Contract Management: DOD Needs Better Guidance on Granting	 
Waivers for Certified Cost or Pricing Data (22-APR-02,		 
GAO-02-502).							 
                                                                 
Although most federal contracts are awarded through competition, 
the government also buys unique products and services, including 
sophisticated weapons systems, for which it cannot always rely on
competition to get the best prices and values. Instead, it uses a
single source for its procurements. In these cases, contractors  
and subcontractors provide the government with cost or pricing	 
data supporting their proposed prices and certify that the data  
submitted are accurate, complete, and current, as required by the
Truth in Negotiations Act.  This ensures that the government has 
the data it needs to effectively negotiate with the contractor	 
and avoid paying inflated prices. The government can waive the	 
requirement for certified data in exceptional cases. In these	 
instances, contracting officers use other techniques to arrive at
fair and reasonable prices. Using the Department of Defense's	 
(DOD) contract database, GAO found 20 waivers, each valued at	 
more than $5 million, in fiscal year 2000. The total value of	 
these waivers was $4.4 billion. In each case, the contract	 
pricing or waiver documents stated that sufficient information	 
was available to determine the price to be fair and reasonable	 
without the submission of cost or pricing data. There was a wide 
variety in the quality of the data and analyses being used, from 
very old to very recent data. Despite the range of techniques	 
employed to arrive at a price, DOD does not have guidance that	 
would help buying organizations determine acceptable data and	 
analyses and what kinds of outside assistance, such as		 
contracting and pricing experts, should be obtained.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-502 					        
    ACCNO:   A03124						        
  TITLE:     Contract Management: DOD Needs Better Guidance on	      
Granting Waivers for Certified Cost or Pricing Data		 
     DATE:   04/22/2002 
  SUBJECT:   Contracts						 
	     Defense cost control				 
	     Defense procurement				 
	     Equipment contracts				 
	     Prices and pricing 				 
	     Service contracts					 
	     Waivers						 
	     F-16 Aircraft					 
	     Orion Radar System 				 


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GAO-02-502
     
Report to the Subcommittee on Readiness and Management Support, Committee on
Armed Services, U. S. Senate

United States General Accounting Office

GAO

April 2002 CONTRACT MANAGEMENT

DOD Needs Better Guidance on Granting Waivers for Certified Cost or Pricing
Data

GAO- 02- 502

Page i GAO- 02- 502 Contract Management Letter 1

Results in Brief 2 Background 3 DOD?s Use of Waivers for Certified Data 5
Data and Analyses Used to Arrive at Prices 7 Risk Depends Largely on
Certainty of Data Being Used to Support

Analyses 9 DOD?s Guidance on the Waiver Process Is Not Adequate 12
Conclusions 14 Recommendations for Executive Action 14 Agency Comments and
Our Evaluation 15

Appendix I Scope and Methodology 17

Appendix II Federal Acquisition Regulation Provision on Waivers 18

Appendix III Comments from the Department of Defense 19

Appendix IV GAO Contacts and Staff Acknowledgements 24

Tables

Table 1: Waivers of Certified Cost or Pricing Data (Dollars in Millions) 6
Table 2: Contracts Selected for Review (Dollars in Millions) 6 Table 3:
Techniques Primarily Employed to Analyze Contractor

Proposals 8

Figures

Figure 1: Noncompetitive Contracting Process under the Truth in Negotiations
Act 4 Figure 2: Examples Highlighting Factors Impacting Risk 11 Contents

Page 1 GAO- 02- 502 Contract Management

April 22, 2002 The Honorable Daniel K. Akaka Chairman The Honorable James M.
Inhofe Ranking Member Subcommittee on Readiness and

Management Support Committee on Armed Services United States Senate

To maximize the value of taxpayer dollars, the federal government generally
seeks to award its contracts through competition. However, the government
also buys unique products and services, including sophisticated weapons
systems, for which it cannot always rely on competition to get the best
prices and values. Instead, it must turn to a single source for its
procurements. For example, in fiscal year 2000, the Department of Defense
(DOD) awarded contracts valued at about $36.2 billion without competition.

