oversight

F-16 Program: Reasonably Competitive Premiums for European Coproduction

Published by the Government Accountability Office on 1990-05-14.

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

GAO
                   United States
                   General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-239473
                   May 14,lQQO

                   Mrs. Dr. Saskia Stuiveling
                   Chairman, SupremeAudit Institution
                     Conferenceon F-16 Matters
                   Algemene Rekenkamer
                   2500 EA ‘s-Graver&age
                   The Netherlands

                   Dear Mrs. Stuiveling:

                   In responseto your request at the June 1989 SupremeAudit Institution
                   Conferenceon F-16 Matters in Brussels,Belgium, we reviewed the pro-
                   cedures used by General Dynamics Corporation to calculate reasonably
                   competitive premiums for the F-16 Multinational Fighter Program. The
                   SupremeAudit Institutions want to ensure that their respective govern-
                   ments pay the proper price for goods delivered and services rendered
                   under this program. The premiums are used by General Dynamics to
                   determine whether subcontract proposals involving European compa-
                   nies are reasonably competitive. As agreed at the conference,we
                   reviewed General Dynamics’premium calculations, including the
                   exchange rates that were used to convert European currencies to U.S.
                   dollars, for three F-16 componentsthat have been coproduced by Euro-
                   pean companiesto determine whether the calculations were reasonable
                   and accurate.

                   Our review of reasonably competitive premiums for three aircraft com-
Results in Brief   ponents demonstrated that, overall, General Dynamics used reasonable
                   methods, suitable data, and accurate computations in setting the premi-
                   ums for those components.We did not identify anything in General
                   Dynamics’calculations that overstated premium values or prevented
                   European subcontract proposals from being reasonably competitive.
                   The production hours, labor rates, support costs, domestic and Euro-
                   pean purchase order values, cost estimating methodology, and other fac-
                   tors General Dynamics used to calculate the three premiums we
                   reviewed were supported by adequate documentation. In addition, we
                   found that General Dynamics used the correct currency exchangerates
                   to compute the three premiums. The procedures used by General
                   Dynamics to establish the reasonably competitive premiums and the




                   Page 1                                GAO/NSIAD-96-181 F-16 Program Premiums
             B-239473




             related reasonablycompetitive coproducedprices and reasonably com-
             petitive purchase order values for the F-16 Multinational Fighter Pro-
             gram are describedin appendix I.


             Under the F-16 Multinational Fighter Program,four European coun-
Background   tries-Belgium , Denmark,the Netherlands, and Norway-joined with
             the U.S. government in purchasing the first 998 F-16 aircraft under
             prime contracts awarded to GeneralDynamics.The program to purchase
             these aircraft is known as the 998 program . As a part of that program ,
             the US. government agreedthat a portion of future manufacturing
             activity for third country F-16 saleswould be awarded to companiesor
             coproducersin the four European countries, provided their offers were
             reasonablycompetitive with offers from U.S. (domestic)companies.The
             prem iums were calculated by GeneralDynamicsand approved by the
             U.S. Air Force F-16 SystemProgram Office to establish a basis for
             awarding reasonablycompetitive production subcontracts for F-16 com-
             ponents to the European coproducers.
             GeneralDynamicsestablishedprem iums for 51 aircraft components
             (airframe parts, avionics and mechanicalsystems,and program manage-
             ment) for the F-16 program . The prem iums were developedin 1982
             basedon a study of the costsof manufacturing and assemblingaircraft
             for the 998 program . Someof the prem iums were revised in 1983
             becauseof changing aircraft configurations and corrections made to cer-
             tam details in the analysesof production tasks.
             For each F-16 componentcoproducedby European companies,General
             Dynamicsapplies the prem ium from the 998 program to the domestic
             unit price for follow-on production to set a reasonably competitive
             coproducedprice. A reasonably competitive purchase order value is
             computed from this price to evaluate subcontract proposals involving
             European companies.Proposalsthat are equal to or less than the reason-
             ably competitive purchase order value can be agreedto by General
             Dynamicsas part of normal contract negotiations.If, however, a propo-
             sal exceedsthis value, GeneralDynamicsmust notify the F-16 System
             Program Office, which makesthe final determ ination whether
             coproducersmeet reasonably competitive criteria.




              Page 2                                GAO/NSItiD&I-181   F-16 Program premiums
   ,


              I5239473




              We used three factors to selectthe aircraft componentsand premiums to
Scopeand      review. First, we selectedhigh-dollar components;second,we selected
Methodology   componentscoproducedby companiesfrom different European partici-
              pating countries; and third, we included both airframe parts and a
              mechanicalsystem. We selectedtwo airframe parts-the aft and center
              fuselages-which are coproducedin Belgium and the Netherlands,
              respectively. In addition, we selecteda mechanicalsystem-the ammo
              handling system- which was coproducedin Norway.

