each year. The final report of August 1964 doubled the amount alleged to be due but kept the same theory as third draft. The contractor strongly dissented to all these reports.

DOD takes the position that the situation was clear to both the Government and the contractor and that the Government received offsetting benefits because the contractor charged military R. & D. costs to commercial engine work. Rent items have been included in negotiations for 1960 and subsequent yearly contracts. No further recovery was attempted for earlier years.

31. "Improper Disposition of Refunds of Group Insurance Premiums by Gruman Aircraft Engineering Corp., Bethpage, N.Y.," B146780, January 13, 1964 (OSD Case No. 1727).

GAO made a finding that the Government was entitled to a portion of receipts by the contractor from premium refunds under an employee group insurance plan, estimated at $499,000. GAO reviewed refunds under contracts for the years 1952-61, and recommended that the Navy review refunds under contracts back to 1940.

DOD agreed with GAO on the 1952-61 period, and $421,000 was deducted from current billings. Although demand was made upon the contractor for $713,806 for contract years 1940-51, this action was dropped, with GAO concurrence. Accounting for costs prior to 1953 had been accepted as reasonable and allowable.

32. "Overpricing of Ship Propulsion Boilers Purchased Under FixedPrice Contracts NObs-76301 Negotiated With Foster Wheeler Corp., New York, N.Y., Department of the Navy," B-146733, January 31, 1964 (OSD Case No. 1773).

GAO made a finding that the negotiated fixed price for the purchase of boilers in 1958 was $132,200 greater than the costs the contractor could reasonably expect to incur, plus profit at the 10-percent rate used in the price proposal.

DOD agreed on the basic finding that the price was excessive because of unsatisfactory data submitted by the contractor. Navy audit found the excessive cost to be $141,000.

The case was referred to the Justice Department by the GAO. Justice brought suit in New York in November 1964, asking double damages in the amount of $282,000. The case is still pending in the pretrial stage.

33. "Overpricing of Nuclear Reactor Components Purchased From Westinghouse Electric Corp., Pittsburgh, Pa., Under a CostPlus-a-Fixed Fee Contract Awarded by the Bureau of Ships, Department of the Navy," B-146733, February 6, 1964 (OSD Case No. 1787).

In this case, which is similar to cases Nos. 24 and 25, the GAO made a finding that the contractor had awarded fixed-price subcontracts without adequate cost analysis, and estimated excessive costs of $705,000.

The Navy, in its August 1963 response to the GAO draft report, agreed that subcontract prices were unreasonable, although price comparisons were used to evaluate them. A Navy audit indicated that the excess profit above 10 percent was about $500,000. No additional withholding or suspension of funds was undertaken by the Navy in this case, and no disallowance was made.

The Justice Department has had jurisdiction of the case since February 6, 1964, by referral from the GAO. The contractor submitted a comprehensive memorandum on the case to Justice on April 5, 1965. The status of the case as far as the Navy is concerned is indicated in the letter quoted in connection with Case No. 24.

34. "Overpricing of Nuclear Submarine Components Purchased by Plant Apparatus Division, Westinghouse Electric Corp., Under Two Subcontracts Awarded to Edwin L. Wiegand Co., Pittsburgh, Pa." B-146760, February 12, 1964 (OSD Case No. 1804). The GAO reported that the contractor, in awarding fixed-price subcontracts in 1960 and 1961 under Navy CPFF contracts, incurred excessive costs of $234,000 because it failed to obtain and analyze subcontractor cost data, and $46,000 because the subcontractor charged prices for one of the components higher than other suppliers would. The Navy consented to the subcontracts on the basis of price comparison. A single producer of heaters and connectors of S5W reactors was desired for quality control reasons. Navy audit set the amount of unjustified profit at $99,931.68.

The Justice Department has had jurisdiction of the case since February 1964.

35. "Overpayments Made Under a Cost-Plus-a-Fixed Fee Contract for the Procurement of Nuclear Submarine Components From Combustion Engineering, Inc., New York, N.Y.," B-146846, February 19, 1964 (OSD Case No. 1786).

