Review of NASA Contract To Determine Procedures Used in Negotiating Noncompetitive Contracts

Published by the Government Accountability Office on 1977-02-03.

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

                                        UNITE!) STATES GENERAL Acc0f~N-r~                    OFFICE   .
                                                         REGlePNAL        QFFICE
                                                  fn#m   Wpo.   M    W.    26-l-H   AVEUUE

                                                   DENVER.      COLORADO             80211

    .   J

            Dr. W. R, Lucas, Director
            George C. Harshall Space Flight Center
            Hational Aeronautics And Space Administration
            M8rshall Space Flight Center, Alabama      35812

            Dear Dr. Lucas:
                  The General Accounting Office has completed a review of Contract
          EAS 8-31665 awarded August 13, 1975, by the Harshall Space Flight Center
          -(Marshall)   to the Martin Marietta   Corporation   (:4artin Marietta),   Denver
          I)ivisioa.    The.basic contract was for 322 Pyrotechnic Initiator        Controllers
        . (PIG), three test sets and data at a value of $1,900,000.            The current
          value of the.contract     through modification    30 is $2,600,911.

                      This contract was selected as part of a survey of procedures and
             practices     used by civil     agencies to negotiate noncompetitive      contracts
             with prices exceeding $lOO,GOO. Our objectives            were to determine wSether
             tk Warshall Space Flight Center.required           Martin Marietta    to famish cur-
             rent,     complete, and accurate c3st or pr iting.'data     as required by Title 10
             W,S.C, 2304, Truth in Negotiations         Act, and the National    Aeronaut its and
             SPace.Administraeion's        implementing procurement regulations,       and whether
            lferahall     evaluated and relied upon that data in negotiating         the contract
.-_          pX?iCle.
                _..        - --          -----                      . .       _.
                  The Truth in Negotiations       Act, requires      that with certain    exceptions,
            contractors   be required to submit cost or pricing data in support of pro-
            posed prices for noncompetitive        contracts      and contract modifications     expected
            to exceed $100,000.      In addition,     contractors      are required   to certify  at the
            time of negotiations     that data submitted is current,           complete, and accurate.
            A clause is inserted in the contract          which gives the Government a right to
            a price reduction where it is determined that the price was increased
            because the data submAted were not in        6
                                                             accord with the certification.

                   Our conclusions and recommendations are summarized below.         Eriefly;
            we believe that     had Martin i4arietta    provided current, complete, and accurate
            data concerning     the cost reduction     studies ongoing at the time of negotiations,
            the contracting    officer     would have had 3 sound basis for reducing the current
            price   by $83,649.-Mditionally,         Martin Marietta will realixe-a sabstantial                 _
            unantic%pated    profit    resulting  from savings on material purchases, because
            the contracting    officer     at Marshall failed to follow up on recoamndations                .
            coatained in the Defense Contract Audit Agency (DCAA) audit report.

i       .

        Prior    to negotiations          held on July I and 2, 13: i, :;;?rtin                 :.Iarietta
project     personnel      on the PIC program becam aware OF a potential                              overrun
in PIG production          hours     on an existing          contract.       Xartin     Xariettn        could
not provide       documented data          on   the exact date or mount               of tile overrun;
however,      subsequent       infornation        disclosed      that the Potential           omunt        cculd
be $150,300.          As a result,        studies      were started in the Electronics                   >ianu-
facturing      Facility      to determine how ta reduce production                      r~irur~.      Tne
recommendations for reduction                 in production hours ha.1 beer developcj                       about
Jun.? 23, 1975, but were not disclosed                     to Liarshall.         Participants         iu these
studies     included     responsible         Martin Xarietta           personnel    in the following
       PIC Project
       PIG Project Manager
       Chief, Electronics    Manufac:uring                Facility
       Manufacturing    Engineers
       Haterial   Engineer
       Quality Control                   -.
       Packaging Engineer

     The recommendations for actions to be taken to reduce product.ion hours,
which were arrived at by personnel in the' Electronics      Manufacturing Facility,
were submitted in writing    to the PI6 Project Manager on July 7 and 9, 1975.
These submissions identified    the following  cost reduction a;tions:          '

