Navy postscript, May 14, 1965 Agreements reached by a tri-service negotiation group and the contractor on April 7, 1965, resulted in deletion from overhead expenses applicable to costs reimbursement contracts, of those amounts included for product liability insurance covering the years 1962 and 1963. GAO Report B-152600, July 31, 1964 41. Title: "Overpricing of Survival Kit Equipment Furnished by Rocket Jet Engineering Corp., Glendale, Calif., to Scott Aviation Corp., Lancaster, N.Y., for the F-4 Aircraft Program” (OSD case No. 1941). GAO finding: Scott Aviation repeatedly accepted subcontract prices proposed by Rocket Jet on sole-source procurements of survial kit components for F4 aircraft without benefit of cost data or other evidence of the reasonableness of the prices. In addition, in awarding a subcontract to Rocket Jet in 1963. Scott Aviation violated Public Law 87-653, as well as the terms of the contract it held by failing not only to obtain pricing certification, but also to include a contract provision giving the Government the right to recover any overpricing. GAO estimate of unnecessary costs: $317,000. Time period of GAO report: 1961 through 1963. DOD comments on GAO finding: DOD agrees with GAO finding. DOD comments on costs: DOD agrees with GAO estimate. DOD corrective action: Auditor General of the Navy has taken action to disallow part of the excess costs. As a consequence, the prime contractor has not made payment to Scott. The Navy has taken appropriate steps to recover the balance of the excess costs without prejudicing any other rights that the Government may have. DOD has developed policies and procedures which are now in effect to ensure satisfactory subcontract pricing by review and evaluation of contractors' purchasing systems and by the review of individual subcontracts. Navy postscript, May 14, 1965 The Department of Justice is currently considering a proposal for settlement. GAO Report B-132998, August 4, 1964 42. Title: "Unnecessary Costs Incurred in the Procurement of Ground Speed and Distance Indicators From Douglas Aircraft Co., Inc." (OSD case No. 1892). GAO finding: The GAO concluded that the Navy incurred unnecessary costs of approximately $200,000 as a result of the premature procurement of a production quantity of an aircraft ground speed and distance indicator for a loft bomb release computer system before an acceptable indicator was developed and before any assurance existed that an acceptable indicator could be developed. GAO estimate of unnecessary costs: $200,000. Time period of GAO report: GAO review: March through July 1963. Time period of DOD actions reviewed: mid-1957 through mid-1959. DOD comments on GAO findings: It is considered that the Navy decision to procure the indicators was not unreasonable or unwarranted in the circumstances. When the decision was made, it was recognized that technical problems would likely appear, but the technical principles involved were within the state of the art. Navy personnel concerned judged that the effort to provide the indicators in production quantities for operational use was reasonably likely of success and warranted by the operational advantages to be gained. The timing of placement of purchase orders for the indicators, considering governing contractual aircraft delivery schedules, are not considered imprudent or improper. Navy investigation indicates that decision to terminate the indicator effort and resort to a different device was affected by considerations additional to difficulties in achieving satisfactory quantity production of the indicators. DOD comments on costs: In view of the circumstances as outlined in paragraph 5 above, the computer effort and its attendant costs were not unwarranted expenditures. DOD corrective action: Consideration is being given to a proposed change to ASPR 3-903.4 to emphasize the need for the contracting officer to assure that the proposed purchase is in accordance with prudent business practices, after verifying the technical justification of the particular supplies, equipment or services. In addition, directives regarding Government approval of subcontracts now provide detailed guidance to Navy contracting officers to protect the interest of the Government. Navy postscript, May 14, 1965 An ASPR Subcommittee has studied and endorsed the recommendation that ASPR 3-903.4 be supplemented to require contracting officers to assure the technical justification for selection of particular supplies, equipment, or services. GAO Report B-146932, October 1, 1964 43. Title: "Unnecessary Costs Incurred in the Procurement of Defective Torpedo Tubes From the Youngstown Welding and Engineering Company, Department of the Navy" (OSD case No. 1952). GAO findings: The Navy incurred unnecessary costs in the purchase of torpedo tubes from the Youngstown Welding & Engineering Co. because the contractor