              Becausethe premiums continue to be used in making reasonably com-
              petitive subcontracting decisionsfor current F-16 production for salesto
              third countries, they are consideredto be competition sensitive by the
              U.S. Air Force and GeneralDynamics.Accordingly, we are not disclosing
              premium values and the data used to computethem.

              Although we cannot disclosespecific values for the three 998 program
              premium calculations we reviewed, we replicated each step of the calcu-
              lation for each premium. In addition, we reviewed the application of the
              premiums for the initial follow-on production program (Multiyear I). We
              examined GeneralDynamics’working papers supporting the premium
              calculations and, where possible,verified the data used in the calcula-
              tions by tracing them to official company records or U.S. government
              documents.If official company records were no longer available, we
              used alternate proceduresto ensure that the data were suitable for the
              premium calculations. A detailed description of the factors and calcula-
              tions GeneralDynamicsused for each premium is shown in appendix II,
              and the documentationwe reviewed is shown in appendix III.

              To conduct our work, we met with officials of the GeneralDynamics
              Corporation, Fort Worth Division, Texas;the DefenseContract Audit
              Agency, GeneralDynamics/Fort Worth; and the US. Air Force F-16 Sys-
              tem Program Office, Wright-Patterson Air Force Base,Ohio. We con-
              ducted our review from December1989 to May 1990 in accordancewith
              generally acceptedgovernment auditing standards. We provided a draft
              of this report to officials from GeneralDynamics and the F-16 System
              Program Office, and they agreedthat the report is accurate and contains
              no competition sensitive information that would limit its distribution.




              Page 3                                GAO/NS~96-181   F-16 Program Premiunw
B-239473




We will not distribute this report until 30 days after its issue date. At
that time we will send copiesto appropriate congressionalcommittees;
the Secretary of the U.S.Air Force; GeneralDynamics;and the Director,
U.S.Office of Managementand Budget.

Pleasecontact me at (202) 275-4268if you have any questions concern-
ing this report. Other major contributors to this report are listed in
appendix IV.

Sincerelyyours,




Nancy R. Kingsbury
Director
Air Force Issues




Page 4                                 GAO/NS~~181     F-16 Program Premiums
.




    Page 6   GAO/NSIAD9@181 F-16 Rvgram Pmmiums
Appendix I                                                                               ,

ProceduresUsed by General Dynamics to
Establish ReasonablyCompetitive Premiums for
the F-16 Multinational Fighter Program
               Under the 1975 “Memorandum of Understanding Betweenthe U.S. Gov-
               ernment and the Governmentsof Belgium, Denmark, the Netherlands,
               and Norway, Relating to the Production and Procurementof F-16 Air-
               craft,” companiesin the four European countries participated in produc-
               ing the initial 998 F-16 aircraft. In addition, on the condition that
               reasonably competitive terms were offered in accordancewith the mem-
               orandum of understanding,the US. government agreedto place 16 per-
               cent of the procurement value of all follow-on third country purchases
               of the F-16 aircraft with companiesin the four European countries.

               The 998 program covered fiscal years 1977 through 1982. Follow-on
               production took place primarily under Multiyear Contracts I and II,
               which covered calendar years 1982 through 1985 and 1986 through
               1989, respectively. General Dynamics placed European subcontracts for
               the 998 aircraft within an agreedframework of a not-to-exceedprice per
               aircraft. Consequently,those subcontractswere consideredto be reason-
               ably competitive by definition. However, the need to further define the
               program requirement that European subcontractsbe reasonably com-
               petitive arose during negotiations for the follow-on contracts (U.S.
               Air Force and third country).

               The F-16 SystemProgram Office consideredseveral approachesto mak-
               ing a reasonablycompetitive determination and decidedto adopt the
               approach of establishing a reasonably competitive premium over the
               domesticprice for each componentcoproducedby European companies
               during the 998 program. The premium plus the current domesticprice
               served as the reasonably competitive coproducedprice to be used in the
               evaluation of subcontract proposals for follow-on production.

               GeneralDynamics computesa reasonably.competitivepurchase order
               value from the reasonably competitive coproducedprice to evaluate
               subcontract proposals involving European companies.Proposalsthat
               are equal to or less than the reasonably competitive purchase order
               value can be agreedto by GeneralDynamics as part of normal contract
               negotiations. If, however, a proposal exceedsthis value, GeneralDynam-
               ics must notify the F-16 SystemProgram Office, which makesthe final
               determination whether coproducersmeet reasonably competitive
               criteria.

               GeneralDynamics establisheda premium for every componentthat was
               coproducedby companiesin European participating countries by ana-
               lyzing the actual tasks and production elementsfor the 998 program.
               The premium is the amount that the averagecoproducedprice exceeded


               Page 6                                GAO/NSIAD-96-181 F-16 Program Premiums
                                           Appendix I
                                           Procedures Used by General Dynamics to
                                           Establish Reasonably Competitive Premiums
                                           for the F-16 Multinational Fighter Program




                                           the averagedomesticprice for a componentfor the 998 program .
                                           According to the requirementsof the memorandumof understanding,
                                           European currencieswere converted to U.S.dollars with October 1974
                                           exchangerates to computecoproducedprices. Both the coproducedand
                                           domesticprices were calculated in January 1980 U.S. dollars to facili-
                                           tate price comparisons.The methodologyGeneralDynamicsused to
                                           computethe prem iums is shown in figure I. 1.


