$418,000 as well as an additional $46,200 for rental of the tooling during its unauthorized use. DOD comments on costs: The Army agrees that unnecessary costs amounting to $464,200, were incurred (The Army determined that in addition to the $418,000, $46,200 is due the Government for Collins' unauthorized use of the equipment). DOD corrective action: The Army, in consonance with the GAO recommendations has (a) taken disciplinary action against the contracting officer concerned and (b) taken action to recover the unnecessary costs from Collins by withholding $464,500 due Collins under other contracts. GAO Report B-146883, June 16, 1964 16. Title: "Unnecessary Costs Incurred for M-61 Machine Gun Components Under Contracts With General Electric Co., Burlington, Vt., Department of the Army" (OSD Case No. 1849) GAO finding: The Government incurred unnecessary costs because the contractor (1) failed to disclose information during negotiations that a new manufacturing process had been adopted which significantly reduced the cost of manufacturing a part, and (2) improperly included in the contract price an amount for items which were furnished by the Government. GAO Estimate of unnecessary costs: $74,500. Time period of GAO Report: November 1959-June 1963. DOD comments on GAO finding: (a) Army investigation has not disclosed any evidence that the contractor at any time made any misrepresentations, withheld any data, or provided any misleading information concerning the new manufacturing process. General Electric on its own initiative had worked with the subcontractor to make the cheaper forgings acceptable. This constituted a reasonable exercise of judgment which, in retrospect, turned out to the advantage of the contractor. (b) The Army agrees that Government-furnished property was improperly included in the contract price. DOD comments on costs: The Army agrees that unnecessary costs were incurred, but holds the amount to be $8,419.45 for which recovery has been effected. DOD corrective action: (a) The GAO is recommending that the Army effect an appropriate recovery from the General Electric Co. (b) The Army has negotiated with General Electric and has effected an appropriate price adjustment of $8,419.45. (c) The GAO recognizes that since award of this contract, Public Law 87-653 requires contractors to agree to an adjustment in the contract price if it is determined that cost information is inaccurate, incomplete or noncurrent. The current ASPR implementation of this law is intended to preclude a recurrence of the problem area reported by the GAO. GAO Report B--146873, June 22, 1964 17. Title: "Overpricing of Contracts DA-20-089-ORD-8406 and DA-36-034– ORD-897 with Chrysler Corp., Newark, Del., by the Department of the Army" (OSD Case No. 1815) GAO finding: The Government incurred excessive costs because an adjustment to the tentative contract prices for changes in the cost of certain components was not based on the cost of the components that had been included in the price originally. According to the GAO, the excessive costs were incurred because the contractor, the contracting officer and the U.S. Army Audit Agency failed to correctly identify the costs of the components considered in negotiating the tentative contract prices. GAO estimate of unnecessary cost: $4,780,000. Time period of GAO report: 1950-59. DOD comments on GÃO findings: (a) The Army was aware of this matter before the GAO made its review. Negotiations, held in 1958, attendant to a partial termination of the contract, led to the withholding of $3.6 million from payments due the contractor pursuant to the termination clause. (b) The U.S. Army Audit Agency report of total material costs, as well as subsequent audit reports dealing with credit adjustments was used as a basis for negotiation. DOD comments on costs: The Army agrees that unnecessary costs were incurred. DOD corrective action: The GAO made no recommendations in view of the fact that the Army negotiated a settlement of $4.5 million. GAO Report B-146793, August 31, 1964 18. Title: "Cost of Welding Equipment Improperly Included in Price Redetermination Proposal Under Contract With Ford Motor Co., Dearborn, Mich., Department of the Army" (OSD Case No. 1845) GAO finding: The Government was about to incur unnecessary costs of $233,000, because Ford included the cost of contractor-owned equipment in its price redetermination proposal. Although the Government and no need for the equipment, the contracting officer accepted it and had it sent to a Government warehouse thereby allowing the contractor to charge the Government for the equipment. GAO estimate of unnecessary costs: $233,000. Time period of GAO report: June 1959-June 1964. DOD comments on GAO finding: The Army agrees with the factual content of the report and acknowledges that through inadvertence, the Procurement Officer accepted the welding equipment in question. DOD comments