GAO Report B-146967, February 26, 1965 76. Title: "Unproper Application by the Hallicrafters Co., Chicago, Ill., of Government's Share of Vendor Credits for Volume Districts Under Contracts AF 33 (600)—40992, -40094, and -42414" (OSD case No. 2067). GAO finding: The Government did not receive its share of credits allowed by a vendor to Hallicrafters for volume discounts on electronic equipment items purchased under Air Force contracts. GAO estimate of unecessary costs: Approximately $72,000. Time period of GAO report: 1962. DOD comments on GAO finding: The Air Force concurs in GAO's findings. Hallicrafters made appropriate accounting and billing adjustments to credit the Government with $57,200. DOD comments on costs: Air Force agrees with GAO estimate. DOD corrective action: The balance will be recovered when the last of the three contracts, a fixed-price incentive contract, is finally priced out by the Air Force. ADDITIONAL COMMENTS BY THE DEPARTMENT OF THE AIR FORCE Problem GAO found that Hallicrafters improperly applied credits of about $72,000 to a firm fixed-price contract when a substantial portion of these credits arose from purchase orders issued under cost reimbursement and fixed-price incentive type contracts which entitled the Government to share in these credits. The credits were extended to Hallicrafters in accordance with the provisions of an annual agreement for volume discounts granted by Eitel-McCullough, Inc., a supplier of certain tubes used by Hallicrafters in the manufacturer of electronic equipment. Subsequent to the GAO disclosures, Hallicrafters made appropriate accounting and billing adjustments which will result in a recovery of about $57,200 by the Government. GAO recommendations (a) That the Secretary of Defense bring this case to the attention of contracting officers and audit personnel in the military services to illustrate the need for careful review of procurement and accounting practices of contractors operating under cost and incentive type contracts. (b) That the Secretary of the Air Force take appropriate action under the final repricing of fixed-price incentive contract 42414 to insure that the amount due is recovered by the Government. Statement Our review has confirmed the GAO findings in this matter. The administrative contracting officer has taken action to preclude recurrence of this condition. As stated in the report, complete refunds have been received from the contractor on the two cost-type contracts. Pursuant to the GAO recommendation that this case be brought to the attention of our contracting and audit personnel, the Systems Command in a letter, subject "Impact of Contractor Purchasing and Accounting Practices on Incentive and Cost Reimbursable Contracts," has directed the attention of all contracting personnel to problems of the type cited in the report that can arise in the administration of contracts. Similar instructions were issued to our auditors. The Department of Defense has brought this case to the attention of audit personnel in the military services to illustrate the need for careful review of procurement and accounting practices of contractors operating under cost and incentive-type contracts. Regarding the GAO recommendation that action be taken to insure that the amount due the Government under contract 42414 is recovered, our auditor verified that recovery has been made. Notification that recovery has been accomplished was forwarded to GAO on April 28, 1965. Status: Case closed. GAO Report B-146784, July 31, 1963 77. Title: "Noncompetitive Procurement of Military Aircraft Forgings From Alcoa at prices Substantially Higher than Current and Expected Costs of Production" (OSD case No. 1648). Problem In brief, the GAO finds that (1) for noncompetitive sales of military aircraft forgings totaling $2.6 million, Alcoa consistently quoted prices substantially above its current and expected production cost, and even though competition was lacking, the company refused to furnish cost data to its military customers, thereby precluding open negotiation of prices. These prices exceeded Alcoa's known current production cost by $893,300, or an average of about 51 percent; (2) notwithstanding the absence of effective competition and the fact that Alcoa's favored position stemmed in part from its possession of special Government facilities, the company refused to accept subcontracts on any basis other than its own terms and rejected the inclusion of contract provisions granting the Air Force or its contractors the right to review actual cost data. As a result of the position taken by Alcoa, and the pressure of time in the overall production of the related aircraft, its military customers had to accept the prices offered without benefit of normal negotiation processes; and, (3) all efforts of the Department of the Air Force to obtain data from Alcoa with respect to the cases cited, as well as other prior Air Force defense business, have been resisted by the company pending the issuance of this report. GAO recommendation "We are recommending that, in addition to taking immediate steps to effect equitable settlements on the contracts discussed in this report, the Secretary of Defense