Amtrak audit uncovers ‘significant waste of funds’

By Sean Reilly | 03/27/2015 01:16 PM EDT

A key Amtrak supplier tacked on markups of almost 2,400 percent for repaired parts while the passenger railroad failed to collect millions of dollars in penalties due from the company for late deliveries, Amtrak’s inspector general concluded in a recent audit.

A key Amtrak supplier tacked on markups of up to almost 2,400 percent for repaired parts while the passenger railroad failed to collect millions of dollars in penalties due from the company for late deliveries, Amtrak’s inspector general concluded in a recent audit.

The audit, which found "a significant waste of funds," casts a harsh light on Amtrak’s management of the sole-source contract with Alstom Transportation Inc. for parts needed to maintain and overhaul Acela express trains. First signed in 2006, the agreement has since been extended to run through September 2016. By May of last year, Amtrak had bought more than $236 million in parts through the contract, according to the audit report released earlier this month.

Nonetheless, Amtrak’s oversight was haphazard to nonexistent, the inspector general found, with contract files in disarray and the management team hampered by repeated turnover.


Amtrak had "no process for conducting parts price reviews, no system in place to track and report Alstom’s parts delivery performance and return of parts, no process in place for settling outstanding warranty claims and no formal process for approving minimum inventory levels," the report said. Instead, Amtrak managers relied on information from Alstom "to monitor these functions," the report said.

For a total of nine repaired parts, ranging from a coffee maker to a door control station, Amtrak paid almost $85,000 more than Alstom’s actual repair costs, which already included a profit markup, the audit said. For individual items, the additional markups varied from 118 percent to 2,377 percent of the repair costs.

And while the contract calls for Alstom to pay penalties for parts delivered late, Amtrak’s lack of a tracking system again led to dependence on the company, according to the audit.

Based on available records for late deliveries since 2013, Amtrak failed to claim as much as $19.4 million in penalties. According to one Amtrak official, however, the railroad had "a verbal agreement" not to assess penalties in return for Alstom’s not claiming bonuses for delivering parts early. Beyond that, more than $18 million in warranty claims piled up because "there are no formal procedures" to process and settle them. As an example, auditors cite a microwave oven that was returned to Alstom, repaired and reissued 11 times even as all 11 warranty claims remained outstanding.

Alstom Transportation, whose website touts a relationship with Amtrak "built on trust," is carefully reviewing the audit but has no further comment at this point, spokesman Lawrence McDonnell said in an email. The company is a branch of Alstom SA, a French multinational whose products include wind turbines and locomotives.

In a three-page response attached to the audit, Amtrak Chief Financial Officer Gerald Sokol did not contest the findings and said the railroad is creating a "strategic acquisitions team" to manage both the Alstom contract and other major acquisitions in the future. Amtrak will also review Alstom’s pricing, seek to resolve any outstanding warranty claims and hammer out a new agreement that preserves Amtrak’s ability to levy penalties "for past and future performance," Sokol wrote.

On the pricing review, he said, Amtrak expects Alstom’s "full cooperation."

The Acela trains, which run on Amtrak’s Northeast Corridor from Washington, D.C. to Boston, are a critical moneymaker for the railroad, accounting for more than one-quarter of $2.2 billion in fiscal 2014 ticket revenues. In general, the problems with the Alstom contract did not hurt the Acela’s on-time performance, employees in Amtrak’s procurement and mechanical departments told auditors.

But the inspector general’s findings may reflect broader shortcomings in Amtrak’s purchasing process at a time when it’s entreating Congress for more money for major equipment and construction programs. In a separate review released last year, the inspector general found that the procurement department had no yardsticks to measure effective performance and had only recently begun tracking how quickly money was spent on individual purchase orders.

In managing the Alstom contract, Amtrak has also struggled to keep people in key jobs. Since 2006, there have been five contracting officers, three principal contracting officers and three senior directors for capital equipment. Contract files were "incomplete and disorganized," the auditors reported, with basic elements like change orders missing or filed out of sequence. Although the procurement department once had a document control officer responsible for managing records on capital equipment contracts, according to the audit, that job was abolished four years ago.