Two Navy Ship Contracts Modified by Public Law 85-804--Status as of July 29, 1979

PSAD-80-39: Published: Apr 22, 1980. Publicly Released: Apr 22, 1980.

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In compliance with Federal legislation, GA0 reviewed two Navy contracts awarded to Litton Systems, Inc., for landing helicopter assault (LHA) ships and destroyer (DD-963) vessels. The purpose of the review was to insure that funds authorized to provide relief to Litton are used only on these contracts and that the contractor does not realize any total combined profit on the contracts. The LHA and DD-963 contracts were awarded to Litton in 1969 and 1970, respectively, and are the only remaining vestiges of major systems acquisition policy introduced in the Department of Defense during the mid-1960's. Design problems emerged early in the contracts as well as financial and personnel problems. Moreover, these two contracts have been the subject of several years of administrative and legal proceedings resulting from numerous claims and counterclaims. As of June 1978, Litton's estimated cost at completion of the two contracts was $4,726 million. This would result in a loss of $647 million to Litton if nothing was received from present or future claims against the Navy. However, because the construction delays and cost growth occurred as a result of actions by both the Navy and Litton, a settlement was agreed to, and the contracts were modified accordingly.

In reviewing the contracts, GAO found that the cash reimbursement made by the Navy on the contracts exceeded total allowable costs incurred through July 19, 1979. However, this positive cash flow position was a temporary condition and entirely in accord with the contract provisions. Additionally, GAO found that the contractor continues to project an overall loss of $129 million on the contracts, but this loss is significantly lower than the $200 million estimate at the time of the financial settlement. To realize a profit, the contractor will have to experience a significant underrun on the remaining estimated costs. Moreover, GAO found that the contractor's procedures and controls were adequate to ensure that costs were properly charged to individual contracts and its estimated costs to complete these contracts were reasonable. However, GAO was unable to determine whether Litton had complied with the intent of regulations that the appropriated moneys for relief were unavailable for use on other projects.

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