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schedule the only firm target figure is the aggregate of $1.279 billion. The detailed amounts for the various items are identified in the contract but it is emphasized that they are set forth solely for billing purposes and each such billing price shall not be considered as a firm target price.

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1 Represents actual cost as reported by Lockheed as of June 1, 1969. This cost does not include common materials obtained but not consumed in the manufacturing process and cost of work in process at subcontractors plants. Determination of the amount of these excluded costs involves estimates of future consumption of common material and final prices for subcontractors, including the value of changes not negotiated, and the amount of subcontract overruns to be absorbed by Lockheed. These costs are included as a part of the estimate to complete shown above.

2 As previously indicated, the values assigned to the individual items are for billing purposes and only the total is a firm target.

As can be seen Lockheed has incurred costs of $1.269 billion for the work performed to date against a target cost of $1.279 billion for completion of the contract. Actual costs shown above will continue to increase as additional work is performed and are subject to adjustments when overhead rates and final prices are negotiated. The current estimated overrun for DDT & E and run A at completion is the difference between total estimated cost and the total target. This amounts to $1.036 billion.

Question 3. Let me ask you about the Uniform Accounting Standards study which Congress ordered GAO to undertake this year. This is to me a classic example of the inconsistencies that I have spoken about. In the first place, when the bill for Uniform Accounting Standards, which I introduced, was a subject of a hearing before the Banking and Currency Committee a year ago, the GAO opposed the measure. Your Deputy and other GAO officials testified against Uniform Accounting standards.

Yet, I believe that most people now concede that uniform accounting standards are a good idea. The testimony we have received in the past two weeks suggests the great need for uniform accounting standards. At the same time, I continue to get feed-back that the GAO feasibility study now underway is not being pressed very vigorously.

How many people have you assigned to this study? How many of these individuals are professionals? How many of them are full-time on this job? What is the current status of the feasibility study?

Answer 3. Question 3 relates to the study on the feasibility of uniform cost accounting standards which we have undertaken pursuant to Section 718 of Public Law 90-370. The question mentions that representatives of this Office testified against uniform accounting standards and expresses the view that most people now concede that such standards are a good idea. Also, the question requests information as to the status of our feasibility study and on the number of individuals assigned to this study.

The testimony referred to is apparently that of the former Assistant Comptroller General, before the Senate Banking and Currency Committee on June 18, 1968 (pp. 60-9). The testimony was presented in connection with the Committee's consideration of S. 3097, a bill to amend the Defense Production Act of 1951. Section 718 of the bill dealt with the establishment of "uniform accounting standards."

The views expressed by us on S. 3097 were heavily influenced by the meaning to be attached to the term "uniform accounting standards" and the fact that the companion bill in the House of Representatives (H.R. 17268) did not provide an interpretation of that term. For example, in the hearings on the House bill, the participants freqeuntly used the term "uniform accounting standards"

interchangeably with such terms as "uniform accounting systems," and "nniform accounting procedures." Other interested representatives of industry and the accounting profession appearing at the hearings on S. 3097 also had difficulty with the meaning of the term.

Because of the emphasis that had been placed on accounting methods, procedures and systems during the early consideration of section 718, we were reluctant to endorse this measure. We did, however, point out in our testimony that we were not unmindful of the need for firm and well-developed guidelines for contractors to follow in deterimning costs under Government contracts. Further, we suggested that:

"If the committee should feel that action needs to be taken in the direction required by the amendment to S. 3097, or H.R. 17268, we would suggest that a study group be established to consider the advantages and disadvantages of establishing uniform accounting standards for Government contractors as well as what standards might be appropriate, with a reasonable time period, say not less than 18 months, to complete its work. We would suggest that this study be made by representatives of the agencies primarily concerned with procurement as well as representatives from the Bureau of the Budget and the General Accounting Office. Such a study should include appropriate consultation with industry and the accounting profession. The result of the study should be submitted to the Congress for its consideration."

