oversight

Improvements Being Made in the Controls Over Government Test Equipment Acquired by Contractors

Published by the Government Accountability Office on 1971-04-09.

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

                        T +O THE CONGRESS
                                     lllllllllllllllllllllllllllllllllllllll
                                                LM095593




           lmprowements     eing Made
           In The Controls
                      t Test Equipment
 ‘i
                      y contractors        B-     140389




  i ’
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2:‘i
           Department   of Defense
   1




      i




      I-   BY THE COMPTROLLER GENERAL
           OF THE UNITED STATES
               COMPTROLLER     GENERAL     OF      THE       UNITED   STATES
                             WASHINGTON.    D.C.         20548




B- 140389




To the President   of the Senate and the
Speaker  of the House of Representatives

        This    is our report   on the improvements                             being made     in
the controls       over Government    test equipment                           acquired  by
contractors       for the Department    of ‘Defense.

         Our review  was made pursuant     to the Budget                             and Ac-
counting    Act, 1921 (31 U.S.C.  53), and the Accounting                              and
Auditing    Act of 1950 (31 U.S.C. 67).

          Copies of this report    are being sent to the Director,
Office     of Management     and Budget;   the Secretary   of Defense;
the Secretaries       of the Army,    Navy, and Air Force;    and the
Director,      Defense Supply Agency.




                                                   Comptroller             General
                                                   of the United           States




                      50TH ANNIVERSARY                     1921- 1971
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I   COMPTROLLER GENERtiL'Z                     IMPROVEMENTS BEING MADE IN THE CONTROLS
I   REPORT TO THE CONGRESS                     OVER GOVERNMENTTEST EQUIPMENT ACQUIRED BY
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                                               CONTRACTORS
I                                              Department of Defense B-140389
I

I
I   DIGEST
    ------
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I
    WHY THE REVIEW WAS MADE
I
I        In performing     Government work, defense contractors        use a variety      of
I
I        equipment,    machine tools,    furniture,  vehicles,    and  similar   property.
I        These articles     are known as plant equipment.        Department    of Defense (DOD)
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         regulations    provide    that, with some exceptions,     contractors    furnish    all
I        plant equipment      needed for contract   performance.
I
I
I        Equipment so specialized       that its use is limited    to testing     in the devel-
I        opment or production      of particular  items or performance      of particular     ser-
I
I        vices is not considered      plant equipment.     This type is known as special
I        test equipment.     It is needed for the performance        of negotiated     Government
I
I        contracts   and generally    is acquired   by contractors    for the account of the
I        Government      'ts cost is borne directly     by the Government and ownership          is
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         retailred  uy Lne G lernment.
I
I        Prior work    by the General Accounting              Office     (GAO) indicated     that some plant
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I        equipment    had been inappropriately             classified       as special   test equipmfncand
I        therefore    was acquired          by the. contractor       fo-r th.e account of the Government.
I
I        The-review    ~~~--lm~"~..t'o-i'nquire      into the extent         that this might still     be
I        occurring    and its effects.
                                  .,      -
I
I
I
I   FINDINGS AND CONCLUSIONS
I
I
I        Significant  quantities   of plant equipment--specifically,                general-purpose
I
I        test equipment--   have been acquired  as special     test          equipment   and paid for
I        by the Government.
I
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I        GAO found that five contractors     had special     test equipment on hand costing
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         about $62 million  that had been purchased for the account of the Govern-
I        ment.   Of this amount an estimated    $12 million      represented plant equipment
I        which should have been provided     by private    investment.
I
I
I        Classification       of the $12 million       worth of plant equipment         as special    test \
I
         equipment      and its subsequent      acquisition      for the account of the Government \
         was contrary      to the policy    of Government reliance          on contractors     to provide'
         plant equipment        needed for contract       performance.      Moreover,     this increased
         the Government's        investment   in plant equipment        inventories     along with the
         costs associated        with maintenance      of these inventories,          (See pp. 12 and
         13.)



                                                                        MRIL         9,197         I.
'Had the equipment     been classified   properly    as     general-purpose    test equip-
 ment and been furnished      by DOD under a separate         contract    for providing
 facilities,   it would still     have been contrary        to the Government's      inter-
 est for the reasons cited      above.   Such action        would, however,    have had
 the following    advantages   over the acquisition         as special    test equipment.

   ; --Total  costs to the Government probably    would have been lower because
        fees, which are generally    allowed on equipment  acquired  under produc-
 i
        tion contracts,   are not allowed on equipment furnished    by the Govern-
        ment under a facilities   contract.   (See p0 13.)

    --The Government would have better        assurance       that the equipment was not
       used for commercial      purposes because closer         controls are prescribed
       for Government-furnished       plant equipment.        (See pp. 13 and 74.)

  1 --The reuse potential       for idle equipment would be increased   because
       surveillance     designed for reporting   plant equipment for disposition,
                    is more stringent    than it is for special  test equipment.
  '    yieLeiie'14    to 16.)

 :The acquisition        of plant equipment   as special     test equipment       has been
; permitted       by the Armed Services   Procurement     Regulation     definition    of
; special      test equipment which specifically       includes    'I*** a22 components
  of ytl assem3Zies of such equipment          **;F*." This definition         permits  the
   acquisition      of plant equipment   as special    test equipment when it is to
  be included       in a group of test equipment items assembled for a specific
   use.     (See p. 4.)

  A need exists   to revise   and clarify  the regulations     governing    the classi-
  fication   and acquisition   of special  test equipment.       GAO believes     that
 general-purpose     components assembled to form special        test equipment
 ,khould be subject     to the same approval   criteria    as established     for other
 'pieces of plant equipment.                                                                     I
                                                                                                  I

/GAO believes      that it is feasible      t o require    contractors    to provide     their
'own general-purpose        components of     special  test equipment       and that such a
  requirement     should result   in sign   i ficant  cost savings on new weapons sys-
  terns currently     undergoing  design,     development,     or initial    production.         I
                                                                                                 /
  (See pp. 20 and 21.)                                                                           I
                                                                                                 I
                                                                                                 I
                                                                                                 I
                                                                                                 I
                                                                                                 I
                                                                                                 ,
 The Secretary     of Defense    should   act   to:

    --Revise     the definition     of specia 1 test equipment   in the Armed Ser-
       vices   Procurement      Regulation  and other pertinent    Department  of De-
       fense   regulations      to exclude items that are really     plant equip-
       ment.     (See pC 21.)
                                                            .   .   “L




                    --Require   contracting         officers  to review proposals        for special   test
                       equipment to ensure          that plant equipment is not         included.    (See
                       p. 21.)


          AGEUCY ACTIOJS AUD UNRESOLVED ISSUES

                 DOD concurred         in general    in the GAO findings      and recommendations.

                 The Assistant      Secretary   of Defense (Installations   and Logistics)    stated
                 that the recommendation        to revise the definition  of special     test equip-
                 ment to exclude general-purpose         equipment was concurred  in and that
                 necessary action       in this regard was being developed and would be made
                 effective    soon.     (See p= 30.)

                 Action has begun to describe more clearly      the limited    and special       pur-
                 pose of special   test equipment specifically     excluding   general-purpose
                 test equipment.     Guidance is being developed which will        further    limit
                 the circumstances    under which DOD may take title      to contractor-purchased
                 special  test equipment.     (See p* 31.)

                 'IThe Assistant       Secretary    also told GAO that the Armed Services             Procure-
                  ment Regulation        had been revised to provide a specific             requirement      for
                 ithe r:par-'q       identification      and reporting      of general-purpose      test
                 kqutPlnenL bscd a: romponents of special                test equipment.       This is an
                  interim      measure designed to eliminate          the improper classification,           au-
                  thorization,       reporting,     and utilization      of current    inventories     of
                  general-purpose        equipment acquired as special          test equipment,         (See
                  pa 30.)

