Mr. CLINKSCALES. They would not fit.

Senator CHILES. Why wouldn't they fit?

Mr. CLINKSCALES. I think for a multitude of reasons they just simply did not fit. There were many complaints from agencies that they couldn't use the desks. I would assume that that included everything, that they were out of line and anything that you can think of. They did not fit.

So the contract was changed for them to be shipped with the legs on. In some instances then, after the configuration was changed, the desks were packaged so tightly in a truck that the trucks at our depots could not be unloaded without some special means; in many cases these desks, of course, were damaged.

Senator CHILES. They were wedged into the truck?

Mr. CLINKSCALES. I think it was indicated that a forklift or some type of equipment was used to wedge them in there. They couldn't get them out.

Senator CHILES. Did we accept those desks? We got our own forklift and dug them out?

Mr. CLINKSCALES. Yes, sir. We accepted them.

Senator NUNN. Mr. Chairman, may I ask another question here. Now, who is responsible for that? What department does that come under?

Mr. CLINKSCALES. That, too, sir, is a part of the depot part of the Federal Supply Service.

Senator NUNN. Same department. Is there a subdivision under that that handles forklifts and things like that?

Mr. CLINKSCALES. Yes, sir. There is a subdivision of Federal Supply that is responsible for the depots.

Senator NUNN. How about the transportation?

Mr. CLINKSCALES. Transportation, I believe, in this case was the vendor's own trucks, trucks that were under contract to the vendor. Senator NUNN. Who is in charge of the depots under Federal Supply Service?

Mr. CLINKSCALES. I believe an Assistant Commissioner has that responsibility in the Federal Supply Service; I am almost certain that the responsibility is at the assistant commission level,

Senator CHILES. You have explained the term "buying in," and how it would occur. Doesn't GSA have some way to try to protect itself when there is a change order; isn't there an audit made of that change order to determine if it was valid and if the cost incurred in the change order are all valid and was that done in these cases?

Mr. DAVIA. What normally happens when a contract is changed is that the contractor, whoever he might be, incurs additional costs. which he subsequently presents to the Government as a claim. Now his claim is always audited, if the dollar amount is sufficiently significant.

In Art Metal's case, we have audited quite a few claims. As far as the decision to make the change in the first place, that is not audited or passed on at the time the decision is made to make the change.

Senator CHILES. In those audits, any of the audits with Art Metal, they have to then prove the time that workers worked in addition and additional costs that they had?

Mr. DAVIA. Oh, yes. His claim is normally detailed in such a manner that the contract and audit shows that he incurred so many hours of labor at whatever costs.

Senator CHILES. Have you checked those contracts to see if GSA required that kind of proof?

Mr. DAVIA. We routinely audit those contracts and the change orders at Art Metal, yes.

Senator CHILES. Have we always required that kind of proof, Mr. Clinkscales? Have you found in the Art Metal cases that we have always required that kind of proof?

Mr. CLINKSCALES. Yes, sir. I think that it is my understanding that we did. However, it's also my understanding that some of this proof is in the form of timecards for individual workers would indicate how much time they spent on making on a product; and in at least one substantial instance

Senator CHILES. Substantial-what do you mean by substantial? What kind of an amount are we talking about?

Mr. CLINKSCALES. I don't know in dollars but I'm talking about substantial in terms of records. These records, it was my understanding, were accidently destroyed. I think we're talking about 350,000 records.

Mr. DAVIA. What Mr. Clinkscales is describing is a change order which subsequently involved a $10 million claim by Art Metal. Senator CHILES. A $10 million claim?

Mr. DAVIA. Yes, sir, near $10 million.

Senator CHILES. And the timecards were destroyed? How did they get destroyed?

Mr. DAVIA. Well, I'm not sure. They were accidentally destroyed. Senator CHILES. But those are Art Metal's timecards?

Mr. DAVIA. Yes, sir. The timecards that we would normally use in an audit to document that labor had been incurred as claimed. Senator CHILES. So there weren't any timecards because Art Metal said they were accidently destroyed?

Mr. DAVIA. Yes, sir.

Senator CHILES. Did GSA pay the claim?

