India, and (4) whether authority should be given to use non-Public Law 480 excess currency in India for grants without appropriations, as is already permitted for Public Law 480 excess currency. (Report to the Congress, B-146749, Jan. 29, 1971)

107. Potential Displacement of U.S. Agricultural Exports.-The investment survey and guarantee programs were designed to stimulate the flow of private capital in less developed countries by sharing with American firms the cost of conducting investment opportunities and by insuring investors against certain political and business risks.

The purpose of this review was to determine whether sufficient consideration was being given to the potentially adverse effects of investment survey and guarantee programs on export markets for American agricultural commodities. GAO wished to know whether countervailing views of Government agencies having priority interests in domestic farm programs and problems and in the U.S. balance-of-payments position were being sought and were being given due consideration and whether the kinds of economic analyses needed to weigh the effect of the investment programs on U.S. agricultural export markets were being made.

Until January 19, 1971, investment survey and guarantee programs were administered by the Agency for International Development (AID). Pursuant to the Foreign Assistance Act of 1961, as amended in 1969, a new agency, the Overseas Private Investment Corporation, was established to carry out incentive programs for private investment in less developed countries. The Administrator of AID is the Chairman of the Board of the Overseas Private Investment Corporation.

GAO found that AID did not make the kinds of economic analyses necessary for measuring whether U.S. foreign policy and economic development gains from underwriting programs to boost foreign production and exports of agricultural commodities produced in excess quantity in the United States offset the disadvantages to the domestic U.S. farm economy and balance-of-payments position. Also, efforts of AID officials were directed primarily toward assisting other nations to increase their agricultural productivity through economic development and, by doing so, raise their standards of living. AID officials therefore could hardly have been expected to always be knowledgeable of and give overriding consideration to factors which were at odds with their primary objectives.

GAO recommended that applications for investment survey and guarantee programs involving potential foreign exports of crops in U.S. surplus should be called to the attention of all executive agencies concerned, so that due consideration could be given to the likely effect of the proposed investment on the American economy, exports, and balance-of-payments position. GAO proposed that the views of each agency participating in the deliberations be recorded in detail and that the reasons for decisions reached be explicitly set forth.

GAO also observed inconsistencies in policies enunciated in AID handbooks for investment survey and guarantee programs and in the AID manual order dealing with these programs. Accordingly, GAO further recommended that the policies with respect to investment survey and guarantee programs be reviewed and revised to insure that they are uniform and consistent in their interpretation and application.

GAO further recommended to the Board of Directors of the Overseas Private Investment Corporationwhich assumed responsibility for the evaluation of proposals after the completion of GAO's fieldwork-that the Corporation (1) consult with the Department of Agriculture and other executive agencies to establish an evaluation procedure acceptable to all parties and (2) include in its policy directives the necessary measures for analyzing projects which could adversely af fect U.S. agricultural exports.

Although the executive agencies agreed, in general, that there was a need for consideration and coordination by all agencies concerned, they cautioned about the potential for delays in approval of applications if the applications were submitted to a formal board They suggested several alternative approaches. GAO concluded that any one of the several suggestions fo better evaluation of the impact of proposed investmen survey and guarantee programs would achieve th objectives sought. However, whatever the means. adopted, the Department of Agriculture should be given an effective voice in the decisionmaking process. (Report to the Congress, B-166077, Apr. 27, 1971)

108. Phasedown of U.S. Military Activities in Vietnam. Between June 8, 1969, and April 15, 1970, the U.S. forces in Vietnam were reduced from 538,000 to 425,500 troops as a part of the phasedown of U.S. military activities in Vietnam. These reductions were made in three steps-over periods of 3 to 4 months for each step-by redeploying military units or placing

them in an inactive status, by reassigning individuals, and by curtailing replacements scheduled to be sent to Vietnam. The military services met each of the directed troop reduction schedules despite the relatively short time provided. The phasedown of the large quantities of supplies and equipment was and continues to be a more formidable task.

GAO reviewed the policies and procedures being applied in the phasedown to identify problems being encountered-particularly in the logistics area—and to bring the problems promptly to the attention of the responsible military commanders and the Secretary of Defense while the phasedown was continuing. The review was directed primarily to matters connected with the third-step reduction of 50,000 troops completed April 15, 1970.

