The Case for the $435 Hammer

...Add $1,000 to the direct cost of the part and you get a billing price...

...For almost a year after he first learned of the Navy's audit Bedell—in congressional debates, in speeches, and in the press—reiterated its findings...

...Regardless of the block, Bedell spent the first part of 1984 working very hard at introducing spare parts amendments and educating his colleagues as to the outrageousness of parts overRep...

...These investigations led the Pentagon to announce on July 27 that Gould had overcharged the Navy "hundreds of thousands of dollars" for the hammer and other items under the same contract...

...others, known as "buy-and-sell items," could be bought at an ordinary hardware store...

...An accompanying photo depicted him with a claw hammer in his right hand...

...Using the equal allocation method each part is assigned $1,000 in such costs, even though one item may be a sophisticated circuit card assembly, which requires the attention of high-salaried engineers and managers, and another item may be a plastic knob...

...In addition, there is still not enough emphasis on buying in bulk to reduce unit costs...

...Bedell's staff director was dispatched to Garden City to study what went wrong...

...charges, the Gould contract being his main example...

...A man whom I shall call Dave Johnson, an administrative contracting officer there, was put in charge of the proposal...

...The need for billing prices arises because contractors want to be paid up front for items that are shipped earlier than others...

...Bedell said that he heard him, but had a mental block on the subject nonetheless...

...But here's the rub: the DOD didn't pay $435 for a hammer...

...Leading the way was Iowa Rep...

...And if the Pentagon doesn't know the real price it is paying for each spare part, it is also difficult for it to determine whether it is spending too much in support costs...

...But the Pentagon didn't pay nearly $428 too much...

...The government simply didn't pay $10,000 for $92 worth of tools...

...Says the patron: "That must be the same outfit that sells hammers to the Pentagon ." Claw hammers, to be exact...

...No explanation was given for the reversal, perhaps acknowledging that the less said about this blunder the better...

...That made the Simulation Systems Division of Gould, Inc., the lone provider of a comprehensive list of more than 400 different parts needed to keep trainers in the field in good repair...

...The hammer contract has been investigated by Congress, discussed during the 1984 presidential debates, and used as Exhibit A by politicians, journalists, and businessmen in their recent calls for military reform...

...In 1984 the Pentagon did abolish the equal allocation method...

...In June 1982, the Naval Training Equipment Center (NTEC) at Orlando, Florida, James Fairhall is a New York writer and a former contracting officer at the Defense Logistics Agency...

...The price it showed for the claw hammer was $435...

...Barbara Boxer of California, for instance, praised Bedell for having "taken the lead in this whole issue of spare-parts ripoffs...

...The Navy Ships Parts Control Center (NSPCC), to select one buying office, issues orders for a large variety of spare parts with seemingly little regard for the advantages of quantity...

...In the three years since the story broke, the $435 hammer has become synonymous with waste in the Department of Defense (DOD...

...Attorney's office in New York that no charges should be filed against Gould for billing the government $435 for a hammer...

...They found the difference in price to be about 369 percent...

...He also visited the naval air station in Florida where the hammers were being used, and talked with both Navy and Gould officials...

...Take a contract to provide spare parts for a set of radar tracking monitors...

...No $729,000 refund should be made against an $847,000 contract when the contractor, as a DCAA audit shows, had bought almost $300,000 in materials alone...

...Its main innovation was to place at the center of an already cumbersome process a GS-11—a retired oil company executive with no DOD experience—to monitor all spare parts contracts...

...This audit focused on whether Gould had been guilty of defective pricing—i.e., if it had violated the Truth in Negotiating Act by withholding information that would have reduced the overall contract price...

...But while the $435 hammer resulted from this method, other spare parts scandals were caused by more fundamental procurement problems...

...There was only one problem: he didn't know what he was talking about...

...So, they calculated that every item in the contract, big or small, complicated or simple, was also overpriced by 369 percent...

...This proved to be a mistake...

...This didn't stop Bedell...

...The article began and ended with observations to the effect that, thanks to the hammer, people were finally starting to pay attention to the softspoken ten-year congressional veteran and former president of the Spirit Lake Kiwanis Club...

...Four days later The New York Times ran a similar article by James Barron in which he devoted five paragraphs to the Gould hammer, and dutifully discussed the DOD's pricing system...

