dependent on events as they occur and the finality of the earlier action should determine what the result is.

Mr. ROBACK. If you want to make any further written commentary on that point, you may do it.

Mr. LUEVANO. I would like to.

(The information requested follows:)

With regard to the specific case under discussion, I believe there is a misunderstanding; my statement did not deny in entirety misrepresentation by General Electric. I said, in fact, that the Army agreed that the price proposals were overstated, but not in the amount reported by GAO. The Army held that only $8,419.45 was overstated, which figure represented $5,486 attributable to defective cost data and $2,933.45 in Government-furnished property. Therefore, Public Law 87-653 would have an application to only a part of this case; namely, the part wherein GE gave defective cost data ($5,486) and incorrect data regarding Government-furnished property. It would not have applicability to the intentional "eyes-open" attempt to establish a second-source subcontractor.

BURROUGHS CORP.-INTEREST ON PROGRESS PAYMENTS CASE (B-146747)

Mr. ROBACK. One case had to do with the Burroughs Corp., where they had advance progress payments perhaps in more quantity than they should, based on these quarterly allocations. So the GAO found that the Government lost in effect $208,000. This was a case of the Government not having the money and therefore losing the interest, $208,000. Now, in your commentary to the GAO in the final report or Blue Book, you agreed in substance with the GAO finding and you undertook to make a negotiation with Burroughs. While you were in the midst of that negotiation and between the draft report and the final report, the GAO asked you to refer the case to the Justice Department. This case was then settled in the Justice Department. You seem to be somewhat reproachful that while you were negotiating with Burroughs in good faith to recover the lost interest, you had to take this to Justice.

Will you explain the circumstances there? Do you know anything about it?

General GOSHORN. It is my understanding that in the course of our discussions with Burroughs, who were quite willing to discuss the matter, the directive came from the GAO to refer the matter to Justice. As I recall, the amount which we were discussing with Burroughs was approximately some $160,000.

Mr. ROBACK. They offered $168,000?

General GOSHORN. This is correct.

Mr. ROBACK. And you were in the process of negotiating that upward?

General GOSHORN. Well, hopefully, yes.

Mr. ROBACK. Hopefully. But anyway, at least it was a not unreasonable response to the kind of problem that was involved?

General GOSHORN. Certainly it was not nonresponsive by any manner of means.

Mr. ROBACK. So you had, in effect, to suspend negotiation on recommendation of the GAO final report and refer the matter to Justice? General GOSHORN. This is correct.

Mr. ROBACK. So that Justice took over the problem of negotiating, and they negotiated a little better than you might have because they

got 190,000. But, in any case, you felt it was not the right thing ta do.

General GOSHORN. You mean that it should be taken from our hands and given to Justice?

Mr. ROBACK. Yes. I mean, is that good business or bad? You were making a diligent responsive effort to recover the interest and you felt in the middle of it all you had to suspend. You did not like that? General GOSHORN. I think it is only fair to state that when we start out on a course of action, we would like to carry it to completion. But by the same token, it may be argued on the other side, if we were talking in terms of 160,000 we might have stopped there, and if Justice was able to negotiate an agreement for $190,000, I do not think we should be sensitive about someone getting into

Mr. ROBACK. I understand. What I want to know is why-knowing the issue to the extent that you do-why should this matter be referred to Justice when, presumably, you were responding to a request to resolve it? Are there special circumstances here? Why should not all issues be referred to the Department of Justice?

General GOSHORN. There was a suspicion of fraud in this case because of these reports that they had been overstated, and it was for this reason, I think, that GAO suggested and that we acquiesced that it should be turned over to Justice. Certainly, I do not think that we could say that close enough attention had been given to these reviews of the quarterly progress reports.

Mr. ROBACK. I am not debating whether it should go over to Justice or not. I just wanted to know what the Army position on the matter was.

General GOSHORN. It was because of the suspicion of fraud that it was felt this would be more proper.

Mr. DAHLIN. In that same case, the Army received an offer of settlement from Burroughs of the $160,000 and that was based on the theory that Burroughs had already paid taxes to some extent on the amount, whatever it was, that would be involved.

General GosHORN. This is correct.

Mr. DAHLIN. Does Army ordinarily deal with contractor recoveries, either voluntary or involuntary, using this theory that taxes already paid are a deductible item from a recovery?

General GOSHORN. We frequently do; yes.

Mr. DAHLIN. Do you do this in a large number of cases, or does it not come up very often?

General GOSHORN. I would say that its occurrence is relatively infrequent. But here again, it depends upon time and how much has been paid, what the circumstances are.

