Pricing of Noncompetitive Contracts Subject to the Truth-in-Negotiations Act

Published by the Government Accountability Office on 1977-04-11.

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

                                     nOCSNBUT BESs!
0t142      -   [At521.       3
Pricing        oncnopetitwe Contracts Subje¢t o the
Trunt .--in-3giotiations Act PD-77-91; B-39995. r.1 l .,                     ' 97.
if, fit.

Re:ort to the C,ress;               by Rotsrt Z.      eller,   Actia   Comptroller
 .3Xsue        tlr:ea'   aUeral Procursment o   Goods and Services:
    Reasonableness of rices Under eqotiated Contracts and
      u·tucontracts (19041).
Con-act: .rocuremeut     and Systems cquisition Div.
Budgoe Function~ ational Defense: Department of Defense -
    Procurament      Contracts (058).
Organization Concerned: Department of Defense.
Congressional Relevance:      ouse Committee cn Armed Services;
    Setateo tL3ittee on rmed Services; Congress.
Authoritvs   Truth-in-Vegotiations    ct (P.L. 87-653).
          GAO conducts a continuing review and evaluation of how
ptrchasing offices carez    out the purposes of ithe
Truth-in-Ieq;tiations ct for pricing negotiated noncompetitive
contracts and the rasonaleness of the contract prices. The
,'icing of 10 prime cotracts a.d 18 subcontractE with a walue
of about qO0O ailliuo    ,as examined at the Departvant of Defense
(DOD). Findinys/Conclusons: Generally, DOD procurement
personnel are effectively using the systed established. HIwever,
in reviewing available cost information, 2P contracts a:li
subcontracts were found to be valued about S22 million higher
than could b supported by cost or pricing data vailable at the
time f negotiations. Overpricing was attributed to: inaccurate,
incomplete, or noncurrent data subaitte by contractors and
subcontractors; prime contractors inadequately evaluating
subcontractor proposals; and Goiernment personnel inadequately
evaluating contractor proposals. DOD purchasing ffices are
acting on GAO reports of overpricing. Procedural improvements
have been ade or promised, Recommendations: The Secretary of
Defense should ephasize to all purchasing off ces and field
pricing support agencies the need for strict coemliance with
established procurement procedures and regulations in
n,-otiating noncompetitive contract prices. (Author/QM)
                 REPORT TO THE CONGRESS

                    BY THE COMPTROLLER G FNERAL
.   ( ,,
             at :'. OF THE UNITED STATES
           \ \

                 Pricing Of Noncom petitive
                 Contracts Subject To
                 The Truth-In-Negotiations Act.
                 Department of Defense
                 Generally, Deoartment of Defense procure-
                 ment staff are effectively carrying out the
                 system established for pricing noncompeti-
                 tive contracts. However, some contracts still
                 are overpriced.
                 GAO's review of 28 noncompetitive prime
                 contracts and subcontracts valued at about
                 $400 million indicated they were overpriced
                 by about $22 million. Procurement person-
                 nel are usually responsive to GAO recom-
                 mendations for corrective action.

                 PSAD-77l1                                       APRIL 11, 1977
                          WASHINTON. D.C.   043


To the President of the Senate and the
Speaker of the House of Representatives

     This is our report to te Congress entitled "Pricing
of Noncompetitive Contracts Subject to the Truth-in-:y'eo-
tiations Act." This review was made pursuant to the Budqet
and Accounting Act, 1921 (31 U.S.C. 53); the Accounting and
Auditing Act of 1950 (31 U.S.C. 67); and the authority of
the Comptroller General to examine contractors' records, as
set forth in contract clauses prescribed by the United
States Code (10 U.S.C 2313(b)).
     Copies of this report are being sent to the Director,
Office of Management and Budget; the Secretary of Defense;
the Secretaries of the Army, Navy, and Air Force; the
Director, Defense Contract Audit Agency; and the Director,
Defense Logistics Agency.

