91-043 

REPORT ON THE 

RENEGOTIATION ACT OF 1951 

PREPARED FOR THE USE OF THE 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

BY THE STAFF OF 

THE JOINT COMMITT:EE ON INTERNAL 

REVENUE TAXATION 

APRIL 2, 1968 

U.S. GOVERNMENT PRINTING OFFICE 

WASHINGTON : 1968 JCS-ll-68 
CONGRESS OF THE UNITED STATES 

JOINT COMMITTEE ON INTERNAL REVENUE TAXATION 

SENATE 

RUSSELL B. LONG, Louisiana, Chairman 

GEORGE A. SMATHERS. Florida 

CLINTON P. ANDERSON, New Mexico 

JOHN J. WILLIA::VIS. Delaware 

FRANK CARLSON, Kansas 

MEMBERS 

HOUSE 

WILBUR D. MILLS, Arkansas, Vice Chairman 

CECIL R. KING, California 

HALE BOGGS, Louisiana 

JOHN · W. BYRNES. Wisconsin 

THOMAS B. CURTIS, Missouri 

LA URENCE N. WOODWORTH. Chief of Staff 

LINCOLN ARNOLD, Assistant Chief of Staff 

(II) 

1.\ 

: .. , 
LETTER OF TRANSMITTAL 

CONGRESS OF THE UNITED STATES, 

.JOINT COMMITTEE ON INTERNAL REVENUE T AXATIO~ , 

Hon. 'VILBUR D. 1hLLS, 

lVashington, D.C., April 2, 1.968. 

Chairman, Committee on Trays and Means, U.S. House of Representatives, Trashington, D. C. 

DEAR CHAIRMAN 1/IrLLS: During the debate on the Renegotiation 

Act the last time it was extended in 1966 yon requested the staff of 

the joint committee to make an examination of the Renegotiation Act 

to help the committee in evaluating this net. ",hen its extension \yas 

next under consideration, 

This report is in response to your request. The first part presents: 

introductory material and a smnmary of recommendations. The 

report itself is divided into seven sec·tions. The first outlines the 

renegotinJiol1 process, and the second the views of the administration 

\\"ith respect to renegotiation. The relationship of renegotiation to 

procurement trends, methods, and policies is dealt ,,"ith in section 3. 

The considera,tions as to ,,"hethel' the Renegotiation Act should be 

extended are set forth in section 4 and the coverage of the nct inclndingconsiderations of the "floor" are discussed in L section 5. Section 6-

discusses briefly the manner of determining excessive profits and the; 

report concludes with staff recommendations. 

The 1/lessrs. Dennis P. Bedell, Leon 'V. Klud, and Joseph P. 

Spellman of the staff of the joint committee have done the bulk of the 

,,"ork in preparing this report. As indicated in the introduction, they' 

have drawn heavily 011 other reports made by congressional committees 

and subcommittees as ,,'ell as other sources of information. Chairman 

Hartwig of the Renegotation Board and hi..:; staff have cooperated 

with 'the staff in snpplying information for this report. 

Respectfully sublnit ted. 

LA URENCE N. WOODWORTH, 

Chiej oj Staff. 

(III) 

CONTEN TS 

P age 

Introduction and summary of recommendations________________ ___ ____ 1 

Section 1. The renegotiation process_______________________ __________ 3 

A. Outline of the renogotifl.tion process___________________________ 3 

B. Brief history of renegotiation_________________________________ 4 

C. Data on renegotiation, 1961 through 1967_____________________ 6 

1. Filings with the Renegotiation Board___________________ 6 

2. Board's estimated workload, 1968 and 1969_____________ 8 

3. Excessive profit determinations and voluntary refunds____ 9 

4. Appeals to the Tax Court_____________________________ 9 

5. Expenses and personneL_ _ _ _ _ __ __ __ ____ _ ___ __ __ __ ____ 10 

Section 2. Administration views_____________________________________ 11 

1. Renegotiation Board________________________________________ 11 

2. Department of Defense______________________________________ 12 

3. National Aeronautics and Space Administration___ _____________ 13 

4. Atomic Energy Commission__________________________________ 14 

5. Maritime Administration____________________________________ 15 

6. General Services Administration_ _ _ __ __ __ ____ __ _____ _ ____ _ ___ _ 16 

7. Federal Aviation Administration______________________________ 16 

Section 3. Procurement trends, methods, and policies_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 19 

A. Recent trends in defense and space-related procurement_________ 19 

1. Trends in total defense-related procurement_____________ 19 

2. Methods of procurement placemenL ______ -____________ 20 

3. Types of contract pricing provisions____________________ 20 

4. Truth in Negotiations Act____________________________ 20 

5. Summary of Defense Department cost reduction program_ 23 

B. Renegotiation and procurement______________________________ 24 

1. Renegotiable sales and profits-by type of contract pricing_ 24 

2. Renegotiable sales and profits, and excessive profits determinations_____ _ ____ _ _ _ ___ __ _______ _ ___ _ _ _ _ ___ _ 24 

3. DOD profit policy concepts___________________________ 25 

4. Studies of defense industry profitability_________________ 28 

Section 4. Considerations in extending the Renegotiation Act___________ 33 

A. Should renegotiation be continued? ___________________________ 33 

1. The policy of renegotiation____________________________ 33 

2. The results of renegotiation___________________________ 33 

3. Renegotiation and procuremenL_______________________ 35 

4. The recent procurement buildup_______________________ 36 

B. Should renegotiation be made permanent? _____________________ 37 

1. Administration's request for indefinite extension_________ 37 

2. Considerations for a limited extension__________________ 37 

Section 5. Coverage of the act______________________________________ 39 

A. Receipts and accruals and covered departments________________ 39 

B. Exemptions________________________________________________ 40 

1. Mandatory exemptions_ _ ___ _________ ____ __ _ _ ______ ___ 40 

2. Exemption for standard commercial articles and services__ 40 

3. Permissive exemptions________________________________ 48 

C. The statutory minimum or "floor" ____________________________ 48 

1. Present law_________________________________________ 48 

2. Suggested changes in the "floor"_______________________ 49 

3. Discussion_ _ _ __ __ _ _ _ _ _ _ __ __ _ _ ____ __ _ _ __ _ _ _ _ __ ______ _ 49 

Section 6. Determining excessive profits______________________________ 53 

A. Determination of contractor or subcontractor _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 53 

B. Determination of the contractor's fiscal year and accounting method__________________________________________________ 53 

C. Determination of renegotiable sales, costs, and profits_ _ _ _ _ _ _ _ _ _ _ 54 

D. The statutory factors_ _ _ __ _ _ _ _ _ __ _ _ _ _ _ _ __ __ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 55 

(V) 
VI 

Page 

Section 7. Staff recommendations_ ____ _ _ __ _ _ _ __ __ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ ___ 59 

A. Extension of the Renegotiation Act_______ ____________________ 59 

B. Exemption for standard commercial articles____________________ 60 

C. Additional data reqnired for evaluation of renegotiation_________ 60 

D. Treatment of incentive contracts_____________________________ 61 

APPENDICES 

Appendix A. Suggested changes in the Renegotiation Act __________ ~_ 63 

A. Departments covered by the act______________________________ 63 

B. Exemptions___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 63 

C. Fiscal year basis of renegotiation_______________ ______________ 64 

D. Other______________ _________________________ ______________ 64 

Appendix B. Procurement trends, methods, and policies__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 67 

A. Recent trends in defense and space-related procurement__ _ _ _ _ _ _ _ 67 

B. Renegotiation. and procurement______________________________ 101 

Appendix C. Additional information on Department of Defense pro- cnrement_____________________________________ __________________ 111 

A. Formal advertisement versus negotiation in DOD cont.rnct policy_ 111 

B. Negotiated authority-DOD military contracts_ _ _ _ _ _ ___ __ _ __ _ _ 112 

Appendix D. Secretary Nitze's memo of September 29, 1967, and 

views thereon by the Comptroller General, regarding postaward alldits__ 115 

Appendix E. Renegotiable profits and 108ses__________________________ 119 

Appendix F. Information relating to National Aeronautics and Space Administration contracts_ _ __ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ 121 

Appendix G. Information relating to Atomic Energy Commission con- tracts ________________ _____ ~______ _____ __ __ _________________ 125 

Appendix H. Information relating to Maritime Administration and 

Maritime Subsidy Board (successor to Federal Maritime Board) con- tracts___ ____ _____ ____________________________________________ __ 131 

Appendix 1. Information relating to Geneml Sen'ices Administration 

contracts_ ___ ____ __ _________ _______ ________ __ ____ ___ __ __ ____ ___ _ 135 

Appendix J. Information relating to Federal Aviation Administration 

contracts_______________________________________________________ 145 

Appendix K. Renegotiation Act of 1951 as amended to date ____________ 147 
INTRODUCTION AND SUMMARY OF RECOMMENDATIONS 

Pursuant to the request of Mr. Wilbur D. Mills, chairman of the 

House Committee on Ways and lVleans, the staff of the Joint Committee on Internal Revenue Taxation prepared this report on the 

Renegotiation Act of 1951 to assist the Committee on Ways and 

Means in evaluating the act. 

In preparing this report, the staff collected information and materials from a number of sources. Information was obtained regarding the procurement activities in recent years from the Go'Vernment departments and agencies named in the act. With regard to procnrement practices and policies, the staff was assisted by the studies 

which have been made by the Special Investigations Subcommittee 

of the House Armed Services Committee, by the Subcommittee on 

Federal Procurement and Regulation of the Joint Economic Committee, and by the Sul;>committee on Economy in Government of the 

Joint Economic Com-mittee. In August 1967, the Special Investigations Subcommittee began an overall review of military procurement 

policies, procedures, and practices. To date the subcOlnmittee has 

held two sets of hearings and has issued two interim reports: "Part 1-

Truth in Negotiations," and "Part II-Small Purchnses." The Subcommittee on Federal Procurement and Regulation held hearings on 

Government procurement, and issued two reports on the subject in 

1966: "Background 11aterial on Economic Impact of Federal Procurement" (1\1arch 1966), and "Economic 1m pact of Federal Procurement-1966" (lV1ay 1966). The Snbcommittee on Economy in 

Government held hearings during 1967 011 Government procurement 

and Issned three reports recently: "Background l\faterial on Economy 

in Government-1967" (April 1967), "Economy in Government" 

(July 1967), and "Economy in Goverllment-1967: Updated Background Material" (November 1967). . The Renegotiation Board furnished the staff with data and materials relating to its operations and activities and to the application 

of the act. 

The departments and agencies named in the act also fnrnished the 

staff with their vie,,'s on the Renegotiation Act and its applicability 

to contracts awarded by them. 

In addition, Representative Gonzalez furnished the staff with the 

materials he assembled on the Renegotiation Act and the activities 

of the Renegotiation Board. 

In response to a reqnest for comments contained in a press release 

issued by Chairman NIiIls, a number of interested individnuls and 

organizations submitted their COlnments and viems on the Renegotiation Act and the vrrrious pending bills to extend and/or modify 

the act.. 

The staff's report is intended as a discussion of the more important 

aspects of renegotiation and of the framework within which it functions, rather than as a discussion in detail of the renegotiation process. 

11) 
2 

As a result of its study, the staff makes the following recommendations: 

(1) The Renegotiation Act should be extended for at least 2 

years. In addition, the committee may wish to give consideration 

to extending the act for a 4-year period in "iew of a nunlber of 

factors: the continuing procurenlent buildup associated with 

the Vietnaln conflict; the timelag between procurement .. and 

renegotiation ·with respect to a contract; and the time required 

in order to meaningfully evaluate the effectiveness of ne-w procurement Inethods and practices in preventing excessi,~e profits. 

(2) The committee may also wish to give consideration to 

revising the exemption for standard commercial articles and 

services in order to insure that goods and services qualifying for 

the exemption are, in fact, commercial items. 

If the committee desires to take action in this area, the staff 

recommends three modifications in the exemption. First, the percentage of the sales of an article or service (or class of articles) 

which must be nonrenegotiable for the exemption to apply could 

be raised from 35 to 50 percent. Second, contractors "'ho "selfapply" the exemption for a standard commercial article could be 

required to report the application, and its basis, to the Board. 

Third, it could be provided that for the exemption to apply, a 

standard commercial article (or service) must be sold to the 

Government at a price which is reasonably comparable to the 

price charged a commercial purchaser for an order of sinlilar 

quantity. 

(3) The Renegotiation Board should develop and maintain 

various additional types of information which are needed for an 

adequate analysis of some of the more fundamental aspects of 

renegotiation. 

(4) The Renegotiation Board should reevaluate its position 

regarding the treatment in renegotiation of amounts received 

under incentive-typel contracts and report the results of this 

reevaluation to the committee. This report might place particular 

emphasis on the manner in which amounts received under incentive contracts awarded by the National Aeronautics and Space 

Administration are treated. 
SECTION 1. THE RENEGOTIATION PROCESS 

A. OUTLINE OF THE RENEGOTIATION PROCESS 

Renegotiation is a process whereby the Government, acting through 

an independent establishment in the executive branch known as the 

Renegotiation Board, may require a contractor to refund that portion of profits on Government contracts or related subcontracts 

'which are determined to be "excessive." In making this determination, consideration is given to amounts received or accrued by a 

contractor during his fiscal year (or such other period as may be 

fixed by mutual agreement) on contracts or on related subcontracts 

'with Government departments named in the act. Amounts received 

under such renegotiable contracts and subcontracts are sometimes 

referred to as "renegotiable sales," "renegotiable business," and 

"renegotiable receipts or accruals." The departments named in the 

act are the Department of Defense, the Departments of the Army, 

Nary, and Air Force, the Maritime Administration, the Federal 

IVfaritime Board, the General Services Administration, the National 

Aeronautics and Space Administration, the Federal Aviation Agency, 

and the Atomic Energy Commission. 

A determination of "excessive profits" by the Renegotiation Board 

is subject to redetermination by the Tax Court of the United States, 

and the decision 'of the court is subject to review by the U.S. courts 

of appeals on material questions of law. 

Under the Renegotiation Act of 1951 as amended to date, the Renegotiation Board is composed of five members appointed by the 

President, by and with the advice and consent of the Senate. The 

Secretaries of the Army, the Nary, and the Air Force, respectively, 

subject to the approval of the Secretary of Defense, and the Administrator of General Services, each recommend to the President, for his 

consideration, one person from civilian life to serve as a member of 

the Board. The President, at the time of appointment, designates 

one member to serve as Chairman. No member is permitted to 

actively engage in any business, vocation, or employment other than 

as a member of the Board. The principle office of the Board (frequently 

referred to as the headquarters office) is in Washington, D.C. Under 

authority granted to it by the act, the Board has established two 

regional boards located in Washington, D.C., and Los Angeles, 

California. 

The act does not apply to amounts attributable to contracts exempt 

from its provisions under section 106 (providing for "mandatory" 

and" permissive" exemptions), or to those amounts which are below 

the minimum amolmt subject to renegotiation specified in section 

105(f). This minimum amount presently is $1 million, and it is 

commonly referred to as the "floor." Under the act, renegiotation 

may not be conducted with respect to individual contracts, but must 

be conducted with respect to all amounts received or accrued by a 

contractor during his fiscal year (or such other period as may have 

(3) 
4 

been agreed upon) under contracts or related subcontracts with all 

Government departments specified in the act. Under this procedure, 

it is said that renegotiation determinations are made on an" aggregate'" 

or "fiscal-year" basis, rather than on a contract-by-contract basis. 

In order for the Renegotiation Board to determine "excessive 

profits," it is first necessary that the contractor or group of contractors to be renegotiated be determined, that the accounting period 

and method of accounting to be used for renegotiation be fixed, that 

sales, costs, and profits be determined and segregated as between 

renegotiable and nonrenegotiable business. Then, a determination 

may be made of the amount, if any, of renegotiable profits which 

constitute excessive profits, and this requires the application of the 

so-called statutory factors which are set forth in section 103(e) of 

the act. 

The renegotiation procedures provided for by the act require that· 

there be an adlninistrative proceeding before the Board in which a 

determination of excessive profits is made either by agreement between the contractor and the Board, or by the unilateral order of the 

Board. Section 111 of the act excludes the functions of the Board 

from the operation of the Administrative Procedure Act except as to 

the requirement of section 3 thereof, dealing with the publication of 

rules, orders, and so forth. The Administrative Proceedure Act was 

amended by Public Law 90-23, and the Board has revised its regulations (part 1480) to conform with that amendment. 

After the Board has entered an order determining excessive profits. 

with respect to any contractor or subcontractor he may, within 90' 

days from the date of mailing of the notice of the order of the Board, 

file a petition with the Tax Court of the United States for a redetermination of the amount of such excessive profits. When a petition is so 

filed, the Tax Court is authorized to determine that the amount of 

excessive profits is an amount less than, equal to, or greater than that. 

determined by the Board. 

The act requires that the proceeding before the Tax Court is not 

to be treated as a review of the determination of the Board, but that 

it shall be treated as a proceeding de novo. Proceedings under the 

Renegotiation Act are subject to the same rules of procedure applicable to other cases before the Tax Court and, therefore, the burden 

is upon the contractor to prove that the Board's determination is 

erroneous. 

As a result of a July 1962 anlendment (Public Law 87-520), renegotiation cases filed ,,-ith the Tax Court after July 3, 1962, are subject to 

review by the U.S. courts of appeals in a manner, and to the same 

extent, generally, as decisions of Federal district courts in a civil 

action tried "iTithout a jury. However, the determination of the existence and the extent of excessive profits by the Tax Court is. conclusive 

unless such findings are arbitrary or capricious. Upon reviewing a 

decision of the Tax Court, a circuit court may either affirm the decision 

of the Tax Court, or may reverse it on material questions of law 

and remand the case 'to the Tax Court for such further action as 

IS necessary. _ B. BRIEF HISTORY OF RENEGOTIATION 

Renegotiation procedures under the Renegotiation Act of 1 951~ 

are similar to those which prevailed (after amendment) under an 

earlier statute generally know as the Renegotiation Act of 1942. 
5 

Although a few earlier attempts had been made to limit contractors' 

profits on contracts with the Government,! the 1942 act was the first 

renegotiation statute. As originally enacted, it provided for renegotiation on a contract-by-contract basis by the procurement officials of 

the departments involved. However, 6 months after enactment it was 

amended to place renegotiation on what is now known as a fiscalyear basis. Subsequent amendments extended it to the end of 1945, 

prescribed certain factors which were to be taken into consideration in 

determining excessive profits, and also provided for de novo redetermination proceedings before the Tax Court. 

In 1948, a ne,,- Renegotiation Act was passed; it was applicable 

principally to certain Air Force contracts for aircraft procnrement. 

Lnter in the same year, bo,,-ever, it was amended to authorize the 

Secretary of Defense to extend it to other contracts, nnd subsequent 

amendll1ents made it applicable to all negotiated Department of Defense contracts entered into during the Governm.ent's fiscal ~TeaI·s of 

1950 and 1951. The administration of this act was placed under 

the Secretary of Defense who established departmental renegotiation 

boards \yhich were subject to review by the JVIilitary Renegotiation 

and Revie,,- Board. 

The Renegotiation Act of 1951 gTanted renegotiation authority 

effective \yith respect to amounts received or accrued on 01' after January 1, 1951. This act expired on December 31, 1953, but 8 months 

thereafter it was amended and extended for 1 year until December ~H, 1954. At this time, the Ininimnm amount re'negotiable under the 

act, the "floor," \vas raised from $2.50,000 to $500,000. In addition, the 

amendments enlarged the exempt jon for eontraets not connected ,,-itll 

the national defense, modified the partial exemption for sales of durable productive equipment, provided an exemption for standard commercial articles, and nlodified the exemption for contracts 'xith common carriers for transportation. 

In August of 1955, 7 months after the nct had e~-pired, it 

\yas amended and extended for a period of 2 years from its expiration date, or until December 31, 1956. These amendments broadened 

the provisions suspending the profit limitations of the VinsonTrammell and :r"ferchant ::\.farine Acts (footnote 1, supra) to sllspend 

those limitations where the sales were exempt under the standard 

commercial artides exemption, broadened the standard commercial 

articles exemption to include standard conlmercial services, added an 

exemption for certain construction eontracts let by competitive bidding, and further nlOdified the exemption for sales of durable prodllctive equipment. 

In 1956, the 1951 act was extensively amended and further extended 

for a period of 2 years, to December 31, 1958. These amendments 

reduced the number of departments whose contracts were subject to 

the act, provided for a 2-year carryforward of losses on renegotiable 

business, raised the "floor" from $500,000 to $1 million, and modified 

the provisions relating to the computation of the aggregate amounts 

received from persons under common control for purposes of applying 

the "floor." The 1956 amendnlents also lnade technical amendlnents 

to the mandatory exemption for certain subcontracts related to 

contracts exempt from the act, substantially modified the exemption 

I For example, the Vinson-Trammell Act of 1934 and the Merchant Marine Act of 1936, and subsequent modifications of those acts. These acts limited profits 011 contracts in excess of $10,000 for the construction of 

vessels and aircraft, with contractors agreeing to refund to the Treasury all profits in excess of 10 percent of 

the total contract price with respect to the major contracts, and 12 percent of such total on aircraft contracts. 
6 

for st.andard commercial articles and services, and instituted a requirement that the Board file annual rHports of its activities with 

Oongress. -

In September of 1958, the act was amended to bring the National 

Aerona.utics and Space Administration under its coverage, and it 

was extended for a period of 6 months, or until June 30, 1959. 

Amendments made in July of 1959 extended the act for 3 years, or 

until June 30, 1962, and extended the period for carryforward of 

losses from 2 to 5 years. 

Amendments enacted in 1962, 1964, and 1966, each extended the 

act for 2-year periods; the present extension expires on June 30, 

1968. The 1962 amendment also provided for review by the U.S. 

courts of appeals, with respect to material questions of law, of redeterminations of excessive profits by the U.S. Tax Court. The 1964 

amendment also provided that contracts and subcontracts of the 

Federal Aviation Agency would be included in the act's coverage 

with respect to amounts received or accrued after June 30, 1964. 

C. DATA ON RENEGOTIATION, 1961 THROUGH 1967 

1. Filings with the Renegotiation Board 

All contractors having renegotiable business in excess of the statutory mininlum (the "floor") must file a report with the headquarters 

office of the Renegotiation Board. Contractors whose renegotiable 

sales are below that minimum amount are not required to file reports 

with the Board, but they may do so if they desire and a number of 

contractors in this category do elect to file a report. For fiscal years 

1961 through 1967, the number of reports filed with the Board are 

as follows: 

REPORTS FILED 

Fiscal year 

1961 ________________________________________________ _ 1962 ________________________________________________ _ 

1963 ________________________________________________ _ 1964 ________________________________________________ _ 1965 ________________________________________________ _ 

1966 ________________________________________________ _ 1967 ________________________________________________ _ 

Total 

13,061 

11,968 

10,375 

9,772 

7,151 

5,997 

6,065 

Above the floor Below the floor 

3,717 9,344 

3,862 8,106 

3,913 6,462 

4,007 5,765 

3,673 3,478 

3,387 2,610 

3,737 2,328 

The contractors' reports are screened at headquarters, and each 

filing showing renegotiable business above the statutory minimum is 

reviewed to determine the acceptibility of the segregation which the 

contractor has made of sales and his allocation of costs. This information is then evaluated to determine whether the filing should be 

assigned to a regional board for renegotiation, or whether it. may be 

cleared at headquarters without assignment. If the latter determination is made (for example, because a report shows a loss or obviously 

nonexcessive profit), then headquarters will complete action on the 

filing by issuing to the contractor a notice of clearance without assignment. The following tabulation, for the Board's 1961 through 1967 

fiscal Years, shows the number of above-the-floor filings made by contractors (and by brokers and manufacturers' agents) for those years 

which were screened at headquarters, the number which were cleared 

without assignment and the number assigned to a regional board for 
7 

renegotiation, and the average t.ime required for the screening of a 

filing: ABOVE-TH E-FLOOR FI LI NGS 

Fiscal year 

Total screened Cleared without Assigned to a Average number of at headquarters assignment regional board days requi~ed for 

screening 

3,712 2,786 926 (1) 

3,618 3,228 390 (1) 

4,068 3,517 551 66 4,383 3,881 502 59 3,691 3,336 355 36 3,372 2,928 444 38 

3,782 3,147 635 48 

1961 ______________________________ _ 

1962 ______________________________ _ 1963 __________________________ -___ _ 1964 ______________________________ _ 1965 ______________________________ _ 1966 ______________________________ _ 1967 ______________________________ _ 

1 Not available. 

The amount of renegotiable sales, in total and by contract type, 

reviewed by the Board for the fiscal years 1963 through 1967 are 

as follows: 

REN EGOTIABLE SALES REVI EWED, BY CONTRACT TYPES 

Fiscal year 

1963 _____________________ _ 1964 ______________________ _ 1965 ______________________ _ 1966 ______________________ _ 1967 ______________________ _ 

Total sales 

$31,227 

39,283 

34,758 

31,841 

33,124 

[In millions of dollars) 

Cost plus fixed fee 

$11,052 

14,135 

10,130 

7,820 

6,020 

Types of contracts 

Fixed price 

$14,389 

16,109 

14,893 

14,436 

17,288 

1 "Other" contracts include incentive, price redetermination, and time and material contracts. 

Other 1 

$5,786 

9,038 

9,774 

9,585 

9,816 

The amount of renegotiable sales, profits, and losses, on contracts 

involved in the above the floor filings (other than filings by brokers or 

manufacturers' agents) screened for the fiscal years 1963 through 1967 

are as follows: 

RENEGOTIABLE SALES, PROFITS, AND LOSSES IN ABOVE THE FLOOR FILINGS SCREENED 

[Dollar amounts in millions) 

Renegotiable sales and profits 

Number ot Fiscal year filings screened Net profit reports Net loss reports 

Sales Profits Sales Losses 

1963 ___________________ 3,487 $26,208 $1,250 $5,020 $333 1964 ___________________ 3,990 34,073 1,492 5,210 359 1965 ___________________ 3,315 29,953 1,333 4,845 291 196L _________________ 3,072 26,915 1,245 4,926 283 1967 ___________________ 3,447 28,914 1,443 4,210 272 

The profit and loss figures in the preceding table are net figures, reflecting the fact that both profitable and loss contracts ma:r be 

involved in individual cases. Also, the figures are based on cost 

allowances required for renegotiation purposes, which differ in significant respects from costs allow-able for procurement purposes. 

The amounts of renegotiable sales, profitt., and losses reported in 

filings which the Board receiYes in a given fiscal year generally relate 

to contractors' receipts or accruals during the preceding 2 calendar 

years. Thus, filings during fiscal 1968 would relate to receipts and 

accruals during the calendar years 1966 and 1967. This timelag occurs 
8 

because contractor~ are not required to file a report with the Board 

until 4 months after their business year ends, and also because many 

of them request and are granted extensions of time (usually for 90 

days) for filing their reports. 

The Board has reported that most of the substantial increase in 

cases assigned to the regional boards in fiscal 1967 occurred in the 

last quarter of that year when the first filings reflecting the increase of 

Vietnam procurement were processed, and that it indicated the beginning of an upward trend in the Board's workload. 

Cases assigned to the regional boards generally involve substantial 'qnestions, and require more extensive examination and analysis than 

those which are screened at the headquarters office. (The average time 

for processing such cases from filing to determination is 15 months, -although the time required for a given case might vary considerably 

from that average.) The regional board formally COlnmences renegotiation in each case it is assigned, it obtains such additional information as it luay need, and it then determines the amount of the contractor's excessive profits, if any. 

The regional boards have been delegated final authority to issue 

clearances or make refund agreement in cases involving aggregate 

renegotiable profits of $800,000 or less. If a determination of excessive 

profits is made and the contractor will not enter into an agreement 

to refund such profits, the regional board issues an order directing 

a payment of the refund. The contractor may appeal such an order 

to the Board. The regional boards do not have final authority in 

cases involving more than $800,000 renegotiable profits, and their 

reeommendations must be approved by the Board before refund 

agreements may be executed or Clearances issued. If a recommendation of the regional board is not acceptable either to the Board or 

to the con tractor, the case is reassigned from the regional board to 

the Board for further processing and completion. 

For fiscal years 1963 through 1967, the following tabulation shows 

the number of cases worked on by the regional boards, their disposition 

of those cases, and the number of cases completed at headquarters 

after reassignment to it: 

FILINGS CONSIDERED BY THE REGIONAL BOARDS 

Fiscal year 

1963 ___________________________ 1964 _______________________ ____ 1965 _________________________ __ 1966 ___________________________ 1967 ___________________________ 

Assignment 

551 

502 

355 

444 

635 

Completed Pending 

464 543 

521 524 

457 422 

402 464 

421 678 

2. Board's estimated workload, 1968 and 1969 

Disposition of completed cases 

Refund agree- Transferred 

ment, clear- to head- ance, or quarters 

decision not for further to proceed processing 

265 199 

294 227 

222 235 

193 209 

213 208 

Cases com- pleted at headquarters after 

further 

processing 

212 

234 

259 

184 

201 

The Renegotiation Board estimates that in the fiscal years 1968 and 

1.969 it will rec-eive a significantly increased nunlber of fi]ings reflecting 

substantially gTeater renegotiable sales. In addition, the Board 

estimates that the number of cases assigned to the regional boards 

for renegotiation also will increase significantly in these years. The 
9 

Board's estimates for fiscal years 1968 and 1969, and the actual 

amounts in fiscal years 1966 and 1967, of the number of the above 

the floor filings received, the amOlmt of renegotiable sales reported 

in those filings, and the number of cases' assigned to regional boards 

are as follows: 

BOARD'S WORKLOAD 

(Dollar amounts in millions) 

Fiscal year Filings received 

1966____ _ _ _ _ _ _ ___ _ _ _ _ _ __ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ 3,387 

1967 ___________________________________________ 3,737 

1968 (est,)_______________ __ _ __ __ ___ __ __ __ _______ 4,400 

1969 (est,)______________________________________ 4,800 

Renegotiable sales Cases assigned to a regional board 

$31,841 444 33,124 635 

40,300 725 

44,600 800 

3. Excessive profit determinations and vol1lntary rejl1/f/..ds 

The following table shows the number and amount (before adjustment for Federal inconle and excess profits tax credits) of excessive 

profit determinations made. by the Board for fiscal years 1961 through 

1967, the amounts determmed by agreenlent and by order, and the 

amount of voluntary refunds and price reductions made by contractors for those years: 

DETERMINATIONS OF EXCESSIVE PROFITS AND VOLUNTARY REFUNDS AND PRICE REDUCTIONS 

(Dollar amounts in thousands) 

Total number Amount deter- Amount deter- Total excessive Amount of volFiscal year of determina- mined by agree- mined by uni- profits untary refunds and 

tions ment lateral order price reductions 

1961 __________ ~ ______ 68 $7,738 $9,462 $17,200 $31,490 1962 ________________ 41 6,573 1,271 7,844 17.842 1963 _________________ 48 4,350 5,720 10,070 28,047 1964 ________________ 56 6,861 17,299 24,160 41,097 1965 ____ . ____________ 52 10,689 5,458 16,147 16,403 1966 _________________ 21 2,598 21,916 24,514 23,249 .1967 _________________ 18 5,753 10,227 15,980 30,319 

It should be noted that the excessive profits determinations in a 

,given fiscal year generally relate to amounts received by contractors 

during the second and third preceding calendar years. In other ,,-ords, 

-excessive profit determinations in fiscal 1967 generally relate to 

amounts received by contractors during the calendar years 1965 and 

.1964 under contracts awarded in those or prior years. This substantial time lag between the awarding of a contract and an excessive -profits determination with respect to amounts received under the 

contract is a result of the combined effect of the time lag between 

the receipt of amounts under contracts subject to renegotiation and 

the reporting of those amounts by contractors to the Renegotiation 

Board, and also the time required to process a case from filing to 

determination. 

4. Appeals to the Tax Court 

In those cases ,,,here a contrac.tor does not agree ,vith the Board's 

determination of excessive profits (that is, where the BOHrd has 

issued a unilaterial order directing the contractor to refund such 

amounts to the Government), he may appeal to the Tax Court of the 

United States for a redeternlination. In such a proceeding, the Tax 

Court may determine an amount of excessive profits which is less 
10 

than, equal to, or greater than that determined by the Board. The 

following tabulation, for fiscal years 1961 through 1967, shows the 

number and amount of the Board's determinations appealed to the 

Tax Court, and the number and amount involved in cases pending 

before the court at fiscal yearend: 

APPEALS FROM UNILATERAL ORDERS 

Fiscal year 

1961 ________________________ _ 1962 ________________________ _ 1963 ________________________ _ 1964 ________________________ _ 

1965 ________________________ _ 1966 ________________________ _ 1967 ________________________ _ 

Unilateral orders appealed to Tax Court 

Number 

10 

3 

8 

5 

3 

4 

2 

Amounts involved 

(thousands) 

$8,497 

344 

5,372 

8,979 

1,946 

4,326 

8,644 

5. Expenses and personnel 

Cases pending in Tax Court at fiscal yea rend 

Number 

66 

61 

60 

61 

45 

39 

31 

Amount of determinations (thousands) 

$120,619 

113,159 

95,689 

98,144 

40,891 

41,091 

26,331 

The number of personnel employed by the Board at its headquarters 

office and at its regional boards on June 30 of each of the years 1961-67, 

and the Board's expenses for those fiscal years, are a.s follows: 

PERSONNEL EXPENSES (Thousands of dollars) 

Fiscal year 

Total Head- Regional Total Salaries Other 

quarters boards 

1961 _______________________ 271 123 148 $2,912 $2,601 $311 1962 _______________________ 193 114 79 2,580 2,247 333 1963 _______________________ 223 131 92 2,325 2,025 300 1964 _______________________ 206 121 85 2,507 2,230 277 1965 _______________________ 184 108 76 2,577 2,286 291 1966 _______________________ 179 101 78 2,469 2,180 289 1967 _______________________ 178 102 76 2,536 2,239 297 
SECTION 2. ADMINISTRATION VIEWS 

1. Renegotiation Board.-Under present law, the Renegotiation Act 

expires on June 30, 1968. In identical letters dated February 23, 1968, 

to the President of the Senate and to the Speaker of the House, the 

Renegotiation Board recommended that the Renegotiation Act be 

extended indefinitely. The Renegotiation Board made the following 

statement on this matter: 

Forwarded herewith and recommended for enactment is a 

draft of legislation "To extend the Renegotiation Act of 1951, 

and for other purposes." 

The Bureau of the Budget has advised that enactment of 

this legislation is in accord with the program of the President. 

The proposed legislation would amend section 102(c) of the 

Renegotiation Act of 1951, as amended (50 U.S.C. app., sec. 

1212(c)) by striking out the renegotiation termination date; 

would repeal the exemption of standard commercial articles 

and services provided in section 106(e) in its entirety; and 

would modify the profit limitation suspension section 102(e) 

by eliminating the reference to section 106(e). 

1. Elimination oj term1~nation date.-The continuation of 

statutory renegotiation for an indefinite period is considered 

essential in the national interest. Renegotiation has been the 

subject of temporary legislation for almost 25 years. The 

present act has been extended 8 times since 1951. It is now 

recommended that the act be continued indefinitely because 

there is no foreseeable end to the conditions which make it 

necessary. 

Even if the Vietnam conflict were to end in the near future, 

the end of international tensions is not in sight. Hence, 

there will be a continuing demand for new and increasingly 

complex aircraft, missiles, space vehicles and other specialized items; and huge purchases will continue to be made 

under conditions similar to those now prevailing. l\1arkettested prices do not and cannot exist for costly, novel and 

complex military and space products. For this reason, prices 

must be negotiated, often with sole source contractors. 

Such negotiated prices are necessarily based upon uncertain 

cost estimates because reliable cost experience is not available. Improved purchasing techniques cannot alter these 

basic characteristics of military and space procurement in a 

period of advancing technology. 

Furthermore, although a,vards will continue to be made 

on a contract-by-contract basis, the profitability of the 

contracts cannot be known until the profits resulting from 

the contractor's performance of all his contracts are recorded 

for his fiscal year. Renegotiation provides an after-the-fuct 

review of such profits. Thus it affords the only means for 

(11) 

91-043-68-2 
12 

assuring that the profit outcome of procurement is reasonable. 

An indefinite extension would greatly assist the Board's 

effort to recruit skilled personnel and would otherwise improve the administration of the act. 

The present proposal is not new. In 1960, a special subcommittee of the House Committee on Armed Services 

recommended among other things, that the Renegotiation 

Act of 1951, as amended, "be made permanent law" (H. 

Rep. No. 1959, 86th Cong., 2d sess. 38 (1960)). 

* * * 

Sincerely yours, 

(Signed) 

* * * * 

Lawrence E. Hartwig 

LAWRENCE E. HARTWIG, 

Chairman. 

A BILL To amend the Renegotiation Act of 1951, and for other 

purposes 

Be it enacted by the Senate and House oj Representatives 

of the United States of America in Congress assembled, That 

this Act may be cited as the "Renegotiation Amendments 

Act of 1968". 

ELIMINATION OF TERMINATION DATE 

SEC. 2. Section 102(c) of the Renegotiation Act of 1951, 

as amended (50 U.S.C. App., 1212(c)), is amended by striking out the heading thereof and paragraph (1) in its entire,ty; 

by redesignating paragraph 2 as subsection (c) ; and by striking out "paragraph" in the last sentence and inserting in 

lieu thereof "subsection". 

* * * * * * * 

2. Department of Defense.-In a letter dated March 7, 1968, the 

Deputy Assistant Secretary of Defense (Procurement), m~de the 

following comments on behalf of the Departments of Defense, the 

Army, the Navy, and the Air Force as to the applicability of the 

Renegotiation Act to contracts placed by those departments: 

Reference is made to your letter, dated February 23,1968, 

to the General Counsel of the Department of Defense and the 

General Counsels of the Military Departments requesting 

their views with respect to the effect of changes in procurement policies on the need for renegotiation. Your letters have 

been referred to this office for reply. 

In recent years we have made substantial progress in 

improving our procurement p:(actices and we have gradually 

shifted from cost-plus-fixed-fee contracts to fixed-price contract types which ~e consider more desirable. In this process, 

we have managed to shift considerably more risk to our major 

contractors. 

Notwithstanding the. improveInents that have been made, 

the Department of Defense feels that the Renegotiation 

Act should be continued at t4is , time. We have experienced 

a large increase in procurement volume in recent years, 
13 

from $28 billion in fiscal year 1965 to $44.6 billion in fiscal 

year 1967. This increase in volume is due to the impact of 

our SEA activities and we feel that, under these circumstances, there is a need for continuation of the renegotiation 

process. 

3. National Aeronal1tics and Space Administration.-The National 

Aeronautics and Space Administration in a letter dated March 13, 

1968, lllade the following comments r:egarding contracts placed by it 

and the applicability of the Renegotiation Act to those contracts: 

As I understand it, the determination of excessive profits 

must, in each instance, reflect the judgment of the Board on 

the application of each of the statutory factors enumerated 

in Section 103 of the Renegotiation Act. Among these factors 

is subparagraph (6) which reads in part: "Such other factors 

the consideration of which the public interest and fair and 

equitable dealing may require * * *." 

We believe that the Renegotiation Board might well give 

added ,veight to special factors involved in perfor1uing work 

under NASA contracts. We believe that it should be recognized that NASA's work involves complex, long leadtime, 

advanced research and development in which progress, development plans, and costs cannot ahvays be laid out with 

assurance of meeting eyery goal established. Every effort is 

made to plan the work in such a way that potential problems 

are anticipated and so that guidance is given to contractors 

by the Government to assure that the work proceeds as 

satisfaetorily as possible. These circumstances require close 

monitoring of contractor activities by NASA laboratories 

haying a strong technical interface with the contractor. 

Through our laboratory competence we must provide construetive criticism all through the program, rather than 

waiting for demonstration of suecessful achievement of program goals only when the end product is delivered and 

flown. Nevertlieless, the 'final test of the success of the 

development prograIll and of the ,york aimed at solving and 

reducing the number of problems encoWltered through the 

eourse of the development program is in the final flight 

operations of the aeronautical or space system involved. 

While we are aware that the Board under its regulation 

and policy pronouncements recognizes the objectives of incentive contracts, we believe the Board has not given full 

recognition to the difficult performance requirements of our 

major research and development programs. NASA has relied 

on extensive management and technical program reviews, 

as ,,~ell as innovative contractual arrangements, to assure 

that the Government receives the result it is seeking through 

the expenditures of Government funds. These reviews, and 

the incentive contract arrangements wherein the contractor's 

profit is based on evaluation of the quality of his ,York and 

his ability to achieve specified program requirements, provide for a thoughtful control of the profit paid to the ('.ontractor. This control considers the diffieulty of the job, the 

risk of the eontraetor's reputation and financial status, 

the investnlent Illade by the contractor in undertaking the 
14 

"ork, including his financial and management commitment 

to the job, and the overall management responsibility that 

he assumes for the work that he directly performs or that 

his subcontractors perform. In our effort to get the best 

possible performance and in recognition of these various 

factors, our incentive fee contract arrangements aTe so established that added profit goes "Tith high performance by the 

contractor. 

In summary, then, we believe that the complexity of our 

,York, its public visibility and the long time required for 

completion of any individual part of it argue for some special 

consideration when the reasonableness of the fees we have 

paid are rejudged. We do believe, however, that the Renegotiation Act of 1951 should have continuing effect. We 

support legislation removing the provision of that act which 

limits to June 30, 1968, the contracts subject to renegotiation 

under that act. 

Because of the urgency of your committee's most recent 

request, this report has not been submitted to the Bureau 

of the Budget for advice as to its relationship to the program 

of the President. 

4. Atomic Energy Commission.-In a letter dated February 26 t 

1968, the Atomic Energy Commission made the following comments 

regarding contracts placed by it and the applicability of the Renegotiation Act to those contracts: 

You will note that there was a substantial decline in 

the percentage of dollars awarded under fixed-price contracts 

after fiscal year 1962. This was due to a significant reduction 

in the program for the purchase of uranium ore. 

Our cost contracts are basically all either cost plus a fixed 

fee or, in the case of educational institutions and nonprofit 

organizations, straight cost contracts. In the case of our costplus-a-fixed-fee contracts, we have adopted declining fee 

curves which are based upon the scope, character, and estimated cost of the work to be performed by the contractor 

and which provides for fees which we feel are fair and 

reasonable. 

Expenditures under our cost contracts are closely controlled by established cost principles, periodic audits, establishment of approved procurement and contracting procedures for subcontracting and purchasing, and specific approval 

of subcontracts over a specified dollar amount. We do not 

have readily available information as to overruns and underruns of estimated cost. In the case of cost-plus-a-fixed fee 

contracts, the fee, which includes the contractor's profit, of 

course would not change because of overruns or underruns 

of estimated cost. 

While our contracts cover the entire range from off-theshelf items to first-"of-a-kind production items to basic research, the major part of our prinle contracting is carried on 

under cost or cost-plus-a-fixed-fee operating contracts, which 

provide little, if any, opportunity for excessive profits, therefore, the Renegotiation Act has a limited impact on our 

progranlS. However, in view of the possibility that there may 
15 

be some direct fixed-price procurements for which there is 

relatively little cost and production experience available. and, 

for fixed-price procurements by our cost-type contractors, 

we believe the Renegotiation Act may be a deterrent to excessive pricing and provides a measure of insurance against 

excessive profits. We do not have any specific suggestions for 

improvement in the act. 

5. Maritime Administration.-The Nfaritime Administration in a 

letter dated March 1, 1968, made the following comments regarding 

contracts placed by it and by the Maritime Subsidy Board: 

You have asked about the extent of overrun or underrun 

of estimated costs employed in initial pricing. Overruns 

or underruns arise primarily in connection with the administration's research and development cost reimbursable 

contracts. An analysis of the research and development 

contracts completed during fiscal years 1961 through 1967, 

indicates that overruns and underruns have not been in 

excessive amounts. As the attached tabulation shows 

[see appendix H], however, in fiscal year 1967, there was a 20-

percent overrun in a ship construction contract. 

The procurements of the Nfaritime Administration (Maritime Subsidy Board) are of ships employed in the foreign 

commerce of the United States, under the Merchant Marine 

Act of 1936, as amended. Under these three-party contracts 

the owner, the ship operator, pays to the contractor a SUIn 

equal to the l\1aritime Subsidy Board's estinlate of the 

cost of building the vessel of the owner to similar plans and 

specifications in a foreign shipyard. The Board pays the 

difference between the estimated foreign cost and the 

domestic price. The Maritime Administration also enters 

into ship construction contracts with shipbuilders on the 

basis of orders placed by other Federal agencies under the 

Economy Act of 1932, as amended. 

The dollar values shown for new ship construction and 

ship conversion do not represent, in the entirety, Government 

expenditures in the indicated amounts. With respect to procurements under the Merchant Marine Act of 1936, as 

amended, Government expenditures amounted to approximately 51 percent of the total contract expenditures. The 

balance is paid by the owner·. Of course, under the Economy 

Act contracts, the Government is responsible for the total 

price. 

The maintenance and repair contracts noted in the 

attached tabulation, represent specific job orders awarded 

on the basis of competitive bid or negotiation, and are 

referable to master lump sum repair contracts entered into 

by the Maritinle Administration with shipyards in the 

several coastal regions. A ship, undergoing maintenance and 

repair after each voyage, will have a considerable number of 

job orders to be perfonned. Because of the magnitude of the 

number of maintenance and repair job orders brought about 

by the increased activity due to the Southeast Asian conflict, 

currently involving approximately 650 voyages each year, 

estimates of the total number of contracts, and the total 
16 

dollars cOllnected therewith, are based upon sampling of ships 

and voyages as they relate to geographic and traffic factors. 

The sampling is necessary only for fiscal years 1966 and 1967. 

In the earlier fiscal years, the number of contracts and dollar 

amounts shown were based upon actual data. 

6. General Services Administration.-In a letter dated March 1, 

1968, the General Services Administration made the following comments regarding contracts placed by it and the applicability of the 

Renegotiation Act to those contracts: 

The vast majority of the Federal Supply Service contracts 

are on a fixed price basis and do not involve the problem of 

initial pricing and subsequent price redeterminations as in the 

case in cost-type contracts. We do encounter cases where 

there is little cost and production experience available for ne,,' 

items being introduced into the supply system; however, in 

most cases it is possible to extrapolate pricing data available 

with respect to similar supply items involving closely related 

types of cost and production. Variances in the products and 

services procured from year to year are experienced but the 

differences normally do not relate to commodity or service 

areas in which we have not had some prior experience. The 

footnotes shown on schedule II [see appendix I] are selfexplanatory regarding PMDS contracts. 

Due to the nature of our programs and operations, the Renegotiation Act has limited application to contracts placed 

by this agency. The basic statutory exemptions in the act, 

particularly the one covering standard comlnercial articles 

and standard commercial services, are applicable to a wide 

range of our procurement activities. In addition, the Renegotiation Board has determined that major areas of GSA 

contracting do not have a direct and immediate connection 

with the national defense and, therefore, are exempt from 

renegotiation (see paragTaph 5-53.804.1 of the attached 

copy of General Services Adnlinistration procurement regulations, subpart 5-53.8). 

With respect to the proposed amendments to the Renegotiation Act of 1951, GSA has no objection to the enactment of the Board's draft bill which was submitted to the 

Speaker of the House by letter dated February 23, 1968 from 

Mr. Lu,vrence E. Hartwig, Chairman of the Renegotiation 

Board. 

7. Federal Aviation Administration.-The Federal Aviation Administration in a letter dated 11arch 1, 1968, made the following comments regarding contracts placed by it and the applicability of the 

Renegotiation Act to those contracts: 

The materials/services procured by this agency cover a 

,vide range of cost. type study, design, or design and initial 

production of hardware. The fixed price type contracts 

cover production or performance type specifications, follow on 

supply type of procurement, and the bulk of Ollr construction contra.cting. To illustrate this point, our current active 

contracts list contains 479 contracts that are not completed 

for a variety of reasons. A breakdown of the 479 contracts 
17 

is as follows: Fixed price-256 (53 pereent); cost type-147 

(30 percent); issued to other Government ugencies---:-48 

(10 percent); labor hour and time and materiel-28 (7 

percent). NIany of our contracts are entered into for which 

there is no previous cost or prodnction experience. We find 

that there is little change in the variety of supplies and 

serviees that are procured from year to year. 

At this time the FAA has no partielllar comment to 

make as to the merits of any proposed extension of the 

Renegotiation Act. It is expeeted that the Offiee of the 

Secretary will in the future be making one comment on the 

effects of such legislation on all elements of tbe Departlnent 

of Transportation. 

SECTION 3. PROCUREMENT TRENDS, METHODS, 

AND POLICIES 

A. RECENT TRENDS IN DEFENSE- AND SPACE-RELATED PROCURE'MENT 

The need for renegotiation generally is predicated on various 

aspects of military and space procurement: the lack of competition, 

the extensive use of negotiated contracts, and the inability of procurement methods to insure against excessive profits. The amount 

and the nature of the procurement buildup associated with Vietnam 

is also relevant since the buildup is another reason advanced for 

continuing renegotiation. In this part of the report, various aspects 

of the procurement framework "within which renegotiation functions 

are considered: trends in procurement; the use of advertisement 

and negotiation in awarding contracts; the types of contract pricing 

used; the Truth in NegotiationsAct; and the Defense Department cost 

reduction program. In addition, various aspects of renegotiation and 

the relationship between procurement and renegotiation are discussed. 

The major emphasis with regard to procurement is focused, of course, 

upon the Department of Defense in view of the relative magnitude 

of its procurement activities within the overall framework of defenseand space-related procurement. A more detailed analysis of this topic 

is presented in appendix B. 

1. Trends in total defense-related procurement 

In 1967, total Defense Department military procurement rose 

to $44.6 billion, surpassing the previous peak of $43.6 billion ",~hich 

occurred in the Korean conflict year of 1952. Although the 1967 

military procurement surpassed the previous peak level, it was the 

result of a much slower buildup than occurred during the Korean 

conflict. Military contract awards to business firms for work in the 

United States increased from $5.4 billion in 1950 to $30.8 billion in 

1951, or 476 percent. From 1950 to 1952, the increase was from $5.4 

billion to $41.5 billion, or 675 percent. The Vietnam buildup, on the 

other hand, was more gradual. ]\1ilitary procurement increased $8.7 

billion from 1965 to 1966, or 35 percent. The 2-year buildup (1965-67) 

was $14.5 billion, or 57 percent. In addition, only 39 percent of the 

Vietnam procurement buildup ,vas accounted for by "costly, novel, 

and complex" items such as aircraft, missile and space systems, ships, 

and electronics and communications equipment. 

Small business firms have been participating in military contract 

awards to an increasing extent. In the last 7 years, small businesses' 

share of military prime contract awards increased from 16 percent 

of total awards to over 20 percent. The alnount of military subcontracts awarded to small business also increased dm'ing this period 

from 37 percent of total subcontracting to over 43 percent. Thus, 

the total share (prime contracts and subcontracts) of small business 

in military procurement has increased from 31 percent in 1961 to 37 

percent in 1967. 

(19) 
20 

2. Methods of procurement placement 

There are two basic methods by which the Defense Department 

awards lnilitary eontracts: through formal advertisement and through 

negotiation. From 1961 to 1965, the pereentage of contracts awarded 

through formal advertisement increased, reaching 18 pereent of military procurement in 1965. This ,,-as followed by a decline to 13 percent 

in 1967. The >percentage of niilitary contracts a,varded' tb small bnsi~ 

ness firms through formal advertisement has remained relatively 

stable at about 20 percent during the last 5 years. The pereentage 

of eon tracts awarded to large business firms by formal advertisement 

has also remained relatively stable at about 13 percent, except for 

1965 when it rose to 18 percent. 

The bulk of procurement (about 95 percent) in recent years of 

NASA and AEC, which account for most of the procurement of the 

nondefense agencies covered by renegotiation, has been obtained 

through negotiation rather than formal advertisement. 

In determining the degree of price competition which exists in its 

pl'oenrement, the Defense Department considers price eompetition to 

be present when a contract is awarded by formal advertisement and 

also in certain situations ,,-hen a eOlltraet is awarded by negotiation. 

From 1960 to 1967, the degree of price competition in Department of 

Defense military procnrement rose from 30 to 43 perc-ent. Negotiated 

price competition, the largest conlponent within the price competition 

category, accounted for almost one-half of price competition in 1966 

and 1967. 

3. Types of contract pricing provisions 

The basic principle behind Defense Dep<1rtmen t procuremen t actions is that the business profit motive should be utilized effectively 

in order to achieve economical contract performance. To make effective use of the profit motive in private business, the Defense Department believes the contractor should be given cost responsibility as 

soon as possible and to the maximum extent possible. For this reason 

some variation of the fixed-price eon tract is preferred by the Department. 

Prior to 1960, the use of fixed-price contracts \yas declining. This 

trend was re\-ersed, ho\\-ever, from 1960 to 1967, during which the use 

of fixed-price con tracts rose from 57 percen t. of military procnrement 

to 79 percent. 

From 1960 to 1967, the llse of cost-plus-fixed-fee contracts declined 

from 37 percent of procurement to 10 percent, and the nse of fixedprice (other than incenti\7e) contraets rose from 44 percent of procuremen t to 61 percen t. 

The use of incentive-type contracts (fixed-price and cost) was 

declining prior to 1961; however, from 1961 to 1964 the use of incen ti ve 

contracts increased from 14 percent of procurement to' 33 percen't. 

This was followed by a decline to 26 percent in 1967. 

4. Tl'uth in Negotiations Act 

(a) In genel'al 

The Truth in Negotiations Act (Public Law 87-653) was enacted 

September 10, 1962, to strengthen the ability of procurement officials 

in the military departments and the National Aeronautics and Space 

Administration to ascertain and obtain "accurate, complete, and current cost or pricing data" upon which to establish fair and reasonable 
21 

prices. This " 'as largely due to a numberof reports by the General 

Accounting Office (GAO) during 1957-62 on instances of increased 

costs to the Government due to the laek of "aecurate, complete, and 

current cost or prieing data" in negotiating contracts. Selected audits 

during this period indieated that the failure to obtain appropriate cost 

data resulted in higher priees to the Government of at least $61 

million.l 

The Truth in Negotiations Act stated and reconfirmed a general ~ongressional policy to (1) maximize the use of formal adyertising 

where feasible and practicable, and (2) solicit as many proposals, in 

all negotiated procurements over $2,500, from a maximunl number 

of qualified sources ("where rates or prices are not fixed by law or 

regulation and in which time of delivery ,,·ill permit") to obtain 

Hcompetitive" prices (considering other factors eonsistent with the 

requirements of the goods or services needed). 

Furthernlore, the aet specified that a prime eon tractor or any subcontractor shall be required to submit and certify that cost or pricing 

data are "aceurate, eomplete, and current" if the negotiated contract 

award exceeds $100,000 (for prime contracts, modifications or changes 

in contracts and subcontracts). 

