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The after-the-fact criticism of these negotiations in your report completely overlooks the fixed price aspect of this contract. The parties discussed cost elements but directed the negotiations toward a contract price. Unless the proposed report departs from this strict cost approach it will not reflect the manner in which the price redetermination provisions of the contract were given effect.

Any discussion of this contract should take into consideration the fact that General Motors Corp. financed its participation in this program with no recovery of the funds employed until planes and spare parts were sold. From February, 1951 until June 1953, General Motors' investment grew to a total of $93,464,000 before billing the Government. The unrecovered expenditures reached a peak of $135,846,000 in May 1954. Billings did not offset aggregated expenditures until March 1955.

The proposed report contains certain of the data or the information previously supplied by the contractor. However, I believe that a more complete and more accurate account will be presented if the following information is also included:

(1) In footnote (c) of page 2, a statement is made that a profit rate of 8 percent was agreed upon at the time this contract was placed and that the prices negotiated included a contemplated profit of not more than 8 percent. There was no agreement or commitment of any kind that the contractor was to be limited to a profit of 8 percent on actual costs nor was the contractor guaranteed any percentage of profit on costs or protected against loss on the contract. The correspondence between Mr. Harlow H. Curtice, then executive vice president of General Motors Corp. and Brig. Phillips W. Smith, Chief, Procurement Division, Air Materiel Command, Wright-Patterson Air Force Base, dated April 25, May 9, and August 13, 1951, and attached as exhibits A, B, and C, respectively, includes the complete agreement reached at that time.

Your attention is called particularly to the following statement in exhibit A:

All contract bids will be subject to redetermination and it is my understanding that we will benefit to the extent savings are accomplished through good performance.

(2) Subcontractor's prices: This portion of the proposed report concerns two subjects. The first is the claimed overstatement of $1,700,000 in the bill of material submitted just prior to the negotiation of the second segment prices in September 1954. The second relates to the right and ability of the contractor to negotiate price adjustments required by the thousands of engineering changes.

The contractor's position with respect to the alleged overstatement of $1,700,000 was fully set forth in the letter of October 25, 1956, from Mr. John F. Gordon, vice president, General Motors Corp., to Brig. Gen. William T. Thurman, United States Air Force, Deputy Director, Procurement, Headquarters, Air Materiel Command. It is requested, therefore, that a copy of the letter which is attached as exhibit D be incorporated in the proposed report. As this letter stated, the contractor was unable to find any basis for any misunderstanding of the facts on the part of any of the parties participating in the price negotiation conference of September 1954. Furthermore, as the terms of the contract required that the negotiations were to be on the basis of price, not on the basis of segregated cost elements, and the procedure followed at this conference conformed to this requirement, there was no deviation from contract terms or from negotiating principles.

The report also discusses the recovery of costs resulting from engineering changes. The contractor was well aware that engineering change costs were recoverable under the “changes” provision of the contract. There were no costs of this nature included in the proposed prices for second and third segment planes.

The contractor agrees with the statement in the report that suppliers should “be expected to live within firm fixed prices agreed upon.” In the establishment of its subcontract structure, the contractor directed its efforts to securing dependable and qualified suppliers. It followed its normal business practices with these suppliers. When these suppliers demonstrated need for price relief because of the many delays and other interruptive Air Force actions, it granted such relief if otherwise equitable.

(3) Direct labor estimate: The report states that there was an error of 1,600 hours per airplane in the estimated direct labor hours for airplanes Nos. 72 through 299, and an overvaluation of direct labor inventory in process. From this premise, the report proceeds to the conclusion that there was an overstatement of approximately $842,000 in the direct labor costs. On page 8 the report

recognizes that the Air Force negotiators used other labor data in the price redetermination negotiations. In other words, the direct labor as estimated by General Motors was not the basis for the redetermined prices.

