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STUDY OF AIR FORCE CONTRACT AF 33(038)-18503

GENERAL MOTORS CORP., BUICK-OLDSMOBILE-PONTIAC ASSEMBLY DIVISION

MONDAY, JULY 22, 1957

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ARMED SERVICES,
SUBCOMMITTEE FOR SPECIAL INVESTIGATIONS,

Washington, D.C. The subcommittee met at 10 a. m., Hon. F. Edward Hébert (chairman of the subcommittee) presiding, with the following members present: Mr. Hess, Mr. Gavin, Mr. Rivers, Mr. Cunningham, Mr. Bates, Mr. Hardy, Mr. Osmers, and Mr. Miller.

Mr. HÉBERT. The committee will be in order.

Members of the committee, before proceeding this morning the Chair wishes to make a statement in connection with our meeting of last Saturday morning, and the subsequent developments.

Because of the development of events which the committee is familiar with, Mr. Hurley's not being prepared at the time, or not desiring to comment on the matter that was put in the record at the direction of the committee, it was thought advisable that as far as the aircraft engine hearing is concerned it be suspended until next Monday, when we will pick up again, and then await the pleasure of Mr. Hurley before we called the Air Force witnesses in connection with the matter discussed.

In the meantime, the subject matter of today's hearing was set at the direction of the chairman of the full committee, and, with the approval of the members of the subcommittee, I desire to make this statement:

This hearing will be a review with representatives of the General Accounting Office, headed by Lawrence J. Powers, the Director of the Division of Defense Accounting and Auditing, to discuss with us the findings made by the General

Accounting Office on Air Force contract No. 33(038)-18503, dated April 25, 1952, for the production of 599 F-84 airplanes for the United States Government.

We have been directed by the chairman of the full committee to take this matter up immediately. It is of far reaching importance and bears close examination because of the subcommittee's recent report on negotiated contracts and because of the pendency of H. R. 8711, which would amend the Armed Services Procurement Act to correct many abuses in negotiated procedure.

The matters which will be raised this morning, as we understand from a short briefing, may well require immediate legislation, and, of

course, that would require prompt action on the part of the subcommittee.

I shall not detail the matter further excepting to say that this was a contract performed by General Motors Corp., Buick-OldsmobilePontiac assembly division, located at Kansas City, Kans.

Now, Mr. Courtney, do you have your witnesses ?

Mr. COURTNEY. Mr. Chairman, we have as witnesses this morning Mr. Lawrence J. Powers, who is Director of the Defense Auditing and Accounting Division of the General Accounting Office, sitting in the center of the group. On his right, Mr. W. A. Newman, Deputy Director. And to the extreme right, Mr. Stephen Haycock. Mr. Power's left-Mr. James Hammond and Mr. David Lambert, of the General Accounting Office. Mr. Lambert, as you know, is legislative and liaison representative with the Congress, from the General Accounting Office.

Mr. Chairman, as a part of the record, and without reading it, I should like to offer and have included the letter of transmittal from the Comptroller General of the United States to the chairman of the committee relating to this subject matter. (The letter is as follows:)

JULY 19, 1957. Hon. CARL VINSON, Chairman, Committee on Armed Services,

House of Representatives. DEAR MR. CHAIRMAN: Herewith for the use of your committee is a copy of our report on review of Department of the Air Force contract AF 33 (038)-18503 with General Motors Corp., Buick-Oldsmobile-Pontiac assembly division, Kansas City, Kans., for the manufacture of 599 F-84F airplanes. Our examination was made pursuant to provisions of the Budget and Accounting Act, 1921 (31 U. S. C. 53), the Accounting and Auditing Act of 1950 (31 U. S. C. 65), and the Armed Services Procurement Act of 1947, as amended by the act of October 31, 1951 (41 U. S. C. 153 (c)).

This report shows that the contractor realized a profit of $17,459,200 in excess of that contemplated in price-redetermination negotiations and that this additional profit resulted in part from inadequate analysis and evaluation by the Air Force of the contractor's pricing proposals. Our examination disclosed that the contractor's proposals included overestimates totaling $8,322,000 which were not considered in negotiations. Recognition of these overestimates by the Air Force should have resulted in substantial savings to the Government. After completion of contract performance, the Air Force requested, on at least three occasions, General Motors Corp. to consider making a voluntary refund on this contract, but the contractor declined to make any refund or otherwise adjust the contract prices.

Based on the information available to us, including comments dated June 18, 1957, from General Motors Corp., there is serious question as to the legal validity of the negotiated prices. In order to resolve this matter, additional information was requested from the Secretary of the Air Force on July 8, 1957. Sincerely yours,

JOSEPH CAMPBELL,

Comptroller General of the United States. Mr. COURTNEY. And the answer of the chairman of the full committee, and of the chairman of the subcommittee, to the letter of transmittal. (The letters are as follows:)

JULY 19, 1957. Hon. JOSEPH CAMPBELL, Comptroller General of the United States,

Washington, D. C. DEAR MR. COMPTROLLER GENERAL: I have just read your letter of July 19, 1957, No. B-125054, with which you transmitted a report and review made by the General Accounting Office of Air Force contract No. 33 (038)-18503 between General Motors Corp. and the Government.

