ence that the Department of Defense must and does purchase. Hence, industry is able to make far greater use of the fixed-price contract than is possible for the military departments.

"Mr. Secretary, you say on page 7 of your statement, that the General Accounting Office had called attention to the fact that excessive prices were initially paid to some contractors because the contractor was not furnishing the Government with current, complete, or accurate cost information at the time of negotiation. Because of this, the Department of Defense now requires the prime contractor, on all procurements over $100,000, to certify that he is furnishing up-to-date cost data."

Question 1. "Now, why was it necessary to make this a requirement?" Answer 1. There were a sufficient number of GAO reports in which current, complete, or accurate cost and pricing data were not furnished by contractors that the possibility occurred to us that other similar situations might exist. To eliminate this possibility, we established this requirement.

Question 2. "Why weren't the contracting officers getting up-to-date, complete, and accurate information right along?"

Answer 2. Our contracting officers insisted upon current, complete, and accurate data and sincerely believed that such information was being furnished by contractors. The GAO reports, however, led us to conclude too much re liance was being placed in our contractors in this regard.

Question 3. "Did they do any more than ask for it?"

Answer 3. See answer 2.

Question 4. "Why limit it to contracts over $100,000?"

Answer 4. Our regulations do not limit the requirement to contracts over $100,000, but make it discretionary with the contracting officer to require it in contracts under $100,000 because in smaller contracts there is likely to be more competition and less use of cost estimates.

Question 5. "Isn't accurate and current cost information the very heart of the basis for the incentive contract or any contract, for that matter?"

Answer 5. Where we are pricing on the basis of cost estimates, current, complete, and accurate cost and pricing data goes to the heart of negotiating the contract.

"On page 8 of your statement, you stated that the General Accounting Office reports indicated a weakness in regard to subcontracting because of too great reliance being placed on the prime contractor's pricing of subcontracts." Question 1. "Why was it necessary for the GAO to point this out? Don't you have procedures that would alert you to detect these weaknesses?" Answer 1. This question was answered by Secretary LeBoutillier and Mr. Bannerman on pages 285-287 of the committee's transcript.

"In order to take care of these weaknesses, I see that you have issued new regulations in part 9, section III of the Armed Services Procurement Regulation. Under 'Purchasing Systems,' pages 9 and 10, you say that you analyze the purchasing system of the prime contractor and if it is sound and efficient, you approve it. Then you watch it on a sample basis."

Question 2. "What do you mean by sampling? How is that done?" Answer 2. Sampling is accomplished by spot-checking individual subcontracts in order to insure that the efficiency of the prime contractor's purchasing system is being maintained.

Question 3. "If it is sound and efficient, why is there a need for an incentive contract?"

Answer 3. A sound and efficient purchasing system is important to the pricing of subcontracts. Incentive contracts, on the other hand, are directed priImarily at the prime contractor's own production line and seek, therefore, to achieve reduced costs in the prime's operations.

Mr. VINSON. All right.

Mr. Courtney, have you any questions to ask him?

Mr. COURTNEY. Just two or three questions, Mr. Chairman.

Under section 9 of the amendment to the National Security Act, the act of August 6, 1958, contracting authority was given to the Department of Defense in respect of research and development contracts. And I would ask, if you will, at this time to put in the record the statistics relating to the discharge of that responsibility as it was done in the Department.

Mr. NASH. You want, Mr. Courtney, those contracts which were made under that authority?

Mr. COURTNEY. Made under the authority of section 9.

Mr. NASH. We can get those.

Mr. BANNERMAN. We will put them in the record.

Mr. COURTNEY. If you will have them for the record and ready for

the record.

Mr. BANNERMAN. Yes, sir.

Mr. COURTNEY. Are they now merged in the figures that were given us for the different departments?

Mr. BANNERMAN. No, sir.

Mr. COURTNEY. They are not.

Mr. BANNERMAN. Excuse me.

I think that is correct.

Mr. NASH. There are only two contracts, Mr. Courtney, which were made directly at the OSD level. So they would not appear in the military department figures.

Mr. COURTNEY. So that since the act became effective, this authority has been exercised only in two instances?

Mr. NASH. Under the Reorganization Act at the OSD level, yes, sir. Mr. COURTNEY. Under the Reorganization Act.