         1.    Transformer - strippi-ri     6f magnetic wires
         2.    Cure cycles - change: in materials*        times, and temper&urec
         3.    Insulation    tape - investigate    new type material                   , .
         4,    Part sleeving - e?iminate,sleeving
               Flicking of conformal coating - evaluate wicking        OF,%? heat sink
        ii:    Go/no go tool - clesign tool
        7:     Weighing - restrict     to sampling
        8.     Removal of parts - unsolder and reuse rather than clip
      . 9.     Kitting    by PIC assembly - use of bins.        _.
       10.     Dedicated fabricators     - need for monitoring     and motivating
       11.     Torque - use of a new torque      tool
       12.     Flow solder    - machine (wave) soldering      in place of hand soldering.

The machine (wave) solderiag study, dated June 23, 1975, was the onl*: study
for which there was documentation.    This study began at least L. to a weeks
prior to June 23, 1975.
                 - -~                                       ----.         _
      Problems.in PIC production and possible solutions  were presented CO
the Executive   Xmagment   Xeviev panel on July 24, 1375, by the PIC project
             .                    ,.                                                                           :
                 manager.    The proposed reeamenkitisns     Par the reduction  of pro,iJcfion’  hours             .
        ..       presented   at that 'meeting were the arcas. covered in the rccnorantlu~     of
    ;            July 9, 1975, and identified    a potential   reduction  of 6.7 hours per FIC
                 in manufacturing    labor.

                       As a result,     a PIC study  committee     was Eorlncd to tcvizw         productior!
                 costs and make reco;aaendations.       This comxxittee       concIudriI     that the PIC
                 could be manufactured     a& a profit   provided     their     recom:x+ndations      -xere
                 implemented,    Their  recommendations      included    those cost reduct io.1 act ions
                 identified   by the Electronics    Manufacturing      Facility      studies     and isple-
        _ ~-_-mentation
               .._.*_      began on August 8, 1975.

                      We determined the overpricing  by using prices, rates, and factors in
              Martin Marietta's     revised proposal dated Way 19, 1975. The amount was
              determined as follows:

                 Estimated labor hour reduction per PIC                                  8.7
                 Total PICs in basic contract                                            322
                 Total estimated labor hotr savings                                   2,801
                 Average hourly manufackring     labor rate                           $8.28
                    Estimated labor honr dollar savings                                          $23,192
                 Average manufacturing overhead rate                                     167%
                  . Estimated overhead dollar savings                                              38,731
                    Subtotal                                                                       61,923
                 Average general and administrative      rate                           21.7%
                    Estimated general and administrative      ciillar      savings                 13,437
                   Eatimeted~cost      s&Tings                                                     75,360
                 Refit      rate (datewined    reasonable by Marshall)                    11%
    t              Profit on estimated savings                                                      8,289
                   TOhl moaat attiributeble         to cdst
                       r**:atioa8                                                                $83,649

                         Ia response to our draft report,    the contractor  contends that the "studies"
                  referred to were only prelitiaaty    efforts   on the part of Martin llariett’a
                  personnel to resolve an overrun position it Lhe PIC program, and were not
                  pursued as in-depth studies prior to final contract       negotiation8  with
                 Ikrshall . However, l&USARocurement Regulations define cost or pricing data
                  ar consisting    of aay management decisions or facts “. . . which could
                  reasonably be expected to have a significant      bearing on costs under the
                 proposed contract."     Therefore,  we believe that the cost reduction      studies,          .
                 which were in process prior to final negotiations      and Martin Xarietta’s
                 aigaiag the Certificate    of Current Cost or Pricing Data, are data which
                 could reasonably be expected to have a significant      impact on negotiations.