                         ACTING Comptroller General
                                of the United States
                                             TRUTH-IN-NEGOTIATIONS ACT
                                             Department of Defense

            Based on its continuing review and evaluation
            of (1) how purchasing offices carry out the
            purposes of the Truth-in-Negotiations Act for
            pricing negotiated noncompetitive contracts
            and (2) the reasonableness of the contract
            prices, GAO concludes that, genera''y, Depart-
            ment of Defense procurement perso .,el are
            effectively using the system established.

            However, iln rLviewing available cost informa-
            tion, GAO still found some overpriced con-
            tracts. The 28 contracts and subcontracts re-
            viewed were valued about $22 million higher than
            could be supported by cost or pricing data
            available at the time of negotiations.   (See
            p. 4.)
            These contracts were valued at about $400 mil-
            lion; they were selected for review after a
            preliminary examination of 31 prime contracts
            and 29 subcontracts, valued at about $815.4
            million, indicated deficiencies in obtaining;
            reviewing; and using accurate, complete, and
            current cost or pricing data in negotiating
            contract prices.   (See p. 13.)
            The act requires, with some exceptions, that
            contractors submit cost or pricing data support-
            ing proposed prices of noncompetitive contracts
            over $100,000. It also requires contractors to
            certify that the supporting data is accurate,
            complete, and current. (See p. 2.)
            Overpricing was attributed to
            --inaccurate, incomplete, or noncurrent data
              submitted by contractors and subcontractors
              (see pp. 5 to 8 and 10);

            --prime contractors inadequately evaluating
              subcontractor proposals (see pp. 5 and 6);

  er Sh.    Upon remnoval. the report   1.               PSAD-77-91
cover dee should be note hereon.
 -- Government personnel nldequately evaluating
    prime contractor proposals. (See pp.
                                         8 and 10.)
 Reviewing contracts is one way GAO
 Department of Defense's adherence tomonitors the
 laws, regulations, and procedures in
 noncompetitive contracts. The results negotiating
                                         of GAO
 reviews of the 23 contracts and subcontracts
 have been reported to the purchasing
 responsible for contract negotiation
 Secretary of Defense, when appropriate. to the
 pp. 1, 4, and 13.)                        (See

 Defense purchasing offices are usually
 sive to GAO recommendations for determingrespon-
 whether the Government is legally entitled
 a price reduction and whether impro 7ements
 needed in carrying out prescribed polices are
 procedures. Eight contracts have been        and
duced by a total of $7.8 million, and     re-
are being taken to reduce the prices
others by $650,OCJ. Purchasing offices two
evaluating actions required on the remaining
contracts on which we reported overpricing
of $5.3 million. A clause in each   contract
gives the Government the right to a price
duction when it is determined that the       re-
was increased because the data submitted price
not in accord with the certification.
Procedural improvements ave been made
promised.                                or
            (See pp. 3,9, and 10.)
Accordingly, the Secretary of Defense
emphasize to all purchasing offices andshould
pricing support agencies the need for
strict compliance with established procurement
procedures and regulations in negotiating
competitive contract prices.               non-
                              (See p. 12.)
The Defense Department expressed general
ment with the information presented       agree-
                                    in this re-
port. In regard to GAO's recommendation,
Department said that all levels of procurement
management responsibility had emphasized,
would continue to stress, the need for     and
attention to the submission and analysis
                                          of cost
or pricing data. (See p. 12,)



      1    INTRODUCTION                                   1
               Contract pricing laws, regulations, and
                 procedures                               2
             INDICATES THEY SHOULD BE                     4
               Materials                                  5
               Labor                                      6
               Overhead and general and administrative
                 expenses                                 7
               Otner costs                                7

      3    AGENCY ACTIONS ON OUR REPORTS                   9
               Purchasing office responses to our reports 9
               Field pricing support agency actions and
                 improvements in evaluation procedures    10

             COMMENTS                                     12
               Conclusions                                12
               Recommendation                             12
               Agency Comments                            12

      5    SCOPE OF REVIEW                                13


      I    Letter dated January 10, 1977, from the
             Assistant Secretary of Defense (I&L) to
             the General Accounting Office                14

