General Electric Company Claim Shown in GAO Report to Congress

Published by the Government Accountability Office on 1971-05-18.

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

                                    WASHINGTON, D.C. 20548


        Nval&1hip Systems Comand
        Washington, D. C. 20360

              Attention:     M. C. Oreer (Ships 08)
        Dear 6tir

              In August 1967 the oeaeral Accounting Office (GAO) issued a
        report to the Congress (B-156313) concerning the pricing of nxclear
        submarine propulsion equipment that General Electric Corpazy, Mleium
        Steam Turbine Generator and Gear D      nprtaent (GE) furnished under sub-
        contract to GeMeral Dynamics Corporation, Electric Boat Division.
        The Ravy had egotiated the subcontract with GE. The report showed
        that a signifioant portion of GE's certified costs were based on the
        cost of proceesing 16 castings in its own plant, although before the
        pricing certificate was executed on fPebruary 3, 1964, GE had requested
        and rcivend quotations from vendras for fufly processed castings at
        substantially lower costs. Two quotes were not disclosed to the Navy
        during negotiations. .e estimated that, if the Navy had been told
        about these quotes a price reduction of about $564,000 could have been

              The Navy agreed that the quotes for castings were significant
        pricing datu which should have been submitted by GE for consideration
        in price negotiations. The Navy said that action would be taken to
        recover an appropriate amount.

            At the time of our examinatito in 1965 and 1966, contractors
       were not permitted by Departent of Defense regulations to offset
       overestimated costs by underestimated costs. After the Cfutler-Eaner
        (Court of Claims) decision, the DepOrtarnt of Defense revised its reg-
       ulations in March 1970 to permit recognition of properly supiported and
       verified claims by contractora for such offsets. In April 1970 GE
       advised the Navy that it bad found underestimates of about $61,000
       as offsets against the potential price reduction of $*564,00 for

                                                      BEST DObUf11K-I AVAILABLE
     CZ clailmd um4.erwstimatee an the bmsls of
ovwbsad raes. (ay eriono. c o 1963) and otter histosical   data an
                                                inrovmtiaan wich,, it
mid wW available as of th 4tm
196ki ad shoum htve bum consuidermdofinpries  cWtification (Jtbrumn 3,
                                         pbse zoe tiatiass.* G d
not say why thse faotors were not wied at negotiation.

     In Jnse 19l10 the Neflenw,      mItwset Audit Agsncy
auijttojp at GE4 reviewed 0 '"s oelalind                 (DUA&) resident
                                                 Imtes and qumstt.sed
$1821W0O of the *h2OO.        These
because Of lack of detailed auditablatswere m Pmstioned p-rimriy
                                         .apost,  for a labor redustion
which OE cla4med should have been reinstated
                                             in the pMice negotiated
as of February 3, 1964.

     In October 1970, the Havy infa=Zz Uy requeted
claim, particulartly fro the standpoint of whether QO to review G3E's
avvport fot the undritestimates sgvated a basis     Wa's rationsl" and
eao~mt of over'estim, ed costs. Pr= this staulpoint ieressiza8 thi
                                                     and on the b3his
of the data subsequently f um.isbd by (33 in ovprt
                                                    of  it. olaid
offsets, ws found that overestiatead costs lass
                                                of'sete moaoted to
about $524,60O as shown beslo.

                                                 Ovoresistates   Lessrrc~s

                                                 claim            Recomgutation
     Oastings                                  i6qU0O0
    Heinstatuwent of
     reductions in GE
     Specifications                           ($42, 00o)
    Labor variance based on vork
      arsa variances
                                                                       $ 88, 700
    Indirect muIftoturixg expense
     based on work area rates
    Not adjnstimant for   contrauctual
     way inwreases                            ( 353,000)           (     68, 700)
    Net adjimtnent    of overeead
     load factors                            £l5120O
    Net mAmrstatezzt ofiste ts                W6       2og

    Net price over-   (umder-)

                                    BEST DOCUME2' i AVAILABLE
       hA stated in a reprcs the over mt woud have had a basis
fo re Olag the sbaet             price by an aomt which ve    ,stlated
abvat $56kOQ bad  a  C subhitted to the hyy the quota rselivsd from
two vndrrso (G $ts1 TONxZY antd OGenral Stsel Industries).        0W
cetaetiom of the potential prie reductio n         canservstiv bearMe
it was based on pproaing all2 16 cstlin  nGE fts the    Pow y, the
highmr priced of the two vendrs. vHad wi ei u ted the potential price
redutiom ca the basis of proaewing each of te 16 estimn at the low-
   estpric oaffered by etOLch venda, we would hve astimated the overcie-
in at about $669,300.

