Statement We do not concur with the GAO conclusion that the Air Force did not give sufficient consideration to prior cost experience in negotiating the prices for this order. After receipt of the contractor's proposal, the administrative contracting officer (ACO) through the price analyst, submitted a request to the Army Audit Agency for review of certain elements of the proposal. The Army Audit Agency was informed that under a prior contract, AF 30(635)–16211, the Air Force Auditor General reviewed and examined the contractor's proposal for similar work. In addition, a technical evaluation of the labor hours was requested from the industrial engineer at the Cincinnati contract management office. These reports were reviewed by the price analyst. He, in turn, submitted his own evaluation of the contractor's proposal to the ACO. Available, then, for ACO evaluation were three reports: Audit report, industrial engineering report, and price analysis report. Each of these reports was based on information in official Avco records. Historical costs were considered, although they were not the only criterion used for establishing reasonableness of the proposed price. Analysis of contract work requirements was also a consideration. However, it now appears that Avco had, at the time of negotiations, more current informal memorandums indicating lower labor costs which had not been made known to the Air Force negotiators or the Army auditor. Such information would not normally be available to Government personnel unless disclosed by the contractor. This information was not reflected in the records during the time the contractor's proposal was under review and negotiation; therefore, review of the contractor's proposal was adequate and the contractor was remiss in failing to disclose information that would have resulted in the negotiation of lower labor costs. Additionally, the contractor executed a certificate of current pricing data and the contract contains the defective pricing data clause. Status: Case closed. Policy: The Air Force does not concur with the GAO recommendation that this particular report be used to emphasize the importance of considering contractor's prior experience when negotiating prices. The issue in this case is not one of allowance for contingencies by our negotiators, but failure on the part of the contractor to disclose the most current available pricing data. The ASPR, AFPI and other directives contain adequate guidance in this regard, and in this case our personnel complied with ASPR 3-800 regarding preparation for negoiation, use of historical cost data, use of audit and price analysis and utilization of a pricing certificate and defective data pricing provision in the contract. At the request of OSD, however, the report was distributed to subordinate organizations for information. GAO Report B-146918, August 18, 1964 64. Title: "Overstated Material Cost Estimates Included in Firm Fixed Prices Negotiated for T-37 Airplanes Produced by Cessna Aircraft Co., Wichita, Kans." (OSD case No. 1929). Problem (a) The GAO finds that the firm-fixed prices negotiated by the Air Force and Cessna for T-37 airplanes produced under contracts AF (33(600)-33891, −35569, -36776, and -38888 included material cost estimates which were overstated by about $275,300 in relation to pertinent information available either at the time the proposals were prepared or at the time of negotiations. The estimates included costs for some parts in excess of contract requirements and for one part which was to be furnished by the Government without cost to the contractor. Also, in some instances the cost estimates were not based on the latest available cost and pricing information. Cessna's addition of about $51,500 to the overstated cost estimates included in the negotiated contract prices, to provide for material rejections, general, and administrative expenses, and profit, resulted in increased costs to the Government of about $326,800. (b) During price negotiations for contracts -35569, -36776, and -38888, Cessna certified that in preparation of its proposals it had utilized and provided to the Air Force for negotiation purposes the most current, complete, and accurate data available for this purpose. Contract -33891 was negotiated before such certifi cates were required. GAO recommendations (a) In its Draft Report the GAO recommended that (1) the Secretary of the Air Force take action to obtain appropriate adjustment of the prices negotiated with Cessna for contracts -33891, -35569, −36776, and -38888, and (2) a review be made of the prices of contracts for T-37 airplanes negotiated with Cessna subsequent to the contracts discussed in this report to determine whether they include similar overstated cost estimates and, where appropriate, to obtain adjustments in the contract prices. (b) In its Final Report, the GAO recommended that action taken by the Air Force to obtain an adjustment be coordinated with the Department of Justice. Statement We are in agreement regarding the overpricing of the four contracts cited in the report. Cessna has offered a refund for complete restitution