Time period of GAO reports: GAO review: Prior to March 29, 1963; prime contractor's actions: July 1, 1968, to August 21, 1962.

DOD comments on GAO finding: The GAO findings are substantially correct. DOD comments on costs: A refund in the amount of $158,109.73 was obtained from Hughes.

DOD corrective action: Increased emphasis is being placed on the contractor procurement review program which is designed to assist in achieving reasonable subcontract prices. The Air Force Systems Command Manual 70-3 provides detailed instructions in this area and this problem is being emphasized during staff surveillance and other discussions with field personnel.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

GAO final report B-125071, October 24, 1963, "Examination of Pricing of Stabilizers and Flippers for Falcon Missiles Purchased from Avco Corp., Crosley Division, Cincinnati, Ohio, by Hughes Aircraft Co., Culver City, Calif., under Department of the Air Force prime contract AF 33 (600)−37981" (OSD case No. 1745).

Problem

The GAO alleges that its examination showed that the prices proposed by Avco and accepted by Hughes without change included estimated material costs which were excessive in relation to cost data available at the time those fixed prices were negotiated. As a result the Government has borne additional costs of about $136,100 plus an undetermined amount for the prime contractor's indirect costs. GAO recommendation

That the Secretary of the Air Force take such action as may be necessary to recover for the Government the additional costs for stabilizers and flippers incurred in the procurement of Falcon missiles under contract AF 33 (600)−37981. Statement

At the request of the Air Force, Avco refunded $136,100 to Hughes who in turn applied its indirect costs and refunded a total of $158,109.73 to the Government. Avco, in their reply, stated they were forced to estimate part of the material costs because they were allowed only 11 days to respond to the Hughes proposal. Status: Case closed.

GAO Report B-114808, December 30, 1963

53. Title: "Overestimated Costs Included in Prices Negotiated for Modification of Aircraft Engine Test Stands Under Fixed Price Contracts With Space Corp., Dallas, Tex." (OSD case No. 1681).

Problem The GAO alleges that Space Corp. certified to the Air Force that in establishing the prices for modification of 32 each AF/M37T-1 jet engine stands all actual or estimated costs or pricing data available at the time had been considered in preparing its price proposals and had been made known to the Air Force contracting officer or his representatives during price negotiation. The GAO found no evidence, however, that Space Corp. disclosed to the Air Force contracting officer or price analyst, or that these Air Force representatives otherwise were aware that the prices negotiated for modificaton of the 32 test stands included (1) costs in excess of prices Space had already established with its suppliers, and (2) the cost of certain parts that Space should have known at the time would be neither required nor furnished in performance of the modification work. That as a result, therefore, the Government has borne additional costs of about $213,000. GAO recommendation

That the Air Force take all available and appropriate action to obtain recovery from Space Corp.

Statement

After learning, on August 26, 1963, that GAO had not forwarded the case to the Department of Justice as proposed in their letter transmitting copies of the draft report to the Air Force, we proceeded with a full investigation of the matter.

Our comprehensive audit and analysis established that the prices negotiated for the modification of the 32 test stands did include (1) costs in excess of prices Space Corp. had already established with its suppliers, and (2) costs for certain parts that should have been furnished by Space Corp. as a part of the test stands under the basic contract. The facts as established are considered sufficient to justify a request for refund even though these procurements were negotiated prior to the enactment of Public Law 87-653.

Pursuant to departmental procedures the Air Force Logistics Command's proposal for obtaining a refund from Space Corp. was approved. Their findings, conclusions, and the amount of refund to be sought were in consonance with the conclusions and recommendations contained in the GAO report. The command was instructed to take all available and appropriate action to obtain an adequate adjustment in price from Space Corp.

Space Corp. offered a refund in the amount of $32,064. This amount was unacceptable to the Air Force and the entire matter was turned over to the Office of Special Investigations for a comprehensive investigation into the possible existence of purposeful misrepresentation. The OSI performed a further investigation and referred the matter to the Criminal Division of the Department of Justice. The U.S. attorney, Dallas, Tex., issued a lengthy opinion on the case and declined to prosecute the matter. The Office of the Judge Advocate General, U.S. Air Force, is currently studying the feasibility of any further legal action in this matter.

