oversight

Pricing of Noncompetitive Contracts Subject to the Requirements of the Truth-in-Negotiations Act--A Summary of Reports Issued in Fiscal Year 1971

Published by the Government Accountability Office on 1971-10-14.

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

REPORT TO THE



Pricing Of Noncompetitive
Contracts Subject To The
Requirements Of The
Truth-In-Negotiations Act--
A Summary Of Reports
Issued In Fiscal Year 1971 8-39995

Department   of Defense




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                COMPTROUER     GENERAL      OF     THE   UNITED    STATES
                             WASHINGTON.     DC.     20548




B- 39995




To the President   of the Senate and the
Speaker  of the House of Representatives

        This is our report   on the pricing of noncompetitive      con-
tracts   under the Truth- in-Negotiations   Act--a  summary       of
reports    issued in fiscal year 1971 to the Department       of De-
fense.

         This review     was made pursuant       to the Budget and Ac-
counting     Act, 1921 (31 U.S.C. 53), the Accounting         and Audit-
ing Act of 1950 (31 U.S.C. 67), and the authority           of the
 Comptroller      General    to examine   contractors’   records   as set
forth in contract      clauses prescribed      by the United States
Code (10 U.S.C. 2313(b)).

       Copies of this report   are being sent to the Director,
Office  of Management    and Budget; the Secretary    of Defense;
the Secretaries   of the Army,   Navy, and Air Force;    the Direc-
tor, Defense Supply Agency;     and the Director,  Defense     Con-
tract Audit Agency.




                                           Comptroller            General
                                           of the United          States




                     6 50TH ANNIVERSARY                  192t-    1971
COMPTROLLERGENERAL'S                       PRICING OF NONCOMPETITIVE CONTRACTS SUBJECT
REPORT TO THE C@NGRESS                     TO THE REQUIREMENTS OF THE TRUTH-IN
                                           NEGOTIATIONS ACT--A SUMMARYOF REPORTS
                                           ISSUED IN FISCAL YEAR 1971
                                           Department of Defense B-39995


DIGEST
------


WHY THE REVIEW WASMADE

        The Truth-in-Negotiations       Act of 1962, Public         Law 87-653, provides      the
        Government with safeguards       against   payment of       higher prices    because of
        overstatements     of costs used in negotiations          for noncompetitive      procure-
        ments.    Noncompetitive    contract    awards by the       Department of Defense (DOD)
        averaged about $23 billion       annually    for fiscal      years 1968, 1969, and 1970.

        Since enactment of the law, the General Accounting           Office  (GAO) has con-
        tinuously    examined its administration      by DOD, particularly     the reason-
        ableness of the costs proposed by contractors           and accepted by the Govern-
        ment.     The objective    of these examinations   is to identify    the causes of
        any overstated     estimates    and to suggest corrective    action.

        This report     summarizes 23 reports that GAO issued          to agency officials   and
        contractors     during fiscal year 1971 on the pricing           of selected  noncompeti-
        tive contracts.

        GAO reviewed selected      cost elements included          in the prices of contracts
        totaling    about $217 million,    negotiated    with 19 contractors.            The con-
        tracts    were awarded by 13 procurement       activities,        most of them in calendar
        year 1968 or 1969.      GAO selected    them for examination           on the basis of in-
        dications     that some pricing   or contracting       deficiencies       were present.
        Since it was not practical      to review a selection            based on a scientific
        random sample due to the number of procurements                involved,     our findings
        must not be construed      to apply to all noncompetitive             contracts.


FINDINGS AND CONCLUSIONS

        The negotiated    prices for 28 contracts     were about $8.7 million  higher than
        indicated   by cost or pricing    data available    to the contractors at the
        time of negotiations.      No overestimated    costs were found for five other
        contracts   examined.    (See p. 5.)

         Factors   contributing   to the overpricing      included

             --the failure   of contractors   to submit to the Government significant
                 cost data which became available   after they had submitted  their   pro-
                 posals,


                                                                        m-.14,1971
Tear Sheet
       --the failure   of contracting  officers to obtain all significant              data
           or to have these data reviewed by Government auditors,     and

       --inadequacies      in the Government's  audits     and technical     evaluations      of
           contractor   proposals.   (See ch. 3.)

