Should the Navy Reverse McDonnell Douglas Corporation's Award to the F-18 Ejection Seat Contract?

Published by the Government Accountability Office on 1977-04-11.

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

                          DOCUMENT RESUME
01143 -   A10lo2016]

Should the Navy Reverse McDonnell Douglas Corporation's Award to
the F-18 Ejection Seit Contract? PSAD-77-99; B-1e3851. April 11,
1977. Released April 13, 1977. 5 pp. * appendices (30 pp.).

Report to Rep. John J.   cFall; by Robert P. Keller, Acting
Comptroller General.

Issue Area: Federal Procurement of Goads and Services:
    Reasonableness of Prices Under Negutiated Contracts and
    Sutcontracts (1904).
Contact: Procurement and Systems Acquisition Div.
Budget Function: National Defense: Department c Defense -
    Procurerient & Contracts (058).
Organization Concerned: Department of the Navy; Lepartment of
    Defense; McDonnell Douglas Ccrp.; artin-Baker Aircraft Co.,
    Ltd.; Stencel Aero Engineerinq Corp., Inc.
congressional Relevance: House Cotmittee on Armed Services;
    Senate Committee on Armee Services. Rep. John J. cFall.
Authority: Anti-Dumping Act (19 U.S.C. 160-71).   .S.P.R.
    9-201 (b),

         The F-18 aircraft prime contractor, McDcnnell Douglas
Corporation, awarded subcontract to Martin-Eaker Ltd. (M-B) a
British firm, to develop the ejection seat for the F-18
aircraft, reversing the original intention to buy the seats from
the Stencel ser~ .Dineering Corporation of Asbeville, orth
Carolina. Findings/Conclusions: The basis of the ward was
questionable and it may not have been in the best interest of
the government. cDonnell's evaluation of procurement offers
found Stencel Corporation's seat to be technically superior, bu
N-B was selected for the lower price. -B was ranted deviations
from specifications in five important areas, ad its seat will
require a 0% redesign (as opposed to 15% for Stencel).    -B's
lower price for development will be more than offset by
increased support costs. In the past, H-B has also refused to
provide adequate cost data or allow audits. Reccmmendations:
The Navy should reexamine this procurement. Specifically, it
should conduct an independent technical evaluaticn and a
comprehensive life cycle cost analysis of the tc  proposals.
Attention should be paid to the waivers given M-E that relate to
the aircraft mission and safety of the crew, especially ejection
height and stability after ejection. Past difficulties in
getting -B's data should be considered, and alsc the need for a
domestic source for this item. (Author/DJH)
                   sA KICTIKD     Net o       be   r^'i-4 4"trtsld te- Cwil
                 A eeuntig Office ·   .                         pecific approval
                 by h Office of Co4i..,:...          .,:.

           r   REPORT OF THE
 ~,t't\~       OF THE UNITED STA TES

               Should The Navy Reverse
               McDonnell Douglas Corporation's
               Aware Of The F-18
               Ejection Seat Contract?

               This report discusses the circumstances sur-
               rounding the development contractor's
               award of a contract to develop the ejection
               seat for the F-18 aircraft. The basis for the
               award is questionable and it may not be in the
               best interest of the Department of Defense.
               GAO recommends that the Secretary of
               Defense direct the Secretary of the Navy to
               reexamine this procurement decision.

               PSAD-77O9                                              APRIL 11, 1977
                          WASHINGTON. I).C.   OU


The Honorable Johr J. McFall
House of Representatives

Dear Mr. McFall:

     In your October 20, 1976, request to investigate the
procurement of ejection seats for the Navy's F-18 aircraft,
you specifically asked that we consider the circumstances
surrounding the decision of the F-18 prime contractor,
McDonnell Douglas Corporation, to award the contract to the
Martin-Baker Aircraft Company, Ltd., a British firm. You
pointed out that this decision reversed McDonnell's original
intention, specified in its proposal to the Navy for the
F-18, to buy the seats front the Stencel Aero Engineering
Corporation, Inc., of Asheville, Nrth Carolina,

     Our review was made primarily at the F-18 Program and
Air Crew Escape Systems Offices of the Naval Air Systems
Command, Alington, Virriaia. We also visited the offices
of McDonnell Aircraft Company, a subsidiary of the McDonnell
Douglas Corporation, at St. Louis, Missouri, and Washington,
D.C. We examined contract files, reports, and other agency
and contractor records as well as procurement policies and
procedures. We also discussed pertinent matters with
Navy and contractor officials. As you directed, we did not
obtain formal advance comments on this report from the
Department of Defense or the contractors involved. We did,
however, informally discuss the factual matters with Defense
personnel and their comments were considered in preparing
this report.

     The details of our review are included as appendix I
to this report. Answers to your questions are included in
appendix II.  Appendix III is a copy of our June 12, 1975,
letter to the Secretary of Defense (B-146905/PSAD-75-94),
and the Navy's August 21, 1975, response, relating to pre-
vious procurements from Martin-Baker, is appendix IV.

     The technical proposal submitted by McDonnell--the
basis for its selection to develop the F-18 aircraft--
specified an ejection seat developed by Stencel. At a
later date, McDonnell decided to obtain competition for the
ejection seats.

      Tiic Navy agreed to McDonnell's decision on
 that competition provides greater opportunity forthe premise
 the most capable, reliable product at te least costselecting
 risk. Stencel and Martin-Baker submitted proposals
 the full-scale development of an ejection seat and for
 production options for a total of 119 production seats.
 Martin-Baker's price was about $3.5 million less than
 Stencel's. McDonnell's evaluation found the Stencel
 to be technically superior, but Martin-Baker was selected
 provide the ejection seats because of the lower price.     to

     The proposals were evaluated against specific engineer-
ing and procurement factors. Stsocel's proposal was
conside.ably higher than Martin--Baker's--79G versus rated
                                                     701 of a
possible 1,000 points. The evaluation scoring consisted
a possible 700 points for engineering and 300 points       of
procurement factors including price: Stencel's proposalfor
received the higher engineering core--588 versus
points--while Martin-Baker received the higher procurement
score--294 versus 202 points.

      Although the McDonnell evaluation showed the
 Baker proposal to be inferior to that of Stencel, Martin-
 engineering evaluation conclusion was that both companies
 were capable of producing an acceptable ejection seat.
 Martin-Baker, howeve, was granted deviations from
 cations in five areas which Navy engineering personnel
 sidered important. These deviations included (1)
 ing or reducing safety related requirements (low altitude/
 adverse attitude capability, certain system redundancy
 features, and ejection seat stability after ejection),
 (2) weight restrictions, and (3) using parts not already
 the Navy supply system. The Martin-Baker seat will         in
 require an estimated 40-percent redesign of its existing
 seat to conform with McDonnell specifications; an estimated
redesign of 15 percent would be required for the Stencel
s at. More qualification testing will be required
Martin-Baker seat than the Stencel seat. The largerfor the
centage of redesign and qualification testing for
Baker increases the risk of not meeting the delivery
required by McDonnell's production schedule, which
have an adverse impact on the cost of the F-18 program.
      The lower price of the Martin-Baker seat may be more
than offset by other costs which should have been
sidered in evaluating the proposals. For example,
McDonnell engineers estimated that it would cost
million more in support costs for the             $1.3
                                       Martin-Baker seat


development than the cost McDonnell would incur for the
Stencel 3eat development.  (See p. 18.) Any additional sup-
port cost will be borLe by the Government under McDonnell's
cost-plus-incentive fee contract. The use of the Martin-
Baker seat will increase Navy management costs for spare
parts inventory. From 200 to 600 more ne' parts are re-
quired for the Martin-Baker than for the Stencel seat be-
cause the Stencel seat uses many parts already stocked by
the Navy. Introducing a new part into the inventory entails
estimated one-time costs of $200 per item and annual re-
curring estimated costs of $165 per item, excluding the cost
of the part itself. Consequently, the Martin-Baker seat will
entail one-time costs of between $40,000 and $120,000 and
annual costs of between $33,000 and $100,000 over the F-18's
20-year life.

     The maintenance costs that would be incurred for the
Martin-Baker and the Stencel seats are not known at this time.
However, the maintenance costs experienced for a Martin-Baker
seat used in the Navy's F-14 aircraft are much higher than
the costs for a Stencel seat used in the Harrier aircraft.
If the proposed seats for the F-18 require approximately the
same level of maintenance as these in-service models, then
much higher costs will be incurred for the Martin-Baker seat
throughout the service life of the   irLcraft.

     There are indications that Martin-Baker's price does
not include full recovery of development costs, which appears
to account for a large part of the differences between the
two proposals. Based on the approved F-18 program, there
will be follow-on contracts for at least 741 seats, as well
as spare parts purchases over the life of the aircraft.
The review and verification of cost and pricing data will
provide the only assurance that future contracts' proposed
prices are fair and reasonable and do not include develop-
ment costs not recovered on the initial contract.
     In the past, Martin-Baker has not provided adequate
cost data or allowed adequate audits by the Department of
Defense or our office, even where the contract included the
Comptroller General's access-to-records clause. The Navy
has justified the prior use of Martin-Baker ejection seats
despite these practices, because they were considered techni-
cally superior to seats available from domestic sources.
Since the Stencel seat was found to be technically superior
by both Navy and McDonnell engineering personnel, quality no
longer dictates the use of Martin-Baker seats.


