Time period of GAO report: 1947 through 1957. DOD comments on GÃO finding: DOD agrees that the prices of certain contracts with Collins included amounts for royalties expected to be paid but which were not paid because of the subsequent settlement of antitrust litigation involving two major licensors. DOD comments on costs: DOD's estimate of costs closely parallels GAO's estimate. DOD corrective action: Some of the contracts contained a clause expressly providing for the refund of any unpaid royalties. In compliance with this clause Collins has refunded approximately $144,000 of unpaid royalties. The military departments are conducting a further review to determine whether a basis exists for obtaining recovery of the balance. In addition, the ASPR was revised in 1963 to specify when and under what circumstances a patent royalty recapture clause should be used. Also, the DOD audit agencies surveyed over 300 major defense contractors to determine whether similar unpaid royalties were being retained by contractors. It was found that such conditions existed in only a few instances and, where necessary, corrective action was taken. It is believed that the ASPR changes noted above and the widespread attention given this subject should prevent a recurrence of similar situations in the future. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF AIR FORCE GAO states that Collins Radio Co. retained about $406,000 in unpaid royalties under 40 contracts with the triservices which should have been returned to the Government. Of this sum, about $211,170 pertained to 11 Air Force contracts. GAO recommendations (a) That all recoveries of unpaid royalties retained by Collins because of its own negligence in not refunding the related amount include interest. (b) Under the GAO draft report, DOD was requested to direct the military agencies to examine into unpaid royalties at other major defense plants and institute recovery action where appropriate. GAO now requests the Secretary of Defense to provide a report summarizing the findings of his auditors at each of the contractors' plants examined. Statement DOD responded to GAO by letter of December 11, 1963, on the draft report. GAO was advised that recovery of unpaid royalties would be sought in all cases where a valid legal or equitable basis for refund existed. GAO was also advised that "the military audit agencies were requested on October 18, 1963, to examine the unpaid royalties situation at major defense plants and recovery action will be taken where appropriate." GAO was further advised that a "refund of royalties clause" had been developed and inserted in ASPR 9-112 as of November 15, 1963. This clause requires a contractor to furnish a statement, during negotiation of the contract, as to royalties to be payable thereunder, and before final payment, to file a statement as to actual royalties paid or required to be paid. Review of these reports affords protection of the Government's interest in this area. These reported actions were responsive to the recommendations in the GAO draft report. Status: Case open, the Air Force will seek refunds totaling about $211,200 as recommended by GAO; $6,299 has already been recovered on a legal basis under one contract. We will seek an additional $42,352 under four contracts having "recapture" clauses (a legal basis). The balance under six remaining contracts will be sought on an equitable basis. GAO Report B-146761, January 19, 1965 11. Title: "Unreasonably High Prices Paid by Government Prime Contractors and Subcontractors for GG 49 Gyroscopes Purchased From the Only Qualified and Approved Source, Honeywell, Incorporated, Aeronautical Division, Minneapolis, Minnesota" (OSD case No. 1938). GAO finding: Government prime contractors and subcontractors paid prices for GG 49 gyroscopes which were about 46 percent higher than costs experienced and available to Honeywell at the time the prices were established. Honeywell refused to furnish cost data for the GG 49 gyroscopes or to permit representatives of the military departments access to its cost records. GAO estimate of unnecessary costs: Not stated by GAO. DOD comments on GAO finding: DOD investigation into the circumstances surrounding the negotiations in question is still underway to determine whether a refund is in order as recommended by GAO, and, if so, to what extent. DOD comments on costs: DOD investigation is in progress. DOD corrective action: Public Law 87-653 would now apply to such negotiations. Implementation of the statute in the Armed Services Procurement Regulation clearly would require the contractor to furnish current cost data and certify as to its currency and accuracy. Since the time of these negotia tions, DOD pricing agreement has been reached with Honeywell which provides for the furnishing of cost data for items such as GG 49 gyroscopes which are developed, either all or in part, at company expense. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF AIR FORCE Prime and subcontractors negotiated prices with Honeywell, a sole-source supplier, without adequate information on prior costs, effective price competi tion or other evidence to support the reasonableness of the prices negotiated. AC Spark Plug, a subcontractor to Burroughs Corp. under contract AF 33 (600)-40540, awarded a subcontract to Honeywell for gyros for a negotiated price of $510,400, which price GAO found to be $171,000 in excess of recent cost figures available to Honeywell. GAO recommendations (a) That the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration initiate action to obtain for the Government appropriate price adjustments of the excessive amounts paid Honeywell for GG 49 gyros. (b) That the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration have their contracting officials review the remaining procurements of GG 49 gyros from Honeywell and initiate action to obtain for the Government appropriate price adjustments from Honeywell for any excessive amounts disclosed in the review. (c) That the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration require their contractors to comply with their contractual agreements to include in all subcontracts and purchase orders that require cost certifications and defective pricing clauses the right of audit by their respective offices, and that contracting officials be instructed to withhold approval of all