consisting of $428,438 for two of the Queen Airs and the L-60 aircraft and $20,487 for travel performed on the third Queen Air and the Jet Star aircraft. Lockheed has not accepted this disallowance action and is to advise the Air Force negotiator of its position in this matter within 90 days. (b) Lockheed's key operations on the west coast are separated by considerable distance and their widely separated operations are interrelated in support of all major contracts emphasizing the need for 24-hours-a-day, 365-days-a-year availability of aircraft transportation to meet any emergency at any time. Lockheed could have been criticized for not providing this margin of safety in the performance of high risk scheduled commitments where a slip in launch schedule could involve national security and be damaging to the worldwide leadership image and prestige of the United States. During 1962, the contractor supported 42 launches from the Atlantic Missile Range and 34 launches from Vandenberg. The scope of the contractor's responsibilities encompassed extensive launch pad modifications between launches and configuration control between coast-to-coast operations. The company aircraft were utilized for (1) the transportation of urgently required hardware and classified documents to launch sites; (2) the delivery of urgently required contractor supplied hardware, spare parts, and data to subcontractor's facilities; (3) transportation of priority mail, test reports, blueprints, et cetera, during critical program development periods; (4) the movement of both Lockheed's and their suppliers' personnel whose services were of necessity required at launch site for the resolution of technical problems and the negotiation of changes related to installation and checkout and launch functions; and (5) the rapid transportation of executive- and middle-management personnel to numerous locations for on-site observations and determinations required in the performance of contract obligations. (c) We must concur with the contractor, that the responsibility for program management and success rests with the contractor and the judgments of management, at a point in time, must be evaluated with considerations given to the risk of failures of performance, as well as to the provisions of our procurement regulations. (d) Contingent on the exercise of reasonable controls by Lockheed and prudent use of its aircraft in the support of contractual commitments, we conclude that the benefits derived by Lockheed and the Government through the use of executive aircraft by Lockheed warrants continued operation of the aircraft, particularly when a comparison is made between the rate per hour resulting from our recent overhead negotiations, and that rate which Lockheed would probably have experienced had it chartered similar services. (e) We are unable to concur with GAO's criteria for disallowance of Lockheed's costs for operating its fleet of aircraft for 1962, for 1963, and subsequent years. (f) In reaching the conclusions contained in the report, based entirely on a comparison between the cost of commercial flights and the cost of Lockheed's maintaining an executive fleet, GAO failed to give consideration to the factors influencing companies such as Lockheed in the United States, who utilize approximately 30,000 business aircraft. The reasons for the use of private aircraft by Lockheed are not all the factors to be considered. They are, however, sufficient to illustrate that a comparison of costs incurred in maintaining a company operated fleet versus cost of transportation via scheduled commercial or charter service airlines is not necessarily the sole criterion on which to judge reasonableness. Status: Case closed. Policy The Air Force has issued instructions to its procurement personnel regarding determining the reasonableness of costs of contractor owned or operated aircraft fleets and cautions contract administration activities that the current trend for increased use within industry of privately owned or operated aircraft make this a matter for particular attention in determining the allowability of such costs in the pricing of Government contracts. While the cost of equivalent commercially available transportation is one of the specific factors considered, others include: (1) Whether travel requirements could be met by using commercially available transportation; (2) The convenience and time saved by having aircraft immediately available for high-salaried executives and for emergency business requirements; (3) The proximity of airline terminals to sites of contractor activity, considering total time and cost of transportation; (4) Whether the number and type of aircraft are reasonably required; and (5) Whether the aircraft are used for non-Government requirements, such as commercial sales promotion and good will. The entire matter has been referred to the Armed Services Procurement Regulations Committee for their consideration and appropriate ASPR coverage. GAO Report