in the testing of aircraft and aircraft engines instead of permitting the contractors to supply these products as a part of their contracts.

Our review was made at three plants where estimated requirements represented about 86 percent of the total petroleum needs of Navy aircraft and aircraft engine contractors. We estimated that during 1964 the Navy paid two of the contractors about $229,000 more than it would have paid if the products had been furnished to the contractors. We estimated that about $250,000 and about $400,000 could have been saved in 1965 and 1966.

With regard to the third contractor, our review showed that the contractual arrangements in effect were different and that the resulting profit rate was considerably less.

The Navy advised us that, in the case of one of the contractors, substantial savings might be realized if the Government were to furnish the petroleum products or, alternately, if a change in the contractual treatment of these products were negotiated and stated that negotiations were taking place.

With regard to the second contractor, the Navy stated that the savings would be small and that it was to be the overall advantage of the Government for the contractor to continue to furnish the petroleum products. Although the potential savings are not substantial, the Navy should consider negotiating new arrangements with the contractor.

Therefore, in the case of this contractor and other contractors under similar conditions, we recommended that the Navy consider negotiating new contractual arrangements.

Index No. 26, B-159868, June 4, 1968

NEED TO INCREASE COMPETITION IN PROCUREMENTS OF ANTHRACITE COAL BY THE U.S. ARMY FOR USE IN EUROPE

We reviewed the procurement of anthracite coal by the Army in fiscal years 1962 through 1967. The coal involved was mined in the United States and was procured by the Army from European importers under negotiated fixed-price contracts awarded on a competitive basis.

On the basis of our findings, we concluded that the competition was not sufficiently effective to ensure the lowest price to the Army. The contractual practices followed by the Army permitted the sources of supply to be limited almost entirely to one American exporter. The exporter, in turn, procured the coal from only a limited number of producers. The use by the Army of unduly restrictive specifications also limited competition.

The major anthracite suppliers have, under the provisions of the Webb-Pomerene Act, entered into agreements among themselves to set prices and allocate quantities of coal for export and ultimate sale to the Army. The general policy of most of the larger American anthracite suppliers is to offer their coal only to a certain coal export company. This company advised us that it purchased coal for the Army procurements only from members of the Anthracite Export Association-an association representing the larger anthracite producersalthough there are other producers, not members of the association, that are qualified to meet specifications of the Army.

Because of these arrangements, the company was the only exporter in position to furnish enough coal to meet total needs of the Army. Furthermore, the exporter's quotations to European importers were conditioned on their purchasing from the exporter all of their requirements for the Army procurements. Members of the Anthacite Export Association, when participating in these procurements, furnished statements that, under the provisions of the Webb-Pomerene Act, they were not required to submit unqualified certifications of independent price determination. Therefore what little competition existed was limited to the importer functions where the costs generated-principally transportation costs-represented only a small fraction of the total cost of the coal to the Army.

Also, we found considerable evidence that the Army's specifications for ash content and ash-softening temperature may be more restricted than necessary and may have limited competition.

In response to our findings, the Army stated that, for the fiscal year 1969 procurement, offerors would not be permitted to claim exemption under the WebbPomerene Act from certifying that prices proposed were arrived at independently. The Army stated also that tests were being conducted by the Bureau of Mines to determine the minimum quality of coal which can be used economically

in Europe, that the tests would be completed in August 1968, and that the results of the tests would be considered in the specifications for the fiscal year 1970 procurement.

Index No. 27, B-133396, June 25, 1968

NEED FOR MORE COMPETITION IN PROCUREMENT OF AERONAUTICAL SPARE

PARTS-DEPARTMENT OF DEFENSE

In response to the expressed interest of the Subcommittee on Economy in Government of the Joint Economic Committee, Congress of the United States, we made a Defense-wide survey of the procurement of aeronautical spare parts. We found that problems we had previously identified as restricting competition in procurement continued to require management attention and correction. In addition, many of the procurements reported by procuring activities as having been made competitively had not, in our opinion, been made under competitive conditions.

The Department of Defense advised us of the following corrective measures: -Procedures were being revised to provide for earlier reviews of items to determine whether they could be procured competitively.

