DOD comments on GAO finding: DOD does not agree with GAO's finding. This finding is based upon the fact that when meters, a new method of recording use time, were introduced recorded use time decreased. DOD agrees that meters are more accurate than the earlier manual system but does not agree with the conclusions drawn by GAO. The manual system was not arbitrary or unreasonable, it was the system in general use and it was the system intended by the parties when they entered into their rental agreement. GAO did not present, nor could we find, any evidence that the manual recording system had been incorrectly applied. This is a case where a superior technique was developed and displaced a less sophisticated technique. It does not follow from this that "unnecessary costs" were incurred because a less sophisticated technique was used in the past.

DOD comments on costs: No excessive costs were incurred.

DOD corrective action: Action is being taken to promote the use of meters on equipment leased by Government contractors.

GAO Report B-125050, August 28, 1964

93. Title: "Preliminary Survey of the Extent to Which the Defense Department and Its Contractors Have Complied With the Requirements of Pub

lic Law 87-643 in the Pricing of Negotiated Contracts" (OSD case No. 1626-A).

GAO finding: The survey disclosed a significant improvement in the obtaining of certified cost data since a previous review prior to enactment of Public Law 87-653. Relatively few instances were disclosed of failure to obtain adequate pricing certifications from prime contractors or subcontractors.

GAO estimate of unnecessary costs: None indicated.

Time period of GAO report: Contracts and subcontracts negotiated in 1963. DOD comments on GÃO findings: Independent DOD reviews of 11 procurement activities under the procurement management review program involving 2,568 contract actions disclosed that there was no noncompliance in 7 of 11 activities involving 2,519 actions. Where deficiencies were found, they generally were cased by a misunderstanding or misinterpretation of the requirements. DOD comments on costs: None required.

DOD corrective action: Continued emphasis will be placed on the importance of contractors furnishing accurate, current and complete data, and certification thereof. The requirements for certification have been clarified. Defense Procurement Circular No. 12, dated October 16, 1964, underscored these require ments. The military departments have brought this to the attention of all procurement and review personnel and have taken steps to assure full compliance.

GAO Report B-146926, September 1, 1964

94. Title: "Unnecessary Costs to the Government for Insurance on GovernmentOwned Inventories and Special Tooling Held by Contractors Under Negotiated Fixed-Price Contracts" (OSD case No. 1884).

GAO finding: The Government incurred unnecessary costs of about $1,237,500 over a 5-year period ended in 1961 because the miiltary services required four Defense contractors to bear the risk of loss or damages to certain Governmentowned parts, materials, inventories, work in process, and special tooling in their possession under fixed-price contracts. At a fifth major contractor's plant, the Government assumed the risk of loss or damage to such property in the possession of the contractor and, as a result, avoided costs of about $295,800 during a comparable 5-year period. Accordingly, the GAO recommended that the Government take over the risk of loss or damage to this property and eliminate insurance through private insurers.

GAO estimate of unnecessary costs: $1,237,500.

Time period of GAO report: 1957 through 1961.

DOD comments on GAO finding: The GAO takes the position that the Govern ment should assume the risk of loss to this property in order to avoid the cost of premiums paid by contractors for private insurance. This position logically can be based solely on the premise that private insurance is uneconomical and should

be replaced by the Government's acting as its own insurer. In our opinion, the sample used by GAO to support this position is totally inadequate. The partial experience of only five contractors, over a 5-year period, was examined by GAO. Their actual loss experience for the period was $12,500, or a little over 1 percent of premium costs, whereas insurance industry averages indicate that losses approximate 50 percent of premium costs. In the year immediately following this period, one of the contractors experienced a loss of $110,000. In addition, GAO did not consider other significant costs. For example, there was little consideration given in the report to the additional costs for such services as inspections, claims adjustment, litigation, etc., which the Government would have to provide if it were to assume the risk of loss to the property in question. In short, the report does not demonstrate that private insurance is uneconomical. DOD comments on costs: The report presents no evidence on which it can be concluded that there were any unnecessary costs.

