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 U 1o"UREMIN'IPTANDIY8"IMU 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. -5-
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)