Review of Selected Defense Contracts Negotiated Under Public Law 87-653

Published by the Government Accountability Office on 1971-04-16.

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

                                          REGIONAL                 OFFICE
                                   ROOM         7054,    FEDERAL        BUILDING
                                  300   NORTH           LOS   ANGELES       STREET

                                Los ANGELES,CALIFORNIA                             90012

      ,   Vice President and General Xanager
          Eleatromagnetio    and Aviation
             Systems I&vision
          RCA Coxpoxation
          8500 Balboa Boulevard
          Van Ehys, California    9U.09

          Dear b!kc. K.rantzr
                This is to advise you that we have completed a xcvis;r of the
          prices newtiated    for co&xact X00104-6&C-j&;      awarded to X,1
          Corgoxation, Zlectxoma~e%.c     and Aviation Systcss Divisicn by kc
          IT. S. Eavy Ships laxts Coiitxol Center (Si?CC). We also e:z.mireQ
          selected aspects of the negotiation     of contxact XOOO2&6%'XOp2
          awaxded by the Naval Ship Systems Command(X3X).
                Our review of oontxact -3434 was directed -pximaxily towaxd
          detexminin6 the reasonableness of proposed costs in accox&~.~ce with
          the xeqy.irements of ?ublio Law 87-653 and the im@ementiq provi-
          sions of the Aimed Services Pxocuxesnt    Regulatior.
                 We found that the negotiated contract costs were 'h&hex Thor
          indicated by available cost irJomnation pxiox to negotiations     by
          about $46,500 including applicable overhead and profit.      This
          resulted pximaxily because RCA did not update the cost p~~~?osal prior
          to ne@iations      to reflect the most current data OXI labor hours and
          other costs ex--exienced under letter   coiztxact -3434.
                b.xtz review of contract -1092 was directed toward eValI?.ating
          (1) the adequacy of BCAss cost az&ysis       of major subcontxact
          proposals, (2) the feasibility     of direct procurement by the Govern-
          ment of traveling    wave tubes9 and (3) the reasonableness of nc;oti&ted
          profit rates for major field modifications      involving the pxocuxcmeri;
          of s-to& repair paxts.
               The results of OUT review which were discussed wit3, -khe ?kne.~ox,
          Operations Control, aud othex RCA fiziancial. and coztxact officials

       Hr.   F.     3.     I-ccantz                            -2-                        AR? I 6   1973

                  better       contract         -3l43&,   d.atec~ January 11, 1968, provided        for tie
       production of 27,200 I4K 25$ Nod O9 fuze MOXL~O~S. On Fcbr~~q 89
       lpG8, RCA ~ubulitted a cost proposal in the mount of $715,G54 In
       reaponae to the requiremnts of the letter contraot.           !The proposed
       price was reduced to $Gpl+,p60, th0 -0    as;~oun% k3i3tb.eea    i.11 ti0 w~t~2~
        contrmd price.    On Mamh I9 1968, the cont~~&G.~~gofficer exercised
       a contract option increasing the total units to 40,200. RCA was not
       requested to submit a revised proposal for the new qua&i@.
               Contraot negotiations  took place between Eay 24. and June lls,
        1968.    As of s&y 23p 1968, 139600 UEL~S or 34 percent of the ~~&xw-
        tual units had been defivered.      A tit prime 02 $24.95; ~af-3nc@&tud
        resulting in a total contraot prica of $2,002,990.      RCA oxeoutcd   a
        Cartifioats    of Currsnt Cyst or Pricing Data on June Up 1968, and a
        defective pricm      clause waC3included in the oont~ao-i;.

