Corrective action: Navy has no objection to using GSA schedules as a general guide to evaluate the reasonableness of prices paid by contractors, but not as an absolute limit.

GAO draft report, January 28, 1965

50. Title: "Inappropriate Use of Formal Advertising and Unnecessary Costs in the Procurement of Aircraft Carrier CVA 67, Department of the

Navy" (OSD case No. 2241).

GAO finding: Navy awarded contract NObs-4766 to the low bidder, Newport News Shipbuilding & Dry Dock Co., on a formally advertised basis even though the quality and extent of competition was not adequate to provide assurance that a reasonable price had been obtained. The only other bidder, Electric Boat, had never built a comparable aircraft carrier and had other problems which Navy acknowledged made it doubtful that such bidder could compete effectively. Comparison of Navy estimate of construction costs indicated that the Newport News price was about $9.3 million higher than the Navy might have obtained had bids been rejected and price negotiation conducted. Award made on basis of contracting officer's findings of effectiveness of competition and price reasonableness without adequate supervisory review.

GAO estimate of unnecessary costs: $9.3 million.

Time period of GAO report: Bids opened April 28, 1964, award made April 30, 1964.

Navy comments on GAO finding: Three firms, Newport News, New York Shipbuilding, and Bethlehem Steel were qualified and desirous of being considered for the work in November 1963 at time of bid solicitation. Two bids were received, one from Newport News, as low bidder, and the second from Electric Boat (General Dynamics), as successor to Bethlehem Steel, Quincy. Problems in construction of CVA 67 are no more severe than those that New York Shipbuilding encountered in construction of the CVA 63. Electric Boat, through acquisition of Bethlehem Steel's Quincy facilities, was qualified based on past experience. The need to invest in additional facilities was not considered a handicap that could not be successfully overcome. Navy thus had every reason

to expect a responsive reasonably priced bid from Electric Boat.

Two responsive and responsible bids were received from bidders independently contending for the procurement. Navy considers competition was adequate because no offeror was denied an opportunity to compete; that the low bidder had no determinative advantage over other bidders and thus was not immune to the stimulus of competition in proposing a price, which was determined to be reasonable.

Navy comments on cost: Navy properly compared low bid price of $188,500,000 from Newport News to price of $224,875,550 from Electric Boat and a $189,638,000 Navy estimate. Price analyses was also made with prices bid for CVA 63 (Kitty Hawk) and CVA 66 (America). Projection of prices of CVA 63 and CVA 66 were adjusted for differences of ship characteristics of CVA 67 and periods of time involved. Price analyses, in addition to adequacy of competition, demonstrated that the price was reasonable.

GAO's premise that $9.3 million could be saved by negotiation was based on comparison of isolated cost element in the contractor's proposal with those of its counterparts in Navy's estimate. In effect, the low cost element was taken from each estimate without considering pricing interrelationships between all separate elements of cost.

Navy corrective action: None.

To have rejected all bids and negotiated would have been inconsistent with provisions of 10 U.S.C. 2304(a)(15) and seriously violated the integrity of the advertised bidding system. Appropriate supervisory review was exercised as follows: Documentation was signed at Branch level of contracting officer; contract signed at Division level by the Director of Contracts who performed price analyses with full support of professional staff. Award was also personally reviewed and approved by the Secretary of Defense who personally reviewed and approved the judgment that adequate competition existed.

APPENDIX 2D-AIR FORCE CASES

GAO Report B-146801, July 31, 1963

51. Title: "The Increased Price for Ballistics Computers Resulting From Excessive Estimated Material Costs Under Department of the Air Force Contract AF 09(603)-34097 with Servomechanisms, Inc., El Segundo, Calif." (OSD case No. 1729).

Problem

The Comptroller General states that (1) the price proposed in March 1957 by Servomechanisms for contract -34097, and accepted by the Air Force without change, included estimated material costs that were excessive costs and related overhead costs and profit, amounting to about $83,800 were included in the contract price of $308,516, (3) appropriate evaluation by Air Force contracting officials of information available at the time the price was established would have disclosed that the material cost estimates were higher than the costs Servomechanisms would reasonably have expected to incur.