for the alleged overstatements disclosed by the GAO; however, the entire matter, including production and follow-on contracts, was referred to the Justice Department on March 11, 1965, for their review prior to the Air Force taking any further action in the case. Cessna explained that such human errors could have and did occur as a result of the timing of the negotiations which occurred during a time period when engineering and configuration changes were being experienced. Cessna indicated that in its opinion it was neither fair nor reasonable for the Government, based upon its after-the-fact review of material prices, to expect restitution, especially on the quantity errors. It was the stated opinion of Cessna that the quantity errors (i.e., item quantities in excess of contract requirements) were within reasonable limits in view of the time required to reduce the bills of material to a more precise figure. These comments were based on the fact that the indicated discrepancies in pricing represented a 1.53-percent error in pricing bills of material. Status: This case will remain open pending completion of Department of Justice review of the matter and Air Force efforts to obtain an equitable price adjustment. GAO Report B-146916, August 18, 1964 65. Title: “Overstated Cost Estimates for Miscellaneous and Minor Outside Production Items Included in Incentive Target Prices Negotiated with the Boeing Co., Seattle, Wash., for KC-135 Airplanes" (OSD case No. 1881). GAO finding: Due to overstated cost estimates for miscellaneous and minor outside production items, unwarranted target and incentive profits will accrue to Boeing under two contracts for KC-135 aircraft unless the contract target prices are reduced. GAO found that the Air Force was unaware of the overstated estimate or that the contractor, during negotiations, reduced its proposed prices because of these overstatements. Since Boeing used similar procedures in estimating costs for other contracts for KC-135 aircraft, pricing deficiencies may also exist in those contracts. GAO estimate of unnecessary costs: About $541,590. Time period of GAO report: Negotiations concluded: One contract November 1961, other contract for 72 aircraft November 1960, and for 13 aircraft May 23, 1961. DOD comments on GAO finding: An audit and review of the costs for the two contracts, which involved a comprehensive review of GAO work papers and Boeing records, have been completed. Findings and conclusions were submitted to the Department of Jutsice on December 21, 1964, for consideration and coordination in accordance with GAO's recommendation. DOD comments on costs: The Air Force did not comment. DOD corrective action: Boeing concurred that identifiable duplications and errors had occurred. The computation of the adjustment offered by Boeing was verified and considered appropriate. A supplemental agreement has been processed effective a contract profit reduction of $60,573. Two KC-135 contracts negotiated subsequent to the above contracts are currently being reviewed. Results of the review will be furnished Justice if desired. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem GAO alleged that estimated costs for miscellaneous and minor outside production items included in incentive target prices proposed by the Boeing Co., Seattle, Wash., in 1960 and 1961 for KC-135 airplanes under contracts AF 33 (600)-41979 and AF 33(600)-43416 disclosed that these estimated costs were overstated by about $1,475,100 in relation to costs the contractor could reasonably expect to incur. After Boeing revised its target price proposals several times during negotiations, the Air Force negotiated overall reductions in the target prices proposed by the contractor. GAO found no evidence, however, (1) that the Air Force was aware of the overstated estimated costs for miscellaneous and minor outside production items disclosed by our review or (2) that the contractor, during negotiations, reduced its proposed prices because of these overstatements. Unless the contract target prices are reduced appropriately, the Government will incur unnecessary costs of about $541,590 in the form of unwarranted target and incentive profits to Boeing attributable to the overstated cost estimates. Under both contracts Boeing certified that (1) all available pricing data had been considered in preparing its estimates and (2) all significant data considered in negotiations was current. However, it is evident that, in estimating target costs for miscellaneous and minor outside production items, Boeing did not give adequate consideration to all available pricing data since it did not make appropriate adjustments to the historical data used as a basis for its estimates. GAO stated that the target prices negotiated under contracts -41979 and -43416 would have been reduced substantially had the Air Force been aware of the overstated data used by Boeing in estimating costs for miscellaneous and minor outside production items. It was then reasoned that inasmuch as the procedures followed by Boeing in estimating costs for other contracts for KC-135 aircraft were similar to