subcontracts and purchase orders which do not conform to the provisions of the prime contracts. (d) Where a Government prime contractor or subcontractor refuses to furnish accurate, complete, and current cost and pricing data on the grounds that the item to be procured is proprietary in nature, GAO recommends that the Secretary of Defense and the Administrator of the National Aeronautics and Space Administration require contracting agencies to determine whether the position of the prime contractor or subcontractor has merit, and to investigate and propose alternate means by which the Government may obtain an item which will satisfy its requirements at prices which are fair and reasonable. Statement A review was made of all procurements of GG 49 gyroscopes made from Honeywell on behalf of the Air Force, 47 in all, from inception of the product to the formalization of the long-term pricing agreement concluded between the Triservice/NASA Committee and Honeywell in March 1964. This review disclosed no evidence that Honeywell made any misrepresentations or provided any misleading information to the Air Force or its prime or subcontractors. It is. therefore, Air Force opinion that there is neither a legal nor equitable basis for seeking any refund. (This covers GAO recommendations (a) and (b).) As to recommendation (c), we do require contractors to comply with their contractual agreements relative to pricing of subcontracts. The contractual clauses referenced below contain flow-down provisions that require upper tier contractors to include similar provisions in subcontracts and purchase orders. Compliance with these provisions is monitored through purchase system survey reviews and Air Force contracting officer consent to certain individual subcontracts: ASPR 3-807.3 ASPR 3-807.4 Cost and Pricing Data. Certificate of Current Cost or Pricing Data. ASPR 7-104.29 Price Reduction for Defective Cost or Pricing Data. ASPR 7-104.42 Subcontractor Cost and Pricing Data. Regarding recommendation (d), it is Air Force opinion that the provisions of ASPR 3-807.6, "Refusal To Provide Cost of Pricing Data" already embody the substance of this recommendation. Status: Case open. NOTE.-National Aeronautical Space Administration recently obtained a refund of $139,886 under this case, partly under a most-favored-customer clause and partly for product engineering and tooling costs. Air Force is presently investigating whether or not we have any basis for seeking a small refund (possibly $15,000 to $18,000) under product engineering and tooling. We have no other basis for a refund. GAO Report B-146965, February 2, 1965 12. Title: "Increased Costs Due to Failure To Obtain Competition in Procurement of Electric Parts on Qualified Products Lists at the Defense Electronics Supply Center, Dayton, Ohio" (OSD case No. 2030). GAO finding: Increased costs have been incurred annually at the Defense Electronics Supply Center, Dayton, Ohio, through the failure to obtain competition in the procurement of electronic parts in Federal supply class 5960 listed on qualified products lists. GAO estimate of unnecessary costs: Estimated by GAO to be as much as $1.5 million annually. Time period of GAO report: Fiscal year 1963. DOD comments on GAO fiinding: The failure to obtain competition found by the GAO is due primarily to a depression in the tube industry caused by the advent of solid state devices rather than being due to the fault of the procuring agency as implied by the report. Accordingly, tube manufacturers are extremely reluctant to invest money in the development of a competitive product because of the declining market for new products. The Defense Electronics Supply Center and DSA Headquarters recognize clearly the fact that competition results in lower procurement costs. DOD comments on costs: No independent DOD estimate was made; however, it is to be noted that the GAO estimate is based primarily upon certain tube costs which are not comparable and there were other factors affecting price other than competition. The GAO estimate is therefore questionable. DOD corrective action: DOD is actively engaged in reducing the need for QPL's and, where this cannot be accomplished, insuring that ample competition exists on QPL buys. There presently exists in ASPR and departmental procurement regulations abundant policy guidance to encourage vigorous competition in this area. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE The report stated that increased eosts have been incurred at the Defense Electronics Supply Centers (DESC) due to failure to obtain competition in the pro curement of electronic parts listed on qualified products lists. GAO recommendations: That (a) Where military specifications are used as a basis for the procurement of commercial products, activities responsible for preparing specifications be in structed to eliminate qualification requirements, where practicable. (b) Where effective competition has not been obtained on established QPL's, procedures be established at DESC to provide that inquiry be made of the activity responsible for preparing the specification as to substitute methods of quality assurance as required by ASPR. (c) Where QPL's are necessary, DESC be instructed to take aggressive action to establish additional qualified sources. Statement DSA responded to the allegations contained in the report. Status: Actions on draft report completed. Policy Our comments which constitute Air Force policy on this matter are confined to the first GAO recommendations. Air Force regulation 81-1, dated July 2, 1964, is considered quite stringent in this area and DOD agrees. This regulation requires approval of the Deputy Chief of Staff, Systems and Logistics (AFSPPER) of all specifications requiring QPL which are prepared by Air Force activities. These specifications are re viewed to be assured that the requirements of ASPR 1-1103 are met, and, if so, the procuring activity is notified of such approval, in writing. These regulations are being followed scrupulously by Air Force procurement activities. Only 10 QPL approvals have been granted for all FSC's in the last 12 months. This is a minute percentage of the specifications prepared by the Air Force. This subject is a matter of continuous review in the Air Force. Office of Assistant Secretary of Defense, Installations and Logistics, memorandum of Octo ber 6, 