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Defense Contracting: Air Force Machine Tool Procurement Raises Buy American Questions

Published by the Government Accountability Office on 1990-02-21.

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

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                                 ..~_I_St,at,w
                                           ----- (kneral   Accounting   Of’ficre
                            k:port t.,othe Honorable
                            ICobert W . Kasten, ?Jr.,U.S. Senate, and
                            t,he Honorable ,John E. Porter, House of
                            Representatives
_.._--.~.
IJtAl)t71 it ry   I !)!I0

                            DEFENSE
                            CONTRACTING
                            Air Force Machine
                            Tool Procurement
                            Raises Buy American
                            Questions




__-                                           --
(;AO/‘NSIAI)-!)O-7:1
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-232190

                   February 21,199O

                   The Honorable Robert W. Kasten, Jr.
                   United States Senate

                   The Honorable John E. Porter
                   House of Representatives

                   In your respective letters of December 29,1988, and January 4,1989,
                   you requested that we examine the circumstances of the Air Force’s
                   July 15, 1988, contract award to the Italian Machine Tool Agency (IMTA),
                   Inc. The firm fixed-price contract in the amount of $1,299,53 1 was for a
                   machining center. You expressed concern that the award was in direct
                   conflict with the statutory restriction prohibiting the use of funds for
                   foreign-made tools. Specifically, you requested that we provide informa-
                   tion on the Air Force’s actions relative to its compliance with the statu-
                   tory restriction prohibiting the acquisition of foreign machine tools,
                   determination that IMTA was a manufacturer as defined in the Walsh-
                   Healey Act, and determination that IMTA was “responsible” as defined in
                   the Federal Acquisition Regulation. Subsequent to our review work, IMTA
                   disclosed that it would be unable to build the machining center. Details
                   on IMTA'S disclosure and information you requested are summarized
                   below and discussed in appendix I.


                   We reviewed the Air Force’s actions from both a legal and an audit
Results in Brief   standpoint and believe the Air Force, in awarding the contract to IMTA,
                   acted on information that was too limited to determine that IMTA would
                   deliver a domestic product in compliance with the statutory restriction
                   and that IMTA met the Walsh-Healey Act requirements. Nevertheless, we
                   have no legal basis to challenge the contract award to IMTA and therefore
                   sustained the Air Force’s award in a bid protest reconsideration decision
                   dated September 27, 1989 (see app. II).

                   Of primary importance now is that IMTA disclosed in early October 1989
                   that it would be unable to build the machine specified in the contract
                   because a major supplier would not honor an agreement to supply a crit-
                   ical item. IMTA proposed that it supply a machine from the Henri Line
                   Company, which IMTA indicated is a Canadian manufacturer. IMTA stated
                   that the Line machine has the exact specifications of the proposed IMTA
                   machine. The Air Force is considering IMTA'S proposal and has asked
                   IMTA to provide data to ensure that the Line machine meets the domestic
                   content criteria.


                   Page1                                 GAO/NSL4D-9O-73MachineToolProcurement
                   B232190




Domestic Content   IMTA'S contract requires that it deliver a domestic product.’ A product is
                   considered to be domestic if it is manufactured in the United States or
                   Canada and the cost of its U.S. and/or Canadian components2 exceeds 60
                   percent of the cost of all its components. IMTA certified in a letter that it
                   would meet the U.S.-manufactured requirement. Also, the contracting
                   officer requested that IMTA provide evidence to show that it would meet
                   the U.S.-manufactured requirement. In response, IMTA provided a price
                   list that purported to show the portion of domestic and foreign compo-
                   nents to be used in producing the machining center. The contracting
                   officer reviewed the price list and concluded that IMTA would manufac-
                   ture a domestic product.

                   We do not believe that the price data contained the detail necessary to
                    conclude that IMTA would deliver a domestic product. The contracting
                   officer should have requested that IMTA provide a more detailed listing
                   of anticipated foreign and domestic component parts as well as pro-
                   jected costs for those items, The Air Force should have obtained suffi-
                   cient data to ensure compliance with statutory restrictions.


Walsh-Healey Act   Under the Walsh-Healey Act, a contractor must certify that it is either a
                   manufacturer of or a regular dealer in the items to be delivered under a
                   government supply contract over $10,000. IMTA certified that it was a
                   manufacturer under the Walsh-Healey Act. The contracting officer
                   determined that IMTA qualified as a manufacturer based on IMTA'S certifi-
                   cation and its parent company’s status as a manufacturer. However, the
                   contracting officer did not apply the provisions of the Federal Acquisi-
                   tion Regulation that state that each offeror must qualify in its own right
                   as a manufacturer and that an offeror’s affiliation with or relation to
                   another firm, even its parent company, are not evidence of the offeror’s
                   own eligibility as a manufacturer. The regulation provides that the con-
                   tracting officer must investigate and determine the eligibility of an
                   offeror if the offeror has not previously been awarded a contract by the
                   individual acquisition office.

                   At the time of the award, IMTA did not meet the regulation’s require-
                   ments in terms of having the necessary prerequisites, such as plant and
                   equipment, or having made all the necessary arrangements and commit-
                   ments to obtain them, To remedy this situation, a contracting officer

                   ‘The restriction on buying domestic products is generally referred to as a “Buy American” restriction.
                   “Components are those articles, materials, and supplies incorporated directly into end products.



                   Page 2                                              GAO/NSIAD4JO-73Machine Tool Procurement
                  E-282120




                  may terminate a contract if it is determined that the Walsh-Healey Act
                  certification was not made in good faith. We found no evidence during
                  our review that IMTA had not acted in good faith, but the Air Force must
                  make this determination.


Resdonsibility    Before awarding a government contract, a contracting officer must
Detebmination     determine that the potential contractor is responsible in accordance with
                  acquisition regulations. The contracting officer must determine whether
                  the potential contractor has, among other things, adequate financial,
                  technical, and physical resources to perform the contract or the ability
                  to obtain such resources. Although the regulations specify the factors to
                  be considered in determining whether a prospective contractor is
                  responsible, the specific type and quantity of information used in mak-
                  ing such a determination is left to the contracting officer’s judgment. In
                  this case, IMTA was judged to be responsible based on very general input
                  from the Des Plaines, Illinois, Better Business Bureau on IMTA'S record as
                  a distributor.


Agency Comments   acknowledged that the contracting officer did not comply with some
                  parts of the Federal Acquisition Regulation (see app. III). However, the
                  Department believed we erroneously implied that a contracting officer,
                  in most cases, must conduct a detailed cost analysis to ensure domestic
                  content. The Department also believed that we gave a misleading
                  impression that the contracting officer’s analysis was inadequate, even
                  though the contracting officer did more than was required to conclude
                  that IMTA would deliver a domestic product and could have relied solely
                  on IMTA’scertification.

                  We recognize that domestic origin certifications from contractors are
                  usually accepted by the Department of Defense’s contracting officers at
                  face value. However, the Comptroller General has taken the position in
                  bid protest decisions that an agency should not automatically rely on
                  such certifications when it has reason to question whether a domestic
                  end product will be furnished. It was apparent that the contracting
                  officer requested additional information from IMTA because some ques-
                  tions existed regarding IMTA'S ability to deliver a domestic product.

                  We believe that once the contracting officer received the additional
                  information, she was responsible for analyzing it. Under the regulations,
                  to determine whether an item is a domestic product, only the total cost


                  Page 3                                GAO/NSIAD-90-73Machine Tool Procurement
,   B-232180




    of the components is used (i.e., what the contractor paid for the compo-
    nents or the total cost to make them in-house). The key indicator is cost
    of components. IMTA provided information that showed the price, not the
    cost, of major components and noncomponents. In short, the Air Force
    needed more information from IMTA to resolve the contracing officer’s
    apparent concerns that led her to request additional data.


    The problems identified in this report reinforce the need for better
    application of acquisition regulation requirements. Because our scope
    was limited to one contract, we are not making any recommendations.
    However, we suggested to Department of Defense officials that better
    application of acquisition regulation requirements be included as an
    issue needing attention in the fiscal year 1990 Federal Managers’ Finan-
    cial Integrity Act3 analysis.

    We are sending copies of this report to the Chairmen, House and Senate
    Committees on Appropriations and on Armed Services; the Secretaries
    of Defense and the Air Force; the Director, Office of Management and
    Budget; and other interested parties.

