,000. In additions, we do not haveDepartment wide information for the FPI waiver data related questions.Specifically, we cannot address the number and dollar value of purchases in whichwaivers should have been submitted based on FAR 8.6 guidance for customerdisputes related to price, quality, character, or suitability of FPI supplies; and thenumber and dollar value of purchases in which waivers were submitted andapproved by FPI. For FY 1996 and 1997, we relied on FPI waiver data forapproved and also denied Department waiver requests.

Comparison of DLA and FPM Waiver Data. Based on our review, we haveconcluded that the FY 1997 FPI waiver data for "DoD Other" (which includesDLA) is understated. We compared data from DLA centers at Richmond andPhiladelphia with FPI data from the Customer Service Center in Lexington,Kentucky. The DSC Philadelphia waiver data listed 27 FPI approved waivers;however, the FPI data fisted only 10 approved waivers for Philadelphia. The DSCRichmond had 130 waiver approvals for electronic supplies; however, the FPI datahad no waivers listed for Richmond. We discussed our waiver data basecomparison with FPI headquarters officials. They agreed that the FPI waiver datais understated due to data inputting between commodity groups at FPIheadquartes and Lexdngton.

Methodology on Reviewing Waiver Procedures and Data. We reviewed DoDDirectives and Instructions relating to FPI. We interviewed officials from theOffice of the Secretary of Defense, Small and Disadvantaged Business Utilization.We obtained and reviewed DLA guidance, and we interviewed personnel from thematerial management office at DLA. We also interviewed DLA center officials

33


from the Small Business and procurement offices. We reviewed waiverdocumentation at DLA centers, to include contract files, waiver data, and DSCPhiladelphia waiver database.

We interviewed the FPI Ombudsman to discuss the appeal process for deniedwaivers. We obtained FPI waiver guidance, waiver data, and waiver appealsinformation. We also interviewed the FPI Director of Sales, Marketing andCustomer Service and officials from the Electronic Commodity Group.

34

Appendix D. Department of Justice Opinion

Offic of upi CwMsi

ofr6W Mc r.€ itu:

3spt e"r 13, 1993

Un M O OR x. MAeN.Di.rector. Federal Subeau of Prisons

Cma.isemoner, Federal Prison Industries

Re: application of the Federal AcquLs1ti Reogulations:3w lh•,m~nt, f em d erad l 6P.4an Tn rm ais

Thiscrandm responds to the request of the bs•eau ofPrisnms four pini on Whether certain federal procu.esestatutes and provIsia of the leftral Acquisition egulti(PAR) apply to Federal Prison Industries, Inc. (FPX).Specifically. we have been auked: (1) whether VIZ has theultimate authority. subject to "mZ authorizing legielation, todecide the price at which to Sell its goods to federal Vowroencustomere; (2) whether FIZ niust submit certifiLed cost a rcindata to federal agencies pursuant to 10 U.S.C. S 230" and PAR1s.sr and (3) whether• P may estimate the current market priceof its goods by zeference to the price of the same or similargoods more than one year In the past.

We conclude that the provisions of the FAR governing thesubmission of certified cost or pricing Information, thecalculation of a areasonable prices other than market price, andthe general FAR procedures for resolving pricing disputes do notapply to IPZ. We alSO conclude that the requiremat of 10U.S.C. 9 2306a do not apply to VPX. We express no opinion onVPZO* Individual calculations of the ourrentmrket price of Itsgoods by reference to the actual price of the same or Similargoods in the paste. We conclude, however, that In may use any

ethod that re1iably estimates current mmrket prices. subject todispte by potentl custamere prior to purchase and arbitrationunder 13. U.Si.C. 3 4124(b).

1.

1PX. also referred to as W;ECOR. is a self-supporting,wholly owned- governnt corporation.s VIZ operates pursuant to a

Sm 31 U.S.C. 5 9101(3).

35


statutory uandat~e to "provide emloyment for the greatest numberof those Inmates in the United States penal and correctionalinstitutions who are eligible to work an Is reasonablypossible. . . 'z, 15 U. S.C. 5 4122 M (2) . In fulfilling thatmandate, 171 s authorizing statute requires that It diversifyoperations so Othat no single piaeindustry shall be forced tobear an undue burden of competiinf~ the products of theprison work-shops, and to reduce to a minimu competition withprivate Industry Ur taree lao.' 6 j. BAn allg 5 4122 (b) (3) (FF1"shall diversify its products so that Its sales are distributedag its industries as broadly as possible'). Thi statute alsorequires that VPX focus its operations on labor- intensivemanufacturing. 5 43.22(b) (2).

FFZ makes a variety of products using paid prisom labor.DPX goods that are not used by the federal prisons way be soldonly to 'the departments or agencies of the United States.'I 4222(a). Although F?! Is prohibited fron selling to the publicin cometition with private enterprise, it Mas been granted apreference In sales to the United States. Federal departments,agencies, and institutions mjet spurchase (furn VP!, I at not toexceed the current market prices, sach [M)~ products . . . asmeet their requirements and my be available.' 1 4124 (a). Alldisputes about the price, quality, character. or suitability ofill's products are expressy cocmitted to an arbitration board.I 4124(b). The decision of the arbitration board is 'final. andbinding upon all parties.' Id.

2%6 mandatory preference granted 11? Is an exception to therules that normally Novern the! way goods are procured by theUnited States. Typically, federal procurement is governed byPAR, 46 C.P.R. IS 1.000-51.205. a detailed sot of procedures andtorms proilgated pursuant to the Office of Federal ProcureimentPolicy Act of 1974 (Procuroment Act), 41 U.S.C. IS 401-424. TheProcureMent Act embodies aL nmber of policy goals, including"promoting full and op en cometition;. . . promoting thedevelopment of simplified unitorm procuremient processes;land) pintingmt fair dealings and equitable relationships withthe prilvite s'ector.' 41 U3.S.. 5 401.

The Office of Federal Procurement Policy 4OFPP) * created bythe Procurement Act, Is charged with provid~ng overall directionof procurent policy and leadin the development of procurement"ystimm for the hzecutive agencies. 41 U.S.C. I 405. Under theguidance of the OVVD AdWaini-strator. two separate councils,repremsentative of defense and civilian agencies, respectively,maintain FXR's unifosm standards and procedures. 46 C.I.A.1 1.201. The Administrator of OF??, however, ret-ain authorityto prescribe gavernment-wide procuremient policies through PAR'with due regard for applicable laws and the program activities

-2

36

Appendix A. Department of Justice Opinion

of the executive agencies-I" 41. U.S.C. I 405(a), Wb. The OvswAdministrator, with the coacurrencef of the Director of the Off iceof lanagmnent and Budget, may rescind any goveriment-wideregulation or'~nuy rule or regulation of an executive agencyrelating to procuremnt that the Administrator determines is

i icnitent with the policies of the Procuremnt Act or the iaR.41 U.S.C. 5 405(f).

II.

on October 111 1931.h Iseco General of-the Departmentof Defense (Inspector enrlisedan audit report entitled

=De Procurement frcom Federal Prison Industries.' Report no.92-005 (Audit Report). fth Inspector General examined a nmberof procurement contracts pursuant to which the Department ofDefense (DoC) parchesed electronic and electrical cable from "IPbetween 1354 and 1990.* The Audit Report concluded that DoD didnot comply with the VAR In awarding the audi'ted contracts to II!and that, as a consequence. DoD wa overcharged on a substantialinumber of the sampled contracts.

