Contractors Use of General Services Administration Sources and Stores

The third area where the GAO has recommended greater Government participation in the operations of defense contractors is in the buying of supplies, such as office furniture, office supplies, housekeeping and maintenance items that are either carried in the GSA storehouses or listed in the GSA catalogs. The recommendation by the GAO is that if the contractors elect not to use GSA sources and supplies, the allowable cost of such operating supplies charged to Government contracts should be limited to the amount which would have been incurred if GSA procurement sources were utilized.

We have advised the GAO that it is inappropriate in our opinion for the Government to impose such a requirement with respect to any item that the contractor buys for itself and not for the Government and which never becomes the property of the Government. We have stated that our primary objection stems from the fact that it is the contractor and not the Government who has the responsibility of determining what furniture and other operating supplies are most suitable for meeting the contractors' current and future requirements. Any policy which would compel Government contractors either directly or indirectly to buy from the same companies that the Government buys from would compel these companies to use equipment and supplies which may not be best adapted to meet each individual contractor's requirements.

The proposed expansion in the use of GSA supply sources by Government contractors as recommended by the Comptroller General would displace the normal private commercial marketing and distribution channels for these items. As in the case of the other problems that I have discussed in this portion of my statement, this action would almost certainly lead to legitimate charges of intrusion by the Government into the areas of private enterprise.

THE DEFENSE CONTRACT AUDIT AGENCY

Mr. Chairman, in your letter to Secretary McNamara you asked that we provide information on the new Defense Contract Audit Agency. I have available a statement on the Agency which, with your permission, I would propose to submit for the record. A representative of the Office of the Assistant Secretary of Defense (Comptroller) is with me today and can respond to questions on the Audit Agency should you desire to raise them.

Mr. HOLIFIELD. The statement will be received for the record without objection.

(The statement referred to is as follows:)

STATEMENT ON THE DEFENSE CONTRACT AUDIT AGENCY

(a) Establishment

To effect substantial improvements in the contract audit function, the Secretary of Defense directed in December 1964 the consolidation of the military department audit agencies into one DOD unit which would be the sole DOD organization for contract audit. This action is expected to result in uniformity in contract audit management, organization structure, policy direction and resource utilization, as well as consistent cost recommendations and related audit advice to procurement. This single DOD unit has been designated the Defense

Contract Audit Agency (DCAA). The Director, Mr. William B. Petty, and Deputy, Mr. Edward T. Cook, have been appointed by the Secretary from nominations made by the military departments. The Director, DCAA, reports to the Secretary of Defense.

A general plan for the consolidation of DOD contract audit activities into DCAA has been approved and it is anticipated that all personnel to be assigned to DCAA will be placed under the technical control of its Director as of July 1, 1965.

(b) Responsibility

DCAA will be responsible for performing all required contract audit for the Department of Defense and for all DOD components. In general, DCAA will assume the same contract audit responsibilities that now exist in the audit agencies of the military departments. For the most part, this work consists of examining the records, procedures, policies, and practices of Defense contractors to verify the accuracy and acceptability of cost representations made to the Government incident to the award, administration, and settlement of contracts and subcontracts. The results of these examinations will be evidenced by advisory audit reports issued to the Government contracting officers.

DCAA will be assigned responsibility for review of those General Accounting Office (GAO) reports and DOD responses thereto which involve significant contract or contractor activities for the purpose of assuring the validity of pertinent facts contained therein. This will also allow for continuation of the use of GAO reports as one of the audit management tools for evaluating the effectiveness of the contract audit function and for disclosing significant contract audit matters needing improvement or greater emphasis.

In addition, DCAA will continue the established audit policy of full cooperation with representatives of the General Accounting Office in carrying out their responsibilities; DCAA audit reports and associated working papers shall be made available to GAO.

Uniform contract audit procedures will be established for broad application within DOD. Within DCAA, a revised contract audit manual will be issued for the use of all auditors after July 1, 1965. Planning is underway for the establishment of an ASPR cost principles and technical guidance panel to be staffed by audit and procurement personnel to issue cost interpretations and technical guidance for uniform and consistent application by both procurement and audit offices throughout DOD.

Close working relationships will be established with local representatives of the Defense Contract Administration Services (DCAS) and military department weapons system managers.

