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should provide that in the event the contract is found to be legal then the contractor should be able to recover under the contract his costs occasioned by the delay, including an equitable adjustment in the delivery schedule, that may have been occasioned by the litigation. On the other hand, if the contract is found to be illegal by reason of the procuring agency's failure to comply with applicable laws, rules, statutes, regulations, or the agency's procurement procedures, then the contract shoi:1d be terminated for the convenience of the Government to permit the contractor to recover his costs under that well established procedure.


This title grants the Comptroller General the authority to issue subpoenas to compel a Government contractor or subcontractor to produce records to which the GAO has a right of access by law or agreement. Industry is deeply concerned over this provision. This power has been characterized as the "club in the closet" to be utilized when the GAO feels that it is necessary We feel that there has not surfaced such a problem in the defense industry that would warrant granting the GAO such far-reaching powers.

There are no checks on the subpoena power as the Bill stands at this moment. The GAO has the absolute right to issue a subpoena for any type of record. If the subpoena is not obeyed, then the GAO may petition a Court of competent jurisdiction to have the subpoena enforced and the party refusing to obey the subpoena punished for contempt. There is no protection in this statute for one who disagrees with the issuance of the subpoena, Contrasting the use of a subpoena by a Court, a party has an opportunity to argue that the sub poena should not be issued. The court must then decide on the merits of such an objection before it issues the subpoena. The current statute offers no such opportunity. One must assume that under the present statute that the Court before enforcing the subpoena, will hear objections and make a decision on whether or not the sub poena is proper. This is a mere assumption on what the Court will do and not a right granted by the statute.

In 1969 a similar grant of subpoena power for the GAO was proposed through amendments to S 2546, the military appropriation bill for fiscal year 1970. In the discussions of these proposals on the floor of the Senate and House, the chairmen of the respective Armed Services Committees both stated their very definite views that such wise-reaching subpoena power over contractor records was a Congressional responsibility which should not be delegated to the GAO but retained in the Congressional committees. The final bill as enacted did not grant the subpoena power to GAO. NSIA agrees with this earlier view of the Congress that so broad a grant of power should not be conferred on the GAO.

NSIA further believes that the grant of subpoena power to the GAO is redundant in view of the other rights it seeks under this Bill. GAO seeks the right to retain its own attorneys to represent it in Court without having to utilize the offices of the Justice Department. Assuming this right is granted then the GAO will have access to the Courts which have the very powers GAO seeks. The Courts have the right to issue subpoenas and exercise other powers.

With a properly presented case the Courts will utilize these powers to provide to GAO the documents to which it is entitled and at the same time the parties will be afforded the protection of their respective

rights. Under the circumstances to grant the GAO the right to engage its own attorneys and also independent subpoena power is redundant.

We strongly urge the Subcommittee to strike from this Bill the subpoena
power provisions requested by the GAO. Defense contractors are entitled
to the checks and balances on the issuance of a subpoena as provided by
a Court. In addition, there is no discernible need for the granting of the
subpoena power to the GAO where the GAO has the opp

through its own counsel to obtain that resource through a Court of competent jurisdiction.


Profit on Commercial Contracts


The provision of the Bill which has attracted particular attention from member companies of NSIA is Title IV Profits Study. Under this Title the Comptroller General is authorized and directed to conduct studies on a selective basis of all profits made by contractors on Government and commercial contracts. These studies would be required to be made not less frequently than once in each 5 year period following the enactment of this

The Bill further provides that a Government contractor or subcontractor whose contracts aggregate one million dollars or more shall prepare and submit to the Comptroller General such information maintained in the normal course of business by the contractor as the Comptroller General deems is necessary or appropriate in conducting any study. The Bill goes on to provide that the Comptroller General shall not disclose any information obtained solely under the authority of this section relating to a contractor's profits on any individual contract entered into pursuant to formally advertised competitive bidding.

NSIA understands the Government's need to examine the records of the per-
formance of its contracts awarded to industry; however, we do not feel
that a profit study of a company's commercial contracts is warranted merely
because it also performs government contracts.

NSIA believes that such a study is an unjustified invasion of a company's privacy when the agencies concerned with the award of a government contract do not have any real interest in the commercial endeavors of a contractor.

Beyond the invasion of the privacy of a Government contractor it appears that the Bill if enacted will be detrimental to the Government's established procurement policy of obtaining maximum competition for Government work. NSIA visualizes a situation where certain subcontractors will not compete for Government subcontracts if the profits on their commercial endeavors are subject to disclosure. There are numerous subcontractors in the United States which supply components, raw materials, and services under a federal subcontract who would no longer compete for such contracts if the Government has the authority to come in and disclose their profits on commercial contracts. This, of course, would force a situation where a Government prime contractor would be very limited in obtaining sufficient competition and a competitive price on a federal subcontract.