produced defective tubes; the defects were not detected by Navy inspection and the Navy failed to properly protect this material during removal and shipment back to the manufacturer's plant for rework. Navy made specification changes to overcome the contractor's defective welds. GAO estimate of unnecessary costs: $214,500. Time period of GAO report: GAO field work was completed in October 1963 and covered the NSC Oakland firm fixed-price contract dated June 21, 1961, and subsequent actions. DOD comment on GAO findings: Navy agreed with the findings and recommendations except those alleging that specification changes were issued to overcome the contractor's defective welds. DOD comments on costs: The Navy agreed with the GAO estimate of unnecessary costs except that portion of $129,000 attributable to Navy-desired changes in specifications. These changes, from monel-clad to solid monel material were made to correct known fleet operational defects. DOD corrective action: The Navy is pursuing action to effect appropriate recovery from the contractor. The report has been brought to the attention of general inspection offices to illustrate adverse consequences of not following prescribed inspection procedures. Navy postscript, May 14, 1965 The Navy directed, on April 26, 1965, the accomplishment of an internal reappraisal of the technical, legal and economic issues in this case, with emphasis upon effecting appropriate recovery of any costs incurred for which the contractor should be held liable. GAO Report B-146946, October 2, 1964 44. Title: "Unnecessary Costs Incurred in the Purchase of Automatic Flight Control Systems for A-4 Series Aircraft, Department of the Navy" (OSD case No. 1964). GAO finding: The Government incurred unnecessary costs of about $1.1 million in the procurement of the A-4 series aircraft because the Bureau of Naval Weapons purchased Automatic Flight Control Systems (AFCS) through the Douglas Aircraft Co., instead of purchasing them directly from the actual manufacturer. It should have been apparent to the Bureau as early as November 1960 that the continued involvement of Douglas in the procurement of this subsystem was no longer essential because the subsystem had been proven reliable and fully operational through extensive test programs and it was readily obtainable from Eclipse-Pioneer. The Bureau, however, took no action to authorize the purchase of this subsystem from Eclipse-Pioneer until fiscal year 1964 procurement of A-4E-type aircraft. GAO estimate of unnecessary costs: $1,067,454. Time period of GAO report: Fiscal years 1962 and 1963. GAO field work was completed November 1963. DOD comments on GAO finding: The Navy does not concur with the GAO conclusion that the A-4 automatic flight control system was sufficiently reliable in November 1960 to permit direct procurement from Eclipse-Pioneer. Viewing the history of deficiencies and the unreliability of the A-4 AFCS, and in view of changes contemplated in November 1960, conversion of the AFCS from contractorfurnished equipment to Government-furnished equipment would not then have been appropriate. Douglas' participation was essential because the deficiencies in the AFCS were not limited to the subsystem itself, but were induced, in part, by other subsystems with functions related to those of the AFCS. DOD comments on costs: The Navy does not agree that direct procurement of the AFCS from Eclipse-Pioneer commencing in fiscal year 1962 was practicable and asserts that, under the circumstances, its action was proper and reasonable. Therefore, the costs cited by GAO were not unnecessary. DOD corrective action: This report was one of a series concerning conversion from contractor-furnished to Government-furnished equipment (breakout) after production has commenced. The Bureau of Naval Weapons on October 7, 1964, promulgated a formal policy setting forth the criteria that must be met to qualify an item for breakout. Navy postscript, May 14, 1965 The Bureau of Naval Weapons is currently preparing further detailed guidance to supplement the policy instruction of October 1964. GAO Report B-146898, October 16, 1964 45 Title: "Overcharges Included in Prices Negotiated for Change Orders Issued Under Fixed-Price Contracts Awarded to Avondale Shipyards, Inc., New Orleans, Louisiana" (OSD case No. 2021). GAO finding: Government has borne overcharges of $261,773 in prices negotiated for 32 change orders because Avondale proposed prices which (1) did not allow the Government sufficient credits for deletions or substitutions affecting prior contract requirements and (2) included costs for materials which were in excess of known costs or in excess of known or estimated requirements. GAO estimate of unnecessary costs: $261,773. Time period of GAO report: Review covered 108 change orders negotiated during period July 1, 1961, to June 30, 1963. DOD