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GAO Report B-146892, August 28, 1964

30. Title: "Rent-Free use of Government-owned Facilities in Production of Commercial Aircraft Engines by Pratt & Whitney Aircraft Division of United Aircraft Corp., East Hartford, Conn.” (OSD No. 1559).

GAO finding: During the period of 1951 through 1959, Pratt & Whitney used Government-owned facilities on a rent-free basis in the production of about 10,700 commercial piston aircraft engines. Such rent-free use was granted on condition that any benefits to commercial production which resulted from the use of Government-owned facilities would be reflected in the prices of military engines. There were in fact such benefits, and in the absence of a specific identification thereof in the record of negotiation of prices paid by the Government for military engines, the GAO report concludes that they were not reflected in such prices. GAO estimate of unnecessary costs: $5 million.

Time period of GAO report: GAO review during unknown period prior to 1961. Time frame of DOD actions reviewed 1951 through 1959.

DOD comments on GAO finding: In the absence of fraud, misrepresentation or mutual mistake there is no basis for setting aside the various contract actions authorizing rent-free use of the Government-owned facilities and fixing prices for the production of Government engines. The rent-free use was known to both parties. They also knew that substantial military engineering and other costs were being allocated to commercial work with resulting benefits to the Government. Such benefits were reflected in the prices paid by the Government for military engines and are considered to have offset rent-free use of the Government facilities.

DOD comments on costs: DOD concludes that prices and costs were fair and that there were no unnecessary costs.

DOD corrective action: The business relationship with Pratt & Whitney Aircraft is complex and under constant review and surveillance. The primary objective is to obtain good aircraft engines at equitable prices. DOD considers that this objective is being met.

Navy postscript, May 14, 1965

The Navy believes the position stated herein to be sound; therefore, further action is not contemplated.

GAO Report B-146780, January 13, 1964

31. Title: "Improper Disposition of Refunds of Group Insurance Premiums by Grumman Aircraft Engineering Corp., Bethpage, N.Y." (OSD case No. 1727).

GAO finding: Grumman did not give the Government credit for a portion of refunds it received from a group insurance plan it maintains in its company. Since about 90 percent of Grumman work was on Government contracts during this period, the majority of the refunds would have accrued to the benefit of the Government, thus reducing the contract price.

GAO estimate of unnecessary costs: $449,000.

Time period of GAO report: The GAO draft report was dated February 1963. The GAO reviewed 1952 to 1961, inclusive, and recommended that the Navy inquire into the disposition of prior group insurance refunds dating to 1940.

DOD comments on GAO findings: ASTSECNAV (FM) responded on behalf of SECDEF by letter of March 26, 1964, to GAO. DOD agreed with GAO.

DOD comments on costs: The credits due the Government for 1953 through 1961 were found to be $421,000, rather than $449,000 as reported by GAO. Similar credits from 1940 through 1952 were $712,000.

DOD corrective action: The amounts applicable to the period from 1953 through 1961 are being deducted from current Grumman billings to the Government. Demand has been made for recovery of the credits applicable to the years prior to 1953.

Navy postscript, May 14, 1965

The Navy has disallowed $421,000 (applicable to the period from 1953 through 1961) from 1962 overhead costs. Demand was made for recovery of credits in the amount of $713,806, applicable to the years prior to 1953; however, GAO has concurred in this action not being pursued. The recovery action was terminated since accounting for those insurance costs incurred prior to 1953 was accepted as reasonable and allocable, based on supplemental data provided by Grumman.

GAO Report B-146733, January 31, 1964

32. Title: "Overpricing of Ship Propulsion Boilers Purchased Under Fixed-Price Contract NObs-76301 Negotiated With Foster Wheeler Corp., New York, N.Y.," Department of the Navy (OSD case No. 1773).

GAO finding: The price that the Bureau of Ships negotiated with Foster Wheeler for boilers amounting to $1,722,300, was at least $132,200 greater than the costs Foster Wheeler could reasonably expect to incur plus profit at the rate of 10 percent of such costs, the rate used in Foster Wheeler's price proposal. GAO estimate of unnecessary costs: $132,200.

Time period of GAO report: The GAO draft report was dated May 15, 1963. It covered the buying of main propulsion boilers in October 1958.

