ADA380160

DEPARTMENT OF DEFENSE
AUDIT REPORT
PRICING AND BILLING OP STINGER MISSILES

SOLD TO FOREIGN MILITARY SALES CUSTOMERS
No. 91-055 February 27, 1991
DISTRIBUTION STATEMENT A
Approved for Public Release
Distribution Unlimited
Office of the
Inspector General
20000802 129 DKG QUAKi"* lE&"isuTED 4
3 ISO
INSPECTOR GENERAL
DEPARTMENT OF DEFENSE
400 ARMY NAVY DRIVE
ARLINGTON, VIRGINIA 22202-2884
February 27, 1991
MEMORANDUM FOR UNDER SECRETARY OF DEFENSE FOR POLICY

COMPTROLLER OF THE DEPARTMENT OF DEFENSE
ASSISTANT SECRETARY OF THE ARMY (FINANCIAL
MANAGEMENT)
ASSISTANT SECRETARY OF THE AIR FORCE (FINANCIAL
MANAGEMENT AND COMPTROLLER)
SUBJECT: Report on the Audit of Pricing and Billing of Stinger
Missiles Sold to Foreign Military Sales Customers
(Report No. 91-055)
This is our final report on the Audit of Pricing and Billing

of Stinger Missiles Sold to Foreign Military Sales Customers,
provided for your information and use. Comments on a draft of
this report were considered in preparing the final report. We
made the audit from October 1989 through May 1990. The
objectives of the audit were to determine whether the Military
Departments were identifying and billing appropriate costs for
foreign military sales (FMS) and Economy Act sales in a timely
manner; to evaluate FMS payment schedules; to determine whether
DoD had effectively implemented all security requirements before
entering into FMS agreements; and to reconcile the total
production of Stinger missiles to DoD and FMS inventories. We
also evaluated the applicable internal controls. As of
December 1989, the Army had entered into 37 agreements for
Stinger missiles with 13 foreign countries at an estimated cost
of $205.4 million. This report addresses the pricing and billing
objectives of the audit. A separate draft report addressing the
security requirements and inventory control objectives was issued
on January 23, 1991.
The audit showed that the U.S. Army Missile Command (MICOM)
did not properly identify and report the appropriate costs for
FMS and Economy Act sales. Also, the Security Assistance
Accounting Center (SAAC), an operating directorate of the Defense
Finance and Accounting Service, Denver Center, Denver, Colorado,
did not bill FMS customers for the correct transportation
costs. The results of the audit are summarized in the following
paragraphs, and the details and audit recommendations are in Part
II of this report.
FMS customers were overcharged $1.7 million for packing,
crating, and handling (PC&H) costs on Stinger shipments received
from the Red River Army Depot. The method used to calculate
these costs yielded an unreasonably high reimbursement for the
effort expended. In a draft of this report, we recommended that
the Comptroller of the Department of Defense direct the Army to
rebill for PC&H costs on missiles shipped from Army stock. Based
on the Office of the Comptroller's comments to the draft report,
we have recommended that the Comptroller direct the Army to
provide a different PC&H surcharge rate for the Stinger
missile. We also recommended that the Commander, MICOM initiate
a joint effort with Army depots to establish PC&H rates based on
actual costs rather than using a standard rate (page 5).
MICOM did not price Stinger missiles sold under the Economy
Act in compliance with the policies established by DoD Manual
7220.9-M, "Accounting Manual," issued September 18, 1986. As a
result, MICOM overcharged a non-DoD agency $4.0 million on the
sale of 1,606 Stinger missiles and undercharged the agency about
$982,000 in PC&H and overhead costs. Also, MICOM's use of a
force rearrangement factor to cover the cost of introducing
improved items in inventory resulted in the procurement of
160 more missiles than were sold to the non-DoD agency. We
recommended that the Commander, MICOM, reimburse the customer
$3.1 million for these sales and comply with the policies in
DoD Manual 7220.9-M for subsequent Economy Act sales. We also
recommended that the Comptroller of the Department of Defense
reevaluate the propriety of using a force rearrangement factor on
inter-Government sales (page 9).
SAAC did not correct the erroneous transportation
overcharges of $935,000 billed to the customers. These errors,
which occurred between October 1983 and April 1987, affected
10 FMS cases. We recommended that the Director, SAAC, correct
the transportation charges for each Stinger case, revalidate the
charges on other FMS deliveries, and correct any erroneous
charges (page 13).
MICOM improperly charged FMS customers with asset use costs
for DoD-owned facilities. Also, MICOM charged an inflated asset
use amount for Stinger missiles procured through the Special
Defense Acquisition Fund (SDAF). This resulted in about
$3.2 million in asset use overcharges billed to customers. We
recommended that the Commander, MICOM, reprice the FMS
procurement cases by deleting the improper asset use charges and
adjust the SDAF cases by substituting rental fees for asset use
charges (page 15).
MICOM did not promptly report shipments of Stinger missiles
sold to FMS customers on 62 of 82 deliveries. As a result, SAAC
delayed the billing of $115.9 million of missile deliveries to
the customers. These delays distorted the status reports to FMS
countries. We recommended that the Commander, MICOM, establish
internal controls to monitor all contractor and Army shipments to
ensure prompt billing to customers (page 19).
The audit identified an internal control weakness as defined
by Public Law 97-255, Office of Management and Budget
ii
Circular A-123, and DoD Directive 5010.38. MICOM used
ineffective procedures to report contractor and Army shipments to
SAAC so that SAAC could bill FMS customers promptly. Copies of
this final report will be provided to the senior official
responsible for internal controls in the Army. Recommendation E
in this report, if implemented, will correct this weakness.
We have determined that monetary benefits of $4.1 million
can be realized by implementing all recommendations (Appendix I).
We provided a draft of this report to the addressees on
August 3, 1990, and requested comments by October 3, 1990. We
received comments from the Office of the Comptroller of the
Department of Defense on October 15, 1990; from the Assistant
Secretary of the Army (Financial Management) on October 17, 1990?
from the Acting Deputy Assistant Secretary of the Air Force
(Financial Management) on October 11, 1990; and from the
Director, Defense Security Assistance Agency on September 24,
1990. The comments are summarized in Part II of this report, and
the complete texts of the responses are in Appendixes E, F, G,
and H.
The Office of the Comptroller of the Department of Defense
concurred with Finding B and Recommendation B.2. In a response
to a draft of this report, the Office of the Comptroller
nonconcurred with Recommendation A.I., stating that the Army
correctly applied PC&H costs in accordance with existing DoD
policy. We have reviewed the comments and have revised
Recommendation A.l. and are no longer claiming the monetary
benefits of $1.7 million. We request that the Comptroller
comment on the revised Recommendation A.l. when replying to the
final report.
The Army concurred with Finding E and Recommendation D.I.
and partially concurred with Findings B and D, the monetary
benefits identified in Recommendation D.I., and Recommen-
dations B.l.a., B.l.b., and E. The Army nonconcurred with
Finding A, the monetary benefits identified in Finding A and
Recommendation D.2., and Recommendations A.2. and D.2. Based on
information we received from the Army on Recommendation D.I., we
have reduced the monetary benefits from $3.1 to $1.8 million. We
have reviewed the remaining Army comments and have not changed
our conclusions. We request that the Army reconsider its
position on the monetary benefits identified in Recommen-
dation D.2. and on Recommendations A. 2. and D.2., and concur or
nonconcur with the revised monetary benefits in Recommenda-
tion D.I. when replying to the final report.
The Air Force fully concurred with Finding C and
Recommendations C.l. and C.2. The Air Force's reply did not
fully comply with the requirements of DoD Directive 7650.3
because the response did not indicate concurrence or
in
nonconcurrence with the monetary benefits identified in
Pinding C. Accordingly, we request that the Air Force comment on
the monetary benefits identified in Finding C when replying to
the final report.
The Director of Plans, Defense Security Assistance Agency
(DSAA) nonconcurred with Finding D and Recommendation D.2.
stating that the finding is contrary to the stabilized pricing
concept for SDAF cases. We have reviewed the comments and have
not changed our conclusions. We request that DSAA reconsider its
position on Recommendation D.2. when replying to the final
report.
DoD Directive 7650.3 requires that audit recommendations be
resolved promptly. Accordingly, please comment on unresolved
issues in the report within 60 days of the date of this
memorandum.
The courtesies and cooperation extended to the staff during
the audit are appreciated. If you have any questions about this
audit, please contact Mr. David R. Stoker at (703) 614-1692 (DSN
224-1692) or Mr. Ronald C. Tarlaian at (703) 614-1365 (DSN
224-1365). A list of audit team members is in Appendix K.
Copies of this report will be provided to the activities listed
in Appendix L.
Robert J/Lieberman
Assistant Inspector General
for Auditing
cc:
Director, Defense Security Assistance Agency
IV
REPORT ON THE AUDIT OF PRICING AND
BILLING OF STINGER MISSILES SOLD
TO FOREIGN MILITARY SALES CUSTOMERS
TABLE OF CONTENTS
Page
TRANSMITTAL MEMORANDUM/EXECUTIVE SUMMARY i

PART I - INTRODUCTION
Background -1-
1
Objectives and Scope
2
Internal Controls
2
Prior Audit Coverage 3
Other Matters of Interest
PART II - FINDINGS AND RECOMMENDATIONS
A. Packing, Crating, and Handling Costs 5
B. Pricing of Economy Act Sales 9
13
C. Transportation Costs
D. Asset Use Charges for DoD-Owned Facilities 15
E. Delivery Reporting of Stinger Missiles 19
APPENDIXES See ne
*t page
Prepared by:
Financial Management Directorate
Project No. OFA-0004
APPENDIXES
Page
APPENDIX A - FMS Stinger Missile Cases Implemented 23