In these cases, contractors and subcontractors normally provide the
government with cost or pricing data supporting their proposed prices and
certify that the data submitted are accurate, complete, and current. This
requirement, established by the Truth in Negotiations Act, is meant to
protect against inflated prices, by ensuring that the government has the
data it needs to effectively negotiate with the contractor. However, the
government can waive the requirement for certified data in exceptional
cases. In these instances, contracting officers use other techniques to
arrive at fair and reasonable prices.

This subcommittee has been concerned about the use of waivers. Without
certified data, the government has less information to determine a fair
price. A key concern is that regulations do not provide adequate guidance on
when waivers should be used. In view of this concern, you requested that we
examine (1) the extent to which DOD is using these waivers and why, (2) the
data and analyses DOD is relying on to arrive at a price, (3) factors that
minimize or increase risks of inflated prices, and (4) whether DOD has
provided adequate guidance to minimize these risks. Our scope and
methodology are discussed in appendix I.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 502 Contract Management

Using DOD?s contract database, we identified 20 waivers valued at more than
$5 million each in fiscal year 2000. The total value of these waivers was
about $4.4 billion. In all the cases we reviewed, the contract pricing or
waiver documents stated that sufficient information was available to
determine the price to be fair and reasonable without the submission of cost
or pricing data.

There was a wide spectrum in the quality of the data and analyses being
used. On one end, there were situations where the analysis focused only on
the bottom- line price and not the supporting costs and where the data being
relied on were exceptionally old. On the other end, situations existed where
the negotiations were based on data that were very recently certified with
little change in the quantity. To further reduce risks, some contracting
officers involved pricing experts as well as integrated teams of government
and contractor personnel, which collaboratively developed data. Clearly, the
government was at a higher risk in situations where there was a lot of
uncertainty and at lower risk where there was less uncertainty.

Despite the range of techniques employed to arrive at a price, DOD does not
have guidance that would help buying organizations draw the line between
what type of data and analyses are acceptable or not and what kinds of
outside assistance, such as contracting and pricing experts, should be
obtained. Such guidance is important to reduce the risk of inflated prices.
In addition, DOD does not have adequate guidance to help contracting
officers decide whether a waiver should be granted in the first place. This
guidance is needed to limit waivers as much as possible to situations where
the government is willing to take a greater risk- such as when there is an
urgent need for the item. We are making a recommendation to DOD to develop
guidance that better defines when waivers should be used and how prices
should be assessed in the event that they are used.

In commenting on a draft of this report, DOD agreed that it should develop
guidance along the lines we recommended. However, it disagreed with the need
to place this guidance in the Federal Acquisition Regulation. DOD?s guidance
should help to reduce risks associated with the waiver process. But it is
still appropriate to work toward incorporating the guidance into the Federal
Acquisition Regulation since the regulation is a definitive source for
contract management and it currently lacks clarity on this important issue.
Results in Brief

Page 3 GAO- 02- 502 Contract Management

Historically, a principal concern in noncompetitive contracting situations
has been how to ensure that the prices proposed by contractors are fair and
reasonable. Recognizing this risk, the Congress enacted the Truth in
Negotiations Act in 1962. The act represents the government?s key safeguard
against inflated contract prices on noncompetitive contracts. The act
requires contractors and subcontractors to provide the government with cost
or pricing data supporting their proposed prices and to certify that the
data are accurate, complete, and current. 1 If the government later
discovers that the contractor submitted data that were not accurate,
complete, and current, the act allows the government to pursue remedies,
such as a reduction in the contract price. Interest and penalties can also
be assessed under certain conditions. These provisions are designed to give
the government the information it needs to ensure fair and reasonable
contract prices.

The negotiation process with certified cost or pricing data can be lengthy,
and the documentation requirements for both sides can be extensive. The
process starts when the contractor provides estimated costs for subcontracts
and materials along with a detailed breakdown of the work to be performed,
including estimated manufacturing labor costs, engineering costs, tooling
costs, and other direct costs for each segment of the work. As figure 1
shows, DOD contracting officers then review these data along with price
analysts from the Defense Contract Management Agency and auditors from the
Defense Contract Audit Agency. The government and the contractor then
negotiate cost elements to settle on a price. Once this is done, the
contractor certifies the data as accurate, complete, and current. DOD may
conduct an audit after the contract?s award.

