Lack of Competition in Fairchild Hiller Corporation's Subcontracts With Comprehensive Designers, Inc.

Published by the Government Accountability Office on 1971-03-03.

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

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                                COM~=-~R~LLER          GENERA:      &          fl-iE       UNITED    STATES
                                                     WASHINGTON.        D.C.           20348

                                                                                                                 MAR 3 'WI
                                     J/   d   p---

             Dear Senator    Proxmire:

                   This is    in response            to your       request                     of August      13, 1970 (SS),   and

                   Comprehensive Designers and other job-shop              firms furnished     tempo-
             rary employees primarily         for an Air Force fixed-price-incentive           con-
             tract  with Fairchild     Hiller     for modification      of 52 C-119 cargo aircraft
             to gunships and for inspection           and repair    of the aircraft,    as necessary.
             As of January 25, 1971, the target             price for this contract     was about L
             $111.2 million,      Work on the gunships began under a letter             contract
             awarded on February 17, 1968. The contract                was definitized   on May 20,
             1969, and included     incentive      provisions     under which the Government
             would share 80 percent of cost underruns              or overruns.

                    Fairchild   Killer   awarded               open-end purchase orders to job-shop
             firms for temporary       personnel               to perform aircraft    design and drafting
             services     under the supervision                  of Fairchild  Hiller  personnel.

                   For the period January 1968 through August 1970, all divisions
             of Fairchild  Hiller incurred    costs of about $13.2 million  with job-
             shop firms.   About $4.2 million     of this amount was with Comprehensive


             Purchases    from Comprehensive                 Designers,                    Inc.

                      From the latter     part of April 1968 through November 1968, the
             Aircraft     Service Division       of Fairchild    Hiller    obtained,     without  compe-
             tition,     125 temporary      employees from Comprehensive Designers.              We
             estimate     that,   for 87 of the 125 temporary           employees, the division
             could have avoided costs of as much as $134,000,                  had it obtained     com-
             petition     among several      firms and had it obtained         the employees at the
             lower rates quoted by other suppliers              for employees with comparable
             skills.      The Government's       share of the additional         costs could be as
             much as $107,000.          During this period other job-shop            firms near St.
             Augustine      quoted to the division        lower prices     for some temporary      em-
             ployees of the same skill           categories.      Our estimate     of additional
             costs resulting        from the noncompetitive        procurement     of temporary

                                 -        50TH ANNIVERSARY                              1921- 1971/iiiizzj




             employee services   did not include    costs              for 38 temporary    employees
             obtained from Comprehensive Designers.                    Hourly billing   rates for
             some skills  had not been quoted by the                  other job-shop firms,     so we
             could not make rate comparisons     for the               38 temporary employees.
                    Fairchild     Hiller      officials     advised us that the company had
             entered into an agreement on May 7, 1968, with Comprehensive De-
             signers to resolve          differences       between the two companies that had
             arisen from a technical              services    contract  previously     awarded to
             Comprehensive Designers              for work performed      on a commercial aircraft
             program in England.            A dispute arose between the two companies con-
             cerning performance          under the contract.          Fairchild   Hiller     paid Com-
             prehensive      Designers less than the amount of its contract                   and, as
             part of a settlement,            executed the agreement described            below.

                    Fairchild    Hiller    agreed to give Comprehensive Designers the
             first   opportunity      to furnish  all temporary      employees that it needed
             from May 1, 1968 to December 31, 1971, or until               Comprehensive De-
             signers earned a $150,000 profit.           If the $150,000 has not been
             earned by December 31, 1971, Fairchild           Hiller    has agreed to make a
             lump-sum payment to make up the difference.

                    The agreement also provided        that Fairchild  Hiller would obtain
             temporary   employees from Comprehensive Designers if its direct          labor
             rates were competitive       with those of any other job-shop firm.       The
             agreement provided     further    that Comprehensive Designers    furnish   tem-
             porary employees at negotiated         direct  labor rates plus overhead of
             25 percent and profit,       which has ranged from 6 percent     down to 3

                     An Aircraft         Service Division        official,      who is no longer employed
             by Fairchild        Hiller,      stated that the division             had known in April 1968
             about the impending agreement with Comprehensive Designers.                                  He also
             said that responsible              division   officials         had interpreted       an instruc-
             tion,     received      in May 1968 from corporate               headquarters     officially
             notifying       them of the agreement,            to mean that temporary           employees
             should be obtained            only from Comprehensive Designers.                  The instruc-
             tion received         at the division       made no reference            to the statement         in
             the corporate         agreement about obtaining               temporary     employees from Com-
             prehensive        Designers      at competitive         rates.     Consequently,       from the
             latter      part of April 1968 through August 21, 1968, the division                            ob-
             tained 115 temporary             employees from Comprehensive Designers without
             regard to lower prices               quoted to the division           by other job-shop         firms
             for employees in the same skill                categories.