                 The Assistant       Secretary    did not comment on the GAO recommendation            that
                 contracting     officers      be required   to review proposals      for special    test
                 equipment to ensure that plant equipment is not included.                   Subsequent
                 discussions     with an official        of his office   indicated    that DOD feels that
               ' the revised     definition      of special    test equipment,     combined with present
               ' practices    for reviewing        proposals   for such equipment,      will be sufficient
                 to ensure that items of plant equipment are not included.                   (See p. 22.)

                 GAO believes   that the actions      taken or scheduled by DOD are appropriate
                 and should help bring about improvements          in the management of Govern-
                 ment test equipment.      To ensure that the redefinition        of special     test
                 equipment will    have its desired effect,       however, contracting    officers
                 should be specifically      required    to ensure that items of plant equipment
      I
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                 are not included     when they review proposals      for special    test equipment.
                 (See p. 22.)

          MATTERS FO;? COI;7SIDERATIOh' BY T.FIE CONGRESS

                  This report   is being issued to inform the Congress of the actions          taken
                  or planned by DOD to improve controls      over the acquisition       and management
      I
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                  of special  test equipment to reduce the Government's        inventory    of this
      I           type of equipment and related   administrative     costs.

           Tear Sheet


                                   /                                3
                               Contents
                                                                     Page
--   DIGEST                                                           1

     CHAPTER

       1       INTRODUCTION
                   Acquisition  and management of special
                     test equipment
                   Acquisition  and management of plant
                     equipment

       2       GENERAL-PURPOSE   TEST EQUIPMENTCLASSIFIED
                AND ACQUIREDAS SPECIAL TEST EQUIPMENT                 8
                  Inappropriate    classification     permitted
                     by ASPR definition      of special test
                     equipment                                        8
                  Identification     of general-purpose      items
                     acquired as special test equipment               8

        3      ADVERSEEFFECTS OF INAPPROPRIATECLASSIFICA-
                 TION                                                12
                   Increased Government investment     in
                      plant equipment inventories                    12
                    Increased acquisition    costs                   13
                   Reduced control     over commercial use           13
                   Reduced reutilization     potential for idle
                       equipment                                     14

       4       RESULTS OF RECENT INTERNAL AUDITS                      17
                  Defense Supply Agency audit                         17
                  Air Force audit                                     18

        5      CONCLUSIONSAND RECOMMENDATIONS                         20
                  Recommendations to the Secretary          of
                    Defense                                           21
                  DOD actions and GAO evaluation                      21
        6      SCOPEOF REVIEW                                         23
--   a
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         APPENDIX                                                    Page

             I      Letter from the Assistant   Secretary of
                      Dcfcnse (Installations   and Logistics)
                      tc the General Accounting Office,      dated
                      October 20, 1970                                27

            II      Principal   officials   of the Department of
                       Defense, the military    departments and
                       the Defense Supply Agency responsible
                       for the administration     of activities
                       discussed in this report                       32

                                    ABBREVIATIONS

         ASPR       Armed Services Procurement     Regulation
         DOD        Department of Defense
         GAO        General Accounting  Office
             *

         L


                 COMPTROLLERGENERAL'S                     IMPROVEMENTS BEING MADE IN THE CONTROLS
                 REPORTTO THE CONGRESS                    OVER GOVERNMENTTEST EQUIPMENT ACQUIRED BY
                                                          CONTRACTORS
                                                          Department of Defense B-140389


                 DIGEST
                 ------

                 WHYTHE REVIEW WASMADE
                      In performing     Government work, defense contractors      use a variety      of
                      equipment,    machine tools,  furniture,  vehicles,    and similar    property.
                      These articles     are known as plant equipment.      Department    of Defense (DOD)
                      regulations    provide that,  with some exceptions,     contractors    furnish    all
                      plant equipment needed for contract      performance.

                      Equipment so specialized        that its use is limited    to testing     in the devel-
                      opment or production       of particular  items or performance      of particular     ser-
                      vices is not considered       plant equipment.     This type is known as special
                      test equipment.      It is needed for the performance        of negotiated     Government
-.                    contracts    and generally    is acquired   by contractors    for the account of the
                      Government.      Its cost is borne directly     by the Government and ownership          is
                      retained    c. 'he Government.

                      Prior work    by the ueneral Accounting        Office     (GAO) indicated     that some plant
                      equipment    had been inappropriately       classified      as special    test equipment and
                      therefore    was acquired     by the contractor       for the account of the Government.
                      The review    was made to inquire     into the extent that this might still            be
                      occurring    and its effects.


                 FINDINGS AND CONCLUSIONS
                      Significant  quantities of plant equipment--specifically,             general-purpose
                      test equipment-- have been acquired  as special     test       equipment and paid for
                      by the Government.

                      GAO found that five contractors     had special     test equipment on hand costing
                      about $62 million  that had been purchased for the account of the Govern-
                      ment.   Of this amount an estimated    $12 million      represented plant equipment
                      which should have been provided     by private    investment.

                      Classification   of the $12 million       worth of plant equipment as special          test
                      equipment and its subsequent       acquisition      for the account of the Government
                      was contrary   to the policy of Government reliance          on contractors     to provide
                      plant equipment needed for contract          performance.    Moreover,     this increased
.I   *                the Government's    investment   in plant equipment inventories          along with the
         -            costs associated    with maintenance      of these inventories.        (See pp. 12 and
                      13.)
     Had the equipment been classified      properly    as         general-purpose    test equip-
     ment and been furnished      by DOD under a separate            contract    for providing
     facilities,   it would still    have been contrary            to the Government's      inter-
     est for the reasons cited above.       Such action            would, however,    have had
     the following    advantages   over the acquisition            as special    test equipment.

       --Total  costs to the Government probably     would have been lower because
          fees, which are generally     allowed on equipment acquired  under produc-
          tion contracts,    are not allowed on equipment furnished   by the Govern-
          ment under a facilities    contract.   (See p0 13.)

       --The Government would have better        assurance that the equipment was not
          used for commercial      purposes because closer   controls are prescribed
          for Government-furnished       plant equipment.  (See pp. 13 and 14.)

       --The reuse potential    for idle equipment would be increased     because
          surveillance  designed for reporting   plant equipment   for disposition,
          or reuse, is more stringent    than it is for special  test equipment.
          (See pp. 14 to 16.)

     The acquisition      of plant equipment         as special    test equipment        has been-
     permitted      by the Armed Services        Procurement    Regulation     definition     of
     special     test equipment which specifically           includes    "**A aZZ components
     of avly assemldies      of szlch equipmazt       ***.'I   This definition       permits    the
     acquisition      of plant equipment        as special   test equipment when it is to
     be included      in a group of test equipment items assembled for a specific
     use.     (See p. 4.)

     A need exists    to revise   and clarify  the regulations     governing    the classi-
     fication    and acquisition   of special  test equipment.       GAO believes     that
     general-purpose     components assembled to form special        test equipment
     should be subject      to the same approval   criteria    as established     for other
     pieces of plant equipment.

     GAO believes    that it is feasible      to require     contractors    to provide     their
     own general-purpose      components of special       test equipment      and that such a
     requirement    should result   in significant       cost savings on new weapons sys-
     tems currently     undergoing  design,     development,     or initial    production.
     (See pp. 20 and 27.)


RECOMIWW~A~'IONY OR SUGGESTIOALS

     The Secretary     of Defense     should    act   to:

       --Revise     the definition     of special  test equipment in the Armed Ser-
          vices   Procurement      Regulation  and other pertinent  Department  of De-
          fense   regulations      to exclude items that are really   plant equip-
          ment.     (See p. 21.)
      --Require   contracting       officers  to review proposals            for special   test
         equipment to ensure        that plant equipment is not            included.     (See
         p. 21.)


