0)\\N

DEPARTMENT OF DEFENSE

APPROPRIATIONS FOR 1964

y4

.Ap /4 1

s4]51 9b -z. HEARINGS

GOVERNMEN1

Storage

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

HOUSE OF REPRESENTATIVES

EIGHTY-EIGHTH CONGRESS

FIRST SESSION

SUBCOMMITTEE ON DEPARTMENT OF DEFENSE APPROPRIATIONS

GEORGE H. MAHON, Texas, Chairman

HARRY R. SHEPPARD, California

ROBERT L. F. SIKES, Florida

JAMIE L. WHITTEN. Mississippi

GEORGE W. ANDREWS, Alabama

DANIEL J. FLOOD, Pennsylvania

ALBERT THOMAS, Texas

R. L. MICHAELS, Staff Assistant to the Subcommittee

STATEMENT OF VICE ADM. HYMAN G. RICKOVER

Contracting Procedures

Nuclear Powered Navy

,r

m

C/2 M

`2-

L1444

GERALD R. FORD, JR., Michigan

HAROLD C. OSTERTAG, New York

MELVIN R. LAIRD, Wisconsin

GLENARD P. LIPSCOMB, California

WILLIAM E. MINSHALL, Ohio

itcp

• e

\:4" 4hie.9'T•

'.--",.......---

U.S. GOVERNMENT PRINTING OFFICE

26-511 WASHINGTON : 1963
COMMITTEE ON APPROPRIATIONS

CLARENCE CANNON, Missouri, Chairman

GEORGE H. MAHON, Texas

HARRY R. SHEPPARD, California

ALBERT THOMAS, Texas

MICHAEL J. KIRWAN, Ohio

JAMIE L. WHITTEN, Mississippi

GEORGE W. ANDREWS, Alabama

JOHN J. ROONEY, New York

J. VAUGHAN GARY, Virginia

JOHN E. FOGARTY, Rhode Island

ROBERT L. F. SIKES, Florida

OTTO E. PASSMAN, Louisiana

JOE L. EVINS, Tennessee

JOHN F. SHELLEY, California

EDWARD P. BOLAND, Massachusetts

WILLIAM H. NATCHER, Kentucky

DANIEL J. FLOOD, Pennsylvania

WINFIELD K. DENTON, Indiana

TOM STEED, Oklahoma

JOSEPH M. MONTOYA, New Mexico

GEORGE E. SHIPLEY, Illinois

JOHN M. SLACK, *Ts., West Virginia

JOHN LESINSKI, Michigan

JOHN J. FLYNT, Georgia

NEAT, SMITH, Iowa

ROBERT N. GIAIMO, Connecticut

JULIA BUTLER HANSEN, Washington

EDWARD R. FINNEGAN, Illinois

CHARLES S. JOELSON, New Jersey

JOSEPH P. ADDABBO, New York

KENNETH SPRAN HUD,

It

BEN F. JENSEN, Iowa

WALT HORAN, Washington

GERALD R. FORD, JR., Michigan

HAROLD C. OSTERTAG, New York

FRANK T. HOW, Ohio

CHARLES RAPER JONAS, North Carolina

MELVIN R. LAIRD, Wisconsin

ELFORD A. CEDERBERG, Michigan

GLENARD P. LIPSCOMB, California

JOHN J. RHODES, Arizona

JOHN R. PILLION, New York

WILLIAM E. MINSHALL, Ohio

ROBERT H. MICHEL, Illinois

SILVIO 0. CONTE, Massachusetts

WILLIAM H. MILLIKEN, JR., Pennsylvania

EARL WILSON, Indiana

ODIN LANGEN, Minnesota

WILLIAM HENRY HARRISON, Wyoming

BEN REIFEL, South Dakota

LOUIS C. WYMAN, New Hampshire

Clerk and staff Director
DEPARTMENT OF DEFENSE APPROPRIATIONS FOR

FISCAL YEAR 1964

WITNESS

THURSDAY, MAY 23, 196).

