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Finally, Navy does not agree with the GAO suggestion that Newport News should have attempted to obtain a reduction in Westinghouse's price when Newport News reduced its price proposal to Westinghouse for the engines. Presumably, Newport News would not have received the award in the absence of a price reduction. Its initial quotation was an "approximate price" that was higher than a firm price quotation of its competitor, Baldwin-LinaHamilton Corporation. The competitor's lower price, GAD notes, was used by Westinghouse in preparing its price quotation to Newport News for the elevators. Also, as GAO indicates, Newport News would not have been aware of the amount Westinghouse had included in the price negotiated for the elevator engines. Thus, the lower price quoted by Newport News was not a gratuitous concession but a competitive figure aimed at obtaining an order that could well have gone to another firm. Under these circumstances, the submission by Newport News of a lower quotation to Westinghouse obviously afforded no basis for Newport News to request price reduction from Westinghouse. If Newport News had attempted to obtain a price reduction, it is probable that the engines would have been awarded to another source.

APPENDIXES 4A-4C-ADDITIONAL STATEMENTS FOR

THE RECORD BY CONTRACTORS

APPENDIX 4A-STATEMENT BY HONEYWELL, INC.

HONEYWELL, INC.,

AERONAUTICAL DIVISION,

Minneapolis, Minn., July 10, 1965. Hon. CHET HOLIFIELD, Chairman, Military Operations Subcommittee on Government Operations, House

of Representatives. DEAR MR. CHAIRMAN: We have reviewed the testimony of the General Accounting Office on July 8, 1965, concerning report B-146761 and would appre ciate the opportunity to add a few brief comments to be included in the record of the hearings concerning the Comptroller General reports to Congress on audits of defense contracts.

We are pleased to note that the General Accounting Office testimony on July 8, 1965, concerning report B-146761 apparently accepts the long-term pricing method utilized by the Aeronautical Division of Honeywell, Inc.

However, two points are brought out in the July 8, 1965, GAO testimony to the House Military Operations Subcommittee which should be clarified.

I. Page 48 of the GAO testimony states:

However, this company generally refused to furnish cost data to the Government's prime contractors and subcontractors or permit representatives of the military departments and the National Aeronautics and Space Administration to review its records of costs previously experienced in producing these gyroscopes."

Honeywell did not allow access to its records because prices were not established based on an evaluation of current costs. Prices were the same to all customers, or lower on subsequent procurements, and were not on the basis of current cost. There is no doubt that our prices would have been accepted for early procurements when we were in a loss or nominal profit position. However, we were extremely concerned that current cost would be utilized later to reduce our prices below the competitive level when costs were at a lower point on the learning curve; this would prohibit achieving a fair return even if the predicted market materialized.

This problem was discussed with Government personnel many times. It was evident that Government representatives were not willing to accept the long-term pricing concept because procurement regulations did not prohibit this approach but they also did not clearly and positively recognize this pricing concept. Of course, this problem is now resolved as a result of the long-term pricing agreement with DOD and NASA.

II. Page 49 of the GAO testimony states :

"Since production for the Government has absorbed a substantial portion of the development costs of the GG-49 gyros through overhead charges, recovery of such costs under subsequent contracts and subcontracts would result in duplicate payment of the contractor for these costs."

This statement infers that Honeywell may have recovered the same costs twice. This is completely erroneous. Any cost once recovered through overhead was not again charged to the GG-49 gyroscope. The GG-49 gyroscope costs, as reported in the GAO report and the costs reported by Honeywell, include only costs specifically inventoried and charged to this product plus the proper and applicable share of divisional and corporate overhead.

Inasmuch as our reply dated March 12, 1964, to the GAO report B-146761 and included as appendix II in the report as well as our testimony to the House Military Operations Subcommittee on June 1, 1965, specifically set forth Honeywell's position in detail, it does not appear necessary to comment further. Sincerely,

W.T. NOLL,

Vice President and General Manager. 1072

APPENDIX 4B—STATEMENT BY MELPAR, INC.

MELPAR, INC.,

Falls Church Va., July 16, 1965. Hon. CHET HOLIFIELD, Chairman, Military Operations Subcommittee, Committee on Government Oper

ations, House of Representatives, Washington, D.C. MY DEAR MR. CONGRESSMAN: I appeared before your subcommittee on June 3 and presented a statement regarding GAO audit report B-118695. On June 17, 1965, the Comptroller General filed letter B-155327 with your subcommittee in which he commented, among other things, on this audit report. In view of his further statement on the subject, I am enclosing a one-page supplementary comment for inclusion in the printed record, if you would be good enough to include it.