Status: Case open.

This case will remain open until the GAO is furnished our conclusions in the matter.

GAO Report B-118965, February 7, 1964

54. Title: "Overpricing of B-58 Aircraft Bomber Recording Systems by Melpar, Inc., Falls Church, Va., on Fixed-Price Purchase Order 509 with General Dynamics Corp., Fort Worth, Tex., Department of the Air Force" (OSD case No. 1781).

Problem

The GAO alleges that (1) a firm fixed-price was negotiated by Melpar and General Dynamics for the production of bomber recording systems under purchase order No. 509 without adequate assurance as to the reasonableness of the price in relation to cost experience on prior production or to more realistic available pricing data, and (2) as a result, it appears, that a significant portion of Melpar's profit, which totaled about $827,000 or 42 percent of incurred costs, as shown by the subcontractor's records, was attributable more to the negotiation of an unreasonably high price than to Melpar's efficiency in performing under the purchase order.

GAO recommendation: The GAO recommended the Air Force make every effort to obtain a refund.

NOTE.-1965 Appropriations Hearings (Feb. 11, 1964).

The Washington Post of February 11, 1964, carried an article on this report and members of the subcommittee questioned Generals Gerrity and Smith on this matter. Details of the procurement were provided for insertion in the record as was a copy of the Air Force's October 17, 1963, response to the GAO advising them of the status of the General Dynamic technical evaluation of Melpar's performance and the Air Force's comprehensive audit of Melpar's records.

Statement

A comprehensive review of the matter has been made by General Dynamics, Melpar, and the Air Force. Certain tentative conclusions have been reached and the matter is under negotiation. The GAO report was published prior to completion of the contract and the costs necessary to complete the contract and other adjustments preclude the contractor earning any such profit as implied by this report. Regarding the alleged profit of $827,000, it must be pointed out that this amount includes (1) the actual profit negotiated, estimated at $280,000; (2) a downward adjustment provided for in a Melpar subcontract amounting to $59,158; (3) an adjustment for material attrition error disclosed by GAO -$26.877; and (4) the costs required to complete the contract, estimated at $130,000, since the contract had not been completed when reported by the GAO.

Under no circumstances could the contractor have made the profit implied by the General Accounting Office. The excess profit is estimated at approximately $225,000. Several meetings have been held with representatives of General Dynamics and Melpar, and on April 16, 1965, a tentative agreement was reached on a price adjustment deemed reasonable by the Air Force negotiators. However, we received a copy of a letter from the GAO Boston regional office, dated April 13, 1965, advising the eastern contract management region of alleged discrepancies in the handling of materials concerning Melpar's subcontractor, Anelex Corp., in the production of in-flight printers. The ECMR is presently investigating the matter and it will be several weeks before they complete their review; however, we were informed on May 11, 1965, that the allegations contained in the April 13, 1965, letter had no impact on the price paid Melpar under purchase order No. 509.

Status: Case open. We are now waiting for the contractors to confirm their position in writing, at which time the entire matter will be reviewed with the GAO. We anticipate being in receipt of the contractors' correspondence by May 24, 1965.

GAO Report B-146854, February 28, 1964

55. Title: "Overpricing of CAX-12 Aerial Reconnaissance Cameras by Fairchild Camera & Instrument Corp., Syosset, N.Y., Under Negotiated FixedPrice Contract AF33 (600)-38860, Department of the Air Force" (OSD Case No. 1737).

GAO finding: The Air Force negotiated firm prices without making an adequate evaluation of the contractors proposal, and was not aware that the proposed prices were based on cost estimates which included provisions for contingencies, clerical errors, and inadequate cost data. The final contract price was $814,000, or 64 percent greater than the cost of producing the items.

GAO estimate of unnecessary costs: Undetermined.

Time period of GAO reports: GAO review: Prior to March 1963. Air Force actions: January 1959 through July 1960.

DOD comments on GAO finding: Though this was an emergency requirement, adequate safeguards were not taken to assure the reasonableness of the prices negotiated with the contractor.

