oversight

Review of Selected Defense Contracts Negotiated With Alcan Aluminum Corporation

Published by the Government Accountability Office on 1971-03-19.

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

             UNITED STATES GENERAUX~~UNTING                                   OFFICE
                             REGIONAL               OFFICE
                          ROOM   7066.    FEDERAL        BUILDING
                         300 NORTH       LOS   ANGELES      STREEI-

                     LOSANGELES,CALIFORNIA                            90012


                                                                                 MAR 19 4971

Brigadier General Peter G. Olenchuk
Commanding Officer
U. S. Army Ammunition Procurement
   and Supply Agency
Joliet,  Illinois  60436
Dear General Olenchuk:
     As part of our review of the negotiation      of contract prices
under the provisions     of Public Law 87-653, we have examined into
the prices proposed and negotiated for firm fixed-price       contracts
DAAA09-68-C-0317 and DAAAO9-69-C-0107 awarded to Alcan Aluminum
Corporation,  Riverside,    California, by the U. S. Army Ammunition
Procurement and Supply Agency (APSA). Contract -0317 was awarded
on January 31, 1968, in the amount of $1,191,970 and provided for
the contractor to furnish 346,000 Rocket Motors; HE,66MM,M54,MPTS.
Contract -0107 was awarded on December 30, 1968, in the amount of
$4,631,031 and provided for the contractor to furnish 1,390,700
M54 Rocket Motors.     Contract -0107 was negotiated by the Los Angeles
Procurement Agency (LAPA) at APSA's request.
     Our examination was primarily   concerned with the reasonableness
of the price negotiated in relation to cost or pricing data available
at the date of contract negotiations   and the adequacy of technical
and audit evaluations of the contractor's    cost proposals.
       We found that proposed costs for contract -0317 were based on
the most current, complete, and accurate cost or pricing data at the
time of contract negotiations    with the exception of tool maintenance
costs which were apparently understated.       With respect to contract
-0107, we found that proposed labor costs were higher than indicated
by cost information    available at the date of contract negotiations
by about $31,400, including applicable      overhead and profit.  Also,
proposed tool maintenance costs may have been understated.       The
evaluations of the contractor's     cost proposals were not performed in
sufficient    depth to determine whether the proposed contract prices
were based on the most current, complete, and accurate cost or pricing
data.
     The results   of our review are discussed below.
Brig.    Gen. Peter G. Olenchuk   - 2 -              MAR19 4971


CONTRACT DAAAO9-68-C-0317

      Alcan submitted a price proposal in the amount of $1,358,396
on September 19, 1967, in response to APSA*s request for proposal
number DAAAO9-68-R-0045. A revised proposal was submitted on
December 29, 1967. APSA performed a technical evaluation of the
original cost proposal and the Defense Contract Audit Agency (DCAA)
performed a preaward audit of the revised cost proposal.
       Contract negotiations  were concluded on January 23, 1968, and
resulted in a total contract price of $1,191,970 or $3,445 a unit,
Final contract negotiations    were on a total price basis; therefore,
the amounts negotiated for each element of cost could not be determined.
The negotiated price reduction amounted to $166,426. Alcan executed a
Certificate    of Current Cost or Pricing Data on the negotiation   date. A
defective pricing clause was incorporated into the contract.
Tool maintenance costs
       The contractor proposed $34,500 for tool maintenance based on
historical   costs experienced in the production of units under prior
contracts during July to November 1967 as follows:

                                                         Amount based on
    Cost element                     Unit cost         contract quantities
        Material                      a.03221                 $11,100
        Labor                           .05913                 20.500
        Overhead                        .00852                   2;900
                                      w                       534,500

       We found that the contractor,    in computing the unit cost for
material and labor, incorrectly      matched historical  costs for June
to November 1967 with units produced during July to November 1967.
As a result, we estimate that proposed material and labor costs were
higher than indicated by available cost information       by about $6,600.
We also found that the contractor      did not propose tool maintenance
overhead costs on a basis consistent with the existing method of
allocating   overhead costs.
     Other proposed overhead costs for this contract were based on
the existing allocation method. We estimate that proposed tool main-
tenance overhead costs were understated by about $12,100 as a result
Brig.    Gen. Peter G. Olenchuk    - 3 -           MAR 19 1971



