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; (2) 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 for such projects; (3) upon completion of a 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 the vehicles not required for replacement be disposed of in accordance with established procedures; and (4) in regard to vehicles for use by Government personnel in their work on major projects, the vehicle requirements be included in the annual budgets submitted to the Congress for review and approval.

Although we have some reservations concerning computations of certain cost comparisons in the report, we recognize that substantial 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. However, the actions taken in this case were based upon the premise that 5 U.S.C. 78 precluded the Air Force from acquiring title to passenger vehicles except as specifically authorized by the Congress in the yearly DOD appropriation acts. Also, it was estimated that the time involved in the budgeting, procurement, and delivery time cycle for the vehicles would have resulted in an unacceptable delay in the Minuteman program. While the GAO report indicates that the timeconsuming process required under 5 U.S.C. 78 does not appear to be necessary, and that funds appropriated for the procurement of missiles could be used to procure vehicles for the use of contractor personnel, we are of the opinion that 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.

However, except as previously indicated with respect to the interpretation of the law, and subject to certain limitations indicated below, we are in general agreement with the recommendations included in the report. It is therefore requested that the following procedures be established:

(a) For all major projects (those amounting to $5 million or more) in which substantial numbers (100 or more) of passenger vehicles will be required for use by contractor personnel, a determination will be made as early as possible in the program effort as to the feasibility of providing the vehicles as Government-furnished equipment. Unless there are substantial reasons to the contrary, the vehicles will be so provided when the following conditions are met:

(1) The Government contract will bear the entire cost of the vehicle program.

(2) The prospective contractors (known or unknown) do not have, or would not be expected to have, an existing and continuing capability for providing the passenger vehicles necessary to perform the contract from their own resources.

(3) The number of passenger vehicles required in the performance of the contract is predictable with a reasonable degree of accuracy and is expected to remain fairly constant over a period of 1 year or more.

(4) Considerable savings can be effected by Government purchase of the vehicles.

The required vehicles will not be provided by the Government when they will be used to support the normal and continuing operation of a contractor in the performance of defense contracts generally (or with a mix of use in commercial activities) and the costs thereof would be distributed in overhead among unrelated contracts or partially allocated to commercial use. In these situations, as in the case of other facilities and equipment generally, private investment and management will be encouraged.

(b) If there is insufficient time to obtain congressional approval and purchase the required vehicles before the contractor commences work on the project, the vehicles will be supplied through redistribution of departmental assets to the extent practicable, and otherwise through temporary rental of commercial vehicles, until authorized purchase and delivery can be effected.

(c) Where existing regulations pertaining to the operation and maintenance of Government vehicles (recordkeeping requirements, movement of vehicles between site locations, disposition of vehicles, etc.) would unduly inhibit con

tractors in the performance of contracts, or unnecessarily increase costs, the regulations will be modified to the extent necessary to enable contractors to meet the exigencies and special needs of such projects on an economical basis. However, provisions concerning the use of Government vehicles as set forth in 5 U.S.C. 78 will not be modified.

(d) Upon completion of a contractor's work on a major project, those Government-furnished vehicles suitable for retention will be used to replace vehicles beyond economical repair at other installations or projects, and those not required for such use will be disposed of by the Government in accordance with established procedures.

(e) 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.

Request this office be advised by May 17, 1965, of the action you have taken in this matter.

PAUL R. IGNATIUS, Assistant Secretary of Defense (Installations and Logistics).

GAO Report B-146942, October 5, 1964

68. Title: "Unnecessary Costs Incurred in the Procurement From AC Spark Plug Division of General Motors Corp. of Bombing-Navigational System Components Manufactured by International Business Machines Corp" (OSD case No. 1883).

