APPENDIX 2C-NAVY CASES GAO Report B-114878, January 10, 1964 23. Title: "Review of Atomic Energy Commission and Department of the Navy Large Surface Ship Reactor A-1W Land-Based Prototype Project Constructed Under Contracts with Westinghouse Electric Corp." (OSD case No. 1601) GAO finding: The GAO reviewed costs being incurred in a contract with Westinghouse for the design, construction and testing of a land-based prototype nuclear powerplant located at AEC's National Reactor Testing Station in Idaho. This plant was a prototype of a nuclear propulsion plant suitable for installation in a large naval surface ship. The GAO found that the terms of the contracts were consistent with applicable legislation and that contract administration and management by Government personnel were vigorous and competently handled. GAO estimate of unnecessary costs: None. Time period of GAO report: 1955-60. DOD comments on GAO finding: DOD agreed with GAO's findings. Certain recommendations were made by GAO to the Atomic Energy Commission which were answered by the Atomic Energy Commission. No recommendations were directed to DOD. DOD comments on costs: None. DOD corrective action: No action necessary by DOD. GAO Report B-146733, July 23, 1962 24. Title: "Examination Into the Pricing of a Subcontract for Nuclear Components Awarded by the Plant Apparatus Department of Westinghouse Electric Corp., to Another Department of Westinghouse and Charged to the Navy Under a Cost-Plus-A-Fixed-Fee Contract" (OSD case No. 1594) GAO finding: Plant Apparatus Division, Westinghouse, under a Navy prime contract, awarded a subcontract for 16 A-2W pumps and casings to a manufacturing department of Westinghouse for $3.500,000 without obtaining information as to prior cost experience of the manufacturing department or its estimated cost of performance under the subcontract. A price $1,066,000 lower than that accepted would have covered costs and afforded a profit at the 10-percent rate that Westinghouse later represented to the Navy as being included in the price. The contractor had previously produced comparable items for the Government. Navy approved the award on the basis of a comparison with prices previously paid rather than attempting to obtain cost estimates or prior cost experience. GAO estimate of unnecessary costs: $1,066,000. Time period of GAO report: GAO draft report is dated December 19, 1961. It reviewed a subcontract dated November 5, 1957. DOD comments on GAO finding: Navy's consent to the subcontract was based on the fact that the unit price negotiated was consistent with the cost estimate for Long Beach pumps made by another division of Westinghouse (Westinghouse Bettis Atomic Power Division) as well as unit prices negotiated with General Electric for similar pumps. On this basis, and considering the more costly advanced technological and testing requirements of the A-2W pumps, as well as labor and material increases, the proposed price of $3.5 million was considered to be reasonable, subject, of course, to subsequent Navy audit determinations regarding allowability under the prime CPFF contract. However, had Westinghouse indicated anticipated costs as later revealed by GAO, the contracting officer would have used this as a basis for negotiating a lower price. DOD comments on costs: Concur with GAO. DOD corrective action: Navy advised the contractor that $1,305,839 has been disallowed. The contractor has appealed. This case has been referred to the Justice Department by the GAO. Since the award in question, ASPR has been amplified in the area of cost and price analysis, submission of current and complete cost and pricing data, and execution of certifications (ASPR 3-807), as well as in the area of review of subcontracts (ASPR 3–903.2 and 3–903.4 (a)). Navy postscript, May 14, 1965 This is the first of three coolant pump cases for nuclear reactors involving Westinghouse Electric Corp., B-146733, dated July 23, 1962 (OSD Case No. 1594). Navy cost-plus-fixed-fee prime contract NObs-72205, with Westinghouse Electric Corp., dated October 29, 1956; as amended December 3, 1957, for components for A-2W reactor compartment of nuclear carrier, U.S.S. Enterprise. Telegraphic award of fixed-price subcontract to Atomic Equipment Division (AED) of Westinghouse for 16 main coolant pumps for $3.5 million, dated November 3, 1957. Fixed-price subcontract finalizing telegraphic award (56-P-3210), dated January 9, 1958. Suspension by Navy of costs in the amount of $1,113,936 on basis of advance knowledge of contents of GAO draft report, dated December 18, 1961. GAO draft report alleging overpricing of $1,066,000 on fixed-price subcontract. dated December 19, 1961. Westinghouse reply to GAO draft report, dated February 22, 1962. Navy reply to GAO draft report advising that Navy audit of this and other AED subcontracts would be made February 28, 1962. GAO final report B-146733, dated July 23, 1962. Navy