You said that the general formula was 80-20, and the 80, of savings, goes to the Government and 20 to the contractor. But you indicated there might be some exceptions to that. Is it true?

Mr. JONES. Yes, sir; it is true.

In some instances, where there has been sufficient information to establish a very precise target and yet there are contingencies which may be involved and we are unable to negotiate a fixed-price type of contract, the share that the contractor would obtain might exceed considerably the 20 percent.

Mr. MORRIS. Well, what is the greatest amount to which we might go, might exceed the 20 percent?

Mr. JONES. The largest amount that I am familiar with would be 50 percent.

Mr. MORRIS. Fifty percent.

So in some instances the contractor does get 50 percent of the savings plus his regular 8 percent?

Mr. JONES. This would be a very rare situation.

Mr. VINSON. Well, put in the record, out of the 47 cases, how it has happened, and what percent they derived, and show whether or not any of the contractors did get the 50 percent, or above 20 percent. (See app. 3.)

Now, let me ask this question:

Mr. Secretary, are you using the incentive-type contract more frequently now than has been used in the past 3 years, or is it being not as frequently used as the previous contracts?

Mr. MOORE. One of the most marked trends has been away from the use of redeterminable contracts, as is shown by the figures for the entire Department of Defense.

Mr. VINSON. I am talking about incentive-type contracts.

Is the marked trend to increase incentive contracts or to get away from incentive-type contracts?

Secretary BANTZ. Now, how far back would you like to go, sir? Mr. VINSON. And time you think would be a good answer to the question.

Secretary BANTZ. Five years?

Mr. VINSON. Well, it hasn't been in existence for 5 years-just about 5 years.

Well, take-from the figures, take for the last 3 years.

Secretary BANTZ. All right. We will show the total dollars and also the percentage to the total of Navy procurement for each of those 3 years.

Mr. VINSON. Can you give an opinion, offhand, whether it is more frequently being applied now, this type of contract, or is not quite as frequently used as has been used?

Secretary BANTZ. Can you answer that, Gene?

Mr. JONES. Excuse me.

I am sorry?

Secretary BANTZ. The frequency, is it more today than it was 3 years ago?

Mr. JONES. I would say we are probably using incentive contracts less today than we were using 3 years ago.

Mr. VINSON. That is right.

Mr. JONES. This we would verify by the reports.

Mr. VINSON. That is what I wanted to find out. It is the largest type of contract you make in dollars, is it not?

Secretary BANTZ. No, sir; it was only 12 percent of our procurement dollars in 1959.

Mr. VINSON. Only 12 percent?

Secretary BANTZ. Yes, sir. The advertised was by far the largestI don't mean the advertised. The fixed price was by far the largest ; 38 percent.

Mr. MOORE. The value of fixed price was more than three times as much as the fixed-price incentive, sir.

The firm fixed price was more than three times as great in fiscal 1959 as the fixed-price incentive.

Mr. VINSON. We have got the breakdown in there?

Mr. COURTNEY. Yes, sir.

Mr. VINSON. We have it all?

Secretary BANTZ. I gave it in my Friday morning's testimony, last week.

Mr. VINSON. Mr. Sandweg, have you any questions to ask?

Mr. SANDWEG. I would like to ask, Mr. Secretary, if you could supply for the record the procurement directive that you mentioned in the statement on page 4, that was issued in October 1959, regarding audits and pricing aids.

Secretary BANTZ. Yes, sir.

(See app. 3.)

Mr. SANDWEG. Will that contain an exact statement as to when they must use it, or when it is up to them to determine if they want to use it?

Secretary BANTZ. Well, it is not a positive statement.

Mr. SANDWEG. It is not a positive statement?

Secretary BANTZ. No.

Mr. SANDWEG. There is one other question I would like to ask. If you were not allowed to use the incentive contract, do you think that the Government would start paying more money, or do you think the cost could be kept down by a more thorough audit and inspection system?

Secretary BANTZ. Well, I don't think the audit would do it, sir. Because if you didn't do it, you would either have a cost-type contract with a fixed fee, a redeterminable-type contract which to my judgment is not nearly as good as the incentive type, or a fixed price, and then of course we would have no recourse under the fixed price.

Mr. SANDWEG. Then you think it would start costing the Government more money if you couldn't use incentive contracts?

Secretary BANTZ. I don't think there is any question, sir, that it would, or we wouldn't be using it in the instances we use them.

Mr. SANDWEG. The only reason I ask that is that ordinarily an organization that is in business for profit operates on its own incentive to cut costs, and yet the incentive contracts almost seems to presuppose that in cases where they have Government business, it is going to do differently than it does in general business. Adopting a sort of a shrug-of-the-shoulders attitude.

Secretary BANTZ. I think the comparison we must make there is a cost-type contract, which, well, generally is not used in industry. We are forced to use it because of the unknown cost factors in many of the articles that the services buy. All three services use it.

Mr. JONES. I would like to point out that with regard to the jet aircraft which were mentioned a little earlier-transport aircraft

the airlines have the opportunity of going to one of several companies in order to get the type of aircraft that they can get at the best price and to satisfy their requirement.

Now, usually, when we use an incentive-type contract, as previously indicated, we are in a sole-source arrangement. And we are doing everything we can to apply a contractual means whereby we drive the costs down. It is precisely the reason we use it.

Mr. SANDWEG. To get back to the point, then, that Mr. Vinson made, that because the Government is the sole source, the company pretty much has you over the barrel when you have gone beyond the research and development stage, because you can't go anywhere else to get that product?

