craft and Republic Aircraft Corporations' actual experience on the RF-84F airplane. The price finally negotiated for these 300 units includes 3,915,000 direct labor hours as developed from studies conducted by MCPHH. Further details pertaining to direct labor hours are set forth under paragraph ten (10). Also, certain comments were made by MCPBIA concerning burden applicable to these 300 airplanes. A strictly mathematical calculation using RAC Burden rates developed a rate of 185 percent applicable to these 300 units. During the prenegotiation conference one of the field personnel suggested that a burden rate of 186 percent appeared reasonable. However, it cannot be said that this suggestion by the field personnel was consistent with the MCPBIA forecast because (1) the 186 percent rate was based on the Contractor's original labor dollars forecast and (2) the MCPBIA forecast covered what Contractor terms ordinary burden and super burden (over-time premium, night shift premium and cost of living) whereas the field personnel were referring to only ordinary burden. Further details in respect to burden and super burden are covered in separate paragraphs hereinafter.

6. Delivery schedule.—It was learned at the opening of the prenegotiation conference that Contractor had requested permission of this Headquarters to accelerate the present delivery schedule. The principal consideration offered was a lower price. The proposed forward price of $293,160.00 per unit was predicated upon Contractor meeting the delivery schedule as called for in CGN No. 131 which would complete deliveries in August 1955. However, contractor is presently ahead of this schedule and believed the last airplane could be shop completed on or about May 15, 1955, and Air Force delivery could be made on or about July 8, 1955. On March 21, 1955, Contractor was informed by the buyer via telephone that his suggested accelerated delivery schedule was acceptable. 7. On March 23, 1955 Contractor announced at the beginning of formal negotiations that a revised price of $288,000.00 per unit was being offered not only in consideration of the accelerated delivery schedule but also because (1) an arrangement regarding a uniform lay-off procedure of workers had been made with the Union and (2) settlement of claims with certain suppliers has been made subsequent to the initial price proposal. Lower costs were therefore anticipated in the following categories:

(a) Direct labor hours of 16,000 per unit instead of 17,250 per unit as proposed initially. This amounted to a reduction of about $2,500.00 per unit.

(b) The remainder of the reduction, $2,635.00 per unit, was in overheads. 8. Needless to say Contractor's offer of $288,000.00 was not accepted but discussion and examination was conducted looking into the estimated approach applied, and the reasonableness and reliability of the various elements of costs comprising the price. Each element of cost was taken up separately, examined, discussed and considered.

9. Material. Contractor quoted an anticipated material cost of $153,398.00 per unit. This was composed of three (3) categories, (a) $56,985.00 for material, parts, etc., furnished by other GMC affiliated companies, (b) $95,647.00 for outside purchases from vendors and subcontractors and (c) $766.00 for inbound transportation costs.

(a) Allied (other GMC affiliates) materials were proposed at $56,985.00 per unit and a cost schedule of the seven (7) affiliated companies was furnished. Priced bills of materials which had been audited and examined by the field personnel were submitted in support of six (6) of these affiliates, Fisher Body being the exception. These bills of materials supported 20 prcent or $11,711.00 of the $56,985.00. Contractor claimed the $45,274.00 per unit cost from Fisher for the forward fuselage, longerons and small miscellaneous parts was a reasonable projection based on Fisher's actual costs incurred in producing the prior quantity for 228 airplanes. The forward fuselage was found to account for 98 percent of the Fisher costs. As previously stated in paragraph four (4) Fisher submitted for audit only recorded costs on the 228 units. It was claimed by Fisher that although some actuals cost for these 300 units following the 228 were recorded they were not subject to audit and/or examination. However, the Air Force auditors were able to observe certain cost trends in November, and December, 1954 while checking the books as of October 31, 1954. Fisher shipped the 300th forward fuselage to BOP in the first week of March 1955. It was pointed out to Contractor's representatives that as of this time most of Fisher's costs were known and it appeared reasonable to compare the $45,274.00 per unit quotation against the actuals recorded in November, December, 1954 and the first two (2) months of 1955. This Contractor frankly refused to do. Therefore, by using the recorded costs on 228 forward fuselages plus the labor hour and over

head trends noted in November, and December, 1954 an estimated cost was developed which varied substantially from Contractor's. It was believed and so pointed out to Contractor that the Fisher cost was overstated. To support his position, Contractor then produced a priced bill of material and other Fisher costs which upon further examination supported only $40,274.00 per unit. Thus, it was found that Fisher had been over-estimated by $5,000.00 per unit. But Contractor still claimed that the $45,274.00 per unit price for Fisher was fair and reasonable. Attention was called by Contractor's representatives, to the price of $84,479.00 per forward fuselage charged by Republic Aviation Corporation. This happened early in the program when more forward fuselages were needed than Fisher could supply. The cost of $40,274.00 per unit for Fisher was used in developing the total overall negotiated price.