     In view of the relatively     small number and value of contracts            examined
     and their  selection   on the basis of potential        findings,     general conclu-
     sions cannot be drawn on the overall       effectiveness        of DOD's management
     of its responsibility     to negotiate reasonable       prices.     GAO's findings
     indicate,  however, that there is a need for continued             attention   by DOD
     to the performance    of its personnel   involved     in this function.


RECOMMENDATIONSOR SUGGESTIONS

     GAO reported     its findings   to agency procurement     officials    and individual
     contractors.       It recommended to agency officials      that they determine        the
     extent    to which the Government is legally     entitled      to price adjustments
     under the terms of the contracts.         (See p. 12.)

     GAO recognizes   that its finding    of overestimated         costs may not represent
     amounts for which the Government is leqally           entitled     to price adjustments.      1
     To obtain an adjustment,    the contracting      officer      must determine    that the
     price was increased    because inaccurate,     incomplete,        or noncurrent    data
     were submitted   and were relied   upon in price negotiation.             He must also
     determine   the effect  of such reliance    on the negotiated         price.    Any price
     adjustment so determined may be reduced by underestimated                costs.


AGENCY ACTIONS AND UNRESOLVEDISSUES

     GAO has received  comments on 10 of the reports       involving    overpricing.
     In all instances  DOD officials    have initiated    action    to determine     the ex-
     tent of the Government's     legal entitlement    to a price adjustment,          (See
     p. 12.)

    Because of the significant   amount of negotiated    noncompetitive            procure-
    ments, GAO plans to continue   to review the pricing    of individual             con-
    tracts.


MATTERS FOR CONSIDERATION BY THE CONGRESS

     GAO is    bringing  these matters  to the attention   of the Congress because
     of its    expressed interest   in negotiation   of noncompetitive  contract
     prices.




                                               2
                         Contents
                                                       Page

DIGEST                                                   1

CHAPTER

  1        INTRODUCTION                                  3

  2        ESTIMATED COSTS IN NEGOTIATEDPRICES
           HIGHER THAN INDICATED BY AVAILABLE
           COST DATA
               Bases for overestimated    costs
                   Material
                   Labor
                   Overhead and general and admin-
                     istrative   expenses                7
                   Other costs                           8

  3        INDICATED CAUSESOF OVERPRICING                9
               Contractors                               9
               Contracting officers                      9
               Contract auditors                        10
               Technical specialists                    11

  4        AGENCYACTIONS                                12

  5        CONCLUSIONS                                  13

  6        SCOPEOF REVIEWS                              14

APPENDIX

           Schedule of reports      issued   during
             fiscal year 1971                           17

                          ABBREVIATIONS

ASPR       Armed Services Procurement Regulation
DCAA       Defense Contract Audit Agency
DCAS       Defense Contract Administration  Services
DOD        Department of Defense
GAO        General Accounting Office
COMPTROLLERGENERAL'S                    PRICING OF NONCOMPETITIVE CONTRACTSSUBJECT
REPORT TO THE CONGRESS                  TO THE REQUIREMENTS OF THE TRUTH-IN
                                        NEGOTIATIONS ACT--A SUMMARYOF REPORTS
                                        ISSUED IN FISCAL YEAR 1971
                                        Department of Defense B-39995


DIGEST
------


WHY THE REVIEW WASMADE

    The Truth-in-Negotiations       Act of 1962, Public         Law 87-653, provides     the
    Government with safeguards       against   payment of       higher prices    because of
    overstatements     of costs used in negotiations          for noncompetitive     procure-
    ments.    Noncompetitive    contract    awards by the       Department of Defense (DOD)
    averaged about $23 billion        annually   for fiscal      years 1968, 1969, and 1970.

    Since enactment of the law, the General Accounting           Office  (GAO) has con-
    tinuously    examined its administration      by DOD, particularly     the reason-
    ableness of the costs proposed by contractors           and accepted by the Govern-
    ment.     The objective    of these examinations   is to identify    the causes of
    any overstated     estimates    and to suggest corrective    action.