    Please contact me on (202) 276-4268 if you or your staff have any ques-
    tions concerning this report. Other major contributors to this report are
    listed in appendix IV.




    Nancy R. Kingsbury
    Director
    Air Force Issues




    “Under provisions of the Federal Managers’Financial Integrity Act of 1982 (31 U.S.C. 3612(b) and
    (c)), agency managers are given the primary responsibility for maintaining adequate systems of inter-
    nal control and accounting. The act requires agency heads to report annually to the President and the
    Congress on the status of these systems, and it holds managers responsible for correcting identifled
    deficiencies.



    Page 4                                              GAO/NSIAWO-73 Machine Tool Procurement
Page 6   GAO/NSJ.AD9O-73
                       Machine Tool Procurement
LeFter
  I
                                                                                                  1

Adpendix I                                                                                        8
Buy American            Objectives, Scope, and Methodology
                        Measures Taken to Ensure Domestic Content
                                                                                                 10
                                                                                                 10
Questions Raised in     Walsh-Healey Determination                                               14
Aik Force Machine       Determination of IMTA’s Responsibility                                   16
                        Status of IMTA Contract                                                  17
Tdol Procurement        Adequacy and Timing of Site Visits                                       17
                        Best and Final Offers                                                    18
                        Agency Comments and Our Evaluation                                       18

Appendix II                                                                                      20
Bid Protest
Reconsideration
Decision
Appendix III                                                                                     24
Comments From the
Department of
Defense
Appendix IV                                                                                      30
Major Contributors to
This Report
T&ble                   Table I. 1: Schedule of Items in IMTA’s Contract                         12




                        Abbreviations

                        DCASMA    Defense Contract Administration    Services Management Area
                        FAR       Federal Acquisition Regulation
                        GAO       General Accounting Office
                        IMTA      Italian Machine Tool Agency


                        Page 6                                GAO/NSIAD@O-73Machine Tool Procurement
Page 7   GAO/NSIAD-90-73Machine Tool Procurement
Appendix I

Bby American QuestionsRaisedin Air Force
h&whineTool Procurement

              In October 1987 the Air Force Contracting Center, Wright-Patterson
              Air Force Base, Dayton, Ohio, was asked by the 4950th Test Wing
              (Fabrication and Modification Division), the primary design and
              manufacturing facility at the base, to procure a six-axis machining
              center. A machining center is a computer-controlled machine that,
              depending on the number of axes, is capable of performing a variety
              of complex operations. According to the test wing, the machine was
              needed in the modification, research, and development area to
              ensure higher mission capabilities and enable the test wing to pro-
              vide faster and more sophisticated support to its customers. It esti-
              mated that the Air Force would save millions of dollars by having
              these capabilities in-house. The test wing also planned to use the
              machining center to produce aircraft and other parts of major weap-
              ons systems and estimated that it had spent over $1 million in the
              past 3 years to have a contractor make parts requiring six-axis
              capability.

              Before requesting the assistance of the contracting office, engineers
              from the test wing visited several potential contractors, including
              Pratt & Whitney, Cincinnati Millicron, and White Sunstrand, to examine
              their machining centers. They initially became interested in a machining
              center with a brand name of “Jo Mach 23” through a presentation by
              Walker Machinery Company, who they believed was the manufacturer
              of this machine. After considering its options, the Air Force decided that
              the Jo Mach machine, or its equivalent, would best meet its needs, and it
              initiated the procurement process.


              On December 4,1987, the contracting office at Wright-Patterson Air
              Force Base issued a synopsis in the Commerce Business Daily stating
              that the Air Force wanted to procure a Jo Mach 23 or equivalent
              machining center. According to contracting officials, the Air Force often
              issues “brand name or equal” solicitations to buy off-the-shelf items.
              This practice is not illegal or against procurement policies. However,
              through discussions with officials of Walker Machinery, the contracting
              office later learned that the Jo Mach 23 was made by the Italian
              Machine Tool Agency (IMTA) Industrial Goods, Ltd., Worthing, England,
              and that Walker was merely a distributor for the manufacturer. Due to
              the statutory restriction on the acquisition of foreign machine tools, the
              Air Force withdrew its synopsis, wrote a generic specification for the
              machine, and issued a request for proposals on March 21, 1988.




              Page 8                                GAO/NSIAD-90-73Machine Tool Procurement
Appendix 1
Buy American Questions Raked in Air Force
Machine Tool Procurement




The Air Force’s request for proposals provided for full and open compe-
tition and required that offers be submitted by May 12, 1988, for a ver-
tical six-axis machining center with all necessary tooling, operation and
maintenance manuals, training, and installation. The Air Force received
offers from four firms. One of the offers was determined to be techni-
cally unacceptable. According to contracting office officials, a letter was
sent on June 14, 1988, to the remaining three offerors, asking that best
and final offers be submitted by June 24,1988. Only two of the three
acceptable offerors responded with best and final offers and were there-
fore considered for award.

The contracting officer said that based on a technical evaluation, best
and final responses, and all other information available, the contract
was awarded on July 15,1988, to IMTA Inc., a subsidiary of IMTA Indus-
trial Goods, whose best and final offer was the lowest received. The
firm -fixed price contract was in the amount of $1,299,531 and was num-
bered F3360 l-88-C-O 163.

Pratt & Whitney and Onsrud, two of the competing contractors, filed bid
protests with us, contesting the contract award to IMTA and suggesting
that the contract should be terminated. On December 13,1988, we
denied the protests.1 We said that the contracting officer did not have
information before the contract award that was inconsistent with IMTA'S
commitment to supply a domestic machining center. We also said that
the protesters’ contentions concerning IMTA'S responsibility and its sta-
tus as a manufacturer under the Walsh-Healey Act were not subject to
review under our bid protest regulations, We do not consider protests
challenging affirmative responsibility determinations in the absence of a
showing of possible fraud or bad faith on the part of contracting offi-
cials or an allegation that definitive responsibility criteria contained in
the solicitation were misapplied. None of these conditions had been
alleged. W ith respect to IMTA'S status as a manufacturer under the
Walsh-Healey Act, we said that such matters, by law, are to be decided
by the contracting agency, subject to review by the Small Business
Administration (if a small business is involved) and the Department of
Labor.

On December 30,1988, and January 3,1989, Pratt & Whitney and
Onsrud, respectively, filed requests with us for reconsideration of the
bid protest decision. On September 27, 1989, we affirmed our prior bid
protest decision. A copy of the decision is included in appendix II.

‘The Pratt 81Whitney Co., Inc.; Onsrud Machine Corp., B-232190, et.,   Dec. 13,1988,88-2 CPD 693.



Page 9                                             GAO/NSIAD-90-73 Machine Tool Procurement
                        Appendix I
                        Buy Amerbn Questiona Raised In Air Force
                        Machine Tool Procurement




                        On December 29,1988, and January 4,1989, Senator Kasten and Con-
Objectives, Scope,and   gressman Porter, respectively, requested that we examine the Air
Mbthodology             Force’s contract award for the machining center to IMTA. We agreed to
                        determine (1) whether the Air Force complied with the statutory restric-
                        tion prohibiting the acquisition of foreign machine tools, (2) what over-
                        sight steps the Air Force will take to ensure that IMTA'S product will be
                        manufactured in the United States or Canada, (3) whether the Air Force
                        properly determined that IMTA was a manufacturer as defined in the
                        Walsh-Healey Act, (4) whether the Air Force properly determined IMTA
                        was “responsible” as defined in the Federal Acquisition Regulation
                        (FAR), (6) the status of the contract, paying particular attention to the
                        plant, equipment, and labor force, (6) the reason the Air Force initially
                        specified it wanted the Jo Mach 23 or equivalent and whether that spec-
                        ification was legal, (7) the adequacy and timing of the surveys per-
                        formed by the Defense Contract Administration Services Management
                        Area (DCASMA),and (8) whether the Air Force was obligated to ask
                        Onsrud for a best and final offer and what method the Air Force used to
                        request a best and final offer from Onsrud.

                        We interviewed responsible agency officials and reviewed pertinent con-
                        tract and related documents and regulations at the Departments of
                        Defense and the Air Force, Washington, D.C.; the using organization and
                        contracting office at W right-Patterson Air Force Base, Dayton, Ohio; and
                        DCMMA, Chicago, Illinois. We visited the IMTA facility in Rockford, Illi-
                        nois, and interviewed the president of IMTA. We examined the limited
                        records that IMTA made available to us. We conducted our review from
                        February through September 1989 in accordance with generally
                        accepted government auditing standards.