GAO finding:

Air Force will incur unnecessary costs as a result of having procured certain components from the prime systems contractor, AC Spark Plug, instead of buying them directly from the actual manufacturer, IBM. The Air Force was fully aware that the components were to be purchased by AC Spark Plug from IBM and had, in fact, been purchasing identical components from IBM in connection with a similar subsystem. The additional cost consists of profits allowed to AC Spark Plug on the cost of the subcontracted components. The GAO said that the Air Force failed to follow its own regulation on this subject. GAO estimate of unnecessary costs: $754,000.

Time period of GAO reports: 1961.

DOD comments on GAO finding: Air Force does not agree with GAO that its decision to buy the components through the prime contractor, AC Spark Plug, was wrong or that it should have bought directly from IBM. It was appropriate and in accordance with prescribed Air Force policy and regulations to purchase the components through AC Spark Plug because of changes in the system which were known at the time. These known changes could have resulted in changes to the IBM components. Under such circumstances it was in the best interest of the Government to insure satisfactory integration into the end item by assigning such responsibility to AC Spark Plug.

DOD comments on costs: Since the decision was proper, there were no unnecessary costs.

DOD corrective action: No corrective action necessary. out" is presently undergoing intensive study within DOD.

The subject of "break

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

The GAO has alleged that the Air Force will incur unnecessary costs of at least $754,000 as a result of having procured certain components from the prime contractor, AC Spark Plug, instead of buying them directly from the component manufacturer, IBM, and supplying them to AC Spark Plug. This sum, the GAO alleges, consists of the profit allowed AC Spark Plug on the cost of the subcontracted components. The GAO alleges that in buying the components from AC Spark Plug, the Air Force failed to follow its own policy on the providing of components to systems contractors, and suggests that the Secretary of Defense have reviews made on a continuing basis to assure that the Air Force follows its policy in the future.

GAO recommendation

That the Secretary of Defense have reviews made on a continuing basis at Air Force procurement activities to attain a greater degree of assurance that major components and subsystems are procured from actual manufacturers whenever feasible, in accordance with prescribed Air Force policy.

Statement

In the acquisition of the ASB-15 subsystem, it was determined that the best assurance of timely program success was for a responsible contractor to provide engineering control over all aspects of the configuration and that AC Spark Plug would not accept systems responsibility unless it had control over the engineering design of the various components. AC Spark Plug stated that the required capability of the ASB-15 could be achieved only by complete compatibility of all components and that, to accomplish this, the prime contractor must establish close relationships with its suppliers and assume responsibility for the quality of all components. AC Spark Plug contended that this would be difficult to accomplish if the prime contractor did not have a contractual relationship with the suppliers.

The Air Force and the GAO agree that as a general rule the Government's interests will be served best if the Air Force buys large subsystems from their manufacturer and supplies them to the systems contractor rather than having the systems contractor subcontract for the items. In this way, the pyramiding of overhead and profits can be avoided.

In line with this general rule, the Air Force provided AC Spark Plug with two major components of the AN/ASG-48 bombing-navigation system. The Air Force contracted with AC Spark Plug to manufacture the third subsystem, the AN/ASB-15. The Air Force concluded that it was appropriate for AC Spark Plug to acquire the components of the AN/ASB-15 subsystem manufactured by IBM about which the GAO concerns itself in this report directly from the manufacturer. The design of the subsystem was not firm at the time of the negotiations between the Air Force and AC Spark Plug. The AC Spark Plug proposal was based on, and the Air Force aimed for, maximum commonality between the AN/ASB-15 and the AN/ASB-9A subsystem it was replacing. It was felt that commonality would mean cost savings, and would facilitate timely delivery of the subsystem. However, in order for the new subsystem to have the accuracy and quick reaction time necessary for low level flying, the need for certain changes such as a different "antenna" and a different "terrain computer" were known. What was not known at the time of the negotiations was whether these changes would require changes in the IBM components of the subsystem. Thus, it appeared appropriate to give AC Spark Plug full responsibility for acquisition of the IBM components and their integration into the system. Had AC Spark Plug been unable to use the IBM components without change, Government acquisition of these components and furnishing of them to AC Spark Plug as CFP could have resulted in substantial added costs for the Government. The fact that AC Spark Plug was eventually able to use the IBM components without change is fortunate but, in our opinion, does not mean that the original decision to permit AC Spark Plug to acquire the items was incorrect on the basis of the facts as they then existed.

