Prices Negotiated for Projectiles Purchased From Lansdowne Steel and Iron Company

Published by the Government Accountability Office on 1971-06-30.

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

                               502US       GUS-l-OMHOUSE            2i) AND   CriESTNUTSTREFTS
                                       PHILADEFFWA,              PEP.MSYLVA~MA               19106

                                                                                                              June 30, 1971

CsmmandOng Officer
u,s, ksvy Ships Parts Control Center
Me@hanPcsbuPg, Pennsylvan%a 17055

Dear Sir:

            We have reviewed the prTcimg of 5-rnch 3% caliber       hiK 52 MOD 0
psoject;les        purchased under womompcti tlve f9 ri3 fIxed-price         conLract
NOOO~4-67-C-0084, whIcR was dw=arded by thz U,S, &avy ShEps Parts
Cmt~of Cemler (SPCC) to La~,sdeb~ne Steek acd !ron Csmpamy, Morton,
Pennsyfvan%a.          Our  review was directed prYmar9ly  toward determining
t!ie   reasonableness     of       the       ppice         ,aego"L%ate.s.           117   selatfsn            to   cost   or
prEc&ng data available    to the contvaccoo at the time of nogotiatfon,
We also reviev{ed the Government’s    tzchnEcaY and audit eval~atlsns   ol;
the contractok~s   proposal,

        Our review showed that the fTna% comract                 price of $4,751,835
was about $164,000 hHgher tha9; j+~st$FIed by cost or pricking data
avaH?ablc at the time of negst9ation,                About $%31,500 of the over-
prlclng    resulted      because Lansd;wne failed        to disclose         to the
Government negotiamf           that (1) tme cost of steel purchased during
performance       under letter     co~rtrdrz~: -4908% was lower than the cost
included fn the prlc%ng proposal,               (2) the proposal        Included costs
foe pallets      not to be furnished          ay the contractor,       and (3) zhe
proposal     fncluded overstated         labor costs based upon an fnaccurately
calculated      estlmte     of debor kzx~r mzpirements,             We believe       that the
Government3s technical          and auciit evaluations       ‘famed sufficient           depth
to identify       these deficiencies        ir one contracto~~s        proposal,       The
balance of the overpriccnng,          arnountfrag to about $32,500, occurred
because the Government negot5atsa aid not attempt to negotiate                           a
reductfom in the option quantity               unit pr%ee for a start-up           labor
cost provision        not required    for the additional         units,

                                  50 TH ANNiVERSARY                             7921 - 1971
                   The followPng       tbburetion                shows      tf--bc. overpricing           attributable                 to    e6cri
         of     the matters      noted    above,

                                             QVei-SGited                 MantifacLurYng
                                                 $‘,osr5                     over”lead                        G&A             Prof      it            Totn       :

Steel    raw     material                      $26 0628                                                   $    3,728      $    2,550             SGOfJ

Unnecessary          pallets                      l7,069                                                       2,390           1,635                    21,054

Labor    hour       requirements                 29,328                      $33,434                           8,787           6,oio                    77,553

Unnecessary          start-up      labor          12,290                        $01       2                    3,682           2,529                    32 ,$sJ.

        Overpricl       ng                     $6-A-“”     315                $47    #    5               .$18,58J        $:2,714                    $164,06t
                                                                                                                                                      WY* Iunr-

                  in addition        we notea        another      matter      which    we believe        had an adverse
         effect      on the contract           pricing,          The proposal         included       an estimated
         proviston         for misce4 laneous           direct      materi&!,         The Government’s             technical
         and audit         advisory      agencies       accepted       the est!mate         without      reqcriring
         specific        suppor t or exp ianaLlon              From the contractor.                 Had either        the
         technical         analyst     or auditor         questioned        thrs    item in relatfon            to prior
         cost     experience,        the negotiator            woufd     have been in a position                 to
         challenge         about    $100,000       of the basic          cosp. provision         included.


