DOD comments on costs: Consideration of equipment requirements, replacement dates, replacement or field modifications costs, taxes, and insurance show that the unnecessary costs alleged by GAO will not be incurred.

DOD corrective action: ASPR changes will require contractors to submit comprehensive analyses of lease/purchase costs and equipment replacement requirements, and will base cost allowability on the least cost method of acquisition.

GAO Report B-146885, March 23, 1964

88. Title: "Additional Costs Incurred in the Procurement of P6M Seaplanes From Glenn L. Martin Co., Baltimore, Md." (OSD case No. 1724).

GAO finding: The Navy spent more than $445,400,000 over a 10-year period and did not receive a single serviceable P6M seaplane. Quantity production of 24 operational aircraft were ordered before a reasonably satisfactory seaplane had been developed, and it was known that there were serious unsolved problems with the prototype aircraft. This resulted in the expenditure of $209,200,000 which might have been saved if these contracts had not been awarded. Also significant cost increases were incurred by the Navy because of design and engineering errors committed by the contractor as well as a failure by contractor to adhere to the Navy's aircraft testing procedures.

GAO estimate of unnecessary costs: $209,200,000.

Time period of GAO report: In 1951 the Navy established an operational requirement for a high-performance jet seaplane which would be capable of 600 knots speed at sea level with a capability of carrying a load of 30,000 pounds of ordnance items. The P6M was a result of this requirement. In 1959 the P6M program was completely terminated because of unexpected engineering difficulties, significantly increased costs and the successful advent of the fleet ballistic missile program (Polaris). The GAO review effort on the P6M program extended over a 5-year period (1959-64). Two draft reports (January 1961 and February 1963) and one final report (March 1964) were submitted to to the Navy and OSD for comment. The GAO reviews covered the P6M program from inception to program termination in August 1959.

DOD comments on GAO finding: DOD has furnished GAO with detailed responses (June 22, 1961, and Mar. 28, 1963) to the two GAO draft reports and with the DOD response (June 12, 1964) to the GAO final report.

It is true that serious problems were known and that solutions were not certain when the production phase of the P6M was embarked upon in 1956. However, the military considerations for supplying a new operational weapon system which had advantages over other existing weapon developments and the national need for such military capability were factors weighing in favor of proceeding into the production phase. The decision to go forward into P6M production was based on professional appraisal of contemporary tests, experience and science and on the professional prediction that the then existing technical problems could be solved. The Navy has expressed the view in the replies to GAO that the degree of promise of technical success of the P6M and the degree of justification for management judgments made in that program were greater than would appear to a lay reader of the GAO's statements.

The Government undoubtedly suffered additional expenses due to engineering errors and deficiencies in Martin's performance.

DOD comments on costs: It is agreed that if no contract awards had been made for operational aircraft and for supporting operational facilities, the $209,200,000 for such aircraft and facilities might not have been spent.

As previously stated to GAO, the Navy agrees that an assessment can now be made that management should have reacted more promptly to the problems encountered in the P6M production phase by complete termination of the P6M program at an earlier date. The Navy accepts responsibility for the fact that an earlier termination of the P6M might have resulted in a substantial reduction, possibly as much as $209,200,000, in costs incurred. It should be noted, however, that an estimated amount of $83.8 million of the total P6M expenditure was saved through effective utilization of inventory residual to the terminated program. With the exception of termination charges, which are included in the

estimate of $445 million costs incurred, no further expenditures were made for the P6M after August 1959 and no further expenditures are to be made.

DOD corrective action: As noted in the final GAO report and the DOD response thereto, subsequent to the P6M contract awards in 1952, 1955, and 1956, significant improvements have been instituted by DOD in ASPR and in management controls to govern programs from their inception through their life cycle. These changes are calculated to avoid the undesirable aspects of the situation found in the P6M program, including particularly any premature commitment to major programs. A continuing effort is being made to futher refine these controls to achieve even greater effectiveness.

