Two Contracts for Nuclear Attack Submarines Modified Under Authority of Public Law 85-804--Status as of December 20, 1980

GAO reported on the status at the end of the December 20, 1980, fiscal year of two contracts for submarines modified in the interest of national defense. The Navy and the contractor agreed to a settlement based on an estimated cost at completion of $2,668 million. The settlement provided for the contractor to absorb a $359 million loss over the remaining construction period, the Navy to cover another $359 million, the cost overruns to be divided equally up to a total of $100 million with costs above that figure being the total responsibility of the contractor, and cost underruns to be shared equally. GAO reviews the status of these contracts annually to ensure that funds authorized to provide relief in the claims settlement are used only on the two contracts and that the prime contractor does not use such funds to realize any total combined profit.

GAO found that, at the end of the December 20, 1980, fiscal year, funds provided were still being used only on the specific contracts. The contractor continued to project an overall loss on the contracts and, on the basis of incurred costs through December 20, 1980, could not experience an underrun on the remaining estimated costs to become profitable. The contractor was overrunning the adjusted estimated cost at completion at the time of the claims settlement by about $46 million, versus a $3 million cost overrun as of December 1979. This leaves only $54 million of the $100 million maximum overrun in which both the Government and the contractor share equally. After the fiscal year ended, certain developments occurred that could affect the estimated loss position. The contractor is seeking to recover from the Navy, under the builder's risk insurance provision in the contracts, the costs incurred to correct faulty workmanship by its employees. The contractor submitted an initial insurance reimbursement request for $18.9 million and expects to submit additional requests on the remaining submarines already delivered or under construction. The contractor believes that it might well have a sound legal basis to submit an insurance claim to recover a portion of the $359 million settlement loss, but it has stated that it will not seek such recovery under the insurance provisions of the contracts. The contractor reexamined its contract delivery dates negotiated in the settlement and rescheduled deliveries to delay the delivery dates for the last seven ships.