HYMAN G. RICKOVER, VICE ADMIRAL, U.S. NAVY, MANAGER,

NAVAL REACTORS, U.S. ATOMIC ENERGY COMMISSION

Mr. MAHON. On quite a number of occasions in the past, Admiral Rickover, you have been requested to appear before this committee and give testimony in regard to an assortment of problems.

You have been asked here today, on short notice, to give testimony in regard to a number of matters that will be of interest to the com- mittee.

We have now completed our formal hearings on the defense budget for fiscal year 1964. In these hearings we have had a great deal of testimony in regard to the Navy and in regard to the obsolescence of Navy ships, in regard to the submarine program, in regard to con- tracting procedures in the Government, and in regard to the increas- ing cost of most of these items we are called upon to finance from the Treasury.

We thought it would be helpful to have you before us, and I want to thank you for your appearance here.

If you have any special statement you would like to make pre- liminary to our question period, you may proceed.

Admiral RICKOVER. First, Mr. Mahon, I must say how deeply I

appreciate the invitation to appear before this committee. I have

no prepared statement. However, I do know of some of the prob- lems that concern your committee.

You mentioned contracting. I have had to get into the details of Government contracting in connection with my work and I have run into some basic problems. I wonder if you would care to have me discuss contracting as the first subject.

Mr. MAHON. We are making some studies in this field and if you would be willing to make some comments on that subject, along with

many others, we would like to hear them.

Admiral RICKOVER. Yes, sir. May I start with contracting?

Mr. MAHON. You may begin in that way.

GOVERNMENT CONTRACTING PROCEDURES

Admiral RICKOVER. It is my considered opinion that there should be some basic changes in the way the Government does acting.

I think that under present rules for defense contrac , i is pos- sible for contractors to charge the Government more t they should e

on contracts for complicated equipment, shipbuild. and facility 1

construction.

al (1) -r

44,
2

NEGOTIATED FIXED-PRICE CONTRACTING

I would like to start with negotiated contracts for complicated

equipment. Much of the money for contracting in the Defense Department is being spent for the procurment of these items. Because

furnishing these items involves extensive facilities, capital, and engineering talent, the Government has to negotiate with a few large

qualified companies instead of buying on a fully competitive formally

advertised bid basis.

Due to the continuing rise in prices for equipment I have had to

become interested in whether these prices are justified, and whether

the Government is getting its money's worth through negotiated fixedprice contracting.

Because it is difficult to get enough experienced, qualified contractors that can build this complicated equipment, you may not always

have adequate competition to insure a reasonable price. In this type

of environment, we should impose mandatory controls which provide

Government the kind of protection which would be expected through

real competitive bidding.

I feel that the minimum controls needed for negotiated fixed-price

contracts are: the Government should be provided with the contractor's cost estimating data, the contractor's accounting system should

be approved by the Government, and finally the contractor must divulge all profits included in his bid price. I would like to explain

why these controls are needed.

Mr. FORD. How much authority in the area where you have responsibility do you have for the award, or the selection of contractors?

Admiral RICKOVER. I am not a Department of Defense contracting

officer, sir. However in the area of my responsibility, I must get into

the selection of contractors and the type of contract used in order to

insure that my equipment is technically adequate, and delivered on

time. As I said before I am also concerned over the fact that equipment prices are continually rising, and I am not convinced that the

Government is receiving additional value for these rising prices. Based

on my experience in equipment contracting I have concluded that the

only way to get a better job for less money is through the use of tightly

priced fixed-price contracts. Actually overpriced contracts are detrimental to American industry—the fact that management is not getting into the details of the work because there is no incentive for real

interest in the job. In this respect, an overpriced fixed-price contract

is nothing more than a cost-type contract.

In order to determine the fairness of a fixed-price bid in negotiated

contracting the Government should obtain and evaluate the contractor's cost estimating data. Here the Government encounters varied

and constantly changing accounting systems. Extensive profits can

be hidden in costs just by the way overhead is charged or how component parts or material are priced. The Government agency may

never really know how much the equipment actually costs to produce

and how much profit the contractor makes in producing it.