In particular. the Audit Report found that the PAR mesviolated when DoD failed to obtain, and VP! failed to provide.certified cost and pricing data for the cable products sold.PursUant to VAR L5.803, 10 U.S.C. S 230",. and 41 1U.S.C.I 254(d), 2 mcutive agencies generally must require a contractorto submit and certify cost or pricing data." &Ma ale 46 C.F.R.if 15.004-2, 15.604-4. Ithe contractor's cost and pricing data isused by' the procuring agency to negotiate a -reasonable price'for the goods to be Purchased. 43 C.i.R. 55 25.5023(b) (1) ;15 * 04-1(a). Although the concept of 'reasonable pricem isflexible. 45 C.P.R. I 15.405. the Inapector General, with supportin the regulations, interprets the term to eAmn a pricereflecting allowable costs of production plus a reasonableprofit. Sea 46 C.V.R. SS 25.605-3. 31.201 (reasonable cost),

' The Procurement Act defines the term 'executive agency' toinclude 'a wholly owned Goversment copration fully subject tothe provision. of chapter 91 of t'it 32.' 41 U.S.C.S 403 (1) (D) . Because NIP is Ia wholly own"4 Govexuantcorporation' subject to the provision of chapter 31 of title 31,am 31 9.2.C. S2 9101-9106, 9109, It in an 'moxautive agency' forpurposes of the Procurement Act.

3 here are several exceptioins to the requiremnt to submitcertified pricing data. One exception is when the price of thegoods to be purchased is '-Mt by law or regulation.' 43 c.F.a.S 15.504-3 (a) (3). Since we conclude that FAR IS.$ Is notapplicable to procurement contracts with VPX, we do not addressthe question of whether IPX's prices are set by law or reogulationwithin the msngof FAR 15-.6

.3

37


15.9 (profit). ..Uoth the FPAR and the relevant acquisition relatedstatuts require the inclusion of clauses in the final negotiatedprocuremet contract that provide for *reduction of the Contractprice by any significant amounts that such price was increasedbecause of submission of . . . defective cost or pricing data..48 C.F.R. 15 15.802(a), 15.804-6. 52.215-22. 52.215-24.

The Audit Report also found fault with PXZ's internalaccounting procedures pursuant to which certified cost andpricing data were developed. Zn particular, the Audit Reportoncluded that M1 used •oneou empirical data i•d estiating

its costs, and did net comply with the requiremments oreastivating sysmti set out in FA I S.511. 2he Audit Report alsoconcluded that YIl's cost accommlation procedures were. inadequatein that they failed to segregate costs on each contract andfailed to disttnguish direct and Indirect coats properly. AM 45C.I.R. 5 31.201. Finally, Appendix I of the Report criticizedlIX,s method of esti-ating the market price of Its goods. Itattacked the age of the database, its validity even when current.and PPIis method of adjusting the data by simply aplying anannual inflation factor of four percent.

11! answered generally by stating that, as a wholly-ownedgovent corporation operating in a special procurementei ;t created by Its authorizing legi•latn, it is notsubject to the FAR requizements relied on in the Audit Reportwhen It Is dealing with DoD. It is VVI's position that FM 8.6treats procureienntfra FPZ specially, and that the normalregulations applicable to the procurement from the private sector(the standard term) do not apply.'

III.

in datenin4 whether the standard provisions of the FAMgovern purchases fro FP X, we must interpret the relevantportions of the Procurement Act, the FAR. and III's authorizinglegislation. For the zraons set forth below, we believe that

' The OPP Administrator, whose acquisition regulations arethe subject of this opinion, sent a letter to this Office statingthat OFPP has not itaken a position on the general applicabilityof the provisions of the federal Acquisition Regulation (PAR) tothe acquisition of goods and services from FPX.' Letter fromAllan V. Sua•ma. Administrator, Office of Federal ProcurementPolicy, to John C. garrison. Deputy Assistant Attorney General,Office of Legal Counsel (Sept. 21, 1992). Nonetheless, theAdministrator stated that he did not believe that the submissionof certified cost and pricing data by TIX 'is advisable from apublic policy standpoint' when current market pricing informationis available on analogous products to those purchased from PX.

-4

38


the correct readpq of the relevant statutes and regulations,taken as a whole, is that VP! is not covered by the FARo'standard team, and Instead. MP! must be treated specially underits authorizinj legislation and nh subpart e. 6.

Xnitially, we note that neither the Procuremt Act nor thelRZ states that the standard provisions of the In apply tocontracting with Vi!. Xnstead, both the Procurement Act and theMR contain str -g evidence to suggest that the standard

provisionm of the FAR were not Intended to apply to VP!. Section405 (a) of the Procurenmnt Act States that the WiR pbli•ie Shouldbe prescribed (and, by Implication, applied) vwith due regard forapplicable laws and the program activities of the executiveagencies . . .. . 41 U.S.C. 5 405(a). In short, the ProcurementAct Itself directs that, wheore possible, the FAR should notconflict with specialized procuremnt laws applicable to anexecutive agency such as lP1. Thus, if the na were silentregarding its application to m.Z there still would be reason toconclude that the standard provisions of the FAR do not apply toFP!, bocause the sche set up by PiZ's authorizing legislationis simsply not consistent with the application of the PARprovisions governing routine procurement from the private sector.

The FAR, however, is not silent regarding its application toVPP. Xndeed, RRi subpart 8.6 contains special ptovisionsrelating to acquisition from Vi!. including special procedures toresolve disputes regarding the price, quality, and character ofVP! products.

With respect to pricing, we agree with the Iunpector Generalthat "PZO Statutory Cond not to *exceed current marketprices does not in itself say whether the nR way Impo eadditional price limits. but other aspects of ViZ's authorizinglegislation, coupled with the special treatment of Vp! in theFAR. Indicate that the PAR should not be construed to interferewith VP! 's operations pursuant to its authorizing legislation,including the setting of prices that do not exceed market prices.Subpart ..6 of the l governs cuition r•ran Federal PrismoIndustris, Xnc.0 40 CJ.i.. 1 0.. These provisions provideimplicit and emplicit evidence that purchases from VP! war notintended to be govened by the standard W ters. mostdirectly, st .602 provides that: %

Agencies shall purchase required supplies of theclasses listed in the Schedule of Products made inFederal Penal and Correctional Institutions . . . atprices not to exceed current arket prices. unIna rhonrooures of this uuba~t. (emphas• s added).

Moreover, the procedures prescribed in the subpart strongly Implythat an Mi! price not xceding the warket price may be acceptedwithout regard to the FAR' s standard term:

39


When the contracting officer believes that the FP1price =Can tehe axkgLr.j ri, the matter may bereferred to the cognizant product divisions identifiedin (I? * a iromduct) Schedule or to the "IZ Washingtonoffice for resolution.

4S C.F.R. S 8.604(c)(ep~i added).- This language, which doesnot comel action. ol ites; further negotiation withrespect to price when the MP price =Mthe market Price-Tba threshold issue Is whether liZ ' price exceeds the marketprice. not whether it exceeds wso. independent forziala ofallowble coats plus profit.'

A further ease of VP! Is aSpecial status within the FARframework lies =in the fact that. because DOW must meet its needsfor goods available gu ronIX through M1 (at prices 6not toexceed current market pricee2). DoD lacks its most basic remdyunder the yAM when it deals with 11?. if a private meator entitychooses not to -covy with the nRa, the federal gowerneantnormally may not buy from that entity. In contrast, DOD lacksthe nec-essry contracting freedom to make "iP accept the PM'sac~onstrai nts. NothIng in m's charter* nor in the FAR, suggeststhat governmental. entities may ignore the mandatory prioritySimeply because "Px will not scedem to all requested contractter during neotato. Consequently, if Fri refeases toprovide certified pricing data ot refuses to reduce its price towhat the DOD considers a 'reasonable, price, 9 DoD still nost abideby the mandatory priority and buy javaiabe goods from "I!.

