Review of Prices Negotiated for MK-14 Fin Assemblies Purchased From Lasko Metal Products, Inc.

Published by the Government Accountability Office on 1971-03-09.

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

                       IYmx      STms GSERA~ ACCOUNI-ING
                                            REGiONAL       OFFICE
                            502 U S CUSTOMHOUSE       2D AND    CHESTNUT    STREFTS
                                PHILADELPHIA,PENNSYLVANIA                   19106
                                                                                                  March       9, 1971
Commandr ng Off fcer
U.S, Navy Ships Parts     Control  Center
MechanIcsburg,   Pennsy Ivan1 a 17055

Dear   Sir:

        We have reviewed         the pricrng        of MK 14 fin assemblies             purchased
under negotiated         firm    fixed-price        contract       NOOlO4-68-C-0816,         which
was awarded        by the U,S. Navy Ships Parts                 Control    Center,     Mechanicsburg,
Pennsylvania,         to Lasko Metal         Products,       Incorporated,       West Chester,
Pennsylvania,         on October      5, 1967.        Our review        was directed     pr Imat- Iy
toward     determining       whether      a fart- and reasonable           price    had been ob-
tained     In relation       to cost or pricing            fnformatlon      available      to the
contractor       at the time of negotiation,

        Our review        showed that        the $7.3 mIllton         negottated        price  was
about     $840,000      higher     than Justified         because current          cost or pricing
information        available        to Lasko was not used durtng               negotiation.          The
Government       negotiator        was unaware that           (1) the costs        per pound being
incurred      for certain         aluminum       raw material     during      performance      under
letter     contract       -0816 were lower than costs               Included        In the f I nal
pricing     proposal,        and (2) the quantity            of aluminum       raw material        for
each Ml< 14 assembIy            already       purchased    under the letter           contract    was
less than the quantity                included      in the fina      pricrng       proposal.

       The contract        overpricing            amount   IS comprised               of   the   following:

                                                                           Lesser    requ t re-
                                                  Lower costs                  ments for
                                                  for aluminum                 aluminum
              Parr                                raw mater1      al        raw mater1 al                 Tota?
Retarding       fin                                 $218,015                   $119,416                $337,431
Link                                                  88,298                      74,401                 162,699
Fin support                                          120,888                                             120,888
Clevis                                                 25,329                       50,157                75,486
Co1 lar                                              31,                                                31.,153
        Direct      costs                           S483,683a                  $2431974                $727,657
General      and admlnistrative
   expense     at negotiated         rate             24,571                      12,ygL.                 3,6,g65
        Total     costs                             $508,254                   $256,368                $764,622
Profit     at negotiated        rate                   50,571                   25,                       76,080
Total                                               $558,825                   $281,877                $840,702

aSee   attachment


                              5OTH       ANNIVERSARY             1921-      1971
        We were informed           by the Government          negotiator       that    during
negotiation        on February       7, 1968, the contractor              provided       no updated
 information       concern1 ng its proposed             raw material        costs    for contract
-0816,      a?though     it was given an opportunity                to do so.        As a result,
the Government          negotiator      retled      upon data submitted            by the contractor
in September         1967 as evaluated          by audrt      and technical         analysis     by the
Government * Jhe Government                 negotrator      further      advised     us that    an
updated      audit    of the contractor’s            proposal      was not requested          because
of trme llmitatlons.

         On February      19, 1968, subsequent          to negotlatton,                 the contractor
certrfred      to the accuracy,          completeness,       and currency               of the cost or
pricing     information        submitted     to the Government.            The          contract      In-
cludes     a defective       pr rclng    data clause      that    provides            for decreasing
the contract        price    of the Government         determtnes       that          the price      has
been signlflcantly           increased      because    cost or pricing                 InformatIon
submitted       lay the contractor        was not accurate,          complete,              or current,

        Our findings         are   set    forth     below.