-A management reporting system would be established to document reasons for procurement without competition.

—A means for coordinating interservice spare-parts procurement was under study.

-Rules for reporting procurement actions had been revised.

-Aggressive action would be taken to correct the technical data deficiencies revealed by our survey.

Index No. 28, B-163379, January 10, 1969

USE OF THE SECOND-PHASE METHOD OF CONTRACTING A METHOD THAT DOES NOT ENCOURAGE MAXIMUM PRICE COMPETITION-GENERAL SERVICES ADMINISTRA

TION

Under the General Services Administration's (GSA) second-phase method of negotiating Federal Supply Schedule (Schedule) contracts, GSA requests suppliers of similar items to submit prices at which they are willing to sell their products to the Government. GSA then affords those suppliers which had submitted higher priced offers an opportunity to meet the lowest price offered to GSA. Those suppliers which agree to meet the lowest price are awarded a contract and included on the Schedule for the item. Federal agencies then may procure their requirements for the item at the same cost from any supplier of that item listed in the Schedule.

In addition to the commodities previously reported on, we found that GSA was using the second-phase method in establishing contracts for three additional commodity groups-sound-recording and instrumentation tapes, heavy duty electrical batteries, and lithographing plates. We believe that :

1. The use of formal advertising was practical for many of these items because Federal specifications had been established and there was a sufficient number of suppliers to permit effective competition for the Government's requirements. 2. For the remaining items, the opportunity for GSA to obtain fair and reasonable prices would be enhanced if independent negotiations were conducted with each potential supplier.

We recommended to the Administrator of General Services that GSA: 1. Discontinue the use of the second-phase method of contracting.

2. Take the necessary steps to use formal advertising in establishing Schedule contracts where practical.

3. Use independent negotiations in establishing Schedule contracts for items that are not susceptible to formal advertising.

The Administrator of General Services advised us in August 1968 that GSA agreed that formal advertising should be used in establishing Schedule contracts whenever practical and feasible. The Administrator advised us further that existing Federal specifications for the above-mentioned three commodity groups were not adequate for competitive procurement and that until such time as specifications could be appropriately revised, GSA planned to award future Schedule contracts for these commodities through independent negotiations. In October 1968, GSA advised us that progress had been made in the development of specifications adequate for formal advertising.

Index No. 29, B-162394, February 5, 1969

REQUIREMENTS CONTRACTING AND OTHER ASPECTS OF SMALL PURCHASES IN THE DEPARTMENT OF DEFENSE

About 70 percent of the Department of Defense (DOD) procurement efforts are spent on a large number of transactions for small purchases-supplies and related needs in amounts which do not exceed $2,500. Although small purchases accounted for more than two-thirds of all DOD procurement transactions in fiscal years 1966 and 1967, they amounted to only 4 percent of the total DOD procurement dollars. Procurement regulations provide various methods for making small purchases. We undertook a review to consider whether one such methodrequirements contracting-would be more economical than frequent small purchase transactions, and to evaluate the performance of certain other small purchase operations.

A requirements contract provides for filling all purchase requirements for specific supplies during a specified contract period, with deliveries to be scheduled by timely placement of orders upon the contractor. The advantages of requirements contracting are twofold. It permits supplies in storage depots to be maintained at lower stock levels, and provides a means of obtaining lower unit prices through purchases in larger quantities.

The military departments generally were not accumulating sufficient information concerning small purchases (volume of purchases by Federal Stock Class and by vendors) to serve as a basis for determining the most economical and appropriate procurement methods. We found that at those purchasing activities where such information was being accumulated, and was being used to contract for estimated annual requirements, favorable prices were being obtained and administrative costs were reduced. We expressed the opinion that substantial savings could be realized if this practice were more commonly used. We recommended that the Department of Defense:

-Accumulate information on the volume of purchases at selected installations for selected commodities as a basis for ascertaining the most beneficial procurement method.

-Provide further guidelines to installations for determining when a requirements contract or some other method would be appropriate for procurement of a particular commodity or class of items.