The report also overlooks the fact that the direct labor estimate which is claimed to be overstated was related to the proposed unit price of $442,000 per airplane. The negotiators ultimately arrived at a redetermined price per airplane of $420,000 for airplanes 72 through 299. It must be realized that the contractor at no time was apprised of the basis for the reductions proposed by the Air Force negotiators.

(4) Manufacturing overhead estimate: The proposed report criticizes the contractor for not selecting cost experience on manufacturing overhead for a short period as a basis of future cost projection. It must be borne in mind that the costs to be experienced after March 1955 were a matter of estimate based on the proposed schedule. In the light of past experience, the contractor had every reason to project its estimates on a broader basis than figures quoted by the auditors.

Manufacturing overhead includes indirect labor and supervision, supplies, expenditures related to buildings, machinery and equipment, etc.,' necessary to maintain the basic organization as long as that operation continues, regardless of the level of production volume attained within any short period of time. This overhead organization must be retained during interim periods of low production if schedule requirements are to be met. Otherwise a manufacturer is faced with the additional cost and delay of rebuilding an organization necessitated by a return to higher production requirements. The

record of fluctuating volume throughout the first two segments of the contract was an important influence on manufacturing overhead costs in all forward pricing. The following tabulation sets

forth the manufacturing overhead costs actually incurred by months starting with the first month of deliveries and ending with the last full month of operations preceding the date on which prices were redetermined for the last segment of 300 airplanes.

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The manufacturing overhead cost incurred remained relatively constant each month regardless of deliveries, which were unpredictable for reasons beyond the contractor's control. During this period

of fluctuating volume the contractor had to maintain its basic organization in order that the contract could be brought to a successful conclusion.

At the time of the negotiations in March 1955 there was no basis to assume that the accelerated rate of production

attained in January and February could be continued and that the contract could be concluded earlier than July 1955,

the month established during the negotiations for the completion of deliveries. The contractor's estimates of labor and burden had to be related to the afore said completion date

and the negotiators, therefore, were faced with the problem of arriving at a contract price ich contemplated the retention of the con

of the fixed charges and other burden costs throughout the remaining 5-month period, as well as phasing out costs. sulted in cost savings which gave rise to this after-the-fact comment by the the completion of deliveries 12 months in advance of the established date reauditors on the manufacturing overhead estimate.

General and administrative expense estimate: The contractor's response

comments dealing with manufacturing overhead estimates are applicable to the statements in the report concerning

general and administrative expense

(5) to the

estimate.

(6) Spare parts for mutual defense assistance program: As indicated, the cost experience available at the time of delivery of the 210th plane was selected by the Air Force and the contractor as the basis of the negotiated prices for spare parts to be delivered during the final segment. It was agreed also that the spare parts prices and the airplane prices were to be redetermined as a whole.

From a practical standpoint, the experienced costs of the delivered spare parts necessarily played a very small part in the forward pricing. The remaining spare parts were for the most part to be manufactured concurrently with the manufacture of identical parts and assemblies of the remaining airplanes. Hence, the negotiators based their bargaining for spare parts prices on data prepared on the same basis as the data proposed for the negotiation of plane prices. A reduction of $850,000 was negotiated.

(7) Refund requested from the contractor: While the proposed report includes a portion of the contratcor's reply of June 27, 1956, to the request of the Air Force for a refund in accordance with the claimed voluntary refund policy of General Motors Corp., the position of General Motors Corp. will be more fully explained if the aforesaid letter is included in full. The contractor bas attached this letter as exhibit E and requests that it be included in the report to Congress.

In discussing the refund request, the report loses sight of the fact that the profit rate of 8 percent was a going-in rate of profit, with the understanding that the contractor would benefit to the extent that savings were accomplished through good performance.

Page 3 of the report summarizes as follows the $8,322,000 questioned by the auditor: Known reductions in subcontractors' prices.

