the start of a machine job to its completion, including the time for intervening activities required for completion of the job."

Each contractor installed time meters on its own initiative as a management improvement technique and the metered time recorded is only the actual machinerun time.

For EAM operation, at General Dynamics, present contractual arrangements (to which the Air Force is not a party) do not allow use of such meters for payment purposes and they are being used for management purposes only. Defense contractors are being urged to install time meters on EAM and to urge their acceptance for payment purposes.

In April 1964, IBM installed time meters on all of its EDPE and they are now being used as a basis for payment by all defense contractors, including Lockheed. Rentals computed prior to that date were in accordance with the contract then in effect and no legal or equitable basis exists upon which Lockheed could support a claim for refund from IBM.

Air Force representatives met with IBM to determine whether a price adjustment would be appropriate. IBM's position was that no adjustment is warranted. This position is based on the fact that the rentals were computed in full accordance with the terms of the rental agreements with the contractors involved. GAO has recommended DOD participation in further attempts to obtain a refund. DOD advised GAO they will not seek a refund-not in best interest of Government.

Status: Case closed.

Current as of March 24, 1965.

GAO draft report, March 11, 1965

80. Title: "Lack of Definitive Policy on Furnishing Subsystems to Weapon System Contractors Results in Higher Costs" (OSD case No. 2276).

Period

Report Dated, March 11, 1965.

Time span, N/A policy indictments.

Problem

1. Inasmuch as purchasing by the military departments imposes some administrative burdens, the military departments frequently assign to contractors, as a matter ef expediency rather than economy, a responsibility for purchasing items which should be Government furnished.

2. A lack of definitive policy as to circumstances where subsystems should be purchased by the Government and furnished to weapon system contractors results in higher costs.

GAO recommendations

1. We recommend that the Secretary of Defense direct that the proposed policy guidance include a statement that the general policy of the Department of Defense is (a) to furnish to contractors as many of the subsystems and components as is practicable where such items have a relatively high unit value and (b) to acquire such subsystems and components through system contractors only where the contractor is required to make a major contribution either in production of the item or in technical assistance to subcontractors (or where the item is not readily divisible from a larger assembly of which it is a part).

2. We recommend that the Secretary of Defense direct that the proposed policy guidance include a requirement that where a deviation from the general policy acquisition manager that it is not feasible for the Government to purchase a subsystem or component which, under the general policy, should be Governmentfurnished, such a determination be documented and reviewed at the next higher level of procurement authority as a deviation from the general policy.

3. We recommend that the Secretary of Defense direct that the proposed policy guidance include a requirement that where a deviation from the general policy is approved, positive steps be taken to remove the obstacles that precluded purchase by the Government.

4. We recommend that the Secretary of Defense direct that the proposed policy guidance include a statement that reduction in profit or fees, which otherwise would be negotiated, is a significant factor to be considered in breakout determinations.

Statement

Problem 1:

(a) We do not concur. Our personnel engaged in breakout activities are effectively utilizing breakout procedures wherever substantial reductions in overall costs are possible after thorough evaluation has been made of the tradeoffs between time, quality, and economy. The determination as to whether or not an item should be contractor-furnished (CF) or Government-furnished (GF) essentially is made under the policy set forth in AFR 70-9 as implemented by Air Force Systems Command (AFSC) Supplement No. 1. This policy has evolved through years of Air Force acquisition expericence and is designed to further optimize our procurement methods in fielding a weapon system.

(b) The AFSC supplement contains tables which spell out the procurement categories, CF or GF, for the items required in the missile and airframe systems. The tables only go down to the subsystem level in categorizing these items. To go further and prescribe CF or GF for the components of these subsystems would, in our opinion, seriously jeopardize subsystem integrity and be contrary to our position, that nothing must materially delute the contractor's end item responsibility in order that he can be held fully responsible for the delivery of operable equipment. This responsibility is particularly important due to the extent of critical equipment developed and produced under our systems programs. (c) The tables provided in the supplement to AFR 70-9 serve as detailed guidance to our buying activities to insure fully compliance with the spirit and intent of our policy in this area. Authority to deviate from the GF table has been delegated to AFSC Division Commanders. However, a deviation must be fully documented, and accompanying each request there must be a plan for converting approved deviations back to adherence to the table.