  II       Principal officials of the Department of
             Defense responsible for administering
             activities discussed in this report          16


ASPR       Armed Services Procurement Regulation

DCAA       Defense Contract Audit Agency

DOD        Department of Defense

GAO        General Accounting Office
                        CHAPTER 1
     This report summarizes our reviews of the Department
of Defense's (DOD's) effectiveness in pricing noncompeti-
tive contracts and subcontracts over $100,000. Our re-
views during fiscal years 1974-76 were made t (1) deter-
mine if prices negotiated by DOD were reasonable consider-
.ng information available to the contractor at the time of
price negotiations, (2) identify the causes of any over-
pricing, and (3) suggest corrective action.

     We examined the pricing of 10 prime contracts and 18
subcontracts vith a value of about $400 million. In re-
ports to agency officials responsible for the pricing of
these contracts and to the Secretary of Defense when
appropriate, we explained the basis for our conclusions
that tre was overpricing of about $22 million, or 5.8
percent, of the total negotiated value.

     These individual contract reviews represent part of
our effort to monitor DOD's adherence to prescribed laws,
regulations, and procedures in negotiating ncncompetitive
contracts. We identify areas where we can assist DOD in
improving its contracting activities, and we make recom-
mendations for new laws and regulations and for improve-
ments in implementing the procurement process.

     While reviewing DOD's pricing activities, for example,
we identified an area, operational audits performed by the
Defense Contract Audit Agency (DCAA), where we believed
improvements were needed. Our report to the Congress on
this area (PSAD-76-35, Dec. 18, 1975) stated that opera-
tional audits have resulted in large reductions in contract
costs, and we discussed recommendations we believed would
make these audits more effective.

     DCAA officials agreed with our recommendations arid
evaluation of their operational audits in the December 18,
1975, report and sought to improve performance before and
during our review by partially implementing some recommen-
dations and considering others.

     During fiscal years 1973     DOD noncompetitive pro-
curements accounted for about    percent of its total
procurement dollars spent. '     method of procurement does
not have the built-in safeguaras against unreasonable prices
afforded by adequate price competition between suppliers.


        DOD policies and procedures on pricing
  contracts ae defined in the Armed Services noncompetitive
  Regulation (ASPR), which implements the         Procurement
  Procurement Act of 1947 requirements      Armed   Services
                                         (10 U.S.C. 2301 et
  seq.;.   The policies and procedures cover (1)
 cost or pricing data from the contractor           obtaining
 posed costs, (2) preparing for contract      to  support pro-
  (3) conducting negotiations and preparing negotiations,    and
                                               a record of them.
       The Truth-in-Negotiations Act (Public
                                                 Law 87-653) and
 ASPR require, with some exceptions,
                                       that contractors submit
 cost or pricing data to support proposed
 competitive contracts expected to           prices for non-
                                     exce d $100,000. ASPR
 also provides, in some ases, that prime
 estimated cost of proposed subcontracts contractors support
 cost or pricing data. Prime contractors with subcontractor
 tify that, at the time of prime contract must cer-
 the data submitted, including applicable negotiations,
 was accurate, complete, and current.        subcontract data,

       Estimated contract costs are normally
                                                categorized by
direct materials, direct labor, other
                                         direct costs, and
various indirect expenses. ASPR states
 ing data consists of all facts existing that cost or pric-
agreement on price, which prudent buyers up to the time of
reasonably expect to significantly affect and sellers would
This includes such factors as vendor          price negotiations.
                                       quotations; nonrecur-
ring costs; changes in production methods;
procurement volume; unit cost trends,          production or
ciated with labor efficiency; make-or-buy as those sso-
other management decisions which could        decisions;
                                          reasonably be or
expected to significantly affect costs
contract.                                 under the proposed