vigorously support the recent Air Force action to examine into the prices negotiated with Alcoa for other defense business. Also, we are requesting the Secretary of Defense to notify us in the event Alcoa further denies the Air Force access to its records and to keep us currently informed of the progress made in obtaining an equitable adjustment of contract prices." Statement The Final report did not differ materially in its allegations from the draft report issued in July 1962. Upon receipt of the draft report the immediate problem was that of obtaining access to Alcoa's accounting records to verify, modify, or refute the GAO allegations. Previous attempts at obtaining access to Alcoa's records were unsuccessful. Alcoa stated they were reluctant to permit unlimited access to cost records associated with Government contracts utilizing the heavy press facilities pending issuance of the GAO final report. They advised they would comply with the statutory requirements of Public Law 87-653. The Air Force Systems Command eventually acquiesced to the suggestion that any further attempts to gain access to Alcoa's records should await the issuance of the final report, since Alcoa had been communicating with GAO and had advised they were able to explain the deficiencies cited in the draft report to the General Accounting Office's satisfaction. General Schriever, commander, Air Force Systems Command, did on September 5, 1963, dispatch a second strongly worded letter to the President of Alcoa, in which he informed Mr. Litchfield that (1) Alcoa representatives expressed confidence that the GAO draft report dated July 1962 would be significantly modified in its final form, due to additional detail that had been made available to GAO by your company; (2) he was of the opinion that considerable progress had been made as to clarifying the intent of both parties; (3) it was agreed during our meeting that appropriate Air Force representation would discuss with Alcoa's representatives specific details as to Government audit procedures that would be used; (4) this latter meeting was never formulated due to your company's further discussions with GAO and the understanding that was conveyed which indicated a strong possibility that many of your differences with the GAO had been ironed out; (5) he was disappointed to learn that this final report is essentially the same as the earlier draft; (6) a complete review of appropriate Alcoa records by the pertinent Air Force auditing authorities is a definite requirement; and, (7) he would appreciate Mr. Litchfield's personal response to this letter at the earliest convenient date. A conference was held at AFSC on October 2, 1963 with Mr. Lawrence Litchfield, Jr., and others, from Alcoa in attendance. Generals Veal and Keeling were principals for the Air Force. Mr. Litchfield was completely cooperative and agreed to an Air Force audit of those Alcoa records which pertain to defense products, either prime or subcontract, produced on Government-owned heavy press equipment at the Alcoa Cleveland facility. It was apparent that Alcoa recognized that either the Air Force auditors must be granted access or the GAO would perform the audit function for the Air Force. Undoubtedly, Alcoa prefers Air Force audit after the many futile attempts they made to change the GAO draft report prior to final publication. In order that the scope of the audit and time required to complete it could be determined, it was necessary to make a survey of Alcoa's accounting procedures. In connection with the survey, a review of the GAO working papers was made. During the survey the auditors encountered considerable difficulty in that Alcoa has pooled certain expenses which are not allocated to all work performed. The cost of these expenses are factored and there was no way for determining the reasonableness of these factors or relating them to actual cost. The Air Force auditors completed a detailed audit of two of the five forgings cited in the report. The audit generally supports Alcoa's position with respect to profits over the production life of the forgings as opposed to the more restricted sampling by the GAO auditors. Regarding the trunion-die No. 12204, audit discloses the profit percentage of cost to be 25 percent as compared to the 82 percent stated in the report and for die No. 10689, the profit percent of cost to be 161 percent as compared to the 217 percent set forth in the report. Our investigation did not reveal any instance wherein Alcoa has misled or misrepresented prices they charged our subcontractors. On the contrary, our contractors repeatedly questioned the prices as indicated by the fact that they made repeated efforts to obtain cost data, which Alcoa declined to furnish. Alcoa did not furnish cost data, did not execute certificates of current cost and pricing data, nor would they accept defective pricing clauses. There is, therefore, no contractual basis for seeking a price adjustment. The large profit factor in itself is not adequate justification for seeking a voluntary adjustment or impairing the integrity of the fixed price contracts involved. We have noted with interest a Lockheed purchase of forgings placed during the