profit or fee which the contract officer considers unreasonable. The Air Force does not concur in the position taken by HRB-Singer and has alerted its procurement personnel to the facts of this case in connection with any future contracts involving this company or other companies that refuse to negotiate on reasonable terms.

Problem

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

The GAO alleges that under its prime contract with the Air Force, the Boeing Co. awarded HRB-Singer two groups of follow-on orders for buffer amplifiers for B-47 aircraft at firm prices totaling $158,581 that were $86,442 or 120 percent higher than costs experienced on prior production and available to Singer at the time the prices were established. In the absence of effective competition, Boeing accepted the prices proposed by Singer without obtaining cost information on Singer's prior production experience or other evidence to suppport the reasonableness of the proposed prices.

GAO recommendations

In its draft report, the GAO recommended that the Secretary of the Air Force make every effort to obtain an appropriate price reduction for the unreasonably high prices Boeing paid Singer for buffer amplifiers purchased under prime contract AF 34 (601)-4588 and that the Secretary of the Air Force review the firm prices established by Singer with other Government contractors and advise us of the results of the review.

In the final report, the GAO recommended that the Secretary of Defense stress the need for real personal concern by each member of the procurement team that their responsibilities are carried out in a manner that will adequately protect the interests of the Government and, when making future personnel evaluations and management assignments, appropriately consider the manner in which they had discharged their responsibility and performed their duties.1

Statement

We have examined 29 orders issued by our prime contractors to HRB-Singer. This review consisted of all such orders in excess of $10,000 issued during the period of April 1960 through May 1964. Our review disclosed that all the purchase orders were for electronic countermeasure equipment (ECM) and that many of the procurement were processed in consonance with our quick reaction capability (QRC) procedures established to meet urgent electronic warfare and intelligence requirements. Sixteen of the procurements were emergency requirements and the remainder were urgent requirements to fulfill critical production schedules.

For many of the requirements, our prime contractors solicited proposals from 6 to 11 sources. The initial procurements with Singer were for advance development, classified research, and feasibility studies involving awards on the basis of source screening and technical and price competition. For most of the procurements, Singer was the only source that could meet our prime contractor's requirements, and in at least nine of the procurements the Air Force directed Singer as the source on the basis of technical requirements. Contrary to the conclusion contained in the report, Boeing used all the time allowed, short of endangering delivery requirements, in its efforts to negotiate reasonable prices with HRB-Singer. Boeing made repeated efforts to obtain better prices and additional cost data from HRB-Singer. When these efforts failed, Boeing attempted to obtain the subcontractor's concurrence with use of a redetermination type contract; however, Singer advised Boeing on several occasions that purchase orders on other than a firm-fixed-price basis were unacceptable.

Our interim response of June 2, 1964, advised GAO that steps would be taken to obtain a price adjustment and that withholding action was being taken under the prime contract with Boeing. By letter of May 5, 1964, and in subsequent contacts with the management of HRB-Singer, Inc., the Boeing Co. has taken action to obtain a refund. However, Singer management is adament in their position that the purchase orders with Boeing were fixed price and not subject to price revision. In view of the information disclosed by our more detailed examination of the matter, we concluded that the Boeing Co. should not be held responsible for the unreasonably high prices received by HRB Singer, Inc., since,

1 See "Status."

in a difficult situation, it attempted to act in the best interest of the Government, and the Air Force approved the subcontract fully aware of the circumstances which confronted Being in its dealings with Singer. Therefore, we are directing that the commands discontinue their withholding action under the prime contract. We do not concur with the position taken by HRB-Singer in this matter. A letter dispatched to our buying personnel and those engaged in contract administration cautioning them that in their direct dealings with Singer and in the approval of subcontracts awarded Singer by our prime contractors, that every effort will be made to assure compliance with the ASPR and other pertinent directives. Further, our personnel will be advised that should HRB-Singer, Inc., decline to comply with appropriate directives, Public Law, etc., the matter will be brought to the attention of the Air Staff prior to the entering into, or the approval of, any contract with HRB-Singer, Inc.

