DOCUMENT RESUME 03587 - [A27239411 [Impact of Navy Report of F-18 Ejection Seat Contract]. PSAD-77-167; B-183851. September 28, 1977. 5 pp. Report to Rep. John J. McFall; by Robert F. Keller, Acting Comptroller General. Issue Area: Federal Procurement of Goods and Services: Feasonableness of Prices Under Negotiated Contracts and Subcontracts (1904). Contact: Procurement and Systems Acquisition Div. Budget Function: National Defense: Department of Defense - Procurement & Contracts (058). Organizaticn Concerned: Department of the Navy; Martin-Baker Aircraft Co., Ltd.; McDonnell Douglas Corp.; Stencel Aero Engineering Corp., Inc. Congressional Relevance: Rep. John J. McFall. Nothing in the Navy's report nor the comments from an unsuccessful bidder changes GAO's original conclusions concerning award of the F-18 ejection seat contract to McDonnell Douglas Corp. Findirgs/Conclusions: The principal issues in the procurement are: the better seat, from a technical standpoint, was not selected in favor of an accep t able but less costly seat; the price upon whic! this decision was based was only a small portion of the total costs, including technical assistance costs incurred ty prime contractor; and there was no assurance that the lower initial price would not be offset by either higher life cycle costs cr recovery of development contract losses on follow-cn production and spare parts contracts. Prime contractor's liability to its subcontractor was limited by the contract to S126,]26.32 through September, 1977. The costs to the Government for terminating the present subcontract and awarding it to another source would also include the prime contractor's nonrecoverable costs. As a matter of sound procurement policy, the apparent "buy-in," without adequate basis for assuring that future prices do not include initial award losses, should not be allowed. There is no objection to the termination of the present subcontract un2ess the costs involved become excessive or the new contracto. cannot meet the required delivery schedule. (Author/SS) COMPTROLLER GENERAL OF THE UNITED STATES WABHINGTON. D.C. 20s48 B-183851 SEP 28 1977 The Honorable John J. McFall House of Representatives Dear Mr. McFall: On August 9, 1977, you requested us to review and to comment on the Navy report prepared in response to our April 11, 1977, report "Should the Navy Reverse McDonnell Douglas Corporation's Award of the F-18 Ejection Seat Contract?" Specifically, you asked us to respond to the following question: Is there anything in the Navy report which would cause you to alter your conclusions and recom- mendations including whether you would now recommend termi- nation of the Martin-Baker F-18 ejection seat contract? You also requested confirmation of the cost of $126,326.32 for terminating the Martin-Baker contract through September 1977. Also, on August 22, 1977, you furnished comments prepared by Counsel for Stencel Aero Engineering Corporation, Inc., on the Navy report for our consideration. We considered both the Navy report and Stencel's comments in our evaluation. Basically, there isn't anything in the Navy report or Stencel's comments which would cause us to change our previous conclusions. In our opinion, the principal issues in this procurement are as follows: -- The better seat from a technical standpoint was not selected in favor of an acceptable but less costly seat. -- The price upon which this decision rests is only a small portion of the costs that will ultimately be incurred during follow-on production and operation. -- There is no assurance that the initial price advantage, upon which the decision was made, will not be offset throLgh either higher life PSAD-77-167 B-183851 cycle costs or through recovery of development contract losses on follow-on production and spare parts contracts. Inherent in this procurement, therefore, are the factors of (1) the relative merits of technical superiority and costs, (2) life cycle cost, and (3) "buying in." Other factors to be considered are the adequacy of domestic sources and assist- ance to Martin-Baker. TECHNICAL VERSUS COST Our report suggested that the Navy consider the relative worth of S-encel's technical advantage and Martin-Baker's cost advantage because McDonnell selected the cost advantage even though its source selection scoring process suggested the opposite. The Navy report states that its technical evaluation concluded that the Stencel seat was superior for reasons of better ground safety and more attention to maintainability and reliability, bift that both seats were technically acceptable and equal in lifesaving potential. The report states that the technical advantages of the Stencel seat were not considered to be overriding. Apparently the Navy is satisfied that the lower cost of the Martin-Baker ejection seat is preferred over the technical advantages offered by the Stencel ejection seat. LIFE CYCLE COST The Navy's evaluators made an independent life cycle cost analysis of the two seats which shows a lower cost of about $6.4 million for the Martin-Baker seat. The major differences in cost are the full-scale development and acquisition cost of seats for production aircraft. The areas where costs for the Stencel seat were lower were not sufficient to offset the lower Martin-Baker price proposal. After McDonnell had selected the Martin-Baker proposal, Stencel offered to submit a lower price proposal which