The DOD agreed with the GAO findings as to prices, but said that the prime contractor had done everything possible to obtain cost data. Air Force approved the subcontract because the subcontractor was the sole available source. The GAO states that Air Force written approvals were based on a comparison of prior prices with proposed prices and on an Army Audit Agency report.

The Air Force examined all purchase orders issued to this subcontractor during the period of April 1960 through May 1964 in excess of $10,000. Over half the purchases were "emergency" and the rest were "urgent." In most cases this subcontractor was the only source that could meet quality and delivery requirements.

The prime contractor attempted to obtain a refund, but the subcontractor refused. The Air Force believes that the prime contractor was diligent at all times, and will not attempt recoveries from the prime. The Air Force said it would take all possible action to assure compliance with submission of cost or pricing data requirements by the subcontractor.

75. "Potential Savings Through Procurement of Operating Supplies From General Services Administration Sources by MartinMarietta Corp., Denver Division, Denver, Colo.," B-132992, February 9, 1965 (OSD Case No. 2022).

The GAO made a finding that the contractor could have saved $533,333 a year from 1960 through 1962 by buying office supplies from GSA supply sources instead of from commercial sources. GAO recommended that contractors be allowed to buy from GSA sources and that costs reimbursed to contractors be limited to GSA prices.

DOD reviewed the problems raised in the report, and would not accept the GAO recommendations. DOD generally opposes interference and further involvement in contractor responsibilities, and calls attention to the broad economic effects on normal commercial distribution channels that would be introduced by the proposed policy.

76. "Improper Application by the Hallicrafters Co., Chicago, Ill., of Government's Share of Vendor Credits for Volume Discounts Under Contracts AF 33 (600)-40992, 40094-42414," B-146967, February 26, 1965 (OSD Case No. 2067).

The GAO finding was that the Government failed to receive its proper share, $57,200, of volume discounts amounting to $72,000 which were extended to Hallicrafters by vendors. GAO recommended re

covery.

The Air Force agreed with the finding and recommendation. The contractor made appropriate accounting, billing, and repricing adjustments for $57,200.

77. "Noncompetitive Procurement of Military Aircraft Forgings From Alcoa at Prices Substantially Higher Than Current and Expected Costs of Production," B-146784, July 31, 1963 (OSD Case No. 1648).

The GAO made findings that in noncompetitive contracts totaling $2.6 million, the contractor consistently quoted prices substantially higher than current cost experience and refused to furnish cost data. The GAO estimated that prices exceeded known current costs by

$893,000, or 51 percent. The company refused to accept contracts on other than its own terms, notwithstanding the fact that the contracts were noncompetitive and its position was due in part to its possession of special heavy presses owned by the Government. GAO recommended recovery and efforts to examine prices.

The contractor, after negotiations, agreed to Air Force audit access. Air Force found no misleading data or misrepresentations on the part of the contractor. Although profits were large, the Air Force said there was no basis for a price adjustment. Accordingly, the DOD disagreed with the GAO recommendation as to a refund, although action has been taken to achieve access to cost data for future contracts.

78. "Unnecessary Costs Resulting From Failure To Procure F-105 Aircraft Multiple Ejector Rack Assemblies Directly From the Manufacturer," Draft Report, October 30, 1964, (OSD Case No. 2153).

The GAO made a finding that unnecessary costs of $727,000 were incurred because the Air Force bought assemblies from Republic Aviation Corp., the prime contractor, instead of from the manufacturer, Douglas Aircraft Co., and that this showed insufficient concern on the part of procurement officials and failure to achieve uniform policy. GAO recommended policy changes to direct increased procurement of Government-furnished equipment.

The Air Force disagreed with the findings and recommendations. The assemblies were known to require modifications to fit the aircraft characteristics, and this was the responsibility of the prime contractor. The Air Force believed that current policy and practice is adequate and provides necessary flexibility.

GÃO takes the position that the Air Force agreed to pay for this responsibility as a separate item under the production contract and if the Air Force had elected to procure the bomb racks direct, the Air Force could still have retained the contractual coverage with Republic to insure itself that the bomb racks fit the aircraft and performed adequately.