...Even if they had subtracted the "reasonable cost" from the correct negotiated price, however, the audit would still have been wrong...

...Blackboard jumble Reacting to the publicity, Congress quickly compounded the Navy auditors' mistake...

...In the sidebar, aerospace writer Tom Incantalupo gave a detailed explanation of the equal allocation method...

...The equal allocation method calculates prices for large numbers of items in a contract by assigning "support" costs such as indirect labor and overhead equally to each item...

...On May 2, 1985 The New York Times ran a frontpage story reporting Bedell's accusations that the $84,000 obtained from Gould "was only 11 percent of the refund the Navy auditors recommended ?' Bedell's persistence paid off, though not as he had hoped...

...Certainly, though, it did not cost anywhere near $435...

...In spite of being named Small Businessman of the Year in 1964, Bedell had a problem fathoming the equal allocation method...

...Hints of a rip-off In 1981 the Navy decided to offer a sole-source contract to the electronics company that manufactured the flight instrument trainer for the T-34C aircraft...

...This approach was so wrong-headed you don't even have to understand the equal allocation method to know the results were off...

...An outpost of the Defense Logistics Agency, DCASMA Garden City does a variety of tasks for the buying offices of the military...

...This would be a heartening example of the kind of internally generated reform the DOD so rarely makes except that the Pentagon was wrong...

...The auditors calculated the "reasonable cost" of the parts to be $271,000 and subtracted it from $1 million to arrive at the $729,000 in excess costs...

...For example, if the Pentagon did pay too much for the hammer, a key reason is that it gave Gould a sole source contract...

...Johnson submitted his memo of negotiation and a contractual amendment to the Garden City Board of Review, whose five members saw nothing wrong with it...

...In general, however, the response has been what John Kester, former special assistant to the secretary of defense, describes as Washington's prescription for all procurement ills— "more laws, more rules, more people checking on the checkers...

...Other members of Congress applauded Bedell's efforts...

...It was billed that amount, but that was merely a bookkeeping procedure to create billing prices so that Gould could be paid as it shipped line items at different times during the contract...

...The auditors figured the $271,000 by taking 114 buy-and-sell items—about 25 percent of the line items—and comparing Gould's prices with those of the DOD's own supply system...

...When the chief petty officer in the repair department of a naval air station in Florida saw the unit-price list for the T-34C trainer in 1983, he started asking how anyone in his right mind could have paid $435 for a common hammer...

...This is what the government is billed, though not what the part is really worth—the circuit card being undervalued, the knob being overvalued...

...The problem with the equal allocation method is that it's easier for contractors to overstate support costs when negotiating one price for all of these costs in a contract instead of haggling over them for each individual line item...

...All that remains is to settle a DCAA audit prompted by DOD officials hoping to find justification for getting more than $84,000 back from Gould...

...issued the contract...

...In November, his negotiating team brought Gould's price down from $896,011 to $847,000...

...The kind you buy at your local hardware store for between $7 and $10...

...next to a large photo of a claw hammer...

...An order for 56 circuit card assemblies will be followed six months later— too late to be added to the first production run— by an order for one or two or three of the same item at a relatively astronomical unit price...

...The Times article prompted the Navy to call together everyone involved with the Gould contract...

...Gould Chairman William Ylvisaker knew the audit was flawed, but he wanted to placate Gould's most important customer and put a stop to the bad publicity which was causing a sharp decline in Gould's stock price...

...In one long conversation, Johnson explained it in detail...

...Even though the Pentagon had flubbed the audit, in August Gould agreed to make a good faith refund of $84,000...

...Suppose a monitor has 100 parts and support costs amount to a total of $100,000...

...Since the Gould plant is located on Long Island, the job of reviewing and negotiating Gould's proposal fell to the Defense Contract Administration Services Management Area (DCASMA) in Garden City, New York...

...The toilet seats, ashtrays, and $7,600 coffee pots resulted from gold-plated specifications and the use of costly middlemen...

...Secretary of the Navy John Lehman sent a letter to Gould demanding repayment, and Secretary of Defense Caspar Weinberger gave notice that the DOD had to make "major changes" in its procurement of spare parts...

...Few people are familiar with the price distortions created by this method...

...In fact, nobody will ever know what the hammer really cost, since Gould's accounting system is not set up to track individual line items...

