DOD corrective action: After audit, the Navy determined that the excess cost incurred by the Government is $2,986,669, and the contractor has been.advised that this amount has been disallowed. The contractor has appealed. This case has been referred to the Justice Department by the GAO. Since the time of these procurements in 1958 and 1959, DOD procedures for review and approval of subcontracts have been greatly strengthened. Further, pursuant to Public Law 87-653 and the implementing provisions of ASPR, significant policy changes have been made providing for the use of detailed cost and pricing data in the negotiation of both prime contracts and subcontracts in which there is inadequate competition to assure reasonable prices. Navy postscript, May 14, 1965 This is the second of three coolant pump cases for nuclear reactors involving Westinghouse Electric Corp., B-146760, dated December 26, 1962 (OSD case No. 1641). Navy cost-plus-fixed-fee prime contracts with Westinghouse Electric Corp. for components for S5W reactor compartment of nuclear submarines: NObs 72379, dated January 20, 1958. NObs 77026, dated October 1, 1958. Fixed-price subcontracts for 84 nuclear pumps and 72 casings with Westinghouse atomic equipment department (AED) in the total amount of $8.7 million (56-PR-6022-P, 56-PR-6502-P, and change notice No. 2 to latter)-between March 1958 and April 1959. GAO draft report alleging overcharges of $2,241,000 on above fixed price subcontracts, June 4, 1962. Westinghouse reply to GAO draft report, July 10, 1962. Navy suspension of costs under the above contracts in varying amounts totaling $2,930,195, July 25, 1962. Navy reply to GAO draft report, August 4, 1962. Final GAO report stating that in view of Navy withholding no formal exceptions would be issued against the disbursing officer's accounts, but requesting advice prior to release of any of the moneys withheld, and recommending Navy cooperation with Department of Justice to obtain proper recovery, December 26, 1962. DOD statement for the Bureau of the Budget, advising of general Navy concurrence in GAO recommendations, with copy to Representative Dawson, Chairman of the House Government Operations Committee, pursuant to his request, forwarded February 19, 1962. Copy of DOD statement to the Bureau of the Budget forwarded by Navy to the Comptroller General, February 20, 1963. Comprehensive Navy report to the Department of Justice covering this and the first pump case, B-146733 (dated July 23, 1962), December 7, 1963. Conversion of suspension of costs to disallowance of costs by Navy, under the various contracts, in amounts totaling $2,986,669, November 30, 1964. Administrative appeal by Westinghouse from Navy disallowance of costs, transmitting comprehensive memorandum previously furnished by Westinghouse to the Department of Justice, which is coupled with appeal on first pump case, B-146733 (dated July 23, 1962) dated January 28, 1965. Submission of further Westinghouse comprehensive appeal memorandum, dated April 5, 1965, which had also previously been submitted to the Department of Justice and refers to a further memorandum relative to the third pump case, B-146733 (dated February 6, 1964), April 13, 1965. (This latter memorandum has not been furnished to the Navy Department.) This and the other two pump cases, as well as B-146760, dated February 12, 1964, all involve subcontracts placed by the plant apparatus department (PAD) of Westinghouse. They are all under active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard to them. 48-132-65- -49 GAO Report B-118763, June 28, 1963 26. Title: "Failure of the Department of the Navy to Fully Recover Excessive Administrative Cost Allowances Included in Fixed Prices negotiated with Brown-Raymond-Walsh (a joint venture) under contract NOy-83333 for the Spanish base construction program" (OSD Case No. 1315-B) and supplemental report October 21, 1963 (OSD case No. 1315-C). GAO findings: (1315-B) The fixed price negotiated in conversion of a portion of contract NOy-83333 from cost plus a fixed fee to fixed price included administrative cost allowances of $6,700,000 in excess of a reasonable estimate. We reported this to Congress in 1960 (B-118763, Dec. 30, 1960) and the Navy made recovery of $3 million. After completion of the contract $3,700,000 was still outstanding. (1315-C) Negotiated price included administrative expense allowance of $6,700,000 in excess of a reasonable estimate of costs to be incurred. Navy felt it had recovered $5,100,000 of the overpayments through negotiation of lower administrative expense allowances in prices for additional work. Investigation showed recovery of only $3 million. GAO estimate of unnecessary costs: $6,700,000. (Since was was reduced to $3 million according to GAO, the GAO estimate of unnecessary costs should be shown as $3,700,000.) Time period of GAO report: The GAO review was conducted in the latter part of 1958. The review covered the time period of the CPFF construction contract from January 1954 to June 1958. DOD comments on GAO findings: ASN (I. & L.) by letter of January 9, 1963, to GAO stated that since completion of the contract strenuous but unsuccessful efforts had been made to effect further recovery (of alleged overpayments) from the contractor. DASD (procurement) by letter of August 30, 1963, to GAO advised that there was no legal basis for compelling any further repayment by the contractor and that any action by OSD to effect recovery by other than legal means would be inappropriate. The letter further stated that the matter would receive special separate attention by the Renegotiation Board. DOD comments on costs: The first and second draft reports submitted by GAO to Navy on December 24, 1958, and February 13, 1959, found an overpayment of $3 million. The third draft in November 1959 stated that the conversion could add $9.4 million to the costs of completion of construction. However, the report to Congress in December 1960 (OSD case No. 1315-A) used a figure of $6.7 million. The Navy contention, which is concurred in by OSD, is that the GAO's basic premise, that contractor costs under a fixed-price contract should be the same as contractor costs under the CPFF contract, is false; and further that the GAO used incorrect overhead percentages in computing administrative costs and expenses. The Navy, which has had many years experience in administering as well as closing and converting CPFF contracts, contends that the GAO has applied certain equipment writeoff costs and labor costs to "overhead" when they should have been applied in the converted contract, to "direct costs," thereby calculating overhead costs at 38.4 percent as opposed to the Navy's computation of 29.9 percent. The Navy advised the House Subcommittee for Special Investigations, Committee on Armed Services, on April 28, 1961, that it had recovered $5.1 million of the alleged $6.7 million excessive administrative costs by savings effected by addition of work since conversion with little or no administrative cost allowance, and expected to recover more than the $6.7 million before the contract was completed. GAO using the higher overhead rate credited Navy with having recovered $3 million, în lieu of $5.1 million, which would, according to GAO's computations, leave a balance of $3.7 million still to be recovered. No additional costs were recovered by Navy prior to the closing of the converted contract. DOD corrective action: The analysis in the GAO third draft report of November 1959 had the effect of reducing the amount of excessive administrative costs, alleged by GAO, from $9.4 to $6.7 million before the initial report was made to Congress. Further recoveries were made to the maximum extent possible by Navy which caused GAO to report a reduction of $3 million, in lieu of the Navy's computed $5.1 million, in excessive administrative costs. The Renegotiation Board advises that no determination on this case has been made. Navy postscript, May 14, 1965 Since there are no contractual nor other legal rights to further recovery, and since the Navy has exhausted all reasonable efforts to elicit a voluntary refund, any possible further recovery must be effected pursuant to Renegotiation Board proceedings. GAO Report B-146733, September 20, 1963 27. Title: "Overcharges by Westinghouse Electric Corp. for Propulsion Machinery for the Aircraft Carrier U.S.S. Enterprise, Department of the Navy" (OSD case No. 1688) GAO finding: Price proposed by the contractor and accepted by the Navy included unwarranted provision for contingencies. GAO estimate of unnecessary costs: $1,353,440. Time period of GAO report: The GAO draft report is dated October 10, 1962. It reviewed a contract awarded on February 27, 1957. DOD comments on GAO findings: On December 11, 1962, the Under Secretary of the Navy replied to the GAO draft report. On November 27, 1963, DASD (Procurement) replied to GAO's final report. The Navy negotiated for propulsion machinery for the nuclear carrier, Enterprise, with the only firms considered capable of performing the job, General Electric and Westinghouse. Both companies submitted proposals and Westinghouse was selected for further negotiations on the basis of its lower price, better technical proposal and offer to meet an earlier delivery date. Westinghouse's price was considered reasonable on the basis of this competition and in the light of the Navy's comparison of the price with its own independent estimate and the price of comparable equipment. The specific issue raised in this report was whether Westinghouse included "contingencies" in its estimate which it should have disclosed to the Navy during the