required plans, and 461 of the required 667 plans had been approved by December 1972. special test equipment, by an evaluation of residual value. Theoretically, an offeror without Government-furnished property can bid on a par with one who possesses such property.48 Uniformity in Regulations The bulk of Government property located with contractors is under the control of DOD, NASA, and AEC. As a result, their management in this field is far better developed, and their regulations are much more explicit and detailed, than those of agencies that have a relatively insignificant amount of Government property in the hands of contractors.45 The ASPR has an entire section (part XIII) devoted to Government property, but the FPR has no similar part. However, the importance of Government property in emerging programs of other agencies is being recognized, and we understand that Government property coverage in FPR is being developed by GSA. In this connection, we refer to our recommendation in Chapter 4, for establishment of a single system of Government-wide coordinated procurement regulations which could include the requirement for uniform regulations on Government property. Government property is a significant element of a contract and its cost. Accordingly, under the strict requirements of competitive bidding, the invitation for bid (IFB) must include all significant information concerning property to be furnished by the Government." A bid is nonresponsive if it fails to comply with IFB instructions concerning Government property, or if it is conditioned on an authorization to use Government property."7 Possessing Government-furnished property is deemed to give an offeror competitive advantage over one who does not possess Government-furnished property. To mitigate any competitive advantage that might arise from the use of Government-furnished property, DOD and NASA policy is to charge rent, or rent equivalents, in evaluating bids and proposals; and, in the case of special tooling and 45 William G. Roy, Government-Furnished Property, 1972, p. 1. 48 See ASPR 13-202; 13-305.2 (d) (2); 2-201 (a) (13)-(14); and 3-501 (b) (11)–(12). 47 40 Comp. Gen. 701 (1971); 38 Comp. Gen. 508 (1959); Comp. Gen. Dec. B-149486, Sept. 5, 1962. See also Goodwin, GovernmentOwned Property, Government Contracts Monograph No. 6, George Washington University, 1963, p. 5. Motivating Contractor Investment in Facilities Recommendation 35. Provide new incentives to stimulate contractor acquisition and ownership of production facilities, such as giving contractors additional profit in consideration of contractor-owned facilities and, in special cases, by guaranteeing contractors full or substantial amortization of their investment in facilities specially acquired for Government production programs. Every reasonable effort should be made to minimize Government provision of new production facilities for the performance of Government contracts. To the extent possible, contractors should provide such facilities at their own expense. We recognize that it is unlikely that contractors will always be willing and able to do so. In some cases, the Government will, in its own interest, have to provide facilities because of special mobilization requirements or because of the uncertainty that Government business will continue long enough for the contractor to amortize his investment in full. 49 Provision of facilities by the Government can and should be minimized by motivating contractors to provide their own facilities. For example, in recognition of the added investment and risk involved in the ownership of facilities, contractors who provide special facilities at their own expense should be permitted to earn a higher profit than is allowed to contractors that use Government facilities. Also, if there is doubt in special cases as to the duration and extent of a Government procurement program that requires new production facilities, consideration could be given to a special cancellation charge, or similar arrangements to reimburse the contractor for any losses in 48 ASPR, sec. XIII, part 5; NASA PR, part 13, subpart 5. 49 DOD allows this recognition under its Weighted Guidelines for Profit, ASPR 3–808.5(e) (1). curred in disposal as compared to the nonamortized portion of his investment.50 Negotiated Sale of Government Equipment Recommendation 36. Enact legislation to authorize negotiated sale of surplus elephantine tools (such as heavy machine tools) and of equipment which is "excess to Government ownership but not to Government requirements," with adequate protection to the Government for its future needs when competition is not feasible. While the lack of such authority now appears to be a problem only for the Department of Defense, to provide for future contingencies the legislation should cover all agencies. Although the current DOD policy is to get out of the facilities business, its efforts to do so have been hampered by lack of authority to negotiate sales to the contractor in possession of elephantine tools and equipment that are excess to Government ownership but are still needed on a part-time basis to fulfill Government needs. If a contractor