Investigation of Allegations Regarding NAVAIR Contracts

PSAD-80-57: Published: Jun 26, 1980. Publicly Released: Jul 17, 1980.

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GAO investigated certain allegations regarding Naval Air Systems Command contracts for bomb racks. The first allegation was that a first article inspection clause had been abused by the contracting officer. The firm had successfully built similar items for the Government, and the contracting officer appropriately waived this clause. Out-of-date specifications were allegedly used in the solicitation generating the need for a subsequent price increase. The Navy did use out-of-date specifications because they could not wait for new drawings to be made, and there was a price increase, but there was no evidence of collusive bidding. After rejection, the contracting officer properly referred his rejection of the bid to the Small Business Administration (SBA) for a certificate of competency. A disparity of $1,455,095 existed between the contractor's general ledger and his job cost ledgers, which permitted the firm to claim and receive progress payments prematurely. In effect, the firm was receiving interest-free financing of its operations for 3 years. Premature payments were made as a result of the firm overstating its requests for progress payments due to accounting irregularities and because the Department of Defense accepts job cost ledgers as the basis for making progress payments. The matter was referred to the Federal Bureau of Investigation which decided not to prosecute as no actual funds were lost and the work paid for was eventually performed. The original competitive price was alleged to have been a buy-in at a price significantly lower than the product's intrinsic value. GAO found that this had not occurred, but a modification to the contract was negotiated at a unit price nearly three times the unit price of the basic contract for the same product. However, because Navy officials said they lost all documents used to negotiate the contract price on this modification, a lack of data prevented an evaluation of the price negotiation or a determination of whether the price was fair and reasonable.

GAO concluded that: a first article inspection clause was not improperly used in this contract award; although out-of-date specifications were used for a change in a contract, other offerors were also aware that the specifications could be changed after the contract was awarded; no information was withheld from SBA on the issuance of a certificate of competency but the lack of criteria at that time may have hampered its evaluation of the contractor's competency; certain irregularities in the firm's accounting system resulted in the contractor's receiving premature progress payments; and insufficient evidence was available to establish that a buy-in occurred or that the contractor was permitted to get well on a subsequent change order. Lack of data prevented GAO from determining whether the price negotiated for the change was fair and reasonable.

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