       It is the policy
 vices from responsible of DOD to procure supplies and ser-
                         sources at fair and  reasonable
 prices calculated to result in the lowest
 to the Government. Each contracting         overall   costs
                                       officer is responsible
 for performing or having performed all
actions necessary for effective contracting.
 ing officer avails himself of all appropriate The contract-
tools, such as the advice of specialists
contracting, finance, law, contract audit,in the fields of
sis. ASPR requires, for noncompetitive        and price aaly-
$100,000, cost analyses of the data submitted          over
the proposed price, unless adequate information  in  support   of
aLle to determine the reasonableness                is  avail-
                                       of the price. Cost
analysis is the review and evaluation
                                        of a contractor's

cosL or pricing data and the judgmental factors applied
in estimating the cst of performing the contract, assum-
ing reasonable economy and efficiency. It is usually per-
formed by DCAA auditors, and by technical personnel from
the Defense Contract Administration Services offices or the
military services.
     The results of each analysis are submitted in an advi-
sory report to the contracting officer for use in develop-
ing the price objective.
     Meetings between the contracting officer or his rep-
resentaLive and the contractor are held to discuss the
difference between the proposed price and the Government's
negotiation objective and to decide on a final price.
ASPR requires that the contracting officer prepare, or nave
prepared immediately upon completion of negotiations, a
memorandum of negotiations, setting forth the principal
elements onsidered during negotiations. If cost or
pricing data was submitted and a certificate obtained, the
memorandum must show the extent of any nonreliance on the
contractor's cost or pricing data in deciding on the
final price.
     The contract must include a clause givi,-cj the Govern-
ment a right to red:ce the contract price if the price was
increased because tie contractor submitted certified data
that was not accurate, complete, r current (defetive

                            CHAPTER 2


                   INDICATES THEY SHOULD BE
     Upon review of 10 prime contracts awarded by 7
purchasing offices and 18 subcontracts awarded by 9 prime
contractors under DOD noncompetitive contracts, we found
that negotiated prices were about $22 million, or 5.8 per-
cent, igher than indicated by cost or pricing data avail-
able to contractors and/or Government officials at the time
of prime contract negotiations.

     In sole cases, contractors did not furnish procurement
officials all pertinent information in accordance with the
law and regulation. In other cases, procurement officials
and support personnel inadequately evaluated or considered
information that was available.
     The percent of overpricing by individual contract
ranged from 0.5 percent to 26.3 percent. The largest
procurement examined, awarded by the Air Force's
Aeronautical Systems Division for missiles, accounted for
74 percent of examined costs and 62 percent of the total
estimated overpricing. A copy of our report on this con-
tract's pricing was sent to the Secretary of Defense.

     Overpricing by cost element for all contracts reviewed

            Cost element                    costs
Materials                               $ 5,348,532
Labor                                     5,672,466
Overhead and general and
  administrative expenses                 3,984,490
Other costs                               7,223,237
    Total                               $22,228,725

     As shown, overpricing was not limited to one cost
element but to all cost elements. Some examples of over-
pricing in prime contracts and subcontracts follow.


     The Naval Air Systems Command awarded a contract for
$5,309,989 for target drones based on a firm fixed-price
proposal. We concluded that the price was about $175,300
higher than indicated by available cost information. About
$12,800 related to proposed material costs for a new part
based on a unit price quotation of $226 received from a
supposedly sole-source supplier. On the same day the con-
tractor received the $226 quotation, he also received a
lower unit price quotation of $196.52 from a second
solicited source.

     According to the contractor, the contracting officer
was told (1) of the second source and the quoted price during
negotiations, (2) that the higher price was proposed because,
although the new part had been purchased for a prior con-
tract, it had not been flight-tested, and (3) that the deci-
sion on the part to be used had not been made.
     We found no evidence that the contractor submitted, or
otherwise disclosed, in writing the lower price quotation
to the contracting officer. We believe the second source
price quotation and the prior purchase at the lower price
constitutes pertinent cost data that should have been dis-
closed during negotiations. The parts were subsequently
purchased at the lower price for the contract.
     The purchasing office advise. us that the contracting
officer had taken action to settle the $175,300 defective
pricing claim against the contractor.
     The Air Force Space and Missile Systems Organization
negotiated a fixed-price incentive contract for the produc-
tion of guidance and control systems. The prime contract
price included $3,620,700 for materials (cables) to be
provided by a subcontractor. The prime contract price was
overstated by about $986,000 because the subcontractor's
proposal was not based on accurate, complete, and current
cost or pricing data.

