There is one other factor in this, which is that the Russians do not have the public relations problem we have in these matters. We just have some constraints that they do not have.

(Additional information follows:)

Current evidence precludes exact quantification of the size of the Soviet chemical warfare stockpile, however, Soviet military documents discussing doctrine and employment reflect a Soviet requirement for a major stockpile, both in bulk and in munitions. Massive fill missiles and rockets are but one of many toxic agent delivery systems available to the Soviets. The Soviet ground forces have a variety of toxic chemical delivery means including artillery and mortar shells, multiple rail and tube-launched rockets, free rockets, and tactical missiles. The U.S.S.R. has an active chemical research and development program.

PROGRAM MANAGEMENT

Mr. SIKES. Mr. Secretary, earlier today, in speaking informally, you discussed the need to keep program managers on the job until they learn what they are there to do, and until you got from them the type of service they are capable of contributing. You commented on this in your statement on page 18.

You say they must be kept in the job long enough to get something done. This committee has long urged this course. Are you actually going to be able to accomplish it?

Mr. PACKARD. I have been talking about this problem almost since I have been here. In fact, I think we have made some progress. I reported briefly in my statement on a meeting I had a week ago last Saturday to which I invited nine of the project managers, three from each one of the services.

Two project managers from the Air Force that I know about specifically were given the assignment with the understanding that they would be there for 3 years. They were given authority to bring people into the project management staff and hold them for at least a 3-year tour of duty. In that case, we have made some progress.

The Navy has taken some action. They cited one case of an officer who was given the choice of commanding a ship or taking on one of these projects, and he chose to take on the project.

While the progress is not as much as I would like, I think there is recognition of our concern in this matter. Certainly, all three service Secretaries and all three service chiefs have supported this approach.

I have also suggested to you in my statement that it might be helpful if you would ask the service people, as they appear before you, the extent to which they are doing this. I would appreciate that help.

Mr. SIKES. This committee certainly supports that concept, and recognizes the need for more permanence in positions in contrast to the present system of frequent changes in assignment. It does carry some hazard in that it encourages empire building. Do you recognize that? Mr. PACKARD. I guess that is probably a good evaluation. We have some evidence of that already in various places. I do not know that you can take any one approach without checking upon it to be sure that it is properly used and followed. This is something that I think is a problem.

'One of the difficulties we still have in all of the services is that, even when the service appoints a project manager and gives him responsibility, there are other offices which monitor weapon system reliability

and maintainability and have in many instances built up empires to handle those specific functions. They have a lot of people.

It is all right to have those offices, with their knowledge and experience to do some of these things, but that knowledge and experience should be called for by the project manager, rather than imposed on him.

So, we have empire building already. I do not see any reason why it should be any worse if we go this other way, and it might actually be better.

Mr. SHILLITO. If you look at our hundred plus major projects, you probably would not have more than an average of 70 people in each project.

COMPETITIVE V. NEGOTIATED AWARD OF CONTRACTS

Mr. SIKES. On page 19, you say this:

Price competition is virtually meaningless in selecting a contractor for a cost incentive program. Other factors must control the selection.

Is there any new thinking on the award of contracts through competition rather than negotiation. The law says that you have to award to the lowest and best bidder when there is open competition.

Of course, that is what you should do. But the catch phrase is "best bidder."

Often the services feel that they are tied to the lowest bidder if it appears at all possible that he can perform the contract. The problem is that there are many contractors in today's competitive world who will attempt to buy in just to stay alive and keep their organization intact. Sometimes they cannot perform. The Government loses a lot of money to low bidders who cannot perform satisfactorily and who sometimes must be replaced.

What is your thinking on how best to determine when to award a contract to the lowest bidder? How do you determine if he is the best bidder?

Mr. PACKARD. My statement in that regard was directed primarily at the awarding of development contracts for major new weapons systems.

Mr. SIKES. I understand that, but I want to go into the whole question.

Mr. PACKARD. It is virtually impossible to make an accurate estimate of what a development will cost, and it is even more difficult to make an accurate estimate of what the production of an item will cost before it has been developed.

I am recommending, frankly, that we use more negotiated contracts on a cost incentive basis for these major programs.

Beyond that, I think we must recognize that where competition is feasible, it is a good way to make the selection. Difficulty arises in many cases because the bidder will say he can do something and quote a price for it, and then it turns out that, for one reason or another, he is not able to do it and gets into trouble.

