Mr. HÉBERT. I recognize that.

Let me give you an example now. Let's be specific, and the only way we can understand these things are by specifics. This committee has been trying for years to get the Department of Defense to issue directives, or a directive, in connection with your allowances, as you all discussed just a few minutes ago.

We have tried, we have tried, we have tried. And again the myth of unification is exploded.

It shouldn't be very hard for the Defense Department to lay down a rule of thumb and say, "Now this shall be allowed and this shall not be allowed." And even you, yourself, a contractor, this morning admitted that you hadn't even seen the guidelines.

Mr. HÉBERT. What is the Defense Department doing about it, excepting talking? I don't know.

We have tried for years and years in this committee, particularly, to get the single catalog concept. We are making progress during recent years. But why is it so difficult? Business has the concept of the cataloging system. What makes it so difficult for Government to make up their own mind? If this Defense Department is to unify the services, why can't it issue a policy?

Now these are the questions that you don't have to answer, but these are the questions that the committee has got to ask.

Mr. GROSS. We just hope you will keep on trying, sir.

Mr. HÉBERT. This is a tough job up here, trying to keep up. As I have said many times, you can't try the patience of the military. They can just stay up there and wait until the complexion of the Congress changes or the committee membership changes. It is not a tasteful situation to be placed in, that we continually have to be the policeman on the beat.

Mr. Winstead?

Mr. WINSTEAD. No questions.

Mr. HÉBERT. Mr. Price?

Mr. PRICE. No questions.

Mr. FISHER. No.

Mr. HÉBERT. Mr. Norblad?

Mr. NORBLAD. No.

Mr. HÉBERT. Mr. Hardy?

Mr. HARDY. Thank you, Mr. Chairman.

Mr. Chairman, listening to this presentation-and I have been here through practically all of it, and not only with Lockheed but also with North American-I have been trying to look at this system in the abstract and see if I could understand why it seems we have a system which promotes continually rising prices and costs and the restraints on those rising prices seem to be lacking.

Now I just wonder, Mr. Gross, if actually the trouble isn't in the system itself, if there isn't an essential ingredient of our capitalistic system which is missing from this contracting approach.

I am thinking of the incentive which we normally look to in private enterprise to keep prices down. And in listening to your testimony I have not been able to detect the kind of incentive to keep prices down, which has seemed to be an essential ingredient in the capitalistic

system.

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Now I don't know what we do about it. That is the reason that I am trying to explore it a little bit here now.

You have spoken with respect to contractors, where I think you used the term-I think you said, "We run a real competition for subcontractors."

Mr. GROSS. Yes.

Mr. HARDY. Maybe you do; and I certainly am not going to undertake to argue that point.

But I would like to understand what your real incentives are under the capitalistic system to do that and what your real incentives are to get prices down. Actually, you don't gain anything profitwise by keeping the subcontractors' prices down. The truth of the matter is that you gain a little bit if his prices go up, because you have a 2-percent override. Now where do we correct for that situation? You have no incentive, no business-type incentive, to keep your prices down. I am not talking about you, I am talking about under the

system.

Now what do we do to compensate for that lack of the essential ingredient in private enterprise which is so important in my book? Mr. GROSS. I think my first response to part of your question"What incentive do we as a company have to keep prices down?" Mr. HARDY. Yes.

Mr. GROSS. I am going to let one of the other fellows talk about this as well. But, basically, if the Lockheed Co. does a bad managerial job and doesn't do its best to keep prices down, its own and its subs, we lose out in the long race. Now this is just inherent in any business, and it is just as inherent under this system as it is in any other.

Mr. HARDY. It is if you are competing against others who do, but if the others—if your competitors are engaged in the same type of activity, there isn't any restraint on any of you.

Mr. GROSS. Sir, I must submit to you that these systems are getting to be there seem to be fewer and fewer of them, and the competition for them is very, very severe and intense. If we miss one, we may have lost a major part of our industrial life. Consequently, this is something that I feel very strongly about. It is just there.