The circumstances made it difficult for organizations in Vietnam, subordinate to the command headquarters of the services, to prepare for efficient reductions of military activities. They could not be provided specific information as to size and time of force reductions until announced by the President. Further, they were placed in the position of having to continue their assigned missions until a few days prior to reassignment of personnel and turn-in of equipment. In many cases detailed procedures for withdrawal had to be improvised even as the withdrawal was taking place. Notwithstanding these constraints, the Department of Defense and the military services were making a concerted effort to account for and control the arms, equipment, and materiel which became excess as the phasedown proceeded.

The constraints contributed to a variety of problems requiring attention of military commands in Vietnam and Washington, including the Office of the Secretary of Defense.

There was a need for greater coordination among the three military services in supplying the needs of the Vietnamese Armed Forces. Lack of uniform procedures resulted in some cases in equipment needed by the Vietnamese being shipped back to the United States.

There were problems in returning Army equipment to the United States because of the backlog of equipment which required cleaning (to meet standards of the U.S. Public Health Service and the

Department of Agriculture for treatment and processing of materiel being returned to the United States) and a shortage of facilities for cleaning.

There were problems in returning Air Force materiel to the United States because of a lack of people qualified to pack and crate the materiel. GAO observed also the following situations where improvement might be possible.

Because of ineffective screening, Army repair parts and components were issued to the Vietnamese Army although needed by U.S. military services in Vietnam, or shipped out of Vietnam, although needed by the Vietnamese Army.

The logistical reporting and accounting system did not provide accurate, complete, or timely data. The procedures for cancellation of requisitions for supplies, not needed because of force reductions, were not adequate.

The Army had a significant backlog of unserviceable equipment in Vietnam because of limited maintenance capabilities.

There may also be a need to strengthen control over transfers to the Vietnamese of such facilities as buildings, airfields, and water purification plants, to insure that they are capable of using and maintaining them.

GAO suggested that the Secretary of Defense:

Review existing plans of the military services for anticipated withdrawals to insure that the plans provide for withdrawals on a unit-by-unit basis.

Establish uniform procedures and criteria (1) for the transfer of excess materiel to the Vietnamese Armed Forces and (2) to insure that all excess materiel in Vietnam is considered in fulfilling requirements of the Vietnamese.

Reduce the backlog of equipment awaiting preparation for return to the United States.

The Assistant Secretary of Defense (Installations and Logistics) stated that the military departments concurred generally with the conclusions and suggestions and cited the recent actions to implement the suggestions. GAO believes that the actions, if consistently applied, will improve the conditions which existed in the early stages of the phasedown. (Report to the Congress, B–171579, Mar. 15, 1971)

Contract Administration

109. Contractors' Claims Based on Government-Caused Delays.-GAO had issued to the Congress several reports in prior years on the Navy's procedures in contracting with private industry for ship construction. A December 1958 report pointed out that contractors had submitted claims for costs, sustained because of Government-caused delays, which were vague and lacked adequate support, that evaluations of the claims by the Navy had been inconclusive, and that the claims had been settled without sufficient data to show the damage sustained by the contractors. Two other reports, in June and October 1964, pointed out that a lack of effective price evaluation procedures had resulted in the negotiation of unnecessarily high prices for work which had been added to the original contracts by change orders. GAO made a followup review to determine whether improvements had been made by the Navy.

Claims submitted in the period April 1965 through January 1969 by three contractors (referred to as contractors A, B, and C) in the amounts of $114,300,000, $486,000, and $1,342,000 were settled in the amounts of $96,500,000, $354,000, and $760,000, respectively. Although the amounts of the claims were purported to represent the additional costs incurred by the contractors because of Government-caused interruptions and delays, the contractors provided no tangible evidence of the additional costs incurred. In the absence of such evidence, the Navy, in GAO's opinion, could not adequately evaluate the validity of the claims.

The following are examples of the rationale on which the contractors based their determinations of additional costs attributable to Government-caused interruptions and delays:

Contractor A compared the estimated labor-hours in its original price proposal with the labor-hours actually expended and estimated to be expended to complete the contract and attributed the increase over the original estimate, after an allowance for

the increase it judged to be caused by its own inefficiencies, to Government-caused delays.

Contractor B based its claims on judgment factors. The contractor's chief estimator stated that disruption claims were based on highly intangible judgment factors and, in his opinion, were impossible to accurately detail.

Contractor C compared the labor-hours expended in earlier construction of ships of the same class with the labor-hours expended in the followon construction and, after taking into account the physical differences in the ships, attributed the increase to Government-caused delays.

