7. Defense Production Administration, National Production Authority, the Department of Defense and all production and procurement agencies should continue existing programs of technical aids, production services and contracting and subcontracting assistance to small business.

8. These agencies should undertake a coordinated program of information concerning the basic objectives of small-business participation in defense production and the means by which this can be accomplished. This should include these steps:

(a) Widely publicize the methods of Federal procurement so that small concerns will know where to go for assistance in obtaining contracts.

(b) Encourage all businesses similarly to publicize their need for subcontractors and the methods of their subcontracting activities.

(c) Institute a program of educational forums and exhibits to expedite the location of additional suppliers.

In order to measure the effectiveness of the policy, Mr. Harrison said periodic reports are to be submitted to DPA by the agencies concerned. Summaries will be made public from time to time, reporting the progress of small-business participation in Federal procurement, he said.

The Small Business Executive Committee consists of: John C. Pritchard, Deputy Administrator for Small Business, Defense Production Administration, chairman; the General Manager of the Atomic Energy Commission, and representatives from the Department of Defense, the Munitions Board, the General Services Administration, and the Defense Transport Administration.

STATEMENT OF POLICY ON PRICING, NEGOTIATION, REDETERMINATION, AND

RENEGOTIATION

The purpose of this policy is to establish broad principles of Government-contractor relationship in connection with procurement for mobilization. It attempts to enunciate a plan of mutual interest in the successful procurement of the needed materials in a manner fair to the businessman, equitable to the taxpayer and having the protection of the interests of the Government as its prime requisite.

The whole contractor-Government relationship should be rededicated to a concept that has cost reduction rather than profit reduction as its paramount objective. This is not a condonation of excessive profits but is stated (1) to use the profit motive to stimulate efficient production, and (2) to indicate that the area for greatest savings lies in cost and cost control. The use of strong profit incentives for good contractor performance in all elements of cost control can save far more in the form of cost reduction than it permits in higher profit margins. For example, a reduction of 5 percent in the cost of a million dollar contract, where cost makes up 90 percent of the total, results in a saving to the Government of $45,000 while an equal reduction in profit is only $5,000, a ratio of 9 to 1.

The rearmament program should utilize to the fullest extent the industrial and business organizations and the management methods and controls which have built the very resources that are now available for the emergency.

Full recognition must be given to the fact that organization and management methods and controls vary from industry to industry and from company to company.

The contracting officer must be vested with full and complete responsibility for all of the contract negotiations including cost, pricing, and contract terms. He must have available the services of an adequate staff composed of technicians, engineers, accountants, and lawyers. The contracting officer's authority should not be restricted by the assignment of responsibility for any of the aspects of the transaction to an individual or organization not reporting to the contracting officer.

The contracting officer should be in a position to take full advantage of all available industrial facilities, skills, and manpower. There should be vested in him, within announced procurement policy, full responsibility and authority for the whole contract including price, subject to approval of higher procurement authority when required.

This is particularly important due to the urgency of the present period of partial conversion of facilities from peacetime to munitions production. During this period the objective of securing uniformity and refinements in contract

clauses and pricing methods should be subordinated to the attainment of required conversion as rapidly as possible.

In vesting full responsibility for all phases of procurement within the contracting officer it is important that he have full control with respect to bargaining for price. In order to accomplish this it is essential that the principles and procedures of the Forrestal-Patterson-Henderson agreement of World War II be reinstituted. Failure to so do impairs the procurement responsibility placed in the military services by Congress. The military procurement agencies should be relied upon to carry out in their field the objectives of the Office of Price Stabilization in the control of price.

The same objectives with respect to the reduction in the use of critical material which are now being so strongly encouraged in the civilian field should be made incumbent on all agencies procuring for the defense effort.

A more orderly management of buying practices is necessary to the end that the validity of requirements may be established and that deliveries are scheduled in realistic relation to the time at which they are required. Unless this is clearly understood and implemented violent disruptions to civilian economy cannot be avoided.

