Mr. GORDON. The ground rules are covered by the contract under which the airplanes were produced and the renegotiation law under which these contracts can be renegotiated by the Renegotiation Board.

In the case of these particular requests originating or coming to General Motors, I say the first request was pursuant to our internal policy, alleged internal policy, of 125 percent of bid rate, of return to a contractor, if the actual profit to the corporation exceeded 125 percent of the bid rate. It was not a contractual item, as far as the contract was concerned.

Mr. HÉBERT. Now, Mr. Gordon, in that connection, let me make myself very clear. At no time do I want to indicate to you that I challenge your legal rights.

Mr. GORDON. Yes, sir.

You

Mr. HÉBERT. I think that you have certainly acted within the law. I do not believe that General Motors has acted without the law. have acted within the law.

Mr. GORDON. Yes, sir.

Mr. HÉBERT. But I certainly do believe your position is demanding your pound of flesh within the law, which General Motors has done in this one particular instance, where actually $1,700,000 overcharged on an item, on an assembly, which was later developed, and later revealed, and which I understand General Motors position was, in presenting the invoices on this particular item, that the Government could have found the true value or the true costs if they had only looked for it.

Not having looked for it, the $1,700,000 overcharge was made. And General Motors insisted on its legal position of staying within the letter and terms of the contract and refusing to return the $1,700,000. And in this connection let me say further that it is the information which I understand-my attention has been called to the fact that the General Accounting Office did challenge the legal validity of this claim, and at the moment it is in conference with the Justice Department to determine what legal action can be taken.

Mr. GAVIN. Is that right? Do you know that it is in the hands of the United States Attorney General for legal action?

Mr. HÉBERT. Not in his hand. They are conferring with the Justice Department.

Mr. GAVIN. Oh, they are conferring. You said it is in the hands of. Mr. HÉBERT. They are conferring.

Mr. GAVIN. Conferring is different. It is different from being in the hands of.

Mr. HÉBERT. I thought I made myself clear.

Mr. GAVIN. You didn't make yourself clear with me on that point. Mr. HÉBERT. The General Accounting Office has gone to the Justice Department to ascertain its legal position, and this was also indicated in the original statement by the General Accounting Office to the committee.

Now

Mr. GORDON. Mr. Chairman.

Mr. HÉBERT. Yes, sir.

Mr. GORDON. May I interject a few words here?

Mr. HÉBERT. Certainly.

Mr. GORDON. Relative to your question.

At the time request came in for the return of this $1,700,000, our business, our defense-business reports had already been filed with the Renegotiation Board for the entire year of 1955, including the questionable $1,700,000 refund in this case.

This material had already been prepared and placed before the Renegotiation Board.

There has been no action taken by the Renegotiation Board in relation to the business for that year.

Mr. HÉBERT. Now, I was coming to that next.

On page 5 of your statement-and reaffirming which you just said

now

Further than that, defense sales are subject to the Renegotiation Act of 1951. The act provides that in determining the reasonableness of profits, the Renegotiation Board must give favorable recognition to the efficiency of the contact, with particular regard to the attainment of quantity and quality of production, reduction of costs and economy in use of materials, facilities, and manpower.

Now, Mr. Gordon, don't you know it to be a fact that the Renegotiation Board can't determine this contract as an individual contract? Mr. GORDON. Yes, sir, although all the facts

Mr. HÉBERT. Then why did you make a statement that—

Further than that, defense sales are subject to the Renegotiation Act of 1951—

leaving the impression that the Renegotiation Board can recover, in reference to this particular contract, when, as a matter of fact, they can't? Isn't that a fact?

Mr. GORDON. No, sir; that is not a fact.

Mr. HÉBERT. What is the fact?

Mr. GORDON. The Renegotiation Board goes over the entire General Motors business.

Mr. HÉBERT. That is right.

Mr. GORDON. This contract is an integral part of that business. And all the detail, the profits, and all the rest of it, applicable to this contract, have been included in the summary of the overall corporation business of General Motors as it relates to defense procurement. Mr. HÉBERT. That is right.

