oversight

Defense Acquisition: Guidance Is Needed on Payments for Conditionally Accepted Items

Published by the Government Accountability Office on 1997-12-12.

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

                  United States General Accounting Office

GAO               Report to the Secretary of Defense




December 1997
                  DEFENSE
                  ACQUISITION
                  Guidance Is Needed on
                  Payments for
                  Conditionally Accepted
                  Items




GAO/NSIAD-98-20
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-278211

             December 12, 1997

             The Honorable William S. Cohen
             The Secretary of Defense

             Dear Mr. Secretary:

             During prior work on the C-17 program, we noted that the Air Force
             generally accepted aircraft with incomplete or deficient work, on the
             condition that the contractor complete the work after delivery.1 Although
             the Air Force withheld payment for the work not done, the amounts
             withheld were less than the estimated cost and profit to complete this
             work. We conducted this review to determine if this situation occurred on
             other programs and if additional guidance was needed to avoid paying
             contractors for work not done at the time of delivery.


             When acquiring goods or services by contract, U.S. government policy is
Background   generally to pay only for completed work. The purpose of this policy is to
             reduce the government’s risk of financial exposure in the event a
             contractor fails to perform. In the case of payments at the time of
             conditional acceptance, this would generally mean withholding sufficient
             funds to cover the estimated cost and profit associated with completing
             the work. This policy of only paying for completed work is grounded in the
             prohibition against advance payments contained in title 31, section 3324 of
             the United States Code, which states that “a payment under a contract to
             provide a service or deliver an article for the United States Government
             may not be more than the value of the service already provided or the
             article already delivered.” This policy is also evident in the provisions
             governing progress payments,2 which state that agencies “shall ensure that
             any payment for work in progress . . . is commensurate with the work
             accomplished. . . .”3 The statutory exceptions to this policy apply
             conditions or restrictions to the transaction. For example, a written
             determination is required from the head of an agency, or his or her
             designee, that the use of advance payments is in the public interest.


             1
              Conditional acceptance means that a contracting officer has determined that it is in the government’s
             best interest to accept an item that does not conform to contract specifications or is otherwise
             incomplete with the expectation that the contractor will later correct nonconformances or complete
             other work.
             2
              Progress payments are a method of interim contract financing in which the government and a
             contractor share the financial burden of contract performance.
             3
              41 U.S.C. 255(e)(1) and 10 U.S.C. 2307(e)(1).



             Page 1                                                      GAO/NSIAD-98-20 Defense Acquisition
                   B-278211




                   These policies are implemented in the Federal Acquisition Regulations
                   System. This system consists of the Federal Acquisition Regulation (FAR),
                   which is the primary authority, and agency acquisition regulations that
                   implement and supplement the FAR. The Department of Defense’s (DOD)
                   implementing regulation is the Defense Federal Acquisition Regulation
                   Supplement (DFARS). In addition, each of the military services’ acquisition
                   organizations has issued supplemental guidelines for use in implementing
                   policies and procedures in the FAR and the DFARS.

                   According to the FAR, contracting officers normally should reject supplies
                   and services that do not conform to contract specifications. However, FAR
                   section 46.407 (Nonconforming Supplies or Services) provides exceptions
                   for those circumstances (such as for reasons of economy or urgency) in
                   which accepting such supplies or services may be in the government’s best
                   interest. This section addresses only situations when the government has
                   decided to accept items with permanent nonconformances and not require
                   a contractor to correct the deficiencies after delivery. In these situations,
                   the FAR recommends that the contract be modified to reduce the price or
                   provide other consideration to reflect that the items are less than were
                   specified in the contract.


                   Our review of four selected Air Force, Army, and Navy acquisition
Results in Brief   programs showed that each of the services accept items conditionally.
                   However, federal and DOD regulations do not provide guidance to
                   contracting officers for determining amounts to be withheld from
                   payments in these cases. We also found that there is no consensus among
                   Office of the Secretary of Defense and service officials as to what policy
                   should govern payments at the time of conditional acceptance. Some
                   officials agreed that the amount withheld should reflect the estimated cost
                   and profit associated with the work to be done by a contractor after
                   delivery while others indicated that contracting officers should have
                   discretion to withhold whatever amount they determine appropriate.

                   The extent of service guidance ranged from the Army providing no
                   guidance to standard Air Force and Navy contract clauses that leave
                   determining the amount to be withheld to the contracting officer’s
                   discretion. Such guidance does not ensure that the amount withheld
                   reflects the estimated cost and profit to correct known deficiencies and
                   perform other incomplete work. As a result, it lacks the safeguards
                   necessary to reduce the government’s risk of financial exposure and is
                   inconsistent with the policy of paying only for completed work.



