Contract Pricing:

Dual-Source Contract Prices

NSIAD-89-181: Published: Sep 26, 1989. Publicly Released: Oct 13, 1989.

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Pursuant to a congressional request, GAO reviewed eight dual-source contracts the Department of Defense (DOD) awarded for weapon systems procurement to determine whether contracting officers had a sound basis for negotiating fair and reasonable contract prices.

GAO found that: (1) DOD contracting officers used such safeguards as expert auditors, price analysts, engineers, and production specialists, as well as legislative requirements, to ensure that noncompetitive contracts were fair and reasonable; (2) after determining that contracting officers improperly exempted $8.8 billion of noncompetitive dual-source contracts from pricing safeguards, DOD issued a December 1988 policy memorandum requiring officers to make adequate price competition determinations on a case-by-case basis and to exercise deliberation and thorough review; and (3) the subsequent revision to the DOD Federal Acquisition Regulation (DFAR) Supplement to implement that policy presumed that adequate price competition normally existed on dual-source procurements, did not recognize the importance of obtaining and reviewing cost data, and encouraged contracting officers to make dual-source awards solely on the basis of price analysis. GAO also found that contracting officers: (1) accepted four of the eight reviewed contracts as fair and reasonable, but could have reduced three of the contracts by a total of $28.9 million if they had obtained insight into the basis of contractors' proposed prices; and (2) properly employed noncompetitive pricing safeguards in the other four contracts, resulting in reductions totalling more than $30 million.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: A revision to the DOD FAR Supplement was issued in November 1990 in the form of a Defense Acquisition Circular.

    Recommendation: The Secretary of Defense should direct appropriate personnel to revise the DOD Federal Acquisition Regulation (FAR) Supplement to provide contracting officers guidance for determining when adequate price competition exists in dual-source contracts. The guidance should address the need for contracting officers to obtain a thorough understanding of contractors' proposed prices before making adequate price competition determinations.

    Agency Affected: Department of Defense


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