Mr. POWER. We appreciate that very much, Mr. Chairman. Mr. HÉBERT. Because we don't want the record to show that General Motors was not aware of what was going on. Now, members of the committee, the hearing this morning is in furtherance of the examination of the General Motors contract, which is not a new subject before this committee. The contract originally came to our attention during the investigation of the airframe industry last year. Since that time, for reasons which will be brought forth by Mr. Courtney, counsel for the committee, the General Accounting Office has made a special audit and has reported back to us, which you know. The General Accounting Office reported back that on this particular contract General Motors had made an excessive profit of some $17 million-plus, on the manufacture of approximately 600 airplanes. This profit of $17 million is reflected in three segments of the contract. Today we are concerning ourselves not with the three segments, but with the final segment or the final production of the 300 planes, of the entire contract order. The purpose of the presentation today by the staff will be an explanation and a discussion of exactly what goes on over the table in a negotiated contract. Members of this committee well know the concern which the committee has had for years on negotiated contracts. The membership is also well aware of the concern which the committee has had in the area of excess profits. This contract having been audited out by the General Accounting Office and presented to us furnishes the basis for a public discussion of how negotiation is conducted between the Government and the contractor. It further furnishes the basis for a demonstration on the part of the staff as to the inadequacy and inefficiency on the part of negotiators for the Government. This is a single part of a contract, and I am persuaded that if this is an indication of the manner in which all or a majority or a great number of contracts are negotiated, then there should be great concern, not only on the part of the committee, but on the part of the American people. In the particular instance of General Motors, I am informed that they do a billion dollars worth of business with the Government-a billion dollars worth of business with the Government, a year. That is an average, give or take a couple of dollars. And if this is an indication, this particular contract, of the way all other contracts are negotiated, then I think we should show grave concern about the final deposit of the American tax dollar. Now, specifically, this morning-and I want to bring this into focus so we will all know what we are talking about-the committee staff will present its discussion, on this basis. After the General Accounting Office gave the committee the benefit of its final audit, the committee then called for the minutes of the negotiators' meetings with General Motors, which must be kept under law. The staff, in this particular instance, headed by Mr. Lloyd Kuhn and assisted by Mr. Robert Tyler, placed themselves in the position of Government negotiators, and took from the actual minutes of the negotiation between General Motors and the Government negotiators, as represented by the Air Force negotiators, and came to a conclusion as to what they, as negotiators, would have done had they been at the negotiating table. Bear in mind at all times the only figures available to the staff of the committee were the figures available to the Air Force negotiators at the time of negotiation. Only after they had come to a conclusion and only after that conclusion did they check their figures with the General Accounting Office on their post audit. Now, these figures are very interesting. And these are the figures furnished to our staff. When General Motors first proposed a redetermination of the contract, the first figure was $293,000 per unit. Now keep in mind this-and this is most important-that under the contract and under the law, regardless of the good faith or intention of the contractor, under the law and under the terms of the contract he was required to supply to the Government representatives accurate figures of cost production on the prior 299 planes in order to determine a figure on the projected 300 planes to complete the contract. I repeat and reemphasize, that the contractor was required to supply accurate figures according to the best of his knowledge, based on actual experience. Keep that in mind all through these hearings. Certainly no one can deny that General Motors is not an efficient operation. It has some of the best talent in the country, if not the very best. Certainly it was in a position, based on its experience, to supply accurate figures. At the beginning of the so-called redetermination, General Motors proposed a price of $293,000 per unit. By the time General Motors came to