                 Contract       -0084 was the second            of three    contracts       awarded      by SPCC
         to Lansdowne         for     the MK 52 projectile         during      the period      February      1966
         through      October       1968,      Del tvery    under  the first       contract      (N104-I   I li P9A)
         which    provided        for    production      of 48,750     unP~5,     was completed        In
         Harch    1967 prior          to negotiation       of contract       -0084,

                  SPCC awarded        letter   contract         -0084 LO bansdowne            on January       13, 1967,
         for   the production           of 103,450      T”X 52 pro~ccti        Ies.     Lansdowne       submitt&       a
         price     proposal      of $30.30     per Drojectfle           on February         17, 1967*        The Defe~e
         Contract      Administration         Services         (KU)     performed       a technical        evaiuaLTon,
         and the Defense           Contract    Audit      Agency     (DCAA) audited           the contractor’s
         price     proposal     o Negotiations          held a~ SPCC on April               13, 1967, reduced        the
         price     to $29,86 for a total             definitive       contract      price       of $3,089,017,
         The price       decrease      was the result           of a negotiated         profit     rate    reductio?
         from     10 to 8-4 percent,

                    The contractor       executed           a Certf    Ficate       of        Current         Cost     or Pricfng
         Data       on April     13,   1967, and           a defective        prlciny            clause        was      incorporatea
         into       the contract0

                The contract     contained      an option      clause        for   additional         quantities
        at the same unit       price,       SPCC exercised          ihe option        on May 6 and
        August     30, 1967$ for 51,725         additional        ~tnits.        On Apr;il      18, 1968, the
        contrace      was amended     to ir~lude       5,OOG substandard            projectiles          at S23,50
        each 0 The final       price     of contract       -O08k,       including       ail    modifications,
        was $4,751,815,
           Details              on the             over?rlcing              ad      the    Govcrnnent’s         technical       and    audis
reviews            are         as follows:

bower        costs             for      steel                raw meterlal

        Lansdowne, in its proposal,      tossed eacn pound of steel at $0,06gtl;o,
Based on an estimated steel reatiirement        oi 69 pounds per projectlle,       the
con-tractor    proposed    a steel cosf of .$ba77 for each projecttle,       The pro-
posed quantity       an d price of s-ceaf were acceptea by the Government,
                             0                             D a
           E!us,         prsor          so        negot*atcons,               hansdowne was b@ng                 steel      from two
sources      at $0.065925     and SO,O688j?j          per pond   under purchase      orders
dated Jaisuary       27, 1967, for       4,800     and   600 tons of steel,     respectively,
This represented        abous 67 petcent           of in I t Baa contract   -0084 r-equi rextints                                                0
Th& difference        in the cost of steel supplied              by the two vendors was
attributable       to h igher    freight       costs on one vendor’s      shipments,

        In ascertain    ing the price    effect on the coneract                                                  price,      we compared
the   proposed     cost per pound wick a wz$h~ed average                                                   of      the costs      eK-
perienced for quantities         ordei-ed prior  to negotiations,,                                                    Overpricing         of
steel    was calculated     as follows:

Cost of            steel             raw material                    per    pound
  --proposed    and negotiated                                                                                              $;A~@%&
  --per current cost data availabBe       ?rror to negotiations
Excess of negotiated     over urrenc   cost per pound                                                                       .$0:002&
Quantity   of steel  included in total    conrract quanLity                                                           x 10,707,075             Ibs,
Overpricing                    (exclusive      of general    and
       administrative                  expense   and profit)                                                                  $26&m&

      k’e Found that  OCAR Iwd based its accep”,ance                of proposed    steel     costs
on current   invoices  from     the  higher     priced    source.      There was no evidence
that he contracror     had disclosed         CuPreni: lower cost data relating               to
steel being purchased from the otner souse.                    The c0nt ractor     contends
that  the proposed  steel      costs   included      a contingency      of approximarely
$6 per ton for price      Increase    a?d quality       variations,        However,      tne
contract~r~s                     proposal                    did not identify             this   contingency,     nor did we
find       evidence                  that         the         contractor         had disclosed         this contingency   to

Cost       for       pallets                not         to      be
furnished                by the             contractor

     Lansdowne’s  proposal    included costs of $O,l?                                                     per unit for pallets
to be used for shipment    of the fvnished   projectiles.                                                     These costs we~“e
not Justified                        because pallets                       were to be furnished            by the Government

under contract   -0084,   i-bwevcr, the ~roaosed mZlek costs wore not
deleted from the contract     pEeice at negot;&t;ons, Tne amount of over-
pricing  fs caiculated  as forlows.

