SECTION 7. STAFF RECOMMENDATIONS

A. EXTENSION OF THE RENEGOTIATION ACT

It is recommended that the act be extended for 2 years, or until June 30, 1970.

It appears appropriate to continue the act for this period in view of a number of factors which have been discussed more fully above. One of these factors is the substantial increase in procurement by the departments and agencies subject to the act in the last 2 years. The normal timelag between the time of contract awards and the time of determinations under the Renegotiation Act indicates that amounts received under contracts awarded during the Vietnam buildup will be reported in filings with the Renegotiation Board during at least the next 2 years.

Although substantial changes have been made in the Department of Defense procurement practices in recent years, it appears there is a need to further assess the effectiveness of these practices in insuring that excessive profits will not be obtained on Government defense business, especially in light of the possible impact on these practices of the increase in procurement associated with Vietnam.

On the other hand, it is possible that further time and study will demonstrate that effective procurement practices can achieve normal competitive profits on Government work, or at least reduce the incidence of excessive profits on defense and space work to an insignificant level. In addition, the nature of renegotiation in principle, and its substantial reliance on human judgment in operation, make it a process which should be periodically reviewed. These factors lead to the conclusion that the Renegotiation Act should not be made a permanent feature of the law. In other words, the nature of the renegotiation process, and the many and changing variables of the overall framework within which renegotiation functions, demonstrate the need for a continuing and periodic review of the Renegotiation Act by Congress.

Although a 2-year extension of the act is recommended by the staff, it should be noted that present circumstances would also appear to justify a 4-year extension. The primary factor in this regard is the consideration that it will probably require more than 2 years to adequately determine the effectiveness of new procurement methods in limiting excessive profits. In addition, the application of the renegotiation process to amounts received under contracts awarded during the Vietnam buildup will continue for more than 2 years. Noting that a 4-year extension of renegotiation would appear justified is not to suggest that Congress should not continue to exercise a periodic and continuing review of the Renegotiation Act, but rather to say that present circumstances and past experience with the act suggest that it might be appropriate for Congress to wait 4 years, instead of 2 years, to exercise that review.

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B. EXEMPTION FOR STANDARD COMMERCIAL ARTICLES

The committee may wish to give consideration to revising the exemption for standard commercial articles and services in order to more adequately insure that goods and services qualifying for the exemption are, in fact, commercial items. If the committee desires to take action on this area, the staff recommends three modifications in the exemption. First, the percentage of the sales of an article or service (or class of articles) which must be nonrenegotiable for the exemption to apply could be raised to 50 percent. Second, contractors who selfapply the exemption for a standard commercial article could be required to report the application, and its basis, to the Board. Third, it could be provided that for the exemption to apply, a standard commercial article (or service) must be sold to the Government at a price which is reasonably comparable to the price charged a commercial purchaser for an order of similar quantity. These recommendations are discussed in greater detail in section 5 of the report.

C. ADDITIONAL DATA REQUIRED FOR EVALUATION OF RENEGOTIATION

In the course of its present study of renegotiation, the staff found that needed information was not available with respect to a number of the aspects of the renegotiation process. The lack of this information prevented adequate analysis of some of the more fundamental questions raised with respect to renegotiation, such as: What types of contracts have produced "excessive profits"; whether "excessive profits" are more prevalent in certain industries; whether "excessive profits" occur more frequently with respect to firms of a given size; and the relationship between procurement policies and the method of their implementation, on the one hand, and the policy of renegotiation and the manner of its implementation, on the other hand (e.g., whether the Defense Department profit policy and the renegotiation process are in conflict).

In order to make the needed information available for purposes of future evaluations of the renegotiation process, the staff recommends that the Renegotiation Board develop and maintain the following types of information:

(1) A more detailed breakdown of renegotiable sales and profits by type of contract for contractors reporting net profits on their renegotiable sales as well as for those reporting net losses. (In other words, data for cost-plus-incentive-fee contracts and fixed-price incentive contracts, in addition to the presently available data for (firm) fixed-price and cost-plus-fixed-fee contracts.)

