to Pratt & Whitney for such use as desired and ultimate disposal as scrap. Since these engines were to be used for testing purposes rather than installation in aircraft, the Bureau of Naval Weapons disapproved this recommendation. At least 4 of these engines were being used in test work by Pratt & Whitney as of early October 1961 and use of all 5 for that purpose is expected.

VI. Proposed Action

A. Navy to conduct further investigation regarding the ownership of the engines covered by Contract Now 61-0171-f at the time that contract was made.

B. Obtain advice in detail as to the records and other evidence on which is based the GAO view regarding ownership of the engines.

C. Should such investigations indicate that negotiations with Westinghouse for an adjustment in price are appropriate, the Navy will initiate such negotiations.

D. Navy to furnish GAO results of the foregoing in a report supplementing this statement.

APPENDIX 30-DOD RESPONSE TO GAO REPORT B-146760 OF APRIL 5, 1965 (WESTINGHOUSE-CRANE CO. CASE)

This refers to your report to the Congress, dated January 5,
1965, B-146760, concerning the pricing of nuclear submarine
valves purchased from Crane Company, Chicago, Illinois, by
Westinghouse Electric Corporation, Pittsburgh, Pennsylvania
under cost-plus-fixed-fee contracts with the Department of
the Navy (OSD Case #1759).

The report says that Westinghouse paid Crane an excessive
price for nuclear submarine valves and that this could have
been avoided if Westinghouse had obtained and analyzed the
cost data on which Crane's price was based. The report
acknowledges that the procurement was competitive and that
Westinghouse requested and obtained competitive proposals
from three qualified companies, all of whom had previously
made this type of valve. The report also acknowledges that
a price analysis was performed to check Crane's proposal
against prices previously paid for similar valves under
cost redeterminable contracts in which Crane's costs of
manufacturing the valves had been reviewed and audited.
Nevertheless, the report takes the position (1) that the
competition and price analysis in this case were not suffi-
cient to assure that the price was reasonable, and (2) that
Navy should, therefore, have required Westinghouse to obtain
and review the detailed cost data on which Crane's price
proposal had been prepared.

In its reply to the draft of this report (included as Ap-
pendix III in the present report), the Navy disagreed with
the above conclusions. The Navy position, with which this

office concurs, is that Westinghouse and the responsible Navy officials who reviewed the proposed subcontract were justified in relying on the competition and the price analysis without requiring a review of Crane's cost data. In response to the present report, the Navy has prepared further comments in support of this position which are transmitted with our concurrence.

The question as to whether or not cost data should have been
required in this procurement depends of course on the effective-
ness of the competition that was obtained. This has always
been the primary guideline and it was firmly reiterated in
1962 with the enactment of Public Law 87-653. It is clear
that cost data should not be indiscriminately requested in
every case. ASPR now unequivocally provides that if there
is adequate competition, cost data will not be required.

The application of this principle means that a determination must be made in each case as to whether the competition is in fact sufficient to assure that the proposed prices are fair and reasonable. To assist in making this determination, the Department of Defense developed new guidelines following the enactment of Public Law 87-653 which define "adequate competition" and provide criteria for analyzing and evaluating the effectiveness of the competition in individual cases.

These provisions, which are contained in ASPR 3-807.1, provide
much more explicit guidance than was available five years ago
when the subcontract in question was placed. It is apparent,
however, even with this guidance, that the determination as
to the adequacy of competition will continue to be a matter
for the exercise of sound business judgment rather than for
the application of any rigid rules or formulas.

Your report questions the judgment exercised in this case and says, in effect, that if GAO had been in the position of the Navy or Westinghouse, a different determination would have been reached. This is entirely understandable and we do not question it. In matters of judgment, honest and legitimate differences of opinion are bound to arise. However, in post-audit review of cases of this sort, the question is not whether the determination

was "right" or "wrong" but whether the judgment as exercised by the parties who made the determination was reasonable in the light of the surrounding facts and circumstances. In this respect there is no serious issue in this case. We believe it is evident that the Navy and Westinghouse acted reasonably with respect to the availble information, and the determination that was arrived at was fully in accord with the policies and procedures in effect at the time.

The report recommended that the Navy reconsider the propriety of its reimbursements to Westinghouse for the payments made to Crane under the subcontract. The Navy has complied with this recommendation and, as noted in the attached comments, has determined that no valid basis exists for questioning the reimbursements made to Westinghouse.

The report also recommended that the Department of Defense

. . revise its regulation to point out the inherent dangers of relying on price comparisons under inappropriate circumstances and to provide a clear description of the circumstances under which the price evaluation technique may be used."

In response to this recommendation, we reviewed the pertinent provisions of the Armed Services Procurement Regulation. These provisions make it clear that if adequate competition can be obtained, this takes priority over cost or pricing data as the most reliable means for assuring fair and reasonable prices. On the other hand, if adequate competition (or an established market price) does not exist, the regulation explicitly provides that cost or pricing data must be obtained in the negotiation of all prime contracts and subcontracts of more than $100,000. ASPR 3-807.2 states that a cost analysis shall be performed in these circumstances and specifies the factors to be considered in connection with this analysis (Defense Procurement Circular No. 12 dated October 10, 1964). Further, as pointed out above, the regulation now contains specific criteria for evaluating the effectiveness of the competition and for determining whether or not cost analysis and the obtaining of cost or pricing data are required (ASPR 3-807.1).

In view of the above provisions, we believe that the regulation as it stands provides satisfactory guidance on this subject. Accordingly, while we appreciate your recommendations, we do not believe that further revision of ASPR as proposed would be either helpful or appropriate.

Sincerely yours,

SIGNED

ROBERT H. MCCUTCHEON
Brigadier General, USAF
Acting Deputy Assistant
Secretary of Defense
(Procurement)

Enclosure