    This report     summarizes 23 reports that GAO issued          to agency officials   and
    contractors     during fiscal year 1971 on the pricing           of selected  noncompeti-
    tive contracts.

    GAO reviewed selected      cost elements included          in the prices of contracts
    totaling    about $217 million,    negotiated    with 19 contractors.            The con-
    tracts    were awarded by 13 procurement       activities,        most of them in calendar
    year 1968 or 1969.      GAO selected    them for examination           on the basis of in-
    dications     that some pricing   or contracting        deficiencies      were present.
    Since it was not practical      to review a selection            based on a scientific
    random sample due.to the number of procurements                involved,     our findings
    must not be construed      to apply to all noncompetitive             contracts.


FINDINGS AND CONCLUSIONS

     The negotiated    prices for 28 contracts     were about $8.7 million  higher than
     indicated   by cost or pricing    data available    to the contractors at the
     time of negotiations.      No overestimated    costs were found for five other
     contracts   examined.    (See p. 5.)

     Factors   contributing   to the overpricing      included

         --the failure   of contractors   to submit to the Government significant
             cost data which became available   after they had submitted  their          pro-
             posals,
      --the failure    of contracting officers to obtain all significant                data
          or to have these data reviewed by Government auditors,     and

      --inadequacies      in the Government's     audits   and technical     evaluations       of
          contractor   proposals.   (See ch.     3.)

    In view of the relatively     small number and value of contracts            examined
    and their  selection   on the basis of potential        findings,     general conclu-
    sions cannot be drawn on the overall       effectiveness        of DOD's management
    of its responsibility     to negotiate reasonable       prices.     GAO's findings
    indicate,  however, that there is a need for continued             attention   by DOD
    to the performance    of its personnel   involved     in this function.


RECOMMENDATIONS
             OR SUGGESTIONS
    GAO reported  its findings   to agency procurement     officials    and individual
    contractors.    It recommended to agency officials      that they determine        the
    extent to which the Government is legally     entitled      to price adjustments
    under the terms of the contracts.      (See p. 12.)

    GAO recognizes    that its finding     of overestimated         costs may not represent
    amounts for which the Government is legally             entitled     to price adjustments.
    To obtain an adjustment,       the contracting     officer      must determine    that the
    price was increased      because inaccurate,     incomplete,        or noncurrent    data
    were submitted    and were relied     upon in price negotiation.            He must also
    determine   the effect    of such reliance     on the negotiated        price.    Any price
    adjustment    so determined    may be reduced by underestimated            costs.


AGENCYACTIONSAND UNRESOLVED
                          ISSUES
    GAO has received  comments on 10 of the reports       involving   overpricing.
    In all instances  DOD officials    have initiated    action   to determine     the ex-
    tent of the Government's     legal entitlement    to a price adjustment.         (See
    p. 12.)

    Because of the significant   amount of negotiated    noncompetitive             procure-        (
    ments, GAO plans to continue   to review the pricing    of individual              con-
    tracts.


MATTERSFOR CONSIDERATION
                       BY THE CONGRESS
    GAO is bringing  these matters   to the attention   of the Congress because
    of its expressed interest    in negotiation   of noncompetitive  contract
    prices.
                                    CHAPTER 1

                                 INTRODUCTION

        Since the enactment             in 1962 of Public        Law 87-653,     the
Truth-in-Negotiations             Act, the General Accounting             Office    has
continuously        reviewed      and reported         on the manner in which
the law has been administered                  and the reasonableness          of se-
lected     negotiated       prices.        In our latest      report    to the Con-
gress on this subject              (B-39995,       Dec. 29, 19701, we commented
on the effectiveness             of revised        Department    of Defense (DOD)
procedures       in achieving         fair   and reasonable       prices   for 35
contracts      negotiated        primarily       in calendar     year 1968.      We
also commented on problems                 experienced      by contractor      and
agency officials          in implementing           these procedures.

