We have already submitted to the committee the statistical information requested in your letters of September 16 and October 7, 1963, and you will note that in their entirety they comprise a considerable amount of detail. In order to save the committee's time, I would like, with your permission, to discuss here our small business program results only in their broader aspects. In fiscal year 1963, small business procurement records for the first time were reported by claimant programs and goals were set for each program. The advent of the Defense Supply Agency, which took portions of many claimant programs away from the military departments, plus an important change in reporting methods, brought about a situation wherein there is little validity in comparing individual claimant program results with those of previous years.

In fiscal year 1963, our total procurement amounted to $11.2 billion, an increase over the previous fiscal year of $451 million. Despite this increase, small business prime contract awards were $48 million less than the all-time-high figure of $1,026 million recorded in fiscal year 1962, and the small business percentage of total procurement declined for the first time in 6 years from 9.6 to 8.7 percent. This is most important, Mr. Chairman. Strangely enough, this decline in small business dollar awards and percentage of total awards took place in the very year, fiscal year 1963, that saw us reach an alltime high in small business solicitation, an alltime high in small business bidding, both on a dollar and percentage basis, and an alltime high in small business set-aside awards.

Before discussing this anomaly, I would like to mention a word about the situation in the field of procurements for less than $10,000. Of the increase in total obligations $156 million was in procurements of less than $10,000 and was brought about for the most part by a change in bookkeeping: certain intragovernmental procurements which in previous years had not been included in our business concern statistics were in fiscal year 1963 reported as either large business or small business. Inasmuch as less than 25 percent of these procurements were made from small business concerns, the inclusion of these figures resulted in a small business percentage decline from 60 percent in fiscal year 1962 to 48 percent in fiscal year 1963, although the small business dollars increased slightly.

The remaining approximately $300 million increase in total obligations was in procurements of $10,000 or more in value. As to these procurements, I have three charts here which I believe clearly portray the trend in the participation of small business concerns as prime

contractors.

Chart II breaks down our total obligations of $10,000 or more into two major categories. Category A comprises obligations for airframes, aircraft engines, and complete missiles systems, in which there is no known small business capability as prime contractors. Category B comprises the remaining obligations in all other programs, plus whatever small business awards we were able to make in replenishment spare parts items in category A. In these "other" programs, there is a varying amount of small business prime contract potential and accordingly, our small business prime contracting program operates chiefly in this category B.

1 The statistical information appears on pp. 106-107.

You will note from chart II the increasing proportion of our total dollars that is being placed in category A where the small business prime contract potential is practically nil, and the resulting smaller proportion of total dollars remaining for those programs where there are prime contract opportunities for small business.

CHART II

AF PROCUREMENT OF $10,000 OR MORE = € 100%

Chart III shows what is taking place in category B, portraying the increasing effectiveness of our small business program. The dotted line shows the percentage of the dollars in category B on which small business concerns were solicited, increasing from 25 percent in fiscal year 1959 to 46 percent in fiscal year 1963. Since small business concerns are solicited whenever there is even a remote possibility of obtaining a bid or proposal, this is evidence of progress even in a diminishing field. The solid line shows the percentage of the dollars in category B on which small business concerns actually bid, following solicitation, ranging from 22.4 percent in fiscal year 1959 to 33.1 percent in fiscal year 1963. The difference in percentage between solicitation and bid represents those procurements in which no small business concerns submitted bids even though solicited. It will be noted that there is an increasing gap, and in fiscal year 1963 there were 3,114 such procurements valued at $448 million. We are increasingly concerned at this failure on the part of all small business firms solicited to submit bids and every effort will be made this year to determine the reasons, and to seek out possible remedies.

Chart IV shows the percentage of the dollars on which small business firms bid and were successful. It will be noted that small business

firms are not as competitive as formerly, the percentage of success dropping from 71 to 58 percent in fiscal year 1963. It is possible that this is an indication of the increasing complexity of Air Force items on which small business concerns are quoting today.

TOO HIGH, OR NON-RESPONSIVE, OR NOT RESPONSIBLE

FY '59

80%

70%

60%

50%

40%

30%

20%

10%

SMALL BUSINESS AWARDS

An analysis of the competitive position of small business in fiscal year 1963 reveals the fact that, after eliminating small business setasides from the picture since there was no competition with large concerns in those instances, small business awards came to 47 percent of the formally advertised procurements on which they competed with large firms and 50 percent of the negotiated procurements on which they competed.

These last three charts, I believe, make clear that in Air Force procurement there is a diminishing market for small business concerns as prime contractors, and also that in this smaller market the competition is becoming increasingly difficult.

