Navy Can Reduce the Cost of Ship Construction If It Enforces Provisions of the Contract Escalation Clause

PLRD-81-57: Published: Aug 24, 1981. Publicly Released: Aug 24, 1981.

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Robert M. Gilroy
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A review was conducted of the procedures and practices that Navy shipbuilding contractors use to compute material escalation costs on fixed-price incentive contracts which contain the cost index material escalation clause. The objective of the review was to determine if Navy contractors were computing escalation costs as specified in the contract clause.

Four of the five contractors reviewed were not correctly interpreting and applying the cost index clause. The contractors were overstating the escalation costs by delaying the computation of escalation. As a result, cost indexes for subsequent periods were being applied to costs incurred and invoiced during earlier periods. Contractors would thus receive an estimated $2.4 million in excess payments for escalation costs.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to: (1) recover material escalation overpayments caused by the contractors' failures to compute escalation costs based on invoice receipt dates; and (2) revise the cost index material escalation clause to include full amounts of all billings received from subcontractors, including retention on any progress payments made, regardless of whether such retention is shown on the bill.

    Agency Affected: Department of Defense


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