Opportunity To Reduce Cost of the Navy's Contract for Patrol Hydrofoil Missile Ships

A review of a Navy fixed-price contract found a contract price overstatement due to use of the ceiling price for a subcontract rather than the target price. The examination was part of a contract pricing review of contracts awarded to major Department of Defense (DOD) contractors with the objective of determining the reasonableness of contract price as it relates to pricing data available to the contractor at the time of contract negotiation.

The prime contractor used the established ceiling price for a sole-source, fixed-price, incentive-type subcontract rather than the target price as normally included on proposals. The project officer's representative felt that circumstances might warrant the use of a price other than the target price, and that in this case it was a prudent management decision as costs later approximated the ceiling price. GAO felt that the use of the ceiling price protects the contractor from sharing the cost overruns of its subcontractors, and removes incentives to manage subcontractors in a manner that assures cost minimization. Further, the contract requirements were reduced without a corresponding reduction in contract price. According to the contracting officer's representative, the items that will not be delivered were proposed as needed for testing, and delivery was not specifically required. While this is true, it is felt that the Navy should seek a price adjustment for parts no longer required.

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: Paul F. Math Team: General Accounting Office: Procurement and Systems Acquisition Division Phone: (202) 275-4587