Finally, the pertinent statutory and regulatory frameworktreats FI? transactions sprtely from those with private sectorentities with respect to=dspt resolution. Subpart 33.2 of theNPAM sets out regulations governing 'Disputes And Appeals" inaccordance with the Contract Disputes Act of 1976 (Disputes Act),41 U.S.C. IS 601-613. Both the Disputes act and the associatedNMR regulations place initial jurisdiction to resolve disputesrel~ating to a gaveiment contract with the Contracting Officer-with appeal to a Board of contract appeals,* and eventual reVie-in the United states Claim Court. SM 41 us.'SC. 53 605. 606.609; 43 C.N.R. 1 33.210. in contrast. MI'S authorizinglegislation expressly eomits all disputes asto the 'price.quality, character or suitability' of "X? products to a specialarbitration board. and m&aks the findings of that board 'binding

frm'Moreover, the FM expressly states that clearances to buyaro source other than Np! normally will not be granted solely

because goods are available elsewhere at a lower Cost. 43 C.P.R.8 .605(b).

40


upon all partiest.. 18 U.S.C. I 4124 (b).4 In recognitio of thislaw, subpart 8.6"of the iR contains provisions that xPress*ypreserve Ypres dispute resolution procedure. 48 C.F.RL5 8.605(c) ('DIsputes regarding price, quality, character, orsuitability of products produced by VIP are subject toarbitration as specified in 16 U.S.C. 4124').

Overall, the statutory and regulatory structure of the FARand the II! establish separate procurement regines for twodecidadly different xrxmn•nt progress. The bulk of federalprocurement. ac l n the free market by contracts withentities in the pvat! sector, Is subject to the general termsof the PAR. With such contracts, the FA!R p Ostea the many goalsof the Procurement Act such as uniformity, fair pricecompetition. procuement at the lowest reasonable cost, and theelimination of fraud, waste, and abuse.' A smaal portion offederal procurement Is through "PI. a govrtmnt corporation,with a statutory preference requiring federal entities to buy

o a fzro M11 to the u•ent that MIZ bas them available.WiL 11X contracts, the R 4sfere to the public policy goals ofVPX--pzrvidig work and training for Intes in our federalprisons. Accordingly, given the separate, distinct nature of the

0 h- dispute reslto ircs s iqosed by the Disputes Actand the PAR' s standard tess 4not ly Ainistent with rIX'scharter, but might not apply to VIZ on its om tems. *bsDisputes Act Is written to deal with claim between theagovowrnment and a 'contractor.' &aa 41 U.S.C. s 605Ca). TheAct defines 'contractor' as *a paty to a Governsent contractother than the GoveTimnet.6 5 601(4). IM ins wbolly owned by

e go t run by governmet officials, and Congress hascharacterized sales by 1! an -Intergovernmental [email protected] 4126 (d). It sems likely, therefore, that FIX would have to betreated as the 'GovertO for purposes of the Disputes Act.Thus, the Disputes Act provisions designed to resolvedIsagreements between the govertmt and private contractoswould not apply to contracts between goveremant agencies and VIZ.Similarly, at least me court •s held that the Disputes Act doesnot apply to contracts whe" the goverint has contracted toa goods and services, rather than to buy than. sA Ri9L=vy trntad sl~te., 7 Cl. Ct. 770, aa-d. 790,W.2d 91 (1985)(contract for delivery of third class mail with the Postal

Service). Contracts between IPX and other governm•nt entities=ight be characterized as contracts primarily for the govorinntto provide goods and, therefore, aw pted froa the Act.

'I any of the lRU's policy goals sinply do not apply topurc•ases fronm lZ, which is a further indication that VIR doesnot subject lP! to its standard term. For example, the FVi'sgoal of increasing co€petition cannot be promoted if goods mustbe bought from l"I.

.7.

41


"IPX and the FAR programs, and the language of the pertinent Partsof the Procures•nt Act, the FAR. and the VP! authorizinglegislation. we conclude that the general term of the FAR do notapply to VP!.

Xv.

With the central issue decided, we nov address severalspecific argiueeai the Inspector General ha raised against TPI',position In this dispute. •iret, the Inspector General arguesthat if DoD pays a Smaket price which is higher thaa a pricebased an cost of production and reasonable profit, then DoD wuldbe Subsidizing FPI. In this regard, the Inspector Generalappears to be arguing that PP! should be limited to waking afixed profit an each Item It sells based on the cost of itsproduction, and that any profit above this level unreasonablyreduces the budget of the DOD.

As a factual matter. MP points out uas of the problems inusing the Fax Somalae to eatinate Its true costs of production.especially given rpX's unique statutory obligations. Letter fr•mJ. Michael Quinlan, Director. Sureau of Prisons, to Timothy 9.Flanigan. Acting Assistant Attorney General. Office of LegalCounsl (Sow. S. 3991). For exple, the Inspector Generaldefined MIxs la cost as 8.23 to $1.15 per hour. Although VP1has access to low cost labo becaume it amlays prisoners, italso accepts a variety of special burdme, security costs, andrestrictions because of the mature of Its business. By statute,VP! also Is restricted in the types of products it may produceand even how such of a given product it say produce. 15 U.S.C.5 4122(b) (2)- (4) .6 Perhaps for these reasons, both the FAR andVP!'s charter link 7PX prices to market prices, established bycoapetition, thereby obviating the need for a calculation ofFPms true costs of production.

Zn any event, the existence or non-existence of a subsidy-is a policy guestion that does not affect the legal issue of whatprice FV1 is authorixed to charge and what price DoO mast paywhen it purchases from !VX. WP's statute provides that it maycharge up to the market price regardless of its costs ofproduction or its potential proflt.' 18 U.8X. 5 4242(a).Moreover, it is consistent with coagressional Intent for VPI torun a profit, and there is no limit an its profit an any

S Under its charter. YPI nmst specialize in labor intensiveindustry, -- st diversify as broadly as possible, and must"avoid capturing more than a reasonable share of the market.Z4.

This is also consistent with VAR subpart 8.6. which doesnot require cost-based price estimtion.

42


individual product as long as IPX's prices do not exceed marketprices. By statlute, IPX is self-supporting and relies on itsprofits to exaend and to otherwise achieve its statutory goal ofproviding empibyment and training to the *greatest nuior ofthoes Inmates . . . as is reasonably possible. 0 1 4122(b) (1).Congress also provided that any money under the control of 11!that is not esended by the corporation to achieve its employmentrelated statutory obligations are to be deposited and remain inthe Treasury of the United States. S 4125. Zn this way.Congress ensured that any iPX oprofit would redoupd to thebenefit of the United States and to the prisoners rather than toprivate sector entities.

Next, the Inspector General notes that FiP has a long-standing practice of negotiating contract prices based an cost.The Inspector General also maintains that 1 uses cost data.along with market price infomation for similar products. wheninformation an current market prices of a particula. good isunavailable. Letter from Derek J. Vander Schaaf, DeputyIaspector General, Department: of Defense, to Timothy R. Flanigan,Acting Assistant Attorney General, Office of Legal Counsel (Nov.20, 1991). The Commissioner of lPX agrees that IPX is willing tonegotiate prices, although he does not say whether suchnegotiations are based an cost. Letter from J. Michael Quinlan.Director, bureau of Prisons, to Timothy S. Flanigan, ActingAssistant Attorney General, Office of Legal Counsel (Nov. S.1991). Nevertheless, the fact that lPX apparently has andcontinues to negotiate prices and my consider the cost of itsproduction has no bearing on whether, as a matter of lay, itretains ultimate statutory authority to set its own prices.subject to arbitration. m

Finally, the inspector General argues that, even if 16U.S.C. S 4124(b) is the only remedy for eaessive FPI prices.customers must have certified cost or pricing data under FAR 15.8or they will be unable to detect unfair prices. This argumentassmans, however, that IiZ's prices must be based on cost andthat VM 15.8 applies to IPX. As discussed above, neitherasumptiou is corrct. Although cost data may have m role inprce negotiations, they do not bind iFP to use a cost-plus-prof it system to set prices. Nmoreover. the is no dispute thatFPX continues to provide uncertified cost apd pricing data topotential customers. "I customers remain free to challenge IPX

10 Although IPX enjoys a mandatory priority, that does noteliminate all room for negotiation. PIP may well wish toaccommodate its customers where possible to maintain goodbusiness relations and a cooperative spirit.