AGENCYACTIONSAND UNRESOLVED
                          ISSUES
    DOD concurred      in general     in the GAO findings        and recommendations.

    The Assistant     Secretary   of Defense (Installations   and Logistics)    stated
    that the recommendation       to revise the definition   of special    test equip-
    ment to exclude general-purpose        equipment was concurred   in and that
    necessary action      in this regard was being developed and would be made
    effective   soon.     (See p. 30.)

    Action has begun to describe more clearly      the limited    and special       pur-
    pose of special   test equipment specifically     excluding   general-purpose
    test equipment.     Guidance is being developed which will        further    limit
    the circumstances    under which DOD may take title      to contractor-purchased
    special  test equipment.     (See p. 31.)

    The Assistant       Secretary    also told GAO that the Armed Services               Procure-
    ment Regulation       had been revised        to provide    a specific     requirement      for
    the separate      identification      and reporting       of general-purpose       test
    equipment used as components of special                test equipment.         This is an
    interim      measure designed to eliminate          the improper classification,            au-
    thorization,      reporting,     and utilization       of current     inventories     of
    general-purpose       equipment acquired         as special   test equipment.          (See
    po 30.)

    The Assistant      Secretary    did not comment on the GAO recommendation            that
    contracting    officers      be required   to review proposals      for special    test
    equipment to ensure that plant equipment is not included.                  Subsequent
    discussions    with. an official       of his office   indicated    that DOD feels that
    the revised definition         of special    test equipment,     combined with present
    practices   for reviewing       proposals    for such equipment,      will be sufficient
    to ensure that items of plant equipment are not included.                  (See p. 22.)

    GAO believes   that the actions      taken or scheduled by DOD are appropriate
    and should help bring about improvements          in the management of Govern-
    ment test equipment.      To ensure that the redefinition        of special     test
    equipment will    have its desired      effect,  however, contracting    officers
    should be specifically      required    to ensure that items of plant equipment
    are not included     when they review proposals      for special    test equipment.
    (See pa 22.)

MATl'E% FOR CONSIDERATIONBY THE CONGRESS
    This report   is being issued to inform the Congress of the actions          taken
    or planned by DOD to improve controls       over the acquisition      and management
    of special  test equipment to reduce the Government's         inventory   of this
    type of equipment and related   administrative      costs.



                                                    3
                                                                               ..




                                           CHAPTER1

                                         INTRODUCTION

      Armed Services Procurement Regulation     (ASPR) 13-101.1
i
!establishes five separate categories    of Government-owned
property.   These are material,  special tooling,    special test
equipment, military  property,  and facilities.

         Special        test     equipment     is defined   in ASPR 13-101.6        as:
     i
         l'**    electrical,    electronic,     hydraulic,     pneumatic,
         mechanical or other items or assemblies of equip-
         ment, which are of such a specialized               nature that,
         without modification         or alteration,      the use of
          such items (if they are to be used separately)                 or
          assemblies is limited        to testing    in the develop-
         ment or production        of particular     supplies or parts
          thereof,     or in the performance of particular            ser-
          vices.     The term 'special      test equipment'       includes
          all components of any assemblies of such equip-
         ment, but does not include:

                     (i)       consumable     property;

                   (ii)        Special    tooling;    or

                (iii)          buildings,    nonseverable   structures
                               (except foundations      and similar    im-
                               provements necessary for the instal-
                               lation    of special test equipment),
                               general or special machine tools,         or
                               similar    capital  items."

The major characteristic    of this type of equipment is indi-
cated by its name. Special test equipment is intended for
specific   testing  usage in the development or production    of
particular    items or the performance of particular  services.

      The total amount of                   special test equipment owned by the
Government is not known.                     For one thing, administration     of
this type of equipment is                    fragmented;   although many plants
are under the cognizance                    of the Defense Contract


                                                 4
Administration     Services,    others (those dealing with major
weapons systems contracts)          are handled by Army, Navy, and
Air Force administrators.          A property management official         of
the Defense Contract Administration           Services informed US
that,  as   of March  30,    1970,   it was  estimated  that active and
idle special tooling      and special test equipment under the
cognizance of that organization          was valued at $605 million
and $656 million,     respectively.       The same official     estimated
that the total active and idle Government-owned special tool-
ing and special test equipment under DOD administration
would be about $3 billion         to $3.5 billion.     The latter    fig-
ures do not provide a breakout of special test equipment,
but we have been told that it is considered to be a signifi-
cant part of the total.

       It is DOD policy     to offer existing        Government-owned
special test equipment or components thereof               to contractors
for use in the performance of Government contracts                 if this
action,wil'    -ot interfere      with higher priority        programs and
if it LS ULnerwi 3 advantageous to the Government.                   To mini-
mize the acquisition      of new special test equipment or com-
ponents thereof,     contracting      officers     are required    to screen
existing    Government production        and research property'before
authorizing    the procurement of any item or components with
an acquisition     cost of $1,000 or more to ascertain             whether
any Government-owned property          can be furnished.         Contractors
may acquire new special test equipment for the account of
the Government when existing          equipment is not available          and
when such acquisition       is advantageous to the Government in
the light of specific       criteria      set forth in ASPR.

         Facilities       is defined in ASPR 13-101.8 as industrial
 property7       including     real property    and rights   therein,    build-
 ing structures,          improvements,    and plant equipment.       Plant
 equipment, as defined in ASPR B-102.10, means personal prop-
 erty of a capital          nature,  including    equipment, machine
 tools,    test equipment, furniture,           vehicles,   and accessory
 and auxiliary         items.    The definition     of plant equipment spe-
 cifically       excludes special tooling        and special test equip-
!ment.

       Thus, while special test equipment is intended to be
limited   to a specific  use, plant equipment is general pur-
pose in nature and has multiuse     characteristics. These

                  I
                                        5
  differences      are reflected  in the methods prescribed                       for the
  acquisition      and management of special   test equipment                       and
  plant     equipment.

  ACQUISITION       AND MANAGEMZNT OF SPECIAL TEST EQUIPMENT

          The special      test   equipment     discussed      in this    report     is
  acquired     by contractors       for Government         account    under nego-
  tiated    research      or supply    contracts.        In nonnegotiated         con-
  tracts,     contractors       do not normally       acquire     special    test
\ equipment      for Government       account.

          When acquired    under a negotiated          contract,       the prices
  paid by the Government         normally     include      a fee or profit        com-
  puted on the estimated         cost of the equipment.               Because the
  intended    use of special       test   equipment      is limited        to specific
  products    or services,      very little      control      is exercised      by
  DOD over its utilization,           or lack thereof,          until    the con-
i tractor    determines    that    it is no longer         needed.

  ACQUISITIoN         AND MANAGEMENT OF PLANT EQUIPMENT
         L
           Defense Procurement          Circular     63, which was incorporated
  into ASPR 13-301 by Revision                 3, dated June 30, 1969, states
  that,      with certain      limited     exceptions,        it is DOD policy        that
  contractors         furnish    all facilities,         including    plant    equip-
  ment,      required      for the   performance       of   Government     contracts.
  Facilities         are not to be provided          to contractors       except:

         --For use       in a Government-owned           contractor-operated
            plant.

         --For   mobilization        production      in accordance         with     an
            approved    mobilization        plan    package.

         --When DOD determines       that the furnishing       of facilities
            is necessary     or in the public     interest.      Such deter-
           minations     must be supported      by the contractor's         writ-
            ten statement     that he is unwilling        or unable  to ac-
            quire   the necessary    facilities     with his own resources.

