Contract Pricing

The F-16 aircraft mid-life update program is intended to develop and install upgrades to the F-16 fighter aircraft owned by Belgium, Denmark, and the Netherlands, thereby improving the planes' performance. This report discusses (1) if the rates and factors used to price two selected prime contracts were the same as those used to price contemporaneous U.S. government contracts, (2) how Air Force negotiation officials used the Defense Contract Audit Agency's recommendation in negotiating the prime contract prices, and (3) if the materials and subcontract costs included in the prime contract prices were fair and reasonable. GAO also reviewed the pricing of two selected subcontracts.

GAO found that: (1) the prime contractors proposed and Air Force negotiators accepted rates and factors to price the two MLU contracts that were different from those used to price contemporaneous U.S. government contracts; (2) the contract prices for the European participating governments were $9.4 million higher due to the use of different rates and factors; (3) the Defense Plant Representative Office Commander certified that the forward pricing rate agreement (FPRA) rates and factors used to price the Lockheed Martin MLU contract were the same as those used to price all other contracts awarded to Lockheed Martin during the effective period of the agreement; (4) despite this certification, a special set of higher rates and factors was used to price the MLU contract rather than those called for in the FPRA; (5) for the Northrop Grumman contract, Air Force negotiators used a general and administrative overhead rate established for use in pricing foreign military sales rather than a lower domestic rate established for pricing U.S. government contracts; (6) Air Force negotiators also used two incorrect rates in pricing the MLU contract; (7) DCAA conducted preaward audits of the prime contractors' price proposals, questioned various costs, and reported large amounts of unresolved costs because audits had not been made of several subcontractor price proposals; (8) except for the rates and factors used for the Lockheed Martin contract, Air Force negotiators used DCAA's audit results to assist them in negotiating lower prices for the prime contracts; (9) Lockheed Martin and Northrop Grumman employed safeguard techniques required by U.S. procurement regulations to evaluate and negotiate subcontract and material prices for the prime contracts, and Air Force negotiators accepted the proposed and negotiated subcontract prices as fair and reasonable; (10) there are indications that material in the two prime contracts may be overpriced by as much as $947,000; (11) as for the two subcontracts selected by the European countries' Supreme Audit Institutions for review, Lockheed Martin awarded the Hazeltine subcontract competitively and the Honeywell subcontract noncompetitively; (12) in negotiating the price of the Honeywell subcontract, Lockheed Martin used rates and factors recommended by the cognizant U.S. government contract administration activity and employed the required safeguard techniques; and (13) the Air Force accepted the prices of these two subcontracts as fair and reasonable.