The Air Force's C-5B Should Cost Study

GAO testified on the Air Force's should-cost study on the final option for 21 C-5B aircraft under a fixed-price contract, specifically: (1) the events which led to the Air Force's decision to conduct a cost study; and (2) the methodology upon which the Air Force based the study. GAO found that the Air Force: (1) was concerned that the contractor might substantially underrun the expected costs of producing the C-5B aircraft and achieve a profit rate higher than the 15 percent which the Air Force had negotiated; (2) inserted a profit-sharing clause into the contract to reduce any profit over 17 percent, instead of renegotiating the contract; (3) notified the contractor that it should submit a new proposal, on which the Air Force would perform a cost study to determine if the price of the fiscal year (FY) 1987 option was fair and reasonable; and (4) conducted the study in order to establish a negotiating position if it decided not to exercise the FY 1987 option under contract terms that existed at that time. GAO also found that the should-cost study: (1) evaluated the contractor's proposal in sufficient detail for the Air Force to decide whether it should exercise the option; (2) performed a cost analysis of subcontract costs; and (3) did not identify uneconomical, inefficient, or outdated practices in the contractor's management and operations, since there was not enough time to implement any recommended changes.