oversight

Pricing of a Noncompetitive, Fixed-Price Incentive Contract for Maintenance and Modification of Three Special Purpose Aircraft

Published by the Government Accountability Office on 1977-11-10.

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

                         DOCUEBNT   BSIh

04144 - [ B31544 12;

[Pricinq of a Noncompetitive, Fixed-price Incentve Contract for
maintenance and modification of Three Special Purpose Aircraft].
PSAD-78-9; B-168450. November 10, 1977. 3 pp.

Report to Secretary, Department of Defense; by Bichard  .
Gutmann, Director, Procurement and Systems Acquisition Div.
Issue Area: Federal Procurement of cods and Services:
    Reasonableness of Prices Under Negotiated Contracts and
    Subcontracts (1904).
Contact: Procurement and Systems Acquisition Div.
Dudget Function: National Defense: Department of Defense -
    Procurement & Contracts (058).
organization Concerned: Department of the Air orce; -Systems,
    Inc.
Conqressional Relevance:  ouse Committee on Arued Services;
    Senate Committee on Armed Services,
Autbor.ty: P.L. 87-653.
         Examination of the pricing cf a negotiated,
noncompetitive,  ixed-price incentive contract awarded to
E-Systems, Inc., by the Aeronautical Systems Division of the Air
Force Systems Command ir.dicated that the contract target price
was overstated by as much as $1.4 million ecause contracting
personnel did not adequately evaluate the proposal. The contract
provided for the maintenance ad modification cf three special
purpose C-135 aircraft, including programmed depot maintenance
as well as design, fabrication, and installation of special
electronic systems and equipment.    indings/Conclusions: The
Government evaluators accepted, without dequate evaluation,
questionable allowances for labor hours and an understated sales
forecast as the basis for overhead rates, he questionable labor
hours were related to a beak in production and othex schedule
chanqes. The evaluators also did not identify inconsistencies in
E-Systems' application of learning curves. About $100,000 of the
overstated cost resulted because E-Systems did not adequately
disclose estimating methods. Air Force officials believe that
the cutcome of this contract, an underrun of sli'htly over 8,
is within the bounds of a well-evaluated and negotiated
incentive contract. They also recognize opportunities for
improving evaluation of priced proposals. The Air Ecrce has
initiated a review to determin . whether B-Systems' failure to
adequately disclose certain estimating procedures should entitle
the Government to an adjustment in contract price. (Authcr/SC)
                                 UNITED STATES GENERAL ACCOUNTING OFFICE
                                            WASHINGTON, D.C.   205'3


       PIOCUMMII    AND YUTaMS
          AC.UIIFION DIVISION


                 B-16845t                                                Nov AO 1,7
e-I
'~;ยท            The Honorable
0               The Se,:retary of    'e!fense

                Dear Mr.    Secretary:

                     We h:ne examined the pricing of contract F33657-74-C-0597--a
                negotiated, noncompetitive, fixed-price incentive contract-awarded
                to E-Systems, Inc., Greenville, Texas, by the Aeronautical Systems
                Division, Air Force Systems Command.  This contract, awarded July 29,
                1974, provided for maintenance and modification of three special
                purpose C-135 aircraft including programmed depot maintenance as well
                as design, fabrication, ad installation of special electronic systers
                and equipment. A target price of $14,990,000 was negotiated.

                     The objective of the review was to determ.ne whet.er (1) the
                contracting officer obtained cost or pricing data tc suport the
                proposed contract price, (2) data obtained was evaluated and relied
                on in negotiating the contract price, and (3) the price negotiated
                was reasonable based on cost or pricing data available to the con-
                tractor at the time c negotiations.

                     With certain exceptions, PuLllc Law 87-653 and the Armed Services
                Procurement Regulation require that contracting officers obtain from
                contractors cost or pricing data to support proposed prices for
                negotiated noncompetitive contracts expected to exceed $100,000.
                Contractors are required to certify that cost or pricing data used
                as a basis for --ntiating contract prices is accurate, curzent, and
                complete. A c.        X inserted in the contracts giving the Go-ernment
                a right to reco        a   -' actors any amount by which the contract
                price is oversta,        ;      its rel.lnce on inaccurate, noncurrent,
                or incomplete data .           iata).

                     We believe the c         target prics was overstated by as much
                as $1.4 million beca,         acting personnel did not adequately
                evaluate E-Systems' propobs..   The Government evaluators accepted,
                without adequate evaluation, questionable allowances for labor hours
                and an understated sales forecast as the basis for overhead rates.
                The questionable labor hours were related to a break in production
                ann other schedule changes. The evaluators also did not identify



                                                                       PSAD-78-9
                                                                        (950378)
B-168450



inconsistencies in E-Systema' application of learning curves.
Approximately $100,000 of the overstated ccst resulted because
E-Systems aid not adequatrly disclose estimating methods.

     Details of our observations, findings, and   aly-sis were pro-
vided to officials of the headquarters 2750th Air Base Wing, Air
Force Logistics Command, current manager of the contract. For this
reason, details are not being restated in this report.

     The Air Force officials believe the outcome of this contract,
an underrun of slightly over 8 percent, is within the bounds of a
well evaluated and negotiated incentive contract. These officials
also recognized opportunities for improving evaluation of priced
proposals. Specifically, they statee:

     "Pzocedures under hich evaluation of tis   contract
     vere accomplished have been improved. A a result
     later technical evaluations have been steadily more
     penetrating and comprehensive. Since we recognize
     the need for continuity of the methods employed and
     for a basis upon which to build improved techniques,
     our evaluations f major contract proposals are now
     accomplished by a team based upon a cadre of two
     officers and one senior NCO."

     "In addition to the solid core of experience and
     evaluation methodology resulting from his cadre,
     the project engineer and quality assu-ance inspector
     for the contract being evaluated participate to pro-
     vide specific technical guidance on the project:-
     oriented details of the proposal. We are confident
     that this system will provide for continuous improve-
     ment of the effectiveness of the technically cogniz-nt
     agency of the collocated Government team."

     Additionally, the Commander of the Headquarters 2750th Air Base
Wing informed us that a review has been initiated'to determine whether
E-Systcms' failure to adequately disclose certain estimating pcedures
should entitle the Government to an adjustment in contract price.

     E-Systems officials reviewed our findings on its supporting cost
or pricing data and acknowledged that its use of certain improvement
curves in estimating cost for the proposal had not been disclosed.
E-Systems does not acknowledge, however, the Government's entitlement
to a price adjustment because of the error. Rather, E-Systems believes
a basis for cffset may exist.




                                  2
B-168450



      We would appreciate receiving a copy of the report, and your
assessment thereof, on the review initiated to determine whether he
Government is entitled to a price adjustment for contract 33657-74-C-
0597.



     We are sending copies of this report to the Secretary of the Air
Force, and the Commander of the Air Force Aeronautical System Division.
We are also sending copies of this report to the Chairmen o the House
Committee on Government Operations and the Senate Committee on Govern-
ment Affairs, and to the Chairmen of the House and Senate Comittees
on Appropriations and Armed Services.

                                  Sincerely yours,




                                     W. Gutlann
                                  Director




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