already established policy requiring the purchasing activity to obtain business clearance of a proposed contract with a particular supplier after negotiation. The change is designed to improve internal pricing control and adherence to the Navy's pricing objective. This is brought about through participation by the procurement specialists in the Office of Naval Material during the early planning stages of major procurements. Additionally, the review of proposed procurements prior to commencement of negotiations enables us to examine closely and in a timely manner the many elements involved in our major contract programs. Recently Admiral Clexton and I spent several hours with the negotiation team and the clearance analysts in the Office of Naval Material and-who are responsible for negotiating and reviewing the final contract for the new nuclear carrier Enterprise, which will be completed by the Newport News Shipbuilding & Dry Dock Co. in about 18 months. They described to us what they are doing to secure the best possible contract price and terms. It was a very reassuring experience. The team has spent months in developing their data and in negotiating agreement with the company's spokesmen on the many important elements of the contract. Our auditor assured us that the company had been completely cooperative in providing all of the data needed, including wage rates, overhead rates, projections of workload, estimated labor hours, and all other data asked for. Individually and collectively these men were very impressive in their dedication, competence, and vigor. Concurrently with the change requiring preliminary clearance of procurement plans by the Office of Naval Material for all procurements of $300,000 and over, Navy purchasing activities were directed to apply the same clearance and review principles within their own organizations to procurement plans for and proposed awards of procurements between $50,000 and $300,000. The Office of Naval Material performs another type of procurement review, the nature of which is more broad in scope. It periodically reviews and analyzes the procurement organization, methods, procedures, and pricing techniques used in the various purchasing activities of the Navy. The purpose of these reviews is to evaluate business practices, streamline and improve procurement operations, and insure compliance with existing regulations and policy. As a result of these reviews during the past 3 years, several hundred specific recommendations have been made which have resulted in substantially improved procedures, organizations, and staffing. COMPETITION One of the most effective conditions conducive to the attainment of prices that are fair and reasonable in our contracting is the presence of competition among qualified suppliers. A recent study made by us indicates that contracts involving over 80 percent of our fiscal year 1959 procurement dollars were awarded after price or design competition was obtained, or, as follow-on procurement to contracts so awarded. I believe that two specific actions which we are now taking to increase this proportion of competitive procurement will be of interest to this committee. These are (i) the use of a breakout procedure and (ii) more effective use of drawing and specifications. BREAKOUT PROCEDURES To obtain the component elements of our ships, missiles, and other major end items, there are three basis approaches we may take. First, we can permit the contractor to "make" certain components, reviewing his cost data to insure reasonableness of cost. Second, we can allow the contractor to "buy" certain components from subcontractors, after carefully reviewing his "make or buy" plans to determine their effect on price, quality, delivery, and performance and examining his purchasing system to insure that adequate competition is obtained. Third, we can "break out" from our large complex system procure ments those components and subsystems which, without affecting the technical integrity of the parent system, we may purchase through competitive means from a number of sources; items so purchased are then provided to the prime contractor as Government-furnished material. In each procurement we try to use whatever combination of these three approaches which is in the best interest of the Govern ment. We use the term "breakout" to designate the technique whereby we buy certain components and furnish them to the prime contractor for incorporation in the end item. We use this breakdown technique not only to develop competition but also to broaden our industrial base and bring about economies in both time and costs. Purchases by breakout frequently result in better prices and earlier deliveries. They also serve to increase the opportunities for greater participation by small business firms in our procurement program. Here are several illustrative examples of our application of the breakout procedure during 1959 and the apparent savings realized as a result of competitive procurement. There are three items listed: Item Rolleron-type wing assemblies for sidewinder missile motor_ Apparent savings $141.000 146,000 384, 000 Wherever the selective application of this procurement technique will bring about improvement in price or quality, or will aid small business without sacrifice of price or quality, we will continue to insist on its use. DRAWINGS AND SPECIFICATIONS Another important means of increasing competition in our procurement programs is to insure the timely acquisitions of drawings and other technical data which will serve as a basis for competitive procurement. The Office of Naval Material recently conducted a comprehensive navywide study of the existing policies and procedures concerning the acquisition, control and use of drawings and technical data, particular effort was made to investigate new procedures which would insure the earlier availability of drawings and technical data for competitive procurement purposes. A report containing the results of the Navy study has been provided by the Chief of Naval Material to the chiefs of the major purchasing bureaus, along with instructions to implement its applicable recommendations. As a result of this report and the significant recommendations made therein, increased availability of drawings for procurement is expected, which in turn will result in increased competition. VALUE ENGINEERING A procurement technique which we have employed with considerable success, particularly in the shipbuilding programs, and one which holds promise as a means of reducing the prices of some of our major weapons, is value engineering. Value engineering involves a review of the elements of design, engineering, manufacturing processes, and material which go into an end item, in order to determine whether the item can be made to perform the same function at a lesser overall cost. To encourage value engineering efforts hence cost reduction-by our contractors, we have developed incentive provisions for incorporation in selected contracts. These provisions provide that the contractor will maintain a value engineering staff whose efforts will be devoted during performance of the contract to the development of cost-reduction recommendations with respect to the items being produced. These recommendations with respect to the items, are then submitted to the Navy and if adopted, the contract prices are reduced. by an amount which will permit the contractor to share in the resultant savings. Illustrative of the savings possible through the application of value engineering was that achieved by the adoption of a proposal to revise the method of welding the "stuffing tubes" through which electric cables