Now, in this statement that you are going to give, in this whole area, and I have not dwelled on it because you said you were going to discuss it, but I want to be sure it is in here, it is not the prime who is the sole consideration, it is the subcontractor and the sub-subcontractor.

One of the things that the Small Business Committee is concerned about is this mother sow process where one big prime gets its favorite little piglets and that is a closed family party that keeps on going.

So in this area, the prime and the design itself may be something that has to be, as I say, negotiated.

I certainly think, in the military in particular, you are going to need, as you say, more negotiated bidding than you would otherwise in other procurement agencies.

But, again getting back to our atomic submarine, there are so many component parts of that, and I would say it is more than, a good deal more than the parts that have to be negotiated, that can be done through advertising bid because there are specifications, the radios, the furniture that goes into it, and things of that nature.

Mr. MCGUIRE. Valves and that type of thing, cooking equipment. Representative CURTIS. Yes. So, in your presentation, I presume you will break it down and not just stop at the prime.

Mr. MCGUIRE. I intend to and I think, Mr. Curtis, that in the presentation that we have been talking about, the 200, we will really cover this thing and answer every question on it.

Representative CURTIS. I used this homely illustration of a mother sow and her piglets but you are familiar, are you not, with that problem? At least the Small Business Committee and others have seen where there is the tendency or there can exist a situation where a prime contractor gathers around him a selected group of subs that he wants to deal with and you get a

Mr. MCGUIRE. A very rigid complex.

Representative CURTIS. Yes, you certainly do. I am concerned from an economic standpoint with what it does to our competitive system.

NEW REGULATIONS ON SUBCONTRACTING POLICIES

Mr. BANNERMAN. Mr. Curtis, we have been worried about that, of course, just as the Small Business Committee was. As a result of our efforts we have issued, as I explained a short while ago, a completely new section of our procurement regulations covering subcontracting policies and review.

This section requires that contracting officers interest themselves in the course of both making the contract and administering it, in the extent of competition, outside competition, obtained by prime contractors and assurance that through the attaining of competition that the best possible price is obtained by the Government.

I have a copy of this, if you would be interested in having it for the record.

Representative CURTIS. Is it a regulation?

Mr. BANNERMAN. It is a part of the armed service procurement regulations covering contracting policies of the Department. (The document referred to follows:)

PART 9-SUBCONTRACTING POLICIES AND PROCEDURES

3-900 SCOPE OF PART. This Part sets forth policies and procedures for the evaluation, review, and approval of contractors' "make or buy" programs, purchasing systems, and proposed subcontracts.

3-901 GENERAL.

(a) Information as to the contractor's "make or buy" program, purchasing system, and proposed subcontracts may be important to (i) negotiation of reasonable contract prices (see ASPR 3-807.5 and 3-808.2(h)), (ii)) assurance of satisfactory contract performance, or (iii) carrying out Government policies regarding small business (ASPR 1-707.1), labor surplus areas (ASPR 1-805.1), use of Government facilities, maintenance of mobilization base, or other policies which may be appropriate to the particular procurement. Therefore, Government review of contractors' "make or buy" programs and proposed subcontracts is required as set forth in this Part. Where "make or buy" decisions and subcontracting will have a substantial impact on price negotiation or contract performance or administration, the contractor's "make or buy” program and subcontracting should be evaluated and agreed on during negotiations, to the extent practicable.

(b) Review of the contractor's purchasing system, principal proposed subcontracts and "make or buy" program should generally be made where (i) the item, system, or work is complex, the dollar value is substantial, or competition is restricted; and (ii) cost reimbursement, price redetermination, or incentivetype contracts are to be used.

3-902 REVIEW OF "MAKE OR BUY" PROGRAM.

(a) A “make or buy" program is that part of a contractor's written plan for the production of an end item which outlines the major components, assemblies, subassemblies, and parts to be manufactured (including testing, treating, and assembling) in his own facilities and those which will be obtained elsewhere by subcontract.