      Because of Martin-Baker's failure to
                                            provide cost or
 pricinq data and to allow us unrestricted
 books and records, we recommended, in      access to their
 Secretary of Defense consider other   June  1975, that the
                                     procurement strategies
 for future needs. In commenting on
 advised us that the F-18 would be equippedreport, the Sec-etary
 ejection seat.                              with a Stencel

       Based on our review of available information,
 believe that the selection of Martin-Baker           we
                                              to develop
 the F-18 ejection seat was not in the
 of the Department of Defense or the    best interests
 formulating this opinion, we especially program. In
                                           considered the
 Navy's interest in commonality, reliability,
 tainability which have been stressed           and main-
 procurement cycle.                    throughout  the F-18

      The Navy has directed the procurement
 Baker seats for many of its aircraft        of the Martin-
 they were considered technically superiorprior  years because
                                            to  those manu-
 factured domestically. Now that a
 seat is available domestically, Navy's           superior
 on the Martin-Baker seat is questionable.          rliance

     Furthermore, the price advantage,
award was made to Martin-Baker,        upon which the
                                relates primarily to the
offered price for developing the ejection
based on a serious consideration of       seat.  It is not
                                    the total cost of de-
veloping, buying, operating, and maintaining
                                             the system.

      We recommend that the Secretary of
 Navy to reexamine this procurement       Defense direct the
                                    decision. Specifically,
 the Navy should conduct an independent
and a comprehensive life cycle cost      technical evaluation
                                     analysis of the two
ejection seat proposals. The technical
give particular attention to the effect evaluation should
granted Martin-Baker on the mission       of the waivers
                                     of the aircraft and
the safety of the crew, especially
ejection height and stability after those related to
                                     ejection. The Navy
should also consider past difficulties
                                        in obtaining cost or
pricing data from Martin-Baker in support
and the n ed to maintain a domestic         of proposed prices
                                     source for this critical


      If warranted, the Secretary of the Navy -;lould direct
McDonnell Douglas to terminate the Martin-Baker contract and
award the F-18 ejection seat development contract to Stencel.
(McDonnell's liability to Martin-Baker for ternination is
limited by the contract to $75,363.32 through Ma;, 1977, and
$126,326.32 through September 1977.)    If the contract is to
remain with Martin-Bakers  written  agreements  should be ob-
tained from them and the British Government    that  we and the
Defense Department be allowed  unrestricted   access  to
Martin-Baker's books  and records  relating to  this  and future
procurements of F-18 ejection seats,   including  direct  audits
and evaluation by Defense and our   personnel  of costs  incurred,
engineering and management cost estimates, and overhead and
rate structures.
     As agreed, we are sendinn copies of this report to the
Chairmen of the Senate Committe.. on Gvernmental Affairs;
House Committees on Government Operations, Appropriations, and
Armed Services; the Secretary of Defense; the Secretary of
the Navy; and the Director, Office of Management and Budget.
                              Sincerely yours,

                     ACTING   Comptroller General
                              of the United States

             AIRCRAFT                                      1
               Background                                  1
               Selection of Martin-Baker                   2
               Factors favoring Stencel                   12
      II   QUESTIONS AND ANSWERS                          20
             SECRETARY OF DEFENSE                         26
             GAO                                          30

DMMai/FH   di;ect maintenance man-hours per flight hour
DOD        Department of Defense
FDS        full-scale development
NAVAIR     Naval Air Systems Command
RFP        requests for proposals
APPENDIX I                                    APPENDIX I



     The McDonnell Aircraft Company (McDonnell), a subsidiary
of the McDonnell Douglas Corporation (McDonnell Douglas),
was selected on May 2, 1975, to develop the Navy Air Combat
Fighter (designated the F-18) as a result of its technical
proposal based on the YF-17 prototype aircraft, McDonnell's
technical proposal specified the SIIIS-3F17 ejection seat
developed by the Stencel Aero Engineering Company (Stencel).

     The Navy, based on McDonnell's accepted technical
proposal, expected the P-18 aircraft to include the Stencel
ejectior seat as contractor-furnished equipment. The pro-
posed St ncel seat would be a derivative of the seat
developeL by Stencel for the U.S. Marine Corps' AV-8A
Harrier aircraft under contract with the Naval Air Systems
Command (NAVAIR), to replace the Martin-Baker 9AMK1 seat
originally used in the Harrier. The Stencel seat was
developed because major deficiencies were identified with
the Martin-Baker seat. For this reason, much of the
qualification testing conducted for the Harrier seat would
be applicable for Stencel's proposed F-18 ejection seat.

      In October 1975 McDonnell informally advised NAVAIR
that a competitive procurement was beiig considered for
the F-18 ejection seat. The competitive candidate being
considered was Douglas Aircraft Company (Douglas), another
subsidiary of McDonnell Douglas. In addition, on March 3,
1976, the Martin-Baker Aircraft Company, Ltd., (Martin-
Baker) requested that it be allowed to submit a proposal
for the seat. On March 24, 1976, the president of McDonnell
Douglas approved competition for the F-18 ejection seat
development contract.

     NAVAIR was formally notified of this decision on
March 29, 1976. An April 6, 1976, internal NAVAIR document
stated that any choice other than the Stencel seat was
unacceptable to the Navy because of adverse impacts on the
F-18 program, namely increased technical risk, increased
cost, and increased schedule. This document recommended
that McDonnell either retract its March 29 notification, or
demonstrate that an ejection seat competition would be in
the best interests of the Navy.
APPENDIX I                                        APPENDIX I

     McDonnell briefed NAVAIR on its reasons for advocating
a competitive procurement and cited te following reasons:
     -- There is no existing ejection seat that fits the
        F-18 cockpit without extensive modifications.
     -- There are three companies--Stencel, Martin-Baker,
        and Douglas--capable of building a seat that will
        meet F-18 requirements.

     -- Competition allows the selection of the most capable,
        reliable seat at the least cost and risk.
     -- A Memorandum of Understanding between the United
        States and United Kingdom requires consideration
        of United Kingdom firms where qualified.

     -- Sole source to Stencel, which is in the process of
        being acquired by Talley Industries, presents a
        potential risk to the F-18 program.
     -- McDonnell Douglas wants to compete for the F-18
        ejection seat development contract.
     On May 5, 1976, NAVAIR agreed to McDonnell's decision
to open the ejection seat development to competition on
the general premise that competition provides greater op-
portunity for selecting the most capable, reliable product
at the least cost and risk.


     On June 2, 1976, requests for proposals (RFP) were
sent to Stencel, Douglas, and Martin-Baker with a response
deadline of July 19, 1976. Stencel and Martin-Baker sub-
mitted timely proposals for the ejection seat. Douglas,
however, notified McDonnell on July 21, 1976, that it was
withdrawing from the competition because of (1) the high
initial development costs for the seat, (2) the fact that
the Navy participated in developing the Stencel seat, and
(3) the more advanced development state of the Stencel
and Martin-Baker seats.

     The proposals were subjected to McDonnell's prescribed
procurement and technical evaluations. Negotiations were
then held with the offerors to resolve discrepancies on
technical factors between RFP and their proposals. After

APPENDIX I                                               APPENDIX I

the negotiations, the offerors were given the opportunity
to submit revised price proposals. Shortly after receiv-
ing the price revisions, McDonnell selected Martin-Baker.

Overall evaluation

     An overall evaluation score is obtainable by combining
the results of the independent engineering and procurement
evaluations for a total score based on a 1,000 point maximum.
Of these 1,000 points, 700 were assigned to the engineering
evaluation and 300 to the procurement evaluation for the
ejection seat selection. The results of the overall evalua-
tion scoring are as shown below.

                         Maximum       Martin-
                         points         Baker    Stencel
      Engineering          700           407       588
      Procurement          300           294       202
          Total          1,000           701      790
     As indicated by the point scores above, both the tech-
nical and the overall evaluation favored the Stencel pro-
posal, while the procurement evaluation favored Martin-Baker.

Engineering evaluation

     McDonnell's engineering department evaluated the pro-
posals on the basis of

     -- compliance with technical requirements,
     -- status of development, and

     --capability and schedule.

     The engineering evaluation assesses the degree to which
proposals comply with the various technical criteria in each
of the three categories. These assessments are represented
by a numerical scoring system.

