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
                                               300 NORTH   LOS   ANGELES
                                                                              STREET                lllllll\llllll$lllllIlllllll
                                         Los     ANGELES~CALWORNIA                    90012

                      Rear Admiral 3. A. Scott
                      CommandingOfficer                         I
                      U, S. Havy Ships Parts Control Cmtar
                      Mechanicsburg, Pennsylvania l.7'OSS H&q
                                                              % 103 1Lc -h-,Yq
                      Dear Admiral Scott:                               A.3
                            As part of our revietq of the negotiation of contract prices
                      under the provisions of Public Law 87-6539 we have exzmined into
                      the price proposed and negotiated for firm fixed-price contract
                      ~0010~-68-C-34~1&awarded to RCACorporat;ion9 Electromagnetic and
                      Aviation Systems Division, Van Xqrso California, by the IT. S. Eavy
                      Ships Parts Control Cecter (SPCC), The contract, ori&ally       issue&
                      as a lsttor contract in .J~WXI,X~~1968, was definitized on &.xneJ-9,
   :   .J
                      1968, and provided for the production of 40,200 fuze monitors, XX 25,
                      Mod 0, at a total price of $1,002,990.
,’ ’            ‘1,        Our excmination was primarily concerted with the reasonableness
                      of the price negotiated in relation to cost or pricing data exxil-
                      able at the date of contract negtiations   and the adequacy of
                      Government technical and audit evalua”tions of the contractorPs coat
   :        :
                            Ths results of our review show that the proposed contract price
                      was $I+6,5OOhi&her than indicated by the most current cost in~ozma-
                      tion available at the tixe of contract negotiations:     This resulted
                      because the contractor did not update the cost proposal. prior to
                      negotiations to reflect "de most ciu2m-k production &ata oxpcricnced
                      under the letter contract.    We aLso found that the rcvicwa of the
                      eontractor*s cost proposal by Gover1xx3~trepresentatives were not
                      performed in sufficient depth to identify the most current, complete,
  c                   and accurate cost information available at the time of contraot
                           These matters are discussed in greator detail                        as follows.

                                                                                        contracts awxded to RCA
                                                                                        the period &UWJ 1965
    ‘,         ‘.

         Raax .i&nixal J. A. Scot;t
’        cow         OffioQrp   u.    s.   si?cc   -2-
     Roar A&nixkI. 3. 1. Scott
     Command Offiaeq P. s. !s?cc         - 3-
                                                            APK 16 1971

      AssembIy labor costs
           WQfound that the assembly labor costs negotiated under the COD-
   tmut wera hi&her than indicated by available cost information pxios
   to negotiations by &out &l,200 including ap~lica'ole overhead ad
   profit.     'Jlhis resulted p!rWily    became the contzactor did not q&to
   the cost proposal to reflect the most cuzxent assembly labor data
I' available at the time of nagotfatfons.
             RCAproposed assembly labor of 1.0249 hours a unit, or $101,186
      for the totaL ~on-tract IceqairemenLs. ttha propoeiod bows wore based on
      a standard time of 0.6486 hours a unit &xLch was adjusted upward to
      0.9469 hmxcs by a labor c~ficiency hctor of 68,s percent. !!%o Jabox
      afficiency faetor, kxown as the Labor Utilization   Index (IXL) is a
      produotion control aubsystm used by RCAto coqaxe a woxke~?s efficiency
      against CO& aatimata standards for aXL ta,sks of a production oporatior,
      As the work force lsecomeamore efficient d32dnon-sroduotive ttie
      docraasesy the LUX will fncwaae.
             Ow rczviaw showed that the contractox did not UGQthe most cuxrcn-i;
      and avaUable LUI in ita proposed asambly labor hours, At tIno time
      of negotiations in Jui263 1968, tlm contmctor had available 12302
      efficiency dab fxom coqAa"cod productioil jobs u&er the px:caacUngf'uo
      moni-iar oontzlact DAAG39-67-C-0033 (recorded under RCAjob nu&cro 575
      and GOP), and from the letter cont;tot    -j,!$& (recorded u.ndor RCAjob
    ' numbsr 627). 9?hscontractor, howevars utilized labor efficiozxy d&k
      available throw.@ 3Yebxuary8, 1968, which did not t&c into contidem-
      tion the IXIX experienced during sroduotion under the latter c~a'(;za.c~~
      A oonrrparisonof the neg%ated assembly hours with data availably at
      t2-i~ time of negotfatloas is as follows:

