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capital and the only concept of reasonableness of profit is related to the net worth.
So if we were to follow that side entirely, we would never resort to debt capital.
Mr. Gross. Furthermore, the interest that we have to pay is not allowed.
Mr. COURTNEY. My basic question had to do with whether or not you in your thinking with reference to the profits of a company emphasize the importance and the consideration that should be given to private invested capital and the net worth of the company?
Mr. Gross. That is right.
Mr. COURTNEY. Mr. Chairman, I think those are the questions I had.
Mr. HÉBERT. I just want to clear up one question and pursue what I asked yesterday of Mr. Gross. That is, in connection with the control of the examination of the accounts or the cost of the product.
Mr. Gross. Of the subs?
In other words, you very ably stated yesterday your constant vigilance. It reflects, of course, in your company's success, in following through on these matters.
But the problem that confronts the committee is the possibility of what could happen, whether it has happened or not. I indicated in one case, which was before this committee and in which you were not involved—there was an overcharge on the General Motors case. Only yesterday the General Accounting Office released a report involving the same type of negotiation, whereby the Westinghouse Co. went to the table with estimated costs higher than actual pricing. This cost the Government hundreds of thousands of dollars.
Now those are two outstanding companies, I think, and I would say reputable companies. Certainly the practice of two of them has come to light-General Motors and Westinghouse, in this area, where the Government did not ascertain the accurate figure. Would you say under the weapons concept system and with your diligence and vigilance, that you could obtain these accurate figures without the assistance of the Government, where you had no authority to look at them?
Mr. Gross. As we told you yesterday, we do not have the power to go in there.
And we must rely on our original evaluation, our experience with the subcontractor, and the periodic monitoring that we give the subcontract during its performance. We do our level best to prophesy or foresee overruns. If we see an overrun, we do our best to consult with the subcontractor and try to get the situation corrected, and we have done so. But we do not have the right.
Mr. HÉBERT. You do not have the right. Therefore, it would be logical to come to the conclusion that if this practice has been brought to light that it is perfectly possible a lot of it still is existing and has not been brought to light. And if you are compelled to depend upon the Government, whose performance has not been one of great effectiveness as far as this committee is concerned, then you are leaning on a short crutch to get the facts, aren't you?
Mr. Gross. Well, I say this in reply to that, sir: I think the weapons systems concept is a relatively new thing. For the last few years it has been somewhat experimental. As we go down the road with it we are learning things that probably can be improved. Maybe this is an area.
But we feel that it is generally doing a good job and that we need two times of surveillance of these big programs. We need Government surveillance, but we also need industrial surveillance. Consequently, I think one of the things we must work out is how industry and Government together can best perform the overall weapons systems concept management. I think it can be done. But we must admit exactly what you yourself very ably stated—that while we try to exercise our best efforts, we do not have the right. I think a test of our weapons systems ability and our competence is to be able to persuade and consult with our subcontractors and get a cooperative team effort. This is one of the hearts of the whole thing. If a weapons system manager is a good weapons systems manager, he will develop a closeness, an intimacy of working with his subs, which will result in a good, cooperative climate in which to work.
Now, the essence of one of the things that you have said, sir, and one of the things that makes these elements of cost so very difficult in this kind of a program is the fact that we are not talking about a finite article, a developed article. We are buying invention, and we are buying techniques that do not exist in themselves and have to be developed.
There is no rule book that we can look to find out the exact price of what one of these systems ought to cost. We have to rely on estimates.
Mr. HÉBERT. Yes; you have to rely on estimates. But when the day comes to pay the bill, you have to rely on actual costs, and not an estimate, because the bill is hard money.
Mr. Gross. That is right.
Mr. HÉBERT. Now, if you are not able to find out whether that hard money has been expended as represented, then you are not able to produce at a minimum cost to the Government. If you can't get the figures you can't come to a conclusion, an accurate conclusion.
