Opportunity To Reduce Cost of the Navy's Contract for Patrol Hydrofoil Missile Ships

PSAD-80-3: Published: Oct 18, 1979. Publicly Released: Oct 18, 1979.

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A review of a Navy fixed-price contract found a contract price overstatement due to use of the ceiling price for a subcontract rather than the target price. The examination was part of a contract pricing review of contracts awarded to major Department of Defense (DOD) contractors with the objective of determining the reasonableness of contract price as it relates to pricing data available to the contractor at the time of contract negotiation.

The prime contractor used the established ceiling price for a sole-source, fixed-price, incentive-type subcontract rather than the target price as normally included on proposals. The project officer's representative felt that circumstances might warrant the use of a price other than the target price, and that in this case it was a prudent management decision as costs later approximated the ceiling price. GAO felt that the use of the ceiling price protects the contractor from sharing the cost overruns of its subcontractors, and removes incentives to manage subcontractors in a manner that assures cost minimization. Further, the contract requirements were reduced without a corresponding reduction in contract price. According to the contracting officer's representative, the items that will not be delivered were proposed as needed for testing, and delivery was not specifically required. While this is true, it is felt that the Navy should seek a price adjustment for parts no longer required.

Recommendations 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 contracting officer to consider the information presented herein and take appropriate action to adjust the contract targets for: (1) the cost overstatement resulting from Boeing's failure to obtain and furnish to the Government accurate, current, and complete cost or pricing data; and (2) an equitable credit resulting from the deletion of spare items that the contractor will not be required to deliver to the Navy.

    Agency Affected: Department of Defense

  2. Status: Closed - Not Implemented

    Comments: Due to age and significance of recommendation, additional followup is not warranted.

    Recommendation: The Secretary of Defense should direct that guidance be issued on how incentive-type subcontract prices are to be included in incentive-type prime contracts.

    Agency Affected: Department of Defense


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