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in a timely and economical fashion. Proposals have been advanced that might improve the performance of the Government and industry. However, it will not be easy to accomplish these reforms. Ingrained habits die hard, and it is clear that both industry and Government have grown accustomed to operating in an atmosphere of unrealistic price estimates, which bring with them the need for contract adjust

ments.

Tomorrow we will ask the witness from the Department of Defense about programs of the Department to improve industrial readiness. The committee will stand in adjournment until 10 a.m. tomorrow. Thank you very much.

[Whereupon, at 11:15 a.m., the Joint Committee adjourned, to reconvene at 10 a.m., Friday, September 30, 1977.]

DOD PROCUREMENT PRACTICES

FRIDAY, SEPTEMBER 30, 1977

U.S. CONGRESS,

JOINT COMMITTEE ON DEFENSE PRODUCTION,
Washington, D.C.

The Joint Committee met at 10:05 a.m., in room 5302, Dirksen Senate Office Building, Senator William Proxmire (chairman of the Joint Committee) presiding.

Senator PROXMIRE. The committee will come to order.

This begins the second day of the committee's 2 days of hearings into the condition of the defense industrial base, and how defense policies can affect the ability of industry to produce needed goods and services.

Yesterday we heard testimony from one of the most respected aerospace industry officials, Thomas V. Jones, chairman of the Northrop Corp. Mr. Jones suggested that industrial production efforts have been handicapped by inefficiencies that are built into the system. Contractors and Government officials expect contract cost estimates to be underestimated; they expect production contracts to be let before design work has been completed.

Consequently, cost overruns, design and contract change actions, and reprogramings are almost inevitable. This results in program delays, lower production runs, and dislocations in force structure planning. This coming from a distinguished and successful defense contractor, I think, made the point particularly telling. It didn't come from an outside academician, or Senator or Congressman.

Mr. Jones also suggested that contractors and Government alike often attempt to accomplish too much. Efforts are made to procure overly sophisticated weapons systems, which can also contribute to increased costs, delays, and lower production runs.

Mr. Jones indicated that we have to have a tougher attitude on the part of the Pentagon. That was an interesting suggestion on his part, that we ought to have in advance a notion of just exactly what the Government expected, that we ought to establish a realistic price, and we ought to have the Government insisting that the contractor live up to that price. If the contractor couldn't live up to that price or didn't he would have to take the consequences.

His proposed solution is fairly simple. He suggests that Government should make the maximum use of fixed price contracting, and that both industry and Government should be responsible for their final negotiated agreements. He also suggests that the Government should get out of the landlord business, turning over as much plant and equipment as possible to industry. He suggested that industry efficiency

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would be improved if costly, inefficient equipment is retired from the market place.

Today we will hear from several witnesses from the Department of Defense. We will ask them for their responses to some of Mr. Jones' suggestions.

Our first witness is Mr. Dale W. Church, who is Deputy Director for Acquisition Policy of the Directorate of Defense Research and Engineering. Prior to assuming this position, he was corporate counsel, assistant secretary, and director of contracts for ESL, Inc., of Sunnyvale, Calif. He holds a juris doctor degree from George Washington University, and has practiced law with specialization in corporate and contract law.

Mr. Church, I would like to welcome you to the committee. If you would like to begin I would appreciate it if you could summarize your written statement in approximately 10 minutes, and the full written statement will be printed in the record of these hearings. Go right ahead.

STATEMENT OF DALE W. CHURCH, DEPUTY DIRECTOR FOR ACQUISITION POLICY OF THE DIRECTORATE OF DEFENSE RESEARCH AND ENGINEERING, ACCOMPANIED BY FLOYD TROGDON, ASSISTANT DIRECTOR FOR MATERIEL ACQUISITION POLICY; AND DALE R. BABIONE, ASSISTANT DIRECTOR FOR CONTRACT AND SYSTEMS ACQUISITION

Mr. CHURCH. Thank you, Mr. Chairman.

First off I would like to introduce two gentlemen I have with me. this morning. On my right I have Mr. Floyd Trogdon, who is my Assistant Director for Materiel Acquisition Policy. On my left I have Mr. Dale Babione, who is my Assistant Director for Contract and Systems Acquisition. They are the two deputies of my office who are most directly involved in the questions we are addressing here today. Mr. Chairman, I appreciate the opportunity to discuss with you this morning how the procurement policies of the Defense Department affect the defense industrial base. My comments will address those aspects of our procurement policies which are directed toward obtaining the maximum competition in defense procurement and how our policies are oriented toward establishing and retaining adequate sources of production for military supplies.

I will also touch upon two relatively recent developments which support these efforts; namely, the promulgation of OMB Circular A-109 which provides Government-wide acquisition policies and S. 1264, otherwise known as the Chiles bill, a proposed bill to provide one statutory authority for acquisition for all supplies and services for the Federal Government.

I will also review for you the manner in which we are implementing the findings of our recent study on capacity utilization in the aircraft industry.

Finally, I will offer some suggestions as to how the Congress might assist in achieving a more competitive and responsive defense indus trial base.

Concerning the maximization of competition, I would first like to say that no part of the Government is any more aware of the need for maximum competition than the Department of Defense. We are constantly striving to improve our track record.

In this regard, fiscal year 1976 statistics show that, including price competition, technical and design competition, and follow-on contracts where the source of supply was initially selected by competition, approximately 57 percent of the dollars obligated were the result of competition. The other 43 percent in large part represented one-source solicitations where it is more difficult to obtain effective competition. Contracts for Government-owned contractor operated facilities, utility services, and development and production of complex, high-cost weapons systems involving high capital investment and know-how, exemplify the types of procurement actions in this category.

It is in this latter area where we need to do more to introduce additional competition. Under circular A-109 we are pursuing increased competition among qualified sources in the early stages of major system acquisition. Although we can envision an expanded competitive base for design and technical competition prior to the selection of the full-scale development contractor, we also recognize the difficulty of other potential prime contractors in bidding for the system production contract. The cost experience, know-how, and investment of the development contractor gives him a strong competitive edge. Notwithstanding this, we are striving for increased competition through our high value spares breakout program, by acquiring production data packages and by assuring that the latest production know-how and technology are incorporated into the packages.

Additionally, we are encouraging increased prime contractor use of competition at the subcontractor levels. The approaches we are exploring to encourage the primes to solicit greater competition at the subcontractor levels include: where economical, encouraging the primes to "buy" rather than "make," avoiding "lock-ins" and "data rights situations" which may result in sole source contracts, encouraging primes to tailor subcontracts to reduce technical and administrative burdens, where appropriate, encouraging the primes to make subcontractual arrangements which are not less favorable than those incorporated into the prime contract.

By the same token, we-the Government-are searching for ways to remove the disincentives in our procurement actions in order to encourage greater competition among prime and subcontractors. Among the efforts we are pursuing are: increasing longevity of production through multiyear authorizations and contracts, reducing or eliminating the specialized nature of military specifications and standards. where feasible, accepting commercial practices and products.

We are stressing the increased use of the multiyear contracting technique, within our authority, to provide an assurance of program stability to prospective contractors. Aside from obtaining increased levels of competition we can anticipate reduced unit prices by reason of continuity of production and elimination of repetitive startup costs. These efforts would be greatly enhanced if the Congress would look favorably upon multiyear authorization of funds for major programs and lifting the $5 million limitation on multiyear cancellation ceilings

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