on costs: (a) The Army agrees that unnecessary costs were incurred, and the charge of $232,864 was deleted from the final contract price. (b) In commenting on this report it is pertinent to note that the Army has a system of procedures and controls that would have detected and corrected the initial error of shipping the welding equipment to Government custody. DOD corrective action: (a) The Army has adequate controls in existence which would have detected the error, however, it acknowledges that the GAO did accelerate the date at which the error was detected. Prior to execution of the final contract settlement, reviews conducted by procurement, audit and legal personnel would have revealed the omission. (b) Although mitigating factors were present, disciplinary action was taken against the contracting officer. GAO Report B-146884, August 31, 1964 19. Title: "Unreasonable Charges 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" (OSD Case No. 1821) GAO finding: The Government has been charged unreasonable costs because the institute allocated to Government contracts depreciation on buildings that the institute received at no cost. These buildings were transferred by the Government for a sum of $1 to Standard University under the provisions of the Lanham Act, and then transferred by the university to the institute without charge. GAO estimate of unnecessary costs: $246,923. Time period of GAO report: 1955-1961. DOD comments on GAO finding: The GAO contention that the Army did not consider the reasonableness of the depreciation charges is not concurred in. Reviews conducted by the United States Army Audit Agency resulted in the determination that the institute's accounting treatment of the land and buildings was satisfactory and that there was no basis for objecting to the Government's bearing its allocable share of the depreciation charges. DOD comments on costs: The GAO is being requested to withdraw a notice of exception issued against the disbursing officer for the amount in question because the costs (1) were considered by the U.S. Army Audit Agency to be reasonable and (2) were certified to as allowable costs. Determination of reasonableness is inherent in such actions. (On February 10, 1965, the cognizant GAO representatives informed the Army that the notice of exception is being withdrawn). DOD corrective action: (a) As a result of the DOD examination of this matter it is found that arguments can be made for and against the propriety of charg ing the Governmeint depreciation on these buildings. Although in retrospect. DOD feels that such depreciation charges should have been avoided, it is not believed, in the light of all the circumstances, that the Army's determination was unreasonable or that it resulted in an inequitable gain by the institute. (b) ASPR 15-205.9 was revised by change 10, April 1, 1965, to provide that no depreciation expense shall be allowed on property acquired from the Govern ment at no cost. This provision properly administered will prevent the allowability of such depreciation charges in the future. GAO Report B-146956, November 25, 1964 20. Title: "Excessive Prices for Power Pack Assemblies Purchased from Sparton Corp., Jackson, Mich., by Various Prime Contractors" (OSD Case No. 2026) GAO finding: (a) The Government incurred unnecessary costs because Sparton, as sole source supplier for power packs, proposed to Government prime contractors prices that were based on substantially higher cost estimates than its experienced production costs warranted at the time of the price proposals. (b) The ASPR does not specifically provide for the submission of cost data and related pricing certifications for contracts or contract modifications in amounts of less than $100,000 even though a contractor is expected to do a considerable volume of business with the Government over a period of time. GAO estimate of unnecessary costs: $115,600. Time period of GAO report: September 1960-October 1963. DOD comments on GAO finding: The Army concurs in the GAO findings that there has been an excessive charge made to the Government on the purchase of various combat vehicles from several prime contractors as a result of the pricing policies of Sparton Corp. Although the cognizant Government audit agency substantially concurs with the GAO both as to the amount of and the basis for determining the excess costs, no legal remedy exists that would permit recovery or recoupment from Sparton Corp. DOD comments on costs: The Army agrees that unnecessary costs were incurred. DOD corrective action: (a) Attempts are being made to obtain a voluntary refund from each of the prime contractors involved. (b) The DOD is taking appropriate steps to cover procurements, such as illustrated in the GAO report, in pricing procedures throughout the Department. Defense Procurement Circular No. 22, dated January 29, 1965, relates this case to the requirements of ASPR 