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At the time of the redetermination of the third segment, there was an agreement that the contractor could accelerate without any specification as to what he would accelerate to.
Now, in the pricing, the pricing was based on the assumption or on the agreed position that it would run into July. But I don't think that the schedule called for acceleration to July. It called for acceleration, period. That is my understanding.
So that the point, while perfectly true as a matter of abstract principle, perhaps, has no application here, because the facts don't fit. That is my understanding.
Mr. COURTNEY. Any other questions, Mr. Chairman?
I would like for you, Mr. Courtney, to examine him-
Mr. HÉBERT. I am speaking to Mr. Courtney, General.
The only thing I want to make abundantly clear, General, is that we are supposed to be members of the same team in these instances, and the only way we can is to cooperate. Everything that we do is not letter perfect, and we are certainly subject to criticism, and we open ourselves to criticism.
At the same time, the Armed Forces-we recognize certain existence of certain peculiarities, perhaps, in regulations, and so on. We are trying to arrive at the same goal. But we can't unless we are open with each other, and instead of defending-which I have found has been the policy and not the exception, particularly the years of this committee. The policy is to defend, never to admit.
Now, here is a very important matter. I think the committee should have been given the benefit of what the opinion of the Air Force was in connection with the shortcomings of this particular contract. On the contrary, we were not given the benefit of that opinion.
We have consistently set up here during the whole time the Air Force has been on the witness stand trying to draw from them certain specifications of what was wrong with this contract. All we got in reply was: "General Motors is stupendous. General Motors is phenomenal. General Motors did a magnificent job."
We all agree to that. We know they did. We wouldn't expect them to do anything less. What we want to find out is what criticism, what constructive criticism, can be made in order that we can seek perfection. And we can't do it unless we know that there are shortcomings. But the whole attitude of the Air Force, until this morning, has been that this contract was all right and we did the best we could under it. I had no shortcomings expressed at all.
General THURMAN. Mr. Chairman, let me address myself to that statement, if I may.
Mr. HÉBERT. Certainly.
General THURMAN. Because I am somewhat troubled by some implications of the statement.
I think that we would be remiss in our duty to you and us and all the rest of us if in the course of preparing for your inquiry into any matter we did not explore all of the possibilities involved.
Now, in the course of exporing possibilities involved you accept some and reject others. We did that in this case. Now, there are other pieces of paper, I suspect, that are available which discuss pros and cons of various questions that have come up.
Now, as a result of discussing pros and cons, you come to a conclusion, just as we come to a conclusion. The conclusions that we have come to are the result of all these discussions. This piece of paper represents part of those discussions.
Mr. HÉBERT. The significant thing there is that this piece of paper-the first page of it is exactly what the Air Force's is, which is the good side of the coin.
In the second page which is attached to it nothing is said about it in that sheet, which is the critical side.
Mr. HARDY. Mr. Chairman, are we talking about the memorandum signed by Colonel Thompson?
Mr. HÉBERT. Yes. That is what I am talking about. There you had the document in your hand, presented by your own expert. And you only gave to the committee half of the piece, which was the good side. The critical side was not given to the committee at all.
General THURMAN. I find myself unable to agree to that, Mr. Chairman. When you asked me this morning what I thought of the procurement-I can't remember my exact language, but I think I said that in this as in almost any procurement you could find as an afterthe-fact proposition
Mr. HÉBERT. That is right.
General THURMAN. Things that you would criticize.
General THURMAN. That is true of this procurement.
If the chairman had asked me what was the result of the things I would have criticized, I would have been very glad to state them, and will now.
Now, I have been coming up to these hearings for some time. I have tried to be, and I think I have been, as frank as I know how. I don't think there has been any difference in the presentation of this case, Mr. Chairman.
Mr. HÉBERT. Well, it is interesting for us to know that that has been the presentation in the past, so we can look at some other things in the future. I believe you have been frank. I believe you have been protecting your interests. I don't want to debate it with you, General. But it is a criticism that I have. And we are entitled to our opinion. The Armed Forces come up here again and again and not admit, but only defend. On only one occasion have they ever admitted.
General THURMAN. I can specify one case where I, for one, among other spokesmen for the Armed Services, have said we were in error. Mr. HÉBERT. I said one case.
All right, Mr. Courtney.
