GAO recommendation That the Secretary of the Air Force advise the GAO of the results of his review and the action taken to obtain a suitable refund. Further, the GAO has recommended that the Secretary comment on the need for a revision in administrative procedures of the Air Force or its prime contractors to avoid future overpricing and that the Secretary bring this case to the attention of contracting officers to illustrate the need for a complete disclosure by contractors of current cost information and pricing data during price negotiations as well as the need for adequate review of proposed prices. Statement The GAO findings are substantially correct. Convair's purchase order with Westinghouse was overpriced due to an error in Westinghouse's proposal and the use of unnecessary costs. Regarding the error in its proposal, Westinghouse has voluntarily refunded $24,264.40 to General Dynamics, the prime contractor. The Air Force requested General Dynamics to submit a revision reducing the target price of Contract AF 33 (600)-38975 by $65,585 accounting for the error and unsupported costs in Westinghouse's proposal and the impact on the target fee to be paid General Dynamics. The contractor, in its reply to the Aeronautical Systems Division, letter dated June 17, 1964, stated that it did not believe a revision of contract (target) values was appropriate. Since the target cost and fee of the prime contract were determined by negotiation, and the contractor has rejected any adjustment of these targets; and since the prime contract does not have a defective pricing data clause which would permit unilateral adjustment of targets, we have determined that the Government has no legal basis for revision of targets. However, our procuring activity intends to consider the $61,582 as an unreasonable cost under the contract at the time of the cost and incentive fee determination which is expected to take place in mid-1965. Guidance is available to assist field personnel in avoiding overpricing and is believed to be adequate. The Armed Services Procurement Regulation and corresponding Air Force Procurement Instruction have recently been revised to provide the latest and most complete guidance on subcontracting policies. The Air Force Logistics and Systems Commands have brought the details of this case to the attention of their field personnel. Status: Case open. Case will remain open pending outcome of cost and fee determination and possible need for further action. GAO Report B-118965, April 27, 1964 58. Title: "Overpricing of B-58 Aircraft Components Under Cost-Plus-IncentiveFee Purchase Orders Issued to Sperry Gyroscope Co. by Convair" (OSD case No. 1860). Problem The GAO alleges that Sperry proposed and Convair accepted target costs which were overstated by about $3,289,000 because Sperry (1) estimated the unit prices for proposed purchased parts at prices which were higher than the prices which Sperry was already paying for the parts, (2) applied an arbitrary increase of 100 percent to the unit price estimated for each of the purchased parts proposed, and (3) then added a 100-percent provision for contingencies to the already inflated cost estimates. As a result, it is claimed that these overstatements will result in increased costs to the Government for target and incentive fees of $1,083,725. GAO recommendation That the Air Force, in cooperation with the Department of Justice, take action to recover the amount of the overpayment in addition to such statutory penalties as may be appropriate. Statement On August 13, 1964, the following comments were provided to the Justice Department at its request: (a) That while GAO considered January 1958, as the negotiation date, this was actually when negotiations ended. The negotiation of manufacturing costs (including material and purchase parts) occurred in May and June 1957, as reflected in the minutes of negotiations dated June 27, 1957. Thus the cost data allegedly available for negotiations was not, in fact, available. (b) That, in any event, the negotiation of product material by Convair was not based on a part-by-part analysis, but a learning curve was applied to total manufacturing running costs, and so the GAO analysis is irrelevant. (c) That the use by Sperry of a 100-percent add-on factor, in the circumstances described, was completely unrealistic, but since this method was cast aside for a more realistic approach, the basis for GAO exception was forthwith removed. (d) That the 10-percent conversion factor was not based on unwarranted contingencies as alleged, but on allowance for costs reasonably expected to occur and based on experience reflecting that they did occur on the predecessor sub-contract. It is recognized, however, that GAO only took issue with the part of the factor applying to purchased parts, and due to Convair action in rejecting Sperry method of pricing material and substituting a better method, the basis for the GAO exception was removed. (e) In our opinion, the prices as negotiated by Convair under the conditions existing at the time were not overstated. (f) As a result, we cannot concur in