Now, judgment is, of necessity, a major factor in the actions of people who are trying to project into the future. We have to look at each individual case, of course. If there is an individual who consistently makes poor judgments, we will put him in a different spot, or in an extreme case get rid of him. But another person who makes one single bad judgment after a whole series of good judgments, this is not the person we want to reprimand. We can tell him he made a poor judgment in a case. He probably knows it himself.

Mr. HOLIFIELD. It certainly should not be held open to public cen

sure.

Mr. CHARLES. That is correct, absolutely. You destroy initiative, imagination, and you will not get the good judgment in the future that you are precisely trying to get. So we do not have a policy of public censure.

Mr. HOLIFIELD. Well, I certainly agree with that. As an employee of labor and private industry, I never reprimanded an employee in public. I would call him into my office and explain to him where I thought he had erred, and if I felt that he needed to be admonished I would admonish him privately. Now, if he persisted in his mistakes, why that would be a different thing and it would be, as you say, grounds for relieving him of his duties. But certainly this type of thing is a poor way to maintain the morale of an organization were you depend on initiative and you depend upon freedom to exercise judgment and such expertise that an individual has accumulated over the years.

Mr. CHARLES. I agree.

Mr. HOLIFIELD. Mr. Secretary, and your associates, we appreciate your appearance here this morning. You have been very responsive and I think we have covered quite a few contracts. It gives us an overall understanding of some of these matters and we hope that it will be profitable to the Congress and to the agencies involved.

Mr. CHARLES. Thank you, sir. We appreciate your courtesy.
Mr. HOLIFIELD. The meeting is adjourned.

(Whereupon, at 12:30 p.m., the hearing in the above-entitled matter was adjourned, to reconvene at 10 a.m., Tuesday, June 1, 1965.)

48-132-65- -27

COMPTROLLER GENERAL REPORTS TO CONGRESS ON

AUDITS OF DEFENSE CONTRACTS

TUESDAY, JUNE 1, 1965

HOUSE OF REPRESENTATIVES,

MILITARY OPERATIONS SUBCOMMITTEE

OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C. The subcommittee met, pursuant to recess, at 10 a.m., in room 2247, Rayburn Office Building, Hon. Chet. Holifield (chairman of the subcommittee) presiding.

Present: Representatives Chet Holifield, William S. Moorhead, Frank J. Horton, Delbert L. Latta, and Howard H. Callaway.

Also present: Herbert Roback, staff administrator; Douglas Dahlin, attorney; Daniel Fulmer, attorney; Paul Ridgely and Robert J. McElroy, investigators.

Mr. HOLIFIELD. The subcommittee will be in order.

For the past 3 weeks, the subcommittee has been holding hearings on the subject of "Comptroller General Reports to Congress on Audits of Defense Contracts." We have heard testimony from the Assistant Secretary of Defense (Installations and Logistics), the Comptroller General, the Assistant Attorney General for the Civil Division of the Justice Department, the Controller of the Atomic Energy Commission, the Materiel Secretaries of the Army, Navy, and Air Force, and their supporting witnesses. We have discussed issues that have arisen in a fairly broad range of cases, and the witnesses have called other cases to our attention. We have looked at the roles of the various agencies concerned, at the practices and procedures being followed, and at the agency responses to GAO reports. We have heard about the voluntary recovery efforts that have been undertaken. I believe that we have a very good and unique record, which will be published as soon as it can be edited. We have brought to light and examined problems in procurement and contracting that are sorely in need of examination. We have heard some constructive recommendations and

we hope to get others.

Having heard the Government side, this week we will hear industry witnesses. They represent companies which, in most cases, have been on the receiving end of the GAO reports. I made it clear at the outset of the hearings that we wanted to hear all parties who had useful information or constructive recommendations to present to the subcommittee. In a field so controversial as this, the subcommittee wants to get the full story on all sides. This is not only the fair thing to do but it is necessary in order to perform properly our reporting function to the Congress.

Since our time is more limited than we would prefer, to accommodate all witnesses, we may have to ask them to present their written statements for the record and to highlight the points in oral testimony and respond to questions. The written statements will be printed in full, however.

The first witness will be Mr. Karl G. Harr, president of the Aerospace Industries Association.

Mr. Harr, could you come to the witness chair and bring your associates.

Would it be possible for you to summarize this statement Mr. Harr?