DOD corrective action: No corrective action is necessary. The question of the reasonableness of insurance rates is one of the subjects being considered in our continuing review of insurance coverage in Defense contracts.

GAO Report B-146940, September 18, 1964

95. Title: "Uneconomical Procurement of Motor Vehicle Parts and Accessories" (OSD case No. 1992).

GAO finding: The Government is incurring unnecessary costs because purchasing officials at Navy installatious procure motor vehicle parts and accessories in the open market at prices in excess of those available under General Services Administration Federal Supply Schedule contracts. The ASPR and implementing Navy regulations permit this condition because they do not require procurement officials to obtain and use Federal Supply Schedule pricing data for evaluating prices of motor vehicle parts and accessories purchased in the open market. GAO estimate of unnecessary costs: Estimated at $200,000 annually. Time period of GAO report: July 1963 through March 1964.

DOD comments on GAO finding: DOD agrees that Federal Supply Schedule pricing data should be used as a means of evaluating market prices for motor vehicle parts and accessories. DOD does not agree with the GAO's recommendations as to using only one type of contract or that prices should be limited in all cases to those under Federal Supply Schedules. This would eliminate needed flexibility and could result in higher total costs to the Government.

DOD comments on costs: The GAO estimate of costs is based on a small selective sample at only four Navy installations. The Army and Air Force reviewed their purchases of motor vehicle parts and found no excess costs. The Defense Supply Agency sampled 256 purchase actions with a total value of $144,340.64 and found that only four purchases were made at prices higher than GSA prices. The total excess amount was $20.71. The GAO estimate is therefore questionable. DOD corrective action: The Armed Services Procurement Regulation was amended by revision 9, dated January 29, 1965, to require contracting personnel to consider Federal Supply Schedule pricing data whenever they purchase motor vehicle parts and assemblies in the open market.

GAO Report B-152600, December 30, 1964

96. Title: "Unnecessary Costs Incurred in the Procurement of Selected Subsystems and Accessories for F-4 and Other Types of Aircraft" (OSD case No. 2000).

GAO finding: A review of the procurement of selected subsystems and accessories for installation in F-4 and other types of military aircraft being produced under contracts awarded by the Navy indicated unnecessary costs of about $4.1 million had been incurred in the procurement of quantities of two subsystems (the Martin-Baker ejection seat and the horizontal situation indicator) and an accessory (survival kit) because the items were procured by the airframe manufacturer rather than furnished by the Government. It was estimated that the Navy will incur additional unnecessary costs of about $2.7 million in fiscal years

1965-69 if the Navy continues to purchase the three items through the prime aircraft manufacturers.

GAO estimate of unnecessary costs: $4.1 million on contracts previously awarded, and an estimated $2.7 million during fiscal years 1965 through 1969. Time period of GAO report: Contracts were awarded during period from October 1954 to June 30, 1964. GAO also projects estimates of unnecessary costs from fiscal year 1965 through fiscal year 1969.

DOD comments on GAO findings: The Martin-Baker MK-5 ejection seat de sign was not stable, and continued procurement through the airframe manu facurer was therefore essential. The design of the horizontal situation indicator was sufficiently stable to have permitted direct procurement from Collins Radio during fiscal year 1963. Due to a serious malfunction, the survival kit did not meet Navy specifications in 1959 to permit either direct or indirect competitive procurement. High potential termination costs and major design changes de ferred competitive procurement until fiscal year 1965.

DOD comments on costs: No unnecessary costs were incurred.

DOD corrective action: The Navy is procuring the horizontal situation indicator and the survival kit directly by competitive negotiation in fiscal year 1965 for both itself and the Air Force. Several alternative courses of action for handling the fiscal year 1965 procurement of Martin-Baker ejection seats are being considered. A special ASPR study is underway to review current procedures and provide more detailed guidance on the matter of Government-furnished equip ment. This guidance will include consideration of cost factors and risks resulting from direct procurement by the Government that may offset anticipated savings.