was rejected. Life cycle costs computed by the Navy, on the basis of the revised proposal, show $1.1 million lower costs for the Stencel seat. The Navy evaluators stated, however, that sufficiently reliable data for life cycle cost analysis and for influencing the procurement decision did not and does not exist at this time, largely due to the lack of reliable acquisition cost data for seats following Optio'1 III. - 2 - B-183851 "BUYING IN" Our report stated that there are strong indications that Martin-Baker's development prices will not be sufficient to recover all of the costs it will have to incur in developing and qualifying its seat for the F-18 aircraft. The Navy report acknowledges that this is so but states that this is no apparent violation of the Arme' Services Procurement Regulation because Martin-Baker has agreed not to recover any full-scale development contract losses on follow-on production contracts. However, the Navy report does express concern about the quality of the cost or pric- ing data that Martin-Baker has agreed to provide. Based on (1) the inability of the Martin-Baker account- ing system to accumulate costs on individual projects and contracts; and (2) Martin-Baker's prior actions in denying access to its records; it is our opinion that the Navy will not be able to assure itself that unrecovered development costs are not recovered under follow-on production and spare carts contracts. DOMESTIC SOURCE As part of our recommendation, we stated that the Navy should consider the need to maintain a domestic source for this critical component. The Navy report states that, because of the recent and continuing decline in military requirements, the number of ejection seat suppliers has been reduced to the the point where the market is dominated by two suppliers, Martin-Baker and Douglas Aircraft Company (a division of the McDonnell Douglas Corporation). Although it expressed concern that more than one producer should be available as a mobiliza- tion requirement, Navy evaluators did not consider it within their purview to determine the industrial base requirements for ejection seat:s, but suggested that the Office of the Secretary of Defense should make such a determination. We share the Navy's concern about industrial base require- ments, but feel that these requirements should have been given some consideration in the selection. ASSISTANCE TO MARTIN-BAKER McDonnell engineers estimated during the evaluation of the Martin-Baker and Stencel proposals that McDonne.l would incur $1.3 million in support costs to develop the Martin-Baker seat -3 B-183851 over what it would incur to develop the Stencel seat. McDonnell recognized that Martin-Baker would need technical assistance in meeting integrated logisti.cal support, reliabi- lity and maintainability requirements and assistance in recordkeeping. Althouah the need for McDonnell assistance was recog- nized during technical negotiation with Martin-Baker, there is no evidence of a decrease in Martin-Baker's proposed price to recognize the value of any direct assistance to be received. Since Martin-Baker was awarded a fixed-price subcontract to perform in accordance with stated requirements, we have grave doubts that the costs incurred by McDonnell to augment known deficiencies in the subcontractor capability will be reimburs- able under the prime contract. The rules pertaining to prime contract awards by Government agencies are not ordinarily applicable to subcontract awards by Government prime contrac- tors. If this were a direct award by a Government agency, we would zorequired to question seriously the legality of an awarj to one competitor with the understanding that some portion of the awarded work would not be the contractor's complete responsibility without giving other competitors the opportunity to compete on the same basis. MARTIN-BAKER TERMINATION COSTS In regard to your request for confirmation of the cost of terminating the Martin-Baker contract, McDonnell's liahil- ity to Martin-Baker for termination is limited by the contract to $126,326.32 through September 1977. The costs to the Govern- ment for terminating the Martin-Baker contract and award to another source would also include McDonnell's nonrecoverable costs associated with the design and test of Martin-Baker seats and aircraft redesign to accommodate a different seat. CONCLUSIONS As a matter of sound procurement policy we believe that an apparent "buy-in," without an adequate basis for assuring that future prices do not include losses on the initial award, should not be allowed. We would see no objection to termination of the Martin- Baker contract unless the costs involved become excessive or Stencel could not now meet the Navy's required delivery schedule. With the continued running of the ?iartin-Baker contract, the costs of termination increase daily. - 4 - B-183851 As arranged with your office, we are sending copies of this report to the Chairmen of the Senate Committee on Governmental Affairs and the House Committee on Arnmed Services; the Secretary of Defense and the Secretary of the Navy. Copies will also be available to other inter- ested parties who request them. Sincerely yours, Acting Comptroll r General of the United States - 5 -
Impact of Navy Report of F-18 Ejection Seat Contract
Published by the Government Accountability Office on 1977-09-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)