facilities on long-term leases in up to 5-year contract increments for a total of 20 years with option to purchase the facility at the end of any contract period. Facilities acquired under this law must, however, be either dispersed from areas considered to be major target areas or hardened to the extent that they will not be damaged by anticipated enemy action. (b) Appropriate consideration will be given to the cost of Government ownership of needed petroleum facilities compared with the cost of leasing commer cially owned facilities before a decision is made to acquire or lease such facilities. GAO Report B-146948, October 21, 1964 7. Title: "Use of Private Executive Aircraft Rather Than Commercial Aircraft Resulted in Unwarranted Charges to Government Cost-Reimbursable Type Contracts by Lockheed Missiles & Space Co., Sunnyvale, Calif.” (OSD case No. 1948). GAO finding: Lockheed incurred costs of about $1,029,000 in operating its private executive aircraft fleet when commercial air transportation was available at an estimated cost of about $164,000. Lockheed charged all fleet costs to overhead and allocated the overhead to its various contracts which were almost exclusively with the Government. GAO estimate of unnecessary costs: $865,000 for 1962. DOD comments on GAO finding: The Air Force believes that it was reasonable for Lockheed to maintain a certain executive aircraft capability. Lockheed's sites of key operations are separated by considerable distance and are interrelated in support of all major contracts. The company needs 24-hours-a-day, 365-days-ayear availability of air transportation to meet any emergency at any time. This is a necessity in the performance of scheduled commitments where a slip launch schedule would involve great costs and have an adverse impact on high-priority programs. The contractor's responsibilities included extensive launch pad modifications between launches and properly coordinated control between coast-tocoast operations. Aircraft were utilized for the transportation of urgently required hardware and classified documents to launch sites; delivery of contractor-supplied hardware, spare parts, and data to subcontractor's facilities: transportation of priority mail, test reports, blueprints, etc., during critical pro gram development periods; and movement of both Lockheed's and their supplier's personnel whose services were, of necessity, required at launch sites for the resolution of technical problems and changes related to installation and checkout and launch functions; and the rapid transportation of executive and middlemanagement personnel to numerous locations for on-site observations and determinations required in the performance of contract obligations. A comparison of costs incurred in maintaining a company operated versus cost of transportation via scheduled commercial or charter service airlines is not believed to be the sole criterion to judge reasonableness. Lockheed advises that, after evaluation of all elements involved, the determination was made to utilize executive aircraft to meet the special requirements for aircraft services and that charter services would not provide the necessary responsiveness. However, it is believed that the capacity maintained in 1962 was unnecessary and the increase in costs from 1961 to 1962 was unjustified. DOD comments on costs: Lockheed has proposed Air Force acceptance of $993,299 to cover operation of five aircraft. The Air Force has determined that operational costs of $380,529 for three aircraft are reasonable and allowable. Costs of $68,396 have been allowed for the other two aircraft based on commercial airline costs for employees traveling in these two aircraft on company business. Of the $993,299 claimed by Lockheed, the Air Force has accepted $448,925 and disallowed $544,374. Lockheed has not acceded to the disallowance. DOD corrective action: The Air Force has issued guidance to its procurement personnel with respect to determination of the reasonableness of costs of contractor owned or operated aircraft fleets. These instructions caution contract administration activities that the current trend for increased use within industry of privately owned or operated aircraft is a matter for particular attention in determining the allowability of such costs in the pricing of Government contracts. While the cost of equivalent commercially available transportation may be one of the criteria by which reasonableness may be determined, other important criteria are: (a) Whether travel requirements could be met by using commercially available transportation; (b) the value to the Government in having aircraft immediately available for high-priority missions and for emergency requirements; (c) the proximity of airline terminals to sites of contractor activity, considering total time and cost of transportation; (d) the relationship of the number and type of aircraft maintained by the contractor to the dispersion of his operations and the need for fast movement of people and things between his various sites; and (e) the degree to which the aircraft are used for non-Government requirements, such as commercial sales