DOD comments on GAO finding: DASD (procurement) by letter of April 6, 1964, concurred in the basic GAO finding that the contract price was excessive because of unsatisfactory cost data submitted by the contractor.

DOD comments on costs: Navy computations indicate avoidable costs of $141,000.

DOD corrective action: Abundant policy guidance has been issued and put into effect during the period of more than 5 years since the negotiations in question took place. There are now mandatory requirements for prenegotiation audit reviews to verify contractor's cost and pricing data. Reviews of contractors' estimating systems have also been expanded. ASPR 7-104.41 now provides a contractual right for contracting officers to examine contractors' records for the purpose of verifying cost and pricing data in fixed-price noncompetitive procurements. By this means, practical effect can be given to ASPR 7-104.29 which provides for price adjustment in cases in which the contracting officer determines that the contract price was significantly increased because of effective cost or pricing data.

These safeguards, together with Public Law 87-653, will help minimize pricing problems resulting from incomplete, inaccurate, or noncurrent cost or pricing data.

With respect to obtaining an adjustment in this case, the matter has been referred to the Department of Justice, for examination before any administrative action is undertaken to obtain a refund.

Navy postscript, May 14, 1965

In November 1964, the Department of Justice entered a civil suit in the Federal District Court of New York. The Government is seeking double damages in the amount of $282,000. As of this date, no trial date has been set.

GAO Report B-146733, February 6, 1964

33. Title: "Overpricing of Nuclear Reactor Components Purchased From Westinghouse Electric Corp., Pittsburgh, Pa., Under a Cost-Plus-a-FixedFee Contract Awarded by the Bureau of Ships, Department of the Navy" (OSD case No. 1787).

GAO finding: Plant Apparatus Division, Westinghouse, under Navy cost-plusa-fixed-fee contracts, awarded a subcontract for 35 pumps and 16 casings to Atomic Equipment Division (AED), Westinghouse, without obtaining AED's estimated cost of performance or information as to actual incurred costs in prior production of similar components.

GAO estimate of unnecessary costs: $705,000.

Time period of GAO report: GAO review conducted January 1963 to June 1963. Navy prime contracts (5) involved in this report were dated March 5, 1957, through June 4, 1959.

DOD comments on GAO finding: ASN (FM) by letter of August 8, 1963, to GAO agreed with the GAO findings that, although the subcontracts were let on the basis of price proposals obtained and recommended by the prime and also comparisons with the price of prior procurements, the price of this subcontract was not reasonable.

DOD comments on costs: The GAO report alleges that information was available at the time of award of the subcontract that indicated a profit of 10 percent could be realized and the price could still have been $705,000 less. An after-thefact audit by Navy auditors indicates that the excess profit above 10 percent is approximately $500,000.

DOD corrective action: This matter has been submitted to the Department of Justice for the purpose of coordinating action to effect recovery from the contractor. The ASPR Committee has designated a subcommittee to study pricing between divisions of a prime contractor with particular reference to allowance of costs under CPFF contracts.

Navy postscript, May 14, 1965

This is the third of three coolant pump cases for nuclear reactors involving Westinghouse Electric Corp., B-146733, dated February 6, 1964 (OSD case No. 1787).

Navy cost-plus-fixed-fee prime contracts with Westinghouse for components for S5W reactor compartment of nuclear submarines:

NOb's 72250, dated March 5, 1957.

NOb's 72379, dated January 30, 1958.
NOb's 72401, dated April 23, 1958.
NOb's 77111, dated March 23, 1959.

NOb's 77127, dated June 4, 1959.

Fixed-price subcontract for 35 pumps and 16 casings (including exercise of option for 10 casings) with Atomic Equipment Division (AED) of Westinghouse for $3.99M (56-PR-18007-P and Change Notice No. 2 thereto. Between April and June 1959.)

GAO draft report alleging overpricing of $705,000 on fixed-price subcontract; June 18, 1963.

Navy reply to GAO draft report forwarded to GAO indicating general concurrence with recommendations; August 8, 1963.

GAO final report, B-146733, indicates its understanding that Navy had withheld sufficient funds on Westinghouse; however, no separate suspension or withholding has been made by Navy in this third pump case. Report also requests Navy and Department of Justice to cooperate in recovery and asks to be advised of any proposed settlement; February 6, 1964.

DOD acknowledgment to GAO of DOD concurrence in final report; February 10, 1964.

