review the contractor's proposal. During this interval production is usually continuing and additional cost experience is being gained by the contractor. Although this additional cost data is available to the contractor, it is not ordinarily available to the Government at the time of repricing negotiations. B-132936 March 19, 1958

Report on Examination of the Negotiation of a Final Price Under Department of the Air Force Contract AF 33(600)-8743 with McDonnell Aircraft Corp., St. Louis, Mo.

The report pertains to the negotiation of contract price after completion of contract performance and shows that there is a need for measures which will reduce to a minimum the inclusion of estimates in the cost data used as a basis for price negotiations under such circumstances.

B-118762 March 20, 1958

Examination of Time and Materials Subcontracting by Chrysler Corp., Detroit, Mich., Under Department of the Army Contracts.

The report shows that unnecessary cost was incurred by the Government through the extensive use of time and materials subcontracts without adequate cost controls. The exigencies of the situation and unique nature of the items made the use of time and materials subcontracting necessary for initial procurements of parts required by Chrysler Corp. under its prime contracts with the Army Ordnance Corps. However, the prime contractor continued to award time and materials subcontracts for the procurement of additional quantities of the same parts although fixed-price subcontracting would apparently have been practicable and more economical. Comments furnished us by Chrysler Corp. and the Department of the Army show that action has been taken to restrict the use of time and materials subcontracting and strengthen controls over costs incurred under this type of contracting.

Since the time and materials form of contracting is used by the Departments of the Air Force and Navy as well as by the Department of the Army, we are recommending to the Secretary of Defense that this case be brought to the attention of appropriate officials of those Departments for their consideration and review of the adequacy of their agencies' controls over time and materials contracting and subcontracting.

Report on Examination of the Pricing of Negotiated Contracts Totaling $118,700,000 awarded to Cleveland Diesel Engine Division, General Motors Corp., Cleveland, Ohio, by the Bureau of Ships, Department of the Navy. The report presents our findings that (1) excessive contract prices were negotiated because contracting officials did not give adequate consideration to the contractor's cost experience, (2) the contractor was allowed the same rate of profit on subcontracted major components as on items to be manufactured in his own plant, and (3) excessive allowance was made for overhead in spare-parts prices. Comments received from the Department of the Navy and the contractor on our findings are recognized in the report.

Summary of findings: We brought our findings to the attention of the Department of the Navy and General Motors Corp. and their comments have been recognized in the report. On November 22, 1957, the contractor offered a refund of $690,000 to the Navy in recognition of the fact that profits on the followon contracts exceeded those anticipated. As at May 8, 1958, the refund had not been received but appropriate contract amendments were being prepared. B-132942 June 5, 1958

Examination of Subcontracts Awarded to Lambert Engineering Co., St. Louis, Mo., by Various Air Force and Navy Prime Contractors.

Prices proposed by the subcontractor were generally accepted by the prime contractors without price or cost analysis or comparison with the subcontractor's cost experience even though there was no competition because Lambert was the sole source of supply. As a result, inadequate recognition was given in the subcontract prices to declining costs as production experience was gained and, therefore, close pricing was not achieved.

The Air Force has taken action on two of our recommendations aimed at improving the pricing of subcontracts but did not concur with two other recommendations. The Navy furnished us with no evidence of any specific action hav

ing been taken to prevent a recurrence of the undesirable subcontracting practices disclosed by our examination. We believe, therefore, that further consideration should be given to the need for additional measures to insure that fair and reasonable subcontract prices are obtained. The report includes our recommendations in this matter.

B-118762 July 23, 1958

Examination of Department of the Army Contracts and Subcontracts with Birdsboro Armorcast, Inc., Birdsboro, Pa.

SUMMARY REPORT ON EXAMINATION OF DEPARTMENT OF THE ARMY CONTRACTS
AND SUBCONTRACTS

This summary report is furnished to inform you of the following administrative weaknesses which were disclosed by our examination:

1. Additional cost to the Government resulted from (a) allowing profit to the subcontractor and prime contractor on rent paid for the use of Governmentowned facilities, (b) requiring the contractor to provide insurance on Government-owned facilities, and (c) not adjusting profit allowances for a reduction in the scope of the work actually performed.