1 P. L. 87- 653, Sept. 10, 1962. This requirement applies to contract
actions above the specified threshold ($ 550,000 as of fiscal year 2001)
unless an exception applies. For example, certified data are not required
when the price is based on competition or for the acquisition of commercial
items. Background

Page 4 GAO- 02- 502 Contract Management

Figure 1: Noncompetitive Contracting Process under the Truth in Negotiations
Act

When enacted in 1962, the Truth in Negotiations Act did not include an
explanation of what constituted an ?exceptional case? and it has never been
amended to define that term. Up until 1995, the Federal Acquisition
Regulation (the implementing regulation) largely mirrored the Truth in
Negotiations Act. The waiver provision in the Federal Acquisition Regulation
was amended in 1995 to allow contracting officers to waive data when
sufficient information was available to determine a fair and reasonable
price. However, the regulation still provided little guidance on the
circumstances that would warrant a waiver in a particular case. The first
sentence of the current provision states that the ?head of the contracting
activity . . . may, without power of delegation, waive the requirement for
submission of cost or pricing data in exceptional cases.? 2 The waiver
provision also states that the head of the contracting activity

?may consider waiving the requirement if the price can be determined to be
fair and reasonable without submission of cost or pricing data.? Aside from
stating that a waiver may be considered in this situation, the regulation
provides no further guidance on the circumstances that would warrant a
waiver. Finally, the regulation includes no other guidance to

2 The waiver provision is at section 15.403- 1( c) (4) of the Federal
Acquisition Regulation and is reprinted in appendix II.

Page 5 GAO- 02- 502 Contract Management

help agency officials weigh the potential risks and benefits of granting a
waiver in a particular case, as opposed to obtaining certified data. 3

Members of Congress have expressed concerns about the need to clarify what
would constitute an exceptional case for granting a waiver in several
instances. For example, the conference report on the Strom Thurmond National
Defense Authorization Act for Fiscal Year 1999 stated:

The conferees agree that the term ?exceptional circumstances? requires more
than the belief that it may be possible to determine the contract price to
be fair and reasonable without the submission of certified cost and pricing
data. For example, a waiver may be appropriate in circumstances where it is
possible to determine price reasonableness without cost or pricing data and
the contracting officer determines that it would not be possible to enter
into a contract with a particular contractor in the absence of a waiver.

In response to these concerns, DOD was directed in 1998 to work with
appropriate executive branch officials to clarify situations in which an
exceptional case waiver may be granted. 4 According to DOD, no actions have
been taken to clarify when waivers should be granted.

Using DOD?s contract database, we identified 20 waivers valued at more than
$5 million each in fiscal year 2000. 5 The total value of these waivers was
about $4.4 billion. As table 1 shows, six buying organizations approved
these waivers. Five of the contracts included waivers that covered multiple-
year purchases. Six waivers that we identified involved large, complicated
acquisitions, which combined represented about 94 percent of the dollar
value of the waivers we reviewed. (See table 2.)

We could not assess the extent to which waivers are being used at DOD
because DOD?s contract database is unreliable. However, for the contract

3 The Defense Federal Acquisition Regulation Supplement also includes little
guidance on waivers. 4 See Conference Report on the Strom Thurmond National
Defense Authorization Act for Fiscal Year 1999. Report No. 105- 736, Sept.
22, 1998. 5 The contract actions included contact awards as well as contact
modifications. Modifications included, for example, exercising an option or
funding a contract on an incremental basis. We included waivers that
involved contract actions in which pricing was completed prior to fiscal
year 2000 in our review when the modification happened in fiscal year 2000.
DOD?s Use of Waivers

for Certified Data

Page 6 GAO- 02- 502 Contract Management

actions we examined, we were able to verify data by reviewing the actual
contracts and supporting documents.

