indications that the extra capacity condition may be improving earlier than was projected. For example, commercial airline orders have increased and some production lines are scheduled to increase output rates next year by one-third to one-half. Secondly, the industry is apparently making voluntary corrections to reduce extra capacity in the form of disposing of unneeded facilities and lowering manpower levels. In this connection, an experimental macroeconomic model of the industry constructed during the study showed that without any change in government policy the industry would eventually stabilize at a level of extra capacity below what we experience now. We certainly would prefer to let the free market work to the maximum degree it is able to bring about reductions in extra capacity rather than resort to increased government manipulation or intervention.

At the outset I mentioned that I would offer some suggestions as to how the Congress might assist in achieving a more competitive and adequate defense industrial base. The first of these considers the possibility of Congressional multiyear authorization of funds and the removal of the multiyear contract cancellation ceiling imposed by Public Law 92-436. S. 1264 proposes to give the statutory base for multiyear contracting, which we endorse. However, without consideration of these two additional aspects, we will continue to be severely inhibited in employing this technique to encourage increased competition.

Secondly, I suggest that, whenever possible, the Congress encourage the competitive free market to work in reducing the extra capacity in the aircraft industry. This will alleviate the major problems resulting from unused capacity with fewer resultant inefficiencies in procurement programs.

In summary, although we have found some problem areas in the industrial base, we find the base responsive to our procurement needs. The forthcoming report of the Rand Corporation study of selected segments of the lower tiers of the defense industrial base appears to confirm this finding. The initiatives I have reviewed with you today, coupled with a favorable reaction by the Congress to the suggestions I have offered, should helpt o improve the way in which we do business with the private sector.

This concludes my statement. I will be pleased to respond to any questions the committee may ask.

Senator PROXMIRE. Well, thank you very, very much for a most helpful presentation, Mr. Church, and I realize, of course, that you have made a very sincere effort to improve the procurement. At the same time I think you would agree that you have a long way to go and that there are continuous overruns and late performances, and you have indicated some of the things that the Congress can do to help overcome that. I think those are very constructive suggestions. But we need a great deal more than this.

I would like to start off. as I have indicated in my statement, with whether or not it is possible, realistic, practical, for Government to get really tough and to say when you establish a price, that is it and the contractors produce at that price. When you set a date, that is it. When you don't produce on that date, we go to court.

Mr. Jones suggested that the Government should make maximum use of absolute fixed price contracts: it should enforce costs and scheduled promises. That seems, as I say, to be a sound practice.

Do you believe that can be realistically accomplished?

Mr. CHURCH. Mr. Chairman, I believe there are many areas where we can use firm fixed price contracts very effectively, and we are trying to pursue that type of contract vigorously in those areas.

I also believe we have had some problems in the past when we have introduced firm fixed price contracts at too early a stage in the process of developing a new weapon system. I think the notable example of that occurred when we used the total package procurement concept in buying the C-5A. I believe in that case, the early use of the firm

fixed price form of contract caused significant problems with the procurement of that particular system.

Senator PROXMIRE. Mr. Jones suggests you don't go to fixed price until you are ready for production. In the case of the C-5A, of course, you had the biggest overrun up to that time we had ever had, a $2 billion overrun, and it seemed to me that it came out of a lot of things, including a feeling on the part of contractors that the Government really didn't mean it when they fixed the price, some way they would be able to push it up, and in that case, of course, they did as well as in most other cases. In fact, the instances of programs that are produced to the price that was agreed upon and on schedule are rather rare. They are the exception and almost the rare exception rather than the rule; isn't that correct?

Mr. CHURCH. Too often that has been the case, Mr. Chairman. We are moving to correct this through our DSARC process. Each time a decision coordinating paper comes before us, as part of the DSARC process, we vigorously question the type of contract that will be used in the forthcoming phase of that particular program. In that way, we are insuring that the type of contract is appropriate to the objectives of obtaining the best possible product at the lowest possible cost. Senator PROXMIRE. Let me indicate some of the problems that Mr. Jones and others have indicated are the fault of the Defense Department and the Government.

He said that, for one thing, the Defense Department knowingly accepts unrealistic cost estimates, permits contract price adjustments, puts programs into production before the design has been completed, requires constant design changes.

What is being done to overcome these DOD incentives to overruns and later performance plans?

