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CHANGES IN CONTRACT PROCEDURE

We recognized these conditions at the time our bid estimates were prepared and priced the work accordingly. We also had every reason to believe-based on many years of experience under similar contracts-that the standard Government contract, with its history of operations and procedures, would function on this ballistic missile program as it always had on other Corps of Engineers projects. Patently, this has not been the case. I would like to cite some specific examples of the deviations from these historical and time-honored procedures :

First, the relationship between the contractor and the contracting officer, developed through the years, no longer exists. The designated representatives of our company who have authority to settle contractual matters no longer are allowed to negotiate solely with a similar representative of the Government.

In substantiation of this statement, I am attaching a copy of CEBMCO circular No. 61-4, issued on January 6, 1961. This circular outlines, in detail, the procedures which the Corps of Engineers must follow on contract modifications. It also shows the extent of the intrusion of the using agency into the contractual affairs of the contracting agency and the contractor.

It should be noted that this circular merely formalizes a pattern that has been developing over a considerable period of time.

Secondly, the construction agency is now being directed in its actions by the using agency to a degree never before known and certainly never contemplated by us when we entered into these contracts. As a result, the construction agency either will not or is not allowed to give proper recognition to changes and changed conditions—with their subsequent impact on existing work from both a time and money aspect. In short, since the using agency has established theoretical completion dates for this program, nothing, not one single thing, is to be allowed to change those dates. Consequently, time extension" are vulgar words, and a request for payment of additional cost to make up the lost time, caused by multitudinous modifications, general design lag, or criteria changes developed through continuing missile experimentation, is viewed with indignation. It appears to be an unwarranted presumption on the part of the contractor that he should be paid for his work.

Thirdly, the concept of equitable and reasonable adjustments in contract costs, contract time, and schedules is and has been completely ignored. Since we are now precluded from negotiating with the agency which has the power to decide on the cost of changes and the necessity of time revisions, we are compelled to adhere to an inflexible schedule without the right to negotiate in good faith the actual costs of such changes, their delay to the time schedules and their impact—both cost and timewise on the already complicated problems inherent in this crash construction program.

As a result of these changes in contract procedure, the Government's estimates of the costs of performing modification work are completely unrealistic—as is its refusal to recognize changed conditions. This has imposed an unnecessary financial hardship, not only on us but also on our subcontractors and material suppliers. If we refuse to accept what is offered, we are issued a unilateral order to proceed

with the work at an unagreed or unequitable price. In the endand in some cases it has already happened—this can only mean an unwarranted increase in our cost and absolute disaster and financial ruin to many of our smaller subcontractors and material suppliers.

It now appears that the only hope for an equitable payment for the work we and our subcontractors have done is through time- and money-consuming appeals to various departmental boards or—as a last resort—the courts.

From the dates given earlier in this statement you will note that there is a difference in starting time of approximately 1 year between the contracts at Lowry and the contract at Altus. I believe it is proper to point out that the changes in procedures which I have mentioned were not in effect at the time of the starting of the Lowry contract in 1959. They started to become apparent and disastrously effective during early 1960 and have continued to become more unrealistic and vicious up to the present time. I can say, now, that the position of the contractor is such that any hope of relief under them is practically impossible.

Our contracts are with the Corps of Engineers—the designated representative of the U.S. Government. They are not with the Air Force, the architect engineer or the weapons system manufacturers. Nevertheless, it is obvious that the latter three are controlling in almost all decisions in one way or another. Since we do not have contracts with these latter groups or agencies, we cannot, and properly should not, have to either deal with them or be controlled by their unilateral decisions. Under any concept of law, if we are to do so, we have the right to confront them and have the expectation that any and all negotiations will be in good faith. Since our contracts are with the corps, we can only look to the corps for a return to proper contract administration. Why the corps has made or permitted these changes to be made is not for us to say. We only know they have come about and if left uncorrected we can easily visualize certain disaster for a large part of the construction industry and probable national disgrace for anyone connected with the ballistic missile program.

Certainly, there can be no doubt that the construction contracts awarded in connection with the ballistic missile program were knownbefore their award—to cover a program that is experimental in nature. Therefore, the facilities were obviously designed without a complete knowledge of what will be finally built. Under these circumstances, the architect engineer could not have been expected to furnish any kind of a design which would not require multitudinous changes. It should, therefore, not come as a shock to any intelligent individual that there would be changes and that those changes would be costly.

The problem, as we see it, is that the using agency orders the contracting agency to make changes and modifications as the missile experiments dictate their necessity, without giving sufficient study to their probable cost and as a result, has not made certain that sufficient funds are available to cover a realistic cost of the changes. The lack of prudence in this matter on the part of the using agency cannot be overcome by simply refusing to allow the contracting agency to pay the proper cost of work ordered done.

Since the entire contractor relationship with the Corps of Engineers has been completely changed from the time we first entered into these contracts, it is doubtful that the bids we submitted, in anticipation of working under historically developed corps administrative procedures, can be said to remain valid under existing circumstances.

