Mr. HOLIFIELD. The Chair will be forced to adjourn now. There is a rollcall on the floor of the House. For the time being the hearings will be closed, unless we find that it is necessary to do otherwise when we will reopen, if necessary. I would like to keep the record open, however, for conferences between the staff and the staff of the General Accounting Office and also for requests for certain information and documents. I wish to thank you gentlemen for your appearance here today. The meeting at this time is adjourned. (Whereupon, at 12:40 p.m. the subcommittee adjourned.) APPENDIXES APPENDIXES 1A-11-GENERAL ACCOUNTING OFFICE DOCUMENTS APPENDIX 1A-INFORMATION ON INTERAGENCY RELATIONSHIPS Hon. CHET HOLIFIELD, AND DELAYS COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, Military Operations Subcommittee, Committee on Government Operations, House of Representatives. DEAR MR. CHAIRMAN: We refer to your letter dated October 5, 1964, concerning the administrative suspensions of contract costs made pursuant to recommendations in our contract overpricing reports. You specifically refer to the suspensions of costs made by the Department of the Navy under certain cost-plusa-fixed-fee contracts assigned by the Westinghouse Electric Corp. to its Plant Apparatus Department (PAD). These suspensions totaling $4,225,504 were made by the Navy after consideration of our findings and recommendations included in draft reports on our examination of these contracts. Our final reports to the Congress of these contracts dated July 23 and December 26, 1962, dealt with the pricing of subcontracts awarded by PAD to the Atomic Equipment Department (AED) of Westinghouse. In our July 23, 1962, report we concluded: "Under the terms of the cost-plus-a-fixed-fee contract between Westinghouse and the Navy, subcontracts awarded by Westinghouse became reimbursable costs and thus, in essence, Westinghouse was buying for the Government and was receiving a fee for this service. There is considerable question as to whether the subcontract between the two divisions is a valid contract, since the law requires two or more separate legal entities as contracting parties. However, in any case the cost-plus-a-fixed-fee contract between Westinghouse and the Navy placed great reliance upon Westinghouse and obligated it to exercise due care in the expenditure of funds to be reimbursed by the Government. In awarding this 'subcontract' to a department of its own corporation, without effective competition and without considering available cost estimates and prior-cost data, Westinghouse did not exercise the degree of care that was warranted by its contractual relationship with the Government. We believe that the Government is entitled to recover from Westinghouse on the basis of Westinghouse's failure to use due care in establishing the price for the work performed under the 'subcontract' and charged to the Government under the cost-plus-a-fixed-fee prime contract. Accordingly, we are referring copies of this report to appropriate Government agencies with the recommendation that all available and appropriate action be taken to obtain proper recovery from Westinghouse Electric Corp." The December 26, 1962, report concluded and recommended as follows: "It appears that Navy approval of the subcontracts was largely predicated on price breakdowns submitted by Westinghouse on prior procurements as well as on the first of these two procurements which led the Navy to believe that Westinghouse's prices consisted of anticipated cost plus a 10-percent profit when, in fact, its prices provided for about $2,241,000 more than that amount. Accordingly, it does not seem reasonable that this amount should be reimbursed to Westinghouse by the Government. Further, the cost-plus-a-fixed-fee contracts between Westinghouse and the Navy placed great reliance upon Westinghouse and obligated it to exercise due care in the expenditure of funds to be reimbursed by the Government. In awarding these subcontracts to a department of its own corporation, without effective competition and without considering available cost estimates and prior-cost data, Westinghouse did not exercise the degree of care that was warranted by its contractual relationship with the Government. The Government is entitled to recover from Westinghouse on the basis of Westinghouse's failure to use due care in establishing the prices for the work performed under these subcontracts and charged to the Government under the cost-plus-a-fixed-fee prime contracts. "Since the Navy has advised us that it has withheld sufficient funds from Westinghouse under the prime contracts to protect the Government's interest. we are not at this time issuing formal exceptions against the disbursing officers' accounts. We are, however, asking the Navy to advise us before taking any action to release these funds to Westinghouse. We are, also, referring copies of this report to the Department of the Navy and the Department of Justice with the recommendation that the Navy, in cooperation with the Department of Justice, take all available and appropriate action to resolve this matter and obtain proper recovery from Westinghouse Electric Corp." As will be noted, our reports recommended that a total of $3,307,000 be recovered from Westinghouse on the basis that it failed to use that degree of care required of a cost-reimbursable contractor in awarding the subcontracts to AED without effective competition and without considering available cost estimates and prior-cost data. The Navy withheld an additional $918,504 to further protect the Government's interests pending a final determination by the Department of Justice as to actions to be taken by the Department in connection with the matters reported. The position of Westinghouse as expressed to your subcommittee, and previously to our office (see attached copy of our letter of August 28, 1964, to Hedrick and Lane), is essentially as stated in your letter, in part as follows: **** Apparently Westinghouse takes the position that these suspensions involve only the question of allowability of costs under its contracts with the Navy. The company contends that the procedure for handling such question is covered by the 'allowability of costs' provisions and the 'disputes clauses' of these contracts. "If I understand the company's position rightly, it comes to this: The effect of the General Accounting Office recommendations and the Justice Department considerations are extralegal intrusions upon an administrative process defined in the contract and subscribed to in good faith by the contracting parties. Work under the contracts was performed. If certain costs charged by the contractor are found to be excessive or unwarranted, then the Navy contracting officers, in accord