          Defense Procurement           Circular 61, dated June 10, 1968,
  prohibits     the provision         of any item of plant   equipment



                                              6
  having a unit cost less than $1,000 to contractors except
  those operating Government-owned plants on a fee basis.

               Needed plant equipment, which meets the approval crite-
     ria above and which cannot be furnished               from Government in-
     ventory,      generally     is acquired by the contractor          on a cost-
     reimbursable       basis under no-fee facilities          contracts.      Such
     contracts      normally provide that contractors           pay rent to the
     Government for any use of the items not authorized                    in ad-
     vance as rent-free.            Contractors   are required      to report idle
     plant equipment on a timely basis so that it can be made
     available      for reutilization.
             5
          ,.'-
        *I- The requirement         with respect to reporting         of idle plant
---Iequipment
     "'             does not apply to special test equipment.                The
   i principal      control    over special test equipment is the require-
   iment that it be reported             to the procuring     activity    upon com-
   lpletion       of the contract       under which it was acquired.          Follow-
     ing suc>h rP?C+%i.ng, no additional           reporting    of its status or
     use is reQ..tLLed. Further,           the lack of controls        over the uti-
     lization      of special test equipment makes it questionable
     whether provisions          for rent payments to the Government for
     non-Government use of such equipment are as effective                    as
     those governing         rent payments for plant equipment.

          Our review was made to determine the effectiveness             of
  management controls       over the classification,        acquisition,
  and reutilization      of special test equipment.          We found that
  agency and contractor        actions in these areas were generally
  consistent     with existing     regulations.     The weaknesses de-
  scribed in the following         chapters,    however, evidence a need
  to revise and clarify        the regulations     governing the classi-
  fication    of special test equipment.

         The scope of our review           is described      in chapter     6.
                                CHAPTER2

           GENERAL-PURPOSE
                         TEST EQUIPMENTCLASSIFIED AND

                 ACQUIREDAS SPECIAL TEST EQUIPMENT

      Our review showed that significant    quantities   of plant
equipment- -more specifically general-purpose      test equip-
ment--have been acquired as special test equipment and paid
for by the Government,

 INAPPROPRIATECLASSIFICATION PERMITTED
 BY ASPR DEFINITION OF SPECIAL TEST EQUIPMENT

          The classification    of general-purpose     test equipment
  as special test equipment has been permitted            by the ASPR
  definition     of special test equipment,        If acquired for
  separate use, items of general-purpose          test equipment would
  be subject to approval as plant equipment.            As defined by
I ASPR, however, special test equipment specifically            includes
  I'*** all components of any assemblies of such equipment
  **.“       Consequently,   any item of plant equipment can be ac-
  quired as special test equipment when it is included in a
  group of test equipment items assembled for a specific             use.

IDENTIFICATION OF GENERAL-PURPOSEITEMS
ACQUIREDAS SPECIAL TEST EQUIPMENT

      At the five contractor     locations     visited    during our
review, we estimated the acquisition         cost of special test
equipment on hand to be about $62 million,             Of this amount,
an estimated $12 million     represented     items which properly
should have been classified      as plant equipment and paid
for by the contractors.      Sufficient     data are not available
to enable us to estimate,     on a nationwide        basis, the total
amount of general-purpose     test equipment which has been ac-
quired as special test equipment.          The results     of our re-
view.at the five locations     visited,     however, clearly     indi-
cate that the total     is of such significance        as to warrant
early corrective   action.

         The following   examples are illustrative  of the infor-
mation     we obtained   which leads us to conclude that


                                   8
P

    substantial  amounts-of general-purpose      test equipment have
    been acquired as special test equipment.         We believe    that,
    despite the relatively    small number of contractors       visited,
    these examples are representative      of the problems that
    exist throughout    DOD concerning  the classification      of test
    equipment.

    General-purpose   items
    identified   by agency personnel

             The Defense Industrial       Plant Equipment Center manages
    / selected classes of idle Government-owned plant equipment
      to facilitate    reutilization      and thereby avoid unnecessary
      procurement of new equipment.           We requested assistance
      from the Center in determining          whether a group of test
      equipment, which had been acquired by a contractor            as spe-
      cial test equipment, was properly          classified  as such,    With
      the help of technical        personnel made available    by the Cen-
      ter, we identified       116 items,   with a total cost of $220,511,
      which were general purpose in nature and therefore            should
      not have been bought as special test equipment,
     Identical    items accountable
     under facilities    contracts

            For a number of items classified         as special test
     equipment, we found that there were identical             items on hand
     at contractors'      .plants which were accountable      as plant
     equipment under facilities         contracts.    For example, at one
     contractor    location     we found four Tekronix model RM 33
     oscilloscopes     included as components of consoles account-
     able as special test equipment under an Air Force supply
     contract.     Three other identical        model RM 33 oscilloscopes
     were accountable       as plant equipment under a Navy facilities
     contract.

           At another location    we identified    49 different line
     items of general-purpose     test equipment which had, in dif-
     ferent instances,    been classified     as special test equipment
     and plant equipment.




                                        9
 Items acquired as special test          equipment    used,
 or made available for use,
 on other programs

        We found also that items acquired as special test
:equipment had been used, or made available        for use, on
  other programs.    For example, at one contractor     location
 we found that 49 general-purpose       components had been re-
 moved from five test consoles which were accountable          as
  special test equipment under an Air Force production         con-
 tract and had been transferred     to the Air Force facility
  contract   for use on other programs,     An Air Force letter
 sent to Property Administrators      in January 1969 indicated
 that such transfers    were common.

       At another location   we were told that it was common
practice   to shift general-purpose    components from one test
console to another as needed,

      At two locations  we found that special test equipment
acquired for one program had subsequently    been used on one
or more other programs.

       The use of these items on other programs, or their
retention     for such use, indicates   that they have multiuse
characteristics     and should properly    have been classified
as plant equipment.

Items acquired as special test           equipment
identified    as standard items
in suppliers'    catalogs

 i         We found that data contained      in suppliers'    catalogs
'for many of the items acquired as special test equipment
   clearly    indicated    that they were standard items with multi-
  use potential.        For example, an Atec model 6C86 counter is
'described       as a I'*** general purpose counter/timer        incor-
   porating many measurement capabilities         and featuring      eco-
  nomical design ***."         A North Atlantic   model VM-204 phase
   angle voltmeter       is described as 'I*** a multi-functional        in-
   strument designed to meet laboratory,         production    line and
  ground checkout requirements        for precise measurement of
  complex AC signals ***,'I


                                    10
       The above examples demonstrate that special       test
equipment, as now defined,     can and does include     many items
which are general purpose in nature,      By reason     of their
classification    as special test equipment,   such   items have
not been sclijected    to the appropriate controls    over acqui-
sition    and subsequent management,




                               11
                                           CHAPTER3

              ADVERSEEFFECTS OF INAPPROPRIATECLASSIFICATION

            The acquisition  of plant equipment           items as special
I
I
     test    equipment has resulted   in
            --increased      Government     investment   in plant      equipment
                inventories;

            --increased      acquisition     costs;

            --reduced     control     over commercial    use;

            --reduced     reutilization      potential   for    idle   equipment;
               and
         --disposition without appropriate               screening.
    \
    INCREASED~W'ERNMENTINVESTMENT
    IN PLANT EQUIPMENTINVENTORIES

       The most serious adverse effect          of acquiring    plant
equipment items as special test equipment is the expenditure
of Government funds for items which should be provided by
private    investment.     As stated in chapter 1, Defense Procure-
ment Circular      61 prohibits    the furnishing    of plant equipment
items costing less than $1,000 to contractors              other than
those operating      Government-owned plants on a fee basis.           The
purpose of this restriction          is to minimize the large expense
associated     with maintaining     Government ownership of equip-
ment in contractors'       plants.     At three of the five contrac-
tor plants we visited,        however, we identified       340 examples
of plant equipment costing less than $1,000 an item that
were classified      and purchased as special test equipment.
These items, with a total acquisition            cost of approximately
$95,000, ranged in price from $89 for a power supply unit to
$995 .for a converter,
      Defense Procurement                Circular    63 (subsequently   incorpo-
rated into ASPR 13-301)                provides that contractors      furnish
all facilities      required           for the performance of Government
contracts,     with   certain          limited    exceptions.    (See p. 6.)
It is our opinion that                strict    application   of this policy to
    general-purpose     test equipment, currently    being improperly
    acquired as special test equipment,       would  result   in the con-
    tractors'    being required   to furnish  the items.    This could
    result    in a substantial   decrease in the amount of equipment
    acquired for the account of the Government with an asso- ,
    ciated reduction      in the cost of maintaining    Government eq-uip-
    ment inventories.

