B-146767, DEC. 18, 1962

B-146767, DEC. 18, 1962

TO MR. DAVID PACKARD, PRESIDENT:

THE GENERAL ACCOUNTING OFFICE IS MAKING AN EXAMINATION OF THE PRICING OF ELECTRONIC EQUIPMENT PROCURED BY THE GOVERNMENT FROM THE HEWLETT-PACKARD COMPANY UNDER NEGOTIATED CONTRACTS. OUR EXAMINATION IS BEING MADE PURSUANT TO THE BUDGET AND ACCOUNTING ACT, 1921 (31 U.S.C. 53), THE ACCOUNTING AND AUDITING ACT OF 1950 (31 U.S.C. 67), AND THE AUTHORITY OF THE COMPTROLLER GENERAL TO EXAMINE CONTRACTORS' RECORDS, AS SET FORTH IN 10 U.S.C. 2313 (B).

THE DEPARTMENT OF THE AIR FORCE AWARDED NEGOTIATED CONTRACTS TO THE HEWLETT-PACKARD COMPANY FOR ELECTRONIC EQUIPMENT, INCLUDING FIXED-PRICE CONTRACTS AF 33/604/-22221, AF 33/604/-22362, AF 33/604/-28645, AND AF 33/604/-31884. DURING OUR EXAMINATION OF NEGOTIATED CONTRACTS AWARDED TO YOUR COMPANY, REPRESENTATIVES OF THIS OFFICE HAVE BEEN DENIED ACCESS TO COST DATA RELATING TO THESE CONTRACTS. AS INDICATED BY THE ENCLOSED COPY OF A LETTER DATED NOVEMBER 21, 1962, FROM THE VICE PRESIDENT-FINANCE OF YOUR COMPANY TO THE MANAGER OF OUR REGIONAL OFFICE IN SAN FRANCISCO, CALIFORNIA, OUR RIGHT OF ACCESS TO COST RECORDS IS QUESTIONED ON THE FOLLOWING GROUNDS:

YOU STATED THAT IT WAS YOUR BELIEF THAT COST INFORMATION WAS NOT "DIRECTLY PERTINENT" BECAUSE COSTS WERE NEVER A FACTOR IN THE NEGOTIATION OF THE CONTRACTS INVOLVED, AND THAT YOU ARE THEREFORE JUSTIFIED IN KEEPING THIS INFORMATION COMPANY CONFIDENTIAL. YOU STATED ALSO THAT IN YOUR OPINION THE INTENT OF CONGRESS AND THE GOVERNMENT AS EXPRESSED IN CLAUSE 10, STANDARD FORM 32, IS THAT COST ANALYSIS IS NOT NECESSARY OR DESIRABLE IN THIS TYPE OF CASE; THAT THE USE OF THE WORDS ,DIRECTLY PERTINENT" IN CLAUSE 10, IN YOUR JUDGMENT, WERE CLEARLY MEANT TO LIMIT THE APPLICATION OF THIS CLAUSE TO CONTRACTS WHEREIN COSTS WERE A FACTOR, OR EFFECTIVE COMPETITION WAS NOT PRESENT, OR WHERE STANDARD CATALOG PRICES WERE NOT USED AS A BASIS FOR PRICING, OR WHERE SUBSTANTIAL QUANTITIES OF THE PRODUCTS INVOLVED WERE NOT SOLD TO THE GENERAL PUBLIC; AND THAT CLAUSE 10 SHOULD APPLY ONLY TO THE TYPE OF RECORDS AND INFORMATION UPON WHICH THE PRICE NEGOTIATIONS WERE CONDUCTED.

WE DO NOT AGREE WITH YOUR CONCLUSIONS. RECORDS WHICH PERTAIN TO THE COSTS AND PRICES OF ELECTRONIC EQUIPMENT FURNISHED BY YOUR COMPANY TO THE GOVERNMENT ARE CONSIDERED BY THIS OFFICE TO BE DIRECTLY PERTINENT TO THE CONTRACTS. THE PURPOSE OF THIS LETTER IS TO REQUEST THAT SUCH RECORDS BE MADE AVAILABLE FOR OUR EXAMINATION, AS PROVIDED BY THE TERMS OF THE NEGOTIATED CONTRACTS AWARDED TO YOUR COMPANY BY THE DEPARTMENT OF THE AIR FORCE.