$1, 700, 000 Direct labor estimate---

842, 000 Manufacturing overhead estimate--

4, 500,000 General and administrative overhead estimate--

355, 000

Total.--Profit (8 percent).

7, 397,000

592, 000

Total ----
Revision of prices for spare parts.

7,989, 000

333, 000

Total.

8,322, 000 Even without any consideration of the contractor's explanation for each of these questioned items, the previous page of the report discloses that the reduction negotiated by the parties was $9,400,000. Therefore, the total amount by which the Air Force negotiators reduced the forward prices proposed by the contractor exceeded the total amount by which the report claims that the estimated costs were overstated.

In the final review of his contract, the profit performance should be evaluated on the total results. On this basis, the proposed report indicates a profit rate of 11.2 percent on sales. This contract was subject to the Renegotiation Act of 1951 and profits earned on the contract have been included in the overall profits of General Motors Corp. on defense business reported to the Renegotiation Board for each of the years of contract performance. Gross refunds have been made to the Government totaling $5 million in 1951 ; $20 million in 1952; $10 million in 1953 and $10 million in 1954.

As a result of such proceedings, the corporation's overall profit rate on rene gotiable sales was 10.3 percent in 1951, 10.0 percent in 1952, 9.6 percent in 1953 and 9.8 percent in 1954—margins which were substantially below the profits realized by the corporation on its commercial business. While the corporation has filed with the Renegotiation Board the information required for the years 1955 and 1956, the renegotiation proceedings have not been completed.

Your courtesy in extending to us the opportunity of a preliminary review of your proposed report to Congress was appreciated. It is believed that we have supplied you with substantial additional data. May we request that you incorporate this information in the proposed report. Respectfully yours,

JOHN F. GORDON, Vice President.

APPENDIX C

Exhibit A

GENERAL MOTORS CORP.,

Detroit, Mich., April 25, 1951. Brig. Gen. PHILLIPS W. SMITH, Chief, Procurement Division, Wright Patterson Air Force Base,

Dayton, Ohio. DEAR GENERAL SMITH : This will confirm my understanding of the tentative agreement reached in your office this morning and later confirmed by telephone.

The rates of profit agreed to for the various products would apply on sales price on contract bids with the exception of the F-84-F airplane which would apply to cost. The prevailing rate of profit would continue in effect on the products produced by the A-C Spark Plug division at its Milwaukee operation.

The outstanding letter contracts with the Allison division would be reviewed in the light of an understanding between Allison and yourself, as to the quantities which would carry the 9, 912, or 10 percent profit margins on sales. Future contract bids would be on a 9 percent of sales basis. Rochester Products, fuel controls, 10 percent; Aeroproducts, propellers and other products, 9 percent; Buick Sapphire engines, 942 percent; and Chevrolet 3350 Wright engines, 9 percent. BOP F-84-F airplanes, 8 percent.

Installation costs (including any repair and rebuilding by contractor) and special tools will be provided under the supply contracts; and for convenience in administration, the cost of such items shall be included in the contract price of the articles, but for the purpose of computing profit, the agreed estimated costs thereof shall be excluded. All other costs including preproduction costs, will be allowed with markup.

The cost to the contractor of standard commercial items, supplied by divisions of General Motors Corp., shall be the invoice price, provided the supplying division shall certify that such invoice price is not in excess of prices charged other divisions of General Motors, the public or the Government, whichever is lesser, and not subject to price redetermination but shall be treated in all respects the same as the price of materials purchased from third products.

The cost to the contractor of nonstandard items, agreed to through negotiations with contracting officer, supplied by divisions of General Motors Corp., shall be the invoice price and not subject to price redetermination, but shall be treated in all respects the same as materials purchased from third parties.

All contract bids will be subject to redetermination and it is my understanding that we will benefit to the extent savings are accomplished through good performance.

