B-210603 L/M, FEB 25, 1983

B-210603 L/M, FEB 25, 1983

PRECIS-UNAVAILABLE

TED STEVENS, UNITED STATES SENATE:

IN YOUR LETTER OF JANUARY 6, 1983, YOU ASKED WHETHER THE FIXED-PRICE INCENTIVE CONTRACT RECENTLY AWARDED BY THE NAVY TO NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY FOR CONSTRUCTION OF TWO NIMITZ CLASS AIRCRAFT CARRIERS (CVN-72 AND 73) WAS IN COMPLIANCE WITH THE JOINT RESOLUTION OF DECEMBER 21, 1982, PUB.L. NO. 97-377, 96 STAT. 1831. THE RESOLUTION, IN SECTION 101(C), APPROPRIATED $6,559,500,000 FOR THE CONSTRUCTION OF THE CARRIERS, WITH THE RESTRICTION THAT THE MONEY BE AVAILABLE "ONLY UNDER A FIRM, FIXED PRICE TYPE CONTRACT." 96 STAT AT 1842. DUE TO THE TIME CONSTRAINTS IMPOSED BY YOUR LETTER WE DID NOT REQUEST FORMAL COMMENTS FROM THE DEPARTMENT OF THE NAVY. HOWEVER, WE HAVE SPOKEN INFORMALLY WITH NAVY OFFICIALS. FOR THE REASONS GIVEN BELOW, WE THINK THE CONTRACT CONSISTENT WITH THE QUOTED RESTRICTION.

THE CONTRACT

ON DECEMBER 27, 1982, IN AN ATTEMPT TO COMPLY WITH THE APPROPRIATION RESTRICTION, THE NAVY AND NEWPORT NEWS SHIPBUILDING MODIFIED A PRIOR AGREEMENT REGARDING THE CVN-72 AND 73, AND ENTERED INTO A FIXED-PRICE INCENTIVE CONTRACT FOR THE CONSTRUCTION OF THE CARRIERS. THE CONTRACT PROVIDED FOR A TOTAL CONTRACT TARGET COST OF $2.54 BILLION, A TARGET PROFIT OF $603 MILLION, A TARGET PRICE OF $3.143 BILLION AND A CEILING PRICE OF $3.4544 BILLION. UNDER SCHEDULE H-4 OF THE CONTRACT, NEWPORT NEWS' PROFIT IS RELATED TO THE TOTAL FINAL COST AS FOLLOWS: IF THE FINAL COST IS EQUAL TO THE TARGET COST, NEWPORT NEWS IS PAID THE TOTAL TARGET PROFIT; IF THE FINAL COST IS GREATER THAN THE TARGET COST NEWPORT NEWS IS PAID THE TARGET PROFIT LESS 25 PERCENT OF THE AMOUNT BY WHICH THE FINAL COST EXCEEDS THE TARGET COST; AND, IF THE FINAL COST IS LESS THAN THE TARGET COST, NEWPORT NEWS IS PAID THE TARGET PROFIT PLUS 25 PERCENT OF THE AMOUNT BY WHICH THE FINAL COST IS LESS THAN THE TARGET COST. HOWEVER, IN NO EVENT MAY THE FINAL TOTAL PRICE OF THE CONTRACT EXCEED THE CEILING PRICE.

LEGISLATIVE HISTORY

THE LEGISLATIVE HISTORY OF THE DEPARTMENT OF DEFENSE APPROPRIATIONS FOR FISCAL YEAR 1983 GIVES NO INDICATION OF WHY THE CONGRESS IMPOSED THE RESTRICTION THAT CONSTRUCTION OF THE CARRIERS MUST BE ACCOMPLISHED UNDER A FIRM, FIXED-PRICE TYPE CONTRACT. THE RESTRICTION FIRST APPEARED AS A PROVISO TO THE CVN APPROPRIATION IN S. 2951, 97TH CONG., THE SENATE VERSION OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1983. NEITHER THE COMMITTEE REPORT ACCOMPANYING THE BILL (S.REPT. NO. 97-580, 97TH CONG., 2D SESS.) NOR THE FLOOR DEBATE STATES ANY REASON FOR THE PROVISO. THE HOUSE VERSION OF THE BILL, H.R. 7355, 97TH CONG., CONTAINED NO SIMILAR PROVISION, BUT THE RESTRICTION WAS ADDED, AS A SENATE APPROPRIATIONS COMMITTEE AMENDMENT, WHEN THE HOUSE BILL WAS PLACED ON THE SENATE CALENDAR. WHEN THE COMMITTEE OF CONFERENCE ON THE CONTINUING RESOLUTION INCORPORATED THE DEFENSE APPROPRIATIONS ACT, IT INCLUDED THE RESTRICTION, BUT, AGAIN, WITHOUT ANY EXPLANATION.

