ticular case is, of course, a matter of sound business judgment, experience, and training. The contracting officer and his team of specialists play big roles in this phase of the procurement.

The contracting officer, together with his price analysts, engineers, and technical and other specialists, carefully analyzes the proposals and cost estimates submitted by contractors to determine whether proposed prices are reasonable. Additionally, the contracting officer is required to obtain an audit of the contractor's books and make a preaward survey of the contractor's facilities, whenever these are necessary.

Rules and formulas are, at best, guides which cannot be applied conclusively in every situation. The following factors are among those considered in arriving at fair and reasonable prices, profits, and fees. 1. Type of contract used, that is, whether a fixed-price-type or a cost-reimbursement-type contract.

2. Performance and financial risks taken by the contractor.

3. The character and extent of the contractor's make-or-buy program and proposed subcontracting.

4. The reliability of the contractor's cost estimates based upon prior experience with him.

5. The extent of Government assistance to be furnished to the contractor in the form of financial assistance or facilities.

6. The amount of the contractor's investment in the performance of the contract.

7. The possible benefits to the contractor resulting from the work to be performed.

We recently made a survey of the profits and fees allowed by the Army in situations in which profits and fees can be negotiated. We found that profits negotiated on fixed-price supply contracts ranged from 7 to 10 percent. Fixed fees on cost-plus-fixed-fee contracts vary, but on the average were about 7 percent, well under the statutory limits of 15 percent for research and development contracts and 10 percent for other contracts.

The procurement statistics which have been published by the Department of Defense show that 56.3 percent of our procurement dollars were placed in fiscal year 1959 by firm fixed-price contracts; 6.5 percent were placed under price-redeterminable contracts. About 36 percent of our funds were obligated under cost-reimbursement-type contracts, 32 percent with fixed fees and 4 percent without fee. Price redeterminable contracts are most often used where firm prices cannot. be computed until production experience is obtained, and therefore final prices are established during performance of the contracts. Or, I might add, there is one form of redeterminable that can be determined at the end of the contract. It isn't used very much.

Costs are allowable under cost-reimbursement-type contracts only to the extent that upon audit they are found to be reasonable and allocable to the work performed.

AUDITING

The necessity for increased use of cost-reimbursement-type contracts has required a more extensive use of the facilities of the Army Audit Agency, as well as the auditing organizations of the other military departments. The need for obtaining complete, accurate, and timely

information has long been recognized and recently has been emphasized even more. Auditing as an aid to accurate pricing has also been stressed.

To insure that contracting officers are fully aware of the services that are available to them through the military auditing agencies, a comprehensive pamphlet was prepared to describe these facilities and has been furnished to each contracting officer in the Department of the Army. As a result of this action, Army contracting officers have acquired a good understanding of the need for and the usefulness of the auditing services. This is another of our continuing efforts to assure efficient pricing practices in Army contracts.

USE OF PRICE REDETERMINABLE CONTRACTS

As I have mentioned, an appropriate price redetermination clause is used in fixed-price contracts in certain instances, such as when (i) there is insufficient production experience to definitely establish a firm, reasonable price at the outset; or (ii) the estimate of the low offeror, or the only offeror, exceeds the independent Government estimate; or (iii) it is desirable to eliminate contingency charges; or (iv) other circumstances require protection of the interests of the Government. Depending on the type of redetermination clause, its use must be approved at a level higher than the contracting officer.

In the negotiation of fair and reasonable prices under a price redetermination contract, the contracting officer may take into account, among other things, the efficiency, economy, and ingenuity with which the contractor has performed the contract to the redetermination point. The contractor's skill and economy of performance is accorded full consideration in determining the ultimate allowance for profit in order thereby to provide an incentive to him to reduce cost of performance.

