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)

                          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)
                          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

     -- There is no assurance that the initial price
        advantage, upon which the decision was made,
        will not be offset throLgh either higher life


       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.


     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

     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.


     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 -


     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.


     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.


     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


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

      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.


     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.


     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 -

     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

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