3-807.2 "Requirement for Price or Cost Analysis". In highlighting this case DPC No. 22, states, among other things, “* • ASPR 3-807.2 provides that, in certain circumstances, contracting officers should require contractors to submit certified cost or pricing data in respect to negotiated contracts even though they are not expected to exceed $100,000 * * GAO Report B-146829, January 6, 1965 21. Title: "Procurement Defective Fuel Servicing Semitrailers and School Buses, Department of the Army" (OSD cases No. 1996 and No. 1998) GAO finding: The Government will incur unnecessary costs of at least $167,000 for repairs because the Army accepted defective fuel servicing semitrailers and school buses costing about $4.75 million. (a) Semitrailers: Although the semitrailers, produced by Great Dane Trailers, Inc., had defects such as inadequate interior pipe coating, mislocated valves, and improperly fabricated and assembled piping systems, they were accepted by the Army. In addition, the Army Tank-Automotive Center failed to furnish the inspection activity copies of test reports from Aberdeen Proving Ground, Md., that indicated defects and a need for improved manufacturing quality until substantially all the tankers had been delivered to the Government. (b) Schoolbuses: The schoolbuses, produced under a contract awarded to the Ford Motor Co., did not meet contract requirements because of defects such as insufficient clearance between the steering wheel and the driver's seat, a too high windshield and dashboard cowling that obstructed the driver's vision, and congestion in the area of the brake and clutch pedals. These defects arose when Superior Coach Corp., the manufacturer of the bus bodies, raised its commercial body to meet the military specification for ground clearance. Subsequent to the award of the contract, but prior to the inspection of the pilot model. the military specification for ground clearance was changed. This change would have eliminated the need for Superior Coach to modify its commercial body. Had the Army, Ford, and Superior recognized the solution and incorporated the change into the contract, this situation would have been avoided. Furthermore, the Army inspectors failed to make an adequate inspection of the buses before accepting them. GAO estimate of unnecessary costs: $167,000. Time period of GAO report: April 1962 to January 1964. DOD comments on GAO findings: (a) Semitrailers: The Army was aware of the problems connected with the semitrailers before the matter was reported by the GAO. As early as May 1963, the Army recognized the deficiencies and initiated appropriate action which the GAO makes reference to in its report. (b) Schoolbuses: The Army concurs in the GAO findings except that at the time that the specification as to ground clearance was revised, it was not obvious that the revision should have been incorporated into the contract in question. At that time-August 1962-there was no difference between the frame height of the Ford model B500 bus chassis used on buses previously procured and the frame height of the chassis on the Ford buses procured under the new contract. Since the chassis were identical in height, and no previous problems had been reported, there was no apparent need for contract modification. DOD comments on costs: The Army agrees that the GAO estimate of unnecessary costs is appropriate. DOD corrective action (a) Semitrailers: (1) Disciplinary action was taken against certain inspection personnel involved. Currently, an investigation is in process to determine whether additional disciplinary action is warranted. The expected completion date is May 15, 1965. (2) Although the Army has indicated that there is no tenable basis to seek recourse (appendix III of the GAO report) it will continue to explore the resources available to recover any unnecessary costs involved. (b) Schoolbuses: (1) Disciplinary measures were taken against the Army inspectors concerned and provisions made for improved inspection control. (2) In consonance with the GAO recommendation to seek a price adjustment from Ford, the Army will determine the exact cost involved and initiate action for recovery. NOTE. Under date of April 5, 1965, Ford protested to the Deputy Assistant Secretary of the Army (Logistics) in connection with Army actions to recover. Ford's protest is currently being reviewed to determine the courses of action available to the Army in this regard. GAO Report B-146901, August 24, 1964 22. Title: "Procurement of Unneeded Spare Assemblies Resulting From Negligence of the Raytheon Co., Lexington, Mass." (OSD case No. 1896) GAO finding: The Army unnecessarily procured from Raytheon about $1.1 million worth of spare parts for HAWK missile field maintenance test equipment which had been replaced. The unnecessary procurement was a result of Raytheon's submission to the Army of superseded spare parts lists when Raytheon had knowledge