    INCREASEDACQUISITION COSTS

          Classifying     plant equipment items as special test equip-
    ment and acquiring       the items under supply contracts          result
    in additional     costs.    Plant   equipment     items   which satisfy
    the approval criteria       previously     discussed are generally        pro-
    vided under no-fee facilities          contracts,     whereas the cost of
    special test equipment acquired under supply contracts                  gener-
    ally includes a fee or profit.           From   a   cost  point of  view,
    it is, therefore,      not in the best interest          of the Government
    to acquire plant equipment items as special test equipment.

          For example, at one contractor    location    we identified
    182 plant equipment items with an acquisition         cost of more
    than $1,000 a unit which had been acquired as special test
    equipment during the past 3 years.      The total cost of these
    items was $590,000.   The  supply  contracts     under which these
    items were acquired included negotiated       fees or profits     of
    about 10 percent of the estimated costs.

          At another location,  we found that the price              of plant
    equipment items to be acquired under one contract                included
    a profit  allowance of ‘about $72,000.

          Since substantial    quantities     of special test equipment
    are acquired by subcontractors,         it is logical  to assume that
    acquisition    costs are further     increased by the application
    of profit   factors  by higher tier contractors.

    REDUCEDCONTROLOVER COMMERCIALUSE

           There is no requirement   for contractors  to maintain uti-
    lization    records for special test equipment.      Consequently,
    there is relatively     little control over 'the utilization     of



,                                        13
    such equipment compared to those items which satisfy  the
    approval criteria  and which are furnished by the Government
    under facilities  contracts.

          At two contractor locations we found that plant equip-
    ment acquired as special test equipment had been located in
    areas where both Government and commercial work was pro-
    cessed.   The equipment was not monitored for utilization,
    nor was it covered by any rental agreement.    The contractors
    were unable to provide any assurance that the equipment had
    not been used for commercial work.

           We did not identify  any specific    instances of commercial
    use of the equipment in question.        Due to the absence of
    controls,    however) there is no assurance that uncompensated
    commercial use had not occurred.

    REDUCEDREUTILIZATION POTENTIAL FOR IDLE EQUIPMENT

           At all of the contractor locations   visited, we found
    that many plant equipment items acquired for the account of
    the Government as special test equipment were idle.        These
    included   items which had not been reported for disposition,
    as well as items which were awaiting disposition     instruc-
    tions from higher tier contractors.

    Idle   items   not reported

           Many plant equipment items acquired as special test
    equipment were idle but had not been reported to the Govern-
    ment or the prime contractor    for disposition,      For example,
    at one contractor    location, we identified     198 idle plant
    equipment items, valued at about $162,000, which had not been
    reported.    Examination of 33 of these items, valued at
    $33,870, showed that they had been idle for periods ranging
    from about 6 months to more than 3 years.

          At another location   we identified 47 items, with a
i   total recorded cost of $60,371, which had been idle, await-
    ing disposition,   for periods ranging from 1 to 3 years with-
    out being reported    as such.

         At 8 third location we questioned the contractor’s
    need to retain 76 test consoles which we found to be idle

                                   14
during a physical   inspection.    As a result,           the contractor
agreed to release 22 consoles with a total               cost of $990,235.
These consoles included     155 general-purpose           components with
a total cost of about $154,603.

        We did not attempt to determine the extent to which the
items we identified      as idle could have been utilized       else-
where within the Government.         Officials  of the Defense In-
dustrial    Plant Equipment Center, however, informed us that
they had been able to fill       only about 15 percent of the req-
uisitions     received for general-purpose     electronic  test
equipment.
       It is our opinion that proper classification                 of general-
purpose test equipment would largely             eliminate      the accumula-
tion of unreported        idle inventories      of Government-owned
plant equipment items,            In most cases, the contractor         would
be required      to furnish     these items.     Furthermore,       the items
which could be justified           for Government funding normally
would be provided under facilities            contracts     and subjected
to a higher degree of control            and surveillance.         Conse-
quently 9   idle   items    could    be more readily    identified     and
made available       for reutilization,

Prime contractor     delays     in
directing  disposition

        At one subcontractor's          pAant we found that Government-
owned plant equipment items reported                 to prime contractors  as
excess had remained idle for long periods of time, pending
the receipt      of disposition       instructions.        The two prime con-
tractors     involved   took about 9 months and 10 months, respec-
tively,    to furnish     disposition       instructions.
         This problem should be reduced substantially            by proper
classification         of proposed acquisitions.        Had the equipment
been properly        classified      as plant equipment, in all proba-
bility      the contractor       would have been required     to furnish
the item.        The disposition       of plant equipment which meets
the approval criteria             and which is furnished   by the Govern-
ment would not be subject to the control               of a higher tier
contractor       since the equipment would be provided under a fa-
cilities       contract..to     the subcontractor.
Items purchased    while   identical
items were idle

       At one contractor   location     we identified     four plant
equipment items which were acquired as special test equip-
ment under a supply contract        while identical     items of
Government-owned equipment, also acquired as special test
equipment under a different       supply contract,     were in storage
awaiting disposition.      The contractor      stated that it would
have taken too long to obtain authorization           to use the equip-
ment awaiting disposition.

       Proper classification        should help eliminate    unnecessary
acquisitions       such as those described above.       If the plant
equipment items in question had been furnished            under a facil-
ities    contract,     they would have been available     for use on
all Government contracts         without special authorization,
whereas, because they were acquired as special test equip-
ment, they were not to be used on other work without specific
authorization.
  \




                                 *




                                       16
-




                                             CHAPTER 4

                           RESULTS OF RECENT INTERNAL AUDITS

        DEFENSE SUPPLY AGENCY AUDIT

               In April     1969 the Auditor           General,      Defense Supply
        Agency,     issued a report        concerning        an audit     of the inven-
        tory mission      of the Defense          Industrial      Plant     Equipment    Cen-
        ter.    One of the objectives             of this     audit    was to evaluate
        a recently      completed     reconciliation          of the Center's        records
        and the records        at 1,733 contractor            locations      possessing
        Center-controlled         industrial        plant    equipment.

                 In comparing     Center records      with industrial     plant
        equipment       on hand at about 10 percent         of the total     contrac-
        tor locations        and four Defense Supply Agency storage             sites,
        the Agency auditors         identified     5,791 items of industrial
        plant      equipment   with acquisition       costs totaling     $25,884,657
        which had not been reported             to the Center because they were
        classified       as special    test equipment.
    !
               :The auditors      attributed       the lack of reporting             to two
        causes.      First,    a conflict       existed       between section        13 and
        appendix     B of ASPR regarding           the reporting          to the Center of
        general-purpose        components       of special         test equipment.         Sec-
        tion13required         that contracting           officers      report    general-
        purpose     components     of special        test     equipment     to the Center
        at the time of acquisition,              whereas appendix           B excluded
        general-purpose        components       of special         test equipment       from
        such reporting       requirements.           The second cause was the fact
        that    many contracts,         written    before      ASPR required       the re-
        porting     of industrial        plant    equipment        to the Center,       had
        not been modified         to incorporate          later      ASPR provisions       which
        require     such reporting.

