DEPARTMENT OF THE NAVY COMMENTS

(a) and (b) All SATS procurements involving significant transportation costs are now bid two ways; that is, f.o.b. destination and f.o.b. at the plant. The U.S. Marine Corps as user furnishes a schedule delineating time and place for final delivery. Prior to awarding the contract these methods are examined and the contracts are awarded so as to reflect a transportation plan which results in the greatest saving to the Government. It is now required that the Defense Traffic Management Service (DTMS) be advised on all procurements involving significant transportation costs although their services are not always required. A determined effort will be made by the using and purchasing activity to establish firm or proposed destination prior to issuance of an invitation for bids.

MARINE CORPS COMMENTS

(a) As to the delivery of SATS equipment, it is clearly the responsibility of the Marine Corps to provide timely information as to firm destinations therefor. This can and will be done.

(b) The Marine Corps in certain instances acts as procurement agency for the Bureau of Naval Weapons on SATS equipment. In these cases, and where appropriate, the Defense Traffic Management Service will be notified of significant transportation costs in order that it may enter into negotiation with transportation companies.

GENERAL SERVICES ADMINISTRATION COMMENTS

With respect to recommendation 3(a), the General Services Administration now has in the final stages of development a revision to the Federal Procurement Regulations (FPR) prescribing policies and procedures designed to assure that proper consideration is given to transportation factors in every phase of the procurement of personal property for the Government. The regulations include transportation considerations in procurement planning, transportation factors in solicitations for bids (or offers), and transportation factors in evaluation of bids (or offers). Regarding recommendation 3(b), the transportation costs on volume procurements of specific commodities are examined by the General Services Administration to determine whether such costs are fair and reasonable. The yardsticks by which the costs are measured are those commonly used by commercial firms in their supply operations. Where these measurements justify, negotiations are conducted with the transportation companies for reduction of the costs to fair and reasonable bases. Publication of the FPR material mentioned above will emphasize the procurement and transportation assistance that GSA can provide other agencies.

(The committee subsequently was advised that the above described revision to the FPR was issued September 1964 and appears in sections 1-19.202 and 1-19.203 thereof.)

MATTING EXTRUSIONS AS GOVERNMENT-FURNISHED MATERIAL AND AN EXAMINATION OF THE HEAVY PRESS PROGRAM (Recommendation No. 4):

In the aluminum matting procurement, extrusions will account for up to 90 percent of the contract dollars. Only three companies in the United States can supply the required extrusions. These three companies have four presses, three of which are leased from the Air Force. The Air Force gets a return in the form of use charges based on a designated percentage of company sales; consequently a sizable portion of Air Force revenues from extrusion press operations is derived from Navy and other Government contracts.

Although the Air Force arrangements for leasing, the provisions for use charges, the renewal options, Government priority rights, and other factors were not a major part of our review of the SATS development and procurement programs, we note that the leasing arrangements and terms vary among the several contractors, and questions arise as to the long-term usefulness of these machines to the Air Force. If they do, and will continue to, supply materials for important Government programs, and the rental operations yield more revenue than the costs to the Government for administration and maintenance, there is justification for retaining Government ownership. In such cases, consideration might be given to the exercise of Government-wide priorities and direct contracting with the press operators for extrusions to be supplied as Government-furnished equipment. If, on the other hand, future Government requirements for the output of any or all of these presses will be minimal, negotiated sales to present operators at fair prices should be considered.

We recommend that (a) where extrusions fabricated by private firms using Government-owned presses account for a major part of the dollars in Government contracts for end items, the Government should consider direct contracts for the extrusions to be supplied as Government-furnished material to the end item contractor; (b) Government priority rights under existing lease arrangements be reviewed to determine if all Government agencies are covered; and (c) the General Accounting Office make an audit of the lease terms, arrangements, and returns to the Government from extrusion press operations.

DEPARTMENT OF THE NAVY COMMENTS

(a) Consideration will be given to direct purchase by the Government of extrusions. If such procedure is determined to be technically feasible, the extrusions will be supplied as Governmentfurnished material to the end item contractor.

(b) In regard to the Government's priority rights under the heavy press leases, a clause in the lease requires first priority in the utilization of the presses for Air Force and other Government work, as against commercial business insofar as utilization of production capacity of the presses.

DEPARTMENT OF THE AIR FORCE COMMENTS

(a) and (b) The Air Force has carefully reviewed the recommendations contained in the subcommittee's report. We believe that the recommendation to evaluate procurement of extrusions from the standpoint of acquisition as Government-furnished equipment in lieu of contractor-furnished equipment is entirely valid. We will insure that Air Force procuring activities accomplish evaluations of this type wherever feasible and practical from an economical standpoint. With respect to the Government's priority rights under the heavy press leases, a clause in the leases requires first priority in the utilization of the presses for Air Force and other Government work, as against commercial business insofar as utilization of production capacity of the presses.

On June 17, 1964, the subcommittee staff held a conference with representatives of General Accounting Office at which time recommendation No. 4 was discussed. The staff was advised that GAO was, at that time, making a survey into the procurement, utilization, and disposal of Government-owned facilities furnished to Air Force contractors. It was agreed that, as part of its audit activity in this area, the GAO would initiate a preliminary review of the circumstances under which extrusion presses are leased to contractors. The review would be directed primarily to identifying whether there are any significant areas in the Air Force administration of extrusion press operations where the Government's interest is not adequately protected and which may merit more detailed examination. Subsequently, the subcommittee staff was advised that GAO's preliminary inquiry had been completed and that they had found no significant areas in which the Government's interest was not protected.