     Martin-Baker's proposal received 58 percent of the
maximum point score (407 out of a possible 700 points), while
Stencel's poposal received 84 percent (588 of 700 points).
According to McDonnell's guidelines, proposals falling into
the 0- to 59-percent range indicate that "the proposed method
fails to meet the stated requirements or falls short of   idea
characteristics in a manner that egrae pe   rforiii
                                                 anhce or

                                                    APPENDIX I

significantly increases risk." The 60- to
indicates that -the roposed method falls 89-percent range
characteristics but s sti                      short of ideal
                              accemptablsis                aed.)
     McDonnell's report on the engineering evaluation
results indicates that the Martin-Baker proposal
scored higher than the proposal alone deserved. was
done by the evaluators because, based on              This was
                                             prior experience
with Martin-Baker, it was assumed that Martin-Baker
agree to change its proposal to conform                  would
requirements.                               to  McDonnell's

     General comments included in the summary
engineering evaluation indicated the following: the
     -- The Martin-Baker proposal has major compliance
        deficiencies because of its large overweight
        susceptability to corrosion, and failure       design,
        standard parts from the Navy's inventory. to  use
                                                     The com-
        plex mechanical design requires over-specialized
        maintenance with reduced reliability. McDonnell
        engineers judged this as an inadequate response
        to the compliance with the technical requirements
       category. They also noted that major qualifica-
        tion testing would be required to validate
       Martin-Baker seat.                           the

    -- Redesign of the Martin-Baker MK-10 seat
                                                is esti-
       mated at 40 percent to conform with McDonnell's
       ejection seat procurement specifications.
       Baker was considered to have excellent      Martin-
       and facilities for hardware production, capabilities
       considered deficient in data management but  was
                                                and schedule
    -- Stencel's response to the compliance wi'h
       technical requirements category was considered
       cellei.t and required little final negotiations. ex-
       McDonnell engineers estimated that medium
       fication would be required in areas of change
       the inservice AV-8A Harrier aircraft ejection
       Redesign changes to Stencel's                   seat.
      estimated at approximately 15 Harrier   seat were
                                      percent. Stencel
       facilities for production were considered
                                                  to be
      limited but adequate. Stencel's seat incorpor-
      rates major hardware utilized on existing
      seats; thus Stencel's ability to meet schedules
      low risk. Stencel is also familiar with            is
      integrated logistical support (ILS) requirements
      and data submittal procedures.

APPENDIX I                                               APPENDIX I

     Although the engineering evaluation showed that the
Martin-Baker proposal was inferior to Stencel's, the conclu--
sion was that both Stencel and Martin-Baker were capable of
producing an acceptable ejection seat.

Procurement evaluation

     McDonnell's procurement evaluation, which also uses
a scoring system, is based on the five factors shown below
with price being, by fa r, the most important. The following
table summarizes the results of the procurement evaluation:

                                          Martin-Baker    Stencel
                            Maximum          points       points
                             points          awarded      awarded
         Factor             (note anote           a)      (note a)
Management and
  experience                   4.5             4.50         2.85
Program plan                   6.0             5.85         5.49
Quality control               30.0           27.30         27.90
Price review                 210.0          210.00        120.00
Contractual agreements        49.5           46.80         45.30
    Total                    300.0          294.45        201.54
a/Maximum points and points awarded reflect the 30-percent
  weight assigned to procurement factors.

      As indicated above, the major difference between the pro-
posals in the procurement evaluation scoring is the price
review which represents 70 percent of the procurement evalua-

        The prices proposed and evaluated in the price review

 APPENDIX I                                          APPENDIX I

                                  Martin-Baker       Stencel
 Full-scale development
   (FSD) (38 seats)               $1,899,978.11   $4,532,920.66
Option I (9 seats)                   344,649.13      502,387.13
Option II   (34 seats)             1,251,450.58    1,479,994.26
Option III (76 seats)              3,111,817.18    3,345,264.80

    Total (157 seats)             $6,607,895.00   $9,860,566.85
     McDonnell representatives stated the lowest price offer
automatically receives the maximum allowable points for the
price review. Consequently, because of its $3,252,671.85
price advantage, the Martin-Baker proposal was scored
considerably higher.

     Mcronnell concluded that neither proposal met all the
specifications contained in RFP but that with modifica-
tions both proposals would be acceptable. McDonnell then
met separately with each offeror to resolve the deviations
of tneir respective proposals from the RFP specifications.
Negotiations to reach agreements on the resolution of these
deviations were held with Stencel from August 18 to 20, 1976,
and with Martin-Baker from August 23 to 25, 1976. Upon com-
pletion of the negotiations, each offeror was given the
opportunity to submit revised price proposals. The price
revisions were due by September 3, 1976, for Stencel and
September 10, 1976, for Martin-Baker.

     The negotiations resulted in agreements between McDonnell
and the offeror wherein either McDonnell agreed to changes
in the specifications or the offeror agreed to make specific
changes in its proposed development so that deviations be-
tween the proposal and the specifications were resolved.
Most of the deviations granted to Stencel and Martin-Baker
were either similar or considered minor. Generally, the
deviations from the specifications were granted because the
offeror's product was either superior to RFP specifications
or a different process proposed by the offeror made the
specifications inapplicable.

APPENDIX I                                         APPENDIX I

     Martin-Baker, however, was granted deviations from the
specifications in five areas which NAVAIR engineering person-
nel considered to be important because the product to be sup-
plied will not meet the original specifications. In contrast,
however, Stencel would have substantially met the original
specifications. The deviations granted to Martin-Baker con-
cerned the following:

     -- The Martin-Baker ejection seat could not fully
        meet the specifications concerning redundance (i.e.,
        certain critical components were required to have
        a backup system should the main system fail), and
        McDonnell agreed to eliminate some of the redundancy
     -- The minimum altitude requirement for successful
        adverse position (e.g., upside down) ejections was
        made less stringent because the Martin-Baker ejection
        seat could not meet the require, *nt. This was a
        major reason why the Martin-Bakcr seat was dropped
        from consideration by the Air Force for the F-16

     --A deviation was granted to Martin-Baker on the re-
       quirement for a parts standardization program.
       Therefore, instead of using standard parts already
       in the Navy supply system, Martin-Baker would be
       allowed to substitute other parts.

     -- The Martin-Baker seat could not meet the requirement
        that the seat's angle during an ejection could not
        deviate more than 20 degrees in any direction from
        the upright position and thus, this requirement
        was waived.

     -- The weight requirement of 164 pounds was waived
        because it could not be met by the Martin-Baker
        seat which will weigh 196 pounds. Regarding this
        weight, Stencel's proposed seat would have weighed
        165 pounds.
     Martin-Baker did not revise its price proposal of
$6,607,895 after the negotiations. Stencel, however, in-
creased its price by $291,818 to $10,152,385. The price
difference between Martin-n?ker's and Stencel's proposals
was $3,544,490. The following tatle shows these differences
iY detail.

APPENDIX I                                                                                                                                                                          APPENDIX I

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                                                     APPENDIX I

        The potential Navy savings will be $3,021,495 consist-
 ing of $2,339,848 on the FSD contract and $681,647 on produc-
 tion options I, II. and III, if exercised, as calculated

      -- The FSD prime contract with McDonnell is a cost-
         plus-incentive-fee-type contract with an 80/20-share
         ratio. In effect, the Government's share is 80
         cunt of any cost overrun or underrun. Therefore.
         savings to the Government would be 80 percent of
         $2,924,811 difference, or $2,339,848.
      -- The $619,679 difference on production options
                                                       I, II,
         and III will be saved as well as an estimated $61,968.
         representing the savings of fee/profit t McDonnell
         on the options. This is possible because the Navy
         not yet negotiated prices with McDonnell for production
         lots I, II, and III.  ($619,679 + $61,968 - $681,647.)
These savings, however, could be more than offset
costs discussed on page 15.                       by the

     As shown in the cost proposal comparison on page
most of the difference relates to the development      8,
                                                  portion of
the proposals. The differences in the unit prices
proposed ejection seats narrow with each successive of the
duction option.

     McDonnell officials briefed representatives
on October 13, 1976, concerning their intention of NAVAIR
                                                 to select
Martin-Baker as the developer of the F-18 ejection
NAVAIR had the authority to disapprove McDonnell's
By not doing so, they tacitly approved the selectionselection.
Martin-Baker.                                         of

     On October 14, 1976, Stencel's president
McDonnell buyer for the F-18 ejection seat and visited the
that Stencel wanted to reduce its offer for the informed him
seat by several million dollars and expected to ejection
                                                 submit a
revised offer later that day. The buyer advised
ident that McDonnell management would not considerthe pres-
revised offer. The president then said she would a
submit a revised offer by teletype. The buyer       still
her that the contract award could be made by October
1976. Shortly after advising McDonnell management       19.
Stencel's intent to submit a revised offer, the      of
buyer was directed to announce the award. At approx-
imately 4 p.m. (CDT), on Cctober 14, 1976, McDonnell
fied Martin-Baker of its selection.. On October        noti-
                                                 15, 1976,

 APPENDIX I                                         APPENDIX I

 Stencel submitted a revised price offer for the full-scale
 development and three production options which totaled
 $5,700,000, or about $900,000 less than Martin-Baker's
 Factors cited for
 selecton of Martin-Baker
     The lower price for what was considered an acceptable
ejection seat was the prime reason cited by McDonnell
selecting the Martin-Baker proposal over that of Stencel.
The recommendation to select Martin-Baker, made by McDonnell's
Procurement Review Board to cDonnell's top management,
acknowledged the technical superiority of the Stencel
This was done at the insistence of the McDonnell engineers,
who strongly favored the Stencel seat.

 tencel inqu_y   and Navy actions
     On October 23, 1976, Stencel sent a protest letter
McDonnell Douglas protesting the F-18 ejection seat awardto
to Martin-Baker. A copy of this protest was also delivered
to the Under Secretary of the Navy. Stencel's protest
based on the following:                                 was

     -- Stencel has had an unqualified right to the contract
        for the supply of F-18 ejection seats.
     -- Stencel's revised offer was at a lower price than
        contained in the contract awarded to Martin-Baker.
     -- The Martin-Baker proposed ejection seat does not
        conform to the F-18 ejection seat specifications.
     -- For purposes of Federal procurement decisions,
        McDonnell Douglas must and should have disqualified
        itself from ejection seat source selection.

