September 1, 1979 as the effective date for Department of Defense contracting activities to include notices in solicitations and inclusion in contract awards of subcontracting plans and goals mandated by Public Law 95–507.

On December 17, 1979, on the same day we received your letter, we published instructions to our field activities to comply with the GAO's decision. In view of the newly established effective date regarding our compliance with Public Law 95-507, we initiated a reporting system on December 21, 1979, to determine how many solicitations were issued and contracts awarded since September 1 which did not comply with the law. This reporting system was designed not only to provide us the information we required but also to satisfy the Office of Federal Procurement Policy (OFPP) and the Small Business Administration who desired similar information.

We requested our first report to be provided to us on January 15, 1980, to be followed up with a monthly report thereafter until this matter is resolved. The following is the status of these solicitations and contract awards.

1 Includes $733,800,000 in Army awards not included in the above distribution due to information not being provided. 2 Part of decrease is result of contracts being erroneously reported on Jan. 15, 1980 as not being in compliance when actually no subcontracting clause was required, e.g., requirement was solicited on small business set aside or no subcontracting possibilities existed.

* Increase $2,800,000,000 results from omissions and errors contained in information on which Jan. 15, 1980 report was prepared and from some unknown amount of additional contracts which were not in compliance being made after information for the Jan. 15, 1980 report was prepared.

I am most concerned about this $2.8 billion increase in dollar awards which appears to indicate we are not complying with Public Law 95-507. Some portion of this $2.8 billion is indicated not to be an increase but rather an amount which should have been included in our earlier report. The reason such statistics were not included was that information was not received from field activities before the initial report was cut-off and in other cases erroneous information was provided. A significant portion of the increase is indicated to result from including in the report provisioning orders and options made against many contracts awarded even before the passage of Public Law 95-507 for which no realistic subcontracting possibilities exist. We believe these provisioning orders and exercise of options accounts for the largest portion of the $2.8 billion increase. There was also an unknown amount of contract awards made after the preparation of the initial report which did not contain the required subcontract plans and goals. With our next report we should be able to determine when each award was made. I can assure you we are taking necessary action to preclude more solicitations from being issued or contracts from being awarded that are not in compliance with Public Law 95-507. Our military departments and Defense Logistics Agency

a. Take immediate action to assure that the requirement for the submission of contracting plans and goals is contained in solicitations and contracts which meet the criteria of Public Law 95-507 as implemented by DAC 76–19.

b. Assure reports submitted regarding noncompliance are accurate, current and complete.

c. Require the head of a contracting activity to approve the award of any contract meeting the thresholds of Public Law 95-507 which is to be awarded without a subcontract plan and goal on the basis that the contract offers no subcontracting possibilities.

d. Establish a small business surveillance review program to assure that field contracting activities are complying with all provisions of DAC 76–19 particularly those which apply to subcontracting plans and goals.

I am sure these actions will assist us in resolving this matter. However, it will take some time before this task is completed because of the time necessary to complete negotiations regarding the outstanding 843 contracts. You may be assured of our diligent efforts to complete this task as expeditiously as possible. Most of the laws passed by Congress which deal with acquisition/procurement generally affect a limited segment of our acquisition process. Public Law 95–507, however, is radically different in this case. I am hard pressed to identify any individual involved in our contracting function who is not responsible to some specific degree by Pubilc Law 95-507 in the proper accomplishment of his job. I can assure from the many questions we receive our people are very cognizant of such increased responsibilities. In order to assist them the following actions have been taken :

The Army and the Defense Logistics Agency (DLA) held conferences during October for its senior contracting officials and Small Business Specialists regarding Defense Acquisition Circular (DAC) 76–19 which not only implements the provisions of Public Law 95-507 but contains many new initiatives which will enhance opportunities for small business and disadvantaged business concerns to obtain a larger share of our procurements. The Air Force held a similar conference in November while the Navy held theirs in early January.

Members of the Under Secretary of Defense Acquisition Policy Office as well as those of the Military Departments and DLA have participated in seminars throughout the country conducted in support of the Small Business Administration, National Contract Management Association and industry trade associations conducted for government and industry personnel to provide the information and guidance necessary to assist them in complying with Public Law 95–507. These efforts are ongoing and will continue, I think, at least for another 6 to 9 months.

We are in the process of planning to conduct approximately 20 seminars throughout the country at our largest buying activities. Members of my office and those of the Military Departments and DLA will participate in order to answer the many and varied questions field personnel have regarding this law.

I think these efforts which I have mentioned will do much to improve our people's understanding of what the law requires and improve our compliance with its provisions.