Regarding our response to their draft report the GAO states, "The Air Force has advised us that Boeing initiated action to obtain a refund but that HRBSinger was adamant in its position that the purchase orders with Boeing were fixed price and not subject to price revision. We have been advised that the Air Force does not concur with the position taken by HRB-Singer and that action is being taken to assure compliance with the Armed Services Procurement Regulation and other pertinent directives in all future awards to HRB-Singer."

Regarding the Boeing effort to obtain a refund from HRB-Singer, the GAO states that "the position taken by HRB-Singer in refusing to make a voluntary refund is not in consonance with the position generally taken by other contractors who under similar circumstances have agreed to negotiate adjustments of the prices and have made voluntary refunds to the Government. The action outlined by the Air Force to be followed by contracting officials in future dealings with HRB-Singer should serve to emphasize the need for these officials to use all means necessary to support effective price negotiations and to avoid placing undue reliance on contractors' unverified representations, to assure reasonable pricing."

Status: Case closed.

Regarding the recommendation contained in the final report, OSD has been advised of the urgency and sensitive nature of purchase orders placed by Boeing with HRB-Singer and the apparent justification for Air Force approval of these subcontractors.

Policy: The procurements cited in the report were unusual and the material was required to meet sensitive and urgent electronic warfare and intelligence requirements. In this kind of a situation there is always the likelihood that the policies and procedures regarding subcontract pricing review as set forth in our response to OSD case numbers 1935 and 1942 will not be completely effective. Notwithstanding the emergency nature of these requirements, we abhor the position taken by the subcontractor in the refusal to negotiate reasonable prices with the prime contractor.

GAO Report B-132992, February 9, 1965

75. Title: "Potential Savings Through Procurement of Operating Supplies from General Services Administration Sources by Martin-Marietta Corp., Denver Division, Denver, Colo." (OSD case No. 2022).

GAO finding: GAO found that the prices paid by Martin for operating supplies such as file folders, bond paper, carbon paper, pens, tape, etc., were higher than the prices of comparable items listed in the General Services Administration stores stock catalog. GAO, therefore, recommends that the Government take over the buying and supplying of contractor's operating supplies where GSA stocks such items and allow contractors to buy nonstocked items from GSA sources, thus eliminating purchase of operating supplies from local venders. This would extend to prime contractors and subcontractors holding negotiated contracts who would use operating supplies so obtained wholly or substantially (75 percent of use) in the performance of Government contracts. GAO estimate of unnecessary costs: $533,333 per year. Time period of GAO report: 1960 through 1962.

DOD comments on GAO finding: The GAO recommendation in effect would force the affected defense contractors to buy through GSA from the same sources used by the Government as if the contractors were a part of the Government or agents of the Government. It is to be noted that this principle, if adopted, could be applied to almost anything which defense contractors purchase for

their own use. For example, GAO has also recommended that defense contractors lease electrical accounting machines off GSA schedules (OSD case No. 1902) and buy office furniture from GSA manufacturers (OSD case No. 1985). DOD has indicated its opposition to this approach because of the effect that such practices would have on the normal established commercial distribution of goods and services and because the philosophy which the recommendation embraces would inevitably lead to greater Government control and interference in the operations of contractors.

DOD comments on costs: No independent DOD estimate made.

DOD corrective action: Because of the broad economic and national policy questions raised by this recommendation, particularly with respect to the displacement of existing distribution channels, no change is being made in present procedures pending further review.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

The GAO alleges the Government incurred excessive costs of at least $484,000 during the 3-year period 1960 through 1962 because Martin-Denver purchased operating supplies from commercial sources at prices higher than the prices of comparable items available from manufacturers who supply such items to the General Services Administration. In as much as 99.98 perecnt of MartinDenver's work was performed for the Government, about 99.6 percent under cost-reimbursement type contracts, the Government bears the excess cost of operating supplies used by the contractor.

GAO recommendations

(a) That the Department of Defense initiate action to identify sources for direct procurement of such operating supplies; and that defense contractors and local contracting officials be made cognizant of such sources.

