tractors, have great incentives to design for more economical production, higher reliability and greater ease of maintenance.

In a significant departure from traditional shipbuilding practice, the Navy, too, is now applying the total package concept to the construction of fast deployment logistic ships. This is a total change in ship procurement procedure. Interested bidders were requested last December to submit their qualifications and a formal request for proposals is scheduled to be issued late this spring. Later, in the summer, two or three successful bidders will be selected to conduct a 6-month study of the program. Contract definition, which involves the design, should be completed by the spring of 1967 and negotiation on the total procurement package should begin in the

summer.

Bidders for these ships will be asked to submit costed proposals to meet performance and reliability standards, rather than detailed ship characteristics or material specifications. By avoiding rigid specifications and requiring the bidders to guarantee their cost estimates and ship performance proposals, we hope to provide them with a strong incentive to engineer and design for maximum efficiency. The final contract award will cover the design, construction, and selected support aspects of a fleet of these ships. By employing a multiyear contract, and taking advantage of "learning curve" economies, we should be able to reduce construction costs considerably as well as obtain a highly desirable degree of standardization in this class of ship.

I think it is fair to say that our construction costs for this kind of ship which in some ways is comparable to commercial ships, have far exceeded commercial costs. This was because of particular material specifications or design specifications we inserted in the program. Here we are saying to our shipbuilding industry, we want ships that will do certain things, move at certain speeds, carry certain bulk tonnages, obtain certain efficiencies in loading and unloading, and we want the best possible design to do that. We ask you to prepare that design, to tell us what it will accomplish, to certify that it will, to stake your profit on accomplishing that, and to bid a total price for a given number of ships, including the design. This they are doing. The Air Force is presently planning to develop and procure the short range attack missile (SRAM) under the "total package" concept and the Army may employ a modified version of it for the advanced aerial fire support system. As we and our contractors gain more experience with this new method of procurement, we may be able to widen its use considerably.

The second major objective under "Buying at the Lowest Sound Price," as I mentioned earlier, was shifting from cost-plus-fixed-fee to fixed price and incentive contracts.

A contractor's motivation for good management and tight cost control usually varies in direct proportion to the degree of risk he bears. CPFF contracts, being virtually risk free, provide no such motivation. In contrast, fixed price or incentive contracts offer strong inducements for managerial efficiency because they impose serious financial penalties on the contractor who exceeds his cost estimates, defaults on his delivery schedule, or who fails to meet the performance specification. As shown in the chart below, in 1956 the cost plus

contracts were about 19 percent of our total. They doubled in relation to other contracts between 1956 and 1961, rising to 38 percent, as you can see by the peak of the curve in the following chart. We have reduced them to 9.4 percent.

Chairman DOUGLAS. Mr. Secretary, I think this is a magnificent performance. I have read most of the reports on specific contracts made by the General Accounting Office, and those reports in a large majority of instances were leveled against ways which had crept in because of the cost-plus-fixed-fee contractor.

Secretary MCNAMARA. Many, many of them have emphasized that. You are quite correct.

Chairman DOUGLAS. It is not quite as bad as cost-plus-percentage of cost contracts, which we had in the First World War, but almost as bad.

Secretary MCNAMARA. Yes, and the contractors had no incentive to minimize costs, and it was not that they were sloppy. It is just that in a very real sense the trite phrase "Necessity is the mother of invention" is correct. And as we provided incentive to the contractor, and as it became necessary for him to either reduce costs or reduce profit, he found ways to reduce cost.

The conversion of these contracts amounted to about $6.3 billion in 1965, and resulted in savings of about $436 million in that year. Representative CURTIS. Mr. Secretary, just one thing to be certain. On these you may have time deliveries, and I just assume throughout that the schedules have been met, too.

Secretary MCNAMARA. Yes. Well, the incentive contracts normally put a premium on meeting a time delivery schedule. Representative CURTIS. That is right, yes.

Secretary MCNAMARA. And in the event that schedule is not met, the profit is reduced according to the original terms of the incentive. Representative CURTIS. I felt certain that was so, but I wanted to make the record clear on that.

Secretary MCNAMARA. Yes, that is correct. And again it is true that performance in terms of delivery and in terms of reliability so often correlates directly with the performance in terms of cost. It is the contractor who meets his cost objective that also meets his time schedule, and correspondingly it is the contractor who fails to meet his cost objective who usually fails to meet the delivery schedule. To continue: Now that contracts entailing higher risks for the contractor predominate in our procurement, we are seeking ways to eliminate some of the administrative controls heretofore required under CPFF contracts for the Government's protection. These controls will be eliminated on an individual contractor basis, depending on the degree to which he has assumed the cost risks on his current contracts.

In addition, we are extending our contractor performance evaluation program, which centrally records the past performance of major contractors in meeting their commitments, i.e., delivery schedules, technical specifications, and costs. As I reported last year, our procurement offices are required to evaluate these records before selecting a contractor for a new development project, and before negotiating fees on noncompetitive contracts. We are now planning to use this information wherever applicable.

BUYING AT LOWEST SOUND PRICE

A third section under "Buying at Lowest Sound Price" has to do with multiyear procurement. This year for the first time, savings resulting from multiyear procurements are being included in our cost reduction program. By insuring longer production runs, we enable the contractor to avoid annual startup costs, thereby making it possible for him to offer us lower prices. In fiscal year 1965, the first full year of this effort, savings from multiyear contracts totaled $67 million. Shown below are some recent examples: There is a fertile field for saving here that we have hardly tapped up to the present time.