(b) The estimate of $95,647.00 per unit for outside material was supported by an itemized price list for each of the many vendors. While not every item was checked and vertified to original sources the field personnel had examined 60 percent of the items representing a majority of the dollars involved. This procedure uncovered certain errors which together with prices redetermined subsequent to Contractor's original proposal amounted to $448.00 per unit or $0.5 percent of $95,647.00. This resulted in $95,199.00 being a more reliable estimate. Furthermore, during the course of the negotiations certain checks were made of individual parts, assemblies, etc., to determine whether the prices being paid vendors were reasonable.

(c) Inbound transportation was proposed by contract at $766.00 per unit. On the preceding segment of 228 airplanes a cost of $787.00 per unit was incurred. Contractor believed a slight decrease could be expected from the actuals experienced. However, it was pointed out to Contractor that with nearly all the materials now in for these 300 units an average of $593.00 was shown on the records. Contractor acknowledged this was true but believed it to be inconclusive. In negotiating the price for these 300 units a cost of $593.00 per unit was used.

10. Direct labor hours.-Contractor originally proposed 17,250 direct labor hours per unit for these 300 airplanes. In the supplemental data accompanying the proposal Contractor furnished the usual chart showing "cumulative average hours per plane." These 300 units follow the first 299 units. The "cum curve", reflecting 74 percent efficiency, showed at first glance only a slight toe-up, however, when average unit hours were plotted there appeared quite a different picture the toe-up showing decidedly. Also mathematical calculations employing the actual incurred hours confirmed the indication from the chart that Contractor is forecasting 17,250 (later revised to 16,000 hours) per unit was giving no recognition whatever to any efficiency on these last 300 airplanes. Actual average hours through the 299th unit were obtained from Contractor. Applying the revised proposed hours of 16,000 per unit showed a flat line from unit 300 through 599 which is this segment of airplanes. Experience shows that such is not the case but instead, in situations where a plane is being discontinued, the efficiency continues to the last lot of planes and it is only at this point that the hours normally increase. Various independent calculations were conducted and each resulted in approximately 13,050 hours per unit. This was based on Contractor continuing from unit 299 on the same 74 percent experience curve with 500 hours per unit being added to the last 50 planes due to phasing-out of the model. Experience in the industry shows that such occurrence is normal in a phase-out. Contractor took sharp issue with this approach and insisted 16,000 hours per unit were the best attainable because, (1) there were no follow-on aircraft of any type, (2) 6,000 employees would be laid-off between now and August 1, 1955 with the biggest lay-offs occurring before June 1, 1955, (3) employees, knowing no more work was available, would slow down to prolong their jobs, (4) other aircraft companies were already advertising in the Kansas City newspapers for experiences held and right now were proselyting among the better qualified workers, and (5) a possibility of a strike of the aircraft workers was not remote because the present union contract expires May 29, 1955. thermore, Contractor's representatives said that in estimating the direct labor hours the experience between the 150th units and 300th should be used in preference to all of the first 300 units. This was believed more indicative by Contractor. It was not possible to use exactly these 150 units as details were not available for the 150th unit but the actual unit average at the 139th unit was known as well as certain other points to the 300th airplane. Even using experience from the 139th unit through the 299th developed only a few more hours than 13,050 per unit. This was on a 75 percent curve. Another of the many computations made to determine a forecast of direct labor hours was by converting the known total