         The objectives      of our review       of the pricing          of an indi-
vidual     contract     are to determine       whether     the negotiated        price
is reasonable        in relation      to available      cost information,         to
identify      the causes of any indicated             overpricing,        and to
suggest     corrective     action.       During fiscal       year 1971, we is-
sued to agency officials             and the contractors           involved   23 in-
dividual     reports     on our audits       of the pricing          of 33 selected
contracts.        This report       summarizes     for the Congress the re-
sults     of these audits.          Most of the contracts            were awarded
in calendar       year 1968 or 1969.          A listing       of the procurements
reviewed     and related       information     is shown in the appendix.

        In negotiating      the price     of a noncompetitive         procurement
expected     to exceed $100,000,        the contracting       officer      must
require    the contractor       to submit cost or pricing            data in
support    of proposed prices        and to certify       that these data are
accurate,      complete,   and current.         The contracting       officer   is
required     to include    a clause     in the contract       which gives the
Government      a right   to a price      adjustment    where it is deter-
mined that the price          was increased      because the data submitted
were not in accord with the certification.

       The Armed Services    Procurement      Regulation      (ASPR)           pro-
vides that a cost analysis         of a contractor's       proposal             be
performed    whenever cost or pricing       data are required                 to be
submitted.     Cost analysis     is the review       and evaluation               of a
contractor's    cost or pricing      data and of the judgment                   fac-
tors applied    in arriving    at the estimated        costs.     Its           purpose

                                            3
is to provide   the Government    with information      concerning   the
degree to which the contractor's        proposed   costs represent
the amount that performance      of the contract      can be expected
to cost,  assuming reasonable      economy and efficiency.

        The contracting        officer     is responsible       for negotiating
a fair     and reasonable        price.      He is assisted       in the review,
evaluation,       and analysis        of price    proposals     by personnel       at
the purchasing       office,       such as the price        analyst,    negotiator,
buyer,     and project      engineer.        He is assisted       also by contract
auditors     of the Defense Contract            Audit Agency (DCAA) and
other    technical     specialists       of the Defense Contract          Adminis-
tration     Services     (DcAs).

        The results     of our reviews         of the contracts        summarized
 in this    report    must not be construed            to apply to all DOD-
negotiated       noncompetitive       contracts      since it was not practi-
cal for us to review a selection                based on a scientific           ran-
dom sample due to the number of procurements                     involved.        To
obtain    the most productive          use of our limited         manpower, we
selected      each contract       for review after        a preliminary      exam-
ination     indicated    potential      overpricing       or deficiencies         in
price    evaluations     or in other contract-pricing               procedures.
The scope of our review and the selection                   of contracts        in-
cluded    in this report        are described       in chapter      6.




                                          4
                                     CHAPTER2

                ESTIMATED COSTS IN NEGOTIATEDPRICES
                                                  -
           HIGHER THAN INDICATED BY AVAILABLE COST DATA
      The 33 contracts      we reviewed    totaled  approximately
$217 million    and were awarded by 13 procurement            activities
to 19 contractors.        The costs we examined were found to be
about $8.7 million      higher   than indicated    by cost or pricing
data available     to the contractors      and subcontractors          at the
time of each negotiation.

       No overestimated    costs were found for          five     of the 33
procurements     examined.    For 28 procurements          the    overpricing
ranged from $1,200 to $1,448,800.

        Our findings       of overestimated     costs by cost element,
including     related      costs and profit,     are shown below.

                                                    Overestimated
                        Cost   element                   costs

           Material                                  $1,977,600
           Labor                                      2,250,900
           Overhead and general       and ad-
             ministrative     expenses                1,131,500
           Other costs                                   784,600
           Related     costs and profit               2,579,900

                Total                                $8,724.500

BASES FOR OVERESTIJ?lATED
                        COSTS

       The bases for our findings     of overestimated              costs   by
cost   elements  are described   below.

Material

       Material    cost estimates    included    in prices     of 13 of the
33 procurements       we reviewed   were $1,977,600      higher   than in-
dicated    by various    cost information     available     at the time
of negotiations.        This amount is net of estimated          costs of
material, which were understated    by $47,000 because                   of er-
rors made by the contractor    in computing  costs.