penetrate watertight bulkheads and decks aboard ship. Simplification of this single process has reduced shipbuilding and repair costs by $4.8 million per year. Additional examples of cost reduction through value engineering are included in appendix A, which has been furnished along with this statement. Our experience to date in the use of this technique, though limited, is encouraging, and we will continue to follow its development with great interest and a view to its possible expansion into additional areas of our procurement program. PROCUREMENT TRAINING We have stepped up and expanded significantly the Navy's procurement training program during the past 2 years. Supplementing the training, both formal and informal, which is conducted by our major procuring activities, the Office of Naval Material has assumed an increasing share of the responsibility for the conduct of navywide training in all aspects of Government procurement. In past years courses in contract administration, contract termination, and negotiation and pricing techniques have been conducted from time to time by the Office of Naval Material. Last year, an advanced Navy procurement course, covering such matters as procurement policies, procedures, regulations, and legal requirements, was added. This course was attended by approximately 100 of the Navy's top civilian and military procurement personnel. Presently underway is a Navy procurement course modeled after the advanced procurement course but developed expressly for the intermediate levels of procurement personnel. It is planned that more than 250 military and civilians will have completed this course by the end of this year. A third course will commence in May especially designed for technical personnel of the Navy, in which they will be given instruction in procurement policies, procedures, regulations, and laws as they relate to their responsibilities. This training is expected to assist us in the solution of the many daily problems jointly shared by technical and contracting personnel. Commencing in July of this year will be a new Navy price analysis course in which specific training will be provided in the techniques of analyzing contractors' prime costs, bills of material, subcontracting costs, and related matters. The primary objective of this course will be to improve the skills of our negotiators in applying the many techniques required to assure close pricing in our contracts. Finally, a Navy property administration course designed to instruct Navy personnel in the administration of Government property in the possession of defense contractors will also get underway in the first quarter of fiscal year 1961. Approximately 1,000 of our procurement personnel will have completed the current and planned courses by the end of this year. In addition to the foregoing, during 1959 the Office of Naval Material conducted a series of seminars for procurement personnel in the Washington area. Personnel attending represented Navy procurement organizations responsible for the bulk of the Navy's procurement dollars. The subjects of these seminars included such timely topics as subcontract analysis, analysis of bills of materials, utilization of Navy auditors in pricing, and the recently revised contract cost principles. Before leaving the subject of training, I would like to mention a recent major accomplishment involving one of our more important training media, the publication "Navy Contract Law" issued by the Navy's Office of the General Counsel. This book has just been completely revised and brought up to date. In addition to use by Government personnel, it is available at modest cost to the public through the Government Printing Office so that contractors and their lawyers may better understand what is involved and required when a contract is executed with the Government. I commend this document to all individuals, in or out of the Government, who are concerned with the legal and practical aspects of Navy procurement. THE NAVY PROCUREMENT DIRECTIVES (NPD) The many recent improvements to the Armed Services Procurement Regulations have been discussed fully by Mr. LeBoutillier. To the extent implementation of the ASPR is necessary, or guidance in procurement areas not covered by the ASPR is required, we issue departmental procurement regulations in the form of Navy Procurement Directives (NPD). Last year a revised and greatly improved edition of the NPD was published. The content was rearranged and numbered to conform to the ASPR, and all material which duplicated that contained in the ASPR was removed. As a result, use of this document by our procurement personnel has been greatly facilitated and its size reduced by more than one-third. COST PRINCIPLES The matter of cost principles and their application under costreimbursement-type contracts is of particular concern to the Navy. In view of the fact that approximately 30 percent of our procurement dollars are placed under cost-type contracts, it is of the utmost importance that these cost principles are completely understood and properly applied by our negotiation and audit personnel. In his presentation, the Deputy Assistant Secretary of Defense for Supply and Logistics discussed in considerable detail the new revised set of cost principles which were issued in the ASPR on November 2, 1959. Following receipt of additional guidance from the Department of Defense, the Office of Naval Material issued an instruction on February 17, 1960, which implemented this guidance and provided detailed information on the use of the new cost principles in the Navy. Pending the issuance of this instruction we held two seminars dealing specifically with the new principles, their interpretation, their differences from the previous cost principles contained in the ASPR, and their intended application. Each of these seminars was attended by approximately 300 Navy procurement personnel, including negotiators, located in the Washington area and representing the major buying offices of the Navy. As soon as additional experience is gained under the revised cost principles, we intend to hold other seminars, not only with personnel in the Washington area but with field personnel as well. The purpose of these seminars will be to exchange experience and to assure uniformity in the interpretation and application of the revised cost principles. CONCLUSION Mr. Chairman, I have described to you various steps we have taken and techniques we have developed which were designed to achieve reasonable costs, prices, and profits in our procurement. Although the evidence we have been able to assemble indicates to us that a creditable pricing job is being done by the Navy, this is not to say we are satisfied. Further improvements can be made and we are actively seeking to bring them about. We are refining our negotiation and pricing techniques. We are reviewing our procurement operations to discover and correct any deficiencies which may exist. We are training our procurement personnel to develop their greatest potential. Let me again express my appreciation for the opportunity to appear before this committee to describe the Navy's efforts to improve its procurement policies and procedures. APPENDIX A EXAMPLES OF VALUE ENGINEERING UNDERWATER EXPLOSIVE DEVICE In fiscal year 1956, this $28 item was originally designed and produced as a practice depth charge in accordance with detailed plans and specifications. This device was subsequently incorporated as a vital part of an ASW system which greatly increased the annual procurement requirements. Concerted cost reduction efforts to meet these requirements led to the preparation of a general per |