estimate for a modification and for proper negotiation of time and price with the contractor. The Area Engineer, as the contract-officer's duly authorized representative, may act for him within the limits of authority delegated. 2. Definitions. For the purpose of contract administration of the ICBM program, the following definitions will apply:

a. Expediting is defined as the advancement of a contract established interim or final completion date.

b. Acceleration is defined as:

(1) Type I: Buying back, in whole or in part, equitable time extensions otherwise due the contractor under General Provision 5c of his contract because of unforeseen causes beyond his control and without his fault or negligence, including, but not restricted to, fires, floods, strikes, freight embargoes, and unusually severe weather.

(2) Type II: Buying up, in whole or in part, equitable time extensions otherwise due the contractor under General Provisions 3 and 4 of his contract, covering Changes and Changed Conditions, respectively.

c. Contracting Officer also includes the authorized representative of the Contracting Officer, acting within the limits of his authority.

d. Other special terms used in connection with contract modifications are defined in Appendix A.

3. Expediting and Acceleration Costs. Approval of costs for expediting and acccleration is limited as follows:

a. No expediting action involving additional costs may be taken without the prior approval of the Assistant Secretary of Defense (Properties and Installations). (ASPR 12-102.6.) Accordingly, no expediting will be undertaken without a formal written directive from BMC to CEBMČO, and this directive will include a statement that such necessary Department of Defense approval has been secured.

b. Approval of identifiable acceleration costs will be as follows:

(1) Type I: The Area Engineer has no approval authority. The SATAF Commander's approval authority is limited to $25,000. Above $25,000 the SATAF Commander will forward his recommendations to BMC for approval. (2) Type II: The Area Engineer may approve costs up to $1,000. The SATAF Commander's approval authority is limited to 25% of the total cost of a modification. Above 25%, the SATAF Commander will forward his recommendations to BMC for approval.

(3) BMC approval of acceleration will be addressed to CEBMCO with

copy to SATAF.

c. Both the Government estimate and the contractor's proposal will identify acceleration costs, such as premium labor costs, additional plant and equipment, etc., to the extent these are readily identifiable.

4. Government Estimate. A. The Government estimate, including a determination of a justified time extension, will be prepared by the Area Engineer with the assistance of the SATAF staff, including the design architect-engineer. The purpose of Air Force participation is to assist in understanding the scope and effect of facility modification.

b. The completed Government estimate will be signed by the Area Engineer and forwarded to the SATAF for concurrence. It will be handled as administratively confidential.

(1) When the Government estimate is less than $200,000 and does not exceed the approval authority of the SATAF Commander on acceleration costs when such are involved, and is concurred in by the SATAF, it will be signed by the SATAF Commander or his representative and the Área Engineer will proceed to negotiate with the contractor.

(2) When the Government estimate is over $200,000, or includes acceleration costs which exceed the approval authority of the SATAF Commander, or is not concurred in by the SATAF Commander and agreement is not reached between him and the Area Engineer, it will be forwarded to CEBMCO and BMC with comments, to include a report of any differences. CEBMCO and BMC will consider the matter. If agreement is reached, they will jointly notify their field offices and the Area Engineer will proceed to negotiation with the contractor.

c. Where analysis of the contractor's proposal or subsequent negotiations disclose errors of fact or judgment resulting in revision in the Government estimate of 15% or less, such revision may be made without further SATAF or BMC concurrence. Where such revision exceeds 15%, the new Government estimate will be forwarded for concurrence in the same manner as the original Government estimate.

5. Negotiation. a. When the contractor's proposal exceeds the Government estimate by 15%, the proposal will be reviewed and appraised by the Area Engineer or his representative and the SATAF Commander or his designee.

b. Negotiations with the contractor may be conducted alone by the Area Engineer or his representative until it is apparent that agreement cannot be reached for the amount of the final Government estimate. In such case, the SATAF Commander may be represented by an observer at subsequent negotiations, if he so desires.

c. If the contractor's final proposal exceeds the final agreed Government estimate by not more than 10%, the Area Engineer will meet with the SATAF Commander or his designee and obtain from him a signed statement that he agrees that the contractor's final proposal is equitable and the lowest obtainable, and that acceptance thereof is in the best interest of the Government. If the SATAF Commander does not agree, the matter will be referred to CEBMCO and BMC for resolution.

d. Time extensions will not be granted by the Area Engineer without the prior approval of CEBMCO. Time extensions which will carry work beyond Air Force directed completion dates will not be granted without the prior approval of BMC.