                        The solicitation for the six-axis machining center included the clause
MeasuresTaken to        from section 62.226-7023 of the Department of Defense FAR Supplement,
flnsure Domestic        “Restriction on Acquisition of Foreign Machine Tools,” which states that
Content                 the machine tool to be supplied must be of domestic origin. To be consid-
                        ered domestic, the machine tool must be manufactured in the United
                        States or Canada, and the cost of its components manufactured in the
                        United States or Canada must exceed 50 percent of the cost of all its
                        components. IMTA certified that the machine tool would be of domestic
                        origin, Also, in response to a specific request from the Air Force, IMTA
                        provided a price list to show that it would deliver a domestic product.
                        However, we do not believe that the Air Force could have determined
                        the dollar value of the foreign components of the machine tool because



                        Page10                                     GAO/NSIAD-90-73 Machine Tool Procurement
Appendix I
Buy Amerkan Questions Raised in Air Force
Machine Tool Procurement




(1) there was no component-by-component breakdown sufficient to per-
mit a thorough analysis of foreign versus domestic costs and (2) costs
such as labor, material, and overhead incurred in assembling the various
components into the final product were not separately stated.


As a general rule, all contractors bidding on Department of Defense con-
tracts for certain classes of machine tools, including the machining
center the Air Force contracted for, must agree that the product will be
manufactured in the United States or Canada and the cost of its compo-
nent parts manufactured in the United States or Canada will exceed 50
percent of the cost of all components. This is based on an appropriation
restriction, which, for the fiscal year involved in this case, was con-
tained in section 8085 of Public Law 100-202, dated December 22, 1987.
The Department of Defense FAR Supplement, section 226.7008, imple-
ments the law. Additional guidance concerning the domestic content of
products has also been addressed in our decision@ on “Buy American”
issues that also involve the 50-percent domestic content rule.

To determine whether an item is a domestic end product that has been
manufactured in the United States, only the total cost of the components
is used (i.e., what the manufacturer paid for the components or the total
cost to manufacture them in-house). The total cost of the end product,
price minus profit, is irrelevant because total cost includes noncom-
ponent costs such as labor, overhead, packaging, testing, and evaluation
costs. However, when the same manufacturer produces a component
and incorporates it into an end product, the manufacturer can include
appropriate overhead and other costs incurred in the manufacture of
the component in the total cost of the component.

We were told by the president of IMTA in March 1989 that some of the
components for the machining center will be manufactured in IMTA’S
Rockford, Illinois, facility and that the machining center will also be
assembled at that facility. IMTA’S president said that this is his first man-
ufacturing contract and thus cost projections are not available. He also
told us that his bid was based on data provided by the parent company.




2See,for example,48 Camp.Gen. 727 (1969) and 60 Camp.Gen.697 (1971).



Page 11                                       GAO/NSIAD&&73     Machine Tool Procurement
                                                                                                                                      I




                                         Appendix1
                                         Buy American Queationa I&bed in Air F O F W
                                         Machine Tool Procurement




Air Force’s Analy s is                   The contract awarded to IMTA is for the items shown in table I. 1.

Tat$e 1.1: Schedule of Item6 in IMTA’s
Cojtract                                 Item no.               Item                                                          Price
                                         1                      Six-axis milling machine                                   $995,800
                                         2                      Tooling package                                              21,051
                                         3                      Installation                                                 47,300
                                         -_____
                                         4                      Manuals                                                      19,650
                                         5                      Training                                                      8,600
                                         6                      J ib crane                                                    6,580
   ,
                                         7                      Foundation         s                                         36,000
                                         8                      Automatic digitizing cell                                   164,350
                                         Total                                                                           $1,299,531


                                         In addition to IMTA'S certification that it would comply with the domestic
                                         content restriction, the contracting officer asked IMTA to furnish a break-
                                         down (foreign versus domestic) for each of the items . This additional
                                         s tep was to ensure that IMTA would meet the U.S.-manufactured require-
                                         ment. IMTA provided a price lis t on June 6, 1988, which showed only
                                         items 1 and 8 as having foreign components. The documentation pro-
                                         v ided a major component breakdown for items 1 and 8 and the amount
                                         of “foreign content” for the two items .

                                         The Air Force contracting offic ials analyzed the price breakdown for
                                         items 1 and 8 and concluded that $388,600, or 39 percent, of the
                                         $996,800 price for item 1 and $56,860, or 34.6 percent, of the $164,350
                                         price for item 8 was for foreign components, On the basis of this infor-
                                         mation, the offic ials concluded that IMTA would manufacture a domestic
                                         product.

                                         W e question the Air Force’s analy s is . Prior GAO decis ions have s tated
                                         that when determining the portion of the product that is foreign, only
                                         the cost of the components (what the manufacturer paid for the compo-
                                         nents or the total cost to manufacture them in-house) is used. The price
                                         that the contractor charges for the components (cost plus profit) is irrel-
                                         evant. W e believe the Air Force could not have performed the required
                                         cost analy s is using the price lis t provided by IMTA.

                                         Further, the price lis t should have alerted the Air Force that IMTA'S price
                                         lis t inc luded noncomponent items . IMTA'S price lis t inc luded such
                                         noncomponent items as ins tallation at the manufacturer’s and cus-
                                         tomer’s plants , ins tallation engineering and implementation for tracing


                                         Page 12                                            GAO/NSIADSO-73 Machine Tool Procurement
                      Appendix I
                      Buy American Queetione IfJIbed in Acr mll?@
                      MadUne Tool Procnmment




                      and digitizing, and parametric programming. These are noncomponent-
                      type items; therefore, their costs cannot be considered in determining
                      the portion of the total cost of components that is foreign.

                      We do not know the final assembly costs for items 1 and 8 or what
                      profit is included in the prices given for those items. We asked the presi-
                      dent of IMTA in March 1989 to provide us with this information but were
                      told that the information is not available.

                      In addition, to perform a proper domestic content analysis, we believe
                      that the Air Force needed a more detailed cost breakdown of the compo-
                      nents (foreign versus domestic) included in each end item. Such a break-
                      down was not provided by IMTA or requested by the Air Force. For
                      example, IMTA'S price breakdown showed that the six-axis milling
                      machine included such components as a worktable, direct reading scales,
                      and an operator’s control panel, but it did not indicate which compo-
                      nents were domestic and which were foreign or the cost for any of the
                      components.


Monitoring Domestic   The Air Force is monitoring the domestic content of the machining
                      center with the aid of ncAs&+Chicago. According to Air Force contract
Content               administration officials at W right-Patterson Air Force Base, DCASMA-
                      Chicago has the basic oversight responsibilities in administering the con-
                      tract after award. Initially, the Air Force had no special arrangements
                      planned for administering the contract. However, because of congres-
                      sional interest in the Air Force’s compliance with the statutory restric-
                      tion prohibiting the purchase of foreign machine tools, we suggested
                      that the Air Force provide close surveillance to ensure that IMTA would
                      supply a U.S.-manufactured product. As a result of our suggestion, the
                      Air Force, in February 1989, requested that DCASMA    provide close sur-
                      veillance of IMTA'S production to ensure strict compliance with the
                      domestic content requirement. The Air Force also requested that DCASMA
                      provide monthly reports on its findings, To satisfy the Air Force’s
                      request, DCASMA   devised a plan in March 1989, which the Air Force
                      approved. The plan includes having an industrial specialist visit IMTA'S
                      facility monthly to (1) monitor IMTA'S overall performance and ability to
                      meet milestone schedules, (2) review names and locations of major sup-
                      pliers and subcontractors and the items or materials to be furnished by
                      them, and (3) verify orders placed and subcontracts used. DCXGMA
                      believes that this information would show from which sources IMTA
                      intends to procure the material necessary to perform the contract.



                      Page 13                                       GAO/NSIAJHW73 Machine Tad Procurement
                 Appendix I
                 Buy American Questions Raised in Air Force
                 Machine Tool Procurement




                 In addition, the Defense Contract Audit Agency and DCASMA’Financial
                                                                                S
                 Services Branch planned to perform quarterly audits to review all direct
                 material invoices and corresponding purchase orders to verify actual
                 origin of acquisition, They planned to provide the Air Force with quar-
                 terly reports on their findings.

