Review of Price Increases Under Shipbuilding Contracts

B-159206: Dec 5, 1966

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The General Accounting Office has examined into the propriety of price increases paid to General Electric Company (GE) under 10 subcontracts for marine propulsion equipment and turbine generator sets on the basis of changes in its catalog prices of designated commercial equivalents. Our review was made pursuant to the Budget and Accounting Act, 1921 (31 U.S.C. 53), the Accounting and Auditing Act of 1950 (31 U.S.C. 67), and the contract clauses prescribed in 10 U.S.C. 23l3(b). The 10 subcontracts were awarded to GE's Medium Steam Turbine Generator and Gear Department, Lynn, Massachusetts, and Small Steam Turbine Department, Fitchburg, Massachusetts, by the Bath Iron Works Corporation, Bath, Maine, and the Defoe Shipbuilding Company, Bay City, Michigan, prime contractors to the Department of the Navy for the construction of eight guided missile destroyers under negotiated fixed-price contracts with a price adjustment clause.

The Department of the Navy agreed to reimburse prime shipbuilding contractors for price adjustments paid to their supplier of marine propulsion equipment and turbine generator sets on the basis of increases in the supplier's catalog prices for designated commercial items. Within 3 months after the award of the related subcontracts, the supplier increased the catalog prices for the designated commercial items and claimed and was paid price increases of more than $1.7 million for items purchased by the Government. The record shows, however, that, with respect to certain of these items, there were no commercial sales of the items designated by the supplier as the nearest commercial equivalent upon which to base price adjustments and that, for the remaining items, increases in the commercial selling prices were not proportionate to the increases in the supplier's catalog prices. In fact, in some instances, even though the catalog prices were increased, the commercial selling price remained the same. The Navy consented to the inclusion of the price adjustment clause in the subcontracts and to the related price increases without providing for review and evaluation by either the prime contractors or the Navy of the reasonableness of the catalog prices of the designated commercial equivalents or of the subsequent increases in the prices. The Armed Services Procurement Regulation 7-106.4 and the price adjustment clause included in the subcontracts contributed to the deficiencies disclosed by our review in that they did not specifically require Government prime contractors and/or contracting officers to determine that catalog prices were bona fide commercial prices before agreeing to pay price increases based on the catalog prices. Neither did the regulation or clause provide for examining the supplier's sales records for evidence supporting increases made in the catalog prices of designated items, nor did they require suppliers to furnish evidence that commercial sales had actually been made at the increased catalog prices prior to approving the price increases claimed for items to be furnished to the Government.