Four Essays from the Procurement Seminar

Nov. 1, 1959

Tightening Up the Nation’s Largest Business

By Hon. Donald R. Jackson

Deputy Assistant Secretary of the Air Force, Materiel

It has been said many times that Air Force procurement is the largest single business

In the nation. Obviously, the Air Force programming and procurement practices affect, directly or indirectly, a major segment of the nation’s industry. It logically follows that it is important that we establish a common understanding of our management procedures which have such an impact on both the Air Force and industry….

Our present weapon systems management procedures are an evolution and refinement of the procedures by which the Air Force has historically managed its programs. We will continue to emphasize and improve on the techniques and procedures for management as the varying situations demand.

Two areas of procurement have recently received increased attention in weapon system procurement. These two areas are “team proposals” and “subcontracting.” Both are generically related to the problem of the composition and membership of the industrial structure established for a weapon system or a major subsystem.

Our original purpose in encouraging industry to submit team or group effort proposals was to increase the quality and completeness of proposals made to us…. The desirability for grouping of effort and capabilities grows out of the fact that recent developments in advanced systems have required integration within a widening spectrum of technology. The total technology and knowledge of the military arts for advanced weapon systems have moved forward in separate segments of industry.

One of the clearest demonstrations of this fact is that the Dyna-Soar project will group, for the first time beyond the experimental stage, the products of the ballistic and aerodynamic technologies. The benefit of the team or multi-company approach lies in the grouping of this effort prior to the systems proposal stage rather than aligning the effort after a systems contractor has been selected.

As systems have grown more complex, the interaction and relationship of all elements of a system have become critical. Our appraisal of a complete system proposal, therefore, requires an evaluation of each proposed subsystem. In order for industry to submit proposals which will permit a meaningful evaluation, team or multi-company alignments undoubtedly will continue to be made. This is desirable from two standpoints: First, to improve the quality and completeness of systems proposals which industry offers to the government. Secondly, to gain time through initiation of inter-company coordination and planning as early in the systems cycle as possible. Both of these objectives will continue to grow in importance in future systems competition.

As a practical and necessary preliminary to systems decisions and accomplishments, the team or multi-company approach has much to offer; but here we encounter some very real and important problems. At the root of the problem is the fact that there is not legal basis or definition of a “team.” Our sole means of recognizing and of establishing a contractual relationship is by the historic and accepted “prime” and “subcontractor” relationship.

It would not be to the best interest of industry or to the government to undertake the cost and risks of establishing corporate forms of team responsibility prior to the awarding of any contract. The government must reserve the right to select from all proposals those subsystems which will best meet the requirement for a complete weapon system. From our experience to date with team proposals, we believe there will be very few cases of team alignment being supported by inter-company legal agreements, and we see no need for these legal alignments. We must recognize only the rights and relationship which can be established under present contracting authority between the government and a contractor….

Our Principal goal in procuring a new weapon system must always be to get the best possible system within a time period dictated by the requirement for the weapon. This means that we must make optimum use of competitive ideas, established capabilities, and facilities. We do not consider these objectives to be in conflict but rather that they are mutually supporting. In more specific terms, it means that the membership of “teams,” the selection of products and sources for major subsystems, and the approval of the contract reflecting these, require joint input by the system contractor and the government. Again, let me say we reserve the right to approve or veto any proposals made to us that indicate an incompatibility with the fundamental goal I have just mentioned. We consider that this position encourages the aggressive use of initiative, maximum competitive opportunity, and the flow of cooperation which are characteristic of our industry economy.

Once we have set the basic pattern of subcontracting effort at the system and subsystem level, the subsequent actions in subcontracting are triggered. As development ideas are translated into structural concepts, the questions of specific hardware manufacturing capabilities and capacities arise. In this area, both in the interest of saving time and money, we insist on the joint review with the weapon system contractor of his manufacturing plan. This is commonly known as the “make-or-buy” plan.