WE HAVE BEEN ADVISED INFORMALLY BY NAVY OFFICIALS THAT THE RESTRICTION WAS ADDED AS A COST SAVINGS MEASURE IN RESPONSE TO EXPERIENCES WITH EARLIER CARRIER PROCUREMENT. THEY SUGGESTED THAT FUNDING PROBLEMS AROSE WITH THE CVN-70 BECAUSE INITIALLY THE WORK WAS DONE ON A COST REIMBURSABLE BASIS UNDER A LETTER CONTRACT RATHER THAN UNDER A CONTRACT FIRMLY FIXING THE RIGHTS AND LIABILITIES OF THE PARTIES. THIS RESULTED IN A PERIOD OF UNCERTAINTY ABOUT THE COST. THE NAVY OFFICIALS ALSO TOLD US THAT THEY INTERPRET THE WORD "FIRM" IN THE RESTRICTION ONLY AS REQUIRING A CONTRACT THAT IS FIRM OR DEFINITE, BUT NOT THE PARTICULAR KIND OF CONTRACT KNOWN AS A "FIRM FIXED-PRICE CONTRACT." THESE OFFICIALS ALSO EXPLAINED THAT A STRICT FIRM FIXED PRICE CONTRACT WOULD BE IMPRACTICAL FOR A LONG-TERM SHIPBUILDING PROJECT.

DISCUSSION

THE RESTRICTION REQUIRES THAT THE CARRIERS BE BUILT UNDER A "FIRM, FIXED- PRICE TYPE CONTRACT." IN OUR OPINION, THIS PHRASE MAY BE INTERPRETED AS THE NAVY HAS INTERPRETED IT, I.E., TO REQUIRE ONLY THAT A FIXED-PRICE TYPE CONTRACT BE USED AND TO PRECLUDE THE INCURRENCE OF ESSENTIALLY UNCONTROLLABLE COSTS UNDER PRELIMINARY CONTRACTUAL ARRANGEMENTS SUCH AS LETTER CONTRACTS. THUS, THE USE OF THE COMMA INDICATES THAT THE WORD "FIRM" AND THE PHRASE "FIXED-PRICE TYPE" ARE EQUAL OR COORDINATE MODIFIERS OF THE WORD "CONTRACT." SEE GOVERNMENT PRINTING OFFICE STYLE MANUAL SEC. 8.39 (1973). IN OTHER WORDS, IN ORDER TO COMPLY WITH THE RESTRICTION, THE CONSTRUCTION CONTRACT MUST BE BOTH "FIRM" AND OF A "FIXED-PRICE TYPE." USING THE WORD "FIRM", WE THEREFORE THINK IT PLAUSIBLE, PARTICULARLY IN THE ABSENCE OF RELEVANT LEGISLATIVE HISTORY, THAT THE CONGRESS INTENDED A CONTRACT IN WHICH THE RESPECTIVE RESPONSIBILITIES OF THE PARTIES ARE COMPLETELY AND DEFINITIVELY SET OUT. THE PROVISION IS THEREFORE SUSCEPTIBLE OF NAVY'S INTERPRETATION, I.E., THAT THE CONGRESS MEANT TO EXCLUDE THE USE OF A LETTER CONTRACT, WHICH IN THE CASE OF THE CVN-70 HAD ALLOWED THE CONTRACTOR TO OPERATE FOR SEVERAL YEARS WITHOUT ANY EFFECTIVE CONTROLS ON COSTS.

THE CONTRACT BETWEEN THE NAVY AND NEWPORT NEWS IS FIRM IN THAT SENSE. REQUIRES NEWPORT NEWS TO DELIVER THE TWO VESSELS AND RELATED PARTS BY SPECIFIED DATES. IT SETS FORTH IN DEFINITE FIGURES THE TARGET COST, TARGET PROFIT, TARGET PRICE, AND CEILING PRICE, AND ESTABLISHES THE FORMULA BY WHICH THE TOTAL FINAL PRICE TO BE PAID BY THE UNITED STATES IS TO BE CALCULATED.

SECTION 3-404.1 OF THE DEFENSE ACQUISITION REGULATION DESCRIBES FIXED- PRICE CONTRACTS, AS FOLLOWS:

"FIXED-PRICE CONTRACTS ARE OF SEVERAL TYPES SO DESIGNED AS TO FACILITATE PROPER PRICING UNDER VARYING CIRCUMSTANCES. THE FIXED-PRICE TYPE CONTRACTS PROVIDE FOR A FIRM PRICE, OR UNDER APPROPRIATE CIRCUMSTANCES MAY PROVIDE FOR AN ADJUSTABLE PRICE ***."

ONE TYPE OF FIXED PRICE CONTRACT DESCRIBED BY THE REGULATION IS THE "FIXED-PRICE INCENTIVE CONTRACT." A "FIXED-PRICE INCENTIVE CONTRACT" IS DEFINED AS:

"*** A FIXED-PRICE TYPE OF CONTRACT WITH PROVISION FOR ADJUSTMENT OF PROFIT AND ESTABLISHMENT OF THE FINAL CONTRACT PRICE BY A FORMULA BASED ON THE RELATIONSHIP WHICH FINAL NEGOTIATED TOTAL COST BEARS TO TOTAL TARGET COSTS." ID. SEC. 3-404.4.