Now I admit everything you say. I am persuaded more and more as I hear this program revealed, the weapons concept system is in reality nothing new.
Mr. Gross, That is right.
Mr. HÉBERT. It is a job that the Government should have been doing in the past and was allegedly doing. Now we find out that it was not doing the job. They have shifted the burden to private industry to do the job, and yet retain the same amount of people or the same organization to do what it had not done in the past. That is what it amounts to. We are merely shifting. The weapons concept system is a name now. But as a matter of fact and a matter of operation, the Government should have been doing this same job and pretended to be doing this job efficiently in the past.
But now it comes to light that the burden of managing has shifted, from the Government, to industry. The thing that disturbs me personally more than anything else is that this is not a substitute. This is only another icing on the cake.
Mr. Gross. I don't wish to belabor the point because I understand exactly the position, sir, that you are taking and how you come to that conclusion.
I would like to point out, however, that with respect to our appearance before you, we have used the Polaris development concept as an example. We think it is a shining example. In this particular case, the special projects office of the Navy is the overall weapons systems manager. But the job is so big that while retaining the final and the total coordinating power to pull the whole thing together, they have asked industry to pick up parts of it and help them with managerial supervision.
Mr. HÉBERT. They have asked industry to pick it all up, except for the power of veto suggested by Mr. Courtney. In that connection, may I ask has the Government ever vetoed one of your subs? Mr. Gross. I don't know. I am not sure. We can find that out.
. I just don't know.
Mr. HÉBERT. Well, it would stick out in your mind if they had vetoed one. As a matter of fact, these so-called reviews are merely initialing papers as far as I am concerned on the part of Government officers. Unless you can show where the Government has from time to time or in any one instance vetoed a subcontract for a reason, then the proposition does not stand.
Mr. GROSS. I understand, sir.
Mr. HÉBERT. I would like to know if they have ever vetoed a subcontract?
Mr. Gross. We will find that out, but I am ashamed to say I don't know this morning. But it is an easy thing for us to find out and I think we can.
Mr. HÉBERT. Now in connection with General Electric, for instance, they are a first tier sub to you in this particular area!
Mr. Gross. Yes, sir.
Mr. HÉBERT. And yet almost 90 percent of their sub, as I understood the testimony, is sublet by General Electric to other firms!
Mr. Gross. Well, this was in a phase of it, during a certain calendar phase. Now, we can find out.
find out. But I do not personally this minute know the extent to which the General Electric Co. has subbed their whole program. The whole program is a big program. Mr. HÉBERT.
I think some figures were given about it. Mr. Gross. That is right, 9, 10, or 11 million. This was just for a relatively small period.
Mr. BROWNE. 6 months' period.
Mr. Gross. If you look at the thing in total, I suspect their subcontract will run to $50 to $75 million and I would suspect a very big portion of that would be subcontracted, but I don't know how much.
Mr. HÉBERT. What check do you have on the subs of General Electric, or do you take the General Electric figures when they come to you?
Mr. GROSS. We do not check the sub-subs.
Mr. HÉBERT. There is where I want to show you the danger. In the General Motors case, to which I continually refer because it is a classic case, the overcharge came from another division of the contractor, General Motors.
Mr. Gross. Well, I must not talk about the General Motors because I don't know.
Mr. HÉBERT. I don't want you to talk about it, Mr. Gross. I am merely using these things as specific and definite cases. That is what I am trying to do. I am vying the pattern or the system. I am vying that. The same as I vie the Ten Commandments. But I want to show you how the Ten Commandments can be violated. They are being violated every day. I want to show you the possibilities of it. So in this system we are trying to find out the areas of possibility, where the abuses can come in to the detriment of the Government, whereby the taxpayer eventually picks up a bill that he should not be compelled to pick up.
Mr. Gross. I think it is a fine thing for us to jointly examine this whole thing. I am very glad we are.
I only want to make one overall point, Mr. Hébert, and that is I think the general approach is right.
Mr. HÉBERT. We admit that.