The GAO made a finding that the Navy paid the contractor $200,000 more than it was entitled to under its contract because certain components should have been paid for on a CPFF basis rather than on a fixed-price basis.

The Navy agreed to the GAO interpretation of the contract documents, audited, and suspended payments to the contractor in the amount of $212,548.61. However, Navy, is reviewing the contractor's claim for equitable relief.

The original contract permitted certain intracompany purchases on a fixed-price basis, and the contractor produced components at one of its own plants on a fixed-price basis. Later, a contract modification was proposed to make a change in the overhead rate, and an entire clause was stricken from the contract. The effect of the modification was to change the whole contract to a cost basis. The contractor claims this was a mutual mistake.

36. "Overpricing of Steam Generators for Nuclear Aircraft Carrier, Department of the Navy," B-146733, March 5, 1964 (OSD Case No. 1734).

GAO reported that generators costing over $4 million were purchased from a subcontractor without either the Navy or the prime contractor reviewing the subcontractor's cost estimate which contained undisclosed contingency allowances and provisions for costs, totaling about $489,600 which were not likely to be incurred.

In this case, Navy had obtained proposals from the only four qualified producers. Price analysis and comparison techniques were used. Navy consented to the subcontract awards both to Westinghouse and Foster Wheeler (a split buy of $4 million from each). Navy considered there was adequate competition and that the contractor had performed its obligations. Navy therefore disagreed with both the findings and recommendations of the GAO.

GAO proceeded to issue formal notices of exception as a means of effecting recovery. Navy audited, and found that the most it could have questioned was $18,000 instead of the $489,600 alleged by GAO. In connection with its new policy of avoiding use of notices of exception in cases of allowable cost, GAO withdrew the notice of exception in this case on June 11, 1965.

In a letter dated January 6, 1966, the Acting Comptroller General sent a further letter report to the Department of Defense on this case. He reemphasized and restated the GAO view of the facts in the case, and requested that the Department undertake a recovery action from the contractor.

In response, the Assistant Secretary of the Navy (Financial Management) advised the Comptroller General in a letter dated March 21, 1966:

Since the cases under appeal (referring to the cases noted in connection with case No. 24 above) and this case do involve significant common aspects, it is considered inappropriate that an official Navy position be published during the pendency of these appeals before the Director, DCAA. A substantive reply to the GAO letter report of January 6, 1966, will be furnished when the possibility of such prejudice no longer exists.

In effect, the case has been reopened due to the further expression of views by the GAO, but the Navy has taken the position that it will not respond until the several similar cases are disposed before the Defense Contract Audit Agency and subsequent appeals, if any.

37. "Overpricing of the Nuclear Frigate U.S.S. Bainbridge Purchased From the Bethlehem Steel Co., Quincy, Mass., Department of the Navy," B-146718, March 18, 1964; and supplementary report B-146718, December 11, 1964 (OSD Case No. 1794).

The GAO made a finding that the Navy paid excessive costs of $5 million in contingencies and overstatements for the construction of U.S.S. Bainbridge when the letter contract was converted to a fixed

price contract at 75 percent completion of the work. GAO contended that Navy should have let the letter contract stand and paid the contractor on a quantum meruit basis. GAO recommended recovery from the contractor.

The DOD and Navy took the position that GAO was proceeding on a false assumption-that the costs would have been the same regardless of the form of the contract. While there were divisions of opinion within the Navy, the Chief of the Bureau of Ships undertook negotiations on the price of $87 million, which was $3.8 million below the price sought by the contractor. After the contractor refused to negotiate any lower price, the Assistant Secretary of the Navy (Installations and Logistics) approved the fixed-price contract.

DOD relied on its own independent cost estimates, rather than those supplied by the contractor. The Navy believed there was no overpricing under the circumstances and therefore did not seek a refund. DOD, in order to reduce the general problem of contract conversion, reduced the dollar value of letter contracts outstanding by over twothirds, from $3 billion in December 1962 to $770 million in May 1964, and established policy requiring conversion of letter contracts to firm contracts as promptly as possible.

