United States General Accounting Office

GAO Report to the Heads of the National

Audit Offices of Belgium, Denmark, the

Netherlands, and Norway

September 1996 CONTRACT PRICING

Pricing of F-16 Mid-Life

Update Program

Contracts

G O A

years

1921 - 1996

GAO/NSIAD-96-232

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-274243 

September 24, 1996

Baron Jerome van de Velde

First President of the Court of Accounts

Belgium

Mr. Henrik Otbo

Auditor General

Denmark

Mr. Henk E. Koning

President of the Netherlands Court of Audit

The Netherlands

Mr. Bjarne Mørk-Eidem

Auditor General

Norway

As requested, we reviewed the pricing of selected contracts and

subcontracts awarded under the F-16 aircraft Mid-Life Update (MLU)

program. The MLU program is designed to develop, produce, and install

upgrades to F-16 fighter aircraft owned by Belgium, Denmark, the

Netherlands, and Norway to improve their performance.

We determined (1) if the rates and factors used to price two selected

prime contracts were the same as those used to price contemporaneous

U.S. government contracts, (2) how Air Force negotiation officials used

the Defense Contract Audit Agency’s1

 (DCAA) recommendations in

negotiating the prime contract prices, and (3) if the material and

subcontract costs included in the prime contract prices were fair and

reasonable. Also, as requested, we reviewed the pricing of two selected

subcontracts. This report does not contain proprietary data under 

18 U.S.C. 1905.

Background On June 10, 1975, the U.S. government executed a Memorandum of

Understanding with the governments of Belgium, Denmark, the

Netherlands, and Norway to produce F-16 aircraft under a program known

as the F-16 Multinational Fighter Program. Of the 998 aircraft produced

1

The Defense Contract Audit Agency is responsible for performing all contract audits for the

Department of Defense (DOD) and for providing accounting and financial advisory services regarding

contracts and subcontracts to all DOD components responsible for procurement and contract

administration.

Page 1 GAO/NSIAD-96-232 Contract Pricing
B-274243 

under this program, the U.S. Air Force purchased 650 and the European

participating governments purchased the remaining 348.

Under the ongoing MLU program, the Europeans are upgrading their F-16

aircraft by equipping them with new cockpits and avionics systems. On

behalf of the four European participating governments, the U.S. Air Force

awarded prime contracts to Lockheed Martin Tactical Aircraft Systems2

and Northrop Grumman Corporation3 valued at $622.7 million and

$106.5 million, respectively, to provide the aircraft upgrades. The U.S.

government participated in the development phase of the MLU program, but

it withdrew from the production phase in November 1992.

The European countries’ Supreme Audit Institutions (SAIs) have raised a

number of issues regarding the pricing of the MLU contracts. The U.S. and

European participating governments agreed that they would “endeavor to

establish the same price for the same articles when they were procured

under the same conditions from the same source.” Due to the proprietary

nature of the information affecting the negotiation of the contracts, SAIs

are precluded from having access to this information. On December 15,

1994, a meeting, involving representatives from the U.S. and the European

participating governments, was held during which agreement was reached

to provide assurance that the MLU contract prices were fair and reasonable.

Among the issues discussed were the rates and factors used to price the

MLU contracts. According to the minutes of the meeting, the European

representatives were assured that the “. . . rates and factors that are used

for MLU contracts are the same for all other LFWC [Lockheed Fort Worth

Company] F-16 contracts with the U.S. Government.” Since these rates and

factors are proprietary, the Netherlands representative asked if the United

States could provide certification that the same rates are used on all U.S.

government contracts. The Defense Plant Representative Office

Commander agreed to provide the certification and did so on March 24,

1995.4

2

Formerly known as the Lockheed Fort Worth Company. The name was changed to Lockheed Martin

Tactical Aircraft Systems as a result of the merger between Martin Marietta Corporation and Lockheed

Corporation in March 1995.

3

Formerly known as Westinghouse Electric Corporation. Northrop Grumman Corporation acquired

Westinghouse’s defense and electronic systems business in March 1996.

4

Defense Plant Representative Offices are located at major contractor plants and are responsible for

carrying out various contract administration activities, including negotiating rates and factors.