the GAO recommendation that an appropriate adjustment be obtained by the Government. Contrary to the statement made by GAO that the first item was produced and parts costs were established, our review revealed that at the time the material content of purchase orders Nos. 102 and 105 were negotiated, the first unit had not been made or tested, and an acceptable bill of material had not been developed. By letter dated June 30, 1964, the Air Force advised GAO as follows: “*** we have substantially completed our investigation and arrived at certain conclusions, and pursuant to the recommendation contained in the report, our findings and conclusions will be coordinated with the Justice Department prior to our adopting a final position. Status: Case open pending completion by the Justice Department of its action on the case. GAO Report B-146886, May 21, 1964 59. Title: "Unnecessary Cost Resulting From Excessive Payments to Employees Transferred by Lockheed Missiles and Space Co., Sunnyvale, Calif., Under Contracts With the Department of Defense and the National Aeronautics and Space Administration" (OSD case No. 1802). Problem During 1962, Lockheed paid relocation allowances to many of its employees out of Sunnyvale for periods substantially in excess of the time actually required to accomplish the relocations. This resulted in excessive costs to the Government totaling about $101,200. GAO points out that other aerospace firms have a policy of paying relocation allowances only for the time actually taken to relocate. GAO recommendation That we examine the relocation practices of the other seven divisions of Lockheed (other than Sunnyvale) to determine whether or not any additional unnecessary cosst to the Government have been incurred as a result of the company's relocation policy. Statement Respecting Sunnyvale, we have disallowed the sum of $99,145, rather than $101,200 recommended by GAO. We are convinced the difference of $2,055 was an appropriate expense to Lockheed and we have agreed to Lockheed's retention of this sum. Respecting the other seven Lockheed divisions, the following comments are appropriate: (a) Lockheed Electronics Co., Plainfield, N.J.: Navy audit agency made a disallowance of $4,750. (b) Lockheed Propulsion Co., Redlands, Calif.: No relocation allowances in excess of actual per diem time used to establish a new residence were allowed. (c) Lockheed Aircraft Service, Jamaica, N.Y.: No excessive relocation payments have been made by Lockheed at this division. (d) Lockheed Aircraft Services, Ontario, Calif.: Relocation allowances were found to be appropriate. (e) Lockheed-Georgia Co., Marietta, Ga.: Air Force audit shows that a total of $7,741 was included in fiscal year 1962 overhead for this division for relocation allowances. Our auditors state there is no way to determine from contractors' records the number of days required by the employees to locate. It is, therefore, considered impractical to pursue this further. (f) Lockheed Corporate office and Lockheed-California Co., Burbank, Calif.: We have no basis for seeking a refund. See our attached letter to GAO dated 12 February 1965. NOTE. Our contracting personnel have been alerted to the findings in this GAO report and appropriate letters have been sent to procurement activities emphasizing their responsibilities in this area. This action and revision of ASPR 15-205.33 relating to relocation costs incurred by defense contractors, should reduce the possibility of reimbursing contractors for costs which do not meet the test of reasonableness. Status: Case closed. Hon. JOSEPH CAMPBELL, DEPARTMENT OF THE AIR FORCE, Comptroller General of the United States, DEAR MR. CAMPBELL: Reference is made to your letter of May 21, 1964, to the Secretary of Defense transmitting copies of GAO Report B-146886, entitled, "Excessive Relocation Payments to Employees Transferred from One Company Location to Another by Lockheed Missile & Space Co., Sunnyvale, Calif., a Division of Lockheed Aircraft Corp." (OSD case No. 1802). Reference is also made to the DASD (procurement) OASD (I. & L.) letter of September 25, 1964, to you on the matter. The Air Force has now completed its negotiation of 1962 overhead rates with Lockheed. With respect to the Lockheed-Sunnyvale location, the Air Force has disallowed the sum of $99,145 for excessive relocation payments made by Lockheed through that office. This is slightly less than the sum of $101,200 which you recommended be recovered. The Air Force was convinced during negotiations that the difference had been properly paid by Lockheed and no further action is deemed appropriate. In subparagraph (a) on page 1 of tab A of the above-mentioned letter of September 25, 1964, it was indicated that the Air Force would question $13,097 of relocation allowances for the Lockheed Corp. and Lockheed-California Co. offices at Burbank during negotiation of 1962 overhead rates. During the recent triservice negotiations of the 1962 overhead rate with Lockheed, the matter of relocation allowances was discussed. During these discussions the Government negotiators determined that the