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A 1974 review of certain contracts by DSA for the period JanuaryMarch 1974, found that cost or pricing data was “never required” from the contractors. The review also revealed that the requirement for contractor submission of a Claim for Exemption from Submission of Certified Cost or Pricing Data, DD Form 633-7, "was always waived" (p. 40). According to the review, this was done because the contracting officer had certified the contractor's price was reasonable based on his own knowledge of prices published in industry publications and common market trends (p. 40).
The report also concluded that because of the limited experience of the Government buyers, they failed to establish negotiation objectives in their direct dealings with suppliers. The files they prepared were documented with incomplete or inadequate price negotiation memoranda. The report said "there was a need for more emphasis on ithe determination and documentation of a fair and reasonable price (p. 37 DSA Report, September 1974).
In summary, potential contractors were not required to supply cost or pricing data. More importantly, they were not even required to justify such a waiver through the submission of other data such as catalog or market price to assist the contracting officer to assure price reasonableness.
The oil companies had grown accustomed to easy dealings with DFSC. They apparently had little problem obtaining their price. They had DFSC continually obtaining waivers on their behalf to eliminate the necessity of their supplying data to support their prices. As the upcoming events would show, they would not easily give up these advantages, even going to the extent of implicitly threatening to cut off supplies to the military if they were forced to comply.
TRADE PUBLICATIONS DICTATE PRICES PAID BY GOVERNMENT
How did government contracting officers determine fair and reasonable prices in the absence of obtaining backup data from the contractors?
They simply referred to trade publications and apparently abandoned their own independent analysis.
Despite constant criticism of this practice, it continued.
Undue reliance on independent sources by the DFSC such as data appearing in trade publications, came under criticism during the review of the purchases of petroleum products by the DFSC for the period January-March 1974. The 1974 DSA report said "fair and reasonable prices were predominately determined from market prices in trade publications” such as Platt's Oilgram and the Oil Buyers' Guide (p. 40);
In its criticism of using trade publications as the sole basis for supporting an exemption from the requirement to obtain certified cost or pricing data, the report said that published prices in both Platt's Oilgram and the Oil Buyers' Guide “may reflect both actual sales or offers to sell." The report went on to say, "When a price range was shown, it represented a high-low spread of sales and/or offers” (p. 40).
The report also pointed out that "sales were known to take place both above and below the published price." The 1974 report added :
Platt's has been used by DFSC for many years as a reliable market indicator. However, indications are that it does not meet the criteria contained in ASPR to be used as the basis for an exemption from the need to obtain cost or pricing data or to adequately support price reasonableness determination
(p. 41). The DFSC failed to heed an earlier criticism in this same point that was made in 1970 by another survey team from the DSA. With respect to the undue reliance placed by DFSC on contractor's posted prices published in Platt's Oilgram and used as the basis for the determination of a reasonable price, the 1970 report said:
The acceptance of a contractor's price for jet fuel was heavily influenced by a price analysis based on posted prices for jet grade kerosene from Platt's Oilgram. Neither the file documentation on price reasonableness nor on-site discussions indicated actual knowledge as to whether Platt's Oilgram postings reflected actual prices paid for jet fuel. Lack of such information considerably weakens the determination of price reasonableness (p. 38).
FAILURE TO USE A Cost/PRICE ANALYST First, in 1967, again in 1970, and finally in 1974, the DSA was critical of the DFŠC for its failure to properly utilize a cost/price analyst to assure price reasonableness in non-competitive procurement contracts.
But undue reliance on trade publication data rather than data from the oil companies had been the underlying reason DFSC has ignored the continued recommendation of DSA to properly utilize a cost/price analyst.
With the oil companies not supplying any data to be reviewed, the cost/price analyst was not needed. The 1970 DSA survey report said:
During the ten months period ending January 1970, the services of the price analyst had been requested by procurement personnel external to DFSC in only four instances. *** The prior management review report DFSC (August 1967), after noting a reluctance to use the services of the price analyst, concluded that the quality of DFSC's implementation of PL-87-653 [Truth in Negotiation Statute) and of price reasonableness documentation would be enhanced by clarification of the price analyst's role not only as an advisor to contracting officers but as a monitor of pricing and related documentation actions. The current situation is essentially the same as found in the prior reviews (p. 37).
In 1974 the DSA report again recommended the need for complete center-wide utilization of a professional price analyst. The report said the need for his use was even greater in 1974 because of the shortages which resulted in an increasing number of non-competitive procurements (p. 36).
The report said: "Without adequate competition, determination of price reasonableness is much more difficult and requires greater research and expertise” (p. 36).