Table 1: Waivers of Certified Cost or Pricing Data (Dollars in Millions)
Buying organization

Number of Contracts Waiver value

Naval Air Systems Command 2 $437.9 Naval Sea Systems Command 1 $875.7 Naval
Inventory Control Point 6 $60.3 Army Tank- Automotive and Armaments Command
2 $234.1 Army Aviation and Missile Command 7 $1,258.2 Air Force Materiel
Command (Aeronautical Systems Center)

2 $1,571.2

Total 20 $4,437.4 Table 2: Contracts Selected for Review (Dollars in
Millions) Service Weapon system Value Contractor

Air Force F- 16 fighter aircraft (foreign military sale to Greece) $1,521.9
Lockheed Martin Navy AEGIS weapon system $875.7 Lockheed Martin Army Black
Hawk helicopter engines $720.0 a General Electric Army Apache helicopters
(remanufacture) $462.6 Boeing (McDonnell Douglas) Navy Tomahawk cruise
missiles (remanufacture) $408.6 Raytheon Army Combat vehicle track $200.1 a
Goodyear Tire and Rubber

Subtotal $4,188.9

Air Force Predator reconnaissance vehicles $49.3 General Atomics Army
Wolverine bridge vehicles $34.0 General Dynamics Navy T- 45 Trainer engine
$29.3 Rolls- Royce Army Crashworthy extended- range fuel system $25.9
Robertson Aviation Army Chinook engines $23.3 Honeywell (Allied Signal) Navy
Orion radar equipment $16.6 Raytheon (Texas Instruments) Navy F/ A- 18 E/ F
Super Hornet spare parts $13.5 General Electric Army Hellfire II missiles
$12.2 Hellfire Systems Navy F- 404 turbine blades $9.9 General Electric Army
Chinook engine spares $7.6 Honeywell (Allied Signal) Navy Digital data power
groups $7.4 Data Link Solutions, BAE Systems/ Rockwell Collins Navy F/ A- 18
Hornet radar equipment $6.9 Raytheon (Hughes Aircraft) Army Apache fire
control radar spare parts $6.6 Longbow Limited Navy Satellite communications
equipment $6.0 Linkabit Wireless

Total $4,437.4

a These were indefinite delivery indefinite quantity (IDIQ) contracts. Some
portion of these amounts represents purchases that may occur in fiscal year
2001.

Page 7 GAO- 02- 502 Contract Management

Contract pricing or waiver documents for all of the cases we reviewed stated
that sufficient information was available to determine the price to be fair
and reasonable without the submission of cost or pricing data and did not
cite other circumstances to justify the waivers. This justification complies
with the Federal Acquisition Regulation. In three cases, our review found
that other factors strongly influenced the decision to waive certified cost
or pricing data. These involved purchases for crashworthy fuel systems and
combat vehicle track as well as a foreign military sale of F- 16 fighter
aircraft to Greece.

In the crashworthy fuel system purchase, the company?s business model
requires the company to sell its products at catalog prices rather than use
a traditional government approach based on certified cost or pricing data,
which the company never provides. This unique supplier also developed all of
its products and maintains a production base exclusively at the company?s
expense. In the case of the purchase of combat vehicles track, the company?s
commercial accounting system did not segregate unallowable costs from its
overhead accounts, and the company did not want to run the risk of
government claims and possible damage to its reputation because of the
inadvertent failure to exclude such costs from government proposals. As a
result, the company would not provide certified data. The Army and the
company agreed to reduce general and administrative costs allocated to this
buy by 25 percent to compensate for possible unallowable costs.

Finally, in the F- 16 sale, two approaches were considered. The first called
for accepting the price offered by the contractor during a competition
between different aircraft types. The second called for traditional
negotiations based on the certification of cost or pricing data. The
contractor objected to providing certified data, arguing that adequate price
competition had occurred. As a compromise, the Air Force waived the
certification requirement but obtained and analyzed pricing data from the
contractor.

Contracting officers responsible for the 20 waivers we reviewed used a
variety of techniques and approaches- sometimes a combination of several- to
determine whether prices were fair and reasonable.

Many of the contracting officers conducted a price analysis. Under a price
analysis, the contracting officer reviews the proposed price for the
contract without a breakdown of supporting costs. In 11 cases, the
contracting officers compared contractors? proposed prices with prices
Reasons Why Waivers

Were Used Data and Analyses Used to Arrive at Prices

Page 8 GAO- 02- 502 Contract Management

that had been negotiated previously for the same systems with certified
data. In some cases, if a significant amount of time had elapsed since the
previous price had been established, the contracting officers adjusted the
price to account for inflation and quantity changes.