This report, still in draft form at the time of the hearing, was issued as a final report, "Cost of Indirect Procurement of F-105 Aircraft Multiple-Ejector Bomb-Rack Assemblies," B-156639, August 12, 1965. The report said the Air Force could have used a prime contractor drawing to procure the item directly from the manufacturer with modifications. It recommended attention to the possibility of savings by means of direct procurement, but made no recommendations for recovery from the contractor or for policy changes.

79. "Excessive Cost to the Government in Rentals of Electrical Accounting Machines by General Dynamics/Astronautics, a Division of General Dynamics Corp., San Diego, Calif., B-146920, August 20, 1964 (OSD Case No. 1916).

"Unnecessary Costs to the Government Due to Excessive Rentals for Electronic Data-Processing Machines at Lockheed Missile & Space Co., Sunnyvale, Calif.," Draft Report, January 7, 1965 (OSD Case No. 1882).

In these two similar cases, GAO made findings that the former manual method of recording the use time of data processing equipment

was inaccurate and had resulted in excessive rental charges. Automatic timing devices are now being used. GAO recommended recoveries for prior excessive rentals costs.

Although timing devices are being used for management purposes on electrical accounting machines, the DOD position was that the rentals computed under manual timekeeping methods were in full accordance with the terms of the rental agreements. IBM installed meters on its EDPE in April 1964, and thereafter used them as a basis for payment. Prior to that, the rental contracts provided for charges in accordance with their accepted practices.

The DOD disagreed with the GAO recommendation, finding no legal basis on which to seek a refund.

80. "Lack of Definitive Policy on Furnishing Subsystems to Weapon System Contractors Results in Higher Costs," Draft Report, March 11, 1965 (OSD Case No. 2276).

The GAO made findings that military departments sometimes assign to contractors responsibility for purchasing items which should be Government-furnished, as a matter of expediency rather than economy, and that a definitive policy on furnishing subsystems is lacking. GAO recommended an expanded policy guidance to require more Government-furnished equipment.

The Air Force strongly disagreed with the findings and recommendations. It took the position that the policies and procedures are extensive, the required reviews are detailed and ample, and that time, quality, and economy are tradeoffs to be balanced-satisfactory performance and timely delivery cannot be jeopardized.

On April 29, 1966, the Comptroller General issued a final report, "Policy Guidance Strengthened on Direct Procurement of Components Needed by Contractors in Production of Weapon Systems and other Major End Items-Department of Defense," B-158604. In that report, GAO took into account and praised the development of a new ASPR section 1-326, promulgated on October 1, 1965, and revised on December 1, 1965. GAO said the new policy represented "a significant step toward realizing more fully the economies which are obtainable by direct procurement under appropriate circumstances."

The ASPR policy requires, for major million-dollar procurements, full considerations of possible savings obtainable by "breakout" of components, if significant savings can be achieved and if such action will not jeopardize quality, reliability, performance, or timely delivery.

AEC-1. "Procurements of Aluminum Caps and Cans Without Adequate Pricing Data by the General Electric Co. from the Aluminum Co. of America under Atomic Energy Commission Contracts," B-114878, May 31, 1963.

The GAO made findings that prices of subcontracts totaling $7.9 million were about $3.9 million, or 100 percent in excess of average experienced production costs. General Electric, the CPFF prime contractor at AEC's Hanford works, made the procurements as nego

tiated, fixed-price, sole-source subcontracts or purchase orders without obtaining cost data. The prime contractor tried unsuccessfully to develop a second source for the aluminum caps and containers for nuclear reactor fuel. GAO recommended that AEC, after consultation with the Justice Department, obtain retroactive price adjustments on the procurements.

AEC referred certain of the procurements by General Electric described in the report, to the Department of Justice. Following review of these procurements, the Department advised AEC that there was no basis for legal action.

AEC-2. "Procurements of Aluminum Caps and Cans Without Adequate Pricing Data by the E. I. du Pont de Nemours & Co., Inc., From the Aluminum Co. of America," B-114878, July 23, 1963. The GAO made findings that prices of subcontracts totaling $2.7 million were about $1.4 million in excess of average experienced production costs. DuPont, the CPFF prime contractor at AEC's Savannah River plant, made the procurements as negotiated, fixed-price, solesource subcontracts or purchase orders without obtaining cost data. The prime contractor tried unsuccessfully for 2 years to obtain a second source for the aluminum caps and containers for nuclear reactor fuel. GAO recommended that AEC obtain price adjustments, and AEC undertook to negotiate directly with the subcontractor.