period that Systems Command was acquiring audit access at Alcoa. This procurement resulted in both execution of a cost certificate and acceptance of a defective pricing clause by Alcoa. However, to clarify fully Alcoa's policy with respect to future Government subcontracting, a letter was sent to Mr. Lawrence Litchfield, chairman of the board, Alcoa, requesting written confirmation as to future policy with respect to their furnishing cost breakdowns, executing certificates of cost data, accepting defective pricing data clauses, and permitting audit access on Government subcontracts. The Alcoa response indicates acceptance of ASPR requirements. Dissemination of policy governing future procurements for Alcoa has been made to all procuring and prime contractor activities and no further action will be taken in this case. Status: Case closed. GAO draft report, October 30, 1964 78. Title: "Unnecessary Costs Resulting From Failure To Procure F-105 Aircraft Multiple Ejector Rack Assemblies Directly From the Manufacturer" (OSO case No. 2153). Problem The GOA finds that that (1) the Air Force incurred unncessary costs totaling about $727,000 because the Aeronautical Systems Division and the mobile air materiel area procured F-105 aircraft multiple ejector rack assemblies from Republic Aviation Corp, the manufacturer of the F-105 aircraft, rather than directly from the manufacturer of the rack assemblies, the Douglas Aircraft Co.; (2) the Air Force under Systems Division contracts for production of F-105 aircraft and under a mobile contract for F-105 aircraft modification kits, negotiated prices which included profits of about $727,000 on rack assemblies and related spare parts which Republic procured from Douglas at prices totaling about $8,071,000 and (3) another Air Force procuring activity, the Warner Robins Air Materiel Area, procured spare rack assemblies directly from Douglas and, as a result, avoided costs of about $259,000 which we estimate would have been incurred had these rack assemblies also been procured from Republic. The GAO concludes that the indirect procurement of the rack assemblies resulted from insufficient concern with the need for economy in Government operations on the part of officials who were involved in these procurements. As a result, they failed to take actions which, if taken, should have caused procurement of the rack assemblies directly from the manufacturer. It appears, however, that (1) Air Force Regulation 70-9 which designates peculiar rack assemblies as equipment which is to be procured from aircraft systems contractors; and (2) the practice of procuring expensive items of equipment as components of modification kits, were significant contributing factors to the failures to procure rack assemblies directly from the manufacturer. GAO recommendations (a) The GAO recommends that (1) the Secretary of the Air Force direct that Air Force Regulation 70-9 be reviewed and revised to the extent necessary to assure that procurement officials avoid procurement of equipment from other than the manufacturer in all instances where it is feasible to do so, and (2) the Secretary of the Air Force direct that only low-cost items be procured as components of modification kits. (b) The GAO states that they have previously reported other instances where the services have incurred additional costs due to failure to procure costly equipment directly from the manufacturer and recommended that the Secretary of Defense make reviews on a continuing basis at Air Force and other defense procurement centers to assure that the services furnish major equipment to contractors wherever feasible. GAO is requesting that they now be advised of the means established by the DOD to review decisions as to whether material should be furnished by the contractor or the Government. Statement The procurements questioned stemmed from a very urgent requirement in early 1961 for increased conventional bombing capabilities for the F-105 weapon system. As a result of studies on this requirement the decision was made to utilize a modified version of the Douglas rack. In August 1961, a meeting of representatives of Republic Aviation Corp., the Aeronautical Systems Division, Hq USAF, and MOAMA was conducted at Republic for the purpose of discussing a means of providing the desired capability. At the time of this meeting, the exigencies of the world situation prompted the Hq USAF representative to state that actions necessary for attaining this capability would be carried through with the urgency of wartime. A Douglas-produced rack assembly was evaluated by the group who agreed that the assembly would have to have a undetermined amount of redesign and/or modification. In view of the fact that Republic was the manufacturer of the F-105, was the only source with complete technical knowledge of this highly complex aircraft, and due to the urgency of the requirement and necessity for engineering of a new or, at best, an undetermined amount of redesign or modification of an existing rack assembly, it was decided that Republic would be responsible for furnishing not only the necessary engineering, but also the component parts. The extent and degree of modifications required