     This subcontractor proposed, for example, a wire
requirement for each cable based on a parts list issued by
the prime contractor. We learned that before prime con-
tract negotiations, the prime contractor issued two revi-
sions to the parts list which reduced the wire requirement
for each cable. The subcon':ractor did not, however, revise
its proposed wire requirement. This overstated quantity
resulted in increased proposed costs of about $13,800.
The bill of material was not audited before prime contract
negotiations, even though the prime contractor told
DCAA that it would review direct costs.
      The urchasing office agreed with our findings.
 The contract price has been reduced by $962,978.

     The Department of the Army's Picatinny Arsenal awarded
a firm fixed-price contract for the production of arm/safe
devices for $586,202. A contract option was exercised for
the production of more devices at an additional cost of
$317,350. The contract price, including the option price,
was overstated by about $135,000 because the contractor
did not tell the Army pertinent fabrication labor cost

     The contractor proposed, for example, fabrication
costs based on engineering estimates instead of on
experience. This contract was a follow-on contract to an
initial production contract for the devices. At the time
of the follow-on contract's proposal, actual fabrication
costs under the initial contract were available for more
than half of the parts that the contractor proposed to

     Had the actual fabrication costs experienced with
the initial contract been used as a basis for proposing
fabrication costs for the follow-on contract, the follow-
on contract's price would have been reduced by $26,604.
Use of the actual fabrication cost experienced would have
resulted in an additional reduction of $16,530 in the
proposed and negotiated price of the option.

     The prices of the fllow-on, option, and another
contract were reduced by $200,000.

     The Space and Missile Systems contract discussed on
page 5 includes a $214,500 overstatement for subcontractor
labor costs.

     The subcontractor proposed 110,130 hours to manufac-
ture the cables, 80,112 hours for direct labor, and 30,018
hours for variance. However, the subcontractor had in-
cluded an allowance for the variance in overhead expenses.
As a result, allowance for variance was included in both
direct labor and overhead.

     The prime contractor did not audit the subcontractor's
proposed direct labor hours before negotiations. Subcon-
tractor officials agreed that the proposal included duplicate
cost for the labor hour variance. The prime contractor and
the subcontractor, however, had negotiated a subcontract
price of $1,266,700 less than the amoun- ngotiated in the

 prime contract price. Some of this reduction may have
 been for the duplicative labor hours. The prime contract
 was not, however, initially adjusted for this difference
 but, as stated on page 6, the contract price has been
 reduced by $962,978.


     As mentioned on page 5, the Navy's contract for
$5,309,989 for target drones was overstated by about
$175,300. About $83,400 relates to overhead costs based
on higher rates then indicated by available data at the
time of contract negotiations.

       We noted that the contractor's forecast-direct-cost
 bases were underestimated because they did not include
 about $369,000 of direct costs for three projects and inter-
division work orders. Since overhead rates generally vary
 inversely with the direct costs in the bases u;ed to com-
pute the rates, the understated base in the ca:;e resulted
 in overstated rates. This information was available
ntcr- contract negotiations, and contractor officials
agreed that the additional direct cost-, should have been
included in the proposed contract price. They said,
however, that because they had been achieving only about
85 percent of forecast direct costs for several years, they
rr.cst likely would have proposed the same rates negotiated
re{gardless of the lower rates indicated by our review.

     The contracting officer told us he was unaware of
the understated base costs and would have attempted to
negotiate lower rates if this information had been d--
closed. As stated on page 5, the contracting officer
is proceeding to settle the $175,300 defective pricing
claim against the contractor.

     The Naval Air Systems Command awarded a $156,800,000
fixed-price incentive contract fcr the production of 11
Model E-2C aircraft: and related resting, materials, and
technical data.

     The contract was overstated by about $615,000 because
the price was not based on accurate, complete, and cur-
rent cost data.