While the Army does not consider it advisable to prescribe a hardand-fast rule as to a specific period of time in which price redeterminations must be completed, since such time limits could put contracting officers in an adverse bargaining position, 120 days is considered a reasonable target. For the past 2 years, the Army has used a vigorous followup system to assure that unreasonable delays in finalizing prices do not occur. Excellent results have been accomplished in this area. For instance, on June 30, 1957, there were outstanding 115 contracts, which had not been finalized within the Army's desired objective of 120 days after the redetermination point was reached, as compared to only 19 such contracts on December 31, 1959.

We have reviewed our experience during fiscal year 1959 on the redetermination of 295 contracts. It is interesting to note that the revised contract prices totaled $631 million against estimated target prices of $656 million. The profit originally contemplated in these contracts amounted to $56 million (82 percent of the target prices) while the profit finally allowed amounted to only $48 million (7.6 percent of the revised prices).

The Department of the Army does not maintain statistics which would show the number of contracts awarded with a price redeterminable feature. Statistics reported show only that 1,614 actions were processed during fiscal year 1959 which relate to this type of

contract including the 295 actions which finally redetermined the prices as described above. Pursuant to a request of the House Committee on Appropriations, a survey was made as of the end of fiscal year 1959 which revealed there were outstanding 190 price redeterminable contracts valued at $300,000 or more on which the prices had not been finalized; 145 had not reached the redetermination point and the remaining 45 were in various stages of processing.

REVIEWS OF CONTRACTS

Surveillance over the Army procurement program is exercised at all levels up to and including the level of the Secretary. The general authority to enter into contracts is delegated by me through the Deputy Chief of Staff for Logistics and the heads of procuring activities to contracting officers at the buying office level. The delegations to lower echelons are progressively more and more limited to assure review of larger dollar value contracts at successively higher echelons. These successive reviews of proposed awards are accomplished by procurement officials or review boards composed of specially and technically qualified personnel. The purpose of these reviews is to assure that the overall business aspects of Army procurements have been given due consideration and that resulting contracts represent the most realistic contracts which can be made in the interest of the Government.

SUBCONTRACTING AND THE BREAKOUT PROGRAM

The Army is continually working toward expanding the sources of supply for components and subsystems of its large complex equipments and weapon systems. The two methods used by us for this purpose are the control of subcontracting and the breakout program.

Prime contracts for these complex equipments provide for subcontracting by the system contractor and for consent by the contracting officer to the award of large dollar value subcontracts. For instance, on the Pershing missile system, the five major subcontractors were selected by the system prime contractor and the Army from a list of 25 potential subcontractors. In reviewing subcontracts, the contracting officer insures that competition has been secured wherever possible and that the contractor has used adequate cost- and priceanalysis methods.

The prime contractor's planned make-or-buy program is analyzed and approved by the contracting officer and is thereafter periodically reviewed to determine that the actions taken by the prime contractor are consistent with the plan. This procedure results in other benefits. For example, in one case the Army Ballistics Missile Agency was able to furnish to the system prime contractor the names of five sources capable of performing work which he had proposed to do himself. This enabled the prime contractor, and subsequently the Army, to save a substantial sum.

I would like to make an interjection here, gentlemen, to point out that what I have been describing here is a system with the prime contractor which must be agreed upon prior to the placing of the contract. In other words, it must be a contractual relationship that we can do all these things, and we can require all these things. Otherwise, we

would be in the position of requiring the contractor to do something on which he had not agreed and we would relieve him of responsibility. And, of course we must not do that. But when we enter into his subcontracting structure, it must be on a prior understanding that we can do so and that he retains the responsibility for the final product.

Mr. RIVERS. Could I ask the Secretary a question?

Secretary JOHNSON. Yes, sir.

Mr. RIVERS. At another hearing we had on the airframe industry, I think it was, Mr. Courtney, we had allegations to the effect that certain of the contracting officers of one of the departments found in many instances a contracting officer sitting across the table from some very high-priced, highly experienced men, totally out of his realm of capability, with whom he could negotiate. In other words, you would have a lower-paid man in the Government who had to do business with a high-powered man in industry.