Mr. NASH. We have made other contracts under Public Law 600, 79th Congress Employment of experts and consultants

Mr. COURTNEY. Yes.

Mr. NASH. And organizations. But there have been only two contracts made at the OSD level under this particular authority of section 9.

(The material referred to follows:)

SD-60-Radio Corp. of America

Date: June 1, 1959.

Amount: $600,000.

Classified cost-plus-fixed-fee study contract with regard to antisatellite defense. SD-62, Arthur D. Little, Inc.

Date: November 9, 1959.

Amount: $120,000.

Classified cost-plus-fixed-fee study contract with regard to a missile defense system.

Mr. COURTNEY. Now, I had another question in respect

Mr. VINSON. All right. Ask any questions you want to, now. Because this information is to enable us to write a report; not in the slightest degree any criticism of what is going on, but for all to get all the facts and see that the facts warrant the conclusion.

Go ahead.

Mr. COURTNEY. Now, a further question with respect to Department of Defense Directive 7800.6, which is the progress payment, I guess you would describe it, directive, in which progress payments, I believe, are limited to 80 percent or some such factor.

Mr. BANNERMAN. That is correct.

Mr. COURTNEY. Rather than the full 100 percent estimated progress payments.

So that industry, in some instances, is required to go to borrowing in order to finance its contracts.

How does the Department, if it does, compensate the contractor for the additional costs of borrowing? Or the interest on borrowings.

Mr. BANNERMAN. The Department does not compensate them directly for the additional cost of borrowing.

Actually, as you know and as I know, most business in this country is done by companies performing contracts or other work with their own capital.

The Government, however, because of the very large demands for capital, frequently makes arrangements to put up progress payments. We expect industry to be able to carry that portion of the financing which is on top of the amount of progress payments we pay.

Mr. COURTNEY. Well, let me state it a different way.

Mr. BANNERMAN. This is not a cost that we allow under our contracts.

Mr. COURTNEY. It is not a cost allowance, but isn't it a fact that since this directive has been in effect, that the fees of the contractors have been increased to compensate for the required borrowings due to the cutback which this directive requires?

Mr. BANNERMAN. That is true, Mr. Courtney, with respect to those contracts where we had to amend the contract to accommodate this new policy.

Mr. COURTNEY. To accommodate the new policy, which is expressed in the directive.

Mr. BANNERMAN. That is correct.

As a matter of fact, to get that amendment, we had to provide consideration for it. Now, it is not necessarily true with respect to new contracts made since that time.

Mr. COURTNEY. Made since this directive became effective?

Mr. BANNERMAN. That is correct. We consider this, but we do not give any dollar-for-dollar equivalent.

Mr. COURTNEY. Then we would understand that under this directive, where it is operative, for the record, that the additional borrowings which it requires on the part of the contactor to finance the contract, are compensated in the fee of the contractor, rather than as a direct allowable cost for borrowing?

Mr. BANNERMAN. Not compensated in the sense that there is any dollar-for-dollar compensation.

Mr. Courtney

Mr. COURTNEY. Well, let's say this: Is it recognized in the fee? Mr. BANNERMAN. It is recognized, just as all contractor contributions, by way of facilities, capital investment, is recognized in computing profits or fees.

Mr. COURTNEY. Those are the two questions I had, Mr. Chairman. Mr. VINSON. Mr. Sandweg, have you any questions?

Mr. SANDWEG. Yes, Mr. Chairman.

Mr. Secretary, I would like to refer to page 7 of your statement, wherein you mention because of matters brought out by the GAO, a requirement was imposed upon contracts over $100,000 that a certification be inserted by the contractor that current costs and pricing data were being utilized.

I would like to ask what did you have in mind on that in connection with the possible penalty? Would you look upon that as being a false statement to the Government if it was later found not to have utilized current cost data?

Mr. BANNERMAN. Mr. Sandweg, we do recognize the appropriateness of criminal penalties for false certification. This I think comes

under the general statutes relating to certifications made to the Gov

ernment.

The possibility of a criminal penalty appears right in the certification itself.

Mr. SANDWEG. Well, along that line, then, have you established any new procedures, other than those you had before, for review to find out whether they are in fact furnishing current cost and pricing data? Mr. BANNERMAN. The revisions to part 8 of section 3 of the Armed Services Procurement Regulations cover the extent to which we are required to conduct examinations, audits, and other reviews of price proposals that are made to us under such certification as this, and those revisions have been rather extensive within the last 6 months. We have, I think, by policy, stepped up the scope and extent of our examination.