43


with their own or IPZ's figures when they have reason to believelPV s prices exceed those set by the market."

V.

The final question posed by M is whether it my estimatethe market price of its goods by taking the price of the same orsimilar goods that prevailed more than one year in the past andadjusting that price for inflation. Given our conclusions above,FP?'s question, in effect, requests our opinion on whether aparticular formula calculates "current market pri-ces and whetherchat fozmula es employed correctly in particular contracts. Wedecline to render an opinion on these questions.

Neither MP?'s authorizIng legislation, nor 1MR subpart 8.6gives any specific guidance on bow 'current market priceS suostbe detezained. Moreover, the oawy relevant Arbitration boarddecision of which we are awre gives no affizmative direction oanthis issue. That decision states that scost of production Is notcurrent mIt price," nor is eawket price necessarily the lowestof competitive bids received, since the bid may have resultedfrom error, misunderstanding of the specifications, or distress.lccerpt of Findings of board of Arbitration- -Prison Industries,Objection to War Department to Price of Brooms, Feb. 7, 2131.But the Board Opinion gives no affirmative direction. =. 48C.I.R. 5 1S.30S-2 (eC zing a variety of methods forestimating a •rmaonable prices').

We believe the tern current market price' should beunderstood to convey its cmmon economic meaning, which reflectsthe dynamic of supply and demand in a coipetitive market.n we

" Zn its submission to this Office, rPI states that:

FP? does not dispute that the DOD has authority toaudit its cost estimation and accumlation system.

owever. an with, pricing policy. -RI? does not believethat the nAR policies sad procedures for 8uhisasion ofcost data are necessarily controlling (including aprovision for Interest and penalty paymanta ; however,VPX acknowledges that the Doo ZG has identifiedproblems that are significant in its cost accumlationsystem and FP? is committed to rectifying theseproblems . . . with assistance (from DoDi.

.1d. at 3-4 (footnote omitted).

0 a LmnruIlUX Milton N. Shapiro, lourdations of thetrkbet-.Pr-ce •ystem 179-233 (1955); Rdwin Mansfield,Icraoennmdes. Theory and Inliatios (3d ad. 1979); Wayne C.

Curtis, tiooeeonrmdc Conct. for Atto-neys: A reAferfnc Guide

44


hesitate, however, to say Vhat melthdologies my or may not beused to determiif- the market price of certain goods at a certaintime. Several approaches my be appropriate including, at times,a cost-plus-profit approach.

Similarly, we decline to commant on the Audit Report'scriticism of the accuracy of VIX's underlying price data.3 Zfmarket price Is to be estimated by adjusting a prior price.certainly that prior price most be valid and accurate and theadjustment most be arithmetically sound. But these challengesraised by the inspector General to the validity and accuracy of"Ion's data and calculations appear to be largely empirical ratherthan legal.

Questions about the accuracy and validity of base prices,like the issue of what method are suitable for calculatingmarket prices. are probably best resolved In future contractnegoations by discussions between the parties or, if necessary,by resort to the Arbitration Board.

VI.

in summry. we determine that the provisions of the FARgoverning the usubission of certified cost or pricingin!azctioe, the calculation of a "reasonable price other thanmket price, and the general ViZ procedures for resolvingpricing disputes do not apply to VV!. We also conclude that therequirwsnts of 10 U.S.C. S 2306a do not apply to VV!. Weexress no opinion an •PZ's individual calculations of thecurrent market price of its goods by reference to the actualprice of the same or similar goods in the past. We conclude,however, that VPX my use any method that reliably estimatescurrent market prices, subject to dispute by potential customersprior to purchase snd arbitration Under IS U.S.C. I 4124(b).

(1984).

0 Appendix I at 43-45. Tb. body of the Inspector General'sAudit Report does not discuss PPI's market price calculations,probably because the report concluded that FPX's prices wer"governed by the Via's provisions for det a "reasonableprice.5 The factual accuracy o F!P' s records of prior non-FP?market prices, and the validity of its adjustment formula on theaudited contracts, were apparently only reviewed in response toIPXs coments on a draft of the Audit Report.

45


please let.us know if we may be of turtber assistance.

Acting Assistant Attorney GeneralOffice of Legal Counsel

cc: Honorable Derek J. Vender ScheafDeputy xnspector GeneralDepartment of Defense

Honorable Allan V. BurmanAdministratorOffice of vederal Procurement Policy

12 2

46

Appendix E. FAR Guidance for CommercialContracts

While not applicable to purchases from FPI [see Finding A], FAR 15.402,"Pricing policy," provides guidance and an order of preference for contractingofficers in determining the type of information required when negotiating prices forsupplies and services.

Contracting officers shall-(a) Purciase supplies and serv from responsible sources at fair

and reasonable prices. In establishing the reasonableness of theoffered prices, the contracting officer shall not obtain moreinformation than is necessay. To the extent that cost or pricing dataare not required by 15.403-4, the contracting officer shall generallyuse the Mlowing order of preference in determining the type of

fom io require(1) No additional infomation from the offtror, if the

price is based on adequate prce competition, except as provided by15.403-3(b).

(2) Information other than cost or pricing data-

(i) Information related to prices (e.g.,established catalog or market prices or previous contract prices),relying tis on information available within the Government; second,on information obtained from somces other than the offror and, ifnicessary, oan information obtained from the offetrr. When obtaininginformation from the offeror is necessary, unless an exception under15.403-1(bXl) or (2) applies, scih Infrmation submitted by theofferor shall include, at a minimum, axopriale information on theprices at which the same or similar iems have been sold previul,adequate for evaluaing the reasonableness of the price.

(ii) Cost inforation, that does not meet thedefinition of cost or pricing dafta at 15.401.

(3) Coit or pcing data Th contracting offi shoulduse every mmns available to ascertain whether a fair and reasonableprice can be determined before requesting cst or pricing data.

Conratig officers shall not require unnecessarily the submission ofcost or pricing data, becau it leads to increased proposal preparationcosts, generally amends acquisition lead time, and consumesadditional contractor and Government remuces.

(b) Price each contract sepM and indeedently and not-(1) Use proposed price reductions under other contracts

as an evaluation factor, or

47

Appendix E. FAR Guidance for Commercial Contracts

(2) Considr louses or prft realized or anticipatedunder other contractL

(c) Not includ in a contract price any amount for a specifiedcontingency to the exten that the conract provides for a priceadjustment based upon the occurrence of that contingency.

FAR 15.404-1, "Proposal analysis techniques," provides guidance for contractingofficers reviewing contractor proposals.

(a) General. The objective of proposal analyi is to ensure that thefinal agreed-to price is fair and reasonable.

(1) The contracting officr is sponsible for evaluating thereasonableness of the offeed pnceL The anayical techniques andprocedures described in this subsection may be used, singly or incombination with othes, to emsure that the final price is fair andreasonable. The complexity and circumstances of each acquisitionshould determine the lve of detail of the analysis required

(2) Price analysis shall be used when cost or pricing data are notrequired (see paragraph (b) ofthis subsection and 15.404-3).

(3) Cost analysis shall be used to evaluate the reasonableness ofindividual cost elements when cost or pricing data are require& Priceanalysis should be used to v'iify that the overall price offered is fairand reasonable

(4) Cost analsis may be used to evaluate information other thancost or picing data to determine cost reasonableness or cost realismn

(5) The contracting ofcer may request the adv= and assistanceof other eaperts to emure that an appropriate analysis is performed.

FAR 15.404-1(b), "Price analysis," defines price analysis as the process ofexamining and evaluating a proposed price without evaluating its separate costelements and proposed profit The Goverment may use various price analysistechniques and procedures to ensure a fair and reasonable price, given thecircumstances surroundin the acquisition. Examples of such techniques include,but are not limited to the foilowing:

(i) Comparison of proposed prices received in response to the

(H) CoVan tpvioms proposed prices and contract prices withcurrent proposed pric for the same or similar end items, if both thevalidity of the comparison and the reasonableness of the previousprice(s) can be established.