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hours expended in January, and February, 1955 to average unit hours. This test further confirmed the belief that 13,050 hours per unit were a reasonable expectation. In view of this firm conviction concerning the direct labor hours a unit average of 13,050 was applied in developing the Government's concept of a fair and reasonable price for this group of airplanes. In the price finally negotiated there are 13,050 hours per unit. This reduction of 4,200 hours per unit from contractor's original asking price amounts to a total of 1,260,000 hours or 25 percent. 11. Burden.-Contractor's original quotation included burden at $72,176.00 per unit which was revised to $69,000.00 when a price of $288,000.00 per unit was offered. (See paragraph 7.) Even this revised quote of $69,000.00 was believed high by Government representatives. Contractor resisted any reduction in price due to burden by offering numerous arguments in defense of $69,000.00. One of these was actuals incurred on the prior 228 airplanes was 224 percent against 209 percent used in developing that price. This indicated, according to Contractor, that they forecast burden low. Other arguments and reasons offered bore merit and were given careful consideration. However, Government representatives believe $69,000.00 per unit was about $3,000.00 high and presented what was believed equally meritorious arguments. The production period for these 300 airplanes is December 1954 through May 15, 1955, for shop completion and July 1955 for Air Force delivery. Contractor, on the basis of the old delivery schedule estimated some overhead expenses will fall into the third quarter of 1955. This was because the last plane was scheduled for August 1955 delivery. The accelerated delivery as accepted by the Air Force on March 21, 1955, should result in a sharp decrease of expenses after May 15, 1955. The tools and machinery are to be stored but the costs of this expense are covered under a separate contract. Also Contractor certified that the overhead quoted for these 300 airplanes did not include any costs for dismantling, storage, etc. It was known that as of December 31, 1955 there was $5,100,000.00 of burden held in inventory and that burden for the first three (3) months of 1955 averaged $2,400,000.00 per month. Therefore, using these costs as a base, estimates were made for the remaining period of the contract. By this method it was believed that $66,500.00 per unit was a reasonable expectation. Contractor vigorously resisted this assumption claiming it was too low. It was pointed out to Contractor that the Government recognized this was a tight estimate but that there was no intention of accepting excessive costs on which a profit is paid. It was believed that $66,500.00 per unit for burden was a realistic cost which Contractor could attain by diligent work. Accordingly, the price negotiated took into consideration burden at $66,500.00 per unit. acceptable burden excluded those costs normally unallowable on Government contracts such as interest, bonus, corporate financing expenses, contributions, consumer influence, etc. The latest negotiated disallowance factor of 29 percent for GMC central office expense was applied. This rate covers the period January 1, 1955 to June 30, 1956.

The

12. Superburden.-It is Contractor's practice to classify overtime premium, night-shift premium and cost-of-living wage adjustment as Super Burden. Contractor's quotation for Super Burden amounted to $7,110.00 per unit, this estimate being based primarily on actuals incurred on the preceding 228 airplanes. As a check against this quotation the actual trends incurred in January and February 1955 were noted. Overtime premium amounted to nearly one-half of Super Burden, averaging $3,466.00 per unit on the preceding 228 units with $3,000.00 per unit being expected for these 300 planes. Night-shift premium amounts to $0.05 per hour and the cost-of-living adjustments is known to be 7.2 percent of wages paid. Certain tests and calculations were made which indicated that in negotiating the price a reduction of approximately $1,000.00 per unit could possibly be applied to Super Burden. It was evident that Contractor would object to any such reduction, however, the negotiated price does reflect the Government representatives' concept.

13. Flight. Hangar and flight costs subsequent to shop completion and up to Air Force delivery are included in this category. Contractor quoted this cost to be $1,093.00 per unit as compared to an actual cost on the previous 228 units of $1,188.00. Contractor attributed the expected reduction to more experience and faster deliveries. Investigation disclosed that since September 1954, this cost has steadily decreased from a high of $1,914.00 per unit to an average of $700.00 per unit in January 1955. A study of this situation indicated that for these 300 airplanes the very minimum that could be expected was $800.00 per unit. It appeared from checks made that the cost experienced in December 1954 of

$948.00 each on 50 airplanes was reasonable. This assumption was based on several factors most important of which are (1) the rate of deliveries will be about the same as the 50 units in December 1954, (2) problems resulting from the accelerated delivery, and (3) flight-personnel shortage, due to going out of business. In connection with this matter it is to be noted that seven (7) out of fifty-one (51) of Contractor's crew-chiefs recently quit to go with another airframe company. Flight expense covers fairly fixed costs such as pilot and tower personnel salaries, insurance, taxes, fuel, utilities, supplies, etc. For negotiating purposes contractor's quote of $1,093.00 per unit was believed high by about $100.00 and the lower amount was applied in the price negotiated.

14. GFAE was estimated by Contractor to cost $250.00 per unit for these 300 airplanes. Actual experience on the previous 228 airplanes average $242.00 per unit. Cost trends on this item showed a decline from September to December 1954. It appeared on the basis of information available that these 300 airplanes would incur $200.00 per unit. This amount is reflected in the negotiated price. 15. General and administrative expense was expected to cost $5,445.00 per unit but Contractor reduced this $1.000.00 in the revised price of $288,000.00. The reduction was due primarily to the schedule change. It was found that on the 228 units the G & A was $5,261.00 or 1.5 percent of other costs. Applying $4,419.00 against the Government's concept of other costs resulted in $4,419.00 being 1.5 percent. Further investigations looking into what would be a reasonable expectation for G & A expense on these 300 airplanes indicated $4,419.00 was a possible attainment. As a result this amount was used in developing the Government's concept of a fair price which ultimately was negotiated.