                   Page 2                                       GAO/NSIAD-98-20 Defense Acquisition
                      B-278211




                      Our review of the four selected acquisition programs showed that when
                      items were conditionally accepted, each of the services paid contractors
                      the billing price, assuming 100-percent completion, less some amount for
                      nonconforming or unfinished work. In general, the amounts withheld were
                      less than the costs to correct known deficiencies and complete unfinished
                      work and resulted in contractors being paid for work that had not been
                      performed at the time of conditional acceptance. For example, the
                      estimated price to correct known deficiencies and complete unfinished
                      work on two C-17 production contracts exceeded the amounts withheld by
                      about $61 million, based on the contractor’s cost estimates, or $127 million
                      based on the cost estimates used by the Defense Contract Management
                      Command (DCMC) in administering the contract. The Hunter Unmanned
                      Aerial Vehicle program accepted five systems with six conditional waivers
                      for which no money was withheld. Program officials told us that they
                      believed the contractor would correct the deficiencies. The program office
                      was not able to provide an estimate of the potential cost of this work.

                      The DFARS should be amended to provide departmental guidance on the
                      amounts to be withheld in cases of conditional acceptance by the services.
                      This amendment should require that the amount withheld when
                      conditionally accepting nonconforming items reflect at least a reasonable
                      estimate of the cost to correct known deficiencies and to do other
                      incomplete work remaining at the time of delivery. If a contracting officer
                      determines that withholding a lesser amount would be in the best interests
                      of the government, the determination should be accompanied by
                      safeguards adequate to protect the government’s interests.


                      The FAR and the DFARS do not provide guidance for withholding payment
Guidance on           for work to be performed after delivery in situations where the
Conditional           government conditionally accepts nonconforming or incomplete work.
Acceptance of Items   Moreover, within the military acquisition community, no consistent way
                      has been developed for determining whether payments should be withheld
Is Not Adequate       or how to determine the amount to withhold.

                      The DOD Director of Defense Procurement told us that a contracting officer
                      should withhold from payment the estimated cost and profit for work to
                      be done by the contractor after delivery. However, Air Force and Army
                      acquisition officials told us that while the cost and profit of the remaining
                      work should be a consideration, the amount withheld, if any, should be left
                      to the discretion of the contracting officer.




                      Page 3                                      GAO/NSIAD-98-20 Defense Acquisition
B-278211




Air Force supplemental guidance includes a standard contract clause
allowing contracting officers to use their discretion in determining the
amount to be withheld. The Army provides no supplemental guidance to
the FAR for use in conditionally accepting items and establishing a
withhold amount. At the Naval Sea Systems Command and the Naval Air
System Command (NAVAIR) procurement and contracting officials agreed
that amounts withheld should directly relate to the anticipated cost of
work to be performed by a contractor after delivery. However, contract
clauses that the two commands use give a contracting officer authority to
withhold a lesser amount.

From 1981 through 1992, the Air Force Materiel Command’s (AFMC)
Aeronautical Systems Division supplements provided for a standard
contract clause entitled “Correction of Supplies Accepted With
Deficiencies,” which called for withholding 10 percent of the price when
conditionally accepting items. The clause allowed a contracting officer to
use a higher or lower percentage as conditions warranted.

In July 1997, AFMC revised this clause and left the determination of the
amount withheld to the contracting officer’s discretion. The revised clause
provides a list of factors to consider when deciding on a withhold amount,
including (1) the cost to correct the deficiencies; (2) any loss of value to
the government due to reduced reliability, increased life-cycle costs, or
reduced availability; and (3) any other factors that may affect government
use or cost of ownership.

In ship construction and conversion contracts, the Naval Sea Systems
Command uses a standard payment clause that requires a contracting
officer to withhold a percentage of the contract price when a ship is
conditionally accepted. The clause provides for withholding, as a
performance reserve, the greater of either 1.5 percent of the contract price
or $100,000. This clause also provides that a contracting officer may
withhold more than the 1.5 percent if he or she finds that the standard
withhold amount is insufficient to cover the cost to correct deficiencies or
complete unfinished work. The NAVAIR standard clause entitled
“Acceptance Under Fixed-Price Contracts” allows a contracting officer,
under certain conditions, to accept nonconforming items and to withhold
an amount, as he or she determines appropriate.