     On October 26, 1976, the Under Secretary of the
directed NAVAIR to review the technical advisability Navy
selecting the Martin-Baker seat and the method of awarding
the subcontract for eection seats. The NAVAIR review
conducted from October 28 to 30, 1976, at the McDonnell was
facility in t. Louis, Missouri, and November 1 to 3,
at NAVAIR Headquarters, Washington, D.C.

     The NAVAIR team reviewed (1) procurement
as defined in McDonnell management directives, guidelines
                                                (2) engineer-
ing guidelines for the technical proposal evaluation
tained in McDonnell Engineering Operating Procedures, con-

APPENDIX I                                        APPENDIX I

(3) the actual procedures followed, the evaluations performed,
and the selection made by McDonnell during the ejection seat
competition. The review team did not conduct an independent
source selection.

    The Navy review team concluded:

     -- Considering both technical performance and price,
        the Martin-Baker seat as described in the purchase
        order is as desirable for use in connection with
        the F-18 as the Stencel seat.

     -- The award to Martin-Baker was in compliance with
        McDonnell's and McDonnell Douglas' approved purchase
        order systems.

     At the request of the Under Secretary, NAVAIR also pro-
vided information on (1) a quantitative evaluaticn of the
ejection seat technical proposals as modified by negotiated
agreements, (2) an estimated cost of a dual source develop-
ment program for the ejection seat, and (3) the potential
legal and financial impact of the termination of the Martin-
Baker subcontract. NAVAIR also provided the Under Secretary
information on the possibility that foreign firms get favor-
able treatment when competing with U.S. firms for defense
Our observations on Navy
reaction to the selection

     During our investigation we interv'iewed NAVAIR officials
representing both procurement and engineering functions for
the F-18 ejection seat. These discussions gave us the impres-
sions that NAVAIR engineers
     -- were convinced the Stencel ejection seat would be
        selected for the F-18,

     -- believed the Stencel seat was technically superior
        to the Martin-Baker seat, and

     -- were very surprised that Martin-Baker was selected
        instead of Stencel.

     The only official Navy position on the selection of
Martin-Baker was the NAVAIR review of McDonnell's source
selection for the ejection seat conducted for the Under
Secretary of the Navy. This review concluded that the pro-
curement had been conducted in accordance with McDonnell's

APPENDIX I                                      APPENDIX I

approved purchase order system and that both the Stencel
and Martin-Baker seats were desirable for use in the

     McDonnell has stated that Martin-Baker was selected to
develop the ejection seat for the F-18 aircraft primarily
because of the price advantage that Martin-Baker offered.
Aside from the price advantage, many factors pertinent
the ejection seat development favored the selection of to
Stencel. Also, the apparent price advantage of the
Baker selection is subjec5 to qualification, as discussed
on pages 15 through 19.
Technical superiority

     Both Navy and McDonnell engineers have judged the
Stencel seat to be technically superior to the Martin-Baker
seat. The technical advantages of the Stencel seat include
the following:

    --The proposed Stencel seat employs fewer mechanical
      processes than the Martin-Baker seat and, therefore,
      has far less moving parts, thus resulting in higher
      reliability and lower possibility of failure due to
      mechanical fatigue or maintenance errors.
    -- Stencel's proposal calls for the use of processes and
       materials that are more resistant to fatigue and action
       by the elements and thus considered by the Navy to be
       superior to those proposed by Martin-Baker.
    -- The proposed Stencel seat will meet or exceed all major
       specifications for the ejection seat set out in the
       RFP. Martin-Baker, however, will not meet all of these
       major specifications and requires that certain of them
       be either reduced or waived.  (See p. 7.)
    -- The proposed Stencel seat would weigh approximately
       31 pounds less than the Martin-Baker seat (165 versus
       196 pounds). We were informed that this lower weight,
       like he fewer number of movable parts, are in large
       part due to Stencel's use of more expensive light-
       weight metals.
    --The use of light-weight metals and fewer moving parts
      has allowed Stencel to build in more redundance, as

APPENDIX I                                      APPENDIX I

       required by the specification, than can be incorporated
       into the Martin-Baker seat. The redundancy is desired
       because it minimizes the possibility that a single com-
       ponent or subsystem failure will preclude a successful
     -- The Stencel seat is considerably faster in achieving
        stability after ejection.  In certain positions--
        notably adverse attitude--the Martin-Baker seat re-
        quires over double the terrain clearance of the
        Stencel seat for a successful ejection. In addition,
        the Stencel seat, unlike the Martin-Baker seat,
        stabilizes oscillation of the seat within 20 degrees
        of vertical. In the opinion of Navy medical person-
        nel, oscillation in excess of 20 degrees signifi-
        cantly increases the chance of pilot injury.
C-eater risk in
Mar n-Ba F-er-ve loment
     The proposed Martin-Baker seat will require a 40-percent
design change to the existing Martin-Baker MK-10 seat in order
to meet F-18 ejection seat specifications. The Martin-Baker
MK-10 seat has not been qualified by any U.S. defense or tech-
nical authorities. Thus, it will require major qualification
testing. This is in contrast to the Stencel seat which will
require only 15 percent or less in redesign of the Stencel
seat which was qualified for and used in the Harrier aircraft.
Consequently, the Stencel seat will require only medium re-
qualification. Regarding the qualification testing and
evaluation, Martin-Baker has agreed to pay the Navy for
these costs estimated by the Navy to be about $500,000.

     Martin-Baker has indicated the lead time required for
the first preproduction unit is 18 months compared to 12
months for Stencel. Counting from November 1976, 18 months
would run through April 1978. McDonnell requires delivery of
the first seat by May 1978 in preparation for first flight
of the F-18 aircraft in July 1978. NAVAIR engineers indi-
cated first flight could be conducted without the Martin-
Baker seat (using any other seat available), but it would
be restricted in altitude, speed, bank angle, and related
performance factors.
     NAVAIR engineers we talked with have expressed some
doubt that Martin-Baker can satisfy the ejection seat re-
quirements it agreed to and still meet the F-18 aircraft
development schedule. Any delays in delivery of the
ejection seat could have an adverse impact on the F-18

APPENDIX I                                       APPENDIX I

program schedule and thus, F-18 program costs. Luring the
July 1978 time frame, F-18 program expenditures will be
approximately $30 million a month.
Prior difficulties in contracting
with Martn-Baker

     In its prior contracts with the Department of Defense
(DOD), Martin-Baker has consistently refused to comply with
certain contractual requirements required of all contractors
doing business with DOD. (See apps. III and IV.) Specifi-
cally, Martin-Baker has refused to

     -- submit certified cost or pricing data in support of
        its proposed prices for noncompetitive contracts and

     -- accept the cost accounting standards clause i.i its

     In the past, waivers of these requirements have been
granted because of the urgency of the procurements. In addi-
tion, Martin-Baker's longstanding position has been that
neither we nor any other U.S. Government agency will be
permitted to review its books and records. This position,
relative to us has been taken even when the contract included
the Comptroller General's access-to-records clause.
     The unanswered question is what position Martin-Baker
will take with regard to these contractual requirements on
the full-scale production and future spare parts contracts
which will most likely be sole source procurements.
     The Navy has traditionally made these types of procure-
ments on a sole source basis because
     --engineering data and rights could not be obtained
       from Martin-Baker; therefore, the Navy lacked infor-
       mation which would allow it to competitively procure
       these items and

     --reverse engineering of either the ej:ection seat or
       spare parts would be very difficult and expensive.

     McDonnell's contract with Martin-Baker only covers
(1) the development of the seat, (2) the delivery of 38
developmental units, and (3) production options for 119
seats. Since the Navy anticipates buying a minimum of 860
production seats, at least 741 seats will probably be pur-
chased under a sole source contract with Martin-Baker.

APPENDIX I                                        APPENDIX I

       As noted on page 13, Martin-Baker will incur an esti-
mated $500,000 over and above the development cost for major
qualification testing. Also, according to a McDonnell of-
 ficial, Martin-Baker's price proposal does not include all
of the cost that will be incurred to develop a competitive
product for the U.S. ejection seat arket. Unless Martin-
Baker agrees in the follow-on production and spare parts
contracts to (1) submit certified cost and pricing data,
 (2) adhere to the cost accounting standards, and (3) allow
the audit of its records, DOD can not assure itself that
Martin-Baker is not including unrecovered development
costs under its production and spare part contracts and,
thus, negating the price advantage in its price for the de-
velop,.,ent contract. The Navy will also not be able to
determine if Martin-Baker's proposed prices are fair and
Life cycle costs not adequately
considered lniiecting Marin-Baker

     The Navy, as a result of McDonnell selecting Martin-
Baker, may incur additional costs which could result in the
Martin-Baker seat becoming more expensive than the Stencel
seat over the operational life of the F-18 aircraft. Through-
out the F-18 development program, NAVAIR has put considerable
emphasis on life cycle costs, reliability, and maintain-
ability. Life cycle cost was one of the factors to be con-
sidered by McDonnell in its evaluation process.

