Two Navy Ship Contracts Modified Under Authority of Public Law 85-804--Status as of August 3, 1980

Gao ID: PLRD-82-8 October 6, 1981

GAO reported on the status of two modified shipbuilding contracts for 5 landing helicopter assault ships and 30 Spruance class destroyer ships. The report covered the contractor's fiscal year ended August 3, 1980. After years of disagreement over shipbuilding claims filed by the contractor, the Navy and the contractor agreed to a settlement. GAO reviewed the contracts to ensure that funds authorized to provide relief in the claims settlement were being used only on the two contracts and that the prime contractor did not use such funds to realize any total combined profit. The GAO review included: (1) an update of a prior review of procedures and controls and a test of transactions for July 1980 to ensure that costs were properly charged to the individual contracts; (2) an examination of contract records and discussions with the contractor and Navy officials to determine the combined profit/loss status of the two contracts; and (3) an examination of progress payments and related costs to determine whether the funds were being used only on the two contracts as required.

GAO found that, as of the contractor's fiscal year ended in August 1980, funds provided were being used only on the specified contracts. The contractor continues to project an overall loss on the two contracts. When profit on change orders and the incentive fee for ship silencing are considered, the overall loss is calculated at $35 million. The total loss projection reflects a significant improvement from the $200 million estimated loss during the 1978 shipbuilding claims settlement. To become profitable, the contractor will have to experience a significant underrun on the remaining estimated costs. Delivery of the last ships on the contracts was made in April and June of 1980. The contractor has continued to do various modification and warranty/guarantee work. The prospect of achieving such efficiencies, once considered to be remote, is now possible in view of the contractor's work experience during the past fiscal year.

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