A policy that would require the withholding of at least the estimated cost
and profit in this circumstance or require written justification for an
exception would protect the government’s interests and be consistent with



Page 4                                      GAO/NSIAD-98-20 Defense Acquisition
                           B-278211




                           the treatment accorded payments for work that has not been completed in
                           other instances. For example, FAR, subpart 32.4, which implements the
                           advanced payment statutes, requires that approval of a contracting
                           officer’s recommendation for an advance payment be based on a written
                           determination by an approving official that such advance payment is in the
                           public interest or facilitates the national defense.


                           Our review of four selected acquisition programs indicated that each of
Inadequate Withholds       the services conditionally accepted nonconforming items, with the
Result in Contractors      expectation that the contractors would correct known deficiencies and
Being Paid for Work        complete unfinished work. When conditionally accepting nonconforming
                           items, each of the services paid contractors the billing prices, assuming
Not Completed              100-percent completion, less some amount that was withheld for
                           nonconforming or unfinished work. The services differed in how they
                           determined the withhold amounts, but in each case, the amounts were less
                           than the estimated costs to correct known deficiencies and complete
                           unfinished work. As a result, the contractors were paid for work not yet
                           done.


Air Force’s C-17 Program   To meet the need for additional long-range airlift, the Air Force contracted
                           with the McDonnell Douglas Corporation, which later merged with the
                           Boeing Company, to develop and produce 120 C-17 aircraft. As of
                           October 1997, the contractor had delivered 34 production aircraft, all of
                           which were conditionally accepted by the Air Force with a number of
                           waivers and deviations that required corrective action by the contractor.
                           We reviewed the adequacy of amounts withheld for eight aircraft
                           conditionally accepted under two contracts for fiscal years 1990 and 1992,
                           production lots III and IV, respectively. At the time of last aircraft delivery
                           for each lot, the Air Force had withheld a net amount of about $47 million
                           for problems with such things as computer software and assembly
                           workmanship and for certain components on which qualification testing
                           had not been completed. However, the amount withheld was significantly
                           less than the estimated cost to correct known deficiencies and finish other
                           incomplete work.

                           Both contracts stipulated that the contracting officer should withhold a
                           minimum of 10 percent of the contract price when conditionally accepting
                           aircraft until the contractor completed the corrective actions. The lot IV
                           contract, however, allowed the contracting officer to deviate from this
                           requirement and withhold a lesser amount. C-17 program officials stated



                           Page 5                                        GAO/NSIAD-98-20 Defense Acquisition
B-278211




that they did not believe 10 percent was reasonable given the aircraft’s
high price. Therefore, starting with lot III, instead of withholding
10 percent of an aircraft’s billing price, the program office and the
contractor agreed to categorize waivers and deviations and establish
standard withhold amounts for each category. In addition, they agreed to
negotiate specific amounts for unique nonconformances. However, the
program office did not modify the C-17 contracts to incorporate this
withhold policy.

Program officials told us that the withhold policy implemented in the C-17
program was not intended to cover the estimated cost and profit of the
work remaining to be done by the contractor after conditional acceptance.
They said that withholds were intended only to be an incentive to the
contractor to correct deficiencies and finish other incomplete work.

Table 1.1 compares our estimate of what should have been withheld after
the delivery of the last aircraft in each lot with the amounts actually
withheld. Our review indicated that the cost and profit to correct
deficiencies and complete unfinished work for production lots III and IV
exceeded the $47 million withheld by about $61 million, based on the
contractor’s estimates of the cost of the aircraft at completion, or about
$127 million, based on DCMC’s estimates of the cost of aircraft at
completion.4 The final aircraft of lots III and IV were accepted in February
and August 1994, respectively. At the time of our review, the contractor
was correcting deficiencies and completing unfinished work.