owned the equipment and therefore could use it for nonGovernment work, the cost to the Government could be materially reduced. Legislation to authorize negotiated sales in such cases has been before Congress for several years. Recently the House passed a bill 51 to provide for the disposal of Government-owned equipment by negotiated sales.52 The bill: • Restricts the procurement of production equipment for the purpose of furnishing it to contractors, unless it is necessary for mobilization requirements, it is determined by the Small Business Administration to be necessary to assist small businesses, or it is needed to meet essential needs for supplies or services that cannot be met by any other practical means. • Authorizes the negotiated sale of certain production equipment to using contractors To a limited extent such arrangements are embraced in the present ASPR provisions for multi-year contracting, under which a cancellation charge is paid the contractor in the event the full multi-year program is not completed. ASPR 1-322.1(a). #H.R. 13792, 92d Cong., 2d sess., 1972. Reported in Government Contracts Surveyed, Sept. 1, 1972, p. 16. under terms which require the purchaser to maintain the equipment in good working order and available for use on Government contracts on a priority basis. (It is this second factor which DOD considers most important.) Comprehensive studies have shown that in many instances Government-owned equipment is needed in its present location to meet current and projected military requirements, but that Government ownership would not be necessary if the equipment could be sold in a way which would insure its availability on a priority basis for use on Government contracts. H.R. 13792 would permit such sales. The bill stipulates that a fair market value shall be established by experienced GSA appraisers and that a sale shall not be made at less than fair market value. To facilitate surveillance of the program, the bill provides that the details and circumstances of the negotiated sales shall be reported promptly to Congress. Contracts for such sales would require that, for a period agreed upon, the property or its replacement will be available for defense needs on a priority basis. Equipment now eligible for sale cost about $450 million and has a current market value of from $150 to $200 million. It is held by about 485 contractors, approximately 35 percent of whom are small businesses.53 Transfer of title without change of possession will: • Relieve the Government of administrative burdens and costs for management, control, maintenance, and protection • Add property to State and local tax rolls in jurisdictions which now tax personal property • Give the contractor greater flexibility in managing and using the property • Give the contractor an incentive to modernize and improve the property to meet all production needs with benefits to the Government in the form of better contract performance and lower contract costs. In the case of elephantine tools, even though 53 Based on Department of Defense survey. See testimony of Barry J. Shillito, Assistant Secretary of Defense (I&L), before House Armed Services Investigating Subcommittee, H.A.S.C. No. 92-60, 92d Cong., 1st sess., Oct. 7, 1971, pp. 14793-14795. the equipment is truly surplus and is not needed by the Government, the alternative of a negotiated sale is necessary to provide greater assurance that the Government receives a fair price for the equipment. In an advertised sale, any bidder other than the contractor in possession would have to incur the costs of dismantling, shipping, and reassembling the tools elsewhere. This gives the contractor in possession an overwhelming competitive advantage and relieves him of the normal market pressures to bid the full in-place value of the equipment. In such cases, authority to negotiate would allow the Government disposal officer to use competitive negotiations, formal advertising, or both, to produce the highest return for the Government. SUBCONTRACTING Subcontractors are an integral part of the Government procurement process and are essential to its effective operation. They perform many of the services and furnish much of the material required to perform prime contracts (direct Government contracts) either under contract to prime contractors or to higher-tier subcontractors. In 1970, an estimated 50 cents out of every DOD prime contract dollar went to subcontractors. An earlier DOD review showed that the top 10 prime contractors subcontracted an average of 54 percent of their contract dollars."4 In many procurements, no single prime contractor has the ability or capacity to perform all the technical operations or to produce all the materials required for the end product. The organization needed to develop and produce a major system, for example, requires capabilities in many technical fields, as well as large and diverse physical facilities, which seldom exist within any single organization. The Apollo program provides an example of the degree to which subcontractors are involved in Government procurement activities. Of the more than 20,000 companies included in the program, only