APPENDIX B - Analysis of Pricing Methods Used for
Economy Act Sales 25
APPENDIX C - Schedule of Erroneous Transportation Charges 27
APPENDIX D - Summary of Facility Asset Use and Rental
Charges 29
APPENDIX E - Comptroller of the Department of Defense 33
Comments
APPENDIX F - Department of the Army Comments 35
APPENDIX G - Department of the Air Force Comments 51
APPENDIX H - Defense Security Assistance Agency Comments 53
APPENDIX I - Summary of Potential Monetary and Other
Benefits Resulting from Audit 57
APPENDIX J - Activities Visited or Contacted 59
APPENDIX K - Audit Team Members 61
APPENDIX L - Final Report Distribution 63
REPORT ON THE AUDIT OF
PRICING, BILLING, AND INVENTORY CONTROLS OF
STINGER~MISSILES SOLD TO FOREIGN MILITARY SALES"CUSTOMERS
PART I - INTRODUCTION
Background
The Arms Export Control Act (AECA), which governs the sale of
defense articles and services to foreign countries, requires that
all costs incurred in these sales be fully recovered. DoD Manual
7290.3-M, "Foreign Military Sales Financial Management Manual,"
June 30, 1981, specifies the costs that must be included in the
pricing of Defense articles and services to comply with the AECA.
The Defense Security Assistance Agency (DSAA) has overall
responsibility for the coordination and implementation of all
foreign military sales (FMS) agreements. The U.S. Army Missile
Command (MICOM), as the inventory manager of Stinger missiles, is
responsible for providing defense articles and services to
satisfy the requirements of sales agreements. In addition, MICOM
is responsible for reporting all costs of the sales agreements to
the Security Assistance Accounting Center (SAAC), which bills FMS
customers. As of December 1989, 13 foreign countries had entered
into 37 sales agreements for 3,413 Stinger missiles with an
estimated cost of $205.4 million. Through December 1989,
2,539 missiles with a reported cost of $133.0 million had been
delivered to 13 countries.
Objectives and Scope
The objectives of the audit were to determine whether the
Military Departments were identifying and billing appropriate
costs for foreign military sales (FMS) and Economy Act sales in a
timely manner; to evaluate FMS payment schedules; to determine
whether DoD had effectively implemented all security requirements
before entering into FMS sales agreements; and to reconcile the
total production of Stinger missiles to DoD and FMS
inventories. We also evaluated the applicable internal control
procedures for each area. This report addresses the pricing and
billing objectives of the audit. A separate draft report
addressing the security requirements and inventory control
objectives was issued on January 23, 1991.
During the audit, we reviewed the pricing, billing, and reporting
documentation for all 37 FMS cases that were implemented from
April 1980 through May 1989. We analyzed MICOM pricing and
billing data, including the case and contract files and SAAC's
delivery histories, to determine whether all appropriate costs
were charged and billed in compliance with regulations. In
addition, we evaluated SAAC's procedures for billing
transportation costs to FMS customers. We reviewed payment
schedules for selected FMS cases to ensure that they were
consistent with estimated contractor delivery dates and to
determine whether necessary adjustments were made. In addition,
we analyzed the methods MICOM used to price sales under the
Economy Act.
This program audit was made from October 1989 through May 1990 in
accordance with auditing standards issued by the Comptroller
General of the United States as implemented by the Inspector
General, DoD, and accordingly included such tests of internal
controls as were considered necessary. Appendix A lists the FMS
Stinger missile cases reviewed during the audit. Activities
visited or contacted during the audit are listed in Appendix J.
Internal Controls
We evaluated the internal controls over the pricing and billing
of appropriate costs associated with the sale of Stinger missiles
to FMS customers to determine whether MICOM complied with DoD
pricing guidance. In addition, we assessed MICOM's internal
controls over monitoring shipments and reporting them to SAAC for
prompt billing of customers. We found an internal control
weakness in the procedures MICOM used to report shipments of
Stinger missiles from contractor and Army facilities. The
weakness is discussed in Finding E, "Delivery Reporting of
Stinger Missiles." Implementation of Recommendation E will
correct the internal control weakness identified in this report.
Prior Audit Coverage

U.S. Army Audit Agency Report No. SO 89-200, "Foreign Military
Sales Management, U.S. Army Missile Command, Redstone Arsenal,
Alabama," December 20, 1988, concluded that the procedures for
recouping the nonrecurring costs of research, development, and
production for major defense equipment were not effective, and
that the procedures for billing and accounting for foreign
military sales were not always adequate. As a result^ of these
deficiencies, the Government did not recoup $38.0 million in
nonrecurring costs, which included $2.9 million for Stinger
missiles. Also, billing inadequacies resulted in overcharges of
$5.8 million and undercharges of $12.5 million to FMS
customers. The Army Audit Agency recommended that MICOM
recompute the nonrecurring cost recoupment rates for the Stinger
missile system and correct the billing errors. Generally, MICOM
concurred with the recommendations and was taking corrective
action.
U.S. General Accounting Office Report NSIAD-87-114, "Iran Arms
Sales, DoD's Transfer of Arms to the Central Intelligence
Agency," March 13, 1987, OSD Case No. 7249, addressed problems
with determining the correct price for TOW missiles and Hawk
missile spare parts sold under the Economy Act. The incorrect
pricing resulted in a $2.1 million undercharge to the Central
Intelligence Agency (CIA). A recommendation was made for DoD to
adjust the billing to the CIA and obtain reimbursement for the
pricing deficiencies. Finding B in our report addresses problems
in pricing an Economy Act order for the Stinger missile.
Other Matters of Interest