                 Even though DCWMA agreed in March 1989 to increase its production
                 surveillance by having an industrial specialist visit IMTA'S facility on a
                 monthly basis and have its Financial Services Branch and the Defense
                 Contract Audit Agency conduct quarterly audits, few visits have actu-
                 ally been made to date. More specifically, DCASMA’industrial
                                                                       S          specialist
                 has only visited IMTA'S facility twice (in August and October 1989) over
                 an 8-month period from March 1989 through November 1989. Moreover,
                 no quarterly audits have been conducted during this period. We were
                 told by an Air Force official that the industrial specialist had called IMTA
                 frequently over the period to discuss the status of IMTA'S production
                 efforts. Accordingly, the specialist found that plant visits were not nec-
                 essary at the time because no production activity had occurred. Addi-
                 tionally, since IMTA had not placed any purchase orders or requested
                 progress payments, quarterly reviews did not have to be conducted by
                 DCASMA’Financial
                            S         Services Branch and the Defense Contract Audit
                 Agency.


                 Under the Walsh-Healey Act, a contractor must certify that it is either a
Walsh-Healey     manufacturer of or a regular dealer in the items delivered under a gov-
Determ ination   ernment supply contract over $10,000. FAR subpart 22.6 implements this
                 requirement.

                 FAR 22.606-1(a)(2) requires new manufacturers to have made all the nec-
                 essary arrangements and commitments for manufacturing space, equip-
                 ment, and personnel. At the time of award, IMTA did not appear to meet
                 this requirement in terms of having the necessary prerequisites such as
                 a plant and equipment, or having made all the necessary arrangements
                 and commitments to obtain them. However, at the time of our visit IMTA
                 appeared to be a manufacturer under the Walsh-Healey Act.

                 Although IMTA certified when it responded to the solicitation that it was
                 a manufacturer, it did not have at that time or at the time of the award
                 the manufacturing facilities, equipment, or personnel needed to perform
                 a manufacturing operation, or written, legally binding arrangements or
                 commitments to obtain them. The contracting office considered IMTA as



                 Page 14                                      GAO/NSIAD-90-73 Machine Tool Procurement
Appendix 1
Buy Amerknn Questions Bald       ln Air Force
Machine Tool Procurement




an established manufacturer and not a “new” manufacturer just enter-
ing the business, primarily because of the reputation of its parent com-
pany, IMTA Industrial Goods, Ltd., Worthing, England. Contracting office
officials advised us that IMTA was “just setting up shop in another coun-
try” and would only be transferring its technology to the United States;
therefore, IMTA was considered eligible to receive the contract.

Contracting office officials explained that they did not pursue IMTA'S sta-
tus as a manufacturer because no one came forth before the award to
protest IMTA'S eligibility and no information in the files cast doubt on
IMTA'S ability to perform as a manufacturer. They pointed out that at the
time of the award FAR 9.104-3 stated in part that the contracting officer
shall investigate and determine Walsh-Healey Act eligibility and not rely
on the prospective contractor’s representation if a protest has been
lodged or the contracting officer has knowledge that casts doubt on the
validity of the representation.3 We were told that since none of these
circumstances existed, the contracting officer did not consider the
requirement for further eligibility examination to be applicable.

We do not agree with the Air Force’s position. Even though an investiga-
tion to ensure IMTA'S status as a manufacturer may not have been
required under section 9.104-3(a) of the FAR, section 22.606-1(c) of the
FAR provides that every offeror must qualify as a manufacturer in its
own right and that an offeror’s affiliation or relation to another firm ,
even its parent company, are not evidence of the offeror’s own eligibility
as a manufacturer. Further, section 22.608-2(b) provides

“The contracting officer shall investigate and determine the eligibility of the offeror
and not rely on the offeror’s representation that it is a manufacturer or regular
dealer in the following circumstances:

“(3) The offeror that is in line for contract award has not previously been awarded a
contract subject to the Act by the individual acquisition office.”

The contracting office in this case had no prior contracting experience
with IMTA. Thus, further inquiry into IMTA'S ability to satisfy the Walsh-
Healey Act was required. At the time of award, IMTA did not qualify as a
Walsh-Healey manufacturer because IMTA did not have the prerequisite
resources or explicit arrangements or commitments to obtain them.


3Section 0.104-3, which was arguably inconsistent with FAR 22.608-2, has subsequently been changed
and now merely cites FAR section 22.608-2 asthe applicable FAR provision on Walsh-Healey Act
determinations.




Page 16                                           GAO/NSLiD-90-73 Machine Tool Procurement
                                                                                                                                                       J




                          Appendix I
                          B u y A m e r i c a n Q u e s t i o n a R a b e d in Air F o r c e
                          M a c h i n e Tool P r o c u x w m e n t




                          T h e A ir Force c o n c l u d e dth a t IM T A h a d th e necessaryfinancial, techni-
te r m i n a tio n o f    cal, a n d physical resources(i.e., p e r s o n n e l a n d e q u i p m e n t) to perform
T A ’s R e sponsibility   th e c o n tract primarily a s a result o f M IA ’S record a s a distributor,

                          T o b e eligible to receive a g o v e r n m e n t c o n tract, a c o n tracting o fficer
                          m u s t d e te r m i n e th a t th e prospective c o n tractor is “responsible” in
                          a c c o r d a n c ewith F A R criteria. F A R S u b p a r t 9 .1 0 3 (a) a n d (b) provides th a t
                          c o n tracts a r e to b e a w a r d e d to responsibleprospective c o n tractors only
                          a n d th a t n o a w a r d s h o u l d b e m a d e unless th e c o n tracting o fficer m a k e s
                          a n a ffirm a tive d e te r m i n a tio n o f responsibility. T o b e d e te r m i n e d r e s p o n -
                          sible within th e m e a n i n g o f F A R 9 .1 0 4 -1 , a prospective c o n tractor m u s t

                      l h a v e a d e q u a te financial resourcesto perform th e c o n tract or th e ability
                        to o b ta i n th e m ;
                      . b e a b l e to c o m p l y with th e r e q u i r e d or p r o p o s e d delivery or perform-
                        a n c e schedule,considering all existing c o m m e r c i a l a n d g o v e r n m e n tal
                        b u s i n e s sc o m m i tm e n ts;
                      l h a v e a satisfactory p e r f o r m a n c e record;
                      . h a v e a satisfactory record o f integrity a n d b u s i n e s se thics;
                      l h a v e th e necessaryorganization, experience, a c c o u n tin g a n d o p e r a tio n a l
                        c o n trols, a n d technical skills (including, a s appropriate, s u c h e l e m e n tsa s
                        p r o d u c tio n c o n trol procedures, property c o n trol systems, a n d quality
                        a s s u r a n c em e a s u r e sa p p l i c a b l e to m a terials to b e p r o d u c e d or services to
                        b e p e r f o r m e d b y th e prospective c o n tractor a n d s u b c o n tractors) or th e
                        ability to o b ta i n th e m ;
                      l h a v e th e necessaryp r o d u c tio n , construction, a n d technical e q u i p m e n t
                        a n d facilities or th e ability to o b ta i n th e m ; a n d
                      l b e qualified a n d eligible to receive a n a w a r d u n d e r a p p l i c a b l e laws a n d
                        regulations.

                          T h e c o n tracting o fficer a t W right-Patterson A ir Force B a s e m a d e a n
                          a ffirm a tive d e te r m i n a tio n th a t IM T A w a s a responsiblem a n u facturer
                          within th e m e a n i n g prescribed in FAR. A c c o r d i n g to c o n tracting o ffice
                          o fficials, th e d e te r m i n a tio n w a s primarily b a s e d o n a B e tter B u s i n e s s
                          B u r e a u report from th e B u r e a u ’s o ffice in D e s P laines, Illinois. T h e con-
                          tracting c e n ter a n d th e D e fe n s e C o n tract A u d i t A g e n c y indicated th a t
                          IM T A n e v e r h a d a c o n tract with th e c o n tracting c e n ter, th e A ir Force, th e
                          D e p a r tm e n t o f D e fe n s e ,or th e g o v e r n m e n t. H o w e v e r , th e B e tter Busi-
                          n e s s B u r e a u reported th a t IM T A is a m e m b e r in g o o d standing, h a d n o
                          record o f a n y complaints, a n d h a d successfully c o m p l e te d work o n vari-
                          o u s m u n i c i p a l projects in th e D e s P laines a r e a .