the negotiating table, that negotiating price had been reduced to $288,000, a reduction voluntarily on the part of General Motors of some $5,000. The $288,000 brought to the negotiating table was to be accepted as the accurate figures of the cost of production per unit, per plane, based on actual experience of the first 2 segments of the contract, or 299 planes. The Air Force, in going to the negotiating table, based its figure of a fair cost at $262,090 per unit, or approximately $26,000 under what the General Motors, as a contractor, proposed. These figures of the Air Force were based on knowledge which the Air Force had and had accumulated on previous contracts, previous experience, and based on the same experience attributed to General Motors. There we find the General Motors negotiators and the Air Force negotiators at the negotiating table with this difference of $26,000, to proceed for the negotiation. The contract was finally completed at a price actually paid to General Motors per unit of $275,000 Mr. KUHN. That is right. Mr. HÉBERT. $275,298. Then came the GAO postaudit. Now, after the postaudit was obtained, General Motors was supplied with a report of the General Ac 94763-57- -5 counting Office and asked for comment, which they made, and which is part of the record. Following the public hearings and the public statement by General Accounting Office, the staff-in this instance, again, headed by Mr. Kuhn and assisted by Mr. Tyler-proceeded to take the minutes of the Air Force negotiators and arrive at what they considered the proper price for the plane, per unit. They used two different methods of computing these figures. They will explain to you in detail. By the first method, they carried at the worst price the Government should get, or the highest price-they arrived at $257,644 per unit, in the contract. By a second computation and by what they considered the best price that the Government could obtain, it was $254,073 per unit. In each instance, using the same figures that the Air Force had available to them, even our own staff was able to come up with a figure better than $262,000, which the Air Force opened the negotiations on. Now, in the ultimate, the $275,298 per unit was paid to General Motors. It is interesting to note-and this is an important thing-that up to this period the Air Force was dealing on an assumption based on its experience. General Motors was dealing with figures assumed to be accurate. General Motors alone was in possession of the true figures at all times of the contract. Only General Motors knew the actual figures, until the General Accounting Office conducted its postaudit. The actual audit by the General Accounting Office showed an actual cost per plane of $231,521. This was the actual cost as audited. And I direct the attention of the committee in this comparison to the alleged accurate figures of General Motors of $288,000 per unit. That is the actual cost. Keep in mind that the $288,000 does not reflect the 8 percent allowable profit, as I understand it. However, even if it did, adding the 8 percent profit would show an actual cost of $250,042 per unit. You compare the $250,000 per unit to the estimate of the Air Force and the estimate of the committee staff and you will see how close the committee staff came to the actual audited figures, as compared to what General Motors offered as accurate figures. That is the case as simply as it can be stated, in generalities. The staff will develop the details. I think that about places right on the table the situation as we know it. The staff will present its case and the chairman will ask the cooperation of the members of the committee not to interrupt the staff with questions until after the staff has had an opportunity to present the story as it found it by its examination, and then the chairman will recognize each and every member of the committee for any questions he desires to ask. Mr. Courtney. Mr. COURTNEY. Mr. Chairman, to complete, that is to make a complete record and a presentation of the subject matter, I would first direct the subcommittee's attention to the provisions of the contract. with which we are dealing, Air Force contract No. 33(038)-18503. Page 13, under clause 2, is a provision for the submission of data accumulated by the contractor for use at point of redetermination. In pertinent part it reads: At the time of each of the times specified or provided for in paragraph 8 of this clause and parenthetically those are the occasions on which redetermination negotiations are to occur― the contractor shall submit, one, a new estimate and breakdown of the unit cost and the proposed prices of the items remaining under this contract after the effective date of the price revision, itemized so far as practicable in the manner prescribed by War Department Standard Form 105. That is the