promotion and goodwill. The other military departments will be informed of these instructions, and the entire matter is being referred to the Armed Services Procurement Regulations (ASPR) Committee for their consideration and appropriate ASPR coverage. Lockheed will be required to maintain records reflecting the circumstances of flights for which it proposes to seek reimbursement. Problem ADDITIONAL COMMENT BY THE DEPARTMENT OF THE AIR FORCE The GAO alleged that their review of the use of private executive aircraft by the Lockheed Missiles & Space Co. (Lockheed), Sunnyvale, Calif., disclosed that during calendar year 1962 Lockheed incurred costs of about $1,029,000 in operating its private executive aircraft fleet when equivalent commercial air transportation was available at an estimated cost of about $164,000. Lockheed charged all costs of operating its private executive aircraft to overhead and allocated the overhead to its various contracts. Since Lockheed operates almost exclusively under contracts with the DOD and NASA, the Government was charged with almost all the $865,000 of additional costs Lockheed incurred in 1962 by operating its own fleet of aircraft instead of using commercial air transportation. GAO comment Pending advice from the Air Force as to the action taken in response to the recommendations below, credit in the disbursing officers' accounts will be withheld, to the extent permitted by statute, for amounts by which the costs of Lockheed's executive aircraft operation exceeded the costs for comparable commercial, chartered, and Government-sponsored aircraft services. GAO recommendations (a) That, in negotiation of the allowable overhead rate for 1962, the Air Force disallow all Lockheed's costs of operating its fleet of aircraft that are in excess of the costs that would have been incurred if maximum use had been made of commercial aircraft, chartered aircraft, and Government-sponsored air services and if a minimum capability for unusual or emergency needs had been maintained. (b) That the Air Force make similar reviews for prior years and seek recovery of any unwarranted charges disclosed by those reviews. (c) That the Air Force apply these same criteria in determining rates for 1963 and subsequent years. (d) That the Secretary of Defense provide all military services with guidelines to be followed in determining the allowability of costs of company-operated aircraft operations to be included in prices of negotiated Government contracts, and that these guidelines be based upon the principles set forth in this report. Statement The GAO has been advised that: (a) As pertains to the costs incurred for 1962 we have completed our investigation of the matter and, as a result of the review, have concluded that the costs in connection with two of the Queen Air and one L-60 aircraft are reasonable. For the remainder of the costs which pertain to the third Queen Air and one Jet Star, the Air Force has accepted one-third of the passenger travel on the third Queen Air and that travel performed on the Jet Star at equivalent airline costs of employees traveling on company business. The 1962 overhead negotiations were conducted during October 1964. The total costs incurred by Lockheed for the executive aircraft amounted to $1,028,557. After voluntary deletions by the contractor, and other adjustments. the contractor proposed that our negotiators accept this item in the amount of $993,299. Of the amount proposed by the contractor, the Air Force negotiator agreed to acceptance of costs totaling $448,925, 48-132 0-65- 48 consisting of $428,438 for two of the Queen Airs and the L-60 aircraft and $20,487 for travel performed on the third Queen Air and the Jet Star aircraft. Lockheed has not accepted this disallowance action and is to advise the Air Force negotiator of its position in this matter within 90 days. (b) Lockheed's key operations on the west coast are separated by considerable distance and their widely separated operations are interrelated in support of all major contracts emphasizing the need for 24-hours-a-day, 365-days-a-year availability of aircraft transportation to meet any emergency at any time. Lockheed could have been criticized for not providing this margin of safety in the performance of high risk scheduled commitments where a slip in launch schedule could involve national security and be damaging to the worldwide leadership image and prestige of the United States. During 1962, the contractor supported 42 launches from the Atlantic Missile Range and 34 launches from Vandenberg. The scope of the contractor's responsibilities encompassed extensive launch pad modifications between launches and configuration control between coast-to-coast operations. The company aircraft were utilized for (1) the transportation of urgently required hardware and classified documents to launch sites; (2) the delivery of urgently required contractor supplied hardware, spare parts, and data to subcontractor's facilities; (3) transportation of priority mail, test reports, blueprints, et cetera, during critical program development periods; (4) the movement of both Lockheed's and their