Admiral JELLEY. I think it was in the summer of 1946.

Mr. SHEPPARD. They are in business with the Navy in a joint venture, are they not?

Admiral JELLEY. Yes, sir. As a matter of fact, the fee they get is down now to less than 2 percent. It is 1 point something or other percent. As you say, we are partners now. We have control of his

operations to such an extent that we are partners.

Mr. SHEPPARD. What was the original fee, which you have reduced to 2 percent?

Admiral JELLEY. As I recall it, it started off in the neighborhood of 3 percent, 21⁄2 to 3 percent.

Mr. SHEPPARD. How do you arrive at that percentage, and what service do you get for it?

Admiral JELLEY. We have built up over the years a curve of fee depending on the size of the job, the difficulty of the job, the length of time estimated to complete the job. We have coordinated with the Army. They have a similar system, and our fee curves are pretty close together.

For that fee we get the know-how of that company.

We have

enough of their regular permanent employees to staff our job. We get the benefit of the contractor's experience. I will say that that has been a very real contribution.

Mr. SHEPPARD. Is that exclusively in the category of these respective firms?

Admiral JELLEY. Oh, every firm in the country has it.

Mr. SHEPPARD. So far as operational know-how is concerned?
Admiral JELLEY. Yes.

Mr. SHEPPARD. The type of construction I have observed in the South Pacific, when I made my trip there, indicated to me that if a contractor were capable of being a contractor his additional knowhow would be nil so far as justifying the expenditure is concerned. Admiral JELLEY. I do not follow you, sir.

Mr. SHEPPARD. The type of construction I saw your contractors doing when I was in the South Pacific would indicate that any contractor worthy of the title of being a contractor ought to be able to handle the situation without a specialized know-how.

Admiral JELLEY. I would not say it was a specialized know-how, but the know-how that a contractor has is paid for in the profit he makes on the job, which usually runs a lot more than the fee we are paying him.

Mr. SHEPPARD. Is it not a fact that your present American personnel who are in the South Pacific are pretty well established, and your percentage of replacement is practically nil?

Admiral JELLEY. That is true; yes, sir.

Mr. SHEPPARD. Do you consider that the present contractor you are doing business with over there would be the only type of people who could pick up and carry on?

Admiral JELLEY. Oh, no, sir; but they are there now. As I said, we interviewed a large number of contractors. We will do the same for the work at Kwajalein and on the classified project.

In general, you could pick out a dozen firms or combinations of firms who could do every one of the jobs. It is a question of picking the ones in the best position at that time.

I do not mean to imply that this particular group we have in Guam is the only one in the country which can do it. There are many. Mr. SHEPPARD. That was my interpretation.

Mr. MAHON. The thing that concerned me, Mr. Sheppard, also, was how can you know in advance that you are going to continue to utilize these same men of the same firm you have in Guam? It may be that somebody else can do the job for less money. If they can know they are going to get this additional work from you you are rather at a disadvantage in your bargaining.

Admiral JELLEY. We picked those three companies on the basis of their experience. The Pacific Bridge Co. has had a fine background in water-front work and heavy steel construction. Brown & Root has a fine reputation in earth moving and dam building and so on. The Maxon Co. had a fine reputation in building. That way we tried to foresee any possible type of work that might come along.

The bargaining is rather one-sided. It is on the Navy side, not the contractor's side. I would say our complaints have been entirely on the basis that we do not pay enough fee.

Mr. SHEPPARD. You paid enough fee to keep them over there this period of years. That does not indicate much unhappiness to me.

Admiral JELLEY. The advantage of the fee contract to the contractor is that it is sure money. When he bids on a job it is a gamble. He may make 10 percent or he may lose 10 percent. If he is willing to work on a fee basis he is sure that money is coming in.

EMPLOYEES OF CONTRACTORS ON GUAM

Mr. SHEPPARD. In other words, as a contractor you could have hypothetically 150 directing personnel on this job, and limit the rest of your jobs in the continental operation, could you not? Your actual executives of the corporation itself on that island job, if my information is correct, have been there 1 or 2 years. Is that correct or incorrect? Your supervision has been vested in the established personnel who are presently on the job directing; is that right or is that wrong?

