The Department of Defense’s Wasteful Spending and How Boeing Cashed In

According to a recently released Department of Defense report, Boeing (NYSE:BA) overcharged the U.S. Army by $13 million dollars for 18 parts, the bill for which came to $23 million as opposed to a fair sale price of $10 million. While it’s only recently become public, the report is dated May 3, and at the time of its issue, Boeing had already repaid $1.3 billion in what the aircraft manufacturing called “defectively priced parts”. In one instance, Boeing charged $644.75 for a gear that sells for $12.51. Boeing also charged the Army by tens of thousands of percents over fair sale values on parts the DoD already had in surplus, like 4 cent thin metal pin for which Boeing charged $71.01.

This news brings into focus not just bookkeeping issues inside one of the world’s top two aircraft manufacturers, but also ethical issues at both Boeing and the Department of Defense, which spent exorbitant amounts of taxpayer money on products it didn’t need. The report also found that the government could fulfill $200 million worth of orders it had made with Boeing with inventory it already had in storage. Though technically the Pentagon has no policy that requires the Army exhaust surplus inventory before making new purchases, it seems especially cavalier and wasteful to spend unnecessarily when the government is is in the midst of a budget crisis.

DoD’s 2010 audit also found that the Air Force spent $70 million on parts from outside contractors that they already had in their inventory. And it’s apparently common practice for Boeing to negotiate lower prices on parts from its suppliers only after it has signed contracts with the Army, but before supplying them with the discounted parts. Boeing then pockets those savings to increase its own profit share rather than passing them on to the Army in the form of lower prices.

While the latest report suggests the government seek refunds from Boeing for merchandise for which they were overcharged, the Army disagrees, saying that the firm-fixed-price contracts it entered into with Boeing did not require an adjustment to prices when Boeing negotiated lower prices for certain parts from its suppliers, while Boeing claims that they already voluntarily reimbursed the government for parts that were inaccurately priced.

Until recently, the U.S. defense budget has been a sort of “sacred cow”, with Congress largely unwilling to cut spending to a department that makes up roughly half of the annual budget when including the expenses of VA hospitals, pensions, and other services made available ex-military members and veterans. But just as some Republican congressmen have begun to consider Democrats’ proposals to cut defense spending, news of the DoD’s waste implies the department could easily manage a slightly smaller annual budget.

Boeing was the second largest Pentagon contractor in 2009 after Lockheed Martin (NYSE:LMT), receiving $22,239,786,802 in Pentagon contracts that year.

Boeing Competitors to Watch: Lockheed Martin Corp. (NYSE:LMT), Embraer SA (NYSE:ERJ), Raytheon Company (NYSE:RTN), Northrop Grumman Corp. (NYSE:NOC), General Electric (NYSE:GE), Honeywell Intl. Inc. (NYSE:HON), Spirit AeroSystems Hldgs., Inc. (NYSE:SPR), General Dynamics Corp. (NYSE:GD), Orbital Sciences Corp. (NYSE:ORB), Alliant Techsystems Inc. (NYSE:ATK), and Rockwell Collins, Inc. (NYSE:COL).

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