In four cases, contracting officers conducted more thorough analyses using
the contractors? cost data, but the contractors were not required to certify
the data as accurate, complete, or current. Under a cost analysis, the
contracting officer reviews a breakdown of supporting costs in terms of
materials, labor, and various overhead accounts. Such a breakdown, for
example, could list various prices for materials as well as anticipated
hours and rates for labor.

In five cases, a variety of other pricing techniques were employed,
including the use of regression analyses, 6 learning curves, 7 and
parametric estimates. 8

Table 3 summarizes primary techniques employed on each of the 20 waivers we
reviewed.

Table 3: Techniques Primarily Employed to Analyze Contractor Proposals
Primary Techniques

System Price analysis

using prior certified prices

Cost analysis using uncertified data Other Comments/ Other techniques

Tomahawk cruise missiles (remanufacture) X Regression analysis of 1992- 97

historical prices. T- 45 Trainer engine X Reviewed contractor?s performance

on prior contracts. AEGIS weapon system X Price analysis of historical
prices and

costs; cost analysis for selected elements using uncertified data. Orion
radar equipment X F/ A- 18 E/ F Super Hornet spare parts X Price analysis on
most parts under

preceding contracts.

6 A statistical technique used to establish the relationship among variables
(such as direct labor and overhead costs). 7 A technique for projecting the
amount of direct labor or material that will be used to manufacture a
product on a repetitive basis. 8 A technique employing one or more cost
estimating relationships to estimate costs associated with the development,
manufacture, or modification of an end item.

Page 9 GAO- 02- 502 Contract Management

Primary Techniques System

Price analysis using prior certified prices

Cost analysis using uncertified data Other Comments/ Other techniques

F- 404 turbine blades X Digital Data Power Groups X F/ A- 18 Hornet radar
equipment X Price analysis of other Navy

contracts. Satellite communications equipment X Price analysis of other Navy

contracts. Black Hawk helicopter engines X Apache helicopters
(remanufacture) X Price analysis of historical prices and

cost analysis of subcontract material. Regression analysis and learning
curve estimate on historical labor costs. Crashworthy extended range fuel
system X Parametric estimate. Chinook engines X Hellfire II missiles X
Review of procurement history and

independent government estimate. Apache fire control radar spares X Chinook
engine spares X Combat vehicle track X Wolverine bridge vehicles X F- 16
fighter aircraft (foreign military sale to Greece) X Price analysis (prices
negotiated

during competitions between F- 16 and other aircraft) and review of model
used within company to prepare budget estimates. Predator reconnaissance
vehicles X

Total 11 4 5

The government was at a higher risk of inflated pricing in situations where
there was a lot of uncertainty about the data used to support analyses and a
lower risk in situations where there was less uncertainty. Factors that
increased uncertainty included changes in the design of the weapon system
since a previous purchase, changes in the processes or equipment used to
produce the system, or even changes in the amount being ordered by the
government. More indirect factors contributing to uncertainty include
mergers and acquisitions, cost- cutting measures, or changes in
relationships with subcontractors. All of these things can significantly
affect the costs of a product. Risk Depends Largely

on Certainty of Data Being Used to Support Analyses

Page 10 GAO- 02- 502 Contract Management

The practice of relying on previously certified data that are fairly old
also increased risk- principally because it increased the potential for more
uncertainty. In several cases we reviewed, the data relied on were 2 to 3
years old. At times, contracting officers took action to make up for the
uncertainties associated with the time elapsed, such as adjusting the price
to account for inflation. However, the contracting officers still could not
be assured that all other conditions- such as production processes, business
processes, subcontractor relationships- affecting the purchase remained the
same. One case we identified, the Navy?s purchase of spare parts for Orion
radar systems, was particularly risky- not only because the contracting
officer relied on 7- year- old data, but the data had never been certified.

We also identified factors and practices that helped to minimize risk. Of
course, relying on data that were certified fairly recently for systems
where conditions had not changed lowered the risk to the government. This
occurred in several cases that we reviewed.

In other cases, contracting officers employed pricing experts from the
Defense Contract Management Agency and the Defense Contract Audit Agency to
help them analyze costs and/ or prices. Such officials lent substantial
expertise and experience to the negotiation process by performing audits and
reviews of the contractor?s purchasing systems, estimating systems, overhead
rates, and operations in general.