(d) AFR 70-9 and AFSC Supplement No. 1 thereto are not designed to be a deterrent to GF assignments. To the contrary, they serve to encourage such assignments as they are attainable without dissipation of our manpower resources and whenever material savings are foreseen without endangering system performance.

(e) The CF/GF assignments as they are made in a program and the aforediscussed deviations (see par. c, above) to the GF table in supplement No. 1 are both made through the action of multiprofessional boards at the division level in the systems command. Such action takes place early in the advance planning stage of the program in accordance with AFPI 1-365 on advance procurement planning and AFSC procurement management instruction PMI 1-11. Such timing is particularly important. Since we can assume a 5-year system acquisition phase (average), the detailed parts identification and design stabilization would not be available to our personnel in time to make a reasonable GF "breakout" judgment that would allow initial GF support before the fourth or fifth year of the acquisition phase, the time when the average acquisition phase is virtually completed. Thus, it is clear that in the procurement of our subsystems, which normally requires 18 to 24 months leadtime, no marked advancement in the number of GF breakouts can be made beyond those made at the outset of the program.

NOTE.-Under a proposed AFSC revision to supplement No. 1 to AFR 70-9 these boards are also to accomplish annual reviews of CF items having a dollar value as low as $500 to decide the feasibility of converting them to GF.

(f) The systems command boards, acting in consonance with our policy, make CF/GF assignments and deviation requests only after a thorough evaluation. These evaluations are made in the light of the advantages accruing to the Government with each GF determinations (including profit pyramiding) and the resultant basic Air Force policy of AFR 70-9 that subsystems and components to GF to the fullest extent practical and certainly not CF purely as a matter of expediency or convenience.

(g) Further substantiation of our position in this matter is contained in our replies to GAO reports, OSD cases Nos. 1883, 2000, 2025, 2142, 2160, and 2183. Problem 2:

We do not concur with the GAO. Our policy is definitive and our requirements as set forth in AFR 70-9 are specific. As stated on page 13 of the GAO report our regulation “*** provides procedures and guidance for analyzing weapons systems and for classifying the related subsystems and components into categories based on the method (contractor-furnished or Government

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furnished) to be used in purchasing them. Systems managers are required to justify their decisions, and to obtain authorization from higher levels on an individual item basis, before assigning to a contractor responsibility for purchasing items which under the criteria of the regulation should be Governmentfurnished."

Recommendation 1:

We do not concur in total. We take exception to the alternative condition in part (b) which indicates "(or where the item is not readily divisible from a larger assembly of which it is a part)." This is not a criterion for breakout. It is Department of Defense policy to breakout components that are procured by the end item contractor whenever such breakout will result in overall savings to the Government and will not jeopardize the satisfactory performance and timely delivery of the end item. It is important that nothing be included in the ASPR that would defeat the program manager's effectiveness as promulgated by the 375 series Air Force regulations.

Recommendation 2:

Concur to the extent that DOD policy would be consistent with the intent of AFR 70-9 and AFSC Supplement No. 1 thereto. Should DOD policy be more exacting in nature the additional review and analysis and documentation (for contract file) burdens placed on our manpower authorizations could seriously encumber the entire procurement operations.

Recommendation 3:

Concur: This is the intent of AFR 70-9, as indicated earlier. Also advance procurement planning as required by AFSC PMI 1-11 serves to eliminate or minimize such obstacles as this.

Recommendation 4:

We do not concur: Profit or fees are only one facet of the factors weighing on the CF/GF breakout decision. Other specific factors which are equally as important, if not more so, are as follows:

(a) Has the design stabilized?

(b) Is the design highly critical?

(c) Is an adequate reprocurement data package available?

(d) Are the manpower resources available to enable the Department to undertake direct procurement?

(e) Is adequate technical support available?

(f) Are any reliability, technical or integration problems known which will require effort by the prime contractor? How complex are they?