In its supplementary report of December 11, 1964, the GAO repeated its criticisms of Navy's judgment in awarding the contract and failing to obtain a refund. GAO also recommended that the Secretary of Defense take action to assure that, in the negotiation, award, and administration of subsequent contracts, Government procurement officials give appropriate consideration to Bethlehem's actions in rejecting a flexible pricing arrangement and its adamance in refusing to accept anything but a fixed price involving amounts deemed excessive by the Navy. The DOD maintained that there were no misrepresentations and no basis to seek a refund.

The contractor has, since the performance of the contract, sold the shipyard to General Dynamics Co.

38. "Improper Charges to Government Cost- and Incentive-Type Contracts Held by Grumman Aircraft Engineering Corp., Bethpage, N.Y., Department of the Navy," B-146877, April 8, 1964 (OSD Case No. 1840).

The GAO made a finding that $188,000 in costs incurred during 1958-61 under no-cost and cost-sharing research and development contracts were improperly charged to Government cost-type contracts. GAO found that Navy auditors had questioned $93,000 of such costs, but had not questioned $95,000 in similar costs. GAO recommended recovery. DOD agreed. Adjustments in the account were made to eliminate the remaining $95,000 in costs. DOD also transmitted memorandums to field auditors to look for similar charges whenever improper charges are found.

39. "Overcharges to the Government for Change Orders Issued Under Navy Contracts Awarded to the Ingalls Shipbuilding Corp., a Division of Litton Industries, Inc., Pascagoula, Miss.," B146751, June 30, 1964 (OSD Case No. 1785).

The GAO found that $175,500 in unnecessary costs were incurred in 147 change orders issued during 1957-63 because the contractors' estimates were excessive in relation to current cost data at the time of the contract negotiation, or did not allow the Government sufficient credit for canceled items, or contained mathematical errors.

The Navy took the position that change orders must be based on the cost of work at the time of the change order, and not at the time of the original contract. GAO contended that the only records available for deleted material pertained to costs in the original contract. Since this was the best information available, it was used during the audit. GAO agreed with the Navy position, and said it would conduct its audits on that basis so long as adequate records are maintained. DOD therefore considered that there was a legal basis for recovery from the contractor in the case of only one change order, and an equitable basis for a refund request in two other cases. The Navy is seeking recovery of $5,496 under one change order. For the future, audits will be made of change orders estimated to be in excess of $50,000.

In a letter dated November 10, 1965, the Assistant Secretary of the Navy (Financial Management) informed the Comptroller General: "From a reevaluation of the change orders, it appears that further efforts to recover 'overcharges,' which were initially estimated by the Navy as representing $5,496 plus a further indefinite amount due the Government, are not warranted because of additional costs to the Government in the net amount of about $66,000. The bulk of this is made up of support labor for the lead crafts. The contractor should have included these additional costs in the prices of the change orders, but did not do so. The estimated additional costs were obtained by following current instructions on change order pricing.

"In view of this situation, the Navy plans to take no further action." For the future, audits will be made of change orders estimated to be in excess of $50,000.

40. "Overcharges for Aircraft Products Liability Insurance Under Various Contracts Awarded to Pratt & Whitney Aircraft Division of United Aircraft Corp., East Hartford, Conn." B-146900, June 30, 1964 (OSD Case No. 1837).

GAO made a finding that $2,200,000 in unnecessary costs had been incurred during 1955 through 1961 because the contractor charged to the Government overhead costs of providing aircraft products liability insurance on items sold commercially. GAO recommended recovery. The Navy agreed to the GAO dollar estimate, but found no legal or equitable basis for recovery. To reopen the contracts for prior years would expose the Government to higher counterclaims by the contractor. The Navy therefore refused to attempt recovery on contracts for years prior to 1962. However, according to a Navy response to GAO dated July 21, 1965, in the final negotiations with Pratt-Whitney for fiscal years 1962 and 1963, Navy auditors questioned $597,777 and $620,