Mr. IGNATIUS. The Defense Contract Audit Agency, Mr. Horton, is concerned, or will be concerned when it is fully operational in the next few months, with audit of our contracts, preparing audits that are advisory to our contracting officers. Essentially, it represents a consolidation of that portion of the existing audit activities of the individual services that are concerned with contract audit as opposed to internal management audit. The results of their work, then, are used by our contracting officers and procurement officers and other officials. This agency will work closely with the GAO, as have the individual services audit agencies in the past, making available to them the results of the audits performed.

Mr. Petty, the director of this new agency, is here with me, and he may wish to add to my comments, if you choose to have him do so.

Mr. HORTON. I would like to ask you this, Mr. Secretary: Is it your opinion that this audit agency will help and assist the Department of Defense to pick up, perhaps, some of these errors or some of these calculations which perhaps have been the subject of GAO reports which have come in understandably at a later period after the contract had been awarded and after performance? Do you feel that this is going to help the Department of Defense to pick up some of this type of criticism within the Department, so that you will be in a better position to reply to contractors before work is completed, or while work is in progress, or while contracting negotiations are in process?

Mr. IGNATIUS. I do indeed, Mr. Horton.

Mr. HORTON. And this is a function that the Department of Defense did not have as such during the time that we are talking about except in the different military departments?

Mr. IGNATIUS. That is correct. We have had the separate audit agencies. This new agency, as I say, represents a consolidation of the contract audit function. The audit agencies of the services will continue, but they will be doing internal management reports as opposed to contract audit.

This agency, without burdening my comment unduly, has followed on another action that we have taken; namely, to consolidate all contract administration functions. Project 60, so called, in the Department of Defense has culminated in a defense contract management organization across the country that is merging the contract management offices of the individual departments concerned with postaward activities-the many aspects of contract administration.

Having taken this step, it then became apparent that it would be desirable to have a defense contract audit agency as a concomitant to the contract administration agency. This group of auditors, as in the past, will be extremely valuable to our procurement people. We feel that by concentrating on contract audit we can give this function perhaps even greater attention, and insure the highest standards of professionalism. I have no doubt that we will be able to point out difficulties of the kinds that we have discussed.

Mr. HORTON. You mentioned Project 60. Is that General Veal's project?

Mr. IGNATIUS. Yes. General Veal is in charge of it.

Mr. HORTON. Is he expected to testify here? Did you expect to put in some information with respect to Project 60, and what it proposes to accomplish?

Mr. IGNATIUS. We had not intended to do that, but if the chairman wishes General Veal to testify, he will be glad to do that.

Mr. HORTON. I would like to have General Veal testify, Mr. Chairman. I have this project in my district, this Project 60, and the consolidation and removal of some of the functions in the area, and I think it would be well for the committee to know what the purpose is, and whether or not they will actually accomplish what the purpose of Project 60 is designed to accomplish.

Mr. HOLIFIELD. The Chair believes the request is pertinent, and we will arrange it with the staff.

Mr. HORTON. No further questions.

Mr. HOLIFIELD. Mr. Callaway?

POLICY ON VOLUNTARY REFUNDS

Mr. CALLAWAY. Thank you, Mr. Chairman.

I would like to commend you, Mr. Secretary, for throwing some light on a very complicated question.

I would like to try to simplify it if I can. On the voluntary refunds, if the contractor had a fixed-price contract and ended up with a windfall, which was not because of his efficiency but through some windfall, if the price of some very important component is reduced and he then makes a very major profit on this contract, what is your position on the voluntary refund in a case like this?

Mr. IGNATIUS. This is a difficult question that you are raising, Mr. Callaway. Our position is that in the example that you have described, if there was no misrepresentation, if there was no deception, and it just happened that he made a lot more than he had anticipated, and it was under a firm fixed-price contract, we would honor our contract.

We have said in our policy that both of two conditions must be present, that the Government was overcharged in the pricing of the contract, and the retention of the amount would be contrary to good conscience and equity. We would have to look at the case on its merits. One of the problems you have here is that the reverse can happen under a fixed-price contract.

Mr. CALLAWAY. That was going to be my next question, what is your policy on that?

