Reasonableness of Noncompetitive Contract Prices Proposed and Negotiated for 1976 Deliveries of 111 TF-41 Engines

PSAD-77-77: Published: Jan 31, 1977. Publicly Released: Jan 31, 1977.

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The primary objective of a review of noncompetitive contract prices was to determine whether the negotiated price was reasonable and based on cost and pricing data available to the contractor when the price was established. The government's evaluation of the contractor's proposal, the cost or pricing data submitted in support of proposed costs, the negotiation process and, on a selected basis, the cost incurred were examined.

No apparent defective pricing on the subject contracts was found; however, GAO noted that Air Force negotiations apparently failed to consider established overhead and profit factors when negotiating a contract price adjustment clause for foreign exchange rate fluctuation. As a result, the contractor may receive an unintended economic benefit due to the fluctuation in the exchange rate between the U.S. dollar and the British pound sterling. The Air Force and the contractor recognized that currency exchange rates fluctuate and that the amount of overhead costs and profit assigned to the contracts was based on material costs. The net result was an increase of 24 percent on the material costs. GAO thinks that the negotiated 15-percent overhead and profit factor does not satisfy the intent of the price adjustment clause in the contracts, and the apparent failure to recognize the intent of the price adjustment clause could have an impact on negotiations for future commodities purchased from foreign companies.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Air Force should attempt to get full recovery of the 24-percent increase during the final currency fluctuation pricing settlement. The Air Force should also give particular attention to calendar year 1977 TF-41 engine pricing negotiations and future purchases of other foreign equipment to preclude contractors from gaining windfalls from foreign exchange rate fluctuations.

    Agency Affected:


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