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 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 certain 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:

Segment No. I, 71 planes, price per unit, $2,350,000, total, $168,850,000.

Segment, No. II, 228 planes, price per unit, $420,000, total of segment, $95,760,000.

Segment No. III, 300 planes, price per unit, $325,000, total for segment, $97,500,000, or a grand total of $360,110,000.

On February 3, 1955, BOP submitted a further proposal for forward price redetermination with respect to the third (and final) segment of 300 planes. The price proposed was $293,160 per plane as compared with the $325,000 agreed upon at the September 1954 price redetermination. Meetings with the Air Force were held in late March. The final price agreed upon was $271,165 or $21,995 per plane below BOP's redetermination proposal. Thus final agreement was reached on the basis of the following prices:

Segment No. I, 71 planes, price per unit, $2,350,000, total for segment, $166,850,000.

Segment No. II, 228 planes, price per unit, $420,000, total for segment, $95,760,000.

Segment No. III, 300 planes, price per unit, $271,165, total for segment, $81,349,500, or for the contract, $343,959,500.

This means that through negotiation between the Air Force and BOP, and through good performance in reducing costs, the total contract value for planes was reduced from $370,529,236 as contemplated in the July 1954 proposal to $343,959,500 finally agreed upon late in March 1955, or a reduction of $26,569,736.

The two price redeterminations that I have just described were mandatory under the contract. But in addition, both the Air Force and BOP had the right under the contract to demand additional redetermination at intervals of not less than 90 days after the effective date of any prior demand. Neither party elected such additional price redetermination under the contract.

General Motors' profit on this entire contract was 11.3 percent on sales before income taxes and 5.4 percent after taxes. This is a reasonable rate of profit and substantially below the rate of profit realized by General Motors on its commercial business.

As previously indicated, the F-84F contract is subject to the Renegotiation Act of 1951. Profits on the F-84F contract have been included in the overall profits on defense business General Motors has reported to the Renegotiation Board for each of the years during the life of the contract. Renegotiation proceedings have been completed through 1954. Most of the F-84F fighter plane deliveries took place in 1955. The required reports for that year, as well as 1956, have been filed with the Renegotiation Board, but proceedings have not been completed. The Board will review profits on this and other contracts and may negotiate any refund considered appropriate.

Any evaluation of the F-84F contract should give weight to the fact. that the contractor financed his participation solely with his own. funds. No advances or partial payments were received from the Government as is frequently the case in this type of contract. BuickOldsmobile-Pontiac assembly division's investment from February 1951 until June 1953 grew to a total of $93,464,000 before invoicing the Government for the first plane and reached a peak of $135,846,000 in May 1954. This investment was substantial in relation to the size of this contract.

On May 22, 1957, the Honorable Joseph Campbell, Comptroller General of the United States, write to Mr. Harlow H. Curtice, president of General Motors, enclosing a draft of a proposed report to Congress resulting from a review by the General Accounting Office of Contract No. AF 33 (038)-18503 for F-84F aircraft.

Mr. Curtice directed me to examine the draft report and to reply to Mr. Campbell, which I did on June 18, 1957. Since then the report has been submitted to your subcommittee, together with copies of my letter to Mr. Campbell and supporting documents. A GAO representative has appeared before your subcommittee to testify regarding the report.

In my letter to Mr. Campbell I commented in detail on each of the points raised in the report, and this information is on record with your subcommittee. I have already discussed in this statement some of the criticism in the report directed at data submitted by BOP in connection with the first price redetermination.

I would like to comment further on certain GAO report findings having to do with items of cost. We disagree with the findings per se, as fully brought out and explained in my letter to Mr. Campbell.

More fundamentally, however, the GAO's strict cost approach to the study of this contract and its after-the-fact criticism of the price negotiations between General Motors and the Air Force completely overlook the fixed-price aspect of this contract. As I have brought out previously, in arriving at price redeterminations the parties discussed costs, but directed the negotiations toward a contract price. Hence the report does not reflect the manner in which the price redetermination provisions of the contract were given effect.

