Prices Negotiated for Steam Turbine Generator Sets Purchased from De Laval Turbine, Inc.

Published by the Government Accountability Office on 1971-06-29.

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


                                          502 U S CUS7OlrlHOUSE            20   ARID   CHESTNUT      STREETS
                                                PHILADELP~-~IA,        BENNSYLVAN~A                  19106
                                                                                                                      June 29, 1971

Commanding  Officer
NaWl   SbEp Systems                   COninland
Arl Yngton,            Virginia        22202

Dear       Sir:

          We have         revlewed           steam turbine generator sets
                                              the      pricing        of        32
~?OOOlGJ)purchased from De Lzval Turbfne, lnc,, Trenton, New Jersey,
under contract  tiO0O2&&&-c-!Z!y~ awarded    by the Naval  Ship Systems
Coibmandon December 11 p 1968,   %qotiations      resulted in a firm
fixed-price             contract            of $S,993,360                 which was definitized                       on
Aprgi      11,        19690        Our      review         was      primar%iy             concerned            with    the     reassn-
ab'leness of the price negotiated in relation to cost or pricing
Information available to the contractor at the time of negotiation
and the adequacy of Government rechnlcal and audit evaluations   of
the      contractorPs              cost       proposal,

        Our review showed that the negotiated price was $20:,257
higher than justified      by cost or p~=ic”lng data avaIlable  prior to
negotiation,      Of this amounT: $131,408 resulted because the provis~o~r
for setup labor was higher than warranted by experience         under a pre-
ceding contract.       The balance of $69,849 Is attributed    to rhe falnure
of the contractor to adjust prior cost experience for a change in a
testing procedure.
          The overprIcing                   amount is detailed                         Bn the fotlowfng                tabulation:
                                                              Excessive                           Change     in
                                                         setup charges                       test      procedure               -Iota1
DI rect    labor                                            $ l%%o
Manufacturing               overhead                              79,279
           Subtotal                                         $ 99259                                 $52,760                  $W!,O119
Genera 1 and
      administrative               expense                     16,934                                  9,001                   25,935
           Subtotal                                         $I&'893                                 $61,761                  $U7,954
Profit                                                         15,215                                  8,088                   23,303
          Overpricing                                       $1?1,4s8                                $69,849                  $201,257

                                              50TH         ANNIVERSARY                    1921-      ‘1971
       In addition        to the above,      we belleve    that a further       price    reduction
of a&out $126,000           could   have been obtained       during negotiations         had the
Government      negotiator        made appropriate      use of the Defense       Contract      Audit
Agency    (DCAA) findings,           (See pB 4 .>

       Contract     -5254 includes         a defective         pricing    data clause          that   pro-
vides    for decreasing       the contract          price    if the Government            determines
that   the price     was significantly            increased        because cost or pricing
 information      submitted by De Lava1 was not accurate,                       complete,        or current,
De Lava1 was requested           to submit       cost and pricing           information          on two
bases--one      for a single-year          procurement         and the oLher for a multiyear
procurement.        Subsequent      negotiations          were based on the cost and pricing
data for the multiyear           procurement,            De Naval certified           to the accuracy,
completeness,       and currency       of the cost and pricing                information         submitted.

        Our findings        with     regard     to   the    overpricings        are   set   forth     below,


        De Lavai’s     proposal    included      14,779  labor   hours to set up machinery
and equipment       to manufacture        the bits and pieces      for the turbine
generator    sets.      De Lava1 proposed         to manufacture      the bits   and pieces
in lots,    corresponding       generally     to the periodic       requirements    OF the

         The proposed         setup hours were based on experience                         under a prior
contract.          The setup        hours under that         contract         for the nine turbines
produced         as one lot were reduced              to a unit        basis,      doubled,      and then
multipl      isd by the number of units                 to be produced           to determine        the
setup hours for the first                  two ‘lots on contract              -5254.       The total     setup
hours for the first              year requirements,            reduced        by 40 percent,         was then
used for each of the remaining                    three    lots,        The reduction          of 40 percent
appears        to have been an attemot              by De Lava1 to equate                the first      year
 requirement         with the lesser          number of turb;nes              bought     for each of the
 remaining        3 years.        In view of the fact            that     the setup        time for each
 lot is unaffected            by the number of units               in the lot,         that    is setup
time     fs essentially          constant,      we Inquired          into     the basis for such an
estimating         technique.         De Lava1 could         provide        no explanation         for    its
calculations,         or why the inappropriate               use of setup data had escaped
 its review        process.

         Using   the same experience        data on which De Lava1 based’its               pro-
posal,      but applying      it on a lot basis,      we computed        9,135    hours for
the setup category         of direct     labor,     De kavalss       computatron      was 5,644
hours higher,          By using   the negotiated      labor    rate,    we calculated        this
overpricing        as $19,980 (exclusive        of manufacturing         overhead,     genera1
and administrative         expense,    and profit),        De Lavai      agreed    with the
reasonableness         of our computations.

