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United States General Accounting Office: 
GAO: 

Report to the Subcommittee on Readiness and Management Support, 
Committee on Armed Services, U.S. Senate: 

April 2002: 

Contract Management: 

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

GA0-02-502: 

Contents: 

Letter: 

Results in Brief: 

Background: 

DOD's Use of Waivers for Certified Data: 

Data and Analyses Used to Arrive at Prices: 

Risk Depends Largely on Certainty of Data Being Used to Support 
Analyses: 

DOD's Guidance on the Waiver Process Is Not Adequate: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Federal Acquisition Regulation Provision on Waivers: 

Appendix III: Comments from the Department of Defense: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Tables: 

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

Table 2: Contracts Selected for Review (Dollars in Millions): 

Table 3: Techniques Primarily Employed to Analyze Contractor Proposals: 

Figures: 

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

Figure 2: Examples Highlighting Factors Impacting Risk: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

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.

Results in Brief: 

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. 

Background: 

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.[Footnote 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. 

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

[Refer to PDF for image: illustration] 

1. Contractor submits detailed proposal with estimated contract costs. 

2. DOD contracting officers review contractor's cost data in the 
proposal. 

3. The government and the contractor negotiate cost elements to settle 
contract price. 

4. Contractors certify the data as accurate, complete, and current. 

#2-#4: Contractor continually provides updated data on estimated 
costs. Defense Contract Management Agency price analysis and Defense 
Contract Audit Agency analysts auditors analyze contractors' data. 

5. Post-award audits are conducted to validate that the date were 
accurate, complete, and current. 
 
[End of figure] 
 
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.[Footnote 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 help agency officials weigh the potential risks and 
benefits of granting a waiver in a particular case, as opposed to 
obtaining certified data.[Footnote 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.[Footnote 4] According to 
DOD, no actions have been taken to clarify when waivers should be 
granted. 

DOD's Use of Waivers for Certified Data: 

Using DOD's contract database, we identified 20 waivers valued at more 
than $5 million each in fiscal year 2000.[Footnote 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 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: 

Buying organization: Naval Air Systems Command; 
Number of Contracts: 2 
Waiver value: $437.9 million. 

Buying organization: Naval Sea Systems Command; 
Number of Contracts: 1 
Waiver value: $875.7 million. 

Buying organization: Naval Inventory Control Point; 
Number of Contracts: 6 
Waiver value: $60.3 million. 

Buying organization: Army Tank-Automotive and Armaments Command; 
Number of Contracts: 2 
Waiver value: $234.1 million. 

Buying organization: Army Aviation and Missile Command; 
Number of Contracts: 7 
Waiver value: $1.258 billion. 

Buying organization: Air Force Materiel Command (Aeronautical Systems 
Center); 
Number of Contracts: 2 
Waiver value: $1.571 billion. 

Buying organization: Total; 
Number of Contracts: 20 
Waiver value: $4.437 billion. 

[End of table] 

Table 2: Contracts Selected for Review: 

Service: Air Force; 
Weapon system: F-16 fighter aircraft (foreign military sale to Greece); 
Value: $1.522 billion; 
Contractor: Lockheed Martin.

Service: Navy; 
Weapon system: AEGIS weapon system; 
Value: $875.7 million; 
Contractor: Lockheed Martin.

Service: Army; 
Weapon system: Black Hawk helicopter engines; 
Value: $720.0[A] million; 
Contractor: General Electric.

Service: Army; 
Weapon system: Apache helicopters (remanufacture); 
Value: $462.6 million; 
Contractor: Boeing (McDonnell Douglas).

Service: Navy; 
Weapon system: Tomahawk cruise missiles (remanufacture); 
Value: $408.6 million; 
Contractor: Raytheon.

Service: Army; 
Weapon system: Combat vehicle track; 
Value: $200.1[A] million; 
Contractor: Goodyear Tire and Rubber.

Service: Subtotal. 
Value: $4.189 billion. 

Service: Air Force; 
Weapon system: Predator reconnaissance vehicles. 
Value: $49.3 million; 
Contractor: General Atomics.

Service: Army; 
Weapon system: Wolverine bridge vehicles; 
Value: $34.0 million; 
Contractor: General Dynamics.