'Vhere this certificate is required, the contract must also contain 

a provision to insure against "defective pricing (or cost)." A price 

adjustment would be required if the cost or pricing data were "inaccurate, incomplete, or noncurrent." 

The Truth in Negotiations Aet, hmyever, does not apply to contracts or subcontracts where the price is negotiated on "adequate price 

eompetition, established eatalog or market prices of commercial items 

sold in substantial quantities to the general public, prices set by la,,-

or regulation," or in exceptional cases where the head of the agency 

states in writing his reasons for w'"aiver of applieation. 

In addition, the Act provided that decisions to award a contract 

under certain of the statutory provisions (10 U.E.C. 2304(a» allmying 

contraets to be negotiated rather than advertised formally, and ehoices 

of the type of eontraet to be used, ,yere to be substantiated by \\Titten 

reasons as to why the eontract qualified for negotiation (inelnding the 

reasons why formal advertising was not feasible and practieable) and 

why the type of eon tract selected ,yas likely to be less costly than 

another type. 

(b) GAO findings and recommendations 

Continuing its program of selected postaward audits of Government 

contracts, the GAO issued Report B-158193, February 23, 1966, recommending: (1) that the DOD's Defense Contract Audit Agency 

(DCAA) establish an organized and regular postaward revie,Y of 

'(noncompetitive" negotiated contracts, and (2) a revision of the 

armed services procurement regulation (ASPR) to provide a elause to 

give DCAA auditors access to the books of contractors affected under 

Public Law 87-653. 

GAO Report B-39995 January 16,1967, testimony at the l\Iay 1967 

hearings by the Joint Economic COlllmittee's Subcommittee on Economy in Government, and testimony at hearings by the House Armed 

Services' Subeommittee for Special Investigations (August 3 and Septenlber 25, 1967) indicated a laek of complete cOlnpliance by the 

1 House Armed Services Committee, Subcommittee on Special Investigations, .. Review of Defense Pro- curement Policies, Procedures, and Practices: Part I-Truth in Negotiations," (Feb. 29, 1968). p. 3. 
22 

DOD with Public Law 87-653. Report B-39995 revealed that fronl a 

sample of 242 negotiated prime contracts and subcontracts (awarded 

after October 1964),185, or 76.4 percent, complied with the general requirements of submission and certification of cost or pricing data under 

Public Law 87-653. The remaining 57 of the 242 awards did not submit 

the certificates because they were apparently legally exempted. However, the records of these 52 exempted awards did not contain a 

written explanation of why they were classified as being "competitive," 

etc., and thus exempted. Also, of the 185 that did comply, 165, or 

89.2 percent,. did not provide written records identifying the cost or 

pricing data submitted and certified. 

Furthermore, the GAO found that prime contractors "had no 

record identifying the cost or pricing data submitted by subcontractors 

in support of significant cost estimates even though agency contracting officials were required, under negotiated prime contracts other 

than firm-fixed-price type, to ascertain that such data were being 

obtained. " 

Also, the DOD contracting officials were not requiring prime 

contractors to use the new contract pricing proposal form (DD Form 

633, December 1, 1964). 

Therefore, in addition to its February 1966 report recommending 

a postaward audit system and obtaining the right of access to performance cost information on noncompetitive firm fixed-price contracts, the GAO recommended in its January 1967 report, and in the 

May 1967 Joint Economic Committee hearings, that the DOD-

(1) obtain written identification of data submitted by the 

contractor; 

(2) revise the ASPR to make it clear tp.at making data available to the auditors without identification in writing does not 

constitute data "submitted," in terms of the law; 

(3) document procurement files where cost or pricing data 

were not requested to indicate the basis of decision to waive 

the requirements; and that 

(4) DOD utilize the DD Form 633. 

The report of the House Armed Services Subcommittee for Special 

Investigations, "Review of Defense Procurement Policies, Procedures, 

and Practices: Part I-Truth in Negotiations" (February 29, 1968), 

contained very similar ·findings and recommendations (pp. 3-4) as did 

the July 1967 report of the Joint Economic Oommittee's May 1967 

hearings. 

(c) DOD response to GAO recommendations 

Following the February 1966 GAO report, the DOD's Defense 

Oontract Audit Agency (DOAA) took steps to implement a regularly 

scheduled posta ward audit system. The DCAA had been established 

in 1965, but only provided for general audit surveillance. 

The second GAO recommendation of February 1966, regarding 

obtaining the right of access to performance cost information on 

noncompetitive firm fixed-price contracts, was not implemented until 

a September 29, 1967-, memorandunl was issued by the Deputy 

Secretary of Defense (see appendix D for text of memorandum and 

views thereon by the Comptroller General). 

The Defense Department in DOD Circular 57 (November 30, 1967) 

issued an order for implementation of the requirements regarding access to a contractor's performance records for negotiated noncompeti-
23 

tive firm fixed-price contracts and fixed-price with escalation contracts. 

This order applied to contracts over $100,000 for which a cost certificate had been obtained, i:p.cluding subcontracts subject to :public Law 

87-653. Access to a contractor's performance records was already 

available in the ease of cost-reimbursement contra,cts. Oircular 57 

also included provisions regarding compliance with Public Law 

87-653's cost documentation requirements (including certificates of 

cost documentation). In addition, a revised defective cost or pricing 

clause was prescribed (i.e., a clause requiring price readjustment in 

the case of "inaccurate, incomplete, or noncurrent cost or pricing 

data"). This order was to be effective upon receipt.2 

Further testimony by the DOD in the Joint Economic Oommittee's 

November 1967 hearings indicated increased efforts were being made 

to improve training for procurement officials and personnel, including 

seminars on implementation of Public Law 87-653 and explanation 

of the new DOD regulations. 3 The GAO indicated at the November 

1967 hearings that, in general, the DOD Oircular 57 did include all of 

their recommended changes. 4 

In its testimony at the November 1967 Joint Economic Oommittee 

hearings, the Bureau of the Budget stated that "Our investigation 

and our discussions with officials of GAO and the Department of 

Defense since the 11ay 1967 hearings [JEO] indicate that substantial 

progress has been made. A period of operational testing will be necessary to assure that desired results are being achieved." 5 

The GAO testified, however, that it would be at least 6 months, or a 

year, before they could adequately evaluate the effectiveness of the 

new DOD regulations in terms of compliance with the Truth in 

Negotiations Act. 6 

According to a recent speech before the Electronics Industries 

Association Spring Oonference, "Symposium on Economics for the 

Defense Industry" (March 5, 1968, Washington, D.O.), Oomptroller 

General Elmer B. Staats stated that the GAO has begun a broad 

suryey of contract administration by the Defense Oontract Administration Services and by the military departments'. 

This survey will cover the trend toward shifting cost responsibility 

to the contractor, including special emphasis on the effects of incentive 

type contracts. In addition, the GAO will examine such newer management contracting concepts as "multiyear :Rrocurement," "total 

package" contracts, and "life cycle costing." Hence, there appears 

to be more research to be done to ascertain the effectiveness of these 

newer procurement policies and techniques. 

5. Summary of Defense Department cost reduction program 

In fiscal year 1962, the Department of Defense instituted a cost 

reduction program. One of the more inlportant aspects of this program was shifting from noncompetitive procurement to price competitive procurenlent. The Department estimates that the savings from 

shifting to price competitive procurement averages about 25 percent. 

Another aspect of the cost reduction program was reducing the use 

of cost-plus-fix:ed-fee contracts and increasing the use of fixed and 

2 Joint Economic Committee, arin~s, "Economy in Government Procurement and Property Manage- ment," (Nov. 27-30 and Dec. 8, 1967). pp. 162-177. 3 Ibid_, pp. 110-13.'1; e.g., DOD Training Seminar on "Certified Cost or Pricing Data and Public Law 

87-653," (September 1967). 

4 Ibid., p. 376. ~ Ibid., p_ 305. 

6 Ibid., p. 379. 
24 

incentive price contracts. Savings are estimated at 10 percent per 

dollar converted from cost-plw;;-fix~d;fee contract pricing to .fixed 

or incentiv~'type' contract pcicing~iOther aspects of the' cost reduction 

program included purchasing items directly from the manufacturer 

rather than through a prime contractor, and the multiyear procurement procedure which is used in lieu of awarding a separate contraet 

each year. 

B. RENEGOTIATION AND PROCUREMENT 

In analyzing the rela.tionship between renegotiation and procurelnent policies and methods, it is useful to consider the types of contracts represented in renegotiable sales and their relative profitability. 

It also would be helpful in attempting to determine the types of pro- curenH~nt whieh tesult in "excessive profits" to examine the types of 

contracts, and their profitability, represented in the sales of contractors ,,,ith respect to 'which excessive profits deternlinations were made. 

This latter information was not provided to the staff. The available 

data, however, do afford some indication of the relative magnitude 

of excessive profits within the overall framework of renegotiation. 

In addition, some indications are provided of the relative profitability 

of those contractors with respect to which excessive profits deternlinations were made. 

The objective of -renegotiation it;; to limit "excessiv.e pr.ofits." In 

this connection, it is worthwhile to consider the profit policy of the 

Defense Department and recent studies of defense industry profitability. 

1. Renegotiable sales and profits-By type oj contract pricing 

The changes in the procurement patterns of the Department of 

Defense in recent years are reflected in the types of renegotiable sales 

reported to the Renegotiation Board. An increasing percentage of 

renegotiable sales is attribu table to fixed-price type and incentive type 

contracts. On the other hand, the percentage. of renego,tiable sales 

attribu table to cost-plus-fixed-fee contracts has declined. 

An analysis of the ratio of renegotiable profits to total renegotiable 

sales for various types of contracts in recent years indicates that 

incentive type contracts (both fixed-price and eost-reimbursement) 

have a profit/sales ratio about twice that of nonincentive type contracts. On th~ otheltrhi}I).d·, if: ouly :profi"-table reneg6.tiabl~ sales are 

considered, firm fixed~pric.e contracts generally 'show the highest 

profit/sales ratios. Firm fixed-price contracts also show the highest 

rate of losses when only loss renegotiable sales are considered. 

2. Renegotiable sales and profits, and excessive profits determinations 

The magnitude of excessive profits 'wi thin the overall con text of 

renegotiation is relatively small. In recent years, excessive profits haye 

averaged less than one-tenth of 1 percent of renegotiable sales and 

about 1.3 percent of renegotiable profits. When the amount of exeessiye 

profits actually returned to the Government (i.e., after reduction for 

the Federal income ta~ credit) is considered, these percentages are 

approximately halved. 

Those con tractors with respect to whieh excessive profits determinations were made had profit/sales ratios on their renegotiable 

business which were 'substantially higher than the profit/sales' ratios 

for all contractors reporting to the Renegotiation Board. On the other 

hand, the profit/sales ratios on the nonrenegotiable business (all other-
25 

sales of the contractor-cOlnmerical and nonrenegotiable Government) 

of .thQse"c.ontl;a.c;tm.;~"w;it~l T¢speGt .to .whi<;h·excfs,siv:e PI;o:tits 9.et~:r:minations were made were significantly higher ' than the profi tjsl1les 

ratios on the renegotiable business of these firms. 

3. DOD profit policy concepts 

(a) DOD profit policy 

Basically, it is the policy of the DOD to utilize the business profit 

motive to encourage competent and resourceful private industry to 

compete for the sales the DOD generates. 7 In order to facilitate the 

achievement of this goal, adequate targeted profits must be available 

in the negotiation of defense contracts. The DOD promulgated a new 

profit policy on August 15, 1963 (ASPR, sec. 3-808), for all contracts 

negotiatBd 'after January 1, 1964 .. This policy included the following 

statement: 8 

* * * Effective national defense in a free enterprise 

econOlllY requires that the best industrial capabilities be 

attracted to defense contracts. These capabilities will be 

driven away from the defense market if defense contracts 

are eharacterized by low profit opportunities. Consequently, 

~~?,ti~~ipn~ a~rp.~~ ~erely at reducing profits, with no 

realIzatIOn of tnefunctlOn of profit-cannot be condoned .* * * . 

Further;more, any particular average percentage of profits earned 

is not to be used to set a limit on a given contraet, as "negotiation of 

very low profits, the use of historical averages, or the automatic 

application of a predetermined percentage to the total estim~ted cost 

of a product, does not provide the motivation to accomplish such 

performanee"; 9 i.e., more effeetive tllld economical contract performance. 

To provide this motivation, "the profit objective must be fitted to . the circumstances of the particular procurement, giving due weight to 

each of \ he performance, risk7 and other factors * * * . This will 

result in a '~Tider range of profits, which, in many cases, will be significantly higher than previous norms * * *, [since] low average 

profit rates on defense contracts overall are de'trimental to the public 

interest." 10 

'fl?-~ overal~ .. .o.bje?.tive, of the new DOD p,rofit policy on negotiated 

contracts (whle,h,' In 1967';' accounted for 86 percent of the dollar 

amount of military procurement with business firms in the United 

States) is to set up adequate inducement for a "broad reduction in 

defense costs"; and, at the same time, to shift as much cost responsibility as possible to the contractors. Thus, as indicated above, higher 

rewards (i.e., profits) will go to contractors ,,"ho: undertake more 

difficult assignments requiring high technical skills; assume greater 

cost risk; show excellent past performance records; and undertake the 

responsibility to provide their own facilities and financing. ll 

The DOD profit policy operates in conjunction with the change in 'contract pricing policies discussed previously. Changes in DOD 

procurement policies during the lQ60's have tended to increase the 

contractor's risk by increasing his cost responsibility: the use of 

.7 Armed Services Procurement RegUlation (ASPR), sees. 3~02(a) (1) ,and 3-808.1(a). 8 ASPR, sec.3-808.I(a). . G lbid, '. 10 Ibid. 

II Ibid. 
26 

cost-plus-fixed-fee contracts has declined rapidly; conversely, increased 

use has been made of firm fixed-price and incentive contracts' in 

addition, price competitive procurem~t has been rising steadily. ' 

This shift from cost-type contracts to fixed-price type contracts has 

also increased the contractor's working capital requirements because 

progress payments by the DOD have been at a lower rate of costs 

incurred for fixed-price contracts than for cost contracts (70 percent 

vs. 100 percent for cost) Y 

The recent trend toward higher risk contracts (firm fixed-price) 

includes a potential for greater contractor profit (if performance 

exceeds expectations) or lower profits (or losses, if costs are not 

managed efficiently). 

As indicated previously, overall profit/sales ratios for firm fixedprice contracts of renegotiable sales were much lower than for incentive 

type contracts. This was due to the high rate of losses reported on firm 

fixed-price contracts. Considering only reported profitable renegotiable 

sales, however, firm fixed-price contracts revealed the highest profit/ 

sales ratio of the three major categories of contracts reported by the 

Renegotiation Board. 

(b) DOD profit review system 

The DOD established a profit review system to implement the new 

profit policy stated in ASPR, sec. 3-808. This set up "Weighted 

Guidelines" for negotiating target profits, based upon weighted 

percentages for certain inputs and costS.I3 

The factors to be considered included the following: past contract 

performance (e.g., management quality, cost efficiency, cost reduction 

program, value engineering, quality of product, delivery efficiency, 

inventive contribution, and small business and labor surplus area 

participation); contractor risk (e.g., type of contract pricing, difficulty 

of contract task); high technical skill requirements (and other material 

and engineering inputs); and contractor investment (Le., whether 

government supplied).14 Weighted Guidelines are to be used in all 

contracts where cost analysis is performed, except certain service and 

con s truction con tracts. 

The DOD also developed a contractor performance evaluation 

system to allow analysis of the efficiency of defense contractors and 

properly reward them by establishing targeted profits befitting past 

performance and contractor risk.I5 In all negotiated contracts over 

$200,000, the contracting officer must complete a report of the individual contract profit plan, reflecting the cost weighting that resulted 

in the negotiated target profit~I6 Following completion of such a 

negotiated contract, a report must be made to provide a comparison 

of the effectiveness of the targeted ("going in") profit and the cost 

performance, which is reflected in the final earned ("coming out") 

profit. 17 

12 DOD reported that progress payments would be 80 percent for fixed-price contracts as of Mar. 1, 1968. Small business was increased from 75 percent to 85 percent. These recommendations were made during hearings by the Subcommittee on Government Procurement, Senate Select Committee .on Small Business, 

Feb. 6, 7, 1968. 13 ASPR, sec. 4-808.2. U ASPR, sec. 3-808.4. . 15 DOD Directive 5126.38. Dec. 3, 1965. 16 DD form 1499, Aug. 1, 1966, ASPR, sec. 21-300. 

Prior to the Weighted Guideline period (1958-63), reports were ouly required on all contracts over $1000000. From 1964 to July 1, 1966, all contracts over $500,000 were reported; since July 1, 1966, the figure h~s been lowered to the present $200,000. "Smaller contract negotiations were covered by limited sampling." Logistics Management Institute, Defense Profit Review (November 1967), vol. I., p. 33. 17 DD form 1500, ASPR, sec. 21-400. 
27 

To compare the negotiated "going in" profit rates (before taxes) 

during the Weighted Guideline period _ (1964-67) with previous 

"going in" profit rates, the DOD developed conlparative data on 

"going in" target profit rates for 3,615 contracts negotiated during 

1959-63 and 6,440 contracts negotiated during 1964-67 (see table 1). 

TABLE I.-DOD PROFIT REVIEW; NEGOTIATED "GOING IN'· PROFIT RATES (BEFORE TAXES), FISCAL YEARS 1959-

63 AND 1964-67 

[Dollar amounts in millions] 

Base period, Fiscal Years 1959-63 WGL period, Fiscal Years 1964- 67 

Type of contract Profit rate on- Profit rate on- Number Dollar Number Dollar Cost Cost Sales Cost Cost Sales 

Percent Percent Percent Percent Firm fixed-price _____________ 1,582 $6,565 9.0 8.3 3,064 $9,490 11. 0 9.9 Fixed- p rice-j nce ntive-fee _____ 396 10,749 8.9 8.2 915 9,116 9.4 8.6 Cost-plus-incentive-fee ______ 136 3,948 6.0 5.7 971 4,605 7.4 6.9 Cost- plus-fixed-fee __________ 1,501 10,059 6.2 5.8 1,490 2,601 6.9 6.4 

Total. _______________ 3,615 31,321 7.7 7.1 6,440 25,812 9.4 8.6 

Source: Cited in Logistics Management I nstitute, Defense Profit Review (November 1967), vol. I, p. 36. 

In the ease of each type of eontraet prieing in table 1, negotiated 

"going in" profits ,,-ere higher (as a percentage of both cost and sales) 

during the recent Weighted Guideline period, 1964-67, than during the 

prior 5-year period. 

(c) DOD profit policy and the renegotiation process 

The renegotiation process does not focus directly on the problem of 

unreasonable prices to the Government (or "excessive" profits) on 

any single contract award. A finn's renegotiable business is aggregated (profits and loss contracts) for each fiscal year. Therefore, the 

Government may have paid an excessive price on part of a contractor's sales, but this may have been partially offset by other factors; 

namely, low or average profits on other contracts; losses on current 

work (due to underbidding or lack of effective eost control); or loss 

earryforwards from prior years. In other words, the renegotiation 

process einphasizes the elimination of "excessive profits" on a firm's 

aggregate renegotiable business during the fiscal year, and the Defense 

Department procurement process emphasizes the attainnlent of 

"reasonable prices" by the Government on its procurements. 

The profit policy of the Department of Defense states the relationship between costs, prices, and profits for procurement purposes as 

follows: 18 

* * * while the public interest requires that exeessi,-e 

profits be avoided, the contracting officer should not become 

so preoccupied with particular elements of a contractor's estimate of cost and profit that the nlost inlportant consideration, 

the total price itself, is distorted or diminished in its significance. Government procnrement is concerned primarily'-with 

the reasonableness of the price wllieh the Government ultimately pays, and only seconda.rily with the eventllal cost and 

profit to the contractor. 

IS ASPR, sec. 3-806 (b) . 

91-043-GR--3 
28 

In cases where adequate price competition exists (formally advertised contracts and certain negotiated contracts), the cost-price-profit 

policy of the Defense Department is stated more specifically as 

follows: 19 

* * * fixed-price type contracts \Yill be awarded to the 

lowest responsible offerors without regard to the amount of 

their profits. Under these circumstances, the profit which is 

anticipated, or in fact earned, should not be of concern to 

the Government. In such cases, if a low offeror earns a large 

profit, it should be considered the normal reward of efficiency 

in a competitive system and efforts should not be made to 

reduce such profits. 

According to the DepartIllent of Defense, "adequate price competition" existed in over 40 percent of the dollar amount of procurement 

in 1967. In addition, slightly more than 90 percent of 11.7 million 

procurement actions in 1967 (excluding intragovernmental) were 

classified as "price cOlllpetitive." 20 Thus, less than 10 percent of procurement actions in 1967 accounted for almost 60 percent of the dollar 

alllount. 

It is possible, therefore, that these relatively few noncompetitive 

negotiated contract actions will become lllore effectively "policeable" 

in light of various factors such as the following: the recent tightenin~ 

of the implementation of the Truth in Negotiations Act; preaudit and 

postaward audits by the Defense Contract Audit Agency; postaudits 

by the General Accounting Office on the reasonableness of contract 

costs and effectiveness of contract management by the DOD; and 

illlproved accuracy by the DOD in applying the Weighted Guidelines 

in negotiat.ing target costs and profits. 

4. Studies oj dejense industry profitability 

A recent study by the Logistics 11anagement Institute (LMI) , Defense Industry Profit Review (November 1967), indicated that 

average profits on defense business were declining relative to average 

profits on commercial business, 1958-66 (i.e., for the firms in the 

sample, defense profit ratios were declining, while commercial profit 

ratios were increasing). The sample of firms doing defense business 

included: (a) 23 firms defined as high volume ($200 million or more 

defense sales) ; (b) 17 medium volume firms ($25 million to $200 million 

defense sales; and (c) 25 low volume firms ($1 million to $25 million 

defense sales).21 Defense sales to these firms were estimated as represen ting the following percen tages of the total defense sales to all firms 

within each category: (a) high volume-92 percent; (b) medium 

volume-50 percent; and (c) low volume-3 percent.22 

Inasmuch as the low volume companies in the sample only accounted for a small percentage of defense sales to all low volume 

companies, conclusions were drawn only with respect to the 40 high 

and medium volume firms. For purposes of making profitability comparisons, profit/sales .ratios (before tax) were derived for the commercial sales of the firms, as well as for the sales of a sample of 3,500 

industrial firms chosen from Federal Trade Commission (FTC) and 

19 ASPR, sec. 3-S0S.1(c). 20 Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontract Payments or Commitments. July 196&-June 1967," p. 33. 21 Lor.isti('s Management Institute, Defpnse Industry Profit Review," (Nov. 1967), vol. II, p. 3: 22 Ibid., p. 101. 
29 

Securities and Exchange Commission (SEC) quarterly financial reports. These FTC/SEC manufacturing firms were drawn from SL,,{ 

industrial categories comparable to defense industries: transportation 

equipment, electrical machinery, equipment and supplies, other machinery, other fabricated metal products, instruments and related 

products, and miscellaneous manufacturino- and ordinance.23 

Profit/sales ratios (before taxes) for the defense business of the combined 40 high and medium volume firms declined from 5.4 percent 

in 1958 to a low of 3.9 percent in 1963, rose to 4.8 percent in 1965, 

and declined slightly to 4.5 percent in 1966. Ignoring the 2 low years 

of 1960 and 1961, profit/sales ratios for the commercial business of 

these firms rose from 6.6 percent in 1958 to a high of 10.1 percent in 

1965, and declined to 9.2 percent in 1966. At the same time, profit/sales 

ratios for the FTC/SEC sample increased from 7.1 percent in 1958 to 

a high of 10.4 percent in 1965, and declined slightly to 10.0 percent in 

1966 (see table 2). 

An additional overall profit/sales ratio included in table 2 compares 

net renegotiable pTofits (net of losses) to total renegotiable sales reviewed by the Renegotiation Board. This profit/sales ratio declined 

from 6.5 percent in 1956 to a low of 2.9 percent in 1963 and 1964, 

increased to 3.0 percent in 1965 and 1966, and increased again to 3.5 

percent in 1967. It should be noted that the data from which this 

ratio is derived are based on cost allO\vances required for renegotiation 

purposes. 

Additional Renegotiation Board data are presented in tables 25 

and 26 of appendix B for firms determined to have excessive profits, 

1963-67. Before renegotiation, renegotiable profit/sales ratios of these 

firms ranged from 8.8 percent in 1963, to 12.8 percent in 1964, and to 

16.0 percent in 1967. On the other hand, the profit/sales ratios on the 

nonrenegotiable sales of these firms rose from 19.9 percent in 1964 to 

31.4 percent in 1967; and overall profit/sales ratios increased from 17.8 

percent in 1964 to 29.2 percent in 1967. 

TABLE 2.-COMPARISONS OF PROFITABILITY RATIOS OF DEFENSE AND COMMERCIAL INDUSTRIES,} 

1958-66 

[I n pe rcent) 

Category 1958 1959 1960 1961 1962 1963 1964 1965 1966 

Profits/sales (before taxes): Defense business _______________ 5.4 5.1 4.0 4.3 4.2 I 3.9 4.0 4.8 4.5 

Commercial business ____________ 6.6 6.7 4.3 5.9 8.2 8.4 9.6 10.1 9.2 

FTC/SEC sample firms ___________ 7.1 8.9 7.8 7.7 8.9 9.1 9.5 10.4 10.0 

Renegotiation Board data 2 _______ 4.9 4.2 4.0 3.6 3.1 2.9 2.9 3.0 3.0 

Profits/equity capital investment: ~ Defense ____________________ __ __ 25.0 23.7 21.1 18.5 18.3 16.1 15.6 18.2 17.4 

CommerciaL ___________________ 17.3 17.7 11.8 16.8 23.5 23.1 27.4 28.7 27.5· FTC/S EC _______________________ 16.5 21. 9 18.5 17.8 21. 9 22.6 24.1 27.4 27.1 

Profits/total capital investment: 3 Defense 13.0 ________________________ 20.4 19.1 17.0 14.6 14.3 12.5 12.2 14.3 CommerciaL ___________________ 13.4 13.8 9.2 13.2 18.1 17.2 20.6 21. 4 19.7 FTC/S EC _______________________ 14.1 18.8 15.9 15.1 18.5 19.2 20.4 23.1 22.6 

} Logistics Management Institute sample of high-and medium-volume firms doing defense and commercial business, 

and sample of FTC/SEC manufacturing industry groups (averages weighted by company sales). 2 Reported renegotiable profits and sales (net of reported renegotiable losses); data for 1956 and 1957 were 6.5 and 

5.8 percent respectively; 1967 was 3.5 percent. 3 Does not include equity or investment furnished by the Government. 

Source: LMI, Defense Industry Profit Review (November 1967), vol. I, pp. 26-27. 

23 Ibid., p. 7. 
30 

The Renegotiation Board did not furnish data on profits as a 

percentage of corporate net viTorth (or as a rate of return on capital 

investment) for individual cases or in total. Therefore, comparisons 

are not available between Renegotiation Board data and the Ll\1I 

data on profit/capital investment ratios. 

The LJ\!II study also segregated defense sales and profits by type 

of contract, the results of which are snmmarized in table 3. On the 

average, subcontracts revealed a slightly lower profit/sales ratio than 

prirne contracts, exeept in 1966 'when subcontract profits averaged 6.5 

percent of sales as compared to 4.9 percent for prime contracts. In 

recent years, fixed-price incentive contracts revealed the highest 

profit/sales ratios, and firm fixed-price contracts had the lowest ratios. 

TABLE 3.-COMPARISONS OF DEFENSE PROFIT/SALES RA lIOS, BY TYPE OF CONTRACT PRICING, 195e-66 

(AVERAGES WEIGHTED BY COMPANY SALES) 

[I n percent) 

Year Prime contracts Subcontracts Cost plus Cost plus Firm fixed Fixed price fixed fee incentive fee price incentive fee 

1958 __ _____ 5.2 4.2 3.9 2.7 7.2 6.3 1959 ____ ___ 4.8 5.2 3.8 4.6 7.3 5.7 1960 __ _____ 4.9 3.9 3.7 6.1 5.4 5.8 196L _____ 4.8 4.8 3.6 4.4 3.8 6.8 1962 _______ 4.5 4.7 3.5 4.0 3.9 6.3 1963 _______ 4.0 4.1 3.3 4.6 2.4 5.6 1964 _______ 4.1 4.6 3.7 4.9 .9 6.1 1965 _______ 5.2 4.3 4.7 5.0 3.7 6.5 1966 ___ ___ _ 4.9 6.5 4.6 5.3 2.9 5.9 

Source: LMI, Defense Industry Profit Review (November 1967), vol. I, p. 32. 

The profit/sales ratios in table 3 for the T.JJ\!II study were ronghly 

comparable to the profit/sales ratios for total renegotiable sales and 

profits (net of losses) in 1965-67 (table 22 of appendix B); for example, 

fixed-price incentive contracts had the highest ratios in both cases, 

and firm fixed price contracts had the lowest. 

Another recent study of comparative profitability of "defense 

business" and commercial business was reported by Dr. Murray L. 

Weidenbaum, professor of economics, in "Department of Economics 

Working Papers 6717," Washington University, St. Louis, J\!10. His 

sample included six large defense firms whose defense or space sales 

accounted for over 75 percent of their total sales in 1965. Six commercial firms were selected on the basis of similar sales volume; these 

samples were compared for 1962-65 and for 1952-55. 

This study differed from the LJVII profit study in various respects. 

The L1VII study selected a larger sample (40) of representative firms 

having both defense and commercial sales (high and medium volume 

defense sales-over $25 million). In addition, the firms in the LMI 

study were compared with commercially oriented firms (FTC/SEC 

sample of 3,500 firms) in industries producing durable equipment similar to th3..t produced by the defense sample. In other words, it appears 

that Professor Weidenbaum's sample of the six large defense oriented 

firms was Jess representative of firms doing defense business than the 

Ll\11 study. 

Professor Weidenbaum's findings revealed a higher profit/capital 

investment ratio (return on net worth) for the six defense firms (17.5 

percent) than for the six commercial firms (10.6 percent). On the 
31 

other hand, the "'profit margin on sales" was only 2.6 percent for 

the defense firms, while the commercial firms had a 4.5 percent margin. 

This was due to the higher "capital turnover" of 6.8 times yearly 

for the defense companies, as contrasted to 2.3 times yearly for the 

nondefense companies. The greater "capital turnover" rates for the 

six defense firms was related to the presence of Government furnished 

capital and equipment investment. Professor Weidenbaum has noted 

the limitations of the study data regarding the coverage of the sample 

and the fact that the capital investment ratios did not take into 

aecount Government supplied capital. This capital, if properly accounted for, would reduce the profit/capital investment ratios for 

certain defense oriented companies. 

The LMI survey indicated significantly lower "capital tnrnoyer" 

rates for its larger, more representative sample of defense businesses. 

The commercially oriented firms had even lower turnover ratios, but 

they had much higher profit/sales ratios than did Professor Weidenbaum's sample of six comlnercial firms. 

The L1VII study also indicated declining profit/capital inyestment 

ratios for its defense sample; at the same time, the commercial business of these 40 firms and the FTC/SEC sample of 3,500 firms in 

comparable industries revealed increasing profit/capital investment 

ratios (see table 2). 

The Logistics ~vranagement Institute is eontinuing its study in 

an attempt to further evaluate the data collected. It is also making 

further efforts to improve the coverage of small volume defense 

businesses ($1-25 million in defense sales) so as to obtain a statistically 

reliable sam pIe. 

A fourth indicator of defense business profitability is the continuing 

analysis under the DOD profit review system. The purpose of this 

analysis is to calculate realized profit rates on completed contracts, 

by type of contract, and compare average earned profit rates to average negotiated target profit rates. Limited data are available at the 

present time, however, concerning earned ("coming out") profits of 

contractors during the period the Weighted Guidelines have been in 

effect. The 1,842 contraets covered in table 4, which include only 

$11.2 billion in costs, were all awarded before the initiation of the 

Weighted Guidelines; this is due to the length of time bet,,-een a contract award and the determination of profits earned on the completed 

contract. 

The data in table 4 are also limited since no reports ,,-ere tabulated for firm fixed-price contracts (whieh have accOllllted for an 

increasing majority of contrac.t awards). In addition, the average 

earned profits do not reflect the deduction of "unallowable/nonrecO\Tel'-

able costs," as do the data for defense business in table 2. If this had 

been done, the average earned profit in table 4 would have been 

"reasonabl eomparable" with profits by type of contract pricing iny 

table 2.24 In both cases, however, fixed-price incentive coutrncts had 

the highest profit rates. Furthermore, data on earned profit rates in 

table 4 are limited by the fact that they, as the studies mentioned 

previously, are averages; thus, they do not reflect Yariatiolls among 

differen t business. 

2{ LMI, p. 34. 
32 

TABLE 4.-000 PROFIT REVIEW: REALIZED PROFIT RATES (BEFORE TAXES) ON COMPLETED CONTRACTS I 

Type of contract 

Firm fixed-price ____________ _ 

Fixed redetermination ______ _ Fixed-price incentive fee ____ _ Cost-plus-incentive-fee _____ _ Cost-plus-fixed-fee _________ _ 

Total contracts reported __________ _ 

Average 

Number of Total costs negotiated 

profitpercent 

of cost 

Average 

earned 

profitpercent 

of cost 

contracts (millions) Sales Sales 

(2) 

351 

311 

75 1,105 

---$i2~ 346 -----------9: 3 ---------8.-5-----------8:6---------j.-9 ---- 3, 883 9. 3 8. 5 9. 2 8. 4 331 6.4 6.0 7.2 6.7 

4,689 6. 4 6. 0 6. 1 5. 7 

------------------------------------------------- 1,842 11,249 

I Contracts awarded July I, 1958-Dec. 31, 1963 (preweighted guidelines). Also, "Contracting officers have not yet submitted sufficient data on completed contracts which were placed under the weighted guidelines (1964-67) to permit a mean- ingful [analysis)." 2 No data. 

Source: LMI, p. 37. 

In order to relate the DOD profit review system to the LMI profit 

study, "the LMI profit study task will require an increase in its analysis of the consolidated [DOD] 1499 and 1500 Forms data as those data 

expand. An improved understanding of the relationship between the 

data collected under the DOD system and the data received from 

contractors participating in this [LMIJ study should result." 25 

In view of the limitations of the various profitability studies diseussed above eLMI, Renegotiation Board data, Professor Weidenbaum, and the DOD profit review system), it is apparent that a 

continuing and more refined analysis of the profitability of defense 

business and comparable commercial business is necessary for an 

adequate evaluation of the effects of recent changes in Defense Department procurement and profit review policies. 

25 LMI, p. 35. 
SECTION 4. CONSIDERATIONS IN EXTENDING THE 

RENEGOTIATION ACT 

A. SHOULD RENEGOTIATION BE CONTINUED? 

There are a number of factors which should be taken into account in 

considering whether renegotiation should be continued. The more 

important of these are presented below. 

1. The policy oj renegotiation 

The policy underlying renegotiation is that contractors doing 

business with the Government in the defense and space programs 

should not be allowed to obtain excessive profits on that work. Another 

relevant policy is that the goods and services needed by the Government should be secured at a fair and reasonable price. As is discussed 

more fully below, it is difficult at the present time to judge the effectiveness of new procurement policies and methods, especially during 

the procurement buildup associated with the Vietnam conflict. in 

obtaining Government procurements at proper prices and also in 

limiting excessive profits on these procurements. It is also difficult 

to judge whether renegotiation supplements these procurement policies 

and methods, including the role assigned to the profit motive, or 

whether it detracts from their full implementation and effectiveness. 

In this connection it should be noted that the Department of Defense 

feels the Renegotiation Act should be continued at this time. 

2. The re8ults oj renegotiation 

Renegotiation has recovered for the Government more than the 

amounts expended by the Renegotiation Board for its activities. In 

analyzing this aspect of renegotiation, it does not appear appropriate 

to consider the Board's activities from its inception to the present 

time. The effect of looking back to 1951 is to attribute in part to the 

present time amounts recovered during a period characterized by 

crash procurement and substantially less sophisticated procurement 

methods. The procurement framework of the present time is quite 

different in terms both of the methods employed and the circumstances 

in 'which procurement must take place. Accordingly, the past 5 years 

have been used for purposes of analysis as more representative of 

current conditions. 

Actual determinations of excessive profits by the Renegotiation 

Board for the fiscal years 1963 through 1967 averaged about $18.2 

million a year (before the Federal tax credit), resulting in an average 

net recovery by the Governmen t of $9.4 million a year. In yie,,- of the 

normal timelag between the time a contract is awarded by a prOCllremen t agency and the time a determination is nlade by the Renegotiation Board \vith respect to amounts received under that contract, 

the determinations of excessive profits mentioned above (iucluding 

those in 1967) resulted, generally, from contraets a\nlrded ill a period 

of relatively stable procurement; that is, fi. period which does not 

(33) 
34 

include the acceleration in procurement result.ing from the Vietnam 

conflict. 

It would appear that renegotiation also may limit excessive profits 

through voluntary refunds and priee reductions which are lnacle by 

contractors. For the fiscal years ] 963 through 1967, contractors 

reported to the Renegotiation Board voluntary refunds and price 

reductions ,vhich averaged over $27.8 million a year. This probably 

resulted in an average net recovery by the Government of about 

$14.5 million a year (assuming the portion of refunds and price 

reductions recovered is about the same as the portion of excessive 

profits recovered). These voluntary refunds and price reductions, 

which are made to procureInent agencies and higher tier contractors, 

are not required by a contract provision. It ,vould appear, therefore, 

reasonable to assume that the existence of renegotiation is at least one 

of the motivating factors behind the making of these refunds and price 

reductions. 

I t is also possible that renegotiation limits excessive profits by 

exerting a deterrent effect on the determination of the contract price 

at the time a contract is awarded. Although this effect is not measurable, it appears reasonable to assume that the existence of renegotiation 

may have a restraining effect on contract pricing. 

Thus, the measurable effect of renegotiation in controlling excessive 

profits has averaged somewhere bet"Teen $9.5 and $24 million a year 

during the past 5 years, depending on the extent to which voluntary 

refunds and price reductions are attributable to renegotiation. When 

the immeasurable effect which the existence of renegotiation probably 

has on contract pricing is also taken into account, it is apparent that 

renegotiation has resulted in recoveries to the Government which 

exceed the comparatively small amounts expended by the Renegotiation Board for its activities (approximately $2.5 million a year over the 

past 5 years). 

On the other hand, the impact of renegotiation within the overall 

procurement context is relatively insignificant. In 1967, the excessive 

profits determinations by the Renegotiation Board amounted to 

only one-twentieth of 1 percent of the amount of renegotiable sales 

reported in filings with the Renegotiation Board. 

Another indication of the relatively small magnitude of the recoveries attributable to renegotiation is shown by the fact that the amount 

of profits which the Renegotiation Board determined to be excessive 

from fiscal year 1963 to fiscal year 1967 averaged 1.3 percent of total renegotiable profits. Moreover, the amount actually recovered by the 

Government with respect to these determinations of excessive profits 

(i.e., after allowance of the credit for Federal inconle taxes previously 

paid on the excessive profits) amounted to 0.7 percent of the total 

net profits on renegotiable sales. 

If the voluntary refunds and price reductions which are made to 

procurement agencies and higher tier contractors are considered to 

be a result of the existence of renegotiation, the magnitude of the 

savings resulting from ,renegotiation would be increased sOlnewhat. 

In addition to the fact that recoveries pursuant to the Renegotiation 

Act are relatively insignificant in magnitude, it should also be noted 

that contractors incur costs in complying with the requirements of 

the Renegotiation Act, both in preparing the necessary reports and in 

the actual renegotiation of a case. However, the magnitude of the 

costs incurred solely by reason of renegotiation is not ascertainable. 
35 

These costs in addition to being deductible for Federal income tax 

purposes are probably passed on at least in part to the Government 

in future contracts. 

3. Renegotiation and procurement 

The structural environment within ,,'hich defense and space procurement takes place is characterized by uncertainties. Large amounts 

are being spent in the defense and space effort for products with respect 

to which there is little or no production or cost experience available. 

The steadily rising pace of technological change and innovation has 

made available, and the rising sophistication of the defense and space 

programs have required, new and extremely complex products, materials, applications, and systems. These various factors produce an 

environment characterized by uncertainty and lack of cost and production experience. 

In order to insure fair and proper prices on military purchases by 

the Government within this environment, and also to reduce the cost 

of these purchases to the Government, the Department of Defense 

has significantly revised its procurement methods in recent years. A 

eost reduction program was adopted, procurement emphasis was 

shifted from cost-plus-fixed-fee contracts to fixed price and incentive 

contracts, the amount of eompetitive proellrement was increased, 

contract review and auditing procedures have been expanded, and 

the Truth in Negotiations Aet has been implemented. A significant 

percentage in terms of value of Defense Department contracts, over 

56 percent in 1967, ,yere firm fixed-priee contraets. In addition, over 83 

percent of the 229,357 contracts a,Yarded (over $10,000) by the 

Defense Department in 1967 were firm fixed-price contracts. Firm 

fixed-price contracts are not used in the cirenmstances usually cited as 

requiring renegotiation; namely, where there is a lack of adequate cost 

and production experience. lVloreover, an additional 30 percent in 

terms of value of contraet awards by the Department of Defense in 

1967 included a price adjustment feature (i.e., incentive escalation, or 

redeterminable). In other ,,'ords, 86 percent of the value and 93 percent of the number of contract awards (over $10,000) ,,'ere either 

firm-fixed price or included a price adjustment feature. 

Although substantial and signifieant ehanges have been made by 

the Department of Defense in its proeurement methods in recent 

years to make those proeurement methods more effecti,·e, it appears 

that there is a need to further assess those methods before their 

effectiveness ean be judged, espeeially with respect to adequately 

insuring against excessive profits. The amount of excessive profits on 

procurement occurring during the Vietnam buildup (fiscal years 1966 

and 1967) will be reflected in Renegotiation Board determinations 

during the next few years. The level of these determinations will 

afford some indication of the effectiveness of procurement methods 

during recent years. 

The overall review of military procurement policies, prnetices, and 

proeedures begun last August by the Special Investigations Subcommittee of the House Armed Services Committee, ,dlich it is not 

contemplated will be eompleted for some time, has resulted in t,,'o 

interim reports indicating some deficiencies in procurement prn.ctices 

regarding implementation of the Truth-in-Negotiatiolls Act and also 

regarding small purchases. 
36 

The studies in recent years of the General Accounting Office, the 

Federal Procurement and Regulation Subcommittee and the Economy 

in Government Subcommittee of the Joint Economic Committee have 

also indicated some shortcomings in procurement practices. 

A t the present time, studies also are being made of the level of 

profi ts in defense work 'wi th a view to determining the effectiveness 

of the Department of Defense profit policy in terms of the overall 

goals of securing the goods and services needed by the Governmen t 

at reasonable prices and of encouraging the growth of efficient and 

innova tive suppliers. 

4. The recent procurement buildup 

It appears that the amounts subject to the renegotiation process 

will increase substantially in the next few years. Amounts received 

under contracts awarded during the buildup in procurement associated 

with the Vietnam conflict are just beginning to be reflected in contractor filings with the Renegotiation Board. The number of filings 

with the Board, the amount of renegotiable sales reported in those 

filings, and the number of cases assigned to regional boards increased 

substantially in fiscal 1967 and are expected to do so in fiseal1968 and 

1969. Although the procurement buildup associated with Vietnam has 

been less rapid and more orderly than the Korean conflict procuremen t 

buildup, the Vietnam buildup has reached a higher absolute dollar 

level of expenditures. I t also should be noted that the percentage of 

negotiated procurements by the Department of Defense reversed a 

downward trend in fiscal 1966 and began rising again. Moreover, the 

percentage of negotiated procurements by the National Aeronauties 

and Space Administration and the Atomic Energy Commission, which 

together with the Departnlent of Defense account for the bulk of 

renegotiable sales, have in recent years consistently stayed at a high 

level. In addition, the portion of Department of Defense procurement 

which is considered by the department to be price competitive accounted for only 43 pereent of total procurement in fiscal 1967, a slight 

decrease from fiscal 1966, and almost half of price competitive procurement occurred in the category of "negotiated price competition." 

On the other hand, the procurement buildup associated with Vietnam does not appear to have been of a type which would impair the 

basic effectiveness of procurement methods. The Vietnam buildup, 

unlike the Korean buildup, has occurred at a relatively slow pace. 

The Department of Defense military prime contract awards increased 

675 percent from fiscal 1950 to fiscal 1952 ($5.4 billion to $4l.5 billion). 

On the other hand, these same awards increased by only 57 percent 

from fiscal 1965 to fiscal 1967 ($25.3 billion to $39.8 billion). 1\1[oreover, the increase in procurement associated with Vietnam did 

not occur primarily with respect to those types of items for which 

renegotiation is usually said to be necessary; i.e., those items for which 

there is little prior cost and production experience available. Approximately 39 percent of the $14.5 billion increase in the Department of 

Defense procurement from fiscal 1965 to fiscal 1967 occurred in items 

such as aircraft, missile and space systems, ships, and electronics and 

communications equipment. The bulk of the increase, however, 

occurred in such common items as ammunition, tank and automotive 

products, subsistence, and textiles, clothing and equipage. In other 

words, the Vietnam procurement buildup does not appear to have 
37 

been of the type which would significantly impair the effectiyeness of 

procurement methods. 

B. SHOULD RENEGOTIATION BE MADE PERMANENT? 

1. Administration's request jor an indefinite extension 

As indicated in section 2, the Renegotiation Board has requested 

that the Renegotiation Act be continued for an indefinite l)eriod. 

The basic reason advanced for making the a.ct permanent is that the 

conditions presently necessitating the act will continue for the foreseeable future. 

The Board elaborated on its request for an indefinite extension in 

the following manner. There will be continuing large purchases of 

novel and complex military and space products for which markettested prices or reliable cost experience data do not exist. These 

items must be procured on the basis of negotiated prices determined 

with reference to uncertain cost estimates. Improved procurement 

techniques cannot alter these basic characteristics of Inilitary and 

space procurement. JVloreover, the only means for insuring that the 

profit outcome of procurement is reasonable is through the overall, 

after-the-fact review provided by renegotiation. The Board also 

noted that its ability to recruit skilled personnel and to otherwise 

administer the act would be greatly improved by an indefinite extension. Finally, the Board noted that in 1960 the Special Subcommittee on Procurement Practices of the Department of Defense, of 

the House Committee on Armed Services, recommended that the 

Renegotiation Act be made permanent law. CH. Rept. No. 1959, 86th 

Cong., 2d sess. 38 (1960)). 

2. Considerations jor a limited extension 

In addition to the considerations which may be advanced for 

making the Renegotiation Act a permanent feature of the law, there 

are also considerations involving the nature of renegotiation and 

the effectiveness of procurement methods which support a limited 

extension. 

In both principle and operation, renegotiation is a process \\-hieh 

warrants periodic review by Congress. The underlying principle of 

renegotiation is profit control, and in operation, a significant portion 

of the control effected through the renegotiation process is dependent 

on the subjective application of the general standards set forth in the 

statute. It would seem desirable that there be a periodic assessment 

of the need for governmentally imposed profit controls. To the extent 

it is determined that it is necessary and desirable to limit profits in 

the manner of the renegotiation process, it would also seem approprjate 

that the irnplementation of the limitation be periodically reviewed. 

Although it may not be possible for procurement methods to completely eliminate the occurrence of excessive profits on Goyernment 

contracts, it is conceivable that procnrement methods could reduce the 

incidence of excessive profits to a level which would be considered 

insignificant. Because of the timelag between contract H\ynrds nnd 

determinations by the Renegotiation Board of excessi\-e profits, the 

full impact of the procurement changes ,,-hich have been instituted 

in recent years on the need for renegotilttion is not c1ear at this time. 

It is also difficult to judge at this time the effect of the increase in 

procurement associated with the Vietnam conflict on procurement 
38 

lnethods and practices and on the incidence of excessive profits on 

defense and space program work. At the present time, moreover, 

procurement policies, practices and methods are being reviewed by 

congressional eommittees and the General Accounting Offiee. Studies 

of the profitability of defense work are in process to determine ,,-hether 

the Defense Department profit policy is adequately implemented. 

The results of these studies and the experienee with renegotiation in 

the next few years will be of substantial assistanee in evaluating the 

need for renegotiation and the interrelationship of renegotiation and 

proeurelllen t polieies and methods. 
SECTION 5. COVERAGE OF THE ACT 

A. RECEIPTS AND ACCRUALS AND COVERED DEPARTMENTS 

Except for those receipts and accruals attributnble to contracts or 

subc.ontracts exempt fronl the act Hnder section 106 (providing 

certain Umandatory" and "permissive" exenlptions), and those which 

are not renegotiable under section 105(f) because they are below 

the luiniulum amount subject to renegotiation (the "floor"), the 

Renegotiation Act applies to all amounts received or accrued on or 

after January 1, 1951, under contracts with the depa.rtments named 

in the act, or under related subcontracts. 

Section 103(a) of the act specifies several departments of the Gov·· ernment and provides that a contract is not subjeet to the act unless 

it is with one of those departments or with a department designated 

by the President. The named departments at the present time nre 

the Department of Defense, the Departments of the Army, Navy, 

and the Air Force, the IVlaritime Administration, the FedernllVlaritime 

Board, the General Services Administration, the National Aeronautics 

and Space Administration, the Atomic Energy Commission, and the 

Federal Aviation Agency. 

The Board is required by the act to exercise its powers with respect 

to the aggregate of the amounts received or accrued during the fiscal 

year (or such other period as may be fixed by mutual agreement) by 

a contractor or subcontractor under contracts with the departments 

and subcontracts, and not separn,tely with respect to amounts received 

or accrued under separate eontracts with the departments or subeontraets. The referenee to contracts applies to those with the departments named in the act and which are not exempt under section 106. 

The reference to subeontraets applies to eontracts or arrangements 

defined by seetion 103(g) as "subcontracts." 

Seetion 103(g) broadly defines "subeontract" to inelude three different elasses of subcontracts. The first dass comprises "any purchase 

order or agreement * * * to perform all or any part of the work, or 

to make or furnish any materials, required for the performance of any 

other contract or subcontract," but "does not include any purchase 

order or agreement to furnish office supplies." The second class 

eomprises "any contract or agrrangenlent eovering the right to use any 

patented or secret method, formula, or device for the perfornuwce of a 

eontraet or subcontract." The third class comprises "any contract or 

arrangement * * * under which-(A) any amount payable is contingent upon the procurement" of any renegotin,ble c.ontract or subcontract, or (B) "any amount payable is determined ,,·ith reference to 

the amount" of a renegotiable contract or subeontract, "or (C) any 

part of the services performed or to be performed consists of the 

solieiting, attempting to proeure, or procuring" a renegotiable COlltraet or subcontract. 

(39) 
40 

B. EXEMPTIONS 

Section 106 provides 10 "mandatory" exemptions, five "permissive" exemptions, and a "cost allowance" which has the effect of an 

exemption for integrated producers of certain agricultural products 

and raw materials. 

1. Mandatory exemptions 

The mandatory exemptions are as follows: 

1. Any contract by a department with any territory, possession, or 

State, or any agency or political subdivision thereof, or 'with any 

foreign government or any agency thereof. 

2. Any eontract or subcontract for an agricultural commodity in its 

raw or natural state, or if the commodity is not customarily sold or 

has not an established market in its raw or natural state, in the first 

form or state, beyond the raw or natural state, in which it is customarilv sold or in which it has an established market. 

3. Any contract or subcontract for the product of a mine, oil or 

gas well, or other mineral or natural deposit, or timber, which has 

not been processed, refined, or treated beyond the first form or state 

suitable for industrial use. 

4. Any contract or subcontract with a common carrier for transportation or with a public utility for gas, electric energy, water, 

communications, or transportation, when made in either case at 

rates not in excess of unregulated rates of such a public utility which 

are substantially as favorable to users and consumers as are regulated rates. 

5. Contracts or subcontracts with organizations, which are tax 

exempt charitable, religious, or educational institutions. 

6. Any contract which the Board determines does not have a direct 

and immediate connection with the national defense. 

7. Subcontracts directly or indirectly under contracts or subcontracts ,yhich are exempt. 

8. Any contract, awarded as a result of competitive bidding, for 

the construction of any building, structure, improvement, or facility, 

other than a contract for the construction of housing, financed 'with 

a mortgage or mortgages insured under the provisions of title VIII 

of the National Housing Act. 

9. Certain receipts and accruals from contracts or subcontracts 

for "durable productive equipment." 

10. Certain receipts and accruals from contracts or subcontracts 

for "standard commercial articles" or "standard commercial services." 

2. Exemption jor standard commercial articles and services 

(a) Present law 

The standard commercial article exemption provided by sect~on 

106(e) exempts amonnts received or accrued in a fiscal year under 

any contract or subcontract for anyone of the following categories: 

1. A standard commercial article. 

2. An article which "is "identical in every material respect" ,yjth 

a standard commercial article. 

3. A standard commercial service. 
41 

4. A service which is "reasonably comparable" \yith a standard 

commercial service. 

5. Any article in a standard eommercial class of articles. 

For the exemption to be applicable to an article or senrice in any 

one of the above five categories, the itenl must meet what may be 

referred to as the 35 percent rule, as well as other tests prescribed by 

the act. The 35 percent rule requires, in the case of a standard commercial article, that at least 35 percent of the contractor's sales of the 

item be nonrenegotiable during the fiscal year under review or, alternatively, at least 35 percent of the aggregate sales for such year and the 

preceding fiscal year. In other words, at least 35 percent of the contractor's sales of the item must be commercial sales or sales to Government departments and agencies not covered by the act. In the 

case 6f the other four categories, the rule requires that at least 35 

percent of the sales for the year under review be nonrenegotiable. 

Certain other tests must also be met with respect to each category. 

Thus, for an article to qualify as a standard commercial article, it 

must be one which is either "customarily maintained in stock" by 

the contractor or is "offered for sale in accordance with a price schedule 

regularly maintained" by the contractor. If an article is to be exempt 

as being identical in every material respect with a standard commercial 

article, it must be of the "same kind and manufactured of the same 

or substitute materials * * * as a standard commercial article," and 

it must be sold at a price which is "reasonably comparable ,,·ith the 

price of such standard commercial article." 

For a service to be exempt as a standard commercial service, it 

need meet only the 35-percent test and be a "service" as defined by 

the statute. And, for a service to be exempt as "reasonably comparable 

with a standard commercial service", it must be of the "same or a 

similar kind, performed \yith the same or similar materials, and" have 

"the same or a similar result * * * as a standard commercial service." 