I congratulate you on the magnificent job which your staff has performed in bringing these facts to light and presenting them for the information of the Congress.

I am today referring the matter to the Special Investigations Subcommittee of this committee, which is authorized under House Resolution 67 to examine into matters of this sort. You will hear immediately from the chairman of that subcommittee. Sincerely yours,

CARL VINSON, Chairman.

JULY 19, 1957. Hon. JOSEPH CAMPBELL, Comptroller General of the United States,

Washington, D. O. DEAR MR. COMPTROLLER GENERAL: Hon. Carl Vinson, chairman of the Armed Services Committee, has handed to me and I have reviewed your letter of this date, No. B-125054, with which you transmitted your report to the Congress on Air Force contract 33 (038)-18503.

I believe this is a matter of transcendent importance. Accordingly, I have set the matter for hearing before this subcommittee on Monday, July 22, 1957, at 10 o'clock. You realize, of course, that the subcommittee is now in consideration of a pending matter, but I believe that its work will have been completed on or before 10 o'clock. In any event, I trust it will be convenient to have your staff available to discuss this matter with the subcommittee at that time.

This is a matter which requires prompt and definitive action. I am very much impressed with the thoroughness of the report and the complete detail which has been presented, and I feel that the subcommittee must be fully acquainted with it at the earliest opportunity so that proper action may be taken in the premises. Sincerely yours,

F. EDWARD HÉBERT, Chairman. Mr. COURTNEY. Mr. Chairman, Mr. Powers has a prepared and written report. I would ask that he be permitted to proceed in order.

Mr. HÉBERT. Mr. Powers, present your statement in your own order. And I will ask the cooperation of the members of the committee that they allow you to finish your statement before they begin their examination.

Mr. COURTNEY. A portion of the figures which may be detailed and repeated, at least the more important ones, are on the board, and reference will occasionally be made to the figures on the board as well as in the printed document.

Mr. HÉBERT. All right, Mr. Powers.

TESTIMONY OF LAWRENCE J. POWERS, DIRECTOR OF DEFENSE AUDITING AND ACCOUNTING DIVISION, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY W. A. NEWMAN, DEPUTY DIRECTOR, STEPHEN HAYCOCK, JAMES HAMMOND, AND DAVID LAMBERT

Mr. POWERS. Mr. Chairman and members of the Subcommittee on Special Investigations of the Committee on Armed Services, we appreciate the opportunity to appear before your subcommittee to explain at your request our report to the Congress of the United States, dated July 19, 1957, on review of Department of Air Force contract AF 33(038)-18503, with the General Motors Corp.

We have examined the negotiation of the prices under Department of the Air Force contract AF 33 (038)–18503, dated April 25, 1952, which was awarded to the General Motors Corp., Buick-Olds-Pontiac assembly division, Kansas City, Kans., by the Headquarters Air Materiel Command, Wright-Patterson Air Force Base, Ohio. Our examination was made pursuant to provisions of the Budget and Accounting Act, 1921 (31 U. S. C. 53), the Accounting and Auditing Act of 1950 (31 U. S. C. 65), and the Armed Services Procurement Act of 1947, as amended by the act of October 31, 1951 (41 U. S. C. 153 (c)).

Contract AF 33 (038)-18503 was for the manufacture of 599 F-84F airplanes, plus related spare parts, and was a negotiated fixed-price contract with a price-redetermination clause which provided for an initial mandatory redetermination of prices to be applied retroactively and prospectively upon acceptance of the 71st airplane and a second mandatory repricing to be applied prospectively upon acceptance of the 299th airplane. The contract did not place a limit on the amount of upward or downward price revision. The contract provided also for optional repricings for undelivered airplanes after acceptance of the 71st airplane at intervals of not less than 90 days on demand of either party, but this option was not exercised by either party.

The mandatory price redeterminations, which resulted in establishing a final price of $375,848,000, were conducted in September 1954 and March 1955. The contract was substantially completed in May 1955. In the retroactive pricing of the first 71 airplanes, the contractor was reimbursed his costs plus a profit of 5.9 percent on cost. We consider the negotiated price of that segment to be reasonable in relation to the minimum risk involved. The remaining comments in our report apply primarily to the negotiation of prospective prices for the second segment of 228 planes and the third segment of 300 planes.

Our findings and conclusions were presented to the Air Force and General Motors Corp. in the form of draft reports, and the comments received from those parties have been recognized in our report, and included as appendixes A, B, and C.

Summary: The financial results experienced by the contractor on the forward portion of the contract and spare parts, compared with those contemplated in negotiations, are summarized below: Contract price established in redetermination...

$208, 998, 000 The contractor's experienced costs_

176, 057, 500

The contractor's experienced profit.. Profit contemplated---

32, 940, 000
15, 481, 300

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Experienced profit in excess of contemplated profit.

17, 459, 200 Selected data with respect to prices negotiated and profits realized, Mr. Chairman, is contained in a tabulation on page 3 of our report. With your permission, I would like to insert that tabulation into the record.

Mr. HÉBERT. Without objection.

Mr. Powers. It is my understanding that this summary on the blackboard is the same as the tabulation appearing on page 3 in our report.

Mr. COURTNEY. It is, Mr. Chairman, with the exception of the explanatory notes which Mr. Powers will give in the course of his

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