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)

                                     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
                                                             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
        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

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
      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