Mr. IGNATIUS. We don't come to his assistance by raising the contract price. We say, "This was a firm fixed price, you went into it knowingly, and we may be sorry as individuals that you have incurred this loss, but this is a responsibility that you undertook at the time you signed the contract. Therefore, we feel that if you do the one, you have got to do the other." So that if we followed a practice of bringing pressure to bear to compel him to return money to us when he made the windfall, I am sure this would be accompanied by a demand from the contractors for equal treatment when they exceeded their estimates. And once that begins to happen, you are no longer in a fixed-price situation, you are back into reimbursing costs which we have devoted several years of effort to trying to get away from.

Mr. BANNERMAN. I think, Mr. Callaway, quite clearly, absent any misrepresentation, intentional or unintentional, in short, if there was full revelation at the time the contract was made, based on accurate and current knowledge, our answer would be that the windfall belongs to him, and we should not seek a refund.

Mr. CALLAWAY. And unless you reverse the situation you are inconsistent, you can't take contrary positions, you have to take one or the other?

Mr. BANNERMAN. When you move away from a cost-reimbursement type of contract into a fixed-price type, you are going to get wider spreads of profits, and that is one of the reasons this happens. We think this is good, because that wider spread will, we firmly believe, automatically be attaching to a lower cost base; that is, lower because of the intense effort he will apply to make it lower.

Mr. CALLAWAY. That is the way the private sector usually works? Mr. BANNERMAN. Precisely.

POLICY ON GOVERNMENT-FURNISHED EQUIPMENT

Mr. CALLAWAY. Just one other question. On your subcontracting of the Government-furnished equipment, do you find that as you use a higher percentage of Government-furnished equipment, that the prime contractor then gets in a situation where he takes the position that he is not responsible for the finished product? If you get more Government-furnished equipment, it seems to me it is harder to pinpoint where the responsibility is.

Mr. IGNATIUS. This is a very real problem, Mr. Callaway. This can happen, particularly in some of the more complex items that we buy. There must be responsibility for configuration control, for the interface of the different components, and for the technical aspects of designing it. Very careful scheduling of production is also involved in this work. So while we believe that we should procure directly from the supplier, those things that we properly can, we must be very careful to avoid a problem such as the one that you describe. In short, we want to place responsibility on the prime contractor. We want to define what we are buying with as great precision as we can. We want to obtain his efforts under contracts that given him a clear opportunity to improve his profit by careful management of the effort. In this kind of a procurement philosophy, it is very important that we not dilute or erode the very responsibility on which it rests.

And so we must temper these things with judgment. We ought to buy directly all that we properly can. But there is a limit in a given system as to how far one would want to go in this direction. I tried to bring out some of the considerations in my prepared statement. Mr. CALLAWAY. Thank you, Mr. Chairman.

Mr. HOLIFIELD. Mr. Latta?

OPENING OF CONTRACTS FOR REFUNDS

Mr. LATTA. Mr. Secretary, do you follow anything similar to the statute of limitations in pursuing these refunds?

Mr. IGNATIUS. I am advised by Mr. Nash from the Office of the General Counsel, Department of Defense, that we do not.

Mr. LATTA. Than you can go back for?

Mr. BANNERMAN. You can ask.

Mr. ROBACK. I might ask in that connection, when is the farthest time that GAO has gone back for refunds in recent years?

Mr. BANNERMAN. I would like to do a little researching on that, Mr. Roback. It is certainly 6 or 7 years involved from the date the contracts were made.

Mr. ROBACK. In some cases, you would have to get refunds going back to 1940, isn't that so?

Mr. BANNERMAN. I don't recall such a case, but it may have been. Mr. ROBACK. The Grumman insurance payments, wasn't that back to 1940?

Mr. BANNERMAN. Yes; you are right.

Mr. HOLIFIELD. This seems to put a completely farcical interpretation on contracts that have been considered as finished and performed, and the contractor paid. If he is in jeopardy for that many years for something that he did, it would seem like to me it would destroy all confidence in the integrity of contracts.

Mr. BANNERMAN. Mr. Holifield

Mr. HOLIFIELD. I am speaking here to a situation where fraud was not involved.

