One hundred companies and their subsidiaries listed according to net value of military prime contract awards, July 1, 1958, to June 30, 1959—Continued

1 Net value of new procurement actions minus cancellations, terminations and other credit transactions. The data include debit and credit procurement actions of $10,000 or more, under military supply, service and construction contracts for work in the United States; plus awards to listed companies and other identifiable U.S. companies for work overseas.

Procurement actions include definitive contracts, the obligated portions of letters of intent and letter contracts, purchase orders, job orders, task orders, delivery orders, and any other orders against existing contracts, and debit and credit actions that amend, cancel or terminate contracts. The data do not include that part of open-end or indefinite quantity contracts that have not been translated into specific orders on business firms. The data do not include purchase commitments or pending cancellations that have not yet become mutually binding agreements between the Government and the company.

The assignment of subsidiaries to parent companies is based on stock ownership of 50 percent or more by the parent company, as indicated by data published in standard industrial reference sources. The company totals do not include contracts made by other U.S. Government agencies and financed with Department of Defense funds, or contracts awarded in foreign nations through their respective governments. The company names and corporate structures are those in effect as of June 30, 1959. Only those subsidiaries are shown for which procurement actions have been reported.

Less than 0.05 percent.

Stockownership is equally divided between North American Aviation, Inc., and Phillips Petroleum Co.; one-half of the total military awards is shown under each of the parent companies.

Less than $50,000.

Stockownership is equally divided between General Motors Corp. and Standard Oil Co. of New Jersey; half of the total military awards is shown under each of the parent companies.

7 Stockownership is equally divided between Standard Oil Co. of New Jersey and Socony Mobil Oil Co.; half of the total of military awards is shown under each of the parent companies.

8 Stockownership is equally divided between Standard Oil Co. of California and Texas Co.; half of the total of military awards is shown under each of the parent companies.

A joint venture of Brown & Root, Inc., Raymond International, Inc., and Walsh Construction Co.

10 A joint venture of Morrison-Knudson Co., Inc., Paul Hardeman, Inc., Johnson-Drake & Piper, Inc., Olson Construction Co., and Young (F. E.) Construction Co.

11 A joint venture of Kiewit (Peter) Sons, Inc., Groves (S. J.) Sons Co., Johnson (Al) Construction Co., and Condon Cunningham, Inc.

Source: Office of the Secretary of Defense.

QUALITY OF CONTRACTING OFFICERS

The scope of military procurement and its impact upon the national economy and segments thereof and the great responsibility placed upon Government contracting officers raises the point as to the caliber of these individuals. In this connection a discussion involving Senator Kerr, Senator Douglas, and Chairman Carl Vinson of the House Armed Services Committee developed the following points: 23

Senator KERR. The President said in his speech last January among other things, as I recall, in referring to a certain bomber-I don't know whether he said the value or the cost of it exceeded the amount of its weight in goldMr. VINSON. Silver.

Senator KERR. No; he said gold.

Mr. VINSON. It is absolutely correct, I checked it. And I had the figures submitted to me, but they were classified, and that is the reason I couldn't bring them over here. I have all that information. And I was astonished to know what these missiles and what these airplanes and these bombers are costing. But we have got to have them. These companies are doing a magnificent job. I find no complaint with what they turn out. All I find is that I want them to earn a reasonable profit and not an excessive profit. And if you permit this bill to go through in the language it is written, then they will earn an excessive profit.

Senator KERR. Can you tell us from information which is not classified the aggregate amount of orders outstanding at this time having been given by the Defense Department to contractors?

Mr. VINSON. It is in the neighborhood of $24 billion.

And, as I say, that brings this thought in mind, 90 percent of all contracts from the Department of Defense are negotiated contracts.

Senator KERR. You mean contracts representing 90 percent of the total value, is that what you mean?

Mr. VINSON. It is 90 percent; 90 percent of all contracts.

Senator KERR. Now, does that mean of the number of contracts or of the total amount of them?