(b) Where the nature of the procurement is such that, in view of the factors in ASPR 3-901(b) above, review of the "make or buy” program is appropriate or is otherwise considered essential, the prospective contractor shall be required to submit his proposed "make or buy" program, together with sufficient data to permit the contracting officer to evaluate such factors in (c) below as are pertinent.

(c) In reviewing the "make or buy" program during negotiation, considertion shall be given to the following factors in the light of how they affect the interests of the Government:

(i) the effect of the contractor's plan to make or buy, as the case may be, on price, quality, delivery, and performance;

(ii) whether the contractor plans to broaden his base of subcontractors through competitive means;

(iii) whether the contractor has given consideration to competence, abilities, experience, and capacities available within other firms;

(iv) whether small business concerns are given an equitable opportunity to compete for subcontracts;

(v) whether the contractor or major subcontractors proposed to do work in plant, the nature of which differs significantly from their normal in-plant operations or for which they are not historically suited;

(vi) whether production of the item or performance of the work will create a requirement, either directly or indirectly, for additional facilities to be furnished by the Government, by the contractor, or by subcontractors; (vii) whether the contractor proposes to use additional Government-furnished facilities to do a type of work in plant for which there is capacity elsewhere (not requiring Government facilities) which is competitive in quality, delivery, and overall cost, and is acceptable as a source to the contractor; and

(viii) other factors, such as the nature of the item, experience with similar items, future requirements, engineering, tooling, starting load costs, market conditions, and the availability of personnel and material. After agreement on the program is reached, the contracting officer shall notify the contractor as to the Government's approval of the program and shall inform the contractor as to any requirement for further review during performance of the contract.

(d) In contracts resulting from negotiation in which a "make or buy” review has been made and agreement reached thereon pursuant to (c) above, there generally should be included a requirement for notification to the Government in advance of any proposed change to the "make or buy" program together with justification therefor. Where notification is required, the following clause shall be used:

CHANGES TO MAKE OR BUY PROGRAM

"The Contractor agrees to perform this contract in accordance with the 'make or buy' program attached to this contract except as hereinafter provided. If the Contractor desires to change the "make or buy" program, he shall notify the Contracting Officer in writing of the proposed change reasonably in advance and shall submit justification in sufficient detail to permit evaluation of the proposed change. With respect to items deferred at the time of negotiation of this contract for later additions to the 'make or buy' program, the Contractor shall notify the Contracting Officer of each proposed addition at the earliest possible time, together with justification in sufficient detail to permit evaluation. The Contractor shall not, without the written consent of the Contracting Officer, make changes or additions to the program; provided that in his discretion, the Contracting Officer may ratify in writing any changes or additions and such ratification shall constitute the consent of the Contracting Officer required by this clause. The 'make or buy' program attached to this contract shall be deemed to be modified in accordance with the written consent or ratification by the Contracting Officer."

(e) Approval of the contractor's purchasing system (ASPR 3-903) shall not be construed as approval of the "make or buy" program where such is required. 3-903 REVIEW OF SUBCONTRACTING AND CONTRACTORS' PURCHASING SYSTEMS. Examination of the contractor's purchasing system and plans for subcontracting, review of proposed subcontract sources and prices in the light of the factors indicated in ASPR 3-901, and discussions with contractor to bring about any adjustments which may be needed to clear the way for formal subcontract approval, should generally be accomplished as part of the negotiation of the prime contract. Any resulting purchasing system approvals may be granted before the contract is executed.

3-903.1 Contract Clauses.

(a) The prescribed clauses, covering Government consent to subcontracts, for cost-reimbursement type contracts are set out in ASPR 7-203.8 and 7-402.8. Except where definite and final evaluation of the contractor's subcontracting is accomplished during negotiations, the following clause (unless modified in accordance with (b), (c), or (d) below) shall be included in all fixed-price incentive and fixed-price redeterminable contracts where

(i) it is anticipated that one or more subcontracts may each exceed $100,000 or such other figure as is to be included in (b) (ii) and (iii) of the following clause in accordance with (c) below;

(ii) the work of the prime contractor, or of the plant or division of the prime contractor which will perform the contract, is predominantly for the Government; or

(iii) the estimated contract price is $1,000,000 or more.

