Forward Pricing Rate Agreements in Initial Contract Pricing

To determine whether Department of Defense (DOD) contracting officials were obtaining adequate data in support of forward-pricing rate proposals from defense contractors and whether contract administration and audit personnel were adequately evaluating business volume forecasts in support of indirect expense rate negotiations, a review was conducted of defense contractors' forecasts developed in connection with the process of negotiating forward-pricing rate agreements for allocating indirect expenses in the initial pricing of contracts. In recent years, DOD prime contract awards have exceeded $40 billion annually, and indirect expenses are estimated to account for at least two-thirds of contractors' inplant costs and about one-third of total contract costs. Contractors' proposals were often incomplete and did not identify information sources and methodologies used in business volume forecasts; some contractors refused to furnish supporting data when requested to do so. Evaluations of business volume forecasts did not focus on the accuracy of supporting data or on the rationale of contractors' assumptions and judgments. Government personnel, however, adequately monitored the approved or recommended rates after negotiations, and when appropriate, the rate agreements were withdrawn. Cost savings clauses were included in contracts, permitting retroactive indirect expense rate adjustments. The Secretary of Defense should reemphasize the need for contracting officers to obtain adequate forward-pricing rate proposals which identify the bases for business volume forecasts and for contract administration and audit personnel to conduct thorough evaluations of forward-pricing rate proposals.