(b) That the costs of operating supplies charged to Government contracts and reimbursed to the contractor be limited to amounts equivalent to those which would be incurred if GSA procurement sources were utilized.

Statement

OSD advised the GAO that (1) they have recently reviewed Air Force policies on the use of GSA schedules by defense contractors; (2) the Air Force conclusions together with the conclusions of the Department of Defense, were reported to them in response to the draft report on procurement of office furniture by Lockheed Missile & Space Co. (OSD case No. 1985); (3) as was stated at that time, we agree in general with the first of the recommendations but disagree with the second; (4) we noted, in summary, that the first recommendation might provide useful information and guidance to defense contractors, the second, however, would interfere with the judgment of the contractor, who has the primary responsibility for determining what supplies and equipment are best suited to his current and future requirements; and (5) although the Lockheed case was concerned with furniture rather than office supplies, we are of the opinion that the reasoning behind our position in that case is equally ap plicable to the procurement of all items that the contractor buys for himself and not directly for the Government.

Status: The DOD comments are quoted below:

The GAO recommendation in effect would force the affected defense contractors to buy through GSA from the same sources used by the Government as if the contractors were a part of the Government or agents of the Government. It is to be noted that this principle, if adopted, could be applied to almost anything which defense contractors purchase for their own use. For example, GAO has also recommended that defense contractors lease electrical accounting machines off GSA schedules (OSD case No. 1902) and buy office furniture from GSA manufacturers (OSD case No. 1985). DOD has indicated its opposition to this approach because of the effect that such practices would have on the normal established commercial distribution of goods and services and because the philosophy which the recommendation embraces would inevitably lead to greater Government control and interference in the operations of contracts.

Because of the broad economic and national policy questions raised by this recommendation, particularly with respect to the displacement of existing distribution channels, no change is being made in present procedures pending further review.

GAO Report B-146967, February 26, 1965

76. Title: "Unproper Application by the Hallicrafters Co., Chicago, Ill., of Government's Share of Vendor Credits for Volume Districts Under Contracts AF 33 (600)-40992, -40094, and -42414" (OSD case No. 2067). GAO finding: The Government did not receive its share of credits allowed by a vendor to Hallicrafters for volume discounts on electronic equipment items purchased under Air Force contracts.

GAO estimate of unecessary costs: Approximately $72,000.

Time period of GAO report: 1962.

DOD comments on GAO finding: The Air Force concurs in GAO's findings. Hallicrafters made appropriate accounting and billing adjustments to credit the Government with $57,200.

DOD comments on costs: Air Force agrees with GAO estimate.

DOD corrective action: The balance will be recovered when the last of the three contracts, a fixed-price incentive contract, is finally priced out by the Air Force.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

GAO found that Hallicrafters improperly applied credits of about $72,000 to a firm fixed-price contract when a substantial portion of these credits arose from purchase orders issued under cost reimbursement and fixed-price incentive type contracts which entitled the Government to share in these credits. The credits were extended to Hallicrafters in accordance with the provisions of an annual agreement for volume discounts granted by Eitel-McCullough, Inc., a supplier of certain tubes used by Hallicrafters in the manufacturer of electronic equipment. Subsequent to the GAO disclosures, Hallicrafters made appropriate accounting and billing adjustments which will result in a recovery of about $57,200 by the Government.

GAO recommendations

(a) That the Secretary of Defense bring this case to the attention of contracting officers and audit personnel in the military services to illustrate the need for careful review of procurement and accounting practices of contractors operating under cost and incentive type contracts.

(b) That the Secretary of the Air Force take appropriate action under the final repricing of fixed-price incentive contract 42414 to insure that the amount due is recovered by the Government.

Statement

Our review has confirmed the GAO findings in this matter. The administrative contracting officer has taken action to preclude recurrence of this condition. As stated in the report, complete refunds have been received from the contractor on the two cost-type contracts.