4
 These cost estimates were in effect at or shortly after the delivery of the last aircraft in each lot.



Page 6                                                          GAO/NSIAD-98-20 Defense Acquisition
                                        B-278211




Table 1.1: Estimates of Unearned Cost
and Profit Paid at the Time of Last     Dollars in millions
Aircraft Delivery for C-17 Production                                                          Based on:
Lots III and IV
                                                                   Contractor’s estimate at                        DCMC’s
                                                                         completion                         estimate at completion
                                                                   Lot III       Lot IV       Total        Lot III      Lot IV         Total
                                        Price paid at
                                        deliverya               $1,202.9      $1,131.6                  $1,202.9     $1,131.6
                                        Less
                                        overpayment in
                                        priceb                                        22.0                                13.2
                                        Adjusted price                          1,109.6                                1,118.4
                                        Less earned cost
                                        and profit at
                                        delivery                 1,136.7        1,067.2                  1,082.5       1,064.1
                                        Unearned cost
                                        and profit                   66.2             42.4                 120.4          54.3
                                        Less amount
                                        withheld                     29.0             18.3                   29.0         18.3
                                        Unearned
                                        amount paid at
                                        delivery                    $37.2         $24.1       $61.3        $91.4         $36.0       $127.4
                                        a
                                        Includes only aircraft contract line items.
                                        b
                                         The contractor was overpaid due to the government’s failure to decrease the billing price to
                                        reflect a transfer of engineering costs from the lot IV contract to the development contract. The
                                        amount of overpayment also depends on whether the contractor’s or government’s cost estimate
                                        is used to compute an adjusted billing price.




Army’s Tactical Vehicles                The Army established the Family of Medium Tactical Vehicles (FMTV)
Program                                 program to replace its aging fleet of 2.5-ton and 5-ton trucks and vans. The
                                        Army plans to purchase about 85,000 FMTV vehicles over a 30-year period.
                                        In October 1991, the program office awarded a $1.2-billion contract to
                                        Stewart and Stevenson Services, Inc., for the initial production of
                                        10,843 trucks and vans over 5 years. In August 1996, the program office
                                        revised the contract to procure these vehicles over a 7-year period. As of
                                        June 1997, the contract price to produce 11,197 trucks and vans was
                                        $1.36 billion.

                                        The contractor produced 3,040 vehicles during the program’s low-rate
                                        initial production phase. Nearly all of these vehicles (2,936) required a
                                        retrofit after production to resolve problems. These problems had been




                                        Page 7                                                     GAO/NSIAD-98-20 Defense Acquisition
B-278211




identified prior to acceptance during early testing.5 The government
conditionally accepted 1,941 of these vehicles prior to retrofitting them.
Many of these vehicles required an extensive retrofit effort, dismantling
them down to the frame.

The program office applied three different payment withholds, related to
retrofit requirements, against the 1,941 vehicles. One withhold was for
parts that were missing when the trucks were conditionally accepted. A
second was imposed on vehicles accepted before the completion of first
article testing, and a third involved deficiencies in the contractor’s quality
control system. These withholds were released to the contractor after
each vehicle had been retrofitted and accepted by the government.

The second withhold was required by the contract’s conditional
acceptance clause. This clause required that 10 percent of the billing price
be withheld for those vehicles conditionally accepted prior to completion
and approval of first article testing. The 10-percent figure was negotiated
between the program office and the contractor. It did not bear any
relationship to a projected cost estimate for retrofitting delivered trucks
after testing was completed. A contracting officer with the U.S. Army
Tank-Automotive and Armaments Command (TACOM) said that this clause
was included in the FMTV contract based on experience with the previous
M939A2 5-ton truck program.6

The third withhold was implemented later in the program because of
government concerns that the vehicles did not conform to contract
specifications because of inadequate contractor quality control. In July
1995, the program office modified the contract’s conditional acceptance
clause to require an additional withhold amount on program year 1 and
2 vehicles. It involved withholding $2,000 for each vehicle built prior to
April 11, 1994, and $1,000 for each vehicle built on or after this date. FMTV
program officials were unable to provide an analytical basis for the two
withhold amounts. Contracting files indicated that this withhold was
implemented as an incentive to the contractor to improve his quality
control system, thereby reducing the government’s risk in conditionally
accepting vehicles.


5
The remaining 104 vehicles were produced when the other vehicles were being retrofitted, and the
modifications were incorporated during production.
6
 In that program, the contractor, which had been paid the full price, was required to retrofit about
2,500 trucks to correct nonconformances found during testing. The contractor was planning to do the
retrofit work during breaks in new truck production or at the end of the program. TACOM officials
convinced the contractor that leaving the retrofit work until the end would not be acceptable.



Page 8                                                     GAO/NSIAD-98-20 Defense Acquisition
                                        B-278211




                                        DCMC had estimated that the cost could be as high as $24 million to retrofit
                                        vehicles but had not developed a detailed estimate that we could use to
                                        evaluate the reasonableness of the amounts withheld. However, on the
                                        basis of the actual costs to retrofit these vehicles, we estimated the cost to
                                        retrofit the 1,941 vehicles conditionally accepted and compared that
                                        estimate to the amounts withheld related to the retrofit. As shown in table
                                        1.2, we estimated the cost to retrofit the 1,941 vehicles exceeded the
                                        amounts withheld by about $2 million. At the time of our review, the
                                        retrofit required at the time of conditional acceptance had been
                                        accomplished.

