CONTENTS II. How we buy III. How we are organized to buy Exhibit 1. Net value of military procurement ac- Exhibit 2A. Extent of competitive procurement Exhibit 4. Coordinated procurement programs Exhibit 5. Single Department procurement as- Exhibit 6. Plant cognizance procurement assign- Exhibit 7. Single managerships Exhibit 8. List of Federal supply schedule con- Exception 1-National emergency Exception 4-Personal or professional services Exception 5-Services of educational institutions Exception 6-Purchases outside the United States Exception 7-Medicines or medical supplies Exception & Supplies purchased for authorized Exception 9-Perishable and nonperishable sub- Exception 10-Supplies or services for which it is Exception 11-Experimental, developmental, or Exception 12-Classified purchases Exception 13-Technical equipment requiring Advantages and limitations of formal advertising Criteria for effective use of formal advertising Specifications Origin of specifications Design and performance specifications Specification policy Items developed by private industry Items developed under defense contracts Fixed-price contract with escalation Fixed-price contract providing for redetermina- Fixed-price incentive contract Cost-reimbursement type contracts Cost contract Cost-sharing contract Cost-plus-a-fixed-fee contract Cost-plus-incentive-fee contract Indemnification Feasibility studies Weapons systems Introduction Source selection Program planning and control Pricing techniques Pricing of subcontracts Profit or fee Conclusion STATEMENT BY THE HONORABLE PERKINS MCGUIRE, ASSISTANT SECRETARY OF DEFENSE (SUPPLY LOGISTICS) Before the Procurement Subcommittee of the Senate Committee on Armed Forces Mr. Chairman and members of the committee. I appreciate the opportunity to appear before this committee in response to your invitation to discuss the procurement policies and practices of the Department of Defense. When the committee hearings on Senate bills 500, 1383, and 1875 concluded last summer, I devoted considerable thought to how the Department could best be of constructive assistance in your procurement study called for by Public Law 86-89, which extended the Renegotiation Act. It appeared to me, and to my staff, that your purpose in this study would hardly be served if we directed our attention only to specific areas of general interest. After discussing the scope of our presentation with the staff of the committee, we felt that we could be more helpful if we undertook to present a comprehensive picture of defense procurement. Accordingly, in consultation with the military departments, I determined that such an extensive presentation on defense procurement should be prepared. We have done so. It is long-necessarily so. We think it is worth while and that it will be helpful to you in the study in which you are now engaged. For convenience and ease of understanding, we have broken this subject into eight separate topics. They are1. Introduction to Defense Procurement, 2. Historical Development of Procurement Methods, 3. Advantages and Limitations of Formal Advertising, 4. Specifications, 5. Types of Contracts, 6. Research and Development, 7. Weapon Systems, and 8. Pricing of Defense Contracts. The purpose of the first presentation, "Introduction to Defense Procurement," is to provide some general background Information which should be of assistance in considering the presentations which follow. It covers, for example, what we buy, how we buy, how we are organized to buy, and how we control it. The second subject discusses the 17 specific situations in which Congress has authorized the use of the negotiation method of procurement. It goes into the legislative history of these authorities. I think it will prove of interest to see how far back some of these grants of authority go. There is a mistaken belief in some quarters that most, if not all, of the so-called 17 exceptions originated with the Armed Services Procurement Act of 1947. The remainder of the subjects to be discussed are generally self-explanatory. The paper on "Formal Advertising" explains when this method of procure ment is effective and when it is not. The "Specifications" presentation discusses our use of specifications and their part in stimulating maximum competition. I cannot emphasize too strongly the importance of the discussion on "Types of Contracts." As you know, the availability of various types of contracts is essential to realistic pricing of our purchases. "Research and Development" and "Weapons Systems" could have been joined together. We chose to separate them, however, in order to give proper balance to the important features of each. "Pricing" is the final subject for discussion Those of us with management responsibilities in the Department believe a good buying job is being done. We know it can be improved. The discussion of pricing will show you what our pricing problems are, how we come at them, and what we are doing continuously to improve our operations. Mr. Chairman, and members of the committee, before I conclude, I must say that I do appreciate your making both yourselves and the time available for us to present this material to you. I think we will all find that it will be time well spent. In order that you may have an analysis of our procurement program and policies in detail, I have with me today my three top procurement people, Mr. Bannerman, my Director for Procurement Policy; Mr. Phelan, the