Mr. CHURCH. There is no question that you can find examples of each of those abuses that have occurred in the past. What we are doing in that area is to use our new organization, which was set up to respond to the policy of A-109, to vigorously review the program through each stage of the DSARC process to insure that all of these areas are adequately reviewed and to insure that the Services are in fact following through in the areas that you have suggested.

It is difficult oftentimes to determine when a program is ready for production, but that is not holding us back in performing those reviews in such a way as we do make that determination.

We are also reviewing procedures to avoid the buy-in technique to which you have referred to. The buy-in technique is not illegal. But, it is often difficult in rigorous competition to detect when in fact there has been a buy-in or whether all the contractors are probably bidding at relatively the same levels because they are all trying to buy in.

Senator PROXMIRE. Let's get into that buy-in situation, because some contractors charge that the Defense Department in effect invites a buy-in.

The president of Boeing Aerospace Co., for instance, said in a recent trade publication, and I am quoting:

After we had submitted the cost proposal, we were invited in for cost discussions extremely detailed cost discussions. We were told "This is the last face-toface meeting with us before you are informed whether you won or lost." Then the

Government team proceeded to detail where it thought the Boeing costs were out of line. I will let you decide for yourselves if there was any auctioneering. The team looked at us across the table and said our price for this was "substantially high," in another area it was "significantly high," in another area "very high," in another "very, very high." It also told us which issues were controversial. I have been to cattle auctions that were more subtle than that.

That was the quotation from the president of Boeing.

My question is, with these practices you are almost guaranteeing that companies will buy into a procurement. I believe everyone will agree that an initially unrealistic bid does not serve anyone's long-term interest.

What are you doing to eliminate these practices and assure more realistic enforceable price estimates?

Mr. CHURCH. Mr. Chairman, we do agree that such instances have occurred. I have attended similar sessions so I don't have any disagreement that such instances have occurred and that this technique has been used. I also agree that it is wrong, and we are trying to correct it.

We are doing a number of things in this area to eliminate these practices. The one which offers the most promise is the four-step sourceselection technique which is designed not only to avoid the buy-in practice but also another, which is equally as abusive to the contractors. I refer to the technical transfusion which occurs in the kind of situation that you just described.

The Government negotiator will give a list of questions that is not tailored to the particular contractor he is addressing but rather, provides the questions being asked of all the contractors in the competition. This procedure frequently discloses the technically innovative approaches that have been used in other contractors' proposals.

To avoid this, we are testing the four-step source-selection technique. It is being resisted in some areas, but we have pilot programs underway under the direction of Mr. Babione in various procurements to show people how it can work. It is actively supported by the Defense Science Board. They are working with us and we believe by going through this four-step practice we will be able to avoid the kind of abuses in both these areas, both in the buy-in and the technical transfusion.

Senator PROXMIRE. How common is this situation? You said you have been in sessions like this and you agree that they are not constructive, they don't result in a realistic price. How common is that? Would you say that is rare or would you say that is rather common?

Mr. CHURCH. It not only occurs with respect to some prime contracts where the Government is doing it, but also with price contractors who in turn use the same technique on their subcontractors. So it has abuses in both areas.

The prime contractors, although they have complained about it, don't hesitate oftentimes to use the same technique on their sub

contractors.

We are trying to pursue a policy of eliminating these objectionable techniques from these areas. As to how common they are, I can't put a numerical score on it, does it happen 10 percent of the time or whatever? I would say it happens where the competition is the most. vigorous, and particularly when the amount of Government business is shrinking. You will often find that the abuses exist merely because the contractors are willing to let them happen and they are afraid to

stand up for their rights. In any case, we believe that that is wrong. It does not provide the best product at the lowest possible price and we are attempting in a very rigorous program to find the right technique to avoid it.

Senator PROXMIRE. Let me suggest one way in which you could end it rather effectively, and that is by really enforcing the price established, sticking to it. Then the contractor, as Mr. Jones indicated, recognizes that he has got to come up with a realistic estimate and if he doesn't he is in the same kind of trouble he would have been when he deals with another corporation and comes in too low. That is his problem. And if you just do that a few times, the word gets around, I think we would be getting far more realistic pricing.

Now, in addition to the cost overrun problem, there is a serious problem of declining force levels, you just don't have the money to produce the number of planes, or the number of tanks we need, because they cost so much.