a handful were prime contrac 54 U.S. Comptroller General Report B-169434, Need to Improve Effectiveness of Contractor Procurement System Reviews, Aug. 18, 1970, p. 4. Reliable data on the amount of subcontracting by prime contractors with civilian agencies are not available. tors; the remainder were subcontractors. In construction, the prime contractor rarely has the manpower skills and equipment needed to perform all of the contract work.55 Although the statutes and regulations give little attention to subcontracts, many agency requirements and practices have significant impact on subcontractors. For example, defective specifications, contract changes, and terminations can have very serious implications for subcontractors. Because there is a lack of privity of contract,56 subcontractors usually cannot seek redress directly from the Government contracting agency. Thus, there is some truth to the observation that the subcontractor is "the forgotten man in Government procurements." 99 57 Many subcontract problems result from problems that affect the procurement process as a whole, such as unnecessary statutory restrictions, complex procurement regulations, variation in agency requirements, social and economic program requirements, and profit and risk policies. Subcontractors often are small businesses that have the usual problems of a small business. Since our recommendations address the basic issues in Government procurement, they generally cover subcontractor problems. However, having a dynamic, healthy family of subcontractors is so essential to the Nation's industrial base that it is important to highlight some of their concerns. Flowdown of Contract Requirements While subcontractors usually are subject to the same contractual obligations as prime contractors, they often do not receive the same benefits. Many prime contracts provide for advance and progress payments, but subcontracts seldom do. In addition, subcontractors sometimes are required to indemnify a prime contractor in areas where the prime contractor has no similar obligation to the Government. Although many flowdown problems (prob 5 See Part E for a more detailed discussion. 56 Privity of contract is the legal connection or relationship which exists between two or more contracting parties. 57 U.S. Congress, House, Committee on Government Operations, Government Procurement and Contracting, part 7, hearings on H.R. 474, May 1969, p. 1832 (statement of Prof. Harold C. Petrowitz). lems arising from the flow of requirements down through the tiers of subcontracts) result from actions of the prime contractor, others are the direct result of Government requirements. There are numerous contract clauses specified by Government procurement regulations that prime contractors must include in subcontracts, often without any change in wording; for example, the Notice and Assistance Regarding Patent and Copyright Infringement Clause,5% and Contract Work Hours Standards Act Overtime Compensation Clause. Some other standard prime contract clauses require that clauses "substantially conforming thereto" be incorporated into subcontracts; for example, those concerning military security requirements,6° and safety precautions for ammunition and explosives.61 Other clauses are silent as to their applicability to subcontracts but are applicable by operation of statute or regulation; for example, the Walsh-Healey Public Contracts Act 62 and Priorities Allocations and Allotment Clause.63 Some clauses make no reference to their applicability to subcontracts but impose obligations on prime contractors which cannot be fulfilled unless similar provisions are incorporated into subcontracts; for example, those regarding changes and United States products (Military Assistance Program).65 Some standard clauses are written solely for use in subcontracts; for example, the Subcontract Termination Clause 66 and the Subcontract Termination Clause-Cost Reimbursement Type.67 The Government should clarify the extent to which prime contract clauses apply to subcontractors and the manner in which they are to be applied and interpreted. Our recommendation to establish a coordinated Governmentwide system of procurement regulations would provide a mechanism for accomplishing this. Further, we believe it desirable to establish criteria for the guidance of prime contractors with respect to terms and conditions ASPR 7-103.23. ASPR 7-103.16. ASPR 7-104.12. ASPR 7-104.79. ASPR 7-103.17. "ASPR 7-104.18. "ASPR 7-103.2. "ASPR 7-104.43. ASPR 8-706. ASPR 8-708. appropriate for particular subcontract situations. The development of a set of standard subcontract terms and conditions which prime contractors could use, as appropriate, would help avoid overimplementation of prime contract requirements. Low Thresholds on Social and Economic Programs The social and economic programs implemented through the procurement procurement process create subcontract as well as prime contract problems. These problems are discussed in detail in Chapter 11 and in Parts D and E. Of particular concern are the low dollar thresholds at which these programs come into operation. At the time such social and economic