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gation to make a refund. The review of the request for a refund has, therefore, been directed to an evaluation of all the circumstances in connection with the price negotiations of the second segment of the contract.
At the time of the negotiation of the second segment prices in September 1954, the Buick-Oldsmobile-Pontiac assembly division used its best judgment in arriving at a price equitable to both parties in the light of the conditions existing at that time. Prices for materials required for the second segment were firm prices, even though a substantial number of the items were priced to BuickOldsmobile-Pontiac assembly division at different figures as many as three figures—with the figure for the first quantity of the segment being the highest and, in some instances, substantially higher than the other figures for remaining quantities of the segment.
In setting forth the price of an item in the bill of materials, the higher price for the first quantity was generally used to protect the division's position in the event of early termination during the period while such prices would be effective. This was also desirable from the division's viewpoint in the event of a request for redetermination of price prior to completion of the second segment of the contract. Also, it was recognized that despite firm prices the division might find it necessary in the interest of insuring an uninterrupted flow of assembly parts and production, to make upward material price adjustments under proper circumstances to suppliers even though such adjustments would result in a corresponding reduction of profit. In view of these considerations, it would neither be practical nor reasonable to have priced such items in the bill of materials at a lower average price or at a lower actual price for any other quantities of the second segment.
In its comments wih respect to material costs the General Accounting Office refers to the transmittal accompanying the submission of the bill of materials and the statement therein that "the unit prices shown for material purchased from outside suppliers are firm and are supported by purchase orders.” The report then makes the following comments:
“Acceptance by the negotiators was based on an audited bill of material, according to the minutes of negotiations.
“Generally, the prices used in the bill of materials were amounts being used to cost material into inventory during the initial 71 planes of the second segment, rather than firm unit prices of the material to be supplied for the follow-on portion.
"(a) Outside suppliers-overstated $1,700,000: Review of the priced bill of materials submitted by the contractor reveals that firm prices supported by purchase orders amounted to $1,700,000 less than that shown on the bill of materials.”
The report implies that the prices used in the bill of materials, representing material costs for the initial quantities of planes of the second segment were not firm prices. Actually, prices were firm for varying numbers of initial planes of the second segment, although there were lower firm prices for later production of additional quantities. The statement in the transmittal was therefore
Also, from the foregoing comments of the report there is an implication that the statement that such unit prices are supported by purchase orders” was intended as a representation to be relied upon by Air Force representatives without verification, and that the Air Force representatives did rely on the state
However, the report fails to set forth other facts which show that this was a statement of fact, not a representation in the technical sense. No mention was made of the following:
(1) At the heading of each sheet of the bill of materials the caption "Estimated Material Costs” appeared twice. (2) In accordance with the provisions of the contract, Air Force representaapproved all purchase orders amounting to $25,000 or more.
Although not required by the provisions of the contract, copies of all purchase orders amounting to $25,000 or more were given to the Air Force
In accordance with the terms of the contract, all other purchase orders Were a vailable at all times to Air Force representatives. This was the fact situation when the bill of materials was furnished to the Air Force representatives approximately 2 weeks prior to the pricing conference.
inly, on these facts there is no basis for any implication that there was any misrepresentation in the statement of the transmittal quoted above. Nor
any significance be attached to the omission from the statement concerning unit prices of a qualification to the effect that the prices applied only to
quantities. The data submitted were as complete a disclosure as if such
a qualification were set forth in the transmittal letter, and it was reasonable to expect that the Air Force representatives would read the caption on the pages and would at least spot check the purchase orders against the estimated prices on the bill of materials.
Finally, it would appear that the Air Force representatives could not have been misled in any way and could not have misunderstood the procedure followed in estimating the material costs because, according to the comments of the General Accounting Office, “Acceptance by the negotiators was based on an audited bill of material, according to the minutes of negotiations.” Further, in the face of the reference to an "audited bill of material” made at the time that negotiations were in progress, not months later, is it reasonable to assume that the negotiators merely “reviewed” the bill of materials and did not make any check against the copies of purchase orders in the possession of the Air Foree?
The price redetermination conference which took place at Wright Field on September 8, 9, 10 and 11, 1954, was attended by 9 representatives of the Air Force, 4 of whom were resident at the plants of the Buick-Oldsmobile-Pontiac assembly division or Fisher body division and were familiar with the contract and the program. Prior to the aforesaid conference, namely, on July 15, 1954, a proposal was submitted to the Air Force setting forth a unit price of $442,890 for the second segment of the contract. At the opening of the conference on September 8, 1954, a revised proposed price of $440,000 was submitted by the contractor. This reduced price reflected the elimination of certain costs which took place after the first proposal was submitted in July. The first 3 days and part of the fourth day of the conference were spent in reviewing and discussing the Air Force audit reports covering both Fisher body division and BuickOldsmobile-Pontiac assembly division, the contracting officer's comments on costs and operations, and the detailed price buildup of the proposal of the BuickOldsmobile-Pontiac assembly division.