2. The contractor's fee under a cost-plus-a-fixed-fee contract included charges for indirect costs, making it difficult to determine whether regulations limiting such fees were complied with.

3. The contractor used Government-owned facilities for commercial operations for 2 years without formal contractual agreement and without paying rent to the Government.

B-118787 August 29, 1958

Examination of Subcontracts Awarded to Goodyear Aircraft Corp., Arizona Division, Litchfield Park, Ariz., under Department of the Air Force Prime Contracts.

The report presents our finding that unreasonably high subcontract prices were negotiated because the latest available cost information was not utilized in establishing the prices. A price reduction applicable to these subcontracts has subsequently been negotiated and the Air Force has taken action to assure that current actual cost data are given consideration in negotiating prices of prime contracts and subcontracts.

After we brought to the attention of the parties the excessive price established for canopy assemblies, a price reduction of $164,920 was negotiated.

B-133056 October 14, 1958

Examination of Subcontracts with the Firestone Tire & Rubber Co., Los Angeles, Calif., for Aircraft Fuel Cells.

The report discloses that neither the prime contractors nor the Department of the Air Force have required the subcontractor to furnish evidence of the reasonableness of proposed prices for aircraft fuel cells, and as a result the prime contractors have not had sufficient information to use as a basis for negotiating fair and reasonable prices. For the 3 fiscal years ended October 31, 1956, Firestone earned a profit of about $3 million, 35 percent of cost, on these fuel cells.

B-133118 November 26, 1958

Review of Selected Activities of the Aviation Segment of the Navy Supply System.

Our review of the aviation segment of the Navy supply system disclosed that, because of serious deficiencies in several critical areas, the system does not adequately meet aircraft spare parts requirements of the fleet and results in the accumulation of substantial quantities of excess material. For example, in September 1958, an average of 8 percent of the Navy's operational aircraft were reported grounded for lack of parts; however, for certain first-line aircraft, this rate was much higher. Conversely, during fiscal years 1955-58, excess material valued at approximtaely $823 million was declared excess for disposal purposes. The Navy estimates that an additional $274 million worth of aeronautical material will be declared excess in the near future.

Although it has not been possible to identify all the direct causes, we found a need for (1) improvement of accuracy of requirement computations, (2) improvement in the accuracy of field reporting of quantities and conditions of assets on hand, (3) reevaluation of certain aspects of program-life procurement

policies, (4) closer coordination of military services in supply activities, and (5) simplification of the appropriation structure.

B-132945 December 3, 1958

Examination of Department of the Army Contract DA1-28-017-501-ORD(P)1467 With A. O. Smith Corp., Milwaukee, Wis.

The report discloses that agency officials negotiated prices without verifying cost data which the contractor furnished in support of the proposed prices. Consequently, these officials were not aware that the contractor had adjusted experienced cost data upward to correct estimated discrepancies and they accepted the proposed prices, which were excessive. As a result of our bringing this finding to the attention of the contracting agency, the contractor has refunded $126,775 to the Army and we have been advised that our findings would be brought to the attention of all Ordnance Corps installations concerned with procurement.

B-133103 December 8, 1958

Examination of the Pricing of Department of the Air Force Negotiated Contracts and Subcontracts With Avtron Manufacturing, Inc., Cleveland, Ohio. The report discloses that unnecessary costs were incurred by the Government because firm fixed-price contracts and subcontracts were awarded without competition being obtained and before sufficient cost experience was available. After we brought our findings to the attention of the contractor, Avtron refunded $52,000 to the Air Force.

B-133021 December 8, 1958

Examination of the Pricing of Department of the Air Force Contract AF 33 (600)–29507 With General Motors Corp., A.C. Spark Plug Division, Milwaukee, Wis.

The report discloses that unreasonably high prices were negotiated because the Air Force awarded the contract on a fixed-price basis without requiring the contractor to furnish detailed support for the estimated costs included in the prices proposed by the contractor. The estimated costs were not a reasonable basis for contract pricing because they did not reflect cost reductions which might be expected to result from purchases in larger quantities. Further, additional quantities were ordered under the contract at prices which did not give effect to lower, more current, costs of materials.