Negotiations for voluntary price adjustment, commenced in November 1963, were terminated in October 1964, because the condition for further negotiation imposed by Alcoa, that AEC agree in advance tha a return of 25 to 30 percent on capital employed was a reasonable profit, without data on which AEC could base such an opinion, could not be accepted.

AEC-3. "Overpricing of K-27 Tube Sheet Assemblies Procured From Fairbanks, Morse & Co. by Union Carbide Nuclear Co. Under Atomic Energy Commission Cost-Type Contract," B-114878, October 14, 1963.

The GAO found overpricing of $464,000 in a negotiated contract price of $938,400, and recommended recovery. The contract was a negotiated, fixed-price, sole-source subcontract for tube sheet assemblies for nuclear power reactors, placed by Union Carbide Nuclear Corp., an AEC prime contractor holding a CPFF contract. The subcontractor was taking losses on a basic contract for tube assemblies, and had already been refused on an application for relief or adjustment. It later developed, however, that the prime contractor was required to purchase new-type assemblies for which another producer could not be developed before 8 months. The subcontract in question, which was profitable to the subcontractor, was negotiated.

Lacking any legal or contractual basis for seeking a refund, and in view of all the circumstances, including a loss of nearly $1 million incurred by Fairbanks, Morse on the total subcontract, AEC concluded that it would be unrealistic to seek, as a matter of equity, a

voluntary refund on that portion of the subcontract on which Fairbanks, Morse realized a profit. No further action was taken or is contemplated by the AEC.

AEC 4. "Unwarranted Inclusion of Tooling Costs in the Price of Case Extrusion Cylinders Procured From Wyman-Gordon Co. by the Bendix Corp. Under Atomic Energy Commission CostType Contract," B-114878, April 9, 1964.

GAO made a finding that the inclusion of $49,000 tooling costs in a fixed-price purchase order was "unwarranted," because a previous purchase order had covered this cost. GAO recommended recovery. The AEC, the contractor, and the subcontractor all said that the previous purchase order was for the right of "exclusive use," and not for the entire allowable cost of tooling.

On the basis of statements made by the contracting parties, it was concluded that there was no intent to prohibit recovery of unamortized tooling costs in later production orders. Also the Department of Justice reviewed the case and determined that there was no basis for legal action. Hence, no action was taken to seek recovery on a voluntary basis of unamortized tooling costs included in the production orders examined by GAO. However, the Commission took action to assure that whenever orders were awarded for "exclusive use of tooling" in the future, the contract language would clearly express the intent of the parties with respect to recovery in future production of any unrecovered tooling cost.

AEC-5. "Overpricing of Reactor Weldments Procured From the Aluminum Co. of America Under Purchase Orders Awarded by E. I. du Pont de Nemours & Co., Inc.," B-114878, June 23, 1964. The GAO made a finding that prices of subcontracts for reactor weldments totaling $5,519,159 exceeded average experienced production costs by $2,038,800, or 60 percent. The subcontractor refused cost data, audit access, and refund efforts by the prime contractor and the AEC. The AEC found no legal basis on which to obtain a refund, but tried to negotiate a voluntary refund.

Negotiations for voluntary price adjustment commenced in November 1963 were terminated in October 1964 because the condition for further negotiation imposed by Alcoa that AEC agree in advance that a return of 25-30 percent on capital employed was a reasonable profit, without data on which AEC could base such an opinion, could not be accepted.

AEC-6. "Cost and Pricing Data Not Obtained for Determining the Reasonableness of Prices for Weapons Components Procured From the Aluminum Co. of America by the Bendix Corp. and ACF Industries, Inc.," B-114878, October 26, 1964.

In a review of $4.4 million of purchase order subcontracts, GAO found no review of pricing by AEC prime contractors. The subcontractor refused purchase order audit access terms, and refused access to cost data. GAO wanted AEC to audit in cases where access not prohibited, or provided for in documents.