oversight

Pricing of Firm Fixed-Price Noncompetitive Contracts with R. L. Polk and Co.

Published by the Government Accountability Office on 1977-07-22.

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

                         DOCUMENT RESUME
02960 - [A20731695]
(Pricing of Firm ixed-Price :oncompetit-ve Contracts with R. L.
Polk and Co. ]. PSAD-77-144; B-114860. Jujy 22, 1977. 5 pp.
Report to Patricia E,. Harris, Secretary, Department of Housing
and ULban Development; by Henry Eschwege, Director, Community
and Economic Development Div.

Issue Aiea: Fderal Procurement of Goods and Services:
    Reasonableness of Prices Under Negotiated Contracts and
    Subcontracts (904).
Contact: Community and Economic Development Div.
Budget Function: Community and Regional Development: Community
    Development (451).
Org;Lnization Concerned: R. L. Polk & Co., Detroit, HI.
Congressional Relevance: House Committec on Banking, Currency
    and Housing; Senate Coamittee on Banking, Housing and Urban
    Affairs.

          An examination of the pricing of two firm fixed-price
noncompetitive contracts, H-3837 and H-2605, awarded by the
Department of Housing and Urban Development (HUD) to R. L. Polk
and Company, showed that contract H-3837 was overpriced y more
than $734,000. This occurred because cost data available prior
to contract negotiations were not used b the contracting
officer to negotiate the contract price, and cost or pricing
data were not obtained to support the price proposed for
contract H-26C5. Findings/Conclusions: Although the HUD auditor
and the price analyst questioned cost data in the proposal for
contract H-3837, the contracting officer disregarded their
recommendations and accepted the contractor's negotiation
position that the price proposed was reasonable. The contracting
of.  er for contract H-2605 did not comply with the regulations
in that he did not require Polk to submit cost or pricing data
in support of its cost proposal. He also did not request a
preaward audit of the proposal. Recommendations: The Secretary
of HU) should: emphasize to contracting officials the importance
of obtaining, evaluating, and using cost or pricing data to
negotiate noncompetitive contract prices, including prices
proposed on the basis of commercial catalogs where it is
determined that the catalog price's are not reasonable; dtermine
whether the Government is entitled to a price adjustment under
contract H-3837; and take action to provide sufficient leadtime
for proper evaluation of contract prices before contract award.
(SC)
                         UNITED STATES GENERAL ACCOUNTING OFFICE
                                 WASHINGTON, D.C.   20548

                                                             twzftT   8B-114860
COMMUNITY ANO ECONOMIC
   DEVELPM!NT DIVISION




                                                            JUL 22 1977
       The honorable Patricia R. Harris
       The Secretary of Housing
         and Urban Development

       Dear Mrs. Harris:

            As part of our survey of negotiated noncompetitive
       contracts awarded by selected civil agencies, we examined
       the pricing of two firm fixed-price noncompetitive contracts,
       H-3837 and H-2605, awarded by the Department of Housing and
       Urban Development (HUD) to R. L. Polk & Co., Detroit, Michigan.
       Contract H-3837, dated May 21, 1975, for $1,579,610, was for
       statistical information on changes i housing in 318 cities.
       Contract H-2605, dated September 30, 1976, for $135,020, was
       for housing vacancy data in 144 cities.

            With certain exceptions, Federal Procurement Regulations
       (FPR) requires that contracting officers obtain from contractors
       cost or pricing data to support proposed prices for negotiated
       noncompetitive contracts expected to exceed $100,000. Con-
       tractors are required to certify that cost or pricing data
       used as a basis for negotiating contract prices is accurate,
       current, and complete. A clause is inserted in the contracts
       giving the Government a right to recover from contractors any
       amount y which the contract price is overstated because of
       its reliance on inaccurate, noncurrent or incomplete data
       (defective data).

            Our objectives during this survey were to determine
       whether (1) contracting officers obtained cost or pricing data
       to support the proposed contract prices, (2) data obtained was
       evaluated and relied on in negotiating the contract prices, and
       (3' the prices negotiated were reasonable in relation to cost
       or pricing data available.

           In summary, we found that contract -3837 was overpriced
      by more than $734,000 because cost data available prior to
      contract negotiations was not used by the contracting officer
      to negotiate the contract price. We also found that cost or
      pricing data was not obtained to support the price proposed
      for contract H-2605.

                                                       PSAD-77-144
B-114860


        Contract H-3837

     On April 10, 1975, Polk submitted a proposal and support-
ing cost data in the amount of $2,001,606. Subsequently, Polk
reduced the proposed price to $1,579,610 by reducing the cost
proposed for "survey and data preparation" to about $600,000.
The initial proposal and proposal as revised by cost elements
follow:

                                         Initial         Proposal as
         Cost Elements                   proposal        revised

Cost for providing information           $     '12,462   $    712,462
on year-to-year changes in
housing in 318 cities

Salary and travel                              267,330        267,330

Survey and dta preparation                   1,021,814        599,818
cost
Proit                                              _         _-   -



             Total proposed cost         $2,u01,606      $1,579,610


     The HUD auditor and the price analyst questioned the
$599,818 proposed for "survey and data preparation" because
this was incurred in prior years in te development of other
products and, therefore, was not a cost to Polk for this new
effort. The auditor and price analyst recommended that tne
contracting officer negotiate a lower amount for this cost
item. Disregarding these recommendations, the contracting
officer accepted Polk's negotiation position that the price
proposed was reasonable because it equated to 10 cents per
household to be surveyed whereas sales of similar data to
other customers equated to 15 cents per unit, and awarded the
contract at the proposed price of $1,579,610.
     The contracting officer apparently based his decision on
price reasonableness on prior commercial sales of the same
data. Although, the HUD auditor verified that Polk had prior
sales of similar data and that 3 of these sales were at
15 cents per unit, we believe the contracting officer erred
in his assumption that these sales justified the reasonableness
of the price proposal.