After we brought our findings to the attention of the Air Force and the contractor, the latter made a refund of $750,000 applicable to this contract and the Air Force issued a directive to contracting officials designed to strengthen procedures relating to the use of cost data in the negotiation of contract prices. B-133121 December 23, 1958

Review of Requirements, Determinations, and Related Procurement for Ground Communication-Electronic Equipment, Rome Air Force Depot, Department of the Air Force.

The Air Force did not have effective program control of ground communication-electronic equipment or the capability of computing current and vali requirements, under the methods of computing requirements in operation at the time of our review, and the supply system did not have the capability to promptly identify and cancel excess equipment on order.

During our review we reported to the Air Force a number of excesses on contract that had not been canceled. The Air Force subsequently terminated orders for equipment with a total contract price of approximately $1,400,000. A much larger reduction of excesses would have been possible, however, if the Air Force had acted when the reduced requirements were originally recorded. B-132936 January 20, 1959

Examination of Department of the Navy Contract NOas 53-204 and Lease Agreement NOy(R)−60218 Negotiated with McDonnell Aircraft Corp., St. Louis, Mo.

In establishing a firm price for airplanes to be produced under contract NOas 53-204, Navy contracting officials utilized, without adequate evaluation or verification, cost data which included duplicate costs and costs not applicable to the airplanes. The contractor incurred costs of about $6 million less than the amount contemplated, of which $2,596,000 could have been recognized by

Navy contracting officials by an adequate review of cost data available at the time the price was established. As the result of our bringing our findings to the attention of the agency, the contractor offered to reduce the price by $3 million. As of December 1, 1958, the Navy had not accepted this offer.

We found also that the contractor's claim for termination inventory was overstated, that rent and insurance on Government-owned facilities caused unnecessary cost to the Government, and that the contractor's inventory records were not reliable. The Navy has informed us that the Navy auditor would review the final termination settlement proposal and make appropriate recommendations, that consideration is being given to revising the rental and insurance aspects of the facilities lease, and that the contractor's inventory accounting procedures are being improved.

B-133125 January 23, 1959

Review of Army Signal Corps Supply Operations, U.S. Army, Europe Communications Zone, Orleans, France.

The value of the inventory controlled by the Signal Supply Control Agency at December 31, 1957, was $108 million. Of this amount, $42 million worth of stock was in excess of normal operating requirements and approved reserves. The generation of excesses was caused by many factors. In addition to obsolescence, changes in military requirements, and new logistical concepts, many of the deficiencies disclosed in our review contributed significantly to this condition.

Our review disclosed that Signal Corps practices, procedures, and controls were inadequate to assure proper supply determinations, and this has resulted in uneconomical supply operations. The major deficiencies were that the supply records were inaccurate and unreliable, orders had been placed for supplies from the United States which were not needed in Europe, stocks were reserved unnecessarily, and stock levels were excessive. A summary of the report is found on pages 4 to 8.

B-125057 June 30, 1959

Review of Supply Management and Production Control Activities at Selected U.S. Naval Shipyards, Bureau of Ships, Department of Navy.

We found that the shipyards have consistently overestimated their needs for material for ship overhaul and conversion work. As a result, enormous quantities of surplus materials have been accumulated which, experience shows, will be ultimately disposed of at a fraction of its cost. During the fiscal years 1956, 1957, and 1958, a sizable amount of Navy inventories have been classified as excess to its needs. This included nearly $850 million worth of those materials used almost exclusively for shipwork; i.e., electronic and shipboard equipment and ship repair parts.

We found also (1) that retention of inactive items increased shipyard storage, accounting, and administrative costs and delays in making this excess stock available to other potential users, (2) that about 40 percent of material carried in shop stores for day-to-day use was in excess of established supply levels and that a substantial amount of the stock held as insurance items did not meet the criteria established for stocking such items, and (3) that little or no accounting control exists over the more than $40 million in surplus materials at the four shipyards we reviewed.