In some cases, government and contractor personnel worked collaboratively
and effectively within integrated product teams to analyze costs and prices.
In doing so, they shared and used the same data to come to a consensus on
issues affecting contract price. This arrangement also served to minimize
the development of adversarial relationships between the contractor and the
government.

Another factor that could lower risk is the contractor?s having sound
estimating and purchasing systems- ones approved by government
organizations. Such systems are integral to producing credible proposals.
Nearly all of the contractors in the cases that we reviewed had such
systems, and in a few cases, allowed government representatives direct
access to the data within the systems. Specific examples highlighting risk
factors are provided in the figure below.

Page 11 GAO- 02- 502 Contract Management

Figure 2: Examples Highlighting Factors Impacting Risk

Page 12 GAO- 02- 502 Contract Management

DOD?s guidance on the waiver process is not adequate. First, DOD does not
have guidance that would help clarify for buying organizations what an

?exceptional? case might actually entail. The Truth in Negotiations Act does
not define exceptional cases and the regulatory guidance is limited. The
current guidance states that the head of the contracting activity may
consider waiving the requirement if the price can be determined to be fair
and reasonable without the submission of cost or pricing data. But the
guidance cites only one example of a situation where a waiver may be
granted: ?if cost or pricing data were furnished on previous production buys
and the contracting officer determines such data are sufficient, when
combined with updated information.?

The trade- offs and complexities involved in making the decision to grant a
waiver require more guidance. On the one hand, the certification process
DOD?s Guidance on

the Waiver Process Is Not Adequate

Page 13 GAO- 02- 502 Contract Management

greatly lowers the risk of inflated pricing and provides the government with
recourse in the event that items are found to be defectively priced. In
fact, in fiscal year 2000, Defense Contract Audit Agency audits related to
the Truth in Negotiations Act identified potential cost savings of $4.9
billion. 9 On the other hand, the certification process can be costly to
both the contractor and the government in terms of time, effort, and money.
And there may be times- such as when there is an urgent need for the item or
when the same item was purchased very recently using certified data- when
the government may be willing to take a greater risk. By developing more
detailed guidance, DOD could help buying organizations weigh these trade-
offs and avoid using the waiver process as merely a shortcut to getting an
item, even an expensive weapon system, quicker and easier.

Second, DOD does not have guidance that would help buying organizations draw
the line between what type of data and analyses would be acceptable or not
and what kinds of outside assistance, such as DOD contracting and pricing
experts, should be obtained. Our analysis showed that there was a wide
spectrum in the quality of the data and analyses being used. On one end,
there were situations where the analysis focused only on the bottom- line
price and not the supporting costs and where the data being relied on were
exceptionally old. On the other end, were situations where the negotiations
were based on data that were very recently certified with little change in
quantity. In addition, in some situations, other risk mitigating techniques
were employed, such as involving contract and pricing experts. Clearly, it
is in DOD?s interest to encourage contracting officers to reduce the risk of
inflated pricing as much as possible by conducting more rigorous analyses
and taking advantage of DOD?s pricing and contracting expertise.

Third, we identified several issues, not covered within existing guidance,
where there was some confusion on what the law and regulations allowed. For
example, contracting officers? views differed on whether the government can
obtain a waiver that covers only a portion of costs associated with a
procurement. In purchasing Apache helicopters, for example, the government,
in fact, obtained a partial waiver covering subcontractor costs and
recurring labor costs, estimated at $462. 6 million of the total $2.3
billion contract. In contrast, in another case, the

9 Identified in DOD Inspector General?s semiannual reports to the Congress.

Page 14 GAO- 02- 502 Contract Management

contracting officer told us that the regulations do not provide for partial
waivers.

Another question that could be clarified is whether waivers can be applied
to planned, but unpriced, contract options in later years. Specifically,
under contracts which have options that are not priced or under which the
price can be redetermined, it is not clear whether a waiver obtained in the
first year of the contract should apply to price negotiations that occur in
subsequent years of the contract. This question came up with the Army?s
purchase of combat vehicle track from Goodyear Tire and Rubber. In another
related situation involving the Army?s purchase of Black Hawk helicopter
engines from General Electric, the waiver ultimately covered planned
purchases over 5 years under two separate contracting actions.

