furnished) to be used in purchasing them. Systems managers are required to justify their decisions, and to obtain authorization from higher levels on an individual item basis, before assigning to a contractor responsibility for purchasing items which under the criteria of the regulation should be Governmentfurnished."

Recommendation 1:

We do not concur in total. We take exception to the alternative condition in part (b) which indicates "(or where the item is not readily divisible from a larger assembly of which it is a part)." This is not a criterion for breakout. It is Department of Defense policy to breakout components that are procured by the end item contractor whenever such breakout will result in overall savings to the Government and will not jeopardize the satisfactory performance and timely delivery of the end item. It is important that nothing be included in the ASPR that would defeat the program manager's effectiveness as promulgated by the 375 series Air Force regulations.

Recommendation 2:

Concur to the extent that DOD policy would be consistent with the intent of AFR 70-9 and AFSC Supplement No. 1 thereto. Should DOD policy be more exacting in nature the additional review and analysis and documentation (for contract file) burdens placed on our manpower authorizations could seriously encumber the entire procurement operations.

Recommendation 3:

Concur: This is the intent of AFR 70-9, as indicated earlier. Also advance procurement planning as required by AFSC PMI 1-11 serves to eliminate or minimize such obstacles as this.

Recommendation 4:

We do not concur: Profit or fees are only one facet of the factors weighing on the CF/GF breakout decision. Other specific factors which are equally as important, if not more so, are as follows:

(a) Has the design stabilized?

(b) Is the design highly critical?

(c) Is an adequate reprocurement data package available?

(d) Are the manpower resources available to enable the Department to undertake direct procurement?

(e) Is adequate technical support available?

(ƒ) Are any reliability, technical or integration problems known which will require effort by the prime contractor? How complex are they?

(g). Will breakout create interchangeability or interface problems?

(h) Is there adequate time available to procure the component from a new source if competition by the Government could result in a new producer? (i) Where incentive contracting is contemplated, the effect that breakout will have on the incentive structure (cost, performances, and/or schedule). (j) Will the subsystem be procured on a competitive basis (in which case Government is reasonably assured of a fair price)?

(k) How much will breakout dilate the contractor's end item responsibility? (7) Will breakout actually result in substantial overall cost reductions even after the acid test of real/ultimate cost factors?

Other information

Attachment No. 1: GAO final report dated November 29, 1963, on "Uneconomical Procurement of Electronic Equipment Under Contract AF 01 (601)31042 With Grumman Aircraft Engineering Corp., Bethpage, Long Island, N.Y." OSD case No. 1682.

Attachment No. 2: GAO final report dated January 6, 1965, on "Additional Costs Resulting From the Failure To Procure Parts Used in Overhauling SAM Aircraft Engines Directly From the Overhauling Subcontractor, Curtiss-Wright Corp." OSD case No. 2002.

Attachment No. 3: Proposed letter to GAO on OSD case No. 2002.

Attachment No. 4: CFE versus GFE ASPR Subcommittee on Systems Component Breakout.

Attachment No. 5: Summary of GAO reports on CFE versus GFE. Other briefs

See B-152600, B-146942 and B-146882.

APPENDIX 2E-ADDITIONAL CASES ON WHICH INFORMATION WAS FURNISHED BY THE DEPARTMENT OF DEFENSE

GAO Report B-146732 series

81. Title: "Excess of Lease Costs Over Full Purchase Costs for Continued Use of Equipment Over a 5-Year Period by General Electric Co., General Motors Corp., the Boeing Co., General Dynamics Corp., Lear Siegler, Inc., Hercules Powder Co., Radio Corp. of America, and Other Defense Contractors Involved in 19 GAO Reports," all numbered B-146732, OSD case nos. 1850, 1857, 1859, 1872, 1874, 1893, 1899, 1906, 1907, 1912, 1921, 1925, 1931, 1939, 1954, 1960, 1990, 2017, 2235. GAO finding: Since September 1963 GAO has been issuing a continuing series of reports on the subject of contractors' leasing of electronic data processing equipment. These reports are virtually identical in most cases except for the name of the company and the applicable figures. The conclusions and recommendations are essentially the same in all cases.

