ing that all other contractors who have engaged in missile work have suffered enormous losses on lump-sum contracts and overruns in costs on their cost-plus work.

There are five basic criteria which we believe are essential to a lumpsum or fixed-price type of contract:

1. Detailed working drawings and detailed specifications are completed and available for bid purposes, as well as construction.

2. The successful bidder procures all equipment and material and expedites the delivery of equipment and material as required to meet his schedule or he is entitled to rely on the delivery dates represented by the owner.

3. The contractor schedules all work, subject only to limited concurrence or approval by the owner.

4. The contractor has access to all work areas without interference from other groups.

5. The contractor has complete control over the number and type of personnel required to perform his contractual obligations within scheduled dates.

On the one lump-sum missile job undertaken by the Ferguson Co.; namely, the high energy fuel plant for the Gallery Chemical Co. and the Department of the Navy at Muskogee, Okla., not one of these criteria was met. The plans and specifications were incomplete, inconsistent, contradictory, and misleading. The successful bidder was not permitted to procure equipment material and could not rely on delivery dates promised by the owner.

Mr. SHEPPARD. Who were the people not permitted to procure equipment?

Mr. OLMSTEAD. The Parsons Co.

Mr. SHEPPARD. Proceed.

Mr. OLMSTEAD. The contractor tried to schedule the work and was constantly ordered to do work on a different schedule and a different manner. The contractor did not have access to work areas and was interfered with by the other contractors, the owner, and other interested agencies.

Mr. SHEPPARD. When you say "by other groups," is there any reason you should not indicate the groups so we may have some knowledge of the procedure and the factors involved here?

Mr. OLMSTEAD. Other contractors, Mr. Chairman, employed by the owner and not having any particular coordination with us, by the representatives of the prime contractor, and of the architect-engineer. Incidentally, the contractor did not have control over personnel. The contractor did not have control over personnel and he was constantly subjected to orders from the owner to hire additional personnel on a more or less frantic basis without regard to work schedules or efficiency. Contractors of the prime contractor occasionally issued orders to our foreman in the field to engage additional personnel, without reference to our job management. In the light of these conditions it is little wonder that costs were excessive in relation to the bid and the time schedule could not be met.

My company has had occasion to study the conditions under which some other missile jobs were performed and has heard a great deal about the conditions affecting others. Generally similar conditions seem to have prevailed in all of the missile work. Contracting being a somewhat hazardous business, occasional losses are likely to occur

but when all of the contractors experience a uniform bad experience on every missile job it would seem that the fault is not entirely that of the contractor. The entire program has been experimental in nature and a great many changes continue to be made in the work. At the same time the program is on a crash or emergency basis.

I think it has become obvious to everyone that a program of this kind cannot be handled through lump sum contracts. Moreover it is nearly impossible for any contractor to complete such a job and then to account in a formal sense for his claims. If the contractor holds up the work until he can get additional costs approved as the work goes along he will have no chance of meeting completion dates. Therefore, if the conditions we encountered are found to prevail generally the Government should convert these contracts into cost reimbursable contracts and to adopt a plan for future contracts which is better adapted to the circumstances surrounding the work.

Mr. SHEPPARD. Thank you very much.

The next witness will be Mr. Edgar F. Kaiser, president of the Kaiser Industries.

Mr. Kaiser, please.

STATEMENT OF EDGAR F. KAISER, PRESIDENT, HENRY J. KAISER

Co.

Mr. KAISER. Mr. Chairman, gentlemen of the committee, I believe copies of my statement are being passed around.

In addition to the written statement I would like to supplement it with some other remarks for the record.

Mr. SHEPPARD. Very well.

Mr. KAISER. I am Edgar F. Kaiser, president of Henry J. Kaiser Co., the sponsoring member of the joint venture consisting of Henry J. Kaiser Co., Raymond International, Inc., Macco Corp., and Puget Sound Bridge and Dry Dock Co.