Admiral JELLEY. We only reimburse for those employees actually on the island.

Mr. SHEPPARD. Yes.

Admiral JELLEY. We do not reimburse for the officers of the company. They have had representatives, vice presidents, officers of the corporations on the island. I would say that would average at least 2 months out of the year. To my knowledge there have been at least a half dozen of the top executives of the company who have visited the job and have spent several weeks' time on the island. Mr. SHEPPARD. When was the last time that occurred, if you know? Admiral JELLEY. Last month. Mr. Keenan of the Pacific Bridge Co. just came back.

Mr. SHEPPARD. What was the interim between the visit last month and the one previously?

Admiral JELLEY. Two months.

Mr. SHEPPARD. What is the top executive salary being paid under the contract or contracts which you have with those people at this time?

Admiral JELLEY. The top reimbursable salary is $12,000. Most of the top people are getting more than that because they are being paid by their company on a nonreimbursable basis for varying amounts above the $12,000.

Mr. SHEPPARD. Let me get that clear in my own mind. In other words, when these men are employed on the island in executive capacities you are only paying a proportion of their total salary under your contract; is that correct?

Admiral JELLEY. No. I am referring only to the people who are on the island full time.

Mr. SHEPPARD. That is right.

Admiral JELLEY. The top man may get $25,000 a year from his company, but we are only reimbursing $12,000 for that. The fellow from the main office who goes out for an inspection is different. We do not pay his salary.

Mr. SHEPPARD. He is charged to the overhead of the operation of the main office?

Admiral JELLEY. Yes, sir; which we do not reimburse.

Mr. SHEPPARD. What is the situation that prevails where you have a man whose services are there permanently and his home office carries over and above his salary or compensation for the Navy, say $12,000 up to $25,000? In other words, am I to assume from that that you are underwriting the difference between $12,000 and $25,000?

Admiral JELLEY. That comes out of their fee. That is a part of the out-of-pocket expense that they are not reimbursed for. Their fee is not all pure profit. I would estimate that not more than threequarters of the fee is profit before taxes.

Mr. SHEPPARD. The thing that strikes me at the moment-and probably I do not know the intricate operation-is that it is a rather far-fetched financial aspect if corporation X would pay $25,000 to an executive for his time in one of your island operations and yet only be reimbursed on a premise of $12,000. Your statement is to the effect they carry that differential in the overhead of the corporation itself.

Admiral JELLEY. It amounts to that; yes. But it must come out of the fee. In some cases we have required the fee contractor to provide such a full-time employee without any charge at all in the Navy-it is an officer of the company.

Mr. SHEPPARD. Am I to believe at the moment from your conclusions that again this differential between $25,000 and $12,000 does not come out of the total payment for the contract?

Admiral JELLEY. Well, it undoubtedly comes out of the fee, but it is not paid by the Navy in addition to the fee as a reimbursed salary. Mr. SHEPPARD. Let us say, for example, that the contract is for $1,000,000. Then your payrolls that support the operation on the island speak for themselyes insofar as personnel is concerned, and your peak there is $12,000. When it is all done and over with the total profit fee that comes out of it permits the $25,000, or the difference between $12,000 and $25,000?

Admiral JELLEY. That is right.

Mr. SHEPPARD. In reality, so far as the taxpayer is concerned, while you are not paying it in one sense you are ultimately paying it out of the taxpayer's money; to-wit $25,000.

Admiral JELLEY. We are paying it out of the fee.

Mr. SHEPPARD. So what it is actually costing you there for a $12,000 man is $25,000?

Admiral JELLEY. Yes.

Mr. SHEPPARD. They are a rather expensive personnel. Do you have to pay that kind of money to executives to handle that type of contract?

Admiral JELLEY. I think that you will find that some of those executives are getting more than that.

Mr. SHEPPARD. In those circumstances, I see that they can get more than that.

Admiral JELLEY. I think you will find on some of the lump-sum bid work the salaries paid are much higher than those that we are paying. Mr. SHEPPARD. You are pretty familiar with the engineering personnel throughout the United States, are you not?

Admiral JELLEY. I think so.

Mr. SHEPPARD. How many competent engineers today are getting $25,000 a year-just an estimate?

Admiral JELLEY. I would say a very small percentage of them, less than 5 percent, certainly.