        A Defense           Contract       AdpiQfsrration              Services         (DCAS)      technical         analysr
eva1 UGted De Lava 1 Bs proposed                      labor      hours P According                to his       report,       the
einphasis      of his         review      wds directed           to the si ng1 c-year               procurement           pro-
posal      (in effect           the f i rsi      two iots        to me manufactured)                  since      supporting
data for       both the single-year                  2nd    mu1    t i year     procurements            ware     deve$   aped
using      identica’l         facts*        Had the technical               analyst        evaluated         the multi-
year    aspects         of the proposal,             he Cjould have,              in ow       opinion,         noted      that
setup     hours       forithe        multiyear       quantities           were      disproportionately                higher
than those          for     the single-year            quantity.            This      would     have served           as a
basis     for     further         inquiry      and identification                of this        point,


        For contract           -5254, De Lava1 requested                a deviation        from the Govcrn-
merit’s     standard       testing      procedures         to permit       the testing       of each pair     of
turbine       generator        sets   with     the same pafr         of condensers*            The request
was approved          and a clause         was Inserted          in the contract         to provide       For
 this   deviation.           Thus only       the last        two condensers        shipped      would   need
cleaning,        However,        De Lavai      made no corresponding             adJustment        ~n its
proposed       costs     for     the savings        in cleanfng        cos’cs  that     could     be expecte;
from    this     change      in testtns        procedures.

         The labor     hour experience           used as the basis           for the proposal       for
contract       -5254   included      time     required        to clean    each condenser     after
testing       had been completed,             We were advised           by the De Lava?    supervisor
having      cognizance      over   this    operation          that   it usually    takes  about     100
hours     to clean     a condenser        after      testing,

         On the basis       that     the cleaning       operation     would     be required      for
only     two condensers        after      testing    che Base units,        we compured      the over-
statement       in the proposal           as 3,000    hours      (BOO hours     x 30 units).         The
resulting       excess    labor      provision     in the final       negotiated      price    was
$10,620      (exclusive       of manufacturing          overheaa,     general     and administrative
expense,      and profit)       e

         De Lava 1 representat               i ves 1 in      cornTenting         on our      finding,         stated      that:

         --The    intent        of the       change    was to expedite                 shipment         of   the
            completed         turbine        generator     sets,

         --Government   approval    for    the change                      was    In the       nature     of
            permission  to conduct      the tests    in                    the    manner       requested,
            if De Lava1 so desired,

         --The    mu’ltfyear       feature       of the contract,          in effect,     results
             in four      annual     contracts,       on this     basis,       the two condensers
            used each year           would      have to be cleaned           because   they would
            be shipped        with     the completed       turbine       sets.

         --On an after-the-fact          basis,               De iavat         was      not always  able           to
            ship   a new condenser       with              each turbine              because   of a strike
            at its   condenser    plant,

                                                             -3     -
          De taval’s         first            and    second      comments         ab5veg       in   our    opinion,     are     not
relevant    to the issue, On thti multiyear         point,    fund approval       for one
year   is far In advance of delivery        of completed units for the prior year
and there may be, in effect,     continuity       of production,         The strike    clt the
condenser plant was an unforeseeable          event    having    no bearing    on what
should have been negotiated,       En summ;irry, the cost impact of this change
should      have been considered           dur!ng negotiations        and the price     reduced
accord    f ng ‘i y 0 Further,     if the Government        required     the contractor      to
deviate      from      the agreed    procedure,   the cost impact could have been con-
tingently         provided     for fn the basic    contract        or handIed   through    the
changes      artjcle       of the contract0

         The technical            analyst,      In hts report,          did not comment         om De Lavolcs
proposed        labor      hours     for testing          the completed turbine           generator       setSo
The work        flies      relating        to thSs      preaward     evaluation     were     not retained,
The technical            analyst       stated     that,      In view    of the absence of these files,
he could not comment on the reason that rhe changes                                  in time      requirements
for    testing        were    not reported,             We can only       conclude     that the effect          on
 labor     hours      through       use of the same set of condensers                   was not considered,
or the price negotiated                    for this contract          would     have been reduced.

          As   previously             stated,      De Lava1 was               requited         to submit        its   proposal
on two bases --for                   a single-year       procurement                   and   a multiyear         procurement,
DCAA recommended             cost disallowances           on each of the two bases* The price
effect     of the findings           for   the two bases          differed,           En establishing          his
price     objective,         the Government         negotiator        applied       the lesser        amount
questioned         for    the single-year         procurement          (two   lots}     to the mult%year
procurement          cost    data (five      lots) submitted by De LavaI.                     As a result
the price        accepted       by the negotiator           for   the muI tiyear          procurement        was
more than the amount              DCAA regarded         as acceptable           by $3,932 a unit           and
$125,824 in total,               The negotiator         would     have been justified               in
attempting         to negotiate        a price      about     $l?6,000       Bower.

          We brought         this         matter         to    the    attention   of personnel     in the               Naval
Ship Systems Command. They                               had no comments        other    than they   could                not
understand why’ this oversight                                by the negotiator       was not disclosed                   by
reviews        at   higher           levels         within      the Navy,

         We recommend      that    Navy procurement       officials                              consider       the above
findings,      along  with      any additional      information                               available,        to determine
the Government’s         legal     entitlement    to a price                               reduction       with    respect   to
cant ract     -5254,

       We would appreciate   being  advised  of action                      taken    or to be taken    by
your agency with    regard to the matters    aiscussed                       in this    letter.  Copies
of thiis letter  are being   sent to the following:

      Commander,        Defense    Contract     Administration             Services    Region
      Philadelphia,         Pennsylvania

      Reg tona I Hanager p Defense            Contract       Audit       Agency
      Philadelphia,     Pennsylvania

      De Lava1        Turbine,   inc.
      Trenton,        New Jersey

                                                             Sincerely        yours,

                                                   -5    -