the Government needs the contractor's cost or pricing data to be in an estimating and bargaining position equal to that of the contractor.3

In many cases the Government has resident auditors at a contractor's plant, but they cannot, with a small staff, be expected to do as thorough a job of cost accounting as that done by the contractor's staff. Even if they could, they would be duplicating work that the contractor must do in its own interests and for its own pricing and management. Some contractors say that one good result of the law has been a strengthening of their internal procedures for recording, collecting, and communicating data.

While outright refusal to disclose data is not widespread, a problem does exist in some industries for some classes of products. In these cases, arguments center on whether there is an acceptable alternative to cost as the basis for reaching agreement on price. A company may claim that the price it offers has been set by competition, that cost data is proprietary, or that disclosure of cost information is inimical to its competitive position. Some companies maintain that because of the nature of their product and the way it is produced, customary cost estimates and supporting accounting data are not meaningful in establishing price.

We have concluded that the Truth in Negotiations Act properly utilized is a valuable tool to assist contracting officers in establishing prices.

EXTENSION TO OTHER AGENCIES

The act does not apply to the civilian agencies other than NASA. It would seem obvious that if truth in negotiations is good for the military departments and NASA, it is equally good for other civilian agencies. The desirability of uniformity in this regard has been recognized and accommodated by incorporating

After soliciting the views of 300 corporate and Government organizations, Study Group 7 reported that most Government people believe the law is a good law and most companies recognize the right of the Government to get cost or pricing data in noncompetitive situations, though many question the continued need of a law for this purpose or for enforcing it by a provision for price reduction for defective data. The main objections of industry are to overzealous administration of the law, its use of loose and uncertain terminology, and the one-sided operation of the law in favor of the Government. Study Group 7 (Cost and Pricing Information), Final Report, Feb. 1972, pp. 226, 227, 268, 309.

truth in negotiations requirements in the Federal Procurement Regulations. This makes them applicable to all the civilian agencies. However, extension of the act itself to the civilian agencies is appropriate as it would give the requirements statutory standing and permanence and greater legal force and effect. This is consistent with our Recommendation 2 in Part A, Chapter 3, to eliminate inconsistencies by consolidating ASPA and FPASA, the two basic procurement acts.

COORDINATED REGULATIONS

The regulations implementing the Truth in Negotiations Act should be coordinated to achieve uniform application and interpretation to the extent feasible. This would minimize variances in practices and eliminate differences in the procurement regulations of different agencies, for example, with respect to obtaining prospective contractor or subcontractor cost or pricing data and the form and number of contract clauses used to give effect to the act. In this connection, see our recommendations 1 and 10 in Part A for a central Office of Federal Procurement Policy and for a system of Government-wide procurement regulations.

Renegotiation Act

5

CONTINUATION AND EXTENSION OF THE RENEGOTIATION ACT

Recommendation 3. Extend the Renegotiation Act for periods of five years."

Recommendation 4. Extend the Renegotiation Act to contracts of all Government agencies.

There is a widely held conviction that no contractor should be permitted to retain exces

FPR 1-3.807-3.

Cf. ASPR 3-807.3(b), FPR 1-3.807-3(b), and NASA Procurement Directive No. 70-2, Feb. 3, 1970.

Cf. ASPR 7-104.29, 7-104.41, 7-104.42, and NASA PR 3.807-4. While Commissioner Staats favors continuation of the Renegoti ation Board and its extension for periods longer than two years, he is unable to take a position on the specific recommendations since an independent review of the Board by the General Accounting Office is now in process. However, he will be prepared to testify on the recommendations at a later time.

sive profits on defense contracts, and the Government has attempted by various means to regulate the amount of profit a contractor can earn on such work. Since World War II, the Government has relied primarily on renegotiation procedures to eliminate excess profits. Advocates of the present Renegotiation Board believe that the Board's impressive total of determinations of excessive profits (more than $1 billion since 1951) amply justifies its continued existence. On the other hand, critics point out that the growing professionalism of procurement personnel and more stringent laws requiring disclosure of price and cost information during negotiation of defense contracts tend to make the likelihood of excessive profits remote.