course of the negotiations. Westinghouse strongly denied that its estimate included contingencies and stated that the amounts in question reflected an increase over an earlier estimate which had been too low and resulted in a loss. The Navy was of the opinion that Westinghouse had not presented adequate facts to refute GAO's finding, but the matter is still in issue. DOD comments on costs: No independent estimate made. DOD corrective action: The matter has been referred to the Department of Justice for further investigation and determination of the Government's legal position. Since the time that this contract was awarded (1957) extensive changes have been made in defense procurement procedures to insure that reliable cost and pricing data is made available by contractors and thoroughly considered by contracting personnel before prices are established in noncompetitive procurement. ASPR requires the certification of data submitted by contractors in support of pricing proposals in noncompetitive procurement. ASPR further provides, however, that such certifications shall not be considered by contracting officials as a substitute for analysis of the contractor's proposals and supporting data. These safeguards, together with Public Law 87-653, will help minimize pricing problems resulting from incomplete or inaccurate cost or pricing data. Navy postscript, May 14, 1965 This case involves inclusion of undisclosed contingency in fixed-price contract with Westinghouse Electric Corp., B-146733, dated September 20, 1963 (OSD case No. 1688). Navy fixed-price contract NObs-73503 with Westinghouse Electric Corp. in amount of $8.17 million for production of propulsion machinery and associated equipment for nuclear carrier U.S.S. Enterprise, dated February 27, 1957. GAO draft report alleging unwarranted provision for contingency in above fixed-price contract, with transmittal letter suggesting that Navy take no action to effect adjustment or recovery or to amend the contract without coordinating such action with the Department of Justice, dated October 10, 1962. Meeting of Westinghouse representatives, separately with Navy and GAO, making presentations urging that certain aspects of the procurement had not been considered by GAO, November 14, 1962. Navy reply to GAO draft report advising that it would consider further a new presentation of Westinghouse position, as submitted in writing; and confirming GAO's agreement to work cooperatively with Navy in determining the validity of the Westinghouse contentions; but that, if unwarranted contingencies were found to be present, Navy would attempt recovery in cooperation with the Department of Justice, forwarded December 11, 1962. GAO final report containing Westinghouse reply, dated October 20, 1962, to the GAO draft report as well as GAO reviews on said reply; advising of referral to the Navy and to the Department of Justice; and recommending to the Navy, in cooperation with the Department of Justice, to take all available and appropriate action to obtain proper recovery, transmitted September 20, 1963. DOD letter to GAO enclosing copy of DOD statement for the Bureau of the Budget, described below, and advising that case was being used to advise cognizant personnel in the military departments and DSA regarding the importance of reviewing contractor's cost estimates even where certificates of accuracy, currency, and completeness of cost and pricing data have been received, dated November 27, 1963. Comprehensive Navy memorandum furnished to the Department of Justice, dated December 20, 1963. Navy letter to the Department of Justice requesting advice on whether unpaid balance of $272,447.54 under the contract should be paid to Westinghouse or withheld, letter dated August 20, 1964. Letter from the Department of Justice advising that payment of unpaid balance under the contract was considered prejudicial to the Government's interests and, accordingly, should not be made, letter dated August 27, 1964. Following numerous consultations between Navy and Department of Justice personnel regarding aspects of negotiation for settlement being conducted by the Department of Justice with Westinghouse, and review of argumentative memorandums and financial information submitted to the Department of Justice, Department of Justice advised Navy that Westinghouse had submitted an offer in compromise of $1,025,000, by letter dated April 26, 1965. Navy recommended acceptance of the Westinghouse offer of compromise, by letter dated May 5, 1965. GAO Report B-146833, December 19, 1963 28. Title: "Excessive Price Paid for Propulsion Reductions Gears Purchased From Westinghouse Electric Corp., Sunnyvale, Calif., Department of the Navy" (OSD Case No. 1711). GAO finding: A contract for gears for an amphibious transport dock vessel included rework cost although Westinghouse