(g). Will breakout create interchangeability or interface problems?

(h) Is there adequate time available to procure the component from a new source if competition by the Government could result in a new producer? (i) Where incentive contracting is contemplated, the effect that breakout will have on the incentive structure (cost, performances, and/or schedule). (j) Will the subsystem be procured on a competitive basis (in which case Government is reasonably assured of a fair price)?

(k) How much will breakout dilate the contractor's end item responsibility? (1) Will breakout actually result in substantial overall cost reductions even after the acid test of real/ultimate cost factors?

Other information

Attachment No. 1: GAO final report dated November 29, 1963, on "Uneconomical Procurement of Electronic Equipment Under Contract AF 01(601) – 31042 With Grumman Aircraft Engineering Corp., Bethpage, Long Island, N.Y." OSD case No. 1682.

Attachment No. 2: GAO final report dated January 6, 1965, on "Additional Costs Resulting From the Failure To Procure Parts Used in Overhauling SAM Aircraft Engines Directly From the Overhauling Subcontractor, Curtiss-Wright Corp." OSD case No. 2002.

Attachment No. 3: Proposed letter to GAO on OSD case No. 2002.

Attachment No. 4: CFE versus GFE ASPR Subcommittee on Systems Component Breakout.

Attachment No. 5: Summary of GAO reports on CFE versus GFE. Other briefs

See B-152600, B-146942 and B-146882.

APPENDIX 2E-ADDITIONAL CASES ON WHICH INFORMATION WAS FURNISHED BY THE DEPARTMENT QF DEFENSE

GAO Report B-146732 series

81. Title: "Excess of Lease Costs Over Full Purchase Costs for Continued Use of Equipment Over a 5-Year Period by General Electric Co., General Motors Corp., the Boeing Co., General Dynamics Corp., Lear Siegler, Inc., Hercules Powder Co., Radio Corp. of America, and Other Defense Contractors Involved in 19 GAO Reports," all numbered B-146732, OSD case nos. 1850, 1857, 1859, 1872, 1874, 1893, 1899, 1906, 1907, 1912, 1921, 1925, 1931, 1939, 1954, 1960, 1990, 2017, 2235. GAO finding: Since September 1963 GAO has been issuing a continuing series of reports on the subject of contractors' leasing of electronic data processing equipment. These reports are virtually identical in most cases except for the name of the company and the applicable figures. The conclusions and recommendations are essentially the same in all cases.

GAO's position is that leasing of computers instead of buying them has resulted, and is continuing to result, in excessive costs which are eventually charged to the Government under defense contracts. This position is based on the premise (a) that this type of equipment has a useful life of from 5 to 10 years and (b) that total rental costs over this period generally exceed the purchase price of the equipment.

On the basis of this premise, GAO at first concluded that defense contractors should have purchased, or should now purchase, the computers being used in the performance of defense contracts. Later (apparently as a result of evidence presented by DOD and defense contractors showing that usage of computers has averaged considerably less than the breakeven period) GAO adopted the position that computers should be bought by the Government and made available to defense contractors as Government-furnished material. Then, even if usage by an individual contractor were relatively brief, the Government would be in a position to exploit the relatively long overall useful life of the equipment by transferring it to other users, including DOD activities and other Government agencies as well as other contractors.

As an ultimate objective, GAO recommends the establishment of a central management office in the Government, suitably empowered to make decisions on the acquisition and utilization of computers by all Federal agencies and their contractors. As an interim measure, GAO recommends that the Department of Defense (1) consider purchasing the contractor equipment identified in the reports or (2) limit the amounts of reimbursement to an appropriate allocation of the cost of ownership based on an estimate of total useful life, considering the requirements of follow-on users as well as of the original user.

- GAO estimate of unnecessary costs: The total amount estimated by GAO in all the reports, projected to the end of a 10-year period, is approximately $60 million.

Time period of GAO reports: 1961 to 1964 (and continuing).

DOD comments on GAO finding: DOD did not attempt to separately investigate the facts in every case when it became clear, after surveys were conducted, that GAO's basic assumptions and premises could not be accepted as valid.

