ater option purchases, the Navy relied on Wiegand's estimated future costs plus certified costs of prior units. (2) Previous to the subject subcontracts, connectors were purchased separately and furnished to the heater manufacturer. However, this procedure caused problems in fixing responsibility, as between the heater manufacturer and the contractor manufacturer for furnishing satisfactory heater connectors. Accordingly, it was determined to be in the best interests of the Government to eliminate this division of responsibility by buying heater connectors from one source; namely, Wiegand. DOD comments on costs: Because of Wiegand's predominately commercial business, it is difficult to determine actual costs experienced under specific subconcontracts. However, Navy audits were conducted following general Navy approaches for allowances of incurred costs and it has been determined that the total amount of profit considered to be unjustified is $99,931.68. DOD corrective action: The ASPR 3-807 has recently been revised to more accurately define "adequate competition." If competition is not considered adequate to justify the price of an item under procurement, then a cost analysis of the proposal shall be performed. This case is being prepared for referral to the Department of Justice for the purpose of effecting recovery. Navy postscript, May 14, 1965 Comprehensive Navy report has been furnished to the Department of Justice which is considering this and the three pump cases [B-146733, dated July 23, 1962 (OSD No. 1594); B-146760, dated December 26, 1962 (OSD No. 1941); and B-146733, dated February 6, 1964 (OSD No. 1787)], all involving the pricing of fixed-price subcontracts, made by Plant Apparatus Department (PAD) of Westinghouse. All these cases are under active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard thereto. GAO Report B-146846, February 19, 1964 35 Title: "Overpayments Made Under a Cost-Plus-A-Fixed-Fee Contract for the Procurement of Nuclear Submarine Components From Combustion Engineering, Inc., New York N.Y." (OSD Case No. 1786). GAO finding: The Navy paid Combustion $200,000 more than it was entitled to under the provisions of cost-plus-a-fixed-fee contract NOb's-72363, because the Navy paid fixed prices for certain components that should have been paid for on a cost-plus-a-fixed-fee basis. GAO estimate of unnecessary costs: $200,000. Time period of GAO report: GAO review conducted July 1962 to December 1962. The Navy contract was dated November 19, 1957, and amendments to the contract were executed on March 14, 1961. DOD comments on GAO finding: ASN (FM) by letter of August 8, 1963, to GAO advised that the original contract was on a cost-plus-a-fixed-fee basis with provisions for intracompany purchases to be paid on a firm-fixed price basis. Subsequent modification number five to the contract changed the payments to an all cost basis. The contractor claims modification number five was not all inclusive; therefore, certain billings were on a fixed basis. The Navy disagrees with this later interpretation and agrees with GAO that some overpayments have been made. DOD comments on costs: Navy audits have determined that excess payments amounted to $212,548.61. DOD corrective action: Payments due contractor in the amount of $212,548.61 have been suspended pending resolution of this entire matter. Navy postscript, May 14, 1965 The Navy is currently evaluating the contractor's claim, filed pursuant to Public Law 85-804. GAO Report B-146733, March 5, 1964 36. Title: "Overpricing of Steam Generators for Nuclear Aircraft Carrier, Department of the Navy" (OSD Case No. 1734). GAO findings: Generators costing over $4 million were purchased from Foster Wheeler Corp. by Westinghouse Electric Corp., as prime contractor, for use under Navy cost-plus-a-fixed-fee contract NObs-72205, without either the Navy or Westinghouse reviewing Foster Wheeler's cost estimate, which contained undisclosed contingency allowances and provisions for costs that were not likely to be incurred. GAO estimate of unnecessary costs: $489,600. Time period of GAO report: The GAO draft report was dated March 6, 1963. It reviewed a subcontract awarded by Westinghouse to Foster Wheeler on April 12, 1957. DOD comments on GAO findings: The Assistant Secretary of the Navy (I. & L.), by letter of May 10, 1953 on the draft report, discussed the basis of Navy's review and approval of the Foster Wheeler subcontract. The primary question raised by the report was whether Westinghouse and Navy were justified in relying on the price proposal submitted by Foster Wheeler without requiring an examination of the detailed cost data supporting the proposal. As indicated in the Navy letter, this depended on whether Westinghouse and the Navy exercised reasonable judgment in concluding that effective competition had been obtained. In response to this question, the letter noted that Navy had obtained competitive proposals from the four major companies capable of producing the types of steam generators required