GAO believes that, without information linking the additional costs to actions of the Government, the Government had insufficient assurance that the settlements made were fair and reasonable. Therefore GAO recommended that supervisors of shipbuilding require contractors to furnish evidence relating the delay and disruptions to actions of the Government and to provide specific data in support of additional costs claimed.

With respect to pricing of contract changes other than those arising from claims, GAO found that certain contractors used historical data and standards in preparing proposals for the pricing but the Navy generally did not obtain that data. It relied on the personal judgment of its negotiators and analysts. GAO believes that the Navy would have been in a better position to evaluate the proposals and would have had greater assurance as to the reasonableness of the prices negotiated had it obtained the data used by the

contractors.

GAO recommended that the newly implemented "change order accounting" contract clause be clarified to clearly require contractors to segregate their direct costs on constructive as well as formally written changes. To facilitate the negotiation of reasonable prices for change orders, GAO recommended also that:

Contractors lacking adequate systems for providing a factual basis for proposed prices be encouraged to improve their systems.

Historical cost data and standards be obtained, whenever appropriate, for evaluation and audit. The Navy insure that supervisors of shipbuilding obtain current evaluations by the Defense Contract Audit Agency of the estimating systems of contractors located in their respective geographic areas and that the evaluations include the bases upon which proposed prices are developed.

The Navy generally concurred with GAO's recommendations but pointed out that some of the cited problem areas are susceptible to improvement but not to total and precise solution. It was the Navy's opinion that this was particularly true of any attempt to achieve total, explicit, and auditable justification of all delay and disruption costs. (Report to the Congress, B-171096, Apr. 28, 1971)

110. Plant Equipment Acquired by Contractors for the Account of the Government.-Department of Defense (DOD) regulations provide that, with some exceptions, contractors furnish all plant equipment needed for contract performance. Equipment so specialized that its use is limited to testing in the development or production of particular items, or performance of particular services, is not considered plant equipment. Such equipment-known as special test equipment-is generally acquired by contractors for the account of the Government and ownership is retained by the Government. GAO's prior work had indicated that some plant equipment had been inappropriately classified as special test equipment and acquired for the account of the Government.

GAO's review at plants of five contractors showed that, of the equipment acquired for the account of the Government at a cost of $62 million, about $12 million worth should have been classified as plant equipment and acquired for the account of the

contractors.

The problem of classification stems from the Armed Services Procurement Regulation which defines special test equipment as including "all components of any assemblies of such equipment." This definition permits the acquisition of plant equipment as special test equipment when it is to be included in a group of test equipment items assembled for a specific use. GAO recommended that the Secretary of Defense:

Revise the definition of special test equipment in the Armed Services Procurement Regulation and other pertinent DOD regulations to exclude items that are really plant equipment.

Require contracting officers to review proposals for special test equipment to insure that plant equipment is not included.

The Department concurred with the findings and recommendations and outlined the actions taken or proposed to be taken. (Report to the Congress, B140389, Apr. 9, 1971)

111. Application of "Should Cost" Concepts in Reviews of Contractors' Operations.-At the request of the Joint Economic Committee, through its Subcommittee on Economy in Government, GAO made a study of the feasibility of applying "should cost" analyses in its audits and reviews of Government procurement. The committee defined the "should cost" approach as an attempt to determine the amount that a weapon system or a product ought to cost given attainable efficiency and economy of operation. In a report to the Congress on the study (B–159896, May 20, 1970) GAO concluded that it is feasible, in auditing. and reviewing contractors' performance, to utilize "should cost" analyses.

Subsequently GAO made a trial application of the "should cost" concepts at the plants of four contractors. At each of the plants GAO found areas where the contractors' operations could be improved and costs could be reduced through such things as better production planning and control, more competition in subcontracting, and greater care to avoid assigning engineers of higher competence than required by the nature of the work to be performed.

Although "should cost" review techniques are intended to find out how contractors' operations can be improved, they also lead to disclosure of areas where Government contracting or administration practices affect contract costs adversely. GAO noted areas where the Government could improve its practices and reduce costs through consolidation of procurements and through elimination of unnecessary requirements for packaging and for testing.

GAO brought its findings and suggestions for improvements to the attention of officials of the contractors and the Department of Defense. The potential for total savings which could accrue from the findings and suggestions was not readily measurable. In those instances where they were measurable, GAO estimated the potential savings to be almost $6 million annually. The Department of Defense advised GAO that the agencies concerned would look into the specific matters noted by GAO at the contractors' plants.