Page images
PDF
EPUB

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. The 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.

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 $3,445.00 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.

19. The following is to be reported : Tentative price, $325,000.00X300_.

$97, 500, 000.00 Contractor's proposed, $293,000.00 X 300

87, 948, 000.00 Negotiated price, $271,165.00X300-

81, 349, 500.00

Reduction from tentative price

$16, 150, 500.00 Reduction from Contractor's proposal--

6, 598, 500.00 Inasmuch as this redetermined price covers the last segment of this contract, it can be considered that the reductions shown above are on a sťraight 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.

Commence first with the material cost, Mr. Kuhn. It is shown in column 1 under the heading “General Motors.”

Mr. Kuhn. General Motors indicated their material cost as $56,985 for allied supplies of purchased parts.

For outside purchased parts, $95,647. For inbound transportation, $766. Giving a total of $153,398.

Based on the information contained in the minutes, we determined that the allied costs were made up of two factors primarily, or two segments primarily, and that is those of Fisher Body, of $40,274, and the balance from the other 6 affiliates of $11,711, giving a total in our computation of $51,984.

Now, while the entire minutes have been introduced into the record, there are certain portions that we would like to read as we proceed. Under paragraph 9 on page 3—I will read that

Mr. RIVERS. Where is that? Mr. Kuhn. On page 3 of your white mimeographed sheet, Mr. Rivers.

Mr. Rivers. Mr. Chairman, could I ask one question before he starts?

Mr. HÉBERT. No, sir. Mr. Rivers, before you came in, we agreed all the members would not ask until they had completed their statement.

Mr. RIVERs. You got a rule. Let's go.

Mr. Kuhn. Under 9 (a), the negotiators' minutes contain, and I quote:

Allied (other GMC affiliates). Terms were proposed at $56,985 per unit and a cost schedule of seven affiliate companies was furnished.

Mr. COURTNEY. Mr. Chairman, may we break in there for information? Allied refers to General Motors' other divisions who supplied and fabricated material for use under this contract.

Mr. Kuhn (reading): Priced bills of materials which have been audited and examined by the field personnel were submitted in support of six of these affiliates. Fisher Body being the exception. These bills of material supported 20 percent or $11,711 of the $56,985. Contractor claimed the $45,274 per unit cost from Fisher for the forward fuselage

Mr. COURTNEY. "Longerons and small miscellaneous parts."

Mr. Kuhn (reading): was a reasonable projection based on Fisher's actual cost incurred in producing the entire quantity of 229 planes. The forward fuselage was found to account for 98 percent of Fisher's costs. As previously stated in paragraph 4 Fisher submitted for audit only recorded costs on the 228 units. It was claimed by Fisher that although some actuals costs 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.

Mr. COURTNEY. Buick-Oldsmobile-Pontiac Division is the explanation of those.

Mr. Kuhn (reading):

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 and December 1954 and the first 2 months of 1955. This contractor frankly refused to do. Therefore,

94763-57-9

by using the recorded costs on 228 forward fuselages plus the labor-hour and overhead 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 per unit. Thus, it was found that Fisher had been overestimated by $5,000 per unit. But contractor still claimed that the $45,274 per unit price for Fisher was fair and reasonable. Attention was called by contractor's representatives, to the price of $84,274 per forward fuselage charged by Republic Aviation Corp. This happened early in the program when more forward fuselages were needed than Fisher could supply. The cost of $40,274 per unit for Fisher was used in developing the total overall negotiated price.

Mr. COURTNEY. Mr. Kuhn, let's come over to the board and show the place-indicate the place where the Fisher Body element is incorporated in the total figure.

Mr. Kulin. Of the General Motors' proposal, of $56,985 for allied parts, $11,700 of those were for the other six affiliates and $45,274 for the Fisher supplies.

We added those two and used the figure of $51,985 for the proposed forward pricing of the allied parts in material.

Mr. COURTNEY. Let's explain that more carefully. The $51,985 used in the two columns of Mr. Kuhn's presentation represent a deduction of the difference between the $15,000 and the $40,000 figure on the forward fuselage supplied by the Fisher Body division of General Motors. That deduction appears throughout this analysis.

Now go ahead, Mr. Kuhn.

Mr. Kuhn. Concerning outside purchased parts, the Air Force representatives audited priced bills of materials on those and found certain errors which reduced the Allied parts to $95,199, and there seemed to be little disagreement concerning that. So we used that figure of $95,199.

Inbound transportation: The Air Force negotiators felt that a figure of $593 for inbound transportation was more realistic and there seemed to be little disagreement concerning that and we used that figure. Giving a total material cost of $147,777.

Mr. COURTNEY. That figure remains constant in the two analyses made by the staff, as contrasted with a pricing proposal of $153,398 for the same material.

Now, let's come to the item of direct labor. Note, Mr. Chairman, the green figures of $32,345 which represent the deduction made by General Motors at the time of the pricing proposal and which differ from the typewritten figures on schedule 8.

Mr. Kuhn. On page 4, under paragraph 10, of the negotiators, is contained an explanation of the development of the direct labor-hours for this segment of the contract. I would like to read that, Mr. Chairman.

Mr. HÉBERT. Go ahead.
Mr. KUHN (reading):

Direct labor-hours: Contractor originally proposed 17,250 direct labor-hours per unit for these 300 airplanes. And I might point out at this time that a wage factor of $2.02 per hour was used.

« PreviousContinue »