Mr. HORTON. Is it your feeling that the GAO will be bound by that finding? Mr. KENNEDY. No; I do not believe they are bound by it. Mr. HORTON. It is your opinion they will not be bound by it? Mr. HORTON. Or do you prefer not to express an opinion on it? Mr. KENNEDY. Let me say this: If you mean will they be bound by the results of the quantum meruit study, I would say technically they will not be so bound. Mr. ROBACK. Legally, you mean? Mr. KENNEDY. Or legally, they may not be so bound. They may well disagree with the result, in which case, they may want to perform one themselves. Mr. HORTON. That was my next question. Could they not direct that another study be made? Mr. KENNEDY. They could very well; yes, sir. Mr. HORTON. How could this case get to the court, then? Mr. KENNEDY. By the Lane Construction Co. instituting suit in the Court of Claims. Mr. HORTON. All right, thank you. ARMY-RAYTHEON (HAWK MISSILE PARTS) CASE Mr. ROBACK. One of the cases discussed in your supporting summaries, which will be entered in an appropriate place in the record according to the chairman's decision, has to do with Raytheon. This case was commented on by Secretary Ignatius when he stated in his prepared statement to the committee that they just disagree with the GAO and they do not believe that this alleged overpayment or overcharging of $1,077,000 was due to any fault on the part of the contractor. What happened in this case? What is the disposition of it? Is it closed out? General GOSHORN. Well, this is one of the cases where it was pointed out, I believe, that there were many extenuating circumstances in the acceleration and the activities incident thereto in fielding a highly complicated missile system. The issues here are the preparation of partial lists on the one hand by the contractor and submitting them for approval, while at the same time, the contractor in his engineering efforts was developing requirements for improved components in the same system. Generally speaking, since this was a "best efforts" type of contract between the Army and the contractor, the only thing that remains to be done is to improve the Army procedures so that in the event of another situation like this arising, we have the necessary safeguards to preclude a recurrence. Mr. ROBACK. In the Blue Book report to the Congress, the final report, the Comptroller General said:" We therefore consider the costs incurred to be unreasonable on the applicable contracts and we are requesting the Secretary of Defense to have the amount of $1,077,000 withheld from current payments due to Raytheon under Defense contracts. Now, in other words, that request was rejected by the Defense Department? General GоSHORN. This is correct. Mr. ROBACK. Was this a matter of allowability of costs? General GOSHORN. Well, I suppose it could be considered from the standpoint of allowability. Mr. ROBACK. The reason I asked the question, would the GAO have an option here to disallow the cost itself? Or was this under the contracting officer's finality option? That is, of the contracting officer's finality privilege? Mr. LUEVANO. It has, I think, been determined by us as a contracting officer finality privilege rather than the allowability of costs. Mr. ROBACK. So this was a case where there was a GAO exhortation which they were not in a position to back up with any disallowance on their part, and since you disagree, that was the end of it. Mr. LUEVANO. I think that is a correct statement. Mr. ROBACK. How would you distinguish this from, say, your obligation to act under a mandate as in the Andrews case? Was that because they were making a legal determination which you consider within their jurisdictional right? Mr. LUEVANO. I think the Andrews case was not unlike this one in one respect; that is, we disagreed with GAO with respect to the legality of the contract. Mr. ROBACK. What was there specifically differentiating those two cases which made one a mandate and one something which you set aside, to be disagreed with? Why did you feel compelled to act in one case and not in another? What is the legal or other differentiating factor? Mr. LUEVANO. I cannot answer. I am not sure I would be totally correct. Mr. ROBACK. Do you want to answer it now or do you want to have Mr. LUEVANO. I would like to submit an insert for the record. (The information requested follows:) The difference in the two cases is that, in the Lane case the GAO said the contract in its entirety was illegal from the inception, whereas in the Raytheon case the GAO merely said there had been an overpayment because of an error committed by the contractor. The Army has determined that there was no legal obligation on the part of the contractor to perform cross reviews