IMPLEMENTATION

In order to implement procurement policy on pricing, negotiation, redetermination, and renegotiation we endorse the following with full recognition that some of these recommendations are already incorporated within armed services procurement regulations and statements of policy by the Department of Defense.

1. Without attempting to prescribe in detail all the types of contracts suitable for use by the Government and industry, certain broad principles of the ideal Government-contractor relationship can be expressed by specific reference to several contracting methods. These are

(a) Fixed price contracts without provision for price redetermination or escalation should be used wherever practicable, either by competitive bid or negotiation, as the facts may warrant.

(b) Where labor and material content in a product purchase can be reasonably estimated at the time the contract is let, automatic escalation of labor rates and material prices may be provided either in competitive bid or negotiation.

(c) When the contract involves procurement of products where the labor and material content cannot be determined with reasonable accuracy, for which final specifications are not available or for other uncertainties, price-adjustment clauses should be provided.

(d) If the product is such that the contractor will be able, at a specified stage of the contract, to make reasonable estimate of his costs, price redetermination at a specified point in the contract performance should be provided. Prices should be redetermined promptly by negotiation at that point. Failure to negotiate until the contract has been 60 to 100 percent completed approaches illegal "cost plus a percentage of cost" pricing. To remove excessive contingencies in the original cost it is recommended that redetermination both upward and downward be provided.

(e) Where sufficient experience has been gained in past production so that a target price may be set, incentive-type contracts wherein both the Government and the contractor will share in the savings accruing through lower costs should be encouraged. It is essential that the renegotiation process recognize the incentive to efficiency and provide an adequate reward for good performance under this method of contracting.

(f) Cost-type contracts provide little incentive to cost reduction. However, their value for certain production tasks, as well as research and development work must be recognized. They should be utilized only when no other type of contract will serve to accomplish a fair and equitable relationship between the Government and the contractor. Before use of this type of contract, determination should be made that the contractor is equipped to provide the proper accounting controls to adequately reflect costs. Repair, overhaul, and maintenance contracts in which cost factors are uncertain are examples of production in which the use of cost-type contracts is deemed advisable.

2. Procedures and contractual provisions should be developed for both prime and subcontractors to facilitate and encourage voluntary price reductions wher

ever and whenever the prime or subcontractor's costs may be reduced below anicipated levels due to production efficiencies or other factors. This should include provisions for price returns on past deliveries, as well as price reduction on future deliveries. The extent to which a contractor or subcontractor utilizes such procedures and provisions should be a factor for favorable consideration by the renegotiation board.

3. Whenever possible, Government contracts should be negotiated in accordance with principles and methods of accounting regularly employed by the contractor. Reference is made to Public Law 9, Eighty-second Congress, "Renegotiation of contracts," paragraph 103 (f): "Such costs shall be determined in accordance with the method of accounting regularly employed by the contractor or subcontractor in keeping his records, but, if no such method of accounting has been employed, or if the method so employed does not, in the opinion of the Board, or, upon redetermination, in the opinion of the Tax Court of the United States, properly reflect such costs, such costs shall be determined in accordance with such method as in the opinion of the Board, or upon redetermination, in the opinion of the Tax Court, or upon redetermination, in the opinion of the Tax Court of the United States, does properly reflect such costs." At the time of negotiating the first contract the contractor's cost-accounting system should be reviewed. When acceptable, subsequent accounting checks can be limited to office review and consultation.

4. It should be recognized that military contracts must share with all of the contractor's other business the normal costs of doing business in accordance with the method of accounting regularly employed by the contractor. To disallow or refuse to allocate certain elements of cost which the manufacturer has found necessary in successfully operating his own business is to defeat the purpose of securing the cost-reduction benefits of free competition. On the other hand, abnormal costs and abnormal cost allocation should be rigidly rejected. Normal costs include such items as administrative overhead, general product engineering, contributions, and other costs frequently referred to as indirect. Those costs involving product advertising, production engineering, selling expenses, entertainment, and travel which are incurred solely for the marketing of the contractor's commercial products and chargeable directly to such products in normal industrial accounting practices should not be allocated in any part to Government contracts.