B-133151 February 4, 1959

Review of Aircraft Engine Overhaul Pipeline in the Department of the Navy. This report discloses that the Department of the Navy, by reason of applying a very liberal allowance for out-of-service time for aircraft engines, is investing very substantial sums of money in the procurement of aircraft engines that are excess to its needs.

Our review of physical movement of engines and comparison with performance by the Department of the Air Force on similar engines suggests that a reasonable pipeline would be approximately 150 days as contrasted with the scheduled 210 days used for computing requirements and with the current performance record of 275 days. On this basis, we estimated that at July 31, 1958, 793 aircraft engines costing about $68 million are being procured in excess of the Navy's requirements. In addition, at that date, the Navy had planned requirements for 204 more of these engines estimated to cost about $33 million. This computation is based solely on the difference in overhaul pipeline time and does not

include any reductions which may be obtainable by more realism in other factors in the requirements determinations.

B-133144 Feb. 20, 1959

Examination of the Pricing of Landing Gears Purchased From Menasco Manufacturing Co., Burbank, Calif., by Department of the Air Force Prime Contractors.

The report discloses that prime contractors accepted prices quoted by Menasco without requiring the subcontractor to submit cost information in support of the prices proposed, and as a result proper evaluation of the prices could not be made. The Air Force has taken action to correct this unsatisfactory situation. B-133143 March 12, 1959

Examination of Department of the Air Force Contract AF 33 (600)-31100 With Avco Manufacturing Corp., Crosley Division, Cincinnati, Ohio.

An excessive price was negotiated for this contract because the Air Force accepted more than $1 mililon of recorded costs which the contractor included in error in its pricing proposal. As a result of our bringing this matter to the attention of the Air Force and the contractor, the contractor has refunded $1,133,510 to the Air Force. In addition, steps have been taken by the Air Force and the contractor to prevent in the future pricing errors of the type, which resulted in negotiating an excessive price for contract AF 33 (600)–31100.

B-133131 March 17, 1959

Examination of the Pricing of Department of the Navy Negotiated Contracts and Subcontracts With Librascope, Inc., Glendale, Calif., for Model MX-1295 Periscopes.

The report presents our finding that firm fixed prices and an incentive target price were negotiated before adequate cost and production experience was available to enable the estimating of future costs of production with reasonable accuracy. Consequently, the firm fixed prices and, to a lesser degree, the final price of the incentive-type contract were unreasonably high.

The report also includes our finding that expenses of $12,675 incurred by the contractor in connection with the exhibition of a commercial product were erroneously charged to Government work. The Navy Area Audit Office informed us that corrective adjustment would be made.

B-133145 March 26, 1959

Examination of Prices Negotiated Under Certain Department of the Air Force Contracts With Friden, Inc., San Leandro, Calif.

The report disclosed that excessive contract prices were negotiated because agency officials did not give adequate consideration to the contractor's previous cost experience. As a result of our review, the price of one contract was reduced $128,005 and a second contract was awarded on a price-redeterminable basis. In subsequent price-redetermination negotiations the price of the latter contract was reduced about $146,200. We believe, however, that further savings might have been realized if agency contracting officials had given adequate consideration to available cost data and had exercised their option to request a second price redetermination.

B-133005 April 20, 1959

Limited Review of Selected Offshore Procurement Contracts Awarded and Administered by the Directorate of Procurement and Production, Air Materiel Force, European Area, in Fiscal Years 1954, 1955, and 1956, Our review disclosed a failure by the Air Force to adjust the amount of a contract for aircraft engines in accordance with the value of the engines delivered by the contractor, resulting in an excess payment of $874,000. As a result of our review, the Air Force obtained additional engines needed in Europe in the amount of the excess payment without additional expenditure.

Our review disclosed also that rework of aircraft canopies produced overseas was necessary at a cost of $71,000 because they were not interchangeable with canopies produced in the United States. We were informed by the Assistant Secretary of the Air Force (Materiel) on December 30, 1958, that necessary action was being taken to recover these rework costs.