Mr. COURTNEY. Mr. Chairman, so the record may be fully clarified, may I read the first paragraph, numbered "A," on page 2 of this memorandum, and ask the general a question?
The paragraph reads:
A. This contract got off on the wrong foot by an agreement between the Chief of the Procurement Division, AMC, with the General Motors Corp. (1) To use a profit rate of 8 percent, and (2) to use a form 2-B type of contract. The use of predetermined profit rates is not consistent with good pricing policy. The negotiation of a contract type prior to accomplishment of the overall pricing negotiation is not a sound pricing procedure.
The question is, General, who was the Chief of the Procurement Division, AMC, at the time this contract was agreed upon?
General THURMAN. I think that Gen. Phil Smith was. I am not
But, Mr. Courtney, I think we must look at the context-
General THURMAN. I know, sir. But I believe in fairness, I must expand on it.
This agreement was made, I believe, after the Korean war had started, when there was a general search to expand our aircraft base.
In occasions like that and circumstances like that, when we have an enemy on our heels and we have to try to fight them, you don't always invoke the best pricing policy in the world. Frequently, conditions are such that you can't do it.
Mr. COURTNEY. Well, isn't it true that occasionally the contractor will be adamant, as has been spoken of here, and insist upon the fixedprice redetermination contract?
General THURMAN. Yes, sir.
Mr. COURTNEY. Have you made any inquiry to learn what the position of General Motors was in this instance as to the type of contract and the rate of profit it would insist upon in the negotiations as a part of its agreement to accept this contract?
General THURMAN. No, sir; I have not, because I couldn't see where it would contribute to the situation. If it will, I will endeavor to do so.
Mr. COURTNEY. Those are are the only two questions I had.
Mr. HARDY. I have none.
Mr. HÉBERT. Mr. Hess?
Mr. COURTNEY. Mr. Chairman, I take it the whole memorandum may be made a part of the record.
Mr. HÉBERT. Made a part of the record.
(The memorandum referred to follows:)
AUGUST 13, 1957.
Memorandum for: General Thurman.
Subject: Evaluation of Contract No. AF33 (038)-18503 General Motors Corp., BOP Division.
Question: Was this a good procurement?
Answer: Yes, based upon evaluation of quality, delivery, and price.
Mr. Marts, MCQ, reports that General Motors produced a good quality aircraft and maintained a production facility as good as the average in this industry. They were considered better than Republic. He stated further that contracts with using commands revealed that there were fewer problems on BOP aircraft than on those manufactured by Republic. Colonel Graalman, who was director of procurement and production at the prime AMA, endorses the comments of Mr. Marts.
Contractor did not meet the delivery schedule originally contemplated but this was no different from many other contractors who were given large programs and unrealistic schedules in the early days of Korea. Contractor did substantially meet the realistic delivery requirements which were later agreed upon
except where the Government failed to meet its obligations in the engine and GFAE area. On the basis that this procurement is only being evaluated insofar as General Motors is concerned, it is believed that delivery requirements were met in an acceptable manner. In addition, the use of a dual-purpose plant for the first time was successfully accomplished, and there was available to the Government a substantial base for expansion should the need have arisen.
Price is considered reasonable based on value received by the Government in comparison with the design contractor's price and with the average cost of other airplane producers. The pricing technique is considered adequate based on the accomplishment of a fixed-price contract in a very difficult pricing situation. The fixed-price arrangement resulted in maximum cost reduction and had the program continued as originally planned would have resulted in great savings to the Air Force. Despite the fact that the pricing of this contract is considered adequate, there were several apparent breakdowns in gaining and communicating knowledge which might have made the pricing more satisfactory:
(a) This contract got off on the wrong foot by an agreement between the Chief of the Procurement Division, AMC, with the General Motors Corp. to (1) use a profit rate of 8 percent and (2) to use a form IIB-type contract. The use of predetermined profit rates is not consistent with good pricing policy. The negotiation of a contract type prior to accomplishment of the overall pricing negotiation is not a sound pricing procedure.
(b) Contractor's experience in the initial period indicated that unrealistic estimates were utilized in negotiating billing prices. This was no doubt due to placing an undeveloped airplane in production in a new plant and was fairly common during Korea.
(c) The validity of the bill of materials used for projection of the 228 airplane segment is questionable.
