Status: Case open. Pending advice from Justice Department. Air Force may or may not find it necessary to resume negotiations with Boeing to obtain further downward price adjustments, depending upon whether or not Justice makes a settlement with Boeing. GAO Report B-118663, June 9, 1964 61. Title: "Overstatement of Contract Target Price Negotiated with American Bosch Arma Corp., Arma Division, Garden City, N.Y." (OSD Case No. 1865). GAO finding: The target cost negotiated was overstated by $216,153 because the contractor estimated costs of purchased parts that were higher than were reasonable in view of suppliers' known prices at the time of negotiations. Unless adjusted increased costs to the Government in the form of unwarranted profits to the contractor of $52,958 will result. GAO estimate of unnecessary costs: $52,958. Time period of GAO report: Negotiations commenced in September 1960, contract completion September 1962. DOD comments on GAO findings: The resident auditor's additional tests disclosed overpricing of material of $170,178 on approximately 72 percent of the proposed material costs versus $127,104 for 60.6 percent stated in the report. Prorated over 100 percent of the material costs results in an overpayment of $236,288. Adding G. & A. of 9 percent, the total overstatement is $258,097. DOD comments on costs: Overstatement of the target cost resulted in unwarranted profit of $63,233 computed as follows: Target profit (9.5 percent of $258,097) –. Total_____. $24, 519 38, 714 63, 233 Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE GAO review of the contract target price negotiated in September 1960 for Department of the Air Force fixed-price incentive contract AF 04(647)-684 with American Bosch Arma Corp., Arma Division, Garden City, N.Y., disclosed that the negotiated target cost was overstated by $216,153. This overstatement occurred because the contractor proposed, and the Air Force accepted, estimated costs of purchased parts that were higher than were reasonable in view of suppliers' known prices at the time of negotiations. Unless adjusted, this overstatement will result in increased costs to the Government in the firm of unwarranted profits to the contractor of $52,958. GAO recommendation Because the total price negotiated is only as sound and equitable as the individual cost elements that make up the total price, GAO believes that this case illustrates the need for adequate records evidencing the agreements which were reached by the parties with respect to the elements of the negotiations. GAO recommends, therefore, that the Secretary of the Air Force take appropriate action to emphasize to all contracting officers the need for such supporting records. GAO requests that the Secretary of the Air Force advise GAO of action taken in this matter. Statement The Assistant Deputy for Procurement stated the DOD position as follows: (a) With respect to the overstatement in the bill of material by the contractor, additional tests made by the Air Force resident auditor disclosed a total overpricing in the bill of material of $170,128 on approximately 72 percent of the proposed material costs compared with the $127,104 stated in your report for the 60.6 percent reviewed by the auditors. The net overstatement of $170,128 for the 72 percent examined, when prorated over 100 percent of the material cost, results in an overstatement of $236,288. When G. & A. of 9 percent is added to this amount, the total overstatement is $258,097. (b) The contracting officer determined that the initial target costs of contract AF 04 (647)–684 was overstated by $258,097 as a result of the contractor's failure to disclose to the Government negotiators recent price changes in material that were reasonably available to the contractor's representatives. (c) The contracting officer's determination has been reviewed and approved by the Staff Judge Advocate and was dispatched to the contractor by certified mail on August 26, 1964. The contractor appealed the contracting officer's decision on September 15, 1964. The appeal was forwarded to ASBCA on September 24, 1964, and the case has been assigned docket No. 10305. Status: Awaiting disposition of the matter by the ASBCA. Policy: A price adjustment was sought in this case pursuant to our policy that price adjustments will be sought when it is determined that the contractor failed to consider and/or disclose to the Government negotiators all reasonably available appropriate cost or pricing data in preparation of its proposal and/or during subsequent negotiations. GAO Report B-125071, July 31, 1964 62. Title: "Overpricing of Modification Kits and Spare Parts Purchased From Hughes Aircraft Co., Culver City, Calif., Under Negotiated Firm Fixed-Price Contracts Department of the Air Force" (OSD case No. 1957). GAO finding: Prices negotiated for certain modification kits and spare parts were overstated in relation to cost and pricing information that was