48

Appendix E. FAR Guidance for Commerisl Contracts

(ili) Use of paramsetric estimating metliods/application. of roughyrudstic (such as dollrs per pouned or per horsopower, or otherunits) to highlight sgini•ca inconsistencies that wmarrant additiongprcig inur.

(iv) Comparison with competitive puished price lists, publishedmarlkt prices of commodities, similar indees, and discount or rebate

(v) Comprisn ofproposed prices with ndpedet Government cogadmateL

(vi) Cmvpi of prood prices with pces obtained throughmarket research for the same or similar item

49

Appendix F. Comparison of FPI andCommercial Vendor Unit Prices

N Higher FPI PriceU Same FPI PriceII Lower FPI Price

70%,

5050

Appendix G. Item Description of Product QualityDeficiency Reports

TotalNumber Number Item Replacement

oP. Otfns Description cost

2 2 Bath Towel $5.34

3 4 Man's Utility Shirt 42.32

14 17 Man's Utility Trousers 127.16

105 105 Man's Utility Shirt; Flame Retardant 1,136.98

36 48 Man's Shirt 428.12

3 4 Woman's Shirt 45.64

2 2 Woman's Utility Shirt 11.93

4 7 Swimmers' Trunks 33.24

3 4 Camouflage Pattern Coat 55.77

66 17,220 General Purpose Trunks 94,292.661

38 6,735 Athlete's T-shirt 28,536.73

2 2 Water Canteen Cover 13.69

18 35 Camouflage Trousers 660.66

7 121, Electrical Items 1.696.30303 24,306 $127,086.54z

'DLA responded to a working draft by saying that the problem with the general purposetrunks, physical fitness uniforms was caused by depot storage not a FPI m cerror.

2 We calculated the dollar value of the potential replacements by multiplying the estimatedcontract unit price times the number of defective items. This calculation does not includethe total replacements received by Defense Supply Center Richmond.

51

Appendix H. Comparison of Delinquent FPI andCommercial Deliveries

Analysis of Federal Prison Industries, Inc. Contracts'

Contract Deliveries

NumberIPP2 of Number

Item Contract Item Deliveries Delinquent Days Late?Shirt 96DCA03 No 12 2 34Trunks 96DCA25 No 31 3 27Undershirt 96DCB62 Yes 11 6 266Jacket 96DCB71 No 13 2 2Trunks 96DCB85 No 18 8 145ECWCS4

Trousers 96DEG07 Yes 15 9 305Shirt 96FCB20 No 10 10 1,977BDU•

Trousers 97DCB1O Yes 17 2 50BDL15 97DCB11 Yes 6 4 135CoatBodyArmor 97FEAO1 Yes 12 9 338Jacket 98DCA04 No 3 1 31

Total 148 56 13310

wThe methodology used to determine a delinquency is discussed in Appendix C, Question

2.2 Industrial Preparedness Planning item that are required for mobilization.

3 Days late represent the total number of days late for all delivery delinquencies.4 Extended cold weather clothing system.

'Battle dress uniform

52

Appendix H. Comparison of Delinquent FPI and Commercial Deliveries

Analysis of Commerial Contracts'

Contract Deliveries

Numberof Number Days

Item Contract IPP Item2 Deliveries Delinquent Late'Undershirt 96D1025 Yes 12 8 199Jacket 97C1018 No 6 6 110Jacket 97C1004 No 9 9 270ECWCS4

Trousers 97C5104 Yes 3 1 5BDU3Trousers 96D0332 Yes 35 1 2Gloves 96D4012 No 22 7 343BodyArmor 97C5046 Yes 7 2 21Total 94 34 950

The methodology used to determine a delinquency is discussed in Appendix C, Question

2.2 Industrial Preparedness Planning item that are required for mobilization.3 Days late represent the total number of days late for all delivery delinquencies.4 Extended cold weather clothing system.

'Battle dress uniform.

53

Appendix I. Report Distribution

Office of the Secretary of Defense

Under Secretary of Defense for Acquisition and TechnologyDeputy Under Secretary of Defense (Acquisition Reform)Deputy Under Secretary of Defense (Logistics)Director, Defense Logistics Studies Information ExchangeDirector, Defense ProcurementDirector, Small and Disadvantaged Business Utilization

Under Secretary of Defense (Comptroller)Deputy Comptroller (Program/Budget)Deputy Chief Financial Officer

Assistant Secretary of Defense (Public Affairs)

Department of the Army

Auditor General, Department of the Army

Department of the Navy

Assistant Secretary of the Navy (Financial Management)Auditor General, Department of the Navy

Department of the Air Force

Assistant Secretary of the Air Force (Financial Management and Comptroller)Auditor General, Department of the Air Force

Other Defense OrganizationsDirector, Defense Contract Audit AgencyDirector, Defense Logistics Agency

Commander, Defense Supply Center - ColumbusCommander, Defense Supply Center - PhiladelphiaCommander, Defense Supply Center - Richmond

54

Appendix L Report Distribution

Non-Defense Federal Organizations

Office of Management and BudgetOffice of Federd Procurement Policy

Technical Information Center, National Security and International Affairs Division,General Accounting Office

Small Business Administration

Chairman and Ranking Minority Member of each of theFollowing Congressional Committees and Subcommittees

Senate Committee on AppropriationsSenate Subcommittee on Defense, Committee on AppropriationsSenate Committee on Armed ServicesSenate Committee on Government AffairsHouse Committee on AppropriationsHouse Subcommittee on National Security, Committee on AppropriationsHouse Committee on Government Reform and OversightHouse Subcommittee on Government Management, Information and Technology,

Committee on Government Reform and OversightHouse Committee on National Security

55

Part HI- Management Comments

Office of the Under Secretary of DefenseComments

, OFFICE OF THE UNDER SECRETARY OF DEFENSE9000 Ollwt[ 1004rrAGoN

WASINGTON. CC SM4OI4000

' .v August 24, 1998

DP/CPA

MEMORANDUM FOR DIPECTOR, CONTRACT KANAGEMENT DIRECTORATE, DODINSPECTOR GENERAL

SUBJECT: Draft Audit Report of Defense Logistics AgencyProcurements from Federal Prison Industries, Inc.(Project No. 7CF-5054)

This is in response to your memorandum of June 17 requestingcoments on the findings and recoamendations In the subject draftreport.

Please find attached our coments on those recowmendationsthat apply to Defense Procurement.

Eleanor R. SpectorDirector, Defense Procurement

Attachment

5

58

Office of the Under Secretary of Defense Comments

PROJECT NIMBER 7CF-5054

"Audit Report of Defense Logistics Agency Procurementsf om Federal Prison Industries, Inc.

DEFENSE PROCUREMENT COMMENTS

** * * 0**

RiCOMMENDATIONS

RECONMNMDATION A: DISPUTE RESOLUTION.A.1. We recommend that the Director, Defense Procurement initiaterevisions to the Federal Acquisition Regulation subpart 8.6"Acquisition from Federal Prison Industries, Inc.' that:

a. Refers buyers to the Ombudsman as the approved method ofresolving disputes pertaining to price, quality,suitability, and character of FPI products, and

b. Uses the word 'clearance' instead of 'waivers' torelate the terminology used with customer disputes.

DP RESPONSE: Partially Concur. While we agree that the FPIOmbudsman is currently the primary adjudicator of disputes withFPI, the arbitration board referred to in FAR 8.605(c) is beingestablished. Until the new board has developed procedures, toinclude its relationship with the FPI Ombudsman, it is prematureto make any changes to FAR 8.6 in this regard.

Recommendation A.l.b is worded incorrectly. The FAR currentlyuses the term "clearances" instead of "waivers.' FPI grantswaivers, not clearances, to customers. We agree that the term"waiver" should be substituted in FAR 5.6 for the term"clearance' wherever it appears.