DoD Directive 2140.2, "Recoupment of Nonrecurring Costs on Sales
of U.S. Products and Technology," August 5, 1985, requires the
Military Departments to charge a prorated share of research,
development, test and evaluation (RDT&E) and nonrecurring
production costs on sales of major defense equipment, such as
Stinger missiles. This Directive specifies that when a model
change occurs in major defense equipment, the nonrecurring cost
recoupment charge will be recalculated based on the degree of
commonality between each model. During the audit, we determined
that MICOM incorrectly calculated the nonrecurring cost
recoupment charge for all three models of Stinger missiles.
MICOM personnel did not properly recalculate the recoupment
charge because they were not aware of this requirement.
Subsequently, MICOM recalculated the nonrecurring recoupment
charge in accordance with DoD policy. At the time of our audit,
MICOM had not submitted the revised rates to the Defense Security
Assistance Agency for its approval.
PART II - FINDINGS AND RECOMMENDATIONS
A. Packing, Crating, and Handling Costs
FINDING
The U.S. Army Missile Command (MICOM) overcharged foreign
military sales (FMS) customers for packing, crating, and handling
(PC&H) costs on shipments of Stinger missiles from Red River Army
Depot (the Depot). The overcharges occurred because DoD's
existing method of calculating PC&H costs did not reasonably
approximate the actual effort expended by the depot. As a
result, PC&H billings to FMS customers and reimbursements to the
U.S. Army Missile Command (MICOM) were overstated by about
$1.7 million.
DISCUSSION OF DETAILS
PC&H costs are the costs that DoD facilities incur for labor,
materials, or services used to draw requisitioned articles from
storage, prepare them for shipment, and confirm the release of
materials. These costs are charged to a customer when the FMS
Detail Billing Report indicates that an article has been shipped
from DoD inventory. PC&H charges are computed at 3.5 percent of
the unit price up to $50,000 and 1 percent for any portion of the
unit price over $50,000.
Collections from customers for PC&H billings are reimbursed to
the appropriation that financed the PC&H. Collections totaled
$1.7 million for Stinger deliveries.
The Red River Army Depot is the primary wholesale storage and
distribution point for the Stinger. Our observations of the
procedures and our discussions with Depot personnel showed that
processing the missiles requires only limited PC&H efforts. The
missiles are delivered by truck from the manufacturer in banded
packs of nine per pallet; they are off-loaded and stowed in
designated bunkers. Normally, no other handling, assembling, or
preparation is required. Pallets of missiles are shipped out in
the same configuration as received, except for pallets that are
broken to match the exact quantity requested or to issue specific
serial numbers as directed by MICOM.
Officials at the Depot estimated that .34 worker hour was
required to process each missile for shipment. Using the maximum
rate of $35 per hour from the Army's Automated Labor and
Production Reporting Manual, the PC&H costs would amount to
approximately $12 per missile for the principal costs, including
overhead. This amount is substantially less than the current
PC&H rate charged to FMS customers, which has averaged about
$1,800 per missile. For example, on FMS case SR-VHB for
400 Stinger missiles, PC&H billings totaled $773,986, or
$1,935 per missile. Based on the Red River Army Depot's estimate
of actual effort expended for each missile, PC&H charges on that
case would have been about $4,800. For the 18 FMS cases for
which Stinger missiles were shipped from the Depot, PC&H charges
at $12 per missile would amount to $11,412 compared to the
$1,727,532 billed, resulting in an overbilling of about
$1.7 million.
These extreme variances indicate that PC&H costs must be brought
in line with actual costs. DoD Manual 7290.3-M, "Foreign
Military Sales Financial Management Manual," June 30, 1981,
permits the use of actual costs if the Military Department
determines that a more equitable charge will result and the
Comptroller of the Department of Defense has approved an
exception. Estimated actual transportation charges for selected
items, including the Stinger, have been developed and published
in a look-up table that provides more realistic charges than
applying the standard transportation percentages.
A similar approach would be appropriate for PC&H costs and could
be adapted to other missile systems managed by MICOM.
Accordingly, MICOM should initiate a joint effort with the Army
depots to ascertain, by engineering analysis or other systematic
means, the actual PC&H costs for the Stinger and other missile
systems. The proposed PC&H rates should be submitted to the
Comptroller of the Department of Defense for approval.
RECOMMENDATIONS FOR CORRECTIVE ACTION
1. We recommend that the Comptroller of the Department of
Defense direct the Army to submit a proposed surcharge for the
Stinger missile. In the interim, the Comptroller should direct
the Defense Finance and Accounting Service to suspend the
packing, crating, and handling surcharge for the Stinger missile
until a reasonable packing, crating, and handling charge is
established.
2. We recommend that the Commander, U. S. Army Missile Command
initiate a joint effort with the Army depots to establish
packing, crating, and handling rates for foreign military sales
customers based on actual costs for the Stinger and other missile
systems.
MANAGEMENT COMMENTS
(Management Systems), nonconcurred with Finding A and
Recommendation A.l. in the draft report to direct the Army to
rebill packing, crating, and handling charges on Stinger missiles
shipped from Army stocks, using a rate of $12 per missile instead
of 3.5 percent of the selling price. The Office of the
Comptroller stated that although the PC&H surcharge could result
in individual billings that are higher or lower than actual
costs, the objective of DoD Manual 7290.3-M is to recover PC&H
costs in the aggregate and not on individual transactions. The
Office of the Comptroller stated that the 3.5-percent surcharge
was applied without regard to actual costs for individual
shipments, and results in a more equitable application of PC&H
costs to the entire FMS program. Further, he stated that DoD
policy permits a deviation from the standard PC&H rate if the DoD
Component requests an exception and submits supporting
documentation before incurring PC&H costs. However, he stated
that the Army acted within the policy prescribed by DoD Manual
7290.3-M; therefore, the amount charged to FMS customers for PC&H
costs was in accordance with the DoD policy.
The Army nonconcurred with Finding A and Recommendation A.2. as
worded in the draft report. The Army's comments stated that Army
systems cannot gather and classify cost data that would be used
to develop a separate PC&H rate for each missile system.
However, the Army will ask DoD to reevaluate the current PC&H
rates. Although the Army is not in favor of multiple rates, if
DoD issues new standard rates, those rates should be applied in
the aggregate and not on individual sales. The Army also
nonconcurred with the monetary benefits of $1.7 million, stating
that PC&H costs were charged according to existing DoD policy.
AUDIT RESPONSE TO MANAGEMENT COMMENTS
We understand the Office of the Comptroller's reluctance to
rebill the PC&H charges for the Stinger missile. The Army has
spent the revenues generated by the overcharges; therefore, money
is not readily available to make refunds. However, we are
concerned about the Comptroller's willingness to let this system
remain unchanged. We recognize that the use of a surcharge will
result in both under- and over- recovery of costs. But in the
case of the Stinger missile, the surcharge amounted to
15,000 percent of the actual costs. Such an excessive charge is
likely to have a negative effect on foreign customers'
willingness to buy from U.S. sources.
Under the current system, the Army (specifically MICOM) would
have to propose any change to the prescribed surcharge. Since
MICOM gets the benefit of the windfall funds, this is not likely
to happen. In response to this final report, we request that the
Comptroller comment on Recommendation A.l. in this final report.
We are no longer claiming the monetary benefits of $1.7 million.
We disagree with the Army's position regarding PC&H surcharge
rates. We recognize that the Army's accounting systems are not
designed to accumulate actual PC&H costs on FMS orders;
otherwise, there would be no reason to apply a standard
percentage rate. The intent of our recommendation was for the
Army to identify other missile systems for which standard PC&H
charges are not realistic and customer billings are inequit-
able. Therefore, we request that the Army reconsider its
position on Recommendation A. 2. when replying to the final
report.
B. Pricing of Economy Act Sales
FINDING
MICOM did not accurately price Stinger missiles sold to a non-DoD
activity under the Economy Act. This condition occurred because
the MICOM Stinger Project Manager's Office (PMO) did not comply
with DoD guidance and priced the sales using the standard price
instead of replacement cost. In addition, the PMO added a
10 percent force rearrangement factor to cover the costs of
putting an improved missile in the Army's inventory, but excluded
PC&H and overhead costs. As a result, MICOM overcharged a non-
DoD agency $4.0 million on the sales of 1,606 Stinger missiles
and undercharged the same agency $982,000 for PC&H and overhead
costs. Also, MICOM used force rearrangement funds to increase
the Army's inventory by about 160 more missiles than were sold to
the customer.
Economy Act sales are authorized under united States Code
(U.S.C.)f title 31, sec. 1535. The U.S.C. states that Economy
Act sales can occur within or between agencies. The sales we
reviewed were reimbursable orders placed by Headquarters, Office
of the Deputy Chief of Staff for Logistics. The Basic Stinger
missiles sold under the Economy Act after March 1987 to a non-DoD
agency were to be replaced with the reprogrammable microprocessor
(RMP) Stinger model. DoD Manual 7220.9-M, "Accounting Manual,"
March 18, 1987, states that the pricing elements for Economy Act
sales are replacement costs, a 10 percent force rearrangement
factor, and PC&H and overhead costs. The DoD Manual further
states that if the sale of a major item will reduce assets needed
to meet approved requirements, the item-must be replaced. An
Army memorandum dated March 25, 1987, "New Guidance for Pricing
Sales to Non-DoD Federal Agencies Under the Economy Act,
31 U.S.C. 1535," states that the replacement price should be used
for Economy Act sales, subject to FMS criteria, when a
procurement action for replacement is required. Army Regulation
(AR) 37-60, "Pricing of Materiel and Services," dated April 3,
1989, states that if a major item needs to be replaced, either
the current standard price or estimated replacement price,
whichever is higher, will be used. MICOM sold 2,356 Basic
Stinger missiles under the Economy Act from March 1986 through
July 1988 at a cost of about $139 million.
Pricing Methodology. From March 1987 through July 1988, a
non-DoD agency was overcharged about $4.0 million for
1,606 missiles sold under the Economy Act. The Stinger PMO
calculated unit prices from the Army Master Data File's standard
price for the missiles and their components, plus applicable
charges for force rearrangement and engineering. Prices did not
include PC&H and overhead costs.
Since Basic Stinger missiles were being replaced with RMP models,
we repriced the sales using replacement cost factors, plus the
required force rearrangement factor. We then computed PC&H costs
at a standard rate and overhead charges at an estimated
1 percent. Our computations showed that the non-DoD agency was
undercharged about $982,000 for PC&H and overhead costs. Appen-
dix B explains our price computations.
Force Rearrangement Factor. DoD pricing guidance allows for
a force rearrangement factor to cover such costs as changes in
spare parts, support equipment, and expenses resulting from the
introduction of an item into the DoD inventory. Since the
contractor performs major maintenance on the Stinger missile,
little support equipment that has not been included in the end
product is required to operate the missile. Therefore, this
factor probably should not have been included in the cost of the
Stinger missiles sold under the Economy Act. Charging this cost
to the non-DoD agency enabled MICOM to procure 160 more missiles
at a cost of $4.0 million than were sold.
To comply with DoD regulations, MICOM should reprice Stinger
missiles sold under the Economy Act to include actual PC&H and
estimated overhead costs, and reimburse the non-DoD agency for
any overcharges. In addition, the Comptroller of the Department
of Defense should reevaluate the application of a force
rearrangement factor to the sale of major items being replaced
with improved models.
1. We recommend that the Commander, Army Missile Command:
a. Reprice the Stinger missiles sold to a non-DoD agency
under the Economy Act from March 1987 to July 1988, using the
appropriate pricing elements, and reimburse the activity for
$3.1 million in overcharges.
b. Comply with DoD Manual 7220.9-M to ensure that
applicable costs are recovered on future Economy Act sales.
2. We recommend that the Comptroller of the Department of
Defense reevaluate the requirement to apply a 10 percent force
rearrangement factor to all items replaced with improved models.
MANAGEMENT COMMENTS
The Army concurred in part with the finding and with Recommen-
dations B.l.a. and B.l.b., stating that the pricing guidance
applicable at the time of the Economy Act sales was unclear and
contradictory. The MICOM Stinger Project Manager (PM) relied on
an Army memorandum dated March 25, 1987, which stated that the
10
replacement price should be used for these sales, subject to PMS
criteria, when items sold to non-DoD agencies were replaced with
improved models. The Army memorandum resulted from a verbal
concurrence with the DoD Comptroller and assurance that
appropriate changes would be made to DoD Manual 7220.9-M.
Because the sale was made to a non-DoD agency, MICOM applied FMS
pricing criteria from AR 37-60. Therefore, the PM correctly used
the higher standard price instead of the replacement price for
these sales. The Army also stated that the U.S. General
Accounting Office (GAO) had criticized the Army for not charging
whichever was higher, standard or replacement cost, in previous
sales to non-DoD agencies. The Army concurred with the
$982,000 undercharge to the non-DoD agency for overhead and PC&H
costs incurred in these sales.
concurred with Finding B and Recommendation B.2., stating that a
review of FMS surcharges, including the force rearrangement
factor, should be complete by December 31, 1990. Based on this
review, any changes to FMS pricing policy will be reflected in
DoD Manuals 7220.9-M and 7290.3-M.
AODIT RESPONSE TO MANAGEMENT COMMENTS
We disagree with the Army's position regarding the pricing of
Economy Act sales. As stated in the finding, DoD Manual 7220.9-M
requires replacement cost pricing when the items are to be
replaced with an improved model. The Army memorandum addresses
FMS criteria in reference to determining a need for inventory
replacement, not as a method for pricing Economy Act sales.
Pricing guidance in DoD Manual 7220.9-M (replacement cost
pricing) should have been used. The PM at MICOM misinterpreted
the Army memorandum and used the standard price, rather than the
replacement price, for the Economy Act sales. The GAO's
criticism of the Army's method occurred before the Army
memorandum of March 25, 1987, changed the pricing method to
replacement cost. Therefore, we request that the Army reconsider
its position on Recommendations B.l.a. and B.l.b. when replying
to the final report.
The Office of the Comptroller's comments are fully responsive to
the recommendation. The Comptroller has recommended that the
force rearrangement factor be deleted from DoD Manual 7220.9-M,
which has not been staffed throughout DoD.
11
12
C. Transportation Costs
FINDING
The Security Assistance Accounting Center (SAAC) had not
corrected erroneous transportation charges to Basic Stinger FMS
cases that occurred between October 1983 and April 1987. SAAC
had corrected a programming logic error in the billing system
that used the transportation look-up table, but had not made
adjustments to the affected FMS cases. This condition occurred
because SAAC determined that projected savings did not justify
the effort required to adjust each case. As a result, 10 FMS
cases were overcharged for transportation by $935,000, and
one case was undercharged by $493,000.
Before October 1, 1983, transportation charges on all FMS
deliveries were computed by applying standard percentage rates to
the selling prices of the articles. In October 1983, a
transportation look-up table was established for a number of
items, including the Stinger missile. The look-up table shows
estimated actual costs when costs using standard transportation
percentages are significantly different from actual charges.
However, because of deficiencies in the automated billing system
at SAAC, transportation charges on Stinger deliveries between
October 1983 and April 1987 were a mixture of estimated actual
costs from the look-up table, costs based on the standard
percentage rates, and costs applied to price adjustment
transactions that were not actual deliveries. Although the
billing system's programming logic was corrected in 1987,
erroneous charges to the FMS cases had not been removed.
We determined that SAAC had billed FMS customers $1,341,801 in
transportation costs on 10 Stinger cases (18 case line
numbers). About 70 percent of the transportation costs, or
$935,000, was erroneously charged. SAAC did not correct these
charges because identifying erroneous transactions would have
been difficult and time-consuming, and the projected savings did
not justify the effort required to make retroactive
adjustments. During our audit, SAAC adjusted transportation
undercharges to FMS case SR-VHB by $493,000. Appendix C
summarizes the overcharges by case line.
We believe the erroneous charges were high enough to warrant
corrective action by SAAC. Since similar errors probably
occurred in transportation charges for other FMS articles on the
look-up table, SAAC should revalidate transportation billings for
all other look-up table items delivered between October 1983 and
April 1987 and correct any erroneous charges.
13
We recommend that the Director, Security Assistance Accounting
Center:
1. Correct the transportation charges for the Foreign
Military Sales cases listed in Appendix C by the amounts shown.
2. Revalidate transportation charges on deliveries of other
Foreign Military Sales articles that are subject to look-up table
rates, and take action to correct any erroneous charges
disclosed.
MANAGEMENT COMMENTS
The Air Force concurred with Finding C and Recommendations C.l.
and C.2. SAAC will review and correct the transportation charges
for each Stinger case. This review should be completed by
November 30, 1990. SAAC will also use statistical sampling
techniques to validate the transportation charges for other FMS
articles. Depending on the results of the validation process,
SAAC will develop a method of correcting the erroneous charges
for each FMS case. This evaluation should be complete by
December 31, 1990.
Although the Air Force concurred with the finding and
recommendations, its comments did not address the monetary
benefits identified by the audit. Therefore, we request that the
Air Force comment on those benefits when replying to the final
report.
14
D. Asset Use Charges for DoD-Owned Facilities
FINDING
MICOM improperly charged asset use costs to FMS customers for
DoD-owned facilities and equipment used to produce Basic Stinger
missiles. In addition, sales of missiles procured through the
Special Defense Acquisition Fund (SDAF) were not charged the
applicable rental fee, but instead were charged a substantially
higher amount for asset use. These conditions occurred because
MICOM did not have adequate internal controls to properly process
price and availability worksheets between the organizational
elements responsible for FMS pricing. As a result, 23 of
28 Basic Stinger FMS cases had an improper or inflated cost for
asset use, resulting in overcharges of $3.2 million to FMS
customers.
Background. Although the Stinger was manufactured by a
contractor, its production also required the use of some DoD-
owned assets, such as test equipment and special tooling. DoD
Manual 5105.38-M, "Security Assistance Management Manual,"
October 20, 1989, provides that the sale of defense articles to
any foreign country shall include appropriate charges for DoD-
owned facilities and equipment used to produce the articles.
These charges will be in the form of asset use charges, except
where production of the articles is subject to rental fees
assessed in accordance with the Federal Acquisition Regulation
(FAR). DoD Manual 5105.38-M further states, "At no time will
both a rental charge and an asset use charge be applied to the
same defense articles on an FMS transaction."
For items procured through the SDAF in anticipation of future FMS
cases, DoD Manual 7290.3-M states that contracts shall not
include rental charges as provided by the FAR. This Manual
further specifies that the DoD Component that has custody of the
SDAF asset being purchased will be responsible for tracking the
related unfunded costs until the asset is sold to an FMS
customer.
We reviewed 28 cases and found that for 14 of 17 FMS cases, unit
prices for the Basic Stinger included improper asset use charges,
resulting in overcharges of $1.8 million to FMS customers.
Inflated asset use charges of $1.4 million were assessed on 9 of
the 11 SDAF cases. Appendix D is a schedule of the cases
affected.
Asset Use Costs for Procurement Cases. For 14 of 17 pro-
curement cases, $1.8 million was charged to FMS customers for
asset use, even though a rental fee for DoD-owned facilities
and equipment was included in the unit price. For example, on
15
contract DAAH0182-C-A003, 646 Basic Stinger missiles were shipped
to the customer for FMS case NE-VLH. Although unit prices
included rental fees, the Stinger PMO improperly added asset use
charges amounting to $1.3 million.
The improper charges occurred because asset use and rental
charges were developed independently and at different stages of
the FMS pricing process. Rental rates were determined during the
procurement process in accordance with the FAR and were included
as part of the contract unit cost. The Stinger PMO added a
4-percent asset use charge when developing the total FMS price
for the Stinger. PMO personnel were not aware that the contract
cost already included an appropriate rental charge.
SDAF Cases. Of the 28 Basic Stinger cases, 11 involved
sales of missiles procured under SDAF procedures. The FMS price
of these missiles included a 4-percent charge for asset use, but
in accordance with DoD Manual 7290.3-M, the SDAF contract price
excluded rental charges. The asset use charges on the SDAF
missiles ranged from $1,559 to $2,625; the rental charges,
ranging from $156 to $326, were applied to missiles procured with
specific FMS customer funds under the same contracts. As a
result of the difference between asset use and rental fees,
customers who received SDAF missiles were charged $1.4 million
more than if the missiles had been procured through normal FMS
channels and properly priced and billed. Therefore, in our
opinion, the Stinger missiles sold from SDAF sources should have
been priced to include the appropriate contract rental charge
rather than the 4-percent asset use charge.
Recent fair pricing legislation (Public Law 101-165) has
eliminated asset use charges on defense articles delivered to FMS
customers after December 1989. However, to comply with DoD
regulations that existed before the legislation was enacted,
MICOM needs to adjust the sales price of Stinger missiles by
deleting the charge for asset use in all FMS procurement cases
when an appropriate rental charge is included in the contract
unit price. For SDAF cases, the appropriate rental charge should
be applied instead of the 4-percent asset use charge.
We recommend that the Commander, U.S. Army Missile Command:
1. Reprice all Basic Stinger Foreign Military Sales
procurement cases by deleting the asset use charge when an
appropriate rental fee was included in the contract cost of the
missile.
2. Adjust the Basic Stinger sales prices on Special Defense
Acquisition Fund cases by substituting the appropriate rental fee
for the 4-percent asset use charge.
16
MANAGEMENT COMMENTS
The Army concurred with Pinding D and Recommendation D.I., and
concurred in part with the monetary benefits associated with the
Basic Stinger missile procurement cases. The Army will review
all open FMS cases for missiles and delete the invalid asset use
charges by March 30, 1991. The Army concurred with only $1.8 of
the $3.1 million in monetary benefits related to procurement
cases, stating that estimated costs on DD Form 1513,
"U.S. Department of Defense Offer and Acceptance," were not
actually billed to customers because of case amendments that
deleted certain charges. The Army stated that the MICOM billing
office has initiated action to refund the $1.8 million to the FMS
cases that were improperly billed.
The Army concurred in part with Recommendation D.2. and
nonconcurred with the monetary benefits of $1.4 million
associated with SDAF sales, stating that MICOM used the proper
DoD guidance in charging 4 percent for asset use on SDAF sales.
However, the Army will recommend that the Comptroller of the
Department of Defense reevaluate the DoD policy concerning asset
use charges for SDAF sales. The Army stated that an adjustment of
$1.4 million to customer billings would not be appropriate.
The Defense Security Assistance Agency (DSAA) nonconcurred with
Finding D in relation to SDAF cases and with Recommen-
dation D.2., stating that the finding is contrary to the existing
policy of using stabilized pricing on SDAF cases. The stabilized
pricing policy ensures that the price of major end items will
remain the same from the Letter of Offer and Acceptance through
case closure. DSAA cited Office of the Assistant Inspector
General for Inspections Report No. 90-INS-15, issued July 26,
1990, which endorsed the "no-loss, no-gain" concept of stabilized
pricing as a means of increasing efficiency and customer
satisfaction.
Based on additional information provided by the Army regarding
asset use charges for procurement cases, we have changed the
number of cases with inaccurate asset use charges from 17 cases
to 14 cases and adjusted the monetary benefits from $3.1 to
$1.8 million. The Army originally concurred with $1.7 million in
monetary benefits; however, MICOM provided detailed case
information that changed the amount to $1.8 million.
We disagree with the Army's position regarding Recommen-
dation D.2. The references cited by the Army are found in
paragraph 70601 of DoD Manual 7290.3-M, which states that unless
appropriate rental charges are made, an asset use charge should
be applied when FMS orders require the use of DoD assets. As the
17
Array pointed out, paragraph 71802.A.2. of DoD Manual 7290.3-M
excludes rental charges on SDAF contracts. However, paragraph
71802.A.2. also excludes the 1-percent and 4-percent asset use
charges to the SDAF. We believe that the intent of these
exclusions was to avoid encumbering SDAF with charges that pass
through the FMS Trust Fund and do not represent actual
expenditures or outlays. When SDAF-owned articles are sold, we
believe that rental or asset use, as appropriate, should be
charged to the purchaser as intended under Section 706 of DoD
Manual 7290.3-M. Although DoD Manual 7290.3-M may not be clear
with reference to the SDAF, it is not practical to apply a
different surcharge for asset use to SDAF items procured under
the same contracts used for other FMS cases. Therefore, we
request that the Army reconsider its position on Recommenda-
tion D.2. when replying to the final report.
We disagree with DSAA's position on Finding D and Recommen-
dation D.2. The stabilized pricing concept protects FMS
customers against price fluctuations from sources outside of DoD,
such as inflation. However, on SDAF sales, stabilized pricing
should not have been used to disguise internal pricing
inconsistencies. DSAA nonconcurred with the "rto-loss, no-gain"
concept cited in Office of the Assistant the Inspector General
for Inspections Report No. 90-INS-15. However, DSAA used that
report as a basis for nonconcurring with the SDAF portion of the
finding and recommendation. We request that DSAA reconsider its
position on Recommendation D.2. if comments are made on this
final report.
18
E. Delivery Reporting of Stinger Missiles
FINDING
MICOM took more than 60 days to report shipments of Stinger
missiles to FMS customers on 62 of 82 missile deliveries. This
condition occurred because MICOM did not have adequate internal
controls to monitor the reporting of shipments diverted from Army
stock, and shipments from contractors or depots to FMS customers.
These reporting delays slowed billings of $115.9 million in
missile deliveries. The delays also caused SAAC to understate
the deliveries reported to FMS countries in quarterly billing
statements.
DoD Manual 7290.3-M states, "Implementing agencies shall report
accrued expenditures (work in process) and physical deliveries to
the Security Assistance Accounting Center (SAAC) through use of a
billing and reporting procedure within 30 days of the date of
shipment or performance." In order to report a physical delivery,
MICOM must receive a confirmation of shipment from the contractor
or depot involved. The contractor uses a "Materiel Release and
Receiving Report" (DD Form 250) to notify MICOM of a direct
shipment. For shipments from Army inventory, the depot enters a
materiel release confirmation into the Commodity Command Standard
System (the System), which automatically updates the
information. After the shipment is confirmed, MICOM submits an
"FMS Detail Billing Report" (DD Form 1517) to SAAC.
We reviewed 28 delivered FMS cases that had 82 separate shipments
of Stinger missiles. We identified 62 deliveries that MICOM had
not reported within 60 days of shipment; 14 deliveries were
diverted from Army stock, and 48 were from contractors and
depots. DoD criteria specify that customers should be billed
within 30 days; however, SAAC processes bills on a fixed cycle,
and the 30-day standard is not always achievable. Therefore, we
allowed MICOM 60 days to complete the billing cycle.
Diversions From Army Stock. MICOM did not report that
missiles had been diverted from Army stock to FMS customers
within 60 days after the missiles were delivered. We identified
14 shipments with reporting delays totaling $41.0 million in
missile deliveries. These missiles were diverted when FMS
customers wanted them before the scheduled delivery dates.
However, MICOM did not report the deliveries from Army stock
until the Army replenished its inventory with missiles from the
procurement contract, causing delayed billings to the FMS
customers. For example, in April 1984, 400 Stinger missiles were
diverted from stock at Red River Army Depot and shipped for FMS
case SR-VHB. MICOM did not report the shipment to SAAC until
19
November 1984, when the Army's stock was replenished. This
7-month delay slowed billings of about $28.1 million to the
customer.
Contractor and Depot Shipments. We identified 48 shipments
for which the contractor and the depot had sent Stinger missiles
to FMS customers, but MICOM had not reported the shipments to
SAAC within 60 days. This resulted in reporting delays of
$74.9 million. The reporting delays occurred because MICOM did
not have effective internal controls to monitor the shipment of
missiles. For example, 12 separate shipments of 646 missiles for
FMS case NE-VLH were made between January 1984 and January 1985.
For 8 of these 12 shipments, the average billing delay was
6 months. These delays, as well as delays in reporting the
diversions from Army stock, caused a corresponding understatement
in the delivery status reported to customers in the quarterly
"Foreign Military Sales Billing Statement" (DD Form 645).
Delays in reporting shipments from contractors and Army depots
had been previously identified by the U.S. Army Security Affairs
Command (USASAC) in a study entitled, "Foreign Military Sales
Army Procurement Appropriation (APA) Major Items Shipped-
Unbilled," issued on October 6, 1988. The study, which included
a review of MICOM procedures, concluded that approximately
35 percent of all billings for major items had not been made
within prescribed time standards.
To ensure prompt billing and accurate reporting of case status to
FMS customers, MICOM needs to develop effective internal controls
to monitor and report shipments from contractors and depots.
RECOMMENDATION FOR CORRECTIVE ACTION
We recommend that the Commander, U.S. Army Missile Command
establish policies and procedures to monitor and report all
shipments from contractors and depots, including diversions from
Army stock, to ensure prompt billing to Foreign Military Sales
customers.
MANAGEMENT COMMENTS
The Army concurred in principle with the finding and
Recommendation E. The Army stated that internal control
procedures will be improved to ensure that FMS Program Managers
explore every means of enhancing earlier reporting and billing of
Stinger missile deliveries. These improved procedures will be
issued by October 31, 1990. The Army further stated that
20
extenuating circumstances within the System, such as data input
errors, precluded billing actions within the prescribed 30-day
time frame.
ADDIT RESPONSE TO MANAGEMENT COMMENTS
The Army's comments are not fully responsive to the recommenda-
tion. Although the Army stated that internal controls would be
strengthened, the Army did not specify the policies and
procedures it will use for monitoring and reporting when it
procures new missiles to replace those shipped from Army stock.
We request that the Army specify these policies and procedures
when replying to the final report. As discussed in the finding,
we recognized the problems inherent in the System, and we used a
60-day criterion to determine the adequacy of delivery reporting
of contractor and depot shipments to SAAC for customer billing.
21
22
FMS STINGER MISSILE CASES IMPLEMENTED
Purchased Delivered
Case Quantity Dollar Value Quantity Dollar Value
Basic Stinger
BA-JUQ 70 $ 3,609,538 70 $ 3,651,538