of the inconsistent   treatment of these costs.  The net understatement
amounted to about $5,500, or about $6,400 including applicable
administrative   costs and profit.
     Contractor officials agreed with our observations and stated
that there had been an oversight in the estimating process.
      Neither the overstatements nor understatements of proposed tool
maintenance costs were identified  during the preaward audit performed
byDCAA.
CONTRACTDAAAO9-69-C-0107
      Contract -0107 was issued as a letter contract on September 3.6,
1968, with a ceiling price of $3.347 a unit.   The contractor*s proposal
to definitize  the contract was submitted on December 6, 1968. UPA
performed a technical evaluation and DCAA performed a preaward audit
of the cost proposal.
     Negotiations    were concluded on December 16, 1968, and resulted
in a total contract price of $4,631,031 or $3.33 a unit.     The contractor
executed a Certificate    of Current Cost or Pricing Data on the negotiation
date, and a defective pricing clause was incorporated into the contract.
Direct    labor costs
      We estimate that proposed labor costs were higher than indicated
by available cost information     by about $26,700, or $31,400 including
applicable   overhead and profit.     This resulted because the proposed
labor rate of $3.96 an hour for the assembly operation was based on
a higher pay job classification     than was appropriate.   A labor rate
of $3.36 an hour should have been proposed for the assembly operation.
     Contractor officials agreed with our observations and stated that
the higher proposed labor rate resulted from an administrative  error.
      We found that DCAA did not review the basis for the contractor's
proposed labor rates.   Had a review been performed, we believe that
the error in the proposed labor rate would have been identified.
Brig.   Gen. Peter G. Olenchuk    - 4 -



Tool maintenance costs
     The contractor proposed $163,800 for tool maintenance on the
basis of historical  costs of $0.12 a unit experienced under prior
production contracts durin g the period June 1967 to June 1968. We
found that the contractor was experiencing a higher tool maintenance
rate at the time of contract negotiations  than had been proposed as
shown below. However, the contractor did not update the cost
proposal to reflect  the higher rate.
                                    Unit              Amount based on
              Period                cost            contract quantities

    June 1967 - October 1968       G.1585                 $220,400
    January- October 1968           .1766                  245,600
    July - October 1968             .2073                  288,300
       We were unable to determine the reasons for the increased tool
maintenance rate because the financial     records did not provide
adequate visibility   as to the composition of such costs.    As a
result, we could not determine whether the costs experienced in the
latter months would have been more representative     of what the con-
tractor could expect to incur during performance of contract -0107.
It does, however, appear that the proposed tool maintenance costs
may have been understated based on the most current data available
at negotiations.
      Contractor officials   advised us that their policy has been not
to update cost proposals at negotiations     unless the more current cost
data varies significantly    from proposed costs.   The officials  acknowl-
edged that they did not update the cost proposal although the more
current data varied significantly.
      We found that the DCAA preaward audit of the contractor*s    cost
proposal did not include a review of proposed tool maintenance costs.
Had a review been performed, we believe that the higher rate would
have been disclosed to the contracting  officer  for consideration   during
negotiations.
Brig.   Gen. Peter G. Olenchuk    is   -



Need to update cost   proposal

      In addition to the preceding example regarding tool maintenance
costs for contract -0107, we identified    other elements of the cost
proposal which were not based on the most current information.
Although the use of more current cost data would not have resulted in
a significant    change in the proposed costs, we believe that such data
should have been disclosed by the contractor during negotiations.
      Contractor officials    generally agreed with a need to update the
cost proposals in those cases where significant      time lags exist
between the original     submission of a cost proposal and the final
price negotiations    and indicated that action would be taken to improve
this condition.


      We believe that the contracting   officer     should consider the
above findings,  along with any additional      information  available, to
determine the extent to which the Government may be legally entitled
to a price adjustment to contract -0107. With respect to proposed
tool maintenance costs under this contract, you may wish to consider
whether the "set off" principles    of understated cost or pricing data
contained in Defense Procurement Circular No. 77 are applicable.
      We would appreciate being advised of actions taken or contemplated
with regard to the matters discussed in this letter.    Copies of this
letter are being sent to the Regional Hanager, Defense Contract Audit
Agency, and to the Commander, Defense Contract Administration   Services
Region, for their information.
                                           Sincerely   yours,



                                           Regional Manager
cc:     Regional Manager, DC& Los Angeles
        Commander, DCASR, Los Angeles