16. Factory cost adjustments.-Examination had been made at Contractor's plant of the recorded actuals for these actuals. It was found that the $459.00 credit per unit was realistic for this group of 300 airplanes. After discussing the subject during the negotiations at this Headquarters the Contractor's forecast of $459.00 was accepted for arriving at the negotiated price.

17. As compared with Contractor's proposed price of $293,160.00 per unit and even the revised price of $288,000.00 per unit as offered after the Government accepted the accelerated delivery schedule it was believed by representatives of this Command that a substantial reduction was due. The Government concept of pricing developed that $271,165.00 per unit was realistic for these 300 airplanes. Contractor took a vigorous stand against any reduction from $288,000.00 per unit. The various aspects of the cost elements involved together with the Government's position and concept was presented in answer to the Contractor's protests. The representatives of the Contractor agreed to the Government's presentation in some respects and made a compromise offer which was still not as low as $271,165.00. It should be noted that at this point the Contractor termed this compromise his final offer. However, further negotiations in the nature of the rebuttal by the Government resulted in Contractor reluctantly accepting the Government's price of $271,165.00 per unit for these 300 airplanes.

18. No contract change notifications applicable to these 300 airplanes is included in the price of $271,165.00 per unit. The price is based on the airplane as known at unit number 299 which is the last plane on the prior segment.

Inasmuch as this redetermined price covers the last segment of this contract, it can be considered that the reductions shown above are on a straight fixed price basis.

20. A profit rate of 8 percent was agreed upon at the time this contract was placed. This is a normal profit rate for a procurement of this type. The negotiated price of $271,165.00 per unit includes a profit factor of not more than 8 percent based on the Government's concept of a realistic cost.

21. Accordingly, a price of $271,165.00 per unit for the 300 airplanes on this final segment of the contract is approved.

CARL F. DAMBERG, Colonel, USAF, Chief, Aircraft Division.

Mr. HÉBERT. Mr. Courtney, what you are offering in the record is what members of the committee have on this white sheet of paper? Mr. COURTNEY. All the information is ready.

Mr. HÉBERT. Without objection.

Mr. COURTNEY. Mr. Chairman, we will proceed to the board here, upon which have been placed the figures to which you have made reference and which will be detailed directly from this exhibit which has been presented for the record.

Mr. Chairman, in the right-hand side, this separate board, is a reproduction of the information supplied by the General Accounting Office at the time of its postaudit. These are familiar figures and have been gone over before. They were merely supplied at the time to refresh your recollection of those transactions.

Now, then, to repeat, so we may have clearly in mind what Mr. Kuhn is going to talk about, there are four columns on this board. This board is a reconstruction of figures that were available and taken from Air Force notes in the negotiations of March 23, 24, and 25, 1955. The figures relate only to the forward pricing or the 300 planes which were to be completed after that date.

The first column, Mr. Chairman, are the figures taken from General Motors pricing proposal, schedule A, which you have before you and which has been spoken of earlier.

The second column is marked "AF" and it is a reproduction of the penciled notations which are identified as having been placed upon the document by some Air Force negotiator, or personnel.

Column No. 1 is a reconstruction of the same information which was in the possession of the negotiating team at the time of the negotiations, using the same factors that were used by the team, allegedly, and allegedly by General Motors representatives.

Column 1 is the most favorable position on that information which could be taken.

Column 2 is the staff's analysis of the figures, on the position which should have been taken on a realistic approach, using the data available.

Now, Mr. Kuhn, will you come forward here so we can ask you to detail these matters?

Mr. KUHN. Prior to that, Mr. Courtney, I think we should point out that prior to the negotiations of the 23d, 24th and 25th of March 1955, General Motors requested and was granted an accelerated delivery schedule.

Based upon that accelerated delivery schedule, General Motors voluntarily reduced their price to $288,000, as you pointed out, Mr. Chairman.

Mr. COURTNEY. Mr. Chairman, those figures are reconstructed, again, at this point.

The $32,000 represents, as Mr. Kuhn has indicated, the change in the figures at the time of negotiation. They differ in that respect from the typewritten figures in the pricing proposal. And the allowance has been made for that and the figure $288,000 represents the change or allowance or deduction of $5,000, roughly.

All right, Mr. Kuhn. I may say, Mr. Chairman, that we propose to emphasize three elements of cost more especially than some of the others. You will note there is a great detail supplied here.