Do they have a specific agency to do that, or how is that determined? Mr. VINSON. Well, I suggest you ask that question when the department witnesses get on. These gentlemen do not do anything but formulate the policy.

Mr. MORRIS. All right.

Mr. VINSON. That is their function.

Mr. MORRIS. All right, then I will withdraw that question, and wait for the other witnesses.

Then one other, and maybe this should be waited for, but I would like to ask it at least.

Is there any specific program in all of the services or any of the services that deal with the problem of requiring careful checks on the proper use of this expensive equipment to prevent injury and destruction to it.

Secretary LEBOUTILLIER. Well, I would think the departments certainly have instructions on how to do this, sir. It would not come out in the procurement aspect of our office.

Mr. MORRIS. Now, I know they do in certain installations, because I have witnessed myself where they had signs-where they had something on the article itself, like a tank or some big, expensive piece of machinery, where they would say, "This costs so much money," or "This gun costs so much money, and be careful with the use of it,” and things of that kind.

Now, whether or not that occurs all out through the services and whether or not there is a particular program or whether it is just in regard to the idea of some local commander or commandant of an installation, I don't know. Can you answer that question?

Secretary LEBOUTILLIER. I think you would have to ask the departments, sir.

Mr. MORRIS. I see. That is all.

Mr. VINSON. The committee will bear in mind this: The observation of the Comptroller and the new procurement regulation with subcontractors is highly important, because the bulk of the component parts of the article are subcontract-purchased. These large manufacturing plants that have planes and all those things-the bulk of their stuff is bought somewhere else, and their plant is the assembly plant. So therefore, it is highly important that the regulations deal and the Department deal and look into subcontracting as well as the prime contractor. And the criticism by the Comptroller General and your directive for closer scrutiny of it is a matter that must be followed very closely, because that determines what price the main contractor submits for his target price or anything else, don't you see?

Now, if there are no questions, we want to thank

Mr. BATES. Mr. Chairman.

Mr. VINSON. Yes, sir.

Mr. BATES. Mr. Bannerman, the philosophy of incentive-type contracts and renegotiation are in conflict with one another. In the first instance, in the incentive-type contracts you say, "You do a good job and you can make more profit."

On the other hand, it is subject to renegotiation. Do you think we should have renegotiation for incentive-type contracts?

Secretary LEBOUTILLIER. Do you want me to answer?

Mr. BATES. Either one.

Mr. BANNERMAN. Mr. Bates, the philosophy of renegotiation, in fact, I think the statute effecting or creating the Renegotiation Board, charges them with the responsibility of recognizing efficiencies and economies that are produced by contractors, by allowing a greater profit.

Mr. BATES. That is right.

Mr. BANNERMAN. If they find that a particular contractor is particularly efficient.

Hence, I don't think there is any basic difference in philosophy. With respect to your last question, to whether we ought to have the Board or not, we testified when the Renegotiation Act was up for extension last year in favor of the extension of the Renegotiation Act.

Mr. VINSON. And in that connection, the Renegotiation Board takes into consideration efficiency and these other matters of similar char

acter.

Mr. BANNERMAN. This is one of their statutory considerations. Mr. BATES. Well, as a matter of fact, do you know that they actually do?

Mr. BANNERMAN. I think that question would better go to them. Mr. VINSON. We will have the Chairman up here, and we will find out from the "horse's mouth." We will ask him.

Mr. MORRIS. Mr. Chairman, may I ask just one more question, please?

Mr. VINSON. Are you through, Mr. Bates?

Mr. MORRIS. Pardon me, I thought you were through.

Mr. RIVERS. He never got started.

Mr. VINSON. Yes, he did get started. He got started and is leading up to a bill that he has introduced.

Mr. BATES. I got on the mark, but I never got rolling.

Mr. VINSON. That is right. You won't get rolling far on that.
Mr. BATES. Don't be too surprised.

Mr. VINSON. Oh, no. You and Senator Saltonstall both got your bills up to do away with the Renegotiation Board.

Mr. BATES. I don't have any bills to do away with the Renegotiation Board. I have no bill that will accomplish such a purpose as that. I wouldn't agree to such a bill.

Mr. VINSON. All right.