Table 1.2: Estimate of Unearned Costs
Paid for Vehicles Conditionally         Dollars in millions
Accepted Prior to Retrofit                                                                           Less   Unearned
                                                                       Number of                 withhold amount paid
                                                                        vehiclesa       Cost      amount   at delivery
                                        Retrofitted                        2,917       $32.0a
                                        Accepted but not retrofitted          19         0.2
                                        Total requiring retrofit           2,936        32.2
                                        Less: vehicles not accepted
                                        prior to retrofit                    995         9.6
                                        Conditionally accepted prior
                                        to retrofit                        1,941       $22.6        $20.6a         $2.0
                                        a
                                        Actual.




Navy’s Conversion of                    To improve the Military Sealift Command’s prepositioning and surge
Commercial Container                    sealift programs, the Navy is converting commercial container ships into
Ships                                   roll-on roll-off sealift ships. Three ships are being converted under a
                                        contract with the National Steel and Shipbuilding Company. We reviewed
                                        the adequacy of the payment withholds for one of these ships, the USNS
                                        Shughart, which the Navy conditionally accepted on May 7, 1996. The
                                        contract for these ships contained the standard Naval Sea Systems
                                        Command clause that provides for a 1.5-percent performance reserve at
                                        the time of conditional acceptance but allows for a greater withhold as
                                        determined necessary by the contracting officer.

                                        At the time of the USNS Shughart’s conditional acceptance, the Navy
                                        project officer recommended withholding about $10.3 million for critical
                                        incomplete work and other deficiencies. However, there was only about
                                        $9.5 million available to withhold from the ship’s $289.7 million billing
                                        price because the Naval Sea Systems Command, with appropriate higher



                                        Page 9                                       GAO/NSIAD-98-20 Defense Acquisition
                           B-278211




                           approval, had already released $5 million in prior progress payment
                           retentions to the contractor. Accordingly, the project officer
                           recommended and the contracting officer withheld the $9.5 million. At the
                           time of our review, the contractor had generally completed work and
                           corrected deficiencies identified at the time of conditional acceptance.


Joint Tactical Unmanned    The Hunter Unmanned Aerial Vehicle (UAV) is a small, fixed-wing aircraft
Aerial Vehicle Program -   piloted remotely from a ground control station. The Hunter system, a part
Hunter System              of the Joint Tactical UAV program, began in 1989 as a joint service effort to
                           provide short-range UAVs for use by the Army, the Navy, and the Marine
                           Corps. The Hunter system contract is administered by NAVAIR. In February
                           1993, this command exercised contract options with TRW, Incorporated,
                           for the low-rate initial production of seven Hunter systems. In
                           January 1996, DOD decided to end the Hunter Program at the end of the
                           low-rate initial production contract.

                           Between April and August 1995, the government conditionally accepted
                           five Hunter systems, and it has since accepted, on an incremental basis,
                           the remaining two systems. The cumulative billing price for the five
                           complete systems was about $128.5 million. From this, the government
                           withheld about $1.6 million for missing parts, nonconforming items, and
                           other incomplete work.

                           Although the contracting officer withheld payment for the above noted
                           work, he did not withhold for other deficiencies. The contracting officer
                           had issued 34 separate contractual waivers to prevent acceptance delays
                           because the systems did not conform to contract specifications. Six of
                           these waivers were temporary in nature and were approved on the
                           condition that corrective action would be taken after delivery. These
                           waivers involved hardware and software problems, subcontractor
                           workmanship deficiencies, and incomplete work.

                           The contracting officer did not withhold from the billing price the
                           estimated cost to correct these deficiencies because program officials
                           believed that the contractor was committed to correcting the deficiencies.
                           However, not withholding funds based on the belief that the contractor
                           will perform requires the government to assume a major risk in the event
                           of nonperformance and is not consistent with a policy that requires paying
                           only for completed work. Because the system had been terminated, we
                           were unable to readily determine the status of the unfinished work. In
                           commenting on a draft of this report, DOD stated that the contractor has



                           Page 10                                      GAO/NSIAD-98-20 Defense Acquisition
                     B-278211




                     since corrected the six deficiencies and the government has accepted, on a
                     final basis, all of the systems.


