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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 IN 1973

As of January 1, 1973, all bulk purchases of petroleum products by DFSC 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 waive its requirements of disdisclosure and conformity with cost accounting principles.

IV. 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 shortcomings 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 waivers 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 (p. 40) But as early as 1967, a DSA survey 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 of negotiations, rationale for price decisions and reasonableness of price.***Documentation was particularly lacking in substance when pricing decisions were made based on personal 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 negotiation efforts and decisions" (p. 58).

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 the 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 DFSC for its failure to properly utilize a cost/price analyst to assure price reasonableness in non-competitive procure

ment 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).

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