Assistant Director; and Commander Malloy, the Chairman of the Armed Services Procurement Regulation Committee, who will be available to answer any questions that you may have as this presentation is made. AN INTRODUCTION TO DEFENSE PROCUREMENT Any consideration of defense procurement must necessarily be based on an understanding of its magnitude and complexity. The Department of Defense annual procurement program is about $25 billion. We buy a tremendous variety of supplies, equipment, and services. These include housekeeping items, maintenance supplies, production facilities, research and development, and military weapons. This vast range of purchased items-running, as it does, from simple, commonplace items to highly complex items never previously manufactured-presents a huge under taking. Because our program is so vast and complex, it is not easy to appreciate in its totality. Therefore, in this initial presentation, we shall try to give you a "feel" for it. We will point outI. What we buy. II. How we buy. III. How we are organized to buy. and IV. How we control it. In this way and with the clarification which appropriate statistics may shed, we hope to bring into some perspective the tremendous undertaking which defense procurement is. 1. WHAT WE BUY Military procurement, as we use the term, refers to purchases of supplies and services, including construction. To simplify this, three general categories of items are purchased (other appropriate breakdowns might be made, but this will serve our purpose at this time): (a) Items which are identical with those required by other Government agencies, such as omice furniture and supplies, household furniture, and commercial tires and tubes. These items are acquired through GSA. These (b) Commercial type items and items of conventional military equipment which can be supplied by many concerns. This category includes such items as clothing, petroleum products, hardware, lumber, paint, small boats, etc. items are normally purchased by formal advertising; negotiation, however, is used for small purchases and in carrying out our small business and labor surplus and disaster area programs. The fact that a procurement is negotiated does not mean an absence of competition-as we will discuss later. (c) The third category-and by far the largest area dollarwise comprises research, development, and production of complex military weapons and equipment. These include missiles, aircraft, ships, tanks, radar, and other complicated items which generally have no counterpart in the commercial market. The majority of these items are procured by competitive negotiation-which will be referred to later. How much of these items do we buy? In fiscal year 1959, our defense procurement program involved the purchase of The procurement responsibilities of the centers, air materiel areas, and the depots are as follows: The Aeronautical System Center procures all manned aircraft weapon systems and aerodynamic nonballistic missile systems including major items of equipment such as engines, airborne electronic gear, fire control systems, bomb and navigational systems, and support equipment for specific weapons. The Ballistic Missiles Center procures ballistic missiles, their guidance systems, nose cones, powerplants, and specialized ground support equipment. The Ballistic Missile Center procures integrated warning and control systems for air defense and the automatic electronic data processing equipment which uses the intelligence provided from the warning radar. Each of the air materiel areas procures or arranges the support of the specific aircraft, guided missiles, ballistic missiles, and control and warning systems for which it has been assigned as the logistic support manager. This support includes procurement of replacement parts, operational support, and necessary maintenance, repair, or modification. In addition, the Rome Air Materiel Area also procures the electronic systems for communication and control of flying operations. The depots procure general support equipment such as refuelers, crash-fire trucks, snow-removal vehicles, and radio and radar tubes. Procurement of research and development in the Air Force is primarily the responsibility of the Air Research and Development Command (ARDC). ARDC procures basic and applied research, as well as some equipment prototypes. It has nine purchasing offices which are responsible for the procurement of many types of research; they also procure limited development associated with specific "hardware" projects. It also has a tenth purchasing office which is the Air Force Office of Scientific Research. The Air Force also has the single manager responsibility for worldwide military air transportation, both cargo and passenger. The Military Air Transport Service (MATS) is the operating agency for this single managership and, organizationally, is assigned directly to the Chief of Staff of the Air Force. Base procurement in the Air Force is accomplished at individual Air Force bases, of all Air Force commands, throughout the world. This, then, is the basic procurement organization of the Department of Defense. At the same time, there exists another type of procurement system which is called the Coordinated procurement program Although the concept of coordinated procurement was applied to a few areas in World War II, this concept, as a fullfledged program, has developed within the past 10 years. Its objectives