If you were in my position, walking the floor nights worrying about whether or not we are going to do a good job and whether if we don't, we will lose out, you would know how I feel.

Mr. HARDY. There isn't anyone who can tell whether you did a good job or not, is there?

Mr. GROSS. Yes, sir; there is.

Mr. HARDY. When you go to negotiating with a subcontractor, you negotiate his price. You used the term in discussion with Mr. Hébert a while ago that you must rely on your original evaluation. You make the best possible estimate you can and you use those as a basis for negotiating the price with the subcontractor; isn't that right? Mr. GROSS. Yes.

Mr. HARDY. And then you add to it a percentage or a fee of some description based on some yardsticks that you may develop. But if you had-if your profit-that is, if your return on your business was dependent upon your getting the best possible price out of this contract, you would have the type of incentive we have normally considered to be effective in the private enterprise system. But when

your profit is not affected by the price which you negotiate, no matter how sincere you are, isn't that incentive which has been the key ingredient in our system lacking?

Mr. GROSS. Well, in the very early stages, in the earliest, primary stages of this whole scene, when everything is research and development, I readily admit that it is difficult to negotiate what you would like to call a fixed price, a hard sell down to earth fixed price. Mr. HARDY. I recognize the difficulty.

Mr. GROSS. All right. Now what I say is that as the program goes down the road-any one of these specific programs, Polaris, or Minuteman, Bomarc or any of them-when they finally get to a certain point down the course their basic nature and character is going to be changed from research and development to production. Then you will have ground into it so many incentives to save money and so many controls that it will shake the place.

But I don't see how we can make any basic changes in this thing in the early stages and get the job off the ground and get going.

Mr. HARDY. That is the thing that really is worrisome. I don't know the answer to that, but I am concerned about these ever-increasing prices. And I haven't found any ingredient in this whole system yet which inherently could be expected to hold prices down. I haven't found the first one.

Mr. GROSS. Yes. But on the other hand, I submit, sir, with every force I have, that there is nothing basic and inherent in this system. itself that tries to encourage higher prices.

Mr. HARDY. Of course the only thing that you have would be relatively small, and that is the overriding percentage that we mentioned a while ago.

But there is another element in it that I think is pointed up in the observations you made awhile ago. As your research and development progresses and you get into production, then you do have incentives, you develop incentive type contracts. And your statement on page 5 of your statement, where you say:

By far the bulk, 90 percent, is under fixed price contract or those types containing an incentive clause that rewards efficient performance and penalizes us for inefficiency.

Mr. GROSS. Yes.

Mr. HARDY. I recognize that. But I also recognize, which I believe to be a fact, that the prices that are negotiated under your incentive type contract are based upon your experience in your research and development stage and in your initial production phase. So they are based upon estimates of what you could accomplish based on your own experience; if you don't live up to reasonable efficiency based on the price determined by your own experience, why it would seem to me we are in the wrong business.

Mr. GROSS. How would we do it otherwise?

Mr. HARDY. I am trying to find out how we can try to get in here. Mr. GROSS. Yes. You turn everything back to the Government, everything, and have

Mr. HARDY. I certainly would not suggest that.

Mr. GROSS. Yes.

Mr. HARDY. But I am trying to find how we can provide the normal incentives that the free-enterprise system contemplates. In my book they are completely missing from this system.

Mr. BROWNE. Mr. Hardy, if I may respond to that? I think you have one of the keys in the experience of our company. As you know, historically, over the period that we have been in business, we have done consistently between 20 and 30 percent of our volume of work in the commercial market, which is highly competitive.

As union contracts work out, as facilities work out, we have no opportunity to say these are commercial facilities and these are military facilities. All you get is an averaging of all of our costs across the board.

We have to be very concerned at all times with our overall cost performance, because we are selling at all times in a highly competitive commercial market.

Now against that background, the Lockheed Co. has within the last 3 years reduced its overhead structure in terms of manpower some 30 percent, to improve our competition, to improve our ability to deal in this highly competitive age. And this is spread all the way across the board to all of our subsidiaries, whether they are 100 percent defense or 70 percent commercial. We cannot split it between it.