XX-JUU 30 1,522,780 30 1,586,530
XX-UXW 34 2,295,791 34 2,095,676
FR-UYP 19 981,750 19 856,980
XX-JAA 18 954,510 18 954,510
XX-JWB 10 505,950 10 505,950
XX-VXD 5 635,500 5 343,048
IT-XKE 12 848,108 12 733,500
IT-XKS 612 31,885,686 601 29,361,312
JA-VFV 17 1,242,315 17 847,866
JA-VFW 7 513,613 7 352,348
JA-VHW 39 2,568,132 39 1,476,160
JA-VHZ 37 2,475,821 37 2,073,398
JA-VKH 14 1,204,959 14 800,876
JA-VKX 39 3,360,137 39 2,145,178
JA-VNC 27 2,008,716 27 1,425,178
JA-VND 29 2,160,038 29 1,489,172
JA-JEP 34 1,873,004 34 1,873,004
JA-JFX 28 1,556,588 28 1,556,588
NE-VLD 646 43,314,510 646 29,331,727
XX-VFD 120 6,236,280 120 6,236,280
SR-VHB 400 28,926,000 400 28,059,600
TK-UQB 62 3,966,939 62 2,723,502
TK-JAW 82 4,447,906 82 3,218,870
TK-JCP 72 4,060,440 72 3,691,800
UK-VSH 60 3,694,560 60 3,814,772
XX-VSN 8 485,440 8 457,299
UK-VTJ 18 1,291,104 18 1,290,090
Subtotal 2,549 $158,626,115 2,538 $132,953,193
Reprogrammable Microprocessor (RMP) Stinger
GR-JXT 500 $ 29,047,250 0 0