Also, in our report, dated June 11, 1968, which was filed with the Senate Banking and Currency Committee, we stated that the establishment of certain ac counting standards may be beneficial.

In our opinion, the legislative history compiled during and subsequent to our testimony on S. 3097 did much to clarify the Congressional intent with respect to "uniform accounting standards," including the addition of the word “cost” to that term. Accordingly, for purposes of our feasibility study we are considering "cost accounting standards" to be general guides to practice aimed at obtaining comparable, consistent cost accounting data with due recognition of different circumstances. Such standards are directed to accounting results, not to accounting methods, procedures or systems. They will be regarded as "uniform" only where through their application-reliable, consistent, and comparable cost data can be obtained with due regard for fairness to all parties.

In addition to my personal attention and interest in this project, you are undoubtedly aware that Mr. William A. Newman, Jr., has been assigned to my office as my Special Assistant to work full time on this project. Mr. Newman was the Director of our Defense Division at the time Public Law 90-370 was enacted, and as such, is one of our most experienced men in the defense contracting area.

The feasibility study is dealing with a broad range of subjects and is being participated in by representatives of Government, industry and the accounting profession. For example, we have and are continuing to work closely with Vice Admiral Rickover and the Defense Contract Audit Agency (DCAA) and to consult with members of professional accounting organizations and trade associations. Also, we have retained several consultants to perform a variety of research tasks. All of this effort is in addition to that being expended by our own professional staff.

Although it is too early for a firm conclusion as to the feasibility of uniform cost accounting standards, we are enthusiastic about the results of our progress to date. We are receiving inputs from the many participants which are now being carefully evaluated by us preparatory to drafting our report. We have, for example, used a questionnaire to survey cost accounting practices in industry and to test industry attitudes and opinions on a few illustrative uniform cost accounting standards. Preliminary results show that at least 60 percent of the more than 1,400 Defense contractor plants receiving the questionnaire responded and that, in general, the responses were constructive.

Other work which is nearing completion is a survey by this Office of contractor cost records maintained for negotiated Defense contracts to determine among other things, the need for standards related to record-keeping. We are also analyz ing a series of cases involving cost accounting matters arising under Government contracts to ascertain the extent to which uniform cost accounting standards are needed. Vice Admiral Rickover's staff and DCAA have been most helpful in this endeavor.

In addition to our personal efforts, we are receiving and/or awaiting inputs from consultants, accounting organizations, trade associations, and the Depart

ment of Defense. These include research into the cost principles and criteria contained in Section XV of the Armed Services Procurement Regulation, studies of the nature of uniform cost accounting standards, and a study of cases heard before the Armed Services Board of Contract Appeals and the Federal Courts which indicate a need for standards to guide the legal profession in the settlement of Defense contract accounting disputes.

At various times during fiscal year 1969, about 170 members of our professional staff, both in Washington, and the field, expended over 25,000 hours on this study. We estimate that about 10,000 hours of additional time will be required to completion. Other participants have also given generously of their time. For example, DCAA advises us that they devoted about 6,000 hours of effort during fiscal year 1969 on this project.

In summary, we would like to stress that this important task has been assigned a top priority within our Office, that it is being pressed vigorously, and that sufficient resources are being applied to bring it to a timely and meaningful conclusion. Question 4. As an example, I would like to discuss a little bit the C-5A report which you transmitted to committees of Congress, including this subcommittee, a while ago.

First, let me say that my overall impression of this report is that there is very little new information. There is very little indication that the GAO conducted its own audits or made its own analysis.

For example, on page 5 of your report, you talk about estimates of program costs prepared by the Air Force in 1964. The fact is that so far as the C-5A is concerned these estimates have very little relevance.

Isn't it true that the 1964 estimate was just a rough one for a so-called "parametric airplane" and not an estimate for a C-5A as we know it today? Wouldn't it have been more appropriate for GAO to refer to the Air Force estimates of April 1965 or October 1965 on the C-5A?