Figure 1.1:General Dynamics’ Calculation of the 998 Program Premium


  Coproduked Price                 Domestic Price                           998 Program
                                                                            Premium
 The average purchase              The average domestic
 order value involving             price of a’component
 European coproduction             for the 998 program
 for a component for
 the 998 program,
 converted to U.S. dollars
 with October 1974
 currency exchange rates,
 plus normal General
 Dynamics support costs
 plus costs to ship material
 to and from the
 European subcontractor



                                           Note: Support and shipping costs include General Dynamics’ earnings.
                                           Note: Prices were calculated in January 1980 U S. dollars




                                           Page 7                                                  GAO/NSIAD-W181 F-16 Pnxgram premiums
Appendix I
Proeednrea Used by General Dynamica to
Establish Reasonably Competitive Premiums
for the F-16 Mnltinationd Fighter Pro6ram




For follow-on production contracts,GeneralDynamicsupdated the
domesticprices of Europeancoproducedcomponentsto reflect the latest
proposed or negotiated prices for the contracts and added the 998 pro-
gram prem iums to those prices to establish reasonablycompetitive
coproducedprices. GeneralDynamicscalculated reasonablycompetitive
purchase order values by subtracting its shipping and support costs
from these prices. Early in the initial multiyear procurementphase,Gen-
eral Dynamicsbeganproducing the F-16 C/D configuration in addition
to the original F-16 configuration, the F-16 A/EL The same998 program
prem iums were applied to domesticprices regardlessof the aircraft con-
figuration. The only time prem iumschangedwas when parts were
deleted and new parts were added. When this occurred, the prem iums
for the deleted items were combinedand allocatedto the new items.
GeneralDynamics’methodsof calculating reasonablycompetitive
coproducedprices and reasonablycompetitive purchaseorder values, or
ceiling prices, for follow-on production involving Europeancompanies
are shown in figures I.2 and 1.3,respectively.




Page 8                                      GA0/Nf4rAD66-181 F-16 Program Premhlma
                                             Appenclix I
                                             Procedures Used by General Dynamics to
                                             Establish Wasonably Competitive Remimns
                                             for the F-16 MnlthmtionaJ Fighter Program




Figure 1.2: General Dynamics’ Calculation of the Reasonably Competitive Coproduced Price

  Domestic Price                    998 Program                             Reasonably
                                    Premium                                 Competitive
                                                                            Coproduced Price
 Determined from the                Premiumestabkhed
 most recent proposed               for a component
 and negotiated prices              from the 998 program
 foia component for                                            -
 follow-on domestic                                            -
 production for the      +
 U.S. Air Force




                                             Note: Prices were calculated in January 1980 U.S. dollars.




Figure 1.3: General Dynamics’ Calculation of the Reasonably Competitive Purchase Order Value




  Reasonably                 Costs to ship
  Competitive                material to
  Coproduced                 and from the
  Price                      European                                                          Order Value
                             subcontractor




                                             Note: Shipping and support costs include General Dynamics’ earnings.

                                             Note: Prices were calculated in January 1980 U.S. dollars.




                                             Page 9                                                  GAO/NSIAIN&181   F-16 Program Premiums
Appendix II

General Dynamics’Calculations for Premiums
and ReasonablyCompetitive Purchase Order
Values for the Aft and Center Fuselagesand the
Ammo Handling System     -
                             For each F-16 componentcoproducedby European companies,General
                             Dynamics adds the 998 program premium to its domesticprice for
                             follow-on production to set a reasonablycompetitive coproducedprice.
                             GeneralDynamics computesa reasonably competitive purchaseorder
                             value from this price to evaluate subcontract proposals involving Euro-
                             pean companies.Proposalsthat are equal to or less than the reasonably
                             competitive purchaseorder value can be agreedto by GeneralDynamics
                             as part of normal contract negotiations.If, however, a proposal exceeds
                             this value, GeneralDynamicsmust notify the F-16 System Program
                             Office, which makesthe final determination whether coproducersmeet
                             reasonablycompetitive criteria.

