Now, in reference to fixed-price type, will you describe for the record what type of contract that is?

Now, we write a definition in our chart, on page 6, where we say—

A firm fixed price for a specified item for a specified price, not subject to price adjustment, used always in formal advertising but may be used in negotiation.

That is the correct definition that you use?

Secretary JOHNSON. Yes, sir. Mr. Chairman, in this regard, I will try to answer your questions in this respect to the very best of my ability. But I would like the opportunity to refer to General McMorrow and Mr. Kintisch to supplement anything that I might say, if I don't give it all.

Mr. VINSON. All right. Any comments you want to make with reference to an explanation of what you classify a fixed-price-type contract to be; is our definition satisfactory to you, in our chart? General MCMORROW. Yes, sir.

Mr. VINSON. All right.

Now, then, the other kind of contract is a fixed-fee contract with a cost reimbursement attached to it, is that correct?

General McMORROW. That is correct, sir.

Mr. VINSON. Now, give the committee some information as to what type of contract that is. You agree on a fee and agree to pay all the costs, is that it?

General MCMORROW. That is correct, sir.

Mr. VINSON. That is all it is, isn't it?

General McMORROW. That is all.

Mr. VINSON. And you pay all the costs, plus a fee?
General McMORROW. That is correct.

Mr. KINTISCH. Up to a ceiling.

Mr. VINSON. Those are the only two contracts in the Army.

Mr. KINTISCH. Mr. Chairman, there can be a ceiling on those costs. Mr. VINSON. Oh, yes, I understand that. Oh, yes, you have a ceiling on the whole thing, yes. But that, broadly speaking, is the types of contracts?

[General McMorrow nods.]

Mr. VINSON. Now, then, you say on page 4, in considering your fee, you use this language:

The following factors are among those considered in arriving at a fair and reasonable price, profit and fee.

Now, this has no application to a fixed-price-type contract because that is positive in selling?

General McMORROW. That is correct.

Secretary JOHNSON. That is correct, Mr. Chairman.

Mr. VINSON. Now, then, take No. 2.

Now, these are factors that you take into consideration in doing but one thing, and that is to fix the fee, isn't that correct? Mr. KINTISCH. No, I don't thing so, no, sir.

General McMORROW. No, sir.

I believe you are referring to paragraph 7, Mr. Chairman, under which we are talking here about the way we analyze the fixed overall price which has been submitted to us, and in analyzing that price to find out whether this fixed price is a proper one or not, we obtain breakdowns as to the actual direct labor, the engineering labor that the

contractor is charging for, and the other elements making up this fixed price.

Mr. VINSON. All right.

General MCMORROW. And by analyzing these, we then determine whether that fixed price is a proper fixed price or is not.

Mr. VINSON. And reaching the decision as to the proper price, the fixed price, these are the criteria you use, which are set out 2, 3, 4, 5, 6 and 7?

General MCMORROW. That is correct, sir.

Mr. VINSON. Good.

Secretary JOHNSON. This is under negotiation.

Mr. VINSON. This is on a cost-reimbursable?

Secretary JOHNSON. No, it is a fixed price, negotiated fixed-price contract.

Mr. KINTISCH. That is right.

Mr. VINSON. Then these standards you set out-then that is only used with reference to the fixed-price-type contract, then?

General MCMORROW. We review those standards on both types of

contracts.

Mr. VINSON. That is what I was thinking.

General MCMORROW. These standards apply on both types.

Mr. VINSON. That is right, to both types.

(Mr. Bates aside.)

Mr. VINSON. As Mr. Bates just suggested, you use this criteria and this standard whether it is a fixed-price type or a fixed-fee, cost reimbursable?

General McMORROW. That is correct, Mr. Chairman.

Mr. VINSON. These factors are taken into consideration?

General McMORROW. Yes, sir.

Mr. VINSON. Now, that requires a great deal of auditing, does it not, to get this information? For instance, the first one is you say:

Performance and financial risk taken by the contractor;

Second, the character and extent of the contractor under the make-and-buy program and proposed subcontracts.

You have to know something about the man's business?

Secretary JOHNSON. Yes, sir.

Mr. VINSON. And you get that from your auditors?

Secretary JOHNSON. And this is where the contracting officer's team comes in.

Mr. VINSON. All right.

Secretary JOHNSON. He has accountants and lawyers and industrial people on his team.

Mr. VINSON. Now, right in that connection, for the record, I want you to put in the record how many people are associated or connected in the Army with procurement and auditing, so you will have all the information to know whether the price that he submitted is a proper price.

