for the use of contract negotiators would result in a substantial reduction of negotiated procurement in favor of procurements by formal advertising and would better serve the interests of both the Government and industry.

According to table 7, page 10, of your committee's tabulation, sole source procurement accounted for over $8.2 billion-over 50 percent by value of the total new procurement dollars for fiscal year 1959. Although sole source procurements are made under several of the other 16 exceptions, a substantial portion of the sole source procurements are negotiated under the authority given in exception 10. This except allows negotiation when it is impracticable to obtain competition. One condition which has led to procurement from single sources is the failure of procuring activities to use drawings and other data obtained at Government expense for solicitation of competition in follow-on procurement of items developed at Government expense.

The procurement of drawings and technical data occurs early in the life of many military items. When an item has been developed to the point that it is procured for test or service use, manufacturing or production drawings generally are procured. Manufacturing-type drawings are required and obtained for use in inspection, for maintenance and repair purposes and for future procurement or production. These drawings are paid for by the Government as part of the contract price and can be used in soliciting bids from competitive sources of supply. The drawings of which we speak are for items developed at Government expense as distinguished from proprietary drawings related to a manufacturing firm's product developed at its own expense.

The Government in many instances has not been in a position to realize the maximum benefits of competition in many procurements of military items because manufacturing drawings were not readily accessible. We found inadequate records, controls, and procedures relative to the receipt, storage, and issue of drawings for procurement purposes. Also, in many cases drawings required by the terms of the contracts were either not furnished by the contractor or were unnecessarily delayed and were, therefore, not available for follow-on procurement.

For instance, a comparison of 45 samples obtained from one procurement office where identical items had been procured both through negotiation and through competitive bidding revealed that prices obtained by competitive bidding were 40 percent lower than the sole source prices. The military departments have informed us that action will be taken to correct this practice. Contracts do not always contain provisions either granting or denying the Government the right to use the drawings and we found that, where the contracts were silent on the right to use drawings furnished, the procurement office took the position that the Government was not permitted to use the drawings for procurement purposes. The postion of the procurement office was contrary to the policy of the Department of Defense and when it was brought to its attention, the practice was discontinued.

We would like to call attention to three essential principles involved in the negotiation of contracts which must be carefully observed if the Government's interest is to be properly protected. These principles are (1) maximum competition must be obtained; (2) cost information

must be complete, accurate, and timely; and (3) the proper type of contract must be selected.

A basic question to be resolved by the procuring agency, after it has determined that a contract must be negotiated, is whether competition can be obtained. Every effort should be made in this regard before it is determined that competition is impractical or impossible. Certainly, in no event should the determination rest on an assumption that it is more economical to continue to obtain the product or material from the initial source or that a particular organization is best suited to do the job. The ingenuity and ability of American industry need not be viewed in this narrow light. Rather, steps should be taken to obtain proposals from qualified offerors and to give all offerors, within a competitive range, an opportunity to discuss their proposals.

While no criteria are prescribed in this area by law, section 3-805 of the Armed Services Procurement Regulation does set out certain standards. Under this section 3-805, where one offeror submits a proposal which is clearly and substantially more advantageous to the Government, negotiations may be conducted with that offeror only. Where several offerors submit offers which are grouped so that a moderate change in either the price or the technical proposal of any one would make it the most advantageous offer, the contracting officer should, but is not required to, negotiate with all offerors in the group. And in certain procurements, where a substantial number of clearly competitive proposals have been obtained and the contracting officer is satisfied that the most favorable proposal is fair and reasonably priced, an award may be made without discussion or negotiation with any

offeroi.

It is our opinion that the authority to negotiate does not, of itself, warrant the curtailment of competition. Yet this may be the result where several proposals are received and the contracting officer decides to negotiate with only one offeror or to award a contract without discussion with any offeror. In such cases the contracting officer must base his evaluation of the contractor's proposal on facts and information supplied by the proposed contractor and is not in a position to determine with any degree of certainty the reasonableness of estimated costs and proposed prices.