On the fourth day, September 11, 1954, the Air Force submitted its first counter proposal on price. There then followed an exchange of suggested prices and a final determination and agreement on the price of $420,000 per plane. This represented an aggregate reduction through negotiation, of approximately $4,560,000 in the price of the second segment of 228 planes from the price proposed by the contractor at the commencement of negotiations.
The fact that neither party demanded a price redetermination during the second segment, although the right to make such a demand was provided for in the contract, indicates that the price was considered reasonable as production progressed. Furthermore, as the profit position improved near the end of the second segment, due to an improved rate of production, Buick-Oldsmobile-Pontiac assembly division waived its contractual right for an upward price adjustment of $1,112,000 as a result of engineering changes.
In view of the foregoing, we are 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. Furthermore, inasmuch 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 the conference conformed to this requirement, there was no deviation from contract terms or from negotiating principles. Under the circumstances, our review of this matter reveals no basis for any refund to the Air Force under this contract. Very truly yours,
(Signed) John F. GORDON, Vice President, General Motors Corporation.
BUICK-OLDSMOBILE-PONTIAC ASSEMBLY DIVISION,
GENERAL MOTORS CORP.,
Detroit, Mich, June 27, 1956. Subject: Contract No. AF 33 (038)-18503, General Motors Corp. (Buick-Olds
mobile-Pontiac Division). COMMANDER, HEADQUARTERS, AIR MATERIEL COMMAND,
Wright-Patterson Air Force Base, Ohio.
(Attention of MCPH.) GENTLEMEN: This is to acknowledge receipt of your letter of June 14, 1956, in which you request General Motors Corp. to “make an appropriate refund"
on contract AF 33 (600)-18503. Inasmuch as we do not have any record of such a contract number, and inasmuch as you refer to a procurement of 599 F-84F airplanes and spare parts, we assume your letter intended to deal with our contract No. AF 33 (038)-18503.
You state that the General Accounting Office has given you a review of this contract, stating the actual profits realized to have been 13.19 percent. Our computations as of this date disclose a profit of 12.1 percent over cost, or 10.8 percent on sales. You are aware, of course, that this contract was subject to the Renegotiation Act of 1951, and that this profit has been included in the overall profits of General Motors Corp. reported to the board for renegotiation.
With regard to the results by segments as outlined in your letter, we have not attempted to check the figures developed by the General Accounting Office and offer the comment that, as these averages by segment seem to constitute the overall average of 13.19 percent quoted, there must exist an element of basic difference in the figures given you by the General Accounting Office and those used by this organization.
You further state that each pricing action results in a firm fixed price for that particular segment of airplanes, not subject to further revision. With this statement we agree.
You also make reference to a policy of General Motors Corp. relating to the refunding of certain profits. As to any recorded expression in this connection, we refer you to Mr. Curtice's letter of April 25, 1951, to Brig. Gen. Phillips W. Smith which, among other things, states: "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.”
May we also point out that the adjustment of contract prices to effect a revision of earned-profit ratios is a matter for internal consideration by General Motors in the overall administration of its affairs and does not constitute a commitment of any nature.
You may be advised that we have considered our profit position in the in-
GENERAL MOTORS CORP.,
COMPTROLLER GENERAL OF THE UNITED STATES,
July 8, 1957. The Honorable the SECRETARY OF THE AIR FORCE.
DEAR MR. SECRETARY: On May 23, 1957, we advised the Assistant Secretary of the Air Force (Materiel) that we had furnished a copy of our draft report on review of Department of the Air Force contract AF33 (038)–18503 with General Motors Corp., Buick-Oldsmobile-Pontiac assembly division, Kansas City, Kans., to the president of General Motors for any comment or further explanation the corporation might wish to present. A copy of General Motors' comments on the report dated June 18, 1957, is attached.
One of the findings in the draft report concerns the known reductions in subcontract prices which were not recognized by the contractor in his price proposal for the second segment of airplanes to be produced under the con
For consideration by this office in determining the legal right of the Government with respect to obtaining recovery from General Motors for their failure to recognize in their proposal known price reductions for materials, we request that your office submit an administrative report including the
1. Minutes of meeting on September 26, 1956, between Brig. Gen. William T. Thurman, USAF, and Mr. R. C. Mark, controller, General Motors Corp., at segment of airplanes and consider, as a matter of principle, a refund of $1,700,000 to the Air Force.
basis for the Air Force suggestion that General Motors consider a refund to the Air Force as a matter of principle, and whether
the Air Force considered the possibility of legal means, contractual or otherwise, of obtaining recovery from General Motors.