Secretary JOHNSON. In order to be sure that this is absolutely correct, may we submit it later for the record?

Mr. VINSON. That is right, put it in the record, don't you see?
Secretary JOHNSON. Yes.

Mr. VINSON. I judge you have a great many, do you not?
Secretary JOHNSON. Yes, there are a lot of people.

General MCMORROW. May I clarify that requirement, Mr. Chairman?

As I understand what you desire here, you do not want the overall total number of people that we have in the Army system, but you want the number that would be involved in the negotiation?

Mr. VINSON. That is right.

General McMORROW. Of a single major contract?

Mr. VINSON. That is right.

General McMORROW. As an average.

Mr. VINSON. I am going to get that same information from each one of the other departments. I am driving to see what scrutiny and surveillance is exercised in determining all these factors, to see how well you are policing it, in plain language.

Secretary JOHNSON. Mr. Chairman, General McMorrow has understood your requirement differently than I did.

Now, I want to be certain. I thought you wanted to know

Mr. VINSON. I am going to curtail it to his understanding, to the General's understanding.

Secretary JOHNSON. OK. Fine.

Mr. VINSON. The form of question was a little broad. (The information requested follows:)

PERSONNEL INVOLVED IN THE NEGOTIATION AND APPROVAL OF CONTRACTS

The contracting officer is the duly designated official who is "authorized to enter into contracts for supplies or services, in accordance with procedures prescribed by the Department concerned, on behalf of the Government and in the name of the United States of America, whether by formal advertising or by negotiation or by coordinated or interdepartmental procurement as provided herein" (ASPR 1-402).

Only persons who have been determined to possess the required attributes, including training, experience, judgment and maturity are designated as contracting officers. In the Department of the Army, contracts over $100,000 may be signed only by contracting officers of the grade or rank of GS-12 or major, or higher, except by special authorization.

The contracting officer involved in the larger procurements is assisted and supported by a team of experts, whose advice and counsel covers the entire procurement area. While the contracting officer engaged in procurement of the more complex equipments is required to be specially qualified, he is not expected or permitted to carry out his responsibility alone and unaided.

Although all of the specialists on the contracting officer's team may not be involved in every procurement action, at one time or another, each is called upon for his expert advice and guidance.

The negotiator is the principal assistant to the contracting officer. His responsibility includes helping to plan the procurement, oversee preparation of the solicitation for proposals, prepare necessary determinations and findings, plan with other members of the contracting officer's team for the negotiations with prospective contractors, attend or conduct the negotiaions, obtain necessary approvals, and in general advise and assist the contracting officer until execution of the resulting contract.

Other members of the contracting officer's team and general statements of their functions are:

Commodity engineer: Assures adequacy of the procurement data for solicitation of proposals, assists in selecting technically qualified sources for solicitation, evaluates technical aspects of proposals received from offerors, including technical qualifications of prospective contractors, and acts as technical advisor to the contracting officer during negotiations.

Price analyst Reviews and analyzes cost breakdowns submitted with proposals to determine reasonableness of the several elements of proposed prices and assists the contracting officer in the negotiations as to pricing of contracts.

Auditor: Examines prospective contractors' books and records when necessary to corroborate cost estimates and to determine the adequacy of their accounting

systems to sustain cost-reimbursement and price redeterminable type contracts and furnishes advisory reports and assitance to contracting officers.

Legal counsel: Reviews proposed solicitations and resulting contracts to assure compliance with applicable laws and regulations, and reviews and often assists in the preparation of contractual documents to assure that they contain provisions evidencing the agreement between the parties.

Patent adviser: Reviews proposed contracts and awards when patent problems are present and advises and assists the contracting officer and his associates with respect thereto.

Small business adviser: Reviews proposed procurements to determine whether they afford an equitable opportunity for small business, and advises and assists the contracting officer in the carrying out of the small business program.

Production expert and industrial specialist: Reviews prospective contractors' proposals and examines their facilities, advises the contracting officer as to the adequacy of the contractors' facilities for performance of the proposed contracts, and arranges for the furnishing of necessary Government tools and equipment where required.

Packing and packaging specialist: Reviews proposed solicitations to insure that proper specifications for packing and packaging are included and assists in the evaluation of proposals with respect to the packing and packaging elements of proposed prices.

Transportation and traffic management officer: Reviews proposed solicitations to insure that the traffic and traffic management requirements for delivery of material are properly set forth and assists in the evaluation of proposals with regard to the transportation elements of proposed prices, furnishes estimated cost of transportation to contracting officer.

