"c. Procurement of GFE items will be funded from the program established for the end article.

"d. GFE items will be delivered or scheduled to be delivered directly to the contractor's facility, if possible. If this is not possible, the materiel will be held in a holding account for this purpose until the materiel is delivered to the contractor's facility."

The inventory manager at the end article air materiel area, in coordination with the responsible engineering activity and the directorate of procurement and production, is responsible for identifying and selecting the items to be furnished as GFE.

Status: Case closed.

GAO Report, B-146860, December 10, 1964

73. Title: "Overstated Costs Included in Price of Turbojet Engine Parts Purchased From Solar Aircraft Co., San Diego, Calif., by General Electric Co., West Lynn, Mass." (OSD case No. 1942).

GAO finding: General Electric purchased engine nozzles from Solar on a noncompetitive basis at a fixed price which was excessive in relation to cost data available at the time the price was negotiated. General Electric did not review Solar's prior cost information but accepted the price proposed by Solar on the basis that the price was lower than the price paid under previous purchase orders. Solar submitted a certified cost and price analysis which merely repre sented its estimate of the various elements of cost and related profit included in the price.

GAO estimate of unnecessary costs: $65,000.

Time period of GAO report: 1961.

DOD comments on GAO finding: The Air Force has audited the subject contract and concurs with the GAO finding with respect to labor costs which account for approximately 80 percent of the total. There is some question as to the balance which is comprised of material costs which are still being reviewed. DOD comments on costs: Air Force investigation not completed.

DOD corrective action: The Air Force will take action to obtain an appropriate refund upon completion of its investigation.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

In their Draft Report the GAO alleged that (1) the Government will bear an additional cost of about $57,500 plus an undetermined amount for indirect costs of the prime contractor, General Electric, for J85-GE-5 turbojet aircraft engines unless an appropriate adjustment is made, and (2) the additional cost is the result of the acceptance by General Electric of Solar's price which was excessive in relation to cost data available at the time this fixed price was negotiated.

GAO recommendation

The GAO concluded that it is neither reasonable nor equitable for Solar to benefit from the excessive prices paid by General Electric and recommended that the Air Force make every effort to obtain an appropriate recovery.

Statement

Our response to the Draft Report advised the GAO that, (1) we had accomplished a comprehensive audit of the matters; (2) we concurred with their findings regarding the overstated labor costs; (3) we did not concur with their allegation that Solar had made an unjustified increase to cover a supplier's price increase; (4) we would seek a price adjustment in connection with the overstated labor costs; and (5) they would be notified of significant developments as they occur.

Problem

In their Final Report the GAO stated that our response to the Draft Report regarding Solar's experienced burden rate was incorrect.

H

Statement

We were unable to reconcile the information contained in the report with the data available in the field and the GAO was requested to provide us with an explanation of their computations.

Our response to the final report, in brief, advised the GAO that (1) Solar has been adamant in refusing General Electric's request for a price adjustment and has stated that "* * * it appears the transactions were fair to all concerned and there is no basis in law or in equity for requesting a refund from Solar nor reason for Solar to make such refund * * *"; (2) in view of Solar's adamant position, action will be taken to obtain an adjustment from General Electric Co., based on actual cost experience for the period of May-December 1961 which it is assumed was, or reasonably should have been, available to General Electric; (3) with reference to their comment appearing on page 21 of the report regarding the burden rate, it is true that the 182.10 percent applies to the period of production, April 1962 through January 1963; however, further examination on the part of their auditors would have disclosed that essentially the same results had prevailed prior to the November 14, 1964, quote; (4) we must disagree with the allegation that 46 of these partitions were included in the Solar quote at a cost of $7.735 and eight at a cost of $8.037, as a review of the GAO work papers (D-4/5) discloses that their auditors obtained these figures from Manufacturing Orders Nos. 1748172 and 1748209 completed on September 24, 1961, and October 22, 1961, respectively. However, these orders relate to production prior to the November 14, 1961, quotation and as such represent cost history rather than a cost estimate; and (5) at no time did Solar experience such a cost ($6.30); rather, $6.75 was the lowest amount paid for the item. Status: Case open.