to the Douglas rack to meet the F-105 requirement could not be defined in sufficient detail to permit GFAE-type procurement on a timely basis. Regarding the procurement of the additional 321 rack assemblies under production contract 8154, it should be recognized that the configuration of the last 36 aircraft of the fiscal year 1962 contract (42709) was changed from the "D" to "F" model and was followed by the fiscal year 1963 contract (8154) for the final buy out of the F-105 series aircraft. The change involved a 2-place configuration which required a new series of flight tests. At this point in time, assurance that the MER configured for the "D" series would be compatible with the longer 2-place, F-105F model, could not be determined until completion of category II flight test which was not completed until August 1964. The case in question is not the result of blind adherence to the regulation. As a matter of fact, procurements to be made in a higher category than that specified in AFR 70-9 do not require an approval to deviate as cited in the report, A deviation approval is required only if an item is procured in a numerically lower category than called for in the regulation. The Air Force does not concur with the implication that MOAMA actions in this case indicate insufficient concern with the need for economy. The decision to procure the kits from Republic was arrived at during the August 1961 meeting, at which time it was decided that Republic would be responsible for furnishing the engineering and component parts of the kits for the reasons set forth above. The Air Force took exception to the conclusion that the indirect procurement of rack assemblies resulted from insufficient concern with the need for economy in Government operations on the part of officials who were involved in these procurements. GAO failed to recognize that the primary concern of the project manager was and must be to obtain equipment that will work properly in its intended application. Regarding the recommendation that the Secretary of the Air Force direct the review and revision of AFR 70-9, the Air Force expressed concern with the apparent intent of the recommendation even though qualified by the phrase "when feasible to do so." The Air Force is not unmindful of the potential savings that can be realized by direct Government procurement of subsystems and components that lend themselves to GFAE, and the Air Force reviews annually the tables of procurement categories to add, delete or change categories of items. Regarding the second of the recommendations, namely, that only low-cost items be procured as parts of modification kits, the Logistics Command of the Air Force has recently published a new regulation, AFLCR 57-10, which provides for the maximum use of direct procurement and supply of materiel to modification contractors where it is feasible and in the best interests of the Air Force. Regarding the GAO request concerning OSD review of decisions made by the services as to whether material should be furnished by the contractor or the Government, as stated above, we believe that adequate restraints now exist to protect the Government's interests in this area. It is essential that discretion to make decisions of this nature inust remain with our commanders in the field. Time and in-house capability are usually the major factors involved in decisions of this nature, and fast reaction is important to avoid possible delays and added costs to the systems programs. Furthermore, authority of this nature is an integral and vital part of the systems management process and as such, must remain vested in the field in the interests of time and efficiency. Status: Case closed, March 19, 1965. GAO Report B-146920, August 20, 1964 79. Title: GAO draft report dated January 7, 1965, on "Unnecessary Costs to the Government Due to Excessive Rentals for Electronic Data-Processing Machines at Lockheed Missile and Space Co., Sunnyvale, Calif." (OSD case No. 1916). Problem GAO final report B-146920 dated August 20, 1964, on "Excessive Cost In both cases the GAO alleged that a comparison of manually recorded use time with metered time measurements, made after installation of automatic timing devices, demonstrated that the previous manual method was inaccurate and had resulted in excessive rental charges for the use of the computers. GAO recommendation That the Department of Defense insure that the contractors obtain appropriate refunds from IBM of the excessive machine rentals. Statement The determination of use time on a manual basis during the period covered by the requested refund was consistent both with industry practice and with the contracts with IBM. The machine use time so determined represented elapsed time between job start and job stop and included time when the machine was not actually in operation, but was briefly stopped for such things as removal or insertion of cards in the case of electronic accounting machines (EAM) at General Dynamics and program loading in the case of electronic data-processing equipment (EDPE) at Lockheed. This logging practice was in consonance with the standard IBM lease contract which defines "job time" as "the total time from |