     The proposed and negotiated cost for 24 subcontracted
production data items was $467,300 higher than warranted

because the prime contract r included costs for 14 items
that should not have been included in the prime contract
price negotiated. The prime contractor's proposal stated
that the proposed price did not include these data costs.
Some of the 14 production data items were also ordered
bt: the administrative contracting officer under a separately
priced modification to the contract, as was originally
ink ended and stated in the prime contractor'f proposal.

     In its preaward audit, DCAA was aarently unaware
that the proposed production data cost included the 14
items. The prime contractor furnisied DCAA oly those
pages of the subcontract purchase order containing the
original option provisions; these pages did not describe
the data making up the total production cost. It also
appears that the purchasing office was unaware of what data
made up the proposed cost.
     In response to our report, Navy officials said that
they and DCAA would investigate the matter.
     The factors contributing to the overpricing in the
examples we cited, and in general to all the contracts
known to be overpriced, can be identified as follows:
     -- Inaccurate, incomplete, or noncurrent data sub-
        mitted by contractors and subcontractors.
     -- Prime contractors inadequately evaluating sub-
        contractor proposals.

     -- Government personnel inadequately evaluating
        prime contractor proposals.

                           CHAPTER 3
      In each of 18 reports issued to Government purchasing
offices, we recommended that the had of the office consider
our findings and determine if the Government is legally en-
titled to a price reduction under contract terms. Further,
we made recommendations for needed improvements in imple-
menting established purchasing procedures. Procedural de-
ficiencies by field pricing support personnel found during
our reviews were reported to the appropriate purchasing
offices and to the support agencies. We issued seven such
reports to agencies supporting the purchasing office in
reviewing and evaluating the contractor's proposals, such
as DCAA and the Defense Contract Administration Services.

     Although based on factual information available at
the time of contract negotiation, our findings of over-
stated costs may not represent defective pricing for which
the Government is legally entitled to a price reduction.
The contracting officer makes this determination based on
whether inaccurate, incomplete, or noncurrent data was
submitted to him or his representative at the time of
negotiations and whether such data was relied on in nego-
tiatini the contract price. Where overpricing results be-
cause of the Government's improper use of the ccatractor's
certified cost or pricing data or other relevant informa-
tion, a price adjustment is not legally required.

      In all cases, purchasing officials have responded to
our reports. For eight prime contracts with overpricing of
$15,788,080 the contractors have agreed to price reductions
of $7,870,404. The difference between the total reported
amount of overpricing and the total amount of the contract
price adjustments resulted from instances where the con-
tracting officers determined that adjustments were not re-
quired because the overpricing was not caused by the con-
tractors' action and other instances where lesser amounts
are agreed to.

     For two other contracts, for which we reported over-
pricing of about $700,000, the contracting officers have
acted to reduce the contract prices by about $650;000.
As of January 1977, purchasing officials had not resolved
a $5.3 million reported overpricing on the remaining con

     The purchasing offices are usually responsive to our
recommendations on needed improvements in implementing
prescribed policies and procedures.

     Support agencies also responded positively to our

      In reviewing the contract awarded by the Picatinny
Arsenal, we found that DCAA"s failure to comment on the
preaward audit's limited scope may nave contributed to
the overpriced contract. The preaward audit did not in-
clude, for example, a comparison of the cost to fabricate
(make) items with prior purchase cost information for these
same items. The contractor prepared the proposal on the
basis of aRaking four parts. Parts for a prior contract had
been pur(hased at a unit price less than the proposed fab-
brication cost. Considering indirect expenses, the pro-
posed fabrication cost was $78,391 more than the buy cost.
The contactor did not disclose this historical cost, infor-

     The DCAA regional manager responsible for the preaward
audit told us that the audit's scope was curtailed because
of the limited time allowed by the purchasing office o
complete it--7 working days after the audit request waj re-
ceived. We found, however, that the preaward audit report
did not include a notice, although it is required by r'CAA
audit guidance, that the audit esults might be affected by
time constraints. The DCAA regional manager agreed that the
report's qualification could have included comments on the
impact of the time constraints.