Service: Navy; 
Weapon system: T-45 Trainer engine; 
Value: $29.3 million; 
Contractor: Rolls-Royce.

Service: Army; 
Weapon system: Crashworthy extended-range fuel system; 
Value: $25.9 million; 
Contractor: Robertson Aviation.

Service: Army; 
Weapon system: Chinook engines; 
Value: $23.3 million; 
Contractor: Honeywell (Allied Signal).

Service: Navy; 
Weapon system: Orion radar equipment; 
Value: $16.6 million; 
Contractor: Raytheon (Texas Instruments).

Service: Navy; 
Weapon system: F/A-18 E/F Super Hornet spare parts; 
Value: $13.5 million; 
Contractor: General Electric.

Service: Army; 
Weapon system: Hellfire II missiles. 
Value: $12.2 million; 
Contractor: Hellfire Systems.

Service: Navy; 
Weapon system: F-404 turbine blades; 
Value: $9.9 million; 
Contractor: General Electric.

Service: Army; 
Weapon system: Chinook engine spares; 
Value: $7.6 million; 
Contractor: Honeywell (Allied Signal).

Service: Navy; 
Weapon system: Digital data power groups; 
Value: $7.4 million; 
Contractor: Data Link Solutions, BAE Systems/Rockwell Collins.

Service: Navy; 
Weapon system: F/A-18 Hornet radar equipment; 
Value: $6.9 million; 
Contractor: Raytheon (Hughes Aircraft).

Service: Army; 
Weapon system: Apache fire control radar spare parts; 
Value: $6.6 million; 
Contractor: Longbow Limited.

Service: Navy; 
Weapon system: Satellite communications equipment; 
Value: $6.0 million; 
Contractor: Linkabit Wireless.

Service: Total; 
Value: $4.437 billion. 

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

[End of table] 

Reasons Why Waivers Were Used: 

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. 

Data and Analyses Used to Arrive at Prices: 

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 
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,[Footnote 6] learning 
curves,[Footnote 7] and parametric estimates.[Footnote 8] 

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

Table 3: Techniques Primarily Employed to Analyze Contractor Proposals: 

System: Tomahawk cruise missiles (remanufacture); 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Check]; 
Other: [Empty]; 
Comments/Other techniques: Regression analysis of 1992-97 historical 
prices. 

System: T-45 Trainer engine; 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; 
Comments/Other techniques: Reviewed contractor's performance on prior 
contracts. 

System: AEGIS weapon system; 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; 
Comments/Other techniques: Price analysis of historical prices and 
costs; cost analysis for selected elements using uncertified data. 

System: Orion radar equipment; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: F/A-18 E/F Super Hornet spare parts; 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Check]; 
Other: [Empty]; 
Comments/Other techniques: Price analysis on most parts under 
preceding contracts.

System: F-404 turbine blades; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty];. 

System: Digital Data Power Groups; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; [Empty]; 
Comments/Other techniques: [Empty]. 

System: F/A-18 Hornet radar equipment; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; [Empty]; 
Comments/Other techniques: Price analysis of other Navy contracts. 

System: Satellite communications equipment; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: Price analysis of other Navy contracts. 

System: Black Hawk helicopter engines; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: Apache helicopters (remanufacture); 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; 
Comments/Other techniques: Price analysis of historical prices and 
cost analysis of subcontract material. Regression analysis and 
learning curve estimate on historical labor costs. 

System: Crashworthy extended range fuel system; 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; 
Comments/Other techniques: Parametric estimate. 

System: Chinook engines; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: Hellfire II missiles; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: 
Other: 
Comments/Other techniques: Review of procurement history and 
independent government estimate. 

System: Apache fire control radar spares; 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Check]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: Chinook engine spares; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: Combat vehicle track; 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Check]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: Wolverine bridge vehicles; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: F-16 fighter aircraft (foreign military sale to Greece); 
Primary Technique: 
Price analysis using prior certified prices: [Empty]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Check]; 
Comments/Other techniques: Price analysis (prices negotiated during 
competitions between F-16 and other aircraft) and review of model used 
within company to prepare budget estimates. 