Pursuant to the GAO recommendation that this case be brought to the attention of our contracting and audit personnel, the Systems Command in a letter, subject "Impact of Contractor Purchasing and Accounting Practices on Incentive and Cost Reimbursable Contracts," has directed the attention of all contracting personnel to problems of the type cited in the report that can arise in the administration of contracts. Similar instructions were issued to our auditors. The Department of Defense has brought this case to the attention of audit personnel in the military services to illustrate the need for careful review of procurement and accounting practices of contractors operating under cost and incentive-type contracts.

Regarding the GAO recommendation that action be taken to insure that the amount due the Government under contract 42414 is recovered, our auditor verified that recovery has been made. Notification that recovery has been accomplished was forwarded to GAO on April 28, 1965.

Status: Case closed.

GAO Report B-146784, July 31, 1963

77. Title: "Noncompetitive Procurement of Military Aircraft Forgings From Alcoa at prices Substantially Higher than Current and Expected Costs of Production" (OSD case No. 1648).

Problem

In brief, the GAO finds that (1) for noncompetitive sales of military aircraft forgings totaling $2.6 million, Alcoa consistently quoted prices substantially above its current and expected production cost, and even though competition was lacking, the company refused to furnish cost data to its military customers, thereby precluding open negotiation of prices. These prices exceeded Alcoa's known current production cost by $893,300, or an average of about 51 percent; (2) notwithstanding the absence of effective competition and the fact that Alcoa's favored position stemmed in part from its possession of special Government facilities, the company refused to accept subcontracts on any basis other than its own terms and rejected the inclusion of contract provisions granting the Air Force or its contractors the right to review actual cost data. As a result of the position taken by Alcoa, and the pressure of time in the overall production of the related aircraft, its military customers had to accept the prices offered without benefit of normal negotiation processes; and, (3) all efforts of the Department of the Air Force to obtain data from Alcoa with respect to the cases cited, as well as other prior Air Force defense business, have been resisted by the company pending the issuance of this report.

GAO recommendation

"We are recommending that, in addition to taking immediate steps to effect equitable settlements on the contracts discussed in this report, the Secretary of Defense vigorously support the recent Air Force action to examine into the prices negotiated with Alcoa for other defense business. Also, we are requesting the Secretary of Defense to notify us in the event Alcoa further denies the Air Force access to its records and to keep us currently informed of the progress made in obtaining an equitable adjustment of contract prices."

Statement

The Final report did not differ materially in its allegations from the draft report issued in July 1962. Upon receipt of the draft report the immediate problem was that of obtaining access to Alcoa's accounting records to verify, modify, or refute the GAO allegations. Previous attempts at obtaining access to Alcoa's records were unsuccessful. Alcoa stated they were reluctant to permit unlimited access to cost records associated with Government contracts utilizing the heavy press facilities pending issuance of the GAO final report. They advised they would comply with the statutory requirements of Public Law 87-653.

The Air Force Systems Command eventually acquiesced to the suggestion that any further attempts to gain access to Alcoa's records should await the issuance of the final report, since Alcoa had been communicating with GAO and had advised they were able to explain the deficiencies cited in the draft report to the General Accounting Office's satisfaction.

General Schriever, commander, Air Force Systems Command, did on September 5, 1963, dispatch a second strongly worded letter to the President of Alcoa, in which he informed Mr. Litchfield that (1) Alcoa representatives expressed confidence that the GAO draft report dated July 1962 would be significantly modified in its final form, due to additional detail that had been made available to GAO by your company; (2) he was of the opinion that considerable progress had been made as to clarifying the intent of both parties; (3) it was agreed during our meeting that appropriate Air Force representation would discuss with Alcoa's representatives specific details as to Government audit procedures that would be used; (4) this latter meeting was never formulated due to your company's further discussions with GAO and the understanding that was conveyed which indicated a strong possibility that many of your differences with the GAO had been ironed out; (5) he was disappointed to learn that this final report is essentially the same as the earlier draft; (6) a complete review of appropriate Alcoa records by the pertinent Air Force auditing authorities is a definite requirement; and, (7) he would appreciate Mr. Litchfield's personal response to this letter at the earliest convenient date.