DOD advice to Representative Dawson, chairman of House Government Operations Committee, pursuant to his request; February 13, 1964.

Comprehensive Navy report to the Department of Justice; October 16, 1964. It is understood that a comprehensive Westinghouse memorandum, dated April 5, 1965, relative to this third pump case has been submitted by Westinghouse to the Department of Justice. The Navy has not received a copy of such memorandum, presumably because no disallowance has yet been taken in this case and hence there is no administrative appeal now pending.

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.

GAO Report B-146760, February 12, 1964

34. Title: "Overpricing of Nuclear Submarine Components Purchased by Plant Apparatus Division, Westinghouse Electric Corp., Under Two Subcontracts Awarded to Edwin L. Wiegand Co., Pittsburgh, Pa.” (OSD Case No. 1804).

GAO finding: PAD acting as a prime contractor for the Navy awarded two subcontracts to Wiegand Co. for five 664 S-5W pressurized heaters and heater terminal connectors on a negotiated basis for $671,000. The Navy paid (1) $234,000 more than was warranted because the prices were negotiated without obtaining and analyzing Wiegand's most recent experienced costs and (2) $46.000 more than warranted for connectors because Wiegand charged higher prices than other suppliers would.

GAO estimate of unnecessary costs: $280,000.

Time period of GAO report: GAO review conducted September 1962 through June 1963. The two subcontracts which are the subject of this report were awarded in May 1960 and November 1961.

DOD comments on GAO finding: (1) Navy's consent to Wiegand's subcontracts were based on PAD's recommendation of prices obtained from two available suppliers and also on a comparison with prices paid on prior procurements. As to

later option purchases, the Navy relied on Wiegand's estimated future costs plus certified costs of prior units. (2) Previous to the subject subcontracts, connectors were purchased separately and furnished to the heater manufacturer. However, this procedure caused problems in fixing responsibility, as between the heater manufacturer and the contractor manufacturer for furnishing satisfactory heater connectors. Accordingly, it was determined to be in the best interests of the Government to eliminate this division of responsibility by buying heater connectors from one source; namely, Wiegand.

DOD comments on costs: Because of Wiegand's predominately commercial business, it is difficult to determine actual costs experienced under specific subconcontracts. However, Navy audits were conducted following general Navy approaches for allowances of incurred costs and it has been determined that the total amount of profit considered to be unjustified is $99,931.68.

DOD corrective action: The ASPR 3-807 has recently been revised to more accurately define "adequate competition." If competition is not considered adequate to justify the price of an item under procurement, then a cost analysis of the proposal shall be performed. This case is being prepared for referral to the Department of Justice for the purpose of effecting recovery.

Navy postscript, May 14, 1965

Comprehensive Navy report has been furnished to the Department of Justice which is considering this and the three pump cases [B-146733, dated July 23, 1962 (OSD No. 1594); B-146760, dated December 26, 1962 (OSD No. 1941); and B-146733, dated February 6, 1964 (OSD No. 1787)], all involving the pricing of fixed-price subcontracts, made by Plant Apparatus Department (PAD) of Westinghouse. All these cases are under active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard thereto.

GAO Report B-146846, February 19, 1964

35 Title: "Overpayments Made Under a Cost-Plus-A-Fixed-Fee Contract for the Procurement of Nuclear Submarine Components From Combustion Engineering, Inc., New York N.Y." (OSD Case No. 1786).

GAO finding: The Navy paid Combustion $200,000 more than it was entitled to under the provisions of cost-plus-a-fixed-fee contract NOb's-72363, because the Navy paid fixed prices for certain components that should have been paid for on a cost-plus-a-fixed-fee basis.

GAO estimate of unnecessary costs: $200,000.

Time period of GAO report: GAO review conducted July 1962 to December 1962. The Navy contract was dated November 19, 1957, and amendments to the contract were executed on March 14, 1961.

DOD comments on GAO finding: ASN (FM) by letter of August 8, 1963, to GAO advised that the original contract was on a cost-plus-a-fixed-fee basis with provisions for intracompany purchases to be paid on a firm-fixed price basis. Subsequent modification number five to the contract changed the payments to an all cost basis. The contractor claims modification number five was not all inclusive; therefore, certain billings were on a fixed basis. The Navy disagrees with this later interpretation and agrees with GAO that some overpayments have been made.