                             GeneralDynamics establishedreasonablycompetitive premiums for the
                             aft and center fuselagesand the ammo handling system by computing
                             the differences betweentheir domesticand European coproducedprices
                             for the 998 program. The premiums were used to compute the reasona-
                             bly competitive purchaseorder values (ceiling prices) for the compo-
                             nents for follow-on production. The methods and data General
                             Dynamics used to calculate the components’domestic and coproduced
                             prices for the 998 program and their respectivereasonablycompetitive
                             purchase order values for follow-on production are describedbelow.
                             GeneralDynamics’processfor calculating the 998 program domestic
Calculation of the 998       prices for the aft and center fuselagesis shown in figure II. 1. To calcu-
Program Domestic             late domesticprices, GeneralDynamics determined the number of labor
Prices for the Aft and       hours required to produce the componentsfor the 998 program from
                             recorded actual hours and a projection of hours to completedomestic
Center Fuselages             production. Learning curves derived from the actual hours were used to
                             make the projections. The total hours computed from the actual and
                             projected hours were divided by the number of units domestically pro-
                             duced to compute the averagelabor hours to produce one unit. (Actual
                             hours comprisedabout 78 percent of the total hours for the aft fuselage
                             and about 76 percent of the total hours for the center fuselage.)
                             GeneralDynamics applied a compositehourly labor rate for direct and
                             indirect costs to the averagelabor hours per unit to compute average
                             unit costs.The compositelabor rate was developedwith January 1980
                             direct labor rates, averagenegotiated indirect cost rates from the
                             998 program, and labor composition(i.e., manufacturing, researchand
                             engineering,tool manufacturing, and plant engineeringlabor) that was
                             planned for the first year of the initial multiyear contract. General
                             Dynamics used planning data rather than actual data to determine labor



                             Page 10                                GAO/NSJAD90-181 F-16 Program Premiums
Appendix II
General Dynamics’ Calculations for
Premiums and Reasonably Competitive
Purcbase Order Values for the Aft and Center
Fuselages and the Ammo Handling System




compositionbecauselabor accountingrecords were not available at a
sufficient level of detail for the 998 program .

GeneralDynamicsapplied an earnings factor to the averageunit cost
and a manufacturing support factor to the averageunit price (cost plus
earnings) for each item to set the domesticunit price for the 998 pro-
gram prem ium calculations.Neither of these factors was included in the
compositelabor rate mentioned above. The earnings factor was repre-
sentative of GeneralDynamics’earnings on 998 program contracts, and
the manufacturing support factor was negotiated with the US. govern-
ment. GeneralDynamicsfurnished materials to the European companies
for the aft and center fuselages;therefore, material costswere not
included in either the domesticor coproducedprices.




Page 11                                        GAO/NSIADWlSl   F-16 Program Premiums
                                           Appendix II
                                           General Dynamics’ Calculations for
                                           Premiums and Reasonably Competitive
                                           Pm-chase Order Values for the Aft and Center
                                           Fuselages and the Ammo Handling System




Figure 11.1:Calculation of the 998 Program Domestic Prices for the Aft and Center Fuselages



                                     Actual Labor Hours
                              plus   Projected Labor Hours
                           equals    Total Labor Hours
                       divided by    Number of Units Domestlcally Produced
                           equals    Average Labor Hours Per Unit

                                                                                              I




                                     Average Labor Hours Per Unit
                    multiplied by    Composite Hourly Labor Rate
                           equals    Average Unit Cost

                                                                                              I




                                     Average Unit Cost
                    multiplied by    General Dynamics’ Earnings Factor
                           equals    Average Unit Cost Including Earnings




                                     Average Unit Cost Including Earnings
                    multiplied by    Manufacturing Support Factor
                           equals    Domestic Unit Price




                                           Page 12                                        GAO,‘NS~96-181   F-16 Program Premiums
                         Appendix IL
                         General Dynamics’ Calculations for
                         Premiums and Reasonably Competitive
                         Pm-chase Order Values for the Aft and Center
                         Fuselages and the Ammo Handling System




                         GeneralDynamics’processfor calculating the 998 program coproduced
Calculation of the 998   prices for the aft and center fuselagesis shown in figure 11.2.General
Program Coproduced       Dynamicscalculated coproducedprices by adding support costsand the
Prices for the Aft and   costs to ship materials to and from the European-companiesto the aver-
                         age European purchase order values for these componentsfor the 998
Center Fuselages         program .

                         The averageEuropean purchase order values were computedby General
                         Dynamicsfrom the most current European subcontractor proposals.The
                         proposalswere converted by GeneralDynamicsfrom European curren-
                         cies to U.S. dollars with October 19’74exchangerates and expressedin
                         January 1980 U.S.dollars to facilitate comparisonsto domesticprices,
                         which were calculated in January 1980 U.S. dollars. The support costs
                         were basedon a compositefactor consistingof coproducersupport,
                         material overhead, product liability insurance,general and administra-
                         tive expenses,cost of money, and earnings.

                         GeneralDynamics’shipping costsconsistedof shipping material, trans-
                         portation, direct labor, and shipping support costs.The shipping support
                         costs included overhead, product liability insurance,general and admin-
                         istrative expenses,cost of money, and earnings.The various elementsof
                         support coststhat were applied to both purchase orders and shipping
                         costs were basedmainly on indirect cost rates experiencedduring the
                         998 program . The earnings were representative of GeneralDynamics’
                         earnings on 998 program contracts.




                         Page 13                                        GAO/NSIAD!HH81   F-16 Program Premiums
                                                                                                                                   .