are (a) the elimination of duplication and overlapping of procurement operations between and among the military departments, and (b) the improvement of the effectiveness and economy of supply and service operations throughout the departments. These objectives are achieved through centralization and consolidation of procurement functions common to two or more military departments in order to secure the benefits of large volume purchasing. This is made possible by combining requirements of the military departments. At the same time certain duplicating procurement facilities and economies are achieved by eliminating personnel. The Department of Defense is constantly striving to have one military department procure, wherever it is practical, the requirements for common-use items of all three departments. Based upon recommendations of the military services, of the Armed Forces Supply Support Center or of the OASD (S. & L.), the Assistant Secretary of Defense for Supply and Logistics directs the establishment of assignments within the coordinated procurement program. The ASD (S. & L.) is also responsible for reviewing the assignments to assure effective implementation. Recommendations, of course, are supported by detailed data concerning the important factors which are determinative of the department to whom the assignment should be made. For example, among the factors involved are the value of each department's procurement and inventory program considering both peacetime and mobilization requirements, each department's average contract cost for the items involved, their efficiency and effectiveness, adequacy of their procurement staffs and technical facilities, and experience in relation to the item involved. The coordinated procurement program has two major subprograms (exhibit 4): (a) The single department procurement program; and (b) The plant cognizance procurement program. Navy whether the propellers are required by the Army, the Air Force, or the Navy. Although this program is presently confined to these items, expansion of the program to other supplies is actively under study. Procurement under this procedure permits proper service allocation of the sometimes limited production capacity available, avoids duplication of military inspection procedures and personnel in a particular plant, and provides a single point of contact and source of information within the plant for the contractor. A list of the assignments made under this coordinated procurement program is set forth in exhibit 6. This, in brief, is the coordinated procurement program. It is a continuing program which is being specifically furthered by the Armed Forces Supply Support Center. The center, which was established on June 23, 1958, has some 26 study groups considering additional means and areas whereby this concept of integrated supply including procurement, may be further implemented. In sum, we feel this program is moving ahead very satisfactorily. Another important program which is related to, but is more comprehensive than, coordinated procurement is ourSingle manager program This program was established in DOD in 1956. Under this program, the basic supply functions for selected commercial type commodities and services used in common by the military departments were integrated. Management of each was assigned to the Secretary of one department as the single manager. To carry out his responsibility, each single manager established an operating agency, generally jointly staffed by personnel from all services, for his assigned commodity or service. Some of these operating agencies had previously been functioning on a single department purchase basis. In addition to procurement, the supply functions incorporated in the single manager concept include computation of net requirements, whole (a) The single department procurement sale inventory management, stock fund program Under this program, certain commodities used by two or more military departments have been assigned to a single department for procurement. The assigned department consolidates and purchases the combined requirements of all of the services, utilizing its regularly established purchasing system. There are presently 32 single department procurement assignments, which are listed in exhibit 5. (b) The plant cognizance procurement program Under this program, responsibility for all procurement of aircraft engines, propellers, and airframes from certain commercial aviation plants has been assigned to either the Air Force or the Navy. For example, contracts covering propellers to be manufactured in the Windsor Locks, Connecticut plant of the Hamilton Standard Division of the United Aircraft Corp. are made by the administration, warehousing, and distribution. To date, seven single managerships-four commodities and three services are in operation. Moreover, two more commodity assignments have been made and are scheduled for early implementation. Exhibit 7 lists the seven existing and the two new assignments and indicates their respective operating agencies and single managers. At this time, there is another centralized procurement program which should be mentioned. This is the gov ernmentwide interdepartmental procurement program, operated by the General Services Administration (OSA). Under this program, GSA procures certain commonly used, commercial-type items for all Government agencies, including the Department of Defense Examples are household