It is necessary that we demonstrate that the contractor is qualified to perform before we accept his bid. If he has a bid sample, that bid sample can be tested. If it can be determined that his proposal does meet the specifications, and is otherwise responsive, then by all means

he should have the bid. The problem comes when you cannot really evaluate what his capability is.

I think that kind of approach should be encouraged. Finding that a contractor can demonstrate that he has achieved results, as contrasted with only saying he will do the job, is the sort of thing that can be useful.

Let us take the example of a development contract, just a hypothetical case. You have two firms. One of them might be a group of engineers who have hired a loft in New York City, and have a little money behind them. The firm has never done anything, but it bids on this program. How do you prove that the firm cannot do it? It is very difficult, especially when you compare that one with a firm that has produced these things over a period of time and you know they can do it. It is difficult for a contracting officer to be willing to stick his neck out, so to speak, and make those judgments, because you just cannot prove it.

I think that when we are negotiating contracts, we do have more flexibility. We can put more emphasis on whether this fellow did a good job the last time, and whether his performance has been good. I think past performance should be more of a factor in selection than what one says he can do in his brochure or in his response to the RFP. I think we should go more on performance.

Mr. WYMAN. Will you supply for the record what the phrase "cost incentive" means in a negotiated contract?

Mr. PACKARD. Yes.

(The information follows:)

The term "cost incentive" as used in negotiated contracts refers to one of three types of incentive parameters in incentive contracting. These are cost, schedule, and performance. A cost incentive is an arrangement whereby the contractor's profit or fee increases or decreases as his actual incurred costs fall below or above the contract target cost. The arrangement must be written so that it offers the contractor a real incentive to meet or better cost objectives; it must offer him rewards commensurate with the risks he assumes; and it must not create a situation in which cost is overemphasized or underemphasized relative to other procurement objectives.

Mr. PACKARD. While I say it is difficult to estimate the cost in advance of a development, it can be estimated at least as a ballpark figure. There is no trouble in asking the fellow you are negotiating with to give you a figure on what he thinks the development will cost and setting it up on an incentive basis, so if he does in fact equal or reduce the cost, he earns a larger share as profit. If his cost goes up, he gets a lower profit. If his cost is actually more than the estimate, you might say that at some point he shares in the excess costs, or at least receives no profit.

This gives him an incentive to try to meet some goal, but it recognizes that he might miss the target. If he misses the target very far, he gets nothing out of the job, but at least you do not put him in bankruptcy.

Mr. WYMAN. Are there any dollar limitations on review of negotiated contracts as a matter of policy within the Department? Mr. SHILLITO. What do you mean by that question?

Mr. WYMAN. I assume that in most of these negotiated contracts you probably would not be the person who actually designates the contractor. It would be somebody beneath you, under you in terms

of rank in the Department. Do you draw a line and say, for example, that in a negotiated contract involving in excess of $25 million or $50 million, I want to take a look at it?

Mr. PACKARD. Yes, there are some lines drawn. We have established the DSARC procedure, which essentially says that we review certain programs at the OSD level-what is the level on that?

Mr. SHILLITO. The level is $25 million for R. & D.

Mr. PACKARD. Yes; $25 million on R. & D., and $100 million for production.

Whether those are the right limits or not, that is what we are following.

Mr. SHILLITO. I think the point that should be made here is that each of the major weapons systems that Secretary Packard is talking about go through the DSARC procedure.

Mr. WYMAN. When you award the big ones, are Mr. Packard or Secretary Laird actually the people who make the final decisions.

Mr. PACKARD. In general, we do not try to make a decision as to which contractor it will be. We ask for a recommendation from the service. We look over their recommendation and simply approve their recommendation unless there is some reason not to do that.

Mr. WYMAN. Do you ask for a specific single recommendation and not a group of alternatives?

Mr. PACKARD. In general, some source selection procedures have been established which, in my view, are somewhat more elaborate than they should be. These procedures provide for an evaluation of the bidders and a recommendation from the source selection group to the service chief and the service Secretary. The service chief and the service Secretary can apply judgments to modify that decision.