     Consequently, in a memorandum to the audit staff, the
DCAA branch manager stated that, as a minimum, the audit
report should have mentioned the inability to adequately
evaluate available cost data because of time limitaLtons
set by the purchasing office. He also stated that complete
disclosure of any adverse condition affecting the audit
should be made.  In addition we were told by the Picatinny
Arsenal commander that responsible purchasing personnel
have been instructed to permit DCAA a longer period of
of time to adequately evaluate all cost factors concerning
the contract or to consider using letter contracts when
the urgency of awarding the contract limits the audit and
negotiations leadtime. The final contract prices can then
be negotiated when adequate information is available.

     In z'ne cases, suLpyort agencies involved did not agree
with needed improvements or dd not popose bpecific actions
regarding our ecmmendations. We plan to follow ulp on
these cases to deteniir.me if further action is warranted.

                           CHAPTER 4

                     AND AGENCY COMMENTS


     B3sed on continued review and evaluation of the
purchasing offices' implementation of the Truth-in-Negotia-
tions Act and the reasonableness of contract prices, we
conclude that, generally, purchasing personnel are
effectively implementing the system established for pricing
and negotiating noncompetitive contract prices. However, we
continue to identify overpriced contracts. In some cases
the contractors do not provide the required accurate,
complete, and current cost or pLicing data.  In other cases,
procurement officials are inadequately considering all the
informetion available or are not fully complying with
established policies and procedures.

     Accordingly, purchasing offices, support agencies, and
Siternal rview groups should continue to give attention to
noncompetitive contract pricing.

     We recommend that the Secretary of Defense emphasize
to all purchasing offices and field pricing support agencies
the need for strict compliance with established purchasing
procedures and regulations in pricing and negotiating non-
competitive cntract prices.

     DOD's comments in its letter dated January 10,1977,
(see app. I), indicated general agreement with the informa-
tion presented. In regard to our recommendation, DOD stated
that all levels of rocurement management responsibility
had emphasized, and would continue to stress, the need for
close attention o the submission and analysis of cost or
pricing data.

                          CHAPTER 5
                       SCOPE OF REVIEW

     We summarized the results of our reviews made during
fiscal years 1974-76 of 28 DOD noncompetitively awarded
contracts--10 prime contracts awarded by 7 purchasing
offices and 18 subcontracts awarded by 9 prime contractors.
These contracts have a value of about $400 million. For
each contract reviewed, our results were submitted to the
contracting officer responsible for the award and appro-
priate DOD agencies.

     The 28 prime contracts and subcontracts were reviewed
after a survey of 60 contracts--31 prime contracts and
29 subcontracts--valued at about $815.4 million indicated
deficiencies in obtaining; reviewing; and using current,
accurate, and complete cost or pricing data in negotiating
contracts. The 60 contracts were judgmentally selected
for review.

     We examined contractor price proposals, cost or pricing
data submitted to support estimated cc  s, and the latest
cost information available to contractors at the time of
negotiations. We reviewed the adequacy of data verifica-
tion, cost estimate evaluations by agency audit and tech-
nical personnel, and the acceptance and use of their find-
ings by negotiators and contracting officers. We also
tried to identify the causes or management weaknesses con-
tributing to the overpricing noted in our reviews.

 APPENDIX I                                                         APPENDIX I

                          ASSISTANT SCRETARY OF DWI
                               WASlHITl,   DC.   sM

                                                             1 0 JAN 1977

   Mr. R. W. Gutrann
   Director, Procurement and
     Systems Division
   U. S. General Accounting Office
   Washington, D. C. 205,'

   Dear Mr. Gutmann:

   This is in reply to your letter to Secretary Rumsfeld of October 18, 1976,
   concerning your draft report entitled "Pricing of None ,mpetitive Contracts
   Subject to the Requirements of the Truth-in-Negotiations Act: A Summary
   Report. " (OSD Case #4397-D)