(c) Authority

The Director of DCAA will report to the Secretary of Defense. Normally this reporting will be done through the Assistant Secretary of Defense (Comptroller) or his deputy.

All contract audit service will be rendered by personnel who are organizationally independent of procurement and contract administration.

Audit reports and audit counsel will continue to be performed on request or in accordance with DOD and departmental policies covering the matter of when an audit is required. As in the past, contract audit reports and counsel will be advisory to the contracting officer. If DCAA believes that a valid recommendation has been disregarded to the detriment of the Government, internal procedures will be provided whereby DCAA may bring the matter to the attention of higher level procurement personnel for consideration of corrective action. Within the established report deadlines, the DCAA auditor will determine the scope and depth of the audit.

(d) Personnel and workload

DCAA expects to have a staff of approximately 3,600 and about 250 operating offices located in most major U.S. cities and in the plants of the larger defense contractors. Arrangements for furnishing contract audit service to certain non-DOD agencies, such as NASA and AEC, will continue. Workload volume is indicated by the statistics of the Army, Navy, and Air Force contract audit organizations for the fiscal year ended June 30, 1964-audit reports covered evaluations of contractor prospective pricing proposals ($24.8 billion) and audits of contractor incurred costs ($19.9 billion). The audits involved over 50,000 contracts and subcontracts held by 6,400 contractors.

Mr. IGNATIUS. I might add that the representative is Mr. William B. Petty who is the Director of the new Defense Contract Audit Agency. He is behind me here this morning.

CONCLUSION

In conclusion, Mr. Chairman, I would like to emphasize once again that Secretary McNamara and our principal officials regard GAO reports as a source of management assistance. Together with our own internal audits, they can point to areas in need of attention and improvement. I can cite a number of instances from personal experience within the Department of Defense where my attention was directed to problems disclosed by GAO reports which enabled me to take the necessary corrective action.

It is inevitable that there will be differences of opinion between the GAO and the DOD, and I have attempted in my statement to review some of our principal disagreements with respect to procurement policy and contracting methods. My associates and I are now prepared to respond to questions that you or the members of your committee may wish to direct to our attention.

Mr. HOLIFIELD. Thank you, Mr. Secretary.

The members of the committee will observe that this is a very complicated matter. Our staff has been studying these problems now for several months. It is the intention of the Chair to recognize any member at any time when he has a comment to make or a question to ask. However, possibly the burden of the questioning will be the staff's responsibility in view of the complicated nature of the matter we are considering. But at this time, I will ask any of the members if they wish to comment or ask any questions.

Mr. Moorhead?

GAO REPORTS ON COMPUTERS

Mr. MOORHEAD. I would like to ask about the use of computers. This is also a matter before another subcommittee of Government Operations of which I am a member.

Mr. Secretary, just to be sure that I understand that correctly, sir, you are discussing here a difference involving defense contractors who are not, you might say, wholly owned by the Government and doing exclusively Government work, you are talking about private agencies which are engaged in other business than defense work; is that correct, sir?

Mr. IGNATIUS. No, sir. The GAO reports here address particularly the question of lease versus buy and they make the suggestion that the Government would save money in effect if these computers were purchased by the Government and furnished to the contractors as Government-furnished equipment. I am familiar with the bill, indeed I testified on it in this room several weeks ago. The Department of Defense has supported the Brooks bill. But we did point out to Chairman Brooks in our testimony that we felt there were several features of the bill which pose very serious problems from an administrative standpoint.

One of the features that we pointed out was this feature here, Mr. Moorhead. We feel that it would be administratively difficult, indeed

we feel it would be wholly impractical for the Government to make decisions with respect to the furnishing of computers and it is not just the computer, but it is all of the associated programing that goes with it, the so-called software that it would be quite impractical for the Government to furnish this equipment to its contractors.

We feel also that this is contrary to the general policies that we have been trying to emphasize-namely, to place responsibility on the defense contractors. We are buying management as well as production, and we want to negotiate contracts that give contractors a positive incentive to manage their affairs and their resources in the most economic way possible.

Mr. MOORHEAD. What is your opinion, sir, with respect to the corporations which do exclusively defense work?