Our principal reason here is that we have created a very large complex of specialized manufacturing capacity, which we cannot afford to duplicate or neglect if it is needed. This area of concern is covered by our present make-or-buy policy which is established by the Air Force Procurement Instruction 53-101. Under this, prime contractors involved in cost-reimbursement and redeterminable contracts for more than $350,000, or in firm fixed-price contracts requiring additional government furnished facilities, are required to submit their proposed make-or-buy structures in advance of negotiations. This is an outline of a manufacturing plan, describing which of the major or critical components, assemblies, or subsystems a company plans to manufacture in-plant, and those which it proposes to place with subcontractors.

We want to establish this make-or-buy structure before a contract is let because of its obvious impact on the over-all cost, quality, and delivery of the product, and on the possible requirement for government-furnished industrial facilities. In addition, we want to assure ourselves that existing capabilities, including small business concerns, will be used to the maximum feasible extent, and that the prospective prime contractor is not planning to use this contract as a means of expanding into new areas of production where adequate subcontracting capacity exist. The proposed make-or-buy structure is a subject for negotiation, and when agreed to, is attached as an exhibit to the contract. The prime contractor may make changes in the structure, but he must advise of his intentions, in advance, which gives us an opportunity to assess the change and object, if occasion warrants….

Finally, a few words regarding cost reduction. I realize this subject has been stressed many times in the past, but its importance is particularly critical now. Today, the fiscal year 1960 and 1961 budgets of the Air Force pose monumental problems. Industry will feel the impact in terms of further emphasis to work harder — and harder — on reduction of costs. This, of course, means that competition will become even keener than in the past. Success in obtaining contracts, as well as their continuance, may well depend upon the ability of primes as well as subcontractors to control their cost. Industry has already felt the impact of this problem. It will not be alleviated in the near future.

… Industry and USAF Must Be Able to Trust Each Other

Lt. Gen. Mark E. Bradley, Jr., USAF

Deputy Chief of Staff, Materiel

Congress bases the appropriation of funds for the Air Force primarily upon three considerations:

Congress bases the appropriation of funds for the Air Force primarily upon three considerations:

• The type and proximity of the threat facing us.

• The strength of the national economy.

• The ability of the Air Force to use the money wisely and efficiently.

It is the third consideration — the ability of the Air Force to use its funds wisely — which I want to examine. This thought is highly important because it affects the relationship of the Air Force to Congress. Unless Congress is convinced that the Air Force handles its funds carefully, it will not be willing to grant the Air Force the sums it needs. The denial of funds would seriously affect the ability of the Air Force to execute its mission.

I am keenly aware of the fact that the Appropriations Committees of both houses of Congress seem to be convinced that the Air Force and industry are not managing the defense dollar as well as we might. We have only to look at the reports of the Senate Appropriations Committee for the past two fiscal years to see why I say this. In both cases the Committee expressed grave concern over spiraling defense costs. This year the House Appropriations Committee made a one percent across-the-board slash in the amount appropriated. The purpose of the slash was to obtain improved management of funds. The final defense appropriations approved by Congress carried a one-half percent reduction in funds for the defense effort.

Congress did this partly because of the recent reports of the General Accounting Office on the misuse of funds by contractors. Several contractors had to refund substantial amounts to the Air Force on the ground that the money they had received was not earned.

Industry can help the Air Force improve its position before Congress if it will cooperate in three problem areas. These, then, are the sore spots we want to eradicate. First of all, as partners we must be able to depend on each other for reliable and accurate information when we are negotiating contracts. Secondly, when we arrange letter contracts, we must be able to expect definitization of contracts without undue delay. And thirdly, we in the Air Force must have cooperation from contractors in reducing overhead costs. A fourth point relates to small business. We are doing pretty well there, but I want to encourage further progress.

As for partners, industry and USAF must be able to trust each other fully during negotiations. Both of us must furnish the other with current and completely accurate information. Inaccurate or out-of-date information defeats the purpose of the incentive-type contract. This type of contract, properly used, benefits both the Air Force and industry. It benefits the air Force because costs are substantially reduced. It benefits industry by making profits commensurate with performance. It benefits the taxpayer by giving him more defense for his money.

It should not be necessary for one partner to require signed certificates attesting to the accuracy and currency of cost information. However, it now appears, from the facts furnished by the General Accounting Office that USAF will have to require a certificate of accuracy.