1961, subject: "Specifications with qualified products list requirements' required the Departments to review their QPL procedures. This review of specifications to justify QPL retention was completed in April 1962. By way of further illustration, as a result of reviews conducted at Aeronautical Systems Division (ASD) in the last 6 months, the prior qualified requirement has been canceled on 42, or approximately 10 percent of its QPL items. APPENDIX 2B-ARMY CASES GAO Report B-133295, January 31, 1964 13. Title: "Excessive Charges for Components for M-60 Tanks Under Contract With Chrysler Corp., Detroit, Mich., Department of the Army” (OSD Case No. 1808). GAO finding The revised final contract price for M-60 tanks under Department of the Army contract with Chrysler Corp. contained duplicate and excessive costs which increased the contract price by about $315,200 for components made at certain of the contractor's plants. Summary cost data submitted by the contractor as basis for negotiating the final price were prepared after the tanks were produced and the contractor should have been aware of the incurred costs. The procuring agency (1) failed to obtain a certification on the cost data, despite a contract requirement for such a certificate and (2) accepted the summary cost data without an adequate review. GAO estimate of unnecessary costs: $315,200. Time period of GAO report: May 1960 to July 1962. DOD comments on GAO finding The Department of the Army agrees that the revised final contract price for M-60 tanks under contract with Chrysler Corp. contained duplicate and excessive costs which increased the contract price. The repricing proposal included experienced as well as projected costs in accordance with the terms of the contract. The excessive costs were included in the contractor's cost projections. DOD comments on costs The Department of the Army agrees that duplicate and excessive costs in the amount of $315,200 were included in the redetermined price of the contract. However, the contractor has agreed to the Government's recoupment, after consideration of certain offsetting costs, of a net amount of $258,060. (See Contract Modification No. 297, August 29, 1964, to Contract DA 20-018-ORD-23403). Total contract cost: $171.4 million. DOD corrective action (a) Since the award of this contract, Public Law 87-653, dated September 10, 1962, has required contractors to make a written certification that the cost data supplied are the most current, complete, and correct data available. This law further requires that the contractor agree to a provision for price adjustment if determination is made that cost information furnished is inaccurate, incomplete, or noncurrent. (b) The Army does not agree with the GAO recommendation for disciplinary action. The contractors price proposal included experienced costs and cost projections. Complete audit and review were accorded this proposal. Prior to agreeing upon a redetermined price, the Army negotiating team took added steps to obtain data to support the contractor's cost projections. It is pertinent to note that the type of situation disclosed by the GAO will probably not be repeated in view of the fact that the ASPR now limits the use of repricing articles. The forms C and D articles which are similar to the clause used in the M-60 contract are no longer authorized for use. GAO Report B-146747, April 17, 1964 14. Title: "Unnecessary Interest Costs Incurred by the Government Because of Improper Retention of Overpayments by Burroughs Corp., Detroit, Mich., Department of the Army" (OSD Case No. 1828) GAO finding: The Government incurred unnecessary interest costs of $208,000 because the contractor improperly retained for long periods of time about $4,900,000 of progress payments made by the Government. GAO estimate of unnecessary costs: $208,000. Time period of GAO report: June 1956 to January 1962. DOD comments on GAO finding: The Department of the Army agrees that unnecessary interest costs were incurred because payments made by the Government were improperly retained for long periods of time. DOD comments on costs: The contractor has offered in settlement $162,000. However, in keeping with the GAO recommendation, the case has been referred to the Department of Justice for review by that agency. Case has been settled for $190,000. DOD corrective action: (a) The DOD does not agree with the GAO recommendation for a contractor certification, similar to that required under Public Law 87-653, for cost data submitted for determining whether refunds are due the Government. (b) The current ASPR requires the contractor to furnish quarterly statements of billings and costs. The contractor is also required to credit or make immediate refund to the Government of the amount of excess billings paid by the Government over actual costs incurred. Further, contracting officers are required to ensure compliance on a continuing basis, and to make prompt reviews of the quarterly statements submitted by contractors. In this connection. Army Procurement Circular 715-2-2, dated May 1, 1962, refers contracting officers to the requirements of ASPR 7-108 and 7-109 "Limitations on Payments" and to ASPR E-604.2 "Price Revision Contracts-Quarterly Statements", which set forth the requirements for such quarterly statements. In addition this area is also subject to reviews by the U.S. Army Audit Agency. Under these circumstances the instant case is not of itself sufficient to warrant an additional ASPR requirement on the subject of contractor certification of cost or pricing data. GAO Report B-125016, June 2, 1964 15. Title: "Unnecessary Costs to the Government for Unreasonable Delay by Collins Radio Co., Cedar Rapids, Iowa, in Releasing Special Tooling" (OSD Case No. 1868) GAO finding: The Government has borne unnecessary costs resulting from the contractor's failure to transfer Government-owned special tooling in a timely manner to a subsequent producer of radio receivers for the Army. Late receipt by the subsequent producer necessitated Government authorization to accelerate production in order to meet the contract completion date. GAO estimate of unnecessary costs: $418,000. Time period of GAO report: February 1959 to December 1961. DOD comments on GAO findings: The Army agrees with the GAO findings as representing breach of the contract and action is being taken to recoup the |