mediate relief is forthcoming they cannot much longer continue. Two of our subcontractors have already reached the point where they have refused to continue. We have been able thus far to shoulder the burden, but our capacity is also limited and we are unable to continue in this fashion indefinitely, nor do we believe the Government has any legal or moral right to ask us to do so. The answer to this problem lies in the principle of the Government being willing to pay for the cost that it is incurring in this experimental wartime missile base construction contract. All of the other major participants in the program, except the construction industry, are, I believe, on a cost-reimbursable type contract. This type of contract should be utilized for the construction industry as well. In the Armed Forces Procurement Regulations, section 3-404-3, a cost-type construction contract is recommended where the specifications are not complete or where major changes substantially affecting the scope of the work are expected. In retrospect, we find that this describes our situation. The immediate retroactive conversion to a cost-reimbursable form of contract would immediately change the whole character of the project. The contracting officer and the contractor having had the barrier of a fixed-price relationship removed as an obstacle between them would be in a position to effectively join forces in a cooperative effort to further the interests of the Government in achieving the objectives of the program in the most expeditious and economical fashion. The elimination of the arms-length relationship which presently retards and impedes the program would be of tremendous value to the Government. The contractor, his subcontractors and suppliers would be compensated for authorized expenditures as they were incurred and thus be relieved of the tremendous burden which they are now under. The Government would know currently the actual cost of the missile program. This is a point I think deserves a little further consideration here. On our contract, we expect that the actual cost to our subcontractors, our suppliers and ourselves will equal at least 100 percent over the base bid of 24-million-odd dollars we have put in, and as of the moment we have received nothing extra above our original contract price. I do not believe I am exaggerating when I tell you that the way this program is heading at the present time will result in a horrible catastrophe for a large part of the construction industry and that our Government may well find this essential program grinding to a halt because of its failure to recognize the need for handling this experimental wartime program on a flexible basis that will enable its representatives to pay the actual cost in overcoming each obstacle as it occurs, rather than closing its eyes to reality and hoping that the problem does not exist. Mr. SHEPPARD. Thank you. The next witness will be the representative from the Morrison Knudsen Corp., Mr. J. D. McClary, executive vice president. STATEMENT OF JAMES D. McCLARY, EXECUTIVE VICE PRESIDENT, MORRISON-KNUDSEN CO. Mr. McCLARY. My name is James D. McClary; I am executive vice president of Morrison-Knudsen Co., Inc., of Boise, Idaho. I am here, willingly, at the invitation of this committee to make a statement regarding the ballistic missile program of the Department of the Air Force, or at least regarding that portion of the missile program with which my company is intimately associated. Morrison-Knudsen Co. is the sponsoring company of two joint venture groups engaged in missile base construction. One group is constructing the Titan I complexes under two separate contracts at Lowry AFB, near Denver, Colo.; the other group is constructing an Atlas F Missile Launch complex at Altus AFB, near Altus, Okla. Both facilities are being constructed under contracts awarded by the U.S. Corps of Engineers following receipt by the corps of competitive bids. In addition, my company has minority interests in joint venture. groups, sponsored by other contractors, engaged in the construction of Titan I facilities at Larson AFB near Moses Lake, Wash., and at Ellsworth AFB, near Rapid City, S. Dak. While our knowledge of and interest in the outcome of these latter two contracts is of as much importance to us, I plan to comment on the ballistic missile program as it affects our contracts at Lowry and Altus, only, because representatives of the sponsoring companies of the Larson and Ellsworth joint ventures were also invited to appear before this committee and make statements regarding them. It is important, however, to bear in mind that my remarks are based on a knowledge of the construction operations and problems on four missile bases in widely scattered parts of the country. Contracts were awarded to Morrison-Knudsen & Associates for the Titan I facilities at Lowry AFB in April and June of 1959. These contracts had an original value of $67 million. Since award, these contract prices have been increased by more than 50 percent by reason of approximately 600 major design changes and modifications. The contract for the Atlas F facilities at Altus AFB was awarded to Morrison-Knudsen-Hardeman & Associates in May of 1960. It had an original value of $21 million. As of December 31, 1960, this contract has had 65 modifications and design changes. By reason of these modifications and our unresolved claims, this contract may eventually cost close to $31 million. Both of these bases, being constructed under our sponsorship, are ahead of schedule in spite of the administrative and operational problems that have plagued-not only our work-but the entire missile program of the Air Force. Our contracts cover the construction of facilities that admittedly are novel, complex, and intricate. Facilities, that by contract requirement, must be built under extremely tight scheduling which allows for no slippage. They also cover construction of facilities for weapons that are still in the final stages of development. CHANGES IN CONTRACT PROCEDURE We recognized these conditions at the time our bid estimates were prepared and priced the work accordingly. We also had every reason to believe based on many years of experience under similar contracts that the standard Government contract, with its history of operations and procedures, would function on this ballistic missile program as it always had on other Corps of Engineers projects. Patently, this has not been the case. I would like to cite some specific examples of the deviations from these historical and time-honored. procedures: First, the relationship between the contractor and the contracting officer, developed through the years, no longer exists. The designated representatives of our company who have authority to settle contractual matters no longer are allowed to negotiate solely with a similar representative of the Government. In substantiation of this statement, I am attaching a copy of CEBMCO circular No. 61-4, issued on January 6, 1961. This circular outlines, in detail, the procedures which the Corps of Engineers must follow on contract modifications. It also shows the extent of the intrusion of the using agency into the contractual affairs of the contracting agency and the contractor. It should be noted that this circular merely formalizes a pattern that has been developing over a considerable period of time. Secondly, the construction agency is now being directed in its actions by the using agency to a degree never before known and certainly never contemplated by us when we entered into these contracts. As a result, the construction agency either will not or is not allowed to give proper recognition to changes and changed conditions-with their subsequent impact on existing work from both a time and money aspect. In short, since the using agency has established theoretical completion dates for this program, nothing, not one single thing, is to be allowed to change those dates. Consequently, "time extension" are vulgar words, and a request for payment of additional cost to make up the lost time, caused by multitudinous modifications, general design lag, or criteria changes developed through continuing missile experimentation, is viewed with indignation. It appears to be an unwarranted presumption on the part of the contractor that he should be paid for his work. Thirdly, the concept of equitable and reasonable adjustments in contract costs, contract time, and schedules is and has been completely ignored. Since we are now precluded from negotiating with the agency which has the power to decide on the cost of changes and the necessity of time revisions, we are compelled to adhere to an inflexible schedule without the right to negotiate in good faith the actual costs of such changes, their delay to the time schedules and their impact-both cost and timewise on the already complicated problems inherent in this crash construction program. As a result of these changes in contract procedure, the Government's estimates of the costs of performing modification work are completely unrealistic as is its refusal to recognize changed conditions. This has imposed an unnecessary financial hardship, not only on us but also on our subcontractors and material suppliers. If we refuse to accept what is offered, we are issued a unilateral order to proceed with the work at an unagreed or unequitable price. In the end— and in some cases it has already happened this can only mean an unwarranted increase in our cost and absolute disaster and financial ruin to many of our smaller subcontractors and material suppliers. It now appears that the only hope for an equitable payment for the work we and our subcontractors have done is through time- and money-consuming appeals to various departmental boards or as a last resort the courts. From the dates given earlier in this statement you will note that there is a difference in starting time of approximately 1 year between the contracts at Lowry and the contract at Altus. I believe it is proper to point out that the changes in procedures which I have mentioned were not in effect at the time of the starting of the Lowry contract in 1959. They started to become apparent and disastrously effective during early 1960 and have continued to become more unrealistic and vicious up to the present time. I can say, now, that the position of