RECOMMENDATION 3: NEGOTIATED PRICES FOR MANDATORY SUPPLIES.B.I. We recomend that the Director, Defense Procurement proposea revision to the FAR to eliminate language in subpart 8.605(b),which states that price will not normally be the basis for awaiver and insert:

a. A definition of current market price and how to determinecurrent market price when:

(1) The supplies being purchased are of the kindgenerally bought and sold on the commercial market.

59

Office of the Under Secretary of Defense Comments

(2) The supplies are manufactured in accordance withGovernment specifications.

b. A requirement that waivers should be requested when theproposed price significantly exceeds the current market price.

DP RESPONSE: Von-concur. The FAR contains a definition of thetermn fair market price* (Part 19.001, Definitions) and anexplanation of how to determine fair market price at FAR 19.202-6and 19.907. FAR 15.404-1(b) contains information on how toconduct a price analysis of the kind called for in recomendationB.l.a. The term "current", when attached to fair market price,is self-explanatory and needs no further definition. Thisinformation is taught to contracting personnel as part of theirrequired training. It would be redundant to repeat thisinformation elsewhere in the FAR.

FAR 8.604 (c) states 'When the contracting officer believes thatthe FPI price exceeds the market price, the matter may bereferred to the cognizant product division identified in theSchedule or to the FPI Washington office for resolution.0 Thisis also self-explanatory. We believe contracting officers haveflexibility to determine whether a waiver should be requested andthat mandating a waiver as proposed in B.I.b when the pricesignificantly exceeds the current market price is unnecessary.

The recoimendation also asks that DDP propose a revision to theFAR to eliminate language which states that price will notnormally be the basis for a waiver. DoD is preparing a report toCongress that will address a number of issues concerning the waywe do business with FPI. We prefer to negotiate with FPI anyproposed FAR changes emanating from that report at the conclusionof the report. The change the IG recomends will be considered.

60

Defense Logistics Agency Comments

DKFENSE LOGISTICS AGRNCY

WO2 JOHNNJ. KINOMAN ROAD. SUMT 2533

0FT. SEOLVGR VRGINI 22060422

T1O D" 2 SS

UWBMAMWFOlaMMM LMPAI.WAR OrFDMwATDI DbOBW CAWai Mumukg NOM

MJII~ANO3qu~htDsh L IWAhsusy ft 0.PSdu Mbfths. l~ks,&-VWINO7C.SS4

as DAawuwftshummbym I7hW apui. Lfysmqipb Gaud w MWI Sd~*uj?67-0.C

hd NIELA P. RADUS/Tý Laaip LUm= Palsy/beuiRwhwaMCU..

Foods~hPUiQ~bMi ~ W

61

Defense Logistic Agecy Comments

5U3IECT:. D usLgdcAgo"y hoMnM~IS ftOO Fedasi PMuo bD&HIulI~(nt. tN 7EF-50)

FDIDIG A: The uow smidngd ac~yproceduresfurreadying dhp~ims miappud wave denmh is muauekab modis am bdugweed byFedmw Prima. lauwiuds, lnoer Govmuuiinuuamom. This oaadidom adat becauseFAR aabpu S.4 -AopWdm bass Federal PrIso baehs, ha.7 guiduane: ban noboom ISYISed to danly eaab"u peadmorus for pwemug walvu and 1=&Mvia dApuubaiwam FF dits wmum. Asa summtDoD Iamseffecdvances for hadadug orapoeain wdvru~maw and orrmiving di~alsrp uxbdiato put. quality,

LA CONNEMM-S Nameascur. WhIlevrdw sabot rocedausfar xeolingdispoe and appealing wahEv melk d dw. h mokioam inot Iw roviue FAR guidance Asswdid I heladesDqmutm.dWdssm a ckmefnd abwegdteDauftAudt Repog;~U. FAR, huqtr Saabpot 3iisgecarafy mpp&cblto FPL TheFAX governs

Clovesumu sacelordo. uinde d uthesDn of Pdmm in tho Juatlee DeputmumatCova ng.e FPI apears in FAR Subpart L6i n ogimic put combsading offcer an

ct a nto s a odas dmi by mady cmmiii, the Govermeunt is oW*Wd toc I A~withths amos Ali .owvmapssniiddmiamlmtdowith tuflhnaiofdth=ad,- FIuthproofsimdaaIdido.inotbaehngthas. Fmda uder~

the F! qappem proces belomp thewIbm hind Code of Fadeal Rteguluiom andlor inDeportwmemt himsucamo. ThIi~ lo bs mdeoi tobe audkmoatdit OSD levL

ACI10t OFFCIR Mary kbswasu. DISC-F??31VI3CWiAMOVAIL- GUwiy IL. leddes Jr, CAPr, Kc USN, MUMn Exeautive

COORDDIAIION: Mimi Schimuvctr DDAI

DLA AFI'RRO

Rear Admiral. SC. USNDeputy Diactor

62

Defense Logisic Agency Comments

SU3RIDCT Deftn. LqgduAgincy mmoftmu."P bubuldesI~h

R3CO~BWIDAT0Ai.a Dacommsond dom Dimcor Defense LegludcuAgMarsvhsi Dafa ogI~i Asmm Dracdive 4105.1 VeDivo Logidac AcquhimDkogjygUujPMU -Acquisihon IW Fed"u Pie n&Ikin, Inc." to coompl wish

PdAI Muiulia Ropidla uPu~t L6 and im M99 Deportzmet 00of mu LegalOphdnk p~t Io Mora FuwPruisn Iadaiaik Inc.

LA COSINDIM Can=. We We diiDLAD 4105.1. Subpahrt L6. qun,gvnisa. Aapali (IbmfoI.k~dam uh~mub4UuspmtL7 (L706, .L790,mdL.791)m tw%*it cowumily wW nawm emovud fiam 6oDMAD via PROCLTR 97-34,&WOMBn Adsquiim 3110 Particpato.inshDLA New hM.des Iitsotives (Dewcanbe10. 1997M

B&SPOSfON:(X) Action.Is oogalagE. Deccmber 1993.( ) Adionis =Mompli

AMfON4 Off1CZL- Muy Whmmo, DISC-?PIRXV1W/APlROVA14 Gullyss KL Joudd. kr. CAMT SC, USN, Acting Essacuvm

DhuBMPM, ,MomseotDireno DLSCrCOORUDMIAONs Mode Sdskmodw. WDAI

DLAANROAP1--

E. 1. HWUERLINRear Admiral. SC, USNDeputy Director

63


hw- (Poed No. 7CF4OS$4)

RZCONMIDATION MA:2b Raeommddo Dk~dwot Dedoa 1gia&& Almey=uvim Deftn JI ietl Asmoy Diauetw 4105.1 -De& Loglahl AmpqulitiDiseetvle, szbpu UA -Acqubisii A. Fedial Prima bIaduime Inc. to nta buwerto *e Ombudxm as dwm qqm-md medmd of .. lviq &doqsh putgainig to pice,quflty. vAiilty, mmd,- duaaFIjuod

DLA eOMM1r Coining Nciwidmotw pumal fthr* (asA.Ubelow)11.1detailedDLADmuaep (aflit e am 'uwahqappea) dAlmud aotbe dcea~mfiuumisafer remaib of a swnwtmue-bued DoVdFP stmdy pow have be= mWli~dwd dieonbudsam woce&a seamn like ska shadph, uamenaIbymeooizd scitic did itstreabnm is 8. aboody noeams eprp 4 - d udikaly o dhmmg Val maacmpligh dshias put of 66 coglsvluia ofDMAD 4105.1, Suiput L6, uiadnedam in ourm m

DISPOSMTON:CX) Actiob ma pngoio EM: Dweacbe 199L

)Actiouis copleie

ACTON OFVCEL. 3d.7 Mum*. DSLC-PWP3VEMWIAI'PROVA14 OwilMK huld. ekim r, CAPT. SC, USN. Actig Execubtve