...An agent from the Defense Criminal Investigative Service, who grasped the equal allocation method better than FBI and GAO auditors had done in an earlier investigation, used a blackboard to persuade an official in the U.S...

...billed to the Pentagon for $435 a piece...

...Why did no one protest...

...Either way, it has nothing to do with the price of the hammer...

...The Pentagon continues to offer sole source contracts, refuses to punish corrupt or inefficient defense contractors, and allows disruptive inter-service rivalry to hinder military planning...

...It confirmed the general suspicion of a rip-off, and it seemed to discourage analyses of the root causes of the hammer pricing by reporters...

...Then, after Gould had signed the amendment, he too signed it, making it legal and binding...

...His efforts won him praise from the press, including a June 13, New York Times article entitled "The Provocative Saga of the $400 Hammer...

...His inquiries led to press stories and investigations by a number of agencies including the Navy Audit Service which, on May 27, reported that the Gould contract contained "excess costs of about $729,000...

...Berkley Bedell...

...More important, many of the major flaws in the DOD procurement process remain untouched...

...Under this system the line item price does not reflect the item's true value...

...See Gregg Easterbrook's "Sack Weinberger, Bankrupt General Dynamics, and Other Procurement Reforms " on p. 33] We've all taken our cues from "Motley's Crew...

...During the first few months of 1984, Bedell called Johnson a number of times to discuss the hammer contract...

...There was only one problem: Bedell didn't understand the hammer contract...

...As one official at DCASMA Garden City wrote in a memo that reprinted two comic strips dealing with the hammer: "When a subject makes the comic pages, it has become a serious matter indeed...

...Bedell was praised for having taken the lead in spare parts rip-offs...

...the FOR THE $435 HAMMER by james fairhall "You want how much for a beer...

...Because the equal allocation formula makes line item prices meaningless...

...This type of institutionalized failure in spare parts procurement, which illustrates David Packard's recent complaint that "there's been no effective long-range planning in the system," simply does not elicit the interest and outrage that high-priced hammers or toilet seats or coffee pots do...

...At a meeting on May 17 at Cameron Station, Virginia, a representative of the Office of Naval Acquisition Support revealed that they had retracted the Navy Audit Service finding of a $729,000 overcharge...

...Perhaps this is the greatest pity of the hammer controversy: it has given Congress and the press a nice warm feeling of indignation while distracting them—and the public—from deeper, more complex, less "newsworthy" sources of defense waste...

...DCASMA Garden City, for example, issued in April 1985 an impressive "Procedure for EvaluaLion of Spare Parts" consisting of nine singlespaced pages plus a checklist and a chart...

...From Beetle Bailey to Walter Mondale, everyone has expressed outrage at this apparent swindle...

...This came close to the recommended price resulting from reports by an engineer, a price analyst, and a Defense Contract Audit Agency (DCAA) auditor...

...Most likely this dispute will be settled for much less than $92,310 or it will end up before the Armed Services Board of Contract Appeals...

...Of the items ordered, some were peculiar to the trainer and would have to be manufactured by Gould...

...The finding: Gould overcharged the government not $729,000 or $84,000, but $92,310...

...Shortly after Ylvisaker announced he would pay the $84,000, Newsday ran an article accompanied by a sidebar entitled "Would You Pay $435 for This...

...It's a good bet we paid too much for it (for reasons related in part to something called the equal allocation method and in part to larger problems in defense procurement...

...The outrage over the $435 hammer could have resulted in some procurement reforms, but that hardly happened...

...The article by Steven V. Roberts recounted the tale of Bedell's introduction to the hammer contract ("I almost fell out of my chair") and his purchase for $92.44 of 21 tools billed in the contract for $10,168.56...

...Even the issue of fraud disappeared...

...The Pentagon did launch a potentially valuable drive to eliminate these middlemen from the spare parts business...

...And just as certainly, the government will have spent well over $84,000 on investigating and explaining the hammer contract by the time it is finally put to bed...

...The hammer was his ticket out of obscurity...

...But both pieces ended with suggestions that—the complexities of buying spare parts notwithstanding— someone had ripped off the government...

...He had the Navy Audit Service findings, and he had the smoking gun—Gould's $84,000 repayment...

...To begin with, the Navy Audit Service based its findings on Gould's original $1-million price list instead of the $846,000 list negotiated by Dave Johnson...