B-133307, November 19, 1964 8. Title: "Inventions Not Disclosed and Confirmatory Royalty-Free Licenses Not Obtained Under Selected Research and Development Contracts With Certain Divisions of Thompson Ramo Wooldridge, Inc." (OSD case No. 2020). GAO finding: The contractor did not comply with various patent provisions of its defense contracts and Government administrative personnel did not establish the necessary surveillance to assure compliance with contract terms. For example, the contractor had failed, in violation of contract terms, to disclose to DOD 18 inventions which were made up to 31⁄2 years earlier. For some of these 18 inventions, the contractor had patent applications on file. Also, disclosures were delayed for unreasonable periods up to 4 years. These violations jeopardized the Government's patent rights. GAO estimate of unnecessary costs: No estimate given. The Government may have paid unnecessary royalties but this is not known. Time period of GAO report: 1955 through 1963. DOD comments on GAO finding: DOD agrees. DOD comments on costs: DOD agrees. DOD corrective action: Revision 5 of ASPR, dated May 11, 1964, made changes aimed at improving patent administration such as establishing stringent time limitations on the contractor for disclosing inventions and for filing patent applications. Similarly, the amount to be withheld for failure to submit or delay in submitting invention disclosures was increased. This subject is also under study at this time by the Armed Services Procurement Regulations Committee which is considering other changes to insure full compliance with patent terms. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem The GAO found that (1) certain divisions of Thompson Ramo Wooldridge, Inc., were not complying with various patent provisions of its defense contracts and that Government administrative personnel had not established the necessary surveillance to assure compliance with contract terms; (2) the contractor had failed, in violation of contract terms, to disclose to the Department of Defense 18 inventions which had been made under defense contracts up to 31⁄2 years earlier; (3) for some of these inventions, the contractor already had patent applications on file, and (4) in another such violation, the contractor delayed disclosures of numerous inventions to the Department of Defense for unreasonable periods of up to 4 years. The GAO concludes that as a result of such violations, the Government's patent rights were jeopardized since it was not aware of inventions in which it had contractual rights to royalty-free use or to obtain title to the invention. Consequently, the Government may have lost its rights to such inventions because of intervening patents by third parties. GAO recommendations That the Department of Defense amend the patent provisions of the Armed Services Procurement Regulation to include contract clauses requiring adequate financial sanctions in the form of liquidated damages in the event of contractor failures or delays in complying with contractual patent provisions. Statement Regarding the GAO's comment that the contractor failed to submit invention disclosures to the Government the OSD response to the draft report recognized the fact that present surveillance techniques are to some extent inadequate. The ASPR Patents Subcommittee is currently reviewing this matter. Regarding the GAO finding that confirmatory licenses are not submitted to the Government promptly, the ASPR Patents Subcommittee is now preparing a recommendation to the ASPR Committee on this matter. With respect to the GAO recommendation that "ASPR patent provisions should include financial sanctions in the form of liquidated damages," the ASPR Committee is currently exploring this matter also. NOTE. This case is similar to OSD No. 2049. Status: Case open pending completion of study by ASPR Subcommittee. OSD has agreed to advise GAO when study is completed. Policy As noted in the reports, the Department of Defense has taken action to insure that contract patent terms are fully complied with by contractors. Revision 5 of the Armed Services Procurement Regulation dated May 11, 1964, imposed stringent time limitations on the contractor for disclosing subject inventions and for filing patent applications. The contractor must furnish the contracting officer a written disclosure of each subject invention within 4 months after conception or actual reduction to practice, whichever occurs first under the contract, together with a written election as to the filing of a patent application. If the contractor elects to file a patent application, he must do so within 6 months, and he must notify the contracting officer at the time of filing. Also, the amount to be withheld for a contractor's failure to submit or delay in submiting invention disclosures was increased. In addition, the Department of Defense is studying the general question of patent administration and has under consideration, along with other alternatives, your