Mr. HOLIFIELD. Mr. Abbadessa, we are going to have to adjourn now. I have duties on the floor. I want to thank you, gentlemen, for your appearance here this morning, and we may want to submit some questions by letter to you for answers Mr. ABBADESSA. Certainly, Mr. Chairman. Mr. HOLIFIELD (continuing). In order to conclude. Mr. ABBADESSA. Thank you. (The following documents were submitted for the record:) Hon. WILLIAM L. DAWSON, U.S. ATOMIC ENERGY COMMISSION, Chairman, Committee on Government Operations, House of Representatives. DEAR MR. DAWSON: On May 31, and July 23, 1963, the Comptroller General issued reports to the Congress of the United States relating to procurements of aluminum caps and cans by two AEC contractors from the Aluminum Co. of America. The reports disclosed that the negotiated prices for the caps and cans exceeded Alcoa's costs by more than 60 percent, and recommended that AEC negotiate with Alcoa for the purpose of obtaining equitable price adjustments. We informed you of our intention to seek voluntary price adjustments from Alcoa in our letters to you of July 18 and September 12, 1963. The initial meeting with Alcoa's chairman of the board and its vice president and controller took place on November 30, 1963. This was followed by several other meetings as well as interchanges of letters. In the aggregate, these efforts proved unproductive and we have concluded that further efforts to obtain voluntary price adjustments would be equally unproductive. We have therefore terminated our efforts in this regard and have so informed the Aluminum Co. of America. Attached for your information is a copy of our letter to Alcoa which gives the highlights of this negotiation and summarizes the factors leading to our decision to discontinue further efforts to obtain a voluntary price adjustment. If you would like to have further information regarding this matter, we will be pleased to provide it upon request. Sincerely yours, Mr. S. T. GUSTINE, Vice President and Controller, JOHN V. VINCIGUERRA U.S. ATOMIC ENERGY COMMISSION, DEAR MR. GUSTINE: By letter dated February 12, 1964, we set forth our proposed basis for negotiating a voluntary price adjustment on aluminum caps and cans procured from Alcoa by two AEC operating contractors. In an effort to develop a proposal that would be acceptable to Alcoa as a basis for negotiation, we accorded to certain Alcoa conditions previously communicated to us even though they represented significant departures from normal Government concepts of profit measurement and evaluation, and we accepted and used the Alcoa-prepared financial data that was available to us even though some of this financial data was not accepted by the General Accounting Office in its reports. Briefly, we proposed a negotiation between a low parameter of profit at 10 percent of cost and a high parameter of profit at 29 percent of cost. We used financial data provided by Alcoa to GAO and financial information from Alcoa's published annual reports in determining that a profit on the order of 29 percent of cost would produce a 20-percent return on capital employed-our understanding being that Alcoa's normal profit objective is a 15- to 20-percent return on capital employed. By letter dated April 9, 1964, you advised us that the high parameter of profit at 29 percent of cost was unacceptable. You maintained that the figures we used from Alcoa-prepared financial data were inappropriate for evaluating profits on manufactured products. By letter dated June 16, 1964, we requested that you provide us the additional financial data that Alcoa considered necessary for us to use in evaluating the profit it made on impact products produced for our contractors. Your answer, by letter dated August 4, 1964, does not include the additional financial data we requested, which data Alcoa had previously indicated we needed in order to be able to appropriately evaluate the profit it made. Instead, you state: "The profit on shipments of impact products to G.E. and Du Pont as shown by Alcoa in summary form to the GAO and included in their reports represents a pretax return on capital employed in the range of 25 percent to 30 percent. We consider such a return to be reasonable for these products. If you agree that these rates of return are fair, we would be willing to meet with your representatives to further discuss the basis for our determination of the rate of return realized. If you feel that a 25 percent to 30 percent pretax return on capital employed is excessive for these procurements, we question whether further discussions would serve any useful purpose." We of course have absolutely no basis for agreeing, in advance and without data on which to make a sound judgment, that a return of 25 percent to 30 percent on capital employed is a reasonable profit. In fact, what we do know of Alcoa's financial operations tends to lead us to the conclusion that such a profit would be excessive. Since you require that we agree