Policy: The overpricing in this instance was due to inadequate review of Solar's proposal by General Electric. Significant action has been taken by the Air Force regarding the examination of the prime contractor's purchasing systems and review of proposed subcontract sources and prices. Periodically, reviews are made of contractors' purchasing and estimating systems and recommendations are made where appropriate to assist the contractor to improve his system. Where appropriate, contractors are required to execute a pricing certificate and a defective data pricing clause is incorporated in a contract which provides a legal remedy by which the Government can effect appropriate price adjustment in the event the contractor has failed to furnish the Government negotiators reasonably accurate, complete, and current pricing data.

GAO Report, B-146954, December 28, 1965

74. Title: "Overpricing of Buffer Amplifiers Purchased From HRB-Singer, Inc., State College, Pa. by the Boeing Co., Wichita Branch, Wichita, Kans. for B-47 Aircraft" (OSD case No. 1971).

GAO finding: Under an Air Force prime contract Boeing awarded follow-on purchase orders to HRB-Singer at prices totaling $158.581 that were about $86,440, or 120 percent, higher than costs recently experienced, as shown by the information available to HRB-Singer at the time the prices were established. Boeing accepted the prices proposed by HRB-Singer without cost information on HRB-Singer's prior production experience or other evidence to support the reasonableness of the proposed prices although it did not obtain competition. GAO estimate of unnecessary costs: $86,440.

Time period of GAO report: 1960 and 1961.

DOD comments on GAO finding: The GAO is correct with respect to the actions of HRB-Singer. Boeing, however, did everything possible to obtain cost data and the Air Force knew of this and approved the subcontract to HRB-Singer notwithstanding the lack of cost data because HRB-Singer was the only source that could meet requirements.

DOD comments on costs: No independent DOD estimate made.

DOD corrective action: The ASPR has been revised since 1961 to provide additional guidance with respect to the furnishing of cost and pricing data and also to require contracting officers to withhold making contract awards and to refer procurement actions to higher echelons whenever a contractor (1) refuses to provide required cost or pricing data, or (2) insists on a price or demands a

profit or fee which the contract officer considers unreasonable. The Air Force does not concur in the position taken by HRB-Singer and has alerted its procurement personnel to the facts of this case in connection with any future contracts involving this company or other companies that refuse to negotiate on reasonable terms.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

The GAO alleges that under its prime contract with the Air Force, the Boeing Co. awarded HRB-Singer two groups of follow-on orders for buffer amplifiers for B-47 aircraft at firm prices totaling $158,581 that were $86,442 or 120 percent higher than costs experienced on prior production and available to Singer at the time the prices were established. In the absence of effective competition, Boeing accepted the prices proposed by Singer without obtaining cost information on Singer's prior production experience or other evidence to suppport the reasonableness of the proposed prices.

GAO recommendations

In its draft report, the GAO recommended that the Secretary of the Air Force make every effort to obtain an appropriate price reduction for the unreasonably high prices Boeing paid Singer for buffer amplifiers purchased under prime contract AF 34 (601)-4588 and that the Secretary of the Air Force review the firm prices established by Singer with other Government contractors and advise us of the results of the review.

In the final report, the GAO recommended that the Secretary of Defense stress the need for real personal concern by each member of the procurement team that their responsibilities are carried out in a manner that will adequately protect the interests of the Government and, when making future personnel evaluations and management assignments, appropriately consider the manner in which they had discharged their responsibility and performed their duties.'

Statement

We have examined 29 orders issued by our prime contractors to HRB-Singer. This review consisted of all such orders in excess of $10,000 issued during the period of April 1960 through May 1964. Our review disclosed that all the purchase orders were for electronic countermeasure equipment (ECM) and that many of the procurement were processed in consonance with our quick reaction capability (QRC) procedures established to meet urgent electronic warfare and intelligence requirements. Sixteen of the procurements were emergency requirements and the remainder were urgent requirements to fulfill critical production schedules.