                                              Appendix II
                                              General Dynamics’ Calculations for
                                              Fremlmns and Reasonably Competitive
                                              Purchase Order Values for the Aft and Center
                                              Fuselages and the Ammo Handling System




Figure 11.2:Calculation of the 998 Program Coproduced Prices for the Aft and Center Fuselages



         Average European Purchase Order Value

         Computed from the most current European subcontractor        proposals




          General Dynamics’ Support Cost Per Unit

          Computed by multiplying the average European purchase order value
          by a composite support factor




          Shipping Cost Per Unit

         Computed by adding the cost of shipping material per unit,
         shipping/ other charges per unit, and direct labor hours cost per unit




                                              Note: Support and shipping costs include General Dynamics’ earnings.




                                              Page 14                                               GAO/NSiAD-90-181 F-16 Program Premiums
                       Appendix II
                       General Dynamics’ Cshlations for
                       Premiums and Reasonably Competitive
                       Pmchase Order Values for the Aft and Center
                       Fuselages and the Ammo JiIandljng System




                       GeneralDynamics’processfor calculating the reasonably competitive
Calculation of the     purchase order values for the aft and center fuselagesis shown in
Reasonably             figure 11.3.To establish reasonablycompetitive purchase order values
Competitive Purchase   for the initial multiyear contract, GeneralDynamicsused domestic
                       prices for the contract period, added the 998 program prem iums,and
Order Values for the   adjusted the prices to exclude its shipping and support costs.
Aft and Center
Fuselages              GeneralDynamicsdeterm inedthe domesticprices for the initial multi-
                       year contract period by (1) applying a compositelabor rate (including
                       earnings) to its projected hours for fabrication and assemblytasks, (2)
                       dividing the resultant domesticcost by the number of units to be pro-
                       duced for the U.S. Air Force to compute an averageunit domesticcost,
                       and (3) adding additional machineshop costs for work to be completed
                       at GeneralDynamics’facility in Abilene, Texas. GeneralDynamics
                       developedthe fabrication and assemblycompositelabor rates primarily
                       with January 1980 direct labor rates, averagenegotiated indirect cost
                       rates for the initial multiyear proposal, labor compositionbasedon
                       detailed analyses,and an earnings rate representative of its earnings on
                       998 program contracts.
                       GeneralDynamicsadded the 998 program prem iums for the aft and
                       center fuselagesto their respective domesticunit prices to set reason-
                       ably competitive coproducedunit prices for the items. Shipping and sup
                       port costswere subtracted from the reasonably competitive coproduced
                       unit prices to establish reasonablycompetitive purchase order values.
                       The indirect cost rates GeneralDynamicsused in computingthe support
                       and shipping costswere the averagenegotiated rates for the initial
                       multiyear proposal.




                       Page 16                                       GAO/NSJAD96-181 F-16 Program Premiums
                                                                                                                                            ,

                                                                                                                                                ,
                                             Appendix II
                                             General Dynamics’ Calculations for
                                             Premiums and Reasonably Competitive
                                             Purchase Order Values for the Aft and Center
                                             Fuselages and the Ammo Handling System




Figure 11.3: Calculation of the Reasonably
Competitive Purchase Order Values for
the Aft and Center Fuselages                 I                                          ‘L
                                                              Fabrication                                   Assembly

                                                               Total Projected Hours                       Total Projected Hours
                                                 multiplied by Composite Labor Rate          multiplied by Composite Labor Rate
                                                        equals Domestic Cost                        equals Domestic Cost

                                                                                                                                        I
                                             \



                                                                    Fabrication Domestic Cost
                                                           plus     Assembly Domestic Cost
                                                         equals     Total Domestic Cost


                                                                                       1
                                                                    Total Domestic Cost
                                                      divided by    Number of Units Produced
                                                         equals     Domestic Unit Cost




                                                                    Domestic Unit Cost
                                                            plus    Abilene Facility Cost Per Unit
                                                         equals     Total Domestic Unit Price




                                                                    Total Domestic Unit Price
                                                           plus     998 Program Premium
                                                         equals     Reasonably Competitive Coproduced Unit Price


                                                                                       1
                                                                     Reasonably Competitive Coproduced Unit Price
                                                          minus     Shipping Cost Per Unit
                                                          minus     General Dynamics’ Support Cost Per Unit
                                                         equals     Reasonably Competitive Purchase Order Value                         I


                                             Note: The composite labor rates and all cost elements include General Dynamics’ earnrngs




                                             Page 16                                               GAO/‘NSIAB90-181 F-16 Fro@am F’remiums
                         Appendix II
                         General Dynamics’ Calculations for
                         Fremiums and Reasonably Competitive
                         Purchase Order Values for the Aft and Center
                         Fuselages and the Ammo Handling System




                         GeneralDynamics’processfor calculating the 998 program domestic
Calculation of the 998   price for the ammohandling systemis shown in figure 11.4.To calculate
Program Domestic         the domesticprice, GeneralDynamicsadded support coststo the aver-
Price for the Ammo       age domesticpurchase order value for the 998 program . General
                         Dynamicscomputedthe averagedomesticpurchase order value from
Handbng System           the amount negotiated with its U.S. subcontractor for loo-percent
                         domesticproduction. (For the 998 program , GeneralDynamicsand its
                         U.S.subcontractor negotiated separate agreementsfor loo-percent
                         domesticproduction and for domesticproduction with European partici-
                         pation.) Support costswere applied with a compositefactor.