         Lasko’s     prrce       proposal       for contract           -0816,      submitted        on
September        12, 1967, included               raw material           costs which were based
on then-current             vendor      quotatrons,           The cant ract          pr 1ce negot 1ated
several       months      later,      on February          7, 1968, included               estimated      raw
material       costs      determined         by using the same costs                  shown tn these
quotat Ionso          Prior      to negot i at&on,           however,       Lasko had issued
purchase       orders       for substantial            quantrttes         of aluminum           raw material,
Purchase       orders        Issued to one vendor              on October          1, 1967, showed
costs     per pound for the collar,                    clevis,       retarding        ftn,      and fin
support       which were lower than costs                     used in the contractor’s                  pro-
posal,        The vendor’s           involces       received       prior      to negotlatron           showed
costs      not In excess           of purchase         order     costs.         An unpri ted purchase
order      for the link was rssued to another                          vendor      on October         13, 1967.
This vendor’s           invoices        received       prior     to negotiation              also showed a
cost     lower than that             used in the contractor’s                   proposal.

       Lasko did not dlsclose         to the Government    the lower costs          for
aluminum      raw material,    nor did it revise      Its proposal     to reflect
these    lower costs,,      We found that    these  lower costs     remarned      in
effect     for all shipments      received   for contract    -0816,

       Our calculation             of the contract      overprtcing      relating     to lower
costs    for aluminum           raw material     JS presented       rn an attachment       to
thr s letter.       For      illustrative      purposes,      the retarding       fin   IS
discussed     below.

                                                     - 2 -
        Lasko’s    proposal     Included      a requirement       of 22,67 pounds of
aluminum     for the retarding          ftns    for each MK 14 assembly,              tncludlng
a 2 percent       scrap al lowance.          The total     proposed     requirement          for
the 135,449       assembI!es     to be produced         under contract         -0816,      ihere-
fore,    was 3,070,629       pounds.       Alum! num for the retard1 ng f rn was
costed     rn the contractor*s          proposal     at $0,536      per pound and was
supported       by a vendor     quotation       dated September        10, 1967.

        Lasko Issued a purchase         order     to the vendor        on October      1, 1967,
for approximately       1,4 mIllton      pounds at a cost of $0,465               per pound,
or $0.071     per pound less than proposed.                 Vendor    lnvolces showed that
about 817,000     pounds had been shipped              at the purchase        order   cost
prior    to the negotratron       of contract        -0816,      The same cost       remained
 In effect    For all   shipments      made subsequent          to negotration       of the
cant ract . We calculated         this    overprrclng        as follows:

       Quant 1ty of alumi num proposed
         and negot I ated                                                            3,070,629      lbso
       Cost per pound--proposed             and negotiated             SO.536
                          --current        1nvoice   data               0,465
       Excess of negotiated           over
         current     cost                                                              x $0.071
              OverprIcing       (exclusive       of general
                 and adml nl strat 1ve expense
                 and prof 1t)

       Lasko officials       stated     that   the failure       to disclose    the lower
costs    to the Government        was attrl     butable    to a lack of famll rarity
with the requl rements         of Pub1 i c Law 87-653,         and a breakdown      1n
communlcatlons       between     Laskols     contract    negotiator      and the purchasing
and account I ng departments.             They also stated         that  their  negotiator
probably    had no knowledge         of the lower costs*

        Lasko offlclals         agreed    that    the lower costs establlshed           by
purchase     orders     and lnvolces        should    have been disclosed        during
negotration,        However,       they asserted        that   these costs   should     not
have served       as the basks for the cost of raw material                  Included
in the negotiated          contract     price     because    the vendors    would not
guarantee     therr     prices      for the life      of contract    -0816.

       The Defense        Contract        Audit     Agency performed          an audrt    of the
contractor’s        proposal      during       the period       October     17 through
October      31, 1967, and Issued a report                  thereon       on November      17, 1967,
The audit       dtd not reveal          the existence         of the purchase         orders    Issued
on October        1, 1967, whrch showed aluminum                   costs    lower than those         In
Laskol s proposa 1       l   The proposed           aluminum     costs were verified          by re-
view1 ng vendor        quotations         submltted       by the contractor*           WI th respect
to whether        he had spect Focally            requested      the contractor        to furnish
any purchase        orders     Issued      under contract          -0816,     the Defense     Contract
Audit    Agency audltor          stated      that     he could     not remember whether           he had
made such request.           HIS supervrsor     stated  that    It IS the contractorts
responsrblllty         to furnfsh   such information,        Agency procedures
generally      provide    for examination     of purchase     orders   In reviewing    a
contractorJs       proposal,


