. .. 1 4 COM~=-~R~LLER GENERA: & fl-iE UNITED STATES WASHINGTON. D.C. 20348 ~-168678 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 Designers. COMPETITION NOT OBTAINED 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 c? -7k A .- t B-168678 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 percent. 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 -2- .- i ~-168678 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, -3- ~-168678 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 competition. 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 Enclosure J The Honorable William Froxmire United States Senate -4-
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)