                                   3ata atilable    at
                                the time of ne:qotiations
I     Proposed and ne,gotiated          Wai&tad    Computed Increase in
      LTJI factor       Hours a       avem;Co LTJI houra   contmct price
        68.5$           38,065   627      78.4$      33&G         $3SpGoO

                                 609      70.@       36,880         8,600


                          Webelieve tie I;oJ e~o%ionoed  undex‘the 1ottex contract (Job $521)
                          would have baen the most xelevant and cuxxent cost data availabls at
                          “theetime of negotiations.
                               T~Q DCAS9ndusttia.l engineer took ~10excepki.on to the proposed
                          labox hours based upon a review of t??e contxactor~s assembly op@xationsp
                          drawings, worbheets, and estimati~ pxocedmes. DCBIS,    did not xoview
                          proposed houxs sines r&Liable labor hour data q~oxionced on the
                          preceding fuzs contract was not avaiTab2.o baaawe thG contxact was not
                          uompleta at the t$.mo of the gxoawaxd audit.
                                ITeither DCASnox PCAAevaluated the eontxaotox9s pxoposod LIE
                          faotor either at ths time of their cost pxososal.. reviews in BG~L~
                          1968 or at the time of the contr%oting offic&s      sequost on June so
                          2.968, for mppLementa,ry zi.nfo%mationon the contractores proposed costs.
                          DCAAoffioials infoxm& us that in late 1968 the xeaident office bogan
                          to XOV~QW   LUI*s in preawaxd audits of cost pxoposals where pxoductiou.
                          eq~xience was available.
                                 An RCAofflcia3. advised us that management xocog&zed the bi,gh@x
                          L’M: factor fox ansembly Labox under the l~ttex oontraot~   howover,
                          rnam,aent   dacidod against xevising the psogosaJ to x&loo% the high~s:
                          efficiency faotor because the ctistin g trend of decrasiq     production
                          levels would lead to roduasd labor @ffiGh'lGi0#   ti the fut~~?. RCA
                          did not d.isolose the mom currant LUX factora to the Govc~ont d~in@l
                          contxact no~~tiaticms nox WQXQ   ths xeasons fox mana,~cntga decision
                          not to revise the proposal disclosed to the cJ6ntxacti.n: officer.
                                331addition to the proposed assembly ~CSLXCS,the contractor addad         ,
     ,                    a E; psxcsnt factox fox a br&+tipxoduction    to covcz a txaneitioil
                          poriotl between pxoduction on tha pxecoding fuz~s monitor con&-& and
                     ,    lettex oontraat -3434. The pxogoaed factor was negotiated into the
                          contxaot znd amounted to 1,903 houxs.
                                  We found that the oontmctox had er;pexienoed the break-in-pxoiiuction
                           prior to neg0tiations of contract -Jl& in the amount of LPI25 hours,
                           ox 778 hcrcus Zess than pmpoaed, The Labox hour diffarcncc ~~~ountod
                         ; to about $5,600 kncludin~ overbead and pxofit.     The break--in-pxoducfion
                           oc~xod      in Pebxuaxy 1968 at appromtely    the SEIJIM
                                                                                  time as the
                           Gwm-matt~       ao&t propoea.ILr~tiewe; howevex thy szqexiancsd data WELT
                           not xaviewed by SAA ox 3X%3.,           ’
    Rsar Admiral J. A. Scott
    CommandingOfficer, U. S. SPCC            - 5 -