GAO Report B-153403, July 21, 1964

97. Title: "Report on Survey of Activities of Selected Defense Contractors Relating to Employee Morale and Recreation" (OSD case No. 2031). GAO finding: GAO found little uniformity in the management and control of morale and recreational expenditures by contractors. In 8 of the 36 contractors' plants surveyed, vending machine income was used to offset the entire cost of employee morale and recreational activities. However, at the other locations contractors provided further financial support for such activities. Most contractors set aside income generated by employee activities, such as vending machine income, and donated the funds to employee organizations to conduct recreational and morale activities. The funds in the custody of these organizations were freely used at the discretion of the organization management, generally without interference of review by the contractor or the Government. Some of these organizations accumulated large amounts of cash and other assets. While employee organizations accumulated surpluses from donations of revenue generated from vending machines, contractors incurred sizable losses in food service operations-an employee activity comparable to vending machine operations even though funds from vending machine income were more than sufficient to offset the losses in food operations.

Expenditures for employee morale and recreational activities charged against Government contracts are subject to selective reviews by Agency auditors and allowability of such charges rests on the judgment of individual contracting officers. Items of cost determined by Agency personnel to be reasonable at one contractor's plant were found by Agency personnel to be unreasonable at another plant. It appears that the interpretation and application of the Armed Services Procurement Regulation by agency personnel have achieved little uniformity as to the nature and extent to which such costs are allowed under Government contracts.

GAO estimate of unnecessary costs: Not estimated.

Time period of GAO report: Latest 1-year period for which information was available for each of the 36 contractors, usually 1962 or 1963.

DOD comments on GAO findings: DASD (A. & A.) reply to GAO dated June 17, 1964, stated it has never been the policy of DOD that certain employee morale and recreation costs are always allowable and certain other costs are always unallowable. Rather, it has been generally the policy that if the contractor has a well-balanced employee morale and recreation program which is equitable to all employees when considered in light of total employee expense under all

conditions, the costs incurred are allowable if reasonable in amount. It was also recognized that a need existed for developing additional guidance for evaluating the overall reasonableness of the total employee morale and recreation cost incurred by contractors.

DOD comments on costs: Costs not included in finding.

DOD corrective action: DOD reviewed the policy set forth in ASPR 15–205.10 (Employee Morale, Health and Welfare Costs and Credits) and 15-205.14 (Food Service and Dormitory Costs and Credits). It was determined that the coverage was not adequate. The following revisions have been approved by the ASPR committee and have been sent to the industry associations for their comments. (a) Losses from the operation of food and dormitory services may be allowed only if the contractor's objective is to operate such services on a breakeven basis. Losses sustained because such services are furnished without charge or at prices or rates which obviously would not be conducive to accomplishment of the above objective are not allowable.

(b) Where the contractor has an arrangement authorizing an employee association to provide or operate a service such as vending machines in the contractor's plant, and retain the profits derived therefrom, such profits shall be treated in the same manner as if the contractor were providing the service; i.e., such profits shall be considered as a credit or a reduction of overhead.

(c) Contributions by the contractor to an employee organization, including funds set over from vending machine receipts or similar sources, will be allowable only to the extent that the contractor demonstrates that the costs incurred by the employee organization would be allowable if incurred by the contractor directly.

APPENDIXES 3A-30-DEPARTMENT OF DEFENSE
DOCUMENTS

APPENDIX 3A-POLICY LETTER BY THE SECRETARY OF DEFENSE RE GAO REPORTS

There has been an increase in the number of GAO report cases in which DOD comments to the GAO, the BOB, and Congressional Committees are delayed beyond the established 60-day target period (75 days for draft reports involving the military assistance program).

Even though the volume of GAC draft and final reports has increased substantially (from 182 during 1961 to 544 during 1964), the requirement for making responsive DOD comments within 60 days has not been changed.

In order that responses to GAO may be made within the required period, it is essential that the time schedules established for each case by the Assistant Secretary of Defense (Comptroller), for preparation of proposed comments and for review by appropriate officials, not be exceeded. In the event that it is not possible to make a complete response, a partial or interim reply should be prepared as soon as it becomes evident that the full reply cannot be completed in time, but in no event later than the scheduled time.

Please accord adequate staff effort and emphasis to assure that GAO reports are handled on time.

/s/ Robert S. McNamara