B-205862 L/M, MAR 12, 1982, OFFICE OF GENERAL COUNSEL
Highlights
GAO BELIEVES THAT PROPOSED REVISIONS TO DAR 3 403.3(C)(3) AND CLAUSE PRESCRIBED BY PROPOSED DAR SEC. 7-106.3 RELATING TO COST INDEX METHOD OF ESCALATION SHOULD BE REVISED TO INSURE THAT CONTRACTORS DO NOT RECEIVE ESCALATION COSTS HIGHER THAN THEY ARE ENTITLED TO DUE TO DELAYS IN COMPUTATION OF ESCALATION COSTS. ALTHOUGH THE COST INDEX METHOD IS PERMITTED BY EXISTING DAR SEC. 3-404.3(C)(3). THERE IS CURRENTLY NO PRESCRIBED CONTRACT CLAUSE FOR USE OF THIS METHOD. FOUND THAT SHIPBUILDING CONTRACTORS WERE RECEIVING HIGHER ESCALATION COSTS THAN THEY WERE ENTITLED TO BY DELAYING THE COMPUTATION OF ESCALATION COSTS. WE REPORTED THAT ESCALATION COSTS (1) WERE COMPUTED USING THE DATES INVOICES WERE RECORDED RATHER THAN THE DATES INVOICES WERE RECEIVED.
B-205862 L/M, MAR 12, 1982, OFFICE OF GENERAL COUNSEL
DIGEST: GAO COMMENTS ON PROPOSED REVISIONS TO DAR SEC. 3-403.3 AND OTHER DAR SECTIONS RELATING TO ECONOMIC PRICE ADJUSTMENT POLICIES UNDER FIXED PRICE CONTRACTS. GAO BELIEVES THAT PROPOSED REVISIONS TO DAR 3 403.3(C)(3) AND CLAUSE PRESCRIBED BY PROPOSED DAR SEC. 7-106.3 RELATING TO COST INDEX METHOD OF ESCALATION SHOULD BE REVISED TO INSURE THAT CONTRACTORS DO NOT RECEIVE ESCALATION COSTS HIGHER THAN THEY ARE ENTITLED TO DUE TO DELAYS IN COMPUTATION OF ESCALATION COSTS.
MR. JAMES T. BRANNAN, OFFICE OF THE UNDER SECRETARY OF DEFENSE FOR RESEARCH AND ENGINEERING:
BY LETTER DATED DECEMBER 7, 1981, YOU REQUESTED OUR COMMENTS ON PROPOSED REVISIONS TO THE DEFENSE ACQUISITION REGULATION (DAR) SEC. 3 403.3 AND OTHER SECTIONS OF DAR RELATING TO ECONOMIC PRICE ADJUSTMENT POLICIES UNDER FIXED PRICE CONTRACTS. AMONG OTHER THINGS, THE REVISIONS ADD A CONTRACT CLAUSE FOR THE COST INDEX METHOD OF ECONOMIC PRICE ADJUSTMENT. ALTHOUGH THE COST INDEX METHOD IS PERMITTED BY EXISTING DAR SEC. 3-404.3(C)(3), THERE IS CURRENTLY NO PRESCRIBED CONTRACT CLAUSE FOR USE OF THIS METHOD.
IN A RECENT REPORT TO THE SECRETARY OF DEFENSE ENTITLED "THE NAVY CAN REDUCE THE COST OF SHIP CONSTRUCTION IF IT ENFORCES PROVISIONS OF THE CONTRACT ESCALATION CLAUSE" (PLRD-81-57) WE NOTED A PROBLEM WITH THE NAVY'S USE OF THE COST INDEX METHOD OF ECONOMIC PRICE ADJUSTMENT. FOUND THAT SHIPBUILDING CONTRACTORS WERE RECEIVING HIGHER ESCALATION COSTS THAN THEY WERE ENTITLED TO BY DELAYING THE COMPUTATION OF ESCALATION COSTS. SPECIFICALLY, WE REPORTED THAT ESCALATION COSTS (1) WERE COMPUTED USING THE DATES INVOICES WERE RECORDED RATHER THAN THE DATES INVOICES WERE RECEIVED, AND (2) WERE NOT COMPUTED ON AMOUNTS WITHHELD FROM EACH PROGRESS PAYMENT (RETENTION) UNTIL THE TIME OF CONTRACT CLOSE OUT. AS A RESULT, CONTRACTORS WERE RECEIVING EXCESS PAYMENT FOR ESCALATION COST.
THE CONTRACT CLAUSE PRESCRIBED BY PROPOSED DAR SEC. 7-106.3 AND REVISED DAR SEC. 3-403.3(C)(3) DO NOT ADDRESS THE PROBLEMS WE NOTED IN OUR REPORT. WE BELIEVE THE REGULATION AND THE PROPOSED COST INDEX METHOD CLAUSE SHOULD BE REVISED TO PROTECT AGAINST THE ABUSES NOTED IN OUR REPORT.
WE HAVE NO FURTHER COMMENTS TO OFFER.