         Lasko’s      proposal       Included        costs which were based on estimated
quantities         of aluminum         raw maternal        needed to fabricate         three      parts
of the MK I4 assembly--the                    retarding     fin,     1 ink, and clevls.        These
quantrtles         were accepted           as proposed       It-t the determlnatlon        of the
raw mater1 al cost             Included        1n the negot 1ated price          for contract
-0816.       However,        information         available       to Lasko prior      to negotration
 Indicated       that     the quantities           of aluminum       needed for these        parts
were substantially               less than included            in rts proposal.         Lasko drd
not dlsclose          this     information         to the Government,         nor did it revise
 Its proposal         to reflect         these     lesser   quantrties,

        Since the       circumstances         differed       for      the    three   parts   in
question,     each      IS drscussed         below.

Retardinq       fin

       Each MK lit assembly          required    four   retarding     fins.    Lasko&s
proposed    costs    included      a requirement      of 5.5564      pounds of aluminum
per retarding     fin,     exclusive       of a 2 percent       scrap allowance.

        On October     1, 1967, Lasko Issued a purchase                order   for the
aluminum    needed for the retarding            fins,       The al urnI num was ordered
In pieces     (blanks)     with one piece        requl red per retard!        ny f rn.     The
purchase    order    specified      an approxrmate        weight   per piece of 5.12
pounds,     Lasko received         23 shipments       under thrs     purchase     order
prior    to contract     negotiation,        Vendor      Invoices    for these      shipments
showed that      Lasko had received         160,378      pieces   which weighed        a total
of 816,600     pounds,     an average     of 5.0917        pounds per piece.

       We calculated          this    overprlclng        as follows:
Number of MK 14 assemblies                     to be produced                                     135,449
Number of retarding               fins      per MK 14 assembly                                          x4
Number of retaraing               fins      requrred    (excluding          scrap)                541,796
Allowance       for scrap--2            percent
Number of retard1 ng f 1ns requr red                                                              ai=% s
Aluminum       needed per retard1 ng f 1 n
        --proposed         and negotiated                                   5.5564   Ibs,
        --current        InvoIce        data                                se0917   lbso
Overstatement          of aluminum            needed
    per retarding          fin                                                                x 0.4647         lb.
Total     overstatement           of
    alum1 num needed                                                                           256,808         lbs,
Cost per pound --cur rent                 i nvo 1ce                                           x $0,465
         Overprrclng           (exclusive        of general     and
            admlnlstratlve             expense      and profit)                                   $J 1 g,,+G
       The Defense        Contract      Admrnistratlon     Services evaluated the
contractor’s       proposed       alumrnum     requl rement for the retard1 ng fin
in October       1967, In his report             dated November 2, 1967, the tech-
nical    analyst     stated:

        “An ortqinat     blank was not avarlable,       however,   a formed
        fin was weighed       and calculations    made on estimated       basis
        for scrap     (2%) factor     and rt was decrded    the weight     and
        factor   as proposed      were considerad   reasonable.”       (under-
        scoring    suppl led)

       With respect         to our request        for an explanation          of hrs procedure
for   evaluating        the proposed      aluminum       requrrement    for the retarding
fin,    the technIca          analyst   stated      that    he could   not comply      because
his origrnal        files     were no longer        avatlable.       He stated,     however,
that    an examination         of lnvolces      IS    not genera1ly      included    in a
technical      evaluatron.

LI nk

       Ekght 1 inks were requ t red for each MK 14 assembly.                     Lasko’s
proposed    costs     included    a requirement       of 0.91826      pound of aluminum
per lrnk,     exclusive      of a 2 percent       scrap allowance,         Contractor
personnel     Informed      us that    this  alumrnum    had prevrously        been pur-
chased from two vendors           and that     the aiumrnum       supplied    by these
vendo&     had different       weights.      The proposed       requl rement,     we were
informed,    was based upon use of the heavier                alumtnumo