                 DWLNTICIPATEDPRDFIT ON ElATEHAL          PURCHASES                               ---.
                       Ia the initial     proposal,   Martin krietta       proposed material     costs of
                 $532,026.    War&all     requested   the Air Force     Plant   Heprosentative    Office
J,       .-

                        <AFPKG) at.Martin            .iYarietta          to conduct a price analysis. The AFPRO price
                        aualysis          included   an audit            of rates and factors by the DCAA at &rein

                               DCAA's audit report number 7501-03-5-0123 dated April 22, 1975, was
                        reported to the APPRO. One of the recouzendations     in the report was that
                        current          prices   for all         anticipated                 and potential      materia!         quantities         be
                        obtained.     DCAA found that lartin Xarietta's material costs were proposed
                        on quantities   necessary to produce only 70 PI&.     The AFPRO re;:orted their
                        price analysis to Natshall on April 24, 1975, and included DCAA's audit
                        report      as an enclosure.                   The APPRO's report                  concurred     with      the DCAA audit
                        report      recommendations.                                                                              -
                            Yarshall performed a technical analysis without naking a visit     to the
                      Martin arietta      plant facilities. A cost analysis report was prepared by
                      the price analyst at Marshall on June 20, 1?75, which incorporated     the
                      Marshall technical evaluation and the AFPRO price analysis.      The Marshall
                      cost analysis report accepted the material costs; Powever, it questioned
               -.   / the material    adjustment factor and the escalation rate.   It did not include
                      a follow-up on the earlier AFPRO price analysis recommending that current
                      material   prices be obtained.
                                The total material costs in the revi-ed proposal w&e $484,393.     Martin
                        Zfarietta provided the General Accounting iiffice data on nine material     itezns
                        which were proposed at a cost of $124,403.      The actual cost for these items
                        was $93,724 or 24.7 percent less than prbposed.      The nine items selected
                        byllartixa Marietta were the following:                -_
                          Part Number                                         Proposed                        Actual                  Difference

                      M385~0/01201 BAC/BAB                                    $ 4,104                         $ 1,137                   $ 2,967               -
                      M38510/06205 %AC                                           3,278                          1,191                     a,087 -
                      8S99DlO8A-1                                             _ 34,357                         31,878                      2,479
                      SS99Olll-1.                                               41,181                         36,708                      4,473
                        JANTXV4U23     1                                        28,336              -.         15,224                     13,112
                    . JANTXV2102219A                                             1,288                             SO2                        786
                      JANTXI-21022228                                           -4,444                          2,801                      1,643
                      JANTXWH297OA                                               4,346                          1,868                      2.478
                      JANTXV2N2920                                               3,068                          2,415                        -653

                                 Totals                                       $124,402                        $93,724'                  $30,678

                        Martin      Yarietts’s       material            cost savings were ehelt                            of:
                                                                  _-                                                                           --_   -.-
                                 --procuring         parts on one lot buy,                                                                                            I
                                 -obtaiaing          price options and delaying                            deliveries     uatil       funding        was


                                                            _ .



                                                                                                                                                          1 _._.
                    _       ’
     ,   --.                        ‘_    i                             _.I     j.       ..
                 --obtaining    more favorable prices                                                      by contact in:; more ?;uppI icr:;,                                                       and
                 --taking    advantage of the general                                                      reduction                     of   electronic               prices
                    being experienced.


                 We believe    that as a result      of Xartin    Xarictta’s     ovcrru.~ position       on
           an existing   PIC contract,    cosc    reduction    studies      warp ini t i.7ts-J- but. not
           disclosed to Marshall officials          prior   to negotiating      contract      ;:AS 8-31665.
           Had Hartin Marietta provided        the contracting       officer    current,      coaplcte,   and
           accurate data concerning the cost reduction studies ongoing at the time of
           negotiations,    the contracting     officer     would have had a sound basis for                                                                                                                                                                ‘f

           reducing the contract price by $83,649.

                  In addition,  as a result of the Warshall contracting  officer   not
           following   up on the recommendations in DC&I’s audit report,     NASA incurred
           excess material costs.

                  Accordingly,    we recommend that you detemine       whether the Goverment      is
           entitled    to a price adjustment or recovery    of costs attributable         to the
           cost reduction actions under contract NAS 8-31665. Additionally,                 we
           reco:mnd that you emphasize to contracting        officials      the i??ortance     of
           obtaining,    evaiuating,   and using current,  complete, and accurate ccst or
           pricing data to negotiate noticompetitTive contract prices.

                 We would appreciate                      receiving                          your           cbmmeats                     on these               matters.

                                                                                                       Sincerely                     yours,                     ___
                                                                                                                                                                                                                       --                         . .   -

                                                                                                       William             D. Martin,                Jr.
                                                                                    ..                 Regional Manager
                                                                                                                                                           ._    ‘                    .-
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