Radio Corp. of America, B-133374, July 13, 1961.

4. The Burroughs Corp., referral, B-146747, of April 1964, was settled for $190,000.

5. The Hawk Tool & Engineering Co., referral, B-146803, was closed on April 7, 1965, because, in the Department's opinion, litigation was not justified.

6. The AiResearch Manufacturing Division referral, B-146945, of October 1964, was closed on May 21, 1965 and the matter returned to the Air Force at its request for administrative settlement.

7. The Northern Radio Co., referral, B-133133, of July 1959, went to trial and on April 27, 1965, the Court published an opinion in favor of the defendant.

8. The Thompson Ramo Wooldridge, Inc., referral, B-133307, of May 10, 1960, was closed on May 21, 1965 because the Air Force had settled the matter administratively.

9. The Westinghouse Electric Corp., referral B-146733, was settled by compromise in the total amount of $1,025,000.

I have also been requested to comment on the GAO legal memorandum concerned with the "duty of cost-type contractor to exercise due care in making reimbursable expenditures." This Department does not take exception to either the general principle or the authorities cited in the memorandum, although as noted the cases do not relate to Federal contracts. However, even though Federal cost-type prime contracts are carefully supervised, expenditures generally being subject to the approval of the contracting officer and to cost renegotiation, it can be broadly stated that costs which are either unreasonable or unnecessary are not reimbursable. For a detailed discussion of the problem of reimbursable costs, and the exceptions to the general rule, your attention is invited to "Government Contracts" by McBride and Wachtel, and in particular to chapters 23 and 24 which deal with "Allowable Costs."

Sincerely yours,

JOHN W. DOUGLAS, Assistant Attorney General.

(Whereupon, at 12:20 p.m., the hearing on the foregoing matter was adjourned to reconvene at 10 a.m., Wednesday, May 19, 1965.)

COMPTROLLER GENERAL REPORTS TO CONGRESS ON AUDITS OF DEFENSE CONTRACTS

WEDNESDAY, MAY 19, 1965

HOUSE OF REPRESENTATIVES,

MILITARY OPERATIONS SUBCOMMITTEE

OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C. The subcommittee met, pursuant to recess, at 10 a.m., in room 2247, Rayburn Office Building, Hon. Chet Holifield (chairman of the subcommittee) presiding.

Present: Representatives Chet Holifield, Frank J. Horton, and Delbert L. Latta.

Also present: Herbert Roback, staff administrator; Douglas Dahlin, attorney. Paul Ridgely and Robert McElroy, investigators. Mr. HOLIFIELD. The subcommittee will be in order.

General Campbell has been-you just saved the day.

Come in, General. You know what happened to the general that was late to battle?

Mr. CAMPBELL. I am sorry, Mr. Chairman, but I was delayed-and also got lost.

Mr. HOLIFIELD. Well, on that latter ground of getting lost in this building, you are absolved.

Mr. ROBACK. As long as we do not get lost in the subject matter.

STATEMENT OF HON. JOSEPH CAMPBELL, COMPTROLLER GENERAL OF THE UNITED STATES; ACCOMPANIED BY ROBERT F. KELLER, GENERAL COUNSEL, GENERAL ACCOUNTING OFFICE; WILLIAM A. NEWMAN, JR., DIRECTOR, DEFENSE ACCOUNTING AND AUDITING DIVISION; AND CHARLES M. BAILEY, DEPUTY DIRECTOR

Mr. HOLIFIELD. Mr. Campbell, you have had opportunity since our former meeting to read the testimony of Secretary Paul Ignatius? Mr. CAMPBELL. Yes, sir.

Mr. HOLIFIELD. And you are now ready to

Mr. CAMPBELL. I have a statement

Mr. HOLIFIELD (continuing). Respond to some of the questions? Mr. CAMPBELL. I have, Mr. Chairman. My statement is rather lengthy

Mr. HOLIFIELD. Well, let us hold the statement off because

Mr. CAMPBELL. I do not know. Perhaps you would like to have it put in the record; it may answer some of your questions.

Mr. HOLIFIELD. Well, we would like to have it and we will put it in the record.

Off the record just a minute. (Discussion off the record.)

Mr. HOLIFIELD. Back on the record.

In view of the fact that this statement has not been presented to us before now, and we have not had a chance to go through it, it may be necessary for us to ask you questions later after we have had a chance to study the complete statement.

In the meantime, I am going to ask Mr. Roback to start off with some of the pertinent questions in regard to Secretary Ignatius' statement.

GAO POLICY ON EXCEPTIONS TAKEN TO ACCOUNTS

Mr. ROBACK. Mr. Campbell, we discussed somewhat last time the position of the office regarding the administrative procedure that is embodied in defense contracts. There was a case concerning Lockheed Missile & Space Co., which was the subject of correspondence between you and the company, in which you apparently had changed a position, the later position being that you did not want to interfere with the decision by the contracting officer as to the allowability of certain costs relating to the use of executive aircraft. Can you restate for this committee what is the position of the General Accounting Office where an issue arises which involves an action by the office, and that action affects the procedural provisions in the contract?

In other words, what is the policy significance of your communication to Lockheed Missile & Space Co.?

Mr. CAMPBELL. Was that the December 15 letter?

Mr. ROBACK. This is a letter of January 7, 1965, on B-146948.