System: Predator reconnaissance vehicles; 
Primary Technique: 
Price analysis using prior certified prices: [Check]; 
Cost analysis using uncertified data: [Empty]; 
Other: [Empty]; 
Comments/Other techniques: [Empty]. 

System: Total; 
Primary Technique: 
Price analysis using prior certified prices: 11; 
Cost analysis using uncertified data: 4; 
Other: 5. 

[End of table] 
 
Risk Depends Largely on Certainty of Data Being Used to Support 
Analyses 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.

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. 

Figure 2: Examples Highlighting Factors Impacting Risk: 

[Refer to PDF for image: illustration] 
 
Decreased risk: 

* In purchasing data-processing equipment for about $7.4 million from 
Data Link Solutions, the Naval Inventory Control Point relied on 
certified cost data from a contract negotiated 4 months prior for the 
same equipment. 

* The Army awarded a $2.3 billion contract to Boeing (formerly 
McDonnell Douglas) to remanufacture 269 Apache Longbow helicopters. 
The requirement for certified cost or pricing data was waived on only 
about 20 percent of the contract value, or $462.6 million, while the 
balance of costs under the contract was certified. The government 
waived certified data for the subcontractor's recurring material costs 
as well as the prime contractor's recurring labor costs. On the 
subcontractor material costs, an integrated product team--comprising 
contractor and government representatives, including analysts from the 
Defense Contract Management Agency and the Defense Contract Audit 
Agency-challenged subcontractors to reduce, by as much as 20 percent, 
subcontract prices awarded under a prior remanufacturing contract. As 
an incentive to subcontractors, the team recommended waivers of the 
requirement for certified data. For the recurring labor costs, the 
contractor prepared a regression analysis and developed a learning 
curve to project recurring labor hours on the basis of historical 
experience on over 100 prior remanufactured helicopters. 

* In purchasing $49.3 million worth of Predator unmanned aerial 
vehicles and ancillary equipment from General Atomics, the Air Force 
included a defective pricing clause, allowing the government remedies, 
such as a reduction in contract price, if certified data on which the 
previous contract had relied on were found not to be accurate, 
complete, and current. The Air Force also used an integrated product 
team to help negotiate the price. The team included analysts from the 
Defense Contract Agency. The acquisition was based on certified data 
that were less than a year old for the same equipment. 

* Under a basic ordering agreement, the government ordered 756 
different spare parts in support of the engine of the F/A-18 E/F Super 
Hornet aircraft from General Electric. These parts ranged in value 
from less than a dollar to about $258,000. General Electric's proposed 
price of $14.6 million was developed from an approved cost-estimating 
system. Moreover, consistent with normal practices with certified 
data, the Navy requested that Defense Contract Audit Agency review 
General Electric's proposed costs on the 11 highest value parts, which 
covered about $10.7 million, or about 73 percent of the total 
proposal. The Navy also performed a price analysis of prices paid on 
these 11 parts and most of the other parts under preceding contracts, 
which were based on certified cost or pricing data. Ultimately, the 
price was negotiated at $13.5 million, or about a 7.3-percent 
reduction from the proposed price. 

Increased risk: 

* The Naval Inventory Control Point purchased spare parts for the 
Navy's Orion radar system from Raytheon (formerly Texas Instruments) 
for about $16.6 million. Prices negotiated in 1996 between the Naval 
Air Systems Command and Texas Instruments were used as a basis for 
determining that the contractor's price was fair and reasonable. 
Although the contracting officer believed the 1996 prices had been 
based on certified data, in fact, certified data had not been 
obtained. Rather, we found that the prices for the 1996 contract were 
based on a 1993 commitment by Texas instruments to sell the radar 
parts at a specified price. 

* The Air Force purchased 60 F-16 fighter aircraft from Lockheed 
Martin in support of a foreign military sale to Greece at about $1.5 
billion. This contract called for the production of a new version, 
which included modifications to existing equipment. This configuration 
had not been purchased before with certified cost or pricing data. 
Risk was increased for this situation because the contractor did not 
use its normal cost-estimating system to generate its proposal. 
Instead, the contractor's cost buildup relied on a cost model used to 
prepare budget estimates and certain commercial proposals; the model 
had not been used to prepare price proposals for government contracts 
using certified data covered under the Truth in Negotiation Act. 
Additionally, the waiver was based on comparisons to purchases under 
two similar programs involving sales to Israel and Norway. Under the 
Israeli sale, price had been established through a competition with 
the F-15 aircraft. Norway was still conducting its competition in 
which the F-16 was competing against a European aircraft. Because 
there were differences between the aircraft sold to Greece and those 
sold or offered to Norway, the Air Force also had to make subjective 
comparisons for nonrecurring tasks. 

* The Naval Air Systems Command awarded a $408.6 million contract to 
Raytheon to remanufacture Tomahawk cruise missiles, which involved 
upgrading payload guidance, and propulsion systems. For negotiations, 
the contractor provided the government with high-level cost data. 
Documents in the contract file stated that because Raytheon had never 
remanufactured two of the four variants covered under the contract and 
because the contractor had not prepared a complete price proposal, 
there was some uncertainty Management Agency and Defense Audit 
Contract about the risks being assumed by the contractor. Recognizing 
that uncertainty, and in order to arrive at a price on an expedited 
basis, the Navy included an additional $25.8 million in the contract. 

[End of table] 
 
DOD's Guidance on the Waiver Process Is Not Adequate: 

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 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.[Footnote 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 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. 

Conclusions: 

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. 

Recommendations for Executive Action: 

We recommend that the secretary of defense work with the Office of 
Federal Procurement Policy[Footnote 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 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. 

Agency Comments and Our Evaluation: 

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. 

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.

Signed by: 

David E. Cooper: 
Director: 
Acquisition and Sourcing Management: 

[End of section] 

Appendix I: Scope and Methodology: 

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.

[End of section] 

Appendix II: Federal Acquisition Regulation Provision on Waivers: 

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. 

[End of section] 

Appendix III: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
Acquisition, Technology And Logistics: 
DP/CPF: 
3000 Defense Pentagon: 
Washington, DC 20301-3000: 

April 9, 2002: 

Mr. David E. Cooper: 
Director: 
Acquisition and Sourcing Management: 
United States General Accounting Office: 
Washington, DC 20548: 

Dear Mr. Cooper: 

This is the Department of Defense (DoD) response to the General 
Accounting Office (GAO) Draft Report, GAO-02-502, "Contract 
Management: DoD Needs Better Guidance on Granting Waivers for 
Certified Cost and Pricing Data," dated March 26, 2002 (Code 120040). 
The Federal Acquisition Regulation (FAR) at 15.403-1(c)(4) authorizes 
the Head of the Contracting Activity (HCA) to waive the requirement of 
the Truth in Negotiations Act (TINA) that a contractor certify that 
cost or pricing data he submitted is current, accurate, and complete. 
Such waivers are granted by the HCA in exceptional cases. The GAO 
reviewed 20 such waivers with a total contract value of $4.4 billion. 

Our detailed comments on the recommendations included in the draft 
report are enclosed. We appreciate the concerns expressed regarding 
the age and usefulness of the data and analyses used in arriving at 
fair and reasonable prices on some of the 20 actions reviewed. The 
quality of data used in performing a price or cost analysis must 
always be a matter of concern for the contracting officer, 
irrespective of whether that data has been subject to a TINA 
certification. We also agree that questions regarding the waiver of 
certified data for part of a proposed price, and whether unpriced 
options can be the subject of TINA waivers, need to be addressed. 
However, we do not agree that the FAR should be the vehicle for 
addressing these and other pricing issues that may be encountered when 
considering whether a TINA waiver is warranted. We believe that 
existing guidance and training should be updated and improved without 
revision to the FAR. We intend to issue guidance on these matters to 
the Military Departments and Defense Agencies, and to update the 
Contract Pricing Reference Guides that are used in our training 
courses to reflect the expanded guidance. 

Thank you for the opportunity to comment on the draft report. 