Cost of pal let             material          per projecer        ?e
Total      cmtraet          quantity
Overpricing      (exclusive   OF genaral and
  administrative       expense and pro-Fir)

          The contractor               stared      rliat    the negotiated              price    reduction              incluazd
the delecim        of proposed        pa%ler      mstse                   However,        the contractor      pr3vf~;e3S
us no documented         basis    f3r    Its     pos;c;on,                  SPCC4s         record  of negwtiatim
contains      pro evidence     that    pallet       costs                hSd been        deleted from tr,e conli~~~
price.      The SPCC negotiatc2r            informed                   rfs that all costs were accepted as
proposed p The only reduction                  was in                  the profit   rate, which was rcdwc~d
from     10 to 8,4 percent.

          DCAA’s audit            report        conta!ned        no comrslenr concerning                    the unnecess~y
pallet      costs,

          The technical            analysis           report       contained      the following               statement         CL,,--
cerning       the     inclusion          of     pallet       costs     in the     mmtrector’3                proposal       0

          **got is    noted       that     conerary         to   the     ;eqcirements           of    the     letter       opdcr
          the Navy has been urmabjie to provide    pajiets    and/or plugs for t’7e
          nose of tne proJectile   in sclff;cienL   giantity      to support the con-
          tractor’s  production  or in satisfac~ry       condition    for  use,”
      According to the 3CAP analyst,   ~lhis statement was intended to take
exception ‘co the inclusion of tbrj paller: costs,    In oui- opinion, thi5
stacemenf could have been construed as an acceptance of the pallet         costs,

Lower labor           hour requirements

       Lansdowne   proposed labor at $6,75 per projectile           based upon a
requ 1 rement of   2.50 labor hours at a uro,ected       hourly rate of $2,7Cl,
The labor requirement       consisted of 2,33 production       hours   and 0,166
start-up   hour,   for  a total    of 2,&96  hsu-s rounded to 2.50 homrs,
The start-up     hours were required      to estab% ish a second shift opera-

         in   its calculations                   of labor provisions,              which were               based
largely       on costs being                  Incurred   on the preceding                 contract,           the
contractor           used      which resulted
                              values              in an overstatement    of
start-up   hours and an understatement          of production    hours,   Our
review   shooed that labor per projectile           should have been 2,430
hours, consisting        of 2,342 product$on      hours and 0,088 start-up
hour,    The net effect,       after considering     the understatement,
resulted    in overpricing       calculated   ds foi Bows:

                                                                                BEST                            TA'VAl
Labor hours         required  per project;               52
  --proposed         and negotiared
   --per      adjusted     cost     data
Overstated      labor   hour
Hourly     rate negotiated
Oversrared      labor   cost per           projectile
Tota?    cant t-act quant i ty
Overpricing         (exclusive    of       manufacturing           overhead,
  generai        and administrative             expense,         and pcofit)

       We dssctissed        the results   of our review with a Lansdowne offieiai
who agreed that           availanle   data indicated   a per unit labor requirement
of 2,430 hours*            We contended that a labor iiodr requirement     of 2,430
would have been           rounded     upward to 2,50 for proposal         purposes0                     in view
of the significant             effect   on pricing       of tile large multipiier,                    we
question    whether         the Govcrnqient      negotiaror     wsuld have accepted                    this
round 1 ng LI

         The DCAS technical         report    indicated     that    rhe ana’;yst    based hi3
acceptance        of proposed     labor    hour requirements          on a review of
operations        in the contractoris         p;act     and an exa,,lZnation      of historical
data,       His report     failed     to disclose       the discrepancies        in the con-
tractor’s       labor   hour calculations,

     We were ‘in-Formed by a DCAA ofr’lcial    that                         no detailed          review   was
made of the contractorUs   ldbot hour provision,                                Lanor     hours were
accepted       as proposed         on the     basis       of    eechnical      advice     from    DCAS,

tinnecessary    start-up            labor COSTS
 included    in option           qLtantity price