(The table referred to follows:)

Examples of savings resulting from multiyear procurement

Secretary MCNAMARA. The third major area of saving has to do with "Reducing operating costs. In 1965, through this category of action, we realized savings of about $1.1 billion. The first and by

far the most important section of this program has to do with terminating unnecessary operations.

Because the defense program is greatly influenced by changes in the international situation and in military technology, frequent and, at times, drastic shifts in requirements for weapons, manpower, and facilities cannot be avoided. Even while we have been steadily increasing our military strength, many existing military installations have become surplus to all foreseeable peacetime and wartime needs. These facilities must be closed if the defense program is to be managed efficiently and waste eliminated.

Although the impact of scientific and technological progress on weapons is generally well understood by the American people, not so well understood is its effect on our requirements for military facilities. Yet, the very fact that radically new weapons are continually replacing old ones means that we must often build new specialized facilities even though existing facilities become idle.

The impact of technological change on our installation complex goes very deep, affecting not only the operational facilities but also training, support, maintenance, and supply facilities. The depth and scope of this impact is well illustrated by the shift from manned bombers to strategic missiles which has taken place over the last 5 or 6 years. At the end of fiscal year 1961 we had about 2,500 strategic bombers and tankers compared to about 100 strategic missiles. By the end of this fiscal year, July 1966, we will have about 1,300 bombers and tankers and almost 1,500 missiles; and during this same period we phased out some 180 Atlas and Titan I missiles, which became obsolete. Such a major shift in weapons was bound to have a major impact on the required base structure; and the same kinds of changes, although to a lesser extent, have been taking place in the other services. In addition, the improvements in logistics management which both you and we have been striving toward, in themselves, result in reduced requirements for supply and maintenance facilities.

It was in recognition of these changes that the Defense Department in 1961 undertook a comprehensive, systematic review of all of its thousands of major and minor military installations around the world. These installations were examined category by category-the Army's supply and distribution facilities, the military ocean terminals, the naval shipyards, the Strategic Air Command base structure, the Air Force's supply and maintenance depots, et cetera. In each case, the facilities excess to our present and foreseeable requirements, including all emergency and mobilization needs, were identified and scheduled for closure or reduction.

Let me give you just one specific example to demonstrate the way in which these studies were carried out. In 1960 the bulk of the Air Force's supply and maintenance workload was being performed by nine major depots-this was the year in which the phaseout of the B-47 force began. Since that time, the total workload of these depots has declined very sharply and is projected to decline still further. Depot stocks, for example, declined from about 3.2 million tons to about 2.4 million tons by end fiscal year 1964, and a further reduction to about 1.8 million tons is projected by fiscal year 1970. The number of maintenance personnel (which is a good measure of the maintenance workload) declined from 57,000 to about 45,600 during the fiscal year

1960-64 period and is projected to decline to about 44,500 by 1970. In the light of these trends and on the basis of a detailed study of its depot needs over the balance of this decade, the Air Force concluded that five depots would provide all the warehousing required and more than enough maintenance capacity. Accordingly, a year ago last November we decided to close three depots, in addition to the one closed in 1963. The closing of these three depots will free almost 4,300 acres, eliminate about 7,500 positions, and save about $86.5 million annually when completed.

The present status of the program to terminate unnecessary operations on a "when completed" basis-is shown below. We have taken 852 actions to close or to substantially reduce bases or installations around the world. We released 1,752,378 acres of land. That is over 2,738 square miles of land. We have made 66 industrial plants available for commercial use. We have eliminated over 200,000 job positions, and this will result, when completed, in savings of about a billion and a half dollars per year.

Chairman DOUGLAS. Mr. Secretary, this is something that has been needed for a long time, and I think you have been the first Secretary to have the courage to put it into effect. Am I right in my understanding that a good many of the Navy yards were established in the days of sailing ships, when the distances in days between the Navy yards was relatively great, because the speed of the ships was low?

Secretary MCNAMARA. Yes, sir; that is true. Many of the Navy yards go back into the early part of the 19th century, and one as I recall into the 18th.

Chairman DOUGLAS. And isn't it also true that many of the Army posts were established in the days of the Indian wars?

Secretary MCNAMARA. Yes, that is definitely true, and it is necessary to

Chairman DOUGLAS. The Indians are no longer a menace to the internal safety of the United States.

Secretary MCNAMARA. We think not and believe not.

Representative CURTIS. Mr. Chairman, at this point let me join in your observation, because this has been a very difficult thing to do politically. I wish the press would note this. They did not note it the last time it came up. It is perfectly true that Senators and Congressmen will speak up when a base is being closed in their district, and indeed they should. But the bulk of the Members of both the House and the Senate, I would observe, have supported your position. I certainly have. I think that it did require political courage, but there were many that were backing you. I notice what you are going on to state about the economic adjustments. I think you have done a magnificent job there, and this shifting, Mr. Chairman, is one of the major areas that the Joint Economic Committee must be concerned about. So I want to join with the chairman in commending you in this regard.

Secretary MCNAMARA. I much appreciate the compliment you have given me. Obviously, I could not have done this without the support and as a matter of fact at the insistence of two Presidents, nor could I have done it without the support of a majority of the Members of Congress. I think it is entirely appropriate that our citizens should

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