suspensions of costs adjusted to $1,295,309 July 25, 1962. DOD statement for the Bureau of the Budget, forwarded September 17, 1962. Copies of DOD statement for the Bureau of the Budget, forwarded by Navy to Chairman Dawson of the House Government Operations Committee, pursuant to his request, and to GAO September 19, 1962. Comprehensive Navy report to the Department of Justice, covering this and the second pump case, B-146760, dated December 26, 1962, forwarded December 7, 1963. Conversion of suspension of costs to disallowance of costs by Navy, totaling $1,305,839 November 30, 1964. Administrative appeal by Westinghouse from Navy disallowance of costs. transmitting comprehensive memorandum previously furnished by Westinghouse to the Department of Justice, coupled with appeal from various similar disallowances of cost related to the second pump case B-146760, dated December 26, 1962, and containing advice that a further memorandum relative to that case would be submitted, dated January 28, 1965. This and the other two pump cases, as well as B-146760, dated February 12, 1964, all involve subcontracts placed by the Plant Apparatus Department (PAD) of Westinghouse. They are all under active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard to them. GAO Report B-146760, December 26, 1962 25. Title: "Examination into the Pricing of Subcontracts for Nuclear Submarine Components Awarded by the Plant Apparatus Department of Westinghouse Electric Corp., Pittsburgh, Pa., to Another Department of Westinghouse and charged to the Department of the Navy under Cost-Plus-A-Fixed-Fee Contracts" (OSD case No. 1641) GAO finding: The plant apparatus division of Westinghouse awarded subcontracts for 84 pumps and 72 casings to a manufacturing department of Westinghouse for $8,700,000 without obtaining an estimated cost of performance or information on costs incurred in prior production. Cost estimates of the manufac turing department before award indicated that prices $2,241,000 lower would have covered costs and a 10 percent profit. The Navy approved the award without requesting cost estimates or prior cost data. GAO estimate of unnecessary costs: $2,241,000. Time period of GAO report: The draft report was dated June 4, 1962. It re viewed two subcontracts placed on March 7, 1958 and April 6, 1959. DOD comments on GAÕ finding: Navy considered that competition with three potential sources and a comparison with prices paid on three previous procurements was adequate to assure the reasonableness of the price. In addition, the Navy did obtain a breakdown of costs from the contractor which substantiated the previous negotiated price. DOD comments on costs: Concur with GAO. DOD corrective action: After audit, the Navy determined that the excess cost incurred by the Government is $2,986,669, and the contractor has been advised - that this amount has been disallowed. The contractor has appealed. This case has been referred to the Justice Department by the GAO. Since the time of these procurements in 1958 and 1959, DOD procedures for review and approval of • subcontracts have been greatly strengthened. Further, pursuant to Public Law : 87-653 and the implementing provisions of ASPR, significant policy changes have been made providing for the use of detailed cost and pricing data in the negotiaItion of both prime contracts and subcontracts in which there is inadequate competition to assure reasonable prices. Navy postscript, May 14, 1965 This is the second of three coolant pump cases for nuclear reactors involving Westinghouse Electric Corp., B-146760, dated December 26, 1962 (OSD case No. 1641). Navy cost-plus-fixed-fee prime contracts with Westinghouse Electric Corp. for components for S5W reactor compartment of nuclear submarines: NObs 72379, dated January 20, 1958. NObs 77026, dated October 1, 1958. Fixed-price subcontracts for 84 nuclear pumps and 72 casings with Westinghouse atomic equipment department (AED) in the total amount of $8.7 million (56-PR-6022-P, 56-PR-6502-P, and change notice No. 2 to latter)--between March 1958 and April 1959. GAO draft report alleging overcharges of $2,241,000 on above fixed price subcontracts, June 4, 1962. Westinghouse reply to GAO draft report, July 10, 1962. Navy suspension of costs under the above contracts in varying amounts totaling $2,930,195, July 25, 1962. Navy reply to GAO draft report, August 4, 1962. Final GAO report stating that in view of Navy withholding no formal exceptions would be issued against the disbursing officer's accounts, but requesting advice prior to release of any of the moneys withheld, and recommending Navy cooperation with Department of Justice to obtain proper recovery, December 26, 1962. DOD statement for the Bureau of the Budget, advising of general Navy concurrence in GAO recommendations, with copy to Representative Dawson, Chairman of the House Government Operations Committee, pursuant to his request, forwarded