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PLRD-81-57 1 (1981-08-24)

handle is hein.gao/gaobabcie0001 and id is 1 raw text is: ...... .... UNITED STATES GENERAL ACCOUNTING 0 IC PROCU REMENT, LOGISTICS, AND READINESS DIVISION B-203560 AUGUST 24, 1981 The Honorable Caspar W. WeinbergerI Illl t I I The Secretary of Defense 116207 Subject: The LNavy Can Reduce the Cost of Ship Construction If It Enforces Provisions of the Contract Escalation Claus7(PLRD-81-57) Dear Mr. Secretary: We have reviewed procedures and practices 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 this review was to deter- mine if Navy contractors are computing escalation costs as specified in the contract clause. The Navy includes in fixed-price-type contracts provisions which protect shipbuilders from inflation by making escalation payments relating to cost increases beyond the shipbuilders' or the Navy's control. This protection is especially needed in shipbuilding contracts because of the length of time involved in constructing a ship. When cost-reimbursement-type contracts are used, the Navy pays the shipbuilder the actual costs incurred. These costs automatically account for material and labor costs changes due to inflation. However, fixed-price-type contracts (generally used for shipbuilding) contain an escalation clause to reim- burse shipbuilders for costs attributed to inflation. We reviewed procedures, practices, and computations of escalation on five contracts awarded by the Navy to the follow- ing contractors: one each to Bath Iron Works Corporation, Bath, Maine; the Boeing Company, Seattle, Washington; and Newport News Shipbuilding and Dry Dock Company, Newport News, Virginia; and two contracts awarded to Todd Pacific Shipyard Corporation, Seattle, Washington. The five contracts have estimated material costs of $424.7 million, of which we estimate the Navy will pay $162.6 million for escalation. // (950606)

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