In addition to the limitation of competition, this Bill, if enacted could very well discourage companies doing a significant business in commercial product lines from bidding on Government contracts. The management of such companies would be quick to realize that the disclosure of profits under a number of contracts on a commercial product line could have a severe impact on its competitive status in the commercial market. This could be especially true where the Government contractor is competing in its commercial endeavor with another company which by reason of the mere fact that it does not perform Government contracts would never have its profits disclosed. This situation certainly places a Government contractor at a serious disadvantage in the commercial marketplace and would undoubtedly be a deterrent to the performance of Government work by diversified companies.

Profit on Government Contracts

NSIA also objects to the provisions of this Title which would permit profit studies on Government contracts and the disclosure of these studies. Primarily our objection is based upon the lack of any discernible problem which would justify profit study on individual Government contracts. At the present the only justification given for this Title was stated by Senator Ervin on June 21, 1973 when the Senator introduced the earlier version of this Bill, s. 2049. The purpose was stated as follows:

"Title (V) would authorize the Comptroller General to make
selective studies of the profits of major Government con-
tractors, for the purpose of comparing profits from govern-
ment business with those from commercial sources and
ascertaining whether proper allocation of costs are made
to government business. Necessary access to information
authority would be provided for application to such studies,
together with safeguards against disclosure of information
relating to commercial transactions."

A profit study in itself will not assure that proper allocation of costs are made to Government business. Only an audit of the costs incurred under a Government contract and charged to that contract will reveal whether or not costs have been properly allocated. We firmly believe that the purpose of Title IV can be and is more than satisfied by the proper administration of the various laws and contractual requirements to which companies must adhere when performing a Government contract.

Under existing law and under existing contract requirements major Government contractors must comply with Cost Accounting Standards which compel disclosure of a contractor's accounting procedures to the Government. In addition, in pricing a contract a Government contractor rust abide by the Truth in Negotiations Statute (PL 87-653, 76 Stat. 528). During the course of the performance of a contract a Government contractor is under the constant surveillance of representatives of the Defense Contract Audit Agency. These laws and activities are designed to insure that not only is the price on a Government contract fair, but that the costs allocated to those contracts are fair, reasonable and proper. We believe that these safeguards, properly administered, are more than adequate to assure proper allocation of costs to Government contracts.

If the purpose of Title IV is to determine whether or not a company' 's profits on Government contracts are reasonable then NSIA believes that the Government has already legislated this purpose when it subjected Government contractors to the Renegotiation Act. In view of this Act, Title IV appears to be redundant legislation.

each year.

If the purpose of Title IV is to monitor company-wide profits of major defense contractors, then we submit that this information is already available to GAO for the asking. The major Government contractors in the United States are public companies, all of which publicly disclose their profit or loss

In addition, the Securities and Exchange Commission requires the disclosure of detailed financial information on these companies. This information is available for the asking. The relative profitability of each major Government contractor each year is available not only to the Government but the public at large. This information should satisfy the needs of the Government to monitor the profitability of the major Government contractors.

In conclusion it appears to NSIA that the ability of the Government to perform a profit study on commercial and Government business would discourage companies doing a significant business in commercial product lines from bidding on Government contracts and deter subcontractors from competing for Government business. In addition, a profit study would not satisfy the stated purpose of Title IV of assuring proper allocation of costs to Government and commercial business. Finally, the Government presently has more than adequate safeguards in order to satisfy the purpose of Title IV without the enactment of Title IV. NSIA strongly urges the Subcommittee to eliminate Title IV from this Bill entirely.

NSIA requests that Senate Bill 2268 be modified in accordance with the above recommendations.




Senator METCALF. I don't have another date set for hearings so I am not going to set a special time for response. There isn't any real urgency, but we would like to get this out of the way before we start our hearings on the regulatory agencies and so forth.

I wish you would give us some response as soon as you can and then we will hold at least one additional hearing to hear some on the other side who either criticize the GAO for its administration or who are in opposition to extending that power and authority and jurisdiction of the GAO to these various governmental agencies.

Mr. Staats. We would be very happy to respond in any way that you think would be useful. I would simply like to underscore the basic point that we make. I suppose it would be relatively easy for us to not push on some of these points. But we feel that we would not be doing our duty. We would not be fulfilling the charge that we believe we have from the Congress if we just remained silent on these thingswhich we think was not the intention of the Congress.

Senator METCALF. I know that several members of this committee and this Senator believes that we need your help. We need the guidance of your experience and that of your staff.

We want you to come up here and speak very frankly about the impact that some of the legislation has. I appreciated your position on S. 2268, a bill that I introduced. I will repeat what I say so frequently, that the introduction of legislation is only like filing an initial pleading. By the time you get up to the appellate court, you may have changed the whole proceeding; that is one way to get into court and get people to express their attitudes.

So we want you to continue to help us and advise us on this legislation that you feel will help you do a better job in working for us in that agency that you administer so well.

Thank you very much. That will conclude the hearing. We will adjourn subject to the call of the Chair. This material will be made available to anybody that needs it and we will keep in touch with you. Thank you for coming.

Mr. STAATS. Thank you very much.

[Whereupon, at 12:08 p.m., the subcommittee recessed, to reconvene subject to the call of the Chair.]

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