Are you cognizant of that? Are you conscious not to let a condition. like that entail in your shop, Mr. Secretary.

Secretary JOHNSON. I am, Congressman Rivers. I am very conscious of it. And one reason that I am is because I have been on the other side of the table. I have sold to the Government. And that allegation is simply not so in my own experience. That is, in relation to any contract of any importance. The contracting officer-there is such an individual. He has an authority, but he is surrounded by a group of people, that is, a team of people, who are very capable people, with long experience. And his final decisions in important contracts are reviewed at various levels, sometimes as many as five or six different levels, up to my office.

So the idea that the contracting officer is being overcome by the skills and experience of an individual who is dealing with him is not so.

Mr. RIVERS. I just wanted you to have a chance to make that state

ment.

Mr. VINSON. Go right ahead, Mr. Secretary.

Secretary JOHNSON. Under the breakout program, components and subsystems originally supplied by the prime contractor are established in design as soon as possible, thus enabling subsequent procurements of these items by competitive means. To date, this program has been applied primarily to missile systems. During the past year, systematic phased breakout programs have been established for all missiles, except those still in the early stages of research and development or still undergoing major design changes.

Breakout of stabilized items can sometimes actually precede the placement of research and development contracts. Before contracting for the design and development of a new system, existing stabilized items are identified as capable of use in the new system and provision for their use is made accordingly. Also, if components and subsystems are susceptible of separate development, they are identified for separate procurement from sources other than the system prime contractor. In the Pershing system, the capabilities of 20 Government agencies and 97 prime contractors are thus being utilized, in addition to the system prime contractor. The products and

services of all these are brought together under the overall direction of the Army Ordnance Missile Command.

We have cited the Pershing system several times here, gentlemen, because it is the latest complicated system that we have placed, and these things have all been applied in the procurement of this system. The system prime contractor is also required to prepare and furnish drawings and documentation in accordance with a prescribed schedule. For example, in connection with the Pershing contract, the system prime contractor will furnish lists of production equipment, plant layouts, flow charts, routing sheets, bills of materials, and names of suppliers, so that qualified manufacturers would be able to produce subsystems or components of the Pershing missile.

In addition, the Army maintains at the plants of system prime contractors resident staffs who, in addition to other duties, insure that items are broken out as soon as possible, and that necessary documentation is available when needed. The magnitude of this program can be appreciated from the fact that the Army Rocket and Guided Missile Agency currently has more than 800,000 drawings in its files.

TRAINING AND QUALIFICATION OF PROCUREMENT PERSONNEL

It is axiomatic that the quality of the procurement job, or any other job, depends upon the competence of our personnel engaged in performing the job. The Army has therefore placed special emphasis on securing the best qualified personnel for work in the procurement field. Minimum qualifications have been established for the appointment of personnel as contracting officers. Contracts of larger dollar value, those over $100,000, are executed by the more senior personnel. Both military and civilian personnel make up the procurement team. Military and civilian career programs have been established to maintain and increase the competency of our personnel. The military program is sponsored by the Deputy Chief of Staff for Logistics. Similarly, a logistics civilian career management program has been established and implemented by the technical services. Specifically, procurement and related career field programs are underway for procurement officers, contracting officers, and acceptance inspectors. In line with these career programs, we are continuing our emphasis on training of our personnel. I would like to briefly mention several of our actions along these lines. During the fiscal year 1959, 1,117 military and civilian personnel received advanced management training at the Army Logistics Management Center in the areas of procurement, supply, requirements, maintenance and property disposal. A new course on specifications management has recently been added. A total of 1,240 students have been programed for these courses during the present fiscal year. Secondly, we arrange and participate in procurement conferences and seminars. Third, correspondence courses on procurement have been developed and are offered by the Army schools. Fourth, military and civilian personnel are sent to civilian colleges and universities for specialized training related to procurement.