                         GeneralDynamics’compositesupport factor included product quality
                         assurancelabor, labor overhead, fringe benefits, vendor support, mate-
                         rial overhead, product liability insurance,general and administrative
                         expenses,cost of money, and earnings. The compositesupport factor
                         was developedwith January 1980 labor rates, actual and negotiated
                         indirect cost rates for the 998 program , and an earnings rate representa-
                         tive of GeneralDynamics’earnings on 998 program contracts.




                         Page 17                                        GAO/NSIAlMO-181 F-16 Program Premiums
                                           Appendix II
                                           General Dynamics’ Calculations for
                                           Premiums and Reasonably Competitive
                                           Pnrchase Order Values for the Aft and Center
                                           Fuselages and the Ammo Handling System




Figure 11.4:Calculation of the 998 Program Domestic Price for the Ammo Handling System



         Average U.S. Vendor Purchase Order Value

         Computed from the amount negotiated with the U.S. subcontractor
         for loo-percent domestic production




                                                                                                     I
         General Dynamics’ Support Cost Per Unit

         Computed by multiplying the average U.S. vendor purchase order
         value by a composite support factor




                                             -
                                             -
                                                                                                     I
         Domestic Unit Price




                                            Note Support costs include General Dynamics’ earnings.
                                                                                                     I

                                            Page 18                                              GAO/BISIAD-90-181 F-16 Program Premiums
                         Appendix II
                         General Dynamics’ Cakulations for
                         Premhuus and Reasonably Competitive
                         Purchase Order Values for the Aft and Center
                         Fuselages and the Ammo Handling System




                         GeneralDynamics’processfor calculating the 998 program coproduced
Calculation of the 998   price for the ammohandling systemis shown in figure 11.5.General
Program Coproduced       Dynamicscalculatedthe coproducedprice by applying the samesupport
Price for the Ammo       factor that was used in setting the domesticprice to the average
                         purchase order value involving European coproduction. This purchase
Handling System          order value was basedon the latest proposed bid-including European
                         participation-by the U.S. subcontractor;the European portion of the
                         proposal was converted to US. dollars with October 1974 currency
                         exchangerates.
                         Shipping costswere not added to the European coproduction purchase
                         order value becauseGeneralDynamicsdid not ship material for the
                         ammohandling systemto its U.S. subcontractor or to European
                         coproducers.




                         Page 19                                        GAO/NSIANM-181   F-16 Program Premiums
                                             Appendix II
                                             General Dynamics’ Calcnlatio~~ for
                                             Premhuns and Reasonably Competitive
                                             Pnrchase Order Values for the Aft and Center
                                             Fuselages and the Ammo Handling System




Figure 11.5:Calculation of the 998 Program Coproduced Price for the Ammo Handling Svstem



          Average Purchase Order Value Involving European Coproduction

          Based on the latest proposed bid-including    European participation-
          by the U.S. subcontractor




                                                  +


         General Dynamics’ Support Cost Per Unit

          Computed by multiplying the average purchase order value involving
          European coproduction by a composite support factor




                                              -
                                              -




         Coproduced Unit Price




                                              Note. Support costs include General Dynamrcs’ earnings




                                              Page 20                                              GAO/‘NSW96-181   F-16 Program Premiums
                       Appendix II
                       General DynamW Calculations for
                       Premiums and Reasonably Competitive
                       Pm-chase Order Vahtes for the Aft and Center
                       Fuselages and the Ammo Handling System




                       GeneralDynamics’processfor calculating the reasonablycompetitive
Calculation of the     purchase order value for the ammohandling systemis shown in
Reasonably             figure 11.6.To establish a reasonablycompetitive purchase order value
Competitive Purchase   for the initial multiyear contract, GeneralDynamicscomputedthe
                       domesticprice for the componentfor the contract, added the 998 pro-
Order Value for the    gram prem ium , and adjustedthe price to exclude support costs.
Ammo Handling
System                 GeneralDynamicsdeterm inedthe domesticprice by adding support
                       coststo the averagenegotiatedpurchaseorder value for domestically
                       produced items. GeneralDynamicsused negotiatedvalues from fiscal
                       year 1983 of the initial multiyear contract becauseonly domesticpro-
                       duction was planned for that year. (European coproduction was planned
                       for fiscal years 1984 and 1985.) The support costswere added to the
                       purchase order value with a compositefactor that included product
                       quality assurancelabor, labor overhead,fringe benefits, vendor support,
                       material overhead,product liability insurance,general and administra-
                       tive expenses,cost of money, and earnings.The compositefactor was
                       developedwith January 1980 labor rates, negotiated indirect cost rates
                       for the initial multiyear proposal, and an earnings rate representative of
                       GeneralDynamics’earnings on 998 program contracts.