February 19, 1962. Copy of DOD statement to the Bureau of the Budget forwarded by Navy to the Comptroller General, February 20, 1963. Comprehensive Navy report to the Department of Justice covering this and the first pump case, B-146733 (dated July 23, 1962), December 7, 1963. Conversion of suspension of costs to disallowance of costs by Navy, under the various contracts, in amounts totaling $2,986,669, November 30, 1964. Administrative appeal by Westinghouse from Navy disallowance of costs, transmitting comprehensive memorandum previously furnished by Westinghouse to the Department of Justice, which is coupled with appeal on first pump case, B-146733 (dated July 23, 1962) dated January 28, 1965. Submission of further Westinghouse comprehensive appeal memorandum, dated April 5, 1965, which had also previously been submitted to the Department of Justice and refers to a further memorandum relative to the third pump case, B-146733 (dated February 6, 1964), April 13, 1965. (This latter memorandum has not been furnished to the Navy Department.) This and the other two pump cases, as well as B-146760, dated February 12, 1964, all involve subcontracts placed by the plant apparatus department (PAD) of Westinghouse. They are all under active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard to them. 4S-132-65- -49 GAO Report B-118763, June 28, 1963 26. Title: "Failure of the Department of the Navy to Fully Recover Excessive Administrative Cost Allowances Included in Fixed Prices negotiated with Brown-Raymond-Walsh (a joint venture) under contract NOy-83333 for the Spanish base construction program” (OSD Case No. 1315-B) and supplemental report October 21, 1963 (OSD case No. 1315-C). GAO findings: (1315-B) The fixed price negotiated in conversion of a portion of contract NOy-83333 from cost plus a fixed fee to fixed price included administrative cost allowances of $6,700,000 in excess of a reasonable estimate. We reported this to Congress in 1960 (B-118763, Dec. 30, 1960) and the Navy made recovery of $3 million. After completion of the contract $3,700,000 was still outstanding. (1315-C) Negotiated price included administrative expense allowance of $6,700,000 in excess of a reasonable estimate of costs to be incurred. Navy felt it had recovered $5,100,000 of the overpayments through negotiation of lower administrative expense allowances in prices for additional work. Investigation showed recovery of only $3 million. GAO estimate of unnecessary costs: $6,700,000. (Since was was reduced to $3 million according to GAO, the GAO estimate of unnecessary costs should be shown as $3,700,000.) Time period of GAO report: The GAO review was conducted in the latter part of 1958. The review covered the time period of the CPFF construction contract from January 1954 to June 1958. DOD comments on GAO findings: ASN (I. & L.) by letter of January 9, 1963, to GAO stated that since completion of the contract strenuous but unsuccessful efforts had been made to effect further recovery (of alleged overpayments) from the contractor. DASD (procurement) by letter of August 30, 1963, to GAO advised that there was no legal basis for compelling any further repayment by the contractor and that any action by OSD to effect recovery by other than legal means would be inappropriate. The letter further stated that the matter would receive special separate attention by the Renegotiation Board. DOD comments on costs: The first and second draft reports submitted by GAO to Navy on December 24, 1958, and February 13, 1959, found an overpayment of $3 million. The third draft in November 1959 stated that the conversion could add $9.4 million to the costs of completion of construction. However, the report to Congress in December 1960 (OSD case No. 1315-A) used a figure of $6.7 million. The Navy contention, which is concurred in by OSD, is that the GAO's basic premise, that contractor costs under a fixed-price contract should be the same as contractor costs under the CPFF contract, is false; and further that the GAO used incorrect overhead percentages in computing administrative costs and expenses. The Navy, which has had many years experience in administering as well as closing and converting CPFF contracts, contends that the GAO has applied certain equipment writeoff costs and labor costs to "overhead" when they should have been applied in the converted contract, to "direct costs,' thereby calculating overhead costs at 38.4 percent as opposed to the Navy's computation of 29.9 percent. The Navy advised the House Subcommittee for Special Investigations, Committee on Armed Services, on April 28, 1961, that it had recovered $5.1 million of the alleged $6.7 million excessive administrative costs by savings effected by addition of work since conversion with little or no administrative cost allowance, and expected to recover more than the $6.7 million before the contract was completed. GAO using the higher overhead