Reinistatemet oif refttioas in
GR*'s       sP~eilfriCtiou

      In a preliinai    y quotatioa   to the havy dated July 12, 1963, GR
prcxose a labor reduetion of $35,167 for the relaation of technical
requireamats to Governwet specifications. After GE's July 12, 1963,
quottions, various ocdificationa,        additiai, and deletions were mads,
the cost of which wre included in quotes dated 3eptember 1V, 1963,
Decaberg 9, 1963, aad truawy 3, 19614. GE clains that this abor
rductio w inadvertently inwlud in subsequn+ price proposals and
that the f       l neglotiate price iaeluu4 the $35,15T labor 'eductios.
According to GC, the final negotiated price was undtutted by $1J1,,974
(035,167 fotored to a4l*974t        selling price) eclusive of contractual
vg      ilncreases eand ovhead rate   irewieg@s.

     In his June 19TO review of GE's claimed undaertat*ewnt, the CXAA
adrito questioned 4153,993 (.)141,97T plus $12,019 in contrualcti &V
increases and overhead rate inease and profit) fQr this iteo, on the
basis of a technical evaluatiox by aCeny enginoering personnel and a
laek of subtsAutiat1on.

        Accordidg to the techkx,1cal evaluation reprt,, the original propose
direct labor reduction of $35,167      ms    n     ner       estinate without
backup data. The evaluator sid that bhe coid not deteine if the
tasun related to the planned labcr rdeuctioes were included in labor
costs in subeequent proposals.

     The administratlve contracting officer noted that, althogh the
contractor bhad said that the alleged uwierstatemnt of $35,167 wa tot

        1        aeta.y paLd abort            Less than the umm t included
              in the negotiated price for the castis b biy ing at lrve
              prices from the two suppliers.

                                              U "Ii '
                                      BEST DOCUM         4~~~
                                                         :;j1      l .      ~3-   'iLivIS\
elialated ia later prposals, he had mot fiusihed any mmstantiat1ag
wrim oc Of this.
      We 4e4 vith DA
                   A' a positina that GN has ot sq'WMe its claim
that osts fS the S speelfisatls mhamosr" e omitted &romits fifn.e
Nrmpml. lwm, tee elamidmameretat        t of &btw $1k2,PO should                     -o

be allmoda asa afeet.

    ak a        varimoe
      alubed in the casts ertfe4d by GE x Febram 3, 19, was m
sst~ited aIt of $36 ,920 ca               a     6 pa eet variance
 actor to tU iAd labr sosts of $%65,196. The 6k
                                              _Pet     factla ean-
slated of £
          a !.8 percent sats by %Weh
                                 iactitl   'Lb csts     e expeted
to exceed stendar            lsbo       costs for tbre   Ia-r elubeteamos Aere the
propulsion a)ste4 was to be       t      plus a 50 percet in r s.     GC
conmtened tAut tah 50 percent I nctree, which added *u19,816 in labor
eoets, was justified because the
                             t   w    involved was suh that actul ests
would be apprsowiately 50 Percent peater thn standard cosmA.

      GE ditd not gire eoasidartion,, bo*ver, to thm fact that 76 percent
of tt, work was to be doDe in one of the thre subsections which had a
variene rate of only 30.8 percent, cr 12 perent ln"a than the compoite

     We recped     the total labor                costs on the basis of variance rates
for each of the te    subsetions,                 which ware available st the time of
negotiatiosc, applied to estimated                standard cost fr eh m subtetlo.
A a*result, estimted labCo costs                  aeepted in negotiations ere abot
4    (,000(factored to $88,700 w1Uing price), hipsr than indicated by
labor cost data for each subsection.                This      t is an addition to our
reported findings oa eastins.