For an article to be exempt as an article in a standard commercial 

class of articles, the class in which it is grouped must be a "standard 

commercial class." This means, under the statute, the class must 

consist of two or more articles with respect to which three conditions 

are met: (1) "at least one of such articles either is customarily maintained in stock by the contractor. . . or is offered for sale in accordance with a price schedule regularly maintained by the contractor," 

(2) "all of such articles are of the same kind and manufactured of the 

same or substitute materials," and (3) "all of such articles are sold 

at reasonably comparable prices." 

A contractor may waive the exelnption for sales of anyone or all 

of the five categories discussed above for any fiscal year under certain 

prescribed conditions. In waiving the eXeInption with respect to any 

particular article or service, the contractor will not necessarily wai,re 

the exemption for any other article or service. The exemption for sales 

of a standard commercial article is "self-executing," in that it may be 

applied by the contractor without the filing of any application therefor. 

However, exemptions for sales of articles or services in any of the other 

four categories can be obtained only if the contractor files fin application with the Board. 
42 

The following list indicates some of the types of items which are 

regarded by the Board as qualifying for the standard commercial 

article exemption: 

Abrasives, steel shot, grit 

Adhesive tape 

Aircraft 

Aluminum ingots, sheets, bars and 

other standard 11lill fOTms 

Antennas 

Antifreeze 

Boilers, oil and gas fired 

Boots 

Broadcloth 

Bushings 

Cases, frozen food display cases 

Chenlicals 

Coffee 

Computers and related equipment 

Cotton greige goods 

Cylinders, gas 

Digital equipnlent and components 

Drills, counterbores, countersinks, 

and boring bars 

Drugs: 

Actifed 

Colymycin 

Deramyl 

Lanoxin 

Mandelamine 

Pyridium 

Drugs-Con tin ued 

Stelazine 

Thorayine 

Fabrics, polyester, and nylon 

Fans and blowers 

Frequency and time measuring 

equipment 

Fuel and lubricants, automobile 

and aircraft 

Gases, industrial and medical 

Governors 

Insecticides 

Nlemory systems and components 

11icrowave instruments and components 

Nails 

Nuts 

"0" rings 

Paints and thinner 

Potentiometers 

Recorders, video and audio 

Sheets and pillowcases 

Shoes 

Tacks 

Tools, taps, gages 

Vegetables and fruit, canned 

Ventilators 

Wire screen cloth 

In each year, an unkno'wn number of contractors self-apply the 

standard commercial article eXeInption and do not infol'lll the Board. 

The Board is of the belief that nlillions of dollars of sales are thus 

exempted, but it has stated that it has no way of knowing or estimating the amount involved. However, for the fiscal years 1963 

through 1967, the amounts involved in self-applications of exemptions 

which were reported to the Board are as follows: 

Fiscal year: 

Reported amounts of self-applications 

1963 ________________________________________________________ _ 1964 ________________________________________________________ _ 1965 ________________________________________________________ _ 1966 ________________________________________________________ _ 1967 ________________________________________________________ _ 

Millions 

$623 

603 

561 

439 

773 

The applications received by the Board for fiscal years 1963 through 

1967 for exemptions under the provisions of the standard commercial 

article exemption which are not self-executing (i.e., identical articles, 

standard commercial services, identical services, and classes of 

articles) showed the following: 
43 

APPLICATIONS FOR STANDARD COMMERCIAL ARTICLE EXEMPTION 

[Dollar amounts in thousands] 

Fiscal Number of Amount of exemptions 

year applications 

Applied for Approved 

1963 _____________________________ 218 $515,564 $479,074 1964 _____________________________ 230 566,445 556,589 1965 _____________________________ 244 485,958 457,922 1966 _____________________________ 264 545,733 527,667 1967 __________________ -- - ________ 251 671,901 636,611 

(b) Administration's recommendation 

Denied 

$36,490 

9,856 

28,036 

1~ 066 

3 ,290 

In identical letters dated February 23, 1968, to the President of the 

Senate and to the Speaker of the House, the Renegotiation Board 

recommended that exemption for standard commercial articles and 

services be elinlinated in its entirety. The Renegotiation Board made 

the following statement on this matter: 

Forwarded herewith and recommended for enactment is 

a draft of legislation "To extend the Renegotiation Act of 

1951, and for other purposes." 

The Bureau of the Budget has advised that enactment 

of this legislation is in accord with the program of the 

President. 

The proposed legislation would amend section 102 (c) of 

the Renegotiation Act of 1951, as amended (50 U.S.C. App., 

sec. 1212(c» by striking out the renegotiation termination 

date; would repeal the exemption of standard commercial 

articles and services provided in Section 106 (e) in its entirety; 

and would modify the profit limitation suspension in Section 

102(e) by eliminating the reference to Section 106(e). 

* * * * 

2. Elimination of commercial exempfion.-The exemption 

of commercial articles and services in Section 106 (e) of the 

Act should be repealed in its entirety. 

The exemption of individual articles provided in Section 

106(e) may be self-applied by the contractor if, among 

other things, his sales of an article in a fiscal year, or in s11ch 

fiscal year and the preceding fiscal year, are at least 35 pel' 

cent nonrenegotiable. 

Section 1()6(e) also provides exemption for an article 

which is identical in every material respect \yith a standard 

commercial article; for an article in a standard commercial 

class of articles; for a standard commercial service; and for 

a service which is reasonably comparable with a standard 

commercial service. In these four eategories, the contractor 

must make application for the exemption and the 35 per cent 

requirement is limited to sales in the fisenl year. 

The contractor is entitled by the Act to "Taive these 

exemptions, in whole or in part. 

The cODlmercial exemption assumes that excessi\Te profits 

will not result when at least 35 per cent of the sales of nn 

article \yhich the contractor either maintains in stock or 

offers for sale from a price schedule are nonrenegotinble. 

91-043-6S----! 
44 

This assumption is not yalid because what is a fair price in 

commercial sales nlay be clearly excessive for large Government contracts. The assumption is particularly untenable 

when the volume of Government purchasing is expanded 

and accelerated by the threat or fact of war. 

There is an additional ground for objection to the class 

exemption. Under this exemption only one article in a class 

need be maintained in stock or offered for sale in accordance 

with a price schedule. Other articles ,vhich are of the same 

kind and content and are sold at reasonably comparable 

prices may be included in the class,and all are exempt, provided only that 35 percent of the aggregate sales of the 

articles in the class are nonrenegotiable. This exemption 

has been applied to a wide variety of articles, many of which 

are sold exclusively or predominantly to the military departments. 

Sincerely yours, 

(Signed) Lawrence E. Hartwig 

LA WRENCE E. HARTWIG, 

Ohairman. 

A BILL To amend the Renegotiation Act of 1951, and for other purposes 

Be it enacted by the Senate and House of Representatives of 

the United States oj America in Congress assembled, That 

this Act may be cited as the "Renegotiation Amendments 

Act of 1968". 

* * * * * 

MODIFICATION OF PROFIT LIMITATIONS SUSPENSION 

SEC. 3. (a) Subsection (e) of section 102 of such Act (50 

U.S.C. App., 1212(e)) is amended by striking out "or wou:d 

be subject to this title except for the provisions of section 

106(e)" wherever such words appear therein. 

(b) The amendment made by subsection (a) shall apply 

to contracts with the departments and subcontracts only to 

the extent of the amounts received or accrued by a contractor or subcontractor after June 30, 1968. 

ELIMINATION OF COMMERCIAL EXEMPTION 

SEC. 4. (a) Section 106 of such Act (50 U.S.C. App., 

1216) is amended by striking out subsection (e) thereof. 

(b) The amendment made by subsection (a) shall apply 

to contracts with the departments and subcontracts only' 

to the extent of the amounts received or accrued by a contractor or subcontractor after June 30, 1968. 

(c) Discussion 

In addition to the Renegotiation Board, some Members of Congress 

have recommended in bills introduced by them that the exemption 

for standard commercial articles and services be eliminated. 

It should be noted that it is difficult to estimate the impact of 

repealing the standard commercial articles exemption in terms of 

additional filings and renegotiable sales, especially in view of the 
45 

fnet that the Renegotiation Board is not notified of a significant 

portion of the instances in which it is applied. Accordingly, the estimate by the Board of the effect of eliminating this exemption must be 

viewed in light of the data and forecasting difficulties involved. The 

Board has estimated that the repeal of the exemption for standard 

commercial articles and services would result in 600 additional 

contractor filings with the Board and additional renegotiable sales 

of $2.1 billion in fiscal 1969. This would increase estimated renegotiable sales in fi scal 1969 to $46.6 billion, an increase of 4.7 percent. 

A number of interested individuals and organizations submitted 

comments setting forth their reasons in opposition to the proposed 

repeal of the exemption for standard comlnercial articles and services. 

The reasons advanced are as follows: 

The exemption has been in the act since 1954 and \"as 

given further consideration by Congress in 1955 and again in 

1956 on the basis of experience under the act. Moreover, the 

exemption was carefully considered by Congress when 

enacted and also when revised. In essence, Congress factually 

concluded that in the case of standard commercial articles 

and services there was no basis or need for renegotiation 

since cost and pricing experience had already been acquired 

and prices made in a competitive market. The exemption was 

designed to recognize the fact that prices on commercial 

items are made in a competitive market and accordingly 

can be assumed to be reasonable. 

In other words, Congress adopted a minimum exemption 

to prevent the unreasonable and unnecessary renegotiation 

of commercial articles that find a fair price in the competition 

of the marketplace. In addition, the marketplace for standard 

commercial articles and services is more competitive today 

than it was in 1956 when the exemption took its present form. ~10reover, the exemption presently requires that a company, 

before it can avail itself of the exemption, must itself have a 

commercial market and established price for the article or 

service in question. Under these conditions there are no circumstances in which Congress can justify subjecting the 

receipts from commercial articles or services to renegotiation 

since the effect of this would be to allow the Government to 

indirectly pay less through the working of renegotiation for 

standard articles or seITices than commercial purchasers 

would have to pay. 

It is difficult to evaluate the exemption for standard commercial 

articles because of the incomplete nature of the information regarding 

the exemption. The extent of the application of the exemption is not 

known. Ioreover, there is little indication of whether the incidence 

of excessive profits on articles qualifying for the eXeInption is higher 

or lower than the incidence of excessive profits on renegotinble sales 

generally. Also, the effect of the procnrement buildup associated 

with the Vietnam conflict on the incidence of excessive profits on 

commercial items is not ascertainable at this time. Some tangible e\"idence with respect to this exemption resulted from the recent iuyestigagation of the Special Investigations Subcommittee of the House 

Armed Services Committee into small purchases practices \dlich revealed situations in which the Government was significantly over-
46 

charged for commercial items. This study indicated deficiencies in 

pro('.urement procedures for small purchases, although the overall 

extent of overcharging is not clear. 

The premise underlying the exemption for standard commercial 

articles and services is that the competitive ID.arket which exists for 

these items insures against excessive profits. It is suggested that a 

competitive market generally is not characterized by uncertainties 

regarding cost, production, or price experience which may give rise 

to excessive profits. 

In its request for an indefinite extension of the Renegotiation 

Act, the Renegotiation Board primarily justified the continued need 

for renegotiation on the basis that market-tested prices do not exist 

for novel and complex military and space products which accordingly 

lnust be procured on the basis of negotiated prices and uncertain cost 

estimates. By implication, this would appear to corroborate the 

basic premise of the standard commercial articles exemption. 

The primary reason advanced by the Board for rmTIoving the 

standard commercial article exemption was: "The commercial exemption assumes that excessive profits will not result 'iyhen at least 

35 percent of the sales of an article "which the contractor either maintains in stoek or offers for sale from a price schedule are nonrenegotiable. This assumption is not valid because what is a fair price in 

conlnlercial sales may be clearly excessive for large Government 

eontracts." In effect, the Board appears to be suggesting that the 

volume discounts received by the Government on commercial items 

may not be large enough. Substantial questions may be raised as to 

whether this is a proper concern of renegotiation. The failure to 

obtain a proper volume discount would appear to indicate either 

inadequate implementation of procurement practices by contracting 

officials or an otherwise cruable defect in procurement methods. 

This is quite different than the premise on which renegotiation is 

based; namely, that uncertainties at the time of the procurement of 

certain types of items requires the after-the-fact review provided by 

renegotiation. 

It would seem that a more fundamental question with respect to the 

standard commercial articles exemption would be whether the exemption's underlying premise is adequately implemented through the 

statutory definition. Prior to 1956, the exemption did not apply 

unless the Board made a specific finding that competitive conditions 

affecting the sale of an article were such as would reasonably prevent excessive profits. This manner of implementing the premise 

of the exemption was abandoned in 1956 because of the great burden 

it placed on the Board and the considerable expense it involved 

for industry. Instead, it was decided that the underlying premise of the 

exemption could be implemented by looking at the individual contractor concerned, rather than at an entire industry. In place of the 

"competitive conditions" test, it was provided that the exemption 

would apply if at least 35 percent of a contractor's sales during the 

year of an item or class of items were nonrenegotiable. It was recognized that the substitution of the 35-percent test for the "eompetitive 

conditions" test was a considerable liberalization of the exemption 

then available.- In addition, the exemption for a class of articles was adopted 

because of the substantial difficulties which would be encountered by 
47 

contractors in identifying to whom many similar article::; ,,-ere old. 

Contraetors' reeords often do not disclose on a pl'oduet-by-product 

basis the buyers of similar products. 

Although there is a lack of specific. information regarding nlrious 

aspects of the exemption for standard commercial articles, there are 

certain factors which suggest it 111ight be desirable to make chano'es 

in the exemption. The procnrement buildup associated with the 

Vietnam conflict, although not a crash procurement, lilay well !Jaye 

put substantial strains on certain markets. In addition, the recent 

disclosures of overpricing on certain commercial items suggests a 

higher incidence of excessive profits on tliese items than the exemption 

eon templates. 

There are three changes which the staff believes the committee 

might want to see made in the exemption in order to give more assurance that items qnalifying for the exemption are commercial products. 

First, the ratio between renegotiable and nonrenegotiable sales ,,-hich 

presently is a prerequisite to applieation of the exemption 'iv-ould appear 

to be lower than is appropriate. The commereial nature of an item 

'iyould be more certain if at least 50 percent of the sales of the item 

(and the items in a dass) were not subject to renegotiation. A similar 

change regarding serviees would also be appropriate. Second, it ,,-ould 

appear desirable to require contractors ,vho self-apply the exemption 

to report the self-application and its basis to the Renegotiation Board. 

This would provide a better indication of the extent to 'i"hich the 

exemption is used and also would tend to make contractors more 

careful in applying the exemption. Third, the investigation by the 

Special Investigations Subcommittee of the House Armed SmTices 

Committee indicates that items maintained in stock or item.s for which 

a price schedule is maintained may, in fact, be sold to the GO'iTernment 

at prices 'iyhieh are greatly in excess of the prices on a comparable 

order for a commercial purchaser. This type of price differentiation ,,-as 

not contem.plated when the present exemption for standard eommercinl 

articles was adopted. Accordingly, it would appear to be appropriate 

to preseribe an additional requirement 'i"hich must be met for an 

article (or service) to qualify as a standard eommercial article (or 

service): namely, that the price at which the article (or seryiee) is 

sold to the Government must be reasonably eomparable to the price 

charged a commerical purchaser for an order of similar qnantity. 

Although it is true that a particular product qualifying for the class 

exemption may be sold entirely to the Government, it does not appear 

appropriate to make any changes in this aspect of the exemption, other 

than raising the required pereentage of nonrenegotiable sales to 50 

percent. The statutory requirements regarding the itmns 'i"hieb may be 

included within a class would appear to be adequate to insure a substantial degree of snbstitutability between the items inchlded in the 

class. This substantially negates the im.plications regarding the nonexistence of a competitive market which might otherw'ise be considered 

to result from the fact that an item included in an exempt dass mas be 

sold solely to the Governmen t. 1\10reover, the basie reason for adopting 

the class exemption in 1956-the difficnl ty of identifying sales of 

similar articles-would appear to be equally valid today. 
48 

3. Permissive exemptions 

Under the "permissive" exemptions provision of section 106 (d) of 

the act, the Board is authorized, in its discretion, to exempt from 

some or all of the provisions of the act: 

1. Any contract or snbcontract to be performed outside of the 

territorial limits of the continental United States or in Alaska. 

2. Any contracts or subcontracts under which, in the opinion of the 

Board, the profits can be determined with reasonable certainty when 

the contract price is established. 

3. Any contract or subcontract or perfornlance thereunder during 

a specified period or periods if, in the opinion of the Board, the provisions of the contract are otherwise adequate to prevent excessive 

profits. 

4. Any contract or subcontract the renegotiation of which would 

jeopardize secrecy required in the public interest. 

5. Any subcontract or group of subcontracts not otherwise exempt 

if, in the opinion of the Board, it is not administratively feasible in 

the case of such subcontract or in the case of such group of subcontracts to determine and segregate the profits attributable thereto 

from the profits attributable to activities not subject to renegotiation. 

The Board is not permitted to delegate its power to grant permissive 

exemptions, and it may exercise its power to grant permissive exemptions both individually and by general classes or types of contracts. 

Under the last of the permissive exemptions enumerated above 

the Board is authorized to provide an exemption when in its opinion 

it is not administratively feasible to determine and segregate the 

profits described therein. This is known as the "stock item" exemption; it has been in effect throughout the life of the act, and it generally applies to sales made to replenish stock customarily maintained 

by a purchaser. The Board's regulations (section 1455.6 (b» state that 

under the exemption it will exempt from the aet amounts received 

or accrued from "all subcontracts snbject to the act which are for 

materials (including maintenance, repair and operating supplies) custonlarily purehased for stock in the normal course of the purchaser's 

business, except when such materials are specifically purchased for 

use in performing one or nl0re prime contracts or higher tier subcontracts subject to the act." 

c. THE STATUTORY MINIMUM OR "FLOOR" 

1. Present law 

With one exception, the Renegotiation Act provides that if the 

aggregate of renegotiable amounts received or accrued during a fiscal 

year ending after June 30, 1956, by a contractor or subcontractor, is 

not more than $1 million, such receipts and accruals shall not be subject to renegotiation. In addition, if the aggregate of the amounts 

received or accrued is more than $1 million, no determination of excessive profits may' be made in an anlount greater than the amount by 

which the aggregate exceeds $1 million. The minimum amount subject 

to renegotiation is referred to as the floor. It was originally $250,000, 

vyas later raised to $500,000, and, in 1956, was raised to the present 

$1 million. For purposes of applying the floor, am_ounts received or 

accrued by persons controlling, under the control of, or under common 

control with, a contractor or subcontractor are combined with the 
49 

reeeipts or accruals of the contractor or subcontractor. Thus, a 

business may not be fragmented to avoid renegotiation. 

The one exception referred to above (respecting the amonnt of the 

floor) is contained in section 103(g)(3) of the act, describing certain 

contracts with brokers, manufacturer's representatives, etc. In tho~e 

situations, the aet provides that the applieable floor is $25,000, regardless of the }:ear involved. If the aggTegate of the amounts received 

or aecrned chu'mg a fiscal year from such contracts is more than 

$25,000, no determination of excessive profits with respect to sueh 

contracts may be made in an amount greater than the amount by 

which such aggregate exceeds $25,000. 

A contractor who is subject to the act, must file an annual financin,l 

statement with the Board if the aggregate of his renegotiable sale~ 

exceeds the statutory floor. If his renegotiable sales do not exceed 

that amount, the contractor may at his election file a statement (of 

nonapplicability) for the fiscal year with the Board. 

2. Suggested changes in the "floor" 

A number of proposals have been m.ade to change the present 

statutory mininlum, or floor. It has been recomm.ended that the 

floor be lowered to $250,000. It also has been recommended that 

the floor be raised to $5 nlillion or to $10 million. In the past, it has 

been recomnlended that the floor be raised to $2 million. 

S. Discussion 

At the request of the staff, the Renegotiation Board prepared estimates of the effects of changing the floor to various levels. As is 

true in the case of the estimates regarding the impact of repealing the 

standard commercial article exemption, the estimates of the effec ts 

of changing the floor must be viewed in light of the forecasting difficul ties involved. 

The Board estimated that if the floor remained at $1 nlillion, it 

would receive 4,800 filings involving renegotiable sales of $44,500,000 

in fiscal 1969. The changes in the amount of filings and renegotiable 

sales which would result from raising or lowering the floor to various 

levels, as well as the absolute amount of filings and renegotiable sales 

which would result if the floor was set at the various levels are indicated in the following table: 

Amount of floor 

$5,000,000 

2,000,000 

1,000,000 

500,000 

250,000 

ESTIMATED IMPACT OF PROPOSED FLOOR CHANGES, FISCAL 1969 

[Dollar amounts of sales in millions) 

Number of filings 

2,300 

3,700 

4,800 

7,800 

12,400 

Increase or (decrease) in number of filings 

(2,500) 

(1,100) 

o 

3,000 

7,600 

Renegotiable s~les I ncrease or (decrease) 

which would be in reported 

reported renegotiable sales 

$40,300 

43,300 

44,500 

46,700 

48,400 

($4,200) 

(1,200) o 2,200 

3,900 

Various considerations may be advaneed in support of changing the 

level of the floor. The considerations whieh support lowering the floor 

include the following. The present $1 million floor allmys appreciable 

amounts of renegotiable sales, and presumably exeessive profits, to 

escape the renegotiation process. 110reover, the firms with renegotiable 

sales of less than $1 million are in many cases not small business eon-
50 

eerns, but rather are large companies whose renegotiable sales comprise 

a relatively sluall portion of their total sales. To the extent contractors 

with less than $1 million of renegotiable sales are small business concerns, it should be noted that the recent trend in military procurement 

toward granting a higher percentage of contract awards to small 

business firms indicates that a significant portion of military procurement awards goes to firms which are not subject to renegotiation because of the present fioor. In addition, lowering the floor might 

increase the anlolmt of voluntary refunds and price reductions made 

by contractors. 

On the other hand there are a nunlber of considerations which 

support the view that the floor should be maintained at its present 

level or in fact raised to a higher level. These considerations include 

the following. Proposals to lower the floor do not appear to take account of the reasons which convinced Congress in 1956 that it should 

raise the floor to its present level (S. Rept. No. 2624, 84th Cong., 2d 

sess., 1956): 

Because of the subst.antial compliance cost, renegotiation 

is a serious burden on small business firms. Another consideration supporting this increase in the statutory floor is the fact 

that only a small portion of the renegotiation recoveries 

comes from firms that would be affected by the amendment. 

This change in the statutory floor ,,"ill be a substantial aid to 

small businesses. It will in addition enable the Board to 

concentrate on the larger cases. 

Reducing the floor would complicate administration of the act. 

l\10reover, a lower floor would put a substantial burden on small businesses in terms of the costs of, and personnel needed to, comply with 

the act. The amount of small companies which do not do business with 

the Government at present because of the difficulties involved nlight 

increase, if in addition these companies were required to cope with 

the difficulties and expenses of the renegotiation process. In other 

words) lowering the floor luight cause small companies to participate to 

a lesser degree in defense procurenlent. This appears to conflict vdth 

established Governluent policy toward small business, as indicated 

by the increasing amount of military procurement being awarded to 

small business concerns and also by' programs of the Small Business 

Administration. Moreover, the amount of excessive profits which 

would be recovered by reason of lowering the floor would in all probability be less than the additional funds whi('.h the Renegotiation 

Board ,,'ould require to administer the substantially increased number of filings it would receive and be required to process. If the rate 

of excessive profits actually recovered by the Government (i.e.) excessive profits minus the credit for Federal income taxes) on the estimated 

additional renegotiable sales resulting from a lower floor was the same 

as the average rate of recoveries on total renegotiable sales for the 

past 5 years) a $500)000 floor would result in additional recoveries by 

the Government of approximately $620,000 and a $250,000 floor 

would result in additional recoveries of $1.1 million. The Board has 

informed the staff that its additional expenses would be $1 million to 

$1.5 nlillion if the floor ,vere lowered to $500,000 and $3.2 million to 

$3.7 million if the floor were lowered to $250,000. It is difficult to 

know whether lowering the floor would also increase the amount of 

voluntary refunds and price reductions. 
51 

It also can be argued that even the present floor imposes hardships 

on small and medium-size companies, and accordingly, the floor should 

be raised to eliminate this hardship and to bring the renegotiation process into accord with the general Government policy to\yal'd smull 

business concerns. :NIoreover, it hus been 12 years since the floor wus 

increased. In view of the increase in the general price le\'el during 

that period, it can be argued that it is necessary to raise the floor 

merely to make the relationship of the act to the present economie 

conditions the same as the relationship which existed "'hen the floor 

was increased in 1956. The price rise, reflected by the implicit price 

deflator for the gross national product, suggests that prices at the end 

of 1967 were 126.5 p'ercent of 1956 prices. In effect, this price rise has 

lowered the $1 million floor to about $790,000 in terms of 1956 prices. 

SECTION 6. DETERMINING EXCESSIVE PROFITS 

The procedures prescribed by the act for determining excessive 

profits require that several other determinations first be made. These 

involve determinations of-

(1) The contractor or subcontractor to be renegotiated. 

(2) The fiscal year (or other accounting period) and the method 

of -accounting to be used for renegotiation. 

(3) The segregation of the contractor's sales, costs, and profits 

for the fiscal year between renegotiable and nonrenegotiable 

business. 

After these determinations have been made, the statutory factors 

enumerated in section 103(e) of the act are applied in order to determine the amount of renegotiable profits which constitute "excessive 

profits. " 

A. DETERMINATION OF CONTRACTOR OR SUBCONTRACTOR 

Section 105(a) requires the Board to exercise its powers with respect 

to amounts received or accrued by a "contractor or subcontractor," 

but that term is not defined in the act. However, section 103(j) does 

define "person" to include "an individual, firm, corporation, association, partnership, and any organized group of persons whether or not 

incorporated." And, the Board's regulations provide that the term 

"contractor" generally includes "subcontractor," and that a joint 

venture will be treated as a contractor or subcontractor within the 

meaning of the act. 

Section 105(a) of the act requires renegotiation to be conducted on 

a consolidated basis with a parent and its subsidiary corporations which 

constitute an "affiliated group" under the provisions of the Internal 

Revenue Code, if all the corporations within the group request renegotiation on that basis and consent to certain regulations of the Board. 

This section of the act also authorizes the Board in its discretion, and 

by agreement with the contractor, to conduct renegotiation on a 

consolidated basis "in order properly to reflect excessive profits of 

two or more related contractors ot subcontractors." 

B. DETERMINATION OF THE CONTRACTOR'S FISCAL YEAR AND 

ACCOUNTING METHOD 

Section 105(a) of the act provides that renegotiation is to be conducted "with respect to the aggregate of the amounts received or 

accrued during the fiscal year (or such other period as luay be fixed 

by mutual agreement)" and "not separately with respect to amounts 

received or accrued under separate contracts." (However, the Board 

may conduct renegotiation ,,-ith respect to one or nlore separate contracts at the request of the contractor or subcontractor.) The fiscal 

year referred to in the act is the contractor's taxable year for Federal 

income tax purposes. 

(53) 
54 

The Board's most recent annual report to Oongress expressed the 

following views regarding the fact that renegotiation is conducted on a 

fiscal year basis: 

The contracts may vary in form from cost-plus-a-fixed-fee 

to firm fixed-price; they may be prime contracts or subcontracts; and they may relate to a variety of products and 

services. Also, they may be performed over differing periods: 

some may be completed within the contractor's particular 

fiscal year, while the performance of others may extend beyond such year. Accordingly, aggregate renegotiable profits 

during any fiscal year of a given contractor will often reflect 

the performance of different contracts in different stages of 

completion, and may result from an offset of losses or low 

profits on some contracts against high or even excessive 

profits on others. Thus fiscal year renegotiation, ·which deals 

with aggTegate profits, is entirely different from price adjustment or redetermination of individual contract prices pursuant to contract provisions. 

Sections 103 (f) and (i) of the aet provide that receipts and aecruals 

and costs are to be determined in accordance with the method of 

accounting regularly employed by the contractor in keeping his records; however, if such a method of aecounting does not, in the Board's 

opinion, properly reflect the contractor's receipts, accruals, or costs, 

then these items are to be determined in accordance with the method 

which does, in the opinion of the Board, properly reflect the items. 

The Board's regulations require the use of the method of accounting 

employed for Federal ineome tax purposes, but also provide for special 

accounting agreements in writing, between the contractor and th~ 

Board, if the tax method is "manifestly unsuitable for the purpose 

of renegotiation because it does not clearly reflect" renegotiable 

profits, and the method to be adopted does clearly reflect such profits. 

Such an agreement may change the contractor's entire method of 

aecounting, or it may provide only for the treatment of a particular 

item of cost. In addition, a change may be permitted to the "completed contract method" in the case of certain contracts; for example, 

contracts for the construction of major facilities or major units (such 

as a vessel), etc. 

C. DETERMINATION OF RENEGOTIABLE SALES, COSTS, AND PROFITS 

For purposes of segregating renegotiable sales and costs, the Board's 

regulations provide that the terms "renegotiable business" and 

"renegotiable sales" mean the aggregate business of a contractor or 

subeontraetor under subject prime contracts and subcontracts which 

are not exempt, and that the term "nonrenegotiable business" means 

any business of a contractor or subcontractor other than renegotiable 

business. The regulations note that the report which a contractor 

files with the Board requires a statement of the amount of his renegotiable sales and for an explanation of the methods used in determining 

that am.ount. They also state that "The contractor has the primary 

responsibility for determining which of its sales are subject to renegotiation," and that his segregation of such sales must be satisfactory 

to th e Board. 
55 

Section 103(f) of the act defines the term "profits derived frol1l 

contracts with the Departments and subcontracts" io mean "the 

excess of the amount received or accrued under sneh coutrads and 

subcontracts over the cost paid or incurred with respect thereto and 

determined to be allocable thereto." That same provision pro"ides 

generally, that all items estimated to be o.llowed as deductions and 

exclusions under the Internal Revenue Code shall, to the extent 

allocable to such contracts and subcontracts, be allowed as item~ 

of cost. 

D. THE STATUTORY FACTORS 

Section 103(e) of the act provides that in determining "excessive 

profits" the Board lnust give favorable recognition to the efficiency 

of a contractor or subcontractor, and that it give particular consideration to the attainment of quantity and quality production, 

reduction of costs, and economy in the use of materials, facilities, 

and manpower. In addition, the following factors set forth in that 

section (commonly referred to as the "sta tn tory factors") are to be 

taken into account in determining excessive profits: 

(1) Reasonableness of costs and profits, with particular 

regard to volume of production, normal earnings, and comparison of war and peacetime products. 

(2) The net worth, with particular regard to the amount and 

source of public and private capital employed. 

(3) Extent of risk assumed, including the risk incident to 

reasonable pricing policies. 

(4) Nature and extent of contribution to the defense effort, 

including inventive and developmental contribution and cooperation with the Government and other contractors in supplying technical assistance. 

(5) Character of business, including source and nat-lITe of 

materials, complexity of manufacturing technique, character and 

extent of subcontracting, and rate of turnover. 

(6) Such other factors the consideration of which the public 

interest and fair and equitable dealing may require, ,yhich factors 

shall be published in the regulations of the Board from time to 

time as adopted. 

The deternlination of excessive profits may also be affected by 

renegotiation losses in a year prior to the year under revie,,·. Section 

103(m) (4) of the act provides that a renegotiation loss for any fiscal 

year (the "loss year") ending on or after Decelnber 31,1956, shall be 

a renegotiation loss carry forward to each of the 5-fiscal yenr" follo"'ing 

the loss year. The act does not provide for a canyback of such losses. 

Section 105(a) of the act provides as follows: 

vVhenever the Board makes a determination with respect 

to the amount of excessive profits, and snch determination 

is made by order, it shall, at the request of the ('ontrnctor or 

subcontractor, as the case may be, prepare and furnish such 

contrator or subcontractor with a statement of such detennination, of the facts used as a basis therefor, and of its 

reasons for such determination. Such statement shall not be 

used in The Tax Court of the United Stn tes ns proof of the 

facts or conclusions stated therein. 
56 

In its last annual report to the Congress, the Board commented 

as follows upon the statutory factors contained in section l03(e) of the 

act: 

It is apparent from the statutory language that no 

formulae or preestablished rates can be used to determine 

whether the profits are, or are not, excessive in any given 

case. Rather, the determination in each instance must 

reflect the judgment of the Board on the application of each 

of the statutory factors * * * to the facts of the specific 

case. 

These statutory factors have been viewed by others, however, as too 

general to provide any realistic basis for determining whether prof} ts 

in a specific case are excessive. 

I t is difficult, of course, to formulate a prescribed set of standards 

to determine the reasonableness of a business concern's profits which 

is both specific enough to be implemented and general enough to 

take account of the varieties and multiplicity of situations to which 

it must be applicable. 

It would appear that the application of the statutory factors to 

reach a determination of whether profits in a given case are excessive 

in view of the attendant factors and circumstances vvill essentially 

involve a process of economic evaluation and comparison. In other 

words, if, for investment purposes, a business concern vvas being 

evaluated to determine its financial position and the degree of its 

profitability, the process would basically involve an economic analysis 

of the concern through the use of the various analytical tools available 

and then a comparison of the results of that analysis with the results 

of analyses of other similarly situated business concerns. 

In evaluating a business, various ratios may be developed to determine the company's financial position. Thus, ratios which relate 

net income after taxes to sales, various items of expense to sales, 

net profit after taxes to total sales, and net profit after taxes to 

stockholders equity may be used to measure a concern's profitability. 

Other ratios may be used to measure the concern's use of assets, such 

as the relationship of sales to inventories, cost of goods sold to inventories, net investment in plant to sales, and receivables to sales. A 

concern's liquidity may be measured by ratios such as the following: 

the relationship of current assets to current liabilities; the ratio of 

cash, marketable securities, and receivables to current liabilities; 

and the relationship of cash and marketable securities to average 

daily cash payments. Of course, numerous other rativs are available 

to take into account the varying factors in specific types of situations . . After an economic analysis of a concern's financial position has been 

developed, comparisons are necessary in order to evaluate the results 

of the analysis. Thus, the concern could be compared with other 

concerns in the same type of business or with similar product lines and 

with other concerns of the same relative size. The results of the 

economic analysis for the year could be compared with other years' 

analyses. These comparisons, by indicating the relative position of the 

00ncern, would provide the basis for an overall judgment of the 

concern. 

In essence, the renegotiation process would appear to involve procedures very similar to those employed in analyzing a company's 

financial position for investment purposes. In other words, the various 
57 

analytical ratios would be developed, including those necessitated by 

the nature of defense and space program work, and the \yarious releya~t c?mparisons made. The product of this analysis ,,·ould be an 

IndICatIOn of the degree to wInch the profi ts of the business eoneern 

were substantially above a reasonable, competitive norm; in other 

words, the extent to which the profits were excessi\re. The present 

statutory definition "would appear to be a fair statement of the process 

of economic evaluation and comparison which is the essence of 

renegotiation. 

Concern has been expressed, however, regarding the manner in 

which the statutory factors are applied by the Renegotiation Board in 

various types of situations. One specific area of concern has been the 

treatment of incentive contracts. In the last several years, greater u::;e 

has been made of incentive-type contraets in procurement, and concern has been expressed by some regarding the treatment which the 

Board would accord profits realized from this type of contracting. In 

order to state its position, the Board issued release No. 3-62 on April 

17, 1962. It eontained the following views regarding the treatment of 

incentive contracts: 

The Renegotiation Board has followed with interest the 

formulation of the [Defense] Department's incenti\Te program, and recognizes its objectives. The Board understands 

that the new program represents an expansion and modification of past incentive arrangements. The Board is aware 

that the Department hopes to achieve its aim of greatly 

reducing the cost of new weapons, improving their quality 

and speeding their development, by encouraging and rewarding performance efficiency and by penalizing inefficiency. 

The Board believes that the Renegotiation Act does not 

impede the proper accomplishment of these objectives. 

Under the Renegotiation Act and regulations, the Renegotiation Board rewards demonstrated efficiency by according 

it "favorable recognition" in determining whether and the 

extent to which the contractor's total profits, from all its 

contracts in a fiscal year, are excessive in the light of the 

several factors prescribed in the Renegotiation Act. The 

Board's determination is not earmarked to the profits on any 

particular con tract, or any particular portion of a con tract. 

Bonus profits realized under an incentive-type contract, and 

the performance facts that gave rise to them, are a part, but 

only a part, of the total renegotiation case. 

The regulations of the Board state that particular attention will be given, under the statutory factor of efficiency, to 

the nature and objectives of incentive contracts and the 

extent to which any differences between estimated costs and 

actual costs are the result of the efficiency of the contractor. 

The regulations also state that the Board will consider and 

give due regard to the vie"w"s of the contracting agencies on 

such differences and reasons therefor. It is belie\red that these 

and other provisions of the regulations are adequate to enable 

the Board, as an independent agency, to gi\Ye fair and proper 

consideration to performance excellence in the context of the 

\vhole case under all the factors prescribed in the renegotiation law. 
58 

In the 6 years which have elapsed since the Board stated its position 

on incentive contracts, the use of incentive contracts has increased 

substantially. This is particularly true in the case of the National 

Aeronau tics and Space Administration: the relative use of incentive 

contracts in NASA procurement increased from less than 2 percent in 

fiscal 1962 to 68 percent in fiscal 1967. In addition, there have been 

significant improvenlents during this period in cost analysis and 

certific&tion procedures and in profit review and control techniques. 

The Renegotiation BOi1rd does not i1ppear to have officially indicated 

in its regulations or rulings, however, whether it has reevaluated its 

1962 position on the treatment of amolmts received under incentive 

contracts in light of the intervening procurement changes. 

The need for reconsideration of the manner of treating incentive 

contracts in renegotiation is suggested not only by the fact that there 

does not appear to have been an indication of a change in policy in 

this regard since 1962, but also by the comlnents of the National 

Aeronautics and Space Administration on this matter. NASA stated 

that it does not believe the Renegotiation Board has given full recognition to the difficult performance requirements of NASA's major 

research and development programs and the role which incentive 

contracts have been given ,,~ithin this framework. In other words, in 

order to obtain the best contractor performance in its programs, NASA 

relies on a combination of extensive management and technical program reviews and incentive contract arrangements which relate a 

contractor's profit to the quality of his work and his ability to meet 

program requirements. NASA believes the result of this combination is 

a thoughtful eontrol of profit, on the one hand, and high performance 

stimulated by incentives, on the other hand. 

If the Renegotiation Board has not already done so, it is believed 

the Board should reevaluate the manner in which incentive contracts 

are taken into account for plITpOSeS of renegotiation and report to the 

committee the results of this reevaluation. Such a report nlight include 

a detailed discussion of the specific manner in which the Board impleInents the statutory command that ,,* * * favorable recognition must 

be given to the efficiency of the contractor or subcontractor * * *" 

vVhen it considers incentive contracts. The report might also indicate 

specifically the manner in which incentive contracts awarded by NASA 

are taken into account. In other words, the Board m.ight indicate how 

it takes into account the procurement difficulties with ,yhich NASA is 

faced and the contracting arrangements and review programs NASA 

has instituted to deal with these difficulties in determining whether 

profits realized on NASA incentive contracts are "excessive." 
SECTION 7. STAFF RECOMMENDATIONS 

A. EXTENSION OF THE RENEGOTIATION ACT 

It is recommended that the act be extended for 2 years, or until 

June 30, 1970. 

It appears appropriate to continue the act for this period in view 

of a number of faetors "which have been discussed more fullv above. 

One of these factors is the substantial increase in procurement by 

the departments and agencies subject to the act in the last 2 years. 

The nornlal timelag between the time of contract awards and the 

time of determinations under the Renegotiation Act indicates that 

amounts received under contracts awarded during the Vietnam buildup 

will be reported in filings "with the Renegotiation Board during at 

least the next 2 years. 

Although substantial changes have been made in the Department 

of Defense procurement practices in recent years, it appears there 

is a need to further assess the effectiveness of these practices in insuring that excessive profits will not be obtained on Government defense 

business, especially in light of the possible impact on these practices 

of the increase in procurement associated with Vietnam. 

On the other hand, it is possible that further time and study will 

demonstrate that effective procurement practices can achieve normal 

competitive profits on Government work, or at least reduce the incidence of excessive profits on defense and space work to an insignificant 

level. In addition, the nature of renegotiation in principle, and its 

substantial reliance on human judgment in operation, make it a 

process which should be periodically reviewed. These factors lead to 

the conclusion that the Renegotiation Act should not be made a 

permanent featlITe of the law. In other words, the nattITe of the 

renegotiation process, and the many and changing variables of the 

overall framework within which renegotiation functions, demonstrate 

the need for a continuing and periodic review of the Renegotiation 

Act by Congress. 

Although a 2-year extension of the act is recommended by the staff, 

it should be noted that present eircnrnstances ,yould also appear to 

justify a 4-year extension. The primary factor in this regard is the 

consideration that it will probably require more than 2 years to ndequately determine the effectiveness of nmy procurement methods in 

limiting excessive profits. In addition, the application of the renegotiation process to amounts receiyed under contracts awarded during the 

Vietnam buildup will continue for more than 2 years. K oting that 

a 4-year extension of renegotiation ,yould appear justified is not 

to suggest that Congress should not continue to exercise a periodic 

and continuing review of the Renegotiation Act, but rather 1 () say 

that present circumstances and past experience with the act suggest 

that it might be appropriate for Congress to vi-ait 4 years, instead 

of 2 years, to exercise that review. 

(59) 

91-043--68--5 
GO 

B. EXEMPTION FOR STANDARD COMMERCIAL ARTICLES 

The committee may wish to give consideration to revising the 

exemption for standard commercial articles and services in order to 

more adequately insure that goods and services qualifying for the 

exemption are, in fact, commercial items. If the committee desires to 

take action on this area, the staff recommends three modifications in 

the exemption. First, the percentage of the sales of an article or service 

(or class of articles) which must be nonrenegotiable for the exemption 

to apply could be raised to 50 percent. Second, contractors who selfapply the exemption for a standard commercial article could be 

required to report the application, and its basis, to the Board. Third, 

it could be provided that for the exemption to apply, a standard commercial article (or service) must be sold to the Government at a 

price which is reasonably comparable to the price charged a commercial 

purchaser for an order of similar quantity. These recommendations 

are discussed in greater detail in section 5 of the report. 

C. ADDITIONAL DATA REQUIRED FOR EVALUATION OF RENEGOTIATION 

In the course of its present study of renegotiation, the staff found 

that needed information was not available with respect to a number of 

the aspects of the renegotiation process. The lack of this information 

prevented adequate analysis of some of the more fundamental questions raised with respect to renegotiation, such as: What types of 

contracts have produced "excessive profits"; whether "excessive 

profits" are more prevalent in certain industries; whether "excessive 

profits" occur more frequently with respect to firms of a given size; 

and the relationship between procurement policies and the method of 

their implementation, on the one hand, and the policy of renegotiation 

and the manner of its implementation, on the other hand (e.g., whether 

the Defense Department profit policy and the renegotiation process 

are in conflict). 

In order to make the needed information available for purposes of 

future evaluations of the renegotiation process, the staff recomlnends 

that the Renegotiation Board develop and maintain the following 

types of information: 

(1) A more detailed breakdown of renegotiable sales and 

profits by type of contract for contractors reporting net profits 

on their renegotiable sales as well as for those reporting net losses. 

(In other words, data for cost-plus-incentive-fee contracts and 

fixed-price incentive contracts, in addition to the presently available data for (firm) fixed-price and cost-plus-fixed-fee contracts.) 

(2) Renegotiable sales and profits by type of industry and size 

of contractor (asset size and amount of sales); in addition, data 

on nonrenegotiable sales and profits for these same firms. 

(3) Renegotiable profits (before and after renegotiation) as a 

percent of contractor net worth (including reporting of amounts 

of Government supplied capital and equipment). 

(4) Data analyses of firms determined to have excessive 

profits: types of industries, sales and profits by types of contracts, percentage distribution of their renegotiable contracts by 

types, contractor net worth, and amounts of Government supplied 

capital. 
61 

D. TREAT~lENT OF INCENTIVE CONTRACTS 

In 1962, the Renegotiation Board stated its position on the treatment in renegotiation of amounts received under incentiye contrnets. 

Since that time, the use of incentive cuntrncts hus increased signifi- ctlntly and substantinl developments have occurred in the area of cost 

control and 1'evie,,' procedures. In addition, the National Aeronautics 

and Space Administration stated its belief that inadequnte recognition 

has been given by the Renegotiation Board to KASA incentive 

contracts and the reasons underlying their use. These fnctors suggest 

the need for a reconsideration of the manner in which incen tive 

contracts are tnken in to account for reneg:otia tioll purposes. 

The staff recommends that the Renegotiation Board reevaluate its 

treatment of incentive contracts, and report the results of this reev"aluation to the c01ll1nittee. The report might include R detailed discllssion 

of the specific 111anner in which incentive contracts are taken into 

account in the renegotiation process. ~loreoyer, the report might 

place particular emphasis on the specific Inanner in which the Board 

takes NASA's procurement difficulties, prograIllS, and contraeting 

arrangements into account in deternlining \yhether profits realized on 

NASA incentive contracts are "excessive." 

Appendix A 

SUGGESTED CHANGES IN THE RENEGOTIATION ACT 

Various changes in the Renegotiation Act have been suggested 

in bills introduced by Members of Congress and in comments of 

interested individuals and organizations which were submitted to the 

Committee on Ways and Means and made available to the staff of 

the Joint Committee on Internal Revenue Taxation. The proposed 

changes concerning the length of the extension of the act (i.e., whether 

renegotiation should be made permanent), the statutory floor, and the 

exemption for standard commercial articles have been discussed 

in earlier parts of this report. The other changes which were suggested 

are summarized below: 

A. DEPARTMENTS COVERED BY THE ACT 

It was suggested that the act be made applicable to the Tennessee 

Valley Authority. (H.R. 6792, Mr. Gonzalez; H.R. 14678, Mr. Yanik; 

H.R. 14697, Mr. Feighan; H.R. 14999, Mr. Minshall; H.R. 15341, 

Mr. Evins.) , I t was also suggested that certain "fringe" agencies be eliminated 

from the application of the act; namely, the General Services Adnlinistration, purchases in connection with the civil works functions of 

the Army Corps of Engineers, and the nonmilitary procurements of 

the Atomic Energy Conlmission. (Machinery and Allied Products 

Institute, Charles Stewart, president.) 

B. EXEMPTIONS 

It was suggested that amounts received under arm's-length bona 

fide competitive bid subcontracts for a snm of less than $1 nlillion 

be exempted from renegotiation, if the subcontractor is not affiliated 

with the prime contractor. (H.R. 3100, 1\1r. l\1ulter.) 

It was suggested that the existing partial mandatory exenlption 

for new durable productive equipment be limited in its application to 

subcontracts where the equipment does not become a part of either an 

end product acquired by the Government or of an article incorporated 

in such an end product. (H.R. 6792, Mr. Gonzalez; H.R. 1467, 1V1r. 

Yanik; H.R. 14697, Mr. Feighan; H.R. 14999, 1\1r. 1\/

linshall; H.R. 

15341, 1\1r. Evins.) 

It was suggested that the existing exemption for competitive bid 

contracts for the construction of any building, structure, imprm"'enlent, 

or facility be eliminated. (H.R. 6792, l\lr. Gonzalez; H.R. 14678, 

1\1r. Yanik; H.R. 14697, Mr. Feighan; H.R. 14999, 11r. 11inshall; 

H.R. 15341, Mr. Evins.) 

It was suggested that an exemption be added for all formally advertised conlpetitive bid supply contracts. (1\1achinery and Allied Products 

Institute, Charles Stewart, president.) 

(63) 
64 

It ,vas sug;ge~ted th~t cost-plus-fixed-fee c.ontracts be exempted 

fronl renegotIatIOn. (Wmzen Research, Inc., D. R. Williams, VICe 

president.) 

It was suggested tha:t contracts in which incentive and competitive 

elements have been Introduced be exempted from renegotiation. 

(N ational Association of :\/lanufacturers.) 

It was suggested that all contracts with a value of less than $5 

million be exenlpted from renegotiation. (National Association of 

]\1anufacturers.) 

C. FISCAL YEAR BASIS OF RENEGOTIATION 

It was suggested that the provisions of the Renegotiation Act which 

allow a 5-year carry forward of losses on renegotiable sales be amended 

to also allow a 3-year loss carryback. It also was suggested that a 

5-year loss carryback be allowed. It was further suggested that a 

carry forward and carryback of inadequate profits be allowed. 

(Nlachinery and Allied Products Institute, Charles Stewart, president, 

and National Association of Manufacturers.) 

D. OTHER 

It was suggested that amounts received under competitive bid subcontracts should not be taken into account for purposes of applying 

the statutory floor, if three or more competitive bidders took part in 

the bidding and the subcontractor is not affiliated with the prime 

contractor. (H.R. 3100, }\Ilr. lVlulter.) 

It was suggested that some form of relief should be extended to 

companies whose business generally consists of competitive bid subcontracts. (lVIr. Donald A. Holmes, Minnea.polis, ~1inn.). 

It was suggested that the act be made inapplicable to contractors 

whose renegotiable sales amount to 5 percent or less of their total 

sales. (Machinery and Allied Products Institute, Charles Stewart, 

presiden t.) 

It was suggested that cost allowances consistent with those allowed 

by the Internal Revenue Service be allowed for purposes of renegotiation, including allowances for contributions, interest, advertising new 

securities issues, and expenses for corporate organizations. (National 

Association of Manufacturers.) 

It was suggested that the Renegotiation Board in determining excessive profits be required to give favorable recognition to economies 

achieved through contracting with small business concerns. It also 

was suggested that in determining excessive profits a contractor or subcontractor who achieves economies through governmental programs to 

increase the share of small business concerns in procurement be allowed incentive rewards with fair profit allowances. (H.R. 3100, Mr. 

Multer.) 

It was suggested that the act be amended to provide for the revocation of any excessive profits determination if the amount of "excessive 

profits" is employed directly by the contractor to conduct reconversion planning, to undertake new commercial product research and 

development, -to conduct market surveys on products not connected 

with Government work, or otherwise to be used in reconverting to 

civilian activity company facilities now devoted to defense work. 

(JVlachinery and Allied Products Institute, Charles Stewart, president.) 
65 

Various changes regarding the organization and procedures of the 

Renegotiation Board were suggested; namely, that minority party 

representation be required on the Board; that appointees to the 

Board be required to be "qualified and experienced in financial or 

logistical activities"; that the Board be required to establish and 

maintain a regional office in the south-central area of the country; 

and that the Board be required, prior to arriving at a settlement agreement with, or issuing a unilateral order against, a contractor to make 

available to the contractor the reports, documents, etc., which the 

Board has prepared or obtained regarding the contractor's performance. It was further suggested that a corps of hearing examiners be 

established within the Board's structure to adjudicate appeals by contractors and subcontractors aggrieved by an order of the Board determining an amount of excessive profits. (Ives, Whitehead & Co., Inc., 

W. S. Whitehead, president.) 

It was suggested that the flat rate profit limitations contained in the 

Vinson-Trammel Act of 1934 and the Merchant Marine Act of 1936 

be repealed. (Machinery and Allied Products Institute, Charles 

Stewart, president; National Security Industrial Association, J. 1VI. 

Lyle, president.) 

It was also suggested that these flat rate' profit linlitations be repealed if renegotiation is made permanent (Shipbuilders Council of 

America, Edwin :1\1. Hood, president). 

Appendix B 

PROCUREMENT TRENDS, METHODS, AND POLICIES 

A. RECENT TRENDS IN DEFENSE AND SPACE RELATED PROCUREMENT 

In examining the renegotiation process, and in order to put renegotiation into context, it is useful to look at the procurement activities 

of the Government agencies covered by the Renegotiation Act; 

namely, the Department of Defense (DOD), the National Aeronautics 

and Space Administration (NASA), the Atomic Energy Commission 

(AEC) , the General Services Administration (GSA), the IVlaritime 

Administration and Maritime Subsidy Board (formerly Federal 

Maritime Board) (MAMSB), and the Federal Aviation Agency 

(FAA) which has been a covered agency since the beginning of fiscal 

year 1965. In this part of the report, various aspects of the procurement activities of these departments and agencies are considered 

The major emphasis is focused, of course, upon the Department of 

Defense in view of the relative magnitude of its procurement activities 

within the overall framework of defense and space related procurement. 

1. Trends in total defense related procurement 

The historical trend in total DOD military procurement (including 

intragovernmental and overseas purchases) from fiscal years 1951 to 

1967 is shown in table 1. The peak year for total military procurement 

prior to 1967 was the Korean conflict year of 1952, $43.6 billion, as 

compared to $44.6 billion in 1967. Following the low year of 1954 

of $13.3 billion, total military procurement increased steadily (except 

for a decline in 1960) until reaching a 1963 total of $29.4 billion. In 

1964 and 1965 there were slight declines in total military procurement 

before the 1966 and 1967 Vietnam conflict expenditure increases. 

TABLE i.-TOTAL DEPARTMENT OF DEFENSE MILITARY PROCUREMENT, FISCAL YEARS 1951-67 

[Amounts in millions] 

Fiscal year: 1951 ______________________________________________________ _ 1952 ______________________________________________________ _ 1953 ______________________________________________________ _ 1954 ______________________________________________________ _ 1955 ______________________________________________________ _ 1956 ______________________________________________________ _ 1957 ______________________________________________________ _ 1958 ______________________________________________________ _ 1959 __________________________________________________ - ___ _ 1960 ______________________________________________________ _ 1961 ______________________________________________________ _ 1962 ______________________________________________________ _ 1963 ______________________________________________________ _ 1964 ______________________________________________________ _ 1965 ______________________________________________________ _ 1966 ______________________________________________________ _ 1967 ______________________________________________________ _ 

1 Includes intragovernmental procurement and purchases outside the United States. 

Total 

procurement l 

$32,649 

43, 569 

31,812 

13, 279 

16,582 

19,590 

21,458 

24, 197 

25, 312 

23, 6S9 

25,584 

29, 254 

29,379 

28, 796 

27, 997 

38, 243 

44, 632 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontracts or Commitments, July 1966 to June 1967," and "July 1961 to June 1962." 

(67) 
68 

(a) Korean versus Vietnam military procurement buildup 

Data for total military procurement (including intragovernmental 

purchases and purchases outside the United States) are not indicated 

in Defense Department statistics for years prior to fiscal 1951; however, comparable figures for the net value of military contract awards 

to business firms for work within the United States indicate a rapid 

expansion from $5.4 billion in 1950 to $30.8 billion in 1951 (almost a 

sixfold increase) due to the sudden nature of the involvement in the 

military conflict (and a further increase of $10.7 billion in 1952). On 

the other hand, the Vietnam buildup was more gradual, with the 

greatest increase occurring in 1966 (an $8.7 billion increase, or 34.6 

percent). The 2-year (1965-67) buildup (again, on the basis of procurement with business firms within the United States) was $14.5 

billion, or 57.5 percent (see table 6 for the historical trend in military 

contract awards to business firms in the United States, 1948-67). 