comments on GAO finding: The Navy reviewed 12 of the actual change orders involved which comprise 98 percent of the alleged overcharge. The Navy investigation is not complete as yet but indications are that possible excess costs amount to only a small portion of the total given by GAO. DOD comments on costs: The Navy investigation is in process. DOD corrective action: The difference of opinion present in this case involves the question of the method to be used to assure the fair and equitable pricing of change orders. Stated briefly, the GAO would have change orders priced out on the basis of how much was included in the original proposal for the item being changed. The DOD disagrees with this approach and is of the opinion that changes should be priced out on the basis of current estimated costs; i.e.. that true cost effect of a change order is best determined by comparing what it would actually have cost the contractor to perform the work as it was before the change and what it will actually cost to perform the work as changed. The difference represents the real cost of the change. Navy postscript, May 14, 1965 Navy will seek recovery of a small portion of the excess stated by GAO, based on an evaluation of the change order pricing in accordance with the method believed by the Navy to assure fair and equitable pricing of change orders. GAO Report B-146733, October 29, 1964 46. Title: "Unwarranted Allowance for Material Price Increases to Newport News Shipbuilding & Dry Dock Co., Newport News, Va., for Construction of the Aircraft Carrier U.S.S. Enterprise" (OSD case No. 1956). GAO findings: That in its evaluation of the final price for fixed-price incentive contract NObs-3959 for the aircraft carrier U.S.S. Enterprise, the Navy included an amount of $237,000 as incentive profits resulting from an unwarranted adjustment for increases in material prices. Also, that Navy contract auditors were remiss in not uncovering this matter. GAO estimate of unnecessary costs: $237,000. Time period of GAO report: The time period of the GAO review covers the period November 1957 through April 1963. DOD comments on GAO findings: The Department of the Navy does not agree with GAO's findings. Under modification No. 7 of the contract, Newport News received a total price for all work in lieu of separate identifiable allowances for incentive profit, contract costs, changes and price adjustments. Therefore, a separate identifiable amount for incentive profit was not negotiated for the contract. The Navy auditor had no basis for raising the questions GAO claimed he should have since he was not furnished information by the contracting officer indicating the composition of target costs after the contract was definitized. DOD comments on costs: Navy does not agree that the total price of $234,600,000 includes unwarranted incentive profit of $237,000. DOD corrective action: The Navy review of the flow of information to contract auditors disclosed a need to provide the auditors information concerning the contracting officer's intent as to the composition of target costs after contract execution. Effective procedures for obtaining and transmitting such information to contract auditors have been found more difficult to develop than anticipated, and the development is still in process. Navy postscript, May 14, 1965 Improvement in administrative communications is being pursued. The Navy's position on the basic pricing issue does not warrant adjustment of established prices. The Navy believes that to demand voluntary refund would be contrary to the facts and equities in this case. GAO Report B-146732, December 2, 1964 47. Title: "Unnecessary Cost to the Government Through the Leasing of Electronic Data Processing Systems by Defense Electronic Products, Radio Corp. of America, Camden, N.J." (OSD case No. 1960). GAO finding: The Government will incur unnecessary costs of about $3,416,000 over a 5-year period if the contractor continues to lease the systems because the contractor will pay rentals greater than the full purchase and maintenance cost to the Government, including interest on the investment. Amount of unnecessary cost will increase to about $2,342,000 annually after 5 years, and about $15,126,000 at the end of 10 years. GAO estimate of unnecessary costs: $3,400,000. Time period of GAO report: January 1960 to June 1963. Navy comments on GAO finding: ASD (I. & L.), by letter of May 21, 1964, to GAO, commented on 23 reports (5 final and 18 draft) issued to date on the same subject, including the draft of this report. GAO bases its findings in all reports on its position that computers have a "useful life of 5 to 10 years" and should be retained in use for that period; that cost of leasing will exceed cost of ownership by the end of 5 years; therefore, the Government should buy computers and furnish them to contractors. The DOD position is that the useful life of computers will vary with each equipment type and its economic utility in given areas of application; and that the present policy of the Government to require contractors to furnish their own facilities should remain unchanged. DOD feels that computers can be purchased on a selective basis when the stability of both systems and equipment can be established. Navy comments on costs: The unnecessary costs considered by GAO are based upon conditions assumed to prevail over a prospective period. The Navy does not believe that adequate consideration was given other factors that bear significantly on the basic assumption. Corrective action: ASPR changes will require contractors to submit comprehensive analyses of lease/purchase costs and equipment replacement requirements, and will base cost allowability on the least cost method of acquisition. 48-132--65- -50 GAO Report B-146760, January 5, 1965 48. Title: "Unsupported Cost Included in Price of Nuclear Submarine Valves Purchased From Crane Co., Chicago, II., by Westinghouse Electric Corp., Pittsburgh, Pa., Under Cost-Plus-a-Fixed-Fee Contract" (OSD case No. 1759). GAO finding: The negotiated price for 23 nuclear submarine valves purchased by Westinghouse from Crane under Navy CPFF contracts included unsupported costs of about $65,000. In addition, the valve prices included profit applied at a higher rate than that normally awarded by Westinghouse to other vendors. Westinghouse should have obtained and reviewed Crane's cost estimate for the valves but did not do so. GAO estimate of unnecessary costs: $65,000. Time period of GAO report: 1960. DOD comments on GAO finding: The GAO position that Westinghouse should have obtained and reviewed Crane's cost estimate is based on GAO's opinion that there was insufficient basis for assuring that Crane's price was reasonable. The DOD disagrees. There was price competition in which all three of the qualified and experienced companies submitted bids and Crane was the low bidder. In addition, a price analysis was performed which substantiated the reasonableness of the price. The Navy and the prime contractor had a sound basis for concluding that the price was fair and reasonable. DOD comments on costs: There were no "unsupportable" costs. Navy postscript, May 14, 1965 The Navy believes that a sound basis existed for determining the reasonableness of price; therefore, request for a voluntary refund is not warranted. GAO Report B-146975, April 30, 1965 49. Title: "GAO Report on Procurement of Office Furniture by Lockheed Missiles & Space Co., Sunnyvale, Calif., Potential Savings on Procurement Through GSA Sources" (OSD case No. 1985). GAO findings: GAO recommends: (i) DOD examine provisions of ASPR with the objective of providing a basis for use by Government contractors of GSA supply sources, (ii) where there is a significant amount of negotiated Government work that defense contract administrators review existing contracts and incorporate necessary provisions in existing contracts to use GSA sources, and (iii) when significant amounts of costs are involved controls be established to insure that GSA furniture is utilized unless equal quality furniture can be obtained at equal or lower cost from commercial sources. GAO estimate of unnecessary costs: Based on average prices differential (GSA versus Lockheed's costs) savings of $218,000 would have accrued in 1962. Using 1962 as a basis, unnecessary costs of $1 million accrued from 1956 to 1962. Time period of GAO report: Calendar year 1962. Navy comments on GAO findings: Defense contractors ought to be able to use or reject GSA sources for such items as furniture as it is the contractor and not the Government who has the responsibility for determining what furniture and equipment is most suitable to meet requirements; that the prices paid for such items when purchased from sources other than GSA ought not to be limited to GSA costs but weighed, on a case-by-case basis by knowledgeable Government personnel; that selected portions of industry should not be given procurement advantages over others; and that defense contractors ought not be required to use identical equipment, if circumstances indicate the need for different types. Navy concurs that information available from GSA sources should be used for guidance purposes in enabling contractors to make sound decisions in selecting furniture and in evaluating the reasonableness or prices quoted by a wide range of suppliers. Prices of certain items in GSA schedules were based on large quantities for which the contractor did not have immediate use. Navy comments on costs: Navy does not question the GAO contention that had Lockheed been authorized to purchase office furniture through GSA supply sources, it is probable that a saving to the Government might have been realized, of some considerable dollar value. |