5. Section 15 ASPR, Contract Cost Principles, should be redrafted. It fails to reflect sound commercial accounting practices. Its principles are at variance not only with standard commercial accounting practices but also with the accounting principles incorporated in Public Law 9, Eighty-second Congress, renegotiation of contracts.

6. In the period of extreme uncertainty immediately ahead it is probable that there will be violent changes in production goals, both upward and downward. Contracting officers should be directed to incorporate the principles of fair, fastand final settlement into individual contracts, and administrative regulations should be prepared to carry out this purpose. It is essential that Congress be urged to speedily reenact the Contract Settlement Act of 1944. In addition, the services should readopt the joint termination regulations. Only such changes as are necessary under the National Security Act of 1947 should be made. It is urged that this action be taken as quickly as possible due to the uneasiness which already exists on the part of industry because of the constantly changing base of the defense program.

7. The necessity for financial help to all businesses doing defense work has been recognized by legislation and Executive orders. It is recommended that financial help be made more readily available by the preparation of clear-cut and simplified procedures for securing V-loans, advance and progress payments, and that all operations of review and approval be streamlined in order to speed up contract placement and contractor operations. Pending legislation designed to remove secondary liability of banks making V-loans should be expedited. A program for prompt payment of contractor's vouchers should also be instituted. The current practice under which contractors must sometimes wait weeks and months for their money is not in accord with accepted commercial practice and places a particular hardship on small business.

8. Industry integration committees are necessary to efficient defense production in certain instances. It is necessary that the Department of Justice promptly develop a basic plan under which such integration committees can be established. 9. Minor facilities and building alterations should be considered as make-ready expense under supply contracts and should be recognized in the price. The dispo

sition, ownership or recovery of such facilities and alterations should be clearly spelled out in the contract so that such questions do not become matters of dispute at the close of the contract.

10. Incentives to the maximum amount of subcontracting by prime contractors should be provided. Any attempt to hold down the amount of profit which may be earned on subcontract work to a level below that which would normally obtain in commercial practice operates to defeat the objective of spreading the load.

Current cost analysis practices tend to discourage subcontracting by allowing less administrative costs, overhead costs and profit on subcontracted portions of prime contracts on the theory that it is less costly to the prime contractor to administer subcontracts than to do the work in his own plant. This acts to encourage prime contractors to build as much as possible of the completed product within their own plants and thus tends to defeat the objective of spreading the load. Contracting officers should be directed to fully recognize the expense to prime contractors in administering subcontracts. Such costs rightly include purchase assistance, engineering assistance, material and production assistance, inspection and other costs actually entering into the subcontractor relationship, as well as a profit margin adequate to encourage subcontracting. Care is required in distinguishing between subcontracting for fabricated or assembled portions of the end item and the purchase of materials and standard parts. The same principle applies to renegotiation.

11. The present mandatory patent indemnity clause should be continued in all contracts for items of a standard commercial nature. Procurement regulations do not provide for the inclusion of such a clause in contracts for strictly military items although they are some times negotiated. Contracting officers should be specifically directed to omit patent indemnity clauses from such contracts in order to eliminate the cost of indemnity from the price of the product.

12. Agreements made during World War II with several industries providing for reduction, elimination or lump sum royalty payments for the use of patents should be reinstituted. This should be done on a graduated scale based on the size of the particlular procurement program involved.

13. Considerable emphasis has been placed on the attainment of uniformity in contract negotiation practices in recent years. On a long-term basis much has been and can be accomplished in this direction. During the current period of partial mobilization, however, the Government-ontractor relationship needs some latitude to mesh with the practices of the contractor to speed up the procurement job and to spread the load as much as possible. There should not be overlooked such opportunities for uniformity as may effect economies for the Government. Among these are:

(a) Symbols and identification for materials.

(b) Inspection procedures and practices.

(c) Specification writing and interpretation.

(d) Material, performance and component standards.

(e) Packaging methods and marking.

(f) Cataloging and item identification.

(g) Security regulations.