        Examples    of the    overestimates      follow.

        --Estimates    of $24,164,600    were $1,169,800     higher    than
           shown by firm purchase     orders and vendor quotations
           received by contractors     after  their    proposals    had
           been submitted   but prior    to completion     of negotia-
           tions.

        --Estimates     of $3,201,300       were supported  by noncompeti-
           tive price     quotations     that were $470,800   higher  than
           prices   previously      paid to other suppliers    who had
           not been requested        to submit quotations.

        --Material      prices    of $92,100 were increased by $85,400
           for the costs of parts which were duplicated        in the
           contractor's       proposal.

        --A cost estimate      of $83,200 for anticipated              price  in-
           creases was included      in a contract   price,          although
           firm-priced   orders   had been issued at the             time of
           negotiations.

Labor

        The labor cost estimates       included      in prices    of 14 of
33 procurements      were $2,250,900      higher     than indicated    by
various    cost information    available      at the time of negotia-
tion.     Examples of the overestimates          follow.

        --Labor   cost estimates      of $1.3 million      were $119,200
           higher   than indicated     by revised    labor cost standards
           and by production      data which became available        after
           the price    proposals   were submitted      but before   negotia-
           tions,

        --Labor     costs of $2.1 million           included     in a revised
           proposal     submitted     during     negotiations      were overes-
           timated     by $303,600,      because the costs were based on
           inaccurately      computed unit        costs of a prior       contract.
           Costs of the previous           contract     were overstated      by
           including     a duplication        of tooling      costs and by


                                         6
           premature    application   of a wage increase.        The number
           of units    produced under the prior    contract      was under-
           estimated     and thus overstated  unit   costs.

      --Estimated   costs of $14.4 million      for hourly  employees
         were based on the number of employees       needed during
         the prior  year when the scope of the work was greater
         than that under the proposed     contract,   which resulted
         in an overestimate  of $676,400.

      --Estimated    costs of $6.8 million    for salaried   employees
         were increased    by $4.49,900 because contractors    used
         average salary    rates which were not representative
         of prior   cost experience.

Overhead     and general.and     administrative     expenses

        Overhead and general      and administrative    expenses     in-
cluded    in the prices     of four of the 33 procurements        were
increased     by $1,131,500    because (1) specific     cost elements
were higher     than indicated     by cost information     available     at
the time of negotiations         and (2) costs were for services         of
questionable      need or benefit    to the Government.      Examples
follow.

      --General    and administrative    expenses were overesti-
         mated by $163,500      because allocation   practices      were
         not consistently     followed  by the contractor        and a
         current   period was not used to estimate        costs.

      --Indirect     labor costs were $161,000        higher   than in-
          dicated  by (1) actual         cost already incurred    for part
          of the contract       period    and (2) the need for indirect
          labor during    final      stages of the contract.

      --Costs     for depreciation        of buildings      were overesti-
         mated by $53,300 because the rates used for two Gov-
         ernment contracts         were not consistent.         A deprecia-
         tion rate of 33-l/3          percent  was used for pricing         two
         modifications         to the contract      reviewed,   although    a
         rate of 5 percent,          based on a recommendation         by DCAA,
         had been previously          used for the same buildings          on
         another     contract.



                                       7
Other    costs

          Estimates    for other costs   included    in the prices       of
six of the 33 procurements          were $784,600      higher   than in-
dicated       by various   cost data available     at the time of nego-
tiations.         Examples of the more significant         overestimates
follow.

        --Estimated    costs for packaging     labor and materials
           were overestimated    by $194,800.       The contractor's
           proposal  was based on subcontracting,        although      in-
           formation   available  before   negotiations      indicated
           that the contractor    planned   to perform     the packaging
           in-house  at lower costs.

        --Freight    and overtime     labor costs were overestimated
           by $161,000   because these costs were estimated          on
           the basis of costs incurred          for a prior contract    ,
           which had required      delivery     of parts by air freight
           and extensive    overtime     to make up lost time due to
           a delay in the contract         award.

