IYmx STms GSERA~ ACCOUNI-ING OFFICE 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 BESTDOCUMENT A'VAILABLE 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. LOWER COSTS FOR ALUMINUM RAW MATER IAL 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, LESSER REQU I REMENTS FOR ALUMI NUM RAW MATER I AL 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. CIevis 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. Conclusions 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, Phlladelphla Sincerely yours, Attachment 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. b Exclusive of general and administrative expense and profit.
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)