Mr. DAVIA. What actually happened was this: When we could not look at the actual documentation, we contracted with a management consulting firm, Booz Allen. The firms engineers and technicians went into the Art Metal plant and observed certain manufacturing processes; they then came up with an estimate of what they thought an appropriate claim should be. They recommended something like $21⁄2 million as appropriate.

Senator CHILES. Art Metal had claimed $10 million and you all got Booz Allen and went in even though their records were destroyed— and that wasn't the Government's fault their records were destroyed. Mr. DAVIA. Not at all; no, sir.

Senator CHILES. But you went in and did a timestudy and came up with $2.5 million. Did you settle the claim on that basis?

Mr. DAVIA. The audit concurred with the study that was made, and we felt that Booz Allen took sufficient care in their estimating process. Also, we had another technical opinion from a statistics expert who concurred that the Booz Allen statistical projections were proper.

The claim was subsequently allowed for something like $51⁄2 million or approximately $3 million more than the Booz Allen recommendation.

Senator CHILES. Why?

Mr. DAVIA. I don't know. There was very little basis, if any, that I would accept as justifying that action.

Senator CHILES. Mr. Clinkscales, do you know anything about that? Mr. CLINKSCALES. We're looking for that answer, sir, but we haven't received anything at all definitive in our answer yet.

Senator CHILES. I understand that you have another change order in which Art Metal had signed a change contract that specifically prohibited them from asking for a profit margin on a change order. Tell me how that came about?

Mr. DAVIA. Well, they were not really prohibited from asking for profit. They entered into an agreement with the Government to forego several items of cost and profit. They agreed to forego profit in the production order they were about to be given. They went into production, and then in presenting their claim, asked for $1 million profit.

As I understand it, at the time their claim was presented, there was no documentation in the Government files, the contract files, which would indicate that there had been mutual agreement between the Government and Art Metal to waive profit.

By sheer chance, we had a Xerox copy in our audit files in our New York field audit effice which showed very clearly that both parties. to that agreement had signed.

Senator CHILES. So, they were claiming labor charges when they had signed the contract saying they would forgo? Did someone say to them, "Remember, you agreed to forgo profit?" Somebody surely would remember that on an item like that.

Mr. DAVIA. AS I recall, at the time the claim was presented, even we in audits were not aware that such an agreement had been signed. There were no other protests at the meeting. I wasn't there, but I'm told by our representatives who were there.

We subsequently scanned our audit files and found the document I described.

Senator CHILES. So you didn't pay that $1 million because you found a Xerox copy of an order that had been signed?

Mr. DAVIA. Yes, sir.

Senator CHILES. Art Metal, obviously, goes to large efforts to get Government contracts. They have gotten about $360 million worth of contracts in the last 10 years. Is that a highly profitable business? Mr. DAVIA. It would not appear so, sir. The latest Dun & Bradstreet on Art Metal would indicate that, I think it was 1974, they had a loss of $600,000 or $700,000. I may have my years just a little bit askew, but in 1975 they had a profit, as I recall, of around $1 million; but in aggregate it would appear that they are just breaking even.

Senator CHILES. Well, are they paying way beyond the scale of wages to the people that are working there?

Mr. DAVIA. It is my understanding that they are employnig minority personnel and on very low wage rates.

Senator CHILES. Well, that is puzzling if their products invoke complaints and seem to vary over a period of time, the corporation is not showing huge profits. It's got 70 percent of the Government's business and it appears about 86 percent of the business they do is done with the Government, or 80 percent. Do you know why they

go to the bother to do this? I mean, it sounds like to me they are working for the Government.

Mr. ALTO. It sounds like dedicated public concern, Senator, on the face of it.

Senator CHILES. Well, you are in the process now. The contracts that we have give us the right to look at their books. Do we have that coverage of the contract?

Mr. DAVIA. Yes, sir.

Senator CHILES. Are you in the process of doing that?

Mr. DAVIA. Do you mean auditing their overall financial condition? Senator CHILES. Yes, sir.

