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II. THE MAGNITUDE OF DEFENSE OIL PURCHASES

The Defense Fuel Supply Center (DFSC) of the Defense Supply Agency (DS.I) of the Department of Defense is the worldwide, integrated materiel manager of bulk petroleum products for the Department of Defense. DFSC has the responsibility to buy, store and transport petroleum products for the many agencies of the Defense establishment. The Center is located at Cameron Station, Virginia.

The number of awards and their dollar value for the Center for the period 1965 through 1975 are listed below. The awards include the purchase of petroleum products and service contracts for the storage and transportation of the products.

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The table demonstrates the increasing cost of petroleum products. For example, the dollar value of petroleum products to be purchased in 1975 is more than twice as much as the fuel purchased by the Defense Department at the height of the Vietnam War.

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50-191-75-2

III. A SHIFT FROM COMPETITIVE BID TO NEGOTIATED CONTRACTS NECESSITATES DATA SUPPORTING PRICE REASONABLENESS

THE GOVERNING STANDARDS

The Armed Services Procurement Regulations (ASPR) provide that when contracts are awarded on the basis of advertised competitive bids or when there is adequate competition, little is required to justify the reasonableness of the price. However, when competition is limited or is absent--as in the case of negotiated contracts--it is necessary that the reasonableness of the price be supported. The most satisfactory method of determining whether the price is fair and reasonable is to have the contractor submit detailed information as to what his inhouse costs are going to be and what prices he will have to pay for purchased material and services. With this data in hand, Government officials can negotiate with the contractor on an equal footing. This is the preferred method but, as seen below, the Government sometimes accepts less detailed information and in other situations will waive such requirements entirely.

The requirements for providing such data supporting prices charged the government in negotiated contracts stem from the Truth in Negotiations Act. The Truth in Negotiations Act (10 U.S.C. 2306) requires that a contractor submit in writing, prior to the award of any negotiated contract of $100,000 or more, cost or pricing data and to certify that the cost or pricing data submitted is accurate, complete and current. ASPR 3-807 reiterates this requirement and form DD-663 "Contract Pricing Proposal” is designed for the submission of such cost or pricing data. Since contracts are negotiated on the basis of the data submitted, all contracts (except those exempted or subject to waivers) contain a clause that if the data submitted is inaccurate, incomplete or noncurrent, the price shall be appropriately adjusted. (10 U.S.C. 2306(f)(4).)

However, a potential contractor may be exempt from the Truth in Negotiations Act if there are:

(1) Established catalog prices of commercial items sold in substantial quantities to the general public;

(2) Established market prices of commercial items sold in substantial quantities to the general public; and

(3) Prices set by law or regulation.”

For further disclosure and uniformity in procurement Congress, in 1970. created a Cost Accounting Standards Board to promulgate uniform Cost Accounting Standards for those contracting with the government for its defense needs. The Standards had to be followed in negotiated contracts, with exemptions paralleling those in the Truth in Negos tlations Act. Contractors were also required to disclose their cost accounting methods as & condition for contracting and had to agree to price adjustments for failure to comply with cost standards. (See 50 App. U.S.C. 2168). * The same exemptions are provided for the Cost Accounting Standards. (See footnote ?).

Any potential contractor who claims an exemption from the cost or pricing requirements must sign and submit DD Form 633–7, "Claim for Exemption from Submission of Certified Cost or Pricing Data.” If an analysis of the data submitted by the contractor indicates the claim for exemption is not substantiated, then the contractor shall be required to submit cost or pricing data.

However, even if a contractor fails to meet qualifications for exemptions it might still be relieved from such requirements through a waiver of the prescribed requirements. By statute, such a waiver is to be granted "in exceptional cases where the head of the agency determines that the requirements *** may be waived and states in writing his reasons for such determination.” (10 U.S.C. 2306 (f)(4)).3

THE SHIFT TO A NEGOTIATED Basis IX 1973

As of January 1, 1973, all bulk purchases of petroleum products by DESC were made by advertised invitations for bid and by public awards.

