were being adopted. Also, the Department of Defense stated that the military departments would be requested to have contracting officers encourage defense contractors to use aircoach accommodations.

Our report to the Congress on this matter was issued on June 7, 1961 (B-133371). It recommended to the Secretary of Defense that instructions be issued by his office direct to all defense contractors and subcontractors urging the use of less costly accommodations so that immediate savings could be achieved. We also recommended that contractors be advised that the reasonableness of their travel costs would be considered in the negotiation of contract prices. Followup review

On June 4, 1962, 1 year after our report to the Congress, we began a followup review to determine whether defense contractors had actually placed into effect policies requiring employees to use accommodations less costly than first class. Selection of contractors for this followup review also was made by our Washington staff. The selection included the 8 contractors covered in our previous review whose employees traveled only by first-class accommodations and 12 other major defense contractors located in the vicinity of our 13 regional offices, utilizing staffs located at contractor plants so as to avoid expending additional travel funds. The 20 contractors selected consisted of 6 airframe or missile manufacturers, 10 electronics firms, 3 nonprofit organizations, and 1 shipbuilder. The regional offices were requested to obtain from company officials information similar to that obtained in the original review. In addition, they were re quested to list for a 3-month period the flights actually taken by contractor personnel and to determine whether less than first-class service flights were scheduled at the same time.

The review disclosed that substantial savings were being achieved by adoption of air travel policies requiring the use of less costly accommodations. However, we noted that nine of the contractors followed policies and practices which resulted in the continued uneconomical use of first-class air accommodations.

A draft report was issued for review and comment to certain contractors and the Department of Defense on January 7, 1963. Our final report was submitted to the Congress on August 30, 1963.

As a result of these two reviews, the Armed Services Procurement Regulation was revised, limiting reimbursement to less than first-class air accommodations except under stipulated conditions (ASPR 15-205.46 (f)).

[Enclosure 2]

REVIEW OF DEFENSE CONTRACTS UNDER THE F-4 AIRCRAFT PROGRAM

Description of the F-4 weapons system programs

The F-4 is a supersonic all-weather fighter and attack aircraft developed and produced by an aircraft manufacturer under cost-plus-a-fixed-fee, fixedprice incentive, or fixed-price contracts awarded annually since October 1954 by the Department of the Navy. The aircraft, used both by the Navy and the Air Force at the direction of the Secretary of Defense, cost about $3 million each, and over 2,000 are expected to be procured. The program ultimately will involve costs in excess of $5 billion.

Review of F-4 aircraft program

Early in 1963, we had undertaken reviews of the Navy's continued reliance on prime contractors to subcontract for certain fully developed components and subassemblies rather than providing the items as Government-furnished material. The practice of having the prime contractor continue furnishing such items appeared to be unnecessarily adding millions of dollars of additional costs to weapons system programs in the form of fees or increased prices through the failure of the Navy to consolidate purchases of the same item used under two or more programs. Inasmuch as the F-4 was the largest Navy aircraft procurement program, and it was anticipated that the F-4 would.be in production for at least 5 more years, we had selected the prime contractor for this aircraft, among others, for review of this apparent problem area. In addition, we had also undertaken a preliminary review of the activities of this prime contractor in view of the significant amounts of the F-4 aircraft contracts involved.

The purpose of this review was to identify those aspects of the negotiation and administration of the contracts which warranted consideration for detailed review. During the course of the preliminary review, inquiries and evaluations were made with respect to the overall program objectives, the responsibilities of the Navy's program manager, the Navy's practices and controls with respect to the prime contracts and subcontracts involved, and the prime contractor's accounting system and subcontract practices.

The basic information necessary to determine the areas, contractors, and contracts warranting more detailed review had been obtained primarily through (1) discussions with program and project officers in the Navy's Bureau of Weapons; (2) reviews of pertinent Navy records of contract negotiations; (3) discussions with the Navy contracting officers and internal auditors; and (4) discussions with prime contractor officials, contracting personnel, and internal auditors.

Request from House Appropriations Committee

In September 1963, after the above review was underway, the chairman of the House Appropriations Committee requested the Comptroller General to undertake segmented cost studies of the F-4 aircraft program. In subsequent discussions with the committee staff regarding the particular areas of interest, we were requested to direct our efforts to the identification of areas in which potential cost savings could be effected in the remaining portions of the F-4 program and other similar defense programs. Further, these discussions resulted in an understanding that our reviews should include studies of the agency's management of the program as well as the study of the negotiations and administration of the prime contract and subcontracts.