GAO Report B-146882, May 15, 1964

89. Title: "Unnecessary Packaging Costs Incurred in the Procurement of Repair Kits From Hamilton Standard Division, United Aircraft Corp., Windsor Locks, Conn." (OSD case No. 1852).

GAO finding: The Government incurred unnecessary packaging costs of about $344,000 in the procurement of about 40,000 aircraft equipment repair kits from Hamilton Standard. These overcharges occurred because contract prices were not reduced for packaging not actually performed and, in other instances, there was unnecessary packaging of parts into kits which were used at the Hamilton Standard plant in connection with overhaul work performed for the Government. GAO estimate of unnecessary costs: $344,000.

Time period of GAO report: December 1957 to September 1962.

DOD comments on GAO finding: DOD agrees with GAO that the contract prices were not reduced for packaging not actually performed but does not agree that there necessarily was a waste of funds because of what proved in retrospect to be unnecessary packaging of parts. The decision to reinstitute packaging requirements at that time was based on a consideration of the applicable factors and problems then in existence.

DOD comments on costs: $144,120. This represents the cost of the packaging not actually performed.

DOD corrective action: Hamilton Standard has issued credits to the Government of $144,120. Contractual coverage to prevent the occurrence of similar situations with respect to packaging requirements has been developed and is in effect.

In line with this position, the recently completed study by the Bureau of the Budget opposes the idea of a massive program of Government acquisition of computers for the use of contractors. Also, while the study recommends a central management system to control all computers for in-house Government use, it does not agree with the GAO recommendation to include contractor computers in the system. The study recommends some cross screening and computer sharing as between industry and Government but not complete Government management.

DOD comments on costs: GAO's estimates are based on premises that DOD considers unsupported and invalid. DOD therefore disagrees that unnecessary costs have been or are being incurred.

DOD corrective action: DOD's responsibility is to assure that costs reimbursed to contractors are reasonable and proper. This is accomplished through contract surveillance pursuant to the cost-allowance provisions of ASPR. Revisions to ASPR are being developed to provide additional criteria for evaluating and monitoring contractors' lease-versus-purchase decisions.

To the extent that the GAO cases involve objectionable arrangements such as sale-leaseback, DOD will maintain close audit surveillance to insure that ASPR requirements as to cost-allowability are strictly enforced.

DOD agrees with GAO that, if and to the extent that Government-owned computers should ever be made available under special circumstances to defense contractors, such contractors should be required to pay a reasonable charge for any computer used in non-Government work. Provisions to this effect, applicable to all types of Government-owned equipment, are already contained in ASPR.

GAO Report B-133341, June 29, 1964

90. Title: "Unnecessary Costs Incurred in the Procurement of Aircraft Engine Ring and Vane Assemblies From the Allison Division of General Motors Corp., Department of the Navy" (OSD case No. 1910).

GAO findings: Unnecessary costs were incurred by the Navy because of its failure to terminate orders for aircraft ring and vane assemblies that were excess to its needs.

GAO estimate of unnecessary costs: $310,000.

Time period of GAO report: The GAO review was made during the period January through November 1963, and covered actions taken by the Navy during the period August 1962 through January 1963.

DOD comments on GAO findings: The Department of the Navy agreed with the GAO findings.

DOD comments on costs: The Department of the Navy agreed with the GAO estimate of costs incurred.

DOD corrective actions: The Department of the Navy has recovered $97,415.04 from the prime contractor because inaccurate information was provided with respect to termination charges. Procedures are being established to insure that the Bureau of Naval Weapons will provide the Aviation Supply Office with timely and current information on the Navy's operating aircraft engine inventory projected for the succeeding 2 years.

GAO Report B-146921, August 12, 1964

91. Title: "Unnecessary Costs Resulting From Noncompetitive Procurement of Military 4-Ton Trucks" (OSD case No. 1890).

GAO finding: The Government incurred unnecessary costs of $12.1 million because the Army did not competitively procure 4-ton trucks even though it could have purchased drawings for $224,000 from Chrysler Motors Corp. that would have provided information sufficient for use in competitive procurement. GAO estimate of unnecessary costs: $12,100,000.