GAO's position is that leasing of computers instead of buying them has resulted, and is continuing to result, in excessive costs which are eventually charged to the Government under defense contracts. This position is based on the premise (a) that this type of equipment has a useful life of from 5 to 10 years and (b) that total rental costs over this period generally exceed the purchase price of the equipment.

On the basis of this premise, GAO at first concluded that defense contractors should have purchased, or should now purchase, the computers being used in the performance of defense contracts. Later (apparently as a result of evidence presented by DOD and defense contractors showing that usage of computers has averaged considerably less than the breakeven period) GAO adopted the position that computers should be bought by the Government and made available to defense contractors as Government-furnished material. Then, even if usage by an individual contractor were relatively brief, the Government would be in a position to exploit the relatively long overall useful life of the equipment by transferring it to other users, including DOD activities and other Government agencies as well as other contractors.

As an ultimate objective, GAO recommends the establishment of a central management office in the Government, suitably empowered to make decisions on the acquisition and utilization of computers by all Federal agencies and their contractors. As an interim measure, GAO recommends that the Department of Defense (1) consider purchasing the contractor equipment identified in the reports or (2) limit the amounts of reimbursement to an appropriate allocation of the cost of ownership based on an estimate of total useful life, considering the requirements of follow-on users as well as of the original user.

GAO estimate of unnecessary costs: The total amount estimated by GAO in all the reports, projected to the end of a 10-year period, is approximately $60 million.

Time period of GAO reports: 1961 to 1964 (and continuing).

DOD comments on GÃO finding: DOD did not attempt to separately investigate the facts in every case when it became clear, after surveys were conducted, that GAO's basic assumptions and premises could not be accepted as valid.

Essentially, DOD found that the contractors in question had exercised good judgment in deciding to lease rather than buy; if they had bought the computers, the results would have been either higher costs or an impairment of weapons progress due to the retention of relatively ineffective and obsolescent equipment. DOD disagrees that the Government should buy computers on the mere assumption that secondary users will be available when the original user no longer needs the equipment. It would be unreasonable for the Government to undertake the very heavy investment involved in purchasing computers on the scale contemplated by GAO without reliable assurance that follow-on requirements by other users will in fact materialize. Such assurance, however, has been clearly impracticable in the face of the rapid technological progress in the field, changing Government requirements, and the difficulty of predicting user needs 2 or more years in advance in an increasingly competitive environment. Under these conditions, the Government would run the serious risk of accumulating a multimillion-dollar inventory of surplus and obsolescent equipment for which no market would be available. This would be in direct contradiction to the program

which has been underway in DOD to reduce surplus inventories and minimize any further accumulation of excess stocks.

Further, DOD considers it the responsibility of private enterprise to provide its own facilities to the maximum extent practicable rather than have facilities selected and furnished by the Government. Independent management decisions, not dictated by the Government, are considered essential in such matters as the selection, utilization and replacement of contractor-used computers. Sound decisions in this area are integral to a company's competitive position, to the efficiency of its operations, and to its capability to meet increasingly sophisticated defense requirements. In a system of free enterprise, DOD believes that such decisions should be made by private management and not the Government.

GAO Report B-146823, November 29, 1963

82. Title: "Uneconomical Procurement of Electronic Equipment Under Contract AF 01 (601)-31042 With Grumman Aircraft Engineering Corp., Bethpage, Long Island, N.Y., Department of the Air Force" (OSD case No. 1682).

GAO finding: The Air Force did not furnish Grumman with pertinent information relative to past, current and contemplated procurements of electronic equipment by the military services and as a result the prices paid for the equipment by Grumman were about 61 percent higher than prices currently being obtained by the services.

GAO estimate of unnecessary costs: $1,150,000.

Time period of GAO report: The draft report was dated September 28, 1962. It reviewed a contract awarded in June 1960.