Page 2 GAO/NSIAD-96-232 Contract Pricing
B-274243 

Results in Brief The prime contractors proposed and Air Force negotiators accepted rates

and factors to price the two MLU contracts that were different from those

used to price contemporaneous U.S. government contracts. The contract

prices for the European participating governments were $9.4 million

higher due to the use of different rates and factors.

In the case of the Lockheed Martin contract, the Defense Plant

Representative Office Commander certified that the forward pricing rate

agreement5

 (FPRA) rates and factors used to price the MLU contract were

the same as those used to price all other contracts awarded to Lockheed

Martin during the effective period of the agreement. Despite this

certification, a special set of higher rates and factors was used to price the

MLU contract rather than those called for in the FPRA, thus increasing the

price for the European participating governments by $8 million. In

addition, the Air Force negotiated two other contracts with Lockheed

Martin using the lower FPRA rates and factors on the same day the MLU

contract was negotiated.

As for the Northrop Grumman contract, Air Force negotiators used a

general and administrative6

 (G&A) overhead rate established for use in

pricing foreign military sales contracts rather than a lower domestic rate

established for pricing U.S. government contracts. In addition, Air Force

negotiators used two incorrect rates in pricing the MLU contract. These two

conditions increased the price to the European participating governments

by $1.4 million.

DCAA conducted preaward audits of the prime contractors’ price proposals

and questioned various costs. In addition, DCAA reported large amounts of

unresolved costs because audits had not been made of several

subcontractor price proposals. Except for the rates and factors used for

the Lockheed Martin contract, Air Force negotiators used DCAA’s audit

results to assist them in negotiating lower prices for the prime contracts.

5

A forward pricing rate agreement is a written agreement between a contractor and the government in

which the contractor agrees to make negotiated rates and factors available during a specified period

for use in pricing contracts.

6

G&A overhead includes a wide range of indirect expenses such as salaries and wages, operating

supplies, telephone, insurance, and maintenance.

Page 3 GAO/NSIAD-96-232 Contract Pricing
B-274243 

Lockheed Martin and Northrop Grumman employed safeguard techniques

required by U.S. procurement regulations7

 to evaluate and negotiate

subcontract and material prices for the prime contracts. Air Force

negotiators accepted the proposed and negotiated subcontract prices as

fair and reasonable based on the prime contractors’ evaluation and

negotiation efforts. There are indications, however, that material in the

two prime contracts may be overpriced by as much as $947,000. We

provided this information to the cognizant DCAA offices, and, at the time we

completed our review, they were conducting postaward audits8

 of the

prime contracts.

As for the two subcontracts selected by SAIs for review (Hazeltine and

Honeywell), Lockheed Martin awarded the Hazeltine subcontract

competitively and the Honeywell subcontract noncompetitively. In

negotiating the price of the Honeywell subcontract, Lockheed Martin used

rates and factors recommended by the cognizant U.S. government contract

administration activity and employed the safeguard techniques required by

U.S. procurement regulations. The Air Force accepted the prices of these

two subcontracts as fair and reasonable.

Rates and Factors

Used to Price MLU

Contracts

Lockheed Martin and Northrop Grumman proposed and Air Force

negotiators used rates and factors to price the two MLU prime contracts

that were different from those used to price contemporaneous U.S.

government contracts. Also, Air Force negotiators used two incorrect

rates in pricing the Northrop Grumman prime contract. These two

conditions increased the prime contract prices by a total of $9.4 million.

Lockheed Martin The rates and factors used to price the Lockheed Martin MLU contract were

not the same as those used to price U.S. government contracts. Instead, on

December 23, 1994, Lockheed Martin proposed a “special” set of rates to

price the MLU contract rather than using the lower FPRA rates in effect at

7

Executive agencies of the U.S. government are required to follow a single, uniform regulation—the

Federal Acquisition Regulation—in buying supplies and services. DOD has issued a supplement to the

Federal Acquisition Regulation containing requirements unique to DOD. The supplement is called the

Defense Federal Acquisition Regulation Supplement.