Thank you very much for the opportunity afforded by your subcommittee to air this GAO audit report in public. We feel that the audit report was most unfair in its content and publicity, and we hope that the enclosure will help to rectify the situation. Respectfully yours,

AUSTIN G. Roe, House Counsel. Enclosure.

SUPPLEMENTARY STATEMENT BY AUSTIN G. ROE, HOUSE COUNSEL, MELPAR, INC.,

TO THE MILITARY OPERATIONS SUBCOMMITTEE, COMMITTEE ON GOVERNMENT OPERATIONS, HOUSE OF REPRESENTATIVES

The public hearings with respect to GAO audit reports, which includes audit report B-118695, dated February 7, 1964, appear to have reduced the issues in this report to two matters :

1. Whether Melpar's records at the time of pricing subcontract P.O. 509 were suitable for use in projecting future labor costs for purposes of pricing a subcontract on a firm fixed-price basis, and

2. Whether Melpar was contractually authorized to place orders for materials from suppliers prior to the subcontract pricing negotiations which took place on October 10–12, 1960.

The first issue involves solely a matter of judgment on which opinions may differ. Melpar's accounting and records system had the approval of the Defense Department auditors. The after-the-fact opinion of the GAO auditors that the records should have been different is hardly a sound basis for advocating a reopening of a contract.

The second issue involves simply a question as to whether in fact Letter Contract 509 was issued by General Dynamics to Melpar on August 26, 1960 as represented by the GAO (Reference: p. 79 of GAO letter B-155327, dated June 17, 1965, to the chairman, House Military Operations Subcommittee). The letter contract was dated August 26, 1960 by General Dynamics and sent to the AF contracting officer for approval; his approval was given on the 17th of October ; the letter contract was then sent to Melpar, signed and returned to General Dynamics on the 27th of October. (A photocopy of the date and signature pages is attached). It is clear that Melpar did not have the authority to place orders for the materials prior to the subcontract pricing negotiations as represented by the GAO.

This is one example of the kind of mistake which underlies the audit report. There have been three audits and three supplementary audits of the subcontract. It would seem that there should be an end to this.

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APPENDIX 4C—STATEMENT BY NATIONAL ASSOCIATION OF

WHOLESALERS
NATIONAL ASSOCIATION OF WHOLESALERS,

Washington, D.C., July 13, 1965.
Hon. CHET HOLIFIELD,
Chairman, Military Operations Subcommittee, House Government Operations

Committee, U.S. House of Representatives, House Office Building, Wash

ington, D.C. DEAR MR. CHAIRMAN: In a letter of June 17, 1965, the Comptroller General of the United States, Hon. Joseph Campbell, forwarded commentary on testimony which I presented to your subcommittee on June 3, 1965. Basically, the Comptroller General contends that any procurement practice which results in a lower price to the Government should be adopted. The Comptroller General made no reference to:

1. Existing Government policies which pertain to unfair competition with private enterprise.

2. Participation of smaller business enterprises in Government work through contracts or subcontracts.

3. The extra services wholesalers provide customers based on commodity knowledge-a service absent in GSA supply activity.

4. Prompter delivery service of wholesale distributors.

5. Pressure placed on wholesalers to violate the Robinson-Patman Act or lose sales to the Government contractor.

6. Comingling of GSA supplied and private wholesale-distributor supplied items requiring two stocks of identical items. Misuse of each type would be

a violation of law. Not one of the above listed issues was discussed by the Comptroller General. Again, his entire approach is based on the "price justifies the means" principle.

We wish to make one further observation. By use of GSA stocks, according to the Comptroller General the effect would be to "extend competition by placing the item in a more competitive basis nationally.” We are hopeful that your subcommittee is wise enough to know competition nationally means competition by large nationwide corporations. There is no device that could deprive smaller business enterprises of participation in Government contracts to equal the suggestion of the Comptroller General. Smaller businesses cannot compete nationally because they serve regional or local market areas.

It is our hope, Mr. Chairman, that the subcommittee will establish guidelines so that in the future the Comptroller General's recommendations will reflect basic national policies as determined by the Congress. Sincerely yours,

WILLIAM C. MOCAMANT. O

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