and once furniture, typewriters, floor coverings, spark plugs, vacuum cleaners, etc. OSA employs three methods of supply, each of which is utilized substantially by the later, is currently developing the mechanics to accomplish this. It is realized that we have spent considerable time and gone into quite some detail on these fundamental statistics. Our motivation, however, has been strictly one of being helpful and of clarifying information, which, when unexplained, has not been sufficiently clear in the past. III. HOW WE ARE ORGANIZED TO BUY This part of the presentation comes from a request by a representative of the Committee that we explain our procurement organization-in other words, who does the actual buying. At the outset, it should be made clear that the Office of the Secretary of Defense does no purchasing. All procurement is effected by the three military departments. To explain the defense procurement organization, it will be helpful if we approach it from the organizational structure and functional responsibilities first, and then separately discuss the coordinated procurement and related programs under which specific defensewide procurement responsibilities are assigned to one military department. The procurement organization The procurement organization of the Department of Defense is outlined on exhibit 3. Under the Secretary of Defense, the Assistant Secretary of Defense (Supply and Logistics) establishes procurement policies and procedures for the entire Department. To render assistance in this connection, the Armed Services Procurement Regulation Committee develops uniform procurement policies and procedures for issuance by the Assistant Secretary of Defense. This Committee is composed of representatives of the three military departments and the Office of the Assistant Secretary of Defense. Within each military department, an Assistant Secretary is in charge of milltary procurement, namely, the Assistant Secretary of the Army (Logistics), the Assistant Secretary of the Navy (Material) and the Assistant Secretary of the Air Force (Materiel). At the next lower echelon a military official in each Department is responsible for coordinating and directing the overall procurement operation Army The Assistant Secretary of the Army (Logistics) has delegated to the Deputy Chief of Staff for Logistics the authority for carrying out his procurement functions throughout the Army Establishment The Deputy Chief of Staff directs and controls the procurement functions of the technical services, which include the Chemical Corps, Corps of Engineers, Ordnance Corps, Signal Corps. Quartermaster Corps, Transportation Corps, and Army Medical Service. The procurement responsibilities of the individual technical services are as follows: Chemical Corps-procurement of services, material and equipment pertaining to chemical, biological and radiological warfare, and related research. Corps of Engineers procurement of the engineering, construction, repair and real estate services and material for the Army and the Air Force, and related research. Ordnance Corps-procurement of ordnance material, including guns, missiles, ammunition, motor vehicles, and related research. Signal Corps-procurement of signal communications, electronics, pictorial and cryptologistic services and material, and related research. Transportation Corps-procurement of transportation services and material for the Army, and related research. In addition, the Military Traffic Management Agency, a single managership, operates under the Transportation Corps. Quartermaster Corps-procurement of all types of quartermaster equipment, supplies and services, and related research. Additionally, two single manager commodity assignments made to the Army, the Military Subsistence Supply Agency and the Military Clothing and Textile Supply Agency, operate under the Quartermaster Corps. Army Medical Service-contracts for dependents' medical and hospitalization services, medical research, and miscellaneous supplies and services for support of Army hospitals. In addition, the six continental armies in the United States and the Military District of Washington supervise the not inconsiderable volume of local procurement effected at the level of Army posts, camps, and stations. The direction of the Army's research and development effort is vested in the Director of Research and Development and the military Chief of Research and Development. Under their direction and control the technical services are responsible for the research, development and test of material assigned to them. Navy In the Navy, under the Assistant Secretary of the Navy (Material), the Chief of Naval Material directs the efforts of the bureaus and offices of the Navy Department in procurement matters. These bureaus and offices, which are similar to the Army's technical services in that each generally has cognizance of a broad category of material, have respective procurement responsibilities as follows: Bureau of Naval Weapons-procurement of all Navy and Marine Corps aircraft. rockets, guided missiles and naval ordnance, including major components and equipment and services related to their maintenance and repair and related research and development. Bureau was established on December 1, 1959, through a merger of the former Bureaus of Aeronautics and Ordnance. This Bureau of Ships-procurement of naval vessels of all types, including hulls, components, machinery, and