3. Information as to action taken by the Air Force (in addition to the meeting of January 1957, concerning the contractor's reported refund policy) to effect recovery from General Motors after receipt of its letter of October 25, 1956, in which General Motors stated that its review of the matter revealed no basis for any refund to the Air Force.
4. Information as to whether, prior to final agreement on pricing of the second segment of airplanes, the Air Force was in possession of data of any kind indicating that General Motors had commitments from suppliers for parts to be used for planes in the second segment at prices lower than those listed as estimated material cost in its proposal. It will be noted that in the letter of October 25, 1956, to Brig. Gen. William T. Thurman, USAF, General Motors stated that “Although not required by the provisions of the contract, copies of all purchase orders amounting to $25,000 or more were given to the Air Force representatives."
5. For each of the parts listed on the enclosed schedule, the date the Air Force first learned that General Motors had commitments from the suppliers at prices lower than those listed as estimated material cost for the second segment.
6. Information as to whether the Air Force construed the contractor's listing of costs for outside procured materials as being applicable to all planes of the second segment and whether, in negotiating the contract price, the Air Force relied upon the contractor's statement that the listed prices were firm and supported by purchase orders.
We would appreciate prompt consideration of this matter in order that we may make an early determination of the Government's rights and an evaluation of the contractor's statement that there is no basis for any implication of misrepresentation because information other than that included in the price proposal was furnished to the Air Force. Will be glad to furnish any additional information which may be of assistance to you in the preparation of your report. Sincerely yours,
Comptroller General of the United States. Mr. HÉBERT. Thank you very much, Mr. Powers.
Let me once again compliment you, individually, and your staff, for bringing to the attention of the committee this particular matter, and other matters which have been coordinating throughout the year.
As a branch of the Congress, and as our auditing representatives, and on behalf of the committee, I wish you would extend to General Campbell our sincere appreciation for the cooperation which we have received from the General Accounting Office.
Now, I just have about three questions I want to ask before we open up the questioning to members of the committee. I do want to say this, Mr. Powers: These figures and the manipulation of the figures as are developed in this report is shocking, to say the least, and it becomes even more shocking when we associate these manipulations with the General Motors Corp., which occupies such a powerful position in our economic existence.
Some of these figures, particularly in one item, the item of $1,700,000, borders on actual fraud, a fraudulent presentation of figures, and if not actually fraudulent it is so close to it it is hardly distinguishable.
If a little business man would do this, I think somebody would accuse him of keeping two sets of books.
I refer you now to page 5, and I want to ask you about that particular item, in the second paragraph, referring to $1,700,000 overcharge.
Now, do I understand your statement to be this, that this was an erroneous—I will use the word “erroneous” in a kind fashion, instead of saying a fraudulent figure-as compared to the actual cost of this product from Vendo, Inc.? In other words, do I understand you to say that this particular item, allegedly supported by documents, was priced $1,700,000 over the actual and known cost at that time?
Mr. POWERS. This particular example of known price reductions, Mr. Chairman, was known to the contractor at the time of negotiations. These price reductions were made up of an overstatement of $1,700,000 of his actual costs at the time of the negotiations.
Mr. COURTNEY. His actual commitments. Mr. HÉBERT. Actual commitments. In other words, to use simple language perhaps that I could understand, for instance, if I had an order for the purchase of this glass at $1, and I purchased it at 50 cents. In making up my price proposal I put down the figure of $1, knowing at the time the actual cost was 50 cents. Is that a fair comparison?
Mr. POWERS. Mr. Chairman, in complete fairness to the contractor, as well as the Government, the entire matter is, as you know, being considered by the Comptroller General, as to what legal recourse the Government has available to it with respect to this area.
Now, it is quite true that the contractor had in being purchase orders for the higher prices, but at the time of negotiations, as shown by the example in our report, he also had negotiated lower prices which were not disclosed to the Government in his estimates of material costs at the time of negotiations.
Mr. HÉBERT. That is correct. I suggested that there was a two-book system. In other words, he had his own private knowledge of what the product was going to cost, or the assembly was going to cost, yet in presenting the figures to the Government, the contractor—in this instance the General Motors-presented the original contract at the higher figure of $1,700,000, knowing all the time that that was not a true figure of the actual cost.
Mr. Powers. Well, these lower figures, Mr. Chairman, were not shown in his proposal. Now, the contractor had in actual existence lower prices as represented by purchase orders and his position which is under examination by the Comptroller General of the United States Taş that these same lower prices were known by the Air Force since he had furnished them copies of all purchase orders in excess of $25,000.
But recognition was not made in his proposal, and as mentioned in our report the higher prices were cited in his proposal rather than the
Mr. HÉBERT. You put it more delicately than I do.
of the contract ?