THE NEGOTIATED CONTRACTS BETWEEN HEWLETT-PACKARD AND THE DEPARTMENT OF THE AIR FORCE CONTAINS IDENTICAL PARAGRAPHS AT CLAUSE 10 OF STANDARD FORM 32, TO BE APPLICABLE IF THE CONTRACT AMOUNT EXCEEDS $1,000 AND IF THE CONTRACT IS ENTERED INTO PURSUANT TO NEGOTIATION RATHER THAN BY FORMAL ADVERTISING.

THE CITED CLAUSES WERE INCLUDED IN THE CONTRACTS PURSUANT TO PUBLIC LAW 245, EIGHTY-SECOND CONGRESS, 65 STAT. 700, WHICH AMENDED SECTION 4 OF THE ARMED SERVICES PROCUREMENT ACT OF 1947 (CODIFIED AS 10 U.S.C. 2313) BY ADDING THE FOLLOWING SUBSECTION:

"/C) ALL CONTRACTS NEGOTIATED WITHOUT ADVERTISING PURSUANT TO AUTHORITY CONTAINED IN THIS ACT SHALL INCLUDE A CLAUSE TO THE EFFECT THAT THE COMPTROLLER GENERAL OF THE UNITED STATES OR ANY OF HIS DULY AUTHORIZED REPRESENTATIVES SHALL UNTIL THE EXPIRATION OF THREE YEARS AFTER FINAL PAYMENT HAVE ACCESS TO AND THE RIGHT TO EXAMINE ANY DIRECTLY PERTINENT BOOKS, DOCUMENTS, PAPERS, AND RECORDS OF THE CONTRACTOR OR ANY OF HIS SUBCONTRACTORS ENGAGED IN THE PERFORMANCE OF AND INVOLVING TRANSACTIONS RELATED TO SUCH CONTRACTS OR SUBCONTRACTS.'

SENATE REPORT 603, EIGHT-SECOND CONGRESS, TO ACCOMPANY SENATE BILL 921, WHICH WAS LATER ENACTED AS PUBLIC LAW 245, EXPLAINED THE PURPOSE OF THE LEGISLATION AS FOLLOWS:

"THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949 AND THE ARMED SERVICES PROCUREMENT ACT OF 1947 ARE GENERAL LEGISLATION OF PERMANENT APPLICATION TO A VERY LARGE PERCENTAGE OF GOVERNMENT PROCUREMENT. THEY AUTHORIZE NEGOTIATION OF CONTRACTS WITHOUT ADVERTISING UNDER CERTAIN SPECIFIED CIRCUMSTANCES IN THE DISCRETION OF THE AGENCY HEAD. SINCE IT IS WELL RECOGNIZED THAT NEGOTIATED CONTRACTS ARE AT THE SAME TIME EFFECTIVE PROCUREMENT INSTRUMENTALITIES UNDER SPECIAL CIRCUMSTANCES, AND REQUIRE CLOSE SUPERVISION AND CONTROL, THIS LEGISLATION WOULD MAKE EXAMINATION BY THE COMPTROLLER GENERAL A PERMANENT PART OF PROCUREMENT PROCEDURE ON A BASIS OF BROAD APPLICATION. THIS BILL WOULD HAVE THE EFFECT OF EXTENDING THE EXAMINATION PROVISIONS ADDED TO THE FIRST WAR POWERS ACT BY PUBLIC LAW 921 OF THE EIGHTY-FIRST CONGRESS.'

IN CONSIDERING THE LEGISLATION, THE FOLLOWING STATEMENT WAS MADE ON THE FLOOR OF THE HOUSE OF REPRESENTATIVES BY CONGRESSMAN HARDY ON OCTOBER 15, 1951 (97 CONG.REC. 13197):