Mr. Gross. I think it is the only thing we can do, but I urge you gentlemen to seriously realize what we fellows believe in, and that is there has to be industrial coordination as well as Government.
I don't think you can put it all in our hands or all in the Government hands. It is too big.
Mr. HÉBERT. But it is being put all in your hands.
In the case of the Polaris, the Navy still is the final coordinator and makes the master plan. They really do, sir. It is a fact. But I think this is good. "I think the whole spectrum has gotten so big that we need industrial as well as Government.
Mr. HÉBERT. That is not the intent of the system. The intent of the system is to give it all to industry, to give them in effect a blank check. You are managing this system; you come up with the product, and you hand the bill to the Government. That is the intent of the system.
Mr. Gross. The Polaris is a sort of a hybrid to other contracts which have developed since the Polaris. And the future contracts will not be as hybrid
as this particular one is. Mr. HÉBERT. The point I am stressing, and hope not to belabor, with human nature being what it is, is the possibility of padded accounts in the language that I can best use and perhaps can best understand. We have had evidence of these so-called padded accounts. And now in such a massive, complicated and complex system, for procurement such as this, and particularly in R. & D. contracts where you don't have the final product until you accomplish the research, the chances are so great that I think the vigilance and diligence of the Government should become keener. It certainly hasn't been too keen in the past. That is what I am trying to find out. We are not arguing the point or quarreling about the system. It is almost—why, it is almost childish in its fundamentals. It is a logical thing to do. We admit all of that. But the blueprints don't always show what is in the house. That is the thing that we are concerned about.
Now you admit there are such possibilities in the system?
Mr. HÉBERT. You would have to admit them because the evidence of the past is there.
Mr. Gross. Yes, in anything as big as this, we try our best.
Mr. HÉBERT. We know that.
I simply say that as we go down the road here, we can learn some things. I think it is good
Mr. HÉBERT. You keep referring to the contracting officers. As far as I am concerned, I have not been too impressed with contracting officers as they have appeared before this committee. Nor am I too impressed with this review system, which merely amounts as I say, to initialing papers. It is a terrifically big job. I know it. We tangled here this
morning with it. We are trying to find out some way to plug these loopholes or to minimize it.
Mr. Hess. I have no questions. I think Mr. Root wanted to say something.
Mr. HÉBERT. Did you want to say something?
Mr. Root. Mr. Hébert, from actual experience, I have not had it brought home to me that Admiral Raborn on the one hand and General Schriever on the other, are letting me get away with anything particularly. They are really monitoring me pretty closely.
Mr. HÉBERT. Let me say this: General Schriever and Admiral Raborn have my greatest confidence and they are not trying to let anybody get away. But I will bring it down to a personal minimum. Do you think I know everything that goes on in my office? Of course I don't.
I have to rely on people in whom I have confidence. That is the same thing. We are trying to plug up those loopholes.
Mr. Root. Yes, sir; I understand.
Mr. HÉBERT. If I find a weakness in my office staff, then, of course, I am going to try to correct that weakness. But I recognize the weaknesses. I sign letters every day, and so do you. Mr. Gross doesn't know everything going on in Lockheed.
Mr. GROSS. That is correct.
Mr. HÉBERT. But he has to depend on people in whom he has confidence.
Now our experience has been that the people in whom the confidence should have been placed have not lived up to that confidence. That is what is disturbing me.
Mr. BROWNE. Mr. Hébert.
Mr. BROWNE. If I may make one additive statement here, it is our concept at Lockheed that if we do a good job, a reasonable job, or even a meritorious job, in our reviewing and selection and policing of subcontractors, we should not have any vetoes on our selection.
The question of a veto relates to two things.
One: Either the absence of Government surveillance, or possibly good action on the part of the contractor.
We don't take lightly when we get into the position, as I assume we must once in a while, of having the Government say, "You have not in effect done a good job. You should have placed it with somebody else.” That is the thing we are trying to avoid.