Further, the GAO finds that "the revised provisions of the law, together with the actions taken by the Air Force to require that Servomechanisms improve its price estimating procedures, if implemented adequately should reduce the possibility of further overpricing in future contracts which the Air Force may negotiate with this contract."

GAO recommendation

That the Secretary of Defense (1) continue the efforts to obtain a price reduction from Servomechanisms for the excessive estimated material costs and related overhead costs and profit included in the price negotiated for contract AF 09(603)-34097, and (2) make this contractor's adamant position known to all procuring activities and that it be given appropriate consideration in connection with contemplated future procurement from this company.

Since no evidence of fraud or other basis could be found, for legal proceedings, the Air Force requested a voluntary refund which the contractor refused. Perhaps the main reason for the company's adamant position is its declining sales, $23.5 million in 1957 to $9.4 million in 1962 and its declining net income. In 1957 the company showed a net profit of $308,776 while showing a net loss of $197,628 in 1962, and a net loss of $101,000 for the first quarter of 1963. In addition, sales for the first quarter of 1963 were down 43 percent when compared to a like period in 1962. Additional pressure by DOD, except in the most serious cases, would tend to make the term "voluntary refund" meaningless. While the DOD policy is very clear that efforts to obtain a voluntary refund should be vigorously pursued, it is also clear that such efforts must stop short of pressure that would be tantamount to coercion.

For the same reason, DOD cannot concur in the second recommendation be cause in effect it would penalize the contractor for refusing a request for a voluntary refund. It could, as a practical matter, have consequences verging on suspension or debarment without either the justification or safeguards that are essential prerequisites to such actions.

As of the date of the reply, October 1963, the contractor was doing business in an acceptable manner as an approved source.

The Air Force has made appropriate use of the facts of this case, which has reiterated to cognizant officials the importance, in dealing with all contractors. of effective implementation of the policies and procedures applicable to the noncompetitive procurements. Procurement Information Digest, September 1963.

GAO Report B-125071, October 24, 1963

52. Title: "Excessive Costs Included in Prices for FALCON Missile Components Purchased from AVCO Corp., Crosley Division, Cincinnati, Ohio, by Hughes Aircraft Co., Culver City, Calif., under a negotiated contract, Department of the Air Force" (OSD case No. 1745).

GAO finding: Prices of missile stabilizers and flippers were excessive in relation to available cost data, acceptance of prices without appropriate review and evaluation.

GAO estimate of unnecessary costs: $158,110.

Time period of GAO reports: GAO review: Prior to March 29, 1963; prime contractor's actions: July 1, 1968, to August 21, 1962.

DOD comments on GAO finding: The GAO findings are substantially correct. DOD comments on costs: A refund in the amount of $158,109.73 was obtained from Hughes.

DOD corrective action: Increased emphasis is being placed on the contractor procurement review program which is designed to assist in achieving reasonable subcontract prices. The Air Force Systems Command Manual 70-3 provides detailed instructions in this area and this problem is being emphasized during staff surveillance and other discussions with field personnel.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

GAO final report B-125071, October 24, 1963, "Examination of Pricing of Stabilizers and Flippers for Falcon Missiles Purchased from Avco Corp., Crosley Division, Cincinnati, Ohio, by Hughes Aircraft Co., Culver City, Calif., under Department of the Air Force prime contract AF 33 (600)–37981” (OSD case No. 1745).

Problem

The GAO alleges that its examination showed that the prices proposed by Avco and accepted by Hughes without change included estimated material costs which were excessive in relation to cost data available at the time those fixed prices were negotiated. As a result the Government has borne additional costs of about $136,100 plus an undetermined amount for the prime contractor's indirect costs. GAO recommendation

That the Secretary of the Air Force take such action as may be necessary to recover for the Government the additional costs for stabilizers and flippers incurred in the procurement of Falcon missiles under contract AF 33(600)−37981. Statement

At the request of the Air Force, Avco refunded $136,100 to Hughes who in turn applied its indirect costs and refunded a total of $158,109.73 to the Government. Avco, in their reply, stated they were forced to estimate part of the material costs because they were allowed only 11 days to respond to the Hughes proposal. Status: Case closed.