This joint venture on February 8, 1960, was awarded, after competitive bidding, a fixed price contract in the amount of $28,899,000 for the construction of three TITAN missile base complexes at Mountain Home Air Force Base, Idaho.

The Henry J. Kaiser Co. is a member, but not the sponsor, of two other joint ventures which have fixed price contracts with the Government for ATLAS missile bases at Plattsburgh Air Force Base, NY., and Walker Air Force Base, NMex.

Since other members of the sponsoring groups are here I will confine my remarks to the job we are sponsoring at Mountain Home Air Force Base.

This contract was awarded to us almost exactly a year ago on the basis of our submission of the lowest fixed price lump sum bid. Six bids were received by the Government for this project, all from capable, experienced contractors. Our bid was 1.4 percent below the second bidder, and the total range between high and low bids was only 6.6 percent.

We prefer to do construction work on a fixed price basis when the plans and specifications and the type of work permit the preparation of an estimate of cost. Fixed price contracts permit a contractor to control his own operations and to function in a manner as to best accomplish the efficient completion of the work to be performed.

At the time that our contract was advertised for bid, our group, and I believe the bid results indicate the other bidders as well, felt that it was possible to prepare a reasonable estimate of cost based upon our evaluation of the plans and specifications and to submit a fixed price bid for the work.

This was nothing new to us. We have submitted similar bids many times, and have successfully performed fixed price contracts for many Government agencies and for private industry.

It is evident today that the contract upon which we bid did not properly portray the conditions under which missile bases would be constructed. Had we been aware, a year ago, of the problems we have since encountered, I am not at all certain that we would have been able to make a reasonable estimate of the added cost which should have been included in the bid price.

Our contract is approximately 50 percent complete and is ahead of the schedule approved by the contracting officer at the time the contract was entered into. This is without giving any consideration to extensions of time to which we are entitled under the terms of the contract.

Our contract, in common with practically all fixed-price contracts, sets forth the times within which the various items to be constructed will be completed. It also contains provisions which entitle us to extensions of such stipulated times if delays to the work result from causes beyond our control including, among others, those caused by changes in the work ordered by the Government.

We assumed, at the time we entered into the contract, that if we performed the work in such manner that it would be completed within the time provided, including extensions to which we would be entitled, that we would fully comply with the provisions requiring completion by certain dates, and this is what the contract provides. We also believed that this result would be accomplished by normal working procedures and that we would have control and management of the job. It is our responsibility to complete the work within the time specified, but we have the right to do this by regular procedures employed in construction work without employing measures such as extra shifts, overtime and additional equipment which will greatly increase our costs.

We were advised at the time we were awarded the contract that if changes occurred which justified time extensions and the Government determined because of the program's urgency to maintain originally scheduled completion dates, the additional cost for doing so would be promptly evaluated and an equitable price adjustment negotiated. Mr. SHEPPARD. By whom were you advised?

Mr. KAISER. We were advised by the contracting officer on February 9, which was the day following the award of the contract. I have a letter here on that. This was subsequently confirmed in the letter in which he set forth the fact that extensions of time usually authorized would not be granted, but that if we would submit claims on this they would promptly evaluate them.

Mr. SHEPPARD. Very well.

Mr. KAISER. We can understand in the interest of national defense the Government's desire to complete the work in the original contract time irrespective of any delays that may occur due to changes

in design, deliveries and materials, or any other causes beyond the contractor's control.

We do state, however, that our present contract does not obligate us to adopt procedures, at our cost, to overcome delays which result from changes ordered by the Government or from other causes beyond our control.

In view of the importance of completing the work within the times provided for in the contract, irrespective of delays for which we are entitled to extensions of time under our present contract, and in view of the fact that to accomplish such completion extraordinary measures involving large additional costs have been and will have to be incurred, it is our opinion that it would be in the interests of the Government and the contractors immediately to convert our present fixed price contract to a cost plus fixed fee type of contract, and to make such conversion retroactive to the date of the contract.

This would give the Government complete freedom of action to direct the contractor to employ any and all methods the Government believed advisable to expedite the remaining work to be done and would provide an equitable adjustment for the work done to date.