        GE certified to Icdpect i               ufacturwing Elpenset (D6) of$9,8S5) 933
based on a rate of 190 percet of total neotiated labor (*997,859).                   GE
persamel inftmad us that this us a oaMoits ID rate       tete ti"ree
alliceablAe smheeat5     e maufuetng castings, based an experience
for 11 months of 1963 plO an estera for Member.

        M   D    &auditol     r in reviewing O's claim qustiond whetber an
adjitmnt shouI              not     v    been   ade for oerstated costs

                                                             iJ~~             ~I
baed cm the ftnal 1963 e oritee IOE rate of l.T  Poat   of airect
I     dollars u opposd to the 190.0 perent ra   negotiatd. O(
Paree th-t DSexpense should bae been adjwted.

     s8ia toe we of 1963 xpraimeed D1 rates avllable at the tim
of negotiatio for eaimo so" ction    V     the york m to be perfoemd
voul be     qm aprriat    tme Wing a eomeRit rate fr the t see
subseetims, v reqpted the XI oato an this basis. We fom that
 C csts certified by O tare overetimtod by $25,600 (fatored to
$35,600 selling pricel.    · is amoumt, too, is an additiom to ow
rejroted    f14ing onacatings.

U_, .ia           fr

         claimed mdeeentimates in it labor coets bemsae they vere based
on 1961-1962 ar      s standad ourly labr rate effective October 19,
1961, which did4 not inclile thnee vwa increase which had bee   gotiated
with a labor min, as oLows:

            if.!fet._     :~o-rcent
                            ·                                    .D
                 i2I62                                     3.0
                9/23/63                                    3.1
               4/5/65                                      2.5
        CGelams& that the          labor increases wre not ineluded in negotiated
costa certified on         trunW   y 3, 196k.   As a result, labor coasts   ere   m-
stated by '_),469 (exclusive of labor for specification relaxtion) com-
puted      tfollows:
      The original subcontract period of perfcrmane w s Fbruary 8, 1961
to Ieh 13, 1966, or 27 mntbs. The first two of thee wag increases
would, t*erefore, ave a 100 percent iqet     on subecontrat labor costs.
The April 5, 1965, incrase of 2.5 percent. would affect the coot of labor
incurred 1k wonths after awad date (Febrnry 8, 1964 to April 4, 1965)
or after 52 percent of .the total period of perfasmmaeej 1.e. (1   ,month -
52 percent).
      OR coutemd that at 52 pecent collatiou, its experience witA ftow
prior     y cotracts indiaetea that an averep of 1.5 perteat of total
direct la     would be 04Mnid.    Uw, the April 5, 1965, increse would
be plicable to 85.5 pereent of its labor coa t estimate. Sw fow
prior contracts ere:

                                        BEST DOCUMLrENi' ,A ,l, [?,''
                                                                 ~i:b LE
                                                               Peeet ~brmt        labor
                                                               4pended At 52% Ot

       mab -%8196          Aircraft rempr                                    16
       NWobw -&16T7         Ih           n
                                    sruole                                   12
       Nob. -86526           1oler     lm1ines

     Available infaimtion indicatedmthet tht 1961-62e-          81
 abor rates effsetive Otobr 19, 1961, wrm  r ume4        tbe proa1uom
systm prrUPOl ae the wvas in.eseewe          not inel1iA.
the firmt two vw lnreases would be appliabe to tw entie period
of Pwerfxzn e and would account for _'eetfimted lma costs of
$61,r97 aeocedin to OE's ouWBations. Ges clata, bmer thet the
1965 w4P increase of 2.5 pwreaet MWs soiaab1e to 85.5 paeent of the
labQr dolJars to be incUezre nade* t~he uou      act is qetli    ba.  The
data CZ presented to couePte 1A.5 p ont perfdmmee t 52 per-eat
e atletia  did not include a contract for prot*oVpe mehtiasy fc' NMT-12
(,s(N)6o05       the int   pert of which wm delivwred in Nlonmr 1962.               m4
the oost,   eprlbenoe far the Me-12 been i:nlude in On's elqttiona,
it would have shoam that 78.6 percent of laBw costs would be expemed after
 pril 4, 1965. Using the 78.6 percent factce, we oequted a total offset
for incrasd UbOi-    rates of $268,700 instead cf $353,000.

