Examination into the Increase in Cost of the Lunar-Roving Vehicles Being Manufactured by the Boeing Company

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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    Dear Senator     Humphrey:

           In your letter      received     by us on February    17, 1971, you
    requested    our comments on a letter         from Mr. David R. Hammer                    7
    in which he expressed concern about the increase                in cost to
    the National     Aeronautics      and Space Administration        (NASA) of
    the lunar-roving      vehic1l.s     being manufactured     by The Boeing
    Cornpa=--    Mr. Hammer also inquired         why the contractor        would
    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-
    velopment,     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.

                                   50TH   ANNWERSARY                      l921-   197


            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    included   in contract    NAS8-25145
            was $18,673,000.        As of March 29, 1971, the estimated           cost was
            $37,839,000,      an increase     of $19,166,000.      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
            $17,566,0,CO,     NASA attributed      about $8,050,000     to Boeing and
            about $9,450,000       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 vehiclesP           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.

            BOEING's     FEE
                   Mr. Hammer inquired     why Boeing would not be penalized         for
            the increased    costs being 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 accor-
 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 t 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    lunar-roving  vehicle    was the
only other item of hardware        which had been delivered        and which
was subject  to the penalty       provision     for late delivery.     This
vehicle  had been 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 pounds, 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
remaining    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