relocation policy for Sunnyvale was different than that for Burbank. For Sunnyvale, the policy provided that per diem would be paid for time en route and for up to 30 days after arrival. On the basis of this written policy, Government negotiators disallowed per diem costs in excess of actual days required by the employees to establish permanent residence at the new location ($99,145). The contractor has not yet accepted this disallowance, premised on his argument that a full 30 days per diem, after arrival, was intended to be paid to cover all miscellaneous moving expenses as well as per diem. Respecting Burbank, the Government negotiators found that the policy provided for per diem for time en route and for 30 days after arrival. The contractor presented the same argument for Burbank as for Sunnyvale and in this instance we must agree with the contractor's views. The contractor's reasoning had been presented and agreed to by the Air Force Contracting Office prior to the 1962 time period involved here. In the circumstances, we have no basis for seeking an adjustment for Burbank. In this regard, the contractor revised its policy for Burbank effective December 1, 1963, to provide, instead of relocation per diem, a flat $100 relocation allowance. This $100 is in lieu of the former policy of paying for 30 days after arrival. We appreciate your interest in calling these matters to our attention. Sincerely, AARON J. RACUSIN, Deputy for Procurement Management. GAO Report B-146717, May 25, 1964 60. Title: "Overstated Cost Estimates Included in the Initial Target Prices of Incentive Contracts AF 33(600)-36319 and AF 33 (600) −38098 With the Boeing Co., Seattle, Wash., for the Bomarc ‘A' Weapon System" (OSD case No. 1805). GAO finding: The initial target prices negotiated by the Air Force and Boeing for the production of Bomarc A missiles under two Air Force contracts included certain proposed costs which were overstated by about $23,034,500. The overstated initial target costs made available to Boeing additional profits of at least $2,303,450. GAO estimate of unnecessary costs: $2,303,450. Time period of GAO report: April 1958 through May 1960. DOD comments on GAO finding: Air Force partially concurs with GAO finding. DOD comments on costs: Air Force is of the opinion that downward adjustments of $11,284,828 in target prices should be sought rather than $23,034,500. DOD corrective action: Air Force has already obtained downward adjustments of $3,927,204 in initial target prices with resultant savings of $392,720 in profits. Further negotiations have been discontinued because the report has been referred to the Department of Justice in accordance with the current policy of bringing all cases of this type to the attention of Justice before completing administrative action. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE GAO alleges that the initial target costs for the subject contracts were overstated by about $23,034,500 because costs proposed by Boeing and negotiated with the Air Force (1) were not based on available current cost or pricing data even though Boeing certified that such data were used for contract-38098, (2) were not properly related to the requirements of the contract, (3) were not based on reasonably firm designs and specifications, and (4) were not adequately evaluated. GAO recommendations (a) That the Secretary of the Air Force take aggressive action to obtain appropriate adjustment of the overstated initial target costs discussed in this report and, in coordination with the Department of Justice before an administrative settlement of contract -38098 is reached, take steps to enforce rights which the Government may have because of the false certificate given by the contractor with respect to making known to the Air Force negotiator all available cost and pricing data for his use in evaluating Boeing's cost proposal. (b) That the Secretary of Defense establish policies, and have appropriate officials establish criteria and procedures to properly implement such policies, which will provide (1) that, whenever adequate data for the development of realistic estimates of the probable cost of future production for areas of contract cost or performance are lacking, negotiation of prices be deferred for those areas until such time as sufficient and adequate data for developing realistic prices become available, (2) that, wherever an audit of a contractor's initial price proposal is appropriate, the audit be performed, whenever practicable, prior to negotiating contract prices and that where it is impracticable to perform the audit before prices are negotiated, the audit be performed as soon as possible after the prices are negotiated, and (3) that, where it is found that prices included in the contract are not based upon the most accurate, complete, and current pricing information or experience available when the contract prices were negotiated, the contracting officer negotiate prompt adjustment of all such prices and initiate action to enforce all rights that vest in the Government because the contractor used cost or pricing data that were inaccurate, incomplete, or not current. Statement The Air Force agrees that overpricing occurred under the two contracts, but we believe the initial target prices were overstated by about $11,284,828, rather than $23,034,500 as indicated by GAO. It is the Air Force opinion that Boeing could not have reasonably been expected to quote prices low enough to account for the difference of $11,749,672, and we, therefore, disagree with GAO to that extent. There are 14 different areas of overpricing involved. As of the present time, the Air Force has negotiated total downward adjustments of $3,927,204 in initial target prices under the two contracts. The case is now under review by the Department of Justice, Civil Division, to determine whether or not there was fraud on the part of Boeing. The Air Force is precluded from any further effort to obtain additional downward price adjustments until the Department of Justice advises us of the results of its examination. The Air Force agrees with the objectives of the three policy recommendations. The first such recommendation is concerned with the basic need for obtaining adequate pricing data from contractors before prices are established. Procedures have been adopted and vigorously implemented to insure that adequate cost or pricing information is obtained and thoroughly considered by contracting personnel before prices are agreed upon. In cases where adequate data cannot be obtained, the regulations make it clear that firm fixed-price and fixed-price-incentive contracts will not be used. ASPR 3-404.4 states explicitly that fixed-price-incentive contracts are not to be used "where cost or pricing information adequate for firm targets is not available at the time of initial contract negotiation or at a very early point in performance." Further, in connection with firm fixed-price contracts, ASPR 3-404.2 states that such contracts are suitable where "cost or pricing information is available permitting the development of realistic estimates of the probable cost of performance." Existing policy is, therefore, consistent with the GAO recommendation requiring contracting officials to evaluate the adequacy of available data, not only for purposes of establishing prices, but also for the purpose of selecting the appropriate form of contract. On the other hand, existing policy emphasizes the value of firm fixed-price and incentive contracting. After-the-fact pricing may be the soundest approach in a very limited number of situations, however, such pricing gives the contractor little or no incentive to attempt to reduce costs. Accordingly, advance pricing and fixed-price contracting is favored, whenever this can reasonably be done, and it is believed that such pricing is practicable even though uncertainties exist which cannot be fully resolved at the time of negotiation. This view is expressed in ASPR 3-404.2, which provides with respect to firm fixed-price contracts that such contracts are suitable where "the uncertainties involved in contract performance can be identified and reasonable estimates of their possible impact on costs made, and the contractor is willing to accept a firm fixed price at a level which represents assumption of a reasonable proportion of the risks involved." Because the prudent use of fixed-price contracting can mean very substantial savings to the Government, DOD policy seeks to emphasize both factors-first, the need of assuring that sufficient information is available to permit reasonable predictions of future costs and, second, the importance of recognizing that this does not preclude a reasonable degree of uncertainty as long as the risks are identifiable and both parties are willing to assume the risks and share them on a fair and equitable basis. Subject to the above comments, the first recommendation in the report dealing with procurement policy is concurred in. Respecting the second policy recommendation, DOD policy on "audit as a pricing aid" is stated in ASPR 3-809. Audit reviews are obtained not only to verify contractors' data on cost previously incurred but also to assist in evaluating contractors' projections of future costs by obtaining information on cost trends, labor efficiency curves, and other pertinent data. By Headquarters USAF letter of May 7, 1964, appropriate Air Force procurement and audit personnel were instructed that Air Force audit review is mandatory in the case of any contractor proposal of $250,000 or more, except if the potential contract or amendment thereto is to be cost plus fixed fee, in which event audit is mandatory if the proposal is $350,000 or more. In addition, audit may be requested by the contracting officer when considered appropriate, even when the proposal is for less than $250,000. Respecting the third policy recommendation, ASPR 7-104.41 makes post-pricing reviews possible by providing a contractual right for contracting officers and their authorized representatives 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 where the contracting officer determines that the contract price was significantly increased because of defective cost or pricing data. |