        The start-up         hours,    as discussed      in the preceding          section,      were
fully    provided        for   rn the prfczng      of the initial          103,450     unrts.     SFriCC
continuous        production       was anticipated       In the exercise-of            the option,
 it would have been appropriate                 to exclude    start-up        ?aDor in pricing
the option        quantity,        Nevertheless    3 ci-e unit      price    negotiated       for the
option     quantity        was the same as for the initial               quantity,        We calculated
the overpricing            as follows:

Start-up      hours      as adjusted         (see       pQ 4)
Option     quantity

Hour1 y rate        negotiated
Overpricing         (exclusive    of manufacturing
  overhead,        general     and adminiserative
  expense,        and profit)

       The DCAS technfca”s analysis   repor1: Ide~tifled    the start-up  labor
requirement   inciiuded in the zontractorHs    proposal and noted chat ~hc
requ i rement was ~tamortized’~ over the proarction      of the initial  contract
quan$ i ty.

       The DCAA audit report d”nd not comment on start-up   cases,           We
believe   that DCAA should hadc contmented on Lhe nonapplicability            of
these costs to the option quant,ty,

      It is OUY op’inion thar the inkx-mation   suppIled by DCAS should
have a?erted the SPCC negox;azor that the proposed unit price included
costs that would not be app’iiea~le   20 eke option quantity.

Unsupported estimate      of
misca’i Ianeous dt rect   material   costs

        The cotIt i-actor os proposa : included a cost per projectile         of $0,75
identified     as *‘Phos. coat $ pair,t, grease and strappingOfr        whiccI was
purported    co represent      ai 4 $7 reet materials    140~ spect Fied elsewhere
in the proposa?,         According to the contractor,        the amount proposed was
an estimate For which PO supporting           dorxa,entation    was provided    to the

         NeOrher the technical     report nor the aesdi r. report Fncl iaded any
comments on the reasonableness          of the requirement   oi- cost for these
 i terns e The technical    analyst stated     only tnat the bill of material
 included quantities     for paler and packing materials,         The auditor,
wtthout elaboration,       noted that these costs were estimated on a
judgment has I so The ZIUQ~~O~‘S        working gapeis contained     no infor-
mation to show that he had attempted to ascertain             the reasonableness         ’
of the contractor~s      est fimatz,

       A Lansdowne officia’d     ir,formed us chat neither       the DCAS technical
analyst nor the DCP& aud;tor           ma requested  support for this estimated
cost,     At the time of the DCPJ~auoit,        the contractor      had segregated
miscellaneous      dfrect material      toses of less than $a,03 per unir For
projectiles     shipped under pa-eceding contract       -IPIIgA,     which was then
80 percent complete,        iansdowneEs treasurer     contended that the firm’s
cost   accowt~ng      system did not 5z that time allocate          miscellaneous
material    costs accurately     enough to be used for cost estimating,

       We recognize that recorded costs for contract         -I? B19A may not
have accurately       set forth m~scei Saneous material    requirements,
However p it Is otir ophdon chat had the DC4A auditor            reviewed these
costs jl he would have been in a pos?tlon to request documentation            For
the estimate or to alert        the SPCC negotiator   to the need for addl-
tional   suf3stantZatione
       A Lansdowneoffjcial       stab,& chat during oreparation OFthe proposal
for succeeding contract       NOO!O4-G9-C-O095, t,ley recognized that the
estimare of $I,75 per uni; for contract        -0684 was oversrated,      As a
result,  miscellaneous     bisect material   costs of $O,ll per unit were pro-
posed on the basYs of rer;orded contras=t -4084 cost experience.            A
comparEson of the proposed costs for contract         -0084 and contract      -0095
suggests that the former WB~ overstated        by abotit $99,000 excioading
general and administrative       expense and profit,

       We recommend that SPCC procurement     offlctals   consider the matters
reported B along with any add;tional    information     available,     to determine
the Government’s   legal entitlement  to a price reduction         with respect to
contract   -0084.
       We would appreciate  being advised of actions taken or contemplated
with   regard to the matters presented   In this letter,

       Copies of this   fetter   are being     sent to the following:

       Conrmander, Defense Contract     Administration        Services   Region,
       Philadelphia,   Pennsylvarra

       Regional Manager, Defense      Contract    Audsr Agency,
       Philadelphia, Pennsylvania
       Lansdowne Steel ana iron     Company,
       Horton, Pennsylvania.

                                                  SIncerefy     yours,