Mr. GORDON. And it is in the hands of the Renegotiation Board. The details of this contract are in the hands of the Renegotiation Board. I would like to repeat the statement that I made.

As previously indicated, the F-84F contract

this is page 28

is subject to the Renegotiation Act of 1951. Profits on the F-84F contract have been included in the overall profits on defense business General Motors has reported to the Renegotiation Board for each of the years during the life of the contract. The renegotiation proceedings have been completed through 1954. Most of the F-84F fighter plane deliveries took place in 1955. The required reports for that year as well as 1956 have been filed with the Renegotiation

Board, but proceedings have not been completed. The Board will review profits on this and other contracts and may negotiate any refund considered appropriate.

Mr. HÉBERT. I appreicate your reading that, because I was going to come to that later on, and ask you to read that, again, for emphasis. Mr. GORDON. Yes, sir.

Mr. HÉBERT. So we come back to the same position, that as a matter of fact, this particular contract cannot be renegotiated as an individual contract?

Mr. GORDON. That is correct, yes, sir.

Mr. HÉBERT. But the impression is left in the testimony

Mr. GORDON. Not as an individual contract, but certainly as an item, as a very strong part of the entire corporation's business for that year, all of which is renegotiable.

Mr. HÉBERT. That is correct. I admit that. But there is no legal grounds for renegotiating or recovery any one of this $17 million plus, which the General Accounting Office said you received in overprofits, on that contract. It must be included in all other contracts?

Mr. GORDON. Yes.

Mr. HÉBERT. Which would dilute losses in other areas?

Mr. GORDON. That is right.

Mr. HÉBERT. That is correct.
Now, page 18.

Mr. RIVERS. Of course, Mr. Chairman-may I interject there? Irrespective of this or any other contract, that is the weakness in the law which we put on the books.

Mr. HÉBERT. Well, we are not discussing, Mr. Rivers, the weakness of the law. There are a lot of weaknesses in the laws. I am just trying to find out what the fact is and don't want

Mr. RIVERS. I have always complained about that section of the Renegotiation Act.

Mr. HÉBERT. That is correct. I am just pointing out now that I don't want anybody to get the impression by the usage of this language that this contract can be negotiated as an individual contract. Now page 18:

Experience has demonstrated again and again that the fixed-price contract provides the greatest incentive for cost savings.

Cost savings to whom? The Government or General Motors, or the private contractor?

Mr. GORDON. To the Government and the taxpayers, primarily. Mr. HÉBERT. Well, in this particular case the cost savings—your efficiency was certainly amplified and certainly evident, but on the very cost of the product the Government was called upon to pay $17 million more than it should have paid for the particular item. Mr. GORDON. There is basic disagreement.

Mr. HÉBERT. Well, express your disagreement. I want you to.
Mr. GORDON. On the $17 million item, that it is excessive cost. There,

again, if you refer to the statement as made this morning

Mr. HÉBERT. Excessive-I meant overpayment.

Mr. GORDON. Excessive profits.

Mr. HÉBERT. Excessive profits, put it that way. But still the $17 million plus is reflected in what the taxpayer has to take out of the pocket.

Mr. GAVIN. Yes, but what about the contract General Motors has with the Air Force at the time which permitted them, according to his statement here, at least up to 8 percent. They come in here and they have a profit of but 5.4 percent. Let's be fair about this.

Mr. BATES. That is after taxes.

Mr. GAVIN. After taxes, right.

Mr. HÉBERT. They did not-we will correct that right now.

Mr. GAVIN. Well, we correct it here, if you will permit me to read here. If the gentleman would yield. That letter here to Mr. Campbell from General Motors—

The proposed report contains certain of the data or information previously supplied by the contractor. However, I believe that a more complete and more accurate account will be presented if the following information is also included:

1. In footnote C, on page 2, a statement is made that a profit rate of 8 percent was agreed upon at the time that this contract was placed, and that the price negotiated included a contemplated profit of not more than 8 percent. There was no agreement or comitment of any kind that the contractor was to be limited to a profit of 8 percent on the actual cost, nor was the contractor guaranteed any percentage of profits on cost or protected against a loss on the contract.