for nuclear propulsion. On the basis of an analysis of these competitive proposals and comparison of the prices with prices for comparable equipment, the Navy concluded that adequate competition had been obtained and that the proposal submitted by Foster Wheeler was reasonable. Accordingly, the Navy consented to the placing of the subcontract by Westinghouse. Since Navy determined that Westinghouse had complied with its contractual obligation to establish subcontract prices which were reasonable, Navy did not seek an adjustment from Westinghouse. GAO has, however, issued formal exceptions as a means of effecting recovery.1 DOD comments on costs: A recently completed Navy audit, reviewing the cost elements considered by GAO, takes issue with GAO's estimate of overstated costs and finds questionable costs of $18,000 instead of $489,600. DOD corrective action: The ASPR and Public Law 87-653, approved September 10, 1963, are clear in the requirement that cost or pricing data must be obtained from prime contractors and subcontractors in contracts exceeding $100,000, provided, however, that such data is not required in procurements in which there is adequate price competition. Since the determination of whether adequate price competition exists may at times be difficult, judgments will vary, as in the present case. The term “adequate price competition" was not defined in the statute. ASPR has now been revised to provide specific criteria to facilitate this determination. It will necessarily continue to require an exercise of judgment, but the possibility of differences of interpretation will be reduced by the application of standard criteria. Navy postscript, May 14, 1965 It is understood that the Department of Justice has expressed an interest in reviewing this case in connection with its study of the four other cases [B-146733, dated July 23, 1962 (OSD No. 1594); B-146760, dated December 26, 1962 (OSD No. 1641); B–146733, dated February 6, 1964 (OSD No. 1787); and B-146760, dated February 12, 1964 (OSD No. 1804)], the first three of which are known as the pump cases. All five cases involve the pricing of fixed-price subcontracts, made by the Plant Apparatus Department (PAD) of Westinghouse. The four cases are the subject of active consideration by the Department of Justice; and the Navy is in frequent communication with that Department in regard thereto. GAO Report B-146718, March 18, 1964 37. Title: "Overpricing of the Nuclear Frigate U.S.S. Bainbridge purchased from the Bethlehem Steel Co., Quincy, Mass., Department of the Navy" (OSD case No. 1794). GAO finding: The Navy contracted to pay Bethlehem about $5 million more for the construction of the U.S.S. Bainbridge than was warranted based on available cost data and circumstances existing at the time of negotiations, since Bethlehem included provisions for contingencies and cost overstatements in its statements of actual and estimated costs. 1 COMMITTEE NOTE.-The GAO Notice of Exception was withdrawn June 11, 1965. GAO estimate of unnecessary costs: $5 million. Time period of GAO report: The GAO draft report was dated June 28, 1963. The review covered the pricing in January 1962 of a Navy letter contract awarded to Bethlehem Steel Co. in 1958. The final report was dated March 18, 1964. DOD comments on GAO finding: DASD (procurement) by letter of June 1, 1964, enclosing a detailed analysis of the facts by the Navy, questioned the basic finding by GAO that savings of $5 million would have resulted if Navy had permitted the letter contract to stand unpriced until the completion of the job instead of converting it to a fixed-price contract. GAO's finding assumes that the costs of performance which the contractor actually incurred under the fixed-price contract would have been the same if the letter contract had remained in effect until the completion of the job. This assumption cannot be accepted in view of the strong incentive that a contractor has under a fixed-price contract to keep costs as low as possible and the complete lack of such incentive under a cost-reimbursement type contract (such as the letter contract in this case). In this particular case, the contractor would in fact have had a negative incentive; i.e., an incentive to stretch the contract and continue performance as long as the costs could be passed on to the Government under the cost-type contractual arrangement. Conversion to a fixed-price obviated this possibility. GAO recommended that efforts be made to obtain a price adjustment from the contractor on the ground that the contractor's cost estimates contained duplications and other overstatements. DOD noted, however, that the Navy relied on its own independent estimates rather than on cost representations made by the contractor. On the basis of these estimates, the Navy strongly questioned the contractor's price proposals. Agreement was eventually reached after protracted negotiations on a fixed-price of $87 million, or about $3.8 million below the price sought by the contractor. Under these