SUBCONTRACTS

"(a) As used in this clause, the term 'subcontract' includes purchase orders. "(b) Except as provided in paragraph (d) below, the Contractor shall notify the Contracting Officer reasonably in advance of entering into any subcontract which

"(i) is on a cost-plus-a-fee, time and material, or labor-hour basis and which would involve an estimated amount in excess of $10,000, including any fee: or

"(ii) is proposed to exceed $100,000; or

“(iii) is one of a number of subcontracts under this contract with a single subcontractor for the same or related supplies or services which, in the aggregate, are expected to exceed $100.000.

"(c) The advance notification required by paragraph (b) above shall include: "(i) a description of the supplies or services to be called for by the subcontract;

"(ii) identification of the proposed subcontractor and an explanation of why and how the proposed subcontractor was selected, including the degree of competition obtained;

"(iii) the proposed subcontract price, together with the Contractor's cost or price analysis thereof, including current, complete, and correct cost or pricing data, accompanied by a certificate from the subcontractor, in such form as the Contracting Officer may prescribe, to the effect that all cost or pricing data has been considered by the subcontractor in preparing its proposal and that such data is current, and has been provided the Contractor; and

“(iv) identification of the type of contract proposed to be used. "(d) Advance notifications of subcontracts, as required by paragraph (b) above, are not required for any subcontract (i) not on a cost-plus-a-fee, time and material, or labor-hour basis, if the Contracting Officer has in writing approved the Contractor's purchasing system and the subcontract is within the limitations of such approval, or (ii) consented to in writing by the Contracting Officer as a proposed subcontract prior to the execution of this contract.

"(e) The Contractor shall not, without the prior written consent of the Contracting Officer, enter into any subcontract for which advance notification to the Contracting Officer is required by this clause; provided that, in his discretion, the Contracting Officer may ratify in writing any subcontract and such ratification shall constitute the consent of the Contracting Officer required by this paragraph.

"(f) No consent by the Contracting Officer to any subcontract or any provisions thereof or approval of the Contractor's purchasing system shall be construed to be a determination of the acceptability of any subcontract price or of any amount paid under any subcontract or to relieve the Contractor of any responsibility for performing this contract, unless such approval or consent specifically provides otherwise.

"(g) The Contractor agrees that no subcontract placed under this contract shall provide for payment on a cost-plus-a-percentage-of-cost basis.”

(b) The clause set forth in (a) above may be appropriately modified so as not to require advance notification of, or consent to, any subcontracts which have been definitely and finally evaluated during negotiations. In this respect, the clause may limit advance notifications thereunder to one or more particular subcontracts or classes of subcontracts, or may, in individual cases, be tailored to unusual or particular circumstances.

(c) In paragraph (b) (ii) and (iii) of the clause set forth in (a) above, a lower dollar amount may be inserted in lieu of $100,000 where it is determined that closer surveillance of subcontracting is desirable because of the character of the industry involved, the critical nature of work which will probably be subcontracted, the absence of competition in placing the prime contract, uncertainties as to the adequacy of the contractor's purchasing system, or the novelty of the supplies or services being procured. A higher dollar amount than $100,000 may be inserted in paragraph (b) (ii) and (iii) of the clause when the insertion of the higher amount is approved at a level higher than that of the contracting officer, as prescribed by the Department concerned.

(d) The certificate prescribed by paragraph (c) (iii) of the clause above shall be in the form set forth in ASPR 3-807.7 appropriately modified to reflect that it is a certificate to the prime contractor, rather than to the Government. 9.903.2 Consent to Subcontracts.