GY-WNU 2 103,730 0 0
JA-VQE 41 2,759,690 0 0
JA-VQP 54 3,630,264 0 0
JA-VSO 45 2,361,087 0 0
JA-VSP 89 4,895,613 0 0
JA-JAD 48 3,148,137 0 0
JA-JAE 84 794,310 0 0
SZ-JAA 1 67,110 1 67,110
Subtotal 864 $ 46,807,191 $ 67,110
Total 3,413 $205,433,306 $133,020,303
23 APPENDIX A
This page was left out of original document
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25 APPENDIX B
2<P
SCHEDULE OF ERRONEOUS TRANSPORTATION CHARGES
Country Case Amount Amount from

Case Line Billed Look-up Table Difference
FR-UXW 1 $ 13,718 $ 1,990 $ 11,728

FR-UXW 2 12,168 496 11,672
FR-UXW 3 12,319 1,785 10,534
FR-UXW 4 21,859 880 20,979
IT-XKE 1 10,975 1,592 9,383
IT-XKE 2 19,703 2,856 16,847
IT-XKS 1 143,640 86,340 57,300
IT-XKS 2 340,920 166,050 174,870
IT-XKS 13 0 542 (542)
JA-JFX 1 41,894 13,416 28,478
JA-VFV 1 6,713 270 6,443
JA-VFW 1 2,105 90 2,015
NE-VLH 1 451,689 56,076 395,613
NE-VLH 2 51,935 17,898 34,037
PK-VFD 1 6,760 4,200 2,560
TK-JCP 1 174,950 47,812 127,138
TK-UQB 1 28,197 1,680 26,517
TK-UQB 2 2,256 2,356 (100)
Total $1,341,801 $406,329 $935,472
Positive amount is total overcharge and negative amount is total undercharge.
27 APPENDIX C
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31 APPENDIX D
Page 3 of 3
30.
OFFICE OF THE COMPTROLLER OF THE DEPARTMENT OF DEFENSE
WASHINGTON, DC 20301-1100
00T | 5 1990
(Management Systems)
MEMORANDUM FOR ASSISTANT INSPECTOR GENERAL FOR AUDITING, DODIG

SUBJECT: Draft Report on the Audit of Pricing, Billing, and
Inventory Controls of Stinger Missiles Sold to Foreign
Military Sales Customers (Project No. OFA-0004)
Your memorandum of August 3, 1990, requested our comments on

the "Audit of Pricing, Billing, and Inventory Controls of Stinger
Missiles Sold to Foreign Military Sales Customers," draft report.
Our comments address only the recommendations to the DoD
Comptroller. We also commented on the monetary benefits outlined
in Appendix B of the draft report.
We appreciate the opportunity to provide comment on this
report. Should you need to discuss any of our comments further,
Mr. Robert Florence is our point of contact. Mr. Florence may be
reached on 697-3192.
Alvin tucker
Deputy Comptroller
(Management Systems)
Attachment
33 APPENDIX E
Page 1 of 2
DoD Comptroller Comments
on
DoDIG Draft Report on the Audit of Pricing, Billing, and
Inventory Controls of Stinger Missiles Sold to
Foreign Military Sales Customers
(Project No. OFA-0004)
RECOMMENDATION A.I.: We recommend that the Comptroller of the

Department of Defense direct the Army to rebill packing,
crating, and handling charges on Stinger missiles shipped from
Army stocks using a rate of $12 a missile instead of 3.5 percent
of the selling price.
DoD Comptroller Comment; Nonconcur. We recognize that the PC&H
surcharge may result in individual billings which are greater or
less than actual costs. However, our objective is to recover
costs incurred by the U. S. Government in performing packing,
crating and handling (PC&H) services in the aggregate and not
necessarily on each transaction. To achieve that objective, we
apply an approved surcharge, without regard to the precise
actual costs for specific shipments. To selectively use actual
costs, or to bill at the recommended $12 rate, whenever actual
costs are lower, and bill at the surcharge amount when actual
costs are higher, would negate the overall equity of the rate
and result in DoD subsidizing the FMS program. Unless actual
costs are required to be billed on all transactions, some degree
of inaccuracy, i.e., over and under billing, should be
anticipated on all transactions.
DoD policy requires that the surcharge be used for specified
delivery source codes unless the DoD Component requests an
exception with supporting justification prior to the performance
of PC&H. The Army acted within the policy contained in DoD
7290.3-M, Foreign Military Sales Financial Management Manual, by
reporting the delivery with the PC&H surcharge applicable.
We concur that the monetary amount of the difference between
amounts collected and actual costs in this instance were $1.7
million. The amount is not a recurring amount. The missiles
were priced in accordance with existing policy.
RECOMMENDATION B.2.: We recommend that the Comptroller of the

Department of Defense reevaluate the requirement to apply a 10
percent force rearrangement factor to all items replaced with an
improved models.
DoD Comptroller Comment; Concur. We intend to review a number
of Foreign Military Sales (FMS) surcharges including the force
rearrangement factor in the near future. If the review results
in modification to FMS pricing policy, the resultant policy will
be published both in chapter 26 of DoD 7220.9-M, "DoD Accounting
Manual," and in chapter 7 of DoD 7290.3-M, "Foreign Military
Sales Financial Management Manual." The review is expected to
be completed by December 31, 1990.
APPENDIX E 34
Page 2 of 2
.0«5Tirur,0/v
DEPARTMENT OF THE ARMY

OFFICE OF THE ASSISTANT SECRETARY
17 OCT 1990
MEMORANDUM FOR THE ASSISTANT INSPECTOR GENERAL FOR

AUDITING, OFFICE OF THE INSPECTOR GENERAL
OF THE DEPARTMENT OF DEFENSE
SUBJECT: Response to DOD Inspector General (DODIG)
Draft Report on the Audit of Pricing, Billing,
and Inventory Controls of Stinger Missiles
Sold to Foreign Military Sales (FMS) Customers
Enclosed is our response to the subject DODIG draft

report as requested in your 6 August 90 memorandum.
We concur with the recommendation that the Army
establish policies and procedures to monitor the
timeliness of FMS delivery reporting. We also concur
that the Army erroneously charged asset use when rental
charges were included on FMS procurement cases. The
related overcharges total $1.7 million, not $3.1 million
as stated in the report. Additionally, we concur that
the Army omitted charging a non-DOD agency for packing,
crating, and handling and for overhead cost totaling
$982,000, according to the report. Therefore, we agree
to a net reimbursement of about $720,000 ($1.7 million
in overcharges less $982,000 in undercharges). Although
we concur with the intent of the remaining findings and
recommendations, we do not believe that reimbursement is
appropriate.
The other findings on the pricing of Stinger
missiles indicate that alternative pricing methods would
have produced a lower price. This is true. However, we
followed DOD guidance in pricing the missiles and
applying the standard add-on rates. Application of this
frequently results in individual overcharges or
undercharges, when compared to actual costs. We believe
that DOD established this policy to simplify the billing
process, expedite the final billing, and break even on
aggregate sales. It was not the intent that individual
shipments would be precisely billed. If we were to
concur with your recommendations to bill actual add-on
costs associated with the Stinger missile, we also would
35 APPENDIX F
Page 1 of 15
-2-
be required to perform similar actual cost reviews for

all FMS and Economy Act billings, and that is not
feasible.
Our point of contact is Mr. Thomas L. Leonard,
Office of the Deputy Assistant Secretary of the Army for
Finance and Accounting, SAFM-FAP-S, Indianapolis, IN
46249-1046, AUT0V0N 699-3059 or commercial (317)
542-3059.
0
y Douglas A. Brook
Assistant Secretary of the Army
(Financial Management)
Enclosure
Copy Furnished:
The Inspector General, OSA, ATTN: SAIG-PA
APPENDIX F 36
Page 2 of 15
ARMY RESPONSE
DOD Inspector General Draft Report on the Audit of
Pricing, Billing, and Inventory Controls of Stinger Missiles
FAR A - Packing, Crating, and Handling Costs.