                          Page 16                                                              G A O / N S I A D - 9 0 - 7 3M a c h i n e Tool P r o c u r e m e n t
                      Appendix I
                      Buy American Questions Raised in Air Force
                      Machine Tool Procurement




                      Although the FAR specifies the factors to be considered in determining
                      whether a prospective contractor is responsible, the specific type and
                      quantity of information used in making such a determination is left to
                      the contracting officer’s judgment. In this case, the contracting officer
                      could have sought additional information to assesswhether IMTA was
                      responsible; however, we have no basis for taking exception to the con-
                      tracting officer’s affirmative determination of IMTA'S responsibility.


                      As of March 1989, IMTA was operating out of its leased facility in Rock-
St&us of IMTA         ford, Illinois, where it planned to manufacture the six-axis machining
Ccintract             center. IMTA signed a lease with EX-CELL-O Corporation on Novem-
                      ber 17, 1988, for 2 years, with options to extend the term of the lease
                      for additional periods of 1 year each. At the time of our visit on
                      March 3, 1989, IMTA had 23 employees, including engineers, draftsmen,
                      and a machine designer, and planned to hire an additional 7 skilled
                      machinists by mid-1989. Although IMTA planned to subcontract out much
                      of the machining components to job shops in the area, it had two large
                      overhead cranes and planned to purchase a three-axis machining center
                      to do manufacturing work in-house. The president of IMTA advised us at
                      the time of our visit that he was confident that IMTA could perform the
                      work for the contract on time and meet the provisions of the contract.
                      He also advised us that about 10 percent of the contract was completed.

                      More recent information indicates that IMTA cannot manufacture the
                      machining center. In an October 4, 1989, site visit to IMTA by DCASMA'S
                      industrial specialist, IMTA disclosed that it would not be able to build the
                      machine specified in the contract because a major supplier of IMTA would
                      not honor an agreement to supply castings. IMTA proposed that it supply
                      a machine from the Henri Line Company, which IMTA indicated is a
                      Canadian manufacturer. IMTA states the Line machine has the exact
                      specifications of the proposed IMTA machine. The Air Force is consider-
                      ing IMTA'S proposals and has asked IMTA to provide data to ensure that
                      the Line machine meets the domestic content criteria.


                      After the contract had been awarded, the Air Force asked DCASMA       to
Adequacy and Timing   visit IMTA and determine its ability to perform the contract. One of the
of Site Visits        Air Force’s primary concerns was whether IMTA could meet the domestic
         I            content requirement. Two industrial specialist from DCASMA     visited IMTA.
                      The visits consisted primarily of a tour of the facilities and an interview
                      with the president of IMTA.



                      Page 17                                      GAO/NSIAWO-73   Machine Tool Procurement
                        Appendix I
                        Buy American Questiona Itahd   in Ah Force
                        Machine Tool Procurement




                        One of the industrial specialists visited IMTA'S administrative facility in
                        Des Plaines, Illinois, in August 1988. (IMTA had not yet leased its facility
                        in Rockford, Illinois.) The other specialist visited IMTA'S newly leased
                        facility in Rockford in December 1988. Both concluded that IMTA could
                        meet the terms of the contract.

                        We believe that since this was IMTA'S first manufacturing contract and
                        first contract with the federal government, it would have been prudent
                        for the Air Force to have asked DCASMA, before contract award, to visit
                        IMTA to determine its ability to perform the contract. We also believe that
                        if a preaward visit/survey had been conducted, the Air Force would
                        have obtained more detailed information on IMTA'S status as a manufac-
                        turer (i.e., having prerequisite resources) necessary to make its Walsh-
                        Healey Act determination.


                        In its bid protest to us, Onsrud argued that it was not afforded the
Be&t and Final Offers   opportunity to present a best and final offer. An official from Onsrud
                        stated in an affidavit that he did not receive any telephone calls or cor-
                        respondence from the Air Force stating that it wanted a best and final
                        offer. However, contracting office officials stated that they sent
                        requests to Onsrud and two other acceptable offerors for best and final
                        offers and showed us copies of the requests. (The FAR does not require
                        certified mail in requesting best and final offers. Air Force contracting
                        officials said they use regular mail for this purpose.)

                        The Air Force’s contract files contained a copy of a June 14, 1988, letter
                        to Onsrud, which requested a best and final offer. An Air Force official
                        told us that he had telephoned an Onsrud official before the letter was
                        sent to advise the official that the Air Force was requesting a best and
                        final offer. The contracting office had no documentation of that call,
                        since it does not prepare such documentation.


                        The Department of Defense generally concurred with our findings and
Adency Comments and     acknowledged that the contracting officer did not comply with some
Otir Evaluation         parts of the Federal Acquisition Regulation (see app. III). However, the
                        Department believed we erroneously implied that a contracting officer,
                        in most cases, must conduct a detailed cost analysis to ensure domestic
           *            content. The Department also believed that we gave a misleading
                        impression that the contracting officer’s analysis was inadequate even
                        though the contracting officer did more than was required to conclude



                        Page 16                                      GAO/NSLAK@O-73 Machine Tool Procurement
Buy American Que&io~~ Rhed       in Air Force
Ma&he Tool Procurement




that IMTA would deliver a domestic product and could have relied solely
on IMTAcertification.

We recognize that domestic origin certifications from contractors are
usually accepted by the Department of Defense’s contracting officers at
face value. However, the Comptroller General has taken the position in
bid protest decisions that an agency should not automatically rely on
such certifications when it has reason to question whether a domestic
end product will be furnishedS4 It is apparent that the contracting officer
requested additional information from IMTA because some questions
existed regarding IMTA'S ability to deliver a domestic product.

We believe that once the contracting officer received the additional
information, she was responsible for analyzing it. The information pro-
vided by IMTA showed its prices for major components and noncom-
ponents totaling to the contract price of $1.3 million. The contracting
officer concluded from this information that IMTA would deliver a
domestic product.

Under the regulations, to determine whether an item is a domestic prod-
uct, only the total cost of the components is used (i.e., what the contrac-
tor paid for the components or the total cost to make them in-house).
The total cost of the end product, price minus profit, is irrelevant
because total cost includes noncomponent cost such as labor, overhead,
packaging, testing, and evaluation costs.

We recognize that the contracting office will have to exercise some judg-
ment in determining what information is needed to make an adequate
domestic content analysis. In this case, Air Force’s analysis was based
on IM?A’S prices for, not the costs of, components that make up the
machining center. In addition, IMTA'S list and the Air Force’s calculation
included amounts for such noncomponent items as engineering and
installation. Further, the information submitted by IMTA was not suffi-
cient to permit the Air Force to exclude from its calculation amounts for
such noncomponent costs as the labor and overhead incident to final
assembly of the end product. In short, the additional information pro-
vided by IMTA could not have been sufficient to resolve the contracting
officer’s apparent concerns that led her to request additional data.




4Wire Rope Corporation of America, Inc., B-226672, Mar. 13,1987,87-l CPD 286.



Page 19                                          GAO/NSIAMW73       Machine Tool Procurement
                                                                                                                        ,
Appendix
      I II
Bid Protest ReconsiderationDecision



                 The Camptdler      Genctal
                 of the llnitml Sta2ee

                 Wuhhgton.      D.C. 20518

                 Decision
                                    The Pratt    & Whitney      Company,              Inc.:     Onsrud
                 Motur    of:       Machine   Corporation--Reconsideration
                 File:              B-232190.3,             B-232190.4
                 Date:             September          27,     1989

                 DIGBST
                 1.    The award             of   a contract         constitutes       an affirmative
                 determination               of   responsibility.

                 2.       Eligibility    under              the Walsh-Realey         Public      Contracts    Act
                 is      not for resolution                 by the General         Accounting      Office.