     The use of life cycle costing as a procurement technique
recognizes the need to consider all significant costs asso-
ciated with the decision to procure one firm's product over
another. Life cycle costs include the costs to develop, pro-
duce, operate, support, and maintain the equipment over its
full life cycle.

     During the evaluation of the ejection seat proposals,
McDonnell performed some limited analysis of life cycle costs,
but considered the results to be inconclusive. Consequently,
life cycle costs were not seriously considered in selecting
the development contractor.

     Navy life cycle cost engineers believe McDonnell has
the capability of doing extremely sophisticated life cycle
cost analysis. They also believe that McDonnell's life
cycle cost analysis of the ejection seat proposals was
extremely primitive considering its background and avail-
able expertise.

APPENDIX I                                         APPENDIX I

     We have discussed life cycle costing with Navy e 4 ection
seat experts. They stated that Stencel's life cycle costs
will be lower than Martin-Baker's and could more than offset
Martin-Baker's development price advantage. The factors
they cited against Martin-Baker included (1) increased in-
ventory costs, (2) higher maintenance costs (both operational
and rework), and (3) lower reliability.

     Because of the emphasis placed on cost during the
ejection seat contractor selection, we think that an
indepth analysis of the proposal price differences was
warranted. Regarding this, we believe that the total cost
of developing, procuring, supporting, and maintaining the
planned 860 ejection seats should have been compared over
the estimated life of this system. The results f such an
analysis should be a major consideration for a procurement
decision which is based essentially on price differences
of competing systems. We found no evidence to indicate that
this was the case in this procurement decision. Examples
of the costs which we believe did not receive adequate con-
sideration are

     -- the nonrecurring costs of adding 200 to 600 additional
        spare parts to the Navy inventory system and subsequent
        costs in managing this inventory and

     --additional maintenance costs for the Martin-Baker
     The following discussion of these costs indicates why
the initial price advantage is not a proper basis for select-
ing the development contractor.

Spare parts costs
     NAVAIR engineers estimate that the Martin-Baker seat
will add to the Navy's parts inventory a minimum of about
200 spare part items more than would the Stencel seat. De-
pending on the final Martin-Baker seat design, this dif-
ference could be as much as 600 spare part items.

     Our 1975 study estimates that
     -- the nonrecurring cost of adding a new item to the inven-
        tory is about $200 1/ per item and
     -- the annual costs of maintaining a part in the inventory
        is approximately $165 1/ annually.

1/1975 dollars.

 APPENDIX I                                                 APPENDIX I

     Thus, the selection of Martin-Baker will result in addi-
tional nonrecurring spare parts costs of between $40,000 and
$120,000 and annual recurring costs of between $33,000 and
$99,000 over the probable 20-year life of the F-18. These
costs exclude the actual cost of the inventory items.

Maintenance costs

     Martin-Baker's ejection seat as proposed would require
0.07 direct maintenance man-hours per flight hour (DMMH/FH)-
however, during negotiations with McDonnell, Martin-Baker
agreed to meet Navy specification of 0.05 DMMH/FH. In actual
fleet service, the Martin-Baker seat in the F-14 aircraft has
required 0.15 DMMH/FI.

     Stencel's proposal stated that its seat would require
0.004 DMMH/FH (12.5 times better than the requirement of 0.05
DMMH/FH).  In actual service, the Stencel seat in the Marine
Corps Harrier aircraft has required 0.05 DMMF/FH.

     Both the proposals submitted and actual in-service ex-
perience reflect significant differences in maintenance require-
ments and thus, maintenance costs. NAVAIR engineers consider
the Stencel proposal of 0.004 DMMH/FH unachieveable since it
represents essentially a maintenance-free seat. Consequently,
we did not compare the Stencel proposed DMMH/FH with that
proposed by Martin-Baker. Instead, we calculated the mainte-
nance differences over the system's life based on the actual
maintenance being experienced.

     Indications of possible maintenance cost differences are
presented below based on a 20-year service ''<e, an average
hourly labor cost of $16.08, and in-service seat maintenance
experienced in the F-14 and Harrier aircraft.

           Flight                       Average       F-18    Total
          hours per                      labor        seat   mainte-
          aircraft                       hour       require- nance
          (note a) X   DMMH/FH      X    cost   X    ments    costs

                                                              (mill ions)
  Baker       6,000     0.15            $16.08        871       $12.6
Stencel       6,000      .05            $16.08        871         4.2
    Potential saving with Stencel seat                          $ 8.4
a/Based on a 20-year service life.

APPENDIX I                                         APPENDIX I

     If the proposed ejection seats for the F-18 aircraft
require the same level of maintenance as their respective
inservice seats, then there is a significant cost advantage
with the Stnncel seat.

Management costs

      McDonnell engineers estimated during the proposal evalua-
 tion process that McDonnell would have to incur an additional
 $1.3 million in support costs to develop the Martin-Baker
 seat over what it would have to incur to develop the Stencel
,seat. These costs were estimated to cover McDonnell's need to
 provide (1) assistance in meeting integrated logistical sup-
 port and reliability and maintainability requirements, (2)
 assistance in recordkeeping, and (3) travel for McDonnell
 engineer s.

     McDonnell procurement officials disagreed with the esti-
mate, but would not offer an alternative figure. In contrast
NAVAIR engineers expressed the oAinion that the $1.3-million
estimate is not unrealistic. A an example, when NAVAIR engi-
neers questioned McDonnell representatives concerning how
Martin-Baker would meet certain requirements agreed to during
the negotiations, they responded that McDonnell would furnish
management support to Martin-Baker in these areas.

     This cost will be borne by the Government under the cost-
incentive fee contract with McDonnell and could substantially
reduce the potential savings discussed on page 9.

Rights in data

     Another factor which, in our opini,n, favors the selec-
tion of Stencel concerns the Navy's abi. ity to obtain rights
in technical data. Rights in data are cf two types--limited
and unlimited.

     Limited rights are defined in ASPR 9-201(b) as:
     'Rights to use, duplicate, or disclose technical
     data in whole or in part, by or for the Govern-
     ment, with the express limitation that such tech-
     nical data shall not, without the written permis-
     sion of the party furnishing such technical data
     be (1) released or disclosed * * * outside the
     Government, (2) used * * * by the Government for
     manufacture, or (3) used by a party other than
     the Government, except for: emergency repair * * *
     or * * * release to a foreign government."

 APPENDIX I                                         APPENDIX I

     Unlimited rights allow the obtainer the right
the data freely available for any purpose, includingto have
tive procurement. Whoever has paid the development
the dominant interest in the rights to the technical cost  has
pertaining to that product.
      If Stencel had been selected, the Navy would have had
essentially unlimited rights in the data concerning the
Stencel ejection seat because

     --the Navy paid for the development of the basic
       Stencel seat (approximately $11 million) and
     -- the Navy would be paying for the modifications
        to that seat under this contract and would also
        have rights to this data.
     With Martin-Baker, however, the Navy would not obtain
limited rights because                                     un-

     -- Martin-Baker, not the Navy, paid for the development
        of the basic ejection seat and

     -- Martin-Baker may be paying a portion of the costs
        the modifications to the basic seat.

      Consequently, the Navy, by accepting the lower
Martin-Baker proposal, has in all probability given price]
                                                     up un-
limited rights in the technical data for the F-18 ejection

APPENDIX II                                      APPENDIX II

                    QUESTIONS AND ANSWERS
Provide us with your comments on the attached narrative and
legal conclusions you- erive theFefrom.

     See appendix I and answers to the following questions.
Was the price bid y Martin-Baker a "DUMPING" as defined by

     Dumping, as defined by the Anti-Dumping Act (19 U.S.C.
160-171), refers to the sale of foreign-products in the United
States at less than their foreign market value. The law pro-
vides that when petitioned to do so, the Secretary o the
Treasury direct the Commissioner of Customs to conduct an
investigation. After receiving the Commissioner's recommenda-
tion, the Secretary rules on the merits of the petition.

     The contract between McDonnell and Martin-Baker is for
the development of an ejection seat not previously marketed.
As a result, there is no established foreign market value.
However, it appears that the price offered by Martin-Baker
will not allow recovery of all the costs they will incur in
performing under the contract.
     As of March ], 1977, the Secretary has not been requested
to rule on the Martin-Baker ejection seat.

Is McDonnell Douglas in an apparent corflict of interest
position so that thenteityo-te Fteral Procurement
System requires both the      and McDonnell Douglas to dis-
        McDonne   Dougl   as a source selector o ection

     The following factors could be perceived as giving the
appearance of a conflict of interest situation:

    -- Douglas Aircraft Company is a subsidiary of the
       McDonnell Douglas Corporation, and is a major com-
       petitor to Stencel in the domestic ejection seat
       market. The impact on Stencel from not receiving
       the F-18 ejection seat contract could indirectly
       benefit Douglas Aircraft.

