REPORT TO THE CONGRESS Overstatement Of Contract Target Costs For F-l Rocket Engines For Saturn V Launch Vehicle B-167838 Natlonal Aeronautics and 1 Space Admlnlstratlon BY THE COMPTROLLER GENERAL OF THE UNITED STATES - - L . H COMPTRO’d.ER GENERA; OF Tik UNITED STATES WASHINGTON DC 20x)548 B-167838 To the President of the Senate and the Speaker of the House of Representatives This 1s our report on overstatement of contract target costs for the F-l rocket engmes for the Saturn V launch ve- hicle, National Aeronautics and Space Adrnmlstratlon. Our revrew was made pursuant to the Budget and Ac- counting Act, 1921 (31 U.S.C. 53), the Accounting and Audlt- mg Act of 1950 (31 U.S.C, 67), and the authority of the Comptroller General to examme contractors’ records, as set forth in contract clauses prescribed by the United States Code (10 U.S.C. 2313(b)). Copies of ths report are being sent to the Director, Office of Management and Budget, and to the Acting Admm- lstrator, Natlonal Aeronautics and Space Admmlstratlon. Comptroller General of the United States L # I 6, Contents Pane DIGEST 1 CHAPTER 1 INTRODUCTION 3 Contract NAS8-5604 5 Contract NAS8-18734 6 2 TARGET COSTS NOT BASED ON LATEST AVAILABLE COST AND PRICING DATA 7 Material rejection costs 8 Other overstatements of cost 10 3 CONTRACTOR COMMENTS AND OUR EVALUATION 13 4 CONCLUSIONS AND RECOMMENDATIONS AND NASA COMMENTS 17 Conclusions 17 Recommendations 17 NASA comments 18 5 SCOPE OF REVIEW 19 APPENDIX I Letter dated December 30, 1969, from North American Rockwell Corporation, Rocketdyne Division 23 II Letter dated December 24, 1969, from the Acting Associate Administrator for Organization and Management, NASA 34 III Principal officials of the National Aero- nautics and Space Administration re- sponsible for the activities discussed in this report 36 COMPTROLLERGENERAL!,5 OVERSTATEMENTOF CONTRACT TARGET REPORTTO THE CONGRESS COSTS FOR F-l ROCKET ENGINES FOR SATURN V LAUNCH VEHICLE National Aeronautics and Space Admlnlstrat-ron B-167838 w-w---D 1-G E ST WHY THE REVIEW WAS MADE Preliminary review by the General Accounting Office (GAO) at the Marshall Space Flight Center lndlcated large cost underruns for two cost-plus-incentive-fee contracts between the National Aeronautics and Space Admlnlstratlon (NASA) and North American Rockwell Corporation's Rocketdyne Dlvlslon at Canoga Park, Callfornla The contracts are for F-l rocket engines for the Saturn V launch vehicle. Underruns of the target cost--a cost forecast included ln a contract for control purposes--result, ln an incentive type of contract, in a larger fee for the contractor. _ If a target cost ln a contract is not based on accurate, complete, and current data, an underrun might be due to lnltlal overestimates of cost, rather than to efflclency of the contractor. In such cases, the addl- tlonal fee paid the contractor 1s in the nature of a windfall rather than an earnef fee. (See p. 3.) GAO examlned'the two contracts to determlne whether that portion of the target cost related to materials was based on the latest cost and prlc- lng data avallable to the contractor at the time lt certlfled the con- tract prices. GAO revlewed 71 percent of the material costs ($31.6 mll- lion) included ln the target cost of one contract and 76 percent of the material costs ($15.2 milllonj included in tfie target cost of the other. This 1s the second report on overpricing of materials for maJor compo- nents of the Saturn V launch vehicle. The first, issued October 26, 1970 (B-161366), dealt with the first stage of the Saturn V. FINDINGS AND CONCLUSIONS The target costs Included amounts for certain materials and lndlrect costs which were overstated by some $5 million because they were not based on the most accurate, complete, and current cost data avallable to the contractor when it submitted the pricing certificates. As a result, the total fees Rocketdyne could earn under the contracts were increased by about $1.5 million. (See p. 7.) The overstated costs concern two major areas: --Material reject-ron costs for reworking or replacing defective or lost parts for the F-l rocket engines were overstated by about $4.3 millIon. (See p. 8.)' --Other material costs--related to quantities, unit prices, engineer- ing change proposals, obsolescence, and escalatJon--were overstated by about $700,000. (See p. 10.) RECOiWlEi7DATIONSOR SUGGESTIONS NASA's Administrator should require --a postaward evaluation of slgnlflcant material costs not revlewed by GAO to determIne whether they were based on accurate, complete, and current data (see p. 17) and --fee adjustments for the overstated material costs reported herein and for any further overstated costs that may be found in the postaward evaluation (see p. 17). AGENCY ACTIONS AND UNRESOLVEDISSUES The contractor generally disagreed with GAO. (See p. 13.) However, NASA requested the Defense Contract Audit Agency to conduct a de- talled study to determine what the material rejection factors identi- fled In GAO's report would have been if the most current data avaIlable to the contractor had been used. Tn addition, NASA stated that con- tract adJustments would be sought on the basis of those findings and other overstatements found by GAO. (See p. 18.) MATTERSFOR CONSIDERATION BY T8E CONGRESS This report is being submitted to the Congress in view of its continued Interest in the reasonableness of prices negotiated by NASA for carry- ing out the space program. 