We therefore are not in agreement with the present provisions of ASPR 3-805. We believe that the regulation should be amended to require, whenever practicable, the conduct of negotiations with all responsible offerors who submit proposals within a competitive range, price and other factors considered.

Complete, accurate, and timely cost information is necessary to the negotiation of fair and reasonable contract prices. It is unlikely that the Government will, in any negotiation, have full knowledge of all the information available to the prime contractor or that either the Government or the prime contractor will have full knowledge of all information available to the subcontractor. Consequently, the Government must rely largely upon prime contractors (1) to submit reasonable prime contract price proposals and sufficient information with which to evaluate them, and (2) to assure that price proposals submitted to the prime contractors by subcontractors are reasonable, that sufficient information with which to evaluate such proposals is furnished, and that they are adequately evaluated in terms of protecting the Government's interest.

When pertinent data known to the prime contractor are unknown to the Government, the contractor obviously has an advantage in negotiations. Similarly, the subcontractor has an advantage over the prime contractor where the subcontractor is in possession of pertinent data which are unknown to the prime contractor.

Under these circumstances, and particularly where the force of competition to assure the reasonableness of prices is lacking, it is unfair for one party to have pertinent information which is not available to the other contracting parties. It is essential, therefore, that the prime contractors and subcontractors furnish, and that the military departments take all practical steps to assure that its negotiators obtain from prime contractors, and that its prime contractors obtain from subcontractors, all available information having a significant bearing on the reasonableness of proposed prices. Such information must be sufficient to permit an evaluation of the reasonableness of the proposed prices in relation to known or estimated costs to be incurred by the supplier in furnishing the item or service being procured.

In performing the contract, a contractor's costs may be substantially lower than the estimated costs used in negotiating the contract price. We recognize that the contractor should receive additional benefits when such cost reductions are due to economies or efficiencies beyond those normally to be expected and considered in negotiations. It seems equally clear, however, that the contractor should not benefit from "cost reductions" resulting from acceptance by the military departments of estimates which were excessive in relation to information available only to the contractor at the time of negotiations.

We believe that regardless of the type of contract pricing being considered for use in a particular procurement, and whether it be a prime contract or a subcontract, every effort should be made to negotiate a price which will be fair to both parties.

The selection of the type of contract to be used in the procurement of defense needs is most important. The selection of the contract type is generally a matter of negotiation with the contractor. Industry as well as Government contract negotiators are interested in selecting the type of contract best suited for the particular produce or service, taking into account the state of technical advancement and other factors.

Our audits have disclosed several instances where firm fixed-price contracts have been used under conditions where some form of flexible pricing would have been more appropriate. A good example is found in our report referred to as B-133131 on page 12 of the committee tabulation. In this case negotiated firm fixed-price contracts were used to procure a newly developed periscope before adequate cost and production experience were available. As a result, the price was unreasonably high and the contractor realized a profit of approximately $623,000, or about 49 percent of cost. Other examples are referred to in your committee's tabulation.

Where sufficient reliable information is not available to make it possible for the parties to negotiate a fair and reasonable firm fixed price, it may be appropriate to use pricing clauses providing for adjustment of the price after cost and production experience have been gained. It is possible, therefore, for the Government and contractors to provide in all cases for negotiating prices which are fair

and reasonable to both parties through selection of pricing clauses best suited to each procurement problem.

One type of negotiated contract which has caused considerable difficulty in establishing fair and reasonable prices is the fixed-price incentive type. This type of contract provides for the initial negotiation of an estimated target cost, target profit, ceiling price, and a final profit formula which provides for the contractor to participate in any savings resulting from reductions of costs below the target cost or in any losses from increases above target costs. Its objective is to give the contractor a built-in incentive to reduce his cost of performance since his profit is increased thereby.

Our reviews have disclosed that target prices have been excessive because of the negotiating parties' failure to base target price estimates on current cost information available to the contractors or their suppliers. In some instances, both the target prices and subcontract prices on which the target prices were based were excessive because prime contractors were either reluctant or failed to examine the cost records of their suppliers or require submission of cost data in support of proposed prices.