   This draft report summarizers the results of General Accounting Office
   (GAO) reviews uver three years of 10 prime contracts awarded on a
   noncompetitive basis and 18 subcontracts awarded .n a noncompetitive
   basis by prime contractors. These contracts and subcontracts were
   valued at about $400 million. GAO concluded that these transactions were
   about $22 million higher than supported by contractor cost or pricing data
   available at the time of negotiations. GAO recommends that the Secretary
   of Defense continue to emphasize to all procurement activities the need
   for strict compliance with established procurement procedures and

   The results of individual reviews were reported to the cognizant procure-
   ment activities for comment. As the draft report notes, "In all cases,
   procurement officials have responded to our reports. " Further, the
   draft report indicates that these activities were generally responsive
   to the recommendations made. Contract price re luctions of $8. 6 million
   have already been negotiated. Actions on other contracts are either
   underway to reduce prices or the facts are being evaluated to determine
   the extent of any overpricing.

APPENDIX    I                                                       APPENDIX   I


As to several of the specific cases mentioned in the draft report, the Air
Force advises that a price reduction of $4, 351, 000 has been obtained with
regard to the contract mentioned on page 5 and a price reduction of
$962, 978 has been obtained with regard to the contract discussed on page .
The Navy advises with reference to the contract discussed on pages 6 and '1
that current action is underway to obtain a price reduction.

It is evident from comments in the draft report as well as the comments
from the Military Departments that responsive action is being taken on the
GAO findings. As to your recommendation to emphasize compliance with
procurement procedures and regulations, all levels of procurement manage-
ment responsibility have and will continue to emphasize close attention to
these matters in the submission and analysis of cost or pricing data. This
comes about in the day-to-day operations as well as the periodic conferences
and meetings on procurement matters where this subject is frequently on
the agenda. The prompt and responsive attention by the procurement
activities to the individual reports clearly reflects that appropriate concern
is being given this matter. Particular note is taken of the statement in the
draft report conclusion, "... we have concluded that procurement personnel
are generally doing an effective job in implementing the system established
for negotiating noncompetitive contracts. "

 The Defense Contract Audit Agency (DCAA) provided us with comments on
the draft report. DCAA suggests a number of clarifying points be made
in certain parts of the report. We have attached a copy of their comments
for your consideration.    [See GAO note below.)

We appreciate this opportunity to comrr.ent on your draft report.

                                    Since rely,

                                             R. BABIONE
                              Acting P:.cipal Deputy Assistant
                                .ecretary   o   Defense (I&L).

GAO note:   The deleted comments have been considered
            in this report.

APPENDIX II                                           APPENDIX II

                      PRINCIPAL OFFICIALS


                                            Tenure of office
                                            From               To

    Harold Brown                        Jan.   1977    Present
    Donald H. Rumsfeld                  Nov.   1975    Jan. 1977
    James R. Schlesinger                July   1973    Nov. 1975
    William P. Clements, Jr.            May    1973    June 1973
    Elliot L. Richardson                Jan. 1973      Apr. 1973
    Melvin R. Laird                     Jan. 1969      Jan. 1973
    Clifford L. Alexander, Jr.          Feb.   1977    Present
    Martin R. Hoffman                   Aug.   1975    Feb. 1977
    Howard H. Callaway                  May    1973    July 1975
    Robert F. Froehlke                  July   1971    Apr. 1973
    W. Graham Claytor, Jr.              Feb. 1 97 7    Present
    J. William Middendorf II            June 1974      Feb. 1977
    John W. Warner                      May 1972       June 1974
    Thomas C. Reed                      Jan.   1976    Present
    Jqmes Plummer (acting)              Nov.   1975    Jan. 1976
    John L. McLucas                     May    1973    Nov. 1975
    Robert C. Seamans, Jr.              Jan.   1969    Apr. 1973
    Lt. Gen. Woodrow W. Vaughan         Jan. 1976      Present
    Lt. Gen. Wallace H. Robinson, Jr.   Aug. 1971      Dec. 1975
    Frederick Neuman                    Aug. 1976      Present
    Bernard B. ynn                      Nov. 1972      July 1976
    William B. Petty                    July 1$65      Nov. 1972