    -- McDonnell Douglas Corporation through its subsidiary,
       McDonnell Douglas Astronautics East (MDAE), has con-
       tracts with the United Kingdom to design a British
       version of the Navy's Harpoon missile, both submarine
       and air launch versions. In addition, a speculative

 APPENDIX II                                       APPENDIX TI

        high-risk program is being negotiated between ME
        and the United Kingdom to develop a replacement for
        a missile used by the British Royal Air Force. A
        Navy official indicated that British acceptance of
        the program to replace the missile has been greatly
        dependent on McDonnell Douglas marketing efforts.
        The cost of these programs run into the hundreds of
        millions of dollars.
      -- McDonnell Douglas is also discussing with European
         countries, including the United Kingdom, development
         of medium and short range civil aircraft.
      We have not, however, found any evidence to indicate
 that any of these factors influenced McDonnell's selection
 of Martin-Baker.

What representation and inducements were made by the British
Government and Martin-Baker, or any of its affiliates, to
McDonnell Douglas and the Navy to induce the selectioiol
the Martin-Baker eection seat?

Were these inducements and representations material enough
to color the selection process' objectiivi ?

     We found no evidence that any inducements were made
to McDonnell Douglas or the Navy by either the British
Government or Martin-Baker or any of its affiliates con-
cerning the selection of the Martin-Baker ejection seat.

Does the Martin-Baker ejection seat pro $3edto McDonnell
Douglas fully meet the Navy's specifications for the -i
as awarded?
If not, in what areas is the Martin-Baker ejection seat
   deficient ascopared to those specifications ?
     The ejection seat proposed by Martin-Baker to McDonnell
did not meet the Navy's specifications. The details concern-
ing the deficiencies are discussed in appendix I, on page
Has the Martin-Baker ejection seat for the F-18 been
evaluated for conformance to the Navys specifications?

     The Martin-Baker ejection seat was evaluated by
McDonnell Douglas for conformance to the Navy's specifica-
tions.  (See app. I, pp. 3 through 5.)

 APPENDIX II                                        APPENDIX II

 Was the evaluation of the Martin-Baker eection seat, if
 performed, based on data from tests done under U.S. Navy
 auspices and superv    n ois the Navy acceptin uncor-
 roborate Martin-Baker data?

     The Martin-Baker proposal involves the development
new ejection seat which has never been tested by the U.S.of a
Government. This development entails a major redesign (ap-
proximately 40 percent) of an existing Martin-Baker seat
also has never been tested domestically. Once developed, which
the seat will undergo testing by the Navy, estimated to
about $.5 million, which Martin-Baker has agreed to pay. cost
Did the Navy,       in its_ resentation and testimony to the
      ssiconnectn conn   ion withusi       he    author zation and
aro    rlation   or te F-T   a rcra t,   rovlde informat
                                                      on or
reiL on ata showinq that the McDonnel Douglas    roposal for
the F-18             hcontainin
                      e Stencel ejection seat form the basli
of the authorization or appropriation request?
     We reviewed the Navy's congressional testimony regarding
authorizations and appropriations for the F-18 aircraft pro-
gram and did not find any testimony specifically stating
the Stencel ejection seat would be used in the F-18. The
Navy did testify that the F-18 aircraft would be developed
accordance with the McDonnell Douglas' technical proposal   in
specifying use of the Stencel eat.

Are there any legal or procurement uestions or irregulari-
ties which would require ordering McDonnell Douglas to cancel
its award or require your office to issue an oinion tiat
will not aPProve the accounts of the Navy for all or any Tt
of the F-18 aircraft funds expended for -a Martin-Baker ec-
tlon seat?

     Although we find no violation of procurement statutes
or regulations which would require ordering McDonnell Douglas
to cancel its award to Martin-Baker, the findings in appen-
dix I of this report warrant the Navy's reexamination of
award of the subcontract to Martin-Baker. However, in thethe
absence of a finding of a violation of statutes or regula-
tions, cur Office would have no basis for taking exception
to any funds expended for the Martin-Baker seat.

Considering the F-18 aircraft only, how manyjobs in the
U.S. over ow many yearsare encompassed         e ection
seat? Please replboth as to       s    the seat supper
and as to that Isupplers subcontractors and other vendors.

APPENDIX II                                      APPENDIX II

     In December 1977 Stencel will be producing ejection
seats for the Federal Republic of Germany's Alpha Jet at the
rate of 25 seats per month. The Alpha Jet contract will be
completed about March 1979. At this time Stencel has no firm
prospects for further ejection seat orders.
     A Stencel official advised us that as a result of its
losing the F-18 contract, 85 employees have been released
and 20 more will be released. Stencel informed us that, had
they been awarded the F-18 contract, it would have been neces-
sary to immediately hire an additional 20 employees, namely
engineers. This same official informed us that he believed
there would be an impact on employment at Stencel subcon-
tractors; however, specific information concerning this im-
pact was not available.
What is the net effect on the U.S. balance of payments and
tax revenue on an off-sore procurement of e      on seats
for the F-18 aircraft?

     The potential effect on the U.S. balance of payments
on an offshore procurement of 860 ejection seats for the
planned buy of 800 F-18 production aircraft would be approxi-
mately $37 million, computed as follows:
                                Price           Production
                              (note a)           guantity

Development                 $ 1,899,978               -
Production Options I            344,649               9
                   II         1,251,451              34
                   III        3,111,817              76
Remaining production
  (note b)                   30,340,245             741

    Total                   $36,948,140             860

a/1976 dollars.
b/Based on Martin-Baker quoted unit price for Option III.
  ($3,111,817-.76 = $40,945.)
     Any estimate of this procurement's effect on tax
revenues would be very speculative because of the many un-
known variables, such as the corporate profit level on the
specific procurement as well as the corporation's overall
profit/loss situation for those years the contract is i:i

APPENDIX II                                       APPENDIX II

Is the British Government providing any direct or indirect
subsidy to Martin-Ba ker in connection with performance of
an F-18 escape seat contract, including but not limited to,
   ey, tax preference, furnishing facilities. and furnishing
o. test and evaluation services and facilities?

     We found no indications that the British Government was
providing any direct or indirect subsidy to Martin-Baker
aside from the waiver of some indirect costs and overhead
charges related to the use of certain British Government
test and evaluation facilities being used by Martin-Baker.
Martin-Baker pays all direct costs associated with the use
of these facilities; however, certain indirect and overhead
costs are waived based on the tested products' export value.

Has the F-18 Martin-Baker seat been   reviously manufactured?

     Historically, Martin-Baker has been a major supplier of
ejection seats to the DOD. The seat proposed for the F-18
aircraft, however, has not been manufactured previously.
This seat will be based on a major redesign effort (about
40 percent) of its MK-10 ejection seat which is being manu-
factured for two British aircraft, the Hawk and the MRCA.
Has the F-18 Martin-Baker seat been tested and evaluated
 y any U.S. efense or technical authorities?
     Becaume it has not been manuafactured, the Martin-Baker
seat ha,        .n tested. Extensive testing will be required.
Martin-_ ...tt.   r'ver, will pay the Navy approximately
$500,000 for e~...ucting these tests.   (See app. I, p. 13.)

Has the British Government hindered U.S. companies' efforts
to sell ejection seats in the United Kingdom?
     The AV-8A/TAV-8A (Harrier) basic design incorporated
an off-the-shelf Martin-Baker ejection seat. The Navy's
Board of Inspection and Survey Reports on the Harrier AV-8A
cited 31 major deficiencies on the Martin-Baker seat. Sub-
sequently, the Navy contracted with Stencel to develop a
seat to replace the Martin-Baker seat. After extensive
testing, considered the most stringent in the history of
ejection seat test programs, the Stencel seat either met or
exceeded all performance requirements. The Stencel seat
was the only seat in Naval service that met all the per-
formance requirements of the Navy's ejection seat specifi-
cations. The Navy, therefore, decided to replace the
Martin-Baker seat with the Stencel seat.

APPENDIX II                                      APPENDIX II

     Tf  Navy encountered considerable difficulty in having
the St.,cel seat installed in the Harrier. The British
manufacturer of the Harrier originally would not accept
responsibility for Stencel seat failures and, therefore,
refused to install it. The Navy then directed the manu-
facturer to install the Stencel seat and assumed responsibil-
ity for failures. According to several Navy officials, the
British Government then intervened by refusing to allow
British test or ferry pilots to fly Harriers equipped with
the Stencel ejection seat. As a result of this interference
by the British Government, Harriers were built with Martin-
Baker ejection seats, transported to the United States, and
then retrofitted with the Stencel seat.

     Some Navy officials believe, and we agree, that this
action, at least theoretically, has hindered the efforts of
U.S. companies to sell ejection seats in the United Kingdom.

Has the British Government hindered U.S. companies' efforts
to sieT ejection seats in the eera Rep.c      of  Germany?
     We did not find any evidence that the British Government
has hindered U.S. companies' efforts to sell ejection seats
in the Federal Republic of Germany.

