oversight

Contract for the Development and Production of F-16 Aircraft

Published by the Government Accountability Office on 1977-10-21.

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

                         DCCUMERN: ESUME
03853 - [B2994243] (Restricted)
[Contract for the Development and Production et F-16 Aircraft].
PSAD-78-3: B-152600. October 21, 1977. 4 pp. + enclosure (1
pp.)
Report to General Low Allen, Jr., Commander, Department of the
Air Force: lir Force Systems Cossmand, Andrews Ail, nD; by
Richard V. Gutmann, Director, Procurement and Systems
Acquisition Div.
Issue Atoa: Federal Procurement of Goods and Services:
    Reasonableness of Prices Under Negotiated Contracts and
    Subcontracts (1490.41
Contact: Procurement and Systems Acquisition DiV.
Budget ,unction: National Defense: Departsmnt of Defense -
    Procurement & Contracts (058).
Organizaticn Concerned: General Dynamics Corp.: Port Worth Div.
          A fixed-price incentive contract was awarded without
price competition to General Dynastics Corporation for the
development and production of F-16 aircraft. The contract
provided for a full-scale development program and firm-priced
production options. The development program is currently valued
at $442 million, and three production options are priced at
about $1,130 million. Findings/Conclusions: Indications are
that the F-16 program costs will ircrease. Contracting officers
are required to obtain cost or pricing data frcs contractors to
support proposed prices for negotiated noncompetitive contracts,
and contractors are required to certify that the cost or pricing
data used as a basis for negotiating contract prices is
accurate, current, and complete. The Aeronautical Systess
Division of the Air Force Systems Command did not strictly
follow Department of Defense regulations which provided that a
cast analysis be prepared to assure the reasonableness of the
price proposed. Instead of conducting a cost analysis of the
contractor's data, the Air Force relied heavily on its own cost
estimate to determine that the offer was fair and reasonable.
Such an independent analysis cannot identify inconsistencies or
duplications between the contractor's cost elements or errors in
his estimates. Overpricing of $20.a million was identified. ThiL
amount related to costs included for Government-furnished
aeronautical equipment. :ecommendations: The Aeronautical
Systems Division should evaluate available information to
determine whether the Government is entitled to a price
adjustment on the P-16 development program or a reduction in the
prices established for the production options as provided for by
the defective pricing clause included in the contract. (SC)
                                  UNITED STATES GENERAL ACCOUNTING OFFICE
                                           WASHiNG'TON, D.C.      20148


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coD                                 PKR[STZCTLE0 -" trot to be reteastd outside the General
                                     yAccountlng Office oxcept on the basis of ipeoitio approval
O                                   py the Office of Conlw e s sio nal Relatlons.
               B-152600                                           OCT 211977

               General Lew Allen, Jr.
              Commander, Air Force Systems Command
              Andrews Air For.e Be&e, Maryland                  20334
              bear General Allen:
                   We have examined the price proposed and negotiated for
              fixed-price incentive contract F33657-75-C-0310 awarded with-
              out price competition to General Dynamics Corporation, Fort
              Worth Division, for the development and production of F-16
              aircraft. The contract, awarded January 13, 1975, by the
              Ai- Force Systems Command, Aeronautical Systems Division,
              provided for a full-scale development program and firm-
              priced production options. The development program is cur-
              rently valued at about $442 million, and three production
              options are priced at about $1,130 million.
                   Indications are that the F-16 program cost will
              increase. For example, the initial contract provided for
              301 production aircraft while a total of 998 aircraft are
              now planned for production--348 for the European countries
              and 650 for the U.S. Air FOrce. Ultimately. the United
              States plans to buy 1,388 aircraft. A sale of 160 aircraft
              to Iran has been approved and additional sales are possibl                           -
              in Israel, Spain, Tlrkey, and Greece.
                   The Armed Services Procurement Regulation requires that
              contracting officers obtain cost or pricing data from contrac-
              tors to support proposed prices for such negotiated noncompeti-
              tive contracts expected to exceed $100,000. Contractors are
              required to certify that cost or pricing data used as a basis
              for negotiating contract prices is accurate, current, and
              complete.
                   General Dynamics executed the required certificate as of
              January 8, 1975. We found, however, that the Air Force did
              not strictly follow Department of 3efense regulations which
              provide that where cost or pricing data is obtained, a cost
              analysis shall be performed to assui. the reasonableness of