6. Outstanding Modifications. There is an urgent need for the prompt resolution of unnegotiated modifications, an early determination of the status of funds, and an accurate current working estimate for each project.

a. Unnegotiated modifications will be consummated as soon as possible and agreement negotiated with the contractor or a unilateral change directed,

b. On those outstanding modifications for which a directive to proceed has not been issued to the contractor, the Area Engineer will consult and reach agreement with the SATAF Commander on the time frame for initiation and completion prior to directing the change by an initial written order or the first part of a twopart change order, as appropriate. Such order will make no commitment for additional acceleration costs unless directed by BMC or SATAF.

c. On those outstanding modifications for which a directive to proceed has been issued to the contractor, the Area Engineer will review the modification and advise the SATAF of those which have committed the Government to additional accleration costs. Such acceleration will continue unless written instructions are issued by BMC or the SATAF to eliminate or curtail the acceleration. If such instructions would result in a time extension, the Area Engineer and the SATAF Commander will submit their findings and recommendations to CEBMCO and BMC for approval before eliminating the acceleration.

7. New Modifications—Review. a. All new modifications, regardless of origin, will be the subject of a change order conference. Only mandatory changes will be implemented.

(1) Major modifications or "Design Changes" will be considered at a change order conference normally convened by AFBMD in the Arbor Vitae Complex. Conferees will include representatives of BMC, AFBMD, CEBMCO and the design architect-engineer. Such modifications will be implemented in accordance with paragraph 8c below.

(2) Field modifications or "Field Changes" will be considered at a change order conference normally convened by the BMD detachment at the SATAF Office. Conferees will include representatives of the SATAF Commander, including the BMD Detachment, and the Area Engineer. Such modifications will be implemented in accordance with paragraph 8c below. The change request (Change Order, Short Form) will be forwarded to the Area Engineer by the SATAF Commander or his designee.

b. In considering a modification, the change order conference will make appropriate engineering determinations relative to the change, develop gross time and cost implications, and make specific findings on the following:

(1) When and how the change can best be accomplished, i.e., (a) in the construction phase by the construction contractor, (b) as retrofit by separate contract in the time period between construction completion and effective start of installation and checkout, or (c) in the installation and checkout phase under Technical Facility Modification Authorization.

(2) If the work is to be done in the construction phase, whether the change should be accomplished within the established contract time or whether a reasonable time extension may be permitted. This finding is intended as guidance only for the SATAF Commander.

(3) When the necessary plans and specifications or other required information on the change will be provided to the Corps of Engineers.

c. Minutes on each Change Order Conference will be promptly prepared and distributed by AFBMD and BMC or the SATAF Commander or his designee, as appropriate. The minutes will be signed by and represent agreement of the responsible representative of each of the participating agencies. They will include details of the change, the circumstances which require the change to be made, the gross time and cost implications, and the method of implementing the change. The conference minutes will constitute notice to all parties concerned to incorporate the change in the work upon receipt of necessary documents. 8. New Modifications-Implementation. a. The design agency will prepare the necessary papers to implement major modifications or "Design Changes. With these they will furnish the following:

(1) A narrative report briefly summarizing the modification and its effects on contract plans and specifications. This report will include a resume of the technical requirement for the modification.

(2) A manhour and materials summary to include a detailed price and materials take-off and a detailed manhour estimate of the modification by trades. This summary will identify items not priced. It will not attempt to reflect project status such as progress or commitments on purchase orders, fabrication, construction, etc., or their effect on the price of the modification. The summary will be forwarded separately if its preparation will delay distribution of plans and specifications.