 ,et .4         .t   of overhead
Load      afatotM
     GE claiind offseta of $151,218 because higher alendar year 1963
overhead rates, which were not fOmaXY p*llabsd1   by ftbreuy
                                                         r   3, 1964,
vere availAble at that date a"d hould have been ued in negotiating
overhead costs. Our review idca"ted that evidene shig      the aasila-
bility of thee rates at Febriary 3, 1964,   on lack.in
       Data used by GR in ocouting their claim was as follows;

Overhead                        Rate      1963     I2te 1963          Under (Over)

aterial Variance                4..        6.4e%     3/20/64          $ 23,665
Product Engieering
Cost and 20rn.
(PrS)                           3.T       16.1%      2/12/61           122, 306
C lints                        2.2         2.%       2/12/6                10,57
          &A~                  a7%
                               8.          8.6%      2/12/1            (    5.3)
             Ylt Undoerstatemint                                           5u1a

                                BEST DOCUEI,il.oT A"V.,i        'LE                   -6 -
      CRE's efrtife      datas incldetd   s mIter*al vairsr       Per       tas   of k.2
 percent of stiandar material oot baued ca aetul eaeriamee ftr the
 pereiod Sieptu    thra"A Do me 1962. In its esli fr Orfet, cm
 caOtoa    that an e{eriL mene rate of 6.4 pereent f'     e Se ps mb_
 to4      D~eo   r 1963 period was atvIble at NbrWY 3, 1961.          ME
 elatm that the we of thw e       cmmrext rate result. ian   a r       te-
 sent of 416,999 in material coat (23,665 selling grie).
      In slport of tbm 6.k percent rate, GE03   maa ,a      wte'kMw.
It sbom   tbat oan V bch17, 1961k, an adjpwotme  fr owt"Ai est.      wr
  ae which revised a rate of 6.0 perent to 6.4 pae.et.        therwor
not the 6.o pew nt rate was Mailable an Febrwary 3, 196&, is a mattr
for cnjecte. The 6.1 perenat rate,, howver,       was not avlable
fMrch 1T, 1964. If the 6.0 percent rate was available, aplyiS it c ttl  to
material osts less ow ad4utsmnt for overestimted entin           "ot, wroud
result in uwderwtated material eosts of $18,931 lnstad of       ,3665.
     Unless GE bas evidence, however, that the undated varklpper in
suppart of the 6.0 percent rate was available on brtry 3, 1964, the
$16,931 offset would not be Juitified.

             o0verhead factorse
      In 196, GC Peronnel informed us that the rites ctifioed on
Felbrary 3, 1964, for PCE, Cmplaints, and GeA we basd on ex rei-
ane, far the first 11    nitbs of 1963 plus an aditiacal month's esti-
mate to coaplet. the yea. In It~ claim for offaets,        states ht
final infoamatioo on 1963 overhed rtes was available in *soaryform
prior to the certification date Februry 3, 1961.    CM inifcmd the DCA
auditars that overhead rates were not ptUBlishd mtil Febrwry 12, 1964,
aid dates of cmpletion of rate calculatioan were as follows:

                        yZx                      2/12/6&
                      Coaplain                   2//
                      G&A                        2/5/64
      These date s e mshsequent to the date GE certified to the data
submitted to the ry.    The warkshbets sp:wting ao's ealulatioc aWbm
that the total overhad ooas w~e available prior to Pebr.ry 3, 19&;
oteo r date   d , howavr, to compute rates for all     t    t   eots to
specifi dmepar tt    (Ttbfi , ktermml ~ts,      et.,) wee not aSwlable.

                                      r   t'.i             ; :'   ,-    i           -7-D
     Ms41aa Xto      Us1mtis 0a fWailh4 to DA, theM laalcatla of
mo4l -Ita ietw m-                    aft t
                                     &t       eVrtiflmti dvte eaL
tUme    so a ote         tt             m    s ~e to ea.te ftadtc1
to &llafate ovftmul et.     w    syivmw1   ant
                                            am ewllft daft. Thwe-
fi w V    1 thfat
             O    tMme I       Jobie       for wecaIti the caste
gf            o    rmul GM. or oepa mba      of   e
      so   twnglo"m result.   of Om .EmIrbti of     all*clam fiw offsto
 e          tf
     mmrb1tted      yoew inftaritlO.   WO kme *at obtain" fnl        ments

                                            Jat  H. HL Dirtier
                                            aoolate Diroctuw