Despite this fact, a price analyst was only used in 11 of 3.390 cases from July 1, 1973 through June 30, 1974 (p. 36).
T. NEW COMPLICATIONS: THE MANDATORY ALLOCATION PROGRAM AND THE FEDERAL ENERGY ADMINISTRATION REGULATIONS
MANDATORY ALLOCATION PROGRAM
In January 1974, the situation for the DFSC contracting officer was further complicated when the Emergency Petroleum Allocation Act (EPAA) became effective. The EPAA required the DOD to obtain its domestic petroleum needs by allocations placed on refiners by the Federal Energy Administration (FEA) (originally the Federal Energy Office) which administers the Act. Under the allocation system, competitive procurement was also eliminated, and the normal schedule for competitive bid solicitation, evaluation and contract a ward was not employed. But competitive bidding for oil products procured by DFSC had been eliminated since May of 1973.
BUYERS LACKED KNOWLEDGE OF FEA REGULATIONS
Approximately 70 percent of DFSC's procurements were awarded under FEA Petroleum Allocation and Price Regulations. Yet a DSA report in 1974 said "none of the buying personnel indicated a thorough working knowledge of the Regulations” (p. 38 DSA September 1974
Lt. Gen. Wallace H. Robinson, Jr., Director, Defense Supply Agency, in a memorandum dated April 24, 1974, to Arthur I. Mendolia, the Assistant Secretary of Defense (Installations and Logistics), said that the contracting personnel at DFSC were no longer able to determine that the prices established by the suppliers in sales to the Government were fair and reasonable. General Robinson explained:
In general, the prices being paid for petroleum products reflect DFSC's historical position as a spot buyer in the petroleum market. For many years the availability of surplus product enabled DFSC to make purchases at very favorable prices. Now the shortages of product have placed the DFSC at a disadvantage in the marketplace.
Of even greater concern to us is the fact that we must rely upon contractor certification as to the correctness of prices under the Mandatory Allocation Program. General Robinson recommended that the Federal Energy Administration conduct audits “on our more significant contracts particularly those where the price deviates substantially from the average price paid on other contracts for the same product. But DFSC was still not using its primary tool to determine price reasonableness: requesting the oil companies to supply cost or pricing data. Again no immediate action was taken to protect the government's
interest in time for the July 1974 purchases that were made to meet the DOD requirements for the last six months of the year. No attempt was made to obtain cost or pricing data, or in the alternative, to require the potential supplier to file DD Form 633–7, a Claim for Èxemption from Submission of Certified Cost or Pricing Data.
In the talking paper attached to General Robinson's memorandum, he stated that the “Validity of prices established by the sellers and need for review of Federal Policy relating to current pricing structure are beyond the purview of DSA."
But in this same communication it was pointed out that a wide range of prices was available to the oil companies in responding to the Federal Energy Office levy. As an example, JP-4 fuel prices ranged from a low of 17.7 cents to a high of 47 cents a gallon. The wide range of prices reflected the different positions of each company as to its crude source and its approach to pricing under the pricing guidelines.
FEA AUDIT REQUESTED
Following the audit recommendation of General Robinson, on May 25, 1974, Arthur I. Mendolia, Assistant Secretary of Defense, wrote a letter to John Sawhill, Administrator of the Federal Energy Administration, and requested an FEA audit of DFSC contracts to determine whether the prices for military fuels are in compliance with FEA regulations."
Mr. Mendolia also voiced concern that extra costs were being passed on to the Government because of the FEA regulations. He said:
I would also appreciate your views on what might be done to moderate the apparent tendency on the part of some oil companies to treat military allocations as an add on increment to regular business, and thus subject to full passthroughs of highest cost incremental crude and feed stock supply. If this practice continues, there will be a continued heavy impact on Defense operating costs. DISPROPORTIONATE ALLOCATION OF INCREASED COST TO DOD Col. R. K. Estes, Acting Commander of DFSC in a June 14, 1974, memorandum to DSA, also discussed, in some detail, this problem of FEA regulations which permitted a disproportionate allocation of increased costs to DOD. He recommended that action be taken to remedy the situation. Col. Estes explained:
These [FEA] regulations do not permit pass through of the total cost increases for special products" (.e., gasoline, No. 2 heating oil and No. 2 diesel fuel). FEA regulations, however, permit a pass through of such costs in the legal prices for unprotected products (i.e., turbine fuels, petro chemicals, etc.). According to FEA sources, this loading of the prices of unprotected products is limited only in that the prices charged for unprotected products must be applied equally to all purchasers of each sich product witli reference to the "class of customer" to which each purchaser belongs. A supplier may, under the FEA regulations, consider DOD