available to the contractor prior to or during price negotiations, but was not made known to Air Force contracting officials. GAO estimate of unnecessary costs: $722,200. Time period of GAO report: July 1956 through April 1960. DOD comments on GAO finding: The Air Force agreed with the GAO finding. DOD comments on costs: The GAO estimate of unnecessary costs is not questioned. DOD corrective action: A refund of $722,191 has been received from Hughes Aircraft Co. Since the time of the pricing action covered, the Air Force has worked closely with Hughes to accomplish improvements in Hughes estimating and pricing procedures. Several areas were involved, including accounting and estimating procedures and the certification of current cost on pricing data. Steps were also taken to improve the pricing capability of the Air Force representatives at the Hughes plant and Air Force procurement personnel were apprised of the circumstances of the case. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem During the period of July 23, 1956, through April 30, 1960, the Air Force ordered items with a value of $10,448,000 under contract -2173, $6,489,000 under contract -2676, and $18,412,000 under contract -33098. Based upon its costs to deliver the items, Hughes realized profits of $2,232.000, $1,774,000, and $2,153,000, respectively, or 27, 37, and 13 percent of incurred costs. The Air Force plant representative of the Air Materiel Command located at the Hughes facility, was responsible for the administration of these contracts. The approval of the fairness and reasonableness of the prices discussed in this report was the responsibility of administrative contracting officers of the staff of the Air Force plant representative. GAO recommendations The Air Force has stated that numerous improvements have been made in the pricing capability of its plant representative's office since the time of the pricing actions covered by our review. GAO has not evaluated these improvements, but plans to consider them in their reviews of more current pricing actions. However, since their review of contracts -2173, -2676, and -33098 was limited to selected items under certain calls totaling less than 20 percent of the total contract prices, GAO recommended that the Air Force review the pricing of other significant items and calls under these contracts to determine whether action to obtain additional price adjustments would be appropriate. GAO requested they be informed of the results of this review and the action taken or contemplated by the Air Force on the matter. Statement Contrary to the GAO statement that only 20 percent of the total contract dollars were reviewed, in actuality the GAO reviewed 79.1 percent of the dollars on contract -2173, 70 percent on contract -2676, and 5.6 percent on -33098. Regarding contract -33098, the Air Force plant representative advises that discussion with GAO personnel confirms that the GAO auditors did not consider the total profit on the calls to contain sufficient abnormal profit to warrant the time and expense of further analysis and audit. GAO auditors found, on their second visit to Hughes, that a substantial number of calls did not, or were not likely to, produce reportable findings either because the profits were not unreasonable, or in some cases because essential data was not available for analysis and evaluation. It is understood, also, that the GAO auditors determined it was not feasible to examine in detail numerous line items of small amounts. Accordingly, the GAO excluded these items from their review statistics and pursued them no further. We advised the GAO that we concur fully with their determinations and it is doubtful that our resident audit staff would be any more successful than the GAO effort. We informed the Comptroller General that we were advised that an agreement had been made between the General Accounting Office and a Hughes representative resulting in GAO auditors employing the moving average costing method (actual costs), whereas for the period reported Hughes employed a pool concept of costing (standard costs plus or minus a variance). Hughes Co. representatives have advised that the agreement to use moving average actual costs for the purpose of costing the calls was not proper and this method was not used and is not being used currently. Hughes further advised that the attorney who agreed to the GAO auditors employing the moving average system is no longer with the company. Status: Case closed. Policy: In accordance with the objectives of our subcontract review and approval policy, many of the deficiencies in the estimating system employed by Hughes have been corrected. The contractor now employs a system providing for recheck of the prices of significant items prior to execution of a price certificate. Overreliance was placed on the use of a price deck using a negotiated pricing formula. This system is no longer employed by the contractor and spare