period reviewed was fiscal year 1959. Based on information furnished informally by the GAO and the dates of the transactions treated in the current report, it is surmised that the approximate period reviewed in the current report was calendar year 1959 and the first three months of 1960. It is believed, therefore, that because of the comparatively short time between reviews, the findings stated in both reviews are, for all practical purposes, the same. This situation explains why the causes underlying the findings had not been substantially remedied in the time between the two reports and why the results of corrective actions taken as a result of the earlier report were not discernible by GAO at the time of the review on which the second report is based.

A copy of the A-50 Statement covering the first report is being submitted as enclosure (1) hereto; and a description of principal corrective actions taken with significant documentation is attached as enclosure (2). C. SUMMARY OF NAVY RESPONSE TO ALLEGATIONS IN GAO

REPORT, TESTIMONY, AND IMPLICATIONS DRAWN THEREFROM.

I. More Competition Will Be Obtained.

The Navy agrees that, in the procurement of aeronautical replacement parts, greater competition is possible and will be obtained in the future than has been obtained in the past. In order to accomplish this, however, serious obstacles must and will be overcome. These stem essentially from decisions

made decades ago that the military departments would rely

substantially on the aircraft industry, rather than on "in-house"
capability, to furnish the means of assuring requisite quality

and reliability of military aircraft, and of their components
and parts.
In some cases involving aeronautical replacement
parts, however, this assurance can be obtained only by direct
procurement from the prime contractor that designed the aircraft
or equipment with which the particular part must be compatible.
This essential fact is fully supported by Department of Defense
policy relating to the procurement of parts, as set forth in
paragraph 1-313 of the Armed Services Procurement Regulation,
a copy of which is included with enclosure (2).

Although It is Agreed That Generally Competitive Procurement
Is Less Costly To the Government Than Noncompetitive Pro
curement, This Is Not Always True In Individual Cases.

Because of the many intangibles inherent in developing an "in-house" capability where none now exists, agreement cannot readily be made on the application to the procurement of particular parts of the generality that competitive procurement is less costly than noncompetitive procurement. evaluation would require a special study of all of the individual

Such an

circumstances relating to the procurement of each part,

III.

including current verification of all relevant information
available at the time of the initial as well as other prior
procurements. Such an evaluation, of course, would have
to consider the possible risk and consequences of aircraft
failure resulting from competitive procurement, including
possible losses therefrom which, in some cases, would
far outweigh any initial price savings.

The Master or "Open" Form of Contract Has Significant
Advantages and, in and of Itself, Does Not Bar or Discourage
Competitive Procurement, or Involve Misuse of Negotiation
Authority.

This general form of contract has many worthwhile uses
on the part of the military departments. One very significant
advantage is the saving of time in the procurement cycle
which results from advance agreement on the terms and
conditions which apply to orders subsequently placed. This
form of contracting has been successfully adapted to the full
and free competition of formal advertising in the case of the
Master Ship Repair Contract (ASPR Form 1). If considered
to be advantageous, it could and would be similarly adapted
to competitive procurement in other areas.

In the case of the ASO procurement of aeronautical spare parts, however, its use is restricted to those

IV.

procurements which have been justified as sole-source

procurements:

In the past, formal justifications for individual orders placed under these contracts have not been made. For some time, however, contracting officers informally justified the appropriateness of including individual orders under the "master" contract before each order was placed. Recent action has been taken by the Navy to require a

formal determination and findings before any order over
$2,500, which is entered into under an authority to negotiate,
may be placed under a master or "open" contract.

Any curtailment in the present use of this form of
contract would, because of the loss of approximately 75
days in procurement lead time, be seriously detrimental
to the Navy since this would require substantially increased
investment in spare parts inventories to be carried in stock

in order to meet current requirements. It has been

estimated that the amount of such investment would

approximate $45 - 50 million.

The Navy Has Not Been the Victim of Profiteering or Price
Gouging under its Noncompetitive Procurement of Spare Parts.

Of the 26 Navy spare parts referred to at the hearings,

25 of them, charged to the Navy, were from prime contractors

who obtained them from various subcontractors.

As to a

number of these parts, there is a great disparity between the prices charged the prime contractors by the subcontractors and many of the prices to the Navy as shown by GAO. Although these latter prices were taken from Navy contract documents, for the most part they show prices inserted in orders issued under the prime master contracts covering these parts which are in no sense final prices reflecting the ultimate cost to the Government. They are used solely to provide a means of making interim payment to the contractor for any deliveries made prior to subsequent adjustments in these initial "billing prices", as more fully described in E. I. below.

The more exaggerated apparent differentials run from over 100% to as high as 500% or 600% and in some cases even to 1,000% or more. If these differentials reflected actua! "markups" which the Navy was paying for these parts, the implications arising out of the hearings that the Navy was being victimized by profiteering or price-gouging contractors obviously could not be refuted. However, such is not the case; the real "markup" to the Navy for the quality control services for which reliance had been placed on the various prime

contractors bears no relationship whatever to these apparent

differentials.