As was previously explained in our response to GAO on the draft report, profit rates of 10 and 9.25 percent, respectively, were negotiated for the entire effort under fixed-price-incentive-contracts AF 33 (600)-41974, and AF 33 (657)-8007. We also explained that these rates were composite rates both for effort which historically carries a profit rate of over 10 percent as well as for effort which usually calls for a lower rate. Component procurement calls for a lower rate. It has long been customary to allow a prime contractor a fee from 1 to 5 percent, depending upon the complexities for management of subcontract effort. These rates have since been codified in ASPR 3-808.4.

The overriding consideration is, however, that in the judgment of the Air Force the management capabilities of AC Spark Plug were necessary to assure the timely manufacture and successful performance of the AN/ASB-15 subsystem. It was also our judgment that AC Spark Plug should be paid a reasonable profit for that effort. We reaffirm that belief.

We cannot agree with the GAO that the Secretary of Defense should make continuing reviews to assure compliance with prescribed Air Force policy in this area. Such reviews, in our opinion, are unnecessary. The Air Force does not believe that the facts of this case demonstrate that Air Force policy is not

being followed. The Air Force believes that AFR 70-9 which deals with this question is being properly applied, and the interests of the Government are being protected.

Status: Case closed.

GAO Report B-146945, October 16, 1964

69. Title: "Overpricing of Valves Purchased from the Garrett Corp, AiResearch Manufacturing Division, Phoenix, Ariz., by General Dynamics Corp., Astronautics Division, San Diego, Calif., for the Atlas Intercontinental Ballistic Missile" (OSD case No. 1966).

GAO finding: The price negotiated by General Dynamics and the Garrett Corp., AiResearch Manufacturing Division and approved by the Air Force for pneumatic relief and shutoff valves for the ATLAS missile disclosed that the firm fixed price was based on cost estimates for material and testing which were overstated in relation to cost data available to AiResearch at the time the proposal was submitted to General Dynamics.

GAO estimate of unnecessary cost: AiResearch cost estimates overstated by at least $80,900 and an undertermined amount for additional fees to General Dynamics.

Time period of GAO report: GAO review concluded in March 1964. Price negotiations conducted January 10 and 11, 1962.

DOD comments on GAO finding: AiResearch has indicated a willingness to make a refund of $80,900 to General Dynamics. In accordance with GAO recommendation, the Department of Justice was requested to review the matter on September 25, 1964, and advise whether there is any objection to directing General Dynamics to accept the offered refund.

DOD comments on costs: The Air Force agrees with the GAO estimate of increased costs.

DOD corrective action: Public Law 87-653, effective December 1, 1962, provides that in negotiated procurements where competition is absent contractors and subcontractors be required to submit cost or pricing data and certify to the currency, completeness, and correctness of such data. The law also provides that contract prices be adjusted in the event such data are found to be inaccurate, incomplete, or noncurrent. Regulations and instructions have been issued to place increased emphasis on the review and evaluation of cost and pricing data furnished by contractors and subcontractors in support of proposed prices under negotiated procurements.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

The report alleges that the price negotiated by General Dynamics and AiRe search, and approved by the Air Force on purchase order 6214, for pneumatic relief and shutoff valves for the ATLAS missile, included cost estimates for material and testing which were overstated by about $80,900 in relation to cost data available to AiResearch at the time the proposal was submitted to General Dynamics. It is further alleged that AiResearch certified that all available actual cost or pricing data had been considered in preparing its price estimate and that any significant changes from the time of its preparation to the date the proposal was submitted on December 28, 1961, had been made known to the buyer.