Dkaw, Pmot ~mpm*eaetee,DS-COORDINAIION: Mmii Udu~mcirDDAJ

DLA AmrOV:A:L

E. R. CNAISUINPear' Admirl, SC. lISNDepty biecftor

64

Defense LoIstics Agency Comments

SUSIJ3JEC Dshom I gliis Agency Procutmesus hor Fedoul Mona Indnhimbi

U~cO1IENDTIOKA.%=u Rmuimvd ho Duadwr Deab Le~ogtc Agonyrsvhe Deatme LOgSIM rAgeincyflkew4105.1 -dimeu Logisfics MuAop asDkW,"m~bpmt L6 Aagoftot Iee~m Fuedoo None bdiuokIaa. So. buluds bea deftemlhg wimseo nqu~ awwahwm p US.d FedePisna InimusaidiInch.soosw l 1Uds frvCmecm~wdal vamdos mad alo lbs ateda fo qopeaulag awsher

MA4 COMIWITS lNaowm~w. ah cosoduy .ombirway m houniv whids couldhaew m hoped an DLA'a, uid all ofDoD' abwlilmhi wiAh F~l. do FY 92MadwloDalaiws Authwbou aAd iadftJohsDoD/FF shad puu aidreslng the "ir

cMm*Sfic. mad Ism oflAs idazpit would bespamre ahv rus to olabilshboadpotwo-lsd rnIwu for dommoahig v~ awavlvw nowa would be k;aojIe, %IIoribrnappealowldvaivodwla. (Pusomodi onK SC.- mad DDAS za 'DIAos

DISPOUTIO.z

ACJION OfLH3 Mwy hkm, DLSC4lYP3KV3W/AWROVAIL- Owfly. IL Sembk Jr~. CAFr, SC. USK. Acting Enedaci

Dfivdc4FrnaumuldU=maqsulDkfdRlaDUCPCOORDINATION: Wadi Scldmucawbo, DDAI

Rears Admiral, SC. USMDbpaty Director

65


51131Cr: Defome Logisti Array PIOrMMOO fRom Fedual PMoo. Imicbi.

~WING WY-~tz mMU J s)su~ye

Righumod Ad at~ alway msanoiusb* won%* Pwomb1 .rewtblerisdwhax lb eggpos- price wm abowli a , cmumat psi.. As ammutokbuymos miedojppwatwiiu atosdie tcoto(anliss us. inrching tins uzufcWdby bo&hPedoW -an lodshissb mo.sd =Mudu vmdmu. In mýaI - DSC. Philadelphmmed coW or pioma soiasmod mcooi y aqadmid nm nmamblPiom.

I"~ COMMKNT&M Pudafy Commn DSC Ridmomi (DSCR) Is Inth pOm I ofonsabbbh mswLoss Tomn C4@act(LTOs) whish fkin iminpvwd prildn wMi

IlM the 0(11. LTOa lmauld ready zMinmim loftom osfDlM psyivg above a

AMION OVVCUZR Demih Howwd DICR-DI Mon Jbq~kwicA DISC-WAREVIKWIAIIOVMAL Owilm IL JwUmhhuk, CA",. SC. USN, Acting Execatiw

Directo. homamum M~quuoe Dkec~oaK DISC.COORDINATION: MWm Scbmmbw. MDAI

I"L AMPOVAL-

Rear Adnral. SC. fUSDeputy Director'

66

Defense Logistcs Agency Comments

SVDIKCI Defense I dc ApsmcybPacuremmfialFedewN -PdsmmhiuskinIam (N4.gNNo 7M-CF.04)

RUCOSIZN MMiON3± MOCOMImad thecommmader Delm. Ssqpy Ca~urRikixmmnd b iddlmdandeahg .quhiniiforkyuu 4coinkada offlas-w f Amn Fed Pzh ladm is lbs- Mw e ms d= bhancde adgpdas amlysls tinduulque md .rm=Wiada oftheurnn =** oblo II pries alyus toeamplammi com or ad mitodyia.

DLA CON~U~M Commt D)SC Ukimmad w prnvWdeuahh fw bqym modceummuig officer as purchuig lAm PPM Mwlimeaing v4 wil lde cad and price

-U~a bebsiqmm4wih amplasi an pufminrice utaysis 0 o aphmum cost oradmitb -

DISIOSrTONtCx) Actionls aqb&Ema.E )dmah31.1999( ) Actionis cmapkl

AM~ON OFWIC3L Daeuetylkwd DSCLDII Dim Nqkawykow, DLSC4POAREVUZWIA??ROVAJL Owilys IL JmWW k., CAPT. Sr, USK, Acting Executive

Dberlo4 Phvem -ugo DbodoaftDLC-PCOORIDINATION: blima Sidimeber, DDAI

DLA " VA-

E. I. OLWEUINRear Admral. SC. USNIDeputy Director

67

Defense Logistic Agency Comments

5VDIECT: Dd~Ls LogIA~y PWromxf um Fea=I~ Iii..himki.s,hme (Psre o.e 7CP-50S4)

RECOMMENDA ION . Reasamad the Cosmude Woes; Sup* CeauRichmod (06CR)if ~a~dft"Ow nqdmumfu fr ym and ccuraedngoffices uIa Aum Fedmiaim him im Inc. The Itiaft diould iaclud

mmdd iesquabpice. ameuflyOIP' dtmf -b eniuamubmkpice

DLA CWDIRffS COWmX WMC will pw"d bhuntn for boyas ad caduac&*iofi~cm inNg~adon Tadnqu 1 fthe bnhg wl mubePmoeduags 1eslW =A~gjoieuouambd subseanalhy sm I. d=e doe madopride

(IQ Actan is omainS& ECD. Mud 31.1999( ) Aowbcmi.sapldL

ACnfON OMWbcR Doaeuh Hawed, DI)CK-DIADIsna Maykawdayj, DSLC-POAREVIEWIAPPROVALU Owilyna KL Jaiki. Jr., CAPTr. SC, USN, Aaing Ex~easi

Dkmcw. r, oameson Maugmws Dkreacege, DI-SC-PCOORDINATION: )"I Sdahmnchw DDAI

DLA APPIOVALI

E. . CHAMBERLINLAse Admiral. SC, USNDeputy Director

68


SUBR=N Di mom ILoi. Apacy Pu .~ fmo Few rm nohr- (hoojd No 7cF4O4)

RECBIDDATONU2.a so= doin Coscamadm Do. mwd Sup*

OlDOMMI r.,, - swga vwff mped= Pdaladiabie.,lammd e*Agationtotake if hey ikmy do wulver.

W-A COMAMER PudaiyCamm. DS(hm ududoluumingWbiawa-. uichmc ý-pauoindwinig lb quutmoflY 99. Th ~e mlwdvswchinanopn I ciabam is 1 d ulaw. DSM wil review mod make tI~go sbu..1ia doe

X)Ac~iscniWopg Kl Deosibm3l. 1"99()Acdon k conaplois

ACTION OWI(ZR.t Dworth Hound. DSM4.U~iansMaykowthyj DLSC-POAREVWIAWPPlOVAL.- OwibysH. hokib.. k., CAPT. MC USK~ Acwjn EzactW-

Dknctor. Prccam..it Managemew Dkakuwie DLSC.PCOORDiNTO:MIrIM Sbfinachbsu, IDDM

DtA A"fROVALU

Rear Admitral. 3C. USNDeputy Directr

69


SUBJECT: Defese Lozigs AgIMY FosImea Bern Pdeul iris Inudau~ics.Ihe- (FrjeeWo 7C1-5054)

PDIINM a Z aLxi I= ainit. Dsfome sop**mots dido Sot o d~ ~ d om owuuWsm~ma~md by FPLTINS oM F bsemma Dahm mop*y .Mmd wtuiod*jFM abestIn deanedagnowin .~ orwo exmdis do wuroy. Def~ic Iodm Agoncy gudde sehbasaqid pwrtoMl to lbs Nedwowmmns pwy~O~dadby M An 6Mmmi, lb D9 asqapl -~ msasod goe oppodumby lomphes abcut S127,=O indidv Items how4ocmstle Dde~m T g*We Agmeny.