"THIS BRINGS UP ANOTHER POINT. AS I HAVE INDICATED, THE AUTHORITY CONTAINED IN THIS BILL IS REALLY ONLY NECESSARY TO COVER THOSE CASES WHERE THE CONTRACTORS REFUSE TO PERMIT THE GENERAL ACCOUNTING OFFICE TO INSPECT THEIR BOOKS AND RECORDS. AS I HAVE ALREADY POINTED OUT, THE VAST MAJORITY OF CONTRACTORS DO MAKE THEIR BOOKS AVAILABLE ON A VOLUNTARY BASIS WHEN REQUESTED. THUS, THIS BILL WOULD AFFECT THAT COMPARATIVE FEW CONTRACTORS WHO NOW REFUSE THE AGENT OF THE CONGRESS PERMISSION TO SEE THEIR RECORDS. IT WOULD BE COMPULSORY UPON THEM. IT SEEMS LOGICAL TO ME TO SUPPOSE THAT THERE IS GREATER NEED FOR THE GAO TO SEE THE RECORDS OF THOSE FEW WHO DO NOT WISH TO MAKE THEM AVAILABLE ON A VOLUNTARY BASIS THAN IT IS TO SEE THE RECORDS OF THOSE WHO READILY COMPLY. TO PUT IT BLUNTLY, THOSE WITH NOTHING TO HIDE HAVE NOTHING TO FEAR BY OPENING THEIR BOOKS TO THE GENERAL ACCOUNTING OFFICE.'

THE LANGUAGE OF THE ACT AND OF THE LEGISLATIVE HISTORY CLEARLY ESTABLISHES THAT THE STATUTORY PROVISION WAS ENACTED TO MAKE POSSIBLE THE CLOSE SUPERVISION AND CONTROL OVER NEGOTIATED PROCUREMENTS WHICH THE CONGRESS REGARDED AS NECESSARY IN THE INTEREST OF THE GOVERNMENT. THIS PURPOSE REQUIRES THAT THE ACT, AND THE CONTRACT PROVISION WHICH IS ALMOST IDENTICAL IN LANGUAGE, BE INTERPRETED TO PERMIT SUCH DETAILED EXAMINATION OF THE CONTRACTOR'S RECORDS TO ASSURE THE NECESSARY DEGREE OF SUPERVISION AND CONTROL. IN OTHER WORDS, THE CLEAR INTENT OF THE STATUTE WAS TO PROVIDE FOR THE EXAMINATION BY OUR OFFICE OF SUCH OF THE CONTRACTOR'S RECORDS AS WOULD PERMIT A VALID EVALUATION OF THE REASONABLENESS OF THE PRICES CHARGED. THIS IS CLEARLY ESTABLISHED BY FURTHER REMARKS MADE BY CONGRESSMAN HARDY ON THE FLOOR OF THE HOUSE OF REPRESENTATIVES IMMEDIATELY AFTER THOSE QUOTED ABOVE (97 CONG.REC. 13198) AS FOLLOWS:

"IN NORMAL TIMES, COMPETITIVE BIDDING GENERALLY OPERATES AS A BRAKE ON THE PRICE WHICH A CONTRACTOR CAN DEMAND FROM THE GOVERNMENT FOR HIS GOODS AND SERVICES. HOWEVER, THESE ARE NOT NORMAL TIMES, AND IT SHOULD BE OBVIOUS TO ALL OF US CONCERNED WITH THE EXPENDITURE OF BILLIONS OF DOLLARS FOR NATIONAL DEFENSE THAT WE MUST ESTABLISH EVERY REASONABLE SAFEGUARD AGAINST WASTE AND EXTRAVAGANCE IN THE SPENDING OF THESE VAST SUMS. UNDER CONDITIONS AS THEY NOW EXIST, COMPETITIVE BIDDING HAS LITTLE OR NO EFFECT UPON CONTRACTS WHICH ARE NEGOTIATED WITHOUT ADVERTISING. AS A RESULT, WHEN A CONTRACT IS BEING NEGOTIATED, HERE IS A TYPICAL ILLUSTRATION OF WHAT USUALLY HAPPENS: A CONTRACTOR WITH YEARS OF EXPERIENCE COMES TO THE CONFERENCE TABLE ACCOMPANIED BY A HIGHLY COMPETENT ACCOUNTANT AND EQUALLY COMPETENT LAWYER. THE GOVERNMENT REPRESENTATIVE ON THE OTHER SIDE OF THE TABLE WILL, IN A GREAT MAJORITY OF CASES, BE AT A TREMENDOUS DISADVANTAGE, FROM THE STANDPOINT OF BOTH TRAINING AND EXPERIENCE, NO MATTER HOW CONSCIENTIOUS AND HONEST HE MAY BE. SO, ASIDE FROM ANY INTENTIONAL LIBERALITY ON THE PART OF THE GOVERNMENT CONTRACTING OFFICER, THERE IS EVERY CHANCE IN THE WORLD THAT THE GOVERNMENT WILL COME OUT ON THE SHORT END OF THE DEAL. THIS BILL WOULD AT LEAST ENABLE THE AGENT OF THE CONGRESS TO CHECK THE TRANSACTIONS, BOTH FROM THE GOVERNMENT RECORDS AND THE CONTRACTOR'S BOOKS.'