Because-let
The original

Secretary BANTZ. Well, that isn't always the case. me use the Sidewinder missile as an illustration of it. developer is not the sole source. He is still one of the sources. Mr. SANDWEG. Yes, but that is an exception, isn't it? Secretary BANTZ. It would be. Because, after all, when you go to the expense of tooling for an airplane, for instance, you have a pretty difficult time of having a second source on it.

On an item that you don't have this huge tooling problem, like the Sidewinder, for instance there it is much more possible to use two or more contractors, after the development of the article.

Mr. JONES. I think, when you say we are over the barrel, you then assume that you are not dealing with reasonable people.

I believe, really, that in the vast majority of instances we are dealing with reasonable people, and if we can present the sort of information which indicates that a different course should be taken, this course is in fact taken.

Mr. SANDWEG. But then, if you are dealing with reasonable people, you should also presume that they will reasonably cut their costs for the betterment of the Government.

After all, it is their tax dollars that we are spending as well as others.

Secretary BANTZ. They don't do it in a fixed-price contract, sir. They don't adjust their prices on a fixed-price contract.

Mr. SANDWEG. No, I am sure they don't.

That is all, Mr. Chairman.

Mr. VINSON. Mr. Smart, have you any questions?

Mr. SMART. No questions, Mr. Chairman.

Thank you.

Mr. VINSON. Mr. Secretary, I want to thank you and your able staff and assistants.

Off the record.

(Further statement off the record.)

Mr. VINSON. Thank you very much.
It is always a pleasure to have you here.
Secretary BANTZ. Thank you, sir.
Mr. VINSON. Now, Mr. Coggeshall-
Is the Renegotiation Board here?
Mr. COGGESHALL. Yes, sir.

Mr. VINSON. Come right around here.

Now, members of the committee, we have only about 20 minutes. And we will start off with Mr. Coggeshall, of the Renegotiation Board.

Now, Mr. Chairman, have you a prepared statement?
Mr. COGGESHALL. Yes, sir.

Mr. VINSON. Well, now, how long is it?

Mr. COGGESHALL. Í think I can get it in in that time.

Mr. VINSON. Well, now, it might be to the advantage of the committee if you give us your statement and let us read it, and then come back tomorrow morning. Because we will be in a far better position to make inquiries, no doubt, than just having it read off and then have to pick up with some questions as we go along.

Would that suit you, in the morning?

Mr. COGGESHALL. Yes, sir.

Mr. VINSON. We have a full committee meeting in the morning. I don't think it will take us more than half an hour or an hour-will it, Mr. Smart?

Mr. SMART. About 30 minutes.

Mr. VINSON. About 30 minutes. It is a quarter of 12. Let's don't start in.

File your statement.

Have we a copy, Mr. Courtney?

Mr. COURTNEY. Yes, sir.

Mr. VINSON. Have we all a copy?

Mr. COURTNEY. Yes.

Mr. VINSON. Then you come back in the morning. We will take up with your Board, and see what suggestions you have to make and that you think we should make to the committee that has to consider all the facts that we develop.

Let's take a recess until 10 o'clock in the morning.

After our full meeting of the committee tomorrow, then we will put you on the stand.

Mr. COGGESHALL. Thank you.

Mr. VINSON. I will take this home and study it tonight.

(Whereupon, at 11:47 a.m., the subcommittee adjourned, to reconvene at 10 a.m., on Tuesday, May 3, 1960.)

PROCUREMENT PRACTICES IN THE DEPARTMENT OF

DEFENSE

TUESDAY, MAY 3, 1960

HOUSE OF REPRESENTATIVES,
COMMITTEE ON ARMED SERVICES,

SPECIAL SUBCOMMITTEE ON PROCUREMENT PRACTICES

IN THE DEPARTMENT OF DEFENSE,

Washington, D.C. The subcommittee met at 10:45 a.m., Hon. Carl Vinson (chairman) presiding.

Mr. VINSON. The subcommittee will be in order.

Now, Mr. Chairman. This is a continuation of the hearing by the subcommittee in reference to military procurement, in its various types of contracts.

And, members of the committee, you are indeed fortunate this morning to have a statement from the Chairman of the Renegotiation Board. And when he completes his statement, you will get a true picture of what goes on with reference to these various types of contracts that we have been discussing.

It is a pleasure to welcome you here.

Mr. COGGESHALL. Thank you, Mr. Chairman.

Gentlemen of the Subcommittee on Military Procurement, I am pleased to respond to the request of your chairman to testify before this subcommittee as it proceeds with its study of military procurement policies and practices.

As you perhaps know, the Renegotiation Act of 1951 under which we operate provides for fiscal year renegotiation. Renegotiation therefore is conducted not with respect to individual contracts, but with respect to the aggregate receipts or accruals of a contractor under all renegotiable contracts and subcontracts in an entire fiscal year of the contractor. For this reason, generally speaking, the Board does not receive from contractors figures showing, in terms of costs, prices, and profits, the results of performing specific individual contracts. Thus, the Board has little individual contract information of this type. In its records, contracts that have been renegotiated are reflected on a fiscal year basis only.

Of course, in the process of reviewing a contractor's renegotiable business for a fiscal year we are informed of the results, during that year, of the contractor's performance under each of the various types of contracts it may have. Thus, if the contractor performed under fixed-price, CPFF, and redeterminable contracts in the year being reviewed, we would have its sales, costs, and profits on each of these types of contracts for that year. But this, again, is not individual contract data; it is data by contract types, and then only on a fiscal year basis.

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