Finding: Foreign Military Sales customers were overcharged
for packing, crating, and handling (PC&H) costs on shipments
of Stinger missiles from Red River Army Depot. The
overcharges occurred because the existing method for
calculating PC&H costs did not reasonably approximate actual
effort expended by the depot. As a result, PC&H billings to
FMS customers and reimbursements to the U.S. Army Missile
Command (MICOM) were overstated by about $1.7 million.
Recommendation A-l: We recommend that the Comptroller of the
Department of Defense direct the Army to rebill packing,
crating, and handling charges on Stinger missiles shipped
from Army stocks using a rate of $12 a missile instead of 3.5%
of the selling rice.
Comments: While not directed to Army, we submit the following
comments for consideration.
MICOM priced the Stinger missiles in compliance with
paragraph 70402 of DOD 7290.3-M. This FMS manual directs the
standard 3.5% PC&H charge be billed for items $50,000 or less,
and an additional one percent of the selling price over
$50,000. MICOM followed guidance in applying the standard
3.5% PC&H costs to the FMS of Stinger missiles.
Any use of these standard rates will result in an
overcharge or an undercharge, when compared to the estimated
actual cost. We believe that DOD's purpose in developing the
rates was to apply an equitable charge to all items in the
aggregate—not on an individual basis. We strongly believe
that this was the proper approach.
In the case of the Stinger missiles, it appears that
application of the standard rate may have produced a charge
higher than estimated actual PC&H cost. However, we do not
agree that MICOM should refund PC&H charges on past sales of
Stinger and other missiles. Collections were deposited, as
required, and subsequently used to fund approved operations.
Instead, we will ask DOD to reevaluate the existing standard
rates. If determined appropriate, a new standard rate should
be mandated for future (but not past) FMS of all military
items. However, we do not favor separate rates for individual
items. Army commands do not have cost accounting systems to
accumulate and classify expenses, nor the funds to build them.
37 APPENDIX F
Page 3 of 1
Further, applying estimated actual PC&H costs to all items
sold would result in the same overall net result as does the
standard rates.
Recommendation A-2: We recommend that the Commander, U.S.
Army Missile Command initiate a joint effort with the Army
depots to establish PC&H rates for FMS customers based
on actual costs for the Stinger and other missile systems.
Comments:
We nonconcur with this recommendation as currently worded. As
mentioned above, Army systems are not capable of gathering and
classifying costs to establish individual PC&H rates for each
missile system. Instead, we will request that DOD reevaluate
the current rates and, if appropriate, issue new standard
rates. However, we do not favor the establishment of multiple
rates. Like the existing standard rates, new rates should
apply across-the-board to produce the necessary reimbursement
over all sales.
Monetary Benefit: Nonconcur. As stated above, MICOM priced
the Stinger missiles according to DOD guidance. Therefore, an
adjustment of $1.7 million is not appropriate. Also, while a
change to actual PC&H costs may result in a savings to the
customer on Stinger missiles, the overall effect for all FMS
would, in theory, be zero.
APPENDIX F 38
Page 4 of 15
ARMY RESPONSE
FAR B - Pricing of Economy Act Sales.

Finding: MICOM did not accurately price Stinger missiles sold
to a non-DOD activity under the Economy Act. This condition
occurred because the MICOM Stinger Project Manager's Office
did not comply with DOD guidance and priced the sales using
the standard price instead of replacement cost. In addition,
the Project Manager's Office added a 10% force rearrangement
factor to cover the costs of putting an improved missile in
the Army's inventory, but excluded packing, crating, and
handling (PC&H) and overhead costs. As a result, MICOM
overcharged $4.0 million on the sales of 1,606 Stinger
missiles and undercharged $982,000 for the PC&H and overhead
costs. Also, MICOM used the force rearrangement funds to
increase the Army's Stinger inventory by about 160 more
missiles than were sold to the customer.
(Please note that the Stinger Project Manager's (PM) Office is
under the purview of the Program Executive Officer, Air
Defense, and not the Commander, MICOM.)
Recommendation B-l: We recommend that the Commander, Army
Missile Command:
a. Reprice the Stinger missiles sold to a non-DOD
activity under the Economy Act from March 1987 to July 1988,
using the appropriate pricing elements, and reimburse the
activity for $3.1 million in overcharges.
b. Comply with DOD 7 220.9-M to ensure that applicable
costs are recovered on future Economy Act sales.
Response: We concur in part.
The various pricing guidance in effect at the time for
this type of sale was both confusing and contradictory. In
pricing the Economy Act sales, the PM used what was believed
to be the appropriate policy at the time. As noted in the
audit, Paragraph F.4.b.(l)(b) of DOD 7220.9-M (dated
September 18, 1989) does state that items to be replaced with
an improved item should be sold to other Federal agencies at
the estimated replacement cost. We believe that this was the
DODIG's basis for the finding. This is understandable, but,
in our opinion, there are other criteria to be considered.
39 APPENDIX F
Page 5 of 15
During most of the period in question, the PM relied on
an Army memorandum dated March 25, 198 7. The memorandum
subject was "New Guidance for Pricing Sales to Non-DOD Federal
Agencies Under the Economy Act, 31 U.S.C. 1535." It was
issued in advance of a change to Army Regulation (AR) 37-60.
This memorandum stated that the replacement price should be
used for Economy Act sales, subject to FMS criteria, when a
procurement action for replacement is required. This
memorandum resulted from a verbal concurrence with similar
wording from the Comptroller of the Department of Defense
(DOD(O) and assurance that DOD 7220.9-M would be changed
accordingly. Paragraph B.3. of the DOD manual was modified
with the following: "Requisitioning DOD activities ...shall
disclose to both DOD and non-DOD suppliers whether any goods
or services are for the benefit of non-DOD or non-Federal
Government activities, so that proper amounts may be billed
and collected." Since the goods in this case were for the
benefit of a foreign country (a non-Federal Government
activity), it followed that FMS pricing rules should be used.
The PM priced the missiles using FMS rules from AR 37-60.
Paragraph 4-1.a.(6) of the AR states that items to be replaced
will reflect the higher of estimated replacement price or
standard price. Under this criteria, the PM priced the
missiles at the standard Army Master Data File price, which
was higher than the replacement cost. We believe it was
proper to use the higher of the two prices, since this same
rule applied to DOD and other U.S. Government customers. In
one celebrated case, the General Accounting Office was highly
critical of the Army for not charging the higher of the
standard or replacement cost in a sale to another U.S.
Government agency for the benefit of a non-Federal Government
activity. This, too, was a missile sales case.
We will request that the DOD(C) clarify the policy for
Economy Act sales of items to be replaced.
The force rearrangement factor was added as required by
paragraph 26F.4.b.(1)(b) of DOD 7220.9-M for the sale of an
item to be replaced with an improved item. This cost was not
added with the intent to procure more missiles than were sold.
We concur that Army improperly excluded the Overhead and
Packing, Crating, and Handling costs from the price of the
missiles sold under the Economy Act.
Recommendation B-2: We recommend that the Comptroller of the
Department of Defense reevaluate the requirement to apply a 10
percent force rearrangement factor to all items replaced with
an improved model.
Comments: While not directed to the Army, we submit the
following comments for DOD consideration.• The Army followed
DOD guidance in applying the force rearrangement factor. Any
change to this guidance, should not be applied retroactively.
APPENDIX F 40
Page 6 of 15
Monetary Benefit: Concur in part. As stated above, the Army
priced the Stinger missiles according to what we believed to
be DOD guidance at the time. Therefore, an adjustment for a
$4.0 million overcharge is not appropriate. Further, to
reimburse this amount would not benefit the other non-DOD
agency. In most cases it would be credited to merged funds.
We concur with the undercharge of $982,000 for overhead and
packing, crating, and handling.
41 APPENDIX F
Page 7 of 15
AEMY RESPONSE
FAR C - Transportation Costs.

Note: This finding and recommendation is directed to the
Security Assistance Accounting Center. Therefore, we are not
addressing this issue.
APPENDIX F 42
Page 8 of 15
ARMY RESPONSE
FAR D - Asset Use Charges for DQD-owned Facilities.

Finding: MICOM improperly charged asset use costs to FMS
customers for DOD-owned facilities and equipment used to
produce basic Stinger missiles. In addition, sales of
missiles procured through the Special Defense Acquisition Fund
(SDAF) were not charged the applicable rental fee, but
instead, were charged a substantially higher amount for asset
use. These conditions occurred because MICOM did not have
adequate internal controls to properly process price and
availability worksheets between the organizational elements
responsible for FMS pricing. As a result, 25 of 28 basic
Stinger FMS cases had an improper or inflated cost for asset
use that resulted in overcharges of $4.5 million to FMS
customers.
Recommendation D-l; We recommend that the Commander, U.S.
Army Missile Command reprice all basic Stinger FMS procurement
cases by deleting the asset use charge when an appropriate
rental fee was included in the contract cost of the missile.
Comments: Concur. A review will be made of all open FMS
cases to delete invalid asset use costs, if an appropriate
rental charge was incurred through procurement action. This
action will be completed by March 30, 1991.
Recommendation D-2: We recommend that the Commander, U.S.
Army Missile Command adjust the basic Stinger sales prices on v-
SDAF cases by substituting the appropriate rental fee for the
4-percent aBset use charge.
Comments: We concur in part. MICOM followed the guidance in
Paragraph 71806 of DOD 7290.3-M for charging a 4 percent asset
use charge on SDAF sales. The SDAF contract price excluded
rental fees, as specifically required by paragraph 71802 A. 2.
of the same DOD guidance. While application of this policy
may have resulted in a higher price to FMS customers, MICOM
had no basis for deviating from this written policy. However,
Army will request the DOD(C) reevaluate the requirement to
exclude rental fees and include the 4 percent asset use charge
on SDAF sales. We will ask that any change made by the
Comptroller be effective on future sales of SDAF items, not on
past sales.
Monetary Benefit: Concur with part of the monetary benefit
stated. According to the report, the total overcharges were
43 APPENDIX F
Page 9 of 15
$•4.5 million. Of this total, $3.1 million was listed for
procurement cases. However, only $1.7 million (of the $3.1
million) was actually billed to customers. Differences exist
on several of the cases listed in the report because the
estimated costs on the DD Form 1513 were different than the
amount actually billed to the customer. The largest
difference relates to FMS case IT-B-XKS. The report shows
asset use charges in excess of $1 million. However, a 1986
amendment deleted the charges and the country was never billed
for this amount. The MICOM billing office has initiated
action to refund the $1.7 million to the cases improperly
billed. The remaining $1.4 million (of the $4.5 million
total) relates to SDAF cases. Since MICOM priced the SDAF
sales according to DOD guidance, we do not believe that an
adjustment of $1.4 million is appropriate.
APPENDIX F 44
Page 10 of 15
ARMY RESPONSE
FAR E - Delivery Reporting of Stinger Missiles.

Finding: MICOM took over 60 days to report shipments of
Stinger missiles to FMS customers on 62 of 82 missile
deliveries. This condition occurred because MICOM did not
have adequate internal controls to monitor the reporting of
shipments diverted from Army stock and shipments from
contractor or depot facilities to customers. These reporting
delays slowed billings of $115.9 million of missile
deliveries. Also, these delays understated the level of
deliveries reported to the individual FMS countries in the
quarterly billing statements.
Recommendation E; We recommend that the Commander, U.S. Army
Missile Command establish policies and procedures to monitor
and report all shipments from contractors and depots to ensure
prompt billing to Foreign Military Sales customers, including
diversions of Army stocks.
Comments: Concur in principle. A detailed description of the
problems and planned actions by MICOM is attached. MICOM will
complete its efforts by October 31, 1990.
Monetary Benefit: Not applicable.
45 APPENDIX F
Page 11 of 15
Command Comments
DODIG Draft Report on the Audit of ■

Pricing, Billing, and Inventory Controls of
STINGER Missiles Sold to Foreign Military Sales Customers
{Project OFA-0004)
FAR E - Delivery Reporting of Stinger Missiles.
FINDING; "MICOM took over 60 days to report shipments of

Stingar miftftt T**« i*n FMS customers on 62 of 82 missile
deliveries. This condition occurred because MICOM did not
have adequate internal controls to monitor the reporting of
shipments diverted from Army stock and shipments from
contractor or depot facilities to customers. These reporting
delays slowed billings of $115.9 million of missile
deliveries. Also, these delays understated the level of
deliveries reported to the individual FMS countries in the
quarterly billing statements.*1
ADDITIONAL FACTS: Commodity Command Standard Systems (CCSS)

procedures are in place to process and control all shipments
from contractors and depots. There are extenuating
circumstances, however, which preclude billing all actions
within prescribed timeframes, as explained below.
(1) In order to report physical delivery, the Document