Wouldn't this have removed the rationalization of increased size of the airplane as a cause of cost growth?

Wouldn't it also have placed the alleged abnormal inflation in better prospec

tive?

In fact, didn't the basic contract prices taken into account some growth in labor, rates, overhead, and material rates?

Answer 4. With respect to the scope of our audit and analysis work supporting our recent report to Committees of Congress on the C-5A program, we performed considerable detailed analysis work on the contractor's September 1968 study. These analyses included an examination into proposed and actual costs of labor, materials, overhead and subcontracts, for the purpose of identifying where and why costs have increased. We analyzed proposed direct labor hours and actual hours by year to determine how much and why direct labor is increased. We also examined subcontractor's proposed and actual costs and subcontract changes after award of the subcontracts.

Our review included an analysis of how the contractor distributes costs and techniques employed by the Air Force to maintain surveillance over cost distributions. Our review also included an analysis of proposed and actual cost through 1967 to determine if costs had increased sufficiently to predict an overrun of work then under contract.

With respect to the Air Force 1964 estimate referred to on page 5 of our report, we agree this estimate is of little relevance. The reference to this estimate was included in the background section of the report which also included a schedule comparing this estimate with the October 1965 contract prices and current estimates of total program costs. This 1964 estimate was included as background information because it was the original Air Force estimate for the program.

With respect to using the Air Force estimates of April and October 1965 as more appropriate to remove the rationalization of increased size and abnormal inflation, we believe we accomplished this by comparing the contract target price of October 1965 with the current estimate of cost of completion. We did not intend to compare the 1964 estimate with the current estimate because we did not believe that the 1964 estimates was valid for this purpose.

Recent testimony by Department of Defense officials indicated the larger airplane and inflation were the primary factors which contributed to increased program costs. Our report was intended to show the extent that costs are expected to increase in excess of any consideration for the larger airplane and normal inflation which were considered in the contract. The section of our report where cost

increases are identified shows that actual cost is expected to exceed target cost by more than $1 billion. This amount represents cost increases after consideration for the larger airplane and expected normal inflation growth throughout the life of the program.

Question 5. Did the GAO conduct any investigation of the C-5A prior to Novem ber 1968? In fact, it's true, is it not, that GAO made an investigation and drafted a report on some aspects of the C-5A?

I have been informed of the contents of this report. It seems to be to be an amazing document, the gist of which is to admonish the Air Force team which was attempting to get information about the C-5A and to tell them to stop getting so much information from the contractor.

I am informed hat this report concludes that "the increased responsibilities assumed by the contractor under the C-5A program have not been accompanied by an appropriate and corresponding reduction in data requirements or in the num ber of personnel used for contract administration."

You also recommend that greater consideration should be given to using the contractors on internally generated information.

Has this report ever been released? Will you provide the Committee with a copy?

How do you explain the strange conclusions that I have cited?

Answer 5. Prior to November 1968, a review which involved selected aspects of the procurement of the C-5A aircraft was performed. The examination was "directed primarily to evaluating the application of certain aspects of the new total package procurement concept to the acquisition of the C-5A aircraft system as it relates to (1) the need for and management of data being acquired from the contractor and (2) the number of Government personnel engaged in administration of the contract and in monitoring the contractor's activities."

A preliminary draft report was prepared in September 1968. The findings and conclusions contained in this preliminary draft report were those of personnel associated with the assignment at the contractor's plant and did not represent an official GAO position. They were concerned with the relatively new total package procurement (TPP) concept and the need for guidance for determining data and personnel requirements when TPP is used. The findings and conclusions were based on the contention that under the TPP concept, as envisioned by its advocates, a contractor accepts total responsibility for the development and ultimate performance for the system, and the Government's participation in the technical direction and control over the contractor's day-to-day activities is reduced from that control necessary under other type procurements.