parts are estimated on an individual basis. Material is now priced using specific purchase order quotes, purchase record history cards, tab runs for the moving average actual cost for each item, etc. Numerous other changes have been made by the contractor as a result of Air Force surveillance in this area. GAO Report B-133143, July 31, 1964 63. Title: "Excessive Prices Negotiated for Installation and Test of Radar Systems. Under a Negotiated Fixed-Price Contract with Avco Corp., Electronics Division, Cincinnati, Ohio" (OSD Case No. 1935). Problem The GAO found that the price negotiated by the Air Force in May 1963 with Avco Corp., Electronics Division, Cincinnati, Ohio, for installing and testing radar systems under a fixed-price order was excessive by about $119,200 because Avco proposed and the Air Force accepted an allowance for labor that was greater than Avco could reasonably expect to incur on the basis of prior experience. Labor costs previously incurred by Avco for work of a similar nature were not adequately considered in the negotiaton of this price, although recent cost experience was available in Avco's records. After the GAO findings were brought to the attention of Air Force and Avco officials, Avco refunded $119,200 to the Air Force on April 7, 1964. GAO recommendation That the Secretary of Defense, in line with his recent emphasis on this point, have this report brought to the attention of Air Force contracting officials to illustrate the importance of adequately considering contractors' most recent cost experience when negotiating prices. Time period of GAO report: Proposal submitted in January 1963, negotiation concluded in May 1963. Statement We do not concur with the GAO conclusion that the Air Force did not give sufficient consideration to prior cost experience in negotiating the prices for this order. After receipt of the contractor's proposal, the administrative contracting officer (ACO) through the price analyst, submitted a request to the Army Audit Agency for review of certain elements of the proposal. The Army Audit Agency was informed that under a prior contract, AF 30(635)-16211, the Air Force Auditor General reviewed and examined the contractor's proposal for similar work. In addition, a technical evaluation of the labor hours was requested from the industrial engineer at the Cincinnati contract management office. These reports were reviewed by the price analyst. He, in turn, submitted his own evaluation of the contractor's proposal to the ACO. Available, then, for ACO evaluation were three reports: Audit report, industrial engineering report, and price analysis report. Each of these reports was based on information in official Avco records. Historical costs were considered, although they were not the only criterion used for establishing reasonableness of the proposed price. Analysis of contract work requirements was also a consideration. However, it now appears that Avco had, at the time of negotiations, more current informal memorandums indicating lower labor costs which had not been made known to the Air Force negotiators or the Army auditor. Such information would not normally be available to Government personnel unless disclosed by the contractor. This information was not reflected in the records during the time the contractor's proposal was under review and negotiation; therefore, review of the contractor's proposal was adequate and the contractor was remiss in failing to disclose information that would have resulted in the negotiation of lower labor costs. Additionally, the contractor executed a certificate of current pricing data and the contract contains the defective pricing data clause. Status: Case closed. Policy: The Air Force does not concur with the GAO recommendation that this particular report be used to emphasize the importance of considering contractor's prior experience when negotiating prices. The issue in this case is not one of allowance for contingencies by our negotiators, but failure on the part of the contractor to disclose the most current available pricing data. The ASPR, AFPI and other directives contain adequate guidance in this regard, and in this case our personnel complied with ASPR 3-800 regarding preparation for negoiation, use of historical cost data, use of audit and price analysis and utilization of a pricing certificate and defective data pricing provision in the contract. At the request of OSD, however, the report was distributed to subordinate organizations for information. GAO Report B-146918, August 18, 1964 64. Title: "Overstated Material Cost Estimates Included in Firm Fixed Prices Negotiated for T-37 Airplanes Produced by Cessna Aircraft Co., Wichita, Kans." (OSD case No. 1929). Problem (a) The GAO finds that the firm-fixed prices negotiated by the Air Force and Cessna for T-37 airplanes produced under contracts AF (33(600)−33891, −35569, -36776, and -38888 included material cost estimates which were overstated