8

DCAA conducts postaward audits, in accordance with the Truth In Negotiations Act (10 U.S.C. 2306a),

to determine whether contractors submitted or disclosed accurate, complete, and current cost or

pricing data to the government prior to reaching contract price agreement. The government is entitled

to recover overpricing when it determines that a contractor did not submit or disclose accurate,

complete, and current cost or pricing data. In the case of the MLU contracts, the participating

governments would directly benefit from recovery of any overpricing.

Page 4 GAO/NSIAD-96-232 Contract Pricing
B-274243 

that time. The Air Force used the special rates in negotiating the MLU

contract prices. This action increased the contract price by $8 million.

During the December 1994 working group meeting involving U.S. and

European representatives, the Defense Plant Representative Office

Commander stated he would certify that the rates used to price the MLU

contract would be the same as those used to price all U.S. government

contracts. Subsequently, in a March 24, 1995, written certification, the

Commander stated “. . . that the applicable FPRA rates and factors used in

the MLU program are the same as all other programs negotiated between

the LFWC [Lockheed Fort Worth Company] and the U.S. Government.”

However, contrary to the Commander’s certification, the Air Force

negotiated two other contracts with Lockheed Martin on the same day the

MLU contract was negotiated using lower FPRA rates and factors.

Neither Lockheed Martin nor the Air Force withdrew from the FPRA that

was in effect at the time the MLU contract price was agreed to. The Defense

Federal Acquisition Regulation Supplement stipulates that FPRA rates must

be used to price contracts unless waived by the head of the contracting

activity. No such waiver was requested or obtained for the special rates

used to price the MLU contract. Furthermore, there was no evidence in the

contract negotiation records or files that the special rates were audited by

DCAA or approved for use by the Defense Plant Representative Office.

Lockheed Martin proposed and Air Force negotiators used the lower FPRA

rates to establish the negotiation objective for the contract price. Before

contract price agreement was reached, however, Lockheed Martin

provided Air Force negotiators the special set of rates and factors that

they accepted and used to price the contract.

Lockheed Martin officials told us a special set of rates and factors was

required to negotiate the MLU contract because the existing FPRA was only

valid through calendar year 1997. They explained that the MLU contract

performance period covered calendar years 1993 through 2001 and that

rates and factors for the outyears were required. They believe that the

special rates benefited the MLU customers because a new FPRA, negotiated

shortly after the MLU contract, included higher rates than those used for

the MLU contract.

In responding to a draft of this report, the Air Force agreed a special set of

rates and factors was used to price the MLU contract, but it believed the use

of those rates and factors was in the best interest of the European

participating governments. The Air Force also stated that the Defense

Page 5 GAO/NSIAD-96-232 Contract Pricing
B-274243 

Plant Representative Office Commander signed the certification in good

faith, based on his knowledge at that time, and with full intention of being

consistent with the pricing agreement between the U.S. and the European

participating governments. The Air Force further stated that the Defense

Plant Representative Office was negotiating a new FPRA while MLU contract

negotiations were going on and had already offered Lockheed Martin

higher rates and factors than were in the existing FPRA. The Air Force

pointed out that Lockheed Martin would never have accepted the lower

existing FPRA rates and factors, which covered the period 1993 through

1997.

We agree that the certification was signed in good faith. We also agree that

the existing FPRA extended only through 1997 and that rates and factors

were needed to cover the MLU contract performance period. However,

when changing conditions cause rates in an FPRA to be no longer valid,

defense procurement regulations provide approved methods for dealing

with the situation—either withdraw from the rate agreement or obtain a

waiver from the head of the contracting activity. Air Force negotiators did

neither. We found that the Defense Plant Representative Office had issued

recommended rates and factors covering 1998 and 1999. Thus, Air Force

negotiators—using the existing FPRA and recommended rates—had rates

and factors covering 1993 through 1999. According to negotiation records,

this period accounted for 99 percent of the MLU contract value.

Furthermore, the $8-million increase to the MLU contract is not due to

higher rates and factors for the years beyond the FPRA period. Rather, the

increase is due to increased rates and factors for 1993 through 1997—the

same period covered by the existing FPRA.

