voluntary refund, we believe that the contractor's position should be made known to procurement officials so that in dealings with this company these officials will exercise extreme care and obtain adequate assurance, by verification of the contractor's cost estimates and certifications, that the prices negotiated are fair and reasonable. we did not suggest that the Department of Defense coerce the contractor into making a voluntary refund nor imply that the contractor should be penalized by actions having consequences verging on suspension or debarment from Government contracting. We trust that this information will serve the purposes of your inquiry. Sincerely yours, Joseph Campbell Comptroller General The Honorable William L. Dawson, Chairman Committee on Government Operations House of Representatives APPENDIXES 2A-2E-DEPARTMENT. OF DEFENSE STATEMENTS ON GENERAL ACCOUNTING OFFICE CONTRACT AUDIT REPORTS APPENDIX 2A-DEPARTMENT OF DEFENSE CASES GAO Report B-146813, February 25, 1964 1. Title: "Excessive Interest Expense Included in Price Negotiated for Petroleum Storage Under Contract ASP-21801 with New England Tank Industries of New Hampshire, Inc." (OSD case No. 1741). GAO finding: The contractor made financial arrangements prior to the completion of negotiations under which it would incur less interest expense. The contractor did not make this fact known to the Government during negotiations with the result that the amount of interest expense included in its revised 5-year price for petroleum storage was excessive. GAO estimate of unnecessary costs: $253,100. Time period of GAO report: The contractual action in question took place in 1959. DOD comments on GAO finding: DOD agrees with GAO. DOD comments on costs: DOD agrees with GAO. DOD corrective action: DSA requested a refund of the excessive interest expenses from the contractor. This matter also was referred by DSA to the Department of Justice in 1963 and is still under consideration by that agency. No further action is being taken by DSA to obtain a settlement in accordance with a request by the Department of Justice. DSA has taken the following action to improve petroleum storage procurement: (1) procedures have been developed to insure consideration of Government ownership as opposed to contractor ownership whenever practicable, (2) effective use is being made of multiyear techniques, (3) further emphasis has been placed on procedures for obtaining, analyzing and effectively utilizing cost and pricing data. GAO Report B-146894, June 2, 1964 2. Title: "Illegal Award of Advertised Construction Contract and Excessive Costs for Contract Modifications" (OSD case No. 1863). GAO finding: Work contemplated under an advertised construction contract, for about $12 million after modifications, awarded to the Lane Construction Corp., Meriden, Conn., by the U.S. Army Corps of Engineers, differed so substantially in kind and quantity from that advertised that the contract must be considered as having been illegally awarded. The report concludes that the only proper method of payment is on a quantum meruit basis rather than on the basis of the contract price. GAO estimate of unnecessary costs: Not determined. Time period of GAO report: The contract in question is dated January 28, 1959. The GAO review covered the period from June 1958 to May 1963. DOD comments on GAO finding: There is no disagreement as to the facts of the case. The position of the DOD is, however, that the contract awarded to Lane was entirely legal and proper. All the work that was known and that could be specified was included in the competitive procurement and award was made to the low bidder in accordance with the requirements of the Armed Services Procurement Act and implementing regulations. Subsequently, in accordance with customary and long-established procedures, changes were made when specifications for a different type of lighting were developed. GAO states that award should not have been made until these specifications had been de veloped and the new lighting requirements were included in the original invitation. This, however,. would have entailed a delay that was clearly precluded by military requirements. DOD comments on costs: No unnecessary costs were incurred. DOD corrective action: Because of GAO's authority to make binding certifications as to the balance due under Government contracts, the Army is carrying out GAO's direction to evaluate the contractor's work on a quantum meruit basis. This does not, however, alter the Army and DOD position that the contract was entirely legal and proper and that the contractor should be paid in accordance with the contract terms. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE ARMY GAO finding (a) According to the GAO the work contemplated under an advertised construction contract, awarded on January 28, 1959, for about $12 million after modifications awarded to the Lane Construction Corp. by the U.S. Corps of Engineers, differed so substantially in kind and quantity from that advertised that the contract must be considered as having been illegally awarded. (b) On April 9, 1963, 4 years after award of the contract and approximately 1 year after work under the contract had been completed, the GAO suggested that further payment to Lane (approximately $200,000) be suspended until a decision had been reached in the matter (the greater part of this sum remains to be paid to Victory Electric Works, a subcontractor to Lane. This also was the subject of congressional interest (Senator Long's letter dated October 23, 1964)). (c) In letter dated October 12, 1964, on the DOD position statement which disagreed with the GAO determinations, the GAO affirmed the conclusion stated in the audit report that the contract is invalid for failure to comply with the public procurement statutes and that payment to the contractor on any basis other than quantum meruit (fair value) would be illegal. The GAO added that in its view, the quantum meruit studies called for in the report are necessary prerequisites to any further expenditure of funds under the contract and that unless it, the GAO, was assured that such studies would be undertaken promptly it would be compelled to consider appropriate audit action. GAO estimate of excessive costs: $85,100. Time period of GAO report: June 1958 to May 1963. DOD comments on GAO finding: In letter dated January 11, 1965, Mr. Cyrus R. Vance, Deputy Secretary of Defense, informed the GAO as follows: "The Department of the Army is carrying out the action requested in your decision including the evaluation of the contractor's work on a quantum meruit basis and the withholding of further payment under the contract. However, as indicated in the enclosed memorandum of law, we remain firmly of the view that the contract awarded to the corporation was entirely legal and proper. "There is serious concern within the Department of Defense as to the effect that a decision such as was made by your office in this case will have on the confidence that industry is entitled to place in its contracts with the Government. Where firm contractual commitments are made based on determinations made by contracting agencies which involve the reasonable exercise of judgment and where the contractors are not themselves at fault in regard to such determinations, we strongly feel that these commitments should not be repudiated by the Government. This should be particularly true where the contracts have been completed or substantially performed." DOD comments on cost (a) A quantum merit study was performed by means of a fixed price contract with Atlantic Associates, Inc., a private consulting engineer firm located in Baltimore, Md. (b) The study of Atlantic Associates has been completed and is undergoing review by the Office of the Chief of Engineers and Army Audit Agency. It is indicated that if Atlantic Associates' figures are firm, the fair value of work performed will be $12,228,717 compared with the illegal contract value of $12,223,873. (c) The cost of the Government contract with Atlantic Associates was $2,300. DOD corrective action: None indicated in view of the above circumstances. GAO Report B-133149, June 15, 1964 3. Title: "Excessive Prices Negotiated by the Defense Petroleum Supply Center for Storage of Petroleum in a Commercial Facility at St. Ignace, Mich." (OSD case No. 1812). GAO finding: Prices negotiated under contract ASP-15734 for petroleum storage in a new commercial facility at St. Ignace included excessive amounts of $67,000 for interest on a contractor's construction loan and $223,190 for operating costs. GAO estimate of unnecessary costs: $290,190. Time period of GAO report: The contract in question was awarded on March 19, 1957, and gives the Government renewal options through 1967. DOD comments on GAO finding: DOD agrees that insufficient attention was given in the original negotiations to certain elements of the contractor's estimate of cost, including interest, which may possibly have afforded a basis for negotiating additional reductions, although it is to be noted that extensive competition was solicited and the contractor who received the contract was the lower of two bidders by $993,492 for the 10-year period. DOD comments on costs: No independent estimate made by DOD. DOD corrective action: After thorough review by DSA of the facts of the case it was concluded that there are no legal grounds for seeking a price adjustment and since there was no misrepresentation of any sort, there are no grounds for seeking a voluntary adjustment. DSA was partially successful in negotiating lower renewal prices totaling $204,764 over a period of 7 years. DSA has taken the following action to improve petroleum storage procurement : (1) Procedures have been developed to insure consideration of Government ownership as opposed to contractor ownership whenever practicable, (2) effective use is being made of multiyear techniques, (3) further emphasis has been placed on procedures for obtaining, analyzing, and effectively utilizing cost and pricing data. GAO Report B-146922, August 4, 1964 4. Title: "Improper Reimbursements for Personal Property Taxes to Hoffman Electronics Corp., El Monte, Calif., Under Defense Contracts and Subcontracts" (OSD case No. 1908). GAO finding: Hoffman Electronics Corp. improperly claimed and was reimbursed $55,619 by the military departments for personal property taxes paid to Los Angeles County. In addition, Hoffman retained $3,433 of a tax refund from Los Angeles County which should have been returned to the Government. GAO estimate of unnecessary costs: $59,052. Time period of GAO report: 1953 through 1958. DOD comments on GAO finding: DOD agrees with GAO findings. DOD comments on costs: DOD agrees with GAO's estimate of $59,052 and also is questioning an additional $120,759, for which Hoffman was reimbursed under a subcontract. DOD corrective action: Action has been initiated to obtain recovery from Hoffman. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE GAO review of personal property taxes included in the prices of defense contracts and subcontracts with Hoffman Electronics Corp., El Monte, Calif., disclosed that the corporation had improperly claimed and was reimbursed $55,619 by the military departments for taxes paid to Los Angeles County. Hoffman claimed reimbursement in certain instances because a new tax had been assessed against Government-owned property, whereas the taxes included in the claim primarily related to contractor-owned property and were of a type for which provision hal already been made in the contract prices. In other instances, payment of the taxes had not been protested by Hoffman, as required, which precluded the obtaining of any refund from the county when the taxes on Government property were subsequently declared invalid by the California courts. In addition to the improper reimbursement of $55,619, Hoffman retained $3,433 of a tax refund from Los Angeles County which should have been returned to the Government. The Government improperly reimbursed Hoffman for the taxes covered by this report because of misrepresentations by the contractor that the taxes were on Government-owned property or otherwise came within the "price adjustment" provision in the tax clause. GAO recommendation That the Department of Defense, in coordination with the Department of Justice, take action to obtain appropriate recovery from Hoffman. Statement The Department of Defense agreed with the GAO proposals and stated that it would take appropriate action to recover these amounts. The case was referred to the Air Force General Counsel. Status: On October 23, 1964, Mr. G. Wesselink SAF-GC, as chairman of the California Tax Refund Group wrote to Hoffman Electronics asking them to repay the sum to the United States. In three interim replies, Hoffman Electronics failed to be specific. On May 4, 1965, Mr. Wesselink again advised Hoffman Electronics that unless they paid the amount within 30 days appropriate action would be taken. GAO Report B-146922, September 1, 1964 5. Title: "Unnecessary Costs to the Government for Insurance on GovernmentOwned Inventories and Special Tooling Held by Contractors Under Negotiated Fixed-Price Contracts" (OSD case No. 1884). GOA finding: The Government incurred unnecessary costs of about $1,237,500 over a 5-year period ended in 1961 because the military services required four defense contractors to bear the risk of loss or damage to certain Governmentowned parts, materials, inventories, work in process, and special tooling in their possession under fixed-price contracts. At a fifth major contractor's plant, the Government assumed the risk of loss or damage to such property in the possession of the contractor and, as a result, avoided costs of about $295,800 during a comparable 5-year period. Accordingly, the GAO recommended that the Government take over the risk of loss or damage to this property and eliminate insurance through private insurers. GAO estimate of unnecessary costs: $1,237.500. Time period of GAO report: 1957 through 1961. DOD comments on GAO finding: The GAO takes the position that the Government should assume the risk of loss to this property in order to avoid the cost of premiums paid by contractors for private insurance. This position logically can be based solely on the premise that private insurance is uneconomical and should be replaced by the Government's acting as its own insurer. In our opinion, the sample used by GAO to support this position is totally inadequate. The partial experience of only five contractors, over a 5-year period, was examined by GAO. Their actual loss experience for the period was $12,500, or a little over 1 percent of premium costs, whereas insurance industry averages indicate that losses approximate 50 percent of premium costs. In the year immediately following this period, one of the contractors experienced a loss of $110,000. In addition, GAO did not consider other significant costs. For example, there was little consideration given in the report to the additional costs for such services as inspection, claims adjustment, litigation, etc., which the Government would have to provide if it were to assume the risk of loss to the property in question. In short, the report does not demonstrate that private insurance is uneconomical. DOD comments on costs: The report presents no evidence on which it can be concluded that there were any unnecessary costs. DOD corrective action: No corrective action is necessary. The question of the reasonableness of insurance rates is one of the subjects being considered in our continuing review of insurance coverage in defense contracts. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem In a review of insurance costs incurred by four major contractors during 5-year periods ended in 1961, the GAO found that the Government incurred unnecessary costs of about $1,237,500 because the military services required |