It is our recommendation that immediate action be taken to eliminate these existing procedures, so that the normal and proper contractual relationship between the corps and the contractors can be resumed. Failing in this, there is no practical solution of the present impossible situation except to reform most of the ballistic missile construction contracts on a cost reimbursement basis.

In addition to this statement, I have had prepared a more detailed report on each of the bases for which my company has construction responsibility. I would like, at this time, to present these to this committee for its information and later study.

Mr. SHEPPARD. It will be made part of the record. (The information referred to follows:)

U.S. ARMY, CORPS OF ENGINBERS
BALLISTIC MISSILE CONSTRUCTION OFFICE

Los Angeles, Calif.
ENGMA-VY.
CEMBCO Circular Number 61-4.

Issued: 6 January 1961.

Expires: 31 January 1963. Subject: SOP for Control of Contract Modifications. 1. References:

a. OCE Message ENGMC-K 3475, dated 22 November 1960.

b. CEBMCO Message ENGMA-VA 3350, dated 23 November 1960. 2. The procedures outlined in Inclosure 1 to this circular: :"Joint BMCAFBMD-CEBMCO Policy on Modifications to ICBM Construction Contracts," dated 3 January 1961, are issued to implement the basic agreement between USAP and OCĖ as stated in reference la. This joint policy is being issued simultaneously by AMC/BMC and AFBMD to their field organizations.

3. Those portions of the documents listed below which are in conflict with the instructions of Inclosure 1 are rescinded.

a. CEBMCO Circular 60–17, dated 25 October 1960.
b. CEBMCO Memorandum 60–14, dated 23 November 1960.

c. Message ENGMA-VA 3350, dated 23 November 1960. For the Commander:

F. J. DIRKES,
Lt Colonel, Corps of Engineers,

Executive.

Joint BMC-AFBMD-CEBMCO POLICY ON MODIFICATIONS TO ICBM
CONSTRUCTION CONTRACTS

3 JANUARY 1961. 1. General. a. The procedures outlined below will be followed hereafter in the handling of modifications to ICBM construction contracts at operational bases. The procedures do not apply to modifications on which agreement has been reached with the contractor. b. Implicit in these procedures are the following:

(1) AFBMD (WDF) will provide, with design changes, a narrative description of the change, the technical necessity, and man-hours and materials required to implement the change.

(2) AMC/BMC is responsible for providing project funds, for ordering expediting, and for determining whether to grant or undertake acceleration, i.e., trading dollars for time.

(3) The Contracting Officer, who is the CEBMCO Weapons System Director in most cases, is the legal representative of the Government for administering the contracú. He is responsible for safeguarding the interests of the United States in contract matters and for determining the facts under the contract. In the final analysis, he alone is responsible for the Government (3) BMC approval of acceleration will be addressed to CEBMCO with copy to SATAF. c. Both the Government estimate and the contractor's proposal will identify acceleration costs, such as premium labor costs, additional plant and equipment, etc., to the extent these are readily identifiable.

estimate for a modification and for proper negotiation of time and price with the contractor. The Area Engineer, as the contract-officer's duly authorized

representative, may act for him within the limits of authority delegated. 2. Definitions. For the purpose of contract administration of the ICBM program, the following definitions will apply:

a. Expediting is defined as the advancement of a contract established interim or final completion date. b. Acceleration is defined as:

(1) Type I: Buying back, in whole or in part, equitable time extensions otherwise due the contractor under General Provision 5c of his contract because of unforeseen causes beyond his control and without his fault or negligence, including, but not restricted to, fires, floods, strikes, freight embargoes, and unusually severe weather.

(2) Type II: Buying up, in whole or in part, equitable time extensions otherwise due the contractor under General Provisions 3 and 4 of his contract,

covering Changes and Changed Conditions, respectively. c. Contracting Officer also includes the authorized representative of the Contracting Officer, acting within the limits of his authority.

d. Other special terms used in connection with contract modifications are defined in Appendix A.

3. Expediting and Acceleration Costs. Approval of costs for expediting and acceleration is limited as follows:

a. No expediting action involving additional costs may be taken without the prior approval of the Assistant Secretary of Defense (Properties and Installations). (ASPR 12-102.6.) Accordingly, no expediting will be undertaken without a formal written directive from BMC to CEBMČO, and this directive will include a statement that such necessary Department of Defense approval has been secured. b. Approval of identifiable acceleration costs will be as follows:

(1) Type I: The Area Engineer has no approval authority. The SATAF Commander's approval authority is limited to $25,000. Above $25,000 the SATAF Commander will forward his recommendations to BMC for approval.

(2). Type II: The Area Engineer may approve costs up to $1,000. The SATAF Commander's approval authority is limited to 25% of the total cost of a modification. Above 25%, the SATAF Commander will forward his recommendations to BMC for approval.