Mr. VINSON. Both volume and in numbers,

Senator KERR. Is it a correct statement, No. 1, that there is now a backlog of $25 billion to $27 billion orders outstanding from the Defense Department to contractors.

Mr. VINSON. I do not think that is correct. We are going to spend this year about $24 billion. I don't consider them backlogs, I don't think that it is being given out for use, but there will be about $24 billion worth of business.

Senator KERR. But we know there is a very substantial backlog of orders that have not been completed.

Mr. VINSON. That is true, a great many of them.

Senator KERR. Can you give us an idea?

Mr. VINSON. No, I cannot.

Senator KERR. You cannot?

Mr. VINSON. No.

Senator KERR. But whether one has in mind the backlog of unfilled orders or the orders that will be given this year, your judgment is that 90 percent of both in terms of dollars will be on the basis of negotiated contracts?

Mr. VINSON. That is right.

Senator KERR. Not competitively bid contracts?

Mr. VINSON. That is right. The only competitive bidding to amount to anything in the Department of Defense is where we build through the Bureau of Yards and Docks and the Corps of Engineers construction contracts, all construction contracts are bid competitively. Everything over $10,000 in the Department of Defense, speaking broadly, is done by negotiated contracting.

Senator KERR. Then is it a fact that the only thing the Government has as a substitute for its safety that it would get out of the role competitive bidding is through the Renegotiation Act?

Mr. VINSON. You have hit the nail exactly on the head. That is the only place where the Government can do it.

23 Senate hearings of June 2 and 3, 1959, Finance Committee, on Renegotiation Act, pp. 99-103.

Senator KERR. And if this bill is amended, or if the present law is amended, we not only would continue to be without the benefit of competitive bidding, but we would surrender much of what the Government has now in lieu of it?

Mr. VINSON. Exactly. Because here sits the Government, here sits the industry, here they sit to talk about the most complicated things that the mind can think of. How can the Government know as much about it as the man who is going to turn it out and going to build it? Why, of course, in all these transactions we are absolutely at their mercy, and if it were not for the Renegotiation Act we would be in worse shape than we are now.

Senator KERR. You referred to the provisions in this bill that required the Board in advance of renegotiation to give to the contractor all of the information which the Government had with reference to the contractor.

Mr. VINSON. I am quoting the language of the bill.

Senator KERR. Let me ask you this question. Either under present law or under this bill, is there anything that requires the contractor to give to the Government all of the confidential information which the contractor has with reference to the cost of the operation?

Mr. VINSON. I fail to find one line along that line of thought.
Senator KERR. Is there anything in the present law?

Mr. VINSON. The present law does not require it.

My counsel says the present law does require it.

Senator KERR. Let's have the counsel advise us as to the extent to which it does that.

Mr. COURTNEY. Senator, the present law requires the furnishing of such data as may be needed by the Board to formulate its judgment. And it has with it, of course, the penalty of presenting false information. So that a contractor is required to present complete and accurate information to the Board.

Senator KERR. It does it in the way of a report, though, and not in the way of an opportunity of representatives of the Board to go into the files of the contractor?

Mr. COURTNEY. No, we have no provision for searching the files.

Senator KERR. There is nothing in this bill that would strengthen the position of the Government in the receiving of more complete detailed information from the contractor than is required under existing law?

Mr. COURTNEY. None.

Senator KERR. That is all, Mr. Examiner.

The CHAIRMAN. Senator Douglas?

Senator DOUGLAS. First I want to thank Mr. Vinson for great public services. And I hope he will permit me to say very sincerely that I think the whole American public holds him in very high esteem for the magnificent public service which he has given as chairman of the Armed Services Committee of the House, and for his devotion to the public interest, as is evidenced once again this morning.