DLL COIWAMh Cm.o DIA arm do3t hsDmfmus Sqaply Caorns Ad notalwapv obet ola pmaeomw for delctw suppl3 inoabred by FMI and~ *FM wasoat nodlie in sway -u about &bsidws v4Iems DLA Wh? wil be vequired to dlHowcunvtDLAD 41S5.2 polcy= Ia eeImuter odislm dmquktzqohnPQDRslO beprevlda dweuaghDdCtCo dw oesa fw mm inaqae~d gm and dffadl lo ftoinbaderfer- bhmms AeyidmmosinDLI l41SS.Z. Qualby

Assrmhos Pape novnatie ir DLA IC?,, wD be rehfsv doto dmedus doe li&wmiy puovid by FM1 appries fta&H puduna pjmodd by IlM

ACTION OMCM~ 3om DimiDLSC-LEQREVIEWANPROVALt Owily IL 3.m1dm k., CAPT'. SC. USK Aedag Exed

Divecto. Pooemaurn Mwaletow Dbodectte DLSC.?COORDINATION: 111. Sdd-her.~ DDAI

NLA APflOVALU

Rer Admiral, SC. USNDeputy Director

70

Defense Logistics Agency Commnents

SUMJCY: DWm I dWA Aswq bsmsa=W GS Pedce Ptimm hNWl (PamjWNo,7aF45W4)

R~cs~AT~r4C.Lm e Naamo dos ibe Hqnum Deflos LOOMINl

CampiMa (CMDC oh lhQuulfty DW~mcy bqpib OVD(~sr, lo aft. dot tMadma Nalm label. l..KM "tudes WFy qput al Of itl =RALa

DL&COMNWCM C=Mnv lwDbsDm~as Lgd.Agmay jShUwf(DLIl)4135.2, QomflayAwm hI IPimp. hmcdmo flr do DLA IMP (which Is I'DLAM 41 55.2) wIN be amdW to urs MOM dwis 20 aquas WaIMY dume.h~ bu tis

wusuay jail be M&d one mapl ofaib~ s les Etdo e. wuty pwMWde by timfederal Pahdwm bb ss(m C0I aniA b=na uqapY.IO

X)Adiom is ooga~m BCD,. Sqwmhw 30.1998C)Adaonb oampies

ACrIMOl OMCOL Dme Rime DLSC-LBQRKVIEWIAMIRVAL: Owilym R hlube kt. CAPT. SC. 119N. Aefta Execuive

Dkudal, Pmxo mwwnageamgmaalcloeiai DLSC-PCOORDINATIOKMim blSaaitmwchnDDAI

DLA AYROVAIA

E. R. OIAIEP.IWRear Advlral, SC. USNDeptY Director

71


SURM=.J De&s ogwls Apmoy Picnu fm Foduml Pdamu IodautrIwloc (Oject W 7ca-SOS)

RKCOMME4DATMO CJ~w Rlaeaumid IbM lb Hadmiquem DubumseLoSiiiAVMa ruquk Ddms a** cas to amuissdi.t Fehde P.m - ndusirl.s Joe

MA4 COMMMMfF Camow. ThU Ddefme Sup* Coons wii be 'Afutedt czumuMF wORMOtY pmvdom

DISPOSITIN:( ) Aetam is ~oeagoDCD.(X) Acdom Isaompi).

AMtON OWECI~ Dum.m Rac, DLSC4EXDEVIWIAPPROVALA OwilyaxIL hoiu^ALkk, CA"r. MC USN. Acing Exectw

DksctPormmW~m. n"DDb cIneDUC-PCOORDINATONs NMbd 8cauhr DDAI

DLA APPEDVAL

E. R. OIAIERLINRear Admral. SC. USNDeputy Director

72

Defense Logstcs Agency comments

SU3IECT: DhmsLesm Awy PinAsmi m ~tfFOAdulPIh b6MaihUkbLa (Vjoa No. 7MF.50%4)

3EcSIMIDAIOMCaIg aaainmmdo ~Cammdw Dais. iWply C.MY&uddp~a (DSOF) iqmi Pouau Iio l'sau WOW$ b& ruhu f~mAV*yhuwm uisd~ftW2%bV 9ftoW~awyupwfdm*issll

WACADUMM~f~ Caomm. DidMoownv&tbs..wm~dmlaa lHwsvurcd1 efih 2M6 Pco"a Qoft Dddrna locost (PWft) wmare " h~I~ r prO"anpbouai by the PeduuP i , b&wnbim(FMI) Sm N afhPCPs was GKud btrAse sgov.m T1s PI uS be copaumd tD rph. rippl ft amoadm" ikPQDI& w*iA they eummd

(X) Acdam 6 BO EV Deco" 1998Ac is Aduoomplta

AMtOK Ol51M W Lomb D~hikui DSC'-DllmaaMsykowukyj DLSC..POAMEIMWAPPROVALi PieR&6 ChKb ~dAcq.mda Ingra Two

COORDINATION: MA (3d) Owgym okin Achg EapmwDvmcl

DIA PPVA

Raw AmtkaL Sr. 04DOV*7 DkocwOt

73


EUDJECT Tee~q Agecy PWocwMMO ham FINIMMl POWa luD&NOWp,

RUCObBENDATJOC& Raccoose *A Caumilmp Del... SupplyaC~aunhub vuque Fodkml lilias hulut= bmc to mph.. ripply hous mdoiald wigh&ce 7 Product Qualiy Deii ancyiRquo d al awiguei.

DLA COISIENY Casm. Mi *As ndi.mu DSCC uwhwud the 7 Prod" QuliltyDefideacy Repute hin qmail. ad mowed ditdA acicas of rqulatmen vaur taken forall ic =W bmok.Ivo~d hi maded to be ique laruuuplac Dilsb.on each oftba7Can b sattaced.

DISPIMrnON.( ) AcdcIsolurbp& ECD>(X) Acaaias co..pkie

ACMIN OMfCKE DvWRI..DLSC.LRQDZVKWIAPMOVAL Owily. I. Jimkbu 16 CAPT. SC. USN. Aefti Eacemli

Dimtmw, P I cuum-1Maaagum Diumcma, DL5C-PCOORDINATION: MI" Sahunbmr DDAI

E. R. OIAIEO.INPlear MAIMv. SC, USNDeptuty Dlrector;

74

Audit Team Members

This report was prepared by the Contract Management Directorate, Office of theAssistant Inspector Geeral for Auditing, DoD.

Paul J. GranettoTerry L. McKinneyMichael H. ClaypoolChuck I. ChinHarold i. TollefsonJoseph P. BucskoYolanda C. WattsAna M. Myrie

INTERNET DOCUMENT INFORMATION FORM

A. Report Title: Defense Logistics Agency Procurements from FederalPrison Industries, Inc.

B. DATE Report Downloaded From the Internet: 08/26199

C. Report's Point of Contact: (Name, Organization, Address, OfficeSymbol, & Ph #): OAIG-AUD (ATTN: AFTS Audit Suggestions)

Inspector General, Department of Defense400 Army Navy Drive (Room 801)Arlington, VA 22202-2884

D. Currently Applicable Classification Level: Unclassified

E. Distribution Statement A: Approved for Public Release

F. The foregoing information was compiled and provided by:DTIC-OCA, Initials: _VM Preparation Date 08/26199

The foregoing information should exactly correspond to the Title, Report Number, and the Date onthe accompanying report document. If there are mismatches, or other questions, contact theabove OCA Representative for resolution.

?iditit o - dticfrom federal prison industries, inc. report no. 99-001 october 5, 1998 office of the...

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