                The Agency auditors     recommended      that the conflict       be-
        tween section     13 and appendix       B be resolved     and that all      De-
        fense contracts      in force be updated       to require     the reporting
        of industrial     plant   equipment     to the Center.      The conflict
        in ASPR was subsequently        resolved     by Revision     3, dated
        June 30, 1969, which amended appendix              B to require    the re-
        porting    to the Center of components         of special     test equip-
        ment at the time of their         receipt    by the contractor.

                                                    17
                                                                              . .




a
           The Agency report supports our conclusion           that signifi-
    icant quantities      of plant equipment have been acquired as
    special test equipment.         This is even more apparent when
    considering    that items costing almost $26 million           were iden-
    tified    at a small proportion        of the total locations    possess-
    ing Center-controlled       industrial      plant equipment.    Further-
    more, the $26 million       worth of plant equipment includes only
    those items with an acquisition           cost of $1,000 or more. Our
    review showed that, in addition,            there were many items of
    plant equipment acquired as special test equipment for the
    account of the Government which cost less than $1,000 and
    therefore    were not reportable        to the Center.

             The Auditor General's       recommendations concerning
    general-purpose       components of special test equipment deal
    only with the reporting         of such items to the Center.               Al-
    though proper reporting         is important,        the basic problem con-
    cerning the general-purpose            components lies in the initial
    classification.         If properly     classified      as plant equipment
    prior to acquisition,         most general-purpose          test equipment
    items would be provided by private               investment,     including     all
    such items with an acquisition             cost of less than $1,000.
    Furthermore,       if properly    classified,       general-purpose-test
    equipment, which meets the approval criteria                   to be furnished
    as Government-owned plant equipment, would be provided under
    facilities      contracts    and would be subject to reporting              as
    industrial      plant equipment.

    AIR FORCE'AUDIT

           The Auditor General, Department of the Air Force, is-
    sued a report dated March 17, 1970, entitled              "Management of
    Special Tooling and Special Test Equipment."               The audit was
    performed during the period August through October 1969.
    The report dealt primarily         with the screening and retention
    of special tooling      and special test equipment to determine
    proper disposition,       control,    and reutilization     of these
    items.     The Auditor General pointed out that special tooling
    and special test equipment in use on active contracts                 and in
    storage was estimated to exceed $1 billion,              and the condi-
    tion disclosed     in his report indicated         that actions were
    necessary to improve procedures for monitoring,               screening,
    controlling,    reporting,     and disposing      of this equipment.



                                            18
        Implementation         of the recommendations           made as a result
of the internal         audits     discussed    above should help to im-
prove procedures          for the reporting,         screening,     and reten-
tion of special         test     equipment.     Actions     recommended       in
chapter      5, dealing      with the problems        of initial     classifica-
tion   and acquisition          of general-purpose        components      of spe-
cial    test   equipment,        should result     in even further        improve-
ment in the management of this               equipment.




                                          19
                                   CHAPTER5

                     CONCLUSIONSAND RECOMMEXDATIONS

            Defense Procurement Circular            61 and ASPR 13-301 pro-
    vide, with certain         limited     exceptions,    that contractors
    furnish    all plant equipment required            for the performance of
    Government contracts.            Significant     quantities  of general-
    purpose test equipment, however, have been acquired for
    Government account as special test equipment under supply
    contracts.        As a result,     Government funds have been used to
    furnish     items which should have been provided by private
    investment.        Furthermore,      items which might have met the
    criteria      for approval as Government-furnished           plant equip-
    ment have been subjected to a lesser degree of control when
    utilized      and administered      as components of special test
    equipment.        Consequently,     the Government's investment has
    not yielded maximum benefits.

*           "he acquisition  of plant equipment as special test
    eqdlpmen; has been permitted       by the ASPR definition  of spe-
    cial test equipment which specifically       includes "*    all
    components of any assemblies of such equipment *.'I           This
    definition    permits the acquisition    of any item of plant
    equipment as special test equipment when it is to be included
    in a group of test equipment items assembled for a specific
    use.
          On the basis of our review, we believe that general-
    purpose   items in special-purpose        test sets can usually          be
   readily   removed from the assembly and be made available                   for
   general purpose use as plant equipment.              One contractor         of-
   ficial   stated that 90 percent of the general-purpose                 test
   equipment components used in special test sets were merely
   plugged into a power supply and could be made available                     for
   reuse by removing a few bolts and a connector.                  In our opin-
 j ion, it is illogical      to classify      plant equipment as special
; test equipment simply because it is to be used in testing
' in the development or production            of a particular       item or
   performance of a particular         service.     Classification        should
   be based on the equipment's         capabilities     and should be made
   for individual     items or components rather than for the com-
   posite assembly.       The practical     effect of proper classifi-
   cation would be that contractors          would be required         to


                                        20
provide a greater proportion      of their   needed general-purpose
test equipment items.

       Potential  economies are suggested by the fact that sev-
eral new weapons systems likely       to require  significant quan-
tities   of special test equipment are undergoing design, de-
velopment, or initial     production.    These include the Navy's
F-14 and S-3A aircraft     and the Underwater Long-range Missile
System and the Air Force's B-l and F-15 aircraft.

        It is our conclusion    that significant   quantities   of
general-purpose     plant equipment have been improperly       ac-
quired as special test equipment by contractors           for Govern-
ment account.      Furthermore,    we believe that proper handling
of the purchase of such items in the future can result            in
significant    cost savings through a reduction      in the number
of new items acquired for Government account as well as in-
creased control     over those items which can be justified         in
the ':p,ht    c ASF? 13-301 criteria.

RECOMMENDATIONS
              TO THE SECRETARYOF DEFENSE

       We recommend, therefore,    that the Secretary of Defense
require   that the definition   of special test equipment in
ASPR and other pertinent      DOD regulations     be revised to ex-
clude items of plant equipment.          We recommend also that the
Secretary require contracting       officers    to review proposals
for special test equipment to ensure that items of general-
purpose plant equipment are not included.

DOD ACTIONS AND GAO EVALUATION

       In a letter,    dated October 20, 1970, the Assistant    Sec-
retary of Defense (Installations       and Logistics) provided
DOD's comments on a draft of this report and stated that DOD
concurred in general in our findings       and recommendations.
Specifically,     he advised us that our recommendation to re-
vise the definition      of special test equipment to exclude
general-purpose     test equipment was concurred in and that
necessary action in this regard was being developed and was
scheduled for early implementation.

     The Assistant Secretary also indicated  that actions had
been taken which were designed to improve the reporting   and


                                   21
         control   procedures     governing general-purpose    test equipment.
         These actions     include the establishment      of a specific   re-
         quirement for the separate identification          and reporting     of
         general-purpose      test equipment used as components of special
         test equipment.

     I      The Assistant    Secretary of Defense stated that DOD be-
      lieved that contractors      should furnish    all equipment and
      other property    as required     for their performance on defense
    / contracts.   (<A proposed   policy    change is currently    undergoing
     1 study which would require defense contractors           to retain
    ! title   to special test equipment that they acquire for per-
    i formance on Government work except in cases where retention
      and reuse of such equipment is required         in support of ap-
>     proved Government in-house maintenance and repair programs:)

              The Assistant    Secretary's      comments were not addressed,
       as such, to our recommendation that contracting               officers       be
       required   to review proposals        for special test equipment to
       ensure that items properly        classified      as plant equipment are
       not included.      Subsequent discussions         with an official        of
        the Assistant    Secretary's    office    indicate    that DOD feels
     ,; that the revised definition        of special test equipment, com-
        bined with present practices         for reviewing     proposals     for
     ! such equipment, will be sufficient            to ensure that items of
    ' plant equipment are not included.

