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to deliver, and BOP was obliged on short notice to tool and produce the assemblies in its own plant in order to protect its schedule.
The lack of capacity in this country for the making of large forgings presented a major problem. This shortage of press capacity in industry was materially alleviated by the making of dies at the Buick motor and Fisher body divisions so that an inactive press of large capacity at a subcontractor's plant at Adrian, Mich., could be put into operation.
Many engineering improvements were incorporated in large forging designs so as to permit forging and machining of these vital parts without the use of expensive toolroom methods. After the procurement of forgings, a shortage of large machine tools, such as spar milling machines, presented a serious difficulty. BOP'alleviated this situation by arranging for the building of these machine tools from drawings furnished by the machine tool builders.
In a case of wing hinge forgings, no satisfactory vendor could be found to handle these complicated, vital parts. The General Motors process development section took on the manufacture of this item and satisfactorily solved this problem.
About 31 percent of the work involved in producing the F-84F was placed with outside subcontractors. It became quickly apparent, however, that the expanding defense program had absorbed a large part of available capacity. Many potential suppliers would not commit themselves to BOP in view of the relatively small initial program (237 planes) and the engineering and production problems which they could foresee.
Accordingly much time was consumed not only in recruiting suitable subcontractors but also in the intensive training of personnel of the 355 supplier firms. Through the life of the program BOP found it necessary to maintain a field force of product engineers and inspection personnel to help subcontractors in the interpretation of specifications and the solution of quality control problems. In addition, BOP purchasing personnel aided subcontractors with procurement and special tooling.
Mr. Lee White, an Assistant Secretary of the Air Force, was quoted in Aviation Week as having testified before a Senate subcommittee concerning the F-84F program, stating in part:
The experience with this airplane is a prime example of what happens when a new model is rushed into quantity production. Our new production policy of not committing large quantities of airplanes to high rates of production until adequate testing and production experience are accumulated should minimize the occurrence of this type of situation in the future.
Mr. Roger Lewis, Secretary of the Air Force, in a conference including Gen. Orville Cooke, Gen. C. S. Irvine, and other officers from headquarters USAF and AMC and representatives of Republic and General Motors, stated that early in 1954 it was recognized that the F-84F program had been an “impossible” program when established, since the airplane lacked development and proof.
Constant changes in all phases of the program-schedules, delivery dates, design, contract quantities, peak production rates, sources, etc. were far from minor in character. The resultant delays had their inception at the beginning of the program and there was no relief until late 1954.
These delays resulted in production which was constantly behind contract schedules. Inasmuch as our organizational and other expenditures were geared to the contract rate of production, these delays generated high costs. There was
every reason for us to expect that the conditions causing these serious delays would continue throughout the life of the contract.
At December 1954, we were still 25 planes behind the accumulated contract schedule. However, early in 1955, these difficulties began to ease and in January and February 1955 we overbuilt the monthly schedule by 25 planes to put us even with the accumulated contract schedule. We considered this a signal achievement and the accomplishment was recognized by the following letter received from Maj. Gen. Fred R. Dent, Jr.: I have just been advised that for the month of January your organization produced and had accepted by the Air Force 63 aircraft. This is a singular achievement, particularly in view of the fact that your production problem was complicated by difficulties encountered in the engines which the Air Force furnished you. The fact that you were able to produce in such quantities indicates excellent planning and the utmost cooperation with the engine manufacturers' technical representatives in the interest of the end product for the Air Force. My sincere congratulations to you and your organization for a job well done. Sincerely,
FRED R. DENT, Jr., Major General, United States Air Force, Commander. An improved flow of production continued during the next month to the extent that it was recognized in the March 1955 redetermination meeting that we might complete the schedule of deliveries a month ahead of time. This was given weight in pricing the last segment.
Finally, due to the ironing out of production difficulties and the almost complete cessation of other delaying factors, we were able to complete deliveries 3 months ahead of contract schedules. While it was impossible to forecast these conditions, nevertheless it did result in our being able to make important cost savings through an earlier than planned reduction of the aircraft organization and costs.