The amount of procurement with business firms within the United 

States was $34.0 billion in 1966 and $39.8 billion in 1967. 

On the basis of total military procurement (table 2), the 1965-1967 

buildup was $16.6 billion, or 59.4 percent. The 1965-67 increase, 

excluding intragovernmental, was $16.0 billion, or 58.4 percent. 

(b) Ohanges in military procurement, 1960-67 

(i) Total DOD contract awards.-JVlost of the statistical data for 

DOD military procurement in this report covers fiscal years 1960-

1967. On the total procurement basis, military contracts increased 

$20.9 billion from $23.7 billion in 1960 to $44.6 billion in 1967, or 

88.4 percent. 

Total procurement, excluding intragovernmental, rose from $22.9 

billion in 1960 to $43.4 billion in 1967, or 89.4 percent; at the same 

time, contract awards to business firms in the United States increased 

from $21.3 billion in 1960 to $39.8 billion in 1967, or 86.7 percent. 

(ii) Small business awards.-Dnring the same period, military prime 

contract awards to "small business" grew by 134.7 percent, from 

$3.4 billion to $8.1 billion. Small business awards as a percent of 

total business awards ranged from a low of 15.9 percent in 1961 to 

a high of 21.4 percent in 1966, with a slight decline to 20.3 percent in 

1967.1 

1 A small business concern is a firm as defined by the Small Business Administration in the Federal 

Register (title 13, chap. I, pt. 121). The definition also is published in the Armed Services Procurement 

Regulation (1-701). Generally, a small business concern is one that is independently owned and operated, is not dominant in its field of operations, and with its affiliates does not employ more than a specified number 

of employees (usually not more than 500,750, or 1,000) depending on the type of product called for by the contract. For construction and some service industries, the criterion is a specified annual dollar volume of 

sales or receipts instead of employment. 
69 

TABLE 2.-COMPARISONS IN MILITARY PROCUREMENT, FISCAL YEARS 1960-1967 

(Dollar amounts in millions) 

Total Total to all 

Fiscal year Total excluding business Small business 

procurement intragovern- firms in the 

mental United States Amount Percent 

1960 _________________________________ $23,689 $22,908 $21,302 $3,440 16.1 1961. ________________________________ 25,584 24,703 22,992 3,657 15.9 1962 _________________________________ 29,254 28,099 26,147 4,622 17.7 1963 _________________________________ 29,379 29,032 27,143 4,301 15.8 1964 _________________________________ 28,796 28,234 26,221 4,519 17.2 ] 965 _________________________________ 27,997 27,385 25,281 4,943 19.6 1966 _________________________________ 38,243 37,229 34,026 7,269 21. 4 1967 _________________________________ 44,632 43,381 39,809 8,073 20.3 

Amount increase 1961Hi7 ______________ 20,943 20,473 18,507 4,633 --------------

Percent increase 1961Hi7 ______________ 88.4 89,4 86.9 134.7 14.2 

I Percentage points increase. 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontracts or Commitments, July 

1966 to June 1967," and "July 1961 to June 1962." 

(iii) DOD subcontracting awards.-Total subcontracting in DOD 

nlilitary contracts indicated a fluctuating picture: $9.7 billion in 1960; 

a slight decline in 1961; up to $11.4 billion in 1963; down again to 

$8.5 billion in 1965; with a sharp rise to $15.5 billion in 1967. 

The small business share of total subcontracting, however, maintained a steady climb from 37.1 percent in 1960 to 43.3 percent in 1967. 

Thus, small business firms received total military contract awards 

(prime and subcontracts) of $7.0 billion in 1960, with an increase to 

$14.8 billion in 1967, or 110.2 percent. These small business tot.als 

represented an averag~ of one-third of the total military a\yards to 

business firms in the United States during 1960-67. 

TABLE 3.-DEFENSE DEPARTMENT MILITARY SUBCONTRACTING PROGRAM, FISCAL YEARS 1960-67 

(Dollar amounts in millions) 

Fiscal year Total subSmall business total-prime and 

Small business subcontracting subcontracting 

contracting I Amount2 Percent Amount Percent of 

total prime 

business 

awards 

1960 _________________________________ $9.666 $3,587 37.1 $7,027 33.0 1961 _________________________________ 9,407 3,495 37.2 7,152 31.1 1962 _________________________________ 10,560 4,011 38.0 8,633 33.0 1963 _________________________________ 11,411 4,341 38.0 8,642 31. 8 1964 _________________________________ 9,278 3,629 39.1 8,148 31.1 1965 _________________________________ 8,518 3,534 41. 5 8,477 33.5 1966 _________________________________ 12,163 5,102 41.9 12,371 36.4 1967 _________________________________ 15,472 6,697 43.3 14,770 37.1 

1 Represents commitments starting with tiscal year 1964 and payments for prior years. Subcontract amounts relate to the year subcontracting is awarded; therefore, the amounts mayor may not coincide with the year of the prime contract award. 

2 Represents subcontracting from "large" business military prime contractors only; however, the amount of subcontracting received by small business includes an insignificant amount of DOD civil subcontracts (e.g., Corps of Engineers 

contracts). The total amount of DOD civil contracts for all business in the United States was only $800,000,000 in fiscal 

year 1967; $288,000,000 of this amount went to small business concerns as prime civil contracts. Small 'business concerns are not required by the. DOD to report amounts subcontracted by them. Large firms are required to report any subcontracting on any prime contract of $500,000 or more (DOD administrative policy). 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontracts or Commitments, July 

1966 to June 1967," and "July 1961 to June 1962." 
70 

(c) DOD military procurement awards by program, 1960-67 

(i) Changes in program procurement, 1960-67.-A comparison of 

DOD military procurement awards by programs for 1960-67 to 

business firms for work in the United States is shown in table 3A. 

"Large" contract a'wards (over $10,000) for "hard goods" accounted 

for over 70 percent of military procurement amounts during 1960-67. 

These contract awards were for the sizable items typical of major 

military equipment: for example, aircraft, missiles, ships, tanks, 

weapons, electronic, equipment, ammunition, and so forth. Total 

procurement of these hard goods increased from $15.7 billion in 1960 to 

a pre-Vietnam high of $20.2 billion in 1963. A decrease to $17.5 billion 

in 1965 was followed by an increase to $28.5 billion in 1967, which was 

81 percent over the 1960 level. Procurement for services, soft goods, 

and actions of less than $10,000, however, more than doubled: from 

$5.6 billion in 1960 to $11.3 billion in 1967. 

Procurement of military items commonly characterized as "costly, 

novel, and complex" (for example, aircraft, missile and space systems, 

ships, and electronics and communications equipment) increased from 

$13.8 billion in 1960 to $20.2 billion in 1967, or 46 percent. At the same 

time, other less costly (per unit), more standardized, and less complete 

military hard goods (for example, tank-automotive, weapons, ammunition, and miscellaneous) increased from $1.9 billion to $8.3 billion, or 

331 percent. 

Procurement awards for (a) standard military soft goods such as 

subsistence and textiles, clothing, and equipage and (b) for all contract actions of less than $10,000 increased from $2.2 billion in 1960 

to $6.1 billion in 1967, or 179 percent. Thus, procurement of the more 

standardized and less costly (per unit) hard and soft goods (as well 

as all awards of less than $10,000) increased by $10.3 billion from 1960 

to 1967. On the other hand, there was only a $6.4 billion increase in 

the more "costly, novel, and complex" military items. 

(ii) Vietnam military program buildup, 1965-67.-0f the $18.5 

billion increase in military procurement, 1960-67, $14.5 billion occurred 

during the Vietnam military buildup, 1965-67. Procurement for total 

hard goods rose by $11.0 billion. The remaining $3.5 billion of the 

increase was for services and soft goods. 

Within the hard goods category, the more "costly, novel, and 

complex" items (aircraft, missile and space systems, ships, and 

electronics and communications equipment) increased by $5.7 billion, 

or 40 percent. , Procurement of other "less costly (per unit) and less complex" hard 

goods rose by $5.2 billion, or 72 perc.ent. Ammunition procurement 

shmved the greatest percentage buildup during 1965-67: an increase 

from $0.8 billion in 1965 tq $3.6 billion in 1967, or 368 percent (more 

than 4~~ times the 1965 level). , _ Oontract awards for "services" increased by $1.2 billion, or 70 

percent. At the same time, procurement of (a) such standard soft 

goods as subsistence and textiles, clothing, etc. and (b) all awards of 

less than $10,000 rose by $2.3 billion, or 60 percent. Thus, the "less 

costly and less complex" hard goods, soft goods, services, and the 

smaller contraet awards of less than $10,000, accounted for the greatest 

part of the 1965-67 buildup. 
71 

Table 3A 

MILITARY PROCUREMENT AWARDS BY PROGRAM, TO BUSINESS FIRMS FOR WORK IN THE UNITED STATES 

[Amounts in millions of dollarsl 

Major program 1960 1961 1962 1963 1964 1965 1966 1967 

Total, business firms in the United States_ 21,301 22,992 26,147 27,144 26,221 25,281 34,026 39,809' 

Hard goods _________________________________ 15,726 17,499 19,862 20,176 18,721 17,524 24,025 28,497 

AircrafL _______________________________ 4,788 4,936 5,104 5,479 6,067 5,781 7,510 9,677 Missile and space systems _______________ 4,984 5,884 6,690 6,689 5,579 4,233 4,124 4,333 Ships __________________________________ 1,010 1,366 1,475 1,683 1,485 I,m 1,316 2,048 Tank-automotive ________________________ 404 579 1,044 1,032 745 1,555 1,438 Weapons _______________________________ 121 143 220 214 211 299 500 617 Ammunition ____________________________ 476 552 921 886 661 759 2,830 3,554 

Electronics and communications equipmenL 3,026 3,154 3,306 3,061 2,918 2,778 3,602 4,160 Miscellaneous hard goods ________________ 918 886 1,101 1,133 1,054 1,132 2,588 2,671 

Services ___________________________________ 1,321 1,090 1,090 1,504 1,800 1,740 2,290 2,950 All other ___________________________________ 4,255 4,402 5,196 5,464 5,700 6,017 7,711 8,361 

Subsistence ____________________________ 469 469 575 586 579 647 1,046 1,125 Textiles, clothing, and equipage ___________ 177 264 408 259 262 301 1,246 1,141 Fuels and lubricants _____________________ 859 818 883 877 788 818 908 1,059 Construction ____________________________ 1,207 1,186 1,214 1,132 1,360 1,325 2,588 1,185 All actions of less than $10,000 ___________ 1,543 1,665 2,117 2,610 2,710 2,865 3,481 3,852 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontract Payments or Commitments, July 1966-June 1967," and "July 1965-June 1966." 

(d) Changes in nondefense agency procurement, 1961-67 

ProC'lU'enlent C'ontrnct awards to covered agencies, other than the 

Defense Department, ~re smnmarized in table 4 for fiscal years 

1961-67. Spfice rebted procurement by NASA and atomic energy 

contracts by AEC accounted for the majority of nondefense procurement awards. The peak procurement year for NASA was 1965, $4.1 

billion, which was almost a tenfold increase over 1961; whereas, the 

1967 total WfiS $3.8 billion. The high year for AEC was 1962) $2.7 

billion, which was follmved by declining procurement to $2.3 billion 

in 1967. On :the other hand, GSA procurement more than doubled 'from $0.9 billion in 1961 to $1.9 billion in 1967. Combined nondefense 

covered agency procurement rose from $4.3 billion in 1961 to $8.3 

billion in 1967, or 92.6 percent. 

TABLE 4.-COMPARISONS OF NONDEFENSE AGENCY PROCUREMENT FISCAL YEARS 1961-4i7 

(I n millions of dollarsl 

Fiscal year Combined 

total 

NASA AEC GSAI MAMSB2 FAA3 

1961 _______________________________ 4,330.7 $423.3 $2,611. 5 $892.7 $320.4 $82.8 1962 ________________________ ------- 5,056.3 1,030.1 2,737.7 1,034.1 133 . .9 120.5 1963 _________________________ - - ____ 6,444.4 2,261. 7 2,601.1 1,179.2 255.9 146.5 1964 _______________________________ 7,848.5 3,521.1 2,616.4 1,386.8 159.2 165.0 1965 ____________________ :.. __________ 8,341. 2 4,141. 4 2,474.4 1,434.1 189.5 101. 8 1966 _______________________________ 8,494.5 4,087.7 2,364.2 1,515.6 319.0 208.0 1967 _______________________________ _ 8,342.0 3,864.1 2,32.1.0 1,867.1 72.7 217.1 

• 1 Total 'of Federal Supply Service and Property Management and Disposal Service contracts; excludes Public Building 

Service contracts. 2 Maritime Administration and Maritime Subsidy Board (formerly, Federal Maritime Board); exeludes contracts of less 

than $10,000, which amounts to approximately $4,000,000 annually; "with respect to procurements under the Merchant 

Marine Act of 1936, as amended, Government expenditure amounted to approx imately 51 percent of the total [new ship 

construction and ship conversionj contract expenditures. The balance is paid by the owner"; therefore, to obtain the actual 

Government expenditures, the above amounts for MAMSB would be reduced by approximately $153,900,000 lIor 1961, 

$53,100,000 for 1962, $123,000,000 for 1953, $76,400,000 for 1964, $91,400,000 for 1965, $132,600,000 for 1966, and 

$8,100,000 for 1967; in addition, amounts for 1956 and 1967 are based on sampling of incomplet~ data,.and are prelimilary. 3 I neludes intragovernmental purchases, and all procurement awards over $100 to U.S. bUSiness firms. 

Source: Agencies concerned. 
72 

2. Methods oj prOC1.lrement placement 

Basically, Department of Defense procurement methods may be 

divided into two major categories: formal advertisement and negotiation. (See appendix C for a description of the formal advertisement 

and negotiation processes and the statutorily specified situations in 

which a contract may be negotiated.) 

(a) Formal advertisement versus negotiation in DOD military 

contracts 

(i) Generally.-The percentage of total military contracts (excluding 

intragovernmental) a"warded by formal advertisement for the years 1954 

to 1967 is presented in table 5: it increased from 14.2 percent in 1954 

to 16.3 percent in 1957; then decreased to a low of 11.9 percent in 

1961; steadily rose again to a high of 17.6 percent in 1965; and then 

declined again to 13.4 percent in 1967. 

The percentage comparisons for 1948-67 for contracts to all business 

firms for work within the United States are shown in table 6. The 

pattern within this category is similar to that for total military contracts (excluding intragovernmental) after 1954; however, the highest 

percentage of formal advertisement on the contracts with business 

firms for work in the U.S. category occurred in 1949 prior to the 

Korean conflict-29.8 percent. A sharp reduction occurred during the 

Korean conflict reaching the lowest point in 1952-10.8 percent; 

thereafter, the percentage of formally advertised contracts to business 

firms for work in the United States was slightly higher (less than one 

percentage point) than the percentage of total military contracts 

(excluding intragovernmental) obtained by formal advertisement. 

TABLE 5.-VALUE OF FORMALLY ADVERTISED AND NEGOTIATED MILITARY CONTRACTS (TOTAL, EXCLUDING 

INTRAGOVERNMENTAL), FISCAL YEARS 1951-67 

(Dollar amounts in millions] 

Formally advertised Negotiated 

Fiscal year Total value 

Amount Percent Amount Percent 

1951 ____________________ --- $31,585 (I) (I) (I) (I) 1952 ____________________ --- 42,801 (I) (I) (I) (I) 1953 _______________________ 31,240 (I) (I) (I) (I) 1954 _______________________ 12,859 $1,822 14.2 $11,037 85.8 1955 __________________ ----- 16,041 2,401 15.0 13,640 85.0 

1956 _____________________ -- 19,156 2,902 15.1 16,254 84.9 1957 _______________________ 20,996 3,423 16.3 17,573 83.7 1958 ____________________ -__ 23,666 3,282 13.9 20,384 86.1 

1959 __________________ ----- 24,554 3,256 13.3 21,298 86.7 1960 ____________________ - __ 22,908 3,170 13.8 19,738 86.2 1961. ______________________ 24,703 2,932 11.9 21,771 88.1 1962 __________________ ----- 28,099 3,545 12.6 24,554 87.4 1963 _______________________ 29,032 3,678 12.7 25,354 87.3 1964 ___________________ ---- 28,234 4,072 14.4 24,163 85.6 1965 ____________________ --- 27,385 4,817 17.6 22,568 82.4 1966 __________________ ----- 37,229 5,283 14.2 31,945 85.8 1967 ______________ . _____ --- 43,381 5,792 13.4 37,589 86.6 

1 Not available. 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontract Payments or Commitments, July 1966-June 1967," and July 1961-June 1962." 
73 

TABLE 6.-VALUE OF FORMALLY ADVERTISED AND NEGOTIATED MILITARY CONTRACTS (WITH BUSINESS FIRMS 

FOR WORK IN THE UNITED STATES), FISCAL YEARS 1948--67 

Formally advertised Negotiated Fiscal year Total value 

(millions) Amount Percent Amount Percent (millions) (millions) 

1948 _________________________________ $1,456 $196 13.5 $1,260 86.5 1949 _________________________________ 5,463 1,626 29.8 3,837 70.2 1950 _________________________________ 5,355 1,461 27.3 3,894 72.7 195L ________________________________ 30,823 3,720 12.1 27,103 87.9 1952 _________________________________ 41,482 4,479 10.8 37,003 89.2 1953 _________________________________ 27,822 3,089 11.1 24,733 88.9 1954 ____________ _____________________ 11,448 1,789 15.6 9,659 84.4 1955 _________________________________ 14,930 2,386 16.0 12,544 84.0 1956 _________________________________ 17,750 2,815 15.9 14,935 84.1 1957 _________________________________ 19,133 3,321 17.4 15,812 82.6 1958 ______ .: __________________________ 21,827 3,115 14.3 18,712 85.7 1959 _________________________________ 22,744 3,089 13.6 19,655 86.4 1960 _________________________________ 21,302 2,978 14.0 18,324 86.0 196L ________________________________ 22,992 2,770 12.0 20,222 88.0 1962 _________________________________ 26,147 3,412 13.1 22,735 86.9 1963 _______________ • _________________ 27,143 3,538 13.0 23,605 87.0 1964 _________________________________ 26,221 3,889 14.8 22,332 85.2 1965 _________________________________ 25,281 4,660 18.4 20,621 81. 6 1966 _________ • ____________ • __________ 34,026 5,147 15.1 28,879 84.9 1967 _________________________________ 39,809 5,621 14.1 34,188 85.9 

Source: Office of the Secretary of Defense, "Military Prime contract Awards and Subcontract payments or Commitments, July 1966-June 1967", and "July 1961-June 1962." 

(ii) Small business versus large business firms.-The amount of 

contracts obtained by formal advertisement and by negotiation for 

"small" business and "large" business firms are indicated in tables 7 

and 8. Small business data reveal a sharp decline from a high of 

52.2 percent formally advertised contracts in 1957 to a low of 20.2 

percent in 1963; 1964 and 1967 were only slightly higher at 20.6 

percent. On the other hand, "large" business firms had an upward 

trend in the percentage of formally advertised contracts from a low of 

4.5 percent in 1953 to a 1965 high of 17.7 percent; 1966 and 1967, 

however, reversed this trend with 13.5 and 12.5 percent, respectively. 
TABLE 7.-VALUE OF FORMALLY ADVERTISED AND NEGOTIATED MILITARY CONTRACTS, TO SMALL 

Small business as a Fiscal year Total value (millions) percent of total business 

1951 __________________________ _ $6,436 20.9 1952 __________________________ _ 1953 __________________________ _ 7,066 17.0 

4,608 16.6 1954 __________________________ _ 1955 __________________________ _ 2,902 25.3 

3,214 21. 5 1956 __________________________ _ 1957 __________________________ _ 3,475 19.6 

3,783 19.8 1958 __________________________ _ 3,729 17.1 195L ________________________ _ 1960 __________________________ _ 1961 __________________________ _ 

3,783 17.6 

3,440 16.1 

3,657 15.9 196L ________________________ _ 4,622 17.7 1963 __________________________ _ 4,301 15.8 1964 __________________________ _ 1965 __________________________ _ 4,519 17.2 

4,943 19.6 1966 __________________________ _ 1967 __________________________ _ 7,269 2l. 4 

8,073 20.3 

Source: See table 6. 

Formally adv

Amount (millions) 

$1,799 

2,545 

2,035 

1,150 

1,501 

1,750 

1,973 

1,794 

1,466 

1,175 

1,008 

1,089 

867 

930 

1,058 

1,530 

1,663 
co 

~ 

I 

o 

w 

"" 

I 

0) 

r 

0) 

TABLE 8.-VALUE OF FORMALLY ADVERTISED AND NEGOTIATED MILITARY CONTRACTS TO LAR

Fiscal year 

1951 ______________________________________________ _ 1952 ______________________________________________ _ 1953 ______________________________________________ _ 1954 ______________________________________________ _ 

1955 ______________________________________________ _ 1956 ______________________________________________ _ 1957 ______________________________________________ _ 1958 ______________________________ ________________ _ 1959 _____________________ _________________________ _ 1960 ______________________________________________ _ 1961 ______________________________________________ _ 1962 ______________________________________________ _ 

1963 ______________________________________________ _ 1964 ______________________________________________ _ 1965 ______________________________________________ _ 1966 ______________________________________________ _ 1967 ______________________________________________ _ 

Source: See table 6. 

Total value 

(millions) 

$24,387 

34,416 

23,214 

8,546 

11,716 

14,275 

15,350 

18,098 

18,961 

17,862 

19,335 

21,525 

22,842 

21,702 

20,338 

26,757 

31,736 

Large firms as a 

percent of a" 

business 

80.1 

83.0 

83.4 

74.7 

78.5 

80.4 

80.2 

82.9 

82.4 

83.9 

84.1 

82.3 

84.2 

82.8 

80.4 

78.6 

79.7 

Amount 

$1

1

1

1

1

1

1

1

1

2

2

2

3

3

3
76 

(b) Formal advertisement versus negotiation in nondefense agency 

contracts 

Data on formally advertised contract procurement in nondefense 

agencies reveal a wide variation of experience between agencies. 

Table 9 portrays the comparative percentages. 

Of the nondefense agencies, NASA and AEO had the lowest percentages of formally advertised procurement. NASA's formally 

advertised contracts declined from 9.1 percent of total procurement in 

1961 to a low of 2.7 percent in 1966, and rose again to 3.0 percent in 

1967. Formally advertised awards for AEO remained relatively stable: 

2.5 percent of total procurement in 1961 and 2.7 percent in 1967. 

Reported data for GSA indicated 35.0 percent of procurement was 

formally advertised in 1961; advertised procurement rose to a high of 

44.7 percent in 1965, and declined to 34.2 percent in 1967. Procurement for the Maritime Administration (11AlVISB) was reported as 

almost entirely formally advertised, except for a sharp drop to 64.9 

percent in 1967 due to the reduction reported for ship construction 

contracts, ·which are usually advertised. FAA's formally advertised 

procurement declined from 54.6 percent of total procurement in 1961 

to 12.2 percent in 1967. 
TABLE 9.-COMPARISONS OF NON-DEFENSE-AGENCY PROCUREMENT METHODS: FORMALLY ADVER

(I n percent) 

NASA AEC GSA 1 

Fiscal year Advertised Negotiated Advertised Negotiated Advertised Ne

1961 _________________ 9.1 90.9 2.5 97.5 35.0 

1962 _________________ 6.2 93.8 2.6 97.4 36.7 

1963 _________________ 4.7 95.3 2.2 97.8 36.4 

196$ _________________ 3.8 96.2 2.7 97.3 32.3 

1965 _________________ 4.1 95.9 2.1 97.9 44.7 

1964 _________________ 2.7 97.3 2.2 97.8 39.4 

1967 _________________ 3.0 97.0 2.7 97.3 34.2 

1 Excludes public buildings service contracts for GSA. 2 Maritime Administration and Maritime Subsidy Board (formerly Federal Maritime Board); excludes contracts less th

based upon imcomplete sampling data. 

Source: Agencies concerned. 
78 

(c) Competition in DOD procurement placement 

In determining the degree of price "competition" which exists in 

its procurement placement, the Department of Defense considers price 

competition to be present when a contract is awarded by formal advertisment and also in certain situations when a contract is awarded 

by negotiation. 

(i) Price competition in DOD military procurement.-The components of "price" competition in DOD military procurement, 1960-67 

are summarized in table 10. Total price competition increased from 

$6.9 billion in 1960 to $18.6 billion in 1967, or 170.8 percent; at the 

same time, total military procurement (excluding intragovernmental) 

rose by 89.4 percent. Contracts awarded under price competition (as 

a percent of total procurement) increased from 30.0 percent in 1960 

to 44.4 percent in 1966, with a slight decline to 42.9 percent in 1967. 

Certain categories of negotiated contracts are considered by the 

DOD to be price competitive: "set-asides" restricted to bidding by 

small business firms (which utilize the sealed bid procedures utilized 

for unrestricted formal advertising); 2 "set-asides" for labor surplus 

areas; 3 and "open market purchases of $2,500 or less within the 

United States." . 

The largest component of price competition is what has been termed 

"negotiated" price competition-purchases other than the three 

above categories, in which two or more solicitations are made by the 

DOD procurement agency. As indicated in table 10, "negotiated price 

competition" has increased rapidly since 1960 in dollar amount and as 

a percent of total procurement: 9.3 percent in 1960, 13.4 percent in 

1961, 15.2 percent in 1963, 20.9 percent in 1966, and 20.8 percent in 

1967. Thus, "negotiated" price competitjon represented almost onehalf of price competition in 1966 and ~967. 

2 "Set-asides" for small business may be made for any individual item procurement, a class of items, a part of a class, or a total procurement. Tbese "set-asides" are for the exclusive participation of small busi- ness concerns and are made upon the recommendation of the Department Small Business Specialist or the 

contracting officer (if there is "reasonable expectation that bids or proposals will be obtained from a sufficient 

number of responsible small business concerns so that awards will be made at reasonable prices.") (ASPR, 

§§ 1-706.1 and 1-706.5). ' 3 It is the policy of the DOD to place contract awards in "labor surplus" areas whenever possible, pro- vided a comparable price is obtainable. This policy takes precedence over small business set-asides; thus, 

the first priority would be given to "persistent labor surillus area concerns which are also small business 

concerns." (ASPR, § 1-802); 1 
TABLE 10.-PRICE COMPETITION IN MILITARY PROCUREMENT CONTR

Type of price competition 1960 1961 1962 

Total, price competition ____________________________ ______________ $6,875 $8,127 $10,003 

Formally advertised ___________________________________________________ 3,170 2,932 3,545 

Small business and labor surplus area set-asides __________________________ 736 983 1,422 

Open market purchases of $2,500 or less (within the United States) 1 ________ 825 919 1,069 

Negotiated price competition ____________________________________________ 2,144 3,293 3,966 

Total, nonprice competition _______________________________________ 16,033 16,576 18,096 

Price competition ________________________________________________ 30.0 32.9 35.6 

Formally advertised ____________________________________________________ 13.8 11. 9 12.6 

Small business and labor surplus area set-asides __________________________ 3.3 3.9 5.1 

Open market purchases of $2,500 or less (within the United States) 1 ________ 3.6 3.7 3.8 

Negotiated price competition ____________________________________________ 9.3 13.4 14.1 

Nonprice competition __________________________________________________ 70.0 67.1 64.4 

1 "Price competition required on actions of $250 or more," as defined by DOD regulations in effect Source: Office o

during the above years. ments or Commit
80 

Among the 17 categories of allowable contract negotiation (all 

procurement other than formally advertised), "price" competition 

was considered present in 26.3 percent in 1962, 31.3 percent in 1965, 

35.2 percent in 1966, and 34.1 percent in 1967. This, of course, includes 

the categories listed as 100-percent price competitive: (a) small business and labor surplus area set-asides and (b) ORen market purchases 

of $2,500 or less within the United States. Small business and labor 

surplus area set-asides are included within "national emergency" as 

listed in table II. 

Price competition in negotiated contracts for 1967 ranged from 0.6 

percent in "services of educational institutions" to 99.2 percent for 

"national emergency" as indicated in table 11 (see above for primary 

explanation) . 
TABLE II.-PRICE COMPETITION IN NEGOTIATED MILITARY PROCUREMENT CONTRACTS, BY 

[As a percent of total amount of each negotiated 

Statutory authority negotiated procurement 

National emergency __________________________________________________________________________________________

~~~~hca~:~g~~fl;de -tiriiteif Statiis~~~= == == ==== == = = == == = = == = = == == == == = = = = == = = == == == = = == == = = ==== ==== == == = = == == = = = = =

Perishable or nonperishable subsistence ______________________________________ __________________________________

Impractical to secure competition by formal advertising __________________________________________________________

Experimental, developmental, test, or research __________________________________________________________________

Technical or specialized supplies requiring SUbstantial initial investment or extended period of preparation for manufaclur

Purchases to keep facilities available in interest of national defense or industrial mobilization _________________________

g~~~~~~~dof~~~hc~~f;rial-i-ris-tit-u-tions=== == = === ==== == = = == == == = = ==== ==== ====== == = = == ==== == == == == == = = == == == == = = == = = =

Other (miscellaneous) authority _____________ _________ __ _____________________________ _____ _____________________

I Not available for 1960 and 1961. 2 Not available. 

Sources: Offic

Payments or Co
82 

(ii) Definitional problems in price competition-GAO and DOD.-

Certain differences of opinion concerning classification of procurement 

as having "price competition" have occurred as a result of audits of 

Defense Department contracting by the General Accounting Office 

(GAO). Testimony by the GAO at the Joint Economic Committee . hearings, May 1967, challenged certain aspects of DOD statistical 

definitions on price competition by stating: 

A large percentage of the actions which were classified and 

reported to higher management levels within the Department 

of Defense as competitive procurements, in our opinion, 

were in fact made without competition. 

The primary cause for misclassifying procurements as 

having been awarded on the basis of price competition 

appears to stem from the criteria in the Armed Services 

Procurement Regulation. The regulation permits a contract 

award to be classified as competitively priced, even when only 

one response is received, as long as two or more proposals 

were solicited and the accepted proposal meets certain other 

evaluation tests. 

In addition, the Armed Services Procurement Regulation 

permits purchases of $2,500 and under to be reported as 

competitive even though many are not. The four locations 

we visited reported in the fiscal year 1966 a total of about $80 

million in procurement actions of $2,500 and under as being 

awarded on the basis of price competition. Of the total 

amount, however, an estimated $55 million, or 69 percent, 

represented noncompetitive procurements. 

We are proposing changes in the Armed Services Procurement Regulation to provide additional guidance to contracting officers for classifying and reporting of negotiated 

contracts.4 

The GAO did not indicate (other than the example of the $55 

million of "under $2,500" purchases) a number for the "large percentage" of competitive actions that "were in fact made without 

competition." Furthermore, the $80 million of purchases surveyed 

represented a sample of only 4.7 percent of the total procurements in 

the category "open market purchases of $2,500 or less." On the other 

hand, the $55 million judged "noncompetitive" by the GAO did 

indicate the necessity of refining the definition of "price competition" 

and requiring the receipt of at least two responsive bids, not just the 

sending of two or more solicitations. 

Following the GAO recommendations, the Assistant Secretary 

of Defense (Installations and Logistics) issued a memorandum on 

August 18, 1967, regarding the DOD rules on price competition which 

reads in part as follows: 5 

We do not interpret either the GAO or the Joint Economic 

Committee position as suggesting any change in our current 

reporting rules for formal advertising. With respect to 

negotiated procurenlents ho\vever, I have determined that 

~ Joint Economic Committee, hearings, "Economy in Government," May 8, 9,10,16,1967, pt. 1, p. 9. 6 Joint Economic Committee, hearings, "Economy in Government Procurement and Property Manage- ment," Nov. 27-30 and Dec. 8, 1967, vol. I, pp. 77-78. 
83 

statistical accuracy will be best attained by adoption of rules 

substantially as follows: 

1. A contract shall be reported as price competitive if offers 

were solicited and received from at least two responsible 

offerors capable of satisfying the Government's requirements wholly or partially and the award or awards were made 

to the offeror or offerors submitting the lowest evaluated 

prices. However, price competition may exist even though 

only one offer is received when the offers are solicited from 

at least two responsible offerors who normally contend 

for contracts for the same or similar items. 

2. Procurements shall not be reported as competitive 

where only one responsive offer was received and the solicitation was restricted to a prime contractor for contracts 

for the same or similar items. 

3. Multiple awards in such areas as subsistence, clothing 

and equipage, and other commodities where several a"wards 

normally result from one solicitation may be recorded as 

competitive, even though the total quantity of the solicitation is not awarded, if in the judgment of the contracting 

officer there are sufficient facts to support a valid finding of 

price competition. 

4. Transactions shall not be recorded as price competitive 

solely on the basis of the number of solicitations made. Contracting officers shall consider the content of the responses 

to solicitations, the procurement history of the items procured, and other relevant information and shall exercise 

sound judgment in the recording of transactions as competitive. 

5. Purchase orders in amounts less than $250 shall be reported as noncompetitive. With regard to orders of $250 or 

over, but not exceeding $2,500, contracting officers shall 

determine on an individual transaction basis which actions 

should be recorded as competitive and which noncompetitive. However, where it is not econOlnically feasible to do 

this, these actions will be recorded as noncompetitive. 

These instructions shall become effective upon publication 

in a DPC, in approximately two weeks. 

(Signed) PAUL R. IGNATIUS, 

Assistant Secretary of Defense 

(Installations and Logistics). 

The Assistant Secretary testified in the November 1967 Joint 

Economic Committee heaI~ings that had these new classification rules 

(which the GAO has approved) been in effect for defining "price competition," the 1961-67 percentage of price competition would have 

been reduced by 2 to 3 percentage points; for example, insteu.d of 

32.9 percent for 1961, approximately 30 percent ,,·ould have been 

classified as "price competition"; also, instead of 42.9 percent for 1967, 

it would have been approximately 40 percent.6 The percentage of 

price competition in military procurement would still be increased by a 

significant one-third. 

6 Ibid., p. 79. 
84 

3. Types oj contract pricing provisions 

(a) Basic principles in DOD procurement 

The basic principle behind DOD procurement actions is that the 

business profit motive should be utilized effectively in order to achieve 

economical contract performance. The DOD procurehlent policy 

may be summarized as follows. To achieve efficient contract performance, it is necessary to negotiate sound performance (cost) standards 

and realistic targets (prices).7 If effective price competition is present, 

it may be assumed that the contract price represents a sound procurelllent in terms of both cost and price. Thus, comparable cost experience is probably available, and the profit margin is more likely to be 

reasonable (i.e., not out of line with others in the industry).8 

Contracts awarded through formal advertisement must have reasonably definite design or performance specifications available; otherwise, they could not be advertised in such a manner. Therefore, these 

contracts primarily utilize "fixed price" contracts (mostly "firm 

fi-xed price," with some as "fixed price" with an escalation clause).9 

Where effective price competition is not present or design or 

performance specifications are not reasonably definite, it is the 

policy of the DOD to utilize the type of contract pricing that will 

closely associate realized profits to the contractor's efficiency in 

cost, quality, and delivery performance. To make effective use of 

the profit motive in private business, the contractor should be given 

cost responsibility as soon as possible and to the maximum extent 

possible in the contract process. Therefore, some variation of the 

fixed-price contract is preferred by the DOD.lO 

(b) Fixed-price versus cost-reimbursement contracts 

(i) DOD experience.-In light of the advantages of the fixed-price 

contract in placing gTeater cost responsibility upon the contractor, 

the DOD policy and practice since 1960 has been a gradual trend 

toward greater reliance upon fixed-price contracts, and a corresponding 

decline in reliance upon cost-reimbursement contracts. 

The percentage use of fixed-price contracts (as indicated in table 12) 

increased from 57.4 percent in 1960 to 78.9 percent in 1967, an increase of 21.5 percentage points; 1966 was the peak year with 79.2 

percent. Prior to 1960, the trend was down: from 82.1 percent in 

1952 to 59.1 percent in 1959. 

As a percent of the number of contract actions, fixed-price contracts 

showed a gradual year by year increase: from 82.8 percent in 1960 

to 91.0 percent in 1967; correspondingly, use of cost-reimbursement 

contracts declined from 17.2 percent in 1960 to 9.0 percent in 1967. 

(See table 15 at p. 91.) 

7 See ASPR, sec. 3-808.5. 8 See ASPR, sec. 3-807.2. 9 ASPR, sec. 2-104.1. 10 See ASPR, sec. 3-402. 
85 

TABLE 12.-VALUE OF MILITARY FIXED PRICE AND COST REIMBURSEMENT TYPE CONTRACTS, 

FISCAL YEARS 1952-67 

[Dollar amounts in millions) 

Fi xed- price contract Cost-reimbursement contract Fiscal year Total 1 

Amount Percent Amount Percent 

1952 _____________________ ____________ $34,028 $27,954 82.1 $6,074 17.9 1953 _________________________________ 29,285 23,358 79.8 5,927 20.2 1954 _______ __ __ _________ __________ ___ 10,942 7,708 70.5 3,234 29.5 1955 ____________________________ _____ 13,661 10,366 75. S 3,295 24.1 1956 _______ ______________________ __ __ 16,102 11,221 69.7 4,881 30.3 1957 _____________________________ ____ 17,997 11,995 66.6 6,002 33.4 1958 ______________________________ ___ 22,162 13,389 60.4 8,773 39.6 1959 __________________________ _______ 22,873 13,520 59.1 9,353 40.9 1960 ____________________________ __ ___ 21,181 12,160 57.4 9,022 42.6 196L ______ : ____________________ _____ 22,857 13,243 57.9 9,614 42.1 1962 ____________________________ _____ 25,780 15,667 60.8 10,113 39.2 1963 _____________________________ __ __ 26,225 17,013 64.9 9,212 35.1 1964 ____________________________ _____ 25,328 18,029 71.2 7,299 28.8 1965 ___ __________________________ ____ 24,331 18,619 76.5 5,711 23.5 1966 _________________ ________________ 33,515 26,551 79.2 6,964 20.8 1967 ___ ___________________________ ___ 39,249 30,974 78.9 8,276 21.1 

1 Excludes intragovernmental procurement and actions of less than $10,000. 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontract Payments or Commitments, July 1966-June 1967," and "July 1961-June 1962." 

(li) Experience oj nondejense agencies.-A comparison of nondefense 

agency experience with fixed-price versus cost-type contracts in terms 

of the value of contracts awarded is presented in table 13. The data 

indicate a wide variation between the covered agencies, which is a 

reflection of the diverse nature of items procured. 

The comparative use of fixed-price versus cost-type contracts by 

NASA remained relatively stable during 1961-1967. Fixed-price contracts accounted for 15.6 percent of contract awards classified by 

pricing provisions in 1961; the use of fixed-price contracts declined 

to 12.3 percent in 1964, rose again to 14.9 percent in 1965, dropped to 

a low of 12.2 percent in 1966, and climbed back to 14.0 percent for 

1967. 

Fixed-price contract data for the Atomic Energy Commission reveal 

a relatively stable picture after the rapid drop of more than one-half 

from 44.8 percent of total contract awards in 1961 to 20.4 percent 

in 1963; thereafter, the percentage of fixed-price contracts increased 

slightly to 24.5 percent in 1965, before reaching a level of 23.0 percent 

for 1967. 

Fixed-price contracts for the General Services Administration 

averaged almost 100 percent of procurement for the period, 1961-

1967. The Maritime Administration & Board (MA:NISB) also had a 

very high constant percentage, over 98 percent, of fixed-price procurement. Data for the Federal Aviation Administration indicate a 

fluctuating use of fixed-price contracts: 91.4 percent of awards in 

1964, 23.6 percent in 1966, and 88.8 percent in 1967. (See footnote 8, 

table 18, for an explanation of the sharp drop in 1966.) 
Fiscal year 

TABLE 13.-COMPARISONS OF FIXED PRICE AND COST TYPE CONTRACTS OF N

[I n percentl 

NASA AEC 

Fixed price Cost type Fixed price Cost type Fixed pr

!rl_~~~~~!;;i;; ~ i~; ~;;=;!~i!;~ ;--i!!iii 15.6 

14.2 

12.4 

12.3 

14.9 

12.2 

14.0 

84.4 

85.8 

87.6 

87.7 

85.1 

87.8 

86. a 

44.8 

32.3 

20. 4 21. 9 

24.5 

21. 4 23. a 

55.2 

67.7 

79.6 

78.1 

75.5 

78.6 

77.0 

99.9 

100. a 

100. a 

99.9 

100. a 

99.9 

100. a 

1 Less than 0.05 percent. 2 Not available. 

Source: Tables 16 
87 

(c) Specific types oj contract pricing-DOD 11 

(i) Fixed-price contracts.-Fi."\:ed-price contracts may be characterized under four major types: (1) firm, (2) redeterminable, (3) incentive, and (4) escalation. 

Firm jixed-price.-The firm fixed-price contract (FFP) provides for 

a price which is not subject to adjustment. This is due to the availability of adequate cost experience, as was discussed above concerning 

contract pricing in "formerly advertised" procurement. According 

to the DOD: "The firm-fixed-price contract is the preferred contract 

type under most conditions. Under the firm-fixed-price contracts, the 

contractor assumes full cost responsibility and guarantees to deliver a 

product meeting our specifications-this is, in effect, the best form of 

incentive contract, with the contractor assuming responsibility for all 

costs under or over target at the start of the contract period." 12 

The use of firm fixed-price contracts (as a percentage of the total 

value of contracts, excluding intragovernmental and actions of less 

than $10,000) has increased from 31.4 percent and 31.p percent in 

1960 and 1961, respectively, to 57.5 percent and 56.3 percent in 1966 

and 1967, respectively (see tables 14 and 15 for a detailed summary of 

DOD contract pricing provisions, 1960-67). As a percentage of the 

number of military contracts, firm fixed-price contracts have increased 

steadily from 71.8 percent in 1960 to 83.8 percent in 1967. 

Price redeterminable.-A second type of fixed-price contract is 

referred to as "price redeterminable": (a) with "prospective price 

redetermination at a stated time or times during performance of the 

contract" (price redetermination may be upward or downward, after 

an initial period of performance or delivery of a certain quantity 

under the original fixed-price contract); and (b) with "retroactive 

price redetermination" after completion of the contract, which includes the setting of a ceiling price. The use of this type of contract is 

limited to research and deve~opment contracts of less than $100,000 

with contractors that have an adequate accounting system for price 

redetermination purposes. 

Price redeterminable contracts have declined in use in terms of value 

from a peak of $2,403 million (10.5 percent of the total) in 1961 to 

$688 million (1.8 percent of the total) in 1967. As a percentage of the 

number of contract actions, fixed-price redeterminable contracts have 

declined from 2.8 percent in 1960 to 1.1 percent in 1967. 

Fixed-price incentive.-Fixed-price incentive (FPIF) contracts, 

which represent the second largest aggregate and percentage amounts 

within the fixed-price group, may be divided into the following types: 

(a) "Fixed-price incentive with a firm target"-A target cost, a 

target profit, and a price ceiling are negotiated at the outset of the 

contract (along with a formula for determining the final profit and 

price). The Government and the contractor share, within the set price 

ceiling, the responsibility for the difference between the original and 

the final negotiated cost. If the final cost is greater than the target 

cost, the final profit will be less than the tu.rget profit; conversely, if 

final costs are less than target costs, the final profit will be greater. 

The formula, thus, "should reflect the relative risks involved in contract performance." 

11 This discussion of contracts by type of pricing provision is based on ASPR, sec. III, pt. 4-Types of 

Contracts. 12 Memorandum of the Assistant Secretary of Defense (Installation and Logistics), Oct. 10, 1966, as cited 

in Joint Economic Committee, Staff Report, "Background Material on Economy in Government-1967," 

(April 1967), p. 107. Also, ASPR, sec. 3-402 (b). 
88 

(b) "Fixed-price incentive with successive targets"-This category 

of contracts is similar to category (a) except that a production point is 

selected at which time the negotiated profit formula is initiated. At the 

selected production point, a firm fixed-price may be negotiated, or 

another formula may be negotinted for establishing a final profit and 

price, based upon consideration of the "experienced cost and all other 

pertinent factors." . Fixed-price incentive contracts are not to be used in price negotiations unless the contractor's system of accounting is.,''adequate for 

price revision purposes and permits satisfactory application of the 

profit and price adjustnlent forn~ulas." 

The use of ineentive fixed-priCe contract provisions inereased from 

$2,554 million in 1961 (11.2 percent of the total) to $7,001 million in 

1967 (17.8 percent of the total). As a percentage of the number of 

contract actions, FPIF contracts showed a slight decline from 4.7 

percent in 1960 to 3.7 percent in 1967. 

Fixed-price-escalation.-A fourth type of fixed-price contract contains an "escalation" clause. This type of contract is similar to the 

firm fixed-price contract, with the addition of a provision for an upward or downward adjustment of the contract price. The adjustments 

are dependent upon certain contingencies which are specifically 

defined in the original contract; e.g., in cases of unstable market conditions in prices of materials or wage rates. 

The use of fixed-price-escalation contracts has remained relatively 

stable in dollar amounts: $1,075 million in 1961 and $1,193 million in 

1967. The relative use of escalation-type provisions has declined from 

6.3 percent and 4.7 percent in 1960 and 1961, respectively, to 3 percent in 1967. The percentage of contract actions using fixed-priceescalation contracts has declined from 3.5 percent in 1960 to 2.4 

percent in 1967. 

(ii) Cost-reimbursement contracts.-As indicated in table 12, the 

relative use of cost-type pricing in terms of value has declined since 

1961: from 42.1 percent to 20.8 percent and 21.1 percent in 1966 and 

1967, respectively. The dollar amount of cost reimbursement contracts 

declined from $10,113 million in 1962 to $5,711 million in 1965, but 

rose again to $8,276 million in 1967. . 

As mentioned previously, the use of fixed-price contracts is conditioned upon the availability of adequate and reliable cost and pricing 

data, including the use of a reliable cost accolmting system by the 

contractor, and upon adequate Government surveillance of cost performance. Cost reimbursement contracts are primarily used where 

estimated costs are $100,000 or more. Cost-type contracts are segmented into: (a) no fee-including cost-sharing, (b) fixed fee, (c)' incentive fee, and (d) time and materials-including labor-hour contracts. . 

Cost-no fee, cost-sharing.-Cost contracts with "no fee" are utilized 

primarily for research and development contracts with nonprofit 

organizations and for facilities contracts. The amount of "no fee" 

cost contracts has increased from $467 million in 1960 (2.2 percent of 

the total) to $752 million in 1967 (1.9 percent of the total). "Cost-no 

fee" contracts have declined as a percentage of the number of procurement actions from 3.4 percent in 1960 to 1.9 percent in 1967. 

"Cost-sharing" contracts provide for reimbursement of an agreed 

portion of the contractor's allowable costs and are utilized only for 

research and development contracts. This type of cost contract' is 
89 

reported separately for SOlne of the c0"\'ered nondefense agencies, bn t 

not for the DOD. 

Cost-plus:fixed-jee.-"Cost-plus-fixed-fee" (CPFF) contracts provide 

for the reimbursement of a contractor's actual costs, plus a fixed fee. 

This type of contract does not offer adequate incentives for the contractor to reduce costs; aceordingly, the nse of cost-plus-fixed-fee 

contracts haf:? been discouraged by the DOD. This type of contract is 

primarily used for research or preliminary study, where the degree 

of work required is not known. 

The fee in CPFF contracts generally is limited to 10 percent of the 

estimated cost, exclusive of the fee; however, 15 percent is the limit 

for "experimental, developmental, or research work," and 6 percent 

is the limit for architectural or engineering services for public works or 

utility projects (10 U.S.C. 2306 (d)). 

The program of reducing DOD reliance on CPFF contracts resluted in a steady decline in the relative use of CPFF contracts in 

terms of value from 36.8 percent of the total in 1960 to 9.4 percent in 

1965. However, the relative use increased in 1966 and 1967 to 9.9 

percent and 10.4 percent, respectively. The dollar alnolmt of CPFF 

contracts declined from a high of $8,385 million in 1962 to a low of 

$2,289 million in 1965, and rose again to $4,069 million in 1967. 

As a percentage of the number of contract actions, CPFF contracts 

dropped sharply from 12.1 percent in 1960 to 4.5 percent in 1967. 

Cost-plus-incentive-jee.-Under cost-plus-incentive-fee (CPIF) contracts, the fee is adjusted by a formula relating to the allowable 

cost and the target cost. The final fee is calculated according to the 

adjustment formula after the completion of the contract. If the 

final allowable costs are less than the targeted costs, the final fee 

will be larger (within limits); conversely, the final fee will be less if 

the allowable costs exceed the targeted costs. 

The cost-plus-incentive-fee contract is particularly suitable for 

development and test procurement where a target fee and an adjustment formlua can be negotiated to provide an effective profit 

incentive for cost management. CPIF contracts may be used in conjunction with certain performance incentives which provide for 

increased fees or profits if performance targets are improved. 

The use of CPIF contracts increased sharply frOln $673 million 

in 1960 to $3,580 million in 1964 ("\vith a corresponding increase 

as a percentage of the total from 3.2 percent in 1960 to 14.1 percent 

in 1964). In 1965 and 1966, CPIF contracts declined slightly to $2,721 

million and $2,763 million, respectively (the 1966 amonnt was 8.3 

percent of the total); in 1967, they increased to $3,277 million, but 

remained at 8.3 percent of the total. CPIF contracts increased as a 

percentage of the number of contract actions from 0.6 percent in 

1960 to a peak of 2.4 percent in 1965, but dropped to 1.5 percent in 

1967. 

Cost time and materials.-The final form of cost-contracts, "time 

and materials" (including labor-hour eontracts, in which materials 

are not supplied by the contractor) provides for payment at specified 

hourly rates, and for materials at cost.. Time and materials contracts 

are very minor in inlportance, representing only 0.5 percent of the 

total value of contracts in 1967, as compared to 0.4 percent in 1960. 

These contracts also maintained a stable percentage of the number 

of total procurement actions: 1.1 pereent in 1960 and 1967. 
TABLE l4.-MILITARY PROCUREMENT AWARDS, BY TYPE OF CONTRACT, P

Type of pricing provision 1960 1961 1962 1

A

Total 1 _________________________________________ $21,181 $22,857 $25,780 $2

Fixed price ___________________________________________ 12,160 13,243 15,667 1

~~creterminable~= === === === = == = = == == === = === = == == == = 

6,646 7,211 9,795 1

1,298 2,403 1,898 

I ncentive ___ ___________________ ___________________ 2,879 2,554 3,097 

Escalation ________ ________________________________ 1,337 1,075 877 

Cost reimbursement. ______________ ____________________ 9,022 9,614 10,113 

No fee _____ ______________________________________ 467 467 595 

Fixed fee ________________________________________ 7,803 8,362 8,385 

Incentive fee _____________________________________ 673 724 1,061 

Time and materials 2 _______________________________ 79 61 72 

P

100.0 100.0 100.0 

Fixed price ___________________________________________ 57.4 57.9 60.8 

Firm _____________________________________________ 31. 4 31. 5 38.0 

Redeterminable ___________________________________ 6.1 10.5 7.4 

I ncentive _________________________________________ 13.6 11. 2 12.0 

Escalation ________________________________________ 6.3 4.7 3.4 

Cost reimbursement. __________________________________ 42.6 42.1 39.2 

No fee ___________________________________________ 2.2 2.0 2.3 

Fixed fee _________________________________________ 36.8 36.6 32.5 

Incentive fee _____________________________________ 3.2 3.2 4.1 

Time and materials 2 _______________________________ .4 .3 .3 

1 Excludes intragovernmental and actions of less than $10,000. 

'Includes labor-hour contracts. Source: Office 

Payments or Com
eD TABLE 15.-NUMBER OF MILITARY PROCUREMENT ACTIONS, BY TYPE OF CONTRA

I-' 

I 

0 Type of pricing provision 1960 1961 1962 

~ 

~ 

I 

~ 

00 

I Total 1 ___________________ _ _____________________ 117,990 122,306 141,460 

-l Fixed price ___________________________________________ 97,735 101,784 118,852 

Firm ________________________________________ _____ 84,690 89,601 105,719 

Redeterminable ___________________________________ 3,320 2,971 3,408 

I ncentive _________________________________________ 5,568 5,213 4,735 

Escalation ______ __________________________________ 4,156 3,999 4,990 

Cost reimbursement- _____ _________ ----- ___ -----___ ---- 20,255 20,522 22,608 

No fee _______________ . _____ __________ _______ . -___ 4,011 3,600 3,722 

Fixed fee ______________________ -- _____ ------___ --_ 14,278 14,823 16,131 

Incentive fe3 ____ . _____ _ -- ___ ___ ---. -------- ------- 674 893 1,316 

Time and materials 2 ____ __ . ________ • _________ __ _ • __ 1,292 1,206 1,439 

TolaI 1 _ _ ___ . -- _._------- -- --------_. _ - ---- ----- 100.0 100.0 lOG. 0 

Fixed price ______ ___ _ -_ -___ ---------- -. -- -. ----------- 82.8 83.2 84.0 

Firm_. __ .. __ . __ _______ __ ______ . __ _________ __ . __ . __ 71. 8 73.3 74. 7 

Redelerminable __ _____ ___ -------- ----------- --. --- 2.8 2.4 2.4 

I ncentive _______ _____ _ -.-- -------------. ---- ------- 4.7 4.3 3. 4 

Escalation __________ ___ . ___ -. ---. -. -. -. -. -. ------- 3.5 3.2 3.5 

Cost reimbursement- __ . -- -_____ --.-.----- -------- ----- 17.2 16.8 16.0 

No fee __ . __ _____ _____ ___ -__ ----- -. ---- ----.. . . --- 3.4 3.0 2.6 

Fixed fee ______ . ______ . _____ .......... __ . . . . ...... 12.1 12.1 11.4 

Incentive fee ____ _ ... _. -. --- --... ----.. ---- -. -... . .6 .7 .9 

Time and materials2 _____ . ___ . ____ ___ . _____ .. __ . . 1.1 l.0 1.1 

1 Excludes intragovernmental and actions of less than $10,000. Source: Offic

2 Includes labor hour contracts. Payments or C
92 

(d) Specific types oj contract pricing--nondejense agencies 

(i) Fixed-price contl'acts.- Of the agencies listed in tables 16 and 

17, only NASA and FAA segmented their fixed-price contracts into 

"firm," "incentive," and "redeterminable." 

Firm fixed-priee contracts for NASA inereased in lnagnitude from 

$55 million in 1961 (or 15.3 pereent of total contract pricing) to a high 

of $492 million in 1965 (12.3 percent of the total); this dropped to a 

low of 10.1 percent in 1966, before increasing slightly to $410 million 

in 1967 (or 10.8 percent). 

Use of fixed-price incentive contraets (FPIF) by NASA expanded 

rapidly from $4 million in 1962 (or 0.4 pereent of the total) to $117 

million in 1967 (or 3.1 percent). Fixed-price redeterminable and 

and esc ala tion represented only very minor amounts and percentages. 

The gre~test amount and percentage of FAA's total contracts (a~ 

listed by l)ricing provision) h9ve been firm' fixed price, except in 1966: 

FFP contracts accounted for 75.5 percent of total eontract pricing 

awards in 1964; this dropped to 21.9 percent in 1966, before rising to 

85.9 percent in 1967. FAA fixed-price ineentive contraets (FPIF) 

have declined from 13.8 pereent of the total in 1964 to 2.2 percent 

in 1967. 

(ii) Cost-ootype contracts.-NASA and FAA also listed cost contracts by 

type of classifieation. In addition, the MAl\1SB reported cost-plusfixed-fee and cost (no fee) contracts; however, only in 1961 and 1967 

did they have cost (no fee) eontracts. Cost-plus-fixed-fee contracts 

represented only a small percentage of total l\1:Al\I[SB procnrement: 

1.0 percent in 1961, 2.0 percent in 1962, and 1.6 percent in 1967. 

Cost-plus-fixed-fee (CPFF) contracts accounted for the majority 

of NASA contracts in 1961, $300 million, or 82.7 percent of the total. 

The absolute magnitude of CPFF contracts increased to a high of 

$2,841 million in 1965, but this represented only 71.2 percent of the 

total amount. Since 1965, NASA's use of CPFF contracts has declined considerably: $1,591 million in 1966, or 40.3 percent of total 

contract pricing, to $775 million in 1967, or only 20.5 percent. 

The biggest change in NASA procurement policy has occnrred in 

the rapid increase in the use of cost-plus-ineentive-fee (CPIF) contracts. This inereased fron1 $9 million in 1962 (or 1.0 pereent of the 

total), to $502 million in 1965 (or 12.6 percent), to $1,849 million in 

1966 (or 46.8 percent), and to $2,450 million in 1967 (or 64.9 pereent). 

Other types of cost contracts: cost-no fee, cost sharing, and cost-time 

and materials, acconnted for a declining minority of total NASA 

contract pricing. 

The large amonnt and pereentage for FAA under the cost (no fee 

and cost sharing) category for 1966 was H-ttributed to a $151.7 million 

cost sharing award for the supersonic transport (SST). 

(e) Shifting from cost-plus-:fixed1ee to fixed-price and incentive 

contracts. 

(i) DOD experience.-A percentage eomparison of "cost-plns-fixedfee" contracts to fixed-price (less incentive) and incentive (fixed and 

cost) type contract pricing from 1952 to 1967 is presented in table 

18. As mentioned previously, CPFF contracts reached a peak percentage of 36.8 percent in 1960 and a low of 9.4 percent in 1965. Total 

fixed-price (less incentive) contracts declined from 70.1 percent in 
93 

1952 to 4l.2 percent in 1958, and gradually rose to its recent peak of 

63.3 percent in 1966. 

Incentive-type contracts (FPIF and CPIF) showed a decline fron1 

27.7 percent in 1954 to a low of 14.4 percent in 1961; this was followed 

by a rapid rise to a high of 32.6 percent in 1964, and a decline to 

26.1 percent in 1967. 
NASA: 2 

TABLE 16.-NONDEFENSE AGENCY PROCUREMENT AWARDS,! BY TYPE OF CONTRACT 

(In millions of dollars] 

Agency and type of contract pricing 1961 1962 1963 

Fixed-price type _______________ _____________ ________ _ 56.4 129.2 262.0 

Firm__________________________ ____ __ ____ __ ____ _ 55.4 125.0 247.5 

Redeterminable_________________________________ 0.9 0.4 4.1 Incentive_______________________________ ___ __ ___ 0.1 3.8 10.2 

Escalation_ __ ____ __ ___ _ __ __ __ __ __ __ __ ____ __ __ __ __ __ __ ____ _ _ __ __ __ __ _ _ __ ____ ____ ____ _ 0.2 

Cost-type____ __ __ __ _ _ __ __ _ _ __ __ _ _ ___ _ __ __ _ _ _ __ ___ _ _ _ 306. 1 779. 2 1, 85l. 8 

No fee and cost sharing__________________________ 0.5 11. 6 74.5 

Fixed fee________________________________________ 299.9 748.6 1,618.0 Incentive fee_____ _ _ __ _ _ _ _ _ _ _ _ __ __ __ __ __ __ _ _ ___ _ _ _ __ _ _ __ _ _ __ _ _ __ _ _ _ 9.3 152.5 

Time and materials 3___ _ _____ _ ___________ _ __ _ ____ 5.7 9.7 6.8 

AEC: 

Fixed-price tYPe---- __________ --- ----- -----___ ---- --- Cost-type ____ ______________ __ ____ __ _________ _______ _ 

GSA:4 Firm fixed-price ________ ____________________________ _ Cost-type ______ _________________________ _______ ____ _ 

MAMSB: Fixed-price _________________ ____ _________ __ __ __ __ __ _ CPFF ________ __ ______ _____ _____ __________ ____ ___ __ _ Cost-no fee ____ ___ __________ ____ ___________________ _ 

FAA: 6 

1,169.2 

1,442.3 

891. 9 

.8 

315. 8 

3.1 

1.5 

884.2 

1,853.5 

1,034.1 

130. 5 3.4 

529.9 

2,071.2 

1,178.9 

.3 

252. 9 

3.0 

Fixed-price ___________________________________________ -.:..:...-----.-.:...:......-------

(6) (6) (6) 

Firm ___________________ __________________ . ________ _________________________________ _____ - ___________ 

Incentive ___ ___ _____________________ ______ ___________ _____ ____ _____ ___ ___ _______ ____ ___ __ ____________ 

Redeterminable and escalation _______ _____ __ ______ ____ ____ _____ _____ __ _____ ____ ____ _____ _____________ __ 

Cost-type _______________________________ ______ __ ___ _ (6) (6) (6) 

-----------------------------------

No tee and cost 

I ncentive ___________ ____ __ __________ ______ ____ _______ ___ ____________ __________________ _ - _____________ 

Fixed fee ___ __________________________ ___ ___ ____________ ___ _____ _________________ ____________________ 

Time and materials 3 _____ _ _____ _ ___ _ _ _________ _ ___ _ _____ _ __ __ _ __ _ ________ _ _ ___ _ _ ______ _ __________ _ ____ 

! Amounts of contract awards that are classified by type of pricing; agency totals may not equal 

total procurement amounts reported in table 4. 2 Represents awards on research and development contracts over $10,000 and all other contracts of $25,000 and over. 

6 Totals for FAA 

cash purchase ord

ment reported in 

a Includes wage-hour contracts. 4 Total for Federal Supply Service and Property Management and Disposal Service contracts; 

excludes Public Buildings Service contracts. 

6 Not available. 7 Primarily 1966 

Source: Agenci
TABLE l7.-NONDEFENSE AGENCY PROCUREMENT AWARDS 1 BY TYPE OF CONTRA

(I n percent) 

Agency and type of contract pricing 1961 1962 

NASA:2 

1

Fixed-price type: 15.3 13.8 

t~~r~rf~~~~~~~~~ ~~~~~~~~~~ ~~~~~~~~~~ ~~~~ ~~~ ~~~~~~~ ~~ ~~ ~ ~~~ ~ _______ ~3L ____________ ~3~~ _____ _ 

7

Cost type:. _ • 1 l. 3 

!¥j~~~Fi~~;'~;i;~~~ ~~ ~ ~ ~ ~ ~ ~ ~~::: ~ ~ ~: ~ ~~ ~ ~~~ ~~~ ~ ~~~ ~ ~ ~ ~ ~~:: -----';:; ----- l: i 

Are: 

Fixed-pricetype ___________________________________________________ 44.8 32.3 2

Costtype ______________________________________________ ---________ 55.2 67.7 7

GSA:6 

Firm fixed price___________________________________________________ 99.9 100.0 1

Cost type___ __ __ __ _ _ __ __ _ __ _ _ __ _ _ _ _ __ _ _ ___ _ _ __ _ _ _ _ _ _ _ __ _ _ _ __ _ _ _ __ _ • 1 _ __ ____ __ _ ___ __ _ 

MAMSB: 

Fixed price_______________________________________________________ 98.6 97.4 9

g~~{ n'O -fee-_-_~== === ===~= === = = == == == == = = = = = = = = == = === = = = = = = = = == == == = 1: ~ _______ ~~ ~ _____________ 

FAA:6 Fixed price _____________ -_ -_ --- _ - _ --- _ - _ - -- ---- _ ----- ----------------_ - ___________ -----------_______ - ___

Firm_____ _________________________________________________________ __________________________________