For many of the requirements, our prime contractors solicited proposals from 6 to 11 sources. The initial procurements with Singer were for advance development, classified research, and feasibility studies involving awards on the basis of source screening and technical and price competition. For most of the procurements, Singer was the only source that could meet our prime contractor's requirements, and in at least nine of the procurements the Air Force directed Singer as the source on the basis of technical requirements. Contrary to the conclusion contained in the report, Boeing used all the time allowed, short of endangering delivery requirements, in its efforts to negotiate reasonable prices with HRB-Singer. Boeing made repeated efforts to obtain better prices and additional cost data from HRB-Singer. When these efforts failed, Boeing attempted to obtain the subcontractor's concurrence with use of a redetermination type contract; however, Singer advised Boeing on several occasions that purchase orders on other than a firm-fixed-price basis were unacceptable.

Our interim response of June 2, 1964, advised GAO that steps would be taken to obtain a price adjustment and that withholding action was being taken under the prime contract with Boeing. By letter of May 5, 1964, and in subsequent contacts with the management of HRB-Singer, Inc., the Boeing Co. has taken action to obtain a refund. However, Singer management is adament in their position that the purchase orders with Boeing were fixed price and not subject to price revision. In view of the information disclosed by our more detailed examination of the matter, we concluded that the Boeing Co. should not be held responsible for the unreasonably high prices received by HRB Singer, Inc., since,

1 See "Status."

in a difficult situation, it attempted to act in the best interest of the Government, and the Air Force approved the subcontract fully aware of the circumstances which confronted Being in its dealings with Singer. Therefore, we are directing that the commands discontinue their withholding action under the prime contract. We do not concur with the position taken by HRB-Singer in this matter. A letter dispatched to our buying personnel and those engaged in contract administration cautioning them that in their direct dealings with Singer and in the approval of subcontracts awarded Singer by our prime contractors, that every effort will be made to assure compliance with the ASPR and other pertinent directives. Further, our personnel will be advised that should HRB-Singer, Inc., decline to comply with appropriate directives, Public Law, etc., the matter will be brought to the attention of the Air Staff prior to the entering into, or the approval of, any contract with HRB-Singer, Inc.

Regarding our response to their draft report the GAO states, "The Air Force has advised us that Boeing initiated action to obtain a refund but that HRBSinger was adamant in its position that the purchase orders with Boeing were fixed price and not subject to price revision. We have been advised that the Air Force does not concur with the position taken by HRB-Singer and that action is being taken to assure compliance with the Armed Services Procurement Regulation and other pertinent directives in all future awards to HRB-Singer."

Regarding the Boeing effort to obtain a refund from HRB-Singer, the GAO states that "the position taken by HRB-Singer in refusing to make a voluntary refund is not in consonance with the position generally taken by other contractors who under similar circumstances have agreed to negotiate adjustments of the prices and have made voluntary refunds to the Government. The action outlined by the Air Force to be followed by contracting officials in future dealings with HRB-Singer should serve to emphasize the need for these officials to use all means necessary to support effective price negotiations and to avoid placing undue reliance on contractors' unverified representations, to assure reasonable pricing."

Status: Case closed.

Regarding the recommendation contained in the final report, OSD has been advised of the urgency and sensitive nature of purchase orders placed by Boeing with HRB-Singer and the apparent justification for Air Force approval of these subcontractors.

Policy: The procurements cited in the report were unusual and the material was required to meet sensitive and urgent electronic warfare and intelligence requirements. In this kind of a situation there is always the likelihood that the policies and procedures regarding subcontract pricing review as set forth in our response to OSD case numbers 1935 and 1942 will not be completely effective. Notwithstanding the emergency nature of these requirements, we abhor the position taken by the subcontractor in the refusal to negotiate reasonable prices with the prime contractor.

GAO Report B-132992, February 9, 1965

75. Title: "Potential Savings Through Procurement of Operating Supplies from General Services Administration Sources by Martin-Marietta Corp., Denver Division, Denver, Colo." (OSD case No. 2022).