                 DECISION
                 The Pratt      6 Whitney        Company,       Inc.,     and Onsrud Machine
                 Corporation       request       reconsideration            of our decision      in The
                 Pratt    6 Whitney      Co.,      Inc.:      Onstud Machine      Corp.,     B-232130,
                 et al.,     Dec. 13, 1988,           88-2 CPD q 588, in which             we denied
                 protests      by those      firms       of the award by Wright-Patterson               Air
                 Force    Base.of     a contract           for a vertical       CNC six-axis
                 machining      center     to the Italian             Machine   Tool Agency,       Inc.
                 (IMTAI     under request          for proposals          (RFP) NO. F33601-88-
                 R-0017.      We affirm        our    prior     decision.lJ

                 In their      original         protests,         both Pratt        6 Whitney        and Onsrud
                 questioned        IMTA's       ability        to comply      with    a solicitation
                 requireme,nt        that     the machining           center     be of United            States    or
                 Canadian       origin.         The protesters            contended       that     the
                 machining       center       IMTA proposed           to supply       would be. made by a
                 company located            in Italy.            We noted that        there      was no
                 exception       taken      by IMTA to the solicitation                     requirement         and
                 concluded       that     the contracting             officer       had no information
                 prior     to award that           was inconsistent             with    IMTA's       commitment
                 to supply       a machining            center     of U.S. or Canadian               origin.       We
                 added that        whether        IMTA actually           complies      with     the require-
                 ment is an issue             of contract          administration,            which     we do not
                 review      under our Bid Protest'Regulations.                          4 C.F.R.
                 5 21.3(m)(1)(1988).

                 L/     This   procurement     was also      the subject     of a separate
                 audit     conducted    by this    Office.      The preliminary      audit
                 findings      are discussed     later     in this   decision.




               Page20                                                      GAO/NSIAD-90-73Machine Tool Procurement
      Appendix II
      Bid Proteat Reconsideration De&ion




  We did not consider              the protesters’        allegations       that  I%TA
  was not eligible            for award because        it was not a manufacturer
  under       the Walsh-Healey        Public    Contracts       Act,    41 U.S.C.
  ss 35-45         (1982).     We said that       the question        of a firm’s
  status        under that      Act is for the contracting              agency to
  decide,        subject    to review     by the Department           of Labor    (DOL)
          if a small       business    is involved,         the Small Business
  ig;inistration           (SBA).

   Finally,       we noted that          questions       as to whether        IMTA was a
   responsible        contractor--that             is,   whether      it had the ability
   to comply with          solicitation          requirements--also           were beyond
   the scope of our review.                    Under our Regulations,             we only
   review     affirmative         responsibility          determinations          upon a
   showing     that     such a determination              was made fraudulently           or
   in bad faith         or that       definitive       responsibility         criteria    in
   the solicitation           were not met.            4 C.F.R.       9 21.3(m) (5).

  Onsrud      contends        on reconsideration               that      the Air Force           failed
  to apply       definitive          responsibility            criteria,        citing       section
  9.104     of the Federal             Acquisition         Regulation          (FAR) as
  containing         the standards            the Air Force was required                     to apply
  in determining             IMTA’S responsibility.                    The standards
  contained       in FAR section              9.104,     however,          are general
  standards        (such as adequate               financial         resources        and a
  satisfactory           record      of integrity)           that      apply    to all
  procurements;            they are not the type of specific,                           objective
  standards        (such as a minimum period                     of prescribed
’ experience)          that      would constitute            definitive         responsibility
  criteria.         Onsrud also contends                 that      the Air Force           failed       to
  make any responsibility                   determination            at all.        We do not
  agree;      the award of a government                    contract         constitutes          the
  contracting          officer’s         affirmative         determination            of the
  contractor’s           responsibility.              Aesculap         Instruments         Corp.,
  B-208202,       Aug. 23, 1983, 83-2 CPD 11 228.
  Pratt    & Whitney’s    position     on reconsideration       is that     the
  Air Force should       have done more prior         to award to satisfy
  itself    that    IMTA would supply       a U.S.-   or Canadian-made
  machining      center  and that    the firm      was a manufacturer       under
  the Walsh-Healey       Act.     We agree.      For the reasons      discussed
  below,       however, we have no basis       for recommending       that    the
  award      to IMTA be disturbed.

  With   respect    to the country-of-origin        issue,   the solicita-
  tion  provided      that   a machining     center would be considered                                  to
  be of U.S. or Canadian         origin,     if (1) it was manufactured                                  in
  the United     States    or Canada,    and (2) the cost of its
  components     manufactured      in the united    States   or Canada
  exceeded    50 percent      of the cost of all      its  components.                              As
  2                                                                 B-232190.3,          B-232190.4




      Page 21                                                    GAO/NSLAD-90-73Ma&he Tool Procurement
      Appemdk II
      Bid Protest Reconsideration Decision




  we pointed     out in our prior          decision,       the contracting
  officer    concluded      that    IMTA’s    machining         center      would be of
  U.S. origin      based in part       on a price        list       provided      by IMTr.
  prior   to award indicating           “the    amount of foreign              content”
  for various      items.       Based on the price            list,      the contract::;
  officer    calculated       that   61 percent       of IMTA’s          price    for the
  machining     center    represented        domestic      content.

  Although      we previously         did not question          the agency’s
  analysis,       we now find       that     the analysis       was flawed.            First,
  the agency’s        analysis      was based on IMTA’s            prices       for,     not
  the costs       of, components         that     make up the machining              center.
  The list      also did not indicate              which components           were foreign
  and which were domestic.                 In addition,       IMTA’s      list,      and 0.e
  agency’s      calculation,        included       amounts    for such non-
  component       items    as engineering          and installation.              Finally,
  the information          submitted       by IMTA was not sufficient                  to
  permit    the agency to exclude               from its    calculation           amounts
  for such non-component              costs     as the labor       and overhead
  incident      to fin.al     assembly       of the end product.              In short,
  the Air Force needed more information                     from IMTA in order                to
  perform     the proper       analysis.

  Our conclusion            here does not mean, however,                         that   the
  protests       should        have been sustained.                   Fundamentally,            an
  agency’s       preaward          determination             concerning        a prospective
  contractor’s           ability        to supply          a U.S. or Canadian             end
  product      involves          an issue        of responsibility.                 Because
  responsibility            determinations               are basically           judgmental,
  and generally            not susceptible               to objective          review,      our
  Regulations          provide        for    review        of affirmative           responsibility
  determinations            only      in cases of possible                 misapplication          of
  definitive         responsibility              criteria,         fraud,     or bad faith         on
  the part       of procurement              officials.            The protests         involved
  none of these circumstances.                           Therefore,        if we had found            in
  the initial          protests         that     the contracting             officer’s
  conclusion         was based in part                 on incomplete           information,        we
  would not have sustained                     the protests           with     a recommendation
  for cancellation               of the contract.                Rather,       we would have
  suggested        that     the Air         Force obtain           the necessary          cost data
  from IMTA and perform                   the proper          analysis       before     final
  acceptance         of the end product.                     We understand          from our
  audit      work that         the Air       Force       intends      to do so and that            it
  has arranged           for the Defense              Contract        Audit      Agency and the
  Defense      Contract          Administration              Services      Management Area,
  Chicago,       to monitor           performance            and provide         other    assistance
  to ensure        that     IMTA supplies              a U.S. product.

  Regarding  the Walsh-Healey    issue,     our prior        decision
/ correctly  pointed  out that   a firm’s      status       as a manufacturer
  under that   Act is not a matter      for this      office      to decide.

  3                                                                 B-232190.3,          B-232190.4




      Page 22                                                   GAO/NSL4D-90-73 Machine Tool Procurement
        Appendix II
        Bld Protest Recoxwlderatlon Jhcbion




        Rather,  FAR S 22.608-3(b)        provides    that  a challenge     to an
        agency’s  Walsh-Healey      determination       is a matter    for either
        DOL or SBA.    We therefore       affirm   our decision     on this    point.

        Nevertheless,             we found in the course             of our audit        that     the
        Air Force failed                to pursue    IMTA’s Walsh-Healey           eligibility
        as required           by FAR S, 22.608-2(b)(3),              which provides          that     the
        contracting           officer       must investigate         the Walsh-Healey
        eligibility           of an offeror,         and not rely        on the offeror’s
        Walsh-Healey            certification,         if,   as here,      the individual
        acquisition           office       has not previously          awarded    a contract          to
        that      offeror.          Had such an investigation              been conducted
        prior       to award,         it is unlikely       that    the Air     Force would have
        determined          that, IMTA qualified           as a manufacturer           under the
        Walsh-Healey            Act because       the firm      had not made preaward
        arrangements            for manufacturing          space,      equipment,      and
        personnel          as required         by section     22.606-1(a)(2)        of the FAR.
        FAR section          22.608-6(b)       provides     that     if a contracting
        officer       discovers      after     contract     award that         the award was
        made to an ineligible               offeror,     the contracting             officer       may
        terminate        the contract        if the offeror’s            Walsh-Healey          Act
        certification           was not made in good faith.                  That,       of course,
        is a question           for the contracting           agency to decide.                We
        found no evidence            during      OUT audit,      however,         that     IMTA was
        not acting         in good faith         when it made its           certification.             As
        part     of our audit        we visited        IMTA’s    facilities          and it
        appears       to us that       the firm      now has the resources                 required
        to qualify         a8 a manufacturer.