all major electronic equipment except specialized air and fire-control electronic equipment; for research and development on such items; and for materials and appliances connected with chemical and biological warfare defense. It also procures all vessels and water craft needed by the Army and Air Force and makes ship repair contracts with private shipyards. Bureau of Yards and Docks-procurement of services and materials related to public works, including construction and repairs at shore activities, public utilities, and transportation not otherwise assigned. The Bureau also serves as a construction agency for the Air Force. Marine Corps-procurement of all equipment, supplies and services required by the Marine Corps, procurement responsibility for which has not been specifically assigned elsewhere. Office of Naval Research-procurement of basic research of a general nature, procurement for the design and development of training devices and aids, and the procurement of special research projects which augment those being conducted by the various technical bureaus. Bureau of Naval Personnel-procurement of services and materials incident to the recruiting, training, and welfare of naval personnel. Bureau of Supplies and Accountsmanages the Navy's field purchasing organization, which procures all of the replacement spares and parts, and associated consumables for the major prime items of equipment purchased by the technical bureaus as described above. Additionally, it procures general-purpose and common-use items not assigned to one of the Defense Department's coordinated procurement offices, and performs the local purchasing at all of the Navy's field activities such as Navy purchasing offices, naval stations, naval air stations, naval supply depots, and naval shipyards. Also operating under the Bureau of Supplies and Accounts are two single manager agencies, the Miltary Medical Supply Agency and the Military Petroleum Supply Agency. The Navy also has the single manager responsibility for worldwide military sea transportation of passengers and cargo. The Military Sea Transportation Service is the operating agency for this single managership, and, with respect to procurement, is responsible to the Assistant Secretary of the Navy (Material). Single manager agencies have defensewide responsibilities and will be discussed later. Air Force In the Air Force, procurement authority has been delegated by the Assistant Secretary of the Air Force (Materiel) through the Chief of Staff and Deputy Chief of Staff, Materiel, to the Air Materiel Command (AMC). AMC is responsible for the Air Force's central buying program, which is its major buying function and accounts for all except the procurement of research and development and local base procurement. The actual purchasing is performed for AMC within the Zone of Interior by the Aeronautical Systems Center, the Ballistic Missile Center, the Electronic System Center, nine separate air materiel areas, and two depots. Oversea procurement for AMC is accomplished by two air materiel forces one in Europe and one in the Pacific. 51686 0-60- -20 The procurement responsibilities of the centers, air materiel areas, and the depots are as follows: The Aeronautical System Center procures all manned aircraft weapon systems and aerodynamic nonballistic missile systems including major items of equipment such as engines, airborne electronic gear, fire control systems, bomb and navigational systems, and support equipment for specific weapons. The Ballistic Missiles Center procures ballistic missiles, their guidance systems, nose cones, powerplants, and specialized ground support equipment. The Ballistic Missile Center procures integrated warning and control systems for air defense and the automatic electronic data processing equipment which uses the intelligence provided from the warning radar. Each of the air materiel areas procures or arranges the support of the specific aircraft, guided missiles, ballistic missiles, and control and warning systems for which it has been assigned as the logistic support manager. This support includes procurement of replacement parts, operational support, and necessary maintenance, repair, or modification. In addition, the Rome Air Materiel Area also procures the electronic systems for communication and control of flying operations. The depots procure general support equipment such as refuelers, crash-fire trucks, snow-removal vehicles, and radio and radar tubes. Procurement of research and development in the Air Force is primarily the responsibility of the Air Research and Development Command (ARDC). ARDC procures basic and applied research, as well as some equipment prototypes. It has nine purchasing offices which are responsible for the procurement of many types of research; they also procure limited development associated with specific "hardware" projects. It also has a tenth purchasing office which is the Air Force Office of Scientific Research. The Air Force also has the single manager responsibility for worldwide military air transportation, both cargo and passenger. The Military Air Transport Service (MATS) is the operating agency for this single managership and, organizationally, is assigned directly to the Chief of Staff of the Air Force. Base procurement in the Air Force is accomplished at individual Air Force bases, of all Air Force commands, throughout the world. This, then, is the basic procurement organization of