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Mr. COGGESHALL. No, sir; the joint venture stands on its own feet. Mr. JONAS. And the component members thereof cannot break it out into individuals?

Mr. COGGESHALL. That is right. It is an entity.

Mr. JONAS. I do not believe they formed a corporate entity. I think they operate on a partnership basis as a joint venture.

Mr. FENSTERSTOCK. That is true, but under the act the term "contractor" or rather the term "person" includes an individual, firm, corporation, association, partnership, and any organized group of persons whether or not incorporated.

Based on that statutory provision the Board treats a joint venture or partnership as a contractor in its own right, as a separate entity, separate and distinct from the members who compose the partnership or joint venture.

Mr. JONAS. How do you handle a partnership?

Mr. FENSTERSTOCK. In the same way.

Mr. JONAS. And the partnership is treated as a separate entity? Mr. FENSTERSTOCK. Yes. They receive contracts in their joint venture name and as such are renegotiated separately.

Mr. JONAS. And the same rule applies to the joint venture?
Mr. FENSTERSTOCK. Yes, sir.

VACANCIES

Mr. JONAS. I thought the chairman of our subcommittee pretty well established that you can get along with a cut of about $90,000, Mr. Chairman.

Mr. COGGESHALL. Not according to our figures. The decline which occurred was going on all last year. We just got in under the $2,870,000. We had five vacancies then.

Mr. JONAS. How long have you had these 10 vacancies?

Mr. HAGGERTY. The number is always fluctuating. These 10 have existed since January.

Mr. COGGESHALL. Some men dropped out.

Mr. JONAS. How long have you had the 10 vacancies?
Mr. HAGGERTY. Since January.

Mr. JONAS. How many did you have at January 1?

Mr. HAGGERTY. I don't recall offhand. Some vacancies have been there as much as 6 months. We could find nobody to fill them. We have an opening for an accountant in Los Angeles, for instance, grade 14, and we cannot find a man to fill it. Four of the jobs are professional and six are clerical.

Mr. JONAS. The Board is getting along, is it not?

Mr. COGGESHALL. Not entirely.

Mr. JONAS. You are keeping up with your work?

Mr. COGGESHALL. Los Angeles is not.

Mr. OSTERTAG. Do you mean that you cannot find clerical people? Mr. HAGGERTY. Couldn't fill this one job.

Mr. COGGESHALL. And we have a regional board membership to fill there. The regional board member retired January 20. We had a man in the Office of Review who went out in December.

Mr. JONAS. What effort have you made to find an accountant? Have you circulated that information to the U.S. Employment Service?

Mr. HAGGERTY. Mostly civil service. They have to be civil service. Mr. COGGESHALL. We have to have a top accountant.

Mr. JONAS. With four or five million people unemployed there should be some accountants available. In a recession you would have more applications. You have not been able to find anybody?

Mr. COGGESHALL. We had a man lined up who had the experience, before it was civil service. He was reached for. They reached for three men who left. One was willing but they closed the register, I believe.

Mr. HAGGERTY. He could not make the register. They offered him a temporary appointment and he refused it.

Mr. OSTERTAG. Are these positions civil service?

Mr. HAGGERTY. Yes.

Mr. OSTERTAG. A register exists for all of these positions, does it not?

Mr. COGGESHALL. No. They have had to set up registers for renegotiations. Standards have to be so high for the accountants, they set up a special register.

Mr. HAGGERTY. There is a register in New York from which we can draw, but up until this was established there was none. We operate in the regions only.

Mr. ÖSTERTAG. Is that what held you up?

Mr. COGGESHALL. Yes. A year ago we had an excellent man who had been on the Los Angeles board before it was civil service and had been a Board member. He had withdrawn for family reasons. He was interested in coming back and it took us 4 months to get him, although he had been a member of the regional board, before he qualified with the civil service in Los Angeles. He came on as a renegotiator for a year's provisional appointment.

Mr. JONAS. We do not want to cripple the operation but we are always happy when we see an organization such as yours do a fine job with a declining number of people. We congratulate you on getting along without these 10.

REDUCTION IN 1962 FUNDS

I was under the impression, from your answer to the chairman, we might be able to cut you about $90,000 without crippling your opera

tions.