Time period of GAO report: April 1948 to October 1963.

DOD comments on GAO findings: The Army nonconcurs in the GAO findings that unnecessary costs were incurred. The military 4-ton truck meets the criteria of a reasonably priced, austere and utilitarian vehicle that is entirely devoid of unnecessary performance characteristics. The truck has been purchased at a relatively constant price during the history of procurement and improvements to the commercial counterpart are, and have been integrated into the military vehicle at no cost to the Government. It was the judgment of the Army that no benefit would be derived from the purchase of the drawings. The drawings would not permit the preparation of a procurement package that would support competition because the package would require sole-source supply from Chrysler Corp. of the engine, transmission, transfer case, front and rear axles, propeller shafts, and other important components.

DOD comments on costs: The Army does not agree that unnecessary costs were incurred.

DOD corrective action: None indicated.

GAO Report B-146920, August 20, 1964

92. Title: "Excessive Cost to the Government in Rentals of Electrical Accounting Machines by General Dynamics/Astronautics, a Division of General Dynamics Corp., San Diego, Calif." (OSD case No. 1882).

GAO finding: Extra-shift rentals for use of electrical accounting machines, during a 3-year period in which use time was manually recorded, were greater than rentals based on use time as subsequently recorded by meters. Such rentals were therefore excessive.

GAO estimate of unnecessary costs: $158,100.

Time period of GAO report: November 1959 through February 1963.

DOD comments on GAO finding: DOD does not agree with GAO's finding. This finding is based upon the fact that when meters, a new method of recording use time, were introduced recorded use time decreased. DOD agrees that meters are more accurate than the earlier manual system but does not agree with the conclusions drawn by GAO. The manual system was not arbitrary or unreasonable, it was the system in general use and it was the system intended by the parties when they entered into their rental agreement. GAO did not present, nor could we find, any evidence that the manual recording system had been incorrectly applied. This is a case where a superior technique was developed and displaced a less sophisticated technique. It does not follow from this that "unnecessary costs" were incurred because a less sophisticated technique was used in the past.

DOD comments on costs: No excessive costs were incurred.

DOD corrective action: Action is being taken to promote the use of meters on equipment leased by Government contractors.

GAO Report B-125050, August 28, 1964

93. Title: "Preliminary Survey of the Extent to which the Defense Department and Its Contractors Have Complied With the Requirements of Public Law 87-643 in the Pricing of Negotiated Contracts" (OSD case No. 1626-A).

GAO finding: The survey disclosed a significant improvement in the obtaining of certified cost data since a previous review prior to enactment of Public Law 87-653. Relatively few instances were disclosed of failure to obtain adequate pricing certifications from prime contractors or subcontractors.

GAO estimate of unnecessary costs: None indicated.

Time period of GAO report: Contracts and subcontracts negotiated in 1963. DOD comments on GAO findings: Independent DOD reviews of 11 procurement activities under the procurement management review program involving 2,568 contract actions disclosed that there was no noncompliance in 7 of 11 activities involving 2,519 actions. Where deficiencies were found, they generally were cased by a misunderstanding or misinterpretation of the requirements. DOD comments on costs: None required.

DOD corrective action: Continued emphasis will be placed on the importance of contractors furnishing accurate, current and complete data, and certification thereof. The requirements for certification have been clarified. Defense Procurement Circular No. 12, dated October 16, 1964, underscored these requirements. The military departments have brought this to the attention of all procurement and review personnel and have taken steps to assure full compliance.

GAO Report B-146926, September 1, 1964

94. Title: "Unnecessary Costs to the Government for Insurance on GovernmentOwned Inventories and Special Tooling Held by Contractors Under Negotiated Fixed-Price Contracts" (OSD case No. 1884).

GAO finding: The Government incurred unnecessary costs of about $1,237,500 over a 5-year period ended in 1961 because the miiltary services required four Defense contractors to bear the risk of loss or damages to certain Governmentowned parts, materials, inventories, work in process, and special tooling in their possession under fixed-price contracts. At a fifth major contractor's plant, the Government assumed the risk of loss or damage to such property in the possession of the contractor and, as a result, avoided costs of about $295,800 during a comparable 5-year period. Accordingly, the GAO recommended that the Government take over the risk of loss or damage to this property and eliminate insurance through private insurers.

GAO estimate of unnecessary costs: $1,237,500.

Time period of GAO report: 1957 through 1961.

DOD comments on GÃO finding: The GAO takes the position that the Government should assume the risk of loss to this property in order to avoid the cost of premiums paid by contractors for private insurance. This position logically can be based solely on the premise that private insurance is uneconomical and should

be replaced by the Government's acting as its own insurer. In our opinion, the sample used by GAO to support this position is totally inadequate. The partial experience of only five contractors, over a 5-year period, was examined by GAO. Their actual loss experience for the period was $12,500, or a little over 1 percent of premium costs, whereas insurance industry averages indicate that losses approximate 50 percent of premium costs. In the year immediately following this period, one of the contractors experienced a loss of $110,000. In addition, GAO did not consider other significant costs. For example, there was little consideration given in the report to the additional costs for such services as inspections, claims adjustment, litigation, etc., which the Government would have to provide if it were to assume the risk of loss to the property in question. In short, the report does not demonstrate that private insurance is uneconomical. DOD comments on costs: The report presents no evidence on which it can be concluded that there were any unnecessary costs.

DOD corrective action: No corrective action is necessary. The question of the reasonableness of insurance rates is one of the subjects being considered in our continuing review of insurance coverage in Defense contracts.

GAO Report B-146940, September 18, 1964

95. Title: "Uneconomical Procurement of Motor Vehicle Parts and Accessories" (OSD case No. 1992).

GAO finding: The Government is incurring unnecessary costs because purchasing officials at Navy installations procure motor vehicle parts and accessories in the open market at prices in excess of those available under General Services Administration Federal Supply Schedule contracts. The ASPR and implementing Navy regulations permit this condition because they do not require procurement officials to obtain and use Federal Supply Schedule pricing data for evaluating prices of motor vehicle parts and accessories purchased in the open market. GAO estimate of unnecessary costs: Estimated at $200,000 annually. Time period of GAO report: July 1963 through March 1964.

DOD comments on GAO finding: DOD agrees that Federal Supply Schedule pricing data should be used as a means of evaluating market prices for motor vehicle parts and accessories. DOD does not agree with the GAO's recommendations as to using only one type of contract or that prices should be limited in all cases to those under Federal Supply Schedules. This would eliminate needed flexibility and could result in higher total costs to the Government.

DOD comments on costs: The GAO estimate of costs is based on a small selective sample at only four Navy installations. The Army and Air Force reviewed their purchases of motor vehicle parts and found no excess costs. The Defense Supply Agency sampled 256 purchase actions with a total value of $144,340.64 and found that only four purchases were made at prices higher than GSA prices. The total excess amount was $20.71. The GAO estimate is therefore questionable. DOD corrective action: The Armed Services Procurement Regulation was amended by revision 9, dated January 29, 1965, to require contracting personnel to consider Federal Supply Schedule pricing data whenever they purchase motor vehicle parts and assemblies in the open market.

GAO Report B-152600, December 30, 1964

96. Title: "Unnecessary Costs Incurred in the Procurement of Selected Subsystems and Accessories for F-4 and Other Types of Aircraft" (OSD case No. 2000).

GAO finding: A review of the procurement of selected subsystems and accessories for installation in F-4 and other types of military aircraft being produced under contracts awarded by the Navy indicated unnecessary costs of about $4.1 million had been incurred in the procurement of quantities of two subsystems (the Martin-Baker ejection seat and the horizontal situation indicator) and an accessory (survival kit) because the items were procured by the airframe manufacturer rather than furnished by the Government. It was estimated that the Navy will incur additional unnecessary costs of about $2.7 million in fiscal years