Mr. HARDY. Lower?

Mr. SKEEN. Any lower echelons at all, in normal business.
Mr. HARDY. That may be.

Mr. SKEEN. Yes, sir.

Mr. HARDY. I just don't understand. And I think we ought to understand. Because in the original award you outlined a very elaborate procedure of determination at a pretty high level.

Mr. SKEEN. That was the Source Selection Board that made this decision, yes, sir.

Mr. HARDY. That is right. But the Source Selection Board is not continuing to pass on amendments which might have the effect of real wide variations of the original contract.

Mr. SKEEN. This is true.

Mr. HARDY. I think we ought to understand just what level of authority that is and the extent to which they are permitted to modify these contracts.

Mr. SKEEN. Well, I will be glad to prepare a statement and submit it to Mr. Courtney and incorporate the pertinent provisions of our contract to the extent they are unclassified, to clear this point up,

sir.

Mr. HARDY. I don't care if they are classified or not. I think we are going to need to know what they are in the committee.

Mr. SKEEN. Very good.

Mr. HARDY. I am not talking about for publication. But we are going to need to know. Thank you.

Now I wanted to discuss one other part of your presentation which had to do with certain alleged incentives for reduction in price and efficiency.

I don't want any of my comments or my questions to be construed as casting any aspersions on the Boeing Co. or on any of its officials. But I listened to your presentation on that and then I went back and read your statement over again. And the incentives which you have enumerated are not the type of incentives which the private enterprise system of ours has normally considered to be incentives to reduce prices and greater efficiency.

As a matter of fact, as I read your comments, the type of incentive which you have enumerated would be just as applicable in a socialistic system.

So I am having a little trouble understanding the basis on which you would construe these to serve the purpose of reducing prices or really promoting efficiency, because the element of dollar profit improvement is missing.

Now some of these are rather high sounding things that you have here.

Mr. GAVIN. What page is that, Mr. Hardy?

Mr. HARDY. On page 13.

You start with No. 1 and you talk about the personal desire on the part of a contractor's management to solve problems as quickly as possible.

Now we would have to assume that that would apply to any technical individual who naturally has a desire to progress as fast as he can. But certainly there is no profit motive in that.

Mr. SKEEN. May I say something, though, at this point?
Mr. HARDY. Yes. But let me just finish this one observation.

Mr. SKEEN. Surely.

Mr. HARDY. If that were a valid point, then there wouldn't have been any need for any special emphasis on this business after sputnik, because we would have had it before then if there had been this motivation and it was working.

Now if you have a comment on it, I would like to have it, because. frankly, I don't see the validity of it.

Mr. SKEEN. Well, let's start at the beginning, sir. I represented. in accord with the questionnaire received from Mr. Courtney here-I believe you wanted the types of contracts that we use. So we were pointing out here that in the research and development

Mr. HARDY. This has to do with the cost-plus-fixed-fee contract? Mr. SKEEN. That is right; but I was trying to lead up to the point that we use CPFF contracts for the research and development stages of a contract.

Mr. HARDY I understand; yes.

Mr. SKEEN. And I was pointing out that there were incentives for efficiency under CPFF contracts. That is the only point that I was making.

Mr. HARDY. I understand that. And that is one of the things that bothers me about this. Any validity to the argument that there are incentives in the cost-plus-fixed-fee contract, even on research and development, for reducing price and promoting efficiency.

I don't know how you would apply fixed-price contracts to this type of performance. But I have a hard time buying your argument that you have any incentive here to accomplish real efficiency and real price reductions.

Mr. SKEEN. Well, I think it is just about-at least in the Boeing Co., about as follows, Mr. Hardy.

Let's assume that we take on an R. & D. job for $1 million. $1 million is our estimated cost, and to that is added a fee.

Now the incentive is for us to do that job on time and for $1 million or less, because if it costs us $2 million we tie up our scarce scientific and technical people and high-priced research and development facilities for the basic fee. That is the incentive, sir.

Mr. HARDY. Well, of course, you talk about doing it on time.

Mr. SKEEN. Well, time is cost, sir.