~~~ee~~~~iiiable iln-d-escala-tion = == == = = == == == ====== == == = == = == == ==== == == == == == == == == = = == == = = == == == ==== = == 

Cost type ______ ___ ___ ______________________________ - - -- ___ - _ - _______________________ -___________________

No fee and cost sharing__ __ __ __ ____ _ ____ __ __ __ _ _ __ _ __ __ __ __ _ __ _ _ __ __ __ __ __ _ __ _ __ __ __ _ __ _ __ __ _ _ ___ ___ __ 

Incentive____ __ __ __ _ __ ___ __ __ __ ___ __ __________ ___ __ __ ___ _ __ ________ __ ________ _ ___ __ __ __ _ _ __ ____ __ __ __ 

Fixed fee__ _ _ __ __ __ __ __ _______ _______ __ ___ _ __ __ __ __ __ __ ______________ _ __ _ __ __ __ ______ ______ __________ 

Time and materials 4___ _______ _____________ _ __ __ __ ___ _____ ________ __ ___ ___ __ __ __ _ _ __ __________ ________

1 Amounts of contract awards that are classified by type of pricing; agency totals may not equal 

total procurement amounts reported in table 4. 2 Represents awards on research and development contracts over $10,000 and all other contracts of $25,000 and over. 3 Less than 0.05 percent. 4 I neludes wage-hou r contracts. 6 Total for Federal Supply Service and Property Management and Disposal Service contracts; 

excludes Public Buildings Service contracts. 

6 Totals for FA

cash purchase or

ment reported in 

7 Primarily 196

Source: Agenc
TABLE 18.-COST-PLUS-FIXED-FEE CONTRACTS IN RELATION TO FIXED PRICE AND INCENTIVE TYP

[I n percent] 

Fixed-price-Iess-incentive type 

Fiscal year Total Cost plus 

fixed fee Firm Redeterminable Escalation 

1952 ________ --------- 100.0 13.3 29.8 38.5 1.8 

1953.. _______________ 100.0 16.3 31. 8 21. 8 2.2 

1954.. _______________ 100.0 23.8 38 .. 0 5.9 1.4 

1955 _________________ 100.0 19.7 39.7 12.5 .8 

1956 _________________ 100.0 24.1 36.4 9.9 4.2 

1957 _________________ 100. a 29.9 35.3 8.6 4.9 

1958 _________________ 100.0 33.2 27.8 7.4 6. a 

1959 _________________ 100.0 34.3 32.8 4.7 6.3 

1960 _________________ 100.0 36.8 31. 4 6.1 6.3 

1961 _________________ 100. a 36.6 31. 5 10.5 4.7 

1962 __________ " ______ 100.0 32.5 38.0 7.4 3.4 

1963 _________________ 100. a 20.7 41. 5 3.7 3.9 

1964 _________________ 100. a 12.0 46.3 2.4 4.0 

1965 _________________ 100.0 9.4 52.8 2.2 4.9 

1966 _________________ 100. a 9.9 57.5 2.3 3.5 

1967 __________ .. ______ 100. a 10.4 56.3 1.8 3.0 

Note: Details may not add to totals because of rounding. 

Source: Office of the Secretary of Defense, "Military Prime Contract Awards and Subcontract Payments or Comm
97 

On the basis of the number of military contract actions (see table 

15), the relative use of CPFF contracts declined from 12.1 percent of 

total military contract actions over $10,000 each (excluding intragovernmental) in 1960 to 4.5 percent in 1967. On the other hand the 

number of fixed-price (less incentive) eontraets increased from 78.1 

percent of proeurement actions in 1960 to 87.3 percent in 1967. The 

relative use of incentive contracts (fixed and cost) rose from 5.3 percent of procurement aetions in 1960 to a peak of 6.9 percent in 1964, 

and then declined to 5.2 percent in 1967. 

(ii) Experience oj nondefense agencies.-As previously discussed, 

the greatest shift from CPFF contract pricing to either fixed-price or 

incentive contracts in nondefense agency procurement has taken place 

in NASA procurement. CPFF contracts, as a percent of total contract amounts, declined steadily from 82.7 percent in 1961 to 71.2 

percent in 1965; thereafter, 1966 and 1967 revealed a substantial 

drop to 40.3 percent and 20.5 percent, respectively. 

The shift in NASA procurement was to cost-plus-incentive-fee 

contract pricing: from 1 pereent in 1962, to 7.2 percent in 1964, to 

12.6 percent in 1965, to 46.8 percent in 1966, and to 64.9 percent in 

1967. This shift was due to the NASA poliey of using profit incentives 

to encourage industry to undertake the research and development type 

contracts prevalent in the space industry, which involve greater 

uncertainties in accurately estimating costs over the life of the 

contract. 

4· Summary oj DOD cost reduction program 

The DOD has stated that savings from shifting from noncompetitive 

procurement averages about 25 percent. 13 The shift from noncompetitive to competitive procurement is a part of the overall DOD cost 

reduction program initiated during fiscal 1962. The major areas 

involved are as follows (see table 19 for a detailed sunlmary): 

1. Buying only what we need. 

2. Buying at the lmvest sound price. 

3. Reducing operating costs. 

4. IVIilitary assistance program. 

(a) Buying at the lowest sound price 

Shifting from noncompetitive to competitive procurement represents the largest subtotal of "savings" within eategory (2) "Buying at 

the lowest sound priee." A few examples given by the DOD of savings 

achieved from price competition were as follows: 14 

Items 

Electron tube ______________________________________ _ Radio seL _________________________________________ _ 

Night vision sighL _________________________________ _ 

Cluster bomb dispenser and container ________________ _ 

~nU~:~I~~e;o~~~;~~~~t~~== == = == = = = = = = = = = = = = = = = = = = = = = = 

Noncompetitive Competitive Percent 

unit price unit price reduction 

$2,538 

15,123 

1,573 

710 4,806 

24,557 

$1,745 

7,260 

984 

310 2,808 

9,926 

31. 2 52.0 

37.4 

56.3 

41.6 

59.6 

Savings 

$396,400 

3,985,162 

884,130 

7,276,056 

272,700 

1,020,459 

13 See Joint Economic Committee StH.if Report. "Background Material on Economic Impact of Federal Procurement-196" (March 1966), app. 1, p. 41. Also, Joint Economic 

mittee hearings. hEconom.v in Government, Procurement and Property Management" (Nov. 27-30, and Dec. 3, 1967),p. 80. 14 Joint Economic Committee, Staff Report," Economy in Government-1967: Updated Background Material," (November 1967), p. 52. 
98 

Examples given as illustrative of the savings realized from a second 

program under category (2), "direct purchase breakout," were: 15 

Items 

90 spare parts _____________________________________ _ Compensator, 'machine trim __________________________ _ Modification kit, radar scope _________________________ _ 

Prime con- tractor's 

price 

$8,500,000 

2,500 

624 

Manufacturers' 

price 

$5,000,000 

1,801 

177 

Percent 

reduction 

41 

28 

72 

Savings 

$3,500,000 

244,500 

116,900 

Savings were estimated at 10 percent per dollar converted from 

Cost-Plus-Fixed-Fee (CPFF) contract pricing to Fixed or Incentive 

price contracts during fiscal years 1962-66. The estimated value of 

contracts converted from CPFF and from noncompetitive to price 

competitive (1963-66) were as follows: 16 

[In billions of dollars) 

Value of contracts converted fromFiscal year CPFF to fixed or incentive Noncompetitive to price competitive 

1963 ______________________________________________________ _ 1964 ______________________________________________________ _ 1965 ______________________________________________________ _ 1966 ______________________________________________________ _ 

$4.3 

6.2 

6.3 

7.8 

$0.9 

1.8 

2.6 

2.2 

A fourth program under "Buying at the lowest sound price" has been 

the "multiyear procurement procedure," in lieu of awarding a separate 

contract each year. Lower contract prices obtainable via multiyear 

procurement are illustrated by the following fiscal 1967 examples: 17 

Unit price Percent Fiscal 1967 

Department reduction net savings 

Single year Multiyear 

Army: Ima~e $795, DUO intensifier assembly _______________________ $2,060 $1,795 12.9 Radio set AN/PRC-77 ____________________________ 985 937 4.8 258,336 Radio set AN/GRC-106 ___________________________ 7,119 6,897 3.1 166,955 Rocket motors, M-30A2 __________________________ 1,755 1,703 3.0 113,672 

Navy: ' Navigational sets (AN/ARN-52V) _________________ " 6,531 5,060 22.5 287, 000 3 coordinate radar _______________________________ 1,415,029 1,188,977 16. a 1,808,416 Mechanical time fuze, MK-349 model 0 ____________ 31 30 3.2 262,970 Air operation centrals ____________________________ 8,696,800 8,000,000 8. a 1,393,600 Air Force: Aircraft engine, TF-4L ____________________ 354, 090 342,904 3.2 973,182 

(b) Changes in DOD reporting policy 

The detailed "savings" in the DOD cost reduction program for 

fiscal years 1962-69 are summarized in table 19. Fiscal years 1962-66 

composed the original 5-year cost reduction program. The basis of 

determining cost savings for this period was to include recurring 

savings from the base year, 1961, and to continue with each year's 

own savings plus recurring savings from prior years back to 1961. 

"Recurring savings" were those, for example, that were counted 

over the life (within the 5-year period) of a contract in which an 

16 Ibid. 16 Joint Economic Committee Staff Report, "Background Material on Economy in Government-19S7" 

(April 1967), pp. 104, IDS. 17 Joint Economic Committee Staff Report (Nov. 19S7) , p. 53. 
99 

initial savings occurred (e.g., some permanent cost reduction continuing as long as a particular item was procured or serviced). Another 

example of a recurring saving would be the partial or complete 

closing of a military base or depot. 

The goal of the DOD 5-year cost reduction program ,,'as to achieve 

at least a $3 billion continuing annual "rate of savings." This was 

surpassed during both 1965 and 1966. At the end of the 5-year period, 

tlhe DOD adopted new reporting criteria which would measure savings 

only on an annual basis (i.e., savings achieved through current fiscal 

cost improvements that are "realized during the current fiscal year). 

As operations proceeded further away from the previous 1961 base 

year, the allocated "recurring savings" became less realistic. Therefore, 

the annual savings during 1962-66 are not comparable to the annual 

savings reported for 1967 and estimated for 1968 and 1969. It is 

contemplated by the DOD that certain of these savings programs 

realized or authorized during the year will continue or be realized 

during later fiscal years when the cost reduction program is fully 

implemen ted. 
Area 

A. Buying only what we 

TABLE 19.-DEPARTMENT OF DEFENSE COST REDUCTION 

[I n millions of dollars) 

1962 1963 1964 

412 860 1,521 

1. Refining ·requirement calculations____ __ ________________________ 348 769 1,374 

2. I ncreased use of excess equipment and inventory in lieu of new procuremenL_______________________________________ _____ _______________ 19 71 

3. Eliminating "gold plating" (value engineering)___________________ 64 72 76 

4. I nventory item reduction_____ ___ _ __ __ __ __ _ _ __ __ _ _ __ __ __ _ _ __ __ _ __ _ __ __ __ _ _ __ __ _ _ _ _ __ __ __ _ _ __ _ __ _ __ _ _ 

B. Buying at the lowest sound price_____________________________________ 160 237 553 

1. Shift to competitive procuremenL_____________________________ 160 237 448 

2. Shift from CPFF to fixed or incentive prir:e contracts__________________________________________ 100 

3. Direct purchase breakouL______________ _____________________________________________ _____ 5 

4. Multiyear procurement. _ _ _ __________ ________________ ______ ____ __ __ __ ______ ______ __________ __ _ ___ _ _

C. Reducing operating 178 289 757 

1. Terminate unnecessary operations ___ ______ ________ ________ __________ _______ _ 

2. Consolidations and standardizations ____ ________________ ________ 31 

123 334 

31 137 

3. Increasing efficiencies of operations__ _______ _______ _________ ___ 147 135 286 

D. Military assistance program_____________ __________ ____________________ ____________ ____________________ ____

Total Droluam_________________________________________ ____ _____ 750 1,386 2,831 

3 Estimated go

1 Original5-year program including savings realized during and recurring from prior years' actions, 

for 1962-66. 

2 New reporting criteria for fiscal year 1967 and thereafter measures savings on an annual basis 

only. 

.Source: Office 

The Fiscal Year 
101 

B. RENEGOTIATION AND PROCUREMENT 

It is important to note that the discussion of profitability contained 

in this part of the report, and the ratios used for purposes of discussion, 

are presented only for purposes of indicating comparat.ive profitability 

in the various situat.ions described. No 'implications as to the absolute 

profitability of various types of contracts or the absolute profitability 

in other situations are intended. The rat.io generally llsed in t.he discnssion, that of profit to sales, is only one indicator of profitability. 

I\10reover, the Renegotiation Board datH from which some of the 

ratios have been derived are on an aggregate basis and are subject to 

substantial limit.ttions: For eXaInple, different size companies and 

companies with varying proportions of defense and space business are 

included; profitable contracts and loss contracts are included; and the 

effect of the use of Govermnent property and facilities is not known. 

1. Renegotiable sales and profits-By type oj contract pricing 

The Renegotiation Board has reported renegotiable sales, profits, 

and losses by type of contract pricing for 1963-67. The pricing categories data are stated separately for those companies reporting net 

profits and for those companies reporting net losses for the fiscal year 

(i.e., for each company, profits and losses under individual contracts 

are nett.ed). The con tracting pricing types are: (1) "Firm" fixed-price 

(FFP) , (2) cost-plus-fixed-fee (CPFF), and (3) "Other." At the 

request of the staff, the "other" category was segregated further by 

the Renegotiation Board for 1965 and later years into: (a) fixed priceincentive fee (FPIF), (b) cost-plus-incentive-fee (CPIF), and (c) 

"other." The second "other" category includes price redeterminable 

and time and materials contracts. The more detailed classification for 

1965-67, however, combines those eontractors reporting net profits 

for the year with those reporting net losses. 

(a) Renegotiable sales-Combined profits and losses 

As indicated in table 20, total renegotiable sales (profitable and loss 

sales) increased from $31.2 billion in 1963 to $39.3 billion in 1964, 

then declined to $31.8 billion in 1966 and $33.1 billion in 1967. 

As a percent of renegotiable sales, firm fixed-price contracts declined 

from 46.1 percent in 1963 to 41.0 percent in 1964 and 42.8 percent 

in 1965; ho\\'ever, it rose again in 1966 find 1967 to 52.2 percent in 

1967. CPFF eontraets, on the other ha.nd, declined from 35.4 

percent and 36.0 pereent in 1963 and 1964, respectively, to a low of 

18.2 pereent in 1967. This is a reflection of the changing trend in 

DOD military procurement: The llse of FFP procurement increased 

from 31.5 percent. in 1961 to 52.8 perC'ent in 1965 and 56.3 percent in 

1967; at the same time, CPFF procurement declined sharply from 

36.6 percent in 1961 to 9.4 percent in 1965 and 10.4 percent in 1967. 

Incentive-type contract pricing 'Nas segregated by the Renegotiation 

Board for 1965-67 (FPIF and CPIF). These two incentive-types increased from 17.7 percent of renegotiable sales in 1965 to 25.4 percent 

in 1966 and 23.6 percent in 1967. CPIF eontracts showed t.he greatest 

rise: from 5.7 percent in 1956 to 12.4 percent in 1967. 

Since the renegotiable sales reported in the Board's annual reports 

are the result of prior year's procurement policies, it is understandable 

to note the sharp rise in CPIF contracts because of the rapid increase 

in the use of CPIF contracts in military procurement from 1962 to 

1965: 4.1 percent of military procurement in ]962, 11.7 percent in 
102 

1963,14.1 percent in 1964, and 11.2 percent if! 1965. Thereafter, CPIF 

contracts dropped to 8.3 percent of military procurement in both 1966 

and 19f)7 (see table 14). Thus, the noticeable rise indicated in table 20 

for CPIF contracts in renegot.iable sales may level off or decline in the 

next few years. Total nlilitary incentive contracts (FPIF and CPIF) 

have also declined as a percent of total military procurement: from a 

peak of 32.6 percent in 1964 to 24.2 percent and 26.1 percent in 1966 

and 1967, respectively. 

(b) Renegotiable sales-Net profits and net losses 

Sections (B) and (C) of table 20 also give a percentage .breakdown 

for renegotiable sales (net profit sales and net loss sales) by the 

three major contract pricing categories: FFP, CPFF, and other. 

The distribution between these types of contract pricing for firms 

reporting net profits is approximately the same as in section (A) of 

table 20, the combined profit and loss totals. 

Renegotiable sales of firms reporting net losses remained relatively 

stable from 1963 to 1966: ranging from $4.8 to $5.2 billion, before 

declining to $4.2 billion in 1967. As a percent of total renegotiable sales 

reported, however, "net loss" sales decreased from 16.1 percent in 

1963 to 13.3 percent in 1964, increased again to 15.5 percent in 1966, 

and then decreased to 12.7 percent in 1967. 

The greatest share of "net loss" contracts was accounted for by 

FFP contracts: ranging from 67.9 percent to 75.2 percent of total 

"net loss" sales during 1963-67. 
TABLE 20.-RENEGOTIABLE SALES REVIEWED BY RENEGOTIATION BOARD, BY 

[Dollar amounts in millions) 

1963 

Contract type Amount Percent 

A. Total, profit and loss combined _______________________________ $31,228 100.0 

~~~ ~il~~d rr:~~efee-_-~ ~= == ========== = ========= = === ==== === 

14,389 46.1 

11,052 35.4 Other _________________________________________________ 5,787 18.5 

Fixed price incentive fee ____________________________ (2) ------------ Cost plus incentive fee ______________________________ (2) ------------ Other 3 ____________________________________________ (2) -------_ ... _--

B. Total, net profiL _____________________________ .. _____________ 26,208 100.0 

Firm fixed price ___________________________________________ 10,978 41. 9 Cost- plus-fixed fee _________________________________________ 10,361 93.5 Other ____________________________________________________ 4,869 18.6 

C. Total, net loss ______________________________________________ 5,020 100.0 

Firm fixed price ___________________________________________ 3,411 67.9 Cost-plus-fixed fee _____________________________ .. __________ 691 13.8 Other ____________________________________________________ 918 18.3 

1 1965 was first year of breakdown of data into "FPI F, CPI F, and Other"; therefore, division 

between categories may not be completely accurate. 2 Not available. 

1964 

~mount Percent 

$39,283 100.0 

16,109 41. 0 

14,135 36.0 

9,039 23.0 

(2) ----------... 

(2) ----... ------

(2) -----------

34,073 100.0 

12,190 35.8 

13, 25~ 38.9 

8,629 25.3 

5,210 100.0 

3,919 75.2 

881 16.9 

410 7.9 

3 Price redetermi

Source: Renegoti
104 

(c) Renegotiable profits-Combined profits and losses 

As FFP contracts composed the greatest sector of "net loss" 

renegotiable sales, FFP contracts conver ;ely indicated the lO\vest 

profit to sales ratio when total profits and losses are combined. The 

following tabulation compares the profits to sales ratios of FFP, 

CPFF, and other contracts: 

TABLE 2l.-COMBINED PROFITS (NET OF LOSSES) AS A PERCENT OF RENEGOTIABLE SALES, 

FISCAL YEARS 1963~7 

Fiscal year 

1963 ______________________________ _ 1964 ___ ___________________________ _ 1965 _____________ _________________ _ 1966 ___ ___________________________ _ 1967 ______________________________ _ 

Total 

2.9 

2.9 

3.0 

3.0 

3.5 

FFP 

2.1 

2.1 

2. u 2.0 

3.0 

Contract type 

CPFF 

3.1 

2.9 

2.8 

2.5 

2.5 

Other I 

4.5 

4.2 

4.6 

4.9 

5.0 

I Includes FPIF, CPIF, price redeterminable, and time and materials contracts, not reported separately (except for 

FPI F and CPI F in table 20). 

The combined profit (net of losses) to sales ratio varied only slightly 

from 1963 to 1966's 3.0 percent, before rising to 3.5 percent in 1967. 

The major cause of this jump was an increase from the low of 2.0 

percent in 1965 and 1966 for FFP contracts to 3.0 percent in 1967. 

CPFF contracts, on the other hand, showed a decline from 3.1 percent 

in 1963 to 2.5 percent in 1966 and 1967. "Other" contract pricing 

showed an increase from 4.2 percent in 1964 to 5.0 percent in 1967. 

A more detailed comparison of combined renegotiable profits to 

sales ratios for 1965-67 is presented in table 22. As presented, one 

comparison may be made between fixed-price type (FFP and FPIF) 

and cost reinlbul'sement type (CPFF and CPIF) contracts. This reveals little difference in ratios; the Elight gap of 0.2 percentage points 

in 1965 is closed to an even 3.5 percent in 1967. 

Incentive type contracts (FPIF and CPIF) , however, have significantly greater ratios: FPIF increased from 5.4 percent in 1965 to 5.9 

percent in 1967, and CPIF rose from 3.9 percent in 1965 to 5 percent 

in 1967. Within the "fixed" and "cost" categories, incentive contracts 

enjoyed about a two to one edge in ratios in 1967 (5.0/2.5 for 

CPIF/CPFF and 5.9/3.0 for FPIFjFFP). 
TABLE 22.-RENEGOTIABLE SALES AND PROFITS' REVIEWED BY RENEGOTIATION B

[Dollar amounts in millions) 

1965 1965 renegotiable profits 3 1966 

Co ntract ty pe Renegotiable Renegotiable 

sales Amount Percent of sales 

Total' _________ ______ , _________ $34,798 $1,042 3.0 

Fixed price type _______ ____ ______ _____ 19,069 529 2.8 

Firm fixed (FFP) ___ _______________ 14,893 305 2.0 Incentive fee (FPIF) _______________ 4,176 224 5.4 

Cost reimbursemenL _---_. ______ ~------ 12,117 361 3.0 

Fix fee (CPFF) ______________ ______ 10,131 284 2.8 Incentive fee (CPIF) __________ _____ 1,986 77 3.9 

Other 2 ___ _ _______________________ _ ___ 3,612 153 4.2 

, Net of loss figures; also, the above breakdown by contract types "FPIF," "CPIF," and "Other" are the components of what is reported as "Other" in the Board 's annual report (e.g., p. 8, 1967); " Firm fixed price" (FFP) above is what is reported as "Fixed price" contracts in the annual report. 2 Price redeterminable and time and materials. a Data tor " FPIF," "CPIF," and "Other" for fiscal year 1965 may not be completely accurate in 

sales A

$31,841 

18,898 

14,437 

4,461 

11,450 

7,820 

3,630 

1,494 

the particular b

(totals, however

Note: Details 

Source: Rene
106 

(d) Renegotiable profits-Net profits and net losses 

Net renegotiable profits (for firms reporting net profits) fluctuated 

during 1963-67: from $1,250 million in 1963 to a high of $1,492 

million in 1964; profits then declined to a low of $1,245 million in 1966; 

and they climbed again in 1967 to $1,443 nlillion, or an increase of 15.4 

percent over the 1963 level. Total reported net renegotiable losses, 

on the other hand, declined steadily from a high of $359 million in 

1964 to a low of $272 million in 1967 (see app. E for details on net 

renegotiable profits and losses, by major contract types). ' Firm fixed-price (FFP) contracts accounted for a lnajority of 

reported net renegotiable profits: ranging from a low of 41.9 percent 

of profits in 1965 to a high of 54.4 percent in 1967. Cost-plus-fixed-fee 

(CPFF) contracts represented a declining portion of net renegotiable 

profits: from 28.4 percent in 1963 to a low of 10.6 percent in 1967. 

"Other" contracts (primarily fixed-price and cost incentive) increased from 22.0 percent of reported profits in 1963 to 37.8 percent 

in 1966, and 35.0 percent in 1967. 

FFP contracts also accounted for most of the reported renegotiable 

losses: averaging over 90 percent of net losses. CPFF contracts, 

hmvever, represented only a very insignificant percent of losses, e.g., 

2.0 percent in 1963 and 0 percent in 1967. 

Net renegotiable profits as a percentage of renegotiable sales (with 

net profits) ranged slightly higher than combined profits to combined 

sales (profit and loss sales) during 1963-1967. As portrayed in table 

23, the profit/sales ratio ranged from 4.4 percent in 1964 to 5.0 percent 

in 1967, or approximately 40 percent greater than when renegotiable 

losses were "netted" against renegotiable profits. 

Whereas FFP contracts bad the lowest profit/sales ratios in table 

21 (combined sales and profits), these same type contracts revealed 

the highest ratio (in most cases) in table 23. The picture changed so 

markealy for FFP contracts because these contracts had the largest 

share of net renegotiable losses; these losses ranged from 7.1 percent 

to 9.1 percent of renegotiable sales during 1963-67. At the same time, 

CPFF eontracts had the lowest profit/sales ratios in table 23; they 

also had the lowest loss/sales ratios on reported net renegotiable losses. 

A. 

B. 

TABLE 23.-RENEGOTIABLE PROFITS AND LOSSES AS A PERCENT OF SALES BY CONTRACT TYPE, 

FISCAL YEARS 1963--67 

Contract type 1963 1964 1965 1966 1967 

Reported net renegotiable profits _______________ 4.5 4.4 4.8 4.6 

Firm fixed price __________________________ 4.9 5.4 5.7 5.2 Cost plus fixed fee _______________________ 3.2 3.2 3.4 2.9 / Other 1 __________________________________ 5.2 4.7 5.6 5.3 

Reported net renegotiable losses _______________ 6.0 6.9 6.6 5.7 

Firm fixed price __________________________ 7.1 8.1 9.1 8.3 Cost plus fixed fee _______________________ 1.6 1.7 1.0 .8 Other 1 __________________________________ 4.8 6.8 1.7 (2) 

1 I ncludes fixed price incentive fee, cost plus incentive fee, price redeterminable, and time and materials. 2 Profit reported. 

Source: Renegotiation Board. 

5.0 

5.5 

2.9 

5.4 

6.4 

8.2 

0 

2.8 
107 

2. Renegotiable sales and profits, and excessive profits determinations 

The Renegotiation Board did not provide a data breakdown of 

renegotiable sales and profits by type of contract pricing for those 

contractors with respect to which there were excessive profits determinations, as it did for total renegotiable sales, profits, and losses. 

These data would be helpful in analyzing the type of procurement 

most likely to result in "excessive profits." In addition, it would help 

in ascertaining whether or not new or strengthened procurement 

policies were inereasing competitive prieing in contract awards, thus 

reducing the potential for occurrences of profits which are out of line 

with those in the particular industry. The available data, however, 

do aff9rd some indication of the relative magnitude of excessive profits 

within the overall framework of renegotiation. In addition, some 

indications are provided of the relative profitability of those contractors with respect to which excessive profits determinations were 

made. 

(a) Excessive profits determinations 

Excessive profits determinations, as a percent of total renegotiable 

sales, ranged from a low of 0.03 percent (three one-hundredths of 1 

percent) in 1962 and 1963 to a high of 0.08 percent in 1966, and back 

down to 0.05 percent in 1967. Excessive profits as a percent of renegotiable sales with a net profit ranged slightly higher: From 0.04 percent in 1963 to 0.09 percent in 1966 (see table 24). 

TABLE 24.-EXCESSIVE PROFIT DETERMINA nONS AS A PERCENT OF RENEGOTIABLE SALES, FISCAL YEARS 1961-67 

[Dollar amounts in millions) 

Fiscal year 

1961 ______________________ _ 1962 ______________________ _ 1963 ______________________ _ 1964 ______________________ _ 1865 ______________________ _ 1966 ______________________ _ 1967 ______________________ _ 

t Not available. 

Source: Renegotiation Board. 

Excessive profits 

Total renego- Profitable rene- -------------- tiable sales gotiable sales Amount Percent of Percent of 

$25,084 

29,262 

31,228 

39,283 

34,798 

31,841 

33,124 

(1) 

(1) 

$26,208 

34,073 

29,953 

26,915 

28,914 

$17.2 

7.8 

10.4 

24.2 

16.1 

24.5 

16.0 

total sales profitable sales 

0.07 _______________ _ .03 _______________ _ 

.03 0.04 

.06 .07 

.05 .05 

.08 .09 

.05 .06 

Excessive profits determinations (before adjustment for the Federal 

income tax credit), as a percent of total reported renegotiable profits 

during 1963-67, ranged from a low of 0.8 percent in 1963 to a high of 

1. 9 percent in 1966, with a decline to 1.1 percent of profits in 1967. 

The 5-year average was 1.3 percent: 

Fiscal year 

Total renegotiable Excessive prOfits 

profits (millions) ----------

Amount (millions) Percent 

1963..______ ______________________ ____ ____________ ___ $1,250 $10.1 

1964_________________________________________________ 1,492 24.2 1965_________________________________________________ 1,333 16.1 1966____ _ _ _ _ ___________ _ __ __ __ _ _ _ ___ _ _ __ __ _ _ __ _ _ _ _ _ _ _ 1,245 24. 5 

1967 ____ __ __ _ _ __ _______ _ __ ___ _ _ _ __ __ __ _ ___ ____ __ __ _ _ _ 1,443 16. 0 

0.8 

1.6 

1.2 

1.9 

1.1 

5-year totaL___________________________________ ----------------- 6,763 90.9 

5-year average__________________________________ 1,353 18.2 1.3 

91-043-68--8 
108 

(b) Net excessive profits refunded (after Federal income tax 

adjustment) 

Net excessive profits returned to the Federal Government (after 

adjustment for Federal income taxes) fluctuated eonsiderably every 

other year from 1963 to 1967: $5.0 million in 1963, up to $12.3 million 

in 1964, down to $8.8 million in 1965, up again to $12.6 million in 

1966, and back to $8.3 million in 1967. The 5-year annual average 

amounted to $9.4 million per year. The net excessive profits, as a 

percent of reported renegotiable profits, ranged from a low of 0.4 pereent in 1963 to a high of 1.0 percent in 1966, before dropping to 0.6 

percent in 1967. 

Fiscal year 

1963 ________________ _ 1964 ________________ _ 1965 ________________ _ 1966 ________________ _ 1967 ________________ _ 

5-year totaL ___ _ 5-year average __ 

I Revised 

Total renellotiable profits (millions) 

$1,250 

1,492 

1,333 

1,245 

1,443 

6,763 

1,353 

Net excessive profits refunded (after Federal income tax adjustment) 

Amount (millions) Percent 

$5.0 

12.3 

8.8 

112.6 

8.3 

47.0 

9.4 

0.4 

0.8 

0.7 

1.0 

0.6 " 

---------6.-:r-------

(c) Renegotiable sales and profits of firms determined by the Board 

to have excessive profits 

The Renegotiation Board provided the staff with aggregate annual 

data for renegotiable sales and profits before Federal income taxes 

for those firms (contractors-and subcontractors) with respect to whieh 

excessive profits determinations were made. Renegotiable profits 

(before refund) as a pereent of renegotiable sales increased from 8.8 

percent in 1963 to 16.0 pereent in 1967 (see table 25). Profit/sales 

ratios after renegotiation ranged from 7.3 percent to 13.8 pereent for 

the same period. The renegotiable profit/renegotiable sales ratio for 

these firms contrasts with the profit/sales ratios reported previously in 

table 23 for total renegotiable profits and sale of all firITis filing reports 

wi th the Board: " 

----------------------'--'-'-'---'--'-"'" 

Fiscal year 

1963 ______________________ _ 1964 ______________________ _ 1965 ______________________ _ 1966 _____________________ _ _ 1967 ________ " ______________ _ 

Profit/sales ratios, before renegotiation 

Firms with excess profit determinations 1 

8.8 

12.8 

15.2 

13.6 

16.0 

All reported renegotiable profits 2 

4.5 

4.4 

4.8 

4.6 

5.0 

i See table 25. 2See table 23. 

Excessive profits determinations, as a percent of the. renegotiable 

sales of these firms, ranged from 1.2 percent in 1964 to 2.3 percent 

in 1966, and 2.1 percent in 1967. For net excessive profits refunded 

(after Federal income tax adjustments), the profits refunded/sales 

ratio for these firms varied from 0.6 percent in -1964 to '1.2 percent 

in 1966, and 1.1 percent in 1967. 
10.9 

TABLE 25.-RENEGOTIABLE SALES AND PROFITS OF FIRMS DETERMINED TO HAVE EXCESSIVE PROFITS. 

FISCAL YEARS 1963-67 

[Dollar amounts in millions) 

Before renegotiation Excessive profit determination 

Profits After State tax Net of Federal 

Fiscal year Sales 

credit taxes 

Amount Percent Amount Percent Amount Percent 

of sales of sales of sales 

1963 ___________________ $717.2 $62.9 8.77 $10.1 1. 41 $5.0 0.70 1964 ___________________ 2,046.1 261. 0 12.76 24.2 1.18 12.3 .60 1965 ___________________ 1.304.8 198.7 15.23 16.1 1. 23 8.8 .67 1966 ___________________ 1,079.1 146.6 13.59 24.5 2.27 12.6 1.17 1967 ___________________ 776.6 124.2 15.99 16.0 2.06 8.3 l. 07 

After renegotiation 1 

Sales 

$705.7 

2,014.4 

1,282.9 

1,050.6 

756.8 

Profits 

Amount Percent 

of sales 

$51. 4 7.28 

229.3 11. 33 

176.7 13.77 

118.7 11.30 

104.4 13.79 

1 Renegotiable sales and profits after excess profit determination are adjusted by the gross a~ount of the excess profit 

(before State tax credits). 

Source: Based on data supplied by Renegotiation Board. 

Data on renegotiable sales and profits of firms determined to have 

excessive profits by · the Renegotiation Board indieate that these 

firms represent a declining portion of total renegotiable sales and 

profits over the past 4 years, 1964-67. As portrayed in the following 

tabulation, renegotiable sales of these firms, as a percent of total 

renegotiable sales, have declined from the high of 5.2 percent in 1964 

to 2.3 percent in 1967. As a percent of profitable renegotiable sales, 

the decline has been from 6 percent in 1964 to 2.7 percent in 1967: 

TABLE 25A.-RENEGOTIABLE SALES OF FIRMS DETERMINED TO HAVE EXCESSIVE PROFITS, 

FISCAL YEARS 1963-67 

Fiscal year 

1963 ____________________ c _________________________________ _ 

1964 ______________________________________________________ _ 1965 _____________________________________ ~ ________________ _ 1966 ______________________________________________________ _ 

1967 ______________________________________________________ _ 

As a percent of -

Total renegotiable sales Profitable renegotiable 

2.3 

5.2 

3.8 

3.4 

2.3 

sales 

2.7 

6.0 

4.4 

4.0 

2.7 

In addition, renegotiable profits of firms with exeessive profits 

determinations have declined absolutely and as a percent of total 

renegotiable profits reported: from $261 million, or 17.5 percent of total 

renegotiable profits in 1964, to $127 million, or 8.6 percent in 1967: 

Renegotiable profits of firms determined to have excessive profits, fiscal years, 1963-67-

As a percent of total renegotiable profits 

Fiscal year: 1963__________________________________________________________ 5.0 1964 __________________________________________________________ 17.5 

1965 __________________________________________________________ 14.9 

1966 __________________________________________________________ 11.8 

1967__________________________________________________________ 8.6 

The profit/sales ratios on the nonrenegotiable business (all other 

sales of the firm-commercial and nonrenegotiable governmental) of 

the firms having excessive profits determinations ·were nluch higher 

than the profit/sales ratios on the renegotiable business of these firms 

for 1964-67 (see table 26). This ratio increased from 19.9 percent in 

1964 to 31.4 percent in 1967, as compared to the increase from 12.8 

percent to 16.0 percent for the ratio on renegotiable sales during the 
110 

same period. Overall profit/sales ratios for these firms ranged from 

8.2 percent in 1963 to 29.2 percent in .1967. 

Although the renegotiable sales of these firms declined substantially 

from 1964 to 1967, nonrenegotiable sales for 1967 were only slightly 

below the 1964 level after reaching a low point in 1966. Profits on nonrenegotiable sales rose from $987 million in 1964 to $1,484 million in 

1967. 

TABLE 26.-PROFITS AS A PERCENT OF SALES, NONRENEGOTIABLE VERSUS RENEGOTIABLE SALES OF FIRMS 

DETERMINED TO HAVE EXCESSIVE PROFITS, FISCAL YEARS 1963--£7 

[Amounts in millions) 

Fiscal 

year 

1963 _______ 1964 _______ 196L _____ 1966 _______ 1961--_____ 

Sales 

$1,913.8 

7,010.1 

5,630.9 

4,370.4 

5,507. I 

Total 

Profits 

Amount Percent Sales 

of sales 

$157.1 8.21 $1,196.6 

1,248.3 17.81 4,964.0 

1,341. 9 23.83 4,326. I 

932.2 21. 33 3,291. 3 

1,608.6 29.21 4,730.5 

I See table 25 for renegotiable sales before renegotiation. 

Source: Based on data supplied by the Renegotiation Board. 

Nonrenegotiable 

Profits 

Amount Percent 

of sa'ies 

$94.2 7.87 

987.3 19.89 

1,143.2 26.43 

785.6 23.87 

1,484.4 31. 38 

Renegotiable I 

Profits 

Amount Percent 

of sales 

$62.9 8.77 

261. 0 12.76 

198.7 15.23 

146.6 13.59 

124.2 15.99 

The annual profit/sales ratios in tables 25 and 26 represent the 

average of all the firms with respect to which excessive profits determinations were made; thus, an analysis of the variation between firms 

is not possible. The Renegotiation Board did not supply data on 

a case-by-case basis. Moreover, the comparability or noncomparability of the renegotiable and nonrenegotiable business of these firms 

was not indicated. In addition, data were also not provided for a 

comparison of profits as a percent of net worth. Therefore, the above 

comparisons of average profit/sales ratios are based on only one 

indicator of corporate profitability, and the validity of the comparisons 

also is limited by the aggregate nature of the data. 
Appendix C 

ADDITIONAL INFORMATION ON DEPARTMENT OF DEFENSE 

PROCUREMENT 

A. FORMAL ADVERTISEMENT VERSUS NEGOTIATION IN DOD 

CONTRACT POLICY 

The term "formal advertisement" suggests that the nature of the 

procedure is formal and legalistic, with strict and clear specifications 

to be followed by both Government and industry participants. The 

"Government Invitation for Bid" is distributed to prospective bidders 

as well as being announced publicly. Sealed bids are submitted, publicly opened, and the contract is awarded "to that responsible bidder 

whose bid, * * * will be most advantageous to the Government, price 

and other fa.ctors considered." 1 Thus, if clear-cut specifications are not 

availahle for the proposed contract (e.g., research and development 

contract) or cost experience data are not accurately determinable 

(e.g., new weaponry systems), then the contract must be awarded on 

some type of negotiated basis. 

Under a negotiation procedure, a request for proposals or quotations accompanied by adequate supporting cost or price data is made. 

Following review and analysis (and sometimes audit verification), 

negotiations are conducted with "all responsible offerors who submit 

proposals within a competitive range, price and other factors considered."2 In order to justify the use of negotiations, a contract may 

not be negotiated unless it comes within one of 17 statutorily authorized categories (10 U.S.C. 2304(a)): 

(1) necessarily in the public interest during a period of "national emergency"-this includes (a) labor surplus area and 

industry set-asides, (b) small business set-asides, and (c) balanceof-payments program; 

(2) if the "public exigency" does not allow the delay present 

in advertising; 

(3) if the total contract purchase price does not exceed $2,500; 

(4) con tracts for personal or professional services; 

(5) services of educational institutions; 

(6) supplies or services purchased and used outside the United 

States; . 

(7) medicine or medical supplies; 

(8) supplies purchased for authorized resale; 

(9) perishable or nonperishable subsistence snpplies; 

(10) if it is "impractical to secnre competition by formal 

advertising" (includes items obtainable from only one source, where patent rights preclude competition, where formal advertisement has not resulted in a. "responsive" bid, etc.); 

I"ASPR, sec. 2-101. 2-ASPR, sec. 3-102. 

(111) 
112 

(11) " experimental, developmental, test, or research" contracts; 

(12) purchases involving security classified items; 

(13) determination that "standardization of technical equipment and interehangeability of parts" is necessary; 

(14) determination of "technieal or specialized supplies 

requiring substantial initial investment or extended period of 

preparation for manufacture"; 

(15) where fonnally advertised bids are not reasonable or have 

not been arrived at independently in open competition; 

(16) purehases from a supplier in order to "keep facilities 

available in the interest of national defense or industrial mobilization" ; or 

(17) otherwise authorized by specific laws or statutes. 

B. NEGOTIATED AUTHORITy-DOD 11.ILITARY CONTRACTS 

As previously mentioned, contracts may be negotiated only if they 

may be categorized within one of the 17 statutory authorizations. 

A comparative summary for 11 of the major statutory categories is 

presented in tables A and B. Contract awards under "public exigency" 

have sho'wn the greatest absolute and percentage increases from 1960 

to 1967: (1) an increase from $144 million in 1960 to $6,029 million 

in 1967, and (2) a rise from 0.6 percent of total awards (excluding 

intragovernInental) in 1960 to 13.9 percent of such awards in 1967. 

The next greatest increase in dollar magnitude ,yas in the category of 

contracts determined to be "impractical to secure by formal advertising": (1) from $3,327 million in 1960 to $7,521 million in 1967; and 

(2) an increase from 14.5 percent of the total in 1960 to 17.3 percent 

in 1967. 

Negotiated purchases from a supplier in order to "keep facilities 

available in the interest of national defense or industrial mobilization" 

also increased sharply: (1) first, declining from $924 million in 1960 

to a low of $328 million in 1964 and, second, rising to a new high of 

$3,293 in 1967; and (2) as a percent of total purchases, declining from 

4.2 percent in 1960 to 1.2 percent in 1964, then rising rapidly to 7.6 

percent in 1967. 

The t·wo categories previously representing the largest share of 

negotiated procurement were (a) "experimental, developmental, test, 

or research" and (h) "technical or specialized supplies requiring substantial initial investment or extended period of preparation for 

manufacture." These two categories accounted for 20.4 percent and 

26.4 percent respectively in 1960; category (b) increased to 29.2 percent in 1962, and thereafter declined to 15 pereent in 1967; while 

category (a) increased to 21.4 percent in 1961, and steadily decreased 

to 11.2 percent of total defense procurenlent in 1967. The absolute 

amounts for eaeh category in 1967 were about the same as they were 

in 1960, after increases during the intervening years. Thus, the above 

fonr Inajor categories (each over 10 percent) of negotiated contracts 

(all those mentioned except the category of purchases to keep facilities 

available) accounted for 57.5 percent of total procurement in 1966 and 

57.4 percent in 1967. These same four categories accounted for 61.9 

percent of procurement in 1960 and 64.4 percent in 1961. 
TABLE A.-VALUE OF DEPARTMENT OF DEFENSE MILITARY CONTRACT AWARDS BY M

[In millions of dollars) 

Statutory authority 1960 1961 

Total, excluding intragovernmentaL _______________________________________________ 22,908 24,703 

Formally advertised ____________________________________________________________________ 3,170 2,932 

"Other" authority _________________________________________ _________________ _____ 19,738 21,772 

"Other" authority (major categories): 

~~bi~~a~x?~~~~~~C!--~~== = = == ===== === == == == == = = = = = = == == == == = = = = == == == = = ==== == == == == = 

769 941 

144 126 

Purchases not over $2,500 __________________________________________________________ 825 919 

Purchases outside United States _____________________________________________________ 940 1,014 

Perishable or nonperishable subsistence ___ ______________________________ ______ _______ 442 436 

Impractical to secure by formal advertising ___________________________________________ 3,324 3,513 

Experimental, developmental, test, or research ________________________________________ 4,680 5,279 

Technical or specialized supplies requiring substantial initial investment or extended period of preparation for manutacturing __________ ___ _______ _____________________ __ 6,034 6,992 

Purchases to keep tacilities available in the interest of national defense or industrial mobili- zation __________________________________________________________________________ 974 671 

~~~~i~~~dof~~~hc~~rgnar fn-s-tiiijtions~ ~=== == == == == ==== == == == == == = === == = = = = == == == == = = == = 

964 1,259 

299 31

Other (miscellaneous) authority _____________________________________________________ 343 312 

1 Details may not add to totals because of rounding. Source: Offic

payments or co
TABLE B.-VALUE OF DEPARTMENT OF DEFENSE MILITARY CONTRACT AWARDS BY MAJ

[Percentage distribution) 

Statutory authority 1960 1961 

Total, excluding intragovernmentaL _______________________________________________ 100.0 100.0 

Formally advertised _______________ - ------- _ - _ ----- - - ------ -- ---- -- ------- - -- -------- --- 13.8 11. 9 

"Other" authority _______________________ --- - - _____ --- -- -- ___ ----- - -- - -- ---- -- - - --- 86.2 88.1 

"Other" authority (major categories): National emergency ____________ ___________ -- - - _______ ----- -- -- -------- ---- ---- - ---- 3.4 3.8 

Public exigency ______________ - --- - -_ - __ -- - -- - -- _ - ___ ----- ---- -------- - --- ------ --- 0.6 0.5 

Purchases not over $2,500 ________________ -_________ ----- _____ --- - --- __ - - ---- --- - --- 3.6 3.7 

Purchases outside United States ___________ -- - -- - - _ - __ ---- -- - - __ - --- - ----- - - -- -- ----- 4.1 4.1 

Perishable or nonperishable subsistence _________________________ - -- - -- __ - -- --- ---- ___ 1.9 1.8 

I mpractical to secure by formal advertising_ -- - ________ -- -- -- _____ - - - -- __ -------- - ---- 14.5 14.2 

Experimental, developmental, test, or research ___________________ -- ---- _____ ----- -- --- 20.4 21. 4 

Technical or specialized supplies requiring substantial initial investment or extended period of preparation for manufacturing _____________________ ---- ___ ----- -- --- --- - --- -- --- 24.6 28.3 

Purchases to keep facilities available in the interest ot national defense or industrial mobil i- 2.7 zation _______________________________ ---- - --- __ ----- - ---- - - - --- - - --- --- - --- --- -- 4.2 

Classitied purchases ___ - - _ - _____ -- - _____ --- ------- - -- -- - -- ------ ------ -------- - ---- 4.2 5.1 

Services of educational institutions _______________________________ -- - __ - __ --- --- -- - __ 1.3 1.3 

Other (miscellaneous) authority ______________________ -- ________ - --- -- __ -- ------ ----- 1.6 1.2 

Details may not add to totals because ot rounding. Source: Table A
Appendix D 

SECRETARY NITZE'S MEMO OF SEPTEMBER 29, 1967, AND 

VIEWS THEREON BY THE COMPTROLLER GENERAL, REGARDING POSTAWARD AUDITS 

THE SECRETARY OF DEFENSE, 

Washington, September 29, 1967. 

lVlemorandum for: Secretaries of the Military Departments. 