        On October       13 and November 27, 1967, Lasko awarded purchase
orders    to the suppJler           of the lighter         weight      alumlnumD        This
aluminum     was received         in the form of extruded                bars,    which     Lasko
cut to yield        10 1 Inks per bar.              Lasko received        five    shipments      of
aluminum     prior     to contract         negotiations,          Informat     ion was aval l-
able on four        shipments;        these totaled        41,092      bars weighing
324,441     pounds,      an average        of 7.8955     pounds per bar,             Each link
produced     from these        bars,     therefore,       required       an average      of
0.78955 pound of al urni num, 0~2871 pound fess than proposed.
        We calculated         this   overpricing        as follows:
Number of MK 14 assemblies                 to be produced                            135,449
Number of links           per MK 14 assembly                                              x8
Number of 1 inks requt red (exclude ng scrap)                                      1,083,592
Allowance       for scrap--Z         percent                                           21,672
Number of J I nks requr red                                                        1,105,26’+
Alum1 num needed per J tnk
     --proposed        and negotiated                         0~91826 lb,
     --current       lnvolce      data                        0.78955, J b.
Overstatement          of alum1 num needed per 1 Ink                               x 0.12871 lb,
Total     overstatement         of aluminum       needed                             142,259 1 bs,
Cost per pound --current               Invoice                                     X $0.523
         Overpricing        (exclusive       of general    and
           adminrstratrve          expense     and ProfIt)                             $J4,40 1
       An evaluation     of the contractor’s              proposed   aluminum          requirement
for the link was made by the Defense                  Contract     Admrnlstratlon            Serviceso
 in his report,      the technical   analyst          stated.

         “A formed   link was weighed     and calculations   made on an estimated
         has-        scrap   (2%) factor   and rt was decided     that    the weight
         and scrap factor     as proposed   was consldered    reasonab1e.l’       (under-
         scorl ng suppl led)

        The report      did not indicate        whether     the technlcal       analyst     had
evaIuated     the link material         prior    to its being formed          by the contractor
or whether      the formed     link    used In his calculatrons             was of the lighter
or heavier      weight,     With regard       to our request        for an explanation          of his
procedure     for evaluating        the proposed        aluminum    requirement       for the llnk,
the technical       analyst    again stated        that    he could    not comply       because   his
files    were not avaIlable.


        Each MI< 14 assembly        requl red one clevis,          Lasko’s    proposed   costs
 Included    a requirement        of 1.8333     pounds of aluminum         per clevls,   exclu-
sive of a 2 percent           scrap allowance.          Lasko personne I 1 nformed      us that
the proposed       requirement      was based upon the method of procurement                em-
ployed    under the previous          contract.       Under this    method,     Lasko procured
aluminum     bars,    usually     8 feet     rn length,     and cut them to yieId      47
clevlses     per bar,,

        Prior   to the negotiatron          of contract        -0816,      however,     Lasko changed
 Its method of procurement.               On October       1, 1967, Lasko issued            a purchase
order    which called        for delivery       of cIevlses       already       cut to required
 length    by the vendor,        Three shipments          of precut       clevlses     were received
by Lasko prior       to contract        negotiation.         Vendor      invoices     showed that
these    shipments     totaled     18,675 clevrses          weighing       25,762   pounds,      an
average      of 1.3795 pounds per clevrs,              0.4548     pound less than proposed.
The cost per pound was no higher                  than Included        in Lasko’s      proposal.

         We calculated      this   overpricing       as follows:

Number of clevises            requl red (excluding       scrap)                               135,449
Allowance      for scrap-2          percent
Number of clevises            required                                                        T$$s 3
Aluminum      needed per clevls
       --proposed        and negotiated                              1.8333     lbs,
       --current       I nvol ce data                                1.3795     lbs.
Overstatement        of aluminum         needed per c levls                                  x 0,4538    Ib.
Total    overstatement          of aluminum      needed                                        62,696    Ibs.
Cost per pound --current              invoice                                                x $0,800
       Overpricing         (exclusive       of genera1   and
           admi nl st rat Ive expense         and prof It>                                    sso,157
       The technlcal       analysis report     of the Defense     Contract     AdministratIon
Services   did not comment on the contractor’s             proposed     aluminum      requirement
for the clevis,         In response   to our question      as to why this        requrrement
was apparently       not evaluated,     the technical   analyst     could offer         no explana-
Lron.    As stated      previously,   however,    the analyst‘s     files     were unavailable
for inspect ion.