Yesterday you said-counsel said what called his attention to this particular aircraft manufacturer was that they had a profit of 11.3. But you did not add that this 11.3 percent on sales before income taxes, which gave them a net of 5.4, which, according to the agreement they had with the Air Force, was within reasonable bounds. Mr. HÉBERT. Are you finished?

Mr. GAVIN. Correct. I am finished.

Mr. HÉBERT. Now, Mr. Gordon, at page 18, near the bottom of the page, it says:

However, it does not guarantee any profit nor protect against losses.

Now, as a matter of fact, this contract did guarantee you a profit, at an estimated 8 percent, and that was the approach and understanding, that you would negotiate the contract on the basis of an 8 percent profit. At no time in this contract were you subject to any losses. Mr. CUNNINGHAM. Mr. Chairman, would you yield there? Mr. HÉBERT. Yes, but

Mr. CUNNINGHAM. I am just concerned. If it had guaranteed them 8 percent, how did it happen they only got 5.4 percent? Mr. BATES. That is after taxes.

Mr. CUNNINGHAM. Was the 8 percent to be before or after taxes? Mr. HÉBERT. The 8 percent was to be before taxes.

Now, in that connection, what have you to say, Mr. Gordon? Mr. GORDON. Suppose the costs went up on some of these items and it had resulted in a loss, would there have been an 8 percent profit? Mr. HÉBERT. You, by your own testimony, had 90 days in which to protest, for a redetermination again.

Mr. GORDON. After a period of 90 days we could have asked for a price redetermination; yes.

Mr. HÉBERT. You certainly could.

Mr. COURTNEY. Not oftener than 90 days. Mr. HÉBERT. Not oftener than 90 days. all times.

Mr. GORDON. Not retroactively, no, sir. there was no retroactive pricing allowed.

You were protected at

After the first segment

Mr. HÉBERT. We are not talking about the first segment. We are talking about the third segment.

Mr. GORDON. That is the point, sir.

Mr. HÉBERT. That is the point. And you make capital of the fact that if the Air Force felt it had been outnegotiated or had agreed to a price higher, they had 90 days to come in and make a claim.

Mr. GORDON. No, no. The price could not be retroactive in any segment after the first segment, then only prospective forward pricing. Mr. HÉBERT. We will come to that later. Now, in connection with the 8-percent agreement, you had no such agreement?

Mr. GORDON. No, sir.

Mr. HÉBERT. Mr. Courtney, will you read from the minutes of the Air Force?

Mr. RIVERS. No such agreement for what?
Mr. HÉBERT. For 8 percent profit.

Mr. GORDON. Eight percent profit.

Mr. HÉBERT. Wait. Let us get this now.

Mr. GAVIN. It is getting 20 minutes to 12. We are going to the floor of the House.

Mr. HÉBERT. Read, Mr. Courtney.

Mr. COURTNEY. Mr. Chairman, paragraph 20 of the negotiators' notes reads, in the first sentence, as follows:

A profit rate of 8 percent was agreed upon at the time this contract was placed. This is a normal profit rate for a procurement of this type. The negotiated price of $271,165 per unit includes a profit factor of not more than 8 percent, based on the Government's concept of a realistic cost.

Those are negotiators' notes, Mr. Chairman.

Mr. HÉBERT. I know.

Is that a true statement, Mr. Gordon?

Mr. GORDON. It is a true statement as stated there, yes; yes, sir, but if we take a look at the nomenclature, it speaks of profit rate, not an agreed-upon rate of profit for us.

I think the letter very clearly states the conditions that surround this 8 percent, and that is that that is a bid profit rate, a going-in rate, and not a profit rate for profit by the corporation, but for pricing purposes, not a limiting factor. There was no limitation anyplace put upon profit rate on this contract.

The 8 percent factor is the bid rate going in for pricing purposes only, and the correspondence between Mr. Curtice and General Smith at the field outlines that very distinctly.