                     When the government chooses to conditionally accept nonconforming
Conclusion and       items, the FAR, the DFARS, and supplementary service regulations do not
Recommendations      require that an amount sufficient to cover the remaining work be withheld
                     from the contract payment. As a result, the services’ withholding practices
                     are inconsistent and contractors are being paid for work not completed at
                     the time of delivery.

                     We recommend that the Secretary of Defense amend the DFARS to require
                     that, when conditionally accepting nonconforming items, amounts
                     withheld be at least sufficient to cover the cost and related profit to
                     correct deficiencies and complete other unfinished work. If the
                     contracting officer determines that withholding a lesser amount is in the
                     best interests of the government, such a determination should be properly
                     documented and justified in the contract files.


                     DOD generally concurred with the report’s findings, however, it only
Agency Comments      partially concurred with our recommendation. DOD agreed that the DFARS
and Our Evaluation   should be changed to include a requirement that when conditionally
                     accepting nonconforming items, amounts to be withheld should at least
                     cover the cost and related profit to correct deficiencies and complete
                     unfinished work. DOD did not agree that the contracting officer should be
                     required to obtain higher level approval before deviating from this general
                     policy. DOD’s comments are reprinted in appendix I. Technical comments
                     have been addressed in the report as appropriate.

                     While we continue to believe that certain safeguards would help ensure
                     adherence to the policy of only paying for work that is completed, revising
                     the DFARS to specifically include the requirement is a good first step toward
                     achieving this goal. DOD assumes that departure from the prescribed
                     standard would be rare. We do not have information on a sufficient
                     number of programs to address DOD’s assumption. Accordingly, we have
                     modified our recommendation to delete the requirement for higher level
                     approval of decisions to depart from the prescribed standard. We continue
                     to believe, however, that requiring such departures to be justified and
                     documented in the contract file will facilitate further oversight of this
                     issue as needed.




                     Page 11                                     GAO/NSIAD-98-20 Defense Acquisition
              B-278211




              We reviewed the FAR, the DFARS, and supplementary service regulations
Scope and     regarding conditional acceptance of nonconforming items. We also spoke
Methodology   with the DOD Director of Defense Procurement and with acquisition and
              contracting officials from the Departments of the Air Force, the Army, and
              the Navy and the Defense Logistics Agency located in Washington, D.C., to
              determine their policies and procedures for accepting temporarily
              nonconforming items.

              We selected four acquisition programs that had entered low- or full-rate
              production to obtain coverage of Air Force, Army, Navy, and joint service
              programs. In addition, our selections were based on the size of the
              programs and the availability of documentation on the acceptance
              process. We reviewed contract files, billing and delivery documentation,
              and cost data. To gain an understanding of how conditional acceptance
              was implemented in each of the services, we interviewed contracting and
              procuring officials with the (1) C-17 program office in Dayton, Ohio;
              (2) FMTV program office located at the Army’s Tank-Automotive and
              Armaments Command in Warren Michigan; (3) Supervisor of Shipbuilding
              and Conversion in San Diego, California; and (4) Joint Tactical UAV project
              office at Redstone Arsenal, Alabama. We also discussed management of
              the various contracts with contracting personnel at the DCMC offices
              located at the Boeing Company in Long Beach, California; TRW Avionics
              and Surveillance Group in San Diego, California; and Stewart and
              Stevenson Services, Inc., in Sealy, Texas.

              Because we confined our review to defense programs, we have limited our
              recommendation to the DFARS. However, we will provide copies of this
              report to the FAR Council, the group responsible for approving changes to
              the FAR, for their consideration.




              Page 12                                     GAO/NSIAD-98-20 Defense Acquisition
B-278211




Please contact me at (202) 512-4841 if you or your staff have any questions
concerning this report. Major contributors to this report are listed in
appendix II.

Sincerely yours,




Louis J. Rodrigues
Director, Defense Acquisitions Issues




Page 13                                     GAO/NSIAD-98-20 Defense Acquisition
Appendix I

Comments From the Department of Defense




             Page 14         GAO/NSIAD-98-20 Defense Acquisition
Appendix II

Major Contributors to This Report


                        Thomas J. Denomme
National Security and   Noel J. Lance
International Affairs   Carlos M. Garcia
Division, Washington,   Dorian R. Dunbar
                        John A. Carter
D.C.




(707227)                Page 15             GAO/NSIAD-98-20 Defense Acquisition
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested