Mr. CURRIE. Since the hearing in December, we have received reports from agencies on the results of the review and modification program requested in my memo of November 21, 1979.

The review process proved more extensive and time consuming than we anticipated, but we have reports from all agencies. I have attached a chart to my testimony containing a summary breakout of the results as reported to us.

Fifty-two departments and agencies reported reviews. In all, 1,680 contracts, totaling $8.8 billion, that should have contained the required provisions were awarded without them. Of these, at last count 822 contracts, totaling $1.9 billion, were or will be modified to include the provisions. Over 400 outstanding solicitations, totaling $782 million, were also modified. In addition, DOD, which has by far the greatest number, still must review 671 contracts, totaling $5.1 billion, to determine whether or not they could or should be modified.

The agencies will report to the Small Business Administration at their request on a monthly basis until all review and modification activities are complete.

Last month, Mr. Chairman, I issued OFPP policy letter 80-1, prescribing policies to be followed by the procuring agencies regarding coordination with Small Business Administration representatives.

The policy letter requires contracting agencies to provide the SBA PCR's the opportunity to review every solicitation over the stated threshold, prior to their release to the public. It also requires the contracting agencies to give the PCR's an opportunity to review any negotiated contractural document requiring a subcontracting plan, and requires that they provide the PCR's with a copy of the subcontracting plan as finally negotiated. We believe this policy letter will be effective in facilitating SBA's implementation of the review authority in section 211 of Public Law 95-507.

Section 221 of that act provides that contracts less than $10,000 subject to small purchase procedures shall be reserved exclusively for small business concerns if there is competition.

As I reported in December, implementation of this section required some basic policy decisions regarding the treatment of the word "reserved" as a set-aside or otherwise and a new definition of small business for the purpose of this section.

The Small Business Administration has published its final rule in the Federal Register on January 15, 1980. It amended the definition of small business for the purposes of this section. This action will allow small offerors, including nonmanufacturers, to furnish any domestically manufactured product on Federal procurements valued at less than $10,000 and subject to small purchase procedures.

We are near completion of the coordination of final regulations implementing section 221, and I anticipate their publication by the end of the month.

Mr. Chairman, at your invitation, I would like to point out three particular problems we have had in implementing the subcontracting provisions of Public Law 95-507.

First, we have the commercial products problem. In my judgment, the greatest single problem we face in this act in implementing the law is the question of how to deal with commercial products. I have

detailed this problem in my testimony in December. The problem had led, and potentially will continue to lead, to resistance on the part of the makers of commercial-type products to furnish subcontracting plans.

In our initial implementing guidance, we modified the type of plan required for commercial-type products to allow for a single annual plan for a company's commercial product line. However, even this liberalization of plan requirements has been troublesome to implement. We are working with the subcommittee staff to seek a better way to apply the subcontracting provisions to commerical products contracts, and we hope to introduce some improvements in the forthcoming regulatory guidance.

Meanwhile, I would again recommend that this subcommittee reexamine the commercial product situation to determine whether a section 211-type subcontracting program is appropriate for these contracts.

The second problem area, Mr. Chairman, concerns what constitutes an adequate goal. Public Law 95-507 requires a percentage goal for each contract for subcontracting to small and small disadvantaged businesses. The law and its legislative history, however, provide no guidance as to what constitutes an acceptable goal, and, of course, these must vary.

The wide variety of factors that must be considered in negotiating a contract goal has led to considerable disagreement and confusion between Government personnel and contractors in attempting to develop plans, which in turn has led to delays in contract awards. We can hope that, with experience, these particular difficulties will diminish.

The third problem involves the incentive clauses that are included in the contracts to encourage prime contractors to attract additional small and small disadvantaged subcontractors.

However, the procuring agencies' ability to negotiate a tough but realistic individual contract percentage goal is critical to the effective use of incentive clauses. If the goal on which the incentive. clause is based is too low, the contractor can gain a windfall merely by utilizing small and disadvantaged subcontractors it should have used in the normal course with a realistic goal. On the other hand, if the goal is too high, the incentive clause is no incentive for extra efforts.

It was obvious to us that the Government lacked adequate experience in negotiating goals, and last August I advised the procuring agencies that use of the incentive clause in contracts should be waived by a class determination where insufficient experience has been gained in setting goals in subcontracting plans.

We also asked that if the agency procurement exceeds $5 million annually, the agency should use an incentive clause in at least selected negotiated contracts as a pilot program. We asked that the results and lessons learned from these pilot programs be submitted to us by June 1 of this year. At that time, we will evaluate the results and provide further guidance concerning the circumstances in which incentive

Mr. Chairman, that concludes my summary presentation. We will be happy to respond to any questions you might have.

