Page images
PDF
EPUB

Joint Committee on Defense

Production
Subject: DOD Procurement Practices
Hearing Transcript, September 30, 1977
Supplemental Question

2. Senator Proxmire:

plants?

What is the planned method for disposal for these

a. Are the plants being declared surplus to the government's
need?

[blocks in formation]
[ocr errors]

Are bids being solicited from other than defense contractors
(e.g., machinery dealers, developers, state and local governments
or industrial development authorities, non-defense industrial
firms)?

d. Are the disposals being made in compliance with the federal
Surplus Property Act?

e.

Are minimum acceptable bid levels being established below which bids will not be considered? If so, in such cases, will the government retain ownership of the plant and equipment, or will such equipment be scrapped?

Mr. Church: Before responding to this question, I believe it appropriate to define a few terms of reference. These are:

Excess to ownership: Plants required for defense production.
Private ownership is preferred to government ownership.

Excess to need or requirement: Plants no longer required for defense production. They are available for transfer to other Government Agencies or for declaration as excess by the GSA and disposal in any possible manner.

Surplus to Government needs: Plants declared surplus after negative response to GSA screening of all appropriate Government Agencies. These plants are then offered for sale on the open market by the GSA.

I will now respond to your questions:

a.

These seven plants were declared excess to DoD ownership. Since the plants were being operated by defense contractors to support Government contracts, they were turned over to the GSA for disposal by negotiated sale to the using contractor, provided this could be accomplished under existing laws. It is our understanding that the GSA clears these properties for sale through appropriate Congressional Committees and attempts to sell them to the using contractor with a provision that the contractor will retain the production capacity to support defense needs.

negotiated sale to

solicited.

Air Forc

1. Senator Proxmire: Wh

sttempting to sell these

We are aware that GSA negotiation to be so Mr. Church: The

=> Aremes that have established a lease the using contra

vs Adidatstration conducts these negotiated

Each sale is then cleared by the House vermut perations and the Justice Department.

Vir of the Federal Property and Administrative Services 4x and contractor cannot arrive at a mutually acceptable tasks its negotiation price based on a fair market value plus A nyerty is returned to the DoD for retention of ownership.

If a plant is determined excess to DoD needs or requirements 10 is termed over to SA for disposal in any manner.

Air F

Air

?

Senator Proxmire: In reference to the Department's finding that 75 percent
unnecessary personnel, what plans does the Department have to minimize
of the cast associated with idle capacity can be attributed to idle or
on cost reimbursement for administrative, government relations

this problem? Does or can DoD set absolute or percentage of sales limits
or marketing staffs? Are such costs subject to challenge on the
monitoring contractors' costs at major contractor locations will

Mr. Church: We believe that the establishment of a formal program of
associated with idle capacity. This new program is now being
be a significant step in minimizing unnecessary personnel costs
their comments prior to its inclusion in ASPR in a new Part 10 to

reviewed by industry and other interested organizations to obtain
limitations, determined in advance, often do not provide equitable
limited contract situations, but this has disadvantages; because such

The DoD has established limits on contractors overhead rates in very
cost allowance, and contractors are seldom willing to accept contracts

On the other hand such costs are subject to
challenge on the grounds of reasonableness. By advising contractors
of intent to disallow costs; as provided in the proposed new ASPR
part 10 to Section 20 we believe effective control of these costs can

[graphic]

Section 20.

be attained.

Senator Proxmire: Has the productivity improvement reward clause contained
A. in the new profit policy been used yet? If so, please provide details

as to the company and project involved, the amount of the reward, and
the details of the improved productivity which let to the reward.
Mr. Church: We are currently analyzing data gathered during the first
year's implementation of the new profit policy, and special attention
is being given to the use of the productivity reward provision. A
list of contractors, projects, and productivity improvements will be
included in a report on profit policy implementation to be issued
by January 31, 1978.

5. Senator Proxmire: Please describe the details of the special termination

buy-back program. How much equipment is potentially suoject to government re-purchases under what conditions would it be re-purchased; what office or person would be responsible for determining whether to re-purchase the equipment? Mr. Church: The provisions of the special termination buy-back program are contained in a proposed change to ASPR which states special provisions may be included in contracts for R&D and/or production of weapon systems or materiel to provide incentives to contractors to invest in fixed capital assets. Such provisions may permit the Government to acquire specific capital investments at no more than the depreciated value. The provisions become operative if the contract or program is terminated or funds are not provided in subsequent fiscal years to procure sufficient end items that would enable the contractor to recover his investment through the combination of investment incentives, income tax credits or incentives, and allowable depreciation costs pursuant to the ASPR XV cost principles.