Audit work to date

To date we have undertaken reviews of the following areas of the F-4 program which involve overall agency management, agency contract administration, prime contractor performance, and subcontract negotiations and administration:

(1) Readiness of F-4 aircraft from the point of view of maintenance and spare parts support.

(2) Degree of commonality of the Navy and Air Force versions of the F-4.

(3) Requirement policy regarding accessories for spare engines.

(4) Decision to procure foreign-made ejection seats.

(5) Spare parts needs.

(6) Apparent inconsistency between the Air Force and the Navy in determining quantities and types of groundhandling and special support equipment.

(7) Adequacy of policy and practices for authorizing the prime contractor to furnish major components and subsystems.

(8) Adequacy of technical data furnished by the prime contractor for purposes of increasing competitive procurement of items initially procured from a sole source.

(9) Possible duplication of inspection and quality control function by the agency, prime contractor, and subcontractors.

(10) Administration of the prime contract.

(11) Subcontracts negotiated by the prime contractor.

As is evidenced by the areas being reviewed, our efforts represent a relatively comprehensive consideration of a broad, complex program which involves management at many levels within the Department of Defense as well as contract performance and administration by the prime contractor and a selected number of the several thousand subcontractors involved.

Selection of subcontractors for review

Following is a brief summary of the purpose and basis for our reviews of selected subcontractors:

Through fiscal year 1964, eight contracts had been awarded to the prime contractor, in dollar amounts totaling about $2.5 billion. Subcontracts amounting to about $1.1 billion of this amount were awarded to several thousand subcontractors. Accordingly, we undertook to select a representative number of such subcontractors for the purpose of conducting preliminary surveys and, where appropriate, detailed reviews. Our selection was based on the general background

obtained during the broad survey of the F-4 program undertaken in early 1963 and, more specifically, on considerations such as the following:

(1) Dollar value of the subcontracts awarded to subcontractors (we deemed it desirable to consider the adequacy of negotiations for both large and small subcontracts).

(2) Internal audit reports of the Navy and the prime contractor on subcontract awards.

(3) Subcontract awards made either on a sole-source basis or under limited competitive conditions.

(4) Subcontractors not otherwise being considered in connection with other General Accounting Office reviews.

(5) Type of product or component involved.

(6) Subcontractor refusal to permit agency or prime contractor auditors to examine cost records.

Using criteria such as those cited above, and considering the availability of staff to perform the work, we selected 23 subcontractors for preliminary survey. The 23 subcontractors selected had been awarded subcontracts amounting to about $210 million (or about 20 percent of the total amount of subcontracts awarded by the prime contractor).

Audit of subcontractors

In November 1963, after selection of the subcontractors to be surveyed, instructions were issued to nine of our regional offices to initiate surveys at the involved subcontractors' facilities in accordance with guidelines prepared by our Washington staff. Approximately 50 man-days were programed for the preliminary survey at each subcontractor's facility.

During the course of each of the surveys being conducted by our regional offices, representatives from our Washington staff visited the survey sites to discuss and evaluate the survey approach and survey results. The primary purpose of these surveys was to review the negotiation records to consider the adequacy of such negotiations and whether there appeared to be any questionable aspects of the negotiations or performance under any or all of the subcontracts involved.

Matters specifically considered included questions as to whether:

(1) Prior cost and pricing data supported the current price.
(2) Competition was obtained in all feasible instances.

(3) In the absence of competition, negotiations were conducted by the contracting officer in sufficient depth to insure the reasonableness of price. (4) Internal auditors (contractor and agency) had performed reviews at the contractor's activities and what actions were taken as a result of such reviews.

(5) Subcontractor's efforts involved extensive use of outside suppliers and, if so, whether surveys or reviews of second-tier suppliers were warranted.

(6) The accounting practices of the subcontractor were sufficient for purposes of relying upon data obtained therefrom.

The matters found to warrant attention were not confined to those specifically set forth in the guidelines furnished by our Washington staff. The audit staffs frequently noted other questionable matters which they called to the attention of our Washington staff for the purpose of determining whether further consideration or detailed reviews were warranted.

On the basis of the results of the preliminary surveys, it was concluded that only 4 of the 23 subcontractors involved warranted more detailed review. Detailed reviews were then specifically authorized by our Washington office. Frequent visits were made by our Washington staff to the audit sites for the purpose of reviewing the information being obtained and determining appropriate courses of audit action.