(a) The contracting officer's consent to subcontracts required by the clause set forth in ASPR 3-903.1 (for fixed-price redeterminable or fixed-price incentive contracts) or the clause set forth in ASPR 7-203.8 or 7-402.8 (for cost-reimbursement type contracts) shall be accorded by individual consent on subcontract-by-subcontract basis. However, where the contracting officer has approved the contractor's purchasing system, in whole or in part, such consent is not required for subcontracts within the scope of such approval, except as to cost-reimbursement type. time and materials, or labor-hour subcontracts, and in the case of cost-reimbursement type prime contracts, subcontracts, which provide for the fabrication, purchase, rental, installation, or other acquisition of any item of industrial facilities.

(b) The purposes of subcontract consent requirements are usually best served if review and analysis of the contractor's purchasing system and of his proposed subcontracts are carried out in conjunction with negotiation of the prime contract (and concurrently with any review of the contractor's "make or buy" pro

gram as required by ASPR 3-902). Although consent to subcontracts cannot always be formally accomplished prior to execution of the prime contract (since definitive subcontracts are not generally entered into until after execution of the prime), the review, analysis, and discussion leading up to such formal consents should, where feasible, be conducted during the negotiation process. 3-903.3 Approval of Purchasing System.

(a) Approval of a contractor's purchasing system should be granted only after a survey which includes review of such factors as:

(i) the degree of competition obtained by the contractor's purchasing methods;

(ii) the contractor's pricing policies and techniques, when necessary, including its methods of obtaining current, complete and accurate cost and pricing data;

(iii) the contractor's method of evaluating subcontractors' responsibility (ASPR 1-906);

(iv) the extent to which the purchasing system is consistent with any contract requirements covering small business and labor surplus area concerns; and

(v) the treatment accorded affiliates of the contractor or other concerns having close working arrangements with the contractor.

(b) Approval of a contractor's purchasing system may be unqualified or may be limited. For example, the purchasing system may be approved except for subcontracts in excess of a stated amount or except for subcontracts for stated work which is of such critical nature that extraordinary Government surveillance is called for. Where the approval is limited by reason of deficiencies in the purchasing system, the contractor shall be notified of such deficiencies and requested to correct them. In no case shall approval of the contractor's purchasing system waive the requirement for individual consent to cost-reimbursement, time and materials, or labor-hour subcontracts. In the case of costreimbursement type prime contracts, in addition to the foregoing, approval of the contractor's purchasing system shall not waive the requirements for individual consent to subcontracts which provide for fabrication, purchase, rental, installation, or other acquisition of any item of industrial facilities.

(c) Upon approval of the contractor's purchasng system (whether unqualified or limited), the contracting officer shall give the contractor written notice thereof. The notice shall set forth any limitations on the approval and shall state that the approval does not (i) relieve the prime contractor of any of its obligations under any contract, (ii) restrict the Government from subsequently withdrawing the approval in whole or in part, or (iii) cover any unapproved material changes which the contractor may make in its purchasing system.

(d) After approval of the contractor's purchasing system, periodic examination of the contractor's operations under such system shall be made to determine whether any substantial changes in procedures, initiated by the contractor or as a result of recommendations by the Government, have occurred, as well as to evaluate the contractor's performance under the purchasing system. 3-903.4 Review of Individual Subcontracts.

(a) In reviewing or consenting to individual subcontracts, the contracting officer should give appropriate consideration to the following:

(i) whether the decision to enter into the proposed subcontract is consistent with the contractor's approved "make or buy" program, if any (see ASPR 3-902);

(ii) whether the proposed subcontract will require the use of Government furnished facilities;

(iii) the responsibility of the proposed subcontractor (ASPR 1-906); (iv) basis for selecting proposed subcontractor, including the degree of competition obtained;

(v) cost or price analysis or price comparisons accomplished, with particular attention to whether cost or pricing data are current, complete, and correct (see ASPR 3-903.1 (d));

(vi) extent of subcontract supervision;

(vii) types of contracts used (ASPR Section III, Part 4); and

(viii) estimated total extent of subcontracting, including procurement of parts and materials.

(b) In reviewing subcontracts, careful and thorough evaluation is particularly necessary when: