Contract Pricing:

Competitive Subcontract Price Estimates Often Overstated

NSIAD-91-149: Published: Mar 20, 1991. Publicly Released: May 22, 1991.

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Pursuant to a congressional request, GAO analyzed the subcontract costs negotiated in four Department of Defense (DOD) contracts awarded to a single firm.

GAO found that: (1) the four DOD contracts were overpriced by about $8.9 million because the contractor's estimates for 66 subcontracts were not accurate or reliable; (2) the contractor included $44 million for the 66 subcontracts, but after soliciting subcontract prices to support its proposals, resolicited prices to award the subcontracts; (3) the resolicitation resulted in prices on 55 subcontracts that were $10.4 million lower than initially proposed; (4) DOD accepted the contractor's initially proposed prices as fair and reasonable because the contractor informed officials that it based prices on competitive bidding; (5) other defense contractors proposed subcontract prices for which they subsequently obtained substantial price reductions; (6) one study found that contractors proposed prices for 13 subcontracts that they presented as based on competitive bidding but subsequently negotiated prices that were about $3 million less; and (7) the government has not realized the benefits to be gained through competition, since many prime contractors actually obtained significantly lower subcontract costs than they included in their proposals.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The DOD Director of Defense Procurement issued guidance stating that DCAA auditors are required to provide historic vendor data to contracting officers and inform them when that data pertains to competitive quotes so that they can take appropriate action to negotiate reductions to proposed prices. Issuing guidance is the first step to ensuring that improvements will be achieved.

    Recommendation: The Secretary of Defense should ensure that contracting officers determine whether contractors have a practice of providing competitive subcontractor prices for the purpose of negotiating the prime contract and subsequently obtaining lower prices for the purpose of buying the material. Where this practice exists, contracting officers should be required to obtain historical data on purchases from vendors. When that information shows substantially lower subcontract prices than what were proposed, contracting officers should take appropriate actions to negotiate reductions to proposed prices.

    Agency Affected: Department of Defense


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