Assistant Secretary of Defense (Oomptroller). 

Assistant Secretary of Defense (1. & L.). 

Directors of Defense agencies. 

Subject: Access to cost performance records on noncompetitive firm 

fixed-price contracts. 

I have given careful consideration to the arguments for and against 

access to contractor postaward cost perfonnance records on noncompetitive firm fixed-price contracts, for the purpose of determining 

the degree of contractor compliance with Public Law 87-653. Olearly, 

it has been and remains our policy that in firm fixed-price contracts 

the cost and profit consequences are the full responsibility of the 

contractor since he assumes all the risk of performing in accordance 

with the contract. Likewise, it is our policy that such contracts be 

used only where there exists a reliable basis for judging reasonableness of contractor cost estimates. Where such a basis does not exist, 

other contract forms should be used. 

The Department of Defense is required to conduct a program of 

review and audit sufficient to a~certain that the cost or pricing data 

submitted by contractors in connection with the negotiation of noncompetitive firm fixed-price contracts were current, accurate, and 

complete as required by Public Law 87-653. It is our policy to make 

such audits, as fully as possible, prior to completing the negotiation 

of the contract. However, when it is necessary to provide assurance 

that defective cost or pricing data were not submitted, audits should 

also be conducted of actual costs incurred after contracts are consummated. To assure that such postaward audits may be conducted 

when deemed appropriate, action shall be taken to include in all 

noncompetitive firm fixed-price contracts involving certified costs 

or pricing data, a contractual right to have access to the contractor's 

actual performance records. 

Oircumstances which may dictate the use of a postaward cost 

performance audit include such cases as those where: (1) factors of 

urgency in placing the initial procurement were clearly present; (2) 

material costs are a significant portion of the contractor's total cost 

estimate; (3) a substantial portion of the contract is proposed for 

subcontracting; or (4) there was a substantial interval between completion of the precontract cost evaluation and agreement on price. 

In directing this action, I wish to make it clear that the purposelof 

any postaward cost performance audit, as provided herein, is limited 

(115) 
116 

to the single purpose of determining whether or not defective cost or 

pricing data were submitted. Access to a contractor's records shall not 

be for the purpose of evaluating profit-cost relationships, nor shall any 

repricing of such contracts be made because the realized profit was 

greater than was forecast, or because some contingency cited by the 

contractor in his submission failed to materialize-unless the audit 

reveals that the cost and pricing data certified by the contractor were, 

in fact, defective. 

I desire that the Assistant Secretary of Defense (Installations and 

Logistics) and the Assistant Secretary of Defense (Comptroller) issue 

implementing instructions to place the above policies into effect. 

PAUL H. NITZE. 

COMPTROLLER GENERAL OF THE UNITED STATES, 

Hon. WILLIAM PROXMIRE, 

U.S. Senate. 

Washington, D,.C., October 30,1967. 

DEAR SENATOR PROXMIRE: In view of your interest in the implementation of Public Law 87-653 by the Department of Defense, we 

are offering our views on a memorandum issued by the Deputy Secretary of Defense dated September 29, 1967, on access to cost performance records on noncompetitive firm fixed-price contracts. 

The memorandum is addressed to the Secretary of the Military 

Departments, the Assistant Secretaries of Defense (Comptroller) and 

(Installations and Logistics) and Directors of Defense agencies. It 

contains statements on contracting and auditing policies of the 

Department of Defense and directs the Assistant Secretaries of 

Defense to issue implementing instructions to place the policies, 

summarized below, into effect. 

Noncompetitive firm fixed-price contracts shall be used only where 

there exists a reliable basis for judging reasonableness of contractor 

cost estinlates; where such a basis does not exist, other contract forms 

shall be used. 

A program shall be conducted for review and audits sufficient to 

ascertain that the cost or pricing data submitted by contractors in 

connection with the negotiation of noncompetitive firm fixed-price 

contracts were current, accurate, and complete as required by Public 

Law 87-653. Such audits shall be made, as fully as possible, prior to 

eompleting the negotiation of the eontract. 

When it is necessary to provide assurance that defective cost or 

pricing date were not submitted, audits should be conducted of actual 

costs incurred after contracts are consummated. To assure that such 

postaward audits may be conducted, action shall be taken to include, 

in all noncompetitive firm fixed-price contracts involving certified 

cost or pricing data, a contractual right to have access to the contractor's actual performanee records. 

The memorandum also lists circumstances which may indiGate the 

need for postaward audits of performance costs. 

With respect to access to contractors' records, we believe that the 

memorandum would accomplish by administrative action what would 

be accomplished by enactment of the bill, S. 1913, submitted by you 

on June 6, 1967, except that the Deputy Secretary's memorandum is 
117 

silent on the matter of the agency's right of access to subcontractors' 

performance records which was specifically pro\;ded for in your bill. 

'Ve, therefore, spoke to Department of Defense officials responsible 

for drafting regulations to inlplement the menlorandunl about this 

apparent omission. 

vVe were advised that consideration would be given, in drafting the 

implementing regulations, to requiring prime contractors to include 

clauses in subcontracts giving agency representatives the right to have 

access to subcontractors' reeords of performance. As soon as we have 

had an opportunity to review the Department of Defense regulations 

on this matter we will advise you. 

Sincerely yours, 

ELMER B. STAATS, 

Comptroller General of the United States. 

Appendix E 

RENEGOTIABLE PROFITS A

RENEGOTIABLE PROFITS AND LOSSES REVIEWED BY RENEGOTIATION BOAR

Fiscal year 

-0 1963 ________________ _ 

§ mt=============== 1966 _____ _____ ______ _ 1967 ________________ _ 

1963 ________________ _ 1964 ________________ _ 1965.. ______________ _ 1966 ________________ _ 1967 ________________ _ 

Total 

$1,250 

1,492 

1,333 

1,245 

1,443 

$333 

359 

291 

283 

272 

Amounts 

Firm-fixed price 

$620 

658 

559 

574 

785 

$311 

316 

254 

281 

261 

A-REPORTED NET RENEGOTIABLE PRO

[Amounts in millions of dollars] 

CPFF Other t 

$355 $275 

430 404 

296 478 

200 471 

153 505 

B-REPORTED NET RENEGOTIABLE L

$7 

15 

12 

7 

o 

$16 

28 

25 2 (4) 

11 

t I ncludes Fixed-Price I ncentive Fee (FPI F), Cost Plus I ncentive Fee (CPI F), Price Redeterminable, 

and Time and Materials Contracts. 

Source: Re

2 Profit figu reo 

Appendix F 

INFORMATION RELATING TO NATIONAL AERONAUTICS 

AND SPACE ADMINISTRATION CONTRACTS 

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION, 

fVashington, D.C., 1.1arch 13, 1968. 

Hon. WILBUR D. 1\1ILLS, 

Chairman, Joint Committee on Internal Revenue Taxation, House 

of Representatives, vVashington, D.C. 

DEAR l\1R. CHAIRMAN: This is in reply to 1\11'. Woodworth's letter 

of February 13, 1968, requesting information about NASA contracts 

for use in a report on the Renegotiation Act of 1951. The requested 

data is an attachment to this letter. 

1\11'. Wood,vorth also solicits our views on the applica.tion of the 

act to NASA contracts, and I appreciate the opportunity to comment 

on this subject. 

As I understand it, the determination of excessive profits must, 

in each instance, reflect the judgment of the Board of the application 

of each of the statutory factors enumerated in section 103 of the 

Renegotiation Act. Among these factors is subparagraph (6) which 

reads in part: "Such other factors the consideration of which the 

public interest and fair and equitable dealing may require * * *." 

We believe that the Renegotiation Board might 'well give added 

weight to special factors involved in performing work under NASA 

contracts. We believe that it should be recognized that NASA's work 

involves complex, long leadtime, advanced research, and development 

in which progress, development plans, and costs cannot a.lways be 

laid out with assurance of meeting every goal established. Every 

effort is made to plan the 'work in such a way that potential 

problems are anticipated and so that guidance IS given to contractors by the Government to assure that the work proceeds as 

satisfactorily as possible. These circumstances require close Inonitoring 

of contractor activities by NASA laboratories having a strong technical 

interface with the contractor. Through our laboratory competence 

we must provide constrllctive criticism all through the program, 

rather than ,vaiting for demonstration of successful achievement of 

program goals only ,yhen the end product is delivered and flown. 

Nevertheless, the final test of the success of the development program 

and of the work aimed at solving and reducing the number of problems 

encountered through the course of the development program is in 

the final flight operations of the aeronautical or space system invoh ed. 

While we are a,,~are that the Board under its reglliation and policy 

pronounceInents recognizes the objectives of incentive contracts, 

we believe the Board has not given full recognition to the difficult 

performance requirements of our lnajor research and developIllent 

programs. NASA has relied on extensive manageInent and teclmicul 

program reVIews, as well as iLlnovative contractllul arrangements, to 

(121) 
122 

assure that the Government receives the result it is seeking through 

the expenditures of Government funds. These reviews, and the 

incentive contract arrangements wherein the contractor's profit is 

based on evaluation of the quality of his work and his ability to 

achieve specified program requirements, provide for a thoughtful 

control of the profit paid to the contractor. This control considers the 

difficulty of the job, the risk of the contractor's reputation and financial 

status, the investment made by the contractor in undertaking the 

,,-ork, including his financial and management commitment to the job, 

and the overall management responsibility that he assumes for the 

work that he directly performs or that his subcontractors perform. 

In our effort to get the best possible performance and in recognition 

of these various factors, our incentive fee contract arrangements are 

so established that added profit goes with high performance by the 

contractor. 

In slunmary, then we believe that the complexity of our work, its 

public visibility, and the long time required for completion of any 

individual part of it argue for some special consideration when the 

reasonableness of the fees we have paid are rejudged. We do believe, 

however, that the Renegotiation Act of 1951 should have continuing 

effect. We support legislation removing the provision of that act which 

limits to June 30, 1968, the contracts subject to renegotiation under 

that act. 

Because of the urgency of your committee's most recent request, 

this report has not been submitted to the Bureau of the Budget for 

advice as to its relationship to the program of the President. 

Sincerely, 

JAMES E. WEBB, Administrator. 

DISCUSSION OF NASA's METHODS OF PROCUREMENT AND SELECTION 

OF TYPES OF CONTRACTS 

The attached table 1 shows NASA awards to business firms by 

method of placement for the period fiscal years 1961-67. This table 

includes all awards to business firms regardless of the donal' value of 

the individual award. 

Table 2 shows NASA awards to business firms by type of contract 

for the period fiscal years 1961-67. The data in this table include 

only av.rards on research and development contracts of $10,000 and 

over and on other contracts of $25,000 and over. However, the dollar 

value of these larger awards account for more than 90 percent of the 

dollar value of the total awards. Conversely, in terms of numbers of 

actions, the larger contracts account generally for less than 10 percent 

of the total number of actions. 

NASA's extensive use of negotiation procedures, which is evidenced 

in table 2, reflects the fact that most of our procurements are for 

e:Arperimental, development, or research work. Specifications for these 

procurements can rarely be established to the degree necessary for 

firm-fixed-price contraqts and formal advertising. 

With respect to the negotiated procurements, NASA utilizes a wide 

range of con tract types from which we select, for a given procuremen t, 

that type most practical and advantageous to the Government. In 

major research and development projects, NASA employs "Phased 

Project Planning." This procedure provides for the conduct of the 
123 

projects in an appropriate number of sequential phases and the most 

advantageous type of procnrement is utilized for each phase. 

As may be noted from table 2, NASA has been utilizing, to an 

increasing degree, incentive-type contracts. These employ variolls 

types of incentive arrangements from which are selected those most 

suitable for the specific procurements. The various types in effect as of 

December 31, 1967, and their aggregate target values are sho,,'n in 

table 3. It will be noted that the majority of the dollars represent 

cost-plus-incentive-fee contracts. These contracts utilize formulas 

against which performances may be measured objectively. The second 

and third largest groups are the cost-plus-award-fee and the combined 

cost-plus-incentive-fee/cost-plus-award-fee contracts which are primarily for support services and which require subjective evaluation of 

contract performance. 

Generally the range in confidence in negotiated target costs is within 

plus or minus 15 to 25 percent. This range becomes smaller as ,,'e gain 

experience in space age products and are better able to define our 

req uiremen ts. 

Information abont overruns and underruns of estimated costs is not 

regularly maintained in our procurement data bank and is not immediately available. It could be gathered from procnring centers, if 

required. We would, of course, have to carefully define these terms 

since cost growth in a research and development program has multiple 

causes. 

TABLE I.-NASA AWARDS TO BUSINESS FIRMS 1 BY METHOD OF PLACEMENT, FISCAL YEARS 1961-67 

Method of placement 1961 1962 1963 1964 1965 1966 1967 

Net value of awards (millions) 1 

TotaL ___________________ _____ ___ $423.3 $1,030.1 $2,261. 7 $3,521.1 $4,141. 4 $4,087.7 $3,864.1 

Total, competitive _____________ ____ 276.8 565.8 1,302.0 2,119.5 2,630.1 2,692. 5 2,698.4 

Advertised ___________________ ____ ______ 38. 6 64.1 106.6 134.4 169.2 111.0 81.1 Negotiated ___________________ _____ ~ ____ 238.2 501. 7 1,195.4 1,985.1 2,460.9 2,581. 5 2,617.3 

Total, noncompetitive _____________ 146.5 464.3 959.7 1, 401. 6 1,511. 3 1,395. 2 1,165.7 

Follow-on after competition _____ ______ ___ (2) (2) 3255. 7 3 494.8 3 503. 6 3 372. 7 3 346.9 Other noncompetitive ____________________ 146.5 464.3 704.0 906.8 1,007.7 1,022.5 818.8 

Number of contract actions 1 

TotaL _________ __ __ ____ __________ 82,700 109,600 176,600 237,100 235,100 216. 600 212,100 

Total, competitive __________ __ _____ 32,000 36,700 72,800 88,200 101 , 200 97 , 300 91,000 

Advertised ___ ________________ __ __ ______ 4, 000 3,700 9,900 15,500 15,500 13.200 11. 400 Negotiated ______________ _______________ 28, 000 33, 000 62,900 72,600 85,700 84,100 79,600 

Total, noncompetitive _____ ________ 50,700 72,900 103,800 148,900 133,900 119.300 121.100 

Follow-on after competition ______________ (2) ( 2) noo 3200 3100 3 100 3200 Other noncompetitive _________ __ __ ____ ___ 50,700 72,900 103,700 148, 700 133,800 119. 200 120,900 

1 Total awards to business firms. 2 Data included in other noncompetitive procurements. 3 Follow-on after competition procurements of less than $25,000 are included in other noncompetitive procurements 

91-043-68--9 
124 

TABLE 2.-NASA AWARDS TO BUSINESS FIRMSI BY TYPE OF CONTRACT, FISCAL YEARS 1961-67 

(Net value of awards (millions) I) 

Type of contract Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 

year 1961 year 1962 year 1963 year 1964 year 1965 year 1966 year 1967 

Total __________________________ $362.5 $908.4 $2,113.8 $3,379.6 $3,993.0 $3,951. 2 $3,775.4 

Incentive _____________________________ .1 13.1 162.7 269.3 602.2 1,922.5 2,567.6 

Fixed price ______________ _________ .1 3.8 10.2 27.2 100.6 73.6 117.1 Cost reimbursable _________ __________________ 9.3 152.5 242.1 501. 6 1,848.9 2,450.5 

Other fixed price __________________ -- 56.3 125.4 251. 8 388.4 492.5 407.1 411. 3 

Firm _____________________________ 55.4 125.0 247.5 387.0 492.0 399.2 409.5 Redeterminable ___________________ .9 .4 4.1 1.4 .3 1.3 1.2 Escalation ____________________________________________ .2 ------- --- .2 6.6 .6 

Other cost reimbursable _______________ 300.4 760.2 1,692.5 2,713.6 2,885.5 1,612.1 780.7 

Cost no fee _______________________ .3 11.1 71.4 46.5 42.9 20.8 5.6 Cost plus fixed fee ________________ 299.9 748.6 1,618.0 2,664.9 2,841. 3 1,591. 0 774.6 Cost sharing ______________________ .2 .5 3.1 2.2 1.3 .3 .5 

Labor hour _____________________________________ .2 1.3 1.7 2.0 .1 .7 Time and materials ____________________ 5.7 9.5 5.5 6.6 10.8 9.4 15.1 

Number of contract actions 1 

Total. _________________________ 1,270 2,438 4,295 7,544 11,716 12,029 11,623 

I ncentive _____________________________ 10 68 237 602 956 1,265 

Fixed price_______________________ 1 5 48 99 110 145 Cost reimbu rsable ___________________________ 63 189 503 846 1,120 

Other fixed price ______________________ 551 984 1,965 3,565 6,279 6,785 5,870 

Fi rm _____________________________ 541 979 1,941 3,5r~ 6,262 6,7i8 5,844 Redeterminable ___________________ 10 5 22 15 13 Escalation _____________________________ -- __ -- _ -- -- _ - __ 2 ---------- 2 35 13 

Other cost reimbursable ________________ 669 1,361 2,185 3,626 4,689 4,077 4,216 

Cost no fee _______________________ 5 26 80 95 190 198 164 Cost plus fixed fee ________________ 662 1,33j 2,096 3,515 4,484 3,872 4,039 Cost sha ring ______________________ 2 9 16 15 7 13 

Labor hou r ______________________ -- _ - -- - -- ------ 3 14 28 31 8 6 Time]and materials ____________________ 49 80 63 88 115 203 266 

I Awards on R. & D. contracts of $10,000 and over and on all other contract~ of $25,000 and over. 

TABLE 3.-NASA INCENTIVE CONTRACTS-BY TYPE AS OF DEC. 31, 1967 

Type of contract Number of contracts Target value 

(millions) 

g~~t~I~~=~~:~J~~~~~~~~ ~= = ==== ====================================== 1 H $3, ~4~: ~ ~!lsttu~-in~enti~~-fee/award-fee _______________________ -------------- j~ 1, ~~~: i F:~~d=~~:~~= :~~~~t:~~la-waid:fee~== = = == === = = == === === == = = = = = === = = == = = = = = 3 131. 6 Cost contribution____________________________________________________ 1 6.4 

---------------------------- Total. ____________________ -- _ -- - -------------------- - -- - -- --- 273 6,203.2 
Appendix G 

INFORMATION RELATING TO ATOMIC ENERGY 

COMMISSION CONTRACTS 

U.S. ATOMIC ENERGY COMMISSION, 

Washington, D.C., February 26,1968. 

IVIr. LAURENCE N. WOODWORTH, 

Chiej oj Staff, Joint Committee on Internal Revenue Taxation, 

Congress oj the United States. 

DEAR MR. WOODWORTH: In response to your letter of February 13, 

1968, addressed to Chairman Glenn T. Seaborg, I am enclosing 

herewith procurement statistics in the form of summary of procurement actions for the fiscal years 1961 through 1967. Prime contracts 

are broken down to show method of placement; i.e., advertised or 

negotiated. Since subcontracts are not subject to the formal advertising statutory requirements that apply to prime contracts, we do 

not have this same breakdown with respect to method of placement. 

However, our cost-type contractors who operate AEC plants and 

laboratories have established procurement and contracting procedures 

which provide for the placing of subcontracts wherever possible on 

a competitive basis. The enclosed statistics also show for both prime 

contracts and subcontracts a breakdown as to type of work, source of 

supply, and type of procurement. 

You will note that there was a substantial decline in the percentage 

of dollars awarded under fixed-price contracts after fiscal year 1962. 

This was due to a significant reduction in the program for the purchase 

of uranium ore. 

Our cost contracts are basically all either cost-plus-a-fixed-fee or, in 

the case of educational institutions and nonprofit organizations, 

straight cost contracts. In the case of our cost-plus-a-fixed-fee contracts, we have adopted declining fee curves which are based upon the 

scope, character, and estimated cost of the work to be performed 

by the contractor and which provides for fees which we feel are fair 

and reasonable. 

Expenditures under our cost contracts ure closely controlled by 

established cost principles, periodic audits, establishment of approved 

procurement and contracting procedures for subcontracting find 

purchasing, and specific approval of subcontracts over a specified 

dollar amount. We do not have readily available information as to 

ovelTuns and underruns of estimated cost. In the case of cost-plusa-fL'md-fee contracts, the fee, which includes the contractor's profit, 

of course would not change because of overruns or underruns of 

estimated cost. 

While our contracts cover the entire range fronl off-the-shelf items 

to first-of-a-kind production items to basic research, the major part 

of our prime contracting is carried on under cost or cost-plus-a-fix:edfee operating contracts, which provide little, if any, opportunity for 

(125) 
126 

excessive profits; therefore, the Renegotiation Act has a linlited" 

impact on our program. However, in view of the possibility that there 

may be some direct fixed-price procurements for which there is relatively little cost and production experience available and for fixedprice procurements by our cost-type contractors, we believe the 

Renegotiation Act Inay be a deterrent to excessive pricing and provides 

a measure of insurance against excessive profits. We do not have any 

specific suggestions for improvement in the act. 

If there is any further or additional information that you desire, 

we shall be happy to furnish it to you. 

Sincerely yours, 

JOSEPH L. SMITH, 

Director, Division oj Contracts. 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS,! FISCAL YEAR 1961 

[Dollars in millions) 

Actions Amount Percent 

I. Advertised versus negotiated (15,752 prime actions): Advertised_ _ _ ___ ______ ____ ____ __ __ __ __ __ __ __ _ 1,388 $65.5 2.5 Negotiated__ _ _ _ _____ __ __ __ __ __ __ __ __ __ ____ ___ 14,364 2,546.0 97.5 

---------------------------------- TotaL _ _ _ __ __ ____ ______ _ __ _ ____ ___ ___ __ __ __ 15,752 2,611. 5 100.0 

----------------------------------

Prime actions Percent Subactions Percent 

-------------- $54.3 ------------

II. Type ot work: 

Construction and A-E__________________________ $151. 3 

-------------- 65.3 ------------

-------------- 474.9 ------------

-------------- 20.6 ----- -------

Materials, supplies, and equipment (for construc- tion)_ _ _ _ _ _ _ __ __ _ _ _ _ __ __ __ ____ __ __ __ __ __ __ _ 3.8 

Materials, supplies, and equipment (other than construction)_ _ _ ___ __ __ __ __ __ __ _ ___ ______ __ _ 830.3 

Research and developmenL____________________ 524.3 

Plant operation and otheL_____________________ 1,101. 8 -------------- 54.1 ------------

---------------------------------- TotaL_ _ _ ____ __ ____ _______ ___ __ __ __ _ __ ___ __ 2,611. 5 -------------- 669.2 ------------

================================ III. Source of supply: 

67.5 377. 2 56.4 

7.3 277.4 41. 4 

Big business__________________________________ 1,762.0 

Small business________________________________ 190.4 

10.5 7.2 1.1 14.7 7.4 1.1 

Government agency____________________________ 273.5 

Educational and other nonprofit organizations_____ 385.6 

---------------------------------- Total_ _ _ __ __ __ __ ____ ______ __ _ _ _ _ __ __ __ _ _ __ _ 2,611.5 100.0 669.2 100.0 

================================ 

44.8 587.6 87.8 

55.2 81. 6 12.2 

IV. Type of procurement: Fixed-price__ __ __ _ _ __ __ __ __ _ _ __ _ _ _ _ __ __ __ _ __ _ _ 1,169.2 Cost-type_ _ _ _ _ __ _ _ __ __ _____ ___ __ _ _______ ___ __ 1,442.3 

----------------------------------- TotaL_____________________________________ 2,611. 5 100.0 669.2 100.0 

1 Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and supplemental:. agreements. 
127 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS,' FISCAL YEAR 1962 

[Dollars in millions] 

Actions Amount Percent 

I. Advertised versus negotiated (16,494 prime actions): Advertised ________ ____ ___ _____ ___ _____ ______ _ Negotiated ___ _______ ____ __________ ___ ____ ___ _ 

TotaL _____ _____ _______ ___________ ______ __ _ 

II. Type of work: Construction and A- L ____ ____________________ _ 

Materials, supplies, a1d equipment (for construc- tion) ____________ _____________ ____________ _ 

Materials, supplies, and equipment (other than for construction) ____ . __________ __ __________ _ 

Research and developmenL _______ ___ __ _______ _ Plant operation and other __ ________ ____ _____ __ _ 

1,138 

15,356 

16,494 

Prime actions 

$163.3 

6.3 

570.1 

692.2 

1,305.8 

70.2 2,667.5 

2,737.7 

Percent 

----- ------ -- -

-- -... _--- ------

-- ... ----------- --------------

-- --- - - -- -----

Subactions 

$~9.1 

100.8 

511. a 24.1 

61. a 

2.6 

97.4 

100. a 

Percent 

------------

------------

--- ---- ----- ------------ -- ----------

Total _________ ____ ~ ______________ _________ -------------------- 2,737.7 -------------- 735.0 --- -- ----- --

III. Source of supply: Big business _______________ ____ _______ __ _____ _ Small business ______ ___ _____ _____ _______ _____ _ 1,797.2 65.6 382.0 51. 9 191. 5 7.0 338. a 45.9 Government agency ______ ____ _________ ___ ___ __ _ 

Educational and other nonprofit organizations ____ _ 275.1 10.1 10.2 1.4 473.9 17.3 5.8 0.8 

Total ______________________ _______________ _ 

-------------------- 2,737.7 100.0 736. a 100.0 

================================ IV. Type of procurement: Fixed-price ___________________________ __ . ____ _ 884.2 32.3 639.9 86. 9 Cost-type __________ __ ________ _______________ _ 1,853.5 67.7 96.1 13.1 

----------------------- Total. __________________________________ __ _ 2,737.7 100.0 736. a 100.0 

'Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and supplemental agreements. 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS 1 FISCAL YEAR 1963 

[Dollars in millions] 

Actions Amount 

I. Advertised versus negotiated (15,419 prime actions): Advertised _ _ _ _ _ ___ ____ ____ ____ __ __ _ _ __ _ _ _ _ __ _ 968 $58.5 Negotiated_ _ _ _ __ __ __ ______ _ _ _ _ ___ _ _ _ __ _ _ _ _ _ _ _ 14,451 2,542.6 

Percent 

2.2 

97.8 

------------------------------------- Total_ _ _ _ _ ___ _ _ _ _ _ _ _ _ ____ _ _ _ _ _ _ __ __ ___ _ _ __ _ 15,419 2,601. 1 100.0 

Prime actions Percent Subactions Percent :11. Type of work: 

Construction and A-E.__ __ __ _ _ _ _ __ _ _ _ __ _ __ _ _ ___ $181. 3 ---- ---------- $38.9 -------- ---- Materials, supplies, and equipment (for construc- tion)_____ _ __ _ _ __ __ __ _ _ _ ___ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ 4.3 -------------- 67.2 ------------ Materials, supplies, and equipment (other than for construction)_ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ __ _ _ __ __ _ _ _ 198.4 -------------- 549.3 ------------ Research and developmenL____________________ 732.8 ----- ---- -- --- 27.1 ---- ----- --- Plant and operation and other__________________ 1.484.3 -------------- 62. a --- ----- ---- ------------------------------------- TotaL_____________________________________ 2,601. 1 -------------- 744.5 ------------ ================================ III. Source of supply: 67.4 391. 9 52.6 3.2 334.9 45.0 

Big business__________________________________ 1,754.2 

Small business________________________________ 83.5 

9.6 10.8 1.4 19.8 6.9 1.0 

Government agency___________ ___________ ______ 248.5 

Educational and other nonprofit organizations_____ 514.9 

-------------------------- TotaL_____________________________________ 2,601. 1 100. a 744.5 100. a ================================ 20.4 645.8 86.7 79.6 98.7 13.3 

IV. Type of procurement: Fixed-price_ __ _ __ _ _ _ _ _ _ __ _ _ __ _ ___ _ _ _ _ _ _ __ _ _ __ _ 529.9 Cost-type_ _ __ _ ____ __ __ __ __ ________ _ ___ ______ _ 2,071. 2 

----------------------- TotaL_____________________________________ 2,601.1 100.0 744.5 100. a 

1 Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and supplemental agreements. 
128 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS I FISCAL YEAR 1964 

(Dollars in millions) 

Actions Amount Percent 

I. Advertised versus negotiated (16,670 prime actions): Advertised___________________________________ 932 $71. 7 2.7 Negotiated_ _ _ _ __ _ _ __ __ __ _ _ __ __ __ _ ___ ____ __ __ _ 15,738 2,544.7 97.3 

-------------------------------------- TotaL _ _ _ _ __ __ __ __ ____ __ _ _ __ _ _ __ _ _ __ ___ ____ 16,670 2,616.4 100.0 

Prime actions Percent Subactions Percent 

II. Type of work: 

Construction and A- L_ ______________ ___ _______ $133.3 $40.6 --------.... --- Materials, supplies, and equipment (for construc- struction)_ _ _ _ __ _ _ _ _ _ _ _ _ _ __ _ _ _ _ __ __ _ _ __ __ __ _ 1. 4 86.4 ------------ Materials, supplies, and equipment(otherthan for construction_ _ __ __ __ _ __ __ __ _ _ _ _ ____ ______ ___ 177.5 565.1 --------.... --- Research and developmenL ______ ______________ 848.2 21. 8 ------------ Plant operation and other __ ____________________ 1,456.0 58.9 ------------

TotaL -------------------------------------- ____________________________________ 2,616.4 772. 8 ------------ ============================ III. Source of supply: Big business__________________________________ 1,745.9 66.7 

Small business___________ ____________ _________ 60.7 2.3 

388.0 50.2 

364.9 47.2 Government agency____________________________ 225.8 8. 7 

Educational and other nonprofit organizations_____ 584.0 22.3 

13.7 1.8 

6.2 .8 

------------------------------------- TotaL _ _ __ __ ________ __ __ __ __________ __ __ ___ 2,616.4 100.0 772.8 100.0 

============================ IV. Type of procurement: Fixed-price___________________________________ 573.6 21. 9 682.0 88.3 

Cost-type____________________________________ 2,042.8 78.1 90.8 11.7 

------------------------------------- TotaL _ _ __ _ _ _ ______ _ __ __ _____ __ _ __ __ ____ __ _ 2,616.4 100. 0 772.8 100.0 

1 Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and supplemental agreements. 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS I FISCAL YEAR 1965 

(Dollars in millions) 

Actions Amount Percent 

I. Advertised versus negotiated (16,494 prime actions): Advertised___________________________________ 830 $50.5 2.1 Negotiated___________________________________ 15,664 2,423.9 97.9 

------------------------------------- TotaL_________ __ __ __ __ ____ ___ _ __ _ _ ______ _ 16,494 2,474.4 100.0 

Prime actions Percent Subactions Percent 

II. Type of work: Construction and A-L __ ___ _____ __ ___ _____ __ _. $122.8 -----... _------- $34.0 -----...... _ ... --- Materials, suoplies, and equipment (for construc· tion) __________________ __________ __________ _ 9.9 -------------- 76.2 ------------ Materials, supplies, and equipment (other than for construction) ___________________________ _ Research and developmenL ___________________ _ Plant operation and otheL ____________________ _ 

264.4 -------------- 474.3 ------------ 824.1 -------------- 19.7 ----- ------- 1,253.2 -------------- 73.1 ------------ ------------------------------------ TotaL ____________________________________ _ 2,474.4 ------------.. - 677. 3 ----- ------- ============================ III. Source ot supply: Big business _________________________________ _ Small business _______ ___ __________ • __________ _ 1,599.5 64.6 341. 0 50.3 

67.5 2.7 312.3 46.2 

Government agency _. __ ______________ ____ _____ _ 

Educational and other nonprofit organizations ____ _ 234.5 9.5 14. 9 2. 2 572.9 23.2 9.1 1.3 

-------------------------------------- TotaL ________ _________________ • __________ _ 2,474.4 100.0 677. 3 100. 0 

============================ IV. Type of procurement: . Fixed-price_. __________ • __________ • __________ _ 605.7 24.5 611. 3 90.3 Cost-type ___________________________________ _ 1,868.7 75.5 66.0 9.7 

TotaL ____ ______________________ •• _________ _ ------------------------------------- 2,474.4 100.0 677.3 100.0 

I Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and supplemental 

agreements. 
129 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS I FISCAL YEAR 1966 

IDoliars in millionsl 

Actions Amount Percent 

I. Advertised versus negotiated (14,800 prime actions): Advertised_____________________________________ 721 $52.0 2.2 Negotiated_____________________________________ 14,079 2,312.2 97.8 

------------------------------------- TotaL______________________________________ 14,800 2,364.2 100.0 

Prime actions Percent Subactions Percent 

II. Type of work: Construction and A-E __________________________ _ $84.1 -------------- $36.2 --_ ...... _------ Materials, supplies, and equipment (for construc- tion) ______________________________________ _ 

Materials, suoplies, and equipment (other than for construction) ____________________________ _ 

22.1 --------------

171.2 --------------

55.4 -_Oo ...... ------

478.2 ------------ Research and developmenL ____________________ _ 834.5 _ .. - ...... _------- 19.2 ------------ Plant operation and otheL _____________________ _ 1,252.3 -------------- 61.9 --------_ .. _- Total. _____________________________________ _ ------------------------------------- 2,364.2 -------------- 650.9 ------------ ================================ III. Sou rce of su pply: Big business _________________________________ _ Small business _______________________________ _ 1,510.2 63.9 

58.5 2.5 

315.5 48.5 

312.9 48.1 Government agency ___________________________ _ 

Educational and other nonprofit organizations ____ _ 182.6 7.7 612.9 25.9 

13.1 2.0 

9.4 1.4 

Total. ____________________________________ _ --------------------------------------- 2,364.2 100.0 650.9 100.0 

============================ IV. Type of procurement: Fixed-price __________________________________ _ Cost-type ___________________________________ _ 505.2 21. 4 1,859.0 78.6 

590.0 90.6 

60.9 9.4 

Total. ____________________________________ _ 2,364.2 100.0 650.9 100.0 

I Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and su pplemental 

agreements. 

PROCUREMENT STATISTICS-SUMMARY OF PROCUREMENT ACTIONS,! FISCAL YEAR 1967 

IDollars in millions) 

Actions Amount Percent 

I. Advertised versus negotiated (14,288 prime actions): Advertised_ _ _ ___ __ __ ____________ __ ____ __ _____ 692 $62.0 2.7 Negotiated__ _ _____________ __ __ __ __ ___ _ __ __ __ _ 13,596 2,259.0 97.3 

------------------------------------- TotaL____________________________________ 14,288 2,321. 0 100.0 

Prime actions Percent Subactions Percent 

II. Type of work: 

Construction and A-E._________________________ $85.3 -----..... _------ $30.8 ----- ------... 

----_ .. _------- 29.3 ------------

-------------- 484.5 --- ... __ .. --.. -- -------------- 21. 4 .. -----------

-------------- 77.5 ----.. - ... -----

Materials, supplies, and equipment (for construc- tion)_______________________________________ .5 

Materials, supplies, and equipment(other than for construction) _ _ _ _ _ _ _ _ _ _ __ _ _ __ __ __ _ _ _ _ _ _ _ _ __ _ 88. 5 

Research and developmenL____________________ 657.5 

Plant operation and other. _ ___ __ __ __ __ ___ _ _ _ __ _ 1,489.2 

-------------------------------------- TotaL_____________________________________ 2,321. 0 --------- -- --- 643.5 ------------ ============================ 71. 3 337.3 52.4 

2.4 280.0 43.5 

III. Source of supply: Big business__________________________________ 1,656.0 

Small business________________________________ 55.8 

5.1 15.6 2.4 21. 2 10.6 1.7 

Government agency____________________________ 117.3 

Educational and other nonprofit organizations_____ 491. 9 

------------------------------------- TotaL_____________________________________ 2,321. 0 100.0 643.5 100.0 

============================ 23.0 572.8 89.0 

77.0 70.7 11. 0 

IV. Type of procurement: Fixed-price___ _ __ __ __ __ ________ ___ ___ ___ ______ 534.3 

Cost-type____________________________________ 1,786.7 

Total. _ ___ _ _ _ __ ___ ______ _____ _____ __ _ ___ ___ ------------------------------------- 2,321. 0 100.0 643.5 100.0 

I Actions are $25 and over and include original contract (or subcontract) modifications, amendments, and supplemental 

agreements. 

Appendix H 

INFORMATION RELATING TO MARITIME ADMINISTRATION 

AND MARITIME SUBSIDY BOARD (SUCCESSOR TO FEDERAL MARITIME BOARD) CONTRACTS 

OFFICE OF THE ADMINISTRATOR, 

U.S. DEPARTMENT OF COMMERCE, 

.l\1ARITIME ADMINISTRATION, 

Washington, D.C., JJ1arch 1, 1968 . 

.l\fr. LAURENCE N . WOODWORTH, 

Chief of Staff, Joint Committee on Internal Revenue Taxation, Congress 

of the United States, ff'ashington, D.C. 

DEAR .l\1R. WOOD"\YORTH: By your letter of February 13, 1968, you 

asked for certain statistical data with respect to contracts entered 

into by the .l\1aritime Administration and the .l\'faritime Subsidy Board, 

or its predecessor, the Federal .l\1aritime Board, during the fiscal years 

1961 through 1967. Attached to this letter for each of the referred to 

fiscal years is a tabulation of the number and dollar value of the 

agency's contracts (excluding contraets of $10,000 or less) by method 

of procurement, type of contract, and type of product and service. 

Yon hav"e asked about the extent of overrun or underrun of estinlated costs employed in initial pricing. Overruns or underruns arise 

primarily in connection with the administration's research and deyelopment cost reimbursable contracts. An analysis of the research 

and development contracts completed durin o' fiseal years 1961 through 

1967 indicates that overruns and underruns llave not been in excessive 

amounts. As the attached tabulation sho"\,s, however, in fiscal year 

1967, there was a 20-percen t overrun in a ship construction con tract. 

The procurements of the .l\1aritime Administration (.l\1aritime Subsidy Board) are of ships employed in the foreign commerce of the 

United States, nnder the .l\1erchant Marine Act of 1936, as anlended. 

Under these three-party contracts the owner, the ship operator, pays 

to the contractor a sum equal to the .l\1aritime Subsidy Board's 

estimate of the eost of building the vessel of the owner to similar 

plans and specifications in a foreign shipyard. The Board pays the 

difference bet,Yeen the estimated foreign cost and the domestic price. 

The ~.faritinle Administration also enters into ship construction contracts with shipbuilders on the basis of orders plaeed by other Federal 

agencies under the Economy Act of 1932, as amended. 

The dollar values shown for new ship construction and ship conversion do not represent, in the entirety, Government expenditures 

in the indicated amonnts. With respect to procnrements under the 

.l\lerchant lVIarine Act of 1936, as amended, Government expenditures 

anlOlmted to approximately 51 percent of the total contract expenditures. The balance is paid by the owner. Of course, under the 

Economy Act eon tracts, the Government is responsible for the 

total price. 

(131) 
132 

The maintenance and repair contracts noted in the attached t.abulation represent specific job orders awarded on the basis of competitive 

bid or negotiation, and are ref err able to master lmnp-sum repair 

contracts entered into by the laritime Administration with shipyards in the several coastal regions. A ship, undergoing lnnint.enance 

and repair after each voyage, will have a considerable number of job 

orders to be performed. Because of the magnitude of the number of 

main tenance and repair job orders brough t about by the incrensed 

activity due to the Southeast Asian conflict, currently involving approximately 650 voyages each year, estimates of the total number of 

contracts, and the total dollars connected therewith, are based upon 

sampling of ships and voyages as they relate to geographic and traffic 

factors. The sampling is necessary only for fiscal years 1966 and 1967. 

In the earlier fiscal years, the number of contracts and dollar amounts 

shown were based upon actual data. 

We trust the above contains the information you desire. Please 

advise use of any further questions you may have. 

Sincerely, 

OARL O. DAVIS, 

Acting j11aritime Administrator. 

CONTRACTS AWARDED BY MARITIME SUBSIDY BOARDI CONTRACTS AWARDED BY MARITIME SUBSIDY BOARDI 

MARITI ME ADMI NISTRATI ON MARITI ME ADM I NISTRATION-Continued 

FISCAL YEAR 1961 

Method of placement: Advertised ________________ _ Negotiated ________________ _ 

Compensation arrangement: Fixed price ________________ _ 

Cost plus fixed fee _________ _ CosL _____________________ _ 

Types of products and services: 

New ship construction ______ _ Ship conversion ___________ _ 

Research and developmenL_ Supplies, services, and ma- terial t ____ ______________ _ 

Maintenance and repaiL ___ • 

Number 

35 

32 

55 

6 

6 

8 

1 

17 

19 

22 

See footnote at end of table, p. 133. 

Amount 

$315.117,546 

5,242,284 

320, 359, 830 

315,789,661 

3,102,314 

1,467,855 

320, 359, 830 

305, 799, 789 8,193,300 

5,147,458 

t 1,055,818 

163,465 

320,359,830 

FISCAL YEAR 1962 

Method of placement: Advertised ________________ _ Negotiated ________________ _ 

Compensation arrangement: 

Number Amount 

56 $130,170,792 42 3,711, 570 

133,882,362 

Fixed price_________________ 88 130,455,479 

Cost plus fixed fee__________ 10 3,426,883 CosL _____________________________________________ _ 

133,882,362 

Types of products and services: 

New ship construction_______ 4 128,855,000 Ship conversion ___________________________________ _ 

Research and developmenL_ 12 3,498,575 

Supplies, services, and ma- terial t____ _______________ 7 11,169,348 

Maintenance and repaiL _ _ _ _ 55 359,439 

133,882,362 
133 

CONTRACTS AWARDED BY MARITIME SUBSIDY BOARD 

MARITIME ADMINISTRATION-Continued 

/ 

Number Amount 

FISCAL YEAR 1963 

Method of placement: Advertised ________________ _ Negotiated ________________ _ 56 $252,521,123 

40 3,374,539 

255, 895, 662 

Compensation arrangement: Fixed price__________________ 87 252,917,847 

Cost plus fixed fee__________ 9 2,977,815 CosC _____________________________________________ _ 

255, 895, 662 

Types of products and services: 

CONTRACTS AWARDED BY MARITIME SUBSIDY BOARD/ 

MARITIME ADMINISTRATION-Continued 

Number Amount 

FISCAL YEAR 1965-Continued 

Types of products and services: 

New ship construction_______ 7 $186,547,377 Ship conversion ___________________________________ _ 

Research and developmenL_ 7 1,729,172 

Supplies, services, and material! _______________ _ 

Maintenance and repair. ___ _ 

FISCAL YEAR 1966 

Method of placement: Advertised ________________ _ 

23 

42 !946,344 301,464 

189,524,357 

New ship construction _______ _ Ship conversion ___________ _ 8 

2 

10 

242,307,538 Negotiated ________________ _ 189 

504 

296,831,924 

22,212,065 

Research and developmenL __ 

Supplies, services, and material! _______________ _ 

8,762,600 

2,997,798 

!1, 346, 804 Compensation arrangement: 

319,043,989 

Maintenance and repair. ___ _ 25 

51 480,922 Fixed price________________ 692 319,022,974 ----- Cost plus fixed fee__________ 1 21,015 255,895,662 Cost _____________________________________________ _ 

FISCAL YEAR 1964 

Method of placement: Advertised ________________ _ Negotiated ________________ _ 

Compensation arrangement: 

53 

38 

157,040,310 

2,199,302 

159,239,612 

Fixed price_________________ 48 137,422,058 

Cost plus fixed fee__________ 7 1,817,554 CosL ____________________________________________ _ 

159,239,612 

Types of products and services: 

New ship construction_______ 5 155,999,087 Ship conversion ___________________________________ _ 

Research and developmenL_ 10 1,927,283 

Supplies, services, and maTypes of products and services: 

New ship construction ______ _ Ship conversion ___________ _ 

Research and developmenL_ 

Supplies, services, and material! _______________ _ 

Maintenance and repair. ___ _ 

FISCAL YEAR 1967 

Method of placement: Advertised ________________ _ 

Negotiated ________________ _ 

7 

2 

1 

31 

652 

442 

848 

319,043,989 

262,818,796 

7,779,000 

21,015 

!I,248,082 

47,177,096 

319,043,989 

47,172,862 

25,523,744 

72,696,606 

terial! __________________ _ =========== 25 1992,588 Compensation arrangement: Maintenance and repair. ___ _ 51 320,654 Fixed price ________________ _ 1,281 71,422,508 ----- Cost plus fixed fee _________ _ 6 1,164,098 159,239,612 CosL ____________________ _ 3 110,000 

FISCAL YEAR 1965 

Method of placement: Advertised ________________ _ 

Negotiated ________________ _ 

Compensation arrangement: 

43 

36 

187,450,811 

2,073,546 

189,524,357 

Fixed price_________________ 74 188,699,185 

Cost plus fixed fee__________ 5 825,172 Cos!. _____________________________________________ _ 

189,524,357 

72,696,606 

Types of products and services: 

New ship construction_______ 2 16,540,450 Ship conversion ___________________________________ _ 

Research and developmenL_ 11 932,688 

Supplies, services, and ma- terial!___________________ 43 13,202,376 

Maintenance and repaiL____ 1,234 52,021,092 

72,696,606 

! Due to the large number of purchase orders/contracts under $10,000 placed by this agency each year for su pplies, 

ervices, and materials, the analysis excludes approximately $4,000,000 of such expenditures annually. s 

Appendix I 

INFORMATION RELATING TO GENERAL SERVICES 

ADMINISTRATION CONTRACTS 

GENERAL SERVICES ADiVIDHSTRATION, 

Washington, D.O., March 1, 1968. 

NIr. LAURENCE N. WOODWORTH, 

Ohiej oj Staff, Joint Oommittee on Internal Revenue Taxation, Congres8 

oj the United States, Washington, D.O. 

DEAR MR. WOODWORTH: This is in further reply to your letter of 

February 13 requesting statistics and information for use in preparing 

a report on the Renegotiation Act of 1951. 

The statistics requested are attached. Pursuant to discussion of 

February 19 between ~I[r. Holmead of this office and lVIr. Bedell of 

your staff, wherein it was indicated that statistical information was 

not required on Public Buildings Service contracts, such data have 

not been included. Schedule I covers Federal Supply Service contracts for supplies and equipment and schedule II covers property 

management and disposal service contracts for servicing the various 

strategic and critical materials in the stockpile, together with contracts for upgrading basic materials to higher use form and for 

appraisals of real property. The only procurement by GSA of strategic 

and critical materials during the period covered was for jewel bearings from the Government-owned plant at Rolla, N. Dak. However, 

there were certain of these materials acquired through the Commodity 

Credit Corporation under its barter program and transferred to GSA. 

The vast majority of the Federal Supply Service contracts are on 

a fixed-price basis and do not involve the problem of initial pricing 

and subsequent price redeterminations as in the case in cost-type 

contracts. We do encounter cases where there is little cost and production experience available for new items being introduced into the 

supply system; however, in most cases it is possible to extrapolate 

pricing data available with respect to similar supply items involving 

closely related types of cost and production. Variances in the products 

and services procured from year to year are experienced but the 

differences normally do not relate to commodity or service areas in 

which we have not had some prior experience. The footnotes shmnl 

on schedule II are self-explanatory regarding Pl\IIDS contracts. 

Due to the nature of our programs and operations, the Renegotiation Act has limited application to contracts placed by this agency. 

The basic statutory exemptions in the act, particularly the one 

covering standard commercial articles and standard commercial 

services, are applicable to a wide range of our procurement activities. 

In addition, the Renegotiation Board has determined that Inajor 

areas of GSA contracting do not have a direct and immediate connection with the national defense and, therefore, are exempt fronl re-

(135) 
136 

negotiation (see par. 5-53.804.1 of the attached copy of General 

Services Administration Procurement Regulations, Subpart 5-53.8). 

With respect to the proposed amendments to the Renegotiation 

Act of 1951, GSA has no objection to the enactment of the Board's 

draft bill which was submitted to the Speaker of the House by letter 

dated February 23, 1968, from lVIr. Lawrence E. Hartwig, Ohaiflnan 

of the Renegotiation Board. 

If we can assist you further, please let us know. 

Sincerely yours, 

LAWSON B. KNOTT, Jr., 

Adm inistrator. 

PART 5-53 OONTRACT ADMINISTRATION 

SUBPART 5-53.8 RENEGOTIATION 

§ 5-53.801 General. 

(a) The Renegotiation Act of 1951, as amended (50 U.S.O. App. 

1211-1224), provides for recovery by the Government of contractors' 

excessive profits under certain contracts. GSA contracts are subject 

to renegotiation under the terms of the Renegotiation Act of 1951 

unless exempted by the statute or by authorization of the Renegotiation Board. 

(b) The Renegotiation Board, in its Regulations under the Renegotiation Act of 1951 (32 OFR Oh. XIV), prescribes definitions, 

sets forth mandatory and permissive exemptIOns, implements the 

statute with substantive rules, and provides procedures in connection 

with contracts subject to renegotiation. 

§ 5-53.802 Oontract clause. 

(a) Oontracts which are determined to be subject to the Renegotiation Act of 1951 shall contain the following clause: 

RENEGOTIATION 

The contract is subject to the Renegotiation Act of 1951, as 

amended, and shall be deemed to contain the provisions required by section 104 thereof. The extent of renegotiation 

will be determined in accordance with regulations under 

the Act. The Oontractor agrees to include this Renegotiation 

clause (including this sentence) in each subcontract made to 

perform any part of the work or to furnish any materials 

required for this contract. 

(b) When this clause is to be included in preprinted supplemental 

provisions, the clause set forth in (a), above, may be preceded by a 

preamble setting forth the basic exemptions applicable to the contracting programs for which the supplemental provisions form is 

generally used; for example: 

The following Rl?negotiation clause shall apply unless the 

contract calls for delivery to a GSA supply depot or a 

Government agency not in.cluded in the Renegotiation Act 

of 1951. 
137 

§ 5-53.803 Exemptions by statute. 

The Renegotiation Act of 1951 exempts the following: 

(a) Any contract with any Territory, possession, or State, or any 

agency or political subdivision thereof, or with any foreign government or any agency thereof. (See Renegotiation Board Regulations 

32 CFR 1453.1.) 

(b) Any contract or subcontract for an agricultural commodity in 

its raw or natural state, or if the commodity is not customarily sold 

or has not an established market in its raw or natural state, in the 

first form or state, beyond the raw or natural state, in which it is 

customarily sold or in which it has an established market. The term 

"agricultural commodity" includes but is not limited to (see 32 CFR 

1453.2) : 

(1) Commodities resulting from the cultivation of the soil, 

such as grains of all kinds, fruits, nuts, vegetables, hay, stra,,~, 

cotton, tobacco, sugarcane, and sugar beets. 

(2) Natural resins, saps, and gums of trees. 

(3) Animals, such as cattle, hogs, poultry, and sheep, fish and 

other marine life, and the produce of live animals, such as wool, 

eggs, milk, and cream. 

(c) Any contract or subcontract for the product of a mine, oil, or 

gas well, or other mineral or natural deposit, or timber, which has not 

been processed, refined, or treated beyond the first form or state 

suitable for industrial use. (See 32 CFR 1453.2(b).) 

(d) Any contract or subcontract with a common carrier for transportation, or with a public utility for gas, electric energy, water, 

communications, or transportation, when made in either case at 

rates not in excess of published rates or charges filed with, fixed, 

approved, or regulated by a public regulatory body, State, Federal, 

or local, or at rates not in excess of unregulated rates of such a public 

utility which are substantially as favorable to users and consumers as 

are regulated rates. In the case of the furnishing or sale of transportation by common carrier by water, this paragTaph shall apply only to 

such furnishing or sale which is subjeet to the jurisdiction of the 

Interstate Commerce Commission under Part III of the Interstate 

Commerce Act or subject to the jlITisdiction of the Federal 11aritime 

Board under the Intercoastal Shipping Act, 1933, and to such flITnishing or sale in any case in which the Renegotiation Board finds that 

the regulatory aspects of rates for such furnishing or sale, or 

the type and nature of the contract for snch furnishing or sale, are 

such as to indicate, in the opinion of the Renegotiation Board, 

that excessive profits are improbable. (See 32 CFR 1453.3.) 

(e) Any contract or subcontract with an organization exempt from 

taxation under section 501 (c) (3) of the Internal Revenue Code 

of 1954, but only if the income from such contract or subcontract 

is not includible under section 512 of such Code in computing the unrelated business taxable income of such organization. (See 32 CFR 

1453.4.) 

(f) Anv contract which the Renegotiation Board determines does 

not have~a direct and immediate connection with the national defense. 

In designating those classes and types of contracts which shall be 

exempt and in exempting any individual contract under this paragTaph, 

the Board considered as not having u direct or immediate connection 

with national defense any contract for the furnishing of materials 
138 

or services to be used by the United States, a Department or agency 

thereof, in the manufacture and sale of synthetic rubbers to a private 

person or to private persons which are to be used for nondefense 

purposes. (See 32 CFR 1453.5.) 

(g) Any subcontract directly or indirectly under a contract or subcontract already exempt in accordance with paragraph (b), (c), (d), 

(f), or (h) of this § 5-53.803. (See 32 CFR 1453.6.) 

(h) Any contract, awarded as a result of conlpetitive bidding, for 

the construction of any building, structure, improvelnent, or facility 

other than a contract for the construction of housing financed with a 

mortgage or mortgages insured under the provisions of Title VIII of 

the National Housing Act, as now or hereafter amended. (See 32 CF R 

1453.7.) 

(i) Any contract or subcontract which the Renegotiation Board 

exempts, as provided in § 5-53.805. 

(j) Contracts and subcontracts for standard conlmercial articles 

and standard cOlnmercial services (and "like" articles and services) 

exempt from renegotiation in accordance with section 106(e) of the 

Renegotiation Act of 1951. The exemption on standard commercial 

articles only is self-executing; the other require application to the 

Renegotiation Board. 

§ 5-53.804 National defense considerations. 

§ 5-53.804-1 Determinations by the Renegotiation Board. 

Subject to § 1453.5(c) of the Renegotiation Board's Regulations, 

the Renegotiation Board has determined that the following contracts 

do not have a direct and immediate connection with the national 

defense and, therefore, are exempt from renegotiation: 

(a) All contracts of the Public Buildings Service and the National 

Archives and Records Service. 

(b) All stores stock contracts for delivery to GSA supply depots. 