(The letter referred to follows:)

COMPTROLLER GENERAL OF THE UNITED STATES,

Washington, D.C. January 7, 1965.

LOCKHEED MISSILES & SPACE CO.,

A Group Division of Lockheed Aircraft Corp.,

Sunnyvale, Calif.

(Attention Mr. John E. Cavanagh, company counsel.)

GENTLEMEN: Reference is made to your letter dated December 2, 1964, relative to an October 1964 report which we submitted to the Congress on the question as to the reasonableness of charges made under Government cost-reimbursabletype contracts with your company, covering allocated portions of overhead expense which consisted of costs incurred in the maintenance and operation of company-owned and leased aircraft.

The report indicated that the cost of maintenance and operation of the fleet of aircraft during the year 1962 approximated the sum of $1,029,000 as compared with the approximate amount of $164,000 which would have been expended for air transportation during that year if the company had used equivalent commercial air transportation facilities. Your letter takes exception primarily to the following statements made at pages 23 and 24 of the report:

"We recommend that, in negotiation of the allowable overhead rate for 1962, the Air Force disallow all Lockheed's costs of operating its fleet of aircraft that are in excess of the costs that would have been incurred if maximum use had been made of commercial aircraft, chartered aircraft, and Government-sponsored air services and if a minimum capability for unusual or emergency needs had been maintained. We recommend also that the Air Force make similar reviews for prior years and seek recovery of any unwarranted charges disclosed by those reviews. We further recommend that the Air Force apply these same criteria in determining rates for 1963 and subsequent years.

"Pending advice from the Air Force as to the actions taken in response to our recommendations, credit in the disbursing officers' accounts will be withheld, to the extent permitted by statute, for amounts by which the costs of Lockheed's executive aircraft operation exceeded the costs for comparable commercial, chartered, and Government-sponsored aircraft services."

You contend that these statements can only be construed as an attempt to deprive Lockheed of its contractual right to have the contracting officer make an objective determination of reasonableness and allocability of costs. You indicate that most of your contracts with the Government, in effect during the year 1962, contain a disputes clause and a provision for negotiation of overhead rates by the contractor and the contracting officer, with a further provision that any failure of the parties to agree on overhead rates would be considered a dispute concerning a question of fact for decision by the contracting officer within the meaning of the disputes clause.

You refer to the disputes clause as permitting an appeal from the contracting officer's decision to the Secretary of the Department concerned within 30 days after receipt of a copy of the contracting officer's decision, and as providing that the contractor should be afforded an opportunity to be heard and to offer evidence in support of his appeal. You also refer to decisions of our Office and the courts which recognize the principle that administrative decisions rendered under the disputes clause of Government contracts are to be accorded finality except where it is determined that the decisions cannot be sustained under the standards of review as set forth in section 1 of the act of May 11, 1954, 68 Stat. 81, 41 U.S.. 321. With reference, particularly, to the problem here involved, you cite the case of Climatic Rainwear Co. v. United States (88 F. Supp. 415), as one in which the Court of Claims enunciated the rule that, where the contract calls for a decision by the contracting officer, the contractor is entitled to his personal and independent consideration of the matter in question. Our Office has recognized similar rulings of the Court of Claims where Government contracts have provided for decisions on certain matters to be made by a designated official (see 18 Comp. Gen. 870; and 19 id. 358).

In our consideration of claims presented by Government contractors, we ordinarily refuse to express an opinion on the merits of such claims if the procedure of the contract disputes clause has not been followed and is still available and the question of allowability would depend upon the determination of questions of fact as distinguished from questions of law. Both the contractor and the Government are bound to follow the procedure set out in the contract for the administrative settlement of disputes on questions of fact and the contractor must, of course, exhaust its administrative remedies under the disputes clause before making an appeal either to our Office or the courts. See, generally, B. H. Beacon Co. v. United States (189 F. Supp. 146); and Happel v. United States (176 F. Supp. 767, affirmed, 279 F. 2d 88). Only in a situation where the claim involves solely a determination of questions of law would the courts or our Office have immediate jurisdiction to consider the case on its merits. See Atlantic Carriers v. United States (131 F. Supp. 1).

However, where a decision has already been made by a contracting officer which is in favor of the contractor, our Office and the cognizant administrative officials would have the right and the duty to question the contracting officer's decision if there appeared to be a reasonable basis for concluding that it should not be accorded finality under the applicable standards for judicial review of administrative decisions under contract provisions making such decisions final and conclusive on questions of fact arising under the contract. Also, where, as here, there exists a reasonable doubt as to the correctness of amounts previously paid to a contractor on claims which have been approved by the contracting officer, it is our view that the accounting officers of the Government would be justified in recommending a course of action on similar current claims which is consistent with what they believe to be necessary to protect the interests of the Government.

On reconsideration of the statement in our report to the Congress which refers to withholding credit in the accounts of disbursing officers, we agree that it is unnecessary to withhold credit in the disbursing officers' accounts pending the outcome of further negotiations between your company and the contracting officer, or action pursuant to the contract provisions for the administrative settlement of disputes concerning questions of fact arising under your contracts. We do not agree that we have no right to state our own opinion as to the allowability of reimbursable costs, although we do agree that this should not and was not intended to prevent the contracting officer from making the personal and independent determination of allowability to which the contractor is entitled. In regard to the suggestions made in the second to the last paragraph of your letter, you are advised that we would have no objection to your furnishing of