(3) A basic price schedule (summary), by work category, for use by both the Government and the contractor in summarizing their estimates. This will be designed and used for ready comparison of the contractor's proposal with the Government estimate, and for comparison of the Government estimate between projects of a Weapons System.

b. An AFBMD/BMC team, including architect-engineer representatives, will visit the Project Office and advise personnel on the scope and content of the modification as determined appropriate by AFBMD or as requested by Change Order Conferees, the SATAF or the Area Engineer.

c. Upon receipt of the plans and specifications (for major modifications) or change requests (for minor modifications), the Area Engineer will implement the modification, prepare the Government estimate, and secure the contractor's proposal. His implementing order will make no commitment for additional acceleration costs unless directed by BMC or the SATAF.

d. The contractor will be directed to submit his proposal for accomplishing each modification within the minimum reasonable time. To the extent feasible, the contractor will be required to prepare his proposal in the same format as the basic schedule developed by the architect-engineer (for major modifications), or to identify any departure therefrom.

9. Reports. a. A standard format has been developed by CEBMCO for consolidating pertinent data on modifications, reporting progress, and showing the status of negotiations.

(1) Data for this modification log will be updated weekly by the Area Engineer and submitted to CEBMCO to permit close central control of change order action.

(2) CEBMCO will furnish copies to AFBMD and to BMC. The Area Engineer will furnish copies to the SATAF Commander including one reproducible copy for the AFBMD Detachment.

10. Saving Clause. Provisions herein shall not be interpreted as requiring that actions be taken by the Area Engineer or SATAF which CEBMCO or BMC consider should be handled in Los Angeles.

11. Concurrence. The contents of this SOP have been coordinated among and are concurred in by AFBMD, BMC and CEBMCO.

CONTRACT TERMS

1. Change Order means a written order, signed by the Contracting Officer, directing the contractor to make changes which the Change clause of the contract authorizes the Contracting Officer to order without the consent of the contractor. (ASPR 1-201.1)

2. Contract Modification means any written alteration in the specification, delivery point, rate of delivery, contract period, price, quantity or other contract provisions of an existing contract, whether accomplished by unilateral action in accordance with a contract provision or by mutual action of the parties to the contract. It includes (1) bilateral actions such as supplemental agreements, and (2) unilateral actions such as change orders, administrative changes, notices of termination, and notices of the exercise of a contract option. (ASPR 1-201.2) 3. Contracting Officer means any person who, in accordance with Departmental procedures, is currently designated as contracting officer with the authority to enter into and administer contracts and make determinations and findings with respect thereto, or with any part of such authority. The term also includes the authorized representative of the Contracting Officer acting within the limit of his authority. (ASPR 1-201.3) In the ICBM program the CEBMCO Weapon System Director is the Contracting Officer for all operational bases within his weapon system; except that for Vandenberg, Fairchild, Forbes and Warren the appropriate District Engineer is the Contracting Officer, and for Lowry the Area Engineer is the Contracting Officer. Generally the Area Engineer is the Contracting Officer's Representative (COR) for changes up to $500,000 but has no authority to grant time.

4. Contracts mean all types of agreements and orders for the procurement of supplies or services. It includes awards and notices of award; contracts of a fixed-price, cost, cost-plus-a-fixed-fee, or incentive type; letter contracts and purchase orders. It also includes supplemental agreements with respect to any of the foregoing. (ASPR 1-201.4)

5. Initial Written Order means a written order from the Contracting Officer to the contractor, issued under the Changes article and directing a change within the general scope of the contract. Although it may contain an equitable adjustment of price and time, the term as used herein is restricted to changes for which adjustment of price and time cannot be mutually agreed upon in advance of the written order making the change, or the work must progress to some extent before the subsurface or other conditions are sufficiently known or disclosed to permit an order covering all details of the change. Subsequently, the initial written order must be followed by a change order, signed by the Contracting Officer, containing the price and time adjustment and additional details of the change if required. (ER 1180-1-1; 30-273)

6. Unilateral Change Order means a change order on which the Contracting Officer and the contractor cannot agree to a price and time adjustment equal to or within the final Government estimate. In such cases the change order containing the adjustment in time and price contained in the Government estimate may be issued unilaterally. (ER 1180-1-1; 30-273.) General authority to issue unilateral change orders has not been delegated to Area Engineers.