program requirements were enacted, many subcontracts were exempt, but inflation and other factors have all but dissipated those exemptions. As noted in Chapter 11, we believe consideration should be given to raising the dollar thresholds for application of the social and economic programs implemented through the procurement process. Inconsistency in Subcontract Later in this chapter we point out that there is no uniform subcontract approval policy applicable to all agencies. This causes duplication of Government review efforts, unnecessary contractor processing costs, and unnecessary Government administrative costs. The different subcontract approval policies also have an impact on subcontractors by creating delays in their work and by subjecting them to variations in agency requirements, particularly where their work pertains to programs of several agencies. Our recommendation to establish a Government-wide policy for the review and approval of contractor purchasing systems and transactions, together with repeal of the statutory subcontract advance notification requirements, would mitigate subcontractor problems in this area. Truth in Negotiations Act The Truth in Negotiations Act 68 (Public Law 87-653) requires the submission of cost and pricing data by subcontractors under negotiated defense contracts if the price of their subcontracts or any changes or modifications thereto are expected to exceed $100,000. It also requires certification that all such data are accurate, complete, and current. Similar requirements are imposed by FPR on subcontractors performing under civilian agency prime contracts. Subcontractors are concerned with the implementation of these requirements, and particularly that both contracting agencies and prime contractors often require essentially complete cost and pricing data for subcontracts of less than $10,000. Allegations exist that many prime contractors go beyond the requirements of the act and require subcontractors to indemnify them against loss of profit resulting from defective subcontractor data. In Part J we recommend the extension of the Truth in Negotiations Act to contracts of all Government agencies and the development of consistent implementation policies. The statute serves a useful purpose, although there are difficulties in the language of the act which cause problems. Overimplementation of reports and certifications under the act are not good substitutes for adequate analysis and negotiation at either the prime contract or subcontract level. These matters should be considered carefully in developing Government-wide policies concerning this statute. Patents and Technical Data The problems of subcontractors with respect to patents and technical data are, in general, quite similar to the problems of prime contractors. Our recommendations in these areas are contained in Part I. Our studies identified some special problems for subcontractors. Some prime contractors apparently require subcontractors to indemnify the Government against infringement. Most agencies permit prime contractors to publish 68 10 U.S.C. 2306f (1970). data generated under their contracts, but this right is not always passed on to subcontractors. Although prime contractors may not be specifically required to obtain background patent and data rights from their subcontractors, some do so anyway. Technical data of subcontractors is not always given the same protection accorded technical data of prime contractors and subcontractors complained that some prime contractors refuse to accept technical data with any restrictive legend, even when ASPR would permit use of the "limited rights" legend. These situations are inequitable and contracting agencies should try, where possible, to avoid ambiguity in subcontract requirements. However, we do not believe it is desirable or feasible to establish across-the-board mandatory requirements regarding prime contractor/ subcontractor relationships in patent and data areas. The acceptance of our recommendations for the uniform implementation of the Presidential Statement of Government Patent Policy and for uniform policies and clauses concerning rights in technical data and treatment of data submitted with proposals, publications, and copyrights in data would benefit subcontractors as well as prime contractors. Quality Assurance Government requirements for quality assurance create additional problems for subcontractors because agencies impose different quality assurance specifications upon prime contractors. The requirements of these specifications then flow down through the prime contractor-subcontractor chain, often with differences in interpretation at every level. In addition, contractors and subcontractors usually have their own requirements (imposed by company policies) for quality determinations, quality system requirements, and quality rating systems. The result can be the imposition of quality assurance requirements on subcontractors which are greater than those required by Federal specification and a wide diversity of quality assurance programs within a single plant, possibly for similar or identical products. Companies with subcontracts from several |