DOD comment on GAO finding: Acting DASD (procurement) by letter of January 31, 1964, to GAO concurred in GAO's basic finding and in the conclusion that an effective exchange of pricing information is needed between defense agencies and contractors buying the same items. A primary means for achieving savings in this case would have been through the pooling of Air Force and Grumman orders wherever practicable.

DOD comments on costs: No independent estimate made. However, GAO's estimate is considered to be too high because it assumes that all orders placed by Grumman could have been priced out at the same prices paid by the Air Force. This would have depended at least in part on the pooling or combining of orders in order to obtain quantity prices. In many cases this would not have been practicable.

DOD corrective action: Although no legal basis for obtaining a refund exists, Air Force is making efforts through Grumman to negotiate price reductions where it appears that such reductions would be equitable. Reductions totaling $97,789 have been achieved thus far.

Policy guidance has been provided in ASPR to promote the exchange of pricing information and to help assure reasonable prices where items currently being procured were previously purchased either by defense agencies or by defense contractors. Further procedures to improve the effectiveness of this exchange of infomation are under study.

GAO Report B-146836, January 24, 1964

83. Title: "Unnecessary Cost Incurred in the Procurement of AN/ARN 21C Tacan Radio Components through Failure To Accept Option Offer, Department of the Air Force" (OSD case No. 1790).

GAO finding: Air Force incurred unnecessary costs of over $1 million by its failure to incorporate into a contract an option offered by the supplier of Tacan radio components to furnish additional quantities at the original contract price. GAO estimate of unnecessary costs: $1 million.

Time period of GAO report: The GAO draft report was dated June 21, 1963. It reviewed a contract awarded in November 1958 to Hoffman Electronics Co. by the Air Force.

DOD comments on GAO findings: DASD (procurement) by letter of April 7, 1964, and supplemental letter of June 8, 1964, disagreed with the GAO finding

that the Air Force should have accepted the option offered by Hoffman. Hoffman did not at any time offer an unqualified option. The option offer was conditioned on reduced reliability requirements. The Air Force was correct in not accepting the option on this basis since the increased maintenance costs would have far exceeded any reductions in price resulting from the exercise of the option. DOD comments on costs: DOD does not agree that any unnecessary costs were incurred.

DOD corrective action: GAO suggested that it would be helpful to reiterate to contracting personnel that the Government does not commit itself by including an option provisions in a contract. Although this was not a factor in the present case, DOD concurs in the suggestion and is carrying it out.

GAO Report B-146843, January 31, 1964

84. Title: "Increased Costs Incurred for Ammonium Perchlorate Purchased During 1961 for Solid Propellent Missile Motors, Department of the Air Force" (OSD case No. 1680).

GAO finding: The Government incurred increased costs, estimated to be $500,000 in 1961, in procuring its requirement of ammonium perchlorate because prices paid by Air Force contractors generally were higher than prices paid by the Navy under contracts negotiated directly with one of the principal suppliers. GAO estimate of unnecessary costs: $500,000.

Time period of GAO report: The draft report is dated September 28, 1962. It reviewed DOD transactions that took place during 1961.

DOD comments on GAO finding: DASD (procurement) by letter of April 21, 1964, to GAO noted that the lower prices paid by the Navy resulted in part from the fact that the principal Navy supplier had been producing with the aid of a Navy funded facility arranged years earlier when qualified producers were not interested in investing capital. Increased missile and rocket requirements made is possible for the Navy to sell the Government's interest in the facility. As the result of this sale, the company's advantage was eliminated and the differential was reduced. Disposal of the plant obviated the possibility of any recurrence of the 1961 pricing situation. Prices based on the use of privately owned or financed facilities are competitive and all Government requirements are now filled in this

manner.

DOD comments on costs: No independent estimate made. However, since the report does not fully consider differences in quality and type and other factors that would cause substantial variances in price, the estimate of unnecessary costs is considered to be high.

