ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem GAO alleged that estimated costs for miscellaneous and minor outside production items included in incentive target prices proposed by the Boeing Co., Seattle, Wash., in 1960 and 1961 for KC-135 airplanes under contracts AF 33 (600)-41979 and AF 33 (600)-43416 disclosed that these estimated costs were overstated by about $1,475,100 in relation to costs the contractor could reasonably expect to incur. After Boeing revised its target price proposals several times during negotiations, the Air Force negotiated overall reductions in the target prices proposed by the contractor. GAO found no evidence, however, (1) that the Air Force was aware of the overstated estimated costs for miscellaneous and minor outside production items disclosed by our review or (2) that the contractor, during negotiations, reduced its proposed prices because of these overstatements. Unless the contract target prices are reduced appropriately, the Government will incur unnecessary costs of about $541,590 in the form of unwarranted target and incentive profits to Boeing attributable to the overstated cost estimates. Under both contracts Boeing certified that (1) all available pricing data had been considered in preparing its estimates and (2) all significant data considered in negotiations was current. However, it is evident that, in estimating target costs for miscellaneous and minor outside production items, Boeing did not give adequate consideration to all available pricing data since it did not make appropriate adjustments to the historical data used as a basis for its estimates. GAO stated that the target prices negotiated under contracts -41979 and 43416 would have been reduced substantially had the Air Force been aware of the overstated data used by Boeing in estimating costs for miscellaneous and minor outside production items. It was then reasoned that inasmuch as the procedures followed by Boeing in estimating costs for other contracts for KC-135 aircraft were similar to the procedures used in preparing cost proposals for contracts -41979 and -43416, similar pricing deficiencies may exist in the target prices negotiated under other contracts. GAO recommendations (a) That the Secretary of the Air Force make every effort to obtain, through or in coordination with the Department of Justice, appropriate price reductions for the overstated costs. (b) That, if Air Force review of target prices negotiated under other contracts for KC-135 airplanes discloses that the Government incurred additional costs as a result of similar overstatements in the target prices negotiated, appropriate refunds or contract price adjustments be obtained. Statement This matter was forwarded to the Justice Department by SAF-GC letter dated December 21, 1964, with the following comments: "This matter has been under review since receipt of the draft of the GAO report in November 1963. "We do not concur with the GAO findings regarding contract AF 33(600) – 41979, except as pertains to certain costs which were duplicated in Boeing's proposal. Action has been taken effecting an appropriate adjustment for the disclosed duplications. As to the remaining alleged overstatement, Air Force review revealed that there is some basis for the allegation, although such overstatement was not of the magnitude alleged by the GAO, nor does it, in our opinion, exceed a reasonable estimating tolerance. "We disagree with the GAO conclusions regarding contract AF 33(600)43416. Although the proposed miscellaneous and minor cost element was estimated by Boeing in the manner described by the GAO, we do not believe that such overstatements were necessarily included in the negotiated price because (1) the procuring activity's (ASD's) negotiation objective for this element was estimated in a different manner than that proposed by Boeing in order to determine the reasonableness of the total prices proposed by Boeing, and (2) a considerable reduction was negotiated from the contractor's proposed price." Status: Case open pending action by Justice Department. Policy: In the absence of any evidence that would indicate that the Boeing Co. failed to disclose any significant or reasonably available pricing data or that misleading information was furnished the Government negotiators, we find no basis for a price adjustment. It is our policy not to seek a price adjustment to correct negotiations, or in situations where the Government was in no way misled, even though, perhaps because of a superior bargaining position, the contractor was able to obtain an abnormally high price. GAO Report B-146919, September 24, 1964 66: Title: Unnecessary Testing Costs Included in the Prices of Klystron Tubes Purchased from Radio Engineering Laboratories, Inc., Long Island City, N.Y." (OSD case No. 1889). GAO finding: Unnecessary costs were incurred because the prices negotiated for klystron tubes included labor and overhead costs for testing that were neither required nor performed. The contractor did not advise the Air Force that the testing was unnecessary and would not be done, did not reduce its proposed prices for the tubes and did not exclude testing costs in establishing the contract price. GAO estimate of unnecessary