DOD comments on costs: The GAO figure of $814,000 includes the negotiated profit and fails to give effect to additional profit the contractor may have earned through technical developments and manufacturing improvements which the contractor claims were numerous. After the fact review of the cost data and other information that should have been available at the time the contract was negotiated reveals the Government is entitled to a minimum adjustment of $235,428.

DOD corrective action: Fairchild has been adamant in their refusal to consider a voluntary price adjustment. The Air Force General Counsel has taken the matter under review to determine if there is a legal basis for seeking an adjustment or sufficient justification for referring the case to the Department of Justice.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

"Although realistic cost data were not available, the Air Force and Fairchild negotiated firm prices totaling $1,636,998 for various CAX-12 cameras and components, for use by the Navy, under contract AF33(600)-38860. The Air Force did not make an adequate evaluation of the contractor's proposal and supporting data and, as a result, was not aware that the proposed prices were based on cost estimates that included substantial provisions for contingencies as well as clerical errors and that information on previously experienced costs was not adequate for developing realistic estimates of the costs of future production. Subsequent to the award of contract -38860, the Air Force exercised its rights under an option clause in the contract and purchased additional cameras at the same unit price as that previously negotiated for the initial quantity. The Air Force also purchased carrying cases for the cameras. These additional procurements increased the contract price to $2,091,922. This price was about $814,000, or 64 percent, greater than the costs incurred by Fairchild."

GAO recommendation

That the Air Force make every effort to obtain an appropriate price reduction for the CAX-12 aerial reconnaissance cameras procured under contract -38860. Statement

AFSC, after completing their investigation, determined to seek a voluntary refund. Fairchild rejected AFSC's request to discuss a voluntary price adjustment. The Air Staff then undertook the task of obtaining a refund from Fairchild. After several exploratory discussions with Fairchild management representatives, the Director of Procurement Policy and members of his staff met with the president of Fairchild and his staff at the contractor facility. Again Fairchild rejected the Air Force's request. In response to this request for an adjustment, Mr. Hodgson reiterated the position taken in his response to the system command's letter. In addition, he stated that (1) the Fairchild's board of directors had passed on the matter and decided that a retroactive adjustment in the contract price was unwarranted; (2) the GAO refused to review contracts under which Fairchild has sustained a loss; and (3) a review of the historical data available to the Air Force and to Fairchild during the negotiations relating to the Rapidyne contracts, and a review of the technical problems then known to exist, provides ample justification for inclusion in their quotation of the selec tive adjustments made by Fairchild's estimators and management. As a result of Fairchild's adamant stand, the case has been referred to Justice for consideration. Status: Case in Justice.

GAO Report B-146845, March 6, 1964

56. Title: "Overpricing of Contracts Negotiated for T38A Electrical Power Systems With Westinghouse Electric Corp." (OSD case No. 1744).

Problem

The GAO found that the Government has incurred unnecessary costs of about $190,000 because the negotiated prices for T38A electrical power systems and spare components under contracts AF-40529, AF-41603, and AF-42266 included overstated cost estimates for material. The cost estimates proposed by Westinghouse were accepted by the Air Force. Westinghouse furnished pricing certifications on all three contracts which stated that (1) all actual or estimated costs or pricing data available had been considered in preparing the price estimate and had been made known to the contracting officer or his representative and (2) any significant changes in the above data that had occurred prior to price negotiations had been disclosed. Contrary to its pricing certifications, Westinghouse did not disclose during negotiations that the proposed material costs were not representative of the material costs it expected to incur. In fact, the contractor had procured most of the material prior to negotiations at prices lower than those included in its proposal.

GAO recommendations

(a) That the Secretary of the Air Force (1) in coordination with the Department of Justice, take steps to obtain a suitable refund under the contracts, consistent with maximum protection of the Government's interests in terms of the penalties that may be appropriate; (2) bring this case to the attention of Air Force contracting officers to illustrate the need for a complete disclosure of current cost information and pricing data by contractors during price nego tiations as well as the need for adequate review of proposed prices; and (3) require contracting officers to assure that, when assistance is requested from cognizant audit groups, the audit is made at or near the time the contract negotiations take place.