GAO Report B-114808, December 30, 1963

53. Title: "Overestimated Costs Included in Prices Negotiated for Modification of Aircraft Engine Test Stands Under Fixed Price Contracts With Space Corp., Dallas, Tex." (OSD case No. 1681).

Problem

The GAO alleges that Space Corp. certified to the Air Force that in establishing the prices for modification of 32 each AF/M37T-1 jet engine stands all actual or estimated costs or pricing data available at the time had been considered in preparing its price proposals and had been made known to the Air Force contracting officer or his representatives during price negotiation. The GAO found no evidence, however, that Space Corp. disclosed to the Air Force contracting officer or price analyst, or that these Air Force representatives otherwise were aware that the prices negotiated for modificaton of the 32 test stands included (1) costs in excess of prices Space had already established with its suppliers, and (2) the cost of certain parts that Space should have known at the time would be neither required nor furnished in performance of the modification work. That as a result, therefore, the Government has borne additional costs of about $213,000. GAO recommendation

That the Air Force take all available and appropriate action to obtain recovery from Space Corp.

Statement

After learning, on August 26, 1963, that GAO had not forwarded the case to the Department of Justice as proposed in their letter transmitting copies of the draft report to the Air Force, we proceeded with a full investigation of the matter.

Our comprehensive audit and analysis established that the prices negotiated for the modification of the 32 test stands did include (1) costs in excess of prices Space Corp. had already established with its suppliers, and (2) costs for certain parts that should have been furnished by Space Corp. as a part of the test stands under the basic contract. The facts as established are considered sufficient to justify a request for refund even though these procurements were negotiated prior to the enactment of Public Law 87-653.

Pursuant to departmental procedures the Air Force Logistics Command's proposal for obtaining a refund from Space Corp. was approved. Their findings, conclusions, and the amount of refund to be sought were in consonance with the conclusions and recommendations contained in the GAO report. The command was instructed to take all available and appropriate action to obtain an adequate adjustment in price from Space Corp.

Space Corp. offered a refund in the amount of $32,064. This amount was unacceptable to the Air Force and the entire matter was turned over to the Office of Special Investigations for a comprehensive investigation into the possible existence of purposeful misrepresentation. The OSI performed a further investigation and referred the matter to the Criminal Division of the Department of Justice. The U.S. attorney, Dallas, Tex., issued a lengthy opinion on the case and declined to prosecute the matter. The Office of the Judge Advocate General, U.S. Air Force, is currently studying the feasibility of any further legal action in this matter.

Status: Case open.

This case will remain open until the GAO is furnished our conclusions in the matter.

GAO Report B-118965, February 7, 1964

54. Title: "Overpricing of B-58 Aircraft Bomber Recording Systems by Melpar, Inc., Falls Church, Va., on Fixed-Price Purchase Order 509 with General Dynamics Corp., Fort Worth, Tex., Department of the Air Force" (OSD case No. 1781).

Problem

The GAO alleges that (1) a firm fixed-price was negotiated by Melpar and General Dynamics for the production of bomber recording systems under purchase order No. 509 without adequate assurance as to the reasonableness of the price in relation to cost experience on prior production or to more realistic available pricing data, and (2) as a result, it appears, that a significant portion of Melpar's profit, which totaled about $827,000 or 42 percent of incurred costs, as shown by the subcontractor's records, was attributable more to the negotiation of an unreasonably high price than to Melpar's efficiency in performing under the purchase order.

GAO recommendation: The GAO recommended the Air Force make every effort to obtain a refund.

NOTE.-1965 Appropriations Hearings (Feb. 11, 1964).

The Washington Post of February 11, 1964, carried an article on this report and members of the subcommittee questioned Generals Gerrity and Smith on this matter. Details of the procurement were provided for insertion in the record as was a copy of the Air Force's October 17, 1963, response to the GAO advising them of the status of the General Dynamic technical evaluation of Melpar's performance and the Air Force's comprehensive audit of Melpar's records.