DETERMINATION OF PRICES
I have stated previously that it has been General Motors' policy since early in World War II to take defense production contracts on a fixedprice basis wherever possible. Experience has demonstrated again and again that the fixed-price contract provides the greatest incentive for cost savings.
Where a fixed-price contract is not practical because of inexperience with the product to be produced, we believe the fixed-price contract, subject to price redetermination, is the most desirable. This latter type of contract protects the Government in that the services have the opportunity to demand a reconsideration of a price previously established, if it is believed that this price is out of line or not competitive. This pricing method affords the contractor the same opportunity to protect himself against unforeseen cost increases that are beyond his control, such as those occasioned by the difficulties and delays encountered by BOP in the F-86F program. However, it does not guarantee any profit, nor protect against losses.
Because BOP had no experience as a manufacturer of F-84F aircraft, it was recognized that the fixed price subject to price-redetermition type of contract (for IIB) was equitable for both the Government and the contractor. Under this type of contract pricing, the original pricess incorporated in the F-84F contract were tentative prices. At the 71st plane, the contractor was required to submit experienced cost data and prices were negotiated retroactively for the first 71 planes and prospectively for the planes to be delieverd during the remainder of the contract. The forward prices negotiated were fixed prices except that either party had the right to request further price redetermination not earlier than 90 days after the effective date of the previous price redetermination. Prices to be redetermined would be applicable to the planes delivered after the effective date of the request. The price-redetermination clause in the F-84F contract also provided that upon the acceptance of the 299th plane, the parties would negotiate redetermined prices for the balance of the planes to be delivered under the contract.
When it appeared that the first segment of 71 planes would be completed in August 1954, BOP in July 1954 submitted its proposal for the first price redetermination on the 599 planes on order. A copy of this proposal is attached as exhibit I. Three copies of this proposal were submitted to Headquarters, Air Materiel Command, at WrightPatterson Air Force Base and three copies were delivered to the Air Force representatives at the Kansas City plant.
This proposal contained (1) the proposed prices; (2) brief explanations of some of the factors affecting the proposed prices; (3) a review of the principal factors resultipg in the proposed price increase over the contract price of the first 71 F-84F airplanes; (4) a certification that the information for the period ending May 31, 1954, had been compiled from the books and records of BOP in accordance with its regular accounting practices consistently applied; (5) a schedule showing the breakdown of the items of cost and estimated profit for the first segment, based on BOP's cost as recorded on the books for the period ending May 31, 1954, plus an estimate of the cost to complete the remainder of 25 planes remaining in the first segment of 71; and (6) a schedule showing a similar breakdown of the items making up the proposed unit prices for the second and third segments.
For a review and study of this proposal the Air Force had information and data on the operating results of BOP through May 31, 1954. The data were contained in monthly reports furnished by BOP to the Air Force each month commencing with February 1954, and included a profit and loss statement, detail on inventories at cost, and data with respect to preproduction, rearrangement, tooling, manufacturing, and commercial expense. At the time of submission of the proposal in July, the Air Force had received monthly reports through May 31, 1954.
In addition, when the Air Force reviewed the proposal for the first price redetermination it had in its possession copies of all purchase orders amounting to $25,000 or more. The practice was to get verbal approval by the Air Force of all agreements negotiated with suppliers before purchase orders were issued by BOP. When such purchase orders were prepared and prior to issuance to suppliers, they were submitted to and approved in writing by the Air Force. At the time of such approval, and even though not required by the contract, the Air Force was provided with copies of such purchase orders. Purchase orders for lesser amounts were originally given to the Air Force, but at the latter's request this practice was discontinued. However, all of these purchase orders were available to the Air Force upon request.
With its July 15, 1954, submission, BOP assumed that the Air Force had in its possession sufficient data for the price redetermination. However, later in July, the BOP representative at Wright Field was advised that the Air Force required additional data, including labor buildup, burden by months, rates, etc. He was also. advised that a letter confirming the request which would detail the data requested would be forwarded to BOP within a few days. We are unable to locate such a letter in our files but it is the recollection of BOP representatives that there were additional telephone conversations with respect to the required data. As a result, on August 26, 1954, BOP furnished a report entitled “Development of Forward Price Data Supplementing Proposal Dated July 15, 1954,” a copy of which is attached as exhibit II.