Mr. HARDY. Yes; but you have set up the best estimated schedule you can arrive at.

Mr. SKEEN. Right.

Mr. HARDY. When you get into a research contract or a development contract, you don't have any very clear reason to suppose that you can actually make that schedule or that you might be able to reduce it or that you might have to exceed it.

Mr. SKEEN. But the one incentive is there to beat it, though, because you are going to get an answer that will lead to some production business, as I tried to point out, sir.

Mr. HARDY. But then if nobody else is performing a similar R. & D. contract and that is the kind of a situation that we are in now. If nobody is performing a similar R. & D. contract, you haven't a thing in the world to compare it with as to your performance.

Mr. SKEEN. Well, there is research and development being carried on all over this country and at all times people are trying to develop weapons that do a job.

We know there is competition. The Dyna Soar program has been mentioned wherein the Government has another contractor.

Mr. HARDY. I would have to take exception that there is any competition in this kind of a thing which would really promote profit incentive and reduce costs.

And as you go through your other points, they all fall down in my opinion on essentially the same basis. In your No. 2 you say.

The speed with which research and development in the initial production is accomplished is in itself a practical measure of efficiency.

Mr. SKEEN. Yes, sir.

Mr. HARDY. We presume you are going to make progress just as fast as you can.

Mr. SKEEN. Right.

Mr. HARDY. And just as fast as research and development make possible your moving to another stage.

Mr. SKEEN. You are making exactly the same argument here that I am, sir, and that is the point. They are often overlooked under a CPFF contract.

Mr. HARDY. You talk about getting through quickly so you can get into production. But even if that is so, your incentive toward accomplishment is less than it would be in usual private industry, for the reason that it isn't all your plant equipment that is sitting idle. The bulk of the plant that is sitting idle is owned by the taxpayers.

Mr. SKEEN. Well, it depends on what the word "bulk" means. would like to try just once more, sir, and then I will keep quiet.

I

In the case I mentioned here, of $1 million estimated cost with a fixed fee of 6 percent, or $60,000.

Now let's assume that it costs us $2 million; $2 million and we would still get the $60,000. That would be a 3-percent fee instead of a 6 percent, on the same business.

So I say the incentive is definitely there. While if we had finished it for $500,000

Mr. HARDY. But you don't have any penalty if you go over and it costs you $2 million. Somebody is going to have to put it back, unless it is clean out of all reason.

Mr. SKEEN. The penalty is, sir, we receive no profit on an additional 1 million dollars worth of work. That is the penalty. The fee then would become 3 percent on $2 million, because it is fixed; while if we do the job for $900,000 or even $500,000, the fee percentage wise goes up-$60,000 is 12 percent of $500,000.

I am pointing out that there is an incentive there.

Mr. HARDY. It is an incentive based on a percentage. It is not an incentive based on the dollars and cents you get back.

Mr. SKEEN. Well, it is based on effort, Mr. Hardy. It is the reward for effort.

Mr. HARDY. Well, then, in your next one, your No. 3, you have a similar sort of a situation.

You said:

This competition takes a different form from the marketplace struggle between automobiles, but its effect on overall price is as real.

I just can't understand how you arrive at that kind of a thing, because your competition in any other kind of a society would be just as great. Where your fee is fixed and you have no loss, and if you

exceed your price, all in the world you do is you reduce the percentage that you would make. You don't reduce the amount that you would take at all.

Mr. SKEEN. You run the risk of losing the business, Mr. Hardy.

Mr. HARDY. But you haven't anybody competing with you that can take it away from you, because they haven't had the experience in the development of this particular thing.

Mr. SKEEN. On the contrary, there is obviously competitive developments all over the country. We don't know when one of our principal competitors will solve the particular problem faster.

Mr. HARDY. You say "reputation for high costs is damaging to any contractor."

Mr. SKEEN. Yes, sir; we say that.

Mr. HARDY. Yes, sir, reputation for high costs, and if you ask me, everybody in this field has a reputation for high costs in our book.

Mr. SKEEN. Sir, we have to disagree with you, honestly disagree. But I would definitely take exception to that and so would the Boeing Co.