Somehow there is a feeling that every plane has to be able to do everything and do it better than any other plane ever designed or ever conceived of-gold plating.

This has resulted in the type of plane that used to cost $100,000, now costing $15 million; tanks that used to cost a few thousand dollars, now costing $1 million. So that we are moving to a position where we will have one ship, one tank, one plane for the entire military force in this country. It will be a beauty, it will do everything in the world, but it will be all by itself, and because it is so lonely, it won't be able to really accomplish what we need.

Is the Department moving toward a less sophisticated, lower performance weapon that might be more affordable, reliable and realistic? Mr. CHURCH. Yes; we are using the high-low concept, having a varying mix of types of weapon systems that serve a particular purpose, those that are less sophisticated and those more sophisticated. Probably the best example I could use at this point is where the F-16 was to be the low and the F-15 and some other aircraft the high. Unfortunately, we haven't always been able to keep the low low and we are trying to figure out better ways to make sure that that doesn't occur.

In the case of the F-16, it has become much more expensive than when we started out and so it is becoming more a medium-high than the low we envisioned.

So let me say that just simply one problem area isn't going to keep us from trying to pursue that kind of policy wherever it is appropriate, and to figure out better ways to keep the low low.

Senator PROXMIRE. It was suggested by the witness yesterday that the Government ought to get rid of its Government-owned equipment. and plants and so forth. The argument there was that the defense contractor should have control of all of the elements of production if he is going to do an efficient job, he ought to have control of his plant, of his personnel, of his own technology, and so forth, then he can decide what mix is appropriate, how much it would be wise to put into equipment in order to get the best product at the lowest cost, how much to rely on training to get the most skilled personnel and so forth. He argued that if you take one element out of the contractor's control, if

the Government just provides it, then you have a far less efficient operation.

Of course, the Government does own an enormous amount of plant and equipment.

How far do you go in going along or disagreeing with that position? Mr. CHURCH. I agree very much with this particular position. I had a contractor come to my office just recently and try to argue with me the opposite was true. I think he walked out realizing if he wants to proceed in that area he is going to have to end up buying a plant we now own and are trying to sell to him.

We have pursued a vigorous policy of getting rid of the plants. In 1965, we had some 135 plants, today we have 89, which will give you an idea of how we have pursued that thus far.

There are seven plants currently under negotiation to be sold to the contractors. The unfortunate part is there is a minimum number which we reach at some point where it becomes difficult to turn the plants over to the contractors and those, I think, are some 41-odd plants that deal with ammunition production and this sort of thing. In those areas it is probably more effective for us not to sell the plant. to one contractor but to actually compete the operation of that plant among various contractors.

But between the 89 and the 41 there are a number of plants that we will be able to sell. There are others that are so obsolete that the fact is nobody particularly wants them and

Senator PROXMIRE. Then it seems to me the things to do would be to close them and sell them for scrap.

Mr. CHURCH. I agree with you and we are analyzing that to see what needs to be done in those areas. But it is my policy to pursue a rigorous program of turning all plants, wherever possible or wherever practical, over to the contractors to have them own them.

Senator PROXMIRE. Give me a quantitative notion of how many plants over what period would you expect to be able to dispose of.

Mr. CHURCH. Well, I really haven't had time to go into a plant-byplant basis. I say there are 7 under negotiation right now which would bring the total down to 82. I believe there are 41 that are potentially available and of that 41 there is probably some significant portion which fall in the category of obsolescence and scrap.

So we are getting down to the base numbers and hopefully over the next few years we will be able to close them all out. That is the intention of the program.

Senator PROXMIRE. It seems to me one of the big elements here that was mentioned yesterday by Mr. Jones and makes a lot of sense is that we have moved into a different kind of military situation, unfortunately. There was a time when we completely demobilized after a war and our procurement and industrial production for defense diminished to a tiny fraction of what it was. That happened after World War I and happened after previous wars. It is not happening now and won't happen in the foreseeable future. We are going to have a steady demand. Every expectation is we are going to have a defense budget that increases in real terms 3 or 4 or 5 percent every year. I regret that very much and so does everybody else, including people in the Defense Department and defense contractors, and citizens recognize that is unfortunate. It is a fact of life. But that fact it