circumstances, and since the contract was entered into on a fixed-price basis without provision for price adjustment, DOD concluded that no basis existed for seeking a price adjustment from the contractor. DOD comments on costs: GAO's estimate of unnecessary costs is based on assumptions, as noted above, with which DOD disagrees. DOD corrective action: No corrective action is required in this case. In general, with reference to the problems inherent in letter contracts, the policy of the Department of Defense is that the best way of avoiding these problems is to reduce the use of letter contracts to a minimum. Efforts to achieve this result have been greatly intensified during the past 2 years. As a result, the dollar value of letter contracts has been reduced from over $3 billion in December 1962 to $770 million in May 1964. At the same time, a program has been undertaken to convert existing letter contracts as promptly as possible to definitive contracts in order to avoid problems of the type involved in this report. Navy postscript, May 14, 1965 The pricing decision reached by the Navy in this case was made deliberately and only after thorough consideration of all the pertinent facts. The Navy does not believe that there was any overpricing; therefore, attempts to seek a price adjustment are unwarranted. GAO Report B-146718, December 11, 1964 37(a) Title: "Further Comment on Overpricing of the Nuclear Frigate U.S.S. Bainbridge Purchased From the Bethlehem Steel Co., Quincy, Mass." (OSD case No. 1794). GAO finding: GAO issued report B-146718 on March 18, 1964 which concluded that the Navy paid Bethlehem more for this ship than was warranted on the basis of available cost data and the circumstances existing at the time of negotiations. GAO therefore recommended that DOD take action to obtain a price adjustment. The DOD replied to this report on June 1, 1964 and stated that this was a fixed price contract, there was no misrepresentation of any sort and there is no contractual or other legal or equitable basis to seek a price adjustment. The GAO then issued the subject report which reiterates the GAO position taken in the earlier report; i.e., that the Navy should not have contracted with Bethlehem on a fixed-price basis when only 25 percent of the work remained to be completed but should have let the work be completed under the cost-type letter contract. Presumably, this would have resulted in less cost to the Government. The GAO again recommended that action be taken to obtain a price adjustment. GAO estimate of unnecessary costs: $5 million. DOD comments on GAO finding: There is no disagreement as to the basic facts. The disagreement arises as to whether the Navy was justified in acting as it did with respect to the facts. The issue is a pure matter of judgment and the Navy concluded that it was in the best interest of the Government to agree to a fixed-price contract for $87 million rather than permit the letter contract to run on to completion. The grounds for this decision were that the costs probably would have exceeded the $87 million had the letter contract been permitted to run out. DOD comments on costs: No overpricing occurred under the circumstances. DOD correctice action: The Navy decision on the Bainbridge was informed and deliberate and was made only after thorough consideration of the pertinent facts. This decision did not result from misrepresentation of any sort; accordingly, there is no basis in law or equity for the Government to attempt to set aside the resultant contract and seek a price adjustment. DOD believes strongly in using contract procedures that exploit the profit motive to the fullest as a primary means for inducing greater efficiency and lower costs. Current policies therefore encourage the use of fixed-price and other types of contracts that make effective use of this motivation while discouraging contracts in which this motivation is lacking. GAO Report B-146877, April 8, 1964 38 Title: "Improper Charges to Government Cost- and Incentive-type Contracts Held by Grumman Aircraft Engineering Corp., Bethpage, N.Y., Department of the Navy" (OSD case No. 1840). GAO finding: Grumman improperly charged Government cost- and incentivetype contracts with $188,000 in costs incurred under other contracts from 1958 through 1961. The other contracts were for research and development projects that were of primary interest to Grumman. GAO estimate of unnecessary costs: $188,000. Time period of GAO report: GAO's review was made in 1963 and was directed to the calendar years 1958 through 1961. DOD comments on GAO finding: The Assistant Secretary of Defense (Comptroller) by letter of November 27, 1963, to GAO stated "The Department of Defense and the Department of the Navy concur with GAO that the costs in question were erroneously charged to Government contracts and that the Armed Services Procurement Regulation prohibits reimbursement of such costs under cost-type contracts." DOD comments on costs: During the calendar years 1958 through 1961 Grumman