Most bulk petroleum requirements are contracted for on a yearly or half-yearly basis. DFSC buys jet aircraft fuel in six-month increments while other bulk petroleum products are bought for one year's requirements at a time.

Aircraft jet fuel (JP-4 and JP-5) makes up about 60 percent of the dollar volume of petroleum products bought by the Fuel Supply Center. Jet fuel was bought in November for January through June requirements and in May for July through December. Other petroleum products were bought in February for the twelve-month period from April through March.

The public awards for general petroleum products for the year April 1973 through March 1974 were made routinely. However, when the invitations for jet fuel for July through December 1973 were sent out in May 1973, replies were received to cover only about 60 percent of the requirements for that six months period. Contracts were awarded which covered about 60 percent of the jet fuel requirements. The negotiated contracts to cover the remaining 40 percent of the jet fuel requirements were not actually executed until November or December 1973. The Department of Defense was, therefore, unprotected contractually for 40 percent of its jet fuel when the October 1973 Mideast War broke out and when the oil embargo occurred.

A decision was made in May of 1973 that in the future all procurement of petroleum products, not only jet fuel, would be made through negotiated contracts with individual suppliers. Subcommittee staff requested documentation as to this decision. But DFSC advised that there was no documentation in its files as to who made this decision, when it was made or whether there were any guidelines under which these negotiated contracts were to be placed. The decision would prove to have an important bearing on subsequent negotiations with the oil companies.

: The Cost Accounting Standards Board may similarly walve its requirements of disdisclosure and conformity with cost accounting principles.

IT. NEGOTIATIONS OR GIVEAWAYS: GOVERNMENT

PERSONNEL AND TECHNIQUES QUESTIONED

GOVERNMENT BUYERS LACKED EXPERIENCE

The change in 1973 to procuring petroleum products on a negotiated basis caused DFSC contracting officers severe problems. Their previous experience had been limited to writing contracts after the award had been made. The actual awards were made by a computer which was programmed to process the bids submitted in response to the public invitation, and select the appropriate companies and quantities. The contracting officers were therefore unprepared to actually negotiate with oil companies for the most favorable prices for the government's huge petroleum purchases.

A September 1974 DSA report said "a contributing factor to shortconings in negotiation techniques and price analysis was the deficiency in required training in these areas." Data available on 52 of 82 personnel, Grade 9 and above, pertaining to career training in these techniques, revealed that less than one half (25 of 52) had completed the

required training. Twenty of the 52 had no training in either area; the * remaining seven had completed some training in these professional

areas. (P. 37 DSA report, September 1974.)

There is some evidence that this inexperience and lack of expertise cost DOD dearly. For example, a study by the General Accounting Office was made on a sample of the contracts negotiated by the Center in November and December 1973. This study showed that on all of the contracts reviewed, the contracting officer had accepted the first price offered by the petroleum supplier with no apparent evidence of any real negotiation. This, in turn, raised the serious question of whether the government was paying a reasonable price for its petroleum products.

FAILURE TO OBTAIN COST AND Pricing Data The most important tool in ascertaining whether prices charged the government were reasonable-having the potential contractor supply cost and pricing data-was constantly waived by contracting officers.*

In 1970 and again in 1974 DSA criticized DFSC for its use of waiters and its failure to require potential contractors to file DD Form 633-7.

A 1970 DSA report said: “This waiver provision has been so extensively employed by DFSC contracting officers as to virtually nullify the sound control contemplated by the regulation” (p. 37).

See DSA Report Sept. 1974 (n. 40) But as early as 1967, a DSA surver team report said: "Review of contract files for pricing and negotiation documentation indicate that definite improvement is needed in regard to the following: single bid situations, details ne opgotiations, rationale for price decisions and reasonableness of price. *** Documentation was particularly lacking in substance when pricing decisions were made based on Dersonal judgment or feel of the market and the forces acting thereon. * *. It is recommended that DFSC should improve the quality of documentation of pricing and negotiatogefiorts and decisions" (p. 58).

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