Defense Contract Survey

Published by the Government Accountability Office on 1971-03-12.

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

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                          GENERALACCOUNTING OFFICE
                                 REGIONAL              OFFICE
                             ROOM    7066    FEDERAL        BUILDING
                             SOW NORTH      LOS   ANGELES       STREET
                          L.~SANGELES,CALIFORNIA                         90012

Rear Admiral T. J. Walker
Co’iandlng Officer
Naval Air Systems Command
Navy Department
Washington, D. C. 20360                                            I

Dear Admiral   Walker:
      We recently completed a survey of the przcing of negotiated
defense contracts at Douglas Aircraft   Company, a divlslon of McDonnell
Douglas Corporation, Long Beach, California.       The objective of our
survey was to review the procurement process and determine the extent
of compliance by contractor and Government personnel with the require-
ments of Public Law 87-653 and the implementing provisions of the
Armed Services Procurement Regulation (ASPR). During our work, we
noted certain matters concerning the use of basic ordering agreements
(BOA’s) and the timeliness   of price negotiations    which we are pre
senting for your consideration   and any action you may deem appropriate.
      Included in our survey were several orders over $100,000 awarded
to Douglas during the period July 1, 1968, to November 30, 1970, under
BOA’s NOOO19-690ArOOll and N00019-70-A-0004.    Considerable delays were
experienced in the procurement process for these orders.     For example,
an average of 9 months elapsed between the order issue and proposal
submission dates; also, an average of 3.3 months elapsed between the
order fssue and negotiation  dates.
        The major factor contributing     to the txme lags appears to be the
utilization    of firm fixed-price    orders to procure A-4 aircraft    modifi-
cation kits which require considerable developmental effort.           Due to
the substantial     engineering and developmental effort required, the
contractor deferred the submission of cost proposals to the Government
until this effort was essentrally        complete and a more sound basis
existed for estimating production costs.         This delay along mth the
time required to evaluate and negotiate the cost proposals resulted in
many of these orders being negotiated after a substantial        portion of
the total effort had been completed.

                         5OTH ANNIVERSARY                       1921-1971 JF?!zzzfl
Rear Admiral T, J, Walker                   -29
                                                                   f!m 1 2 997j

     As you ars aware, ASPR provides that firm fixed-price      contracts
are suitable when amilable       cost or pricing data permit the development
of realistic     estimates of probable performance costs.    When uncertain-
ties surrounding the contract price cannot be sufficiently       identified
to evaluate their impact on contract prices, the use of other than a
firm fixed-price      contract should be considered.
      We also noted that order LB-24 under BOA -0Oll and LB-01 under 308
-0004 were utilized   to procure two prototype A-M aircraft    at a total
price of about $13.7 million.    The use of R0A orders to acquire prototype
aircraft   does not appear to be a proper application  of this form of
       Ihe contractor recognized the need for timely negotiation              of orders
and recommended to the Naval Air Systems Command (UBVBIR) that a more
flexible-priced      contractual     arrangement be considered.       In May 1967 and
March 1968, the contractor requested that future BOA orders be awarded
on a fixed-pzlce      incentive basis.         Although these requests were favorably
endorsed by the Naval Plant Representative,               subsequent orders were
awarded on a firm fixed-prme            basis.     Contractor  and Naval Plants Repre-
sentative officials       are still     of the opinion that highly developmental
A-4 aircraft     kit procurements should be awarded on a more flexible-priced
basis.      We have been advised that NWUR plans to procure f~scsl year
1972 &-4 aircraft       modification     kit requirements from Douglas on a firm
 fixed-price    order basis.
       It should be recognized that our observations are based solely on
 information  and documentation obtaaned from the Naval Plant Representa-
 tive and contractor personnel.    We have not reviewed any documentation
 at NAV&IR cotmerning the use of Bats or discussed our observations with
 your staff.

      We would appreciate receiving your comments on the matters discussed
 above together with advice as to any actions taken or planned with respect
 to these-issues.   We would be glad to discuss these &tiers  in greater-
 detsilifymso        desire.
                                         Sincerely   yours,

                                        ( 30 &cJ .TmTFTE3
                                        Ho L. KRIEGER
                                        Regional Manager