CONTRACTOR NEGLIGENCE

Mr. DAHLIN. Mr. Secretary, going back to the Raytheon case for just a moment, the GAO indicated in that case that Raytheon was negligent in its submission of parts lists and in its failure to do certain things. Is it your understanding that if there was contractor negligence of any kind, was it within Raytheon's assigned duties under the contract, or was this a matter concerning general due care on the part of the contractor ?

48-132-6518

Mr. LUEVANO. The obligation on us, I believe, is to insist on compliance with the terms of the contract and that failure of performance results when the terms or the conditions of the contract are not being met. It is our duty then to enforce the terms of

Mr. DAHLIN. What was your understanding of the thrust of the GAO finding? Was this for failure to act under the terms of the contract, or was this more general responsibility?

Mr. LUEVANO. I am not clear as to the precise grounds of that particular case; whether it is negligence and a tort situation or whether it is a contractual failure that is being asserted in this case.

Mr. DAHLIN. In this contract, was the contractor operating under close control of the contracting agency? Was he being pretty strongly supervised, or is this a contract where the contractor was supposed to exercise a lot of independent judgment? Can anyone answer that?

General GOSHORN. I would say since it was a best efforts type of contract, he was supposed to do those things which would field assist him to build a system in the shortest period of time, and he would use his organization to the maximum extent. But to use any contractual terms as to specific management actions, I do not believe that they were present in the contract per se.

CONTRACT WARRANTIES

Mr. DAHLIN. Thank you.

Just one more item. In connection with the defective gasoline trailers and buses. you have indicated that this matter is still continuing with respect to whether there will be recoveries. At the same time, GAO has indicated that it has some possible suggestions which it will discuss further with the committee, about proper use of warranties and enforcement of warranties against contractors. Is this case a problem in acceptance that closes out the rights of the Government? That is, was the key factor in the buses and semitrailers the problem of acceptance by an inspecting officer which foreclosed certain rights of the Government, or is that still open to question?

General MILEY. There were two different cases here. In the case of the semitrailer, the tanker, this was built to a fully developed military design, drawings, and specifications. There was no warranty involved and there never is in cases like this. It is like building a tank. In the case of the buses, this was a commercial design with a warranty.

In the case of the semitrailer again, once we accept a military design, the only recourse after that is on a latent defect. In the case of the buses, on a warranty, the thing is warranted for a year and 12,000 miles and anytime up to the expiration of the warranty, we have recourse to the contractor. So there are two different cases.

Mr. DAHLIN. Has the Army considered any procedural changes in this area to do anything more with either warranties or acceptance provisions to protect the rights of the Government? Or is any necessary?

General MILEY. We are exploring the possibilities of extending the warranties overseas, I know for one thing: for example, the warranties now we get on our commercial items stop at the water's edge.

I have just come back from Europe and this is one of the recommendations I made from over there, to get the warranty extended overseas. Mr. DAHLIN. You are presently writing contracts for such things as these buses?

General MILEY. Yes, sir.

Mr. DAHLIN. Where there is a warranty, but it extends only to those items that are used in the United States?

General MILEY. And to the parts furnished for repair overseas, but not to the labor to put the parts on. This we are trying to explore.

Mr. DAHLIN. That is all I have, Mr. Chairman.

Mr. HOLIFIELD. Mr. Secretary and General Goshorn and General Miley, we appreciate your appearance here this morning. You have been very helpful to the committee. It may be that the staff may want to take some matters up with you, either by correspondence or by phone, to clarify the record after we have had a chance to look at it. If so, I hope we will have your cooperation.

Mr. LUEVANO. Thank you, very much, Mr. Chairman.

Mr. HOLIFIELD. The subcommittee will stand in recess until tomorrow morning at 10 a.m.

(The following material was submitted by the Department of the Army :)

Hon. CHET HOLIFIELD,

DEPARTMENT OF THE ARMY,

OFFICE OF THE SECRETARY OF THE ARMY,

Washington, D.C., June 23, 1965.

Chairman, Subcommittee on Military Operations,
Committee on Government Operations,

House of Representatives.

DEAR MR. CHAIRMAN: Enclosed is the documentation requested by your subcommittee on the GAO reports:

GAO final report dated June 2, 1964, B-146894, "Illegal Award of Advertised Construction Contract and Excessive Costs for Contract Modifications, Department of the Army and Air Force, June 2, 1964 (OSD case No. 1863)."

"Unreasonable Costs charged to Government Cost-Type Contracts for Depreciation on Buildings Acquired from the Government at No Cost by Stanford Research Institute, Menlo Park, Calif., Department of the Army, August 31, 1964 (OSD case No. 1821)."