Control File (DCF) must be updated in a timely manner.
Shipments from U.S. Army Depots, (shipments from stock), are
reco'rded based upon the receipt of a confirmation of shipment
from the depot. Shipments from procurement (direct delivery)
are recorded in the DCF based upon receipt of a Shipment
Performance Notice (SPN).
(2) If either transaction in paragraph one above rejects
upon input into the system, billing action will be affected.
Finance and Accounting Division personnel are aware of this
problem and are currently working with MICOM Missile Logistics
to clear all rejects.
APPENDIX F
46
Page 12 of 15
(3^ Arrr.v inventory ite^s being diverted from steck -to
satisfy FMS requirements require special Handling. T-ie
Finance and Account inq Hilling Office cannot procebb billings
to FMS customers unless Proiect Office personnel take prompt
action to genetate wash post ti ansact J oiib to indicate
shipment. Subject audit report stated that billings were not
reported until receipt of the replacement items.
(4) DOD 7290.3-M, requires billing action within 30 days

of shipment. It is generally felt that compliance with this
rule is impossible due to the complexity of DCASR's, Depots,
NICP and Financial systems.
(5) Some commands are billing estimated prices in an

attempt to satisfy the 30-day billing requirement. One
command is reporting billings by utilizing a USASAC management
report that reports shipping status. Neither of these
commands are fully utilizing the CCSS» MICOM has continued to
process all FMS actions through CCSS. Due to rejects and ADP
system run schedules, the 30-day billing timeframe will be
impossible to meet.
(6) The alternatives for meeting the 30-day billing

requirement are loss of control, reversing and re-billing all
estimated bills when the shipments finally post and eliminate
CCSS as part of the billing process. The alternatives are
considered manpower intensive and do not solve the true
problems. MICOM will continue to use these ADP systems and
seek' more-timely updates-of shipment actions trrrou-gh^ system- .. . - -
changes. * • ~
RECOMMENDATION E-l: "We recommend that the Commander, U.S.

Army Missile Command establish policies and procedures to
monitor and report all shipments from contractors and depots
to ensure prompt billing to Foreign Military Sales customers,
including diversions of Army stocks."
ACTION TAKEN: Concur in principle. Internal control
procedures will be strengthened to ensure that MICOM Foreign
Military Sales (FMS) Program Managers explore every
possibility to enhance earlier reporting and billing. The new
guidance will require FMS Program Managers to initiate
requirements for wash post actions whenever the manager
becomes aware of actual shipments via DD Form 250,
DD Form 1149, DD Form 1348, or information from any other
sources, and timely billing has not been accomplished.
Normally, wash post actions are required when materiel is
shipped from a contractor (vendor) facility directly to a
customer and the direct delivery data was not properly
recorded in the automated systems. All wash post actions
require manual preparation of the receipt and requisition
documents. These actions will update an automated program
which will notify Resource Management Directorate of all
diversion actions for necessary financial transactions.
Procedures will be issued NLT 31 Oct 90.
47
APPENDIX F
Page 13 of 15
ARMY RESPONSE
SUMMARY OF PRICING FINDINGS
IN $ MILLIONS
AUDIT NON-
FAR DESCRIPTION TOTAL CONCUR CONCUR
A* PACKING, CRATING AND HANDLING (PC&H) 1.7 1.7

B* ECONOMY ACT SALES
--PRICING MISSILES 4.0 4.0
--PC&H AND OVERHEAD -.9 -.9
--SUBTOTAL 3.1 3.1
D* ASSET USE CHARGES

--PROCUREMENT CASES 3.1 1.7 1.4
--SDAF CASES 1.4 1.4
--SUBTOTAL 4.5 4.5
TOTALS 9.3 .8 8.5
ROUNDED TOTALS 9.3 .7 8.6
See footnotes below.
Footnotes:
FAR A - PC&H.
FINDING: Should have used the actual cost (about $12
each, according to the auditors) instead of the standard
percentage (3.5% and 1%, which amounted to about $1,800
each). This resulted in total overcharges to FMS
customers of about $1.7 million.
COMMENT: Although DOD guidance permits alternate methods
of charging PC&H, individual waivers must be obtained and
we felt the standard DOD percentages were appropriate.
APPENDIX F 48
Page 14 of 15
ARMY RESPONSE
SUMMARY OF PRICING FINDINGS (Continued)
FAR B - ECONOMY ACT SALES.

PRICING MISSILES.
FINDING: Should have used the replacement cost (about
$60,000 each) instead of the inventory cost (about
$62,000 each). Therefore, Economy Act customers were
overcharged a total of about $4.0 million.
COMMENT: Followed DOD guidance in pricing at higher of
two costs.
PC&H AND OVERHEAD.
FINDING: Did not charge appropriate PC&H (about $12
each, according to the auditors' calculations) and
overhead costs (about $600 each, as calculated by the
auditors), thereby undercharging Economy Act customers a
total of about $982,000.
COMMENT: Concur, undercharged about $98 2,000, according
to the auditors' calculations.
FAR D - ASSET USE CHARGES.
PROCUREMENT CASES.
FINDING: Erroneously charged asset use (4%, or about
$1,900 each) of about $3.1 million to FMS customers in
addition to correctly charging rental fees (about $130
each).
COMMENT: Concur, but only about $1.7 million of the $3.1
million was overcharged, since only this portion was
actually billed to customers.
SDAF CASES.
FINDING: Should have charged rental fees (about $290
each) instead of the standard percentage (4%, which
amounted to about $2,100 each). Therefore, FMS customers
were overcharged a total of about $1.4 million.
COMMENT: Although DOD guidance permits alternate methods
of charging asset use, individual waivers must be
obtained and we felt standard DOD percentages were
appropriate.
49 APPENDIX F
Page 15 of 15
O,T)
DEPARTMENT OF THE AIR FORCE
WASHINGTON DC 20330-1000
tioefffso
OFFICE OF THE ASSISTANT SECRETARY
(Financial Management)
MEMORANDUM FOR ASSISTANT INSPECTOR GENERAL FOR AUDITING OFFICE OF

THE INSPECTOR GENERAL DEPARTMENT OF DEFENSE
SUBJECT: Management Comments, DoDIG Draft Report of Audit of Pricing,

Billing, and Inventory Controls of Stinger Missiles Sold to
Foreign Military Sales Customers (Project No. OFA-0004)
This is in reply to your memorandum for Assistant Secretary of

the Air Force (Financial Management and Comptroller) requesting
comments on the findings and recommendations made in subject report.
Air Force comments are attached. Point of contact is John Williams,
SAF/FMABC, extension 76410.
R0NAÜP HOVELL
Acting Deputy Assistant Secretary
(Accounting, Finance and Banking)
Attachment
51 APPENDIX G
Page 1 of 2
DOP(IG) DRAFT REPORT ON THE PRICING, BILLING, AND INVENTORY CONTROLS
OF STINGER MISSILES SOLD TO FOREIGN MILITARY SALES CUSTOMERS PROJECT
NO. OFA-0004
RECOMMENDATIONS AND MANAGEMENT COMMENTS
SECTION C: TRANSPORTATION COSTS
FINDING
Management Comment. Concur with the facts and figures as presented in

the finding.
We recommend that the Director, Security Assistance Accounting

Center:
1. Correct the transportation charges for the cases listed in
Appendix D by the amounts shown.
Management Comment. Concur. Based on a review of each case listed in

Appendix D of the draft audit report, SAAC will adjust the
transportation charges to ensure the Foreign Military Sales (FMS)
customer is charged correctly. It is estimated that these reviews
will be completed by November 30, 1990.
2. Revalidate transportation charges on deliveries of other FMS
articles subject to look-up table rates, and take action to correct
any erroneous charges disclosed.
Management Comment. Concur. The transportation charges on deliveries
of FMS articles subject to look-up table rates will be validated. Due
to the large number of transactions that have been processed against
the look-up tables, statistical sampling techniques will be used to
evaluate the accuracy of transportation charges applied by SAAC. Once
the scope of erroneous transportation charges has been determined, a
methodology will be developed to correct these erroneous charges.
This evaluation should be completed by December 31, 1990.
APPENDIX G 52
Page 2 of 2
DEFENSE SECURITY ASSISTANCE AGENCY
In reply refer to:

1-064656/90'
September 24, 1990
MEMORANDUM FOR THE DIRECTOR, FINANCIAL MANAGEMENT

OFFICE OF THE INSPECTOR GENERAL, DOD
SUBJECT: Draft Report on the DoDIG Audit of Pricing,

Billing, and Inventory Controls of Stinger
Missiles Sold to FMS Customers (Project OFA-0004);
DSAA/Plans/SDAF Comments
REFERENCE: DoDIG Memorandum, 3 August 1990, Subject as above
This memorandum forwards the comments of the Defense