(b) That the Secretary of Defense give consideration to additional requirements that can be established or actions that can be taken to promote a higher degree of responsibility on the part of the contractor for the validity and completeness of the cost and other pertinent data furnished and for the fairness and reasonableness of the proposed prices.

Statement

Pursuant to the GAO's request, Air Force findings and conclusions are being coordinated with the Department of Justice with a view to adopting a final position in the matter and taking such action as is deemed appropriate.

Shown below are the Air Force conclusions and recommendations with respect to the advisability of taking either administrative or legal action to recover any sums believed to have been improperly paid to the contractor.

(1) Regarding contracts AF 33(600)-40529 and -41603 we concur that the Government has been overcharged. Although Westinghouse may have failed to notify its negotiators of the apparent material price reduction, the information regarding the reduction was known to Westinghouse and should have been made known to the Air Force negotiators at the time of the negotiation. Although the contractor signed a certificate that the latest available data had been provided the Government negotiator, the contracts do not contain a defective pricing data clause; therefore, there is no contractual provision upon which to predicate a claim for refund. Whether or not a legal basis otherwise exists for securing a refund it has been determined that the Government has been overcharged and that retention by the contractor of the amount in question would be contrary to good conscience and equity and the Air Force proposes to seek a voluntary adjustment from Westinghouse.

(2) As pertains to contract AF 33 (600)-42266, Westinghouse submitted its proposal on July 7, 1960, and the contract was negotiated on September 30, 1960, for the amount of $1,380,915. Our investigation and the Navy audit reveal that contract -42266 was proposed and negotiated, using the latest revised unit standard cost and that adjustments had been made and accepted to reflect correction of material price variance. In view of the fact that the contractor's proposal contained cost data in accordance with an approved accounting system and procedures, we do not concur with the GAO that a price adjustment be sought. Status: Case open pending completion of action by Department of Justice. Policy: With respect to the recommendation in the report that the Secretary of the Air Force bring this case to the attention of Air Force contracting officers, it would be undesirable to disseminate the facts of this case pending completion of coordination with the Department of Justice. The report also recommends that the Secretary of the Air Force require contracting officers to assure that, when assistance is requested from cognizant audit groups, the audit is made at or near the time the contract negotiations take place. The Air Force fully concurs in this recommendation. Procedures currently in effect throughout the Department of Defense for obtaining audit assistance in connection with contract negotiations are intended to accomplish the same result. It is highly important to conduct pricing negotiations in a timely manner in order to insure that cost data furnished by the contractor-as well as our audits of such dataremain reasonably current and are not outdated by the time the pricing negotiations take place.

Finally, the report stresses the need for creating an atmosphere that will foster reliable representations by contractors, equal knowledge by both parties of all pertinent and significant factors affecting the proposed contract, and reasonable exercise of judgment and estimating based on available data. The report recommends that the Secretary of Defense consider "additional requirements that can be established or actions that can be taken to promote a higher degree of responsibility on the part of the contractor for the validity and completeness of the cost and other pertinent data furnished and for the fairness and reasonableness of the proposed prices." The Department of Defense is entirely in accord with these views and, for some time, has been studying methods of assuring greater reliability of cost and pricing data furnished by contractors in connection with contract negotiations. A committee of Defense Industry Advisory Council has been established to work with the Department of Defense to achieve this result. Specific provisions for incorporation in ASPR are under consideration. Copies of the proposed regulatory material will be furnished GAO in the usual manner when these studies are completed.

GAO Report B-118965, March 30, 1964

57. Title: "Overpricing of B-58 Electrical Power Systems Purchased From Westinghouse Electric Corp. by General Dynamics Corp. Under a CostPlus-a-Fixed-Fee Prime Contract, Department of the Air Force" (OSD case No. 1744A).

Problem

The GAO alleges the Government incurred excessive costs amounting to $81,000 because the prices negotiated for major components of the B-58 electrical power systems included overstated cost estimates for material, labor, and overhead.