In your notice of this hearing, you stated you are interested in learning of difficulties in implementing the subcontracting provisions of Public Law 95–507. The very first problem comes to mind deals with applying these provisions to the purchase of commercial products. We have been participating with the OFPP in an interagency task group to develop a policy directive for Federal commercial products. This consideration appears to be most troublesome in endeavoring to obtain a meaningful subcontract plan and goal from a prime contractor whose business is predominately in the commercial marketplace and has already produced the item we desire to purchase. This situation results in none of our activities having placed an award for a commercial product having a subcontract plan and goal as of this time.

The GAO in its report "The Mandatory Small Business Subcontracting Test: Considerations for Public Law 95-507's New Subcontracting Program" dated May 11, 1979 recognized this problem when it included the following in its report.

"RECOMMENDATION FOR THE CONGRESS

"We are recommending that the Congress amend the law to exempt low bidders and successful offerors on procurements for commercial items from submitting subcontracting information on individual contracts. We consider this necessary because several normal suppliers of commercial items to the General Services Administration either refused to bid on test procurements requiring subcontract

ing information or notified the Administration that they would not bid if future procurements required subcontracting information."

Another problem dealing with the subcontracting provisions involves attempts to modify a contract and the prime contractor replies that to include the subcontracting provisions will cost the government a amount of dollars which we believe to be excessive, if not exhorbitant. It is in these situations that the contracting officer must exercise the strength of his knowledge and determination in deciding on the best course of action to follow to protect the interests of government. Naturally, in a situation where there are many competitive prime contractors, we are in a good position to obtain a subcontracting plan which we consider satisfactory and small business and disadvantaged business goals which are realistic, challenging and attainable. Coversely, where little or no competition exists, we can end up without plans and goals and obtain the product we need or insist on a plan and do without the product. In some situations, this latter consideration is not a viable course of action where national security interests are involved, and therefore, it must be recognized that in some cases we will have no realistic choice and will have to accept a subcontracting plan and goal which we do not consider satisfactory.

Still another problem has to do with who will be responsible to assure that the subcontractor receiving an award meeting the Public Law 95-507 thresholds will carry out the required provisions of his subcontracting plan and meet its subcontracting goal. We believe the prime contractor should accomplish this responsibility, however, industry believes the government should do this. I just don't believe the government has the number of contract administration personnel available to do this job. Another aspect of this problem develops when both the prime contractor and the subcontractor are both large DOD prime contractors who happen to be in competition for another one of our awards. Naturally, the subcontractor in this case does not want the prime contractor to become knowledgeable of his method of operation. In these rare cases, I believe the government can accomplish the contract administration responsibility over the subcontractor.

A problem also exists concerning what is meant by the term "subcontract possibilities." Does this mean those products and services directly related to the performance of the specific contract or does it include a proportionate share of the company's general and administrative (G&A) overhead costs that can be apportioned to the contract. For example, what are the subcontract possibilities in an award we may place with Exxon or Mobil Oil? Realistically, what component subproducts can be provided by small business or disadvantaged business concerns to the production of JP-4 required for military aircraft? Is it logical to require a subcontracting plan and goal if the only possibility for small business and disadvantaged business awards is on the basis of a proportionate share of a company's overhead expenditures whose military business represents, perhaps, less than ten percent of the firm's total sales?

These are just several of the problems associated with the implementation of Public Law 95-507, a law which we consider to be the most significant legislation affecting the acquisition process that has been passed in the last eighteen years.

I can assure you that the Department of Defense is fully committed to carrying out the provisions of Public Law 95-507 not only because it will assist small business and disadvantaged business concerns but also because our national security is most highly depended on this community to provide us both on a prime contract as well as a subcontract basis, the products and services required by our armed forces.

I am prepared to answer any questions you may have.

Mr. LAFALCE. We will now hear briefly from Mr. Schooling, the Army's Assistant Deputy for Procurement Procedures.

Mr. Schooling, please proceed.

TESTIMONY OF ROY L. SCHOOLING, ASSISTANT DEPUTY FOR PROCUREMENT PROCEDURES, OFFICE OF THE ASSISTANT SECRETARY OF THE ARMY, DEPARTMENT OF THE ARMY

Mr. SCHOOLING. Thank you, Mr. Chairman and gentlemen.

GAO report issued subsequent to that hearing, the Army has continued to aggressively pursue a course directed toward fully satisfying the provisions of the Small Business Act as amended by Public Law 95-507. Where problems have been encountered they have been brought to the attention of the Department of Defense, where refinements to the defense acquisition regulation are currently under consideration.