of engineering changes and parts lists, and therefore there has been no overpayment to the contractor. Mr. ROBACK. Do you have any observations? General GOSHORN. The only point I can see here is a distinction between the two, wherein the Andrews Air Force Base-Lane Construction case, the contention of the GAO was that we had in fact an illegal contract. Since they also recommended that we pursue the quantum meruit approach, we felt that we were impelled to do it in that particular case. In this, it was a case of judgment, I would say, of Raytheon rather than a case of legality. Mr. ROBACK. Here it could not go to the legality of the contract; at best it could go to a question of judgment and disallowance, possibly? General GOSHORN. Exactly. RECOMMENDATIONS FOR DISCIPLINARY ACTION Mr. ROBACK. In that other case, it would go to the legality of the whole contract. In several of these cases which you have reported on, you have taken disciplinary action; in other cases you have not; in some cases there have been mitigating circumstances. In one case, in one of the Chrysler cases, for example, the Army did not agree with the GAO recommendation for disciplinary action. What kind of disciplinary action do you take in a case where there was a lack of prudent action or care? Do you enter into the record of a military or civil servant a derogatory statement? Mr. LUEVANO. I believe that would be the minimum disciplinary action that might possibly be taken with respect to any of these cases, in those cases where it was agreed it should be taken. Mr. ROBACK. Is there a procedure for that, or is that entered without the knowledge of the offender? In other words, does the military officer know at the time that there is entered into his record in such cases a derogatory statement, or does he find that out 3 years later when the promotion board is reviewing him? General GOSHORN. In the case of a military officer, he is presented with a letter of reprimand. Then he has the opportunity to comment on it, whether he feels the reprimand is just or not. In that case, then, the officer administering the reprimand makes the judgment as to the sufficiency of his arguments against the insertion of such a statement in his record. Generally speaking, however, when an officer is reprimanded in this regard, he merely acknowledges receipt and sends it back. Mr. ROBACK. He does not argue about it? General GоSHORN. If the case has not been prepared well, he may argue, but unless he has very definite facts to prove that he had no responsibility in the case at all, it would be very difficult to accept his arguments to the contrary, that nothing should be done. But it is done on an established procedure. Mr. ROBACK. In one of the cases that had to do with some Government-owned equipment that had been identified improperly as contractor-furnished equipment, I believe, the contracting officer hurried to get it out of the Ford plant because he was afraid the Government would incur storage costs, and he moved it out when probably he should have found out that it was not really Government equipment, if that is the fact of the case. But it had to do with his concern. In his zeal to protect the Government interest in one respect, he was perhaps not so careful in another. There were mitigating circumstances but since the GAO recommended that action be taken, disciplinary action was taken. What kind of disciplinary action would be taken in a case where you said in your report to us that he acted in good faith; there was inadvertence in the matter. Why should he be disciplined for inadvertence, or should he? General GOSHORN. I do not believe he would be disciplined. He may be counseled, but in the case which you cite, since there was no actual loss to the Government, I do not think it would be proper that a derogatory statement should be put in his record. Mr. ROBACK. So friendly advice in this case would come under the heading of disciplinary action. General GOSHORN. Well, if you will, yes. Mr. ROBACK. You are saying in this case, you did not take disciplinary action. What kind of action was taken? General MILEY. Verbal admonition. Mr. ROBACK. "Don't let it happen again"? SPARTON POWERPACK PRICING CASE (B-146793) Mr. ROBACK. One of the cases the chairman referred to had to do with Sparton Co. where they had catalog prices on subcontracts to primes, and you cannot collect any money from them. Whom do you try to get the money from? Do you try to get it from the prime and let him work on the sub, or do you work directly with the sub? As I recall the AEC testimony, they do not work on the prime. I believe you said in your supplemental statement, "attempts are being made to obtain a voluntary refund from each of the prime contractors involved." Now, do you work on the prime in such cases? Mr. LUEVANO. The prime is the only party with whom we have a legal relationship. Sparton in this case is insulated from us by that relationship. Mr. ROBACK. Suppose you believe you have a legal case but the prime does not? What happens then? Mr. LUEVANO. In that case, we would encourage the prime to assert it against the subcontractor, and we would exercise some rather strenuous efforts in that regard. Mr. ROBACK. Would you take action against the prime in cases where he cannot collect from the sub? Would you dock him? Mr. LUEVANO. If he has exercised all his best efforts, there is not really much we can do to penalize him. On the other hand, if he has not, we have an option of what kind of disciplinary action we are going to invoke. Mr. ROBACK. You said in the Sparton case, there was no legal basis for recovery. Suppose there were in any case a legal basis for recovery. Would it lie against the prime? Mr. LUEVANO. Yes. Mr. ROBACK. It would lie against the prime. The assumption being that if there was a legal basis for recovery, he would have a legal basis against the sub and it was his responsibility to act? Mr. LUEVANO. Yes, absolutely. Mr. ROBACK. Is that the general situation? GENERAL ELECTRIC CO.-MACHINEGUN PARTS PRICING CASE (B-146883) Mr. ROBACK. Now, one of the cases you mentioned had to do with General Electric, where there was an amount of about $74,500, a small part of which had to do with identifying Government equipment incorrectly. That was a small part. We will disregard that. Contractor failed to disclose information according to the GAO finding. The Army found no withholding, no misrepresentation, nothing but an open-eye situation, which you indicate in your testimony, I believe. You say this type of refund would not be appropriate, would really impair the integrity of contracts. Then you also say that Public Law 87-653 would handle this situation in the future. Do you think that Public Law 87-653 would go to situations which would impair the integrity of Government contracts? Mr. LUEVANO. No, as I understand that Public Law 87-653, it is one of the methods that is to be used by the contracting officer in determining the current prices and presumably, from that knowledge, he then acts in negotiating with the contractors. Mr. ROBACK. Suppose the law were in effect, that you knew what was going on, there was no withholding, no misrepresentation, no acting in bad faith, would the law still apply, in your judgment? Mr. LUEVANO. Let me understand that correctly. Mr. ROBACK. There would be administrative recovery, notwithstanding the fact that there was no misrepresentation and no withholding of data. Is that your testimony? Mr. LUEVANO. I understand Public Law 87-653 to require current accurate data, and insofar as that is complied with, it furnishes one of the bases on which the contracting officer deals with the contractor. Subsequent to that, once that contract becomes final, there is no further action he can take on this basis. Mr. ROBACK. In the Defense Department's comments, as submitted in your summary, you indicate that Army investigation has not disclosed any evidence that the contractor at any time made any misrepresentations, withheld any data, or provided any misinformation concerning the new manufacturing process. General Electric on its own agreed to this arrangement. This constituted a reasonable exercise of judgment, which, in retrospect, turned out to the advantage of the contractor. I am asking whether, with that finding or that evaluation, would you then have an administrative right of recovery against the contractor had that law been in effect? Mr. LUEVANO. I do not believe so. Mr. ROBACK. You do not? Mr. LUEVANO. I do not. Mr. ROBACK. You say in your commentary here that the current ASPR implementation of this law, referring to the new law, is intended to preclude a recurrence of the problem area reported to the GAO? Mr. LUEVANO. That presumes that it was inaccurate, incomplete, or noncurrent in that it gives the basis for a judgment at a later time. But as I understand the fact, I understood you to say it was both inaccurate and noncurrent Mr. ROBACK. I was asking whether in fact this law is directed to the situation which you describe? Mr. LUEVANO. No. Mr. ROBACK. I am asking whether it is and you doubt it? Mr. LUEVANO. I think the law in this case does not have particular application to the facts of this case. This case involves a determination at the outset of the contract that subsequent events may be a risk to the contractor or to the contracting party and the two parties agreed to, as in this case, submit the risk. What happened subsequently is |