Mr. BANNERMAN. As Mr. Ignatius pointed out in his statement, we have agreed with GAO and have sought "voluntary" refunds only in those cases where we thought there had in fact been some misstatement of a relevant fact on which we had relied.

We do feel, and we think the Congress feels the same way-as was evidenced by Public Law 87-653, the so-called truth-in-negotiations bill-we feel that when we are dealing with contractors they should deal with us candidly at the time we are asking for estimates or statements as to what their costs have been. We think that even though they deal with us candidly, if they make mistakes they should not profit from such mistakes where the mistakes could have been known at the time the price was quoted. But beyond that, absent any of those factors, we do not feel that we should ask for voluntary refunds. In fact, if we go in with our eyes wide open, we don't think that we should try to change the transaction thereafter.

Mr. HOLIFIELD. Isn't it a reflection on the ability of the Government negotiators to negotiate properly if we reopen these cases back a number of years and come in with a claim, as Mr. Callaway brought out, for a windfall which occurred without misrepresentation or fraud? Mr. BANNERMAN. We feel that that is true. And we also feel that the Government as a contracting party should act as a contracting party and not as a sovereign.

Mr. HOLIFIELD. The Chair in principle agrees with that position, because I have seen too many instances where the Government has exerted the inherent strength of Government more or less as a blackjack in enforcing its will. And I feel very strongly on this matter that our Nation is strong enough that it need not use the inherent tremendous power of Government to overawe or coerce a person who has dealt in good faith with the Government. Of course if they have not dealt in good faith, we have laws on the books to take care of fraudulent representations.

Mr. BANNERMAN. I might say, Mr. Chairman, that if our view of when we should and should not seek voluntary refunds were to prevail-and we assume that it will-pretty soon the question will become academic, because with the passage of Public Law 87-653 in late 1962, we now have a contractual right to adjust prices in those cases where

data submitted to us is not accurate, current, or complete. These are the very cases where in the past we have been seeking voluntary refunds, and in the future we will have a legal right to a price adjustment. So the question of voluntary refunds should, I think, largely drop out.

Mr. HOLIFIELD. I think the contractor has as much right to come in and ask for voluntary restitution of his losses as the Government has to go in and ask for voluntary return of their profits which may have been gained in a perfectly legitimate performance of the contract.

Mr. IGNATIUS. I agree, Mr. Chairman. And as I say, I think once you begin doing this you have soon

Mr. HOLIFIELD. You might as well go to negotiated contracts completely.

Mr. IGNATIUS. Cost reimbursement contracts completely, yes, sir. And we are trying to do just the reverse.

Mr. HOLIFIELD. If you do this, then you impair the principle of competition in the submission of fixed bids.

Mr. IGNATIUS. Yes, sir. But there is nothing to preclude, in a situation such as the hypothetical one that Mr. Callaway brought up a minute ago, if the contractor chooses to say, "I really ran into a windfall here," and if he wants to share it with the Government, there is nothing to preclude that. The distinction we are making is that it should be voluntary and not under duress.

Mr. HOLIFIELD. There have been cases of that.

Mr. BANNERMAN. Yes, sir.

Mr. HOLIFIELD. Was that all, Mr. Latta?

GROUNDS FOR REFUNDS

Mr. LATTA. One further question.

You mentioned that if information is not complete at the time the contract is entered into, that is one of the grounds for seeking a voluntary refund. But assuming that insofar as the contractor is concerned, that he was in good faith at the time the contract was entered into, and it was later discovered that the information was not complete, how about that situation?

Mr. BANNERMAN. Under Public Law 87-653, which states standards for price adjustment, and which standards are substantially the same as we have been using in our seeking voluntary refunds on cases that arose prior to that statute, if data submitted was incomplete in some significant respect, incomplete as to facts which were then known or should have been known to the contractor, and this had the effect of increasing the price, we would seek a price adjustment. In short, we are not saying that we would seek it if facts later became known, but only if the facts were or should have been known at the time.

Mr. ROBACK. Are you saying that the penalty operates only where there is a matter of intent?

Mr. BANNERMAN. No. The standards

Mr. ROBACK. If there is an honest mistake

Mr. BANNERMAN. If there is an honest mistake, and it affects the price upward, we have the statutory right under Public Law 87-653 to revise the price downward, subject to the disputes procedure.