2 CHAPTER 1 INTRODUCTION The General Accounting Office has reviewed the target costs negotiated for F-l rocket engines procured by the Na- tional Aeronautics and Space Administration's George C. Marshall Space Flight Center at Huntsville, Alabama, under cost-plus-incentive-fee contracts NAS8-5604 and NAS8-18734 with North American Rockwell Corporation's Rocketdyne Divi- sion at Canoga Park, California. The F-l engines are for the Saturn V launch vehicle used in the manned space flight program. The scope of our review is described in chapter 5. A cost-plus-incentive-fee contract is a cost- reimbursement-type contract that specifies a target cost and a target fee and typically provides for increasing or decreasing the fee. The increase or decrease depends upon the degree to which the contractor meets or exceeds a com- bination of predetermined cost, schedule, and performance targets. The target cost and fee are negotiated between NASA and the contractor on the basis of their best estimates of the reasonable cost of performing the contract work. When negotiated target costs are not established on the basis of accurate, complete, and current data, cost underruns may result from the overestimates of costs rather than from the efficiency of the contractor. In such cases, the additional fee (incentive fee) paid to the contractor above the target fee is in the nature of a windfall rather than an earned fee. In September 1962, the Congress enacted the Truth in Negotiations Act (Public Law 87-653) for the purpose of providing the Government with safeguards against inflated cost estimates by contractors in negotiated procurements where competition is lacking. The act provides that, before the award of certain negotiated contracts where the price is expected to exceed $100,000, a prime contractor or sub- contractor be required to submit cost or pricing data in support of its price proposal and to certify that, to the best of its knowledge and belief, the data submitted is 3 accurate, complete, and current. The act also requires that these contracts contain a provision for the adjustment of the contract price to exclude any significant price in- creases which the head of the agency determines to have been caused by the furnishing of cost or pricing datae which was inaccurate, incomplete, or noncurrent. NASA has provided for the implementation of Public Law 87-653 in its procurement regulation. Part 3.807-Z of the regulation provides that, when a contractor is required to submit cost or pricing data in support of its proposal, NASA is required to make a cost analysis of such data to ensure the reasonableness of the proposal and to establish a sound basis for negotiations.- CONTRACT NAS8-5604 Under this cost-plus-fixed-fee contract, which was awarded as a letter contract in June 1962 and'definitized in April 1964, Rocketdyne was, among other things, to build 76 F-l rocket engines. A supplemental agreement was nego- tiated in May 1966 which converted the contract from a cost-plus-fixed-fee contract to a cost-plus-fixed-fee and cost-plus-incentive-fee contract. The target cost for the cost-plus-incentive-fee part of the contract, which in- cluded production of the rocket engines, was $205 million, and the target fee was about $13.8 million. The cost and pricing data supporting Rocketdyne's final proposal of $205 million included some data which had not been verified by NASA. The contracting officer advised us that he had accepted the proposal on the basis that the data could be verified, if necessary, after the negotiations were com- pleted. Our review was limited to examining about 71 percent of the material costs of about $31.6 million included in the target cost. The incentive provisions relating to the delivery of engines provide that the fee payable to the contractor be the target fee increased or decreased by 20 percent of the amounts by which allowable costs are either less or more than the negotiated target cost. The contract provides, 5 h.-“* .. \ i ,-b however, that ?$e increase or decrease in fee not exceed specified limitations, Rocketdyne certified that its pricing data supporting the target cost was accurate, complete, and current as of January 26, 1966.