Mr. BATES. I was surprised at the cost-plus-fixed-fee type of contract representing such a large proportion of our contracts. I wasn't aware that it reached that magnitude at all.

Now, these contracts, like the incentive-type contract, are due to the element of uncertainty. You don't know what the actual costs are going to be in either case.

I presume in the cost-plus-fixed-fee they are more uncertain than they are even in the incentive contract type.

Mr. BANNERMAN. That is correct, Mr. Bates. And that is why we have to go to that kind of a contract.

Mr. BATES. Well, has this figure increased in recent years, on the cost plus fixed fee?

Mr. BANNERMAN. It has been going up rather drastically in recent years, Mr. Bates. It has gone from a low of 12.7 percent of our total procurement in 1951, by rather direct stages, up to 40.9 percent in 1959. I think these statistics you have.

Mr. VINSON. Not the fee?

Mr. BANNERMAN. What is that?

Mr. VINSON. Not the fee?

Mr. BANNERMAN. No. These percentages, Mr. Chairman are the percentages of our total contracting which are represented by costplus-fixed fee contracts.

Mr. VINSON. Well, he was talking about the fee, as I understood.
Mr. BANNERMAN. I don't think he is.

Mr. BATES. No. He understands what I am talking about, Mr. Chairman. I would think that a larger number of those could be subject to the incentive-type contract. This is the worst type of contract you can have, a cost plus a fixed fee. It is subjected to padding all along the line.

Mr. BANNERMAN. Well, Mr. Bates, we don't like cost-plus-fixed-fee contracts any better than you do, but the increase stems directly from the change in the nature of the things we are buying. There is no way on earth that you can estimate in advance what it is going to cost you to develop a new missile. And when we get into that kind of contracting, you are going to have to do it under a cost-reimbursement contract. And this has become a very substantial portion of our total procurement dollar.

Mr. BATES. Well, now, we have used the incentive-type contract in the airplane industry. There was a lot of uncertainty there.

Mr. BANNERMAN. Mr. Bates, the incentive contract in the airplane industry is not, and I think generally has not, been used in conjunction with the development of new aircraft. The development was done under cost-plus-fixed-fee contracts. However, as soon as the aircraft is developed and we have gotten some cost experience with it and we put it into production and you had extensive production of such aircraft, that was very frequently done under the incentive contract. We have not reached that stage in our big missile contracts.

Mr. BATES. Well, are these particular contracts more highly scrutinized and more closely audited and challenged in respect to cost than, say, other type contracts?

Mr. BANNERMAN. Individual payments under cost reimbursement contracts are subject to government audit, throughout the life of the contract. However, even in an incentive contract, final costs are audited by the Government.

Mr. BATES. Well, I know just recently-General Services, of course, sell things directly to companies who have Government contracts, and there is a lot of opposition by private vendors because it has taken away the business which they had established. And the contention that came from the sources that I have talked to indicated that a lot of these things which were being bought through GSA are being used for contracts other than Government contracts. And I just wondered how closely a lot of these things are checked.

Mr. BANNERMAN. I can't answer that question, Mr. Bates. I am not familiar with the problem.

Mr. VINSON. Any further questions by any members?

Mr. MORRIS. Just one, Mr. Chairman.

Mr. RIVERS. Mr. Chairman.

Mr. VINSON. Mr. Rivers,

Mr. RIVERS. Of course, we all know the distinguished background and experience of Mr. Bannerman. But I think it would be well for the committee's information if in the future we can have a little background of the witnesses. I am quite impressed with the Secretary's statement, in his capacity. But it would be helpful if we could know a little background, say-how do you pronounce your name, sir.

Secretary LEBOUTILLIER. Yes, sir; with Mr. DeGaulle in town, we are using the French pronounciation.

Mr. RIVERS. Well, in Charleston we have the original Huguenots. So I assume you are one.

Secretary LEBOUTILLIER. I am a Huguenot, too.

Mr. RIVERS. I would like to have a little of your background, because I am quite impressed with you. In the future, I think, Mr. Chairman, it would be helpful to the committee-because this is a staggering responsibility-to know the knowledge of the distinguished gentlemen who have the responsibility of administering these laws, and it would be helpful.

Mr. BECKER. We have mostly competent people from Long Island, Mr. Rivers.