with Armed Services Procurement Regulation guidance, should make determinations of allowability or unallowability. The contractor then has the right of appeal to the Armed Services Contract Board of Appeals if he is not satisfied with the decisions." Contract No. NObs-72205 dated October 29, 1956, between Westinghouse and the Bureau of Ships, covered the design and furnishing of reactor compartment components for the aircraft carrier U.S.S. Enterprise for a total estimated cost of about $59 million. This contract is typical of the other contracts involved in the subject PAD reviews. It provided that work performed by any department or division of Westinghouse would be considered as subcontracted work or services requiring compliance with the clause of the general provisions of the contract entitled "Subcontracts," which provided in pertinent part: "(a) The Contractor shall give advance notification to the Contracting Officer of any proposed subcontract hereunder which (i) is on a cost or cost-plus-a-fixedfee basis, or (ii) is on a fixed-price basis exceeding in dollar amount either $25,000 or 5 percent of the total estimated cost of this contract. "(b) The Contractor shall not, without the prior written consent of the Contracting Officer, place any subcontract which (i) is on a cost or cost-plus-a-fixedfee basis, or (ii) is on a fixed-price basis exceeding in dollar amount either $25,000 or 5 percent of the total estimated cost of this contract, or (iii) provides for the fabrication, purchase, rental, installation, or other acquisition, of any item of industrial facilities, or of special tooling having a value in excess of $1,000, or (iv) is on a time-material or labor-hour basis, or (v) has experimental, developmental, or research work as one of its purposes. The Contracting Officer may, in his discretion, ratify in writing any such subcontract: such action shall constitute the consent of the Contracting Officer as required by this paragraph (b). "(d) The Contracting Officer may, in his discretion specifically approve in writing any of the provisions of a subcontract. However, such approval or the consent of the Contracting Officer obtained as required by this clause shall not be construed to constitute a determination of the allowability of any cost under this contract, unless such approval specifically provides that it constitutes a determination of the allowability of such cost." The particular subcontracts here involved were on a firm fixed-price basis totaling $12,200,360 for primary coolant pumps and casings. Clause 4 of the General Provisions provided that the Government shall pay to Westinghouse as follows: "(a) For the performance of this contract, the Government shall pay to the Contractor the cost thereof determined by the Office of the Comptroller of the Navy (Contract Audit Division) to be allowable in accordance with part 2 of section XV of the Armed Services Procurement Regulation as in effect on the date of this contract and the Schedule (hereinafter referred to as 'Allowable Cost'), plus such fixed fee, if any, as may be provided for in the Schedule. "(b) Once each month (or at more frequent intervals, if approved by the Office of the Comptroller of the Navy (Contract Audit Division)) the contractor may submit to an authorized representative of the Office of the Comptroller of the Navy (Contract Audit Division), in such form and reasonable detail as such representative may require, an invoice or public voucher supported by a statement of cost incurred by the contractor in the performance of this contract and claimed to constitute allowable cost. Each statement of cost shall be certified by an officer or other responsible official of the contractor authorized by it to certify such statements. "(c) As promptly as may be practicable after receipt of each invoice or voucher and statement of cost, the Government shall, except as hereinafter provided and subject to the provisions of paragraph (d) below, make payment thereon as approved by the Office of the Comptroller of the Navy (Contract Audit Division). After payment of 85 percent of the fixed fee set forth in the schedule, as from time to time amended, further payment on account of the fixed fee shall be withheld until a reserve of either (i) 15 percent of the total fixed fee or (ii) $100,000, whichever amount is less, shall have been set aside, such reserve or the balance thereof to be retained until the execution and delivery of a release by the contractor as provided in paragraph (e) hereof. "(d) At any time or times prior to final payment under this contract the Office of the Comptroller of the Navy (Contract Audit Division) may cause to be made such audit of the invoices or vouchers and statements of cost as shall be deemed necessary. Each payment theretofore made shall be subject to reduction to the extent of amounts included in the related invoice or voucher and statement of cost which are found by the Office of the Comptroller of the Navy (Contract Audit Division) on the basis of such audit not to constitute allowable cost, and shall also be subject to reduction for overpayments or to increase for underpayments on preceding invoices or vouchers. On receipt of the voucher or invoice designated by the contractor as the 'completion voucher' or 'completion invoice' and statement of cost, which shall be submitted by the contractor as promptly as may be practicable following completion of the work under this contract but in no event later than 1 year (or such longer period as the contracting officer may, in his discretion, approve in writing) from the date of such completion, and following compliance by the contractor with all provisions of this contract * * The disputes clause of the contract reads as follows: "Except as otherwise provided in this contract, any dispute (other than one concerning the allowability of cost) concerning a question of fact arising under this contract which is not disposed of by agreement shall be decided by the Contracting Officer; and any dispute concerning the allowability of cost under this contract shall be decided by the Director (Contract Audit Division). Such decision shall be reduced to writing and a copy thereof mailed or otherwise furnished to the Contractor. Within 30 days from the date of receipt of such copy, the Contractor may appeal by mailing or otherwise furnishing to the Contracting Officer or to the Director, Contract Audit Division, as the case might be, a written appeal addressed to the Secretary, and the decision of the Secretary or his duly authorized representative for the hearing of such appeals shall, unless determined by a court of competent jurisdiction to have been fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence, be final and conclusive; provided that, |