in advance that a 25 percent to 30 percent return on capital employed is a reasonable profit as a condition to merely discussing with us the basis for your determination that such was the rate of return realized, we are forced to conclude that further attempts on our part to obtain a price adjustment for AEC contractor procurements which have been the subject of GAO reports would be to no avail. Accordingly, we will consider closed the matter of obtaining voluntary price adjustments on the procurements which were the subject of GAO reports and will so advise the congressional committees who have expressed an interest in the outcome of our efforts to obtain a price adjustment, as well as the General Accounting Office and the Bureau of the Budget. Sincerely yours, R. E. HOLLINGSWORTH, U.S. DEPARTMENT OF JUSTICE, Re Wyman-Gordon Co. Unwarranted inclusion of tooling costs in the price of case extrusion cylinders procured by Bendix Corp., under AEC cost-type contracts. ATOMIC ENERGY COMMISSION, Washington, D.C. (Attention: General Counsel). DEAR SIRS Reference is made to your letter of June 10, 1964, calling the attention of this Department to a report of the Comptroller General of the United States to Congress dealing with the unwarranted inclusion of tooling costs in the price of case extrusion cylinders procured by Bendix Corp., under an AEC costtype contract. These unwarranted costs were charged in various purchase orders by Wyman-Gordon Co. We have reviewed the matter at length and have decided that there is no basis for a lawsuit. We are, therefore, returning your file and noting ours as closed. Yours very truly, JOHN W. DOUGLAS, Assistant Attorney General, Civil Division. cc: General Accounting Office, Washington, D.C. (Attention: General Counsel). MEMORANDUM OF UNDERSTANDING BETWEEN AEC AND ALCOA CONCERNING THE FEDERAL PROCUREMENT REGULATIONS AND AEC PROCUREMENT REGULATIONS RELATING TO THE PRICING OF NEGOTIATED PROCUREMENTS Alcoa will comply with the requirements of FPR 1-3.807 and AECPR 9-3.807 and the related contract clauses in FPR 1-3.814 and AECPR 9-3.814 subject to the following understandings: A. Alcoa will submit certified cost data (see attached form of certificate and cost breakdown) in the six categories previously agreed upon, as shown in attachment No. 1, for procurements in excess of $100,000 unless the price negotiated is based on adequate price competition or established catalog or market prices of commercial items sold in substantial quantities to the general public. B. As a general rule, AEC will use price analysis in lieu of cost analysis to determine reasonableness of price in procurments under $100,000; except that, for procurements between $50,000 and $100,000, where AEC or any of its operating contractors anticipate that the item involved will be the subject of repetitive procurements in this price range, Alcoa will submit cost data upon request, subject to the provisions of paragraph A, provided that such request is made in writing by AEC or the operating contractor involved and includes a statement to the effect that follow-on procurements are anticipated. It is understood and agreed that such a statement is not a commitment to place additional orders. C. A single purchase order or contract shall constitute a procurement for purposes of applying the monetary limits in A and B above. This definition governs even though the purchase order includes more than one item, as long as the items are related; i.e., component parts of an assembly. D. The obtaining of price proposals from others will not be construed as limiting Alcoa's agreement to provide the cost breakdowns required under A and B above. If after receipt of such proposal the contracting officer determines that competition is not adequate, he may request and Alcoa will furnish cost data; provided, however, that the request includes a statement by the contracting officer that in his opinion adequate competition as defined in FPR and AECPR was not obtained and reasonableness of prices quoted cannot be established solely by price analysis. E. Initial development orders which AEC and its contractors place with Alcoa are generally firm fixed-price orders for prototype items, usually in a small dollar range, and are not considered by AEC to be the type of special item where prior agreement on the part of the contractor to accept cost-type or price redetermination orders is required under AECPR 9-3.807-53. Nevertheless, it is understood that Alcoa is not committed to accept orders that are costtype or redeterminable. F. All procurements for which Alcoa was required to submit cost or pricing data shall contain a clause giving AEC the right to examine pertinent books, records, and other data for the purpose of determining that the cost or pricing data submitted were accurate, complete, and current, as prescribed by FPR 1-3.814-2 and AECPR 9-3.814-2. AEC will ordinarily use the Air Force or such other Government agency as may be cognizant