Mr. SHEPPARD. I am inclined to say that $25,000 for executives on a job like that is rather expensive.

Admiral JELLEY. Not if they are really executives.

Mr. SHEPPARD. I do not care by what name you call them, it is the cost that is involved. Do you feel that we need executives at $25,000 a year to supervise the construction which, as far as I know, is just common construction? Do you figure that we need $25,000 executives to do that job?

Admiral JELLEY. Sir, he is supervising the operations at present of 4,000 men. He is building a steam power plant. He is building an earth-fill dam. He is building barracks. He is building utilitiesdistribution lines, and so forth. He has a wide variety of operations and a lot of men doing the work.

Mr. SHEPPARD. He is still a construction engineer.

Admiral JELLEY. He is spending $2,200,000 per month, and the $25,000 a year is small compared to that. He could waste his salary many times over.

Mr. SHEPPARD. I grant you that. When you enter into a contract with a firm, you are supposed for a stipulated amount of money to receive their ability, their know-how?

Admiral JELLEY. Right.

Mr. SHEPPARD. And the man who is on the island and in charge of supervision in an engineering capacity for the work that you refer to is an integral part of that corporation's executive ability.

Admiral JELLEY. Yes.

Mr. SHEPPARD. Now, how many do you have on the island that are in the $25,000 capacity?

Admiral JELLEY. I would say one. I am not sure that he is getting as much as $25,000.

Captain PERRY. Off the record.

(Discussion off the record.)

Admiral JELLEY. I do not think there are more than 12 people on the contract getting sums in addition to their Navy pay.

Mr. SHEPPARD. For the sake of discussion and clarification of the record, because there have been a lot of questions asked on this particu

lar issue, you have x-type of work to be done in the Pacific contracts. The next thing is, What kind of man do you need to supervise that situation? I do not think literally that is the business of the Navy. Again I may be wrong. I think the business of the Navy is to Sheppard & Sikes, contractors, "Here is the job. The specifications call for this kind of function." Then it would be up to Sheppard & Sikes, contractors, to supply the necessary mentality to make that job function as the blueprint requirements indicate. If that is the case, then I cannot see why this differential between $12,000 and $25,000 should exist. I cannot see why we have them cataloged at $12,000 when they are getting $25,000. What is your comment on that, Admiral Hopwood?

Admiral HOPWOOD. I am inclined to agree with Mr. Sheppard on the face of it. However, it would seem to me that the differential between $12,000 and $25,000 is probably paid from other contracts which that same firm has that does not relate to the particular Navy project.

Mr. SHEPPARD. Off the record.

(Discussion off the record.)

I am thoroughly satisfied from my knowledge of you gentlemen and your background of experience, as I have been able to observe it through the years, that you are scrutinizing these things and doing your utmost, of course, to protect the taxpayer's dollar, but we cannot just lightly pass over this differential aspect which at the moment at least is the cause of considerable inquiry by people outside of the function of the Navy's operation.

Now, I do not want to confine my interrogations to you, Admiral Jelley, or to you, Captain Perry. But across the table here, in discussing an issue of this character, I think it is only in keeping that we reach a conclusion as to what the terminus of this so-called money is. Let us define whether it comes out of profit or from payroll, and why we should be carrying a man at $12,000, because so far as Navy knows at the moment what you are actually paying for this kind of intelligence is $12,000.

Admiral JELLEY. That is true.

Mr. SHEPPARD. And you among yourselves must have concluded you could get the kind of man for $12,000 and you should not be paying more money. If there is some reason why your judgment was bad, let us have it.

Admiral JELLEY. Off the record.

(Discussion off the record.)

Mr. SHEPPARD. Has your counsel ever discussed this with you? Admiral JELLEY. I do not recall that we have discussed this specific point with our counsel.

Mr. SHEPPARD. I believe in response to an inquiry of the chairman you stated that all, or the major portion of, your State-side function would be in the competitive-bid category.

Admiral JELLEY. That is correct.

Mr. SHEPPARD. And I think it is also reasonable to assume, because you do not exercise the same premise in your remote areas, such as the South Pacific, Alaska, and other places of that general geographical character, that the job is based upon what originally was the cost of