Mr. VINSON. That is right. I do think that, growing out of this committee, if we reach a decision Mr. BATES. Mr. Chairman, that is a good analysis. Mr. VINSON. We ought to try to reenact something like we passed before, in reference to the proclamations. Mr. KILDAY. National emergency. Mr. VINSON. National emergency. Mr. COURTNEY. Then, we will meet Wednesday morning, Mr. Chairman? Mr. VINSON. Yes. Mr. COURTNEY. Would you mind meeting through Friday, Mr. Chairman? Mr. VINSON. Yes. Get them in here and then we will go through it. (Whereupon, at 11:58 a.m., the subcommittee adjourned, to reconvene at 10 a.m., Wednesday, April 27, 1960.) PROCUREMENT PRACTICES IN THE DEPARTMENT OF DEFENSE WEDNESDAY, APRIL 27, 1960 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON PROCUREMENT PRACTICES IN THE DEPARTMENT OF DEFENSE, Washington, D.C. The subcommittee met at 10:10 a.m., Hon. Carl Vinson (chairman) presiding. Mr. VINSON. Let the committee come to order. Members of the committee, this is a continuation of our hearing that we commenced on Monday. The first witness this morning is the Deputy Assistant Secretary of Defense, Supplies and Logistics, Mr. Philip LeBoutillier. Mr. Secretary, we welcome you here this morning. And you have permission to make any statement you desire that will be of aid and assistance to the committee in formulating an opinion with reference to the responsibility placed upon us by an act of the Congress, with which you are quite familiar. Secretary LEBOUTILLIER. Yes, sir. Mr. VINSON. You may proceed. Secretary LEBOUTILLIER. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before this committee in response to vour invitation to discuss the procurement policies and practices of Department of Defense. We noted, Mr. Chairman, that your letter of January 20, 1960, to the Secretary of Defense states that the study, which the committee has undertaken pursuant to the provisions of Public Law 86-89, will be an examination of the experience of the Department— in the use of various methods of procurement and types of contractual instruments, with particular regard to the effectiveness thereof in achieving reasonable costs, prices, and profits. During the past 3 years, we have made numerous refinements and improvements in our procurement policies and practices, such as simplifying and speeding up our termination procedures; providing for single property administration of all DOD contracts performed within the plant of a contractor; developing, together with other Government agencies, cost principles for cost-reimbursement-type contracts with educational and other nonprofit institutions; and publishing on February 1, 1957, a new part 8 of section III of Armed Services Procurement Regulations, which prescribed price negotiation policies and techniques. However, what I wish particularly to discuss here are the actions which we have taken to revise, expand and strengthen the Armed Services Procurement Regulations (ASPR) in regard to the pricing of defense contracts, including the results of a complete reevaluation that was made last year of the negotiated pricing policies and practices we issued in 1957. Specifically, there are three major areas in this category— 1. Cost principles; 2. Price negotiation policies and techniques; and 3. Subcontracting policies and procedures. 1. COST PRINCIPLES Our policy is to use cost-reimbursement-type contracts only when the nature and complexity of the procurement are such that performance costs cannot be predicted with reasonable accuracy-as in contracts having a high content of research, experimentation or development. In recent years, the percentage of our dollars going into straight production contracts has been decreasing and the percentage going into contracts involving research, experimentation, or development has been increasing. Accordingly, the use of cost-reimbursement-type contracts has continued to increase. In the last fiscal year, 40.9 percent of our procurement dollars were obligated by this type of contract. During these same years, this committee has recognized the necessity for a uniform comprehensive set of cost principles for use in the determination and consideration of costs throughout the procurement process and has urged their promulgation. From time to time we have advised of our intensive efforts to provide them. I am pleased to report that the task has been completed. On November 2, 1959, we issued revision 50 to ASPR which contained the first major revision of our cost principles since their original issue in 1948. These new principles are now in use on a permissive basis and, after July 1, 1960, will be incorporated by reference in all cost-reimbursement-type contracts as the contractual basis for cost allowance and payment. Additionally, in all other contracting and contract settlement situations, our new cost principles will serve as a guide in the negotiation of prices or settlements, to the extent that evaluation of costs is necessary for the setting of fair and reasonable prices. A new feature of the revised principles is their use in connection with negotiated fixed-price-type contracts. While cost information has always been. considered when appropriate in the pricing of such contracts, no uniform ground rules have been in use throughout the Department of Defense. All cost-type contracts are subjected, of course, to audit by our auditors and final payments are made only on the basis of such audits. In accordance with the negotiated pricing direction contained in ASPR part 8, section III, audits are especially useful under fixedprice-redeterminable and incentive contracts and, where competition is insufficient to establish reasonableness of price, under firm fixed-price contracts. Our cost principles form the background for these audits and provide guidance for the determination of questions concerning the allowability and reasonableness of costs. The subject of the reasonableness of costs is most important. Generally, our cost principles provide that a cost is unreasonable, and hence, unallowable, if it exceeds that which would be incurred by an ordinarily prudent firm in the conduct of a competitive business. Moreover, we take particular care in scrutinizing the reasonableness of specific costs of contractors in industries, or who are performing contracts in areas, where effective competitive restraints are lacking. One of our tests here is what a prudent businessman would do in the circumstances, considering his responsibilities to the owners of the business, his customers, the Government, and the public at large. Numerous individual elements of cost have traditionally not been allowed in prior cost principles. Examples are advertising costs, bad debts, entertainment, contributions and donations, interest on borrowings, certain selling costs, and so forth. Under the new principles, these costs are still unallowable. Other individual costs, such as material costs, salaries and wages, depreciation, insurance, maintenance, production engineering, training and educational costs, and research and development, while allowable, are subject to certain administrative controls and limitations to insure that costs charged to the Government are reasonable in amount. We have also made provision for reaching agreement with a contractor on the handling of specific costs-such as precontract, unusual travel or research and development costs-in advance of the signing of the contract, whether of the fixed-price or cost-reimbursement types, whenever the reasonableness and allocability of such costs may be difficult to determine, particularly in connection with firms which may not be subject to competitive restraints. The new principles will provide uniform guidelines for both Government and industry and, since costs will receive similar treatment under all types of contracts, will facilitate selection of the proper contract type for the specific procurement at hand. Further, the new principles will assist our auditors in preparing advisory audit reports. We believe that our comprehensive set of cost principles is a major step forward and will materially assist in achieving reasonable costs and prices. These new cost principles will be watched closely in actual operation and we will be ready to make any changes or revisions which are appropriate as we gain experience under them. 2. PRICE NEGOTIATION POLICIES AND TECHNIQUES On February 1, 1957, we published, in ASPR, a new part 8 of section III setting forth policies and techniques for attaining our goal of procuring what we need from responsible sources at reasonable prices calculated to result in the lowest ultimate overall cost to the Government. During the past year, a complete reevaluation was undertaken of this part 8 in order to improve the pricing of prime and subcontracts. The results of this reevaluation were published as a revised part 8 on October 1, 1959. With the committee's permission, I wish to introduce, for the record, this latest revision of our pricing policies and techniques. Mr. VINSON. Put that in, right there, please. |