        --Preproduction   costs included        $199,500   for parts
           which were also included    in     the costs    of producing
           the end-item.
                               CHAPTER3

                 INDICATED CAUSESOF OVERPRICING
        We identified   various actions by contractor     and DOD
officials     that contributed  to the overpricing    we reported.
These matters are discussed in the following        sections.

CONTRACTORS

       Under Public Law 87-653 contractors   are responsible
for submitting    accurate and complete cost or pricing    data
that are reasonably available     as of the date of price nego-
tiations.    ASPR provides guidelines   as to when data are
considered reasonably available.,     Unless specific  cutoff
dates are agreed to, data concerning matters of signifi-
cance to the contractor    and the Government are considered,
under defense regulations,    to be current and reasonably
available   as of the date of price agreement.

      The most significant    cause for the overestimated     costs
we reported was attributed      to the failure of contractors     to
submit significant     cost data which became available    after
their proposals were submitted and before price negotia-
tions were completed,,

$JONTRACTING
           OFFICERS

      For noncompetitive     procurements,   the contracting  of-
ficer is responsible     for negotiating    a price that is rea-
sonable in relation     to the contractor's     expected cost of
performing the contract with reasonable economy and effi-
ciency.

      The price proposal which the contractor        is required     to
submit should be supported by all facts existing            up to the
time of price agreement that could reasonably          be expected
to have a significant      effect on price negotiations.        The
contracting   officer   must review the proposal and obtain au-
dit and technical     evaluations  to the extent necessary to
determine whether the data submitted provide for a realis-
tic basis for price negotiation.        Contracting    officers   did
not always follow prescribed      procedures for establishing        a


                                   9
reasonable price.     In some instances contracting  officers'
actions were influenced    by desires to award contracts    for
requirements  that were designated as urgent and to meet
deadlines to definitize    letter  contracts.

       Instances of actions by contracting   officers      which we
believe contributed    to the negotiation  of higher      prices are
summarized below.
     --Contractors  were not required by contracting         officers
        to submit complete proposals and to properly         identify
        supporting cost or pricing   data.

     --Contracting    officer     did not require or allow suffi-
        cient time for the contractor        to obtain competitive
        price quotations      for required contract    items.
     --Preaward audits were not requested by contracting
        officers,  although available information in support
        of the price proposed was not adequate.

     --Contracting        officers did not allow contract auditors
        sufficient      time to make an adequate preaward audit.

     --Contracting      officers   did not request an audit of
        significantly      revised proposals submitted by con-
        tractors.

     --Contracting      officer did not request the auditors   to
        review cost data that had become available       after the
        award of the initial     letter contract,  although sig-
        nificant    time had elapsed since the audit of the
        initial    proposal.

     --Information    in advisory reports by contract      auditors
        and technical   personnel was not adequately      eonsid-
        ered by contracting    officers  in negotiating    contract
        prices.
CONTRACTAUDITORS

       Preaward audit reports by contract   auditors    of DCAA
did not provide adequate information     to contracting    of-
ficers   in some instances.  Examples of audit weaknesses fol-
low.
                                   10
     --The auditors relied on data submitted by contractors
        in support of price proposals; more current avail-
        able data were not reviewed.
     --The scope of the audit was not broad enough to exam-
        ine significant cost elements.

     --Contracting      officer   was not advised that the con-
        tractor     had deviated from established    practices for
        distributing     administrative   expenses.

     --Audit report did not show that contractor's     proposed
        costs included material to be furnished    by the Gov-
        ernment.
     --Auditors  did not detect        and report     errors    in esti-
        mating proposed costs.
TECHNICAL SPECIALISTS

      The technical  evaluations of contractor   proposals by
procurement office and DCAS personnel did not appear ade-
quate in some instances to identify   questionable    costs.
Examples are shown below,
     --A change in test procedures         that     reduced    labor   re-
        quirements was overlooked.

     --Procedures    used to verify material  requirements  did
        not show that estimated quantities     of material were
        overstated   because the, contractor was buying and us-
        ing.material   of a lighter  weight than was proposed.