As I stated to you, we desire to have our relations with you, as the chief procurement officer, on a sound and equitable basis so that you may fully support our position with the renegotiation board.

pointed out to you that in accepting these lower rates of profit margin on sales of military items during a period when civilian output continues at a substantial rate, should we get into a shooting war

and be required to convert 100 pereent to military products, we would be entitled to reconsideration of the profit margin. I believe you agreed that this was entirely in order.

I shall be glad to have you advise me if the above is in accordance with your understanding of our discussions, both in your office and on the telephone. My very kindest personal regards. Sincerely,

H. H. CURTICE, Executive Vice President.

Mr. H. H. CURTICE,

Exhibit B
HEADQUARTERS, AIR MATERIEL COMMAND,
WRIGHT-PATTERSON AIR FORCE BASE,

Dayton, Ohio, May 9, 1951. Executive Vice President, General Motors Corp.,

Detroit, Mich. DEAR MR. CURTICE: I am in receipt of your letter of April 25, 1951, confirming our agreement on profit for the various divisions of General Motors

Corp.

I am in complete agreement with your understanding as outlined in that letter. However, it should be mentioned in clarification that those profit percentages are to apply on all contracts which on that date were under negotiation and not covered by definitive contract, and regardless of whether or not a letter contract had been issued to allow the initial procurement of materials, etc.

From now on every effort will be exerted by the Procurement Division to place on definitive contract as soon as possible all procurements which were being held up by this profit negotiation. For example, it is anticipated that all fiscal year 1951 procurements from Allison division will be on definitive contract and mailed to Allison for their signature by May 15, 1951.

I want to express my appreciation to you for your efforts which resulted in a satisfactory solution of this profit negotiation. Sincerely yours,

(Signed) PHILLIPS W. SMITH,

Brigadier General, USAF,
Chief, Procurement Division.

Exhibit C

GENERAL MOTORS CORP.,

Detroit, Mich., August 13, 1951. Brig. Gen. PHILLIPS W. SMITH, Chief, Procurement Division,

Wright-Patterson Air Force Base, Dayton, Ohio DEAR GENERAL SMITH: This will confirm our recent telephone conversation regarding the treatment of special tooling under my letter to you of April 25, 1951. I discussed with you the pricing problem which arises in those situations where the corporation makes its own tools instead of buying them from an outside tool vendor. As an example, I referred to the Buick-OldsmobilePontiac assembly division E-84-F contract, under which Fisher Body division would make in its own extensive tool and the die shops approximately $13 million of special tooling out of a total tooling charge of approximately $22 million. It was then agreed that where the corporation makes the special tooling in its own plants a markup will be allowed on the same basis as other costs and that the agreed estimated cost of special tooling to be excluded for the purpose of computing profit under my letter of April 25, 1951, shall include only the cost of that tooling which is purchased from outside vendors.

If the above is in accordance with your understanding, I would appreciate your advising me. Sincerely,

H. H. CURTICE, Executive Vice President.

Exhibit D

GENERAL MOTORS CORP.,

Detroit, Mich., October 25, 1956. Subject: Contract No. AF33 (038)-18503. Brig. Gen. WILLIAM T. THURMAN,

Deputy Director for Procurement, Directorate of Procurement and Pro

duction, Headquarters, Air Materiel Command, Wright-Patterson Air Force Base, Ohio.

(Attention : MCPP.) DEAR GENERAL THURMAN: In accordance with an understanding reached in a meeting on September 28, 1956, at Wright Field between you and Mr. R. C. Mark, General Motors has reviewed the pricing reflected in the second segment of the F-84-F airplane contract. At the September 26 meeting it was suggested that in this review General Motors should consider as a matter of principle a refund of $1,700,000 to the Air Force.

As a result of this request, a review of the negotiation of these prices has been made to determine whether or not there is an obligation on the part of General Motors as a matter of principle, or on a contractual basis, to refund any amount to the Air Force on this contract.

At the outset of the September meeting it was recognized that the F-84-F contract was a fixed-price contract and hence there was no contractual obli

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