For the majority of its sole- source purchases, DOD minimizes the risk of
inflated pricing by requiring its contractors, under the Truth in
Negotiations Act, to provide detailed cost or pricing data to support their
proposed prices and certify that the data are accurate, complete, and
current. But for several billion dollars in contracts, DOD is at a greater
risk of inflated pricing because it is waiving the requirement. In some
cases, contracting officers still make a considerable effort to reduce
risks, such as performing detailed price or cost analyses, involving pricing
and contracting experts, and relying on data that were recently certified.
By developing guidance to encourage all contracting officers to take such
steps and to help buying organizations weigh the decision to grant waivers,
DOD could reduce its risk of inflated pricing even further.

We recommend that the secretary of defense work with the Office of Federal
Procurement Policy 10 to develop guidance to be included in the Federal
Acquisition Regulation to minimize the risk of inflated pricing when waivers
for certified cost or pricing data are granted to its contractors and
subcontractors. This guidance should (1) clarify situations in which an
exceptional case waiver may be granted, (2) identify what type of data and
analyses are recommended for arriving at a price when

10 The Office of Federal Procurement Policy (OFPP) within the Office of
Management and Budget is responsible for the development of governmentwide
procurement policy. The Administrator of OFPP chairs the Federal Acquisition
Regulation (FAR) Council, which reviews and approves proposed changes to the
FAR. Conclusions

Recommendations for Executive Action

Page 15 GAO- 02- 502 Contract Management

waivers are granted, and (3) identify what kinds of outside assistance
should be obtained.

We also recommend that the secretary develop guidance that clarifies whether
the government can obtain a partial waiver and what should be done with
contracts that have options that are not priced. We further recommend that
the secretary survey buying organizations to assess whether additional
specific issues not covered within existing guidance need to be clarified.

In providing written comments on a draft of this report, DOD generally
agreed with our findings and recommendations. Its only disagreement was with
our recommendation to work with the Office of Federal Procurement Policy to
incorporate new guidance in the Federal Acquisition Regulation.

DOD specifically acknowledged that the age and usefulness of data and
analysis should be a concern for contracting officers. In response to our
recommendations, DOD intends to develop additional guidance to the
contracting community regarding (1) the approval of a waiver of the
requirement for cost or pricing data, (2) the types of analyses that should
be conducted when waivers are granted, and (3) outside expertise that should
be engaged in conducting these analyses. DOD plans to include guidance in a
memorandum to the military departments and defense agencies and incorporate
it into the next update of its Contract Pricing Reference Guides. DOD also
agreed with the need to address partial waivers and waivers on unpriced
options. In addition, DOD agreed to survey buying organizations to assess
whether specific issues not covered within existing guidance need to be
clarified. DOD disagreed with our recommendation to place the revised
guidance in the Federal Acquisition Regulation because it believed that such
a listing would detract from the application of the best professional
judgment by contracting officers.

We believe that DOD is taking constructive measures to reduce risks that
come with the waiver process. In addition, we appreciate that providing
additional guidance outside the Federal Acquisition Regulation will provide
a more immediate benefit than amending the regulation. However, it is still
appropriate for DOD to work with OFPP and the FAR Council to incorporate its
guidance into the Federal Acquisition Regulation since the guidance would
help clarify the regulation and since the regulation is the definitive
source for contract management. Agency Comments

and Our Evaluation

Page 16 GAO- 02- 502 Contract Management

We are sending copies of this report to the secretary of defense; the
secretaries of the army, navy, and air force; the director, Office of
Management and Budget; the administrator, Office of Federal Procurement
Policy; and interested congressional committees. We will also make copies
available to others on request.

If you have any questions about this report or need additional information,
please call me on (202) 512- 4841. Key contributors to this report are
listed in appendix IV.

David E. Cooper Director Acquisition and Sourcing Management

Appendix I: Scope and Methodology Page 17 GAO- 02- 502 Contract Management

To meet our objectives, we reviewed 20 waivers valued at more than $5
million each in fiscal year 2000 at six buying organizations. In total, the
waiver value of these 20 contracts amounted to about $4.4 billion. These 20
waivers involved an array of buying commands, weapon systems, major
contractors, and purchasing circumstances.

