Government Source Inspections - U.S. Department of Defense

October 15, 2003

Acquisition

Government Source Inspections

(D-2004-011)

Quality

Department of Defense Office of the Inspector General

Integrity

Accountability

Additional Copies

To obtain additional copies of this report, visit the Web site of the Inspector General of the Department of Defense at dodig.osd.mil/audit/reports or contact the Secondary Reports Distribution Unit of the Audit Followup and Technical Support Directorate at (703) 604-8937 (DSN 664-8937) or fax (703) 604-8932.

Suggestions for Audits

To suggest ideas for or to request future audits, contact the Audit Followup and Technical Support Directorate at (703) 604-8940 (DSN 664-8940) or fax (703) 604-8932. Ideas and requests can also be mailed to:

ODIG-AUD (ATTN: AFTS Audit Suggestions) Inspector General of the Department of Defense

400 Army Navy Drive (Room 801) Arlington, VA 22202-4704

Defense Hotline

To report fraud, waste, or abuse, contact the Defense Hotline by calling (800) 424-9098; by sending an electronic message to Hotline@dodig.osd.mil; or by writing to the Defense Hotline, The Pentagon, Washington, DC 20301-1900. The identity of each writer and caller is fully protected.

Acronyms

DLA DCMA FAR

Defense Logistics Agency Defense Contract Management Agency Federal Acquisition Regulations

Office of the Inspector General of the Department of Defense

Report No. D-2004-011

(Project No. D2002CF-0169)

October 15, 2003

Government Source Inspections

Executive Summary

Who Should Read This Report and Why? The DoD acquisition and contracting community as well as members of quality assurance, technical, and engineering functions who support DoD weapon systems should read this report. The report provides insight into the expectations, appropriateness, and realities of Government source inspections.

Background. Federal regulations require that agencies provide quality assurance to ensure that supplies and services meet contract requirements. Inspection of supplies or services before transfer or acceptance is a key facet of the DoD quality assurance program. Inspection generally occurs at either the point where goods are made or assembled (source inspection) or at the DoD activity receiving the finished product (destination inspection). Federal regulations do not define a source inspection nor do they designate a primer for the steps involved during a source inspection. Instead, engineers, contractors, contracting officers, or quality assurance specialists determine the location and extent of a source inspection.

The Defense Contract Management Agency (DCMA) conducts source inspections. Quality assurance specialists work at either a contractor plant or a DCMA office (in which case, each specialist is responsible for overseeing the work of several contractors). In 9 of the 10 DCMA offices we visited, more than 40 percent of the specialists were located in contractor plants. In FY 2002, DCMA employed 2,846 quality assurance specialists, down from the 3,797 quality assurance specialists employed in FY 1998. In the last 5 years, the DCMA workforce decreased about 25 percent.

On May 29, 1997, the Under Secretary of Defense (Comptroller) issued DoD Management Reform Memorandum Number 10, "Redesigning Department of Defense Source Acceptance Policies and Procedures." The memorandum directed that the Military Departments and DoD agencies review existing stock items designated for a Government source inspection. After that review, a process action team recommended that the Military Departments and DoD Agencies eliminate source inspection requirements for about 158,000 of the 442,000 procurements. Regulatory guidance was subsequently changed requiring contracting activities to consider factors such as a contractor's production and quality history in conducting an inspection at source rather than at destination.

Results. Steps the Under Secretary of Defense (Comptroller) took to reduce source inspection had merit; however, reform has not occurred and DoD needs to relook at its overall quality assurance program. Recent changes in the DoD Acquisition strategy-from acquiring goods and services based upon rigid specifications to a more commercial approach-has changed the quality assurance environment. In addition, communication breakdowns among DoD program offices, procurement activities, and

quality assurance personnel resulted in either unnecessary Government source inspections or inspections of questionable value. Our review of 518 contracts for FY 2001 requiring source inspections showed that as many as 172 inspections provided either nominal or no value to the DoD quality assurance process. Further, an additional 254 inspections provided questionable value because the contracts did not have a quality assurance letter of instruction or a quality deficiency report. The results of most in-plant inspections showed few deficiencies. As a result, the Government was using resources to perform inspections that resulted in very little value added.

To provide a more meaningful quality assurance program, the Under Secretary of Defense for Acquisition, Technology, and Logistics should define what is involved in conducting a source inspection versus a destination inspection. The Under Secretary should also define item criticality for non-aviation critical items, address source inspection requirements for commercially procured items and procurements from distributors, and prohibit source inspections for commercial-off-the-shelf items. In addition, the Under Secretary should require that DoD procurement activities respond to DCMA requests for changes in source inspection requirements as well as determine the need for the use of both the Certificate of Conformance and Alternate Release Procedure methods. To maximize the effective use of DCMA resources, the Director, DCMA should, on a risk-based approach, focus its inspections on new contractors, small contractors, and contractors with known quality problems. The Director should also require that DCMA personnel request procurement activities to change source inspection requirements when appropriate and establish metrics that identify those activities that do not respond to the requests. Finally, the Director, DCMA should instruct its quality assurance specialists on how and when to implement the Certificate of Conformance and Alternate Release Procedures (See the Finding section of the report for detailed recommendations).

We reviewed the management control program as it related to Government source inspections. Management controls did not ensure that formal notifications of changes in source inspection requirements were properly submitted or promptly acted upon.

Management Comments and Audit Response. We provided a draft of this report on June 30, 2003. The Under Secretary of Defense for Acquisition, Technology, and Logistics did not respond to the draft report. Therefore, we request that the Under Secretary of Defense for Acquisition, Technology, and Logistics provide comments to the recommendations in this report by December 1, 2003.

The Executive Director, Contract Management Operations, DCMA either concurred or partially concurred with the recommendations. For the partially concurred recommendations, the Executive Director proposed alternative actions. We agree with the proposed alternative actions in monitoring the effective use of DCMA quality assurance specialists and in the reporting of contract deficiencies involving a requested change from source to destination inspection. See the Finding section of the report for a discussion of management comments and the Management Comments section of the report for the complete text of the comments.

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