                      On August 21, 1968, the program director   instructed   division
             officials     to obtain temporary   employees from Comprehensive    Designers
             only if its direct      labor rates were equal to, or lower than, rates

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             quoted by other job-shop       firms.    Although we were told            that this
             procedure   subsequently   had been followed,      we found that,             of 10 tem-
             porary employees obtained        from Comprehensive Designers             during the
             period August 21, 1968 through November 1968, all were                    obtained at
             higher prices than those quoted by other job-shop firms                     for employees
             in the same skill    categories.      From the latter    part of          April through
             November 1968, only 19 temporary         employees were obtained              from job-
             shop firms other than Comprehensive Designers.

                    During the period December 1.968 through September 1970, the
             division     obtained 100 temporary         employees from various         job-shop
             firms,    including     Comprehensive Designers.            We were advised that the
             temporary      employees had been requested          individually       on the basis of
             their    qualifications       and prior    experience.        We also were told that
             the lowest available         price had been considered            only when a number of
             equally qualified        individuals      were available       to choose from.       We re-
             viewed pertinent        procurement      documents and found that,         in some in-
             stances,     the requesting       office   had recommended that certain           individ-
             uals be obtained        on the basis of their         qualifications.        In other in-
             stances the requesting          office    would furnish       only a list    of nsmes to
             the buyer and request that they be obtained..                    We noted only a few
             instances      where price had been mentioned as a consideration.

             Purchases prior   to agreement
             with Comprehensive Designers

                     During February,   March, and April 1968, the Aircraft           Servicg
             Division     obtained 66 temporary     employees from Advanced R&D, 1nc.r
             and 7% Franklin       Company, both of which had offices         at Orlando,
                   ida    at that time.    The division       did not use competitive    methods
     /       to obtain these temporary       employees but spread the purchases about
             equally between the two job-shop          firms.     Of the 66 temporary     employees,
             42 were draftsmen.       The division    hired 18 of these draftsmen         from
             Advanced R&D at from $.32 to $1.98 an hour more than it paid drafts-
             men hired from Franklin.

                   We estimate  that the costs of obtaining    these employees would
             have been reduced by about $12,400 if they could have been obtained
             at the lower prices    charged by Franklin.    We estimate that the Gov-
             ernment's   share could be about $9,900.     Comparisons could not be
             made for other skills    because other job-shop   firms had not quoted
             rates on these skills    at that time,

                   We discussed the results   of our review with the Air Force Con-
         \   tract  Maintenance  Center administrative     contracting     officer  and the
             Defense Contract   Audit Agency representatives        at St. Augustine,


    Florida.   We also discussed with the administrative            contracting-offi-
    cer the possibility     of disallowing    the additional    costs incurred        for
    temporary  employees because the division         had not obtained the em-
    ployees at the lowest rates available.           We were told that there was
    a basis for disallowing     the additional     costs incurred      but that action
    at this time would be premature because Fairchild           Hiller     has not yet
    submitted  its final    cost proposal   for the contract      and the Govern-
    ment has not yet negotiated       final contract     costs.

           During our review we examined pertinent             procurement       records and
    we interviewed      cognizant    contractor    and Defense Contract          Audit Agency
    personnel.     We also discussed our findings           with the administrative
    contracting    officer.      Additionally,     we interviewed      officials      of job-
    shop firms located in Orlando and Cocoa Beach, Florida.                      Our review
    of the procurement       of temporary      employee services      was for the period
    February 1.938 through September 1970.             In accordance with arrange-
    ments made with your office,           we did not inquire      into other state-
    ments of the constituent        but limited      our review to the adequacy of

            As agreed with your office,    copies of this report will be fur-
    nished to the Secretary     of Defense and to Fairchild     Hiller   with a
    request that any comments which they wish to make be directed            to your
    office.     As requested,  we are returning   the enclosure     to your letter.

                                                 Sincerely    yours,

                                                 of the United      States


J   The Honorable     William    Froxmire
    United States     Senate