Results of examinations

In this connection, our review at one subcontractor's facility disclosed that the prime contractor paid about $467,000 more than was warranted on the basis of prior cost experience; another subcontractor, who was awarded subcontracts totaling about $867,000, charged prices of about $218,000 more than was warranted on the basis of recently experience costs; a third subcontractor repeatedly purchased material on a sole-source basis from a second tier supplier (audited by GAO) without analyzing cost data, which, if obtained and analyzed, would have provided a basis for reducing the price by about $345,000; and a fourth

subcontractor received 14 purchase orders at prices totaling about $600,000 more than was warranted on the basis of cost data available at the time of price negotiations. In the fourth case, however, the prime contractor's own internal auditors discerned the deficiency subsequent to the initiation of our review, and appropriate cost reductions have been obtained. (In view of the action taken and the evident control being exercised by the prime contractor in this instance, we discontinued our review of this subcontractor.) In the other three instances,

one report has been issued to the Congress and two other reports are being prepared on the matters disclosed by our reviews.

Prime contractor: McDonnell Aircraft Corp., St. Louis, Mo.

Schedule of subcontracts selected for survey and review where appropriate

Since the inception of the Defense Accounting and Auditing Division in 1956, work has been performed in the electronics area. In May 1963, the Subcommittee on Defense, Committee on Appropriations, House of Representatives, requested that the General Accounting Office intensify reviews of the procurement of electronic equipment with particular emphasis on the sole-source procurements of this equipment by the military departments.

Audit considerations

In addition to examining into the method of procurement, i.e., whether the military departments were justified in procuring an electronic item on a negotiated sole-source basis rather than on a competitive basis, we also considered the need for the procurement and the performance of the equipment and reviewed the prices for the equipment.

Audit approach

Preliminary information.-The Electronics Command, Fort Monmouth, N.J., is the major subcommand under the Army Materiel Command (AMC) responsible for communication-electronics equipment. The then Army Electronics Materiel Agency at Philadelphia was the inventory control point for such equipment and was the primary source of the original data.

48-132-6540

The Philadelphia, Chicago, and Los Angeles procurement districts were the major districts of the present 11 AMC procurement districts which administered contracts for electronic and communications equipment in the Army. These three districts handled the bulk of the contracts because, prior to the reorganization of the procurement districts, these locations were suboffices for the Materiel Agency in Philadelphia.

The selection of contractors' plants to be visited in the detailed review was carefully monitored in the Washington office, it being the desire that this review expand to a considerable number of contractors' plants in a number of different geographical locations. Therefore, spreading of the workload within our organization became one of the bases for selection of a particular contract for review or, at least, it was considered in the priority of reviews to be initiated by particular regional offices.

Our review utilized, to the maximum extent possible, the work of the internal audit agencies. In general, we found that these agencies had not examined into the need or justification for a particular contract to be awarded on a sole-source basis but that cost or price analysis on contract price proposals was performed by the cognizant audit agency at the contractors' plants or by the economics branch at the procuring agency in almost every case.

By letter dated June 27, 1963, the Philadelphia, Chicago, and Los Angeles regional offices were furnished audit programs and the survey work was subsequently initiated at the procurement district offices. The following basie statistical data resulted from this work:

Detailed selection of equipment and related contracts.-The work performed at each location to obtain these statistics generally included the following procedures:

1. The applicable files of all contract actions that the agency had executed during the 23-month review period were obtained.

2. From these documents, our auditors identified and listed all contract actions in excess of $500,000 that were negotiated on a sole-source basis.

3. Contract actions that were based on small business set-asides were deleted from further consideration because these were negotiated portions of procurements whose prices were evaluated by comparing them with those established through formal competitive advertising.

4. The requirements studies for items identified were reviewed to determine the extent of past and planned future procurements of each item. This resulted in the deletion of some items from further consideration because (1) there were no prior procurements, (2) there were no planned future procurements, or (3) future planned procurements were negligible.

5. For the remaining items, procurement histories were obtained, primarily on the basis of dollar value of contract actions identified, and procurement files were reviewed in detail to obtain basic data and to identify areas of potential deficiency or problems. Major questions considered in this detailed review included:

(a) Was the item potentially available from many suppliers?
(b) Had the item ever been competitively procured?

(c) What was the extent of prior sole-source procurements from the same supplier?

(d) Was the equipment functionally similar to other equipment known to exist in other military departments?

(e) Was the item technically so complex that competitive procurement of only components would be feasible?