the Department of Defense. At the same time, there exists another type of procurement system which is called the Coordinated procurement program Although the concept of coordinated procurement was applied to a few areas in World War II, this concept, as a fullfledged program, has developed within the past 10 years. Its objectives are (a) the elimination of duplication and overlapping of procurement operations between and among the military departments, and The Department of Defense is constantly striving to have one military department procure, wherever it is practical, the requirements for common-use items of all three departments. Based upon recommendations of the military services, of the Armed Forces Supply Support Center or of the OASD (S. & L.), the Assistant Secretary of Defense for Supply and Logistics directs the establishment of assignments within the co ordinated procurement program. The ASD (S. & L.) is also responsible for reviewing the assignments to assure effective implementation. Recommendations, of course, are supported by detailed data concerning the important factors which are determinative of the department to whom the assignment should be made. For example, among the factors involved are the value of each department's procurement and inventory program considering both peacetime and mobilization requirements, each department's average contract cost for the items involved, their efficiency and effectiveness, adequacy of their procurement staffs and technical facilities, and experience in relation to the item involved. The coordinated procurement program has two major subprograms (exhibit 4): (a) The single department procurement program; and (b) The plant cognizance procurement program. (a) The single department procurement program Under this program, certain commodities used by two or more military departments have been assigned to a single department for procurement. The assigned department consolidates and purchases the combined requirements of all of the services, utilizing its regularly established purchasing system. There are presently 32 single department procurement assignments, which are listed in exhibit 5. Navy whether the propellers are required by the Army, the Air Force, or the Navy. Although this program is presently confined to these items, expansion of the program to other supplies is actively under study. Procurement under this procedure permits proper service allocation of the sometimes limited production capacity available, avoids duplication of military inspection procedures and personnel in a particular plant, and provides a single point of contact and source of information within the plant for the contractor. A list of the assignments made under this coordinated procurement program is set forth in exhibit 6. This, in brief, is the coordinated procurement program. It is a continuing program which is being specifically furthered by the Armed Forces Supply Support Center. The center, which was established on June 23, 1958, has some 26 study groups considering additional means and areas whereby this concept of integrated supply including procurement, may be further implemented. In sum, we feel this program is moving ahead very satisfactorily. Another important program which is related to, but is more comprehensive than, coordinated procurement is our Single manager program This program was established in DOD in 1956. Under this program, the basic supply functions for selected commercial type commodities and services used in common by the military departments were integrated. Management of each was assigned to the Secretary of one department as the single manager. To carry out his responsibility, each single manager established an operating agency, generally jointly staffed by personnel from all services, for his assigned commodity or service. Some of these operating agencies had previously been functioning on a single department purchase basis. In addition to procurement, the supply functions incorporated in the single manager concept include computation of net requirements, wholesale inventory management, stock fund administration, warehousing, and distribution. To date, seven single managerships-four commodities and three services are in operation. Moreover, two more commodity assignments have been made and are scheduled for early implementation. Exhibit 7 lists the seven existing and the two new assignments and indicates their respective operating agencies and single managers. At this time, there is another centralized procurement program which should be mentioned. This is the gov (b) The plant cognizance procurement ernmentwide interdepartmental pro program Under this program, responsibility for all procurement of aircraft engines, propellers, and airframes from certain commercial aviation plants has been assigned to either the Air Force or the Navy. For example, contracts covering propellers to be manufactured in the Windsor Locks, Connecticut plant of the Hamilton Standard Division of the United Aircraft Corp. are made by the curement program, operated by the General Services Administration (OSA). Under this program. GSA procures certain commonly used. commercial-type items for all Government agencies, including the Department of Defense. Examples are household and offoe furniture, typewriters, floor coverings, spark plugs, vacuum cleaners, etc. 08A employs three methods of supply, each of which is utilized substantially by the |