There is a question that Mr. Dechert raised yesterday that I would like to get your judgment upon. I think I should preface it by saying that I, too, have been shocked by the reports of the Comptroller General, which I know cover only a small fraction of the contracts which have been negotiated by the Department of Defense, which would certainly indicate erroneous statements of costs by the companies, and incompetence or worse by the negotiating officers of the Department of Defense. This is the question which he raised in somewhat different form but which has been worrying me, on this incentive type of contract. Assuming that the Department of Defense continues to get misrepresentation from supply and contracting officers, and assuming that the practices of American business do not change, so that inflated cost statements are made which are not detected by the Department of Defense, if you outlaw the incentive type contract, what protection do we have? Now, Mr. Dechert argued, as I remember, that the incentive type contract would permit one to recapture at least four-fifths of the overstatement of costs by the contractor, and, therefore, was a protection against an erroneous original fixation of the target costs. I know you have given thought to that.

Mr. VINSON. The trouble with an incentive type contract, as I have viewed it in its broad aspect, is that it gives a profit which the contractor is not entitled to earn.

Senator DOUGLAS. And you would think that this could be handled by the Renegotiation Board itself without the intermediary of the incentive type contract? Mr. VINSON. That is it exactly; they can do so today. Under the law, they can give consideration to cost reduction and efficiency, they can give that con

sideration today, and the Chairman of the Renegotiation Board will testify no doubt to that effect if you ask him, that that is given consideration.

Senator DOUGLAS. So that the ordinary processes of the Renegotiation Board would help correct overstatements of costs, and you do not need the incentive? Mr. VINSON. That is it, exactly; you do not need it. I think when you do that, why, then, you notify the Board that they must deal with that in a separate manner from dealing with the whole contract. And it pinpoints it, legalizes it, it gives it status.

Senator DOUGLAS. Mr. Vinson, you have had more experience with this matter than, I suppose, any man in the country over a long period of time.

Do you share my feeling that this is probably one of the worst abuses which has crept into our Government, namely, the overstatement of costs, and the excessive profits made in war contracts, and the presence of such a large percentage of negotiated bids rather than competitive biddings?

Mr. VINSON. I have been disturbed about it, and I had one of the staff members the House accords my committee about $150,000 a year to build up a staff and look after these matters and this is my general counsel, Mr. Courtney; he has been with the committee for 7 or 8 years-we have made a study of the qualifications of the men who sat across the table from industry. I was dumfounded and shocked at their lack of knowledge on what they were dealing with.

If any man is going to negotiate a $50 million contract, or $100 million, to deal in big figures, and he is sitting across the table from the man who is employed by industry, he must know everything or else he is absolutely at the mercy of the mind and brain of the other man.

And, unfortunately, the Government does not have people who have had that experience and that background, in a great many instances.

There are instances where they do have the background. I had a check made of all these people, and I was surprised at the lack of knowledge and background. Yet they have dealt with matters involving negotiations of $50 million

or more.

Now, how could I sit across the table with some representative of the aircraft industry and talk about ballistic missiles and things of that nature? How could you, as brilliant and smart as you are? You would be absolutely at their mercy.

Senator DOUGLAS. I would be handicapped due both to a lack of ability and a lack of experience.

Mr. VINSON. Of course. And so if you don't have some law like this to protect the Government, you are absolutely at their mercy.

Senator DOUGLAS. Mr. Vinson, there is another question that has disturbed me and I asked for further information from the Department of Defense yesterday and that is the degree to which high ranking officers in the military, upon their retirement or resignation, become representatives of these big contractors and then deal with their former military comrades across the table, many of whom are their intimate personal friends, and some of whom they have promoted in the past.

Mr. VINSON. Well, that is a question, Senator-please excuse me. I just want to keep my argument close to renegotiation. I know all about it. I know about conflict of interests.

Senator DOUGLAS. Mr. Vinson, would you be willing to let me visit you in your office and obtain private information from you?

Mr. VINSON. Yes, sir. I know all about that; we have that come up all the time.

Senator DOUGLAS. Do you regard it as a problem?