7. Two-Part Change Order is used in cases where the change involves a substantial sum and considerable time will be required to determine the equitable adjustment or the exact extent of the change, and it is determined that it would be inequitable to require the contractor to finance the change until the equitable adjustment or the extent of the change is finally determined. In such cases the change order may be issued in two parts. The first part may provide an amount for payment purposes only and will expressly stipulate that such amount is tentative and that the final adjustment will be made in the second part of the change order. (ER 1180-1-1; 30-273.)

8. Changed Conditions refers to those cases where the Contracting Officer finds that there are (1) subsurface or latent physical conditions at the site differing materially from those indicated in this contract, or (2) unknown physical conditions at the site, of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in this contract. In such cases the contract is modified to provide an equitable adjustment in time and price, as provided by General Provision 4 of the contract. (ER 1180–1–1; 30-274.)

9. Supplemental Agreement means a contract modification which is accomplished by mutual action of the parties. (ASPR 1-201.19.) It is the proper

medium for making changes that are outside the general scope of a contract, and

hence cannot be required by the contractor without his consent or acceptance. Therefore, the supplemental agreement is a new negotiated contract, and it is added as a supplement to an existing contract simply as a matter of administrative convenience. (ER 1180-1-1; 30-275.) General authority to approve supplemental agreement has not been delegated to Area Engineers.

10. Government Estimate, as used in this paper, is an independent estimate of time and price prepared prior to the negotiations with the contractor on change orders and supplemental agreements. Its purpose is to guide the conduct of the negotiations and to establish reasonableness of price. When such negotiations disclose errors of fact or judgment in the Government estimate, it will be revised. Award will not be made unless: (1) the final Government estimate equals or exceeds the negotiated price in the case of increases, or (2) the negotiated credit equals or exceeds the Government estimate in the case of reductions, or (3) the correct final Government estimate is included in the contract file, supplemented by a complete statement justifying the award at a cost differing from the estimate and adequate for subsequent review, or (4) price redetermination clauses are employed. (ER 1180-1-1; 3-808; 30-271.)

Mr. McCLARY, Thank you, gentlemen, for inviting me here to make this statement on behalf of my company and its associates. Mr. SHEPPARD. We appreciate your comments.

The next witness will please take the stand, the H. K. Ferguson Co., represented by Mr. Olmstead.

STATEMENT OF R. W. OLMSTEAD, PRESIDENT, H. K. FERGUSON CO.

Mr. OLMSTEAD. Mr. Chairman, gentlemen, my name is R. W. Olmstead. I am president of the H. K. Ferguson Co. of Cleveland, Ohio, which is an engineering and construction company specializing in process and industrial work.

The H. K. Ferguson Co. started working in the missile program with the design of certain NIKE installations near Cleveland, Ohio, in 1954. We have been involved in missile work continuously to some extent ever since. The H. K. Ferguson Co. performed the installation work in connection with the weapon system equipment of the BOMARC missile at Suffolk Air Force Base on Long Island. Later we were awarded the installation work at Offutt Air Base in Nebraska in connection with the ATLAS missile. We have also done, in joint venture with the H. C. Smith Construction Co., some work at the Vandenberg Air Base for Convair and the Martin Co. All of this work has been performed on a cost-plus-fixed-fee type of

contract.

We made the disastrous mistake of bidding lump sum on one job connected with the missile program. In 1958 we bid as a subcontrator to the Callery Chemical Co. under their prime contract with the Department of the Navy a substantial portion of the high-energy fuel plant at Muskogee, Okla. This work was bid on what were reported to the bidders as complete plans and specifications. After getting into the work we found that the plans and specifications were not complete. Indeed, they were little better than preliminary plans. We suffered a direct out-of-pocket loss approximating $21⁄2 million on a $10 million job.

Without exception costs have greatly exceeded the original estimates on the work we have performed under cost-plus contracts. There is a common denominator in all of these jobs; namely, they have been put out for construction while they were still in the research and development stage and the changes which are ordered while work is in progress are unusually numerous and costly. It is my understand