Their recommendations are brought up through the DSARC. They are reviewed by this committee, which includes the Director of Defense Research and Engineering, the Assistant Secretary of Defense (I. & L.), the Assistant Secretary (Comptroller), and the Assistant Secretary (Systems Analysis). The proposals are reviewed at that point. The DSARC is usually more interested in whether the evaluation has been done properly than in what the particular recommendation is.

The final recommendation then comes up to us for approval. Mr. WYMAN. Are there standard operating procedures or regulations within the Department that apply to this process to which you just made reference?

Mr. PACKARD. Yes.

Mr. WYMAN. I would like to have that when it is convenient.
Mr. PACKARD. Yes, we can provide that to you.

(The information follows:)

STANDARD OPERATING PROCEDURE AND GENERAL GUIDELINES THAT APPLY TO THE DEFENSE SYSTEMS ACQUISITION REVIEW COUNCIL

The standard operating procedure and general guidelines within the Department of Defense that apply to the Defense Systems Acquisition Review Council process are embodied in the two documents (copies attached):

1. A multiaddressed memorandum of May 30, 1969, signed by Deputy Secretary of Defense David Packard, subject: Establishment of a defense systems acquisition review council.

2. A memorandum for the Deputy Secretary of Defense of July 19, 1969 signed by Assistant Secretary of Defense Barry J. Shillito and Defense Director of Research and Engineering John S. Foster, Jr., subject: Defense Systems Acquisition

Review Council-administrative procedures. This memorandum was approved by Depeuty Secretary David Packard on August 28, 1969.

[Attachments]

THE DEPUTY SECRETARY OF DEFENSE Washington, D.C., May 30, 1969. MEMORANDUM FOR SECRETARIES OF THE MILITARY DEPARTMENTS, DIRECTOR, DEFENSE RESEARCH AND ENGINEERING, ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER), ASSISTANT SECRETARY OF DEFENSE (INSTALLATIONS AND LOGISTICS), ASSISTANT SECRETARY OF DEFENSE (SYSTEMS ANALYSIS)

Subject: Establishment of a defense systems acquisition review council

I have been reviewing for some time current practices within the Department of Defense for the acquisition of major systems. My review has highlighted the importance of our organization and practices for accomplishing this management job. The primary responsibility for the acquisition and management of our major systems must rest with the individual Services. Within each service, this responsibility is focused in the project manager. Recognizing the service responsibility. I am, at the same time, most anxious of insuring, before we approve transitioning through the critical milestones of the acquisition of a major system, that all facets of the acquisition process are properly considered.

Toward this end, I am establishing a Defense Systems Acquisition Review Council (DSARC) within the Office, Secretary of Defense to advise me of the status and readiness of each major system to proceed to the next phase of effort in its life cycle. The Council will serve to complement the development concept paper (DCP) system, which continues as a formal DOD management and decisionmaking system for the acquisition of major systems. The Council will evaluate the status of each candidate system at three basic milestone points: First, when the sponsoring service desires to initiate contract definition—or equivalent effort; second, when it is desired to go from contract definition to full scale development; and third, when it is desired to transition from development to production for service deployment.

The functions of the Council are separate from and do not encompass the management reviews of major systems which I have previously requested and which are being conducted by D.D.R. & E. with assistance from ASD (I. & L.) and ASD (Comp.). These reviews are focused on the management of the system whereas the DSARC reviews will cover all issues, program thresholds and other matters normally treated in DCP's. Also, the management reviews will normally be held only once on each major system; whereas the DSARC reviews, which are based on program milestones, will be normally conducted three or more times during the acquisition cycle of a particular system.

The membership of the Council will include D.D.R. & E., ASD (I. & L.), ASD (C), and ASD (SA). For the first two milestone reviews, that is, prior to entry into contract definition and prior to entry into full scale development, the Council will be chaired by the D.D.R. & E. For the third review, related to the transition from development to production, the Council will be chaired by the ASD (I. & L.).

I am initially defining major systems, which will be subject to Council reviews, to include (1) those for which development concept papers are required; and (2) those specifically designated by me for review and evaluation. A tentative charter for the Council is attached as an enclosure. I desire that the D.D.R. & E. and ASD (I. & L.), within the next 30 davs jointly prepare the necessary procedures and take the necessary administrative actions to implement the Council charter.

I believe the Council operation will result in improved management and will augment the decisionmaking process within the Department of Defense. I cannot overemphasize the need for complete interface throughout the Department in the system acquisition process.

DAVID PACKARD.