Mr. VINSON. Of course I do. And I know all about it. I know what goes on. And it doesn't only apply there, Senator, it applies up on the Hill here today. Senator DOUGLAS. You have noticed that also?

Mr. VINSON. Yes. Right up here. You get a bright man, a brilliant man, and give him a position up here, if he stays here 3 or 4 years, industry will want him. Senator DOUGLAS. Congressmen as well as admirals are mortal.

Senator FREAR. One question, if I may, if the Senator from Illinois has completed his questions?

Senator DOUGLAS. Yes.

Senator FREAR. Regarding the profit from the incentive program in the illustration that you used of $20,000, is that tax free to the industry?

Mr. VINSON. No.

Senator FREAR. When is tax paid on that $20,000?

Mr. VINSON. Well, it is paid, I imagine, Senator-I hadn't thought about that— when he pays his other taxes. He has made a profit.

Senator FREAR. If it is taxable, then it is due in the taxable year in which it is received.

Mr. VINSON. That is exactly right.

Senator FREAR. Thank you.

The CHAIRMAN. The next witness is Mr. Thomas Coggeshall, Chairman of the Renegotiation Board.

Mr. COGGESHALL. I would like to be accompanied, Mr. Chairman, by the General Counsel, Mr. Fensterstock.

I would like to say by way of preface to quoting the statement of our position made to the House Ways and Means Committee, we are an independent agency in the executive branch of the Government. We have never asked for our own continuance.

I started my statement at the Ways and Means Committee with this statement:

“As you gentlemen know, it is the fixed policy of the Board not to seek its own continuance. We administer the renegotiation law but we do not recommend or endeavor to initiate legislation to perpetuate it. However, when legislation is proposed to extend the act for a further period, and particularly since such proposals are usually accompanied by amendments to the substantive provisions of the act, the Board has always considered it necessary and proper to provide the Congress with the benefit of its experience in the administration of this complex and highly technical law. If we are to have renegotiation, naturally the Board is interested in helping to achieve the best possible system that can be drawn from the wisdom and experience of all interested persons. It is in that spirit that I speak today."

Now, I come to my prepared statement for this committee.

I am privileged once again to appear before this committee to express the views of the Renegotiation Board on a proposal to extend the Renegotiation Act of 1951 for a further period. This proposal is embodied in H.R. 7086, as passed by the House on May 27, 1959. It was the culmination of 3 days of public hearings and an extended and searching examination, in executive session, I think it was 9 days, of the whole subject of renegotiation.

H.R. 7086 extends the coverage of the renegotiation law for 4 years, from June 30, 1959, to June 30, 1963, and provides certain other amendments. By letter dated May 19, 1959, to the chairman of the Committee on Ways and Means of the House, the Renegotiation Board stated its approval of that bill. It is also the opinion of the Board that the committee wisely rejected the numerous other changes proposed to it during and preceding the hearings.

I will say of some of them, if they were adopted, we would have nothing to do but cut out paper dolls.

The extension of renegotiation beyond the present termination date of the act was requested by the President and recommended by the Department of Defense. The Department has pointed out that world conditions today, and for the foreseeable future, require expenditures in unprecedented amounts for the national defense, and has stated that its procurement pricing techniques are not adequate to protect against excessive profits in all cases, particularly in the area of novel and complex weapons characterized by insufficient cost and production experience. The Renegotiation Board concurs in these views of the Department of Defense. It believes that a further extension of the act is in the public interest, and that the length of the extension is reasonable in all the circumstances.

Section 2(a) of the bill requires the Board, in its consideration of the efficiency of the contractor, to accord particular regard to "contractual pricing provisions and the objectives sought to be achieved thereby, and economies achieved by subcontracting with small business concerns." These matters are in addition to the other elements now specified in the statute under the efficiency factor. The substance of the new provisions is already contained in the regulations of the Board, and in practice has always been taken into consideration by the Board in determining excessive profits. The new provisions thus do not compel any change in the Board's application of the efficiency factor, but it is desirable that they be given statutory expression.