Under this type of contract, when negotiated target costs are not forecast with reasonable accuracy, cost underruns may be due to the initial overestimates of costs and not to the efficiency of the contractor. Thus, the additional profits paid to the contractor under the profitsharing arrangement are in the nature of a windfall rather than earned profits. Consequently, there is a continuing need for emphasizing to contract negotiators the necessity for determining the adequacy of information available and for considered analyses of contractors' proposals for target costs as a condition precedent to the selection of a fixed-price incentive type contract. Another method of rewarding the contractor for true efficiency, product improvements, and advancement in the state of the art, which the committee may wish to consider, would be to devise contract provisions that would provide for appropriate increases in the contractors' profits in those cases where savings to the Government can be concretely demonstrated by the contractor. Such additional profits would then be due to actual accomplishments and not to initial overestimates of cost as is now possible under the present fixed-price incentive type contract. Mr. Chairman, this completes our statement, and we are here to answer whatever questions the committee may direct to us.

Mr. VINSON. Well, Mr. Comptroller General, I want to thank you from the bottom of my heart. This is just exactly the kind of analysis that I have been looking for. There is so much meat in this document that I don't know whether, in the short time that we have this morning, we can develop it like it should be.

But I do hope that this committee can have the benefit of consultation by our counsel and the staff with your people, so we can try to write into the statute some of these thoughts that are running through this document which can be written into law.

Thank you again.

It is just exactly the kind of analysis we need; and if this thing can be shaped up along the lines suggested here in a statute, why, we will accomplish a great deal, and, I am satisfied, in getting a better price and in saving probably an immense amount of work, in the use of the Comptroller's Office.

Now, let me ask you this:

You do not appear in the picture until it is all over?

Mr. CAMPBELL. That is correct, Mr. Chairman.

Mr. VINSON. The horse is gone.

All right, then you have to come in. Would it be possible at a certain stage where negotiated contracts are made, for you to appear in the making of the contract?

Mr. CAMPBELL. Mr. Chairman, I don't think that would be feasible. Mr. VINSON. All right. That answers that. That wouldn't be feasible.

Then you have to wait until it is all over before you can step in and find the errors?

Mr. CAMPBELL. I think that is correct.

Mr. VINSON. Now, let me enlarge on that.

Why wouldn't it be feasible for you, who are later on going to tabulate and point out the errors-why wouldn't it be to the advantage of the Government for you to contribute your knowledge at the time the contract is being made? Why should it all wait?

Is it due to the physical limitations of not having enough people to do it, or what is it due to?

Mr. CAMPBELL. I think that is correct, Mr. Chairman. There are not enough people in our organization to do it, if it were feasible. And I do think it would slow up the process of contracting, tremendously.

Mr. VINSON. And it would slow down contracting, is that it?

Mr. CAMPBELL. Yes.

Mr. VINSON. Because you would require more accurate knowledge and more cost information than the negotiators have available at the time of the contract?

Mr. CAMPBELL. That is correct.

Mr. VINSON. Well, if that be true, then should you not be more generous, probably, in your criticism of them? Because they are not in a position to get the information themselves.

Mr. WELCH. May I answer that question, at least in part?

Mr. CAMPBELL. Yes.

Mr. WELCH. We do have a procedure whereby, of course, by statute, the heads of the agencies are free to ask the Comptroller General for an advance decision. They can take advantage of that right if they so desire and submit any question concerning the making of a

contract

Mr. VINSON. That is merely as to the legality.

Mr. WELCH. Yes, that is correct.

Mr. VINSON. That doesn't go into anything, but the legality of the contract.

Mr. WELCH. Generally speaking, that is true.

Mr. VINSON. It doesn't go into the type of contract.

Now, I was impressed here about the case you pointed out where they made the wrong kind of a contract.

Mr. HUDDLESTON. Periscopes.

Mr. VINSON. Where they could have saved $626,000 if they had made the right kind of contract.

Now, we lost some money because they made the contract, and we had to pay them, and after we had paid them, why, you said they made the wrong kind of contract.