at the time that (1) the items on the lists were for nontactical equipment that had been superseded by new tactical equipment already on quantity procurement and (2) the spare parts lists would be used by the Army for the purpose of determining procurement needs. GAO estimate of unnecessary costs: $1,077,000. Time period of GAO reports: 1959 and 1960. DOD comments on GAO finding: The Army agrees that the subject spare parts were unnecessary. The Army does not agree that Raytheon was at fault. It is the Army position that the unnecessary procurement resulted primarily from the decision of the Killian Capabilities Panel to the President to accelerate the deployment of the HAWK missile system by 1 year. This acceleration precluded satisfaction evaluation of provisioning data which inadvertently resulted in the unnecessary procurement of these spare parts. DOD comments on costs: The Army agrees with GAO. DOD corrective action: Procedures to prevent the procurement of unneeded spare parts in similar circumstances have been strengthened in the years since this procurement. In order to stress the need for careful implementation of these procedures, the facts of this case will be brought to the attention of cognizant personnel in the military departments and DSA. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE ARMY GAO findings: (a) According to the GAO the procurement of 10 assemblies by the Department of the Army from the Raytheon Co. disclosed that about $1.1 million worth of spare parts had been procured for HAWK missile field maintenance test equipment which had been replaced. These spare parts were procured under cost-reimbursable contracts whereby Raytheon had undertaken broad responsibilities for development and production of the HAWK missile system, including the requirement to furnish the Army spare parts lists for this system. The GAO alleges that the unnecessary procurement was a result of Raytheon's submission to the Army of superseded spare parts lists when Raytheon had knowledge that (1) the items on the lists were for nontactical equipment that had been superseded by new tactical equipment already on quantity procurement and (2) the spare parts lists would be used by the Army for the purpose of determining procurement needs. Further that Raytheon failed to question the validity of the Army's orders even though Raytheon had knowledge that the parts had been superseded and that the orders were based on spare parts lists which were outdated. (b) The GAO considered the costs to be unreasonable under the applicable contracts and requested the Secretary of Defense to withhold $1,077,000 from current payments due to Raytheon under Defense contracts. GAO estimate of unnecessary cost: Approximately $1,100,000. DOD comments on GAO findings: The Army agrees that there was unneeded procurement. However, the Army does not agree with the implications in the report that this was attributable to a reckless disregard or gross neglect by Raytheon's management and personnel in the discharge of their contractual obligations and responsibilities. It is the Army position that the unnecessary procurement was due to unforeseen circumstances occasioned by the need to telescope and accelerate work on the design and fabrication of HAWK missile hardware because of a paramount requirement to deploy the missile system for field use at the expense of other considerations. In order to meet the accelerated schedule, constant pressure was maintained on the contractor by the Boston Procurement District and the Army Rocket and Guided Missile Agency. It was recognized, however, that it would be an extremely difficult undertaking for the contractor to produce the hardware and schedule the changes, and, in addition, furnish the detailed documentation within the normal time frame. Accordingly, Raytheon was directed to concentrate its efforts initially on the production effort, even though this meant delaying the documentation. It was not foreseen that such delays might so obstruct the orderly processes of internal communication and coordination within Army procurement and supply channels as to accidentally result in a procurement of unneeded supply parts. In view of the foregoing, the Army considers that any withholding of funds from the contractor would not be justified. DOD comments on costs: The Army agrees that the additional costs reported by the GAO were incurred. However, as stated above, this was caused by the decision to accelerate the deployment of the HAWK missile system. DOD corrective action: This case has been brought to the attention of cognizant officials in the military departments in order to stress the need for adequate procedures to prevent procurement of unneeded parts under similar circumstances. Although such procedures have, in fact, been strengthened, reference to this case will emphasize the need for continued management attention to this problem. |