US watchdog faults Air Force on Boeing contract

WASHINGTON (Reuters) - The U.S. Government Accountability Office on Thursday faulted the Air Force again for its handling of a contract with Boeing Co (BA.N), upholding in part a Pemco Aviation Group Inc PAGI.O protest.

At issue is a potential $1.2 billion contract for depot maintenance of KC-135 mid-air refueling aircraft awarded to Boeing on September 10.

The GAO decision was the latest setback to an Air Force deal with Boeing, scarred by a corruption scandal that landed two company officials in prison in 2005.

Pemco's protest claimed the Air Force's evaluation was flawed in several ways, including its tally of the rivals' past performance, mission capability and cost and price data.

"Our decision sustains the protest challenging the cost/price evaluation because the record does not reflect any Air Force analysis as to the realism of certain changes Boeing introduced in its final proposals," said the GAO, Congress's non-partisan audit and investigative arm.

Nor did the record show any Air Force analysis of the potential risk associated with the changes made by Boeing although the solicitation required such analysis, the GAO said in a statement.

The GAO recommended the Air Force perform and document the analysis."

In a one-sentence response, Lt. Col. Jennifer Cassidy, an Air Force spokeswoman, said the service would evaluate the GAO ruling, which is a recommendation, not an order.

Boeing said it remained confident it will "again be determined to have offered the best value to the Air Force for the KC-135" contract, Boeing spokesman Forrest Gossett said.

A representative of Pemco, based in Birmingham, Alabama, could not be reached immediately for comment.

Pemco's protest submission included allegations of pro-Boeing bias by Charles Riechers, the Air Force's No. 2 arms buyer until he was found dead on October 14, an apparent suicide.

Riechers had been responsible for the choice of Boeing over Pemco, the GAO said, calling him the "source selection authority for this procurement."

Just days before Riechers' death, Pemco amended its protest to charge a possible conflict of interest because of ties among Commonwealth Research, a firm that briefly employed Riechers while he awaited White House approval for his new Air Force job; its corporate parent, Concurrent Technologies Corp; and Boeing.

The GAO voiced no opinion on Pemco's bias allegations in light of what it said were local and federal investigations and its own past practice.

Boeing shares closed down 1.24 percent at $88.88, in line with a Thursday decline in the Dow Jones Industrial Average. Pemco, based in Alabama, lost 4.84 percent to close at $1.77 per share.

(Reporting by Jim Wolf; Editing by Gary Hill/Leslie Gevirtz)