The DOD contract database was used as the basis to identify sole source,
fixed- price weapon system contracts, with more than $5 million in
expenditures (or contract actions) in fiscal year 2000. The DOD database
includes a variety of contracting actions, such as a basic award of a
contract as well as modification of a contract. Modifications could include
an exercise of an option to a basic contract or funding of the contract for
a specific year on a contract funded on an incremental basis. As a result,
in some cases with multiyear buys, the pricing of the contract or
modification selected for review occurred before fiscal year 2000.

We selected six commands to visit during this review because these commands,
based on DOD?s contract database, were the only locations that had
individual waivers with more than $5 million in expenditures in fiscal year
2000. These six include the (1) Naval Air Systems Command, (2) Naval Sea
Systems Command, (3) Naval Inventory Control Point, (4) Army Tank-
Automotive and Armaments Command, (5) Army Aviation and Missile Command, and
(6) Aeronautical Systems Center of the Air Force Materiel Command. Because
of concerns regarding the reliability of computer- generated data, we also
requested the commands to independently review their records to identify any
additional waivers meeting these criteria. In total, through the use of the
database and independent review process, we identified the 20 contracts with
waivers amounting to about $4.4 billion. These six are large buying
organizations and visiting these organizations, in our view, gives us
visibility into the use of waivers for large contracts nationally in fiscal
year 2000.

We reviewed the techniques associated with the methods of pricing the
contracts. This review included the data used by contracting officers to
determine whether the prices were fair and reasonable. To accomplish this
review, we reviewed contract files and held discussions with contracting
officers at the DOD buying organizations. In addition, we also held
discussions with representatives of most of the contractors to obtain
information on the orders as well as DOD officials located at contractor
plants.

We conducted our review between March 2001 and April 2002 in accordance with
generally accepted government auditing standards. Appendix I: Scope and
Methodology

Appendix II: Federal Acquisition Regulation Provision on Waivers

Page 18 GAO- 02- 502 Contract Management

Below is the waiver provision, which is at section 15.403- 1 (c) (4) of the
Federal Acquisition Regulation.

The head of the contracting activity (HCA) may, without power of delegation,
waive the requirement for submission of cost or pricing data in exceptional
cases. The authorization for the waiver and the supporting rationale shall
be in writing. The HCA may consider waiving the requirement if the price can
be determined to be fair and reasonable without submission of cost or
pricing data. For example, if cost or pricing data were furnished on
previous production buys and the contracting officer determines such data
are sufficient, when combined with updated information, a waiver may be
granted. If the HCA has waived the requirement for submission of cost or
pricing data, the contractor or higher- tier subcontractor to whom the
waiver relates shall be considered as having been required to provide cost
or pricing data. Consequently, award of any lower- tier subcontract expected
to exceed the cost or pricing data threshold requires the submission of cost
or pricing data unless-

1. An exception otherwise applies to the subcontract; or 2. The waiver
specifically includes the subcontract and the rationale

supporting the waiver for that subcontract. Appendix II: Federal Acquisition
Regulation

Provision on Waivers

Appendix III: Comments from the Department of Defense

Page 19 GAO- 02- 502 Contract Management

Appendix III: Comments from the Department of Defense

Appendix III: Comments from the Department of Defense

Page 20 GAO- 02- 502 Contract Management

Appendix III: Comments from the Department of Defense

Page 21 GAO- 02- 502 Contract Management

Appendix III: Comments from the Department of Defense

Page 22 GAO- 02- 502 Contract Management

Appendix III: Comments from the Department of Defense

Page 23 GAO- 02- 502 Contract Management

Appendix IV: GAO Contacts and Staff Acknowledgements

Page 24 GAO- 02- 502 Contract Management

David E. Cooper (202) 512- 4841 Karen Zuckerstein (202) 512- 6785

In addition to those named above, Erin Baker, Cristina Chaplain, Ken
Graffam, Martin Lobo, Ralph Roffo, John Van Schaik, and Paul Williams made
key contributions to this report. Appendix IV: GAO Contacts and Staff

Acknowledgements GAO Contacts Staff Acknowledgments

(120040)

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