Mr. COGGESHALL. We would have to have a Scotch holiday in the month of June if we were below this year's figure. Our completions are not up to our calculation and that is due partly to manpower. On a prorated basis we are running about 120 behind our projection. Mr. JONAS. Any vacancies in Washington?

Mr. COGGESHALL. One man, Office of Review. There are several clerical.

Mr. JONES. Several clerical vacancies in Washington?
Mr. COGGESHALL. Yes. The girls come and go.

Mr. JONAS. Off the record.

(Discussion held off the record.)

Mr. RHODES. The arithmetic seems to be that with the supplemental you will spend $3,015,000 in this fiscal year, but you are asking for only $3 million for the next year?

Mr. COGGESHALL. That is right.

Mr. RHODES. You are absorbing that $15,000 in the field operation? Mr. COGGESHALL. Yes, sir.

Mr. RHODES. Is it just coincidence that the amount you can absorb in the field operation is $15,000 so it rounds off neatly to $3 million, or is there some possibility that in the same area where you absorb that, you could absorb more?

Mr. COGGESHALL. I did some pretty close figuring when I went to the Bureau of the Budget. At that time, before some of these vacancies had occurred, the $3,050,000 that I talked to them about would have been a close fit. I got word back from them in November, they didn't press me, they have always been very nice at the Bureau as you have been here, they inquired whether we could not get along on $3 million. We had had a couple of men drop out, I looked it over, and I said I thought we could do it.

Mr. HAGGERTY. There is a clue on the $15,000. We abolished the position of the sixth Board member in Detroit.

RENEGOTIATION PROCESS

Mr. RHODES. I note you renegotiate each fiscal year either on the receipts or accruals of the contractor. I assume you renegotiate on either receipts or accruals depending on whether the contractor is on a cash or accrual tax basis?

Mr. COGGESHALL. That is right. From time to time we have provisions for special accounting agreements. If the method of tax reporting is cash, and for the renegotiable business it looks as though the only true picture will be on receipts, we suggest he go on a receipts basis for the purpose of renegotiation. The reverse could happen.

Mr. RHODES. Do you ever have a situation where, because the contractor may be negotiating on an accrual basis or reporting on an accrual basis, that you have need for a loss carryover?

Mr. COGGESHALL. Yes, indeed. There was a provision from the start in the act to have carryover of loss for 1 year on renegotiable business. That was increased along the way in the 1956 amendments act to a 2-year carry forward. In 1958 it was made a 5-year carry forward of loss. We have seen that taken advantage of far more than we ever saw it in the past. I thought only 1 case was what they had in mind, but it turns out we have seen 6, 8, 10 contractors running losses on renegotiable business, along with their commercial business, carried forward 2, 3, or 4 years. There have been no fifth year carry forwards yet.

CONTRACTS SUBJECT TO RENEGOTIATION

Mr. RHODES. Is the International Cooperation Administration subject to the Renegotiation Act?

Mr. COGGESHALL. No, sir.

Mr. RHODES. What about the procurement of military equipment for the nations furnished with such equipment by the ICA?

Mr. COGGESHALL. That is covered.

Mr. FENSTERSTOCK. Contracts entered by the ICA itself are not subject to renegotiation.

Mr. OSTERTAG. Mr. Rhodes is speaking of ICA money used for defense contracts by the Defense Department overseas.

Mr. COGGESHALL. They are subject.

Mr. RHODES. There is no renegotiation of contracts by the ICA for offshore procurement?

Mr. COGGESHALL. No, sir.

Mr. RHODES. No matter what the purpose might be?

Mr. COGGESHALL. That is right.

Mr. RHODES. And none for domestic procurement?
Mr. COGGESHALL. No.

RENEGOTIATION OF CONTRACTS INVOLVING SUBCONTRACTORS

Mr. RHODES. Suppose you have a situation in which a prime contractor has a series of subcontracts, all of them under the $500,000 limitation. In renegotiating a prime contract do you look behind the subcontracts which are under $500,000?

Mr. COGGESHALL. You mean the amount of the contract or the performance thereunder in each fiscal year?