Information regarding the compliance of Army solicitations and contracts to the subcontracting provisions of Public Law 95-507 was initially provided to the subcommittee at its December 4 hearing. Subsequent to that hearing, a GAO opinion discussing failures to comply with the subcontracting provisions, was rendered and the Department of Defense directed appropriate corrective action. This action was directed with respect to noncompliant solicitations issued and contracts awarded on and after September 1, 1979, the date established by the GAO opinion. It required review of all solicitations and contracts which exceeded the dollar thresholds established by Public Law 95-507 and which did not include the required subcontract clause after that date. Monthly reports are rendered to the Department of Defense and will continue until all corrective actions are accomplished.

The following information on the status of Army efforts to identify and take corrective measures on noncompliant solicitations and contracts issued or awarded on and after September 1, 1979, which was developed for the Department of Defense report, is furnished:

The Army has 57 solicitations which were issued on or after September 1, 1979, which exceeded the thresholds of Public Law 95-507 and did not include the required subcontract clause when issued. Of that total, 44 have since been amended to include the clause, 9 are in the process of being amended, and 4 have been determined not to require amendment.

There are 221 contracts valued at $914 million which were awarded on or after September 1, 1979 which exceeded the thresholds of Public Law 95-507 and did not include the required subcontract clause when awarded. Of that total, 36 contracts valued at $368.5 million have since been modified to include the clause; 157 contracts valued at $505.6 million are in the process of modification; and 28 contracts valued at $39.9 million have been determined not to require modification.

Due to the fact that the GAO opinion established differing reporting criteria, no direct comparison has been made between the data provided today and that provided previously for the December 4 hearing. The requested representative subcontracting plans have been provided.

Measures to bring the Army into compliance with Public Law 95507 are well underway and the remaining noncompliant solicitations and contracts will be brought into full compliance soon.

Thank you.

Mr. LAFALCE. Thank you.

We now have Mr. Donald E. Rellins, Director, Small and Disadvantaged Business Utilization for the Department of the Air Force. Mr. Rellins, please proceed.

TESTIMONY OF DONALD E. RELLINS, DIRECTOR, SMALL AND DISADVANTAGED BUSINESS UTILIZATION, OFFICE OF THE SECRETARY OF THE AIR FORCE, DEPARTMENT OF THE AIR FORCE

Mr. RELLINS. Thank you, Mr. Chairman.

After the last hearing, Mr. Chairman, I became personally concerned about whether we were reporting everything in the Air Force since our buying activities are located all over the country and not only here in Washington. On December 17 we sent out a directive to all our commands asking them to report all contracts and all modifications in excess of $500,000 and $1 million in the case of construction, and to use that information as a baseline for the elimination of those for which plans were not required.

I personally went out to one buying activity to review their reporting and discovered a number of problems. I sent my deputy out 2 weeks later. He went to three major buying activities. He found a number of problems. The problems relate to the inclusion of specific modifications being made now to contracts which were awarded prior to September 1, 1979.

We found, for example, that there is no guidance with respect to the exercise of options on contracts. These are prepriced options on contracts awarded way before September 1. There were some priced options on the F-15 program, for example, that may go back 2 years. We exercise such options regularly.

These numbers included, for example, $1 billion or more in option exercises for F-15 and F-16 aircraft which our counsel tells us verbally are not reportable and not required to contain a plan under this statute. However, we have no guidance on this specifically.

I will give you another example. This would be change orders. We issue, in the Air Force, particularly because of the technology we deal with, billions of dollars worth of change orders. We have agreed, or the counsel has advised us again in this case, that modifications involving change order would require a plan. However, the question then becomes timing. When you issue a change order on a contract awarded before September 1, the only authority you have under the terms of that contract is to tell them to change the specifications. You cannot tell the contractor to put a plan in at that time. The only thing you can do, specifically, is to issue a change, or change the specifications. When you get down to the pricing of that change, that is when we are going for the plans. We are trying to get the plans then. But, again, we have no guidance telling us when is the right timing to get subcontracting plans with respect to change orders.

Let me give you another example, Mr. Chairman. We have a lot of contracts known as basic ordering agreements. We call them BOA's. These BOA's are master agreements. It is not a contract until an order is issued. We issue orders and we don't know, for example, whether a contractor will accept them. Acceptance is determined, basically, by delivery. Often they are not priced until the goods are delivered. The question is again, when do you get the plan, or do you get a plan? I have had different lawyers tell me in different instances