improperly charged Government incentive- and cost-type contracts with losses on fixed-price contracts totaling about $188,000. Navy auditors questioned $93,000 of the losses charged to the incentive-type contracts and the contracts were reduced accordingly but at the time of the GAO review they had failed to question the $95,000 improperly charged to cost-type contracts. After the GAO brought the findings to the attention of Grumman, adjustments were made to eliminate the $95,000 of improper charges from the Government cost-type contracts. DOD corrective action: In accordance with GAO's recommendation the Deputy Assistant Secretary of Defense (accounting and audit) by memorandum dated October 16, 1963, requested the Chiefs of the Military Audit Agencies and the Audit Division, Defense Supply Agency to reemphasize to field auditors that whenever improper charges are detected on one contract or group of contracts, there is a need to review the appropriateness of similar charges to other contracts that might be affected. Navy postscript, May 14, 1965 The Navy Comptroller on December 10, 1963, provided further guidance to all auditor personnel. GAO Report B-146751, June 30, 1964 39. Title: "Overcharges to the Government for Change Orders Issued Under Navy Contracts Awarded to the Ingalls Shipbuilding Corp., a Division of Litton Industries, Inc., Pascagoula, Miss. (OSD case No. 1785). GAO finding: In the pricing of a group of change orders issued under shipbuilding contracts awarded to the Ingalls Shipbuilding Corp. by the Navy, the Government was overcharged because the contractor's estimates were excessive in relation to the most current and accurate cost data available prior to price negotiations, or did not allow sufficient credit to the Government for cancellation of items included in the price of the shipbuilding contracts, or contained mathematical errors. GAO estimate of unnecessary costs: A net of $160,400. Time period of GAO report: Fiscal year 1957 through 1963-GAO field work was performed intermittently during July 1962 to June 1963. DOD comments on GAO finding: It would not be appropriate to institute action to recover the alleged overcharges cited in the report which are based on GAO's disagreement with the method employed by the Navy in pricing change orders. DOD considers the Navy method to be the most sound and desirable from the Government's point of view and guidelines for the uniform application of this method are now being developed for inclusion in a DOD pricing manual. DOD comments on costs: It is considered that there is no basis for recovery from the contractor under all but 3 of the 16 cases examined in detail by the Navy. The Navy will seek recovery of $5,496 under one change order and equitable adjustments in the case of two others. The potential dollar recovery is not sufficient to warrant the expenditure of time and money that would be required for review of the remaining 1984 change orders included in the GAO report. DOD corrective action: An audit will be made of all future proposals for pricing changes involving a gross value of $50,000 or more per change. Navy postscript, May 14, 1965 Negotiations are pending with the contractor for recovery of $5,496. GAO Report B-146900, June 30, 1964 40. Title: "Overcharges for Aircraft Products Liability Insurance Under Various Contracts Awarded to Pratt & Whitney Aircraft Division of United Aircraft Corp., East Hartford, Conn." (OSD case No. 1837). GAO finding: During the years 1955 through 1961, Pratt & Whitney charged the Government $2,200,000 of the costs of providing aircraft products liability insurance on items sold commercially. Certain adjustments have been made to 1962 contracts and such charges will not be allowed under future contracts. GAO estimate of unnecessary costs: $2,200,000. Time period of GAO report: The GAO review was made during the period May through September 1963 and covered actions taken by Pratt & Whitney during the years 1955 through 1961. DOD comments on GAO findings: The Department of the Navy does not agree with the accounting principles or factual conclusions recited in the report. DOD comments on costs: The Department of the Navy does not disagree with GAO's estimate of this particular cost. However, there is not legal or equitable basis for recovery. The contracts have finally been settled. To reopen negotiations with respect to this particular item of overhead would expose all other items of overhead to reconsideration. This could be prejudicial to the Government's interest because of the substantial overall benefit to the Government believed to have accrued to the Government as a result of Pratt & Whitney's methods of cost distribution. DOD corrective action: The Department of the Navy took exception to $305,000 in costs for aircraft products liability insurance in the final pricing of contracts for 1962. Action was taken to insure that aircraft products liability insurance not ratably charged to the Government would be questioned in future advisory reports. |