            We believe that the actions taken or scheduled by DOD--
     especially    the planned redefinition        of special test equip-
     ment to exclude general-purpose           components--should   help bring
     about improvements in the management of special test equip-
     ment and would tend to reduce the Government's investment in
     this type of equipment.          We believe also that, to ensure
     that the revision       of the ASPR definition      of special test
     equipment will have its desired effect,           contracting   officers,
     in reviewing proposals        for special test equipment, should be
     specifically     required   to ensure that items of plant eq-uip-
     ment are not included.




                                             22
                              CHAPTER6

                           SCOPEOF REVIEW

      Our review was primarily     directed to an examination    of
the management controls   over the classification,    acquisition,
and reutilization  of special test equipment.      The review was
made at five contractors'    plants and at the Defense Indus-
trial  Plant Equipment Center, Memphis, Tennessee.

       We examined pertinent  DOD regulations     and contractors'
documents and records and interviewed       responsible   officials
at the locations   visited.   We also reviewed selected audit
reports   issued by the Auditors General of the Air Force and
the Defense Supply Agency.

       The results    of our review    were discussed   with   contrac-
tor   and DOD nfficials.




                                      23
 AJ’PENDIXES




25
                                                                                               APPENDIX I
                                                                                                  Page 1

                                             ASSISTAblY   SECRETARY       OF DEFENSE
                                                    WASH~PdCTOW,   D.C.   203)Ql




IWSTALLATIOKS    AND   LOOlSTIC4
                                                                                           20 OCT 1970




                Mr. C. M. Bailey
                Director,   Defense Division
                U. S. General Accounting     Office
                Washington,   II. C. 20548

                Dear Mr.           Bailey:

                Refarence      '- riade to your memorandum of 12 August 1970, in which you
                enclosed d waft         ,aport on the need for improved controls        over the
                classification       and. acquisition of test equipment,      (OSD Case # 3159).
                This report      has been reviewed and the recommendations        studied.     Our
                comments on the recommendations        are attached   and set forth      the actions
                completed and proposed by the Department          of Defense.

                Your interest       and comments on this specific            aspect of our overall      efforts
                to improve control        over Government-owned        property      in the possession     of
                contractors      are sincerely    appreciated.        The planned and recently         im@e-
                mented corrections        cited in the attachment          should when given an opportunity
                for full     implementation,    including      audit,    fully    correct   this problem.
                We would appreciate        your assistance      in examining this matter again in
                later    surveys in about eight (8) to twelve (12) months, including                    your
                further     suggestions.

                                                                              Sincerely,




                Attachment
                   as




                                                                   27
         a
‘-

     d
                APPENDIX I
                   Page 2
                               DOD Statmmt         on GAO Report       (OSD Case i? 3159)


             TTY'LE:

                  "Need for T7~pro~~-d Cohl'rols        Over the Cla ssification          and Acquisition
                   of Test I:qui.pment"



                 In performing     Government work defense contractors         use a variety      of
                 equipment,     machine tools,    furniture,     vehicles, and other personal
                 property . Such items are known as plant equipment,               Depar tmcnt of
                 Defense regulations      provide    tllat,  with some exceptions,    contractors
                 will   furnish   all the plant equipment needed for contract           performance.

                   Specisl     test     equipxent     (STE), which is so specialized          that its use
                   is limited         to testing    in the development        or production     of particular
                   items or performance           of particul3r      services,    is not considered        as plant
                   equipment . STE needed for the performance                   of negotiated     Government
                   contracts        is generally      acquired   by contractors      for the account of the
                   GovcrnF-nnt.         Its cost,     therefore,   is born directly       by the Government
                 \
                   ant . ,...cxrsf :3 rests with the Government.

                 In a review completed during the latter                  part of 1969, GAO found that
                 significant     quantities      of plant equipment more specifically                   general
                 purpose test equipment have been acquired                    as special      test equipment
                 and paid for by the Government under supply contracts.                            At five contractoi
                 locations,     GAO found STE on hand costing               about $62 million          which had been
                 purchased for the account of the Government,                       and of this amount, an
                 estimated     $12 million     representated        plant equipment which normally                should
                 be furnished     and paid for by the contractor.                    GAO states     that acquisi-
                 tion of the $12 million          as STE was contrary             to the best interests         of the
                 Government for the following           reasons:         (1) Government funds were spent
                 to furnish     contractors     with equipment which should properly                    have been
                 provided    by private     investment:         (2) total       costs to the Government were
                 higher because the cost of STE acquired                  under supply contracts            generally
                 includes    a fee or profit;        (3) the Government received                less assurance       that
                 its equipment was not used for commercial                    purposes without         proper compensa.
                 tion,    as there is relatively        little      control       over the utilization         of STE
                 as compared with the controls             prescribed       for Government-furnished            plant
                 equipment and (4) reutilization               potential      for idle equipment was reduced
                 because surveillance         designed to ensure the reporting                  of idle equipment
                 for disposition       or reuse is less stringent               for STE than it is for plant
                 equipment.

                 GAO states       that the acquisition       of plant     equipment as STE has been
                 permitted      by the ASPR definition         of STE    (ASPR.130101.6)   which specifi-
                 cally    includes     "---cl1     components of any      assemblies   of suc11 equipment---".
                 This dcf inition        permits    the acquisition      of plant equipment as STE when
                 it is to bc included            in a group of test      equipment items assembled for a
                 specific     usi'.                                                                                         1

                                                                28
                                                                               APPENDIX I
                                                                                   Page 3


  GAO  b.?lie~s   that: (1) genera; pur;~ose componlznts assembled to form
  STE should be subject to the same ~,;;provnl criter'ia          as established         for
  other items of plant equipment, a:.~ (2) it is feasible               to require
  contractors   to provic?e their ok:.:: .~cneral purpose components of STE and
  tnat such a rcqulrcm?nt     L.-:,i;l.; ;ei,;i L in ri;;r,llYcmt  cost    sa.~~irir;s -on
  new weapons systems currently         undergoing design, development, or initial
  production.

  GAO recommends that OASD take acti'    to: ri) revise the definition
  of STZ in the ASPR and other pertinent    DO!\ regulations to exclude items
  that are really plant equipment and (2) reyuirc! contracting    officers  to
  review proposals for STE to ensure Lhat plant equipment is not included.

  DOD COI+J4EI'iTS
                 ON THE FIXDIWS AL? PECOMKZV'J)ATIOiJS:

  The DOD concurs fully     in the main thrust of the findings            and recommenda-
  tions of the GAO. We believe that contractors                should furnish all equip-
  ment and other property as reqclired for their performance on defense
  contracts.    This certainly    would properly        include equipment identified
  as special test equipment (STE) which is of such B specialized                 nature
  that their use is entirely      limited       to the sole supp-rt of the deveiop-
  ment, production    or maintenance requirements           of a particular     end item
  procured on a specific      supply sor,tract,       upon completion of which wo::ld
  normally become excess to the needs of the Government.                 A proposed llolicy
  change is currently    undergoing stLZy requiring            defense contractors    to re-
  tain title   to both special tooling          and special test equipment that he
  acquires for performance on Government work.               An example'aould be where
  retention   and reuse is required in support of approved in-house maintenance
  and repair programs.      Recent changes to ASPR, as discussed in detail              below,
   should correct the GAO stated deficiencies             on the management of general
  purpose test equipment.

SPECIFIC COMMEI'iTSON GAO STATEMWIS:

   GAO Statement (Page 4):      "Because the intended use of STE is limited
   to snecific   products or services,    DOD exercises very little control
   over it until   the contractor   determines that it is no longer needed."