In addition, the MLU contract awarded to Northrop Grumman for radar

systems encountered the same situation as the Lockheed Martin

contract—that is, it extended beyond the period covered by the existing

FPRA. However, in contrast to the Lockheed Martin situation, the Air Force

used existing FPRA rates and factors to price the radar contract. The

contract performance period extended into the year 2002, while the

existing FPRA went through only 1996. Northrop Grumman proposed and

the Air Force used the existing FPRA rates and factors and projected these

rates and factors over the remaining contract performance period.

Northrop Grumman Northrop Grumman proposed and the Air Force accepted a G&A overhead

rate established for pricing foreign military sales contracts rather than a

lower domestic rate established for pricing U.S. government contracts.

Page 6 GAO/NSIAD-96-232 Contract Pricing
B-274243 

Use of the G&A rate for foreign military sales contracts increased the MLU

contract price by $1.3 million.

Northrop Grumman officials told us they used the G&A rate for foreign

military sales contracts because of the additional costs in doing business

with foreign customers. They also stated they were unaware of any

requirement to use the same rates applied to U.S. government contracts.

They further stated that such a requirement was not made known to the

corporation in the Air Force’s request for proposal or subsequent contract

award.

In commenting on a draft of this report, the Air Force pointed out that use

of the foreign military sales G&A rate was proper on the Northrop

Grumman MLU contract. The Air Force advised us that the contractor could

not use and the Air Force could not accept the domestic G&A rate for

pricing the contract because it would be a misallocation of costs. The Air

Force also pointed out that use of the foreign military sales G&A rate did

not violate the intent or the spirit of the agreement between the U.S. and

the European participating governments.

It should be noted that while the Air Force contends that it would have

been improper to use the domestic G&A rate for pricing the Northrop

Grumman contract, the Air Force used a domestic G&A rate to price the

Lockheed Martin MLU contract. The Air Force did not explain this

inconsistency.

In addition to using the higher G&A rate for foreign military sales contracts,

Air Force negotiators used two incorrect rates in pricing the MLU contract,

which caused its price to be increased by $163,600. The Air Force

concurred that use of the incorrect rates was an oversight. In total, the MLU

contract price was increased by $1.4 million as a result of using the higher

G&A rate for foreign military sales contracts and two incorrect rates.

DCAA Audit Work

Used to Negotiate

MLU Contracts

DCAA conducted preaward audits of both prime contract proposals and

questioned various costs. DCAA also reported large amounts of proposed

subcontract costs as unresolved because several subcontractor price

proposals had not been audited at the time of its preaward audits. Price

negotiation memorandums showed DCAA helped the Air Force evaluate

updated contractor proposals during fact-finding9

 prior to contract price

9

After issuing its preaward audit report, DCAA often helps the procurement activity review the

contractor’s updated cost or pricing data. This process is called fact-finding and occurs before contract

price negotiations start.

Page 7 GAO/NSIAD-96-232 Contract Pricing
B-274243 

negotiations. In addition to making specific recommendations on

proposed costs, DCAA also provided Air Force negotiators with information

on deficiencies in the contractors’ estimating systems, material

management and accounting systems, and other operations.

The price negotiation memorandums clearly show that Air Force

negotiators used DCAA recommendations to assist in establishing

objectives and negotiating lower prices for the two prime contracts. The

memorandum for the Lockheed Martin contract, for example, shows DCAA

reported a substantial amount of proposed subcontract costs as

unresolved because audits of the subcontracts had not been completed at

the time of DCAA’s review. DCAA reported the same condition for the

Northrop Grumman contract. Audits of the subcontractor proposals were

subsequently obtained, and Air Force negotiators used the information in

negotiating the contract prices.

Air Force negotiators also used other DCAA recommendations in

negotiating the prices of the contracts. On the Northrop Grumman

contract, for example, they extensively used DCAA’s recommendations on

proposed material costs. The price negotiation memorandum showed Air

Force negotiators were able to obtain most of DCAA’s recommended cost

reductions for material.

