Examination of NASA Contract With Boeing

Published by the Government Accountability Office on 1971-07-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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 B-171977                                                                                JUL 2       197
 Dear Senator Humphrey:

       In your letter received by us on February 17, 1971, you
  reeuesteA our comments on a letter from Mr. David R. Hammer
  in which he expressed concern about the increase in cost to
  the National Aeronautics and Space Admi-iistration (NASA) of
  the lunar - roving vehicles being marufactured
                                          -by;         :l-eBi
) Company. Mr. Hammer also .iquired why the contractor would
P not be penalized for the increased costs.

       On March 2, 1970, NASA awarded cost-plus-incentive-fee
' contract NAS8-25145 to The Boeing Company for the design, de-
  ve.opment, manufacture, and delivery of four lunar-roving ve-

      We examined contract NAS8-25145 at NASA Headquarters,
 Washington, D.C.; reviewed NASA's records pertaining to the
 amount of, and reasons for, the increased costs; and held dis-
 cussions with cognizant agency officials. We did not make a
 detailed analysis of the reasons cited by NASA for the in-
 creased costs. The results of our examination are discussed


      The news clipping enclosed with Mr. Hammer's letter did
 not mention the type of contract that was used for this pro-
 curement, and it appears that Mr. Hammer may have been under
 the impression that Boeing was awarded a firm-fixed-price con-
 tract. Under a firm-fixed-price contract, the price is not
 subject to adjustment because of the contractor's cost ex-
 perience during the performance of the contract even though
 unexpectedly high costs may result in a loss to the contrac-
 tor. A firm-fixed-price contract is normally used where
 performance has been demonstrated and where technical and
 cost uncertainties are low.

      NASA's contract with Boeing for the lunar-roving vehicles,
 however, is a cost-reimbursement-type contract. A cost-
 reimbursement contract is normally used where performance has
 not been demonstrated and where technical and cost uncertain-
 ties make the use of a firm-fixed-price contract inappropriate.
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Under a cost-reimbursement contract, the contractor is reim-
bursed for the actual cost of performance, subject to certain
restrictions and limitations. The contractor may, with the ap-
proval of the contracting officer, incur costs in excess of
the original cost estimate, since it is recognized that the
nature of the contract task makes it impossible to accurately
estimate costs in advance of performance under the contract.

     The original cost estimate incl.uded in contract NAS8-;25145
was $18,673,000. As of March 29, 1971, the estimated cost was
$37,839,000, an increase of $19,'66,000. NASA advised us that.
about $1,600,000 of this increase was the result of changes in
the scope of the contract. Of the remaining cost increase of
$17,566,090, NASA attributed about $8,050,000 to Boeing and
about $9,450,600 to Boeing's major subcontractor. We did not
verify the validity of the classification of the increased

     NASA officials informed us that the portion of the in-
creased costs attributable to Boeing resulted largely from the
relocation of Boeing's operations from Huntsville, Alabama, to
Seattle, Washington, and from problems in the welding of the
aluminum chassis, the design and fabrication of the navigation
test set, and the design of the deployment system. They in-
formed us also that General Motors Corporation, Boeing's major
subcontractor, initially underestimated the cost of its effort
to design and develop the mobility portion of the lunar-roving
vehicles. For example, the officials stated that problems
were encountered in the evolution of the vehicles' wire wheels
and in the design of the hand controller and electronic drive
control and that these problems led to increases in the esti-
mated costs.


     Mr. Hammer inquired why Boeing would not be penalized for
the increased costs beinp experienced, NASA officials have
advised us that they expect that Boeing will be penalized un-
der the incentive-fee provisions of the cost-plus-incentive-
fee contract.


     A cost-plus-incentive-fee contract specifies a target fee
and provides for an increase or decrease in the fee in acccr-
dance with the degree to which a combination of predetermined
cost, schedule, and performance targets are met by the con-
tractor. The target cost and fee are negotiated on the basis
of the contracting parties' best estimates of the reasonable
cost of performing the work called for by the contract. The
Department of Defense and NASA Incentive Contracting -Guide
states that selection of this type of contract generally in-
dicates that cost and performance uncertainties are such that
a wide range of outcomes is possible.
     Contract NAS8-25145, as amended as of March 29, 1971,
provides for a target fee of $1,570,955, if all four lunar-
roving vehicles perform successfully and if the target cost
is not underrun or overrun. The contract provides also for
a bonus of $50,000 for each lunar-roving vehicle which weighs
no more than 380 pounds or 20 pounds less than the specified
weight at acceptance, whichever is greater. A maximum fee of
$2,612,486 is payable if all the lunar-roving vehicles per-
form successfully and if there is a target cost underrun of 15
percent or more. A minimum of $188,576 is payable if none of
the lunar-roving vehicles perform successfully or if there is
a target cost overrun of 25 percent or more.   The contract pro-
vides further for assessing a penalty against Boeing for fail-
ure to meet scheduled delivery dates. In no event, however,
is the fee to be reduced below the specified minimum fee.
     The estimated costs under the contract, as of March 29,
1971, were more than 25 percent in excess of the target cost
and should result in the contractor's receiving the minimum
     In regard to the penalties that may be assessed under the
contract for late delivery of specified items, we noted that a
lunar-roving-vehicle training unit was delivered 53 days after
the scheduled delivery date. Under the terms of the contract,
this late delivery could result in a fee penalty up to $265,000.
This penalty, however, will not be assessed if Boeing is in a
minimum-fee position at the time of contract completion. At

the time of our review, the first lwuai -roving vehicle was the
only other item of hardware which had been delivered and which
was subject to theo penalty provision for late dblivery. This
vehicle had booen delivered 2 weeks ahead of schedule.
      Boeing will not be entitled to the $50,000 bonus for
weight reduction for the first lunar-roving vehicle because
the vehicle weighed about 490 p-unds, or about 90 pounds over
the specified acceptance weight of 400 pounds. 'A NASA offical
stated that Boeing was not expected to earn a bonus on the
remai.ning vehicles.

     We did not provide NASA with a copy of our draft report
for comment, and copies of this report have not been furnished
to NASA. As requested, we are returning Mr. Hammer's letter
to you.
                              Sincerely yours,

                              Comptroller General
                              of the United States

The Honorable Hubert H. Humphrey
United States Senate