cognizant contracting officer. Under this reporting procedure subcontracting results are furnished on a total Defense basis without reference to agency assignment or singling out performance on a company-by-company basis. The Defense Department has recently released information to the effect that for fiscal year 1963, small business concerns received subcontracts totaling $4.34 billion, a new alltime high. We are all hopeful that there will be continued improvement in subcontract opportunities for small business concerns incident to the conduct of Defense procurement programs. Within the subcontracting area, make-or-buy decisions made by contracting officers during final negotiations with prospective contractors have a very definite impact on small business. The Armed Services Procurement Regulation, under which the Army implements internal policy and procedures pertaining to make or-buy, recognizes this fact. One of the elements of consideration in all makeor-buy decisions is whether small business concerns will be given an equitable opportunity to compete for subcontracts. In addition, the regulation is very specific in that a Small Business Administration representative will be included in such decisions to the maximum extent possible. Another area that should be touched upon, since it has been mentioned in connection with our subcontracting program, is the weighted guidelines method for negotiating profits under contracts where price is established on the basis of a cost analysis. Our experience in the application of this method of negotiating profits is limited since mandatory use is not required until January 1964. However, we feel that this method will not have any adverse effect on potential subcontracting with small business concerns. In fact, one of the profit factors gives consideration to the managerial and technical efforts necessary to administer subcontracts including participation in the small business and labor surplus area programs. The contractor's policies and procedures which energetically support the Defense small business program are given favorable consideration in these negotiations. Any unusual efforts which the contractor displays in subcontracting with a small business firm, particularly for development type work likely to result in later production opportunities, and the overall effectiveness of the contractor in subcontracting with, and furnishing assistance to, such concerns becomes a matter for consideration during these negotiations. Small business participation in research and development (experimental, developmental, test, and research activities) continues to receive special emphasis by the Army. We are currently in the process of visiting every major commodity command and Army contract administration office to review its small business program, including onsite inspection of its internal R. & D. small business procedures. In addition, reviews are being made of the qualifications of the Army small business adviser representing the R. & D. command. This continued effort in the R. & D. small business area is showing good results. Further improvement is possible. Our progress is shown below: [Dollars in thousands] There has been some concern expressed as to the impact on small business awards as a result of multiyear procurements. We believe that multiyear procurements will not have any adverse effect on small business participation or awards. This technique, which provides the maximum incentive for competition and assures continuity of effort, should give small business some assistance. We feel that small business firms will now have more reasons to compete for those military items which require a sizable investment in tooling, facilities, and equipment. Many small firms have previously considered the risk of such an investment too great for a 1-year production contract. As a consequence they declined to participate. Under multiyear buys, writeoffs for tooling, etc., are possible over several years, thereby making it possible for small business to want to risk greater investment. This type of procurement also may be suitable for total small business set-asides. Therefore, in any procurements where both the total set-aside procedure and multiyear procedure are appropriate, both are authorized. During fiscal year 1963 the Army placed three multiyear contracts on a test basis totaling approximately $55 million for trucks, truck engines, and military standard small horsepower engines (12 to 6 horsepower). All three awards were on the basis of two-step formal advertising and small business was not excluded from competition. However, no bids were received from small business. As I have previously mentioned, a significant reason for the overall percentage ratio reduction between fiscal years 1962 and 1963 was a revision to the method of reporting procurement statistics. A tabulation has been provided, exhibit Fattached, to depict the results brought about due to the change in DOD reporting procedures in fiscal year 1963. Not only does this change in reporting have a direct downward effect on the percentage ratio of small business awards in several Army programs, it causes a reduction in the overall Army percentage of awards to small business. Prior to fiscal year 1963, orders placed by one DOD activity against contracts awarded by another DOD activity (or Federal agency) were classified "intragovernmental" and were not included in the breakdown of small business statistics. Under fiscal year 1963 reporting procedures, all such awards are included in the "All business awards" total and identified as large or small business. Since such contracts are predominantly with other than small business, the change causes an increase in total dollars without a corresponding increase in small business dollars. Specific instances of this impact will be further discussed by individual DOD procurement claimant program. Any discussion of the many beneficial policies, procedures, and internal safeguards, geared to the maintenance of a sound and prosperous small business community and found at all levels of command within the Department of the Army, would be incomplete unless we were to familiarize ourselves with the numerous diversified segments of the overall procurement program and understand the impact each segment has on the particular small business industry or geographical area of the Nation involved. Within the Defense Department, segments of the procurement program are known as DOD claimant programs. To the average businessman they are readily identified as aircraft, missiles, combat vehicles, support vehicles, weapons, ammunition, electronics, and communication equipment. Each supports its own clientele of small business laboratories, fabricators, wholesalers, and engineering firms. To what extent the small business community can participate in each of these program as a prime contractor depends entirely on the capability and capacity of the particular small business concern. Provided in exhibit G attached, is a complete breakdown of the total Army procurement program to all business firms and small business concerns for fiscal years 1962 and 1963. Salient points on this tabulation are: The overall percentage ratio of awards to small business firms dropped from 23.3 percent in fiscal 1962 to 20.8 percent in fiscal year 1963. Small business participates in these programs within the Army on a percentage ratio basis from 3.2 percent for missiles and combat vehicles to 91.9 percent for petroleum items. Approximately 90 percent of the $5.7 billion awarded to business firms (both large and small) by the Army in fiscal year 1963 were limited to aircraft, missiles, vehicles, weapons, ammunitions, electronics, construction, construction equipment, and actions under $10,000. Several high dollar programs show a significant percentage reduction in small business awards between fiscals 1962 and 1963. The overall percentage ratio of awards to small business for fiscal year 1963 does reflect a significant reduction from fiscal year 1962. To accomplish any type of analysis of this loss we must look at each segment. We have made a detailed analysis and provided the reasoning or explanation for each program having an apparent shortfall in exhibits H to X. My previous reference to small business losses due to the reclassification of contractors, transfer of functions to DSA, and the statistical impact due to the change in reporting can be readily identified with their impact on a particular program. Again, let me assure this committee that the Department of the Army intends to, and will, continue to seek out every possible measure to insure maximum participation by small business concerns in fiscal year 1964 in all areas of procurement. |