And we have this continuing incentive and drive in our company to keep ourselves competitive in any market we seek.

Mr. HARDY. Well, now, where you have a combination of commercial business and Government business, where there are competitive profits, I think you would have some stabilizing influence in this general area. But I am not at all sure that performance--I am talking now about cost performance and efficiency performance, with respect to commercial aircraft or other products that are going on the commercial market from your plant-would have any influence whatever on efficiency or production in connection with the Polaris or any other missile activity which does not have commercial aspects.

Mr. BROWNE. It does, because we balance their efficiency against our other divisions.

Mr. HARDY. How can you even measure their efficiency when you are buying the bulk of your stuff from subcontractors on a negotiated price basis, where you didn't even have a reasonable competitive incentive to get that price down?

Mr. ROOT. Mr. Hardy, there are a couple of things that should be said in this vein. One of them is that we have two agencies for whom we work-special projects, Admiral Raborn, that I mentioned before, who has gathered a pretty competent team, and General Schriever, at BMD, who has gathered together an equally competent

team.

Now they have a mechanism by which they have a task force review committee to come and ask questions periodically. And you know this to be the case.

That is the No. 1 point I wanted to make.

No. 2 point is that the research and development work that we do, drawings that lead to a certain specific article, are the property of the Government, and therefore those drawings can be given to any other competitive source for production in quantity. And we know this.

Our subcontractors know it in all the tiers. So in any case, knowing that that threat exists, that you may not even be able to produce the thing that you have researched and developed, I do not know any other better incentive to keep costs down, because you know that when

it comes to the place where you are in volume production you may lose your shirt.

Mr. GROSS. May lose the business.
Mr. Root. It is the same thing.

Mr. HARDY. Of course one of the things that would help to avoid losing that kind of business is the fact that you are tooled up and geared to go ahead with it. That makes it extremely difficult, especially on a new item, for somebody else to get into a competitive position. Mr. GROSS. But you understand the Government has in the past allowed one organization to research it and then given the work to somebody else.

Mr. HARDY. I have seen that happen.

Mr. GROSS. Oh, yes.

Mr. HARDY. I am familiar with that.

I have seen that work both ways. I have seen situations where the competition was frozen out and I have seen situations where the research and developer lost out after he had developed the product.

We get into all kind of those things. But I am not sure that that is very effective in a new item; where you have research experience that certainly gives you an advantage and developmental experience gives you an advantage, and a certain amount of tooling that goes along with it, which would make it difficult for Uncle Sam to take that business completely away and let somebody else have it.

But the other aspect you brought up is a fundamental one, I think, and that is the extent to which Admiral Raborn and General Schriever can fill this gap with respect to incentives to hold prices down.

You and I both know that there never has been inherent in Government procurement the kind of incentive that we have looked for in private industry to accomplish reduction in prices through competition. That is one of the fallacies of governmental operation. So long as appropriations are made, the governmental personnel does not itself profit anything by achieving a better contract for Uncle Sam.

It is in the system. I am just pointing out some of the things that I would hope that we might be able to find an answer to in the course of these hearings.

Thank you, Mr. Chairman.

Mr. HEBERT. Mr. Gross, do you not think that if you have the responsibility of administering the contract that you should have the full authority to know everything that enters into that contract?

Mr. GROSS. Well, I must admit that we could do a better job, a more thorough job, if we had it.

But I have to add, sir, that if we did have it, to some degree we would be, I think, trespassing on and destroying some of the fundamental concepts on which American business is built.

In other words, if we as the Lockheed Co. were fully empowered to go into the Boeing Co. or the Douglas Co. and say, "We are not satisfied with your performance on a subcontract and we must see all of your books and records," I think that there would be here, human nature being what it is, a very difficult situation to work out. Mr. HÉBERT. I am not addressing to that so broadly.

Mr. GROSS. I think this would be a result of it where in those possibly rare instances-it would be where the manager of the system