Audit of Payments From Special Fund to Lockheed Aircraft Corporation for C-5A Aircraft Program During the Quarter Ended September 30, 1971

Published by the Government Accountability Office on 1971-11-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)



    Audit Of Payments From
    Special Fund To
    Lockheed Aircraft Corporation
    For C-5A Aircraft Program
     uring The Quarter Ended
    September 30, 1971      B-162578

    Department of Defense


                                          COMPTROLLER     GENERAL     OF      THE      UNITED       STATES
                                                        WASHINGTON,    D.C.         20548


                       To the President of the Senate and the
                 r,/   Speaker of the House of Representatives

                            This is our second report on the audit of payments from the special
                       fund to Lockheed Aircraft Corporation for the C-5A aircraft program.                                     32 .-
                       This report covers the quarter ended September 30, 1971.

                             This audit was made pursuant to section 504, Public Law 91-441,
                       which authorized $200 million    of interim funding for the C-5A aircraft
                       program to be paid through a special bank account.       These funds may be
                       expended only for the reasonable and allocable     direct and indirect   costs
                       incurred by Lockheed on the C-5A aircraft    program.    The law also pro-
                       vides that these funds shall not be used to reimburse Lockheed for inter-
                       company profits,    bid and proposal costs, independent research and de-
                       velopment costs, other unsponsored technical     costs, and depreciation   and
                       amortization    expenses. Under the law the General Accounting Office is
                       required to audit payments from the special bank account on a quarterly
                       b-and        to submit a report to the Congress not more than 30 days after
                       the close of each quarter.

                             Since June 16, 1971, the Air Force paid Lockheed $125,166,211 from
                       the special bank account.    (See appendix for the cumulative expenditures
                       through September 30, 1971.) The amounts deposited in and withdrawn from
                       the special fund and the special bank account for the quarter ended Sep-
                       tember 30, 1971, were as follows:

                                                                                                Special bank     $200 million
                                                                                                   account           fund

             /         Balance as of July 1, 1971                                               $ 1,002,503      $178,594,489
             i         Deposits                                                                  104,645,816
.                      Withdrawals                                                                                104,645,816
        CA                  Labor                               $19,066,763
        .,                  Overhead                             31,838,554
"                           Material and other charges           54,489,940
                            Intercompany transactions:
                                 Charges $4,359,211
                                 Credits -4,991,265                   -632,054                  104,763,203

                       Balance as of September 30, 1971                                         $      885.116   $ 73.948.673

                       LABOR COSTS

                            During the quarter ended September 30, 1971, the Air Force paid
                       Lockheed $19,066,763 for labor costs incurred.  Due to the shortage of
                       wing assemblies created by a work stoppage at a subcontractor's  plant,

                                                   50 TH ANNIVERSARY                   1921-, 1971

the Lockheed-Georgia,Company suspended, effective    September 20, 1971,
essentially all C-5A aircraft   assembly operations and temporarily  laid
off about 2,400 employees.    The subcontractor  resumed work on October 18,
1971, and expected to begin delivery    of wing assemblies early in Novem-

     Because of the disruption   of production due to the temporary lack of
wing assemblies and the approaching completion of subassemblies for all
C-5A aircraft,  we are giving increased attention  to the reasonableness of
labor charges.


       During the quarter overhead expenses totaling  $31,838,554 were paid
to Lockheed from the special bank account on the basis of negotiated pro-
visional    overhead rates. Lockheed and the Air Force negotiate provi-
sional overhead rates for use in costs reimbursement contract billings.
Actual overhead costs are to be negotiated as of December 26, 1971, the
end of the company fiscal year.

      The provisional overhead rate was reduced to exclude those costs
which are unallowable under Public Law 91-441. Such costs amounted to
$3,183,663 for the quarter ended September 30, 1971.


     During the quarter material and other charges totaling     $54,489,940
were paid to Lockheed from the special bank account.

     To ensure prompt payment to vendors, Lockheed is not reimbursed for
amounts owed to vendors which have not been paid within 30 days. At
September 30, 1971, $885,116 had not been paid within 30 days, and this
amount was deducted from the final reimbursement voucher for the quarter.

Intercompany   transactions

      During the quarter intercompany costs totaling  $4,359,211 charged
to the special bank account were more than offset by intercompany cred-
its of $4,991,265.    The credits represent the excess of amounts paid for
delivered items plus progress payments for undelivered items over actual
costs incurred prior to May 31, 1971, when the contract was converted to
a cost-reimbursement   type.

     We noted that intercompany transactions     were not being reconciled
and processed for inclusion    in reimbursement vouchers on a timely basis.
Reconciliation   of intercompany transactions   essentially involves identi-
fying and resolving differences    between the records of the Georgia

company and other Lockheed companies. A    Lockheed-Georgia Company offi-
cial stated that about 81 percent of the   amount involved had been rec-
onciled as of October 4, 1971. Lockheed    has agreed to intensify   efforts
to reconcile and complete the accounting   for intercompany transactions.


     Our review was made at the Lockheed-Georgia Company, Marietta,      Geor-
gia; Lockheed Aircraft   Corporation and Lockheed-California    Company, Bur-
bank, California;  Lockheed Aircraft   Service Company, Ontario, California;
and Lockheed Electronics   Company, Plainfield,  New Jersey.

       Our audit of labor costs included tests to determine whether those
costs appeared reasonable and applicable    to the C-5A aircraft program.
In our review of overhead costs, we examined into the reasonableness of
provisional   overhead rates and the costs eliminated  to comply with Public
Law 91-441.

       We reviewed selected material and other costs shown on reimbursement
vouchers and traced the amounts to such documents as purchase orders, re-
ceiving reports, vendors' invoices,     and work orders to determine the ac-
curacy and propriety    of the amounts paid.   Our review of costs incurred
on the C-5A aircraft    program by other Lockheed companies was directed at
testing the accuracy and allowability     of labor, material,  and overhead
costs charged in intercompany billings.      We reviewed also the Defense Con-
tract Audit Agency audit of payments from the special bank account for
labor, overhead, and material and other costs and tested the work per-

      Our review revealed no payments to Lockheed Aircraft     Corporation
from the special bank account during the quarter ended September 30, 1971,
that were contrary to Public Law 91-441. As indicated      earlier  in the re-
port, however, we are giving increased attention  to the reasonableness of
the labor costs.

     Copies of this report are being sent to the Director,  Office of Man-
agement and Budget; the Secretary of Defense; and the Secretary of the
Air Force.

                                      Comptroller General
                                      of the United States


                         FROMTHE SPECIAL BANK ACCOUNTAND

                     $200 MILLION FUND AS OF SEPTEMBER 30, 1971

                                                    Special bank      $200 million
                                                       account            fund
      JUNE 16, 1971 (note a)                        $         -       $200,000,000

    DEPOSITS                                            126,051,327

    WITHDRAWALS                                                        126,051,327
        Labor                         $23,860,659
        Overhead                       38,755,521
        Material    and other
           charges                     67,593,406
        Intercompany transac-
              Charges $ 7,453,242
              Credits -12,496,617      -5,043,375       125,166,211

    BALANCE AS OF SEPTEMBER30, 1971                 $       885.116   $

    aDate of first     payment from special   bank account.