                       GeneralDynamicsadded the ammohandling system’s998 program pre-
                       m ium to its domesticunit price to set the reasonablycompetitive
                       coproducedunit price. To establishthe reasonablycompetitive purchase
                       order value for its subcontractor,GeneralDynamicssubtracted support
                       costsfrom the reasonablycompetitive coproducedunit price using the
                       compositesupport factor mentionedabove.




                       Page 21                                        GAO/NSIAD-90481 F-16 Program Premiums
                                          Appendix II
                                          General Dynamics’ Calcnlations for
                                          Premiums and Reasonably Competitive
                                          Purchase Order Values for the Aft and Center
                                          Fuselages and the Ammo Handling System




Figure 11.6:Calculation of the Reasonably Competitive Purchase Order Value for the Ammo Handling System




                                  Average U.S. Vendor Purchase Order Value
                           plus   General Dynamics’ Support Cost Per Unit
                        equals    Domestic Unit Price




                                  Domestic Unit Price
                           plus   998 Program Premium
                         equals   Reasonably Competitive Coproduced Unit Price




                                             1
                                  Reasonably Competitive Coproduced Unit Price
                         minus    (No Shipping Cost)
                         minus    General Dynamics’ Support Cost Per Unit
                         equals   Reasonably Competitive Purchase Order Value
                                                                                                   I



                                          Note. Support costs mclude General Dynamics’ earnings




                                          Page 22                                             GAO/NSlAD-96-181 F-16 Program Premiums
+Appendix III

 Support Ekamined by GAO for Factors Used in
 the ReasonablyCompetitive Premium
 Calculations
 Table 111.1:Calculation of the 998
 Program Domestic Prices for the Aft and   Factor                         General Dynamics’ documents reviewed
 Center Fuselages                          Actual labor hours             Printout of actual hours by unit
                                           Projected labor hours          Printout of hours by unit projected on a learning curve based
                                                                          on the actual hours provided
                                           Composite hourly labor rate    Planned manufacturing hours for fabrication and assembly
                                                                          during fiscal year 1982

                                                                          Cost Breakdown Schedules for Labor Composition

                                                                          Estimating Factor Documents for Forward Pricing and
                                                                          Experienced Rates

                                                                          998 Program Worksheet for Average Indirect Costs
                                           General Dynamics’ earnings     Letters of confirmation of negotiations concerning contract
                                           factor                         no. F33657-75-C-0310 and the worksheet computing the
                                                                          average earnings for the 998 program
                                           Manufacturing support factor   Estimating Factor Document for Factor/Field Operations
                                                                          Support
                                           Domestic unit orice            Calculation worksheets


 Table 111.2:Calculation of the 998
 Program Coproduced Prices for the Aft     Factor                         General Dynamics’ documents reviewed
 and Center Fuselages                      Average European purchase      Engineering Change Proposal-0006, F-16 Multinational
                                           order value                    Fighter Program (998 aircraft) Subcontractor Computer
                                                                          Summaries (Fact Finding Current Data) and corresponding
                                                                          summaries and worksheets

                                                                          Escalation Used for Rebasing Subcontract/Coproducer
                                                                          Cost, January 1975/1978 Constant Year Dollars to
                                                                          January 1980 Constant Year Dollars
                                           Composite support factor       Material Support Factor Computation Worksheet and
                                                                          corresponding Estimating Factor Documents
                                                                          Letters of confirmation of negotiations concerning contract
                                                                          no. F33657-75-C-0310 and the worksheet computing the
                                                                          average earnings for the 998 program
                                           Shipping cost per unit         Calculation worksheets for shipping costs

                                                                          Tabulation sheets, prepared by the Shipping and Estimating
                                                                          Departments, noting the cost of materials used for shipping,
                                                                          shipping/other charges per unit, and direct labor hours cost
                                                                          per unit

                                                                          Shipping composite rate computation for direct labor

                                                                          Estimating Factor Document for Shipping Inspection
                                           Coproduced unit price          Calculation worksheets




                                           Page 23                                          GAO/NSIAB~181       F-16 Program Premiuma
                                            Appendix Ill
                                            Support Examined by GAO for Factors Used
                                            in the Reasonably Competitive Premium
                                            calculations




Table 111.3:Calculation of the Reasonably
Competitive Purchase Order Values for       Factor                           General Dynamics’ documents reviewed
the Aft and Center Fuselages                Estimated hours for              Printout of estimated hours for the initial multiyear contract
                                            fabrrcatron and assembly
                                            Composite labor rate,            Composite Rate Worksheet and corresponding Estimating
                                            including earnings, for          Factor Documents
                                            fabrication and assembly
                                            Number of units produced         Printout of A/B and C/D units produced domestically for
                                                                             each year during the initial multiyear contract
                                            Abilene facility cost per unit   Composite Rate Worksheet for the Abilene Facility and
                                                                             Tabulation Sheet for Average Hours by fiscal year
                                            Shipping cost per unit           Calculation worksheet for shipping prices