Essentially, DOD found that the contractors in question had exercised good judgment in deciding to lease rather than buy; if they had bought the computers, the results would have been either higher costs or an impairment of weapons progress due to the retention of relatively ineffective and obsolescent equipment. DOD disagrees that the Government should buy computers on the mere assumption that secondary users will be available when the original user no longer needs the equipment. It would be unreasonable for the Government to undertake the very heavy investment involved in purchasing computers on the scale contemplated by GAO without reliable assurance that follow-on requirements by other users will in fact materialize. Such assurance, however, has been clearly impracticable in the face of the rapid technological progress in the field, changing Government requirements, and the difficulty of predicting user needs 2 or more years in advance in an increasingly competitive environment. Under these conditions, the Government would run the serious risk of accumulating a multimillion-dollar inventory of surplus and obsolescent equipment for which no market would be available. This would be in direct contradiction to the program

which has been underway in DOD to reduce surplus inventories and minimize any further accumulation of excess stocks.

Further, DOD considers it the responsibility of private enterprise to provide its own facilities to the maximum extent practicable rather than have facilities selected and furnished by the Government. Independent management decisions, not dictated by the Government, are considered essential in such matters as the selection, utilization and replacement of contractor-used computers. Sound deci sions in this area are integral to a company's competitive position, to the efficiency of its operations, and to its capability to meet increasingly sophisticated defense requirements. In a system of free enterprise, DOD believes that such decisions should be made by private management and not the Government.

GAO Report B-146823, November 29, 1963

82. Title: "Uneconomical Procurement of Electronic Equipment Under Contract AF 01 (601)-31042 With Grumman Aircraft Engineering Corp., Bethpage, Long Island, N.Y., Department of the Air Force" (OSD case No. 1682).

GAO finding: The Air Force did not furnish Grumman with pertinent information relative to past, current and contemplated procurements of electronic equip ment by the military services and as a result the prices paid for the equipment by Grumman were about 61 percent higher than prices currently being obtained by the services.

GAO estimate of unnecessary costs: $1,150,000.

Time period of GAO report: The draft report was dated September 28, 1962. It reviewed a contract awarded in June 1960.

DOD comment on GAO finding: Acting DASD (procurement) by letter of January 31, 1964, to GAO concurred in GAO's basic finding and in the conclusion that an effective exchange of pricing information is needed between defense agencies and contractors buying the same items. A primary means for achieving savings in this case would have been through the pooling of Air Force and Grumman orders wherever practicable.

DOD comments on costs: No independent estimate made. However, GAO's estimate is considered to be too high because it assumes that all orders placed by Grumman could have been priced out at the same prices paid by the Air Force. This would have depended at least in part on the pooling or combining of orders in order to obtain quantity prices. In many cases this would not have been practicable.

DOD corrective action: Although no legal basis for obtaining a refund exists, Air Force is making efforts through Grumman to negotiate price reductions where it appears that such reductions would be equitable. Reductions totaling $97,789 have been achieved thus far.

Policy guidance has been provided in ASPR to promote the exchange of pricing information and to help assure reasonable prices where items currently being procured were previously purchased either by defense agencies or by defense contractors. Further procedures to improve the effectiveness of this exchange of infomation are under study.

GAO Report B-146836, January 24, 1964

83. Title: "Unnecessary Cost Incurred in the Procurement of AN/ARN 21C Tacan Radio Components through Failure To Accept Option Offer, Department of the Air Force" (OSD case No. 1790).

GAO finding: Air Force incurred unnecessary costs of over $1 million by its failure to incorporate into a contract an option offered by the supplier of Tacan radio components to furnish additional quantities at the original contract price. GAO estimate of unnecessary costs: $1 million.

Time period of GAO report: The GAO draft report was dated June 21, 1963. It reviewed a contract awarded in November 1958 to Hoffman Electronics Co. by the Air Force.

DOD comments on GAO findings: DASD (procurement) by letter of April 7, 1964, and supplemental letter of June 8, 1964, disagreed with the GAO finding