Mr. DAVIA. No, we are not. When we audit the books we audit material which is relevant to their claim and so far

Senator CHILES. Well, if 86 percent of their business is Government business and if you have a right to audit that, you ought to be able to tell from that audit whether they are making money or not or what's happening to the funds, should you not?

Mr. DAVIA. I'm not quite sure. One of the problems in auditing Government contractors is where they have competed successfully on an advertised bid, and are given a fixed price contract, those costs are not subject to audit. What is subject to audit are those costs which subsequently arise because of modifications and that sort of thing.

Senator CHILES. So even though you deal with specifications like this where you turn out only having one or two bidders, if somebody gets the low bid then you are cut off from being able to go in and audit them except on the changes and those kinds of items.

Mr. DAVIA. That is correct. It is assumed that he is the lowest bidder and these fixed price costs are not subject to audit.

Senator CHILES. It sounds like we handicap ourselves in the Government if we don't have the ability to do that. Maybe we're talking about a need for a change there in the Government's ability to do that.

Recently, I understand Art Metal has gotten a contract for making double-shell chairs. Had they ever made chairs for the Government before?

Mr. CLINKSCALES. No, sir; not to our knowledge, they did not.
Senator CHILES. What is a double-shell chair?

Mr. CLINKSCALES. I think you could describe a double-shell chair as a new design that's supposed to be more pleasing to the eye, more modern in concept and it would make for an improved working

environment.

Senator CHILES. We asked you to bring the standard specialists with you who examined the chairs. Would you ask them to come forward, please.

Mr. CLINKSCALES. Yes, sir.

Senator CHILES. Would you give me your names, please?

Mr. HYDE. My name is Frederick Hyde, H-y-d-e.

Senator CHILES. All right.

Mr. MONDAY. Paul Monday.

[Thereupon, Frederick Hyde and Paul Monday, having been first duly sworn, were called as witnesses.]

Senator CHILES. Will you explain briefly what these chairs are supposed to be and how you went about examining them, please, and

you are going to have to speak up so our court reporter and we can hear.

TESTIMONY OF FREDERICK HYDE AND PAUL MONDAY, STANDARD SPECIALISTS

Mr. HYDE. Well, as you mentioned, these are recently designed double-shell chairs. They have an inner and outer shell.

Senator CHILES. Hold on a minute. I can't hear you and I'm afraid no one else can. You might have to hold a mike.

Mr. HYDE. These are what we identify as our double-shell chairs. It's a recently instituted design to go along with and enhance our steel contemporary office furniture, which we started putting into the Federal Supply System about 1971; these are exponents of that style of chair.

These particular chairs were, I understand, obtained from the GSA Depot at Middle River, Md., on a random basis. I, myself, did not select the chairs. I was asked to examine the chairs to see if they complied with the specification requirements; with the help of Mr. Monday, my assistant here, I did just that.

Senator CHILES. So they were picked on a random basis. You didn't pick them, and you don't know but you think they were picked on a random basis.

Mr. HYDE. I believe so, but I had nothing to do with that.
Senator CHILES. Who manufactured these chairs?

Mr. HYDE. Well, we have really one manufacturer of these particular chairs; they were produced by Art Metal.

Senator CHILES. Are they shellback chairs as required by the specifications?

Mr. HYDE. They are double-shell chairs. They are not in total compliance with the specifications.

Senator CHILES. Are they made out of the material called for in the specifications?

Mr. HYDE. Yes; with the exception of the outer shell, which is the plastic component you see there.

Senator CHILES. Point that out for me, if you will, or have your assistant point that out and tell me what is different about that, if you will.

Mr. MONDAY. The black part is the outer shell. It is a different material than specified in the specification.

Senator CHILES. So this is not a material that was specified in the specifications?

Mr. MONDAY. No, sir.

Mr. HYDE. No, sir.

Senator CHILES. Is it better?

Mr. HYDE. I don't know. It is claimed to be as good or better than the specification requirements. It would take better research to determine if it is better. By observation you could not tell this. Incidentally, our inspection or our examination of these particular items was visual, with the exception of the plastic components that you see here and the foam which you see on the floor there. Samples of those were sent over to the GSA Material Evaluation and Development Lab, for a readback as to what the materials actually were, so that