UNITED STATES GENERAL ACCOUNTING OFFICE REGIONAL OFFICE ROOM 7068 FEDERAL BUILDING 300 NOR-A-H LOS ANGELES STREET L~SANGELES~CALIFORNIA 90012 Mr. Edward Curtis Vice President, Contracts and Pricfng 13~ Douglas Aircraft Company #cDonnell Douglas Corporation 1 3855 Lakewood Boulevard Long Beach, California 90801 Dear Mr. Curtist We recently completed a survey of the pricing of negotiated defense contracts at Douglas Aircraft Company, Long Beach, Califirnial The objective of our survey was to determine the extent of compliance by contractor and Government personnel with the requirements of Public Law 87-653 and the ierplementing provisions of ths Armed Services Procurement Regulation. Included in our survey were 25 firm fixed-price procurements over $100,000 awarded to Douglas during the per%od July ls 1948, to November 38, 1970. Based on the results of our work, we do not plan to perform any deta5led exarainations of the pricing of these procura- ments at this time. Although the results of our survey were discussed with the Director, Military Contracts Division, and his staff, we thought it would be useful to supgparise those issues which we believe warrant your attentron. Need to disclose current cost estimates prior to contract negotiations We noted that several orders under basic ordering agreements (BOArs) had not been negotiated untL1 a substantial portion of the effort had been completed. This occurred primarily on those A-4 aircraft modification kit orders which required considerable develop- mental effirt. Due to the substantial engineering effort required, the contractor deferred the submission of cost proposals to the Government until this effort was substantially coii@ete and a more PJlAR 1 2 “1971 Mr. Edward Curt38 -2- sound basis existed for estimating production costs. The cost proposals were essentially based on forward pricing data; however, contract negotiations were conducted on the basis of recorded costs plus an estimate to complete (FTC). Therefore, the cost data in the original proposals were not re&ed on by the Government con- tracting officer. These data, however, were certzi.fied to by the contractor at negotiations. We found that prior to negotiatrons the contractor developed estimates of costs to complete these orders but dild not disclose the estimates to the Government contracting officer. Contractor of fi- cials advised us that the estimates are not submitted unXess the cost of performance plus ETC vary significantly from the original cost proposals. In addition, we were advised that the contractor places greater reUaace on the estimates contained fn the original proposals. WhiXe we do not endorse the late negotiation of orders on the basis of actual performance costs, we do believe that when these conditions arise, performance costs should be considered during the , negotxation pmcess. In addition, we believe th& the ETC*s con- stitute pertinent cost and pricing data that should be disboslad &I ’ writing to the Governmentprior: to negotiationa. Use of ffnn fixed-price orders fir hiphly developmental aircraft modification kits As previously discussed, orders for tap4 aircraft modification kits frequently have not been negotiated in a timely manner pnmarily because of the uncertainty in establishing firm prices at the outset, The use of firm fixed-price orders to procure hardware wluch requires a high level of engineering and developmental effkt has apparenay contributed to these delays. Douglas recogruzed the need for timely negotiation of these orders and recommended to the Naval Air Systems Command (NAVAIR) that a more flexible contractual arrangement be considered. In May 1967 and March 1968, Douglas requested that fiture BOB orders be awacrded on a fixed- price %ncentive basis. Although these requests were favorably endorsed BESTDOCUMENT AVAILABLE Mr. Edward Curt28 -3. by the Naval Flant Representative, subsequent ardem were awarded en a firm fixed-price basis. Your staff has advised us that, in the fWure, you plan to seek a more fletible contractual arrangement for orders involving a high degree of engineering and developmental effcrt. We plan to bring this matter to the attention of NAVAIR for their consideration in the award of future orders. We would appreciate your comments on the matters discussed in thfs letter, in particular, your viewa on the need for disclosure of ETC data to the Government for consideration in the negotiation process. We wish to take this opportunity to acknowledge the coutiesy and cooperation extended to our representatives during this survey. Very truly yours, H. L. KIUEGaER Regional Manager
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)