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B-114860



      To justify not basing the price on supporting cost data,
the FPR states that the price of proposed items must be based
o:, established catalog or market prices of commercial items
sold in substantial quantities to the general public. We
found that the three sales verified by the HUD auditor were
not made to tne general public but were to state and local
governments under HUD and the Department of Transportation
grants. Further, notwithstanding the existence of commercial
sales, the PP provides that cost data may be obtained and
used to establish a reasonable price where the contracting
office: determines that the price proposal is not reasonable.
In this case the contracting officer was placed on notice by
the c:    data furnished by the contractor and an audit of that
data thl3t the -rice proposed was not reasoinable.
     Y1n addition, because the price negotiated was not based on
ava2.abe cost data, no attempt was made to reduce the $267,000
prcrosed for "salary and travel" cost--primarily for a liaison
off..er.   We found that Polk's proposal included 3n annual cost
to maintain the liaison office whereas the HUD contract period
was for 6 months. We also believe that some of the cost pro-
posed for "salary and travel" was unreasonable. For example,
this item of cost included a salary cost for the liaison
officer which was nearly twice as much as the salary of his
supervisor. Had the cost or pricing data been used to nego-
tiate the cont:act price, we believe the contracting officer
would have ha a reasonable asis for reducing the cost pro-
posed for "salary and travel" by at least $134,000, or the
equivalent of 6 onths' cost.
     Contract H-2605
     When awarding contract H-2605, te contracting officer did
not comply with the regulations in that he did not require Polk
to submit cost or pricing data in support of its cost proposal;
neither did he request a preaward audit of the proposal. Because
of this lack of information, we could not make an ssessment of
the reasonableness of the price negotiated.
     On August 26, 1976, the HUD program office requested the
procurement office to award a contract to Polk. According to
the contracting officer, a heavy workload prevented him f.om
requesting a proposal from Polk until September 24, a month
later. As the funds for this procurement had to be obligated
by September 30, the end of the fiscal period, the contracting
officer told us that he ora:ly requested a proposal from Polk.

                             - 3 -
B-114860


     To comply with this   request, Polk, on the same day,
submitted a proposal for   $151,900 to provide housing vacancy
data on 144 cities. The    proposed price was broken down on a
single-sheet format, but   the bases for the cost elements and
the supporting data were   not provided as required by the
regulations.

     The UD price analyst received the proposal cn September 27
and based his evaluation on phone calls to Polk and data obtained
nearly 18 months previously when contract H-3837 was being nego-
tiated. The price analyst recommended that proposed overhead
and general and administrative costs be reduced. Although the
regulations require a preaward audit of proposals in excess of
$100,000, the contracting officer did not have sufficient time
to obtain an audit verification because of the September 30
deadline for awarding the contract.

     Negotiations were concluded on September 30 and a contract
was awarded for $135,020.  The reduction in price was based on
the price analyst's recommendation. A certificate of current
cost or pricing data was executed by Polk.
     As the proposal submitted to HUD lacked adequate support,
we attempted to review the proposal at Polk. However, a Polk
official told us that due to the haste in preparing the proposal,
there was a lack of adequate data to support the proposal.
Consequently, we were unable to evaluate the basis or reason-
ableness of the negotiated price.

     The contracting officer said he did not comply with the
regulation in the award of contract H-2605 because there was
not sufficient time to obtain a formal proposal, supporting
cost or pricing data, conduct formal negotiation, and still
award the contract before the end of the fiscal year. He
said that if the contract had not been awarded, the funds
would have been lost.

Conclusions and Recommendations

     The negotiation of the prices of contracts H-3837 and
H-2605 indicated weaknesses in obtaining, evaluating, and
using accurate, current and complete cost or pricing data.
These weaknesses resulted in the price of contract H-3837



                                - 4 -
B-114860



being overstated by more than $734,000 and the lack of cost or
pricing data to support the price of contract H-2605.

     Accordingly, we recommend that you

     -- emphasize to contracting officials the importance
        of obtaining, evaluating, and using cost or pricing
        data to negotiate noncompetitive contract prices,
        including prices proposed on the basis of commercial
        catalogs where it is determined that the catalog prices
        are not reasonable,

     -- determine whether the Government is entitled to a
        pric2 adjustment under contract H-3837, and

     -- take action to provide sufficient leadtime for proper
        evaluation of contract prices before contract award.



     We are sending copies of this report to the Chairmen of the
Senate and house Committees on Government Oerations, and Appro-
priations. We are also sending copies to the House Committee on
Banking, Currency, and Housing, Senate Committee on Banking,
Housing and Urban Affairs, Office of Procurement Policy of the
Office of Management and Budget, and R. L. Polk and Company.


      As you know, section 236 of the Legislative Reorganization
Act of 1970 requires the head of a Federal agency to submit a
written statement on actions taken on our recommendations to
the House and Senate Committees on Government Affairs not
later than 60 days after the date of the report and to the
House and Senate Committees on Appropriations with the agency's
first request for appropriations made more than 60 days after
the date of the report.

     We would appreciate receiving your comments on these
matters and would be pleased to discuss any questions that
you may have.

                                  Sincerely yours,




                                  Henry Eschkege
                                  Director


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