GAO recommendation

That the Air Force, in coordination with the Department of Justice, take steps to obtain a suitable refund under the prime contracts involved, consistent with maximum protection of the Government's interest in terms of penalties that may be appropriate.

Statement

AiResearch has indicated a willingness to make a refund of $80,900 to General Dynamics. In accordance with the GAO recommendation, the Air Force has forwarded this case to the Justice Department for review.

The total overpricing of $80,900 alleged by GAO, consists of $24,200 for materials and $56,700 for testing of valves.

Evidence shows that the AiResearch proposal accepted by General Dynamics was submitted on December 28, 1961. This proposal contained an estimate for material which was about $24,200 higher than it might have been had AiResearch used the latest cost information available. This necessary information for material cost estimates was available from purchase orders which had been issued by AiResearch on December 5, 8, and 20, 1961, and although no willful withholding is evident, it is believed that the information should have been made available to General Dynamics before completion of negotiations on January 11, 1962.

Respecting that part of the AiResearch proposal to General Dynamics on testing costs, Air Force audit has substantially verified the unit cost findings of the GAO based on the past history of test costs at AiResearch. AiResearch did not use its past history on testing costs as a basis for quoting to General Dynamics, rather it used engineering estimates of testing it believed would be necessary for the subject procurement. This method was used since it was believed at the time that testing requirements on prior orders would not necessarily be indicative of testing requirements on subsequent orders. General Dynamics, based on its own experience, also believed testing requirements on prior orders were not necessarily indicative of testing requirements that would occur under purchase order No. 6214. General Dynamics, therefore, made an independent estimate of the test costs for the valve being procured and concluded that the testing costs as forecasted by AiResearch could be reasonably expected. Although postaudit shows that the judgment of both AiResearch and General Dynamics was faulty, the Air Force believes there is no evidence to show a willful intent of either party to overprice the Government. However, the Justice Department has responsibility to determine whether or not fraud was present.

Status: Case open.

Pending completion of Justice Department review and further advice from that agency.

GAO Report B-146705, November 24, 1964

70. Title: "Overstated Cost Estimates Included in Target Prices Negotiated for B-52G Airplanes Produced by the Boeing Co., Wichita Branch, Wichita, Kans." (OSD case No. 1943).

GAO finding: Target prices negotiated for 140 B-52G airplanes, contracts AF 33(600)-34670 and -37481, included target costs based on cost estimates for sustaining tooling labor, production labor and subcontracting which were overstated by about $7,575,500. Unless adjusted the Government will incur increased costs of about $1,261,000 in the form of additional profit to Boeing. After advice of GAO findings the Air Force and Boeing agreed to reduce target costs by only $597,340, representing reduction in the increased costs to the Government of about $60,400.

GAO estimate of unnecessary costs: About $1,261,000.

Time period of GAO report: Date of GAO review unknown. Contract -34670, firm target price and profit established April 1959; final price negotiated August 1962; -37481, firm target price negotiated March 1960.

DOD comments on GAO findings: The Air Force agrees that subcontract costs were overstated. The remaining estimated costs alleged to have been overstated appear to have been reasonably priced and considered during negotiations. An actual cost incurred for an element that has varied to some degree from the initially evaluated amount does not constitute a sound basis for reopening a negotiated contract for the purpose of increasing or decreasing a target price. On the contrary, this situation is one of the risks shared by both parties to a contract.

DOD comments on costs: Boeing concurred in September 1962 to a target reduction of $39,400 because of overstated subcontract costs of $492,506 under contract -37481. Supplemental agreement was issued in April 1963 reducing the firm target cost by $104,834 for overstated contract termination costs resulting in a Government saving of about $21,000. Total saving $60,400. Adequate tests of reasonableness of other estimated costs were made by the Air Force negotiating team at the time of negotiations and there is no basis for seeking further contract price adjustments.