Industry asserts that there are disadvantages to renegotiation because after-the-fact examination of costs and related profits tends to penalize a producer whose low-cost, efficient operations yielded a comparatively larger profit. In this situation, there is little incentive for such a producer to continue to employ tight cost controls and to exercise strong management.

Renegotiation originated in the early days of World War II as a new method of guarding against excessive profits on war contracts and the current act reflects the focus of its predecessors. 10 The act subjects to renegotiation profits from sales to the Government under contracts having a direct and immediate relation to the national defense. At present, only contracts made by DOD, NASA, GSA, FAA, AEC, and the Maritime Administration are subject to the act.11

Today, however, unique large-dollar contracts for sophisticated services or supplies are made by civilian as well as defense agencies. As a result, the act treats many Government contracts unequally, and this dual standard is no longer tenable. The retention of excessive profits under Government contracts is unacceptable regardless of the agency making the contract. Accordingly, we have concluded that the provisions of the Renegotiation Act should extend to sales made to all Federal agencies in

See U.S. Congress, House, Committee on Government Operations, hearings on Renegotiation Board Operations before a subcommittee, 92d Cong., 1st Sess., table VI, p. 21, 1971.

See Navy Contract Law § 6.9 (2d ed. 1959).

10 50 U.S.C. App. §§ 1211-1233 (1970).

1150 U.S.C. App. §§ 1212(a), 1213 (a) (1970).

order to afford equitable treatment to all contractors.

We have further concluded that the Renegotiation Board should be statutorily renewed for periods of five years. Shorter extensions of the Board's life demonstrate continuing congressional support for the Board, but an excessively short statutory lifespan has made its operations difficult. The present two year lifespan does not foster the efficient development of long-range plans, recruitment of people, or an atmosphere of continuity.

INCREASE IN JURISDICTIONAL AMOUNT

Recommendation 5. Raise the jurisdictional amount under the Renegotiation Act from one million to two million dollars for sales to the Government; and from twenty-five thousand to fifty to fifty thousand dollars for

brokers' fees.*

We have concluded that the thresholds for renegotiation should be raised to $2 million for company sales and to $50,000 for agent fees. This would permit renegotiation personnel to focus their attention on the most significant areas of potential recoupment. Board statistics for fiscal 1970 show that by raising the threshold to $2 million, the Board's work, measured by the number of excess profit determinations, would be decreased 36 percent but its recoveries of excess profits would be reduced by about $5.31 million or only 16 percent. 12 This does not reflect the savings to industry, particularly to small contractors, from being relieved of annual renegotiation filing and processing costs on sales between $1 million and $2 million.

We note that the Government Activities Subcommittee of the House Commmittee on Government Operations has recommended lowering the jurisdictional threshold for company sales to $100,000.13 Their report stated:

There is no logical basis for excluding contractors with renegotiable sales of less than

*See dissenting position, infra.

12 House Committee on Government Operations, The Efficiency and Effectiveness of Renegotiation Board Operations, sixth report by the Committee on Government Operations, H.R. Rept. 758, 92d Cong., 1st Sess., 7-8, 1971.

13 Ibid. at 15.

$1 million, on either legal or moral grounds. The concept of excessive profit is repugnant to the interests of the public, irrespective of the size of the recipient.

However we believe that lowering the threshold to $100,000 would call for a substantial costly increase in the staff of the Renegotiation Board.

Dissenting Position

Some Commissioners* dissent from the recommendation to raise the jurisdictional amount under the Renegotiation Act.