Mr. LAFALCE. Thank you, Mr. Currie.

[Mr. Currie's prepared statement follows:]

PREPARED STATEMENT OF JAMES D. CURRIE, ACTING ADMINISTRATOR, OFFICE OF FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET

Mr. Chairman and Members of the Subcommittee, it is a pleasure for me to appear again before this Subcommittee to discuss the status of the implementation of Public Law 95-507, amending the Small Business Act and the Small Business Investment Act of 1958. Appearing with me today is Thomas F. Williamson, Associate Administrator for Acquisition Law.

In your invitation to testify, you expressed interest in our activities since our last testimony on December 4, 1979, as well as particular problems we are encountering in connection with the implementation of the subcontracting provisions of Public Law 95-507. I am happy to address both points.

PROGRESS SINCE DECEMBER 4

Modification of contracts

As you know, one of the most recent, and most publicized, problems in the law's implementation has been the widespread delays incurred by most large procuring agencies in actually putting the subcontracting requirements of Public Law 95-507 in solicitations and contracts after the implementing regulations were issued.

While we believe this problem has now been alleviated, OFPP on November 21, 1979, directed all agencies to review all solicitations and contracts issued after the effective date of the implementing regulations, and (1) amend the solicitations that should, but do not contain the provisions; and (2) where feasible, modify all contracts awarded that should have, but do not, contain the subcontracting provisions, where modification to include the provisions would lead to a greater utilization of small and small disadvantaged subcontractors.

We asked the agencies to report the results of this review and modification program to us by January 15, 1980. The review process proved more extensive and time consuming than we anticipated, and there were considerable delays in getting reports from the agencies, but we now have received at least preliminary reports from all agencies. I have attached a chart to my testimony containing a summary breakout of the results as reported to us.

Fifty-two departments and agencies reported reviews. In all, 1,680 contracts, totalling $8.8 billion, that should have contained the required provisions were awarded without them. Of these, at last count 822 totalling $1.9 million were or will be modified to include the provisions. Over 400 outstanding solicitations totalling $782 million were also modified. In addition, DOD, which has by far the greater number, still must review 671 contracts totalling $5.1 billion to determine whether or not they could or should be modified.

Of the contracts on which review and action is complete, it appears that somewhat over fifty percent are being modified to include the provisions. I must add a note of caution, however, that because of the complexity of the review process these numbers must be viewed as tentative.

In view of our guidance to modify contracts only where such modification was likely to lead to greater utilization of small and disadvantaged subcontractors, the fifty percent figure does not seem unreasonable, since most contractors get their subcontractors under contract at a very early stage of contract performance. We will, however, verify this with the agencies.

As you may know, the Small Business Administration has requested that the agencies keep it informed on a monthly basis until all review and modification activities are complete.

Coordination between the Small Business Administration and the procuring agencies

As you know, Section 211 of Public Law 95-507 amends section 8(d)(10) of the Small Business Act 15 U.S.C. 637, to authorize the Small Business Administration to review any solicitation for any contract over the stated thresholds. The purpose of the review is to determine whether maximum practicable oppor

tunity has been afforded small business concerns and small business concerns owned and controlled by socially and economically disadvantaged individuals to participate as subcontractors in such awards. Furthermore, the Small Business Administration is responsible for evaluating compliance with agreed upon subcontracting plans.

In order to facilitate the implementation of these provisions by the Small Business Administration, we, in consultation with the Small Business Administration and the major procuring agencies, issued on January 24, 1979, OFPP Policy Letter 80-1 prescribing policies to be followed by the procuring agencies regarding coordination with Small Business Administration representatives. A copy of the Policy Letter, which will become effective February 25, 1980, is also attached to my testimony.

Subcontracting regulatory development

As I stated in my December testimony, in early September 1979 we initiated the development of further regulatory guidance for procuring agencies to assist in their implementation efforts. After gaining some experience with Public Law 95-507, we believed that the complexities of this law needed further explanation for the procuring officials.

On October 29, 1979, the results of this effort were published for comment in the Federal Register. Several areas were addressed in more detail, including guidance on how to negotiate a subcontracting plan and set contract goals, what sort of records should be required to be kept, what to do in case of a contractor's failure to comply with a plan, and the use of incentive clauses.

Also published in that Federal Register for comment were proposed data collection formats to provide essential information required to monitor and evaluate both contractor and agency performance under the Public Law 95-507 subcontracting program and other socio-economic programs affecting subcontracting. When these forms are issued in their final version, we expect that they will provide us with information necessary to properly carry out these programs, with a minimum of burden on both contractors and the procuring agencies.

