Escalation in Engineering Labor Rates at Defense Contractors

In response to a congressional request, GAO reviewed a Defense Contract Audit Agency (DCAA) report which dealt with increases in an aircraft manufacturer's labor rates for engineers and other employees in 1981 and with increases proposed for 1982-1984 for a forward pricing labor rate agreement between the firm and the Department of Defense.

DCAA reported that a substantial increase in the firm's average engineering labor rates would be excessive because they were substantially higher than its estimates of the increases experienced and to be experienced by Government and private sector workers. Therefore, DCAA recommended that the Air Force contracting officer negotiate downward adjustments in the labor rates to bring them into line and to offset excess costs alleged to have been incurred in 1981. GAO found that: (1) the labor rate increase reported by DCAA was overstated because it was not adjusted to eliminate the effects of changes in the proportion of hours worked by higher paid engineers compared to lower paid technicians; (2) the increases were not representative of the trend at the firm for previous years; (3) the computation departed from established practices and made assumptions which did not reflect adequate consideration of underlying uncertainties; (4) Defense Acquisition Regulation guidance was ignored by using Federal increases for comparison purposes; (5) the estimate was based on an assumption that the Government would accept the proposed labor rates without modification despite evidence to the contrary; and (6) a conclusive determination and comparison can only be made by examining the total compensation package from year to year and this was not done. In reviewing the average increases in labor rates for engineers at five contractors, GAO found that the 4-year averages for such increases were in line with increases in the private sector and generally higher than increases in Government rate