        Contractor         offlclals         contended       that     the vendor     InvoIces     drd not
accurately       reflect         the average         weights      of the retarding         f In, 1 Ink, and
clevis     because       the number of pieces                shown represented          an estimated
rather     than an actual             count.       Vendors’       billings     were based on the
actual     weights       shipped        rather     than the number of pieces.                  However ,
contractor       offlcrals           could not demonstrate               any inaccuracy       of quantities
shown on invorces.


        We believe    that the price   negotiated     for PtK 14 fin assemblies             pro-
cured under cant ract      -0816 was about $840,000          higher    than JUstlfled.
The failure      of the contractor   to provide      current     cost or pricing         infor-
matron meant that the Government          did not possess        all pertinent       facts
availab?e     at the time of negotiation,         With these facts,         the Government
should    have been able to negotiate        a substantially        lower price.

        In view of the time elapsed         between      the audrt     and negotlatlon,       the
Government       negotiator,  in our oplnlon,         should   have requested        an updated
audit     of the contractor’s      proposed    costs,       An updated      audit   should  have
disclosed      the existence    of current     cost or prrclng         information.

         We also believe         that  the Government         technical        analyst     should      have
more crrtlcally          evaluated     rhe contractor’s           proposed      aluminum      raw material
requ i rements,         In our opi nton,       an evaluation         based on inspection             of
finished      parts    was insuffIcIent          In this     Instance       for proper      verlflcatlon
of proposed        requirements.         A physical      tnspection         of the raw material            and
an examination         of related       purchase    orders,       receiving       reports,      and lnvolces
should     have shown that          the proposed      requirements          were overstated.

Recommendat      I on

      We recommend         that     Navy procurement        offlclals       determine       the extent
of the Government’s            legal   entitlement        to a price       adjustment       under the
cant ract .

        We would be glad to furnish      additional      Information                   on the above
matters,     We would appreciate    being advised        of actions                  taken or to be
taken    by your agency as a result      of this    review.
      Copies     of   this   letter   are   being   sent   to   the    following:

               Comptroller       of the Navy
               Commander,       Naval Air Systems     Command
               Commander,       Naval SuppTy Systems       Command
               Director,       Defense  Contract   Audtt    Agency
               Regional      Manager,   Defense   Contract     Audit      Agency,    PhlTadeTphla
               Commander,       Defense  Contract   AdmInistration          Services     Region,

                                                                Sincerely           yours,

                                                              CALCULAT 1ON OF OVERPRICING                      RELATING         TO LOL’ER COSTS

                                                                                          FOR ALUHINUM       RAW WTERIAL

                                                                                          CONTRACT No0 104-68-c-08                16

                                                                    Cost or          pricing       information      not used            during
                                                                     contract            neqottation         on February   7,           1968

                               Included      in           negotiated               Purchase            Quantity        received                                       Excess of
            Part                      cant ract            pr i ce                  order                    pribr       to            Purchase         order/    negotiated    over             -_-     I-

                               Quant I ty,                         cost               date                negot i at ion               invorce         cost        current   cost        Over;;iclnz
                                  (1)                              --ET                 (3)                        (4)                           (5)                      (6)
                                                                                                                                                                    (2)   minus    (5)   (1)     times        (;

Retarding          frn         3,070,629            lbs.        $0,536/1b,          ?O-     l-67             816,600       ibs.           $0.465/          1 b.    $0,071/1b,              $218,015

F 1 n support                        138,158        ea.          90083/ea,10-               I-67               31,371     ea.                  8,208/eaea           0,875/P-a.                 120,888

LI nk                          1,014,920            lbs.         0,610/1b~10-13-67                           435,887       lbs.                0,523/1b.            O.O87/lb,                   88,298
                                                                             (1 I-27-67

Cot lar                             311,533         fbs.         I,ooO/lb.10-               l-67               53,732      lbs,             O,POO/lb.               0, iOO/l b.                 31,153

Clevis                              253,290         lbs.         O,pOO/ib.          IO-     1-67               25,762      Ibs.             0,80O/?b,               O.lOO/lb,                   25,329

                                                                                                                                                                           Total          $483 ,683b

alncludes          purchase        order      and    InvoIce        cost      of     $8,1S/ea.         and   freight      of      $O.O58/ea.

    Exclusive       of   general       and     administrative                expense         and   profit.