DOD comments on costs: Navy audits have determined that excess payments amounted to $212.548.61.

DOD corrective action: Payments due contractor in the amount of $212,548.61 have been suspended pending resolution of this entire matter.

Navy postscript, May 14, 1965

The Navy is currently evaluating the contractor's claim, filed pursuant to Public Law 85-804.

GAO Report B-146733, March 5, 1964

36. Title: "Overpricing of Steam Generators for Nuclear Aircraft Carrier, Department of the Navy" (OSD Case No. 1734).

GAO findings: Generators costing over $4 million were purchased from Foster Wheeler Corp. by Westinghouse Electric Corp., as prime contractor, for use under

Navy cost-plus-a-fixed-fee contract NObs-72205, without either the Navy or Westinghouse reviewing Foster Wheeler's cost estimate, which contained undisclosed contingency allowances and provisions for costs that were not likely to be incurred.

GAO estimate of unnecessary costs: $489,600.

Time period of GAO report: The GAO draft report was dated March 6, 1963. It reviewed a subcontract awarded by Westinghouse to Foster Wheeler on April 12, 1957.

DOD comments on GAO findings: The Assistant Secretary of the Navy (I. & L.), by letter of May 10, 1953 on the draft report, discussed the basis of Navy's review and approval of the Foster Wheeler subcontract.

The primary question raised by the report was whether Westinghouse and Navy were justified in relying on the price proposal submitted by Foster Wheeler without requiring an examination of the detailed cost data supporting the proposal. As indicated in the Navy letter, this depended on whether Westinghouse and the Navy exercised reasonable judgment in concluding that effective competition had been obtained.

In response to this question, the letter noted that Navy had obtained competitive proposals from the four major companies capable of producing the types of steam generators required for nuclear propulsion. On the basis of an analysis of these competitive proposals and comparison of the prices with prices for comparable equipment, the Navy concluded that adequate competition had been obtained and that the proposal submitted by Foster Wheeler was reasonable. Accordingly, the Navy consented to the placing of the subcontract by Westinghouse.

Since Navy determined that Westinghouse had complied with its contractual obligation to establish subcontract prices which were reasonable, Navy did not seek an adjustment from Westinghouse. GAO has, however, issued formal exceptions as a means of effecting recovery.1

DOD comments on costs: A recently completed Navy audit, reviewing the cost elements considered by GAO, takes issue with GAO's estimate of overstated costs and finds questionable costs of $18,000 instead of $489,600.

DOD corrective action: The ASPR and Public Law 87-653, approved September 10, 1963, are clear in the requirement that cost or pricing data must be obtained from prime contractors and subcontractors in contracts exceeding $100,000, provided, however, that such data is not required in procurements in which there is adequate price competition.

Since the determination of whether adequate price competition exists may at times be difficult, judgments will vary, as in the present case. The term “adequate price competition" was not defined in the statute. ASPR has now been revised to provide specific criteria to facilitate this determination. It will necessarily continue to require an exercise of judgment, but the possibility of differences of interpretation will be reduced by the application of standard criteria. Navy postscript, May 14, 1965

It is understood that the Department of Justice has expressed an interest in reviewing this case in connection with its study of the four other cases [B-146733, dated July 23, 1962 (OSD No. 1594); B-146760, dated December 26, 1962 (OSD No. 1641); B-146733, dated February 6, 1964 (OSD No. 1787); and B-146760, dated February 12, 1964 (OSD No. 1804)], the first three of which are known as the pump cases. All five cases involve the pricing of fixed-price subcontracts, made by the Plant Apparatus Department (PAD) of Westinghouse. The four cases are the subject of active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard thereto.

GAO Report B-146718, March 18, 1964

37. Title: "Overpricing of the Nuclear Frigate U.S.S. Bainbridge purchased from the Bethlehem Steel Co., Quincy, Mass., Department of the Navy" (OSD case No. 1794).

GAO finding: The Navy contracted to pay Bethlehem about $5 million more for the construction of the U.S.S. Bainbridge than was warranted based on available cost data and circumstances existing at the time of negotiations, since Bethlehem included provisions for contingencies and cost overstatements in its statements of actual and estimated costs.

1 COMMITTEE NOTE.-The GAO Notice of Exception was withdrawn June 11, 1965.

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