CLARIFICATION OF CRITERIA

Recommendation 6. Expand and clarify the criteria used by the Renegotiation Board.**

The Renegotiation Board has operated for more than twenty years. While some statutory adjustments have been made in the Board's operations, there has not been any major revision of the Board's charter to reflect experience gained. We believe revisions should be made in a number of areas. For example, there exists no standard known outside the Renegotiation Board itself for a determination of excessive profits under the Renegotiation Act. A clear and precise definition of excessive profits is lacking, and the Board has contributed to this uncertainty by failing to establish and publish standards by which it determines profits to be excessive. Excessive profits are what the Renegotiation Board says they are. After having issued determinations of excessive profits exceeding one billion dollars, the Board should have accumulated sufficient experience to develop and publish standards.

Procuring agencies often negotiate contracts in which the contractor bears risks of performance that are significantly higher than normal and under which the contractor's success in meeting these risks is rewarded by special monetary awards, incentives, value engineering fees, or pronts. However, these fees or profits are then subjected to renegotiation. The agencies assert they are fully justified in

*Commissioners Holifield and Horton. **See dissenting position, infra.

negotiating contracts to reward contractors who deliver goods and furnish services of more than target quality or at less than target cost to the Government. If the contractor achieves the desired objectives, the added value or savings to the Government far exceed the contractor's reward.

The Renegotiation Board has stated that meritorious performance of high-risk contracts is considered in determining excess profits and that no additional statutory directives are required for this purpose. Nevertheless, many contracting people in and out of Government believe that the Board should be instructed explicitly by statute to permit contractors under incentive contracts to retain fees and profits attributable to superior performance accruing to the direct benefit of the Government.

A persistent criticism by contractors of the renegotiation process is that in examining the profits earned in one fiscal year, the Board may not fully consider losses or low profits experienced in a prior year. The volume and nature of a contractor's sales and related profits and losses often vary widely from year to year. Income also may be affected significantly by research, development, design, and production engineering problems, delays in procurement of specialized equipment, labor learning and other startup costs, and by strikes, acts of God, supply breakdowns, or other production difficulties beyond a contractor's control. Factors such as these tend to produce peaks and valleys in a contractor's renegotiable income from year to year.

To some extent the Renegotiation Board may consider extraordinary costs and deficient profits in prior years. The act itself provides for a renegotiation loss carry-forward-that is, a deduction of losses from succeeding years' profits for a period of five years." Under Renegotiation Board regulations, startup costs may be allocable over several years under a "differing accounting methods" agreement 15 or, even without such agreement the Board will give consideration to deficient profits in prior years resulting from nonrecurring costs in early stages of production, such as labor costs, excessive defective work, idle time, and poor

14 50 U.S.C. App. § 1213 (m) (4) (1970).

15 32 CFR § 1459.1(b) (2).

production occasioned by changes in production methods, design, tooling, plant layout and rearrangement, and abnormal scrap losses.16 These specifics, however, do not cover all causes of fluctuations from year to year in a contractor's renegotiable profits. In the opinion of contractors, it would be more equitable to average a contractor's good and bad years to determine excess profits.

Dissenting Position

Some Commissioners,* as an alternative to the foregoing Recommendation 6, recommend that it be supplemented to read as follows:

Dissenting Recommendation 6. Expand and clarify the criteria utilized by the Renegotiation Board in determining excess profits and include therein a limitation of renegotiation to cost-type contracts.

The added language would exclude fixedprice contracts from the gross amount of a contractor's Government business subject to renegotiation. It is the view of the Commissioners supporting this alternative recommendation that the basic principles and objectives of Government procurement through fixed-price contracting, including contracts arrived at through advertised bids, are violated by the prospect of renegotiation of profits resulting from such procurements. The greater risks which contractors assume under fixed-price contracts warrant their retention of the full profits earned under these contracts. On the other hand, the risks under cost-type contracts are relatively minimal and there is therefore justification for recapture of excess profits accruing thereunder. Furthermore, adoption of a proposed limitation as recommended would have an additional therapeutic value in minimizing cost-type contracts by encouraging suppliers to seek fixed-priced contracts whenever they are appropriate. A change in the act would appear necessary to accomplish the proposed limitation.

16 32 CFR 1460.10 (b) (5).

*Commissioners Beamer, Gurney, Horner, and Joers.