     --Evaluation    of the proposal was not performed in suf-
        ficient   depth to show that more recent data showing
        improved labor efficiency    were available at the time
        of review.
     --Discrepancies   in the contractor's           labor-hour     calcu-
       lation   were not shown by technical            specialists'     re-
       view.




                                  11
                                CHAPTER4

                            AGENCYACTIONS

        In the reports we issued involving   overpricing,  we
recommended that agency officials     consider our findings   and
determine the extent to which the Government is legally       en-
titled    to price adjustments under the terms of the con-
tracts.

        We recognize    that our findings    of overestimated        costs,
although based on factual        information    available     at the time
of contract     negotiation,   may not represent       defective     pric-
ing for which the Government is legally           entitled     to a price
adjustment.       This determination     is made by the contracting
officer    on the basis of whether inaccurate,           incomplete,     or
noncurrent     data were submitted to him or his representa-
tives prior to the negotiation          and his reliance      on such
data and the effect of such reliance           on the price.       Price
adjustments     for defective    pricing may be eliminated         by off-
sets for underestimated       costs.

       We have received comments on 10 of the reports involv-
ing overpricing.      In all instances DOD officials      stated
that action had been initiated       as we proposed to determine
the extent to which the Government is legally         entitled    to a
price adjustment.      Final determinations    of price adjust-
ments totaling    $533,900 have been made on four contracts         on
which we reported     overpricing   of $2,295,900.    For another
contract   the agency advised that there was no basis for a
legal recovery of all or part of the overpricing           we re-
ported but that negotiations      with the contractor     were con-
tinuing.




                                     12
                             CHAPTER5

                           CONCLUSIONS

      Our review of 33 procurements indicated    overpricing
of $8.7 million,  or about 4 percent of the contract prices.
Percentages of overpricing   ranged from .05 to 11.8 percent
of the contract prices.    No overpricing  was found in five
of the 33 procurements.

       DOD's annual noncompetitive    procurements averaged about
$23 billion    for fiscal  years 1968, 1969, and 1970. In view
of the relatively     small number and value of contracts     we ex-
amined and their selection      on the basis of potential   find-
ings, general conclusions      cannot be drawn on the overall     ef-
fectiveness    of DOD's management of its responsibility      to
negotiate   reasonable prices.     Our reviews indicated  that
procurement officials     were aware of DOD's procurement poli-
cies and, for the most part, had adequately implemented
them.

       The Procurement Management Review Croup of DOD and the
internal   audit staffs of the military      services are respon-
sible for reviewing the activities       of procurement and con-
tract administration     officials   to ensure that DOD procure-
ment policies    are being followed.     We believe that there
is a need for continued attention       by DOD to the performance
of its personnel involved in this important function.
       We plan to continue our reviews on the pricing      of in-
dividual   contracts  negotiated    on the basis of cost data.
We are also considering      performing reviews of matters af-
fecting   contract pricing    generally  where the need for im-
provement is indicated.




                                13
                                  CHAPTER6'

                             SCOPEOF REVIEWS

        We examined contractors'        price proposals,     cost or pric-
ing data submitted in support of estimated costs, and the
lastest    information    available     to contractors     at the time of
negotiations.       We reviewed the adequacy of the verification
of data and the evaluation          of cost estimates performed by
agency audit and technical          personnel,   and the acceptance
and use of their findings         by negotiators      and contracting   of-
ficers.     Also we attempted to identify          the causes or manage-
ment weaknesses that contributed            to overpricing    noted in
our reviews.

       We used several methods to select the contracts                  in-
cluded in this report.         .Eleven    contracts   were     selected    from
a DOD list     of contractors.       Fifteen contracts        were selected
after visiting     a number of large procurement and contract
administration     offices    and contractors'       plants.       These con-
tracts were selected after considering              factors,      such as the
relationship     of negotiated      costs to actual costs, size of
the contract,     agency preaward audit or absence of audit, de-
lays between preaward audit and negotiation,                 the DCAA post-
award audit, and prior CA0 reviews at the contractors'                     plant.
        Five contracts  were selected on the basis of linforma-
tion found during other types of reviews at procurement ac-
tivities.     Two of the contracts were reviewed because of a
recommendation made by a congressional      subcommittee.