                                                                             Composite Rate Worksheet (shipping labor, shipping/other
                                                                             charges, and shipping material) and corresponding
                                                                             Estimating Factor Documents
                                            Composite support factor         Composite Rate Worksheet for the Material Support Factor
                                                                             and corresponding Estimating Factor Documents
                                            Reasonably competitive           Comparison of F-16 Domestic and European Participating
                                            purchase order value             Go&nment Coproductron Pnces, Reasonably Competrtrve

                                                                             Calculation worksheets




                                            Page 24                                             GAO/NSIAIWO-181 F-16 Program Premiums
                                      Appendix III
                                      Support Examined by GAO for Factors Used
                                      in the Reasonably Competitive Premium
                                      calculations




Table 111.4:Calculation of the 998
Program Domestic Price for the Ammo   Factor                       General Dynamics’ documents reviewed
Handling System                       Average US. vendor           Engineering Change Proposal-0006       F-16 Multinational
                                      purchase order value         Fighter Program (998 aircraft) Subcontractor Computer
                                                                   Summaries (Fact Finding Current Data)

                                                                   Reconciliation of Reasonably Competitive Pricing Worksheet

                                                                   Negotiation Summary

                                                                   Letter of Audit Resolution

                                                                   Escalation Used for Rebasing Subcontract/Coproducer
                                                                   Cost, January 1975/1978 Constant Year Dollars to
                                                                   January 1980 Constant Year Dollars

                                                                   Detailed Price/Cost Analysis of the Proposal
                                      Composite support factor     Material Support Factor Computation Worksheet and
                                                                   corresponding Estimating Factor Documents

                                                                   Letters of confirmation of negotiations concerning contract
                                                                   no. F33657-75-C-0310 and the worksheet computing the
                                                                   average earnings for the 998 program
                                      Domestic unit price          Comparison of F-16 Domestic and European Participating
                                                                   Government Coproduction Prices (Jan. 1980 U.S. Dollars
                                                                   with Oct. 1974 Exchange Rates) Reasonably Competitive
                                                                   Study
                                                                   Reconciliation of Reasonably Competitive Pricing for
                                                                   Purchase Order 301

                                                                   Calculation worksheet




                                      Page 26                                         GAO/NX&D96-181      F-16 Program Premiuma
                                            Appendix III
                                            Support Examined by GAO for Factors Used
                                            in the Reasonably Competitive Remimn
                                            calculations




Program Coproduced Price for the Ammo       Factor                        General Dynamics’ documents reviewed
Handling System                             Average purchase order value Engineering Change Proposal-0006, F-l 6 Multinational
                                            involving European           Fighter Program (998 aircraft) Subcontractor Computer
                                            coproduction                 Summaries (Fact Finding Current Data)

                                                                          Reconciliation of Reasonably Competitive Pricing Worksheet

                                                                          Negotiation Summary

                                                                          Letter of Audit Resolution

                                                                          Escalation Used for Rebasing Subcontract/Coproducer
                                                                          Cost, January 1975/1978 Constant Year Dollars to
                                                                          January 1980 Constant Year Dollars
                                                                          Detailed Price/Cost Analysis of the Proposal
                                            Composite support factor      Material Support Factor Computation Worksheet and
                                                                          corresponding Estimating Factor Documents

                                                                          Letters of confirmation of negotiations concerning contract
                                                                          no. F33657-75-C-0310 and the worksheet computing the
                                                                          average earnings for the 998 program
                                            Coproduced unit price         Reconciliation of Reasonably Competitive Pricing for
                                                                          Purchase Order 301

                                                                          Calculation worksheet


Table 111.8:Calculation of the Reasonably
Competitive Purchase Order Value for        Factor                        General Dynamics’ documents reviewed
the Ammo Handling System                    Average US. vendor            Calculation worksheet with corresponding documents,
                                            purchase order value          memorandums, summaries, and worksheets
                                            Composite support factor      Composite Rate Worksheet and corresponding Estimating
                                                                          Factor Documents
                                            Reasonably competitive        Comparison of F-l 6 Domestic and European Participating
                                            purchase order value          Government Coproduced Prices (Jan. 1980 U.S. Dollars with
                                                                          Oct. 1974 Exchange Rates)

                                                                          Calculation worksheet.




                                            Page 26                                          GAO/NSIAMO-181 F-16 Program Premiums
‘Appendix IV

 Major Contributors to This Report


                              Isabella P. Seeley,Evaluator-in-Charge
 Da11as    Re@ona1   Office   Kenneth   R. Rupx   &qJuator
                              Linda K. Lohrke, &aluator
                              Joe D. Quicksall, Technical Advisor




(392664)                      Page 27                               GAO/lWAD90-181   F-16 Program Premiums
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