THE DESCRIBED CONTRACT BETWEEN THE NAVY AND NEWPORT NEWS IS SUCH A FIXED-PRICE INCENTIVE CONTRACT, AND IS THEREFORE A FIXED-PRICE TYPE CONTRACT.

THE GUIDANCE CONTAINED IN THE DEFENSE ACQUISITION REGULATION CONCERNING THE CIRCUMSTANCES UNDER WHICH FIRM FIXED-PRICE CONTRACTS ARE SUITABLE FOR USE SUPPORTS THE NAVY'S ARGUMENT THAT A FIRM FIXED-PRICE CONTRACT WOULD BE INAPPROPRIATE IN THESE CIRCUMSTANCES. DAR 3-404.2(B) PROVIDES AS FOLLOWS IN THIS REGARD:

"(B) APPLICATION. THE FIRM FIXED-PRICE CONTRACT IS SUITABLE FOR USE IN PROCUREMENTS WHEN REASONABLY DEFINITE DESIGN OR PERFORMANCE SPECIFICATIONS ARE AVAILABLE AND WHENEVER FAIR AND REASONABLE PRICES CAN BE ESTABLISHED AT THE OUTSET, SUCH AS WHERE:

"(I) ADEQUATE COMPETITION HAS MADE INITIAL PROPOSALS EFFECTIVE;

"(II) PRIOR PURCHASES OF THE SAME OR SIMILAR SUPPLIES OR SERVICES UNDER COMPETITIVE CONDITIONS, OR SUPPORTED BY VALID COST OR PRICING DATA, PROVIDE REASONABLE PRICE COMPARISONS;

"(III) COST OR PRICING INFORMATION IS AVAILABLE PERMITTING THE DEVELOPMENT OF REALISTIC ESTIMATES OF THE PROBABLE COSTS OF PERFORMANCE;

"(IV) THE UNCERTAINTIES INVOLVED IN CONTRACT PERFORMANCE CAN BE IDENTIFIED AND REASONABLE ESTIMATES OF THEIR POSSIBLE IMPACT ON COSTS MADE, AND THE CONTRACTOR IS WILLING TO ACCEPT A FIRM FIXED PRICE AT A LEVEL WHICH REPRESENTS ASSUMPTION OF A REASONABLE PROPORTION OF THE RISKS INVOLVED; OR

"(V) ANY OTHER REASONABLE BASIS FOR PRICING CAN BE USED CONSISTENT WITH THE PURPOSE OF THIS TYPE OF CONTRACT.

"THE FIRM FIXED-PRICE CONTRACT IS PARTICULARLY SUITABLE IN THE PURCHASE OF STANDARD OR MODIFIED COMMERCIAL ITEMS, OR MILITARY ITEMS FOR WHICH SOUND PRICES CAN BE DEVELOPED."

DAR 3-404.4(B), ON THE OTHER HAND, STATES AS FOLLOWS WITH RESPECT TO FIXED-PRICE INCENTIVE CONTRACTS:

"FIXED-PRICE INCENTIVE CONTRACTS ARE APPROPRIATE WHEN USE OF THE FIRM FIXED-PRICE CONTRACT IS INAPPROPRIATE, AND THE SUPPLIES OR SERVICES BEING PROCURED ARE OF SUCH A NATURE THAT ASSUMPTION OF A DEGREE OF COST RESPONSIBILITY BY THE CONTRACTOR IS LIKELY TO PROVIDE HIM WITH A POSITIVE PROFIT INCENTIVE FOR EFFECTIVE COST CONTROL AND CONTRACT PERFORMANCE."

PARAGRAPH 3-404.4(C) PROVIDES THAT:

"*** NEITHER TYPE OF FIXED-PRICE INCENTIVE CONTRACT SHALL BE USED UNLESS A DETERMINATION HAS BEEN MADE, IN ACCORDANCE WITH THE REQUIREMENTS OF PART 3 OF THIS SECTION III THAT:

"(I) SUCH METHOD OF CONTRACTING IS LIKELY TO BE LESS COSTLY THAN OTHER METHODS, OR

"(II) IT IS IMPRACTICAL TO SECURE SUPPLIES OR SERVICES OF THE KIND OR QUALITY REQUIRED WITHOUT THE USE OF SUCH TYPE OF CONTRACT."

IT IS OUR OPINION FOR THE REASONS DISCUSSED ABOVE THAT THE LIMITATION AS TO CONTRACT TYPE CONTAINED IN THE CONTINUING RESOLUTION MAY BE INTERPRETED TO ALLOW NAVY THE FLEXIBILITY CONTEMPLATED BY THE QUOTED DAR PROVISIONS IN DETERMINING THE APPROPRIATE TYPE OF FIXED PRICE CONTRACT FOR THIS PROCUREMENT.

ACCORDINGLY, WE CONCLUDE THAT THE FIXED-PRICE INCENTIVE CONTRACT AWARDED BY THE NAVY TO NEWPORT NEWS SHIPBUILDING FOR CONSTRUCTION OF THE TWO NIMITZ CARRIERS COMPLIES WITH THE RESTRICTION IN THE CONTINUING RESOLUTION.

WE HOPE WE HAVE BEEN OF ASSISTANCE.