4. Government Estimate. A. The Government estimate, including a determination of a justified time extension, will be prepared by the Area Engineer with the assistance of the SATAF staff, including the design architect-engineer. The purpose of Air Force participation is to assist in understanding the scope and effect of facility modification.

b. The completed Government estimate will be signed by the Area Engineer and forwarded to the SATAF for concurrence. It will be handled as administratively confidential.

(1) When the Government estimate is less than $200,000 and does not exceed the approval authority of the SATAF Commander on acceleration costs when such are involved, and is concurred in by the SATAF, it will be signed by the SATAF Commander or his representative and the Área Engineer will proceed to negotiate with the contractor.

(2) When the Government estimate is over $200,000, or includes acceleration costs which exceed the approval authority of the SATAF Commander, or is not concurred in by the SATAF Commander and agreement is not reached between him and the Area Engineer, it will be forwarded to CEBMCO and BMC with comments, to include a report of any differences. CEBMCO and BMC will consider the matter. If agreement is reached, they will jointly notify their field offices and the Area Engineer will proceed to

negotiation with the contractor. c. Where analysis of the contractor's proposal or subsequent negotiations disclose errors of fact or judgment resulting in revision in the Government estimate of 15% or less, such revision may be made without further SATAF or BMC concurrence. Where such revision exceeds 15%, the new Government estimate will be forwarded for concurrence in the same manner as the original Government estimate.

5. Negotiation. a. When the contractor's proposal exceeds the Government estimate by 15%, the proposal will be reviewed and appraised by the Area Engineer or his representative and the SATAF Commander or his designee.

b. Negotiations with the contractor may be conducted alone by the Area Engineer or his representative until it is apparent that agreement cannot be reached for the amount of the final Government estimate. In such case, the SATAF Commander may be représented by an observer at subsequent negotiations, if he so desires.

c. If the contractor's final proposal exceeds the final agreed Government estimate by not more than 10%, the Area Engineer will meet with the SATAF Commander or his designee and obtain from him a signed statement that he agrees that the contractor's final proposal is equitable and the lowest obtainable, and that acceptance thereof is in the best interest of the Government. If the SATAF Commander does not agree, the matter will be referred to CEBMCO and BMC for resolution.

d. Time extensions will not be granted by the Area Engineer without the prior approval of CEBMCO. Time extensions which will carry work beyond Air Force directed completion dates will not be granted without the prior approval of BMC.

6. Outstanding Modifications. There is an urgent need for the prompt resolution of unnegotiated modifications, an early determination of the status of funds, and an accurate current working estimate for each project.

a. Unnegotiated modifications will be consummated as soon as possible and agreement negotiated with the contractor or a unilateral change directed.

b. On those outstanding modifications for which a directive to proceed has not been issued to the contractor, the Area Engineer will consult and reach agreement with the SATAF Commander on the time frame for initiation and completion prior to directing the change by an initial written order or the first part of a twopart change order, as appropriate. Such order will make no commitment for additional acceleration costs unless directed by BMC or SATAF.

c. On those outstanding modifications for which a directive to proceed has been issued to the contractor, the Area Engineer will review the modification and advise the SATAF of those which have committed the Government to additional accleration costs. Such acceleration will continue unless written instructions are issued by BMC or the SATAF to eliminate or curtail the acceleration. If such instructions would result in a time extension, the Area Engineer and the SATAF Commander will submit their findings and recommendations to CEBMCO and BMC for approval before eliminating the acceleration.

7. New Modifications— Review. a. All new modifications, regardless of origin, will be the subject of a change order conference. Only mandatory changes will be implemented.

(1) Major modifications or “Design Changes" will be considered at a change order conference normally convened by AFBMD in the Arbor Vitae Complex. Conferees will include representatives of BMC, AFBMD, CEBMCO and the design architect-engineer. Such modifications will be implemented in accordance with paragraph 8c below.

(2) Field modifications or "Field Changes” will be considered at a change order conference normally convened by the BMD detachment at the SATAF Office. Conferees will include representatives of the SATAF Commander, including the BMD Detachment, and the Area Engineer. Such modifications will be implemented in accordance with paragraph 8c below. The change request (Change Order, Short Form) will be forwarded to the Area

Engineer by the SATAF Commander or his designee. b. In considering a modification, the change order conference will make appropriate engineering determinations relative to the change, develop gross time and cost implications, and make specific findings on the following:

(1) When and how the change can best be accomplished, i.e., (a) in the construction phase by the construction contractor, (b) as retrofit by separate contract in the time period between construction completion and effective start of installation and checkout, or (c) in the installation and checkout phase under Technical Facility Modification Authorization.

(2) If the work is to be done in the construction phase, whether the change should be accomplished within the established contract time or whether a reasonable time extension may be permitted. This finding is intended as guidance only for the SATAF Commander.

(3) When the necessary plans and specifications or other required information on the change will be provided to the Corps of Engineers.

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