had successfully produced identical gears without having to perform any rework. Had Westinghouse advised Navy of this fact, it would have been in a position to obtain a lower price. GAO estimate of unnecessary costs: $64,900. Time period of GAO report: GAO review conducted December 1961 to December 1962. BuSHIPS contracts covered in the review were awarded from June 3, 1959, to November 15, 1960. DOD comments on GAO finding: ASN (I. & L.) by letter of February 18, 1964, to GAO advised that a material fact in this case was not known by the Navy nor the prime contractor negotiators. Namely, that the gears were completed, but accounting records not being currently posted, did not disclose that rework was unnecessary. In these circumstances, the Navy considers a refund unwarranted. DOD comments on costs: While the amount of overpricing is difficult to determine, the Navy concurs that the GAO amount of $64,900 is not unreasonable. DOD corrective action: Demand has been made on the contractor for refund in the amount of $64,900, and he has declined to make any adjustment. However, efforts are being continued to negotiate a settlement. Navy postscript, May 14, 1965 GAO has been asked by the Navy to consider additional facts submitted by Westinghouse, with a view toward withdrawal of the GAO recommendation. GAO Report B-146035, December 31, 1963 29 Title: "Erroneous Purchase of a Technical Data Package From Westinghouse Electric Corp., for $1,010,000, Department of the Navy" (OSD Case No. 1558). GAO finding: The Navy contracted to pay Westinghouse for a technical data package although it had already acquired unlimited rights to use all the significant data included in the package. GAO estimate of unnecessary costs: $1,010,000. Time period of GAO report: The draft report was dated July 28, 1961. It reviewed a contract dated July 8, 1960. DOD comments on GAO finding: DASD (procurement) by letter of March 25, 1964, concurred in a statement by the Navy disagreeing with the GAO finding. Although the Navy had, under earlier contracts, acquired extensive quantities of technical data and the rights thereto, this data was not all-encompassing and was not sufficient to permit the efficient establishment of a completely new production line by another company (Pratt & Whitney). By the terms of this contract, Westinghouse undertook to furnish additional data and to perform other services not required under any prior contract. These services were essential for the economical and timely production of the J-34 engine by Pratt & Whitney and, without these services, additional costs far in excess of the value of this contract would have been incurred. DOD comments on costs: No unnecessary costs were incurred. Navy postscript, May 14, 1965 CHRONOLOGY Navy fixed-price prime contract for $1,010,000 with Aviation Gas Turbine Division, Westinghouse for transfer of technical information, dated July 8, 1960. GAO notice of exception to disbursing officer's accounts, in amount of $655,000 previously paid, and to the balance of $355,000 remaining unpaid under the contract, dated June 12, 1961. GAO draft report confirming exception taken to the entire amount paid or payable under the terms of the contract, report transmitted July 28, 1961. Navy reply to GAO draft report stating that the matter would be investigated, appropriate action taken, and GAO informed of results, reply transmitted November 13, 1961. GAO final report advising that GAO was taking appropriate action to recover the $655,000 already paid by Navy, and reaffirming its advice that remaining payments under the contract be withheld, report dated December 31, 1963. Following GAO reaffirmance of exception upon Navy request to reconsider, Navy withholding, by deductions from Westinghouse vouchers, to $655,000 previously paid, accomplished January 17, 1964. recover DOD letter to GAO requesting reconsideration of its position in view of the strong Navy opposition but forwarding copy of DOD statement for the Bureau of the Budget, classified "For Official Use Only" to avoid possibility of prejudicing the Government in the event of litigation; and copy of such a statement with transmittal letter also furnished to Representative Dawson, chairman, House Government Operations Committee, pursuant to his request; letters dated March 25, 1964. DOD statement for the Bureau of the Budget "For Official Use Only," forwarded March 26, 1964. GAO has advised that it is withholding further action on this case pending the receipt of a brief, for which an opportunity to submit on behalf of Westinghouse was requested in July 1964. Although it was then anticipated that this memorandum would be forthcoming within 2 to 3 weeks, it is understood that this time schedule has not been possible for Westinghouse to meet in view of the priority given to its other GAO cases. |