Comments on the proposed regulatory guidance and data collection forms were due December 15, 1979. Since that time, OFPP has chaired an interagency group to analyze the comments and develop final regulatory guidance to be published for agency use. We hope and anticipate that guidance will be ready in the very near future. We also hope to address in the regulations certain problems I will discuss shortly.

Reservation of contracts under $10,000

Section 15 (j) of the Small Business Act as amended by Section 221 of Public Law 95-507 provides that "each contract for procurement of goods and services which has an anticipated value of less than $10,000 and which is subject to small purchase procedures shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and in terms of quality and delivery of the goods or services being purchased. In utilizing small purchase procedures, contracting officers shall, whenever circumstances permit, choose a method of payment which minimizes paperwork and facilitates prompt payment to contractors."

As I stated in my December 4 testimony, implementation of this section required some basic policy decisions regarding the treatment of the word "reserved" as a set-aside or otherwise, and new definition of "small business" for the purposes of the section.

The public comment period on these policy issues has now been completed and the Small Business Administration, by its publication of final rules in the Federal Register of January 15, 1980, amended the definition of small business for the purposes of the section. This action will allow small offerors, including nonmanufacturers, to furnish any domestically manufactured product on Federal procurements valued at less than $10,000 and subject to small purchase procedures.

We are in the process of final coordination of final regulations implementing section 221 with the Small Business Administration and the procuring agencies, and I anticipate their publication within 10 days.

SUBCONTRACTING PROBLEMS

Mr. Chairman, at your invitation I would like to take this opportunity to again point out some severe problems we have had in implementing the subcontracting

provisions of Public Law 95-507. Some of these problems I discussed in my December 4 testimony.

Commercial products

In my judgment, the greatest single problems we face today in implementing the law is the question of how to deal with commercial products.

As you know, Public Law 95–507 requires subcontracting plans for all contracts $500,000 and over ($1 million for construction). The law does not distinguish between contracts for items made specifically for the government and contracts for commercial type products that the government buys off the shelf.

The problem with requiring subcontracting plans on contracts for commercialtype products is two-fold: First, the contractor generally does not know who its subcontractors were for items delivered under a particular contract; and second, generally the subcontracts were awarded and performed prior to the time the government places its order. These problems are compounded by the fact that in many commercial product situations the government has little or no buying leverage over the contractor since the government business is usually a fairly small portion of the contractor's total business.

These problems have led, and potentially will continue to lead to resistance on the part of the makers of commercial-type products to furnish subcontracting plans. In our initial implementing guidance, we modified the type of plan required for commercial-type products to allow for a single annual plan for a company's commercial product line. This annual plan would be submitted with each government order of the requisite size throughout the year. However, even this liberalization of plan requirements has been troublesome to implement and we expect more difficulties in the future. We are working with the Subcommittee staff to seek a better way to apply the subcontracting provisions to commercial products contracts, and we hope to introduce some improvements in the forthcoming regulatory guidance.

Meanwhile, I would again recommend that this Subcommittee reexamine the commercial product situation to determine whether a section 211 type subcontracting program is appropriate for those contracts.

What constitutes an adequate goal?

The law, of course, requires a percentage goal for each contract for subcontracting to small and small disadvantaged businesses. The law and its legislative history, however, provide no guidance as to what constitutes an acceptable goal, and indeed this clearly must vary depending on the nature of the contract, the particular industry, the geographical area, the contractor's make-or-buy strategy, the availability of prospective subcontractors, and other factors.

The wide variety of factors that must be considered in negotiating a contract goal have led to considerable disagreement and confusion between Government personnel and contractors in attempting to develop plans, which in turn has led to delays in contract awards. I hope that as both sides gain experience in operating under the new law, these particular difficulties will diminish.

Incentive clauses

Another problem area in the implementation of Public Law 95–507 related to the current difficulty in setting goals is the use of incentive clauses to encourage prime contractors to attract additional small and small disadvantaged

subcontractors.

The law in Section 211 authorizes each Federal agency "to provide such incentives as (it) . . . may deem appropriate in order to encourage. . . subcontracting opportunities."

The April OFPP regulations implementing Public Law 95-507 required executive agencies to use the incentive clause authorized by Public Law 95-507 in negotiated contracts for which a subcontracting plan is required unless the contracting officer determines in writing that such clause would be inappropriate. However, the procuring agencies' ability to negotiate a tough but realistic individual contract percentage goal is critical to the effective use of incentive clauses. If the goal on which the incentive clause is based is too low, the contractor can gain a windfall merely by utilizing small and disadvantaged subcontractors it should have used in the normal course with a realistic goal. On the other hand, if the goal is too high, the incentive clause is no incentive for extra efforts.

Therefore, since the processes of developing criteria for determining what percentage goal constitutes a good subcontracting plan in a particular contract