Mr. HARDY. You talk about the military services having an incentive to keep costs down because of appropriations. But you know and I know, that from the standpoint of keeping costs down, the military are the poorest, in the whole structure of our economy. Actually, their incentive is limited because war, itself, is wasteful, and we are preparing for something to be destroyed.

Mr. Chairman, I am sorry that I got into this, to this extent. But we are in a philosophical argument here now. Actually I think it is one of the weakest ones that industry could make. And they are advocating a program which would be completely destructive of our private enterprise system when you are advocating a cost-plus-fixed-fee

contract.

Mr. SKEEN. Mr. Hardy, we are not advocating a cost-plus-fixed-fee contract. We stated we prefer fixed price, and fixed-price-incentive types.

Mr. HARDY. I wish we didn't have to have cost-plus-fixed-fee.

Mr. SKEEN. OK. May I continue here just to get the record straight?

Mr. HARDY. Surely.

Mr. SKEEN. But we recognize, sir, that in the developmental stages of these complex programs, it is impossible to sit down and accurately estimate the costs. So we therefore say that the cost-plus-fixedfee type contract is used, and it is used for a good reason. And we were trying to show here, and we sincerely believe, that there is incentive to do a good job under a cost-plus-fixed-fee contract.

Mr. HARDY. Now go back to your incentive on this thing for just one second.

Mr. SKEEN. Yes.

Mr. HARDY. You spoke of the fact that, if you should try and reduce your costs, you would increase your profit.

Mr. SKEEN. That is right.

Mr. HARDY. Actually you don't have too much incentive on that, because if you do get a substantial increase in your profit on that score, why, you are liable to have it renegotiated out.

Mr. SKEEN. Well, I would like to speak to this one, too. You are quite right. You and I are in complete agreement on that, sir; complete agreement.

Mr. HARDY. I am glad we agreed on one thing.

Mr. HÉBERT. Mr. Courtney, do you have anything?

Mr. COURTNEY. I just want to ask you a few questions

Mr. GAVIN. Before we get off that score, may I ask a question? On this cost-plus-fixed-fee contract-you got the prime contract. You developed the weapon now. What is your technique now, as incentive? What kind of a plan do you have to offer for incentive? Mr. SKEEN. I take it your question, Mr. Gavin, is, How will we arrive at an incentive?

Mr. GAVIN. Yes.

Mr. SKEEN. Fine.

Mr. GAVIN. And the reason for the incentive. Because you are suggesting you should get a basic 6-percent profit anyway. I am just wondering what kind of a profit you expected to get?

Mr. SKEEN. Well, after we develop the system here and it has been described finitely to the point where the negotiators

Mr. GAVIN. And the weapon is ready to go into production.

Mr. SKEEN. Yes, sir. We obviously will develop some of these in the test area, so we will have something to base a solid platform for sitting down and negotiating a tight price. So on the basis of that, we will arrive at an incentive target. That is, this is our desire in the matter, to arrive at an incentive target price which gives us an opportunity to beat it and save the Government, say, 80 cents on the dollar.

Mr. GAVIN. Yes; but supposing you do arrive at a satisfactory price on the contract and you don't realize your ambitions and you don't make the profit you anticipate. What then?

Mr. SKEEN. Well, the Boeing Co. pays for our inability to do that through a reduced profit or no profit at all. But that is the American system.

Mr. GAVIN. You have never found such an incident, though, have

you?

Mr. SKEEN. Yes, sir.

Mr. GAVIN. Have you?

Mr. SKEEN. Yes, sir.

Mr. GAVIN. Well, that is rather unusual, I would say. I just wondered, in negotiating the price of a contract. I think you would be on the safe side after you got into production and you were turning out the weapons. I just wondered how far your profits are going to go. How much do you anticipate in an incentive program? What do you figure? Supposing you were developing an incentive program, for a weapon. And you are ready to go into production now. What do you call a satisfactory profit from an incentive standpoint? You might go into a contract and really make a real profit on that kind of a job, or you might lose, as I say. What would you say is satisfactory, 312 percent?

Mr. SKEEN. No.

Mr. GAVIN. Four percent?