APPENDIX III                                                         APPENDIX III

                                    WPSHINGTON, D.C. 20513


         B-146905                                                JUN 1 2 1975

         The Honorable
         The Secretary of Defense

        Dear Mr. Secretary:

             We have completed our review of the reasonableness f prices
        paid for spare parts purchased from Martin-Baker Aircraft Co., Ltd.,
        Middlesex, England, under Basic Ordering Agreement N383-73A-1375,
        the Navy Aviation Supply Office awarded April 29, 1973, on
                                                                    a non-
        competitive basis. The ordering agreement was used to purchase
        spare parts and components for the maintenance and overhaul of
        Martin-Baker ejection seats used in various Army, Navy, and
        Force aircraft. Ecpenditures under the ordering agreement were
        about $8 million. In addition, during the 3 years preceding
        effective date of this agreement, the Department of Defense awarded
        prime contracts valued at about $11.6 million to Martin-Baker.

             Because of constraints the contractor placed on us, we could
        verify only a small part of the manufacturing cost. We were tus
        not able to evaluate the reasonableness of the negotiated prices
        included i the basic ordering agreement.


            Martin-Baker has consistently refused to submit certified cost
       or pricing data in support of its proposed prices for noncompetitive
       contracts or to accept the cost accounting standards clause in
       contracts. Because of the need for these ejection seat items,
       Secretary of the Navy and the Cost Accounting Standards Board
       waived these requirements.

             Martin-Baker's longstanding position is that neither the GAO
        nor any other U. S. Government agency will be permitted to
        its books and records. The primary reasons given for this position
       are: (1) costs are not accumulated in a manner to reveal the costs
       applicable to just one order or contract, (2) its prices are competi-
       tive with those of other manufacturers' ejection seats, (3) no
       has any right to the cost or pricing data since research and develop-
       ment costs were borne solely by Martin-Baker, and (4) it would
       an inordinate amount of time to arrive at costs of one contract
       without divulging information on ther customers' contracts. This


APPENDIX III                                                   APPENDIX II


  position, relative to GAO has been taken even when the contract
  included, as in this case, the Comptroller General's access-to-records

      In September 1974, however, Martin-Baker officials agreed to
 provide certain cost data to GAO for about 50 spare parts to be selected
 by GAO from the ordering agreement. The officials agreed to permit us
 to review the method Martin-Baker used to arrive at material costs and
 labor hours. Martin-Baker, however, would not allow us to audit labor
 and overhead rates negotiated and accepted by the United Kingdom Ministry
 of Defence. We selected 50 parts from the ordering agreement on a judg-
 mental basis for which we requested supporting data.

      In view of the contractor's request that our review at the plant be
 limited to approximately 2 to 3 days, we reduced our request to inorma-
 tion relating to 30 parts. We were given access to material invoices,
 invoice data cards, labor time estimate cards, and engineering blueprints.


      Martin-"aker representatives told us they developed manufacturing
 costs of all parts by adding estimated material costs which include
 allowances for scrap, finishing, and profit, to the estimated labor costs
 which include applications for overhead, finishing, and profit. We were
 given detailed costs breakdowns by individual part numbers. Martin-
 Baker also gave us the rates for labor, overhead, scrap, finishing, and
 profit but stated these rates were considered to be "company confidential."
 Company officials said, however, that they would also give these rates
 to the Navy Aviation Supply Office upon request.

      The following is a brief discussion of our review of the limited
 information provided by the contractor concerning material, labor,
 overhead, and profit.

 Material cost estimates

     Assisted by the company's design section, the contractor's
estimating section engineers estimate the material cost for each part.
Design section draftsmen prepare blueprints for all parts and list
materials required for manufacturing. The estimators review each
blueprint and ascertain current unit prices for material by (1) refer-
ring to file cards listing recent invoice prices or (2) telephone quotes
if the material has not been purchased before or if the prices on the
cards are too old. Finishing, scrap, and profit rates are applied to
compute the costs of materials used in manufacturing.

     For the selected parts we traced the more expensive material to
current suppliers' invoices and invoice data cards. Although we noted
several discrepancies between the cards and the invoices, the support

APPENDIX III                                                        APPENDIX III


   given us for our sample of material costs appeared, generally, to be
   adequate. Direct material costs, however, constituted less than 9
   per-ent of the total manufacturing costs for our selected parts.

        Martin-Baker did not give us support for the applied scrap and
   finishing rates. Although we obtained ltters from the United Kingdom
   Ministry of Defence stating that it agreed to the rates, we were unable
   to determine the Ministry's review procedures. The contractor had pre-
   viously told us that we would be expected to accept these rates and that
   no supporting ata would be provided.

   Labor cost estimates

        Martin-Baker estimated labor costs by applying an average rate of
   all shop employees engaged in equipment manufacturing to labor hours
   estimated by company engineers. The contractor .uld not give us data
   supporting the hourly labor rate, other than a copy of a letter from
   the Ministry of Defence which agreed with the contractor's rate used to
   estimate manufacturing costs.

        Labor-hour estimates are based on professional judgment and, after
   approval by the director of Martin-Baker, are entered on labor e.tirate
   cards used for reference purposes. We checked the estimated labor times
   given us against the labor estimate cards on file in the estimating
   section. Although 1 card could not be located, 29 supplied labor-time
   estimates were the same as those on the cards.

       The contractor's representatives would not allow us to analyze and
  verify actual labor hours. They told us that the employees were not on
  piecework i,d that their workers' union would never allow us to review
  records showing actual labor time for each manufacturing process on
  each part. Because of these restrictions e cannot attest to the reason-
  ableness of the labor costs.

   Overhead cost estimates

       The estimated overhead rate at Martin-Baker is applied to the
  estimated hourly labor rate to which a profit rate and a finishing rate
  are added to arrive at one combined hourly rate. This overall rate is
  then applied to the estimated labor hours to arrive at estimated manu-
  facturing costs related to the direct labor activity involved in any
  particular part.

         The Mis;,L    '   refenc,   as "provJsionally" agreed to the rates
  for calendar yesr      =4 rnd 975. M.r-v        i ker is using these rates,
  but tb- . , -.-          .... e -in Stry.           ertifiuction. The con-
   tra-t I I        ge           n         uu.pp
                                            -      x- the oerhead rates.

APPENDIX III                                                  APPENDIX III



       The proposed profit rate by the contractor was agreed to by the
  Ministry of Defence and added to all estimated costs.


       MA-tin-Baker representatives advised us that the prices negotiated
  for the ordering agreement represented about 63 percent of the total
  current manufacturing costs, which included the profit the Miistry
  agreed to. As a result, the officials told us they planned to nego-
  tiate prices about 50 percent higher in June 1975 for future contract
  agreements. Since we completed our fieldwork, we were told that the
  proposed price increases are greeter than 50 percent.


       Because of the lack of supporting cost data and because of the
  time constraint Martin-Baker placed on our audit, we were able to
  verify only a small part of the manufacturing cout for these parts.
  We were unable to determine the reasonableness of the prices negoti-
  ated for the items included on the basic ordering agreement.


       Because we were unable to insure the reasonableness of the prices
  Martin-Baker prc)osed through the review and evaluation of cost or
  pricing data, we recomnend that you consider other procurement strategies
  for future needs. For example, strong consideration should be given to
  developing arother source for the items being purchased.

       We are sending copies of this report to the Chairmen, House and
  Senate Coimmittees on Appropriations, Armed Services, and Government
  Operations and to the Chairman, Subcommittee on Priorities and Economy
  in Government, Joint Economic Comnttee. We are also sending copies to
  the Director, Office of Management and Budget; the Secretaries cf the
  Army, Navy, and Air Force; the Director, Defense Supply Agency; and he
  Executive Secretary, Cost Accounting Standards Board.

                                     Sincerely yours,

                                     R. W. Cutmann

APPENDIX IV                                                               APPENDIX IV

                        ASSISTANT SECRETARY OF DIWdSE
                             WASerSON, S.C. 165e1

                                                             1 AUG 1975

   Mr. R. W. Gutmann
   Procurement      d Systems
       Acquisition Division
   TI. S. General Accounting Office
    Washington, D. C.     20548

   Dear Mr. Gutmann:

   This is in reply to your letter report of June 12, 1975 concerning the
   reasonableness of prices paid for ejection seat spare parts purchased
   by the Navy from Martin-Baker Aircraft Co., Ltd., of England. Because
   of constraints placed by the contractor on the review, the General Ac-
   counting Office (GAO) was unable to evaluate the reasonableness of the
   negotiated prices. It was recommended that other procurement strategies
   be considered, including the development of another source. (08D Case 4103)

   Your report was referred to the Department of Navy for comment. At-
   tached is a copy of the Navy comments. In essence the Navy advises
   that it would be costly as well as time consuming to develop other supply
   sources for spare parts. However, the Navy points out that other manu-
   facturers of ejection seats are considered when new types of aircraft are
   introduced. We endorse the Navy comments.

   The GAO review of this matter is appreciated and should cost data be made
   available in the future by Martin-Baker, you will be advised.