Reasonableness of

Subcontract and

Material Costs

We reviewed the fairness and reasonableness of subcontract and material

costs negotiated in the prime contracts because these costs comprised

about 88 percent of the combined negotiated contract prices. Subcontracts

and material under the Lockheed Martin contract totaled $572.7 million, or

about 92 percent, of the $622.7-million contract price. Subcontracts and

material under the Northrop Grumman contract comprised $66.2 million,

or about 62 percent, of the $106.5-million price.

Subcontract Costs For competitively priced subcontracts, we examined the supporting

records and, if adequate competition occurred, we accepted the prices as

fair and reasonable. For noncompetitively priced subcontracts, we

examined the negotiation records to determine if appropriate safeguard

techniques were used to negotiate the prices.

At the time of the prime contract price agreement dates, Lockheed Martin

had negotiated firm prices for 10 of its 11 major subcontracts, and

Northrop Grumman had negotiated firm prices for both of its major

Page 8 GAO/NSIAD-96-232 Contract Pricing
B-274243 

subcontracts. The contractors used the pricing techniques required by the

Federal Acquisition Regulation in negotiating subcontract prices.

Subcontract files and other records showed that Lockheed Martin and

Northrop Grumman (1) obtained cost or pricing data,10 (2) conducted cost

analyses,11 (3) conducted price negotiations, and (4) and obtained

certificates of current cost or pricing data.12 The cognizant Defense Plant

Representative Offices also obtained audits from DCAA or the participating

governments’ audit agencies of the subcontractor price proposals and

provided the audit reports to Air Force negotiators.

For the subcontract that was not priced at the time of prime contract price

agreement, Lockheed Martin, as required by the Federal Acquisition

Regulation, obtained cost or pricing data from the subcontractor and

prepared a cost analysis of the subcontract proposal.

Air Force negotiators accepted the proposed and negotiated subcontract

prices as fair and reasonable based on the prime contractors’ evaluation

and negotiation efforts.

Material Costs We did not examine material items on the Lockheed Martin contract

because they comprised less than 1 percent of the contract price. As for

the Northrop Grumman contract, we examined the pricing of selected

material items because material costs comprised about 9 percent of the

contract price. Northrop Grumman used appropriate safeguard techniques

to price material items.

None of the eight high dollar items we selected for review were priced at

the time of prime contract price agreement. Northrop Grumman based its

proposed prices for four of the items on supplier competitive quotations.

Northrop Grumman received multiple quotations for the four items;

therefore, we accepted the competitive prices as fair and reasonable.

10Cost or pricing data consist of all facts existing up to the time of agreement on contract price that

prudent buyers and sellers would reasonably expect to significantly affect price negotiations. Cost or

pricing data can be independently verified and consist of such information as vendor quotations,

nonrecurring costs, and information on changes in production methods.

11A cost analysis is a review and evaluation of a contractor’s cost or pricing data and of the judgmental

factors applied in projecting estimated costs based on the data. It assesses the individual elements of a

contractor’s proposed cost and profit and generally establishes minimum and maximum target prices

for use in subsequent contract price negotiations.

12In those cases where a subcontractor is required to submit cost or pricing data, the prime contractor

is required to obtain from the subcontractor a certificate of current cost or pricing data certifying that

to the best of its knowledge and belief, the cost or pricing data provided were accurate, complete, and

current at the time agreement is reached on the subcontract price.

Page 9 GAO/NSIAD-96-232 Contract Pricing
B-274243 

Northrop Grumman based its proposed prices for the other four items on

noncompetitive quotations, and it conducted price analyses13 for the items.

For two of the items, the price quotations fell below the maximum prices

established by the price analyses, and Northrop Grumman accepted the

proposed prices as fair and reasonable. Quotations for the other two items

were higher than the maximum price established by the price analyses,

and Northrop Grumman decremented14 the quotations and submitted the

lower prices to Air Force negotiators.

During prime contract price negotiations, Air Force negotiators applied an

additional decrement against the proposed prices for all eight items.

There are indications that material is overpriced by as much as $947,000

under the two prime contracts because the prime contractors did not

provide government negotiators with accurate, complete, and current data

available for the items at the time of the contract price agreement dates.

We provided this information to the cognizant DCAA offices, and they are

reviewing material prices in both prime contracts to determine the extent

of overpricing. The amount of overpricing may change as DCAA continues

its review.

Pricing of Two MLU

Subcontracts

As requested, we reviewed the pricing of the subcontracts Lockheed

negotiated with Hazeltine for the advanced identification friend or foe

system and with Honeywell for the color multifunction display system.

The Hazeltine subcontract was awarded on a competitive basis, while the

Honeywell subcontract was awarded on a noncompetitive basis.

Hazeltine The subcontract awarded to Hazeltine was competed between Hazeltine

and three other vendors. Lockheed Martin subjected the responsive

proposals to a technical evaluation, management evaluation, risk analysis,

and cost evaluation and determined that Hazeltine had the lowest risk

approach with the highest probability of successful completion. Hazeltine

was the only supplier that proposed to meet all of the technical

13A price analysis is the process of examining and evaluating a proposed price without evaluating its

separate cost elements and proposed profit. A price analysis may be done, for example, by comparing

current quotations with prior prices paid for the same or similar items or with independently

developed estimates.

14Decrement means to reduce the proposed price of an item by a percentage. Contractors normally are

able to negotiate prices lower than their vendors initially quote; therefore, the decrement is a

technique used to adjust the proposed price of an item to account for an anticipated reduction in price

as a result of negotiations.

Page 10 GAO/NSIAD-96-232 Contract Pricing
B-274243 

requirements. Lockheed Martin concluded Hazeltine’s proposed price was

fair and reasonable and awarded the subcontract. Air Force negotiators

also accepted the subcontract price as fair and reasonable.

Honeywell Lockheed Martin used the same safeguard techniques in negotiating the

Honeywell subcontract that are required to be used in negotiating

subcontracts under U.S. government prime contracts. There was not an

FPRA with Honeywell at the time the subcontract price was negotiated;

however, recommended rates and factors15 had been issued for Honeywell

contracts. Lockheed Martin used the recommended rates and factors in

negotiating the subcontract price. Air Force negotiators accepted the

negotiated price as fair and reasonable.

Air Force and

Contractor Comments

Air Force and contractor officials reviewed a draft of this report and their

comments have been incorporated in the text where appropriate. Their

comments are presented in their entirety in appendixes I, II, and III.

Scope and

Methodology

SAIs selected two prime contracts for review. The first prime contract

involved the letter contract the Air Force awarded to Lockheed Martin on

August 17, 1993. The contract provides for the production of modification

kits to upgrade the cockpit and avionics systems on the F-16 aircraft. The

Air Force and Lockheed Martin agreed on the contract price on April 21,

1995, and the final contract was signed on June 13, 1995. The second prime

contract involved a letter contract the Air Force awarded to Northrop

Grumman on December 3, 1993. The contract provides for the production

of modification kits for the AN/APG-66(V)2 fire control radar. The Air

Force and Northrop Grumman agreed on the contract price on July 15,

1994, and the final contract was signed on September 27, 1994.

SAIs also selected two subcontracts for review. Both were awarded under

the prime contract to Lockheed Martin. The first involved the subcontract

Lockheed Martin awarded to Honeywell (purchase order 354) on

October 30, 1995, for the production of the F-16 color multifunction

displays. The second involved the subcontract Lockheed Martin awarded

to Hazeltine (purchase order 4XU) on September 24, 1993, for the

production of the advanced identification friend or foe combined

interrogator/transponder system.

15Forward pricing rate recommendations contain rates and factors established unilaterally by the

administrative contracting officer for use by government negotiators when FPRA rates and factors are

not available.

Page 11 GAO/NSIAD-96-232 Contract Pricing
B-274243 

To determine whether the rates and factors used to price the two MLU

prime contracts were the same as those used to price U.S. government

contracts, we reviewed Air Force negotiation records to identify the rates

and factors used for the MLU contracts. We then compared the MLU rates

and factors to those included in FPRAs and forward pricing rate

recommendations in effect at the time the MLU contracts were negotiated.