Security Assistance Agency, SDAF Division, to the referenced
draft report. The Point of Contact (POC) for this response
is Gregory D. Cleva, DSAA/Plans/SDAFc^extens-iopT£95-4448.
Attachment
ft
APPENDIX H
53 Page 1 of 4
DODIG DRAFT REPORT ON THE AUDIT OP
PRICING, BILLING, AND INVENTORY CONTROLS OF
STINGER MISSILES SOLD TO FOREIGN MILITARY SALES CUSTOMERS
( PROJECT OFA-0004)
D. Asset Use Charges for DOD-owned Facilities
(section of this finding relating to SDAF cases)
FINDING
MICOM improperly charged asset use costs to FMS customers
for DOD-owned facilities and equipment used to produce Basic
Stinger missiles. In addition, sales of missiles procured
through the Special Defense Acquisition Fund (SDAF) were not
charged the applicable rental fee, but instead were charged
a substantially higher amount for asset use.
For items procured through the SDAF in anticipation of
future FMS cases, DoD 7290.3-M, "Foreign Military Sales
Financial Manual," states that contracts awarded shall not
provide for rental charges under provisions of the FAR. This
manual further specifies that the DoD Component with custody
of the SDAF asset being purchased will be responsible for
tracking the related unfunded costs until the asset is sold
to an FMS customer...Inflated asset use charges of $1.4
million were assessed on 9 of 11 SDAF cases.
D(2). We recommend that the Commander, U.S. Army Missi-le
Command, adjust the Basic Stinger sales prices on SDAF cases
by substituting the appropriate rental fee for the 4 percent
asset use charge.
DSAA/PLANS/SDAF COMMENTS
Nonconcur with Finding D relative to SDAF cases.
Nonconcur with Recommendation D2.
•' ' ■—■—- i
Major Points:
DSAA's major objection to this finding is that it is
contrary to the existing policy of quoting stablized prices
on SDAF cases. The use of stabilized pricing is'a basic
element of the effective management of the SDAF. It insures
that the price of major end items remains the same from the
$ime of country acceptance of the Letter of Offer and
/Acceptance (LOA) to delivery reporting and case closure.
paragraph 71803 of DoD 7290.3-M states that: "Sales of SDAF
xt%rns will be quoted as firm prices and DD Form 1513
annotated"accordingly." The provision of firm prices,
coupled with accelerated deliveries of end items, largely
accounts for the widespread FMS customer satisfaction the
54
APPENDIX H
Page 2 of 4
SDAF has enjoyed. Hence, the DoDIG finding, and its
associated recommendation to reprice 9 SDAF cases,
undermines the principle of stablized pricing which is
integral to SDAF operations.
It should be noted that stablized pricing is followed
uniformly on SDAF cases. Prices on SDAF cases are not
adjusted even if it is later discovered that specific sales
have resulted in earnings or losses to the Fund. Paragraph
71803 futher states that: "The DSAA is responsible for
reviewing SDAF prices to assure full cost recovery and for
changing any proposed SDAF prices to achieve that
objective." Therefore, it is incumbent on DSAA to insure
that the assumptions on which SDAF prices are based are
correct —i.e., that they insure full cost recovery—prior
to their quotation as firm prices on SDAF cases. Explicitly,
this entails not adjusting prices on SDAF cases once they
are cited as firm prices.
It should also be noted that the DoDIG expressly
supported the concept of stabilized pricing, as outlined
above, in its omnibus report of the Defense Security
Assistance Program (Draft Report issued 25 January 1990).
The DoDIG report called for expanding the SDAF concept
within security assistance as a way of eliminating
inaccurate price estimates, and frequent, unilateral price
changes. Specifically, the DoDIG report states: "If the
principle of 'no-loss, no-gain' was revised to a system of
stable, annually revised prices, then increases in
efficiency and customer satisfaction would result at nearly
every step of the FMS process. At the same time, the
principle of the customer paying for all articles and--,
services would remain satisfied on a long-term break-even
position for the U.S.government."
In light of the above policy, we do not agree that
MICOM should reprice the referenced SDAF cases. Such a
recommendation is at odds with stabilized pricing and its
uniform application on SDAF cases.
Subordinate Points:
The DODIG Finding correctly cites Para 71802(A)(2) of DoD
7290.3-M to the effect that contractor rental costs will not
be_-charged -for sales to the SDAF. However, Para 71806 of DoD
7290.3-M states Explicitly that a 4 percent asset use charge
(not contractor rental charges) shall be applied to items
ifepcured for the SDAF which are being sold to an FMS
IMstomer. Similarly, TABLE 718-1, "SDAF Price Computation
Examples" specifically includes a 4 percent asset use charge
fdr^SDAF^-FMS-;sales, and excludes any reference to contractor
rental charges.
As confirmation of this view, Para 71802(A)(2) of the DOD
55 APPENDIX H
Page 3 of 4
7290.3-M originally drew the relationship between unfunded
contractor rental charges on the buy-in side of SDAF and the
application of asset use charges on SDAF FMS sales more
directly. Specifically, this paragraph (which was in effect
at the time the Basic Stingers were procured into the SDAF
in FY 1984) read as follows: "Contracts awarded to meet SDAF
requirements will not provide for rental charges under
provision of the Federal Acquisition Regulation(FAR), in
which case the 4 percent 4sset use charge will be identified
as an unfunded cost and charged at the time of a sale to an
FMS customer."
The DODIG Finding also indicates that FMS customers were
overcharged $1.4 million on 9 SDAF cases because of the
inappropriate application of asset use charges. While we
have addressed the policy aspects of this Finding above, it
is important to realize that the FMS customers addressed in
this Finding benefited from the SDAF stabilized pricing
concept in terms of the overall pricing of these cases. The
Basic Stingers at issue were procured by SDAF in FY 1983 and
FY 1984 (MIPRs 3011.01 and 4017.01). The sales cases, cited
in Appendix E, were implemented during the period FY 1984-
89. As a consequence, the pricing employed on these cases
would have been the higher of the SDAF buy-in price or the
latest DoD contract price. In either instance, the FMS
customer most likely would have benefited when compared to
prices derived from new procurement, and, additionally,
would have received an abbreviated leadtime on physical
delivery of the missiles.
n
l
56
APPENDIX H
Page 4 ,of 4
SUMMARY OF POTENTIAL MONETARY AND OTHER
BENEFITS RESULTING FROM AUDIT
Recommendation Amount and/or

Reference Description of Benefit Type of Benefit
A.l. and A.2. Program: Align packing, Nonmonetary.

crating, and handling
charges with actual
costs, and eliminate
overcharges to Foreign
Military Sales (FMS)
customers.
B.l.a. and b. Compliance: Ensure proper Nonmonetary.

and B.2. pricing and recovery of all
applicable costs on Economy
Act sales, in accordance with
DoD Manual 7220.9-M.
•C.l. and C.2. Compliance: Correct erroneous Collections to

transportation costs to the FMS Trust
FMS customers by applying Fund of $935,000.
look-up table rates as Nonrecurring
required by DoD regulations. benefit.
D.I. and D.2. Program: Eliminate improper Collections to the

or inflated asset use FMS Trust Fund of
charges billed to FMS $3.2 million.
customers. Nonrecurring
benefit.
E. Program: Improve accuracy Nonmonetary.

of delivery performance
reported in FMS case status
reports and customer billing
statements.
57 APPENDIX I
&
ACTIVITIES VISITED OR CONTACTED
Office of the Secretary of Defense

Comptroller of the Department of Defense
Department of the Army
Army Materiel Command, Alexandria, VA
Army Security Affairs Command, New Cumberland, PA
Army Missile Command, Redstone Arsenal, AL
Red River Army Depot, Texarkana, TX
Department of the Navy
Naval Plant Representative Office, Ontario, CA
Defense Agencies
Defense Security Assistance Agency, Washington, DC
Security Assistance Accounting Center, Denver, CO
Non-Government Activities
General Dynamics, Valley Systems Division, Ontario, CA
General Dynamics, Sycamore Annex, San Diego, CA
59 APPENDIX J
It*
AUDIT TEAM MEMBERS
Nancy L. Butler, Director, Financial Management Directorate

David R. Stoker, Program Director
Ronald C. Tarlaian, Project Manager
Annella F. Chamblee, Team Leader
Clarence E. Knight, Team Leader
Con Noriega, Team Leader
Pamella W. Biggs, Auditor
Averel E. Gregg, Auditor
Susanne B. Allen, Editor
61 APPENDIX K
o.a
FINAL REPORT DISTRIBUTION
Office of the Secretary of Defense

Under Secretary of Defense for Policy
Assistant Secretary of Defense (Production and Logistics)
Comptroller of the Department of Defense
Department of the Army
Secretary of the Army
Assistant Secretary of the Army (Financial Management)
U.S. Army Materiel Command
U.S. Army Security Affairs Command
Department of the Air Force
Secretary of the Air Force
Assistant Secretary of the Air Force (Financial Management and
Comptroller)
Director, Security Assistance Accounting Center
Other Defense Activities
Director, Defense Security Assistance Agency
Non-DoD Activities
Office of Management and Budget
U.S. General Accounting Office,
NSIAD Technical Information Center
Congressional Committees:
Senate Subcommittee on Defense, Committee on Appropriations
Senate Committee on Armed Services
Senate Committee on Governmental Affairs
Senate Ranking Minority Member, Committee on Armed Services
House Committee on Appropriations
House Subcommittee on Defense, Committee on Appropriations
House Ranking Minority Member, Committee on Appropriations
House Committee on Armed Services
House Committee on Government Operations
House Committee on Legislation and National Security,
Committee on Government Operations
63 APPENDIX L
INTERNET DOCUMENT INFORMATION FORM
A. Report Title: Pricing and Billing of Stinger Missiles Sold to Foreign

Military Sales Customers
B. DATE Report Downloaded From the Internet: 08/01/00
C. Report's Point of Contact: (Name, Organization, Address, Office

Symbol, & Ph #): OAIG-AUD (ATTN: AFTS Audit Suggestions)
Inspector General, Department of Defense
400 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 08/01/00
The foregoing information should exactly correspond to the Title, Report Number, and the Date on
the accompanying report document. If there are mismatches, or other questions, contact the
above OCA Representative for resolution.

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DEPARTMENT OF DEFENSE

PRICING AND BILLING OP STINGER MISSILES

No. 91-055 February 27, 1991

20000802 129 DKG QUAKi"* lE&"isuTED 4

February 27, 1991

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE FOR POLICY

This is our final report on the Audit of Pricing and Billing

TRANSMITTAL MEMORANDUM/EXECUTIVE SUMMARY i

APPENDIX A - FMS Stinger Missile Cases Implemented 23

Prior Audit Coverage

Other Matters of Interest

BA-JUQ 70 $ 3,609,538 70 $ 3,651,538

Subtotal 2,549 $158,626,115 2,538 $132,953,193

Reprogrammable Microprocessor (RMP) Stinger

GR-JXT 500 $ 29,047,250 0 0

Subtotal 864 $ 46,807,191 $ 67,110

Total 3,413 $205,433,306 $133,020,303

Country Case Amount Amount from

FR-UXW 1 $ 13,718 $ 1,990 $ 11,728

Total $1,341,801 $406,329 $935,472

Positive amount is total overcharge and negative amount is total undercharge.

in ,_ ,__ in ,_ vn 00 r~- vo IO m "3 00 in t- in in r~ io in

m in VO CM r- <3- CM oo vo o Ch O Ov <t a <t 00 o o o

vo 1^- VO t- VO vO t-- CN (M <N I-- CM 1^

MEMORANDUM FOR ASSISTANT INSPECTOR GENERAL FOR AUDITING, DODIG

Your memorandum of August 3, 1990, requested our comments on

RECOMMENDATION A.I.: We recommend that the Comptroller of the

RECOMMENDATION B.2.: We recommend that the Comptroller of the

DEPARTMENT OF THE ARMY

MEMORANDUM FOR THE ASSISTANT INSPECTOR GENERAL FOR

Enclosed is our response to the subject DODIG draft

be required to perform similar actual cost reviews for

FAR A - Packing, Crating, and Handling Costs.

FAR B - Pricing of Economy Act Sales.

FAR C - Transportation Costs.

FAR D - Asset Use Charges for DQD-owned Facilities.

FAR E - Delivery Reporting of Stinger Missiles.

DODIG Draft Report on the Audit of ■

FAR E - Delivery Reporting of Stinger Missiles.

FINDING; "MICOM took over 60 days to report shipments of

ADDITIONAL FACTS: Commodity Command Standard Systems (CCSS)

(1) In order to report physical delivery, the Document

(4) DOD 7290.3-M, requires billing action within 30 days

(5) Some commands are billing estimated prices in an

(6) The alternatives for meeting the 30-day billing

RECOMMENDATION E-l: "We recommend that the Commander, U.S.

A* PACKING, CRATING AND HANDLING (PC&H) 1.7 1.7

D* ASSET USE CHARGES

TOTALS 9.3 .8 8.5

ROUNDED TOTALS 9.3 .7 8.6

See footnotes below.

FAR B - ECONOMY ACT SALES.

MEMORANDUM FOR ASSISTANT INSPECTOR GENERAL FOR AUDITING OFFICE OF

SUBJECT: Management Comments, DoDIG Draft Report of Audit of Pricing,

This is in reply to your memorandum for Assistant Secretary of

RECOMMENDATIONS AND MANAGEMENT COMMENTS

SECTION C: TRANSPORTATION COSTS

Management Comment. Concur with the facts and figures as presented in

We recommend that the Director, Security Assistance Accounting

Management Comment. Concur. Based on a review of each case listed in