recommendation with respect to liquidated damages. GAO Report B-133386, November 27, 1964 9. Title: "Inventions Not Disclosed and Confirmatory Royalty-Free Licenses Not Obtained Under Selected Research and Development Contracts with Lockheed Missiles & Space Co., Division of Lockheed Aircraft Corp., Sunnyvale, Calif." (OSD case No. 2049). GAO finding: The contractor was not complying with various patent provisions of its defense contracts and Government administrative personnel had not established the necessary surveillance to assure compliance with contract terms. For example, Lockheed failed, in violation of contract terms, to disclose to the Government 58 inventions which had been made up to 23 months before the time of the GAO review and delayed disclosures of numerous inventions for unreasonable periods of up to 46 months. These violations jeopardized the Government's patent rights. GAO estimate of unnecessary costs: No estimate. The Government may have paid royalties unnecessarily but is not known for a fact. Time period of GAO report: January 1960 through June 1963. DOD comments on GAO finding: DOD agrees. DOD comments on costs: DOD agrees. DOD corrective action: Revision 5 of ASPR, dated May 11, 1964, made changes aimed at improving patent administration such as establishing stringent time limitations on the contractor for disclosing inventions and for filing patent applications. Similarly, the amount to be withheld for failure to submit or delay in submitting invention disclosures was increased. This subject is also under study at this time by the ASPR Committee which is considering other changes to insure full compliance with patent terms. GAO Report B-125016, December 21, 1964 10. Title: Failure To Recover Unpaid Royalties Retained by Collins Radio Co.. Cedar Rapids, Iowa" (OSD case No. 1846). GAO finding: Collins retained about $406,000 in unpaid royalties under 40 of its contracts with the three military services which should have been returned to the Government. GAO estimate of unnecessary costs: $406,000. Time period of GAO report: 1947 through 1957. DOD comments on GAO finding: DOD agrees that the prices of certain contracts with Collins included amounts for royalties expected to be paid but which were not paid because of the subsequent settlement of antitrust litigation involving two major licensors. DOD comments on costs: DOD's estimate of costs closely parallels GAO's estimate. DOD corrective action: Some of the contracts contained a clause expressly providing for the refund of any unpaid royalties. In compliance with this clause Collins has refunded approximately $144,000 of unpaid royalties. The military departments are conducting a further review to determine whether a basis exists for obtaining recovery of the balance. In addition, the ASPR was revised in 1963 to specify when and under what circumstances a patent royalty recapture clause should be used. Also, the DOD audit agencies surveyed over 300 major defense contractors to determine whether similar unpaid royalties were being retained by contractors. It was found that such conditions existed in only a few instances and, where necessary, corrective action was taken. It is believed that the ASPR changes noted above and the widespread attention given this subject should prevent a recurrence of similar situations in the future. ADDITIONAL COMMENTS BY THE DEPARTMENT OF AIR FORCE Problem GAO states that Collins Radio Co. retained, about $406,000 in unpaid royalties under 40 contracts with the triservices which should have been returned to the Government. Of this sum, about $211,170 pertained to 11 Air Force contracts. GAO recommendations (a) That all recoveries of unpaid royalties retained by Collins because of its own negligence in not refunding the related amount include interest. (b) Under the GAO draft report, DOD was requested to direct the military agencies to examine into unpaid royalties at other major defense plants and institute recovery action where appropriate. GAO now requests the Secretary of Defense to provide a report summarizing the findings of his auditors at each of the contractors' plants examined. Statement DOD responded to GAO by letter of December 11, 1963, on the draft report. GAO was advised that recovery of unpaid royalties would be sought in all cases where a valid legal or equitable basis for refund existed. GAO was also advised that "the military audit agencies were requested on October 18, 1963, to examine the unpaid royalties situation at major defense plants and recovery action will be taken where appropriate." GAO was further advised that a "refund of royalties clause" had been developed and inserted in ASPR 9-112 as of November 15, 1963. This clause requires a contractor to furnish a statement, during negotiation of the contract, as to royalties to be payable thereunder, and before final payment, to file a statement as to actual royalties paid or required to be paid. Review of these reports affords protection of the