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)

                                    REGIONAL               OFFICE
                                ROOM    7068.    FEDERAL        SUlLDlNG
                              ’ 300 NORTH       LOS   ANGELES       STREEI-
                            LOSANGELES,CALIFORNIA                             90012

AIRIQXL                                                                                  MAR19 1971
Rear Admiral J. A. Scott
Commanding Officer
U. S. Navy Ships Parts Control Center                                                    lllllllllllllllllllllllllllllllllllllI
Mechanicsburg,   Pennsylvania 17055

Dear Admiral    Scott:

        As part of our review of the negotiation             of contract  prices under the
provisions     of Public Law 87-653, we have examined into the price proposed
and negotiated      for firm fixed-price      contract     ?TOOlO4-6+C-0092 awarded to
Alcan Aluminum Corporation,        Riverside,     California,     by the U. S. Navy Ships
Parts Control Center (SPCC). The contract               price was definitized      on
February 7, 1969, in the amount of $1,642,500 and provided                  for the contractor
to furnish     45,000 Zuni Rocket Motors, 5.0" IQ< 16 Mod 1. The contract                 price
was subsequently       increased to $2,447,000 to provide           for 22,065 additional

      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 proposal.

       We found that proposed labor costs were higher than indicated             by cost
information      available    at the date of contract      negotiations by about $91,400,
including    applicable      overhead and profit.      Also, proposed tool maintenance
costs were apparently         understated,   to a lesser extent, because the most
current cost information          was not considered    in the pricing  of this contract.
The evaluations        of the contractor's     proposal by Government representatives
were not performed         in sufficient   depth to determine whether the proposed
contract    price was based on the most current,           complete, and accurate cost
or pricing     data.

      The details     of our review         are discussed                       below.


      SPCC awarded letter  contract -0092 to Alcan on October 2, 1968, for
the production   of 45,COO Zuni Rocket Eotors.   Alcan submitted a cost pro-
posal on Bovember 1, 1968, in the amount of $1,760,850.       A revised proposal
was submitted on December 12, 1968, to reflect    more current labor and over-
head bid rates.

                           50 ‘I% ANNIVERSARY                         1321- I371


            .   .


        *           .

                            Admiral   5, A. Scott                 -2-                        MAR 19 1971

                                ~, The Defense Contract Administration       Services     (DCAS) performed a tech-
                            nical evaluation       of the original  proposal and the Defense Contract Audit
                            Agency (DCAA) performed a preaward audit of the revised               cost proposal.
                            Negotiations      were conducted by telephone    on January 30 and 31, 1963,
                            resulting     in a contract price of $1,042,560.         The negotiated    reduction   of
                            $118,350 was in the general and administrative            expense and profit.      The
                            contract     contained   an option clause for additional       quantities    at the same
                            unit price for the 45,000 units.         SPCC exercised the option on February 19
                            and March 19, 1969, for 22,065 additional         units.

                                  The contractor executed a Certificate      of Current Cost or Pricing          Data
                            on January 31, 1969, and a defective     pricing   clause was incorporated         into
                            the contract.
                            RESULTS OF OUR EVALTJATION

                                  The results     of our review of proposed costs, including    an evaluation
                            of the adequacy of the technical        and audit reviews performed by Govern-
                            ment representatives,      are detailed   as follows:

                            Machine hours

                                   We estimate that proposed machine hours used to compute labor costs
                            were higher than indicated     by available    cost information      by about 6,658
                            hours amounting to approximately       $91,400, including     applicable   overhead
                            and -profit.    This resulted  loecause the contractor     did not update the cost
                            proposal to reflect     the most current machine hour standards for two pro-
                            duction operations.

                                  Alcan proposed 11,@2 machine hours for the aging operation                  based on
                            a standard production      rate of 6 units an hour.        The standard was revised to
                            12 units an hour on movember 12, 1962, several months prior to contract
                            price negotiations.       According to contractor     officials,      the revision      was
                            the result   of modifications      to the aging furnace which doubled its capacity.
                            However, the cost Proposal was not updated to reflect             this increased capacity.
                            As a result,    we estimate that proposed labor costs for the aging operation
                            were higher than indicated        by available cost information         at the date of con-
                            tract negotiations     by about $13,000, or about $82,200,          including.    applicable
                            overhead and profit.

                                     We estimate that proposed labor costs for the anneal operation     were
                            'similarly     increased by about $1,500, or about $9,200, including  applicable
                             overhead and profit     because the cost proposal was not updated to reflect
                             the most current machine hour standard for that operation.

                                   Contractor      officials      stated that the cost proposal had not been undated
                            to reflect     the revised        standards nor were the standards disclosed         to the
                            contracting      officer      because the changes were not considered       significant.
                            However, we believe           the changes were significant       and should have been dis-
                            closed to the contracting             officer  during negotiations.
Admiral   J. A. Scott                     -3-e                       MAR 19 197%

       The proposed machine hours were reviewed as part of the technical
evaluation    performed by DCAS. Ve found that the technical                evaluator
traced the standards in the proposal              to an operation   worksheet    issued in
August 1968, which was the basis for the proposed machine hours.                      However,
we found no evidence that more current data was examined.                   DCAS officials
stated that the revised          standards,    issued on November 12, 1968, may not
have been available         at the date of their review which was performed during
November 15-27, 1968. Based on our discussions                 with contractor     officials,
 it appears that the revised          standards could have been available          at the time
the technical      evaluation      was performed.     In any event, we believe         that the
technical    evaluation       should have included an assessment of the most currenL
 standards in effect        at the date the review was performed.