In response, the Department stated that a test was being conducted which might provide a basis for anticipating the needs for requirements-type contracts and that our recommendations would be considered further at the conclusion of the test.

Index No. 30, B-156556, March 11, 1969

REVIEW OF CERTAIN MANAGEMENT CONTROLS OF THE QUALITY ASSURANCE SYSTEM FOR THE APOLLO PROGRAM-NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

Quality assurance is a planned and systematic pattern of all actions necessary to provide adequate confidence that the end items will perform satisfactorily in actual operations.

Our review showed that:

1. The Headquarters Apollo Reliability and Quality Assurance Office of the National Aeronautics and Space Administration (NASA) had not fully carried out its responsibilities for seeing that adequate manned space flight center plans were prepared. reviewed, and issued.

2. One of the three manned space flight centers which should have issued three quality assurance plans had not issued any. The two other centers had issued plans which did not contain all the established requirements.

3. Some prime contractor quality assurance plans either had not been approved on a timely basis or had not been approved at the time that our fieldwork had been completed.

4. NASA Headquarters had not made any audits of the quality assurance activities at the three manned space flight centers until May 1967-almost two years after the requirement for audits had been established.

5. Although audits of contractors quality assurance activities had been made by all three manned space flight centers, only one center was continuing to make periodic audits.

In our opinion, the objectives and benefits that were expected by NASA management with the issuance of the Apollo Reliability and Quality Assurance

Plan were not being fully realized because many of the requirements applicable to the two areas of the Plan were not being implemented or were not being implemented in the manner called for by the Plan.

We proposed to the NASA Administrator that a special study be made of the Apollo Quality Assurance Program with particular emphasis on :

1. Assessing the adequacy of recent actions by Apollo Program management to obtain more complete implementation of the program requirements for plans and audits and, where necessary, recommending any further actions required to ensure the necessary compliance.

2. Reviewing and evaluating the extent of compliance with other important requirements of the Apollo Reliability and Quality Assurance Plan.

We were advised by NASA that it had established a special study team to review the Apollo Reliability and Quality Assurance Plan.

Index No. 31, B-159463, April 17, 1969

NEED FOR IMPROVEMENT IN PROCURING AND STOCKPILING JEWEL BEARINGSDEPARTMENT OF DEFENSE, DEPARTMENT OF COMMERCE, GENERAL SERVICES ADMINISTRATION, AND OFFICE OF EMERGENCY PREPAREDNESS

The William Langer Jewel Bearing Plant, Rolla, North Dakota, was established by the Government in 1952 as a Government-owned, contractor-operated domestic source of jewel bearings used in defense items to eliminate dependency upon foreign sources of supply which could be cut off in the event of war. The Langer plant is a mandatory source for jewel bearings contained in items purchased by the Government and for jewel bearings purchased for the national stockpile. Because available information indicated that the plant was not being fully used, we made a survey of the purchasing and stockpiling of jewel bearings with the objective of examining into compliance with the mandatory-source requirements and the adequacy of the existing stockpile to meet its objectives. We found that there was a need for:

-Better enforcement of the mandatory requirement for the purchase and use of the bearings produced in the plant.

-Greater compliance with the requirement for the use of military-standardsize bearings.

-Review of the adequacy of the jewel bearing stockpile.

We proposed that:

-The mandatory-source requirement included in contracts for purchases over $2,500 be extended to purchases under $2,500 when the item being purchased is a jewel bearing or a mounted jewel bearing.

-Instructions be issued explaining the bases for granting waivers of the mandatory-source requirement.

-Current military standards for jewel bearings be studied and updated where appropriate and the Armed Services Procurement Regulation (ASPR) be revised to point out the need to use military-standard bearings.

-The jewel bearings in the stockpile be analyzed to determine whether they are applicable to military end items currently in use and can be used in the event of mobilization.

The agencies involved expressed agreement with certain of our proposals. The Department of Defense, however, did not agree with our proposal that the ASPR be revised to point out the need to use military-standard bearings. We recommended that the Department reconsider its position on this matter.