(d) There is an indication that the placing of an emergency airframe program in a non-airframe-producer's plant results in high man-hours per pound in the initial period. This was true at BOP and also at Ford. Since learning curves tend to meet the same point far out in the production run, the curves of these producers should be expected to decrease at a steeper percentage than the curves of regular airplane producers. It may be impossible to sell the steep curves that actually occur to the automobile people, but I believe that it is a sound and reasonable theory and that it should be developed further.
(e) It is indicated that local Air Force personnel discovered in spare parts price analysis that prices of materials had been adjusted downward, but the results had not been posted to inventory pricing cards. These cards were the source of bill of material data. There is no indication that local personnel were aware of the significance of this fact or that any report was ever made to pricing personnel even though it might have been utilized as late as the price redetermination of the third segment.
(f) General Motors was permitted to complete deliveries in May of 1955. There is no evidence that Air Force personnel considered any price change when permitting the contractor to accelerate from July to May.
GEORGE W. THOMPSON,
Lieutenant Colonel, USAF, Chief, Pricing Staff Division, Deputy
Mr. HÉBERT. General, there is one other thing I wanted to clear up, too. In your opening statement the other day you made this
At the outset I would like to take advantage of the fact that this is a hearing on an airframe contract, to express to the committee the gratification of the Air Force growing out of the report submitted by this committee after its hearings of last year on profits of 12 contractors in the airframe industry. We were very glad to read the entire report. Particularly we were gratified at the following conclusion: "The subcommittee concludes on the evidence that there has been no showing that on the average the profits allowed are excessive, and we have viewed the industry represented by these 12 major producers as a whole, and our conclusion relates to them as a whole, and it is our opinion that the Government is getting substantial value."
I want to get the record to show that this contract was not included in those conclusions. This contract was not before the committee at that time. And
the reason why it was not before it was given before. So, while we accede and tell you that on the basis of the hearings last year we do say that the Government got its money's worth.
General THURMAN. I am sorry, I must have misunderstood, Mr. Chairman, because I thought that the committee counsel stated the other day that it was as a part of the data submitted during the course of that hearing that he raised the question with the General Accounting Office.
Mr. HÉBERT. No, sir.
Mr. COURTNEY. It is not-General, it is not in the published proceedings of this committee, and this contract was not considered by the committee in open session.
Mr. HÉBERT. It is not in the evidence.
Mr. COURTNEY. It was expressly reserved.
General THURMAN. It was considered, I thought the 12 airframe prodcers was primarily concerned. And this company was not one of them; isn't that correct?
Mr. COURTNEY. That is correct.
Mr. HÉBERT. Yes, but on the evidence, this company was never injected into the airframe investigation until after the General Accounting Office had made its report. So, while I don't blame you, again, for accepting the accolade.
General THURMAN. We were pleased to have it.
Mr. HÉBERT. I want to keep the record straight that it does not include this particular contract.
Mr. COURTNEY. Nor does it include fixed price redeterminable contracts, Mr. Chairman.
Mr. HÉBERT. That is correct.
Here in your statement, after discussing the savings which the Government made, you make this statement:
Let me illustrate what I mean with respect to figures in this case, which already have been entered into the record. At the time of the negotiation of the second segment of this contract, which was based on experience on the first 71 aircraft and projects for the next 228, the parties agreed to a total price for the third segment of $97,500,000. This price was subject to redetermination at the conclusion of the 299th aircraft, which would be based on efficiency or lack of efficiencies of the contractor as demonstrated in his production of the second segment.
After production of the second segment, the parties redetermined the price of the third segment and lowered the price to $81,350,000, a difference of over $16 million. In other words, the efficiencies of the contractor under this fixedprice segment of the contract produced a direct saving to the Government in excess of $16 million of what appeared to be a reasonable price for the third segment at the time of the negotiation for the second segment.
On that line of reasoning, General: If the contractor walked in and wanted $91 million on these packed and padded figures, which they did go to the table with, then you could have claimed a savings of $26 million to the Government.
General THURMAN. No, sir; I referred to the prices we came out with.
Mr. HÉBERT. I know, but as it develops how this was negotiated and as we are developing what appears to be the facts and in three specific instances where the contractor had padded his figures, if he had padded the figures higher you could have come out with a greater saving, in your interpretation, to the Government, which actually would not have been a saving?