                  RCA pr0po~dd             asssmbly labor           of   ~0249   'noms a tit   or $101,186
        S3r the total                 contact   The proposed hours wers bawd
        on B &md.a.rd Crm of 0.6486 bourn a uxdt adjuotxd upwad to 0.9469
        hours by a Labor Utcilizatfon Index (IXL) factor of 68.5 percent,
              Our rev&w disoloaed that at ths tim3 of nc@iationa      IXA had
        available LUEls fron cornploted production jobs under the prm&i.ng
        fuzo contraot IoiL&-39-67-C-0033 ( recorded under RCA job nurdbors 57s
        and 609) and from the lottex contract -3434 (racorded -under RCA job
        number 627). The company, however, utilized    data available throu&    ,
        Z'ebmaxy 8, 1968, &ich did not ix&o i&o consideration production
        data under thc3 lsttor contract.  A coqmxiuon of the nogdiated asao~bly
        hours with data availabls at the tizm or0 n~~@&xkxus is as followst

. ”:
                                 -3-                        APR 16 1971

                                 Data available   at

                            609 70.@               36,380         8,600
?sb believe that the LUI experienced under the letter   cmstract (Job
#627) wouldl lzav0 been the most relevant and cxmert data available at
the t&m of nagotiations    since it represents mqerienoed data for at          ,
least one-third of the co&%a&xm,l wtita.
        WQwcxre infomed by an RCA official    that the ruors oIxrm3nt LXX
factors were not disclosed to the contmcting       officer.     According to the
official,   the proposal was not revised at the time of coxatr~~ot ne&iaw
tion bacause of a mmagemnt decision that (1) the portion of letter
contract -31~34 com&oted gzior to ne@tiations       was not a mfficicnt
basis for gxedkting     the outcorss of contzx~ct perfomanceg and (2) the
trend of decreasing pmductim        levels at RCA would lead to roduecd
labor efficiencies.     In addition0 we were advised that a lump sum
rcduotion   in the cont2ac-k ptice resulted primxcily      fzon reduotionr; in
proposed labor costs.
       We beliwe that the LUX fm&xc cxp&.onced under the letter
conLract should have been d.isclor;ed to the conkacting    of2icex duxkng          ,
ne&g fiations.   Also, the contracting eff;icm~~s record of no@zrkLalion
indicated no reduotion Ln assembly labor cosix,
      In addition to the proposed assembly homsV RCA proposed a 5 per-
cant faotos for a break-in-y,roduotion to cover a transition   period
between production on the preceding f&e mxxLtor contraot and letter
contraot -3b34. The proposed factor was nqptiated     into tlus contra&
and araountod to 1,903 hours.

                                                                           APR 16 1971

    less &an the negotiated amour&; howevor9 we wire advised "&at
    additional   'noms wese actually qpcrienced bu'c were ohar~:d to the
    wrong oont3zaot. The oontraotor oould not furnish us any evidence to
    this QffQCl.
            In 0~2 opinion,     the exprienced       labor hove-s tier      lsttor contract
    -3434 should have been discLozd              to the contracting    officer during
    Test tecMcian       labor    costs

           We estimale that -teaL tecMc$an    labor costs neptiatcd     under
    the contraot were hi@er than indicated       by cost in,"ormtion   available
    prior to negotiations    by about $6,?03, Similaxly     to asaernbly labor,
    ttis azosultod primarily   bsc2uso i?CA did not update th.0 progoasl to
    reflect   "de most current ad available labor how data.
            RCR proposed teat tcohnioizn          labor of 0.2713 hours a zmit,           or
    $30&p for thc3Lotal aontract r+$lir~oits.                    9-m pwgocod      h0u.m    wc!33
    based on a star~d.azd tiue of 0.2029 houxs a unit               adj~ted     to 0.2713
    howm by an I;'fJf f&BtGr  oaf 74.8 percant.
           Our reviai showod that RCA was eqexioncing    a higi-mr IXZ factor
    for teat tecltisian   labor hours undcrr the u~oat cmsnt     production jobs
    than the nqotiated    LUX faotor.  R comparison of the ne;;otiatcd test
    teuhnioian hours with data available at the time of Ys9gotiatSons 2s as
                                              Data available at
                                          the time of nc,qtiationn
    Proposed.    md negotiated                   Iki&ted       COEip"uOd        ~Iit-~~oase in
    TdSTfactar                                                   hours        contract nrc5aa