for the performance of such audits on an assist basis. G. The examination-of-records clause giving GAO the right to examine Alcoa records will continue to be included in both AEC prime contracts and subcontracts under its cost-type prime contracts in accordance with current statutory requirements. H. Prior to transmittal to the AEC, any report generated by an audit, or review of Alcoa's cost breakdown, shall be reviewed with Alcoa for purposes of ascertaining the accuracy thereof and the presence of proprietary information therein. If Alcoa is satisfied that no proprietary information is contained therein, it may be furnished by the AEC to its prime operating contractor only on the expressed conditions that such contractor will use the information in the report solely in connection with the activity under the operating contract involved and that such contractor will not divulge such information to any other parties. If in Alcoa's opinion, proprietary information is contained in the report, such information shall be separately reported and in no event shall any such information be furnished to AEC's operating contractor. This memorandum of understanding shall be applicable to procurements from Alcoa by all of AEC's field officers and their prime operating contractors. It shall remain in effect for 1 year, at which time it shall be reviewed by AEC and Alcoa in the light of actual experience. 1. Metal value (current published price for aluminum alloy or alloys involved). 2. Outside purchases or services. 3. PCF (prime cost of fabrication). 4. UB (unabsorbed factory burden). 5. PAE (plant administrative expense). 6. G.A. & S.E. (general administrative and selling expense). 7. Profit. 8. Selling price. ATTACHMENT 2-CERTIFICATE OF COST OR PRICING Data This is to certify, that, to the best of my knowledge and belief: (a) Complete cost or pricing data1 current as of have been considered in preparing the Date Date and submitted in writing to the contracting officer or his representative; (b) All significant changes in the above data which occurred since the aforementioned date through 3 have been similarly submitted; and no more recent significant change in such data was known to the undersigned at the time of executing this certificate; and (c) All of the data submitted are accurate. (Date of execution) Note that 18 U.S.C. 1001 prescribes criminal penalties for making false representations to the Government. 1 For definition of "cost or pricing data," see AECPR 9-3.807-51. 2 Describe the proposal, quotation, request for price adjustment, or other submission involved, giving appropriate identifying number (e.g., RFP No.). 3 This date shall be as close to the date of agreement on the negotiated price or fee as is practicable. NOTE. See FPR 1-3.807-4 and AECPR 9-3.807-4. Mr. HOLIFIELD. The meeting is adjourned. (Whereupon, at 12 noon, the hearing in the above-entitled matter was adjourned, to reconvene Tuesday, March 25, 1965.) COMPTROLLER GENERAL REPORTS TO CONGRESS ON AUDITS OF DEFENSE CONTRACTS TUESDAY, MAY 25, 1965 HOUSE OF REPRESENTATIVES, MILITARY OPERATIONS SUBCOMMITTEE, OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. The subcommittee met, pursuant to recess, at 10:05 a.m., in room 2247, Rayburn Office Building, Hon. Chet Holifield (chairman of the subcommittee) presiding. Present: Representatives Chet Holifield, William S. Moorhead, and Frank J. Horton. Also present: Herbert Roback, staff administrator; Douglas Dahlin, attorney; Paul Ridgely and Robert J. McElroy, investigators. Mr. HOLIFIELD. The subcommittee will be in order. We will continue our hearings this morning on General Accounting Office reports to Congress on audits of defense contracts. Our witness this morning is the Honorable Daniel M. Luevano, Assistant Secretary of the Army for Installations and Logistics. Mr. Secretary, I see you have a prepared statement, so will you proceed with it. STATEMENT OF DANIEL M. LUEVANO, ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS); ACCOMPANIED BY BRIG. GEN. JOHN GOSHORN, DIRECTOR OF PROCUREMENT; AND BRIG. GEN. H. A. MILEY, DIRECTOR OF PROCUREMENT AND PRODUCTION, HEADQUARTERS, U.S. ARMY MATERIEL COMMAND Mr. LUEVANO. Thank you very much, Mr. Chairman. The Army is deeply appreciative of this opportunity to appear before this committee, to discuss the subject of General Accounting Office reports to the Congress on audits of Army contracts and the actions which we have taken independently, or as the result of these reports. I have with me today, Brig. Gen. John A. Goshorn, the Director of Procurement in my office, and Brig. Gen. Henry A. Miley, Director of Procurement and Production, Headquarters, U.S. Army Materiel Command. Additionally, there are present representatives from the Materiel Command, the Corps of Engineers, and the Army Audit Agency in the event the committee should desire additional information relating to any of the reports specified for the Army, or in which the Army may be implicated. |