Mr. RHODES. It would have to be the performance in each fiscal year.

Mr. COGGESHALL. Unless the aggregate of such subcontracts exceeded $1 million that subcontractor is not subject to renegotiation.

Mr. RHODES. I know that, and this is the thing that bothers me somewhat. Assuming you have a series of such subcontracts, all below $1 million, all for less than $500,000 in any fiscal year, how can you effectively renegotiate the prime contract unless you know the facts surrounding the execution of the various subcontracts?

Mr. COGGESHALL. We have no power to find out the facts from the subcontractor.

Mr. RHODES. Under the enabling legislation you have no such power?

Mr. COGGESHALL. That is right.

Mr. RHODES. Then this yardstick which you brought forth on page 12 of your very well prepared justifications would apply only to that portion of the prime contract which is not represented by subcontracts of under $1 million or less than $500,000 in each fiscal year?

Mr. COGGESHALL. Those are in the prime contractor's figures. We can take, for example, one of the great airframe companies with $500 million of sales. Generally speaking, in the typical case, $125 million, possibly $250 million is represented by work of subcontractors. Our general position is that the greater the proportion the less the prime contractor is entitled to by way of profit.

Mr. RHODES. Let me remind you of your yardstick on page 5 of the justification. The first item is reasonableness of costs and profits. Second is capital employed. Third is extent of risk assumed. Fourth is nature and extent of contribution of the defense effort. Fifth is the character of the business.

Unless you look behind the terminal figures given in the subcontracts which are the subject of this colloquy, I do not see how you can

take into consideration item No. 1 of your yardstick for the prime contract, which is reasonableness of costs and profits.

Mr. COGGESHALL. We break down the costs of the prime contractor between material, subcontracting, direct labor, overhead, G. and A. expense, and so on.

Mr. RHODES. There is one item in the subcontracts you do not consider. This is what I am getting at.

Mr. COGGESHALL. We have the aggregate figure in each and every

case.

Mr. RHODES. I can give you all sorts of figures. Unless you can go behind them you do not know whether or not they are reasonable. Mr. FENSTERSTOCK. Not when we are renegotiating the prime contractor, except to the extent that the prime contractor himself furnishes the information that enables us to form such a judgment.

So far as reasonableness of the subcontract price is concerned, whether the subcontractor realizes excessive profits, that comes up as a direct matter to the Board only when the subcontractor is himself being renegotiated.

Mr. RHODES. I understand that. But the prime contractor's compensation also is based on the performance under the subcontracts.

Mr. COGGESHALL. That is right. We check carefully with procurement in those cases to get their views. They see it because they pass on all subcontracts in excess of $10,000 and get their view as to whether subcontracting has been well managed, loosely handled, whether high cost or low cost. You can say that is generalization but that is as far as we can go. That is a very important element in renegotiation. Mr. RHODES. I will give you a hypothetical case.

Suppose I have a prime contract for $27 million, and I subcontract that to 30 subcontractors at $900,000 each, and it is to be performed over a period of 2 years.

As I understand the situation, you would have no way of judging the reasonableness of my costs and profits except in accordance with the figures as I gave them to you as the prime contractor?

Mr. COGGESHALL. That is right, except what we get from the procurement department.

When we come to the point of renegotiating the prime contractor we get from the procurement department at our request a performance report on the prime contract and on such important contracts as they have direct information about.

Mr. RHODES. Taking my case again, assume 10 of the 30 companies with which I contracted are subsidiaries of my own company, the prime contractor. Do you take a different look at those subcontracts?

Mr. COGGESHALL. You have intercompany eliminations in that case. In other words, the sales of one become the costs of the other and we eliminate all intercompany transactions.

Mr. RHODES. What do you mean?

Mr. COGGESHALL. First, if there is a consolidated renegotiation your total sales, top sales figure, is $27 million and not $27-million-plus. That is assuming the subcontracts added up to $27 million and they had a 10-percent profit. That is $24 million sales, $3 million profit. You do not have $51 million sales but still $27 million sales. The profit is picked up and it is treated as one profit inside of the consolidated renegotiation. We do the same if it is not consolidated but is

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