Tool maintenance      costs

        The contractor    proposed $41,500 for tool maintenance on the basis of
historical    costs of $0.618 a unit experienced        in the production   of units
under prior contracts         during the period January to June 1968. We found
that the contractor       was experiencing     a higher tcol maintenance rate at the
time of contract       negotiation   than had been proposed as shown below.       Eow-
ever, the cost proposal was not updated to reflect            the higher rate.

                                              Unit          Amount based on
          Period                              cost        contract quantities

    January   - December 1968                    s.713         $47,Eoo
    July      - December 1968                     .807          54,200
    October   - December 1968                     .888          59,500
       We were unable to determine the reasons for the increased tool main-
tenance rate because the financial           records did not provide       adequate visi-
bility   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 representative      of what the contractor        could expect to incur during
performance    of contract      -0092.    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.        In our opinion,  the more current  informa-
tion should have been disclosed           to the contracting   officer during negotiations,
Admiral   J. A. Scott                       -l$-

      We found that the DCM preaward audit of the contractor's      cost pro-
posal did not include a review of proposed tool maintenance costs.          I-lad a
review been performed,    we believe that the higher rate would have been dis-
closed to the contracting    officer for consideration  during negotiations.

Unsupported    cost estimate

      The contractor   included proposed costs of $139,900 for an item of
expense designated    as bar premium.        This item represents    the cost differ-
ential between extruding      bar stock at Alcan and the higher costs if performed
by outside vendors.      Contractor   officials     advised us that at the time the
proposal was submitted for contract          -0092, the 3,500-ton     press used to extrude
bar stock for prior Zuni Rocket Notor production             was scheduled to capacity
with other plant work.       Since the contractor       intended to extrude bar stock
for contract    -0092 on the 3,500-ton       press, this necessitated      the purchase of
extruded bar stock from outside vendors for other plant work.

       We were unable to verify      that the 3,400-ton   press had been scheduled
to full   capacity since the contractor       does not retain production     schedul-
ing records.      Contractor officials    advised us that the records had been
available    for review by Government representatives        prior to negotiations.

        The contractor's      rationale       for including     the bar premium costs in the
pricing    of contract     -0092 was disclosed            in the cost ;proposal.        According to
the record of negotiation,           these costs were accepted by the contracting
officer    since they were audited and found reasonable.                     In this regard, DCAS,
in its nricelcost        analysis     report,     advised the contracting         officer    that the
bar premium costs were acceptable                provided    the contracting      officer    considered
this item as a necessary part of the contract                   requirements.         Eowever, we
found no evidence that either DCAS or DCPA had reviewed the 3,500-ton                            press
production     scheduling     records or had otherwise            evaluated    the propriety      of
the bar premium costs.

       It does not appear that the propriety         of including    the bar premium costs
in the pricing      of contract     -0092 was adeouately
                                                   .       evaluated    by the Government
representatives       during the proposal review process.         We believe   that the
production      scheduling   records should have been reviewed to determine whether
the capacity of the 3,500-ton           qress was such as to require      the procurement
of extruded bar stock from outside vendors in the quantity                and prices proposed.

Need to uodate      cost proposal

        In addition     to the examples previously  noted, we identified other
 elements of the cost proFosa1 which were not based on the most current
 information.       Although the use of more current cost data would not have
                                                                   MAR 1 iI 1974
Admiral   J. A. Scott                  -5-

resulted in a significant ch2nge in the proposed costs, we believe    that
such data should h2ve been disclosed  by the contractor during negotietions.

        Contractor    officials generally  agreed rtith 2 need to update the cost
proposals     in those cases where significant     time lags exist between the
original     submission of a cost po~~osal     2n: 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 find-
ings, along vith any addition@      Information        ava~ilablc,  to determine the extent
to which the Government may be legally         entitled     to a price adjustment.     Xith
respect to proposed tool m2intenance costs , you may wish to consider whether
the 'set off" principles   of understated       cost or pricing       data contained in
Defense Procurement Circular    Eo. 77 sre agolicable.

      Ve would aF?reciate  beins advised of actions te.ken or contem-t;lcted with
regard to the matters discussed in this letter.       Copies of this letter  are
beicg sent to the Re.~ional :?l2iiager, Defense Contract Audit Agency, and to
the Comrrander, Defense Contract Administration    Services Region, for their

                                             SincereP' J yours,

                                             1-i. L . EzXI;GZ3
                                             Regional I.lail2ger
cc :   Regional !:anager, DCkA, Los Angeles
       Commzder, DCASR, Los Angeles