The limitations include:

The capital investment that may be covered by the special provisions is limited to severable plant equipment, including associated accessories that would be capitalized in accordance with the contractor's disclosed accounting practices, but excluding real property.

The program which uses the end items requiring the capital investment must be listed in the DoD Five Year Defense Program (FYDP).

The capital investment would not be made by the contractor except to meet the requirements of the program involved.

The amount of contingent Government liability by fiscal year must be authorized by the Secretary of Defense.

The contracting officer must advise the appropriate fiscal authority of the amounts of contingent liability to be contracted for by fiscal year.

If it becomes apparent that a contingent liability resulting from the use of this technique will become an actual obligation, the Secretary shall be notified and immediate steps taken to obtain sufficient funds to cover the obligation.

b. As indicated in answer an, we are pursuing negotiated sale to the using contractors. Competitive bids are not being solicited.

As discussed in answer a., we are attempting to sell these plants via negotiation to the using contractors. We are aware that GSA has sold some plants to local governments that have established a lease back arrangement with the using contractors.

[ocr errors]

d. The General Services Administration conducts these negotiated sales under the authority of the Federal Property and Administrative Services Act of 1949 (Surplus Property Act). Each sale is then cleared by the House Committee on Government Operations and the Justice Department.

e.

If GSA and a contractor cannot arrive at a mutually acceptable price, the property is returned to the DoD for retention of ownership. GSA establishes its negotiation price based on a fair market value plus a user's value. If a plant is determined excess to DoD needs or requirements it is turned over to GSA for disposal in any manner.

3. Senator Proxmire: In reference to the Department's finding that 75 percent

of the cost associated with idle capacity can be attributed to idle or
unnecessary personnel, what plans does the Department have to minimize
this problem? Does or can DoD set absolute or percentage of sales limits
on cost reimbursement for administrative, government relations
or marketing staffs? Are such costs subject to challenge on the
grounds of reasonableness?
Mr. Church: We believe that the establishment of a formal program of
monitoring contractors' costs at major contractor locations will
be a significant step in minimizing unnecessary personnel costs
associated with idle capacity. This new program is now being
reviewed by industry and other interested organizations to obtain
their comments prior to its inclusion in ASPŘ in a new Part 10 to
Section 20.

The DoD has established limits on contractors overhead rates in very
limited contract situations, but this has disadvantages; because such
limitations, determined in advance, often do not provide equitable
cost allowance, and contractors are seldom willing to accept contracts
with such limitations. On the other hand such costs are subject to
challenge on the grounds of reasonableness. By advising contractors
of intent to disallow costs, as provided in the proposed new ASPR
Part 10 to Section 20 we believe effective control of these costs can
be attained.

4. Senator Proxmire: Has the productivity improvement reward clause contained

in the new profit policy been used yet? If so, please provide details
as to the company and project involved, the amount of the reward, and
the details of the improved productivity which let to the reward.
Mr. Church: We are currently analyzing data gathered during the first
year's implementation of the new profit policy, and special attention
is being given to the use of the productivity reward provision. A
list of contractors, projects, and productivity improvements will be
included in a report on profit policy implementation to be issued
by January 31, 1978.

5. Senator Proxmire: Please describe the details of the special termination

buy-back program. How much equipment is potentially suoject to government re-purchases under what conditions would it be re-purchased; what office or person would be responsible for determining whether to re-purchase the equipment?

Mr. Church: The provisions of the special termination buy-back program are contained in a proposed change to ASPR which states special provisions may be included in contracts for R&D and/or production of weapon systems or materiel to provide incentives to contractors to invest in fixed capital assets. Such provisions may permit the Government to acquire specific capital investments at no more than the depreciated value. The provisions become operative if the contract or program is terminated or funds are not provided in subsequent fiscal years to procure sufficient end items that would enable the contractor to recover his investment through the combination of investment incentives, income tax credits or incentives, and allowable depreciation costs pursuant to the ASPR XV cost principles.

The limitations include:

- The capital investment that may be covered by the special provisions is limited to severable plant equipment, including associated accessories that would be capitalized in accordance with the contractor's disclosed accounting practices, but excluding real property.

-- The program which uses the end items requiring the capital investment must be listed in the DoD Five Year Defense Program (FYDP).

-- The capital investment would not be made by the contractor except to meet the requirements of the program involved.

The amount of contingent Government liability by fiscal year must be authorized by the Secretary of Defense.

The contracting officer must advise the appropriate fiscal authority of the amounts of contingent 1tability to be contracted for by fiscal year.

-- If it becomes apparent that a contingent liability resulting from the use of this technique will become an actual obligation, the Secretary shall be notified and immediate steps taken to obtain sufficient funds to cover the obligation.

« PreviousContinue »