Statement

A comprehensive review of the matter has been made by General Dynamics, Melpar, and the Air Force. Certain tentative conclusions have been reached and the matter is under negotiation. The GAO report was published prior to completion of the contract and the costs necessary to complete the contract and other adjustments preclude the contractor earning any such profit as implied by this report. Regarding the alleged profit of $827,000, it must be pointed out that this amount includes (1) the actual profit negotiated, estimated at $280,000; (2) a downward adjustment provided for in a Melpar subcontract amounting to $59,158; (3) an adjustment for material attrition error disclosed by GAO -$26.877; and (4) the costs required to complete the contract, estimated at $130,000, since the contract had not been completed when reported by the GAO.

Under no circumstances could the contractor have made the profit implied by the General Accounting Office. The excess profit is estimated at approximately $225,000. Several meetings have been held with representatives of General Dynamics and Melpar, and on April 16, 1965, a tentative agreement was reached on a price adjustment deemed reasonable by the Air Force negotiators. However, we received a copy of a letter from the GAO Boston regional office, dated April 13, 1965, advising the eastern contract management region of alleged discrepancies in the handling of materials concerning Melpar's subcontractor, Anelex Corp., in the production of in-flight printers. The ECMR is presently investigating the matter and it will be several weeks before they complete their review; however, we were informed on May 11, 1965, that the allegations contained in the April 13, 1965, letter had no impact on the price paid Melpar under purchase order No. 509.

Status: Case open. We are now waiting for the contractors to confirm their position in writing, at which time the entire matter will be reviewed with the GAO. We anticipate being in receipt of the contractors' correspondence by May 24, 1965.

GAO Report B-146854, February 28, 1964

55. Title: "Overpricing of CAX-12 Aerial Reconnaissance Cameras by Fairchild Camera & Instrument Corp., Syosset, N.Y., Under Negotiated FixedPrice Contract AF33 (600)-38860, Department of the Air Force" (OSD Case No. 1737).

GAO finding: The Air Force negotiated firm prices without making an adequate evaluation of the contractors proposal, and was not aware that the proposed prices were based on cost estimates which included provisions for contingencies, clerical errors, and inadequate cost data. The final contract price was $814,000, or 64 percent greater than the cost of producing the items.

GAO estimate of unnecessary costs: Undetermined.

Time period of GAO reports: GAO review: Prior to March 1963. Air Force actions: January 1959 through July 1960.

DOD comments on GAO finding: Though this was an emergency requirement, adequate safeguards were not taken to assure the reasonableness of the prices negotiated with the contractor.

DOD comments on costs: The GAO figure of $814,000 includes the negotiated profit and fails to give effect to additional profit the contractor may have earned through technical developments and manufacturing improvements which the contractor claims were numerous. After the fact review of the cost data and other information that should have been available at the time the contract was negotiated reveals the Government is entitled to a minimum adjustment of $235,428.

DOD corrective action: Fairchild has been adamant in their refusal to consider a voluntary price adjustment. The Air Force General Counsel has taken the matter under review to determine if there is a legal basis for seeking an adjustment or sufficient justification for referring the case to the Department of Justice.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

"Although realistic cost data were not available, the Air Force and Fairchild negotiated firm prices totaling $1,636,998 for various CAX-12 cameras and components, for use by the Navy, under contract AF33(600)-38860. The Air Force did not make an adequate evaluation of the contractor's proposal and supporting data and, as a result, was not aware that the proposed prices were based on cost estimates that included substantial provisions for contingencies as well as clerical errors and that information on previously experienced costs was not adequate for developing realistic estimates of the costs of future production. Subsequent to the award of contract -38860, the Air Force exercised its rights under an option clause in the contract and purchased additional cameras at the same unit price as that previously negotiated for the initial quantity. The Air Force also purchased carrying cases for the cameras. These additional procurements increased the contract price to $2,091,922. This price was about $814,000, or 64 percent, greater than the costs incurred by Fairchild."