                                           Since rely,

                                              -           J. ENETl
                                        .ant               Scr3tary of Defense
                                             (Inst!-,':icns and Lozi tics)


APPENDIX IV                                                      APPENDIX    IV

                         Department of the Navy Comments


                  GAO Letter    eport B-146905 of 12 June 1975


           Reasonableness of Prices Paid for Spare Parts Purchased

                    frem Martin-Baker Aircraft Co., Ltd.,

                               Middlesex, England

                                (OSD Case #4103)

   I.    GAO Findings and Recommendation

       GAO reviewed the reasonableness of prices paid for spare parts
   purchased from Martin-Baker Aircraft Co., Ltd., Middlesex, England,
   under the Navy Aviation Supply Office Basic Ordering Agreement
   N383-73A-1375, awarded April 29, 1973, on a noncompetitive basis. The
   ordering agreement was used to purchase spare parts and components for
   the maintenance and overhaul of Martin-Baker ejection seats used in
   various Army, Navy, and Air Force aircraft. GAO states that because of
   constraints the contractor placed on GAO, only a small part of the
   manufacturing cost could be verified; therefore, GAO was not able to
   evaluate the reasonableness of the negotiated prices included in the
   basic ordering agreement.

       The report notes that the United Kingdom Ministry of Defence has
   approved or provisionally approved Martin-Baker's labor, overhead and
   profit rates which Martin-Baker applies to its U. S. contracts, including
   the basic ordering agreement with the Aviation Supply Office. However,
   the report does not furnish any costing data for the parts procured under
   the basic ordering agreement, nor does it attempt to draw any cost
   comparisons between those parts and similar parts procured for competifive

       Since GAO was unable to insure the reasonableness of the prices
   Martin-Baker proposed through the review and evaluatic. of cost or
   pricing data, GAO recommends that SECDEF consider other procurement
   strategies for future needs. For example, strong consideration should
   be given to developing another source for the items being purchased.

   11.   Navy Comments

        In view of the lack of any firm evidence that Martin-Baker spare
   parts costs are unreasonable and in view of the anticipated lengthy and

                                                                   APPENDIX IV

  costly effort required to develop competitive suppliers, the
                                                                Navy does
  not concur that new procurement strategies are required for
  procurements of spare parts to support the Markin-Baker ejection
  in inventory. However, the Navy agrees that consideration
                                                              be given to
  developing other sources for ejection seats systems and supporting
  spare parts as is evidenced by the acceptance of Stence! Aero
  seats for the F-18, (See Table I).

  III.   Discussion

        Procuring spare parts for ejection seats largely is governed
  Navy strategy for procuring ejection seats and, once n ejection     by
                                                                    seat is
  procured, significant changes in its spare parts procurement
  extensive technical and production consideration, extensive
                                                               time, and
  prohibitive cost investment.

        In most instances the Navy procures ejection seats as contractor
 furnished equipment (CFE) within a specific aircraft weapons
 ensure that the ejection seat and the entire aircrew escape system. To
                                                               system, of
 which the seat is a part, satisfy the Navy's needs, the Naval
                                                                 Air Systems
 Command has developed and is upgrading continuously its ejection
 type aircrew automated escape system specifications. These
                                                               are imposed
 upon all new aircraft weapons systems procurements and all
 ejection seat escape system procurements.   The specifications stress
 escape capability, system safety, system reliability, system
 ability, utilization of existing components, and rigorous system
 ation in order to provide Navy pilots the best possible chance
 survival, reduce to a minimum system hazards to ground crew      for
                                                               and to
 reduce to inimum the man-power expended upon escape system
        As a consequence of decisions made in the late 1950s and mid
  as discussed under Background Information herein, almoat half
                                                                   of today's
  Navy inventory of ejection seats (Table I) consists of Martin-Baker
  ejection seats. As also shown in Table I, the percentage
  Baker ejection seats to be delivered under current aircraft Martin-
  systems contracts currently stands at just under forty percent.
  II delineates the specific types of ejection seats, Martin-Baker Table
 others, currently in inventory or under contract and lists
                                                              the aircraft
 in which the systems are installed, Currently there are 10
                                                                types of
 Martin-Baker ejection seats in use and no new varieties under
 Of the 10 types three (MK GRU5, MK GRUEA5 and MK H5) are being
 out by upgrading to M7 series with significantly improved
                                                              escape capa-
 bility, one (MK X5) is installed in only two aircraft, and
                                                              one (MK 1
 Type 9A) is being replaced by the SIIIS-3 recently developed
                                                                 by Stencel
 Aero Engineering Ccrporation, Asheville, N. C., under Navy
                                                              contracts. Thus
 there are 5 primary, long-term types of Martin-Baker ejection
 currently in Navy inventory and 5 short-term being phased
       Since the Martin akter ejection seats are proprietary developments,
 the Navy does not hold manufacturing drawings for the vast
                                                             majority of
 the parts. Procurement of the necessary drawings and the

                                                                       APPENDIX IV

   qualification of new suppliers would
   assuming that the drawings were         be costly and time consuming, even
                                    adequate for transfer. Reverse
   neering the parts also would be                                      engi..
                                    extremely costly and time consuming
   inherently would result in untested
                                          uncertainties as to the true inter-and
   changeability of parts. In addition,
                                            the latter effort undoubtedly
  would result in legal action and,
  eries of ejection seats for production likely, interruption of deliv-
                                             aircraft schedules. In either
  case, the new suppliers' parts
                                  would require thorough inspection,
  testing at ubassembly level and
                                     at assembly level. Based upon typical
  costs for recent ejection seat
                                  programs, it is anticipated that
  minimum nonrecurring cost to effect                                  the
                                         a significant change in spare parts
  suppliers for only one Martin-Baker
  $7 million and would require at        ejection seat would be in excess
                                   least                                     of
 The development of a new ejection         two to three years to complete.
                                      seat system to replace only   one of
 the Martin-Baker ejection seats
                                   would require at least $14 million
 possible as much as $18 million                                           and
                                   in nonrecurring costs and at least
 co two and a half years to complete
                                         service release.                  two
 completion of such a program, very                         Pending the
                                       few systems could be
                                    production aircraft and installed
 currently scheduled or projected                                        in
 necessary to undertake a major retrofit                       it would be
 be at least a minimum of $40,000            program. Recurring costs would
                                    per ejection seat (kit cost, aircraft
 modification cost, publications,
       At present, in addition to their
 saving equipment, Martin-Baker ejection highly successful role as life
 native for Navy procurements and         seats represent a viable alter-
 of domestic ejection seat suppliers such  serve to enhance the efforts
                                     to be competitive in cost, weight,
 escape capability, safety, reliability,
                                          and maintainabi:ity.
 IV.   Background Information

      Martin-Baker ejection seats originally
Navy aircraft because heir escape            were incorporated in U.S.
                                    capability had been demonstrated
be markedly superior to that of                                        to
                                 then (late 1950's) existing domestic
manufactured ejection seats. At
                                  that time the best domestic ejection
seats were capable of providing
200 feet terrain clearance and   safe escape at altitudes no lower
                                then only if the aircraft was wings than
flying straignt and level with no                                    level
ejection seats basically were modifications The Martin-Baker HM5 series
ejection seats having a proven groundlevel of existing Martin-Baker
      As a direct consequence of the initial
 Martin-Baker ejection seats, the               decision to incorporate
                                   economies realizable by modifying
 installed seats as opposed to developing                               existing
 lower risk to the flow of production        new replacement seats, and the
seats rather than developing new        aircraft through modifying
                                   replacement seats; to obtain a existing
escape i'apability for front line                                   zero-zero
                                   Navy aircraft equipped with Martin-Baker
MK 5 series ejection seats, the
programs in the mid 1960s to upgrade Air Systems Command undertook
rations. As a result, aircraft          these systems to MK 7 series configu-
                                 currently being produced and currently
constituting ajor segments of the
                                     Navy combat aircraft inventory
equipped with these seats.                                            are

APPENDIX IV                                              APPENDIX IV

         S                  A

                    co':0       c                c

                                 J   5   3   u       i

APPENDIX IV                                                      APPENDIX IV

                                     TABLE II
                                                                 30 June 1975
                          U.S. NAVY EJECTION SEATS

Manufacturer                  1
                         Tye Eje tion Seat      Aircraft           Remarks

Martin-Baker Aircraft
                         MK GRU5                 A-6               Prior to
                                                                     AFC 119

                         MK GRUEA5               EA-6B

                         MK H5                   1-4               Prior to
                                                                     AFC 307

                         MK X5                   F-11A

                         MK F7                   F-8

                         MKUGRU7                 A-6

                         MK GRUEA7               EA-6B

                         MK GRU7A                F-14

                         MK H7                   F-4

                         MK1 Type 9A             AV-8A/TAV-8A

Douglas Aircraft Co.,
McDonnell Douglas
                         ESCAPAC lAl             A-4, C, E, L
                         ESCAPAC 1-C2            A-7

                         ESCAPAC 1-C3            TA-4, A-4F, M

                         ESCAFAC 1-El            S-3

                         ESCAPAC 1-G2            A-7, TA-7          After ACC-23

                         ESCAPAC 1-F3            A-4M/F, TA-4J/F    After AFC

                         ESCAPAC 1-G3            A-4M/F, TA-4J/F    After ACC

Rockwell International
                         LW-3B                   OV-10
                         LS-1                    T-2
                         HS-1A                   RA-5C
                         F-5                     T-38

Stencel Aero Engineering Corp.
                         SIIIS-3                 AV-8A/TAV-8A       After Mod 613

NOTE: *F-18 will be equipped with an SIIIS ejection seat.