costs: About $65,000. Time period of GAO report: Negotiations conducted March through July 1962. DOD comments on GAO finding: The Air Force concurs with the findings. During an Air Force audit review, the subject of "stabilization testing" of the tubes was discussed with a responsible employee of the contractor who advised that the testing was necessary and the auditors knew that such testing had been performed in previous buys. AF personnel have met with the contractor's representatives and reiterated the intent to demand a downward adjustment of $65,000 under the terms of the defective pricing clauses of the contract involved. The contractor has taken an adamant position in refusing to consider a refund. DOD comments on costs: Agrees with GAO. DOD corrective action: The Air Force is taking action to bring this matter to the attention of the Department of Justice as recommended in the report. The Air Force Systems Command has been requested to call this case to the attention of appropriate procurement officials as an illustration of the adverse effect to the Government when contractor's price proposals and other data are not adequately reviewed. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Statement Respecting the first recommendation, Air Force representatives met with the contractors' representatives on Oct. 15, 1964. At this meeting we reiterated our intent to demand a downward adjustment of $65,000 under the terms of the defective pricing clauses of the contracts involved. The contractor has taken an adamant position in refusing to consider a refund. We propose to bring this matter to the attention of the Department of Justice and coordinate our efforts with the Department of Justice as recommended in the report. Respecting the second recommendation, the Air Force Systems Command has been requested to call this case to the attention of appropriate procurement officials as an illustration of the adverse effect to the Government of not adequately reviewing contractor's price proposals and other data. We do not believe, however, for the reasons stated below, that this case need be brought to the attention of the Air Force audit officials. Our records show that Air Force auditors reviewed contractor's price proposals related to contract AF 30 (635)-24412 totaling $1,469,282, that our suditors questioned $187,211 or approximately 12.7 percent of this sum and that the Air Force negotiation team sustained these questioned costs in negotiating the price with the contractor. During this Air Force audit review, the subject of "stabilization testing" of Klystron tubes was discussed with Mr. J. Stuart Frank, controller for Radio Engineering Laboratories. Mr. Frank advised that this testing was necessary for the tubes in question. Also, our auditors knew that such testing had previously been performed on this tube, under other buys, in the hours indi cated in the contractor's current proposal. Our auditors, therefore, believed it unnecessary to pursue the matter further. Our auditors did not participate in the evaluation of the contractor's price proposal for contract AF 30(635)-25699. Status: Case open, a memorandum transmitting the case to the Department of Justice is now being reviewed by the Air Force Counsel. The Air Force overcharge computation amounts to $60,443.88. The GAO computation did not consider visual mechanical tests which amounted to approximately $3,575 and accounts for the major portion of the difference. Additional evidence was located during the Air Force review which could have materially affected the negotiations with the contractor had it been located earlier. The GAO recommendation is being complied with in accordance with instructions issued by SAF General Counsel. Basically the Air Force will pursue its administrative inquiry into the charges contained in the GAO report in order to verify their accuracy and completeness. The Air Force, however, is not to solicit, negotiate or to settle any proposal but should merely report them to Justice. GAO Report B-146876, October 2, 1964 67. Title: "Uneconomical Leasing of Motor Vehicles for Use in Assembly and Checkout Operations at MINUTEMAN Missile Launch Sites and Avoidance of Congressional Controls Relating to Acquisition of Motor Vehicles" (OSD case No. 1867). GAO findings: Lease by the contractor rather than Government purchase of motor vehicles for use by contractor and Government personnel in the assembly and checkout operations at MINUTEMAN missile launch sites will result in increased costs of about $1,852,000 and avoids congressional controls relating to the acquisition of passenger vehicles for use by Government personnel. GAO estimate of unnecessary costs: $1,852,000. Time period of GAO report: April 1961 to September 1965. DOD comments on GAO finding: Actions taken in this case were based on the premise that 5 U.S.C. 78 precluded the acquisition of title to the vehicles except as specifically authorized by the Congress in the yearly DOD Appropriation Acts. Also, it was estimated that the time involved in the budget, procure ment, and delivery cycle for the vehicles would have resulted in an unacceptable delay in the MINUTEMAN program. Although the GAO report states that compliance with 5 U.S.C. 78 does not appear to be necessary when vehicles are for use by contractor personnel, and that funds appropriated for the procurement of missiles could be used to procure such vehicles, we are of the opinion it is the intent of the Congress to control the purchase of passenger vehicles by the Department of Defense, regardless of whether the vehicles are to be used by Government or contractor personnel. DOD comments on costs: Although we have some reservations concerning computations of certain cost comparisons in the report, we recognize that substan tial savings could have accrued if the vehicles in question could have been purchased by the Government and provided to the contractor as Government furnished equipment. DOD corrective action: Appropriate guidelines have been issued to the military departments requiring that for all major projects in which (1) substantial numbers of passenger vehicles will be acquired for use by contractor personnel, (2) the Government will bear the total cost thereof, and (3) contractors would not be expected to have the transportation capability in the performance of defense contracts generally or with a mix of use in commercial activities, a determination will be made as early as possible in the program effort as to the feasi bility of providing the vehicles as Government furnished equipment. Vehicles required for use by Government personnel in their work on major projects will be included in the annual budgets submitted to the Congress for review and approval. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE The GAO alleges that leasing rather than Government purchasing of motor vehicles for use by the Boeing Co. in the assembly and checkout operations at MINUTEMAN missile launch sites under Department of the Air Force contracts will result in increased costs which, on the basis of information available at the time of the GAO review, will amount to about $1,852,000 for the 1,634 vehicles which Boeing originally estimated would be required. The increased costs are attributable to the fact that (1) rental charges are based on purchase prices for comparable vehicles obtainable through the General Services Administration and (2) other costs, such as contractors' administration charges and profits, would not be incurred if the Government purchased the vehicles. The GAO alleges that a means of avoiding controls established by the Congress over the numbers, types, cost, and utilization of vehicles to be obtained for use by Government personnel is provided under the lease method. The Air Force required Boeing to make available for use by Air Force and other Government personnel as many as 188 vehicles a day during the period covered by GAO review. GAO recommendations (a) That the Secretary of Defense initiate appropriate action to provide that, where substantial numbers of motor vehicles are required for use by contractor personnel on major projects and where the contractor does not possess and normally use such transportation capability, the vehicles be acquired through direct purchase by the Government and be furnished to the contractors for use in performing the projects. (b) That existing regulations pertaining to the operation and maintenance of Government vehicles be modified to the extent necessary to enable contractors to meet the exigencies and special needs of such projects. (c) That, upon completion of the contractor's work on a major project, those Government-furnished vehicles suitable for retention be used to replace uneconomically reparable vehicles included in the inventories of Government branches and that vehicles not required or replacement be disposed of in accordance with established procedures. (d) In regard to vehicles for use of Government personnel in their work on major projects, GAO recommends that the vehicle requirements be included in the annual budgets submitted to the Congress for review and approval. Statement In commenting on the GAO draft report, the Deputy Assistant Secretary of Defense (Supply and Services) advised GAO that he recognized that some cost advantages would have accrued from Government purchase of the vehicles. It was his opinion, however, that the action taken by the Air Force was the best possible at that time under the circumstances; that congressional controls pertaining to vehicles were not avoided since they do not apply to vehicles leased by a contractor and used in the execution of a Government contract; that no new policy should be undertaken by the Department of Defense on the purchase of passenger vehicles, but, in peculiar circumstances, such as described in the report, exceptions to the policy on a case-by-case basis should be made where demonstrable economic benefit to the Government could be obtained; that consideration was being given to the need for publication of a special guidance to assure recognition of these situations early in the planning and procurement cycle and that potential savings should not be overlooked. In brief, the Air Force position paper in response to the final report advised OASD that: (1) We do not concur with the alleged increase in costs of $1,852,000 cited in the report; (2) use by DOD personnel of the vehicles leased by Boeing was not contrary to departmental policy or public law, and (3) the lease arrangement with Boeing resulted in substantially lower cost to the Government than would have been incurred if each contractor had supplied its own transportation. In detail, SAF-ILT advised OASD that: (1) Normally, at major construction sites such as the MINUTEMAN missile bases each contractor is responsible for providing the transportation which its own employees require. We realized, however, that if the many contractors at these missile sites each furnished their own transportation, a significant duplication of capability would exist. Consequently, we directed Boeing, the facility contractor, to determine total contractor requirements and provide the necessary on-base transportation for all contractors. (2) The Air Force is still convinced that this procedure resulted in a total cost to the Government substantially lower than the cost which would have been incurred if each contractor had arranged separately for its own transportation. The GAO report does not question this conclusion; rather, the GAO criticizes the Air Force for not saving even more money by purchasing the necessary vehicles itself and furnishing them to the facility contractor as Government-furnished equipment (GFE). (3) The number of vehicles which the Air Force is permitted to purchase is specified by the Congress. The vehicles which our contractors purchase to meet their own transportation needs during performance of Air Force contracts have never been included in our requests to Congress. The GAO claims, however, that when we required one contractor to determine and consolidate transportation requirements of all contractors at a construction site, and provide a fleet of vehicles to meet these consolidated transportation requirements, "congressional controls relating to vehicles for use by Government personnel were *** avoided." This GAO view was considered fully by our General Counsel's office during review of the GAO draft report and we do not agree with the GAO. (4) Aside from the legal question, the GAO proposal presents practical problems. The vehicle requirements of a contractor in connection with performance of a Government contract can be computed accurately only when the exact scope and schedule of work have been ascertained. At this point in time the contractor is prepared to start performance of the contract. If the Department of the Air Force were then to initiate budgeting action to obtain specific congressional authorization for the purchase and furnishing as GFE of the necessary vehicles, the delay in the start of construction work might exceed 2 years. The GAO recognizes this and their letter of transmittal says "in order to avoid delays, emergency requirements could be obtained by short-term lease until the needs have been reviewed by the Congress." The average leased vehicle is retained for about 24 months. Consequently, the GAO's "short-term lease" might prove to be very like our present leases. OSD response to GAO In response of February 20, 1965, OSD advised the GAO that the actions taken by the Air Force were based upon the premise that 5 U.S.C. 78 precluded the acquisition of title to the vehicles, except as specifically authorized by the Congress in the yearly DOD appropriation acts. Also, the time involved in the budget, buy and delivery of the vehicles, would have resulted in unacceptable delay in the Minuteman program. Policy OSD issued a memorandum to the services on this matter on February 20, 1965, which is compatible with the GAO recommendations but provides sufficient latitude to preclude possible adverse impact on sensitive programs. The Air Force has implemented the OSD memorandum by letter dated April 5, 1965, to our procurement officials. Attached is a copy of Mr. Ignatius' memorandum to the military departments. ASSISTANT SECRETARY OF DEFENSE, INSTALLATIONS AND LOGISTICS, Washington, D.C., February 20, 1965. Memorandum for the Assistant Secretary of the Army (I. & L.). Assistant Secretary of the Navy (I. & L.). Subject: Use of motor vehicles in contractor operations. In a recent case (OSD case No. 1867) the General Accounting Office criticized a contract arrangement whereby motor vehicles for use in the assembly and checkout operations at Minuteman missile launch sites were provided by the contractor under a finance lease rather than being purchased by the Government. The GAO contended that (1) this arrangement resulted in increased costs of about $1,852,000 for the 1,634 vehicles which the contractor originally estimated would be required; (2) the contractor was authorized to provide passenger vehicles for use by DOD personnel engaged in monitoring the assembly and checkout work, although the funds used to provide these vehicles were not specifically appropriated for this purpose as required by law (5 U.S.C. 78); and (3) this method of obtaining vehicles for use of Government personnel avoids congressional controls relating to the acquisition of passenger vehicles. The GAO report recommends that (1) the Secretary of Defense initiate action to provide that, where substantial numbers of motor vehicles are required for use by contractor personnel on major projects and the contractor does not possess |