- 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, EXCESStVE PROVISION FOR SETUP LABOR 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 contract. 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 $19,980 (exclusive of manufacturing overhead, genera1 and administrative expense, and profit), De Lavai agreed with the reasonableness of our computations. -2- A Defense Contract AdpiQfsrration Services (DCAS) technical analysr eva1 UGted De Lava 1 Bs proposed labor hours P According to his report, the einphasis of his review wds directed to the si ng1 c-year procurement pro- posal (in effect the f i rsi two iots to me manufactured) since supporting data for both the single-year 2nd mu1 t i year procurements ware deve$ 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, CHANGZ tM TEST IN6 PRDCEDURE NOT CONS I DERED 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. lIdCORRECT APPLlCATEOM OF D&AA FINDINGS DURING NEGOTIATIOMS 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, -4- 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 -
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)