Finally I would like to correct a misinterpretation of certain statements and exhibits attached to the report of the Comptroller General to Congress. In the letter of the Comptroller General transmitting the report, he stated "the contractor realized a profit of $17,459,200 in excess of that contemplated in price redetermination negotiations." There was a quotation from this statement in the release of this subcommittee relative to the public hearing to be held Thursday, August 15, 1957. Also the Director of the Defense Auditing and Accounting Division of the General Accounting Office in his testimony before this subcommittee on July 22, 1957, stated:

To summarize, Mr. Chairman, General Motors Corp. realized profits of $17,459,000 on this contract in excess of that contemplated in negotiation.

General Motors did not "contemplate" any specific profit when this contract was executed and when the prices were redetermined. The 8 percent of cost referred to in the GAO report was the bid-profit rate for pricing purposes, but not for profit purposes, as agreed to in the exchange of correspondence between Brig. Gen. Phillips W. Smith and H. H. Curtice on April 25 and May 9, 1951. Copies of these letters have been filed with your committee. Your attention is directed to the statement in Mr. Curtice's letter to General Smith, dated April 25, 1951, reading as follows:

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.

Fixed price contracts are negotiated on the basis of estimated costs plus a bid profit rate. Once the fixed price is established the

contractor has an incentive toward greater efficiency, lower costs, and prices. This incentive is increased profit. The Government receives the advantage of the lower costs through reduced prices in future price redeterminations and additional procurements.

Accordingly, in negotiating a fixed-price contract the contractor "contemplates"-not a specific profit but rather such profit as he is able to earn through efficient operations. At the same time, the Government "contemplates" receiving lower prices if the contractor is efficient. If the contractor is not efficient, he may receive less profit than the bid rate would produce.

The GAO report summarized the items questioned by the auditor. These items total $8,322,000. However, the total amount by which forward prices were reduced by negotiation between the Air Force and BOP substantially exceeded the amount by which the report claims that the estimated costs as submitted prior to redetermination were overstated.

You will recall that as early as September 1955 General Motors supplied detailed cost and profit data on the F-84F contract to your subcommittee in connection with your investigation of the entire airframe industry.

We are certain that an examination of the complete record will confirm that General Motors' prices on this contract and the profit accruing from it were fair and reasonable, and that our production performance attended, as it was, by extremely difficult conditions— was outstanding.

Mr. COURTNEY. There is an additional statement.

Mr. GORDON. Mr. Chairman—

Mr. HÉBERT. You want to continue your supplemental statement at this time?

Mr. GORDON. Yes.

Supplementing the statement which I have presented to this committee, I would like to address myself to the testimony of the staff presented here yesterday.

For background purposes I would like to quote from section 3-801.4 of Air Force Procurement Instructions entitled "Cost, Profit, and Price Relationships" as follows:

(a) Under fixed-price-type contracts, including redeterminable and incentive type, prices are to be negotiated, net cost plus profit. In many cases a breakdown of price into cost and profit elements may be necessary in the negotiation process. A negotiated price is the basis for reimbursement to a contractor, under fixed-price-type contracts; allowable costs are the basis for payment under cost-reimbursement type contracts. A negotiated price, once firm, becomes an obligation of the Air Force, it is the amount of money the Air Force is legally obliged to pay. Fixed-price contracts should specify, therefore, only price and never elements of cost.

(b) Price is comprised of estimated cost and profit. The cost of the Air Force, or the price it pays, is the sum of contractors real or estimated cost plus a profit, or in some cases merely a portion of the seller's cost if he is willing to sell on that basis rather than forego a sale. Profit is only one element of price and normally represents a much smaller portion of total price than do other elements of the price, such as labor and material. While, in the public interest excessive profits are to be avoided wherever possible, the contracting officer should also avoid the pitfall of excessive preoccupation with such elements of price as overhead and profits to the detriment of the total price. Section 3-802.4 entitled "Negotiated Prices Versus Actual Cost and Profit" points out that negotiated prices and considerations of esti