itemization method which has been employed by the staff and was employed by the contractor in this instance. Two, an explanation of the differences between the original or last preceding estimate and the new estimate. Three, such relevant shop and enginering data, cost records, overhead absorption reports, and accounting statements as may be of assistance in determining the accuracy and reliability of the new estimate. Four, a statement of experienced costs of production hereunder, to the extent they are available at the time or times of the negotiation of the revision of prices hereunder. Again, a similar provision directs the furnishing of costs and availability-makes available from the contractor to Government auditors the records on cost information. Without repeating it, it is clause 45 on page 18 of the contract. Now, Mr. Chairman, first we should like to introduce the contract, having particular reference to the paragraphs and the requirements imposed upon the contractor. Mr. HÉBERT. Without objection. (The contract referred to is as follows:) PR No. 244813: Allotment breakdown Item 1a. 57X3100 163-5000 P131-09 S33-600.... PR No. 85952: Items 1a, 1b and 4. 57X3100 163-5000 P-2112(1)-09 $33-600 $2, 376, 267. 14 158, 984, 539. 45 Items 1c, 2b and 4. 97-110/21045.000 263-7000 P-931-09 $33-600-- 13, 513, 262. 61 74, 142, 500. 00 TOTALS 57X3100 163-5000 P131-09 $33-600_ 57X3100 163-5000 P112(1)-09 $33-600– 57X3100 163-5000 P121-08 $33-600 97-110/21045.000 263-7000 P931-09 $33-600_ SCHEDULE PART I, STATEMENT OF WORK $2,376, 267. 14 158, 984, 539. 45 13, 513, 262. 61 74, 142, 500. 00 (a) The Contractor shall furnish to the Government the articles and supplies in the quantities and at the unit and total prices set forth below, which prices are subject to the Clause of the General Provisions entitled "Revision of Prices": Item 1: a. 71 F-84F aircraft in accordance with Republic Aviation A, dated December 29, 1950, at a unit price of $106, 560, 350.00 Item 1-Continued b. 166 F-84F aircraft in accordance with Republic Avia- c. 250 F-84F aircraft in accordance with Republic Avia- Item 2: $52,568, 880.00 58,742, 500.00 13, 513, 262. 61 14, 702, 325.00 Item 3. Engineering Data for Items 1a, 1b, and 1c, in accordance with Exhibit "1" attached hereto, price of which is included in prices of Items 1a, 1b, and 1c. Item 4. Engineering Changes: a. Such engineering and/or specification changes in the total estimated amount set forth herein below, for the airplanes called for under Item 1 above, as may be authorized from time to time under the provision of this contract or amendments hereto which specifically reference this Item. Such amounts may be increased or decreased from time to time by the Government solely at its discretion. b. If at any time the Contractor has reason to believe that the price for any change authorized under the provisions of this contract and which is chargeable to this Item, when added to the total price for all other unformalized changes chargeable hereto, will exceed the total amount available hereunder for such changes it will so notify the Contracting Officer in writing setting forth the sum which in the opinion of the contractor the amount available will be exceeded. c. Nothing herein contained shall be construed: (1) As relieving the Contractor from the obligation to proceed as directed by any Contract Change Notification issued in accordance with the provisions of this contract; (2) As limiting or enlarging upon the provisions of the Clause hereof entitled "Changes", or limiting the Contractor's right to an equitable adjustment in the contract price as provided in said Clause entitled "Changes", irrespective of the availability of funds under this Item. (3) As permitting the Contractor to proceed with any engineering or specification changes, unless directed in accordance with the provisions of the Clause hereof entitled "Changes", or in any amendment to this contract. (4) As increasing the contract price by the amount allotted for this Item (set forth in paragraph d. immediately below) for the purpose of computing the amount of partial payments that may be made under any partial payments clause incorporated in this contract. d. The total amount for this item is. $2,929, 251. 01 Items 1 (a) and 1 (b): 57X3100 163-5000 P112 (1)-09 S33-600 (b) Spare Parts Provisioning Document shall be modified as follows: "Representatives of the Contractor will participate in the preprovisioning meeting with Republic and the Department." (2) By amending paragraph 2, Part II, to read as follows: "At the preprovisioning meeting, the Department shall establish from the data submitted by Republic Aviation Corporation, a 100 percent production list of major assemblies and components, which major assemblies and components Contractor shall be required to furnish. Within fifteen (15) days after the |