In the subcontracting field where small enterprises receive twice as many Air Force dollars as they receive as primes, our small business specialists in the contract management offices, together with the administrative contracting officers, are continuing to conduct the aggressive small business subcontracting program initiated by the Air Force in 1952. In fiscal year 1962, large defense contractors whose defense small business subcontracting programs are under Air Force supervision paid out $1,850,983,000 to small firms as subcontractors and suppliers. The Department of Defense assigned us the objective of having this figure increased by $119 million in fiscal year 1963. I am happy to report that this objective has been met and exceeded. We have now $129 million. We will continue to press this program and we welcome any assistance we can get from the Small Business Administration in meeting the aims of the Congress.

In the field of research and development procurement in fiscal year 1963, we recorded a healthy increase in the number of contracts and the dollars involved that were awarded small enterprises at the seven development centers of the Air Force Systems Command. The increase was from $17 to $35 million and is attributed both to the greater interest shown by small enterprises in this sort of work and to more effective work on the part of our small business specialists at those installations in providing opportunities.

In your letter of October 7, you asked as to our weighted guidelines policy indicating the extent to which it is implemented and its effect, known or anticipated on the small business subcontracting program. The weighted guidelines method of establishing profit objectives will be applied in all negotiated procurements where cost analysis is used to establish the reasonableness of price. The method is designed to insure consideration of the relative value to the Government of four selected factors. (1) Contractor's input to total performance, (2) contractor's assumption of contract cost risk, (3) record of contractor's performance, and (4) certain selected factors, such as source of resources and special achievement required by the contract. Profit values are assigned to each of these four categories. The detailed procedures are described in ASPR 3-808.5. The policy has been implemented for optional use and will become mandatory on January 1, 1964. Our present experience, due to the newness of the policy, has been very small. The impact on the small business subcontracting program should be to further improve its effectiveness. The manner in which a contractor has implemented the small business program is a plus factor for consideration under the general area "Record

of Contractor's Performance." This is specifically spelled out in ASPR 3-805 (d) (8), as follows:

The contractor's policies and procedures which energetically support Government, small business, and labor surplus area programs should be given favorable consideration. Any unusual efforts which the contractor displays in subcontracting with these concerns particularly for development-type work likely to result in later production opportunities and the overall effectiveness of the contractor in subcontracting with and furnishing assistance to such concerns, shall be considered.

You also requested information on our implementation of the multiyear procurement policy. This is so new that there is little we can report at this time as to results. The multiyear contracting methods were authorized for use by Air Force contracting officers on September 24, 1963, by Air Force Procurement Circular 80. Subsequent to this date, solicitations will be initiated to result in awards being made no earlier than November 1, 1963. It is estimated that no more than 10 awards will be completed prior to the end of calendar year 1963. Multiyear procurement, as authorized, is limited only to the purchase of supplies which are financed by "no year" funds.

In your letter of October 7, you asked as to our techniques in screening and monitoring prime contractors' make-or-buy decisions.

One of the areas in which, we exercise substantial control in the management of procurement programs is by requiring that prime contractors obtain Air Force approval of significant make-or-buy decisions. This control is applied in all complex procurements, as well as in programs where dollar value is substantial or competition restricted, where cost reimbursement, price redetermination, or incentive contracts are used, and where make-or-buy decisions are expected to have a substantial impact on negotiation of firm fixed price contracts. In reviewing a prime contractor's make-or buy proposal, our contracting officers and technical specialists consider whether small business concerns were given an equitable opportunity to compete for the subcontract, and whether contractor management policies regarding small business participation in the subcontract program were considered in each decision. Any changes in the make-or-buy program are also subjected to the same reviews and considerations.

Notwithstanding that "buy" decisions may have been approved by the Air Force, the purchasing systems of all major prime and subcontractors are periodically evaluated to determine that contractors are conforming to acceptable Air Force and Department of Defense standards. One of the factors considered in this evaluation is the extent to which the small business program is applied to all purchase transactions. These reviews are also participated in by the small business specialists, and no purchasing system approvals are granted without his concurrence. Similarly, this factor is considered when granting consent to those subcontracts that are required to be submitted to the Air Force for individual review and approval.

In closing, I assure the committee that the Air Force will continue to exert its utmost efforts in fiscal year 1964 to provide small business concerns with every opportunity to participate in our procurement and production to the limit of the capabilities which we indeed recognize. (The statistical information referred to in the statement follows.)

26-024-64-pt. 1-8