Boeing Charged Japan 1,500% Markup on Part, Air Force Says
(Bloomberg) -- Boeing Co. charged the Japanese government an “excessive” price for some spare parts for its refueling tanker plane, as much as 16 times more than the U.S. Air Force paid for its latest versions, according to a service assessment.
In one example involving an April $79 million spare parts contract for the KC-46 tanker, Japan was billed for navigation lights made by subcontractor Honeywell Inc. “at a unit price more than 1,500% above the previous unit price,” according to the previously undisclosed Air Force summary prepared last month.
From November 2019 until March of this year, the U.S. Air Force tried, without success, to “secure adequate pricing information” from Boeing to determine whether the price for the lights and other parts in the package was fair and reasonable under federal regulations, according to the summary.
“The Air Force was unable to determine that approximately $10 million of the total contract price was fair and reasonable primarily due to the lack of information to support cost or price analysis related to commercial spares,” spokeswoman Ann Stefanek said in an email statement.
The Boeing-Japan case is the latest example of military contracting officials having difficulty compelling contractors to provide backup data for parts classified as “commercial items,” such as the navigation lights.
The Air Force manages contracting for Japan’s four KC-46 tankers, but the Japanese government pays for the planes with its own funds. As part of its management, the service is supposed to make sure proposed prices are fair and reasonable, Stefanek said.
Contractors are required under American law to provide such data for parts categorized as military items, but the Pentagon’s Inspector General has documented a range of such cases involving excess pricing of commercial parts sold to the military.
The Air Force originally requested pricing for 140 sample parts, which was later reduced to 29, including the Honeywell navigation light, Stefanek said. Boeing advised the Air Force that commercial pricing for 28 of the 29 sample parts was not available and that there was no non-government sales data upon which to determine a fair and reasonable price, she said.
In a statement, Boeing said it “made a good faith effort and worked with our supplier to provide the U.S. Air Force with pricing data for the navigation light” but the service “requested supplier proprietary cost and pricing data that was not available to Boeing.
Despite the misgivings about the price of the lights and overall contract, “after nearly 18 months of requests for information to support negotiations,” Air Force Major General Cameron Holt, deputy assistant secretary for contracting, “determined it was in the best interest of the government” to award the eventual $79.4 million contract in April. According to the summary, the decision was made “to meet Japan’s need for spare parts by the expected delivery date and operation” of its first KC-46.
“It was a very hard decision for our head of contracting to make,” Air Force acquisition chief Darlene Costello told a House Armed Services panel on Tuesday. Several components or spare parts were considered commercial types so finding pricing for them was challenging because “they are not held in some depots and it is not being sold to anyone other than the government,” she said.
Boeing has a different view.
“To further demonstrate good faith, Boeing offered to exclude the navigation light from the contract negotiations to allow the Air Force to negotiate directly with the supplier, but the Air Force decided to move forward with procuring the navigation light through Boeing,” spokeswoman Kathleen Kelly in a statement.
Funding for the the navigation light accounted for less than 1% of the total contract value, she said.
As for the Air Force claim of a 1,500% price increase, “Boeing mistakenly undercharged” the Air Force in earlier spare parts contracts, Kelly said.
“We charged the correct price for subsequent KC-46 Tanker spares contracts, resulting in the perception of a price increase,” she said. “In actuality, this was a price correction. Our error was isolated, and we owned our mistake.”
Honeywell spokesman Adam Kress said via email that the company declined to comment.
The Air Force has notified Japan of its “inability to determine fair and reasonable pricing, although the total proposed contract price is below the range authorized by Japan for the spares contract,” Air Force spokeswoman Stefanek said.
The service is also expediting a new contract vehicle “to compete future KC-46 spares to the maximum extent available in order to improve future contract pricing through competition,” Stefanek said.
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