         An RCA offioial agreed that the ac~r;ujt break-in-production
    labor hours charged to the contract was sigxxific~tly    lower than the
    negotiated amount; however, we wore advised that ahditional     hours
    w0re actually experienced but were chargod to th0 wrong contract.     The
    aontractor aould not fkrnish us any evidence to this effect.
         Xn oux opinion, the experienced breek-in-production labor hours
    under letter contract -&& should hav0 been disolosed to th0 contract-
    ing offioer during negotiations.
    Test techn3xi.a.n labor cos'cs
          We estimate that tast t0chnician labor oosts napki.atod under
    tha contract wem higher than indicated by cost info-Son      prior to
    nqotiations   by about $6,700. Similar& to assembly labor, this
    rasultad because th0 contractor did not uplate its pro~osaZ. to roflsot
    the most current   and avail~tble    Sabor how &,%a.

         RCAproposed test tecGhn%ci~~labor of 0.2713 houzcsa u&e, or
    $38,849 for the tot&. contract rsqiiiranents, Tho proposed hours were
    based on a standard "&e of O.2OZphouccsa urcit adjusted to 0,2713
    hours by axeLUX factor of 74.8 percent.
          Our review showed that the oontractor was expsriencing a hi&0r
    Lu3: factor for teat techni&,n labor hours under the most cuxront
    production jobs than the rme@fated LUf factor.    A coqarison of tho
    negotiated test technician hours with data available at the timo of
    neEfoti.ations is as followss
                                         Data available   at
                              the time of negotiations
    Proposed and negotiated          Wsighted    COIXj+X-2d         hcrease in
    LUI fawtor        Bours Job $ averam LUX hours                 conLraot mice
      74.8%            10,goQ     627         7986%       10,247      $6,700       *

                                  609         794%        108259       6, Go0
                                  609         74.s        10,906        -0.

Rear A&xiral J. A. Scott
comraaa~ Officer, P. S. SPCC        - 6 -

Webolievo that the LUI expsrienced under the letter contract (Job
#627) would have been the most relevantand ourrent cost data available
at the time of negotiations.
      The DCASindustrial engineer took no exception to the proposed
labor hours based 01 an evakatfon of estimated time to perform tests
of eight different componentso subassemblies, and asrsemblies. DCAA
did not review the proposed hours. Similarly to the condition
previously identified for assembly hourso neither DCASnor DCM
reviewed the contractorvs   proposed LCX factor or related production
records to ascertain tim xzoat curssn’c labor efficiency factor available
at the time of negotiations.
      An RCAofficial  advised us that the hi&er test technician LUX
factor was not disclosed to the contracting officer during ne@istlona
for the samereason as was oitod for assembly labor.
Production engineering labor costs
      In consideration of Defense P!roc~m~~% Ci%culm No. 77 roan
the l'setofftt principles of tudorstated cost or pricing dxLa, WQ
estimate that i-210oontractor9s proposed production cn,gineering labor
costs were lower than J.ndicatsd by cost inforn3tion awLlab      at nogAia-,
tiona by about $1,400 5.ncluding applicable overhead axedprofit.
     !lJhecontractor  proposed a production on@neoring labor rate of
$6.03 an hour althou&    the approved bid rate was $6.30 an hour. The
cost proposal identified that all direct labor rates were based upon
approved bid rates.
     DCAAdid not identify the error in the contraotorga labor rate and
subsequently the proposed labor %ate was nog&iatod Vito "he contract

      We believe that the contracting officer should consider the above
findings, aloq with any additional information available, to detetine
whether the Government may be legally entitled to a price reduction
with respeot to contract -3%.
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                                        We would appreciate being advined of actiona t&en 0% con-kempl&xxl
                                   with regard to the matters discussed ti -iShi~letter.  Copies of t223.s
                                   let%er are being sent $0 the Comma&or013efenseCon-tract Administi&tion
                                   Servicee RegionD ayld the Regi.onal N%ager, Pel"enasCon"crac'cAudit
                                   Apncy, Loe Angeles.
                                                                          Sincaraly   yowap

                                   aor Commander
                                       Deferme Contmot fGid.tistxation
                                         Services Re&on, Los lbgeles

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