Navy Can Reduce the Cost of Ship Construction If It Enforces Provisions of the Contract Escalation Clause

Gao ID: PLRD-81-57 August 24, 1981

A review was conducted of the procedures and practices that Navy shipbuilding contractors use to compute material escalation costs on fixed-price incentive contracts which contain the cost index material escalation clause. The objective of the review was to determine if Navy contractors were computing escalation costs as specified in the contract clause.

Four of the five contractors reviewed were not correctly interpreting and applying the cost index clause. The contractors were overstating the escalation costs by delaying the computation of escalation. As a result, cost indexes for subsequent periods were being applied to costs incurred and invoiced during earlier periods. Contractors would thus receive an estimated $2.4 million in excess payments for escalation costs.

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.

Director: Robert M. Gilroy Team: General Accounting Office: Procurement, Logistics, and Readiness Division Phone: (202) 275-4268


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