Where differences were identified, we determined the effect on contract

prices. We performed similar work on the Honeywell subcontract. We

discussed the rates and factors with contractor, Air Force, DCAA, and

Defense Plant Representative Office officials.

To determine how Air Force officials used DCAA audit recommendations in

negotiating prices for the prime contracts, we reviewed the DCAA preaward

audit reports and recommendations. We evaluated contract negotiation

records to determine how Air Force negotiators used DCAA’s work in

establishing negotiation objectives and negotiating the contract prices. We

discussed the use of the audit recommendations with DCAA and Air Force

officials.

To determine whether subcontract and material costs included in the

contract prices were fair and reasonable, we compared the pricing

safeguard techniques used by the contractors with those required by the

Federal Acquisition Regulation and the Defense Federal Acquisition

Regulation Supplement. We verified that, when required, the contractors

obtained cost or pricing data, conducted cost or price analyses, carried out

negotiations with subcontractors and vendors, and obtained certificates of

current cost or pricing data. We also determined whether DCAA or audit

agencies of the European participating governments made audits of the

subcontractor price proposals. In addition, we examined negotiation

records for the subcontracts and material items and discussed them with

contractor and Air Force officials.

We performed our work between May and August 1996 in accordance with

generally accepted government auditing standards.

We are sending copies of this report to the Secretaries of Defense and the

Air Force; the F-16 System Program Director; the Director, Defense

Contract Audit Agency; the Commander, Defense Contract Management

Command; and the Chief Executive Officers of Lockheed Martin and

Northrop Grumman Corporations. Copies will be made available to others

upon request.

Page 12 GAO/NSIAD-96-232 Contract Pricing
B-274243 

If you or your staff have questions about this report, please contact me at

(202) 512-4841 or David E. Cooper at (202) 512-4587. Major contributors to

this report are listed in appendix IV.

Louis J. Rodrigues

Director, Defense Acquisitions Issues

Page 13 GAO/NSIAD-96-232 Contract Pricing
Contents

Letter 1

Appendix I 

Comments From the

Air Force

16

Appendix II 

Comments From

Lockheed Martin

20

Appendix III 

Comments From

Northrop Grumman

24

Appendix IV 

Major Contributors to

This Report

25

Abbreviations

DCAA Defense Contract Audit Agency

DOD Department of Defense

FPRA forward pricing rate agreement

G&A general and administrative

MLU Mid-Life Update

SAI Supreme Audit Institutions

Page 14 GAO/NSIAD-96-232 Contract Pricing
Page 15 GAO/NSIAD-96-232 Contract Pricing
Appendix I 

Comments From the Air Force

See p. 1.

Page 16 GAO/NSIAD-96-232 Contract Pricing
Appendix I 

Comments From the Air Force

Page 17 GAO/NSIAD-96-232 Contract Pricing
Appendix I 

Comments From the Air Force

Now on p. 4.

Now on p. 6.

Page 18 GAO/NSIAD-96-232 Contract Pricing
Appendix I 

Comments From the Air Force

Now on p. 7.

Now on p. 10.

Page 19 GAO/NSIAD-96-232 Contract Pricing
Appendix II 

Comments From Lockheed Martin

Page 20 GAO/NSIAD-96-232 Contract Pricing
Appendix II 

Comments From Lockheed Martin

Page 21 GAO/NSIAD-96-232 Contract Pricing
Appendix II 

Comments From Lockheed Martin

Page 22 GAO/NSIAD-96-232 Contract Pricing
Appendix II 

Comments From Lockheed Martin

Page 23 GAO/NSIAD-96-232 Contract Pricing
Appendix III 

Comments From Northrop Grumman

Page 24 GAO/NSIAD-96-232 Contract Pricing
Appendix IV 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

David E. Cooper, Associate Director

Atlanta Field Office George C. Burdette, Evaluator-in-Charge

Maria Storts, Evaluator

Erin B. Baker, Evaluator

Dallas Field Office Joe D. Quicksall, Assistant Director

Jeffrey A. Kans, Evaluator

Kimberly S. Carson, Evaluator

(707173) Page 25 GAO/NSIAD-96-232 Contract Pricing
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100