                                         609        74.%         10,906              -CL


          zxr. F. H. IIcxaatz,                       -5-                    APR 16 1971

                 An RCA offioial  advised us that the more cu~ront LUT factors
          'c~ero not disoloaed to tne contracting officer  for the same xeaaon
          as previously    cited for assembly labor-
          Profiuction      en&xxxinf~    labor costs
                 Xn consideration  of the requirements of Defense Procurement
          Cirdar     Xc. 77 xeLgardin~ tho 'ssetoffll principles of understated
          costs or prioing data, WC"eatimzte thak ECABs proposed production
          en&neering labor costs were understated by about $1,400 incItudiz~g
          applicable overhead and profit.
                 IX.& proposed a produotion cn@neering labor rate of $6.03 an houzc
          although tho approved bid rate was $6.30 an hour. !UI cost prososnl
          identified     that all direct labor rates ore banod upon approved bid
          rate3 D The erroneous labox xate was suboeqwn-bly negotiated into t&
          contraot grice.

                 Contract 4092, awarded on Kovembor If;, 1967, provided that RCA
          furnish stock repair parts, supply sosport backup %I& ovsr'haul and
          repair capability    to maintxki electronic      oqti~mont ~revioua1y pzoc~~d            ,....
          by the Navy from EGA under 0th~ pimc contracts,              'Snder the term; of
          the contract,    the nozotiation     of prices for repair parts and ssaozblici;/
          subassemblies to be repaired, is the responsibility            of the DoT~~sz
          Contract Administration      So;c7ricos (BCAS). At the com@etion of our
          revicwp field modifications       totaling   over $4.6 million had boon
          negotiated under $5~ contract.
          Review of proposed subcontract             costs
                We reviewed three major contract modifications involving    the
          procmemat     of txavdi~  wave tubes (TWZ*s) from &~-&es Airoraft     C;o~~g~any
          as followso

                                  Contract   -1092                        RCA pm2oaa.l for TVT'a    /‘
          S"iodification                                                     inoluding add-on
              nlxmbor          Data nerptintod       Begotiated   price       pricin!~ fGcfOklS    '!
                 17                Y/24/69                 ii4909477             ";7$;4$
                 12                .5/1w9                    3031m-i
                 10                4/S/69                    S639363              402:7;4
    4   Nr.   8.   Es. I!i3xUt5            -Q-                        APR   16   1971


        ??ho TWPs wcxe gromd        on a sofs souse
                                                  basis and, aa a romlt,    RCA
        was wzpired   to obtain cost or pricing data from ths supplier axd
        perfcmn a coat analyaks of the data obtained.    WQfound that RCA
        poxfomod an adequate aost analysis of the su~?plfar's ]?ropoatzls ~rith
        the oxce-gfion of labor hours and yield f~~ctors which we?% not vorifi&
.              In OUT opinion, the RCA cost azalyais should have inuludcd mrch
        a verification     since proposed subcantract labor costs wore a sig~Lf=
        iCaslt   faotor i.Xl the pZicin/J Of FiiJy's. Xi3 sfu-hnro grocxcome~zts ixvolving
        major nonoompotitiva      subcoyrtract price pi-oposals, we bolieve that
        RCA should verify ni.glifica;nt      cost or p;"jcing data or obtain such
        analyses thxou.,$a DCAS whex@ qgro>riate~

                Xn reviewing 421sR&4 processing of the !l?ltiTfrom rsccipt to ismop
         WB found that RCA mended about 16 hours of dixeot labor for each
         !iWl!. This effor% prtiily        cox-kstod of (1) ixxrkallation   of a tube
         mounting b3x&et,      and (2) alootronic    tc?oting. !Phe  labor effort IXLS
         sSgn.ificantly    reduced ;in Exizch 1970 when RCA stogped ~~~fozriing olootrotia
         testiy3e; of !twT! SparQs.
                 Xn vhw of the nddad in-house labor effort required and tho
         substantial    marbpo in the price of tho tubes, we discuss&i with RCA9
         RU&QEI,    and Xavy officials  "Jne possibility of dire& Cw~mr;l~nt ~IUC~TXEI
         of "be m*s.       ws found that2