We are acting in accord with the policy of requiring a certificate of accuracy already adopted by the Department of Defense. In the next revision to the ASPR (Armed Services Procurement Regulations) this requirement will b extended to include all first-tier “subs” where the sum involved is over $100,000 and where there is not effective competition….

The second problem area is that of prompt definitization of letter contracts. Delays often occur because negotiators are reluctant to disclose information to our auditors and price analysts. As a result, negotiations over price are lengthy and time consuming. I think it is important for contractors to recognize that these delays cost them money. For example, as long as a letter contract is in effect, the contractor is paid seventy percent progress payments. However, if this contract is definitized as a cost-type contract, the contractor gets eighty percent of the allowable items of cost. That’s a ten percent spread in financing which should not be overlooked….

The third problem is concerned with overhead costs…. Overhead costs are troublesome because we are faced with a curious fact — although production runs have decreased, overhead costs have not….

Why is it that overhead costs are not coming down as they should I think the reason is that industry tolerates costs, not on firm business plus adequate R&D, but on the hope of future business. We have to become accustomed to the thought that production runs are not going to increase again. We’re not going back to the good old days. It, therefore, unwise to keep overhead in the hope of future business….

There is one more topic on which I’d like to comment before closing this discussion…. Congress expects the Air Force to accept the responsibility to help keep our economy strong. One means of doing this is to distribute the work to the various levels of the industrial community. The Air Force must adhere to the basic procurement principles of quality, prompt delivery, and lowest price. At the same time, we must be sure that competent small business concerns are given every opportunity to share in our business.

It is interesting to note that in the direct Air Force purchasing in fiscal year 1959, the dollar value of contracts awarded to small business concerns was twenty-two percent higher than in fiscal ’58…. The $920 million in prime contracts awarded in 1959 to small business was the highest figure since we started keeping such records about nine years ago.

Responsibility and Red Tape

Maj. Gen. W. A. Davis, USAF

Director of Procurement and Production, Air Materiel Command

The scope and nature of industry’s job have been enlarged and have grown by large increments of work formerly done in the government. Implicit in this reallocation and redistribution of work, however, is the frequently overlooked responsibility that industry has assumed in a fiduciary relationship with the government and public agencies which cannot be expressed and described in cold, technical, and legal language. The assumption of this type of responsibility means that the relationship cannot in any sense be maintained on a caveat emptor basis. We have truly, through these developments, established a partnership arrangement….

Another facet of this responsibility has to do with costs and prices. When the government buys a complex unit, we are required to justify its cost. We are not permitted to establish an initial cost and let it remain for the production life of the article. In this area the weapon system responsibility entails a close pricing initially, with procedures established for periodic review of item costs….

I caution you against interpreting what I have said as on the one hand exploiting the capacity of industry to act and on the other hand destroying that freedom by the imposition of red tape. I do not mean to convey this in any sense. What I am saying is that industry has assumed a tremendously larger role in giving us our advanced aerospace systems, and as a part of that increased role industry must have a more thorough understanding and grasp of the unstated responsibilities that accompany it.

The ‘Weak Link’ in Procurement

Lt. Gen. William F. McKee, USAF

Vice Commander, Air Materiel Command

It is apparent that the pricing of subcontracts has become, in some instances, a weak link in weapons system procurement. Added to the difficulties of accurately estimating costs on new types of materiel have been failures on the part of certain primes to dig for complete, current, rock-bottom cost estimates from their subcontractors. To put it bluntly, they were not spending Air Force funds as carefully as they spent their own in bargaining with the subcontractors. This was compounded by the failure of our Air Force people to exhaustively double check cost data at that level.

We are now committed to developing an extensive program to improve subcontract management. This will include the use of pricing teams; increased use of audits to obtain backup information; and the possible extension to subcontractors of the requirement for certification, which will attest to the accuracy, and currency of all materiel cost estimates….

Until space age weapon system procurement has evolved to such a state, the Air Force has a deep responsibility for active stewardship and participation in every phase of procurement — including subcontracting — which affects the total cost and quality of our airpower. In intensifying our monitorship of subcontracting at this time, our interest is not to dictate, but to learn and to contribute to results. Industry and the Air Force together must exercise their pooled ingenuity and experience to develop reliable, consistent, and fair bases of pricing these new weapons.