    *   ComptrollYer     f;eneral
        of the    United     States




        4                                                            B-232190.3,         B-232190.4
3




        Page 23                                                 GAO/NSLAKMO-73 Machine Tool Procurement
A&ndix
   I     III

C&mmentsFrom the Department of Defense



                                                        ASSISTANT     SECRETARY       OF DEFENSE
                                                               WAS”,NGTON.    D.C. 20301-8000




               PRODUCTION      AND
                   LOGISTICS                                                       December 1, 1989
                        P/FC

                        Mr. Frank C. Conahan
                        Assistant    Comptroller   General
                        National    Security   and International
                          Affairs    Division
                        U.S. General Accounting       Office
                        Washington,     DC 20548

                        Dear Mr. Conahan:

                              This is the Department of Defense (DOD) response to the
                        General Accounting    Office   (GAO) draft report,   "DEFENSE
                        CONTRACTING: Air Force Machine Tool Procurement Raises Buy
                        American Questions,"     dated September 29, 1989 (GAO Code 3924841,
                        OSD Case   8140.   The Department generally    agrees with the report.

                               The DOD agrees that the contracting                     officer       did not comply
                        with the provisions              of Federal Acquisition            Regulation         22.608-2(b).
                        However, the report is misleading                    in some areas particularly                  in
                        its indirect         criticism        of the contracting          officer's       actions.         The
                        draft     report states that the price data in the letter                             submitted      to
                        the contracting            officer     by the contractor          did not contain
                        sufficient        detail      to conclude that the contractor                   would deliver        a
                        domestic product.               This implies      that the contracting              officer      did
                        less than required.                In fact,    the contracting           officer      was not
                        required      to request the letter              at all, but could have relied
                        solely      on the certification            provided by the contractor                  in his
                        proposal.         Instead,       the contracting        officer       requested       additional
                        information        to support the contractor's                certification.              Based on
                        information         available        at the time, the contracting                officer     was
                        satisfied       the contractor          would be able to meet the domestic
                        content requirement.

                             The detailed     DOD comments on the report findings                           are provided
                        in the enclosure.       The DOD appreciates the opportunity                           to comment
                        on the draft    report.




                        Enclosure




                      Page 24                                                      GAO/NSIAD-W-73 Machine Tool Procurement
                           AppendixIll
                           Comments From the Department of Defense




                                   WDRM'TREPORT-DATEDSEPTWSER         29,                           1989
                                         CODE (CA0 392484) OSD CASE 8140

                          "DEFENSE CONTMCTING: AIR FORCE MLCBINE MOL P-
                                        RAISES BDY AMERICAN QDESTIaSS"

                                                  DEPARVWDEFENSBC#MENTS

                                                            *      *         *       l       *


                                                                       FINDINGS

                         CINDING   A;   packuround       on Contract              Award     to   Xtalian    Machine         Tool
                         Bp9ncv. Inc,     The GAO reported that, on July 15, 1988, the Air
                         Force awarded a contract to the Italian       Machine Tool Agency, Inc.,
                         for a six-axis    machining center-- including   associated tooling      and
                         training.     The GAO explained that a statutory     restriction    on the
                         purchase of foreign machine tools by Defense agencies states that
                         certain classes of machine tools,      such as the one contracted       for by
                         the Air Force, must be manufactured in the U.S. or Canada. In
                         addition,   the GAO noted the implementing Federal Acquisition
                         Regulation instructions     require that the cost of U.S. or Canadian
                         components must exceed 50 percent of the cost of all its
                         components.     The GAO found that the contract with the Italian
                         Machine   Tool Agency required the contractor     to deliver     a U.S.-made
                         or Canadian-made product in line with these provisions.            The GAO
                         also found that, at the request of the Air Force, the Italian
                         Machine Tool Agency certified      it would meet the U.S.-manufactured
                         requirement--and    provided a price list that purported to show the
                         portion of U.S. and foreign components to be used in producing the
Nowon   pp, 1-2, lo-14   machine tool.     (pp.2-5, pp.18-2O/GAO Draft Report)

                         DOD RESPONSE:        Concur.

                         FINDING   B:   Air    Force    Analvsis        of       The Contractor's          Certification.
                         The GAO reported that, in addition to receiving            the contractor's
                         certification    it would meet the U.S.-made requirement,           the Air
                         Force also asked the contractor        to furnish a breakdown (foreign
                         versus domestic) for each of the contract          items.     According to the
                         GAO, the contractor      then provided a listing      that showed only two of
                         the eight items contained foreign items.           The GAO noted that,
                         according to the President of Italian         Machine Tool Agency, a
                         proportionate    share of final assembly costs and profit           is included
                         in each of its major component prices.           The GAO found that Air
                         Force contracting     officials   analyzed the price breakdown for these
                         two items and concluded that 39 percent and 34.6 percent,
                         respectively,    of the two items were for foreign components.
                         However, the GAO questioned the Air Force analysis.              The GAO

                                                                                                                Enclosure




                          Page25                                                         GAO/NSIAlM&73MachfneToolProeurement
                             Appedlx Ul
                             C4munenta Prom the Department of Defense




                           pointed out that, in prior decisions it has issued, only the cost
                           of the components is to be used in determining          the portion of the
                           product that is foreign--with         the price the contractor    charges
                           being irrelevant.        The GAO concluded that the Air Force could not
                           have performed the required cost analysis using the price list
                           provided by the Italian         Machine Tool Agency. The GAO further
                           concluded that the price list the contractor         provided should have
                           alerted    the Air Force that noncomponent items were listed.           The GAO
                           emphasized that noncomponent costs cannot be considered in
                           determining    the portion of the total cost that is foreign.           The GAO
                           also observed that the Air Force needed a more detailed            cost
                           breakdown of the components included in each end item--however,
                           such a breakdown was not requested by the Air Force or provided by
                           the contractor.        Overall,   the GAO concluded that the Air Force
                           contracting    officer    should have done more to ensure that the
                           contractor's     product would be made in accordance with requirements.
Now on pp. 2, 10-14.        (p.2, pp. 5-6, pp. 19-22/GAO Draft Report)

                           DOD:                  Partially   concur.   The DOD concurs with the facts as
                           stated     but does not concur with the GAO interpretation        of the
                           facts.     As written,     the report gives the impression that, in most
                           cases,     it is the obligation       of the contracting  officer to conduct a
                           detailed       cost analysis in order to ensure that products required by
                           law to     be domestic are in fact domestic product, the contracting
                           officer      is not required,     and should not reasonably be expected, to
                           conduct      a detailed     cost analysis.

                           The report     also  gives the impression       that the contracting     officer's
                           analysis     was inadequate   and that this       inadequacy was the
                           contracting    officer's     fault.   AS the report indicates,       however,
                           even this far into the contract,          it is too early to tell whether
                           the contractor      will actually    comply with the statutory       restriction.
                           Only after a detailed        cost analysis of actual component costs can
                           it be conclusively       determined whether there will be compliance.
                           Therefore,   regardless      of the extent of analysis done by the
                           contracting    officer    prior to award, the matter could not have been
                           conclusively    resolved.       The contracting      officer did as detailed       an
                           analysis as he believed necessary under the circumstances to assure
                           that requirements were met.
                           FINDING c: Air Force Actions to Ensure Domestic Content,        The GAO
                           found that after the contract was awarded, the Air Force took steps
                           to ensure that the Italian    Machine Tool Agency would meet the
                           domestic content requirement.     In this regard, the GAO reported
                           that the Air Force asked the Defense Contract Administration
                           Services Management Area to visit    the contractor's  Illinois
                           facility   and provide an analysis of the domestic content
                           requirement.    According to the GAO, the Defense Contract
                       w




                              Page 26                                       GAO/NSIAD-90.73 Machine Tool Procurement
                            Appendix Dl
                            Comments From the Department of Defense