THE LANGUAGE OF THE ACCESS TO RECORDS CLAUSES INCLUDED IN THE PERTINENT AGREEMENTS IS MODELED CLOSELY AFTER THE STATUTORY LANGUAGE AND WAS UNDOUBTEDLY INTENDED TO BE COEXTENSIVE IN SCOPE. THEREFORE, WE MUST ADHERE TO THE POSITION STATED EARLIER THAT UNDER THE CONTRACTS WE ARE AUTHORIZED TO EXAMINE SUCH OF THE CONTRACTOR'S RECORDS AS WOULD PERMIT A VALID EVALUATION OF THE REASONABLENESS OF THE PRICES CHARGED WITHOUT REGARD TO THE FACTORS CONSIDERED OR IGNORED BY THE CONTRACTOR ESTABLISHING THOSE PRICES.

EVEN THOUGH OTHER FACTORS ARE CONSIDERED BY HEWLETT-PACKARD IN ESTABLISHING THE PRICES FOR THE ELECTRONIC EQUIPMENT FURNISHED TO THE GOVERNMENT AND THE PRICES ESTABLISHED FOR MAY NOT BE DIRECTLY PROPORTIONATE TO COSTS, COSTS OF PRODUCTION NEVERTHELESS DIRECTLY PERTAIN TO, AND INVOLVE TRANSACTIONS RELATED TO, THE CONTRACT. ALTHOUGH IT IS NOT A CONDITION TO THE LEGAL AUTHORITY OF THE GENERAL ACCOUNTING OFFICE TO HAVE ACCESS TO SUCH RECORDS, WE BELIEVE THAT COST RECORDS ARE DIRECTLY PERTINENT TO THE PRICES ESTABLISHED. WE BELIEVE ALSO THAT AN EXAMINATION OF THE RELATIONSHIP OF EXPERIENCED AND ESTIMATED COSTS TO THE PRICES PAID BY THE GOVERNMENT, AND OF THE PRICING METHODS USED IN ESTABLISHING THE PRICES, IS CLEARLY WITHIN THE SCOPE OF THE TYPE OF EXAMINATION CONTEMPLATED AND REQUIRED BY THE TERMS OF THE CONTRACT.

IT IS OUR POSITION, CONSISTENT WITH OUR INTERPRETATION OF THE ACT AND THE CONTRACT PROVISION, (1) THAT ALL BOOKS, DOCUMENTS, PAPERS, AND OTHER RECORDS RELATING TO THE PRICING AND COST OF PERFORMANCE OF NEGOTIATED CONTRACTS ARE RECORDS RELATING DIRECTLY TO THE CONTRACTS AND TO THE GOVERNMENT'S FINANCIAL INTEREST, (2) THAT SUCH BOOKS, DOCUMENTS, PAPERS, AND OTHER RECORDS ARE NOT LIMITED TO THE FORMAL COST ACCOUNTING RECORDS AND THEIR SUPPORTING DATA, BUT INCLUDE ALL UNDERLYING DATA CONCERNING CONTRACT ACTIVITIES AND OPERATIONS WHICH AFFORD THE BASIS FOR, OR ARE INVOLVED IN ANY WAY WITH, THE INCURRENCE OF COSTS BY THE CONTRACTOR, (3) THAT THE COST RECORDS WHICH WE REQUESTED AND OTHER DATA SUPPORTING THE PRICES CHARGED TO THE GOVERNMENT BY THE CONTRACTOR ARE DIRECTLY PERTINENT TO THE CONTRACTS, AND (4) THAT THEREFORE ALL SUCH BOOKS, DOCUMENTS, PAPERS, AND OTHER RECORDS AND UNDERLYING DATA ARE SUBJECT TO EXAMINATION BY THE GENERAL ACCOUNTING OFFICE UNDER ITS STATUTORY RESPONSIBILITY AND AUTHORITY TO EXAMINE ACTIVITIES AND RELATED COSTS UNDER NEGOTIATED CONTRACTS.

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

WE REQUEST ALSO THAT YOU ADVISE US WITHIN 15 DAYS WITH RESPECT TO YOUR DECISION TO MAKE THESE RECORDS AVAILABLE FOR OUR EXAMINATION.