suppliers' personnel whose services were of necessity required at launch site for the resolution of technical problems and the negotiation of changes related to installation and checkout and launch functions; and (5) the rapid transportation of executive- and middle-management personnel to numerous locations for on-site observations and determinations required in the performance of contract obligations. (c) We must concur with the contractor, that the responsibility for program management and success rests with the contractor and the judgments of management, at a point in time, must be evaluated with considerations given to the risk of failures of performance, as well as to the provisions of our procurement regulations. (d) Contingent on the exercise of reasonable controls by Lockheed and prudent use of its aircraft in the support of contractual commitments, we conclude that the benefits derived by Lockheed and the Government through the use of executive aircraft by Lockheed warrants continued operation of the aircraft, particularly when a comparison is made between the rate per hour resulting from our recent overhead negotiations, and that rate which Lockheed would probably have experienced had it chartered similar services. (e) We are unable to concur with GAO's criteria for disallowance of Lockheed's costs for operating its fleet of aircraft for 1962, for 1963, and subsequent years. (f) In reaching the conclusions contained in the report, based entirely on a comparison between the cost of commercial flights and the cost of Lockheed's maintaining an executive fleet, GAO failed to give consideration to the factors influencing companies such as Lockheed in the United States, who utilize approximately 30,000 business aircraft. The reasons for the use of private aircraft by Lockheed are not all the factors to be considered. They are, however, sufficient to illustrate that a comparison of costs incurred in maintaining a company op erated fleet versus cost of transportation via scheduled commercial or charter service airlines is not necessarily the sole criterion on which to judge reasonableness. Status: Case closed. Policy The Air Force has issued instructions to its procurement personnel regarding determining the reasonableness of costs of contractor owned or operated aircraft fleets and cautions contract administration activities that the current trend for increased use within industry of privately owned or operated aircraft make this a matter for particular attention in determining the allowability of such costs in the pricing of Government contracts. While the cost of equivalent commercially available transportation is one of the specific factors considered, others include: (1) Whether travel requirements could be met by using commercially available transportation; (2) The convenience and time saved by having aircraft immediately available for high-salaried executives and for emergency business requirements; (3) The proximity of airline terminals to sites of contractor activity, considering total time and cost of transportation; (4) Whether the number and type of aircraft are reasonably required; and (5) Whether the aircraft are used for non-Government requirements, such as commercial sales promotion and good will. The entire matter has been referred to the Armed Services Procurement Regulations Committee for their consideration and appropriate ASPR coverage. GAO Report B-133307, November 19, 1964 8. Title: "Inventions Not Disclosed and Confirmatory Royalty-Free Licenses Not Obtained Under Selected Research and Development Contracts With Certain Divisions of Thompson Ramo Wooldridge, Inc." (OSD case No. 2020). GAO finding: The contractor did not comply with various patent provisions of its defense contracts and Government administrative personnel did not establish the necessary surveillance to assure compliance with contract terms. For example, the contractor had failed, in violation of contract terms, to disclose to DOD 18 inventions which were made up to 31⁄2 years earlier. For some of these 18 inventions, the contractor had patent applications on file. Also, disclosures were delayed for unreasonable periods up to 4 years. These violations jeopardized the Government's patent rights. GAO estimate of unnecessary costs: No estimate given. DOD comments on costs: DOD agrees. The Government may DOD corrective action: Revision 5 of ASPR, dated May 11, 1964, made changes aimed at improving patent administration such as establishing stringent time limitations on the contractor for disclosing inventions and for filing patent applications. Similarly, the amount to be withheld for failure to submit or delay in submitting invention disclosures was increased. This subject is also under study at this time by the Armed Services Procurement Regulations Committee which is considering other changes to insure full compliance with patent terms. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem The GAO found that (1) certain divisions of Thompson Ramo Wooldridge, Inc., were not complying with various patent provisions of its defense contracts and that Government administrative personnel had not established the necessary surveillance to assure compliance with contract terms; (2) the contractor had failed, in violation of contract terms, to disclose to the Department of Defense 18 inventions which had been made under defense contracts up to 31⁄2 years earlier; (3) for some of these inventions, the contractor already had patent applications on file, and (4) in another such violation, the contractor delayed disclosures of numerous inventions to the Department of Defense for unreasonable periods of up to 4 years. The GAO concludes that as a result of such violations, the Government's patent rights were jeopardized since it was not aware of inventions in which it had contractual rights to royalty-free use or to obtain title to the invention. Consequently, the Government may have lost its rights to such inventions because of intervening patents by third parties. GAO recommendations That the Department of Defense amend the patent provisions of the Armed Services Procurement Regulation to include contract clauses requiring adequate financial sanctions in the form of liquidated damages in the event of contractor failures or delays in complying with contractual patent provisions. Statement Regarding the GAO's comment that the contractor failed to submit invention disclosures to the Government the OSD response to the draft report recognized the fact that present surveillance techniques are to some extent inadequate. The ASPR Patents Subcommittee is currently reviewing this matter. Regarding the GAO finding that confirmatory licenses are not submitted to the Government promptly, the ASPR Patents Subcommittee is now preparing recommendation to the ASPR Committee on this matter. With respect to the GAO recommendation that "ASPR patent provisions shoul include financial sanctions in the form of liquidated damages," the ASPR Com mittee is currently exploring this matter also. NOTE. This case is similar to OSD No. 2049. Status: Case open pending completion of study by ASPR Subcommittee OSD has agreed to advise GAO when study is completed. Policy As noted in the reports, the Department of Defense has taken action to insure that contract patent terms are fully complied with by contractors. Revision 5 of the Armed Services Procurement Regulation dated May 11, 1964, imposed stringent time limitations on the contractor for disclosing subject inventions and for filing patent applications. The contractor must furnish the contracting officer a written disclosure of each subject invention within 4 months after conception or actual reduction to practice, whichever occurs first under the contract, together with a written election as to the filing of a patent application. If the contractor elects to file a patent application, he must do so within 6 months, and he must notify the contracting officer at the time of filing. Also, the amount to be withheld for a contractor's failure to submit or delay in submiting invention disclosures was increased. In addition, the Department of Defense is studying the general question of patent administration and has under consideration, along with other alternatives, your recommendation with respect to liquidated damages. GAO Report B-133386, November 27, 1964 9. Title: "Inventions Not Disclosed and Confirmatory Royalty-Free Licenses Not Obtained Under Selected Research and Development Contracts with Lockheed Missiles & Space Co., Division of Lockheed Aircraft Corp. Sunnyvale, Calif." (OSD case No. 2049). GAO finding: The contractor was not complying with various patent provisions of its defense contracts and Government administrative personnel had not established the necessary surveillance to assure compliance with contract terms. For example, Lockheed failed, in violation of contract terms, to disclose to the Government 58 inventions which had been made up to 23 months before the time of the GAO review and delayed disclosures of numerous inventions for unreasonable periods of up to 46 months. These violations jeopardized the Government's patent rights. GAO estimate of unnecessary costs: No estimate. The Government may have paid royalties unnecessarily but is not known for a fact. Time period of GAO report: January 1960 through June 1963. DOD comments on GAO finding: DOD agrees. DOD comments on costs: DOD agrees. DOD corrective action: Revision 5 of ASPR, dated May 11, 1964, made changes aimed at improving patent administration such as establishing stringent time limitations on the contractor for disclosing inventions and for filing patent applications. Similarly, the amount to be withheld for failure to submit or delay in submitting invention disclosures was increased. This subject is also under study at this time by the ASPR Committee which is considering other changes to insure full compliance with patent terms. GAO Report B-125016, December 21, 1964 10. Title: Failure To Recover Unpaid Royalties Retained by Collins Radio Co., Cedar Rapids, Iowa" (OSD case No. 1846). GAO finding: Collins retained about $406,000 in unpaid royalties under 40 of its contracts with the three military services which should have been returned to the Government. GAO estimate of unnecessary costs: $406,000. |