The draft report tentatively concluded that "the increased responsibilities assumed by the contractor under the C-5A program have not been accompanied by an appropriate and corresponding reduction in data requirements or in the number of personnel used for contract administration." It also stated that the Air Force could make greater use of data developed by the contractor for its own internal management purposes. These tentative conclusions, however, were directed mainly towards future TPP awards and the amount and types of data needed by the Government to obtain the visibility required under the TPP concept.

The draft also recognized that actions had been initiated by the Department of Defense relative to management control systems. Some of the objectives intended to be achieved from these actions were to (1) regulate data demands with the intent of reducing the volume of data being procured, (2) make maximum use of the contractor's management system when the system will provide the data needed by the project manager, even though it may not be in the specific format desired, and (3) minimize mandatory features of data information for effective management.

The preliminary draft was used during discussions with OSD and USAF representatives. These discussions which involved data needed by personnel not located at the plant where detailed information was available brought out that there was not adequate information being reported to provide the Air Force with the visibility needed over cost, schedule, and performance under the contract. In addition, we were advised that an Air Force study indicated that an increase in the number of personnel over that used in the C-141 program was justified. In view of this information and because of the actions initiated by the Department of Defense to improve management control systems it was decided that the tentative conclusions reached in the draft were subject to question and that a final report would not be issued by the GAO on this review.

As you know we are giving increased attention to defense procurement generally including the area of major weapon system and DOD and contractor management control with respect to these systems. In this latter area we will be interested in determining whether significant changes in cost, schedule, and performance will be identified by the contractors and by the Department of Defense promptly. As we advised you, we plan to prepare an annual report to the Congress on our findings in this area, as well as individual reports as information comes to our attention which we believe may be of interest to the Congress.

Chairman PROXMIRE. Our next witness is Mr. A. E. Fitzgerald, who has been before this committee a couple of days ago. We asked him to return today to give us some additional information. And we ask him to come forward for that purpose.

May I just say once again, Mr. Fitzgerald is a deputy for management systems in the Department of the Air Force. By education, he is an industrial engineer, and from 1951 through 1957, was employed with manufacturing companies doing defense and other Government business. From 1957 to 1965, he was a management consultant for both the defense industry and the Department of Defense. He has been in his present position since 1965.

We again welcome you to the subcommittee, Mr. Fitzgerald.

STATEMENT OF A. E. FITZGERALD, DEPUTY FOR MANAGEMENT SYSTEMS, DEPARTMENT OF THE AIR FORCE

Mr. FITZGERALD. Thank you, Mr. Chairman and members of the subcommittee.

In testifying here this morning I have a problem which I would like to describe to you by reading two memoranda. The first is the memorandum from me to Secretary Nielsen, the Assistant Secretary of the Air Force for Financial Management:

Subject: Items for Senator Proxmire.

The enclosures are the items I have put together so far in response to Senator Proxmire's request. Attachment A is a copy of the memorandum which I sent to Secretary Whittaker requesting the Mark II should cost study and the impact of C5A contract changes. Due to the shortage of time, I have accepted the information in enclosure 1 as an interim reply on the specification impact of changes. I will try to get more time on the submission of the should cost study.

Enclosure 2 is the letter which I wrote outlining the attitude problem---

This is the management attitude problem we discussed the day before yesterday—

as it affected the Mark II. I have requested that Major Rose, who succeeded Mr. George in the Analysis group, delete the confidential portions of Mr. George's letter so as to declassify it.

Parenthetically, Mr. George's letter is an attachment to my own memorandum on the subject of the attitude problem on the Mark II. I was told late last night by Major Rose that Mr. George's letter had been declassified.

To continue:

Enclosure 3 is the information requested on SRAM. If possible, it also should be declassified for presentation to the subcommittee.

This was primarily the cost track comparison, as we call it, depicting the growth of estimates of the SRAM program.

31-690-69-pt. 2-19

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