DOD corrective action: Policy guidance has been established in ASPR (1-303, 3-807 to deal with the underlying problem of assuring that contracting activities and defense contractors buying materials or supplies obtain effective and timely information on the prices charged other buyers for the same items. The availability of such information has improved under existing procedures. More effective techniques to make such information readily available are being examined.

With specific reference to ammonium perchlorate, increased competition has been effective in assuring reasonable prices.

GAO Report B-133396, February 28, 1964

85. Title: "Unnecessary Costs Incurred As a Result of Awarding Without Competition a Contract for Overhaul and Modification of Aircraft Engines, Department of the Army" (OSD case No. 1822).

GAO finding: The Army incurred unnecessary costs because it did not acquire technical data at the time it was first known that there would be a continuing need for aircraft engine overhaul and modification.

GAO estimate of unnecessary costs: $193,000.

Time period of GAO report: 1957-62.

DOD comments on GAO finding: The Department of the Army did not disagree with the GAO finding. However, exception was taken to the GAO recommendation that the Army use the instance described in the report as an illustration in

emphasizing to procurement officials the need for obtaining timely and adequate data.

DOD comments on costs: The Department of the Army did not disagree with the GAO estimate of unnecessary costs. However, there was not sufficient time to both acquire the data and develop a suitable procurement package in time for the procurement.

DOD corrective action: The emphasis being placed by the Army on increasing competition is being applied equally to maintenance and modification services.

GAO Report B-146848, March 17, 1964

86. Title: "Unnecessary Costs Incurred in Furnishing Ammunition for Test Firing M-14 Rifles, Department of the Army" (OSD case No. 1824). GAO finding: The Government incurred unnecessary costs because the Army shipped to a contractor, for use in test firing rifles, ammunition that either had been (1) manufactured and shipped to Army depots by the rifle manufacturer, (2) unnecessarily packaged and then unpackaged by the same contractor, or (3) manufactured by a different contractor and shipped to the rifle manufacturer. GAO estimate of unnecessary costs: $145,000.

Time period of GAO report: August 1959 to August 1963.

DOD comments on GAO finding: (a) The Department of the Army agrees that unnecessary costs were incurred because unpackaged ammunition produced by the rifle manufacturer was not used to test fire this rifle.

(b) An investigation of the circumstances surrounding this case revealed no evidence of willful mismanagement or neglect of duties on the part of Army personnel.

DOD comments on costs: The Department of the Army believes that $65,000, and not $145,000 as reported by the GAO is a more realistic estimate of any unnecessary costs that may have been incurred.

DOD corrective action: The facts of the report were disseminated to contracting and audit personnel throughout the Department of Defense as a means of creating an awareness to situations where alertness on their part can produce significant cost savings to the Government.

GAO Report B-146812, March 18, 1964

87. Title: "Unnecessary Cost to the Government in the Leasing of Electronic Data Processing Systems by the Aerospace Division of Martin Marietta Corp., Baltimore, Md., Denver, Colo., and Orlando, Fla., Department of Defense" (OSD case No. 1799).

GAO finding: The Government will incur unnecessary costs of about $7,700,000 over a 5-year period if the contractor continues to lease the systems because the contractor will pay rentals greater than the full purchase and maintenance cost to the Government, including interest on the investment. Amount of unnecessary cost will increase to $13 million at the end of 6 years and $37 million by the end of 10 years.

GAO estimate of unnecessary costs: $7,700,000.

Time period of GAO report: May 1963 to June 1964.

DOD comments on GAO finding: ASD (I. & L.), by letter of May 21, 1964, to GAO, commented on 23 reports (5 final and 18 draft) issued to date on the same subject, including this report. GAO bases its findings in all reports on its position that computers have a "useful life of 5 to 10 years" and should be retained in use for that period; that cost of leasing will exceed cost of ownership by the end of 5 years; therefore, the Government should buy computers and furnish them to contractors.

The DOD position is that the useful life of computers will vary with each equipment type and its economic utility in given areas of application; and that the present policy of the Government to require contractors to furnish their own facilities should remain unchanged. DOD feels that computers can be purchased on a selective basis when the stability of both systems and equipment can be established.