BIDDER RESPONSIBILITY (Recommendation No. 5):

The circumstances of the aluminum matting procurement suggest this dilemma confronting bidders: Without a contract in hand, they cannot get firm commitments or prices or quantities of material from the three extrusion sources; and without firm commitments they cannot assure the Government that they are qualified producers. Consequently, there is high risk and great uncertainty in the bidding, and the competitive situation is a kind of facade behind which the three extrusion sources operating the Government-owned presses wield the controlling influence.

The lack of assured sources of supply of the material critical for production of the end item also poses a dilemma for the Government procuring agency. In an advertised competitive procurement, an award must be made to the low bidder, providing he has, or can promptly get, the requisite production and financial resources. In determining whether the low bidder has these resources that is, whether he is a responsible bidder-can the Government take into account, and to what extent, the availability of the material components which comprise the bulk of the contract cost? The procurement regulations on this point are unclear, and the Navy has decided it has no authority to

reject a low bid even when the supply commitment is partial and tentative.

We recommend that the Armed Services Procurement Regulation be clarified as to the requirements for establishing bidder responsibility in special circumstances where subcontract sources for major components or material are limited and timely contract performance is urgent.

DEPARTMENT OF THE NAVY COMMENTS

The Armed Services Procurement Regulation (ASPR), section 1-903, requires in part that the contracting officer make an affirmative determination that the proposed contractor is a responsible source which includes the finding that the proposed source has adequate facilities or the ability to obtain adequate facilities to perform the proposed contract.

The extent of subcontracting in the aluminum matting procurement is unusual and the record discloses that the contracting officer conducted a rather extensive inquiry as to the subcontracting for the extrusions. It was for such a situation that ASPR 1-906 was developed. This ASPR coverage on subcontractor responsibility is admittedly broad, but necessarily so, in order to retain to the contracting officer the maximum flexibility that may become necessary as was the case with the aluminum matting procurement. However, this matter will be sent to the ASPR Committee for consideration.

Subsequently, the subcommittee was advised that the present ASPR provisions related to subcontracting do not specifically require that firm commitments be obtained from subcontractors. The contractor must demonstrate, however, his ability to obtain all the resources and supplies necessary to meet contract requirements. In the subcontracting area this may be done by a showing of a testing of the market, receipt of firm quotations, and delivery commitments, or, in the absence of firm price quotations and delivery commitments, the availability of adequate industrial capacity to supply the necessary items or services. It is not always possible to obtain firm commitments, as was the case in the SATS program, or not always necessary, as in cases where an abundance of either commercial capacity "shelf" items exists. The ASPR coverage is flexible in this regard so as to allow well reasoned decisions depending on the nature of the procurement and the market affected. The ASPR Committee concluded that changes in that area were not necessary.

MARINE CORPS COMMENTS

Approval of this recommendation will provide additional assurance that the user will receive equipment and material in accordance with contract schedules and is wholeheartedly supported.

COMPETITIVE PROCUREMENTS FAVORED (Recommendation No. 6):

Harvey Aluminum, Inc., has been a successful developer of aluminum matting and earth anchors in the SATS program.

2

However, Harvey has been consistently underbid in competitive procurement of production quantities of these items, even in the case of aluminum matting, where Harvey controls its own extrusion supply through operation of a Government-owned extrusion press. In view of its successful development work, Harvey has contended that it should have been awarded the initial follow-on production contracts in accord with a general policy statement in the armed services procurement regulation. While the decision to introduce competitive procurement as early as possible is understandable and in line with prevailing Department of Defense policy and congressional enactments, we note that procurement decisions in the SATS program have not been altogether consistent. For example, a sole source production contract was let to Convair Division of General Dynamics Corp. for a certain type of aluminum matting even in the face of strenuous Marine Corps objections to this item. In some instances, procurements were advertised; in others, procurements of the same types of items were negotiated. The usual excuse for negotiating instead of advertising is the need to save time. It appears to us that, in the instances of negotiation which came to our attention, the asserted urgency was less a matter of military need than of spending funds before the fiscal year ran out; or, otherwise, negotiations simply was more convenient and less troublesome for the procurement authorities.

We recommend that (a) the Navy Department establish a more consistent procurement policy in the SATS program which will define the circumstances in which procurement will be competitive or sole source; (b) if the conditions are suitable for advertised procurement, negotiated procurements should be resorted to only in cases that are exceptional and compelling, as contemplated by law, and not on the basis of superficial, routine, or unverified declarations.

DEPARTMENT OF THE NAVY COMMENTS

(a) We believe that present ASPR guidance including ASPR 3-101 and 3-108 provides adequate guidance in defining when procurements should be competitive or sole source. This guidance is by necessity not rigid but flexible since each procurement must be evaluated and processed on its individual circumstances. While most procurements may have seemingly general similarity, all of them, nevertheless, have significant individual idiosyncrasies which affect their processing.

(b) This recommendation appears to be based upon the conclusion that procurements under the SATS program were negotiated on the basis of superficial, routine, or unverified declarations of urgency. It is respectfully submitted that a review of the hearings does not substantiate this conclusion. Further, such conclusion does not give consideration to the fact that Navy operates a control system under which each decision as to procurement by negotiation is reviewed at levels higher than the contracting officer prior to initiating negotiation. In addition, ASPR 2-102.1 and 3-102 require that procurements shall be made by formal advertising pursuant to 10 U.S.C. 2304 (a)

2 In a negotiated procurement of aluminum matting made after the subcommittee hearings, Harvey Aluminum obtained the contract award as low, successful offeror.