Mr. IGNATIUS. I think that with respect to companies that are largely doing defense work in those instances where these contractors have firm fixed-price contracts, or fixed-price incentive contracts with very positive incentives, we must be very careful about telling them what kind of computer equipment they ought to use.

I think by the same token, Mr. Moorhead, that where the work is predominantly of a cost-reimbursement nature, we have an obligation as stewards of the public funds to look rather carefully. We intend to do so, we have done so. I believe that we need to look particularly carefully at lease versus buy decisions in order to assure ourselves that the most economic approach is being taken.

The point I would make here, sir, is that we have had a very dramatic change from 38 percent of our dollars on the basis of the CPFF type of contract down to about 10 percent today. Whereas under the CPFF contract, we had to look very carefully at costs, as we convert these to fixed price, we feel the contractor has a positive incentive to make economic decisions which are in his interest and in ours as well. Mr. MOORHEAD. In that switch, I congratulate you and commend you.

Thank you, very much.

Mr. HOLIFIELD. Mr. Horton?

REPORT ON ILLEGAL CONTRACT

Mr. HORTON. Just a couple of questions I want to ask.

On page 9 of your statement, you refer to the Andrews Air Force Base contract, and you make a statement that 5 years after the award of the contract and 2 years after the completion of the work, the GAO stated that the contract was illegal. And then further on down, you state that

we consider that under these circumstances, the action of the Government withholding funds was inappropriate.

Was the position of DOD with regard to this case based on the fact that GAO did not make its findings or recommendations until 5 years after the work was completed-2 years after the completion of the work and 5 years after the award of the contract, was that the basis on which GAO arrived on that, the time alone?

Mr. IGNATIUS. No. Time was one of the factors, and the other was the nature of the procurement itself. At the time this contract was entered into, there was apparently one aspect of it that hadn't been

finally determined-namely, the type of lighting to be used on the runways, and the specifications as I understand the case were not fully definitive in that regard.

Subsequently, this was made definite, and a change was made in the contract to incorporate the kind of lighting that was desired in the runway. This change, as I recall, amounted to about 7 percent of the contract price. Our position, then, dealt both with the fact that the contract had been completed some time ago, and secondly, as we often find in our procurements, that we didn't have in this urgent procurement everything pinned down to the final detail. We believe that to withhold action or to defer awards can introduce time delays in important programs. We felt in this case-this was an Army Corps of Engineers case that it was entirely proper to proceed, and this was done. The situation which confronted us was not untypical of what often can occur in defense contracting.

Mr. Bannerman is thoroughly familiar with this case and may wish to supplement that.

Mr. BANNERMAN. The main reason we disagreed with GAO in this case was that we considered at the time we made the contract, we considered after we received the GAO report, and we still consider that this was a perfectly legal contract-that there was nothing illegal whatsoever about the contract.

Second, there is no allegation by GAO that the illegality, if any, had anything to do with the contractor. He performed the contract in good faith in accordance with its terms. Hence, we think it is totally inappropriate for the Government at this stage of the game to withhold money.

Mr. HORTON. I understand that there is a difference between GAO and DOD on the legality of the contract.

Mr. BANNERMAN. That difference still exists.

Mr. HORTON. The thing I was trying to pinpoint, too, was whether or not the question of time was involved. And I think both you and the Secretary have indicated that time did have something to do with your position; that is, timeliness of the report from GAO.

Now, do you have any sort of an experience with GAO with regard to the timeliness of their reports?

Mr. BANNERMAN. Most of their reports are submitted a matter of 2 to 5 years, and in rare cases longer, and in a few rare cases, shorter, after the transactions on which they are commenting occurred. I say this without really being critical of it, because I think the nature of their operation is likely to require that sort of thing. But in this case that we are talking about, it was 5 years after the award was made. The thing that was challenged was the legality of the original award. Mr. HORTON. So it does make a difference if it was unreasonably late before the report is received.

Mr. BANNERMAN. It certainly makes a difference to the contractor.

DEFENSE CONTRACT AUDIT AGENCY

Mr. HORTON. Now, you put into the record this Defense Contract Audit Agency statement which I have not had a chance to read yet. But what will be the relationship of the audit agency's functions and the functions of GAO? Is this a supplement to or is it a duplication of the work done by the GAO?