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)

                                        0333z-L3                                    OW

                                    REGIONAL              OFFICE
                                 ROOM   7068    FEDERAL        BUILDING
                                900 NORTH      LOS   ANGELES       STREET

                           LQSANGELES,               CALIFORNIA             90012

    Captain K. B. Mattson
    Naval Plant Representative
    Douglas Aircraft    Company
    McDonnell Douglas Corporation
     3855 Lakewood Boulevard
    lrong Beach, California  90801
    Dear Cap&&n Mattsonl
          We recently completed a survey of the pricing of negotiated
    defense contracts at Douglas Aircraft   Company, Long Beach, California.
    The objective of our survey was to review the procurement process and
    determine the extent of compliance by contractor and 6ovemmen-t
    personnel with the requirements of Publzc Law 87-653 and the ample-
    meuting provisions  of the Armed Serrices Procurement Regulation.
           We included in our survey 25 firm fixed-przce procurements over
    $100,000 awarded to the contractor during the period July 1, 1968, to
    November 30, 1970. Based on the results of our work, we do uot plan
    to perform any detailed examinations of the pricing of these procure-
    ments at this time. Although the results of our survey were discussed
    with you and your staff at the completion of our work, we thought zt
    would be useful to sunnnarlze those procurement and contract adminis-
    tration issues which we believe warrant your attention.
    Need to improve technical
    evaluation procedures
           The Naval. Plant Representative Office  (IWPRO) performed technical
    evaluations for.23 of the procurement actions included zn our survey.
    Although these evaluations appeared to cover the significant     cost
    elements, they were performed by nontechnical personnel of the Contracts
    Division.    We noted that evaluations  performed for basic ordering
    agreement@CA) orders lacked explanation for the conclusions reached
    and the recommendations made. We also noted that documentation in
    mpport    of the work performed was not maintained.

                      - ,507H ANNJVERS
Captain         K.     8. Mattson                               -2-

         A recent Contract         Management       Review (CMR) of NAVPRGoperations
identified        the same issues.         The GMR draft           report    dated December        1970
recommended         that     your office   issue     guideline6        for the evaluation          of
proposals       that     will assure relevant technical comments and include
the rationale           used in the proposal         evaluation        process.        We have been
advised      that     your office      ha6 recently       established        a technical      evaluation
 capability       in the Industrial        Division       and are currently            in the process
of preparing          guidelines      for use during        technical       evaluations.

          We believe              that  actions    taken    in response      to the CMR findings                 wilX
Improve:        the         proposal    evaluation      process   and ass3st the coz&racti.ng
officers          in        negotiating      fair and reasonable        prices.

Need      to    obtain    current       cost      estimates
prior      t0    contract      negotiation6

          We noted     that    several order6 under BGAts had not been negotiated
until      a 6ubstantial         portion        of the effort        had been completed.                   This
occurred primarily             on those A-4 aircraft                modification           kit     order6     which
required       considerable          developmental          effort.        Due to the substantial
engineering         and developmental              effort    required,         the contractor             deferred
the submission of cost proposals                        to the Government            until       the work was
 substantially          complete       and a more sound basis                existed        for estimating
production        costs,       The cost proposals              were essentially               based on forward
prxcing data; however, contract price negotiations                                   were conducted              on
 the basis       of recorded         costs plus          an estimate       to complete           (ETC).        There-
 fore,     the cost data in the original                    proposal6        were not relied              on by the
 Government contracting                officer.         These data,        however,        were certified             to
by the contractor             at negotiations.

           We found that prior     to negotiations        the contractor         developed
 estimates             of
                   cost6 to complete        these order6      but did not disclose               the
estimates to the Government            contracting     officer.         Contractor       official6
advised     us that    the estimates      are not submitted         unless     the cost of
performance plus ETC vary significantly                 from the original           cost proposals.
In addition,      we were advised       that     the contractor       places     greater       reliance
on the estimates         contarned   in the original         proposals.

           In cur opinion,     the           ET@ s constitute            pertinent   cost or pricing                data
 that      should be disclosed               in   writing     to   the    Government    contracting             officer
prior   to negotiations.     $160,    we are concerned with the pOSSibil.ity that
 the Governmentt6 rights     to recover under the defective pricing      clause
 may be impaired    since the certified      cost or pricing data are not being
 relied cm by tie condxacting       officer.
Captain XC. B. Mattson                  -39

Use of fkm fixed-prrce    orders for highly
developmental aircraft   modification kits
      As previously discussed, orders for A-4 aircraft     modification
kits fxequently have not been negotiated in a timely manner primarily
because of the uncertainty   in establishing   firm prices at the outset.
The use of firm fixed-price    orders to procure hardware which requires
a hrgh level of engineering and developmental effort has apparently
contributed to these delays.
       The contractor recognized the need for timely negotiation        of
these orders and recommended to the Naval &ir Systems Command (NAVASR)
that a more flexrble    contractual     arrangement be considered.   In May
1967 and March 1968, the contractor requested that future BCA orders
be awarded on a fixed-price      incentive basis.     Although these requests
were favorably endorsed by your office,         subsequent orders were awarded
on a firm fixed-price    basrs. We plan to bring this matter to the
attention   of NAVAIR for their consideration       fn the award of future
       We would appreciate whatever comments you may wish to make on
the matters discussed in this letter.   &so, we wish to acknowledge
the courtesy and cooperation extended to our replcesentat&ves by your
8taffdUz%ng t&i8 8UVq.

                                    Ii. Id KRIECER
                                    Regional Manager