Use of Cost-Deferred-Fee Contracts Can Be Costly to the Government

GAO reviewed the use of cost-deferred-fee (CDF) contracts with a Navy contractor to determine the appropriateness of that type of contracts and their effect on contract prices. GAO also reviewed procurement records for eight of the contractor's contracts which represented follow-on procurements of missile launchers and gun mounts for the shipbuilding program. In addition, the performance of a Navy technical representative at the contractor facility where the Defense Contract Administration Services (DCAS) is the designated representative for the administration of contracts was reviewed.

CDF contracts are the least desirable method of contracting for supplies and services. They are temporary contracts issued to begin work and are to be converted to a fully definitized contract. They are not recognized in Defense regulations and must be issued following a deviation procedure. The eight CDF contracts have not been definitized in a timely manner because of the parties' inability to agree on price. Until definitized, they operate like cost-reimbursement-type contracts under which the Government is responsible for essentially all costs incurred in performing the contract. While these contracts remain undefinitized, the contractor has little incentive to control costs, and the Government's negotiating position deteriorates. These higher costs may be used as the basis for the negotiation of subsequent contracts. The contractor does not bear an equitable share of the contract cost risk. At this late stage in the program, it would probably be unwise to establish other sources for the weapons. However, the agency should try to avoid dependence on sole sources in future contracts. If information on the manufacturing costs and labor hours incurred were included in the contractor's cost accounting system, the parties would be in a better position to predict future costs. The agency has failed to adequately implement the DOD policy of maintaining a single face to industry in administrating contracts. This is costly and confusing. DCAS should be the sole representative with the contractor on contract administration.

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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