(h) Contract forms.

14. To assure reasonable pricing, contractors must exercise the same degree of diligence in subcontracting and purchasing which they exercise in subcontracting and purchasing for commercial production. This is so even though it must be recognized that in many industries industrial practices do not permit disclosure of costs to their customers.

15. Under the concept of these recommendations the contracting officer is held completely responsible. He must, therefore, be of such caliber that he can be depended upon to use judgment in reviewing procurement requests for the following factors:

(a) Relating the proposed rate of obligation of funds for procurement of specific items to the ability of industry to produce requested quantities without serious economic upset.

(b) Reviewing production schedules to determine that monthly delivery quantities are actually at rates that represent expected consumption and not the rates that will build stockpiles at the expense of the civilian economy.

(c) Reliance upon the current monthly production as a reserve factor in recommending adjustments in the procurement rate to accomplish the objectives of (a) and (b).

(d) The assumption of the same responsibility and the use of equal judgment in the handling of purchase requests from other services where single service procurement is involved.

In the exercise of judgment on these matters, contracting officers should be given full freedom to question all sources originating procurement requests in order to test their validity. Questionable cases should be submitted to higher authority for review.

16. In furtherance of the principle that the contracting officer should have full responsibility for all phases of the contract including price, agencies outside the procuring services should have no authority to pass upon the judgment used by the contracting officer in forming his decisions and reaching his agreements with the contractor. The contracting officer should determine the scope of the audits and checks required to enable him to form a considered judgment of the contractor's prposals and performance. Other agencies of the Government, including the General Accounting Office, should limit their audits or checks of the contractor to matters relating to the administration of the contract by the contracting officer and to the detection of fraud. The contracting officer's decisions must be binding, overriding and final.

17. The contracting officer should be provided with trained and competent personnel and the tools necessary to guide him in the discharge of his responsibility. These tools must include contract clauses which leave to him the widest choice of selection to meet varying situations. There should be vested in the ranking contracting officer at the point of negotiation, the authority, within announced procurement policy, to modify such clauses as may be indicated in the exercise of good business judgment.

18. In the pricing of Government contracts, inflexible policies should not be adopted with respect to the allowance or disallowance of accelerated amortization of certified facilities. Extreme care must be taken to avoid excessive facility amortizations being included in purchase price of articles procured.

19. An educational program concerning all elements of these recommendations and aimed at a greater mutuality of understanding between contracting officers and industry should be instituted. This is a joint responsibility of the Department of Defense and other Federal procuring agencies along with the NPA and DPA. The principal field representatives of these agencies should be required to meet frequently for the purpose of familiarizing themselves with the procurement situation in their area. They should arrange for frequent meetings and forums with industry for the purpose of encouraging exchange of information and better understanding on both sides of the Government-contractor relationship.

20. It is recommended that the Regional Interagency Defense Mobilization Committee working with the Armed Forces Regional Councils institute a program of field review and reporting to see that the intent of these recommendations are, in fact, understood and being carried out in the field. There should be undertaken on a scheduled basis a survey of each field procurement office involving sufficient spot-checks of contracts and contracting officers to determine the effectiveness of the program. Monthly reports shall be submitted to the Defense Production Administrator by the chairman of the Regional Interagency Defense Mobilization Committee.

21. In addition to the recommendations contained herein, all applicable provisions of the procurement policy for small business are hereby made part of these general procurement policy recommendations.

PROCUREMENT POLICY FOR SMALL BUSINESS

The policy for defense procurement should accomplish the following with respect to small business:

1. Spread available production across as wide a base as is possible by bringing into the defense effort on a prime contract, subcontract or purchase part basis, every qualified producer who can be used.

2. Continuing and increasing effort must be made to search out and use the productive facilities of small enterprises for the current procurement program of the Federal Government.

3. Government must make available to small business, information on requirements so that the small manufacturer will have adequate knowledge of the steps required in getting subcontracts from primes, and prime contracts for himself when they are within his capacities or abilities. The initiative, however, for getting defense work in a small plant rests on the small manufacturer.