As a result of a further telephone request, on September 1, 1954, BOP submitted three schedules entitled “Average Unit Cost-Factory Completed Airplanes," "Analysis of Incurred Cost Through May 31, 1954,” and “Analysis of Burden by Quarters-Period June 1, 1953, Through End of Contract." These schedules are attached as exhibit III.
The first item of the August 26, 1954, submission identified as exhibit II is entitled "Estimated Material Cost (Exhibit 1)." The first sentence reads:
Exhibit 1, "Estimated Material Costs," included herewith, shows in detail the estimated cost of direct material included in the prices quoted for the second and third segments of planes.
In addition, exhibit 1, itself, consisted of 12 pages, each of which was entitled "Estimated Material Costs" and each of which contained a column headed up "Estimated Material Costs Per Plane."
This first item also includes the statement that “The unit prices shown for material purchased from outside suppliers are firm and are supported by purchase orders.” The word "firm” is not used in the sense of "actual,” but rather as being "fixed.” Illustrative of this is wording on purchase order revisions such as “Revise to incorporate firm price” and “supplement to incorporate engineering changes * * * into firm prices.” Written instructions of the BOP purchasing department contained statements such as, "The subject orders should be revised to reflect the redetermined firm prices shown on the attached schedule.” In other words the statement in the report merely tracked the language used in purchase order revisions and in the letters transmitting them.
The report of the General Accounting Office implies that the amounts used in the supplemental data with respect to estimated material prices for planes of the second segment were not firm. Actually the prices for material required for the segment were firm and were supported by purchase orders, although a substantial number of the parts were priced to BOP at different amounts, as many as 3 or 4 prices on cer
parts. In such instances, the price for the first quantity of the
segment was the highest and in some instances being substantially higher than the other prices for the remaining quantities of the segment. In many instances the higher price for the first quantity was used in the "Estimated material costs” as the estimated cost for the entire segment on the basis of BOP's evaluation of all of the factors involved in its experience with the supplier, the complexity of the individual part and generally BOP's experience with the program as of that time as well as the terms of the purchase order. In those instances where there was more than one price and where these factors appeared more favorable, a price lower than the highest quoted price was used.
Certainly on these facts there is no basis for any implication that there was any misrepresentation in the supplemental data submitted. In addition the Air Force had in its possession ample data and material for an adequate analysis of BOP's price redetermination proposal. Furthermore, they had access to any other supporting data. Availability of the material presented no problem, since both the contracting officer and the Air Force auditors for the Kansas City area maintained their offices at the BOP Kansas City plant.
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 cost because, according to the comments of the General Accounting Office-Acceptance by the negotiators was based on an audited bill of materials, according to the minutes of negotiation. Further, in the face of the reference to an "audited bill of materials" made at the time the negotiations were in progress, not months later, it is unreasonable to assume that the negotiators merely reviewed the supplemental data and did not make any check against the copies of the purchase orders in the possession of the Air Force.
The price proposal submitted by BOP to the Air Force in July 1954 was as follows:
Segment No. I: number of planes, 71; proposed price per unit, $2,391,596; proposed price segment I, $169,803,316.
Segment No. II: Number of planes, 228; proposed price per unit, $442,890; total for segment, $100,978,920.
Segment No. III: Number of planes, 300; proposed price per unit, $332,490; total, $99,747,000, or a grand total for the sum of the 3 segments, $370,529,236.
Negotiations between BOP and the Air Force took place in September 1954 after BOP had submitted cost estimates in accordance with provisions of the contract. I want to emphasize that while these estimated costs were discussed, the negotiations themselves were directed to price. For comparison purposes, the Air Force representatives presumably had the benefit of information with respect to the contract prices being paid by the Government to the primary source contractor for the F-85F airplane.
In the give-and-take of these negotiations various proposals and counterproposals were studied by the parties. At no time, however, was BOP advised what estimated costs were considered by the Government in making their counterproposal. Final agreement was reached on the basis of the following prices: