Pricing of a Subcontract With General Electric

The pricing of a subcontract awarded to the General Electric Armament Department was reviewed as part of a nationwide review of the pricing of negotiated noncompetitive subcontracts awarded under Department of Defense negotiated noncompetitive prime contracts. The objective of the review was to determine the reasonableness of the subcontract price in relation to cost or pricing data available to the subcontractor at the time of subcontract negotiation.

GAO found that General Electric's proposal was overpriced because the cost proposed for manufacturing and reliability and quality control (R&QC) variances was not based on current cost or pricing data. General Electric's manufacturing and R&QC variance cost estimates, for its initial proposal, were based on a variance forecast that incorporated actual cost history through September 1973. The revised proposal included the same variance percentage estimates; however, the cost or pricing data submitted included actual cost history through December 1973 and supported variance estimates lower than the cost proposed. According to General Electric officials, they became aware of actual first quarter 1974 manufacturing and R&QC variance percentages just before submitting the revised proposal. Three of the four actual variance percentages were greater than had been forecasted using cost history through December 1973. As a result, General Electric decided not to use the variance percentage estimates supported by the cost or pricing data submitted. General Electric officials claimed that the basis for this difference was presented at the negotiations.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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