Mr. VINSON. Go ahead.

Mr. RIVERS. You talked yourself out of court a little while ago, sir. Secretary LE BOUTILLIER. Yes, sir, I will be glad to give it to you. About 20 years ago, after I got out of college, I worked in the Bethlehem Shipbuilding Co. as a blue-collar worker. I went from there to the Electric Autolite Co. in Toledo, Ohio, in the comptroller department. From there I went in the Navy.

While in the Navy, I commanded various subchasers, APD's, and destroyer escorts.

Following that, I went to Toledo, again, as assistant to the president of the Toledo Scale Co.

Two years later, I became president of the Ottawa River Paper Co., which I ran for 10 years, until I merged it with the Mead Corp. 2

years ago.

I was also a director of the National Bank of Toledo, the Spartan Co., Helio Aircraft Corp., and the Boys Clubs of America, which is the only directorship I now hold, although I don't feel that is a conflict of interest. [Laughter.]

Mr. RIVERS. I think that is a good thing for us to know.

That is why I am so impressed with you.

You seem to know quite well what you are doing. I want to congratulate you.

Mr. VINSON. Mr. Secretary, Mr. Bannerman, Mr. Nash, and Mr. Phelan, I want to thank you for giving the committee the benefit of your views in reference to this matter we are discussing.

Mr. MORRIS. Mr. Chairman, may I have just one question before the witnesses are excused?

In regard to these incentive-priced contracts, have you found, by your experience, that the contractors, since they do make a profit if the cost is actually less than the target-have you found that they have an incentive to try to make that target high so they can make a profit?

Secretary LEBOUTILLIER. Well, we don't believe so. But perhaps Mr. Bannerman could answer the thing in detail.

Mr. MORRIS. Now, whether or not you agreed-I am not saying you agreed with them. But have you found that practice, to where since they know they are going to make a profit if the actual cost is less than the target, have you found that they have been making the target high, in your judgment?

Mr. BANNERMAN. Mr. Morris, those targets, of course, are not made unilaterally. We negotiate those targets, too. I think the incentive to make the target high is no greater than the incentive to get a price high in any contract.

For instance, in a fixed-price contract you have exactly the same incentive working to a greater degree.

Mr. MORRIS. I take it from your answer-this last question-I take it from your answer, then, that you gentlemen feel, sincerely feel, that the incentive-type contract is necessary and that it is not costing us more than other types of contracts, is that true?

Mr. BANNERMAN. Yes, sir.

Secretary LEBOUTILLIER. That is correct.

Mr. VINSON. Now, I will say to Mr. Morris: My understanding of the incentive target price is that when the target price is set, there is already an 8-percent profit added in.

Mr. MORRIS. Yes, sir; to start with. But the point is, even notwithstanding that, is there also an incentive to make it still higher so they do participate, as I understand it, in addition to the 8 percent, in a percentage of the sales as between the target and what it actually costs, isn't that correct? And what is their percentage?

Mr. VINSON. 20 and 80.

Mr. BECKER. 20 percent.

Mr. BANNERMAN. It varies contract by contract, Mr. Chairman. A rather standard share rate is 80-20.

Mr. BECKER. 80-20?

Mr. BANNERMAN. I might point out to you, Mr. Morris, that if the cost overrun the target, they lose profit on that.

Mr. MORRIS. But they still get their 8 percent.

Mr. BANNERMAN. No, sir.

Secretary LEBOUTILLIER. No.

Mr. MORRIS. They don't get their 8 percent?

Mr. BANNERMAN. No, sir. As a matter of fact, they may get nothing.

Mr. VINSON. Well, thank you very much.

It has been very beneficial to the committee to have the testimony of you distinguished witnesses.

Secretary LEBOUTILLIER. Thank you.

Mr. BANNERMAN. Thank you.

Mr. VINSON. Now, the next witness is the Assistant Secretary of the Army for Logistics, the Honorable Courtney Johnson.

Now, in view, Mr. Johnson, of the policy adopted by Mr. Rivers, and acquiesced by the committee, we would like to have your background.

Secretary JOHNSON. I will be very glad to submit that, Mr. Chairman, and try not to make it too long.

At this time I have a very considerable background. So it would take some time to recite it all.

Mr. VINSON. Go right ahead.