(c) All Federal Supply Schedule contracts and consolidated direct 

delivery contracts with respect to deliveries made to Government 

agencies other than the Department of Defense (including the military 

departments), Atomic Energy Commission, and National Aeronautics 

and Space Administration. 

(d) Contracts for maintenance and repair of buildings and 

structures. 

(e) Contracts to the extent they obligate funds of, or are reimbursed 

by, another Department named in section 103 of the Renegotiation 

Act of 1951 as exercising functions having a direct and immediate 

connection with the national defense, if the contracts would be exempt 

if made by such other Department. Contractors should be informed 

that funds of other Departments are being used. (See 32 CFR 

1453.5(b) (2).) The Departments named in section 103 are the Department of Defense, the Department of the Army, the Department 

of the Navy, the Department of the Air Force, the Maritline Administration, the Federal Maritime Board, the General Services 

Administration, the National Aeronautics and Space Administration, 

and the Atomic Energy Commission. (See 32 CFR 1451.14(b).) 

(f) Contracts to the extent they obligate funds of another agency 

of the Government, other than a Department named in or designated 

in section 103 of the Renegotiation Act of 1951, or to the extent that 

GSA is to be reimbursed by such other Government agency or other 

person. Contractors should be informed that funds of other De-
partments are being used. Those contracts obligating funds for 

military assistance in connection with foreign aid programs are not 

exempt from renegotiation under this paragraph. (See 32 CFR 

1453.5(b) (3) (ii).) 

(g) Contracts for the purchase of materials for authorized resale 

except contracts for the purchase of materials to be issued or sold 

tmder the monetary clothing allowance system of the armed services. (See 32 CFR 1453.5(b)(4).) 

(h) Contracts for the removal of waste materials. (See 32 CFR 

1453.5(b) (5).) 

(i) Contracts for lanndry, cleaning, and pressing services. (See 

32 CFR 1453.5(b) (6).) 

§ 5-53.804-2 Determinations by GSA. 

(a) Notwithstanding the determination set forth in § 5-53.804-1, 

individual contracts will be subject to renegotiation when the Head of 

the appropriate Service or Staff Office, or any of his designees, determines that such individual contract does have a direct and immediate 

connection ·with the national defense. This determination shall be set 

forth in the con tract as follows: 

For the purpose of the Renegotiation Act of 1951, as amended, 

it has been determined that this contract has a direct and 

immediate connection with the national defense. (See 32 CFR 

1453.5(c).) 

(b) In considering whether a specific contract does have a direct 

and immediate connection with the national defense, the Renegotiation Board requested that such determination be made in any case 

in which: 

(1) The language of the appropriation act making funds 

available, enabling legislation, or the legislative history, is such 

that it is evident that the project was presented to, and approved 

by, the Congress because of its importance to the national 

defense. 

(2) Award of the contract cannot be made without a certification, determination, or comparable prior action that the 

procurmnent is essential or necessary in the interest of the 

national defense. Such certification, determination, or comparable prior action would normally be made by the General 

Services Administration, but could be made by any agency of 

the Government which is competent to act in such manner. 

(3) The contract is to be made under a War Po·wers Actsuch as Public Law 85-804 (50 U.S.C. 1431-1435). 

(4) Loans or advances are to be made to the contractor under 

the Defense Production Act of 1950 in order to facilitate performance of the contract. 

(5) For other reasons, it is believed that the contract has a 

direct and immediate connection with the national defense. 

§ 5-53.804-3 Individual prime contracts. 

Individual prime contracts may be determined not to ha,ye a direct 

and immediate connection with the national defense by the Renegotiation Board on application of the prime contractor through 

GSA. 

91-043--68----10 
140 

§ 5-53.805 EXeInptions by the Renegotiation Board. 

§ 5-53.805-1 Exempted elasses of contracts. 

In the exercise of its discretion as authorized by the Renegotiation 

Act of 1951, the Renegotiation Board has exempted the following 

classes of contracts from reneo'otiation: L 

(a) All prime contracts and subcontracts ,vholly performed outside 

the United States by any person who is not engaged in a trade or 

business in the United States and is (1) an individual who is not a 

national of the United States; (2) a partnership or joint venture in 

which individuals who are not nationals of the United States or 

corporations which are not domestic corporations are entitled to more 

than 50 percent of the profits; or (3) a corporation (other than a 

domestic corporation) more than 50 percent of the voting stock of 

which is owned directly or indirectly by persons described in subdivisions (1) and (2) of this paragraph. (See 32 CFR 1455.2(c), 

(c-l).) 

For the purposes of this paragraph, the term "United States", 

when used in a geographical sense, includes the Territories 

and possessions of the United States, the Commonwealth of 

Puerto Rico, and the Canal Zone; and the term "domestic 

corporation" means a corporation organized under the laws 

of the United States or of any State, any Territory or possession of the United States, the District of Columbia, the 

Commonwealth of Puerto Rico, or the Canal Zone. (See 32 

CFR 1455.2(c), (c-1).) 

(b) Individual prime contracts or subcontracts, or the prime 

contracts or subcontracts related to a particular authorized procurement program, when such prime contracts or subcontracts are to be 

performed outside the territorial limits of the continental United 

States or in Alaska, and when it is established to the satisfaction of 

the Board that (1) the prime contracts or subcontracts involved in 

the request are to be placed with foreign nationals or foreign corporations whom it is not practicable to subject to renegotion; (2) the provisions of the prime contracts or subcontracts are otherwise sufficient 

to prevent excessive profits; (3) the program is of direct and immediate 

concern to the defense of the United States and refusal to grant the 

exemption would jeopardize the success of the program; or (4) the 

contract or group of contracts should be exempted for any combination of the foregoing reasons or for any other reason. (See 32 CFR 

1455.2(d).) 

(c) Contracts or subcontracts under which, in the opinion of the 

Board, the profits can be determined with reasonable certainty when 

the contract price is established. On this basis, the Board has exempted 

the following: 

(1) All prime contracts with natural persons (not partnerships, 

joint ventures, or corporations) which call for performance of 

personal or professional services by the individual contractor in 

person under the supervision of the Government, and which are 

paid for on a time basis. (See 32 CFR 1455.3(b)(1).) 

(2) Prime contracts for the sale or rental of any interest in 

existing real estate. (See 32 CFR 1455.3(b)(2).) 

(3) Prime contracts and subcontracts for the sale or exchange 

of tangible property used in the trade or business of the vendor 
141 

with respect to which depreciation is allowable under section 167 

of the Internal Revenue Code of 1954. (This exemption extends 

only to contracts under which the price is a fixed or determinable 

amount at the time the contract is entered into, and does not 

apply to any contract under which the price, at the time the 

contract is entered into, is contingent upon a subsequent event 

or is thereafter to be determined by reference to a variable 

element.) (See 32 CF R 1455.3(b) (3).) 

(4) Prime contracts and subcontracts for perishable subsistence supplies. (See 32 CF R 1455.3(b) (4).) 

(5) Prime contracts where the aggregate amount does not exceed $1,000 and the period of performance is not in excess of 30 

days. (See 32 CFR 1455.3(b) (5).) 

(6) Subcontracts for architectural, design, or engineering services as provided in the Renegotiation Board's Regulations 

§ 1455.3(b) (6). 

(7) Contracts entered into with a non-profit-making agency 

for the blind pursuant to the program for the purchase of blindmade products. (See 32 CFR 1455.3(b)(7).) 

§ 5-53.805-2 Contracts exempt subject to prescribed conditions. 

The following contracts or subcontracts may be exempted on an 

individual contract basis on application to the Renegotiation Board 

by GSA: 

(a) Contracts or subcontracts where the profits thereunder can be 

determined with reasonable certainty "\yhen the contract price is 

established. (See 32 CFR 1455.3(c).) 

(b) Contracts or subcontracts where the contract provisions are 

otherwise adequate to prevent excessive profits. (See 32 CFR 

1455.4(c) .) 

(c) Contracts or subcontracts the renegotiation of which would 

jeopardize secrecy required in the public interest. (See 32 CF R 

1455.5(b).) 

§ 5-53.805-3 Subcontracts exempted by the Renegotiation Board. 

(a) Stock item exemption. AnlOlmts received or accrued prior to 

January 1, 1964 on subcontracts and groups of subcontraets subject 

to the Act for materials (including maintenance, repair, and operating 

supplies) customarily purchased for stock in the normal course of the 

purchaser's business, except when such materials are specially purchased for use in performing one or more prime contracts or higher 

tier subcontracts subject to the Act. (See 32 CF R 1455.6.) 

(b) Subcontracts related to exempt prime contracts and subcontracts except those performed outside the United States (see 

§ 5-53.805-1 (a» and other subcontracts, when the Board, in exempting prime contracts or subcontracts, determined that the exemption 

will not extend to some or all of the subcontra,cts rebted to such prinle 

contracts or subcontracts. (See 32 CF R 1455.7.) 
SCHEDULE I.-FEDERAL SUPPLY SERVICE CONTRACTS FOR SUPPLIES AND EQUI

Number of term contracts Dollar value of term contracts Number of definite quantity Dollar 

Fiscal 

year 

Advertised Negotiated Advertised Negotiated Advertised Negotiated Advertis

196L _____ 6,425 3,159 207,745,433 555,849,669 3,933 1,882 102, 262, 

196L _____ 6,280 3,564 239,136,069 611,113,842 4,314 2,320 138,379

1963 _______ 6,474 3,984 295,884,454 698,417,633 4,416 2,837 131,965

196L _____ 6,642 4,304 301,966,279 881,811,915 6,578 3,285 143,925

196L _____ 8,074 7,200 491,680,159 730,028,107 6,037 3,874 146,388

196L _____ 8,590 5,883 455,970,483 911,851,815 4,585 4,807 137,860

1961-- _____ 8,307 6,875 476,388,265 11,085,957,198 3,051 4,192 160,401

CONTRACTS NEGOTIATED WITH SINGLE SOURCE INC

1967 _____ __________________ 15 ______________ 11,796,728 __ ____________ 

lOver 90 percent of this total consists of small business set-asides and multiple-award Federal 

supply schedule contracts (term contracts under which using agencies select the lowest priced items 

meeting their particular needs and order direct from contractor). 2 This includes small business and surplus labor area set-asides, emergency purchases, and 

other purchases which are exempt from formal advertising. 3 Intormation on contracts which were negotiated with a single source as contrasted to those con- tracts negotiated with 2 or more bidders is not available as a separate record. A case -by-case review of 

399 _________

negotiated contr

peiformed. The 

automotive vehi

is desired fo r sp

available from o

turers have bee

excess of the m
143 

Schedule II 

SUMMARY OF PMOS PROCUREMENTS 

Firm price contracts Cost-type contracts 

Advertised Negotiated Advertised Negotiated 

Fiscal year and offices 

Num- Num- Num- Numberof Dollar ber of Dollar ber of Dollar ber of Dollar con- value con- value con- value con- value tracts tracts tracts tracts 

1961 Central office ___________________ 15 300,075 80 1,002,671 ---------------- 800,000 Regionaloffices _________________ 55 1,661,852 300 1,836,787 --------------- ------ -----------_ ...... 

Total ____________________ 70 1,961,927 380 2,839,458 ------.. _-------- 800,000 

1962 Centraloffice ___________________ 7 193,171 94 1,506,831 --------_ .... ----_ .. ------ ------ -----_ .. Regionaloffices _________________ 86 1,282,528 527 2,143,034 .............. ---_ .... -_ ...... -_ ...... ----------.. --

Total ____________________ 93 1,475,699 621 3,649,865 -_ .. -- ...... ----------------_ .... - -_ .. --- ---

1963 Central office ___________________ 11 230,230 75 2,893,747 ....... --..... -_ ...... -_ ........ 300,000 Regional offices _________________ 46 1,017,457 643 2,250,779 ----- ------ ---- -- -- ------ -----------

TotaL ___________________ 57 1,247,687 718 5,144,526 ........... -----_ ............... _ ..... -----_ ..... -_ ..... -----

1964 Centraloffice ___________________ 21 482,432 85 1,935,499 ...... --........................ 700,000 Regional offices _________________ 60 916,171 1,024 1,422,200 .. -_ .... ---------------_ .. -----------.. --

TotaL ___________________ 81 1,398,603 1,109 3,357,699 ........... ---_ .............. 700,000 

1965 Central office ___________________ 17 1,794,731 57 1,924,857 ... -------_ ............ ------------ -- --------- Regionaloffices _________________ 91 934,570 881 1,266,980 .. -- ---... -- ... ----------- -----_ ... -- ------

Total ____________________ 108 2,729,301 938 3,191,837 .. ---- ---------_ .... -----------------_ .. 

1966 Central office ___________________ 19 2,153,082 28 197,695 -----.. ----- ----- 1,281,689 Regionaloffices _________________ 134 1,229,108 780 1,738,563 ------- -- -- ---------- -_ ... ------------

TotaL ___________________ 153 3,382,190 808 1,936,258 ---------------- 6 1,281,689 

1967 Centraloffice ___________________ 12 775,428 38 3,133,576 ---------------- 101,759 Regionaloffices _________________ 159 1,746,087 550 1,017,891 --- -------------------- ------ -------

Total. ___________________ 171 2,521,515 588 4,151,467 --------_ ... _----- 101,759 

Note: The firm price contracts are recurring fixed-price type for services and supplies required in the receipt, and/or remova I, storage, maintenance, protection, and quality control of the various stockpile materials. Also included in this 

category are contracts for upgrading basic stockpile materials to higher use form and contracts for appraisal of real property. Prior experience in these types of contracting enables us to determine proper charges. The cost-type contracts include 

economic studies of certain stockpile materials and could be considered labor-hour type contracts. These contracts do not lend themselves to standardization for cost purposes as the scope and complexities of each commodity study will vary depending on the depth of investigation required. A contract with the Bulova Watch Co., which was entered into in June 

1958, for operating the Government-owned plant at Rolla, N. Oak., is also included in the cost-type category. This con tract is considered as a cost-plus-fixed-fee type. The contract has been extended from year to year and the figures include only the amended portion applicable to each fiscal year. 

Approximately 85 percent of the dollar value of contracts negotiated by PMOS for fiscal years 1961 through 1967 were as the result of competitive negotiations (2 or more bids). The balance of negotiated contracts for which competition could not be obtained were in instances where (1) a particuar 

item or service was required to fit a particular need for which there was only one source, (2) there was urgent need for 

the item or service, and (3) competition was not available for services needed in remote areas. 
144 

SCHEDULE II I.- FEDERAL SUPPLY SERVICE CONTRACTS FOR SUPPLIES AND EQUIPMENT FOR FISCAL YEARS 1961 

THROUGH 1967, MULTIPLE AWARD SCHEDULES 

Fiscal year 

1961-______ ________ _________ _____ ______ ___ _____ ___________ ____ _ 1962 ______ ______________ _______________ ___ ____________ ________ _ 1963 __________________________________________________________ _ 1964 _____________________________________________________ ____ _ _ 

1965 ____ ___________ __________ ________ __ ____________ _______ __ __ _ 1966 ________ _______ _________ _______ ___________________________ _ 

1967 ___________ ~ ______________________________________________ _ 

Number of multiple 

award contracts negotiated 

3,023 

3,199 

3,250 

3,511 

3,677 

3,664 

3,406 

Dollar value of multiple 

award contracts negotiated 

551,285,541 

595,982,634 

668, 592, 960 

839,411,910 

665, 941, 284 

820,014,309 

947, 584, 227 

Note: Multiple-award Federal Supply Schedule contracts are those contracts made for items where it is not practicable to have formal standards or specifications permitting formal advertised procurement. These are indefinite quantity term contracts negotiated with more than 1 supplier for comparable items at either the same or different prices for delivery to the same geographical area and are designed to provide effective utilization of industry production and distribution 

facilities. Examples of the type items procured by this method of contracting are office machines, including typewriters, 

adding machines, computing machines, and dictating machines; laboratory equipment; data processing equipment; etc. Using agencies submit their purchase orders direct to the supplier and delivery is made direct to the using agency or point of use. Under Federal Procurement Management Regulations, each ordering agency placing an order under a schedule contract is required to purchase the lowest delivered priced item that will satisfy the agency's minimum needs unless 

purchase of a higher priced item can be fully justified, subject to review by the General Accounting Office. 
Appendix J 

INFORMATION RELATING TO FEDERAL AVIATION ADMINISTRATION CONTRACTS 

DEPARTMEKT OF TRANSPORTA'l'ION, 

FEDERAL AVIATION ADMINISTRATION, 

Hon. RUSSELL B. LONG, 

OFFICE OF THE ADMINISTRATOR, 

Washington, D.C., March 1, 1968. 

Chairman, Joint Committee on Internal Revenue Taxation, 

U.S. Senate, Washington, D.C. 

DEAR MR. CHAIRMAN: Reference is made to Mr. Laurence N. Woodworth's letter dated February 13, 1968, requesting contract information between the years 1961 and 1967. 

A portion of the information requested is readily available and is 

as follows: 

Enclosure 1 lists the method of procnrement for the fiscal 

years 1961 through 1967. 

Enclosure 2 lists for the fiscal years 1964 through 1967 the 

variety of cost and fixed-price-type contracts. This information 

has been accumulated only since 1964. 

Enclosure 3 is a list of the contracts for fiscal years 1965 through 

1967 that have been reported to the Renegotiation Board. This 

was not requested in the referenced letter but is being furnished 

as a result of a telephone call with a member of Mr. 'iV oodworth's 

staff. [Enclosure 3 is not reproduced.] 

The Federal Aviation Administration does not record the accumulated overrun or underrun dollars except on an individual 

con tract basis. 

The materials/services procured by this agency cover a wide range 

of cost type study, design, or design and initial production of hardware. The fixed price type contracts cover production or performance 

type specifications, follow on supply type of procurement, and the 

bulk of our construction contracting. To illustrate this point, our 

current active contracts list contains 479 contracts that are not completed for a variety of reasons. A breakdown of the 479 contracts is as 

follows: Fixed price, 256 (53 percent); cost type, 147 (30 percent); 

issued to other government agencies, 48 (10 percent) ; labor hour and 

time and materiel [sic], 28 (7 percent). JV[any of our contracts are 

entered into for which there is no previous cost or production experience. We find that there is little change in the variety of supplies and 

services that are procured from year to year. 

At this time the FAA has no particular comment to make as to the 

merits of any proposed extension of the Renegotiation Act. It is 

expected that the Office of the Secretary will in the futlu'e be making 

one comment on the effects of such legislation on all elmnents of the 

Department of Transportation. 

(145) 
146 

The data being furnished as enclosures 1 through 3 was discussed in 

a telephone conversation between 1\1r. Erwin Ames of om' Logistics 

Service and 1\1r. Dennis P. Bedell, a member of 1\1r. Woodworth's 

staff. 1\1r. Bedell suggested that the data be submitted and if additional 

information was required, it would be requested. 

Sincerely, 

D. D. THOMAS, Acting Administrator. 

SUMMARY OF FAA PROCUREMENT ACTIVITY BY METHOD-FORMAL ADVERTISING AND NEGOTIATION 

Actions I Dollar value (millions) 2 

Fiscal year Adver- Percent Negoti- Percent Adver- Percent Negoti- Percent 

tised adver- ated negoti- Total tised adver- ated negoti- Total 

tised ated tised ated 

1961 ______________________ 6,275 19 26,780 81 33,055 45.2 55 37.6 45 82.8 1962 _______________________ 8,941 22 32,411 78 41,352 48.1 40 72.4 60 120.5 1963 _______________________ (3) (3) (3) (3) (3) 27.1 18 119.4 82 146.5 1964 _______________________ 2,213 60 1,485 40 3,698 19.9 12 145.1 88 165.0 1965 _______________________ 742 31 1,676 69 2,418 18.7 18 83.1 82 101.8 1966 _______________________ 717 31 1,569 69 2,286 18.6 11 189.4 89 208.0 1967 _______________________ 1,000 41 1,430 59 2,430 26.6 13 190.4 87 217.1 

I For fiscal year 1961 and fiscal year 1962 these data include all procurement awards over $100 from all sources for 

fiscal year 1964 through fiscal year 1967 these data include all procurement awards over $2,500 to U.S. business firms 

only, including new contracts, modifications, and other follow-on actions involving monetary changes to the contract. 2 These data include all procurement awards over $100 to U.S. business firms and through established sources; i.e., 

under other agency's contracts. 3 No data available. 

SUMMARY OF FEDERAL AVIATION ADMINISTRATION CONTRACT ACTIONS BY CONTRACT TYPE 

[Dollar amounts in millions) 

Fiscal Fiscal Fiscal Fiscal 

Contract type year Percent year Percent year Percent year Percent 

1964 1965 1966 1967 

FIXED PRICE 

Firm fixed price _____________ $103.14 82.65 $64.24 93.72 $46.09 93.07 $102.37 96.70 

Fixed price incentive ________ 18.89 15.14 4.22 6.11 2.77 5.60 2.65 2.51 

Fixed price redetermination __ I. 99 1. 61 .05 .07 .61 1. 23 .78 .74 

Fixed price escalation ________ .76 .60 .07 .10 .05 .10 .06 .05 

Subtotal _____________ 124.78 100.0 68.58 100.00 49.52 100.00 105.86 100.00 

COST 

Cost contracL ______________ .35 2.97 .53 1. 47 .20 .12 2.74 20.51 

Cost-plus-incentive __________ 2.83 23.98 1.11 3.08 .39 .24 .75 5.61 Cost-plus-fixed-fee __________ 7.48 63.39 7.79 21. 58 7.46 4.65 5.30 39.67 Cost sharing ________________ .17 1. 44 25.81 71. 50 151. 67 94.48 3.85 28.84 labor hours ________________ .49 4.15 .16 .44 .13 .08 .10 .74 Time and materials __________ .48 4.07 .70 I. 93 .69 .43 .62 4.63 

SubtotaL ___________ II. 80 100.00 36.10 100.00 160.54 100.00 13.36 100.00 

Grand totaL _________ 136.58 __________ 104.68 __________ 210.06 __________ 119.22 __________ 
Appendix K 

RENEGOTIATION ACT OF 1951 AS 

AMENDED TO DATE 

[Public Law 9, 82d Cong., approved March 23, 1951, as amended by 

Public Law 764, 83d Cong., approved September 1, 1954; Public 

Law 216, 84th Cong., approved August 3, 1955; Public Law 870, 

84th Cong., approved August 1, 1956; Public Law 85-930, 85th 

Cong., approved September 6, 1958; Public Law 86-89, 86th Cong., 

approved July 13, 1959; Public Law 87-520, 87th Cong., approved 

July 3, 1962; Public Law 88-339, 88th Cong., approved June 30, 

1964.; and Public Law 89-480, 89th Cong., approved June 30, 1966] 

To provide for the renegotiation of contracts, and for other purposes. 

Be U enacted by the Senate and House oj Representatives oj the Unitf.d 

States of America in Congress assembled, That this Act may be cited 

as the "Renegotiation Act of 1951". 

TITLE I-RENEGOTIATION OF CONTRACTS 

SEC. ]01. DECLARATION OF POLICY. 

It is hereby recognized and declared that the Congress has made 

available for the execution of the national defense program extensive 

funds, by appropriation and otherwise, for the procurement of property, processes, and services, and the construction of f ncili ties neressary for the national defense; that sound execution of the national 

defense program requires the elimination of excessive profit~ from 

contracts mude with the United States, and from re1nted subcontracts, 

in the course of said program; and that the considered policy of the 

Congress, in the interests of the national defense and the general 

welfare of the Nation, requires that such excessive profits be eliminated 

as provided in this title. 

SEC. 102. CONTRACTS SUBJECT TO RENEGOTIATION. 

(a) IN GENERAL.-The provisions of this title shall be applicable 

(1) to all contract.s with the Departments specifically named in section 

103(a), and related subcontracts, to the extent of the amount~ received 

or accrued by a contractor or subcontractor on or after the first day 

of January 1951, whether such contracts or subcontracts were made 

on, before, or after such first day, and (2) to all contracts with the 

Departments designated by the President under section 103(a), and 

related subcont.racts, to the extent of the amounts received or accrued 

by a contractor or subcontractor on or after the first day of the first 

month beginning after the date of such designation, whether such 

contracts or subcontracts were made on, before, or after such first day. 1 

(b) PERFORMANCE PRIOR TO JULY 1, 1950.-Notwithstanding the 

provisions of subsection (a), the provisions of this title shall not 

apply to contracts with the Departments, or related subcontracts, to 

the extent of the amounts received or accrued by a contractor or subI Pub. Law 870, 84th Cong., approved August 1, 1956, struck out at this point "; but provtslons·ortbts title 

shall not be applicable to receipts or accruals attributable to performance, unrler contracts, or subcontracts, 

aft4!r December 31,1956". The last date was changed from "1953" to "1954" by Pub. Law 76483d Cong., approved September I, 1954, and changed to "1956" by Pub. Law 216, 84tb Cong., approved August 3, 1966. 

91-043 0 - 68 - 11 
148 

contractor on or after the 1st day of ,January 1951, which are attributable to performance, under such contracts or subcontracts, prior to 

July 1, -1950. This subsection shall have no application in the case 

of contracts, or related subcontracts, which, but for subsection (c) 

would be subject to the Renegotiation Act of 1948. ' 

(c) TERMINATION.- .-

. (1) IN GEN ERAL:-Thelrovisions of this title shall a,pply only 

unth respect to rece~pts an accruals, under contracts with the Deparfments and related subcontract.~, which are determined under 

regulaaons prescribed by the Board to be reasonably attributable 

to performance prior to the close of the termination date. Notwithstanding the method oj accountinQ employed by the contractor 

or subcontractor in keeping his records, receipfs or acrr'uals determh1.ed to be so attributable, even ~f received or accrued after the 

termination date, shall be considered as having been received or 

accrued not la.ter than the termina60n date. For the purposes oj 

this title, the term "termination date" means June 39JT71968. 

(2) TERMINATION OF STATUS AS DEPARTMENT.-Wfl,en the status 

oj any agency oj the Government as a Department within the 

meaning oj section 103 (a) is terminated, the provisions 0..1 this 

title shall apply only with respect to receipts and accruals, under 

contracts 'With such agency and related subcontracts, which are 

determined under regulations prescribed by the Board to be reasonably attributable to performance prior to the close oj the status 

termination date. Notunthstand1'ng the method oj accounting 

employed by the contractor or subcontractor in keeping his records, receipts or accruals determined to be so attributable, even if 

received or accrued after the status termination date, shall be con- sidered as having been received or accrued not later than the status 

termination date. For the purposes oj this paragraph, the term 

"status termination date" means with respect fo any agency, the 

date on which the status 0.1 such agency as a Department within 

the meaning oj section 103 (a) is terminated. 2 

(d) RENEGOTIATION ACT OF 1948.-The Renegotiation Act of 1948 

shall not be applicable to any contract or subcontract to the extent 

of the amounts received or accrued by a contractor or subcontractor 

on or after the 1st day of January 1951, whether such contract or 

subcontract was ma.de on, before, or after such first day. In the case 

of a fiscal year beginning in 1950 and ending in 1951, if a contractor 

or subcontractor has receipts or accruals prior to January 1,1951, from 

contracts or subcontracts subject to the Renegotiation Act of 1948, 

and also has receipts or accruals after Decemher 31, 1950, to which 

the provisions of this title are applicable, the provisions of this f itle ' 

shall, notwithstanding subsection (a), a.pply to such r('ceipts and 

accruals prior to January 1, 1951, if the Board and such contractor 

or subcontractor agree to such application of t.his title; and in the case 

of such an agreement the provisions of the Renegotiation Act of 1948 

shall not apply to any of the receipts or accruals for such fiscal year. 

t Subsection (c) of section 102 wa.cl added by Pub. Law 8iO 84th Cong., approved August I, 1956, wblch 

also relettered (ormer subsections (c) and (d) as (d) and (e), respecth'ely_ The "t.ermlnatlon date" In parslrraph (1) o( such subs('ctlon (c) was changed by Puh. Law 8&-930, 85th Cong., approved Sept.embflr 

6, 195R, (rom Decemhflr 31, 1958 to June 30, 1959. By Pub. Law 8(;-89, 86th Cong., approved July 13, 1959. 

"June 30, 191i9" was changed to "JunP 30,1962". By Puh. Law R7-520. R7th CODl~ ..... pprov.,d July 3.19112, 

"Junp 30,1952," was changed to "June 30,1964." By Pub. Law 88-339, 88th Cong., approved June 30,1964, 

uJune 30,1964" was changed to .lIune 30,1966." By Pub. Law 89--480, 89th Cong., approved June 30, 1966, 

"June 30, 1966" was changed to "June 30, 1968." 
149 

(e) SUSPENSION OF CERTAIN PROFIT LIMITATIONS.-Notwithstanding any agreement to the contrary, the profit-limitation provisions 

of the Act of March 27, 1934 (48 Stat. 503, 505), as amended and 

supplemented, and of section 505 (b) of the 1ferchant Marine Act, 

1936, as amended and supplemented (46 U.S.C. 1155 (b», shall not 

apply, in the case of such Act of March 27, 1934, to any contract or 

subcontract. if any of the receipts or accruals therefrom are subject to 

this title or would be subject to this title except for the provisions of 

section 106 (e), and, in the case of the Merchant Marine Act, 1936, to 

any contract or subcontract entered into after December 31, 1950, if 

any of the receipts or accruals therefrom are subject to this title or 

would be subject to this title except for the provisions of section 106 (e). 3 

SEe. 103. DEFINITIONS. 

For the purposes of this title-

(a) DEPARTMENT.-The term "Department" means the Department 

of Dejense, the Department of the Army, the Department of the !favy, 

the Department of the Air Force, the Alant~me Administration, the 

Federal Maritime Board, the General Services Adm1'nistration, . the 

National Aeronautics and Space Admim'stration, the Fedtral Aviation 

Agency, and the Atomic Energy Commission. Such term also includes 

any other agency of the &overnment exercising functions having a direct 

and immediate connection with the national defense which is designated 

by the President during a national emergency proclaimed by the President, 

or declared by the Congress, after the date of the enactment of the Renegotiation Amendments Act of 1956; but such designation shall cease to be in 

effect on the last day of the month during which such national emergency 

is terminated.' 

(b) SECRETARY.-The, term "Secretary" means the Secretary of 

Defense, the Secretary of the Army, the Secretary of the Navy, the 

Secretary of the Air Force, the Secretary of Commerce (with respect 

to the Aiaritime Administration), the Federal Maritime Board, the 

Administrator of General Services, the Administrator of the National 

Aeronautics and Space Administration, the Administrator of the Federal 

Aviation Agency, the Atomic Energy Commission, and the head of 

any other &'gency of the Government which the President shall designate as a Department pursuant to subsection (a) of this section.6 

• Matter in Italics in section 102 (e) was added by Pub. Law 216, 84th Cong., approved August 3, 19M, as amended by Pub. Law 870, 84th Cong., approved August I, 1956, and applies only to the extent of amounts received or accrued after December 31, 1953. Pub. Law 870 changed "section 106 (a) (8)" to "section 106 

(e)" with respect to fiscal years ending after June 30, 1956. , Section 103 (a) was amended by Pub. Law 870 84th Cong., approved August I, 1956, which struck out, 

effective December 31, 1956, the Department of Commerce, the Reconstruction Finance Corporation, the Canal Zone Government, the Panama Canal Company, the Housing and Home Finance Agency, and such other agencies of the Government RS were designated by the President under the former subsection 

(a). Federal Civll Defense Adminlstration, National Advisory Committoo for Aeronautics, Tennessee 

Valley Authority, and U.S. Coast Guard were deSignated by Executive Order 10260, dated June Zl, 1951; 

Defense Materials Procurement Agency, Bureau of Mines, and (United States) Geological Survey by Executive Order 10294, September 28, 1951; Bonneville Power Administration by Executive Order 10299, 

October 31, 1951; Bureau of Reclamation by Executive Order 10369, June 30, 1952; and Federal FacUlties 

Corporation by Exceutive Order 10567, September 29, 1954. Section 103 (a) was further amended by Pub. 

Law 85-93r), 85th Cong., approved September 6, 1958, which added the National Aeronautics and Space Administration and which made section 103 (a) applicable to contracts entered into by such Admlnlstration 

and to contracts transferred to such Administration from a Department under section 301 or 302 of the 

National Aeronautics and Space Act of 1958, and to related subcontracts; and by Pub. Law 88-339, 88th 

Cong., approved June 30, 1964, which added the Federal Aviation Agency and which made section 103(a) 

applicable to contracts with such Agency, and related subcontracts, to the extent of the amounts received or accrued by a contractor or subcontractor after June 30, 1964. I Matter in italics in section 103(b), except tbe references to the Administrator of the National Aeronautics and Space Administration and the Administration of the Federal Aviation Agency, was added 

by Pub. Law 870,84th Cong., approved August I, 1956, which also changed "the Chairman olthe Atomic 

Energy Commission" to "the Atomic Energy Commission" and struck out the Board of Directors of the 

Reconstruction Finance Corporation, the Governor of the Canal Zone, the President oltbe Panama'Oanal 

Company, and the Housing and Home Finance Administrator, all effective on December 31 1956. The 

Administrator of the National AeronautiCS and Space Administration was added by Pub. Law 85-930; 

85th C~)Dg., approv.ed September 6, 1958. The Administrator olthe Federal Aviation Agency was added 

by Pub. Law 88-339, 88th Cong., approved June 30, 1964. . 
150 

(c) BOARD.-The term ''Board'' means the Renegotiation Board 

(jreated by section l07(a) of this Act. 

(d) RENEGOTIATE AND RENEGOTIATION.-The t.erms "renegotiate" 

and "renegotiation" include a determination by agreement or order 

under this title of the amount of any excessive profits. 

(e) EXCESSIVE PROFITs.-The term "excessive profits" means the 

portion of the profits derived from contracts with the Departments 

and subcontracts which is determined in accordance with this title to 

be excessive. In determining excessive profits favorable recognition 

mnst be giv~n to the effici('ncy of the contractor or subcontractor, with 

particular regard to attainment of quantity and quality production, 

reduction of costs, and economy in the use of materials, facilities, and 

manpower; and in addition, there shall be taken into consideration 

the following factors: 

(l) Reasonableness of costs and profits, with particular regard 

to volume of production, normal earnings, and comparison of 

war and peacetime products.; 

(2) The net worth, with particular regard to the amount and 

source of public and private capital employed; 

(3) Extent of risk assumed, including the risk incident to 

reasonable pricing policies; 

(4) Nature and extent of contribution to the defense effort, 

including inventive and developmental contribution and cooperation with the Government and other contractors in supplying 

technical assistance; 

(5) Character of business, including source and nature of 

materials, complexity of manufacturing technique, character and 

extent of subcontracting, and rate of turn-over; 

(6) Such other factors the consideration of which the public 

intprest and fair and equitable dealing may require, which factors 

shall be published in the regulations of the Board from time to 

time as adopted. 

(f) PROFITS DERIVED FROM CONTRACTS WITH THE DEPARTMENTS 

AND SUBCONTRACTs.-The term "profits derived from contracts with 

the Departments and subcontracts" means the excess of the amount 

received or accrued under such contracts and subcontracts over the 

costs paid or incurred with respect thereto and determined to be 

allocable thereto. All items estimated to be allowed as deductions and 

exclusions under chapter 1 of the Internal Revenue Code (excluding 

taxes measured by income) shall, to the extent allocable to such contracts and subcontracts, be allowed as items of cost, except that no 

amount shall be allowed as an item of cost by reason of the application 

of a carry-over or carry-back. Notwithstanding any other provision 

of this section, there shall be allowed as an item of cost in any fiscal 

year ending before December 31, 1956,6 subject to regulations of the 

Board, an amount equal to the excess, if any, of costs (computed 

without the application of this sentence) paid or incurred in the preceding fiscal year with respect to receipts or accruals subject to the 

provisions of this title over the amount of receipts or accruals subject 

to the provisions of this title which ~ere received or accrued in such 

preceding fiscal year, but only to the extent that such excess did not 

• Matter In Itallcs In section 103<0 was added by Pub. Law 870, 84th Cong., approved August I, 1956. 
151 

result from gross inefficiency of the contractor or subcontractor. 

For the pti.rposes of the preceding sentence, the term "preceding fiscal 

year" dops not include any fiscal year ending prior to January 1, 1951. 

Costs shall be determined in accordance with the method of accounting regularly employed by the con tractor or su bcon tractor in keeping 

bis records, but, if no such method of accounting has been employed, 

or if the method so employed does not, in the opinion of the Board, 

or, upon redetermination, in the opinion of The Tax Court of the 

United States, properly reflect such costs, such costs shall be determined in accordance with such method as in the opinion of the Board, 

or, upon redetermination, in the opinion of The Tax Court of the 

United States, does properly reflect such costs. In determining the 

amount. of excessive profits to be eliminated, proper adjustment shall 

be made on account of the taxes measured by income, other than 

Federal taxes, which are attributable to the portion of the profits 

which are not excessive. 

(g) SUBCONTRAcT.-The term Itsubcontracf' means-

(1) any purchase order or agreement (including purchase 

orders or agreements antedating the related prime contract or 

higher tier subcontract) to perform all or any part of the work, 

or to make or furnish any materials, required for the performance 

of any other contract or subcontract, but such term does not 

include any purchase. order or agreement to furnish office supplies; 

(2) any contract or arrangement covering the right to use any 

patented or secret method, formula, or device for the performance 

of a contract or subcontract; and 

(3) any contract or arrangement (other than a contract or 

arrangement between two contracting parties, one of whom is 

found by the Board to be a bona fide executive officer, partner, 

or full-time employee of the other contracting party) under 

which-

(A) any a,mount payable is contingent upon the procurement of a contract or contracts with a Department or of a 

subcontract or subcontracts; or 

(B) any amount payable is determined with reference to 

the amount of a contract or contracts with a Department or 

of a su bcon tract or su bcon tracts; or 

(C) any part of the services performed or to be performed 

consists of the soliciting, attempting to procure, or procuring 

a contract or contracts with a Department or a subcontract 

or su hcon tracts. 

Nothing in this subsection shall be construed (i) to affect in any way 

the validity or construction of provisions in any contract with a 

Department or any subcontract, heretofore at any time or hereafter 

made, prohibiting the payment of contingent fees or commissions; or 

(ii) to restrict in any way the authority of the Board to determine 

the nature or amount of selling expense under subcontracts as defined 

in this subsection, as a proper element of the contract price or as a 

reimbursnble item of cost, under a contract with a Department or a 

su bcon tract. 

(h) FISCAL YEAR.-The term "fiscal year" means the taxable year 

of the contractor or subcontractor under chapter 1 of the Internal 

Revenue Code, except that where any readjustment of interests occurs 
152 

in a partnership as defined in section 3797 (a) (2) of such code, the 

fiscal year of the partnership or partnerships involved in such readjustment shall be determined in accordance with regulations prescribed 

by the Board. 

(i) RECEIVED OR ACCRUED AND PAID OR INCURRED.-The terms 

"received or accrued" and "paid or incurred" shall be construed according to the method of accounting employed by the contractor or subcontractor in keeping his records, but if no such method of accounting 

has been employed, or if the method so employed does not, in the 

opinion of the Board, or, upon redetermination, in the opinion of The 

Tax Court of the United States, properly reflect his receipts or accruals 

or payments or obligations, such receipts or accruals or such payments 

or obligations shall be determined in accordance with such method as 

in the opinion of the Board, or, upon redetermination, in t.he opinion 

of The Tax Court of the United States, does properly reflect such 

receipts or accruals or such payments or obligations. 

(]) PERSoN.-The term "person" shall include an individual, firm, 

corporation, association, partnership, and any organized group of persons whether or not incorporated. 

(k) MATERIALs.-The term "materials" shall include raw materials, 

articles, commodities, parts, assemblies, products, machinery, equipment, supplies, components, technical data, processes, and other personal property. 

(1) AGENCY OF THE GOVERNMENT.-The term Hagency of the Government" means any part of the executive branch of the Government 

or any independent establishment of the Government or part thereof, 

including any department (whether or not a Department as defined in 

subsection (a) of this section), any corporation wholly or partly owned 

by the United States which is an instrumentality of the United States, 

or any board, bureau, division, service, office, officer, employee, authority, administration, or other establishment of the Government which 

is not a part,of the legislative or judicial branches. ' 

(m) RENEGOTIATION Loss CARRYFORWARDS.-

(1) ALLowANcE.-Notwithstanding any other provision oj 

this section, the renegotiation loss deduction jor any fiscal year 

ending on or a.1ter December 31, 1956, shall be allowed as an item 

oj cost in such fiscal year, under regulations oj the Board. 

(2) DEFINITIONs.-For the purposes oj this subsection-

(A) The term Hrenegotiation loss deduction" means-

(i) jor any fiscal year ending on or ajter December 31, 

1956, and bejore Janu,ary 1, 1959, the sum oj the renegotiation 

loss carryjorwards to such fiscal year jrom the preceding 

two fi8cal years; and 

(ii) for any fiscal year ending after December 31,1958, the 

sum oj the renegotiation loss carry forwards to 8uch fiscal 

year jrom the preceding five fiscal years (excluding any 

fiscal year ending bejore December 31, 1956). 

(B) The term Hrenegotiation loss" means, for any fiscal 

year, the excess, if any, 0.1 costs (computed 'Without the application oj this sub8ection and the third sentence of subsection 

(f) paid or incurred in such fiscal year with re8pect to receipts or accruals subiect to the provisions oj this title over 

the amount oj receipts or accruals 8ubject to the promsions of 
153 

this title which were received or accrued in such fiscal year, 

but only to the extent that such exce8S did not result from gross 

inefficiency oj the contra ctor or subcontractor. 

(3) AMOUNT OF CARRYFORWARDS TO 1956, 1957, AND 1958.-

For the purposes of paragraph (2) (A ) (i) , a renegotiation loss 

for any fiscal year (hereinafter in this paragraph referred to as 

the "loss year") shall be a renegotiation loss carryforward to the 

first fiscal year succeeding the los8 year. Such renecotiation loss, 

after being reduced (but not below zero) by the profits derived 

from contracts with the Departments and subcontracts in the first 

fiscal year succeeding the loss year, shall be a renegotiation loss 

carryforward to the second fiscal year succeeding the loss year. 

For the purposes of the preceding sentence, the profits derived 

from contracts with the Departments and subcontracts in the first 

fiscal year succeeding the loss year shall be computed as follows: 

(A) If such first fiscal year ends on or after December 31, 

1956, such profits shall be computed by determining the 

amount of the renegotiation loss deduction for such first fiscal 

year without regard to the renegotiation loss for the loss year, 

(B) If such first fiscal year ends before December 31,1956, 

such profits shall be computed without regard to any renegotiation loss for the loss· year or any fiscal year preceding the 

loss year. 

(4) AMOUNT OF CARRYFORWARDS TO FISCAL YEARS ENDING AFTER 

1958.-For the purposes of paragraph (2)(A) (ii) , a renegotiation loss for any fiscal year (hereinafter in this paragraph referred 

to as the "loss year") ending on or after December 31, 1956, shall 

be a renegotiation loss carryforward to each of the five fiscal 

years following the loss year. The entire amount of such loss 

shall be carried to the first fiscal year succeeding the loss year. 

The portion of such loss whic h shall be carried to each of the other 

four fiscal years shall be the excess, if any, of the amount of such 

loss over the sum of the profits derived from contracts with the 

Departments and subcontracts in each of the prior fiscal yearoS 

to which such loss may be carried. For the purposes of the preceding sentence, the profits derived from contracts with the Departments and subcontracts in any such prior fiscal year shall 

be computed by determining the amount of the renegotiation loss 

deduction without regard to the renegotiation loss for the loss year 

or for any fiscal year thereafter, and the profits so computed shall 

not be considered to be less than zero. 7 

SEC. 104. RENEGOTIATION CLAUSE IN CONTRACTS. 

SUbject to section l06(a) the Secretary of each Department specifically named in section 103(a) shall insert in each contract made by 

such Department thirty days or more after date of the enactment 

of this Act, and the Secretary of each Department designated by the 

President under section 103(a) shall insert in each contract made 

by such Department thirty days or more after the date of such 

designation, a provision under which the contractor agrees-

(1) to the elimination of excessive profits through renegotiation; 

7 Section 103(m) was added by Pub. Law 870, 84th Cong., approved August 1, 1956, and was amended 

by Pub. Law 86-89, 86th Cong., approved July 13, 1959. 
154 

(2) that there may be withheld by the United States from 

amounts otherwise due the contractor, or that he will repay to the 

United States, if paid to him, any excessive profits; 

(3) that he will insert in each subcontract described in section 

103(g) a provision under which the subcontractor agrees-

(A) to the elimination of excessive profits through renegotiation; 

(B) that there may be withheld by the contractor for the 

United States from amounts otherwise due to the subcontractor, or that the subcontractor will repay to the United 

States, if paid to him, any excessive profits; 

(0) that the contractor shall be relieved of all liability to 

the subcontractor on account of any amount so withheld, or 

so repaid by the subcontractor to the United States; 

(D) that he will insert in each subcontract described in 

section 103 (g) provisions corresponding to those of subparagraphs (A), (B), and (0), and to those of this subparagraph; 

(4) that there may be withheld by the United States from 

amounts otherwise due the contractor, or that he will repay to the 

United States, as the Secretary may direct, any amounts which 

under section 105-(b)(1)(0) the contractor is directed to withhold from a subcontractor and which are actually unpaid at the 

time the contractor receives such direction. 

The obligations assumed by the contractor of subcontractor under 

paragraph (1) or (3)(A) , as the case may be, agreeing to the elimination of excessive profits through renegotiation shall be binding on 

him only if the contract or subcontract, as the case may be, is subject 

to this title. A provision inserted in a contract or subcontract, which 

recites in substance that the contract or subcontract shall be deemed 

to contain all the provisions reC}!l:ired by this section shall be sufficient 

compliance with this section. Whether or not the provisions specified 

in this section are inserted in a contract with a Department or subcontract, to which this title is applicable, such contract or subcontract, 

as the case may be, shall be considered as having been made subject to 

this title in the same manner and to the same extent as if such provisions had been inserted. 

SEC. 105. RENEGOTIATION PROCEEDINGS. 

(a) PROCEEDINGS BEFORE THE BOARD.-Renegotiation proceedings 

shall be commenced by the mailing of notice, to that effect, in such 

form as may be prescribed by regulation, by regist8!cd mail or by 

certified mail to the contractor or subcontractor. The Board shall 

endeavor to make an agreement with the contractor or subcontractor 

with respect to the elimination of excessive profits received or accrued1 and with respect to such other matters relating thereto as the Board 

deems advisable. Any such agreement, if made, may, with the conseJ?t of the contractor or subcontractor, also include provisions with 

rcspect to the elimination of excessive profits likely to be received 

or accrued. If the Board does not make an agreement with respect 

to thc elimination of excessive profits received or accrued, it shall issue 

and enter an order determining the amount, if any, of such excessive 

profits, and forthwith give notice thereof by registered mail or by 

certified mail to the contractor or subcontractor. In the absence of 
155 

the filing of a petition with The Tax Court of the United States under 

the provisions of and within the time limit prescribed in section 108, 

such order shall be final and conclusive and ~baII not be subject to 

review or redetermination by any court or other agency. The Board 

shall exercise its powers with respect to the aggregate of the amounts 

received or accrued during the fiscal year (or such other period as may 

be fixed by mutual agreement) by a contractor or subcontractor under 

contracts with the Departments and subcontracts, and not separately 

with respect to amounts received or accrued under separate contracts 

with the Department.s or subcontracts, except that the Board may 

exercise such powers separately with respect to amounts received or 

accrued by the contractor or subcontractor under anyone or more 

separate contracts with the Departments or subcontracts at the 

request of the contractor or subcontractor. By agrepment with any 

contract.or or subcontractor, and pursuant to re~ulations promulgated 

by it, the Board may in its discretion conduct renegotiation on a consolidated basis in ord('.r properly to reflect excessive profits of two or 

more related contractors or subcontractors. Renegotiation shall be 

conductpd on a consolidated basis with a parent and its subsidiary 

corporations which constitute an affiliated group under section 141 (d) 

of the,Internal Revenue Code if all of the corporations included in such 

affiliated gr6up request renegotiation on such basi8 and consent to such 

regulations as the Board shall prescribe with respect to (1) the determination and elimination of excessive profits of such affiliated group, 

and (2) the determination of the amount of the excessive profits of such 

affiliated group allocable, for the purposes of section 3806 of the 

lnternal Revenue Code, to each corporation included in such affiliated 

group. Whenever the Board makes a determination with respect to 

the amount of excessive profits, and such determination is made by 

order, it shall, at the request of the contractor or subcontractor, as the 

case may be, prepare and furnish such contractor or subcontractor with 

a statement of such determination, of the facts used as a basis therefor, 

and of its reasons for such determination. Such statement shall not 

be used in The Tax Court of the United States as proof of the facts or 

conclusions stated tberein.78 

(b) METHODS OF ELIMINATING EXCESSIVE PROFITS.-

(1) IN GENERAL.-Upon the making of an agreement, or the 

entry of an order, under subsection (a) of this section by the 

Board, or the entry of an order under section 108 by The Tax 

Court of the United States, determining excessive profits, the 

Board shall forthwith authorize and direct the Secretaries or any 

of them to eliminate such excessive profits-

(A) by reductions in the amoun ts othprwise payable to 

the contractor under contracts with the Departments, or by 

other revision of their terms; 

(B) by withholding from amounts otherwise due to the 

contractor any amount of such excessive profits; 

(C) by directing any person having a contract with any 

agency of tbe Government, or any subcontractor thereunder, 

to withhold for the account of the United States from any 

amounts otherwise due from such person or such subcontractor to a contractor, or subcontractor, having excessive 

;. Matter 111 itallcs 1n section 101l(a) waS added by Pub. Law 8&-1107, 86th Oong., approved lune 11, 1960 
156 

profits to be eliminated, and eV"ery such person or ~ubcontractor receiving such direction shall withhold and pay over 

to the United States the amount~ so required to be withheld; 

(D) by recovery from the contractor or subcontractor, or 

from any person or subcontractor directed under subpara. 

graph (C) to withhold for the account of the United States, 

through payment, repayment, credit, or suit any amount of 

such excessive profits realized by the contractor or subcontractor or directed under subparagraph (C) to be withheld 

for the account of t.he United States; or 

(E) by any combination of these methods, as is deemed 

desirable. . 

(2) INTEREsT.-Interest at the rate of 4 per centum per annum 

shall accrue and be paid on the amount of such exces~ive profits 

from the thirt.ieth day after the date of the order of the Board 

or from the" date fixed for repayment by the agreement with the 

contractor or subcontractor to the date of repayment, and on 

amounts required to be withheld by any person or subcontractor 

for the account of the United States pursuant to paragraph (1) 

(C), from the date payment is demanded by the Secretaries or 

any of them to the date of payment. When The Tax Court of the 

United States, under section 108, redetermines the amount of 

excessive profits received or accrued by a contractor or subcontractor, interest at the rate of 4 per centum per annum shall 

accrue and be paid by such contractor or subcontractor as follows: 

(A) When the amount of excessive profits determined by 

the Tax Court is greater than the amount determined by the 

Board, interest shall aecrue and be paid on the amount determined by the Board from the thirtieth day after the date of 

the order of the Board to the date of repayment and, in addition thereto, interest shall accrue and be paid on the additional amount determined by the Tax Court from the date of 

its order determining such excessive profits to the date of 

repayment. 

(B) When the amount of excessive profits determined by 

the Tax Court is equal to the amount determined by the 

Board, interest shall accrue and be paid on such amount from 

the thirtieth day after the date of the order of the Board to 

the date of repayment. 

(C) When the amount of excessive profits determined by 

the Tax Court is less than the amount determined by the 

Board, interest shall accrue and be paid on such lesser amount 

from the thirtieth day after the date of the order of the Board 

to the date of repayment, except that no interest shall accrue 

or be payable on such lesser amount if such lesser amount is 

not in excess of an amount which the contractor or subcontractor tendered in payment prior to the issuance of the 

order of the Board. 

[N otwithstanding the provisions of this paragraph, no interest 

shall accrue after three years from the date of filing a petition 

with the Tax Court pursuant to section 108 of this title in any case 

in which there has not been a final determination by the Tax Court 
157 

with respect to such pet.ition within such three-ypar period.] 7b 

(3) SUITS FOR RECOVERY.-Actions on behalf of the United 

States may be brought in the appropriate courts of the United 

States to recover, (A) from the cont.ractor or subcontractor, any 

amount of such excessive profits and accrued interest not withheld 

or eliminated by some other method under this subsection, and 

(B) from any person or subcontractor who has been directed 

under paragraph (1) (C) of this subsection to withhold for the 

account of the United States, the amounts required to be withheld 

under such paragraph, together with accrued interest thereon. 

(4) SURETIEs.-The surety under a contract or subcont.ract 

shall not be liable for the repayment of any excessive profits 

thereon. 

(5) AssIGNEEs.-Nothing herein contained shall be construed 

(A) to authorize any Department or agency of the Government, 

except to the exten t provided in the Assignmen t of Claims Act of 

1940, as now or hereafter amended, to withhold from any assignee 

referred to in said Act, any moneys due or to become due, or to 

recover any moneys paid, to such assignee under any contract. with 

any Department or agency where such moneys have been assigned 

pursuant to such Act, or (B) t.o authorize any Department or 

agency of the Government to direct the withholding pursuant 

to this Act, or to recover pursuant to this Act, from any bank, 

trust company or other financing institution (including any 

Federal lending agency) which is an assignee under any subcontract, any moneys due or to become due or paid to any such 

assignee under such subcontract. 

(6) JNDEMNIFICATIoN.-Each person is hereby indemnified by 

the United States against all claimR 011 account of amounts withheld by such person pursuant to this subsection from a contractor 

or subcontractor and paid over to the United States. 

(7) TREATMENT OF RECOVERIES.-Al1 money recovered by way 

of repayment or suit under this subsection shall be covered into 

the Treasury as miscellaneous receipts. Upon the withholding 

of any amount of excessive profits or the crediting of any amount 

of excessive profits against amounts otherwise due a contractor 

from appropriations from the Treasury, the Secretary shall 

certify the amount thereof to the Treasury and the appropriations of his Department shall be reduced by an amount equal to 

the amount so withheld or credited. The amount of such reductions shall be transferred to the surplus fund of the Treasury. 

(8) CREDIT FOR TAXES PAID.-In eliminating excessive profits, 

the Secretary shall -allow the contractor or subcontractor credit 

for Federal income and excess profits taxes as provided in section 

3806 of the Internal Revenue Code. 