the contractor is such that any hope of relief under them is practically impossible. Our contracts are with the Corps of Engineers the designated representative of the U.S. Government. They are not with the Air Force, the architect engineer or the weapons system manufacturers. Nevertheless, it is obvious that the latter three are controlling in almost all decisions in one way or another. Since we do not have contracts with these latter groups or agencies, we cannot, and properly should not, have to either deal with them or be controlled by their unilateral decisions. Under any concept of law, if we are to do so, we have the right to confront them and have the expectation that any and all negotiations will be in good faith. Since our contracts are with the corps, we can only look to the corps for a return to proper contract administration. Why the corps has made or permitted these changes to be made is not for us to say. We only know they have come about and if left uncorrected we can easily visualize certain disaster for a large part of the construction industry and probable national disgrace for anyone connected with the ballistic missile program. Certainly, there can be no doubt that the construction contracts awarded in connection with the ballistic missile program were knownbefore their award to cover a program that is experimental in nature. Therefore, the facilities were obviously designed without a complete knowledge of what will be finally built. Under these circumstances, the architect engineer could not have been expected to furnish any kind of a design which would not require multitudinous changes. It should, therefore, not come as a shock to any intelligent individual that there would be changes and that those changes would be costly. The problem, as we see it, is that the using agency orders the contracting agency to make changes and modifications as the missile. experiments dictate their necessity, without giving sufficient study to their probable cost and as a result, has not made certain that sufficient funds are available to cover a realistic cost of the changes. The lack of prudence in this matter on the part of the using agency cannot be overcome by simply refusing to allow the contracting agency to pay the proper cost of work ordered done. Since the entire contractor relationship with the Corps of Engineers has been completely changed from the time we first entered into these contracts, it is doubtful that the bids we submitted, in anticipation of working under historically developed corps administrative procedures, can be said to remain valid under existing circumstances. It is our recommendation that immediate action be taken to eliminate these existing procedures, so that the normal and proper contractual relationship between the corps and the contractors can be resumed. Failing in this, there is no practical solution of the present impossible situation except to reform most of the ballistic missile construction contracts on a cost reimbursement basis. In addition to this statement, I have had prepared a more detailed report on each of the bases for which my company has construction responsibility. I would like, at this time, to present these to this committee for its information and later study. Mr. SHEPPARD. It will be made part of the record. (The information referred to follows:) a. OCE Message ENGMC-K 3475, dated 22 November 1960. b. CEBMCO Message ENGMA-VA 3350, dated 23 November 1960. 2. The procedures outlined in Inclosure 1 to this circular: "Joint BMCAFBMD-ĈEBMCO Policy on Modifications to ICBM Construction Contracts," dated 3 January 1961, are issued to implement the basic agreement between USAF and OCE as stated in reference_la. This joint policy is being issued simultaneously by AMC/BMC and AFBMD to their field organizations. 3. Those portions of the documents listed below which are in conflict with the instructions of Inclosure 1 are rescinded. a. CEBMCO Circular 60-17, dated 25 October 1960. b. CEBMCO Memorandum 60-14, dated 23 November 1960. For the Commander: JOINT BMC-AFBMD-CEBMCO POLICY ON MODIFICATIONS TO ICBM CONSTRUCTION CONTRACTS 3 JANUARY 1961. 1. General. a. The procedures outlined below will be followed hereafter in the handling of modifications to ICBM construction contracts at operational bases. The procedures do not apply to modifications on which agreement has been reached with the contractor. b. Implicit in these procedures are the following: (1) AFBMD (WDF) will provide, with design changes, a narrative description of the change, the technical necessity, and man-hours and materials required to implement the change. (2) AMC/BMC is responsible for providing project funds, for ordering expediting, and for determining whether to grant or undertake acceleration, i.e., trading dollars for time. (3) The Contracting Officer, who is the CEBMCO Weapons System Director in most cases, is the legal representative of the Government for administering the contract. He is responsible for safeguarding the interests of the United States in contract matters and for determining the facts under the contract. In the final analysis, he alone is responsible for the Government |