by about $275,300 in relation to pertinent information available either at the time the proposals were prepared or at the time of negotiations. The estimates included costs for some parts in excess of contract requirements and for one part which was to be furnished by the Government without cost to the contractor. Also, in some instances the cost estimates were not based on the latest available cost and pricing information. Cessna's addition of about $51,500 to the overstated cost estimates included in the negotiated contract prices, to provide for material rejections, general, and administrative expenses, and profit, resulted in increased costs to the Government of about $326,800. (b) During price negotiations for contracts -35569, -36776, and -38888, Cessna certified that in preparation of its proposals it had utilized and provided to the Air Force for negotiation purposes the most current, complete, and accurate data available for this purpose. Contract -33891 was negotiated before such certificates were required. GAO recommendations (a) In its Draft Report the GAO recommended that (1) the Secretary of the Air Force take action to obtain appropriate adjustment of the prices negotiated with Cessna for contracts -33891, -35569, -36776, and -38888, and (2) a review be made of the prices of contracts for T-37 airplanes negotiated with Cessna subsequent to the contracts discussed in this report to determine whether they include similar overstated cost estimates and, where appropriate, to obtain adjustments in the contract prices. (b) In its Final Report, the GAO recommended that action taken by the Air Force to obtain an adjustment be coordinated with the Department of Justice. Statement We are in agreement regarding the overpricing of the four contracts cited in the report. Cessna has offered a refund for complete restitution for the alleged overstatements disclosed by the GAO; however, the entire matter, including production and follow-on contracts, was referred to the Justice Department on March 11, 1965, for their review prior to the Air Force taking any further action in the case. Cessna explained that such human errors could have and did occur as a result of the timing of the negotiations which occurred during a time period when engineering and configuration changes were being experienced. Cessna indicated that in its opinion it was neither fair nor reasonable for the Government, based upon its after-the-fact review of material prices, to expect restitution, especially on the quantity errors. It was the stated opinion of Cessna that the quantity errors (i.e., item quantities in excess of contract requirements) were within reasonable limits in view of the time required to reduce the bills of material to a more precise figure. These comments were based on the fact that the indicated discrepancies in pricing represented a 1.53-percent error in pricing bills of material. Status: This case will remain open pending completion of Department of Justice review of the matter and Air Force efforts to obtain an equitable price adjustment. GAO Report B-146916, August 18, 1964 65. Title: "Overstated Cost Estimates for Miscellaneous and Minor Outside Production Items Included in Incentive Target Prices Negotiated with the Boeing Co., Seattle, Wash., for KC-135 Airplanes" (OSD case No. 1881). GAO finding: Due to overstated cost estimates for miscellaneous and minor outside production items, unwarranted target and incentive profits will accrue to Boeing under two contracts for KC-135 aircraft unless the contract target prices are reduced. GAO found that the Air Force was unaware of the overstated estimate or that the contractor, during negotiations, reduced its proposed prices because of these overstatements. Since Boeing used similar procedures in estimating costs for other contracts for KC-135 aircraft, pricing deficiencies may also exist in those contracts. GAO estimate of unnecessary costs: About $541,590. Time period of GAO report: Negotiations concluded: One contract November 1961, other contract for 72 aircraft November 1960, and for 13 aircraft May 23, 1961. DOD comments on GAO finding: An audit and review of the costs for the two contracts, which involved a comprehensive review of GAO work papers and Boeing records, have been completed. Findings and conclusions were submitted to the Department of Jutsice on December 21, 1964, for consideration and coordination in accordance with GAO's recommendation. DOD comments on costs: The Air Force did not comment. DOD corrective action: Boeing concurred that identifiable duplications and errors had occurred. The computation of the adjustment offered by Boeing was verified and considered appropriate. A supplemental agreement has been processed effective a contract profit reduction of $60,573. Two KC-135 contracts negotiated subsequent to the above contracts are currently being reviewed. Results of the review will be furnished Justice if desired. |