Contract Pricing:

Inadequate Subcontract Evaluations Often Lead to Higher Government Costs

NSIAD-91-161: Published: Apr 5, 1991. Publicly Released: May 22, 1991.

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Paul F. Math
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Pursuant to a congressional request, GAO reviewed subcontract estimates in four contracts awarded to three Department of Defense (DOD) prime contractors, focusing on whether recent revisions to DOD procurement regulations reduced or eliminated subcontract pricing problems that caused inflated contract prices.

GAO found that: (1) DOD efforts to address subcontract pricing problems were not effective; (2) of the 68 subcontract estimates totalling approximately $162 million, DOD paid approximately $11.7 million more than the prices the contractors paid their subcontractors; (3) in 9 out of 12 noncompetitive subcontract estimates, prime contractors did not complete required subcontract evaluations prior to contract negotiations; (4) on 13 competitive subcontract estimates, prime contractors negotiated subcontract prices that were approximately $3 million less than amounts negotiated in DOD contracts; (5) although the Defense Contract Audit Agency (DCAA) previously cited two of the three contractors for failing to timely evaluate subcontract cost estimates, the deficiencies remained uncorrected; and (6) contracting officers responsible for the reviewed contracts failed to use appropriate contract clauses to protect against inflated subcontract estimates.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD direction to the commanders of the Defense Contract Management Districts was issued on May 31, 1991 and June 19, 1991. The commanders were instructed to become personally involved in assuring that contractors correct estimating system deficiencies. If contractors fail to make adequate progress, commanders are to bring the issue to the attention of higher level management.

    Recommendation: The Secretary of Defense should direct contracting officials to use existing management controls and sanctions to ensure that contractors routinely comply with the subcontract pricing regulations and that subcontract prices included in DOD contracts are fair and reasonable. Contractors should be held accountable for failure to comply with such regulations and contracting officials should be held responsible for enforcing contractor compliance.

    Agency Affected: Department of Defense


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