   DOT)Comment: Tho such conditions       do probably occur, defense policy does
   require that the minimum requirements        of contractors      property control
   systems (ASPR supplement 3-301), in order to qualify           for Government
   approval, must provide for the separate identification            of each item of
   special test equipment (ASPR B-305), including         a breakout listing       of
   all general purpose components incorporated        therein.      Further,  ASPS
   ~-603 states that contractor     procedures     concerning the control       of
   Government property     shall be adequate tc assure that such property is
   used only for the purpose authorized       in the contract     and ASPR 24-205.1(f)
   requires   that special test equi;imr:n; is subject to and muss be separately
   identified    in the screening of tnc contractors'       inventory    schedules prior

   1
    GAO footnote:          In,subsequent   discussions     with DOD officials,
                           it was determined    that the word "example"
                           should properly    be "exception."


                                                 29
 APPENDIX           I
            Page 4




X; Cm3ent:       ASPR 13-1;04 provl&s          th&t" - the rent for all GoverxL..-;
xo5Lc-,ion    snd research   pro;,z-; y s:?all be compxted in accordance            t:lL
,h,J IJr,c and Charges Clause ~2'~ -fork          In ASPR T-752.12 for facilities."
;pccisi    and general purposi       .e-- I, equipment is ,;:Jernment
                                    Llf;.,                            property.

 .P.C s-L.etcr.Y3t (ime 7) : "a-2 Teview showed that significant                                    quantities
-.*I pkfi-G equipment,
3-J                      msrk specifically,   general purpose test                                 equipment,
zavc been acquired      as ;:'5 and paid g'cr by the Government."

303 Crzyent:               During the period of your review,                     several     concurrent
----7---
ECLLIC.~S    were         bein: ia?lemented             by DOi).to update the definition                  of
Industrial             Plant Equipment and to improve the reporting                          and control
procedures              of general purpose test equipment.                      Specifically,          the
  - _I- .
Clel iZLYlOT1          of Industrial          Plant Equipment was revised              and republished               in
XSPR, .::.>pendix B-102.11 and C-102.11)                           on 31 December 1969. Or, this
 $axtz c. ::t changes concerning                    the central      reporting       of Industrial           Plan-L
  :quls...r :.t were also published                   in ASPR B-306.1 and C-306.1 including                       a
  ;peel y; < requircncnt               for the separate          identification         and reportin&           of
  ;er.r-.-:.I ;urposc         test equipment used as components to special                           test
  :qu' _..::sT-.,0 Also, in order to insure the prompt implementation                                     of these
 xoi-:siczs,            item VI, Lkeporting              and Controlling        Industrial        Plant Equip-            k”
tie,?%"      *;TL s published       in Defense Procurement               Circular     No. 80 dated 23 June
197;;. ~5.s item directed                      that immediate        action be taken by coutrzctors
  )or;sebLir;;         Govcrnxnt-owne3            ~lnnt equipment to cm&y                with the provisions
 >f    S..551'\  .;lhich   xere   cited       abxz.        These direcxecl ckx~;;es,          g iven tize,
_-
 LOI- i:..:;icmentatioz           will      for the most part correc-L this type of de<lcien~~-.
The C;'.% reco;rxcnLaBion                 to revise the -definition             ;.:' STE, so as to e:.rclude
;en(d-rzl purpose test equipment is COIlCUITe~                             52 A;cZ necessary         actior,      in
                                                                                                                          “l




this rcg;ard is being deVelOpcci                        md   is  schcdulcti     for early implementaticn.                  k




1                               This      statement,            made in a draft               of this  re-
    GAO footnote:
                                port,       is    clarified        on pages 7,               23 and 14.


                                                           30
                                                                                                                                         a,.“-   . ..*   .

    -i”       J

I
,         .

                     .
                                                                                                             APPENDIX I
              D




                         DOD Gor?t:~c-
                         ___---._-- nt : Such a condition      is cons-i stcnt with cur;-ent    regulations
                         provided   the pl;lnf  equipment   items are intergral     part,, of STE and other
                         identical    itcats of plant  equipment are being utilized        separately,

                         GAO St:?t-cment: (',~;c 9):
                         --__                        "Items             acquired      as STE used,       or made available
                         for use, on other programs".

                         DOD Comment:
                         -_--__     _--        Such actions      contradict       the intent      of ASPR 13-301.     Test
                         equipment,        usable on two or more different                programs,   are not STE, but are
                         in fact,       general    purpose equiljment         and should not be provided          to con-
                          tractors,        The improved ASPR provisions              cited    above for the identifica-
                          tion inventory         control    and idle reporting           of general   purpose test equip-
                         ment will       permit proper compliance             with the provisions        of ASPR 13-301.
                          In addition,        our planned revision          to the definition        of STE to exclude
                         general      purpose components,         will    be the major contributing          factor   in the
                         eventual       resolution       of this problem.

                  DOD CORRECTIVE ACTIOXS:

                         Contractor        compliance      with the requirements            of Item VI of DPC # SO
                         would resolve         the improper        classification        authorization        reporting
                         and utilization          of general      purpose equipment           as if it were STE. Current
                         Department        of Defense policy          does not adequately          recognize        the very limited
                         circumstances         under which the Government should assume the costly                              admin-
                         istrative      and inventory         burden that results           from taking       title      to special
                         test equipment.           The existancc         today of large idle inventories                   indi-
                         cates there is an urgent              requirement        to restrict      further      Government
                         Obmership to discrete             cases of demonstrated            need.      In this regard,
                         action      has been initiated          to more clearly         describe      the limited         and
                         special      purpose of STE and specifically                excluding       general      purpose        test
                         equipment       therefrom.        Secondly,       guidance    is being developed             that will
                         limit     the taking       of title     to STE to demonstrated             cases where subsequent
                         in-house      support      of approved maintenance            and repair        programs is deter-
                         mined to be essential.

                         These policies    when published             and given a reasonable   time for implc-
                         mentation    will substantially            reduce or eliminate    the discrepancies
                         stated    in the GAO report.




                                                                            31
                                                                   APPENDIX II
                                                                       Page 2

                                                         Tenure of office
                                                         From            To
                                                                         -
                               DEPARTMENTOF THE NAVY

  SECRETARYOF THE NAVY:
     John H. Chafee                                Jan.     1969    Present
     Paul R. Ignatius                              Aug.     1967    Jan.    1969

  UNDERSECRETARYOF THE NAVY:
     John W. Warner                                Feb.     1969    Present
     Charles F. Baird                              July     1967    Jan.    1969

  ASSISTANT SECRETARYOF THE NAVY
    (INSTALLATIONS AND LOGISTICS):
       Frank Sanders                               Feb.     1969    Present
       Barry J. Shillito                           Apr.     1968    Feb. 1969

                      1
                             -.DL"4RTMENT OF THE' AIR FORCE
  SECRETARYOF THE AIR FORCE:
     Dr. Robert C. Seamans, Jr.                    Jan.     1969    Present
     Dr. Harold Brown                              Oct.     1965    Jan.    1969

  UNDERSECRETARYOF THE AIR FORCE:
     John L. McLucas                               Feb.     1969    Present
     Townsend Hoopes                               Sept.    1967    Feb. 1969

  ASSISTANT SECRETARYOF THE AIR
    FORCE (INSTALLATIONS AND LOGIS-
    TICS):
      Philip N. Whittaker                          May      1969    Present
      Robert H. Charles                            Nov.     1963    May     1969


                                DEFENSESUPPLY AGENCY

   DIRECTOR:
       Lt. Gen. Earl           C. Hedlund,    USAF July     1967    Present




U.S.   GAO   Wnsh.,   D.C.

                                             33