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 LM092941 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 units. 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. _BACKGROUKD 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 L . * . . . . * . 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 information. SincereP' J yours, $d-Ly& 1-i. L . EzXI;GZ3 Regional I.lail2ger cc : Regional !:anager, DCkA, Los Angeles Commzder, DCASR, Los Angeles
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)