(c) PERIODS OF LIMITATIoNs.-In the absence of fraud or malfeasance or wiUful misrepresentation oj a ma.terial fact, no proceeding to 

determine the amount of excessive profits for any fiscal year shall be 

commenced more than one year after a financial statement under subsection (e)(l) of this section is filed with the Board with respect to 

7b By Pub. Law 87-520, 87th Cong., approved luly 3, 1962, the matter In brackets was made lnappUcahle with respect to petitions for redetermination flIed with the Tax Cour1 after July 3, l~. 
158 

such year, and, in tll,e abserwe oj jraud or malfeasance or willful mi.~­

representation oj a material jact, if such proceeding is not commenced 

prior to the expiration of oneyear following the date upon which such 

statement is so filed, all liabilities of the contractor or subcontractor 

for excessive profi ts received or accrued during such fiscal year shall 

thereupon be discharged. If an agreemen t or order det.ermining the 

amount of excessive profits is not made within two years following the 

commencement of the renegotiation proceeding, then, in the absence 

oj jraud or malfeasance or wiUjul misrepre.~entation oj a material 

jact, upon the expiration of such two years all liabilities of the contractor or subcontractor for excessive profits with respect to which 

such proceeding WllS commenced shall thereupon be discharged, except that (1) if an order is made within such two years pursuant to a 

delegation of authority under subsection (d) of section 107, such twoyear limitation shall not apply to review of such ordpr by the Board, 

and (2) such two-year period ·may be extended by mutual agreement. 8 

(d) AGREEMENTS TO ELIMINATE EXCESSIVE PROFITs.-For the purposes of this title the Board may make final or other agreements with 

a contractor or subcontractor for the elimination of excessive profits 

and for the discharge of any liability for excessive profits under this 

title. Such agreements may contain such terms and conditions as the 

Board deems advisable. Any such agreement shall be conclusive 

according to its t.erms; and, except upon a showing of fraud or malfeasance or a willful misrepresentation of a material fact, (1) such 

agreement shall not for the purposes'of this title be reopened as to the 

m'atters agreed upon, and shall not be modified by any officer, employee, 

or agent of the United States, and (2) such agreement and any determination made in accordance therewith shall not be annulled, modified, set aside, or disregarded in any suit, action, or proceeding. N otwithstanding any other provisions of this title, however, the Board 

shall have the power, pursuant to regulations promulgated by it, to 

modify any agreement or order for the purpose of extending t.he time 

for payment of sums due under such agreement or order, and shall also 

have the power to set aside and declare null and void any such agreement if, upon a request made to the Board within three years jrom the 

date oj such agreement, the Board finds as a jact that the aggregate oj 

the amounts received or accrued by the other party to such agreement 

during the fiscal year covered by such agreement was not more than 

the minimum amounts subject to renegotiation specified in section 105 

(j) jur such fiscal year. g 

(e) INFORMATION AVAILABLE TO BOARD.-

(1) FURNISHING OF FINANCIAL STATEMENTS, ETc.-Every person who holds contracts or subcontracts, to which the provisions 

of tl1is title are applicable, shaH, in such form and detail as the 

Board may by regulations prescribe, file with the Board, on or 

before the first. day of the fijth calendar month following the 

close of his fiscal year, a financial statement setting forth such 

information as the Board may by regulations prescribe as necessary to carry out this title. The preceding sentence shall not apply 

I Matter In italics In section 1011 (c) wa.'! added by Pub. Law 870, 84tb Cong., approved August I, 1966. 

The words "s financial statement" were substituted for "the statement required". These amendments 

apply only with respect to fiscal years ending after lune 30, 1956 . • Matter In ltali~ In section 105 (d) was added by Pub. Law 764, sad Cong., approved September I, 19M. 

This amendDient Is effective as if It were a part of the Renegotlation Act of 1951 on the date ollts enactment. 
159 

to any such per80n with respect to a fiscal year if the aggregate 

of the amounts received or accrued under such contracts and subcontracts during such fiscal year by him, and all persons under 

control of or controlling or under common control with him, is not 

more than the applicable amount prescribed in subsection (f) (1) 

or (2) of this section; but any person to whom this sentence applies may, if he so elects, file with the Board jor such fiscal year a 

financial statement setting forth such information as the Board 

may by regulations prescribe as necessary to carry out this title. 

The Board may require any person who holds contracts or subcontracts to which the provisions of this title are applicable (whether 

or not such ;person has filed a financi,al statement under this paragraph) to furnish any information, records, or data which are 

determined by the Board to be nece8sary to carry out this title 

and which the Board specifically requests such person to furnish. 

Such information, records., or data may not be required with respect to any fiscal year after the date on which all liabilities of 

such person jor excessive profits received or accrued during such 

fiscal year are discharged. Any person who Wil{fully fails or 

refuses to furnish any statement, information, records, or data 

required of him under this subsection, or who knowingly furnishes 

any statement, in/ormation, records, or data pursuant to this 

subsection contain'mg iriformation which is false or misleading in 

any material respect, shall, upon conviction thereof, be punished 

by a fine of not more than $10,000 or imprisonment for not more 

than one year, 01' both. 10 

(2) AUDIT OF BOOKS AND RECORDs.-For the purpose of this 

title, the Board shall have the right to audit the books and records 

of any contractor or subcontractor subject to this tille. In the 

interf'st of economy and the avoid&llCe of duplication of inspection 

and audit, the services of the Bureau of Internal Revenue shall, 

upon request of the Board and the approval of the Secretary of 

the Treasury, be made available to the extent determined by the 

Secretary of the Treasury for the purpose of making examina· 

tions and audits under this title. 

(f) MINIMUM AMOUNTS SUBJECT TO RENEGOTIATION.-

(I) IN GENERAL.-If the aggregate of the amounts received or 

accrued during a fiscal year (and on or after the applicable effective date specified in section 102(a)) by a contractor or subcontractor, and all persons under control of or controlling or under 

common control with the contractor or subcontractor, under contracts with the Departments and subcontracts described in section 

103(g) (1) and (2), is not more than $250,000, in the case of a 

fiscal year ending before June 30, 1953, or $500,000, in the case of 

a fiscal year ending on or after June 30, 1953, or $1,000,000, in 

the case of a fiscal year ending after June 30, 1956, the receipts or 

accruals from such contracts and subcontracts shall not, for such 

fiscal year, be renegotiated under this title. If the aggregate of 

such amounts received or accrued dUI-ing the fiscal year under such 

contracts and subcontracts is more than $250,000, in the case of a· 

10 Mattpr in italics in section 105 (e)(1) was added by Pub. Law 870, 84th Cong., approved August 1: 

1900, which also struck out the second and third sentences of the former paragraph (1). The word "fifth' was substituted for "fourth" in the first sentence. These amendments apply only with respect to ftscal 

yearll ending after Iune 30,1966. 
160 

fiscal year ending before June 30, 1953, or $500,000, in the case oJ 

a fiscal year ending on or after June 30, 1953, or $1,000,000, in 

the case of afiscal year ending after June 30, 1956, no determination of excessive profits to be eliminated for such year with respest 

to such contracts and subcontracts shall be in an amount greater 

than the amount by which such aggregate exceeds $250,000, in 

the case of a fiscal year ending before June 30, '1953, or $500,000, 

in the case of a fiscal year ending on or after June 30, 1953, or 

$1,000,000, in the case of afiscal year ending after June 30, 1956.11 

(2) SUBCONTRACTS DESCRIBED IN SECTION loa(g)(a).-If the 

aggregate of the amounts received or accrued during a fiscal year 

(and on or after the applicable effective date specified in section 

102(a)) by a subcontractor, and all persons under control of or 

controlling or under common control with the subcontractor, 

under subcontracts described in section 103(g)(3) is not more 

than $25,000, the receipts or accruals from such subcontracts shall 

not, for such fiscal year, be renegotiated under this title. If the 

aggregate of such amounts received or accrued during the fiscal 

year under such subcontracts is more than $25,000, no determination of excessive profits to be eliminated for ·such year with 

respect to such subcontracts shall be in an amount greater than 

the amount by which such aggregate exceeds $25,000. 

(3) COMPUTATION.-In computing the aggregate of the 

amounts received or accrued during any fiscal year for the purposes of paragraph (1) of this subsection, there shall be eliminated all amounts received or accrued by a contractor or subcontractor from all persons under control of or controlling or under 

common control with the contractor or subcontractor and all 

amounts received or accrued by each such person from such contractor or subcontractor and from each other such person. If the 

fiscal year is a fractional part of twelve months, the $250,000 

amount, the $500,000 amount, the $1,000,000 amount, and the 

$25,000 amount shall be reduced to the same fractional part 

thereof of the purposes of paragraphs (1) and (2). In the case of 

a fiscal year beginning in 1950 and ending in 1951, the $250,000 

amount and the $25,000 amount shall be reduced to an amount 

which bears the same ratio to $250,000 or $25,000, as the case may 

be, as the number of days in such fiscal year after December 31, 

1950, bears to 365, but this sentence shall have no application if 

the contractor or subcontractor has made an agreement with the 

Board pursuant to section 102(c) for the application of the provisions of this title to receipts or accruals prior to January 1, 1951, 

during such fiscal year. In the case of a fiscal year beginning on 

or before the termination date and ending after the termination 

date, the $1,000,000 amount and the $25,000 amount shall be reduced to an amount which bears the same ratio to $1,000,000 or 

$25,000, as the case may be, as the number of days in such fiscal 

year before the close of the termination date bears to 365.12 

II Mattpr in tsllcs in section 105(0 (1) was added by Pub. Law 764, Bad Cong., approved September 1, 

19M, as amended by Pub. Law 870, 84th Cong., approvp.d AUgll!"t 1, 1956. The latter amendment added the 

references to $1,000,000 for fiscal years endlnJ!: afwr JunP. 30, 1956. 12 Pub. Law 764, 83d Cong., approved September 1, 19M, added "the $500,000 amount" in the ~cond sen- tence of section 105(f){3). Pub. Law 870, 84th Cong., approved August], 1956, substituted "paragraph (1)" 

for "paragraphs (1) and (2)" in the first sentence; added "the $],000,000 amount" in the second sentence; 

and added the last sentence. The amendment substituting "paragraph (1)" applies only to fiscal years ending on or after June 30,1956. 
161 

SEC. 106. EXEMPTIONS. 

(a) MANDATORY EXEMPTIONs.-The provisions of this title shall not 

apply to-

(1) any contract by a Department with any Territory, possession, or State, or any agency or political subdivision thereof, or 

with any foreign government or any agency thereof; or 

(2) any contract or subcontract for an a~icultural commodity 

in its raw or natural state, or if the commodity is not customarily 

sold or has not an established market in its raw or natural state, 

in the first form or'state, beyond the raw or natural state, in which 

it is customarily sold or in which it has an established market. 

The term "agricultural commodity" as used herein shall include 

but shall not be limited to-

(A) commodities resulting from the cultivation of the 

soil such as grains of all kinds, fruits, nuts, vegetables, hay, 

straw, cotton, tobacco, sugarcane, and sugar beets; 

(B) natural resins, saps, and gums of trees; 

(C) animals, such as cattle, hogs, poultry, and sheep, fish 

and other marine life, and the produce of live animals, such 

as wool, eggs, milk arid cream; or 

(3) any contract or subcontract for the product of a mine, oil 

or gas well, or other mineral or natural deposi t, or timber, which 

has nor been processed, refined, or treated beyond the first form or 

state suitable for industrial use; or 

(4) any contract. or subcontract with a common carrier for 

transportation, or with a public utility for gas, electric energy, 

water, communications, or transportation, when made in either 

case at rates not in excess of published rates or charges filed with, 

fixed, approved, or regulated by a public regulatory body, State, 

Federal, or local, or at rates not in excess of unregulated rates of 

such a public utility which are substantially as favorable to users 

and COnsumers as are regulated rates. In the case of the furnishing or sale of transportation by common carrier by water, this 

paragraph shall apply only to such furnishing or sale which is 

subject to the jurisdiction of the Interstate Commerce Commission under Part III of the Interstate Commerce Act or subject to 

the jurisdiction of the Federal Maritime Board under the Intercoastal Shipping Act, 1933, and to such Jurni8hing or sale in any 

case in which the Board finds that the regulatory aspects oj rates 

jor such .furnishing or sale, or the type and nature oj the contract 

for such jurnishing or sale, are such as to indicate, in the opinion 

oj the Board, that excessive profit..~ are improbable: or 13 

(5) any contract or subcontract with an organization exempt 

from taxation under section 101 (6) of the Internal Revenue 

Code, but only if the income from such cont.ract or subcontract 

is not includible under section 422 of such code in computing the 

unrelated business net income of such organization; or 

(6) any contract which the Board determines does not have a 

direct and immediate connection with the national defense. The 

Board shall prescribe regulations designating those classes and 

types of contracts which shall be exempt under this paragraph; 

II Matter In Italics In section 106 (8) (4) was added by Pub. Law 7M, sad Cong., approved September I, 19M. and applles only with respect to tL~ years ending on or alter December 31, 1963. 
162 

and the Board shall. in accordance with regulations prescribed 

by it, exempt any individual contract not falling within any such 

class or type if it determines that such contract does not have 

a direct and immediate connection with the national defense. 

In designating those classes and types of contracts which shall 

be exempt and in exempting any individual contract under this 

paragraph, the Board shall consider as not having a direct or immediate connection with national defense any contract/or the 

furnishing of materials or services to oe used by the Unite States, 

a Department or agency thereof, in the manufacture and sale of 

synthetic rubbers to a private person or to private persons which 

are to be used for nondefense purposes. If the use by such private 

per80n or persons shall be partly for defense and partly for nondefense purposes, the Board shall consider as not having a direct 

or immediate connection with national d~fense that lorti on of the 

contract which is determined not to have been use for national 

defense purposes. The method used in making such aetermination 

shall be subject to approval by the Board. Notwithstanding section 108 of this title. regulations prescribed by the Board under 

this paragraph, and any determination of the Board t,hat a contract is or is not exempt under this paragraph, shall not be 

reviewed or redetermined by the Tax Court or by any other court 

or agency; or 14 

(7) any subcontract directly or indirectly under a contract 

or subcontract to which this title does not apply by reason of any 

paragraph, other than paragraph (1), (5), or (8), of this subsection; or 16 

(Applicable to fiscal years ending on or before June 30,1956. See footnote 16.] 

(8) any contract or subcontract for the making or furnishing of 

a standard commercial article or a standard commercial service, 

unless (lie Board makes a specific finding that competitive conditions 

affecting the sale of such article or such service are such as will not 

reasonably prevent excessive profits. This paragraph shall apply to 

any such contract or subcontract only if (1) the contractor or subcontractor files, at such time and in such form and detail as the 

Board shall by regulations prescribe, such information and data as 

may be required by the Board under its regulations for the purpose 

of enabling it to reach a decision with respect to the making of specific 

finding under this paragraph, and (2) within a period of six months 

after the date oj filing of such information and data, the Board fails 

to make a specific finding th.at competitive conditions affecting the 

sale of such article or such service are such as will not reasonably 

prevent excessive profits, or (3) within such six-month period, the 

Board makes a specific finding that competitive conditions affecting 

the sale of such article or such service are such as will reasonably 

prevent excessive profits. Any contractor or subcontractor may 

waive the exemption provided in this paragraph with respect to 

" Matter In Itallcs In section 106 (a) (6) was added by Puh. Law 764, 83d Cong., approVl'd September 1. 

1954. Thlq amendment iq effective as If It were a part of the Renegotiation Act of 1961 on the date of Its enactment. 1< Mattl'r In itall~ In section 106 (a) (7) was addl'd by Pub. Law 761, 83d Cong., approved September ., 1954, a" amended by Pub. Law 870, 84th Cong., approv('d August 1, 1956. The former amendment llmlted 

thl' exclusion to paragraph (8) and applies only to the f>xtent of amounts receIved or accrued after DeCf'm· 

ber 31,1953. The latter amendment added the references to paragraphs (1) and (6), and applles only with 

respect to subcontracts made after June 30. 1956. 
163 

receipts or accruals in any fiscal year by including a statement to 

such effect in the financial statement filed by such contr(J,Ctor or subcontractor for such fiscal year pursuant to section 105(e)(1). Any 

specific finding of the Board under this paragraph shall not be 

reviewed or redetermined by any court or agency other than by the 

Tax Court of the United States in a proceeding for a redetermination 

of the amount of excessive profits determined by an order of the 

Board. For the purpose of this paragraph-

(A) the term "article" includes any material, part, component, assembly, machinery, equipment, or other personal 

property; 

(B) the term "standard commercial article" means an 

article-

(1) which, in the normal course of business, is customar .. ily manufacturedjor stock, and is customarily maintained 

in stock 'by the manufacturer or any dealer, distributor, or 

other commercial agency for the marketing of such article; 

or 

(2) which is manufactured and sold by more than two 

persons for general civilian industrial or commercial use, 

or which is identical in every material respect with an article 

so manufactured and sold; 

(C) the term "identical in every material respect" means of 

the same kind, manufactured of the same or substitute materials, 

and having the same industrial or commercial use or uses, without necessarily being of identical specifications; 

(D) the term "service" means any processing or other operation performed by chemical, electrical, physical, or mechanical 

methods directly on materials owned by another person; 

(E) the term "standard commercial service" means a service 

which is customarily performed by more than two persons for 

general civilian industrial or commercial requirements, or is 

reasonably comparable with a service so performed; 

(F) the term "reasonably comparable" means of the same or 

a similar kind, performed with the same or similar materials, 

and having the same or a similar result, without necessarily involving identical operations; and 

(G) the term "persons" does not include any person under 

control of, or controlling, or under common control with any 

other person considered for the purposes of subparagraph (B) (2) 

of this paragraph.I6 

(9) any contract, awarded as a result of competitive bidding, for 

the construction of any building, structure, improvement, or facility, 

other than a contract for the construction of housing financed with a 

mortgage or mortgages insured under the provisions of title V I II 

of the National Housing Act, as now or hereafter amendedP 

I. Paragraph (8) of section 106(a) was added by Pub. Law 7M, sad Oong., approved September I, 19M, as amended by Pub. Law 216, 84th Oong., approved August 3, 191i5. The latt('r amendment added the 

references to standard commercial services. The~e amendments apply only to the pxtent of amounts re- ceived or accrued after December 31,1953. PUb. Law 870, 84th Cong., approved August I, 1956, struck out paragraph (8) with respect to fis<'81 years ending after June 30,1956 and added seotion 106(e) with respect to sucll fiscai years. Therefore, section 106(a) (8) applies to contracts and subcontracts only to the extent of amounts rcceiwd or accrued after December 31, 1953, in fiscal ye'U's endins; on or before June 30, 1956. 11 Section 106(a)(9) was added by Pub. Law 216, 84th Cong., approved August 3, 1955, and applies only to contracts with the Departments made after December 31, Ig54, 

91-043 0 - 68 - 12 
164 

(b) COST ALLOWANCE.-In the case of a contract.or or subcontractor 

who produces or acquires the product of a mine, oil or gas well, or 

other mineral or natural deposit, or timber, and processes, refines, or 

treats such a product to and beyond the first form or state suitable 

for industrial use, or who produces or acquires an a~icultural product 

and processes, refines, or treats such a product to and beyond the first 

form or state in which it is customarily sold or in which it has an 

established market, the Board shall prescribe such regulations as may 

be necessary to give such contractor or subcontractor a cost allowance 

substantially equivalent to the amount which would have been rpalized by such contractor or subcon tractor if he had sold such product 

at such first form or state. Notwithstanding any other provisions of 

this title, there shall be excluded from consideration in determining 

whether or not a contractor or subcontractor has received or accrued 

excessive profits that portion of the profits, derived from rpceipts and 

accruals subject to the provisions of this title, attributable to the 

increment in value of the excess inventory. For the purposes of this 

subsection the term "excess inven tory" means inventory of products, 

hereinbefore described in this subsection, acquired by the contractor 

or subcont.ractor in the form or at the state in which contracts for such 

product,s on hand or on contract would be exempted from this title 

by subsection (a) (2) or (3) of this section, which is in excess of the 

inventory reasonably necessary to fulfill existing contracts or ordprs. 

That portion of the profits, derived from receipts and accruals subject to the provisions of this title, attributable to the increment in 

value of the excess inventory, and the method of excluding such portion of profits from consideration in determining whether or not the 

contractor or subcontractor has received Or accrued excessive profits, 

shall be determined in accordance with regulations prescribed by the 

Board. 

(c) PARTIAL MANDATORY EXEMPTION FOR DURABLE PRODUCTIVE 

EQUIPMENT.-

(Applicable to fiscal years ended before June 30, 1953. See footnote 18] 

(1) IN GENERAL.-The provisions of this title shall not apply 

to receipts or accruals (other than rents) from subcontracts for 

new durable productive equipment, except to that part of such 

receipts or accruals which bears the same ratio to the total of such 

receipts or accruals as five years bears to the average useful life 

of such equipment as set forth in Bulletin F of the Bureau of 

Internal Revenue (1942 edition) or, if an average useful life is 

not so set forth, then as estimated by the Board. 

(2) DEFINITIONs.-For the purpose of this subRection-

(A) the term "durable productive equipment" means 

machinery, tools, or other equipment which does not become 

a part of an end product acquired by any agency of the 

Government under a contract with a. department. or of an 

article incorporat.ed therein, and which has an average useful 

life of more t~an five years; and 

(B) the term "subcontracts for new durable productive 

equipment" does not include subcontracts where the purehaser of such .durable prouuctive equipment has acquired 

such equipment for the account of the Government, but 
165 

includes pool orders and similar commitments placed in the 

first instance by a Department or other agency of the Government when title to the equipment is transferred on delivery 

thereof or within one year thereafter to a contractor or subcontractor. 

[Applicable to fiscal years ending on or after June 30, 1953. See footnote 18] 

(1) IN GENERAL.-The provisions of this title shall not apply 

to receipts or accruals (other than rents) from contracts or subcontracts for new durable productive equipment, except (A) to 

that part of such receipts or accruals which bears the same ratio 

to the total of such receipts or accruals as five years bears to the 

average useful life of such equipment as set forth in Bulletin F of 

the Bureau of Internal Revenue (1942 edition) or, if an average 

useful life is not so set forth, then as estimated by the Board 

and (B) to receipts and accruals from contracts for new durable 

productive equipment in cases in which the Board finds that the 

new durable productive equipment covered by such contracts cannot 

be adapted, converted, or retooled for commercial use. 

(2) DEFINITloN.-For the purpose of this subsection, the term 

"durable productive equipment" means machinery, tools, or other 

productive equipment, which has an average usefullije of more than 

five years. IS 

Cd) PERMISSIVE EXEMPTIONs.-The Board is authorized, in its discretion, to exempt from some or all of the provisions of this title-

(1) any contract or subcontract to be performed outside of the 

territ.oriallimits of the continental United States or in Alaska; 

(2) any contracts or subcontracts under which, in the opinion 

of the Board, the profits can be determined with reasonable 

certainty when the contract price is established, such as certain 

classes of (A) agreements for personal service ·or for the purchase of real property, perishable goods, or commodities the 

minimum price for the sale of which has been fixed by a public 

regulatory body, (B) leases and license agreements, and (0) 

agreements where the period of performance under such contract 

or subcontract will not be in excess of thirty days; 

(3) any contract or subcontract or performance thereunder 

during a specified period or periods if, in the opinion of the Board, 

the provisions of the contract are otherwise adequate to prevent 

excessive profits; 

(4) any contract or subcontract the renegotiation of which 

would jeopardize secrecy required in the public interest; 

(5) any subcont,ract or group of subcontracts not otherwise 

exempt from the provisions of this section, if, in the opinion of the 

Board, it is not administratively feasible in the case of such subcontract or in the case of such group of subcontracts to determine and segregate the profits attributable to such subcontract 

or group of subcontracts from the profits attributable to activities 

not subject to renegotiation. 

18 Matter In itall~ In paragrapb 1 was added by Pub. Law 764, sad Cong., approved September 1, 19M. Paragraph 2 was amended to read as shown in italics by Pub. Law 764, as amended by Pub. Law 216, 84th 

Cong., approved August 3, 1955. The iatter amendment added "productive" between "other" and "equip. mp,nt" and struclc out "whicb does not become a ps.rt of an end product, or of an article Incorporated therein, 

and" after "otbE'r equipment". These amendments apply only with respect to fiscal years ending on or alter June 30, 1953. 
166 

The Board may so exempt contracts and subcontracts both individually and by general classes or types. 

[Applicable to fiscal years ending after June 30. 1956] 

(e) MANDATORY EXEMPTION FOR STANDARD COMMEROIAL ARTIOLES 

.AND SERVIOES.-

(1) ARTIOLES AND SERVIOES.-The provisions oj this title shall 

not apply to a.mounts received or accrued in a fiscal year under a.ny 

contract or 8ubcontract jor an article or service which ('With respect to 

such fiscal year) is-

(A) a standard commercial article; 

(B) an article which is identical in every material respect with 

a standard commercial article; or 

(C) a service wh?~ch is a standard commercial service or is 

reasonably comparable 'with a standard commercial service. 

(2) CLASSES OF ARTIOLEs.-The provisions oj this title shall 

not apply to amounts recei-ved or accrued in a fiscal year under any 

contract or subcontract for an article which (with respect to .~uch 

fiscal year) is an article in a standard commercial class 0./ art?·cles. 

(3) APPLloATIONs.-Paragraph (1) (B) or (C) and paragraph (2) shall apply to amounts received or accrued in a .fiscal 

year under any contract or subcontract jor an article or servwe 

only ij-

(A) the contractor or subcontractor at his election files, at 

such time and in such jorm and detail as the Board shall by 

regulations prescribe, an application containing .such information and da.ta as may be required by the Board under its regulat?~ons jor th e purpose oj enabling it to make a determination under th e applicable paragraph, and 

(B) the Board determines that such article or service is, 

or jails to determine that such article or ser'vice is not, an 

art-icle or service to which such paragraph applies, within the 

following periods ajter the date oj filing such applicat?~on: 

(i) in the case oj paragraph (1) (B) or (C), three 

months; 

(ii) in the case oj paragraph (2), six months; or 

(iii) in either case, any longer period stipulated by 

mutual agreement. 

(4-) DEFINITIONs.-For the purposes oj this subsection-

(A) the term "article" includes any material, part, component, assembly, machinery, equipment, or other personal 

property,' 

(B) the term "standard commercial article" means, with 

respect to any fiscal year, an article-

(i) which either is customarily maintained in stock 

by the contractor or subcontractor or is offered jor sale 

in accordance with a price schedule regularly maintained 

by the contractor or subcontractor, and 

(ii) jrom the sales of which by the contractor or subcontractor at least 35 percent oj the receipts 01' accruals 

in such fiscal year, or oj the aggregate receipts or accruals 

in such fiscal year and the preceding fiscal year, are not 
167 

(without regard to this subsection and subsection (c) oj 

this section) subject to this title; 

(0) an article is, with respect to any fiscal year, "identical 

in every material respect with a standard commercial article" 

only ij-

(i) such article is oj the same kind and manufactured 

of the same or substitute materials (without necessarily 

being oj identical specifications) as a standard commercia.l article jrom sales oj which the contractor or subcontractor has receipts or accruals in such fiscal year, 

(ii) such article is sold at a price which is reasonably 

comparable with the price oj such standard commercial 

article, and 

(iii) at least 35 percent oj the aggregate receipts or 

accruals in such fiscal year by th e contractor or subcontractor jrom sales of such article and sales oj such standard commercial article are not (without regard to this 

subsection and subsection (c) oj this section) subject to 

this title; 

(D) the term" service" means any processing or other oper- ,ation performed by chemical, electrica.l, physical, or mech~nical methods directly on materials owned by another person; 

(E) the term "standard commercial service" means, with 

respect to any fiscal year, a service jrom the performance oj 

which by the contractor or subcontractor at least 35 percent 

of the receipts or accruals in such fiscal year are not (without 

regard to this subsection) subject to this title; 

(F) a service is, with respect to any fiscal year, "reasonably 

comparable uxith a standard commercial service" only if-

(i) such service is oj the same or a similar kind, perjormed with the same or similar materials, and has the 

same or a similar result, without necessarily involving 

identical operations, as a standard commercial service 

from the performance oj which the contractor or subcontractor has receipts or accruals in l:;uch fiscal year, and 

(ii) at least 35 percent oj the aggregate receipts or 

accruals in such fiscal year by the contractor or subcontractor jrom the performance oj such service and such 

standard commercial service are not (without regard to 

this subsection) subject to this title; and 

(G) the term "standard commercial class oj articles" means, 

with respect to any fiscal year, two or more articles with respect 

to which the jollowing conditions are met: 

(i) at least one oj such articles either is customarily 

maintained in stock by the contractor or subcontractor 

or is offered jor sale in accordance with a price schedule 

regularly maintained by the contractor or subcontractor, 

(ii) all oj such articles are of the same kind and manufactured oj the same or substit1tte materials ( without 

necessarily being oj identical specifications), 

(iii) all oj 81lch articles are sold at reasonably comparable prices, and 
168 

(iv) at least 35 percent oj the aggragete receipts or 

accruals in the fiscal year by the contractor or subcontractor jrom sales oj all oj such articles are not (without 

regard to this subsection and subsection (c) oj this section) subject to this title. 

(5) WAIVER OF EXEMPTION.-Any contractor or subcontractor 

may waive the exemption provided in paragraphs (1) and (2) 

with respect to his receipts or accruals in any fiscal yp-ar jrom 

sales oj any article or service by including a statement to such effect 

in the financ~'al statement filed by him jor such fiscal year pursuant 

to section 105(e)(1), without necessarily waim:ng sur:h exemption 

with respect to receipts or accruals in such fiscal year jrom sales oj 

any other article or service. A waiver, if made, shall be unconditional, and no waiver may be made without the permission of fhe 

Board for any receipts or accruals with respect to which the contractor 

or subcontractor has previously filed an applicatwn under paragraph (3). 

(6) NONAPPLICABILITY DURING NATIONAL EMERGENCIEs.-Paragraphs (1) and(2) shall not apply to amounts receivf.d or accrued 

during a national emergency proclaimed by the President, or declared by the Congress, ajter the date oj the enactment oj the Renegotiation Amendments Act oj 1956. 19 

SEC. 107. RENEGOTIATION BOARD. 

(a) CREATION OF BOARD.-There is hereby created, as an independent establishment in the executive branch of the Government, a Renegotiation Board to be composed of five members to be appointed 

by the President, by and with the advice and consent of the Senate. 

The Secretaries of the Army, the Navy, and the Air Force, respectively, subject to the approval of the Secretary of Defense, and the 

Administrator of General Services shall each recommend to the President, for his consideration, one person from civilian life to serve as a 

member of the Board. The President shall, at the time of appointment, designate one member to serve as Chairman. The Chairman 

shall receive compensation at the rate of $17,500 per annum, and the 

other mf'mbers shall receive compensation at the rate of $15.000 per 

annum. 19a No member shall actively engage in any business, vocation, 

or employment other than as a member of the Board. The Board 

shall have a seal which shall be judicially noticed. 

(b) PLACES OF MEETING AND QuoRuM.-The principal office of the 

Board shall be in the District of Columbia, but it or any division 

thereof may meet and exercise its powers at any other place. The 

Board may establish such number of offices as it deems necessary to 

expedite the work of the Board. Three members of the Board shall 

constitute a quorum, and any power, function, or duty of the Board 

may be exercised or performed by a majority of the members present 

if the members present constitute at least a quorum. 

(c) PERSONNEL.-There shall be a General Counsel oj the Renegotiation Board who shall be appointed by the Board without regard to the 

civil-service laws and regulations. The Board is authorized, subject 

18 S('ction 106(e) was added by Pub. Law 870, 84th Gong., approved August 1, 1956, and applies only with 

reslY'ct to fiscal years ending after June 30,1956. u. By Federal Executive Pay Act of 1956, Pub. Law 8M, 84th Gong., approved July 31, ]956, compensation of Chairman and other members of Board was increase~ to $20,500 and $20,000, respectively. By Federal 

Executive Sal&ry Act of 1964, Title III, Pub. Law 88-426, 88th Cong., approved August 14, 1964, compensa- tion of Chairman and.other membersiof Board was increased to $26,000. 
169 

to the Classification Act of 1949 and the civil-sen ice laws and regulations,20 to employ and fix the compensation of ~uch officers and 

employees as it deems np,cessary to assist it in carrying out its duties 

under this title. The Board may, with the con~ent of the head of the 

agency of the Government concerned, utilize the services of any officers 

or employees of the United States, and reimburse such agency for the 

services so utilized. Officers or employees whose services are so utilized shall not receive additional compensation for such services, but 

shall be allowed and paid necessary travel expenses and a per diem in 

lieu of subsistence in accordance with the Standardized Government 

Travel Regulations while away from their homes or official station on 

du ties of the Board. 

(d) DELEGATION OF POWERS.-The Board may delegate in whole or 

in part any function, power, or duty (other than its power to promulgate regulations and rules and other than its power to grant permissive exemptions under section l06(d») to any agency of the Government, including any such agency established by the Board, and may 

authorize the successive redelegation, within limits specified by it, of 

any such function, power, or duty to any agency of the Government, 

including any such agency established by the Board. But no function, 

power, or duty shall be delegated or redelegated to any perRon pur 4 

suant to this subsection or sub~ection (f) unless the Board has determined that such person (other than the Secretary of a Department) 

is responsible directly to thp Board or to the person making such delegation or redelegation and is not engaged on behalf of any Department 

in the making of contracts for the procurement of supplies or services, 

or in the supervision of such activity; and any delegation or redelegation of any function, power, or duty pursuant to this subsection or 

subsection (f) shall be revoked by t.he person making such delegation 

or redelegation (or by the Board if made by it) if the Board shall at 

any t.ime thereafter determine that the person (other than the Secretary 

of a Department) to whom has been delegated or redelegated such 

function, power or duty is not responsible directly to t.he Board or to 

the person making such delegation or redelegation or is engaged on 

behalf of any Department in the making of contracts for the procurement of supplies or services, or in the supervision of such activity. 

(e) ORGANIZATION AND OPERATION OF BOARD.-The Chairman of 

the Board may from time to time divide the Board into division of one 

or more members, assign the members of the Board thereto, and in 

case of a division of more than one member, deRignate the chief 

thereof. The Board may also, by regulations or otherwise, determine 

the character of cases to be conducted initially by the Board through 

an officer or officers of, or utilized by, the Board, the character of cases 

to be conducted initially by the various agencies of the Government 

authorized to exercise powers of the Board purusnat to subsection (d) 

of this section, the character of cases to be conducted initially by the 

various divisions of the Board, and the character of cases to be conducted initially by the Board itself. The Board may review any 

determination in any case not initially conducted by it, on its own 

motion or, in its discretion, at the request of any contractor or sub20 First sentence of section 107(c) was added by Pub. Law 8&-89, 86th Cong., approved July 13, 1959, as amended by Pub. Law 88-426, 88th Cong., approved August 14, 1964, which repealed that part of such sentence reading: ", and shall receive compensation at the rate of $19,000 per annum". Matter in italics 

in second sentence was substituted by Pub. Law 870, 84th Cong., approved August I, 1956, for "(but wit~outreg~d !o the ,c}yil:serv!ce law~ an.4.regulations)". 
170 

contractor aggrieved therehy. Unles~ the Board upon its own motion 

initiates a rp.view of such determination within ninety days from the 

date of such determination, or at the request of the contract.or or subcontractor made within ninety clays from the date of such determination initiates a review of such determination within ninety days from 

the date of such request, such determination shall be deemed the 

determination of the Board. If such determination was made by an 

order with respect to which notice thereof was given by registered mail 

or by certified mail pursuant to section 105(a), the Board shall give 

notice by registered mail or by certified mail to the contractor or -subcontractor of its decision not to review the case. If the Board reviews any determination in any case not initially conducted by it and 

does not make an agreement with the contractor or subcontractor 

with respect to the elimination of excessive profits, it shall issue and 

enter an order under section 105(a) determining t.he amount, if any, 

of excessive profits, and forthwith give notice thereof by registered 

mail or by certified mail to the contractor or subcontractor. The 

amount of excessive profits so determined upon review may be less 

than, equal to, or greater than, that determined by the agency of the 

Government who~e action is so reviewed. 2oa 

(f) DELEGATION OF RENEGOTIATION FUNCTIONS TO BOARD.-The 

Board is hereby authorized and directed to accept and perform such 

renegotiation powers, dutip.s, and functions as may be delegated to it 

under any other law requiring or permitting renegotiation, and the 

Board is further authorized to redelegate any such power, duty, or 

function to any agency of the Government and to authorize succe~sive 

redelegations thereof, within limits specified by the Board. N otwithstanding any other provision of law, the Secretary of Defense is 

hereby authorized to delegate to the Board, in whole or in part, the 

powers, functions. and duties conferred upon him by any other 

renegotiation law. 

SEC. 108. REVIEW BY THE TAX COURT. 

Any contractor or subcontractor aggrieved by an order of the Board 

determining the amount of excessive profits received or accrued by 

such contractor or subcontractor mav-

(a) if the case was conducted initially by the Board itselfwithin ninety days (not counting Sunday or a legal holiday in 

the Dist.rict of Columbia as the last day) after the mailing under 

sertion 105(a) of the notice of such order, or 

(b) if the case was not conducted initially by the Board itselfwithin ninety days (not counting Sunday or a legal holiday in the 

District of Columbia as the last day) after the mailing under 

section 107(e) of the notice of the decision of the Board not to 

review the case or the notice of the order of the Board determining 

the amount of excessive profits, 

file a :petition with The Tax Court of the United States for a redeterminatlOn thereof. Upon such filing such court shall have exclusive 

jurisdiction, by order, to [finally] determine the amount, if any, of 

such excessive profits received or accrued by the contractor or subcontractor, and such determination shall not be reviewed or redetertOa Matter In ttaltcs In section 107(e) was added by Pub. Law 86-507, 86tb Cong., approved Junt' 11. 1960. 
171 

mined by any court or agency except as provided in Section 108A.20b 

The court may determine as the amount of excessive profits an 

amount either less than, egual to, or gr~ater than that determined 

by the Board. A proceedmg before the Tax Court to finally determine the amount, if any, of excessive profits shall not be treated 

as a proceeding to review the determination of the Board, but shall 

be treated as a proceeding de novo. For the purposes of this section 

the court shall have the same powers and duties, insofar as applicable in respect of the contractor, the subcontractor, the Board, and 

the Secretary, and in respect of the attendance of witnesses and 

the production of papers, notice of hearings, hearings before divisions, review by the Tax Court of decisions of divisions, stenographic 

reporting, and reports of proceedings, as such court has under sections 

1110,1111,1113,1114, 1115(a), 1116, 1117(a), 1118, 1120, and 1121 

of the Internal Revenue Code in the case of a proceeding to redetermine a deficiency. In the case of any witness for the Board, the fees 

and mileage, and the expenses of taking any deposition shall be paid 

out of appropriations of the Board available for that purpose, and in 

the case of any other witnesses shall be paid, subject to rules prescribed by the court, by the party at whose instance the witness 

appears or the deposition is taken. The filing of a petition under 

this section shall operate to stay the execution of the order of the 

Board under subsection (b) of section 105 only 21 if within tell days 

after the filing of the petition the petitioner files with the Tax Court a 

good and sufficient bond, approved by such court, in such amount 

as may be fixed by the court. Any amount collected by the United 

States under an order of the Board in excess of the amount found to 

be due under a determination of excessive profits by the Tax Court 

shall be refunded to the contractor or subcontractor with interest 

thereon at the rate of 4 per centum per annum from the date of 

collection by the United States to the date of refund. 

SEC. l08A. VENUE OF APPEALS FROM T.4X COURT DECISIONS IN 

RENEGOTIATION CASES. 

[Applicable with respect to petitions for redetermination filed with the Tax Court on or before July 3, 19621 

A decision oj the Tax Co'urt oj the United States under section 108 oj 

this Act may. to the extent subject to review, be revie.wed bll-

(1) the United States Court oj Appeal.~ jor the circuit in which 

is located the office to wMch the contractor or subcontractor made hi.~ Federal income-fax return jor the taxable year which corresponds 

to the fiscal year with respect to which such decision oj the Tax Court 

was made, or if no ~1.LCh return was made jor such taxable year, then 

by the United States Court oj Appeals for the Distr'ict of Columbia, or 

(2) any United States Court of Appeals designated by the Attorney 

General and the contractor or subcontractor by stipulation in 

writing. 22 

tob By Pub. Law 87-&20, 87th Cong., approved .July 3, 1962, the word "finally" was made inapplicable with re!lpe('t to petitions for redetermlnstion flIed with thp. Tax Court after July 3, 1962; and the matter in 

Itsllcs was added effective only with respect to petitions filed after such date. 31 Matter in italics In next to last sentence of sectIon 108 was added by Pub. Law 870, 84th Cong., approved August 1, 1956. This amendment Is effective as of the date of the enactment of the Renegotiation Act of 1961 It Section lOSA was added by Pub. Law 870, 84th Cong., approved August 1, 19M. 
172 

SEC. 108A. REVIEW OF TAX COURT DECISIONS IN RENEGOTIATION 

CASES. 

[Applicable with respect to petitions filed with the Tax Court after July 3, 1962. 

See footnote 22a] 

(a) JURISDICTION.-Except as promded in section 1254 oj title 28 

oj the United States Code, the United States Courts oj Appeals shall 

have exclusive jurisdiction to review decisions by the Tax Court oj the 

United StfLtes under section 108 of this Act in the same manner and 

to the same extent as decisions of the district courts in civil action8 trie d 

without a jury, except as otherwise provided in this section. Inn 0 

case shall the question oj the exi8tence of excessive profits, or the extent 

th ere oj, be reviewed, and findings oj jact by the Tax Gourt shall he conclusive unless such findings are arbitrary or capri,doUJ~. The judgment 

of any such court shall be final except that it shall be subject to review, 

under the limitations herein provided jor, by the Supreme Court of the 

United States upon certiorari. in the manner provided in section 1254 

of title 28 of the United States" Code. 

(b) POWERs.-Upon such review, such courts shall have only the 

power to affirm the decision oj the Tax Court or to reverse such deciiH:on 

on questions oj law and remand the case jor such jurther action as 

justice may require, except that such court shall not reverse and remand 

the case for error oj law which is immaterial to the decision of the Tax 

Court. 

(c) VENUE OF APPEALS FROM TAX COURT DECISIONS IN RENEGO- T~ATION CASES.-A decision oj the Tax Court oj the United States 

under section 108 oj this Act may, to the extent subject to review, be 

reviewed by-

(1) the United States Court oj Appeals for the circuit in which 

is located the office to which the contractor or subcontractor made 

his Federal income tax return jor the taxable year which corresponds 

to the fiscal year with respect to which such decision of the Tax 

Court was made, or if no such return was made for such taxable 

year, then by the United States Court of Appeals jor the District 

oj Columbia, or 

(2) any United States Court oj Appeals designated by the 

Attorney General and the contractor or subcontactor by stipulation in writing. 

SEC. 109. RULES AND REGULATIONS. 

The Board may make such rules, regulations, and orders as it deems 

necessary or appropriate to carry out the provisions of this title. 

SEC. 110. COMPLIANCE WITH REGULATIONS, ETC. 

No person shall be held liable for damages or penalties for any act. 

or failure to act resulting directly or indirectly from his compliance 

with a rule, regulation, or order issued pursuant to this title, notwithstanding that any such rule, regulation, or order shall thereafter be 

declared by judicial or other competent. authority to be invalid. 

SEC. 111. APPLICATION" OF ADMINISTRATIVE PROCEDURE ACT. 

The functions exercised under this title shall be excluded from the 

operation of the Administrative Procedure Act (60 Stat. 237) except 

as to the requirements of section 3 thereof. 

22. Section l08A was amended by Pub. Law 87-520, 87th Cong., approved July 3 1962, to provide for review of Tax Court decisions for cases in which the petition for redetermination is flIed with the Tax Court 

after July 3,1962. 
173 

SEC. 112. APPROPRIATIONS. 

There are hereby authorized to be appropriated such sums as may 

be necessary and appropriate for the ca~g out of the provisions and 

purposes of this title. Funds made available for the purposes of this 

title may be allocated or transferred for any of the purposes of this 

title, with the approval of the Bureau of the Budget to any agency of 

the Government designated to assist in carrying out this title. Funds 

so allocated or transferred shall remain available for such period as 

may be specified in the Acts making such funds available. 

SEC. 113. PROSECUTION OF CLAIMS AGAINST UNITED STATES BY 

FORMER PERSONNEL. 

Nothing in title 18, United States Code, sections 281 and 283, or in 

section 190 of the Revised Statutes (U.S.C., title 5, sec. 99) shall be 

deenled to prevent any person by reason of service in a Departmen t 

or the Board from acting as counsel, agent, or attorney for prosecuting 

any claim against the United States: Provided, That such person shall 

not prosecute any claim against the United States (1) involving any 

subject matter directly connected with which such person was so 

employ-ed, or (2) during the period such person is engaged in employment ill a Department of the Board. 23 

SEC. 114. REPORTS TO CONGRESS. 

The Board shall on or before January 1, 1951. and on or before January 1 of each year thereajter, submit to the Congress a complete report 

of its activities jor the preceding year ending on June 30. Such report 

shall include-

(1) the number oj persons in the employment oj the Board during 

such year, and the places oj their employmfnt; 

(2) the administrative expenses incurred by the Board during 

such year; 

(3) statistical data relaling to filings during such year by con- tractor·~ and subcontractors, and to the conduct and disposition 

during such year oj proceedings with respect to such filings and 

filings made during previous years; 

(4.) an explanation oj the principal changes made by the Board 

duri'M} .~uc.h year in its regulations and uperating procedures; 

(5) the numbm" of renegotiation cases disposed of by the Tax 

Court, each United States Court oj Appeals, and the Supreme 

Court during such year, and the number oj cases pending in each . such court al the close oj such year; and 

(6) such other injormati'On as the Board deems appropriate. 2' 

TITLE II-MISCELLANEOUS PROVISIONS 

SEC. 201. FUNCTIONS UNDER WORLD WAR n RENEGOTIATION ACT. 

(a) ABOLITION OF WAR CONTRACTS PRICE ADJUSTMENT BOARD.-

The War Contracts Price Adjustment Bo~rd, created by the Renegotiation Act, is hereby abolished. 

sa SectIon 113 was amended by Pub. Law 870, 84th Cong., approved August 1, 19M, hy striking ont "dutlng the period (or a part thereof) beg1nn1ng luly 1, 19~ and ending December 31, 1953," before "from acting". It Section 114 was added by Pub. Law 870, 84th \Jong., approved August 1, 1956. 
174 

(b) TRANSFER OF FUNCTIONS TN GENERAL.-All powers, functions, 

and duties conferred upon the War Contracts Price Adjustmpnt Board 

by the Renegotiation Act and not otherwise specifically dealt with in 

this section are transferred to the Renegotiation Board. 

(c) AMENDMENT OF THE RENEGOTIATlON ACT.-Subsection (a) (4) 

(D) of the Renegotiation Act is amended hy inserting at the end 

thereof the following: etA net renegotiation rebate shall not be repaid 

unless a claim therefor has been filed with the Board on or before the 

date of its abolition, or unlesg a claim shall have been filed with the 

Administrator of General Services (i) on or before June 30, 1951,25 or 

(ii) within ninety days aft.er the making of an agreement or the entry 

of an order under subsection (c)(l) determining the amount of excessive profits, whichever is later. A claim shall be deemed to have been 

filed when received by the Board or the Administrator, whpther or 

not accompanied by a statement of the Commissioner of Internal 

Revenue showing the amortization deduction allowed for the renegotiated year upon the recomputation made pursuant to section 124(d) 

of the Internal Revenue Code." 

(d) TRANSFER OF CERTAIN FUNCTIONS.-Al1 powers, functions. and 

duties conferred upon the War Contracts Price Adjustment board by 

subsection (a) (4) CD) of the Renegotiation Act, subject to the amendment thereof by subsection (c) of this section, are hereby transferred 

to the Administrator of General Services. 

(e) FUNCTIONS AND RECORDs.-Each Secretary of a Department is 

authorized and directed to eliminate the excessive profits determined 

under all existing renegotiation agreements or orders by the methods 

enumerated in subsection (c) (2) of the Renegotiation Act in respect 

of all renegotiations conducted by his Department pursuant to delegations from the War Contracts Price Adjustment Board. The c;everal Departments shall retain custody of the renegotiation case files 

covering renegotiations thus conducted for such time as the Secretary 

deems necessary for the purposes of this sp-ction, and thereafter they 

shall be made available to the Renegotiation Board for appropriate 

disposition. The reneKotiation records of the War Contracts Price 

Adjustment Board shall become records of the Renegotiation Board 

on the effective date of this section. 

(f) REFUNDS.-All refunds under subgection (a) (4) (D) of the 

Renegotiation Act (relating to the recomputation of the amortization 

deduction), all refunds under the last sentence of subsection (i)(3) 

of such Act (relating to excess inventories), and all amounts finally 

adjudged or determined to have been erroneously collectpd by the 

United States pursuant to a determination of excessive profits, with 

interest thereon in the last mentioned case at a rate not to exceed 4 

per centum per annum a8 may be determined by the Administrator of 

General Services or his duly authorized representative computed to 

the date of certification to the Treasury Department for paymp-nt 

shall be certified by the Administrator of General Services or his du1y 

authorized representat.ive t(' the Treasury Department for payment 

from such appropriations as may bf' available therefor: Provided, 

That such refunds shall be based sole1y on the certificate of the Administrator of General Services or his duly authorized representative. 

2.l SubsE'c. (a) (4) (D) of the ReDlIgoUatloD Act was further amended by Public Law lR.'l, 82d Cong., a~roved Octob('!r 20, 1951, whtch ('hanged "Junl' 30, 1951" to "October 31, 1951," and by Puhllc Law 576, 8 CO?g., ~ppro~e~ ~p1y 17, 1952, which changed "October 31,1951" to "December 31,1952." 
175 

(g) EXISTING POLICIES, PROCEDURES, ETC., To REMAIN IN EFFECT.-All policies, procedures, directives, and delegations of authority 

prescribed or issued (1) by the War Contracts Price Adjustment 

Board, or (2) by any Secretary or other duly authorized officer of the 

Government, under the authority of the Renegotiation Act, in effect 

upon the effective date of this section and not inconsistent herewith, 

shall remain in full force and effect unless and until superseded, or 

except as they may be amended, under the authority of this section 

or any' other appropriate authority. All functions, powers, and responsIbilities transferred by this section shaH be accompanied by the 

authority to issue appropriate regulations and proqedures, or to modify existing procedures, in respect of such powers, functions, and 

responsibihties. 

(h) SAVINGS PROVISION.-This section shall not be construed (1) to 

prohibit disburseme:l.ts aut,horiz(ld by the War Contracts Price Adjustment Board and certified pursuant to its authority prior to the effective 

date of t.his section, (2) to affect the validity or finality of any agreement or order made or iSRued pursuant to law by the War Contracts 

Price AdjustmC'nt Board or pursuant to delegations of authority from 

it, or (3) to prejudice or to abate any action taken or any right accruing or accrued, or any suit or proceeding had or commenced in any 

civil cause; but any court having on its docket a case to which the 

War Cont·racts Price Adjustment Board is a party, on motion or 

supplemental petition filed at any time within four ye.ars after the 

effective date of this section, showing a necessity for the survival of 

such suit, action, or other proceeding to obt.ain a determination of the 

questions involved, may allow the same to be mainta,ined by or against 

the United States. If any such case has been di.~mi8sed by any court 

for failure to substitute for the -War Oontracts Price Adjustment Board 

prior to the effective date oj this sentence, such case is hereby revived 

and reinstaied in such courl as if it had not been dismissed. 26 

(i) RENEGOTIATION ACT NOT P. EPEALED.-Except as by this Act 

specifically amended or modified, all provisions of the Renegotiation 

Act shall remain in full force and effect. 

(j) DEFINITIONs.-The terms which are defined in the Renegotiation Act shall, when used in this section, have the same meaning as 

when used in the Renegotiation Act. except that where a renegotiation 

function has been transferred by or pursuant to .law the terms "Secretary" or "Secretaries" and "Department" or "Departments" shall be 

understood to refer to the successors in function to those officers or 

offices specifically named in the Renegotiation Act. 

(k) EFFECTIVE DATE OF SECTION.-This section shall take effect 

sixty days after the date of the enactment of this Act. 

SEC. 202. PERIOD OF LIMITATIONS FOR RENEGOTIATION ACT OF 1948. 

No proceeding under the Renegotiation Act of 1948 to determine 

the amount of excessive profits for any fiscal year shall be commenced 

more than one yea:r after the mandatory statement required by the 

regulations is~ued pursuant to such Act is filed with respect to such 

year, or more than six months after the date of the enactment of this 

title, whichever is the later, and if such proceeding is not so commenced (in the manner, provided by the regulations prescribed pur-

• Matter In italics in section 201 (b) was added by Pub. Law 764, 83d Cong., approved September I, 19M. 
176 

suant to such Act), all liabilities of the contractor or subcontractor 

under such Act for excessive profits received or accrued during such 

fiscal year shall thereupon be discharged. If an agreement or order 

determining the amount of excessive profits under such Act is not 

made within two years following the commencement of the renegotiation proceeding, then upon the expiration of such two years all liabilities of the contractor or subcontractor for excessive profits with 

respect to which such proceeding was commenced shall thereupon be 

discharged, except that (1) such two-year period may be extended by 

mutual agreement, and (2) if within such two years such an order 

is duly issued pursuant to such Act, such two-year limitation shall not 

apply to the review of such order by any renegotiation board duly 

authorized to undertake such review. 

SEC. 203. AMENDMENT OF SECTION 3806 OF THE INTERNAL REVENUE 

CODE. 

Section 3806 (a). (1) of the Internal Revenue Code if:! hereby 

amended by striking out subparagraphs (A), (B), and (C) and 

inserting in lieu thereof the following: 

"(A) The term 'renegotiation' includes any transaction 

which is a renegotiation within the meaning of the Federal 

renegotiation act applicable to such transaction, any modification of one or more contracts with the United States or any 

agency thereof, and any agreement with the United States 

or any agency thereof in respect of one or more such contracts 

or subcontracts thereunder. 

"(B) The term 'excessive profits' includes any amount 

which constitutes excessive profits within the meaning assigned to such term by the applicable Federal renegotiation 

act, any part of the contract price of a contract with the 

United States or any agency thereof, any part of the subcontract price of a subcontract under such a contract, and any 

profits derived from one or more such contracts or subcontracts. 

"(C) The term 'subcontract' includes any purchase order 

or agreement which is a subcontract within the meaning 

assigned to such term by the applicable Federal renegotiation 

act. 

"(D) The term 'Federal renegotiation act' includes section 

403 of the Sixth Supplemental National Defense Appropriation Act (Public 528, 77th Cong., 2d Sess.), as amended or 

supplemented, the Renegot.iation Act of 1948, as amended or 

supplemented, and the Renegotiation Act of 1951, as 

amended or supplemented." 

SEC. 204. SEPARABILITY PROVISION. 

If any provision of this Act or the application of any provision to 

any person or circumstance is held invalid, the validity of the remainder of the Act and of the application of its provisions to other persons 

and circumstances shall not be affected thereby. 

o