this process for the first time, has the most trouble understanding the form, what is renegotiable, what is exempt, and whether or not he should file. The small business adviser is there to advise the small businessman with respect to what his duties and obligations are and how to make a filing.

It is also the job of his office to take those filings in the first instance. and determine if, on their face, they are complete. If they are not, they are sent back to the contractor to be filled out in more detail. Then they are sent on to our accountants in the headquarters, who go through them and look at the figures to see that figures follow acceptable accounting practices and conform with the filing instructions.

Mr. CHAPPELL. This is within the Office of General Counsel?
Mr. BURRESS. No. This is the Office of Accounting.

Once they complete the accounting work, the papers are sent on to the screening group, which is in the Office of Review. These men then look at the filing and make an initial determination as to whether or not there is any possibility of excessive profits, based on the figures which have been checked out by the accountants. They also compare the contractors returns with industry ratios, or ratios that they have obtained from contractors similarly situated.

In cases that involve contractors whose renegotiable sales were more than $10 million and/or whose renegotiable profit was over $200,000, the screening group has been delegated the authority to either clear the contractor or assign his case to a regional office.

Any case that involves more than $10 million in sales and/or $200,000 in profits must be forwarded to the statutory Board, with their recommendation, for final action. If their recommendation is to close without assignment, they give the figures on which they base this assessment. The Board then studies the case and either agrees or disagrees or asks for more information. If we disagree, the case is assigned to a regional office.

In the past year, every case that has been recommended for assignment by the screening group has been assigned.

In addition, in a number of cases where they have recommended a clearance, we ordered assignment.

REGIONAL BOARD PROCEDURE

Mr. CHAPPELL. You mean assigned to a region?

Mr. BURRESS. Assigned to a region for full-scale renegotiation. Once it is assigned to a region, it is assigned to an accountant and to a renegotiator. The accountant obtains additional accounting data. He may make a plant visit where he will sit down with the contractor's accountants and go over primarily two things. First, the sales segregation. In other words, what are the sales and receipts that are renegotiable as opposed to nonrenegotiable.

The second thing he goes over is cost allocations. What are the costs that should be borne by the renegotiable business and what are the costs that should be borne by the nonrenegotiable or commercial business.

When the accountant completes this kind of assessment, a copy of his accounting report is sent to the contractor. He has a right to com

ment on it and ask for any modification or change that he believes may be appropriate. If there are any modifications or changes made, the accounting report is amended to reflect these changes. Then it is sent on to the Division of Renegotiating.

In the Division of Renegotiating, the renegotiator has the responsibility to look at all the facts in a particular case and to make a judg ment as to whether or not there are excessive profits.

Here again, a plant visit may be made. The renegotiator must consider the efficiency of the contractor, the contribution of the contractor to the defense effort, the reasonableness of the prices and profits of the contractor. He will also request that the contractor submit a statement under the factors, where the contractor can give his own evaluation of his renegotiable work.

Once the investigation and evaluation is completed, the renegotiator prepares a renegotiation report. In this report, all of the factors are considered and if he believes there are excessive profits, he will so state, with the approval of the Director of the Division of Renegotiating and upon the authorization of the regional chairman.

This report then goes to the contractor. He has an opportunity to comment on it. He can have a conference with the renegotiator to try to work out any differences of opinion and to see if an agreement can be reached.

Failing that, he then has a right to ask for a hearing before a panel of the regional board. At this hearing he can present his full case and argue anything from the figures to the factor evaluation.

The panel of the regional board then makes a recommendation to the regional board on whether it should be a clearance or whether there should be excessive profits found in that case.

The regional board then issues its finding in a memorandum of decision. In the MOD, both the amount of the excessive profits and the reasons for such a finding are set forth. This also goes to the contractor.

If he disagrees, he can so state, or he can enter into an agreement for that amount. If he disagrees, and he makes a good case, an agreement can be entered into on the basis of the new evidence, information or argument.

The contractor also has a right to have his case reviewed by the Statutory Board. Every case that comes to the Statutory Board is heard by either a division of the Board or the full Board. At this hearing, we sit down with the contractor. We invite him to present his full case, any facts he thinks are relevant from the accounting to factor consideration.

We urge him to bring up anything and everything and we give the case a new and fresh look. Then, a division of the Board and finally the full Board itself considers all the data presented by the contractor and makes a finding. This finding is incorporated in a Memorandum of Decision which sets out why we feel a certain amount is excessive profits.

The contractor is invited to respond to this MOD. We are willing to consider anything that he might present which may indicate that we may have made a mistake or where a change is indicated. Again, every effort is made to reach an agreement with the contractor.

If we cannot reach an agreement, then we issue a unilateral order wherein we determine that a certain amount is excessive profits.

The contractor has 90 days to appeal that unilateral order to the Court of Claims.

As I indicated, there are now 120 board cases pending before the Court of Claims.

Mr. CHAPPELL. Thank you. No further questions.

LOSSES CARRIED FORWARD

Mr. ROUSH. Mr. Burress, do I understand that if a contractor had a loss for a period of 5 years, that loss could be carried over and then if, during that time, he had an excess profit, you would permit him to Mr. BURRESS. Correct.

offset that with the loss? Is that correct?

Mr. ROUSH. Let us assume that the man has an excess profit one year and then later he has a loss. Does the same offsetting feature pertain? Mr. BURRESS. Later the same year?

Mr. ROUSH. Or in a subsequent year he suffers a loss.

Mr. BURRESS. No; you cannot carry back. You can only carry forward. However, we do look at subsequent year loss situations to see if they should be considered under the risk factor. In other words, the contractor says to us: "This is a risky business I am in. Defense business is up and down. I am subject to cancellation or reduction in quantity. Witness the fact that although I made certain profits this year, a year later, after I had bought my machinery and employed my people, my contracts were reduced and I lost a million dollars."

In our evaluation under the risk factor, we will give special consideration to such losses when we decide what amount is excessive profits.

CONSOLIDATED FILINGS

Mr. ROUSH. Let us assume the involvement of a parent company which has a loss in one of its subsidiaries and an excess profit in another. Do you permit the offsetting of the loss against the profit in that case?

Mr. BURRESS. It depends on whether or not they have asked for a consolidated filing. They have the right under the act to come in with a consolidated filing, in which case we would consider all of their subsidiaries together with the parent. In the instance which you cited, if they do that, then, yes; the loss of one subsidiary would be set off against the excessive profits of another.

Mr. ROUSH. It occurs to me that this could lead to some manipulation on the part of contractors or certain contractors. That is just an observation.

Thank you, Mr. Chairman.

Mr. TIERNAN. On that point, would that not also work to the disadvantage of small contractors in the area of military contracting, a single contractor?

Mr. BURRESS. Yes. I think a large contractor, because of the volume of his business and the great many divisions he has, and the many subsidiaries he has, has an opportunity to offset the loss of one divi

sion or one subsidiary against the profits of another, which a contractor that has just one plant and one contract has no opportunity to do.

Mr. BOLAND. Mr. Talcott.

RECALCITRANT CONTRACTORS

Mr. TALCOTT. What happens to those contractors who do not file? Is there any recourse against them? How do you ferret them out? Mr. BURRESS. Yes. We are faced with that situation on a fairly regular basis. We refer to those contractors as recalcitrant contractors who say, "I am not subject to the act."

This can be a good-faith statement on their part. They just feel their business is not renegotiable. So they will not make a filing.

We pick up these people in two different ways. One, our assignment people follow the procurement awards and we know who is getting contracts. Also, when the prime contractors make filings, we ask specifically that they list their subcontractors who receive $500,000 or more in renegotiable receipts in a given year.

Then we contact such contractor, and tell them that we have information which indicates that they are subject to the act. We send them the form that should be filled out, and we point out the criminal provisions.

In the past, we spent a lot of time on recalcitrants, going back and forth with them, assigning them to the regions and asking the regions to check with them. We are in the process of changing our procedures now, which will call for due notice on our part that we have this information, that they should be making a filing. We also point out to them the criminal provisions in the act providing fines and imprisonment.

Mr. TALCOTT. How many of those do you handle a year?

Mr. BURRESS. It is really a small number.

Mr. TALCOTT. Twenty-five?

Mr. FENSTERSTOCK. More than that. We are constantly pursuing people who have not filed when we acquire information indicating that they should.

Mr. TALCOTT. It would seem important to me. Can you provide us with additional information on this matter?

Mr. BURRESS. We shall be glad to. We work hard on these people. Mr. TALCOTT. Some of them do this out of negligence or ignorance, and some are just evading the law.

(The information follows:)

Our records show that we sent letters, of the type I have just described, to approximately 50 companies in each of the 2 fiscal years 1971 and 1972. Such letters customarily go out over the signature of the General Counsel after persistent efforts by the Office of Assignments fail to produce the filings required. As a result of these letters, filings were thereafter received from most of the companies involved. In many cases, the filings were sent in by such companies together with filings of related companies who were also required to file.

CONTRACTOR EFFICIENCY

Mr. TALCOTT. I am worried about your efficiency criteria. It seems to me from what you have said here today that the contractor

who is very efficient might be penalized because he is not entitled to as much profit as one who is inefficient. It seems to me that is the wrong way to make these determinations. The inefficient contractor apparently has tried to claim that since he is not quite as efficient as the other, he is entitled to a higher contract and, presumably, excessive profits. Am I wrong in that analysis?

Mr. BURRESS. The first factor we are to take into account in determining excessive profits is a very precise instruction from Congress that in determining excessive profits, favorable recognition must be given to the efficiency of the contractor or subcontractor.

Mr. TALCOTT. If a contractor appears to have an excessive profit of a million dollars and is very efficient, you might allow that when you compared him with a contractor who has a million dollars but is not very efficient?

Mr. BURRESS. That is correct.

Mr. TALCOTT. I have no further questions.

MINIMUM REFUNDS

Mr. TIERNAN. On page 5, you make reference to minimum refunds of $40,000. You increase it to $80,000. Will you explain what that means?

Mr. BURRESS. The contractor, first of all, has to have a million dollars or more in renegotiable business in a fiscal year before he has to file. Also, in his filing he indicates how much he has made. If we determined under the old minimum that his excessive profits would be less than $40,000-then under the application of the minimum refund rule we would not process that case any further.

Mr. TIERNAN. How do you determine excessive profits? Is it 6 percent of capital investment, or is it a very involved accounting formula? Mr. BURRESS. There is no formula. That is where you have to take into account the statute that Congress has passed which sets out the various determining factors.

USE OF AUTOMATION

Mr. TIERNAN. I apologize for my lack of knowledge of this whole subject. I am just getting into it.

Under data processing, which you refer to on page 7, that is electronic data processing techniques?

Mr. BURRESS. That is correct.

Mr. TIERNAN. You are developing a system now?

Mr. BURRESS. Right.

Mr. TIERNAN. The capability of the system, I would assume, you will develop within the Board itself, or are you going to use other agency facilities?

Mr. BURRESS. We are going to use the computers of others. We will be renting time. I believe they will be GSA computers. Mr. STONE. Time-sharing with GSA.

Mr. TIERNAN. Assuming that you are going into the system, once it is set up would it not be practical for you then to lower the floor