July 24 and expressing appreciation for the attention which was given to this matter by me and the members of my organization in addition. In the course of the check which I am conducting, I have been advised that no submission has been made to Convair general offices pursuant to the procedure referred to in my letter of July 24 for resolving differences between General Accounting Office representatives and Convair personnel.

Signed "Frank Pace, chairman of the board, General Dynamics." The committee then, on August 21, sent the following wire to Mr. Pace:

The General Accounting Office has informed the committee that on August 17, 1959, duly authorized representatives of their Dallas regional office again requested the comptroller, Convair, Fort Worth division, to make available specific records relating to engineering, planning, cost, and control data which had previously been denied after a formal request in letter of June 4, 1959, from Comptroller General to General Dynamics Corp.

Comptroller, Convair, stated that he had no authority to furnish these records because they contained estimate to complete as well as cost incurred and he therefore refused to make records to GAO representatives for review. Comptroller, Convair, Fort Worth division, further stated to GAO representative that officials of General Dynamics Corp. and the Convair division did not consider Comptroller General's request for access to records to include records which contained estimated costs as well as actual costs and that it never was the intention of contractor to make available to GAO any records which included cost estimates until after contracts are completed.

The Comptroller General specifically advised Earl Johnson, president, General Dynamics Corp., in his letter of June 4, 1959, that he requires access to engineering, planning, cost, and control data relating to the B-58 program. Your letter of July 24, 1959, assured such data would be furnished. Latest refusal of your local operating officials on August 17 was not made known to Comptroller General until immediately following transmittal of his letter of August 18 to you. Approximately concurrent with the above refusal, comptroller and manager of long-range planning, Convair Astronautics division, San Diego, advised GAO Los Angeles regional office representatives, after discussion with Convair vice president and general counsel, that weekly program control reports which GAO had requested in order to obtain data relating to subcommittee's specific parts shortages and Convair's actions in expediting delivery of these parts would not be made available. For these reasons, the subcommittee considers your reply unresponsive to my wire of yesterday, August 20. Subcommittee again requests statement from you as to what position of your company is with respect to granting AGO access to the within named books, documents, records, and files and others pertaining to negotiated Government contracts as required by 10 U.S.C. 2313(b).

Signed "F. Edward Hébert, chairman of Subcommittee for Special Investigations."

Now, Mr. Chairman, the answer to that wire was received late yesterday, after the close of business.

It reads as follows (addressed to the chairman):

GENERAL DYNAMICS CORP.,
New York, N.Y.

With reference to the two matters raised in your telegram of August 21, I am arranging to see that this information is made available to the General Accounting Office. In addition to this, in order to avoid any future misunderstandings I have asked for an appointment with the Comptroller General and his staff to meet with me and my staff in order to set up agreed-upon procedures which will insure that all proper information is provided to the General Accounting Office. As I have advised your committee, there is absolutely no intention on the part of this corporation to deny the General Accounting Office access to any records to which it is entitled, in fact I personally am fully sympathetic with the need for review by Government representatives of pertinent records under public contracts and I have been and am prepared to place a liberal interpretation on our contract clauses in this regard.

FRANK PACE, Jr.

Mr. HÉBERT, Now, in connection with the exchange of the correspondence with Mr. Pace, the Chair wants to note that Mr. Pace has stated that there was

no intention on the part of this corporation to deny the General Accounting Office access to any records to which it is entitled

and he goes on to state as you have heard that he, personally, was— fully sympathetic with the need for review * * * pertinent records under public contracts

I am convinced that Mr. Pace himself had no knowledge of actions of the comptroller and manager of the Convair Astronautics Division of San Diego and of the Convair vice president and general counsel at San Diego.

I think Mr. Pace has acted with commendable promptness and wisdom, once the subject was brought to his attention by this sub

committee.

Mr. Pace has advised us that he has an appointment for himself and staff to meet with the Comptroller General and GAO staff members on September 1 to come to a full understanding on the relationship of the GAO with divisions of General Dynamics Corp.

This is the second time that denial of access to contractors' records has come before this subcommittee. I think it well to state that the subcommittee will use every resource and every bit of authority at its command to trace every dollar of public expenditures in Government contracts. This we owe to the public and this we are determined

to do.

I hope that the wise action of Mr. Pace and of the General Motors Corp.'s president sometime ago will set a pattern for open and fair dealing between defense contractors and Government.

And I want it also noted that the subcommittee is both determined and prepared for any eventuality.

Any comment, members of the committee?

(No response.)

Mr. HÉBERT. Well, the committee will stand in recess subject to call of the Chair.

(Whereupon, at 11:15 a.m., the subcommittee adjourned to reconvene at the call of the Chair.)

APPENDIXES

APPENDIX I

Hon. F. EDWARD HÉBERT,

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, September 30, 1959.

Chairman, Subcommittee for Special Investigations,
Committee on Armed Services,

House of Representatives.

DEAR MR. CHAIRMAN: Enclosed for the use of your subcommittee is a copy of our report to the Congress on examination of the pricing of certain Department of the Air Force subcontracts awarded to Telecomputing Corp., Whittaker Controls Division, Los Angeles, Calif., by General Motors Corp., Allison Division, Indianapolis, Ind.

The report discloses that unreasonably high prices were accepted for valves for J-71 jet engines because Telecomputing was not required by Allison or the Air Force to furnish cost information in support of prices quoted even though effective competition was lacking.

As a result of our findings and recommendations in this instance and in several other similar instances, the Air Force has issued instructions to its procurement personnel which should, if properly executed, make unlikely a repetition of the pricing deficiencies disclosed by our examination of the subcontracts awarded to Telecomputing by Allison.

Sincerely yours,

JOSEPH CAMPBELL, Comptroller General of the United States. COMPTROLLER GENERAL OF THE UNITED STATES, Washington, September 30, 1959.

B-133189

Hon. SAM RAYBURN,

Speaker of the House of Representatives.

DEAR MR. SPEAKER: Enclosed is our report on examination of the pricing of certain Department of the Air Force subcontracts awarded to Telecomputing Corporation, Whittaker Controls Division, Los Angeles, California, by General Motors Corporation, Allison Division, Indianapolis, Indiana.

The report discloses that unreasonably high prices were accepted for valves for J-71 jet engines because Telecomputing was not required by Allison or the Air Force to furnish cost information in support of prices quoted even though effective competition was lacking.

As a result of our findings and recommendations in this instance and in several other similar instances, the Air Force has issued instructions to its procurement personnel which should, if properly executed, make unlikely a repetition of the pricing deficiencies disclosed by our examination of the subcontracts awarded to Telecomputing by Allison.

This report is also being sent today to the President of the Senate, and copies are being furnished to the Secretary of Defense and the Secretary of the Air Force.

Sincerely yours,

Enclosure.

JOSEPH CAMPBELL, Comptroller General of the United States.

40113-59- -48

749

REPORT ON EXAMINATION OF THE PRICING OF CERTAIN DEPARTMENT OF THE AIR FORCE SUBCONTRACTS AWARDED TO TELECOMPUTING CORPORATION, WHITTAKER CONTROLS DIVISION, LOS ANGELES, CALIFORNIA, BY GENERAL MOTORS CORPORATION, ALLISON DIVISION, INDIANAPOLIS, INDIANA

INTRODUCTION

The General Accounting Office has examined the pricing of certain firm fixedprice subcontracts, for valves for J-71 jet engines, totaling $1,008,145 awarded to Telecomputing Corporation, Whittaker Controls Division, Los Angeles, California, by General Motors Corporation, Allison Division, Indianapolis, Indiana, under Department of the Air Force negotiated cost-plus-a-fixed-fee and priceredeterminable prime contracts.

In our examination, we reviewed the bases for establishing the prices of subcontracts in order to evaluate the reasonableness of costs to the Government under prime contracts. In so doing, we examined the information submitted by the subcontractor in support of prices quoted and the review thereof performed by the prime contractor and the Air Force. We selected for testing Allison's procurement of 4,079 valves from Telecomputing under nine purchase orders issued during the period from June 13, 1955, to June 11, 1957. We compared the prices quoted by Telecomputing and accepted by Allison with Telecomputing's cost experience available at the time the prices were negotiated. Our examination was made pursuant to the Budget and Accounting Act, 1921 (31 U.S.C. 53), the Accounting and Auditing Act of 1950 (31 U.S.C. 67), and the authority of the Comptroller General to examine contractors' records, as set forth in 10 U.S.C. 2313 (b).

HIGHLIGHTS

Prices quoted by Telecomputing for valves were accepted by Allison without requiring Telecomputing to submit cost information in support of the prices. In the absence of detailed cost estimates, supported by prior cost experience, neither the prime contractor nor the Air Force could properly evaluate the proposed prices. Since effective competition was lacking, there was no assurance that the prices were reasonable. As a result, Allison and the Air Force accepted prices which were unreasonably high in relation to Telecomputing's prior cost experience available at the time of negotiations. The financial results experienced by Telecomputing on sales of 4,079 valves under the nine purchase orders which we examined show this lack of close pricing. According to our computations, Telecomputing experienced total costs of $502,865 on sales prices of $1,008,145. Subsequent to the time when these purchase orders were issued, the Air Force has, as a result of our recommendations, issued instructions designed to improve the pricing of subcontracts. These instructions should, if properly executed, make unlikely a repetition of the pricing deficiencies disclosed in this report.

BACKGROUND INFORMATION

CONTRACT AND SUBCONTRACT INFORMATION

The valve which is the subject of this report is a pressure butterfly warm air valve used on J-71 jet engines produced by Allison under various Department of the Air Force prime contracts. Allison had experienced serious difficulties in obtaining delivery of the valves from the original manufacturer, which was the sole source of this item. Allison, therefore, asked Telecomputing to design and develop a valve to meet Allison's requirements. In 1954 Telecomputing developed a valve which is interchangeable with the valve supplied by the original source. Telecomputing did not provide Allison with manufacturing details nor give Allison any right to manufacture the valve. Initially designated Allison part number 6745806, the valve has undergone several minor engineering changes with corresponding changes in part number and is now specified as Allison part number 6800737, but all models of such valves are substantially alike.

The subcontracts under which Telecomputing produced the valve for Allison were all firm fixed-price purchase orders. Allison's prime contracts were principally price-redeterminable contracts which provided for periodic negotiation of firm prices for prospective periods based on the contractor's estimated costs