Time does not permit me to go into all of the detailed reasons as to why we recommend this course of action, but I think it might be helpful if I did touch upon some of the major points.

I think the principal factor is the urgency of getting the work completed irrespective of any delays, avoidable or unavoidable, which may occur and the need for speed in making the missile bases operational. This urgency has been impressed upon us from all sides. We understand the need for speed of construction; and, as was well demonstrated during times of national emergency in the past, contractors are able to build facilities in a hurry; but it is not reasonable to impose upon a contractor conditions different than those contemplated by the contract upon which he submits his bid. Completion of the original contract dates irrespective of changes in design and delays beyond the contractor's control increases the cost of performing the work.

Since the national urgency for this program requires earliest possible completion date, the added costs should rightfully be borne by the Government. Under the present contract it has been necessary for us to expend a great amount of valuable management and engineering time in writing mountains of letters and reports in an attempt to protect our contractual rights to recover added costs which we contend have been caused by Government action. This talent could make a far greater contribution toward the early completion of the missile base if it were relieved of this burden and could devote its entire attention to performing the work. The result, in the long run, would be that the total cost to the Government would be less. As I mentioned earlier, we are approximately 50 percent complete at Mountain Home. By far the largest share of the work done to date is the civil engineering work; excavation, concrete, and the like. To date, we have received 102 specific cases from the Government involving changes to the contract. In addition, we have identified 89 additional items which are the subject of claims. The remaining 50 percent of our contract involves primarily the specialty work being performed by our mechanical and electrical subcontractors. We understand that the number and magnitude of changes on this

portion of the work may be substantially greater than that in connection with the work just mentioned.

The simplest and most effective utilization of fixed-price contracting is that performed based upon complete detailed plans and specifications prepared at the time of bidding and with no changes as the work proceeds. This permits the contractor to completely analyze his job in the beginning, organize his manpower, materials and equipment, and schedule the work so that it can be performed in the most economical manner possible.

This is not the situation we are faced with on the missile base program. The bases are being constructed at the same time that the missiles are being developed, tested, and modified. It appears inevitable, therefore, that as more is learned in these areas, modifications in the existing plans and specifications will be required for the facilities being constructed. In view of the emergency, we understand the reason for carrying on the development program concurrently with construction of the missile bases. We do believe, however, that to be truly effective and to accomplish the earliest possible completion at the lowest cost to the Government, the missile bases should be constructed under a cost-plus-fixed-fee type contract in order to give the Government the flexibility it needs in performing a program of this character.

Under the best of circumstances, it takes time to negotiate the settlement of a change order involving time or money or both on a lump-sum contract. During the period of assembling the data for negotiation and the actual negotiation it is almost impossible to be sure that there is no sacrifice of valuable construction time since there is always uncertainty as to the final outcome of the negotiation. This can be extremely critical when it involves changes that must be immediately incorporated in the work underway. If the contract were on a cost-plus-fixed-fee basis, the contracting officer could take positive steps to have the change incorporated immediately, the contractor would know what he would be reimbursed for, and the efforts of all concerned would be then directed toward accomplishing the construction work rather than the paperwork.

A very serious problem, the full effect of which cannot be evaluated, is the provision for assignment to the construction contractor of the contracts entered into by the Government with suppliers for furnishing standardized equipment.

Prior to awarding the construction contract, the Government had entered into contracts with suppliers for manufacturing and furnishing certain equipment referred to as standardized equipment. This is equipment which is part of the propellant loading system and other critical parts of the work. This equipment is furnished to the construction contractor by assignment of those contracts. However, the contracts were not completely assigned. The Government reserved the right to inspect the equipment at the factory prior to shipment and thereafter. The construction contractor can make no changes in such contracts without express approval of the contracting officer. The guarantees of the suppliers under the supply contracts are to be reassigned to the Government after the work is completed. Claims of the suppliers for adjustment in the contract price are to be decided by the contracting officer.