(2) Renegotiable sales and profits by type of industry and size of contractor (asset size and amount of sales); in addition, data on nonrenegotiable sales and profits for these same firms.

(3) Renegotiable profits (before and after renegotiation) as a percent of contractor net worth (including reporting of amounts of Government supplied capital and equipment).

(4) Data analyses of firms determined to have excessive profits: types of industries, sales and profits by types of contracts, percentage distribution of their renegotiable contracts by types, contractor net worth, and amounts of Government supplied capital.

D. TREATMENT OF INCENTIVE CONTRACTS

In 1962, the Renegotiation Board stated its position on the treatment in renegotiation of amounts received under incentive contracts. Since that time, the use of incentive contracts has increased significantly and substantial developments have occurred in the area of cost control and review procedures. In addition, the National Aeronautics and Space Administration stated its belief that inadequate recognition has been given by the Renegotiation Board to NASA incentive contracts and the reasons underlying their use. These factors suggest the need for a reconsideration of the manner in which incentive contracts are taken into account for renegotiation purposes.

The staff recommends that the Renegotiation Board reevaluate its treatment of incentive contracts, and report the results of this reevaluation to the committee. The report might include a detailed discussion of the specific manner in which incentive contracts are taken into account in the renegotiation process. Moreover, the report might place particular emphasis on the specific manner in which the Board takes NASA's procurement difficulties, programs, and contracting arrangements into account in determining whether profits realized on NASA incentive contracts are "excessive."

Appendix A

SUGGESTED CHANGES IN THE RENEGOTIATION ACT

Various changes in the Renegotiation Act have been suggested in bills introduced by Members of Congress and in comments of interested individuals and organizations which were submitted to the Committee on Ways and Means and made available to the staff of the Joint Committee on Internal Revenue Taxation. The proposed changes concerning the length of the extension of the act (i.e., whether renegotiation should be made permanent), the statutory floor, and the exemption for standard commercial articles have been discussed in earlier parts of this report. The other changes which were suggested are summarized below:

A. DEPARTMENTS COVERED BY THE ACT

It was suggested that the act be made applicable to the Tennessee Valley Authority. (H.R. 6792, Mr. Gonzalez; H.R. 14678, Mr. Vanik; H.R. 14697, Mr. Feighan; H.R. 14999, Mr. Minshall; H.R. 15341, Mr. Evins.)

It was also suggested that certain "fringe" agencies be eliminated from the application of the act; namely, the General Services Administration, purchases in connection with the civil works functions of the Army Corps of Engineers, and the nonmilitary procurements of the Atomic Energy Commission. (Machinery and Allied Products. Institute, Charles Stewart, president.)

B. EXEMPTIONS

It was suggested that amounts received under arm's-length bona fide competitive bid subcontracts for a sum of less than $1 million be exempted from renegotiation, if the subcontractor is not affiliated with the prime contractor. (H.R. 3100, Mr. Multer.)

It was suggested that the existing partial mandatory exemption for new durable productive equipment be limited in its application to subcontracts where the equipment does not become a part of either an end product acquired by the Government or of an article incorporated in such an end product. (H.R. 6792, Mr. Gonzalez; H.R. 1467, Mr. Vanik; H.R. 14697, Mr. Feighan; H.R. 14999, Mr. Minshall; H.R. 15341, Mr. Evins.)

It was suggested that the existing exemption for competitive bid contracts for the construction of any building, structure, improvement, or facility be eliminated. (H.R. 6792, Mr. Gonzalez; H.R. 14678, Mr. Vanik; H.R. 14697, Mr. Feighan; H.R. 14999, Mr. Minshall; H.R. 15341, Mr. Evins.)

It was suggested that an exemption be added for all formally advertised competitive bid supply contracts. (Machinery and Allied Products Institute, Charles Stewart, president.)