Sincerely, 

Signed by: 

Deidre A. Lee: 
Director, Defense Procurement: 

Enclosure: As stated: 

[End of letter] 

GAO Draft Report:
March 26, 2002: 

"Contract Management: DOD Needs Better Guidance On Granting Waivers 
For Certified Cost And Pricing Data" (CODE 120040): 

Department Of Defense Comments: 

Recommendation 1: The GAO recommended that the Secretary of
Defense work with the Office of Federal Procurement Policy to develop 
guidance to be included in the Federal Acquisition Regulation to 
minimize the risk of inflated pricing when waivers for certified cost 
and 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 waivers are 
granted, and (3) identify what kinds of outside assistance should be 
obtained. 

DOD Response: 

Partially concur. We do not agree that the Federal Acquisition
Regulation (FAR) should be the vehicle for addressing these and
other pricing issues that may be encountered when considering whether 
a Truth in Negotiations Act (TINA) waiver is warranted. We believe 
that existing guidance and training should be updated and improved 
without revision to the FAR. The Director, Defense Procurement (DDP) 
will provide additional guidance to the contracting community 
regarding the approval of a waiver of the requirement for contractor 
submission of certified cost or pricing data. This guidance will be 
included in a memorandum to the Military Departments and Defense 
Agencies that will be issued within sixty days of the publication of a 
final GAO report. It will be posted on the DDP website at the time of 
issuance, and also be distributed throughout the Department via an "Info
Release." Its contents will be incorporated into the next update
of the Contract Pricing Reference Guides, scheduled for completion by 
September 30, 2002. These guides are used in our training courses and 
are also available as reference material on the DDP website. 

Specifically, the guidance will advise that documentation prepared in 
support of a request for approval of a TINA waiver must address any 
risk to the government of inflated pricing that may result from 
granting a waiver, and how such risk will be mitigated in arriving at 
a fair and reasonable price. In addition, contracting officers will be 
reminded of the need for a thorough price analysis and, to the extent 
applicable, cost analysis, of information relied on to support a price 
reasonableness determination in the absence of certified cost or
pricing data. They will be further reminded to avail themselves of the 
expertise that can be provided by the Defense Contract Management 
Agency, Defense Contract Audit Agency, and other government 
contracting activities. 

We do not concur with that part of the GAO recommendation that 
additional guidance be included in the FAR with regard to identifying 
situations that could conceivably support the granting of an 
exceptional case waiver of certified cost or pricing data. We believe 
such a listing would detract from the application of the best 
professional judgment by contracting officers, their management, and 
HCAs. They may be hesitant to agree to waivers that serve the 
government's best interests in situations that are not listed; 
conversely, they may be called upon by contractors to grant waivers in 
circumstances that meet the definition of "exceptional circumstances" 
even though a waiver may not otherwise be in the government's best 
interests. 

The contracting officer, management, and the HCA are each responsible 
for ensuring that the rationale for granting a TINA waiver and the 
analysis techniques used to determine a fair and reasonable price are 
properly performed and documented. None of the findings in the draft 
report indicate that waivers are being granted in an indiscriminate 
manner, without adequate justification. In sum, we believe the 
concerns expressed by the GAO in the draft report can be fully 
addressed in guidance issued to the DoD contracting community without 
modification of the FAR. We believe it may be counterproductive to 
list hypothetical exceptional circumstances, whether in the FAR or 
elsewhere, as it could impede the exercise of professional judgment by 
the HCA. 

Recommendation 2: The GAO recommended that the Secretary of
Defense 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. 

DOD Response: Concur. The recommended clarifications will be
addressed as part of the additional guidance that the DDP will provide 
to the MILDEPs and Defense Agencies in response to recommendation 1. 

Recommendation 3: The GAO recommended that the Secretary of Defense 
survey buying organizations to assess whether additional specific 
issues not covered within existing guidance need to be clarified. 

DOD Response: Concur. The DDP will request the senior procurement 
executives of the Military Departments and Defense Agencies to survey 
their respective buying activities to assess the need for any 
additional amplification of existing guidance regarding the granting 
of TINA waivers. The DDP will include this request in the additional 
guidance that will be provided to the Military Departments and Defense 
Agencies in response to recommendation 1. 

[End of section] 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

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

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

[End of section] 

Footnotes: 

[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. 

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

[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. 

[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. 

[9] Identified in DOD Inspector General's semiannual reports to the 
Congress. 

[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. 

[End of section] 

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