Mr. SANDWEG. Has this caused any need for additional auditing facilities?

Mr. BANNERMAN. I think that question had better be directed to the military departments. But I believe, in fact, that some of them are increasing their audit staffs.

Mr. SANDWEG. Fine.

That is all, Mr. Chairman.

Mr. VINSON. Are there any questions by any members of the committee, now, to the policy makers?

Thank you very much.

Mr. COURTNEY. May we clear up one question

Mr. MORRIS. Mr. Chairman, I have some questions.

Mr. VINSON. Mr. Morris.

Mr. MORRIS. I don't want to get ahead of you.

Mr. VINSON. Go right ahead, Mr. Morris. You have been recognized.

Mr. MORRIS. All right. Just a few questions here that I would like to ask. And I will say this is not necessarily intended to be critical at all, but only for the purpose of trying to clear up my own thinking.

Now, on page 8 of your statement, that is, the Deputy Assistant Secretary's statement, you say, in regard to subcontracting policies and procedures, this:

You say:

The other area where the General Accounting Office reports indicated weakness was in regard to subcontracting. In short, it was demonstrated that we had been placing greater reliance upon prime contractors' pricing of subcontracts than was justified in the light of the specific examples of inadequate and ineffective pricing cited.

Then you say further:

Accordingly, we have extensively revised, expanded, and strengthened our ASPR coverage of the subcontracting area by publishing

now, this is what I want to emphasize

on October 1, 1959, an entirely new section, entitled "Subcontracting Policies and Procedures."

Now, since we have had the experience of World War I and of World War II and of the Korean conflict and of the so-called cold war, how does it come that you waited until October 1959 to realize

this situation and to bring about that reform? Why is it that all during this time, with all of this experience, such a reform had not been brought about before?

Secretary LEBOUTILLIER. I think, sir, it is a matter of progressively tidying up as we get experience in this line.

Mr. MORRIS. As you get experience?

That is what I am getting at. We have had the experience. We have had the experience of spending billions upon billions of dollars. And I am for it, because I wouldn't ever want to pinch any penny that would in any way lessen our defense. And I don't think that any Member of this Congress would.

As far as I am personally concerned, I want to give the Department every penny that is necessary to defend us. But we have had the experience of spending billions upon billions upon billions of dollars in recent history and now you apparently have just awakened to the realization that these subcontractors might be padding their prices, apparently.

Secretary LEBOUTILLIER. I would like to have Mr. Bannerman go back over the history of this.

Mr. BANNERMAN. Mr. Morris, we of course have been well aware for many years as to what the effect of subcontract pricing is. We have had for many years procedures that were designed to accommodate this problem. However, I think we would all agree that the time shouldn't come when we can't learn from new information.

Now, the GAO reports provided some new information. They indicated that there was need for further tightening in this field. And we have further tightened.

I don't think that these reports indicate that there was any widespread waste. As a matter of fact, there are a total of about 10 reports from GAO on this subject. But when you get 10 reports on one subject, you begin to consider. And we did consider. And we did feel that there was need for some revision in our regulation.

Mr. MORRIS. So your statement is, then, that in fact, in your judgment, there has been no unreasonable waste in the past?

Mr. BANNERMAN. I think that is correct, Mr. Morris.

Mr. MORRIS. But that you do feel now that you can tighten your belt a little bit and maybe, with new experience, bring about some proper adequate savings?

Mr. BANNERMAN. That is correct.

We make in the neighborhood of 6 million procurement transactions a year, and there have been, in a period of about 3 years, some 8 to 10, perhaps, reports on this subject. Nevertheless, 8 to 10 reports are enough to lead us to think that if they found those, there might be others, and we better tighten up on the regulation.

Mr. MORRIS. May I pursue it just a little further?

I want to personally-and we will dig into that some. And I do not challenge your statement at all, but it seems to me that that is a matter that ought to be thoroughly investigated.

Now, one or two other questions:

Who determines when equipment, this expensive equipment, is obsolete and in surplus? Who makes that determination?

Secretary LEBOUTILLIER. The departments.

Mr. MORRIS. Each department makes its own.

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