rate credited Navy with having recovered $3 million, in lieu of $5.1 million, which would, according to GAO's computations, leave a balance of $3.7 million still to be recovered. No additional costs were recovered by Navy prior to the closing of the converted contract. DOD corrective action: The analysis in the GAO third draft report of Novem ber 1959 had the effect of reducing the amount of excessive administrative costs, alleged by GAO, from $9.4 to $6.7 million before the initial report was made to Congress. Further recoveries were made to the maximum extent possible by Navy which caused GAO to report a reduction of $3 million, in lieu of the Navy's computed $5.1 million, in excessive administrative costs. The Renegotiation Board advises that no determination on this case has been made. Navy postscript, May 14, 1965 Since there are no contractual nor other legal rights to further recovery, and since the Navy has exhausted all reasonable efforts to elicit a voluntary refund, any possible further recovery must be effected pursuant to Renegotiation Board proceedings. GAO Report B-146733, September 20, 1963 27. Title: "Overcharges by Westinghouse Electric Corp. for Propulsion Machinery for the Aircraft Carrier U.S.S. Enterprise, Department of the Navy" (OSD case No. 1688) GAO finding: Price proposed by the contractor and accepted by the Navy included unwarranted provision for contingencies. GAO estimate of unnecessary costs: $1,353,440. Time period of GAO report: The GAO draft report is dated October 10, 1962. It reviewed a contract awarded on February 27, 1957. DOD comments on GAO findings: On December 11, 1962, the Under Secretary of the Navy replied to the GAO draft report. On November 27, 1963, DASD (Procurement) replied to GAO's final report. The Navy negotiated for propulsion machinery for the nuclear carrier, Enter prise, with the only firms considered capable of performing the job, General Elec tric and Westinghouse. Both companies submitted proposals and Westinghouse was selected for further negotiations on the basis of its lower price, better technical proposal and offer to meet an earlier delivery date. Westinghouse's price was considered reasonable on the basis of this competition and in the light of the Navy's comparison of the price with its own independent estimate and the price of comparable equipment. The specific issue raised in this report was whether Westinghouse included "contingencies" in its estimate which it should have disclosed to the Navy during the course of the negotiations. Westinghouse strongly denied that its estimate included contingencies and stated that the amounts in question reflected an increase over an earlier estimate which had been too low and resulted in a loss. The Navy was of the opinion that Westinghouse had not presented adequate facts to refute GAO's finding, but the matter is still in issue. DOD comments on costs: No independent estimate made. DOD corrective action: The matter has been referred to the Department of Justice for further investigation and determination of the Government's legal position. Since the time that this contract was awarded (1957) extensive changes have been made in defense procurement procedures to insure that reliable cost and pricing data is made available by contractors and thoroughly considered by contracting personnel before prices are established in noncompetitive procurement. ASPR requires the certification of data submitted by contractors in support of pricing proposals in noncompetitive procurement. ASPR further provides, however, that such certifications shall not be considered by contracting officials as a substitute for analysis of the contractor's proposals and supporting data. These safeguards, together with Public Law 87-653, will help minimize pricing problems resulting from incomplete or inaccurate cost or pricing data. Navy postscript, May 14, 1965 This case involves inclusion of undisclosed contingency in fixed-price contract with Westinghouse Electric Corp., B-146733, dated September 20, 1963 (OSD case No. 1688). Navy fixed-price contract NObs-73503 with Westinghouse Electric Corp. in amount of $8.17 million for production of propulsion machinery and associated equipment for nuclear carrier U.S.S. Enterprise, dated February 27, 1957. GAO draft report alleging unwarranted provision for contingency in above fixed-price contract, with transmittal letter suggesting that Navy take no action to effect adjustment or recovery or to amend the contract without coordinating such action with the Department of Justice, dated October 10, 1962. Meeting of Westinghouse representatives, separately with Navy and GAO, making presentations urging that certain aspects of the procurement had not been considered by GAO, November 14, 1962. Navy reply to GAO draft report advising that it would consider further a new presentation of Westinghouse position, as submitted in writing; and confirming |