                                      14
APPENDIX
-_______




    15
                                                                                                                             APPENDIX I


                                                            SCHEDULEOF REPORTS

                                                      ISSUED DURING FISCAL YEAR 1971

                                                                                             Contract                                      Overpricing
 Report                                                     Month                                                                           reported
  date                 Procurement      offices           of award                     Commodity                             Amount          by GAO
 7-2-?O       Aeronautical Systems Division,
                Air Force Systems Command                 Feb. 1969     External      fuel    tanKs                      $      712,500    $        2,000
 3-12-71               do.                                Mar. 1964     A-37B aircraft         and related       parts        7,986,400            4,400
                                                          Mar. 1969          do.                                              7,653,700            7,000
                                                          May 1964           do.                                              9,887,400           21,000
10-26-70      Frankford Arsenal,
                Army Munitions   Command                  Junt   1965   20 mm cartridge          links                        1,305,300           81,000
11-18-70      Army Weapons Command                        Dec. 1969     M-16 rifles                                          40,870,OOO          700,900
U-18-70                do.                                Dec. 1968     M-16 rifles                                          33,702,OOO          836,000
U-25-70       Naval Supply         Center,   Hawaii       Apr.   1968   Overhaul      and repair         of valves              158,000             8,900
n-25-70       Air     Force Eastern      Test Range       May    1969   Transponders                                            119,700             1,200
12-11-70      Sacramento Air Materiel   Area,                           Inspection,  modification,     and
                Air Force Logistics   Command             Nov.   1968      repair of electronic    tubes                        257,000           20,200
 2-8-71       Army Ammunition Procurement
                and Supply Agency                         Apr.   1968   FUZeS                                                10,414,700          io7,400
 3-19-71              do.                                 Jan. 1968     Rocket motors                                         1,192,ooo
                                                          Dec. 1968          do.                                              4,631,OOO           31T400
 4-20-71                                                  June 1968     Boosters                                              5,167,600           482,600
                                                          Dec. 1968     Fuses                                                16,190,800        1,275,900
 3-9-71       Navy Ships Parts          Control
                Center                                    Feb. 1568     Bomb fin      assemblies                              7,300,000          840,700
 3-19-71               do.                                Feb. 1969     Rocket motors                                         2,447,400           51,400
 4-16-71               do.                                June 1968     Fuse monitors                                         1,003,000           46,500
 6-30-71               do.                                Apr.   1967   MX 52 projectiles                                     4,751,800          164,100
 6-30-71               do.                                Nov.   1969   Converters-navigation              system               139,500             7,000
 4-16-71      Navy Ships Systems Command                  Nov.   1967   Repair of traveling
                                                                          wave tubes and parts                                4,659,400
 6-29-71               do.                                Apr.   1969   Steam-turbine         generator,sets                  8,943,400           201,300
 6-30-71               do.                                June 1968     Components-navigation              systems               302,700
 4-21-71      Naval      Air Systems Command              Dec.   1968   Radar components                                         662,000           78,400
                                                          Dec.   1968        do.                                                 461,000
                                                          Feb.   1968        do.                                                 875,800           94,200
                                                          Feb.   1968        do.                                                 652,900           38,700
 5-25-71      Air     Force Procurement                   July   1969   Base operations   and                                 4,068,500           231,000
                    Office, Denmark                       July   1970     maintenance   services                              4,135,600           260,600
                                                          July   1969         do.                                             9,987,300           823,400
                                                          July   1970         do.                                             9,867,900           218,500
 6-30-71      Navy Aviation        Supply    Office       May 1970      Aircraft      spare parts                                178,700
 6-30-71      Edgewood Arsenal,
                Amy Munitions           Command           June 1966     Launchers,       35 mm cannister                     16,131,600        1,448,800
                      Total                                                                                              $216,867,100      $8,724,500

Reports                       23
Procurement    offices        13




                                                                           17
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