OTHER STATUTES OF LIMITED APPLICATION

As noted below, our recommendations on the following statutes of limited application appear elsewhere in this report.

Independent Research and Development

Section 203 of Pub. L. 91-441, 84 Stat. 907, imposes restrictions on the payment of Independent Research and Development and Bid and Proposal costs from funds authorized for appropriation to the Department of Defense. See Recommendation 10 in Part B.

Architect-Engineer Statutes

Five statutes inconsistently regulate the fee payable to architect-engineers." Three of these and two other statutes provide express authority for the Army, Navy, Air Force, GSA, and VA to contract for A-E services.18 One statute requires 30-day advance notice to the congressional Committees on Armed Services before the Army, Navy, or Air Force may spend $150,000 or more for advance planning.19 See Recommendation 4 in Part E.

Research Cost Sharing

Section 504, Pub. L. 92-78, which was preceded by Pub. L. 91-126, in effect requires cost sharing by a contractor on any research project not specifically solicited by the Government. It applies to HUD and certain other independent agencies. However, OMB Circ. A100 extends these requirements to other agencies. See Recommendation 8 in Part B.

17 10 U.S.C. § 2306(d); 41 U.S.C. § 254 (b); 10 U.S.C. §§ 4540, 7212, 9540 (1970). See 22 Comp. Gen. 464; 46 Comp. Gen. 183; 46 Comp. Gen. 573, 576; GAO Report B-152306, June 6, 1965.

18 10 U.S.C. §§ 4540, 7272, 9540; 40 U.S.C. 8 609 (a), (b); 38 U.S.C.5002. See also 5 U.S.C. § 3109 (1970).

19 31 U.S.C. § 723a (1970).

192

Although we have not made recommendations concerning them, the following additional statutes should be considered in efforts to achieve Government-wide consistency in procurement policies.

means of achieving greater uniformity in the application of cost accounting standards to defense and nondefense contracts.

In 1970 the Defense Production Act of 1950 was amended to establish the Cost Accounting Standards Board to promulgate cost accounting standards for use by defense contractors and subcontractors.21 Currently, the Board is developing such cost accounting standards, and it published an initial installment effective July 1, 1972.22

Although under the statute the standards promulgated by the Board apply only to defense contracts and subcontracts, the Federal Procurement Regulations (FPR) prescribe the use of such standards for nondefense contracts.23 A recent supplement to the FPR, which exempts competitively negotiated nondefense contracts, is now being considered by the Cost Accounting Standards Board.

24

Although Study Group 7 (Cost and Pricing Information) examined a number of problems in this area and made several recommendations for change,25 we believe that operational experience under the standards thus far promulgated is too limited for evaluation and it would be premature to make recommendations at this time as to extent of need for and best

20 See, for example, Defense Appropriations Act, 1971, Pub. L. 91-668, 834; Pub. L. 91-171, § 634; and Pub. L. 90-580, § 533. 21 50 U.S.C.A. App. § 2168.

22 See 4 CFR 331.1 et seq., 37 Fed. Reg. 4143 (1972).

23 FPR Temp. Reg. 27, July 1972.

24 FPR Temp. Reg. 27, Supp. 2, Nov. 4, 1972, 37 Fed. Reg. 23544 (1972).

25 Study Group 7 (Cost and Pricing Information), Final Report, Feb. 1972, pp. 465, 466.

Contracting Across Fiscal Years

As a rule, service contracts funded by annual appropriations must be for terms within the current fiscal year.26 However, in a few cases, Congress has granted exceptions authorizing an agency to contract across fiscal years, for example:

• NASA contracts for support services and maintenance and operation of facilities 27

• DOD contracts for tool and facility maintenance and leases for real and personal property 28

• Army contracts for fuel.29

An Army provision, 31 U.S.C. § 668a, although not directly related to contracting across fiscal years, authorizes payment of metered services from fiscal year funds current at the end of the period of service, if the period of service extends across fiscal years.