                                                                    PSND-78-3
                                                                    (950356)
B-152600


the price proposed. Cost analysis includes the appropriate
verification of cost data furnished by the contractor, the
evaluation of specific elements of cost, and the projection
of the data to determine the effect on prices. No alter-
native methods of evaluation are authorized. In our opinion
the departure from procedures developed over the years to
increase assurance of negotiating fair and reasonable prices
for needed goods and services was not warranted     For a pro-
gram of this size, in excess of  $1.5 billion,  we believe a
good cost analysis is essential.   Although our  review dis-
closed only a relatively small amount of overpricing, less
than 2 percent of the contract price, we believe the pro-
cedures followed by the Air Force could have allowed
substantial overpricing or underpricing to go undetected.
     Tne Air Force relied heavily on its own cost estimate
to determine that the offer was fair and reasonable. We
believe that the decision to award the contract in January
1975 instead of the originally planned contract award date
of May or June J975 to improve chances of multinational
participation may have contributed to the Air Force's lack
of strict compliance with established regulations and pro-
cedures in awarding the contract.
     The Air Force cost estimate, referred to as an indepen-
dent cost analysis, was prepared using both industrywide and
some contractor data. Although the estimate was extensive and
included many analytical assessments to determine, the expected
cost, it should not have been relied on as a substitute for a
cost analysis of the contractor's data. At best, an independ-
ent analysis-provides a cost estimate which can be used to
identify gross errors in the total price proposed. It does
not, however, take into consideration management judgments
unique to the contractor's proposal, trade-offs the contractor
may have made, or business judgments. An independent analysis
cannot identify inconsistencies or duplications between tha
contractor's cost elements or errors in his estimates.
     The overpricing that we identified relates to costs for
Government-furnished aeronautical equipment. Examination of
contractor data showed that the negotiated price was overstat-
ed because the contractor did not provide the Air Force with
current, accurate, and complete data. The proposal submitted
to the Air Force included two prices--one including the cost




                              -   2   -
B-152600


of the equipment, assuming it would be included in the con-
tract, and one with it supposedly deleted, assuming the
Government would furnish this equipment. The contractor,
however, in arriving at a price withou' the equipment,
deleted $17 million less than the price which it had origi-
nally included for the equipment. This error resulted in
a further overstatement of $3.5 million when an additional
55 aircraft were added to the contract (see enclosure).
     Thus, even though the Air Force ultimately chose to
furnish the equipment to the contractor, the contract target
price included $20.5 million for the equipment. Because of
the incentive cost sharing atrangement between the Air Force
and the contractor (90/10 for the development program and
70/30 for the production program), the final impact of this
overstatement will not be known until the contract is com-
pleted.
     We found no evidence that the contracting officer was
aware that the price accepted included any amount for the
equipment to be furnished by the Government. Had this been
made known by the contractor, the contracting officer would
have had a sound basis for reducing the contract price by
$20.5 million.
RECOMMENDATION
     We recommend that the Aeronautical Systems Division
consider the information presented herein, along with any
additional material available, to determine whether the
Government is entitled to a price adjustment on the develop-
ment programi or a reduction in the prices established -for the
production options, as provided for by the defective pricing
clause included in the contract.


     We are sending copies of this report to the Commander
of the Air Force Aeronautical Systems Division, and the
Vice President-Finance, General Dynamics Corporation.




                             -3-
B-152600


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



                                R. W. Gutmann
                                Director
Enclosure




                              -4-
ENCLOSURE                                                 ENCLOSURE

                   COMPUTATION OF OVERPRICING
       GOVERNMENT-FURNISHED AERONAUTICAL EQUIPMENT (GFAE)
                      DEVELOPMENT PRO    AM
Price (with fee) of GFAE items included
in proposal to Air Force computed by GAO
($4,146,948 recurring + $121,799 nonrecurring)      $4,268,747
Price (with fee) of development aircraft
spares included in proposal applicable to
GFAE ilems (11.2 percent of recurring GFAE)*           464,458
Price of GFAE items aiAd spares included
in proposal                                                       $4,733,205
Price (with fee) of GFA! items and spares
deleted from proposal by General tynamics                             3,157,782
Overstatement (overpricing)                                       $1,575,423
                         FIRM PRODUCTION PROPOSAL
246 aircraft propose   price
Price (with fee) ck GFAE items included
in proposal to Air Force computed by GAO          $61,991,804
Price (with fee) of GFAE items deleted
from proposal by General Dynamics                   46,496,891
Overstatement (overpricing)                                      $15,494,913
Projection of GFAo error to added
55prouct ion aircraft
Impact of error per aircraft $62,987 x 55                             3,4b6,285
(error per aircraft - 15,494,913      246 - $62,987)

Total amount production proposal overstated (overpricing)        $18,959,198

Total overpricing                                                $20,534,621

*General Dynamics proposed development aircraft spares at $12,166,331
 (then year dollars) by applying an 11.2 percent factor against the
 proposed air vehicle recurring cost. Since the GFAE was included as
 air vehicle cost, the development spares estimate included $464,458
 applicable to the GFAE items.

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