In June 1969, the Assistant Secretary of Defense (Installations and Logistics) advised us that the Department of Defense, after reconsidering its former position against including a statement in ASPR 1-315 on the policy with respect to the adoption of military standard bearings in military products, has decided that such inclusion may indeed be helpful in bringing to the attention of contractors and subcontractors the conditions under which adoption of the standard bearings is required as well as the benefits to industry, government, and the taxpayer if standard bearings are adopted voluntarily before the conditions for mandatory adoption occur. The Assistant Secretary indicated this will be a part of the revised ASPR 1-315.

Index No. 32, B-162839, April 25, 1969

POTENTIAL SAVINGS BY IMPROVING EVALUATION OF COMPETITIVE PROPOSALS FOR OPERATION AND MAINTENANCE CONTRACTS-DEPARTMENT OF THE AIR FORCE

We reviewed the procedures of the Air Force for evaluating competitive proposals in the award of negotiated contracts for the operation and maintenance of the Ballistic Missile Early Warning System (BMEWS), the Distant Early Warning Line (DEW Line), and the White Alice Communication System.

At the time of award of contracts for the operation and maintenance of the three systems, the Department of Defense (DOD) was prohibited by law from awarding such contracts for more than a 1-year period. A yearly award to a different contractor, selected through competitive negotiation, involves changeover costs (hiring and training of new personnel and obtaining required security clearances) each year. To reduce such costs, the Air Force was retaining competitively selected contractors for a 3-year period. The competitive selection of contractors was based on the price proposals for only the first year of the 3-year period-in line with DOD policy that contractors' proposals for subsequent years not be considered in awarding contracts for the first year.

This method gave the incumbent contractors a significant advantage over competitors. For example, had the Air Force been permitted to consider each offeror's first-year proposal combined with option prices proposed for the second and third years, it would have been found that the proposal of a competitor for the BMEWS contract, rather than that of the incumbent contractor, was the more favorable. About $8.8 million might have been saved by award of the contract to the competitor.

We suggested that, where there is reasonable certainty that (1) the options for the second and third years will be exercised and (2) failure to consider the option prices for the second and third years would result in substantially increased costs. DOD should explore the means to amend, or deviate from, its policy. DOD advised us that revisions to its policy were being considered.

On July 5, 1968, the President signed legislation (Public Law 90-378) that authorized certain contracts for services and incidental supplies to extend beyond 1 year (multiyear contracts).

The legislation is applicable to contracts awarded for services or incidental supplies outside the United States that are funded by 1-year appropriations and therefore is applicable to the operation and maintenance contracts of the type discussed in our report. This legislation should help alleviate some of the prob lems in the negotiation and award of such contracts.

In June 1969, the Assistant Secretary of Defense (Installations and Logistics) advised us that the Department's option policy was considered by the Armed Services Procurement Regulation Committee and that a revised policy providing for the evaluation of options under certain conditions was issued and published in Defense Procurement Circular No. 68.

The Assistant Secretary stated that the enactment of Public Law 90-378 authorizing multi-year procurements of services outside the United States has been implemented in ASPR 1-322 and published in Defense Procurement Circular No. 64. The Assistant Secretary indicated this method of procurement for services to be preferable to single-year contracts with options for the following years.

With regard to our suggestion that standard procedures for estimating phaseout cost be developed, the Assistant Secretary stated that this matter was considered by the Armed Services Procurement Regulation Committee. He indicated the Committee initially concluded that the computation of phaseout costs would vary significantly in each case and that estimating such costs was a matter of judgment. Therefore, it did not appear feasible to describe detailed procedures for use in this area. The Assistant Secretary stated that a reconsideration of this matter is being undertaken by the Committee, based on a recent LMI study of service contract methodology. He indicated the primary purpose of this effort will be to develop additional guidance for service contracting. Index No. 33, B-39995, July 14, 1969

EVALUATION OF TWO PROPOSED METHODS FOR ENHANCING COMPETITION IN WEAPONS SYSTEMS PROCUREMENT-DEPARTMENT OF DEFENSE

The Chairman, Subcommittee on Antitrust and Monopoly, Senate Committee on the Judiciary, asked that we evaluate two methods, proposed by individuals