                        Administration        specialists     concluded that the contractor       could meet
                        the requirement--however,           they were provided the same price list as
                        was previously        provided to the Air Force.         The GAO also found that,
                        in February 1989, the Air Force requested the Defense Contract
                        Administration        Services Management provide close surveillance            of
                        the Italian      Machine Tool Agency production          to ensure strict
                        compliance with the domestic content requirement and provide
                        informal monthly reports.             The GAO reported that, in March 1989,
                        the Defense Contract Administration              Services Management Area
                        indicated     it plans to increase production           surveillance   and to have
                        the specialists         (1) verify orders     placed, (2) major suppliers       and
                        subcontractors        used, and (3) the materials        furnished by them. The
                        GAO further      reported that the Defense Contract Administration
                        Services Management Area also plans to have its officials                  and the
                        Defense Contract Audit Agency conduct quarterly                 audits of the
                        contractor--to        review and report to the Air Force on all direct
                        material    invoices and corresponding           purchase orders to verify
                        actual origin.         The GAO concluded that, although the Air Force is
                        taking action to ensure delivery             of a U.S.-manufactured     product,    it
                        is too early to tell whether the Air Force will comply with the
                        statutory     restriction      prohibiting    the use of funds to procure
Now on pp, 13-14.       foreign machine tools.            (p.2, pp. 6-7, pp. 9-10, pp. 22-23/GAO
                        Draft Report)

                        DOD RESPONSE; Concur.           The DOD concurs with the GAO conclusion
                        that it is too early to predict whether the contractor               will comply
                        with the contractual        requirements.     The Air Force plans to comply
                        with the statutory       requirement.     If the contractor     does not comply,
                        appropriate      actions will be taken.       It should be recognized,
                        however, that it was not the Air Force responsibility,               as a normal
                        course of action, to require anything more than the contractor's
                        certification      regarding the domestic content of the item.            The Air
                        Force was required to obtain certification            from the contractor     that
                        the item met the domestic content criteria.              The contracting
                        officer     obtained the necessary certification.          However, because of
                        the concerns raised by the Congress and the GAO, the Air Force also
                        requested the Defense Contract Administration             Services Management
                        Area to provide close surveillance          to ensure contract compliance.


                        FINDING D: Walsh-Healv Act Considerations,         The GAO reported the
                        Walsh-Healy Act, as implemented by the Federal Acquisition
                        Regulation,  requires that a contractor    certify   that it is either a
                        manufacturer   of, or a regular dealer in, the items to be delivered
                        under a Government supply contract over $10,000.         In addition, the
                        GAO reported that the Federal Acquisition      Regulation requires that
                        new manufacturers    have made all the necessary arrangements and
                        commitments for manufacturing     space, equipment, and personnel
                    Y




                           Page 27                                         GAO/NSIAD-W-73 Machine Tool Procurement
                           Appendix III
                           Comment.8 From the Department of Defense




                         before contract award. The GAO further                   reported the Federal
                         Acquisition      Regulation requires that each offeror                qualify       in its
                         own right as a manufacturer--and                that an offeror's       affiliation
                         with, or relation          to, another firm, even its parent company, are
                         not evidence of the offeror's              own eligibility.        The GAO found that,
                         at the time of contract award, the Italian                  Machine Tool Agency did
                         not meet these requirements              in terms of having the necessary
                         prerequisites,        such as a plant and equipment.              The GAO found that,
                         instead,      the Air Force determined the contractor               was qualified
                         under Walsh-Healy requirements based on the contractor's
                         certification       and its parent company's status as a manufacturer.
                         In addition,      the GAO found that the contracting               officer       did not
                         follow Federal Acquisition             Regulation provisions        which state the
                         contracting      officer      must investigate       and determine the eligibility
                         of an offeror--       if the offeror       has not previously       been awarded a
                         contract by the acquisition             office.      The GAO reported that the
                         contracting      officials       explained they did not pursue the status of
                         the Italian      Machine Tool Agency as a manufacturer because (1) no
                         one came forward before the award to protest its eligibility                             and
                          (2) no information          in the files cast doubt on the contractor's
                         ability     to perform.        The GAO disagreed with that
                         position--concluding           that, under Federal Acquisition             Regulation
                         provisions,      an investigation         of eligibility      should have been
                         conducted.       The GAO also observed that, although the Italian
                         Machine Tool Agency did not qualify                 as a Walsh-Healy manufacturer
                         at the time of contract award, it now appears to qualify,                           since it
                         has the necessary resources.               The GAO concluded, therefore,               that
                         the purposes of Walsh-Healy are being served.                     The GAO further
                         observed that it found no evidence the contractor                     certification          was
                         not made in good faith.             The GAO also concluded, therefore,                 that
                         there is no basis to recommend termination                   of the contract.
N&v   on pp. 2, 14-15.    (p. 2-3, pp. 7-10, pp. 23-25/GAO Draft Report)

                         pOD wSPm=:       Concur.   The contracting  officer    did not comply with
                         Federal Acquisition   Regulation 22.608-2(b).       However, failure  to
                         comply with this provision     should not be interpreted     to mean that
                         the contractor   did not comply with the provisions       of the
                         Walsh-Healy Act.
                                                                                I 8 Rasp0 n aibilitv.
                         FIND;CNO:     Det0m.i n atio n of the Contractor                                     The
                         GAO reported that, before awarding a government contract,                     a
                         contracting   officer     must determine-that      the prospective         contractor
                         is "responsible"      in accordance with stated Federal Acquisition
                         Regulation criteria.        According to the GAO, contracting              officials
                         made an affirmative       determination      of the Italian   Machine Tool
                         Agency's responsibility--based          primarily    on a report by the Better
                         Business Bureau.        The GAO pointed out that although the Federal
                         Acquisition   Regulation specifies         the factors to be considered in




                           Page 28                                             GAO/NSlAD-SO-73 Machine Tool Procurement
                         AppendixIn
                         Commenta From the Department of Defexwe




                         determining     whether a prospective       contractor    is responsible,    the
                         specific    type and quantity     of information       used is left to the
                         judgment of the contracting        officer.      The GAO observed that in this
                         case, the contracting     officer     could have sought additional
                         information     to assess the contractor's        responsibility.      The GAO
                         concluded, however, that there is no basis for questioning                the
                         contracting     officer's determination       that the Italian     Machine Tool
Now qn pp.3,    16-17.   Agency was responsible.       (p.3, pp. 9-10, pp. 2%27/GAO Draft Report)

                         DOD RESPONSN: Concur.

                         tfNDINO P: Jkleauaov and Timino oi! Site Vieita.            The GAO found that
                         after the contract had been awarded, the Air Force asked the
                         Defense Contract Administration          Services Management Area to visit
                         the Italian      Machine Tool Agency and determine its ability          to
                         perform the contract       and meet the domestic content requirement.
                         The GAO found that two representatives           did visit  the Italian
                         Machine Tool Agency in 1988-- (1) touring the facilities             and (2)
                         interviewing      the president.     According to the GAO, both the Defense
                         Contract Administration        representatives    concluded that the Italian
                         Machine Tool Agency could meet the terms of the contract.                 The GAO
                         concluded, however, that since this was the first            manufacturing
                         contract     for the Italian     Machine Tool Agency, as well as its first
                         contract with the Government--it          would have been prudent for the
                         Air Force to have asked the contract administration            staff to visit
                         the Italian      Machine Tool Agency and determine its ability          to
                         perform the contract.        The GAO also concluded that, had a preaward
                         visit/survey      been conducted, the Air Force would have obtained more
                         detailed     information   on the contractor's      status as a manufacturer
Nowon   pp.17.18.        necessary to make its Walsh-Healy Act determination.              (pp. 28-29/
                         GAO Draft Report)

                         Q$XJRESPONSN: Concur.
                                                          ****e*

                                                        BTIONS




                         Page 29                                     GAO/NSIAD-90-73 Machine Tool Procurement
Apbndix    IV

IYfajorContributors to This Report


                                      Ikin, Associate Director
N$ional Security and    $r~FmB~~~~t  )AAccintnnt
                                        -YU-VVY*.V
                                                 -a* vvvv-
                                                 TXrprtnr

International Affairs   Curtis ’
                               L. Evans, Evaluator-in-Charge
Division, Washington,
D.C.
;Office of General
 Counsel




(392484)                Page 30                                  GAO/NSIAD-90-73 Machine Tool Procurement