the procedures used in preparing cost proposals for contracts -41979 and -43416, similar pricing deficiencies may exist in the target prices negotiated under other contracts. GAO recommendations (a) That the Secretary of the Air Force make every effort to obtain, through or in coordination with the Department of Justice, appropriate price reductions for the overstated costs. (b) That, if Air Force review of target prices negotiated under other contracts for KC-135 airplanes discloses that the Government incurred additional costs as a result of similar overstatements in the target prices negotiated, ap‐ propriate refunds or contract price adjustments be obtained. Statement This matter was forwarded to the Justice Department by SAF-GC letter dated December 21, 1964, with the following comments: "This matter has been under review since receipt of the draft of the GAO report in November 1963. "We do not concur with the GAO findings regarding contract AF 33(600) – 41979, except as pertains to certain costs which were duplicated in Boeing's proposal. Action has been taken effecting an appropriate adjustment for the disclosed duplications. As to the remaining alleged overstatement, Air Force review revealed that there is some basis for the allegation, although such overstatement was not of the magnitude alleged by the GAO, nor does it, in our opinion, exceed a reasonable estimating tolerance. "We disagree with the GAO conclusions regarding contract AF 33(600)43416. Although the proposed miscellaneous and minor cost element was estimated by Boeing in the manner described by the GAO, we do not believe that such overstatements were necessarily included in the negotiated price because (1) the procuring activity's (ASD's) negotiation objective for this element was estimated in a different manner than that proposed by Boeing in order to determine the reasonableness of the total prices proposed by Boeing, and (2) a considerable reduction was negotiated from the contractor's proposed price." Status: Case open pending action by Justice Department. Policy: In the absence of any evidence that would indicate that the Boeing Co. failed to disclose any significant or reasonably available pricing data or that misleading information was furnished the Government negotiators, we find no basis for a price adjustment. It is our policy not to seek a price adjustment to correct negotiations, or in situations where the Government was in no way misled, even though, perhaps because of a superior bargaining position, the contractor was able to obtain an abnormally high price. GAO Report B-146919, September 24, 1964 66: Title: Unnecessary Testing Costs Included in the Prices of Klystron Tubes Purchased from Radio Engineering Laboratories, Inc., Long Island City, N.Y." (OSD case No. 1889). GAO finding: Unnecessary costs were incurred because the prices negotiated for klystron tubes included labor and overhead costs for testing that were neither required nor performed. The contractor did not advise the Air Force that the testing was unnecessary and would not be done, did not reduce its proposed prices for the tubes and did not exclude testing costs in establishing the contract price. GAO estimate of unnecessary costs: About $65,000. Time period of GAO report: Negotiations conducted March through July 1962. DOD comments on GAO finding: The Air Force concurs with the findings. During an Air Force audit review, the subject of "stabilization testing" of the tubes was discussed with a responsible employee of the contractor who advised that the testing was necessary and the auditors knew that such testing had been performed in previous buys. AF personnel have met with the contractor's representatives and reiterated the intent to demand a downward adjustment of $65,000 under the terms of the defective pricing clauses of the contract involved. The contractor has taken an adamant position in refusing to consider a refund. DOD comments on costs: Agrees with GAO. DOD corrective action: The Air Force is taking action to bring this matter to the attention of the Department of Justice as recommended in the report. The Air Force Systems Command has been requested to call this case to the attention of appropriate procurement officials as an illustration of the adverse effect to the Government when contractor's price proposals and other data are not adequately reviewed. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Statement Respecting the first recommendation, Air Force representatives met with the contractors' representatives on Oct. 15, 1964. At this meeting we reiterated our intent to demand a downward adjustment of $65,000 under the terms of the defective pricing clauses of the contracts involved. The contractor has taken an adamant position in refusing to consider a refund. We propose to bring this matter to the attention of the Department of Justice and coordinate our efforts with the Department of Justice as recommended in the report. Respecting the second recommendation, the Air Force Systems Command has been requested to call this case to the attention of appropriate procurement officials as an illustration of the adverse effect to the Government of not adequately reviewing contractor's price proposals and other data. We do not believe, however, for the reasons stated below, that this case need be brought to the attention of the Air Force audit officials. Our records show that Air Force auditors reviewed contractor's price proposals related to contract AF 30 (635)-24412 totaling $1,469,282, that our suditors questioned $187,211 or approximately 12.7 percent of this sum and that the Air Force negotiation team sustained these questioned costs in negotiating the price with the contractor. During this Air Force audit review, the subject of "stabilization testing" of Klystron tubes was discussed with Mr. J. Stuart Frank, controller for Radio Engineering Laboratories. Mr. Frank advised that this testing was necessary for the tubes in question. Also, our auditors knew that such testing had previously been performed on this tube, under other buys, in the hours indi cated in the contractor's current proposal. Our auditors, therefore, believed it unnecessary to pursue the matter further. Our auditors did not participate in the evaluation of the contractor's price proposal for contract AF 30 (635)-25699. Status: Case open, a memorandum transmitting the case to the Department of Justice is now being reviewed by the Air Force Counsel. The Air Force overcharge computation amounts to $60,443.88. The GAO computation did not consider visual mechanical tests which amounted to approximately $3,575 and accounts for the major portion of the difference. Additional evidence was located during the Air Force review which could have materially affected the negotiations with the contractor had it been located earlier. The GAO recommendation is being complied with in accordance with instructions issued by SAF General Counsel. Basically the Air Force will pursue its administrative inquiry into the charges contained in the GAO report in order to verify their accuracy and completeness. The Air Force, however, is not to solicit, negotiate or to settle any proposal but should merely report them to Justice. GAO Report B-146876, October 2, 1964 67. Title: "Uneconomical Leasing of Motor Vehicles for Use in Assembly and Checkout Operations at MINUTEMAN Missile Launch Sites and Avoidance of Congressional Controls Relating to Acquisition of Motor Vehicles" (OSD case No. 1867). GAO findings: Lease by the contractor rather than Government purchase of motor vehicles for use by contractor and Government personnel in the assembly and checkout operations at MINUTEMAN missile launch sites will result in increased costs of about $1,852,000 and avoids congressional controls relating to the acquisition of passenger vehicles for use by Government personnel. GAO estimate of unnecessary costs: $1,852,000. Time period of GAO report: April 1961 to September 1965. DOD comments on GAO finding: Actions taken in this case were based on the premise that 5 U.S.C. 78 precluded the acquisition of title to the vehicles except as specifically authorized by the Congress in the yearly DOD Appropriation Acts. Also, it was estimated that the time involved in the budget, procurement, and delivery cycle for the vehicles would have resulted in an unacceptable delay in the MINUTEMAN program. Although the GAO report states that compliance with 5 U.S.C. 78 does not appear to be necessary when vehicles are for use by contractor personnel, and that funds appropriated for the procurement of missiles could be used to procure such vehicles, we are of the opinion it is the intent of the Congress to control the purchase of passenger vehicles by the Department of Defense, regardless of whether the vehicles are to be used by Government or contractor personnel. DOD comments on costs: Although we have some reservations concerning computations of certain cost comparisons in the report, we recognize that substantial savings could have accrued if the vehicles in question could have been pur chased by the Government and provided to the contractor as Government furnished equipment. DOD corrective action: Appropriate guidelines have been issued to the military departments requiring that for all major projects in which (1) substantial numbers of passenger vehicles will be acquired for use by contractor personnel, (2) the Government will bear the total cost thereof, and (3) contractors would not be expected to have the transportation capability in the performance of defense contracts generally or with a mix of use in commercial activities, a deter mination will be made as early as possible in the program effort as to the feasibility of providing the vehicles as Government furnished equipment. Vehicles required for use by Government personnel in their work on major projects will be included in the annual budgets submitted to the Congress for review and approval. Problem ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE The GAO alleges that leasing rather than Government purchasing of motor vehicles for use by the Boeing Co. in the assembly and checkout operations at MINUTEMAN missile launch sites under Department of the Air Force contracts |