Pricing of Subcontracts Awarded to Pratt & Whitney Aircraft of Canada

PSAD-79-84: Published: Jun 13, 1979. Publicly Released: Jun 13, 1979.

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As part of a nationwide study on the pricing of noncompetitive prime contracts by the Department of Defense, GAO conducted a review of the negotiated fixed-price contracts awarded during 1972 and 1973 by the Naval Air Systems Command to Pratt and Whitney Aircraft of West Virginia, Inc. These contracts were valued at $9,015,747 and $48,292,115. Work performed at the West Virginia plant accounted for only about 20 percent of the incurred costs. The balance of the work was performed by Pratt and Whitney Aircraft of Canada, Ltd., Quebec, under subcontracts. Because the subcontract cost was significant, GAO sought to determine whether the subcontract work prices included in the prime contract were reasonable in relation to cost or pricing data available to the subcontractor at the time of price agreements between the prime contractor and the Navy. Under the regulations, contractors are required to submit pricing data in support of proposed prices for noncompetitive contracts over $100,000, and the prime contractor must verify that the cost and pricing data of the contractor and subcontractor are accurate, complete, and current.

On the basis of the review, it appeared that the prime contract price may have been overstated by about $525,000 because the contractor did not provide the Navy with accurate, current, and complete data. These costs include the effect of subcontractor cost overstatement of about $430,000, and prime contractor additions to these overstatements for cost and profit (about $95,000). Further, the Navy paid about $770,000 more because the price of Canadian work was based on a fixed-currency exchange rate, rather than providing for adjustment based on the rates in effect at the time of payments by the prime contractor. The proposals, prepared by the subcontractor several months before the prime contract award, were not updated at the time of award to reflect more recent cost information. The subcontractor included a contingency allowance that was not made known to the prime contractor or to the contracting officer. The prime contractor notified the Naval Air Systems Command that no costs for warranty were included in the proposed price for one of the contracts, but the subcontractor's records showed that $139 per unit was included for warranty costs in the price furnished to the prime contractor.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The contracting officer should determine the allowability of contingency and warranty costs. It is also recommended that when these costs are determined, the price of the contracts awarded Pratt and Whitney Aircraft of West Virginia, Inc., be adjusted for any overstatement resulting from the contractor's failure to obtain and furnish to the government accurate, complete, and current subcontractor cost or pricing data. It should be recognized that fluctuating exchange rates make it impossible to award an equitable contract unless potential changes are considered in currency value during contract performance. It is therefore recommended that, in all future contracts involving a major subcontractor from another country, the Navy insert a provision providing for contract price adjustments reflecting the exchange rate current at the time of payment to the foreign firm.

    Agency Affected:

 

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