STATEMENT OF KARL G. HARR, JR., PRESIDENT, AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC.; ACCOMPANIED BY MORTON WILNER, GENERAL COUNSEL

Mr. HOLIFIELD. Or would it be just as short for you to read it? Mr. HARR. I might read it. It is not very long.

On my right, Mr. Chairman, is Mr. Morton Wilner, general counsel of the Aerospace Industries Association.

Mr. Chairman and members of the subcommittee, my name is Karl G. Harr, Jr. I am president of the Aerospace Industries Association of America, Inc., an association comprised of the principal manufacturers of aircraft, missiles, and spacecraft, their propulsion, guidance systems, and related components.

First, I would like to thank the subcommittee for this opportunity to testify. The committee's recognition of the need for an open examination and free discussion of the GAO audits of Government contracts is, we believe, most timely, and we are happy to participate. As you have indicated, industry is increasingly concerned with some of the situations created by GAO audit reports and practices.

In the course of the hearings to date this committee and the Government witnesses that have appeared before it, have delved in considerable detail into some of the cases and the issues involving the GAO's reporting practices and their effects.

There will presumably be further consideration of these and other cases and issues in the course of subsequent testimony by representatives of industry.

Therefore it does not seem to me my most useful function, nor would I be the most competent witness for it in any case, to plow this same ground. Company representatives will be in a position to speak to specific cases. I shall instead, Mr. Chairman, seek to pinpoint as precisely as possible the nature of industry's concern.

To set the stage for an understanding of this industry's perspective, let me cite just a few particular facts about the aerospace industry. It is large, perhaps the nation's largest manufacturing industry, employing well over a million people and having annual sales of approximately $21 billion. It is a highly competitive industry. It is a low profit-(2.6 percent compared to a national average of 5.2 percent)— net of sales after taxes industry. And it is an extremely technically oriented industry. It specializes in the management of highly complex systems interfaces and the research, development, and production of highest performance hardware at the outer limits of science and technology.

It sells approximately 85 percent of its products to the Government. In short, it is the Government's principal source of hardware for the support of the Nation's defense and space programs; as such it has become in a very real sense an instrument of national policy and an integral, if largely passive, partner in the procurement system evolved by the Government over the past decade or so.

Yet of course, it remains private industry subject to all of the economic disciplines of the free enterprise system.

In the service of these two tough masters, this industry has produced the technological miracles that underpin our national defense and space objectives, and has done so without loss of its economic viability. It has been able to do this only by virtue of radical managerial innovation, not only with respect to the hardware produced, but also with respect to internal management procedures involving, inter alia, cost control techniques, manufacturing standards and processes, and personnel motivation.

I believe each of these facts has some relevance to the matter at hand. Industry is, of course, deeply concerned with the issues that have heretofore been presented and discussed in the course of the testimony of Government representatives. Particularly the issues affecting integrity of contracts and Government involvement in contractor operations. Essential to the workability of any procurement system either within private industry or between private industry and the Government is the integrity of contracts. This integrity is undermined insofar as industry is concerned if the Government does not speak with one voice as, for example, when a contractor is penalized, publicly criticized or simply rendered uncertain as to whom he is accountable to even when carefully following practices established pursuant to the policies of the procuring agencies. It is also undermined if contracts are demonstrated to be unilaterally amendable after, and sometimes years after, completion; if contract finality is unduly postponed; or if by any of the several other procedures already discussed in the course of these hearings, it is possible to render that which has been openly arrived at, agreed to, held to, and performed by the contracting parties, not binding on both parties.

Government contracts must and do provide the basic structure for all dealings between Government and industry just as they must and do between separate entities within private industry. If the integrity of such contracts is undermined, the whole structure falls apart.

Equally essential to the workability of a procurement system based upon utilizing the skill, experience, and judgment of private industry is the principle that, within the limits dictated by the fully recognized need for adequate safeguards, sufficient opportunities must exist for the application of this skill, experience, and judgment. To the extent that these talents of private industry are diminished, overridden or substituted for, the objective of the system is thwarted, private industry's principal value to the Government is vitiated, and the taxpayer is short changed.

Moreover, oversimplified judgments on highly complex matters made years after the prevailing circumstances of a negotiation, singling out for review but one point from a total context of many interrelated points, hardly constitute an effective way of reviewing, reforming or adjudicating the quality of managerial performance.