The Theta Company Spares Contract

Analyze the following cost proposal submitted by the Theta Company for 25 landing gear systems. Answer the questions that follow The Theta Company cost proposal.

The Theta Company was the prime contractor for production of an Army aircraft which was currently being procured in a C-model configuration. To support the various models of the aircraft, the government had negotiated a basic ordering agreement (BOA) with the prime contractor for spares. On 5 February 2017, an unpriced delivery order was issued unilaterally under the BOA for a quantity of 25 ship sets of landing gears from Theta. The delivery order specified Level A packaging and shipment using a government bill of lading (GBL) to a specified Army Depot. Final source inspection and acceptance by the government for both the flyaway production aircraft and the landing gear spares was at the prime contractor's facility.

On 12 August 2017, the prime contractor submitted a firm fixed price proposal in the amount of $725,611.00 for the 25 ship sets. The proposal included the following cost breakdown.

Subcontracted material $479,425.00

Mfg. labor-receiving inspection

800 hrs. @ $15.00 12,000.00

Mfg. labor overhead 149% 17,880.00

Packaging and shipping 7.5% 36,810.00*

Program coordination 2.7% 14,246.00

Subtotal direct costs $560,361.00

G&A 12.6% 70,605.00

Profit 15% 94,605.00

Total price $725,611.00

Unit price: $29,024.00 per ship set

*Level A packaging. Not applicable to production units.

An evaluation of the proposal and review of prices for previous procurements revealed the following:

(a) Procurement history of similar quantities of the production configuration:

2013 - $16,088.00 per ship set/government buy (GFP)

2014 - $16,335.00 per ship set/government buy (GFP)

2015 - $16,810.00 per ship set/government buy (GFP)

2016 - $17,207.00 per ship set/prime contractor buy (production A/C, C-model)

2017 - $19,177.00 per ship set/prime contractor buy (spares, C-model)

(b) C-model landing gear was identical to previous government buys except for a metering pin change inside the strut. The revised specification was available to the government at the time the order was placed under the BOA. The C-model landing gear was suitable for use on prior models.

(c) The complete landing gear was 100% subcontracted by the prime contractor, Theta ($479,425.00 for 25 units).

(d) On 15 July 2017, the landing gear manufacturer shipped two sets to Theta.

(e) Theta Company inspected the landing gear and repackaged the gear to Level A packaging for shipment to the Army Depot.

(f) Final inspection and acceptance was made by the government at the Theta Company facility. Shipment was made to the Army Depot using a GBL.

(g) The Theta Company has an approved accounting system that is in compliance with cost accounting standards. All costs proposed must be consistent with the accumulation of costs in the contractor's job cost system.

NOTE: The BOA included a clause for definitization of the order price within 180 days after receipt of an order. The price proposal was to be submitted within 60 days of the receipt of the order with fact finding/audit and cost/price analysis completed within an additional 60 days. Negotiation of a firm unit price and modification of the order by supplemental agreement was to be completed within the 180 day period. Payment to the contractor was limited to 40% of the proposed price and 60% after a firm proposal was submitted. (Every unpriced contract action (UCA) should have an NTE price stated in the order.)

Based on your analysis of the spares pricing of the landing gear, answer the following questions in detail. Support the answers with your logic, rationale, or calculations.

1. Determine how the cost elements are assigned to an end cost objective in each of the two contract scenarios. Compare the total costs incurred by The Theta Company in each of the two scenarios. Where are the gear costs recovered from the government?

2. What costs are incurred by Theta in the production contract, but are not incurred in the spares contract?

3. What costs are incurred by Theta in the spares contract that are not required in the production contract?

4. What is the cost of the landing gear to the government when the gear is delivered as a part of the production aircraft price? Show your calculation of the number.

5. Is the landing gear ship set price for the 2016 production aircraft buy fair and reasonable? Why?

6. Is the landing gear ship set price for the 2017 spares buy fair and reasonable? If so, how can Theta justify the price increase of 11.4% from 2016 to 2017?

7. What errors were made by the Army in this procurement? By Theta?

8. What alternatives does the Army have? What action do you recommend the Army take?