In the case of the construction contract for Andrews Air Force Base, there is no notice of exception. Payments were suspended on the basis of the GAO letter, dated April 9, 1963 (referred to on p. 9 of the GAO report) wherein the GAO asserted that the contract was of questionable legality and suggested that payments be suspended until the GAO had reached a decision in the matter. By letter, dated October 12, 1964, the GAO affirmed its position that the contract was invalid and that payment to the contractor on any basis other than quantum meruit would be illegal.

With regard to Stanford Research Institute, we have also enclosed a copy of our letter (November 25, 1964) requesting the GAO to withdraw the Notice of Exception.

Sincerely,

F. W. BOYE, Jr.,
Major General, GS,
Chief of Legislative Liaison.

2. Incls:

1. Ltrs to S/A & S/D on Illegal Award, Apr 9, 1963 and Oct 12, 1964 2. Notice of Exception, Apr 3, 1964, DA Ltr dtd Nov 25, 1964 & Ltr dtd Mar. 29, 1965 w/d Notice

U.S. GENERAL ACCOUNTING OFFICE,
DEFENSE ACCOUNTING AND AUDITING DIVISION,
Washington, D.C., April 9, 1963.

The Honorable the SECRETARY OF THE ARMY.

DEAR MR. SECRETARY: In the course of our review of military construction contracts we have found reasons for questioning the legality, in whole or in part, of the award by the Corps of Engineers of an advertised unit price contract and subsequent modifications made thereto because it nullified competitive bidding. The contract (DA-49-080-ENG-4182) for approximately $8.4 million was for construction of a parallel runway and parking apron at Andrews Air Force Base. It was awarded on January 28, 1959, by the then Washington District Engineer Office to the Lane Construction Corp., Meriden, Conn., the low bidder. However, the advertised work and the contract did not include an estimated $3.5 million of additional and substitute work known prior to the award to be required and subsequently included by negotiated modifications to the contract. As a result of such award, competitive bidding was nullified in establishing the price of about 30 percent of the total job. We also noted other questionable circumstances in connection with the award.

In view of the questionable legality of the award we suggest that further payment to the Lane Construction Corp. be suspended until we reach a decision in this matter. Our fieldwork is nearly completed and we expect to issue a report of findings soon. The circumstances regarding the award of the contract are summarized below.

On November 28, 1958, the then Washington Army District Engineer (DE) Office issued "Invitation for Bids," ENG-49-080-59-24-(25), to prospective contractors for the construction of a parallel runway, taxiway, and apron at Andrews Air Force Base, Md., for the Air Force. The bids were opened on January 20, 1959. The Lane Construction Corp. of Meriden, Conn., submitted a low bid of $8,402,862.79. The next lowest bidder was the Williams Construction Co. whose bid was approximately $13,000 higher than the Lane bid. There were nine other bids ranging from $8.7 million to $10.3 million.

Just after bid opening the Air Force instructed the Corps of Engineers to withhold award of the contract until further notice. The Air Force action was based on a recent change in operational requirements for the proposed runway, necessitating major revisions to the plans and specifications accompanying the invitation. The facts regarding the need for significant changes to the work advertised are summarized below.

1. On January 6, 1959, 2 weeks prior to the opening of bids the Vice Chief of Staff, Air Force, requested the Air Force Deputy Chief of Staff, Operations, to review the construction program at Andrews Air Force Base in light of advancements in the fields of electronics and visual aids, and in context with the contemplated utilization of Andrews as a terminal for the President and highranking United States and foreign political and military dignitaries.

2. In a memorandum for the Director of Installations, Air Force, dated January 19, 1959, the Deputy Chief of Staff, Operations, validated the new operational requirements for Andrews based on his recent study requesting that they be incorporated in the base construction program. Briefly, these were: (1) postpone bids on the new runway for redesign to incorporate narrow gage runway lighting, (2) provide for centerline runway and taxiway leadout (high speed turnoff) lighting, (3) expand present construction plans to provide national standard approach lighting on both ends of runway, and (4) provide additional warmup pad facilities.

The Deputy Chief of Staff also stated, "I recognize a delay may occur in integrating these requirements into the design of the new runway. This delay is acceptable in view of the prohibitive later cost to provide these facilities." (Emphasis supplied.)

It was estimated at the time that the principal changes would cost an additional $3.5 to $4 million, or nearly 50 percent of the lowest bid of $8.4 million. These comprised an additional $2.5 to $3 million for the new lighting system; about $565,000 for inclusion of high speed turnoffs, and about $485,000 for additional warmup pads. All of these items were later included in the contract through issuance of negotiated change orders.

A few days before final award of the contract the Lane Construction Corp. contacted two of its officials who were away on vacation and instructed them to immediately proceed to Washington to discuss the status of the award with the Washington District Engineer. Lane officials informed us that at this meeting