GAO finding: GAO found that the prices paid by Martin for operating supplies such as file folders, bond paper, carbon paper, pens, tape, etc., were higher than the prices of comparable items listed in the General Services Administration stores stock catalog. GAO, therefore, recommends that the Government take over the buying and supplying of contractor's operating supplies where GSA stocks such items and allow contractors to buy nonstocked items from GSA sources, thus eliminating purchase of operating supplies from local venders. This would extend to prime contractors and subcontractors holding negotiated contracts who would use operating supplies so obtained wholly or substantially (75 percent of use) in the performance of Government contracts. GAO estimate of unnecessary costs: $533,333 per year.

Time period of GAO report: 1960 through 1962.

DOD comments on GAO finding: The GAO recommendation in effect would force the affected defense contractors to buy through GSA from the same sources used by the Government as if the contractors were a part of the Government or agents of the Government. It is to be noted that this principle, if adopted, could be applied to almost anything which defense contractors purchase for

their own use. For example, GAO has also recommended that defense contractors lease electrical accounting machines off GSA schedules (OSD case No. 1902) and buy office furniture from GSA manufacturers (OSD case No. 1985). DOD has indicated its opposition to this approach because of the effect that such practices would have on the normal established commercial distribution of goods and services and because the philosophy which the recommendation embraces would inevitably lead to greater Government control and interference in the operations of contractors.

DOD comments on costs: No independent DOD estimate made.

DOD corrective action: Because of the broad economic and national policy questions raised by this recommendation, particularly with respect to the displacement of existing distribution channels, no change is being made in present procedures pending further review.

ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE

Problem

The GAO alleges the Government incurred excessive costs of at least $484,000 during the 3-year period 1960 through 1962 because Martin-Denver purchased operating supplies from commercial sources at prices higher than the prices of comparable items available from manufacturers who supply such items to the General Services Administration. In as much as 99.98 perecnt of MartinDenver's work was performed for the Government, about 99.6 percent under cost-reimbursement type contracts, the Government bears the excess cost of op‐ erating supplies used by the contractor.

GAO recommendations

(a) That the Department of Defense initiate action to identify sources for direct procurement of such operating supplies; and that defense contractors and local contracting officials be made cognizant of such sources.

(b) That the costs of operating supplies charged to Government contracts and reimbursed to the contractor be limited to amounts equivalent to those which would be incurred if GSA procurement sources were utilized.

Statement

OSD advised the GAO that (1) they have recently reviewed Air Force policies on the use of GSA schedules by defense contractors; (2) the Air Force conclusions together with the conclusions of the Department of Defense, were reported to them in response to the draft report on procurement of office furniture by Lockheed Missile & Space Co. (OSD case No. 1985); (3) as was stated at that time, we agree in general with the first of the recommendations but disagree with the second; (4) we noted, in summary, that the first recommendation might provide useful information and guidance to defense contractors, the second, however, would interfere with the judgment of the contractor, who has the primary responsibility for determining what supplies and equipment are best suited to his current and future requirements; and (5) although the Lockheed case was concerned with furniture rather than office supplies, we are of the opinion that the reasoning behind our position in that case is equally ap plicable to the procurement of all items that the contractor buys for himself and not directly for the Government.

Status: The DOD comments are quoted below:

The GAO recommendation in effect would force the affected defense contractors to buy through GSA from the same sources used by the Government as if the contractors were a part of the Government or agents of the Government. It is to be noted that this principle, if adopted, could be applied to almost anything which defense contractors purchase for their own use. For example, GAO has also recommended that defense contractors lease electrical accounting machines off GSA schedules (OSD case No. 1902) and buy office furniture from GSA manufacturers (OSD case No. 1985). DOD has indicated its opposition to this approach because of the effect that such practices would have on the normal established commercial distribution of goods and services and because the philosophy which the recommendation embraces would inevitably lead to greater Government control and interference in the operations of contracts.

Because of the broad economic and national policy questions raised by this recommendation, particularly with respect to the displacement of existing distribution channels, no change is being made in present procedures pending further review.