Preaward surveys are made by specialists who determine the financial, technical, and production capabilities of proposed contractors prior to or in connection with the negotiation of contracts. The individuals involved in such surveys are the production expert and industrial specialist, financial analyst (who reviews contractors' financial condition and capability to finance the proposed contract) and the commodity engineer. The equipment inspection adviser is responsible for determining the adequacy of the proposed contractor's quality assurance operations to assure requisite quality of the manufactured product. Business review.-After negotiations are completed by the contracting officer, the negotiator, and the other members of the negotiating team, proposed awards are reviewed to assure that they comply with applicable laws and regulations and are sound business transactions. This type of review is accomplished in several different ways in different organizations, but the end result of each is a determination that the proposed award is sound from the business point of view.

Approvals.—Procurements are reviewed and approved at varying level depending on the dollar value of the action. Commanders of field central purchasing offices may generally approve contracts up to $1 million. Heads of the procuring activities (the chiefs of the technical services and the commanding generals of the Zone of Interior and oversea armies are heads of the procuring activities) approve_contracts up to stipulated sums, which vary among the technical services. Proposed awards exceeding those amounts are reviewed and approved by the Deputy Chief of Staff for Logistics.

The Assistant Secretary of the Army is notified of certain larger contracts as well as contracts in stipulated areas. The very large contracts thus reach the highest levels in the Department of the Army for review and approval prior to award and execution of the contracts.

In summary, depending upon differences in organization and the commodities being procured, there is involved in the negotiation of a representative major procurement a total of from 7 to 10 individuals, who comprise the contracting officer's team. After the negotiation is completed, review of the proposed award is made by a group of three or four top level people in the purchasing office. The recommendations of all these specialists are considered by the contracting officer in arriving at his decision. Thereafter the procurement is reviewed and approved by the commander of the purchasing office before transmission to the office of the chief of the technical service, in case approval is required at that level. In the office of the chief of technical service, about 8 to 10 people are involved in the review of various aspects of the procurement. If the procurement is of such an amount or nature as requires approval in the office of the Deputy Chief of Staff for Logistics, 7 to 10 people in that office, including the

Director of Procurement, are involved in the review and approval of the procurement. If the transaction requires being brought to the attention of the Assistant Secretary of the Army (Logistics), about three to five people, including the Assistant Secretary, are involved in its review and approval at that level. If other elements of the Department of the Army headquarters are involved, these are also consulted. Thus, a total of 28 to 39 people are normally involved in a representative major procurement.

Mr. VINSON. Now, the next thing I want to clear up is this. I am very much impressed with this statement. Now, on page 7 you said this:

We have reviewed our experience during the fiscal year 1951 on the redetermination of 295 contracts. It is interesting to note that the revised contract price totaled $631 million, against an estimated target price of $656 million.

Now, as I interpret that, the first price was thought to be in the neighborhood of $656 million, is that correct?

Mr. KINTISCH. Yes.

General McMORROW. Correct, sir.

Mr. VINSON. Then when the article was turned out and the cost factors were applied against the articles, it only cost $691 million. Secretary JOHNSON. $631 million.

Mr. VINSON. $631 million.

Secretary JOHNSON. Yes, sir.

General MCMORROW. Yes, sir.

Mr. VINSON. Therefore, that was a $25 million saving to you in the article that you obtained?

Secretary JOHNSON. Yes, sir. You said when the article is turned out. I think to make that absolutely correct, we should say at a point during the manufacturing proceedings we went through a redetermination procedure

Mr. VINSON. That is right.

Secretary JOHNSON. And determined what the price should be from the results.

Mr. VINSON. All right. Then that is what it cost you.
Secretary JOHNSON. Yes; that is right.

Mr. VINSON. That is what it cost you, don't you see?

Then when you use the expression when the article was turned out. it cost you $631 million, against what you first anticipated it would cost, which was $656 million, that is $25 million.

Now, isn't that the same basis that they make incentive contracts on, a target price?

Now, let's take your 295 contracts. Your target price was so much, and you thought your articles would cost you $656 million, but when they were produced, they only cost $631 million. Now, if that had been an incentive-type contract, then there would have been a reduced cost to the Government of $25 million, would there not?

General MCMORROW. Yes, sir.

Mr. KINTISCH. Yes, sir.

Mr. VINSON. And under the formula of 80-20, the contractor would have received $4 million for the incentive of reducing the cost. General McMORROW. Yes, sir.

Mr. VINSON. That is right, 20 percent of the saving of $25 million. Now, at the same time, he would have had a profit of 8 percent in the target price, of $656 million.