Government's interest in this area. These reported actions were responsive to the recommendations in the GAO draft report. Status: Case open, the Air Force will seek refunds totaling about $211,200 as recommended by GAO; $6,299 has already been recovered on a legal basis under one contract. We will seek an additional $42,352 under four contracts having "recapture" clauses (a legal basis). The balance under six remaining contracts will be sought on an equitable basis. GAO Report B-146761, January 19, 1965 11. Title: "Unreasonably High Prices Paid by Government Prime Contractors and Subcontractors for GG 49 Gyroscopes Purchased From the Only Qualified and Approved Source, Honeywell, Incorporated, Aeronautical Division, Minneapolis, Minnesota" (OSD case No. 1938). GAO finding: Government prime contractors and subcontractors paid prices for GG 49 gyroscopes which were about 46 percent higher than costs experienced and available to Honeywell at the time the prices were established. Honeywell refused to furnish cost data for the GG 49 gyroscopes or to permit representatives of the military departments access to its cost records. GAO estimate of unnecessary costs: Not stated by GAO. DOD comments on GAO finding: DOD investigation into the circumstances surrounding the negotiations in question is still underway to determine whether a refund is in order as recommended by GAO, and, if so, to what extent. DOD comments on costs: DOD investigation is in progress. DOD corrective action: Public Law 87-653 would now apply to such negotiations. Implementation of the statute in the Armed Services Procurement Regulation clearly would require the contractor to furnish current cost data and certify as to its currency and accuracy. Since the time of these negotiations, DOD pricing agreement has been reached with Honeywell which provides for the furnishing of cost data for items such as GG 49 gyroscopes which are developed, either all or in part, at company expense. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF AIR FORCE Prime and subcontractors negotiated prices with Honeywell, a sole-source supplier, without adequate information on prior costs, effective price competition or other evidence to support the reasonableness of the prices negotiated. AC Spark Plug, a subcontractor to Burroughs Corp. under contract AF 33 (600)-40540, awarded a subcontract to Honeywell for gyros for a negotiated price of $510,400, which price GAO found to be $171,000 in excess of recent cost figures available to Honeywell. GAO recommendations (a) That the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration initiate action to obtain for the Government appropriate price adjustments of the excessive amounts paid Honeywell for GG 49 gyros. (b) That the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration have their contracting officials review the remaining procurements of GG 49 gyros from Honeywell and initiate action to obtain for the Government appropriate price adjustments from Honeywell for any excessive amounts disclosed in the review. (c) That the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration require their contractors to comply with their contractual agreements to include in all subcontracts and purchase orders that require cost certifications and defective pricing clauses the right of audit by their respective offices, and that contracting officials be instructed to withhold approval of all subcontracts and purchase orders which do not conform to the provisions of the prime contracts. (d) Where a Government prime contractor or subcontractor refuses to furnish accurate, complete, and current cost and pricing data on the grounds that the item to be procured is proprietary in nature, GAO recommends that the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration require contracting agencies to determine whether the position of the prime contractor or subcontractor has merit, and to investigate and propose alternate means by which the Government may obtain an item which will satisfy its requirements at prices which are fair and reasonable. Statement A review was made of all procurements of GG 49 gyroscopes made from Honeywell on behalf of the Air Force, 47 in all, from inception of the product to the formalization of the long-term pricing agreement concluded between the Triservice/NASA Committee and Honeywell in March 1964. This review disclosed no evidence that Honeywell made any misrepresentations or provided any misleading information to the Air Force or its prime or subcontractors. It is, therefore, Air Force opinion that there is neither a legal nor equitable basis for seeking any refund. (This covers GAO recommendations (a) and (b).) As to recommendation (c), we do require contractors to comply with their contractual agreements relative to pricing of subcontracts. The contractual clauses referenced below contain flow-down provisions that require upper tier contractors to include similar provisions in subcontracts and purchase orders. |