Most executive agencies have their own auditors who are supposed

to take care of this problem, but they have neither the time nor the

number of personnel to cope with the complexities and variables employed by industry which confuse the cost-profit picture.
3

Let me give you an example of how profits can be buried in material cost estimates. I will take the case of a specific contract with a specific

company without mentioning the company or the contract we pres- ently are negotiating.

Mr. MAHON. Refer to the company as "company X." Admiral RICKOVER. We negotiated with this company X as the low bidder in a procurement for a noncommercial item involving limited. competition. He quoted us a price and identified that the price con- tained a profit of about 15 percent. This is his base profit. Contrary

to what you hear about the low profits being made by large companies, I think they make pretty high profits. Anyway, the division of company X we are dealing with quoted a profit of 15 percent. Company X has a number of divisions. Parts of this item would be made in four

or five other divisions of this company. Each one of these other divi- sions submitted its costs, plus its profit, to the lead or selling division. We found that no attempt was being made to get prices from outside

sources for these parts and no real check was being made of the reason- ableness of the estimated cost by the various other divisions. In fact, prices from other divisions, including profits were taken at face value by the lead division and we were being asked to pay profit on the other divisions' profits.

• The real profit in such a deal could be in excess of 15 percent if you add the various divisions together.

I have gotten into this and we are hammering out a contract with

company X which requires them to show their estimated costs and profits in each division and permits the Government to go in and audit

to determine what their real costs were and how much profit they are actually making.

This is a veryimportant point because I believe that in dealing with large companies you undoubtedly run into this situation in many places.

Let me give you another example. We had a case recently where the General Accounting Office went to a company that was doing business with us and found they were overcharging considerably by giving us costs which were wrong. The company was warned to CO11103 back and give the straight answer. The company came back and re- peated the original costs.

The General Accounting Office has determined there was a deliberate

overcharge. What do you do in a case like that?

If you simply ask them for a refund, what do you accomplish?

I think in cases such as this the GAO ought to be able to tell the

Department of Justice whether or not it thinks the overcharges are in

violation of law—that there is a case of deliberate misstatement—so

that the individual could be brought to trial if there is a violation. I

think more of that, or some type of enforcement, would probably stop a

great deal of what we are talking about.

To summarize the points I want to make regarding negotiated contracts for complex equipment, I would say:

First. Despite the semblance of competition, you may not have

enough real competition to prevent overpricing because of the limited

number of experienced, qualified contractors.

Second. Some form of additional protection is needed to prevent

industry from making excessive profits on complicated equipments
4

procured by the Government and from hiding these excessive profits

in his costs. I suggest that you look into the possibility of some legislation which would make it mandatory that a company negotiating for

a large, fixed-price Government contract must provide certified cost

data to support his price and that his accounting system must be subject to approval by the Government.

Third. I think he should be required to make a disclosure of all

the profit he expects to make, including any profit hidden in his ,costs,

before the contract is awarded.

Before I leave the subject of negotiated fixed-price contracting let

me make one more point concerning manufacturer's cost data.

Under the present Armed Services Procurement Regulations, the

Government buyer must make a decision regarding the adequacy of

competition in each negotiated fixed-price procurement. If the buyer

determines that insufficient competition is available to insure the Government is getting a reasonable price, he is required to dig in and use

every tool at his disposal to negotiate a fair price for the Government,

including obtaining the contractor's own cost information. If, however, the Government buyer judges that adequate competition does

exist for this given procurement, this judgment simplifies the procurement effort but forecloses the opportunity of the Government agency

to review the basis for the contractor's cost estimate to produce the

equipment and determine how much actual profit the contractor expects to make.

The Government buyer is often poorly equipped to make this vital

judgment of the adequacy of competition. In many cases the issues are

borderline and his only available aid is a Government price estimate

which is usually less complete than the manufacturer's cost-estimating

information.

_ Under these circumstances it seems to me that our regulations should

not force the Government into making a difficult decision which results

in throwing away what I consider to be its rights. I do not believe

that the Government should be barred in any way from using the

company's own cost estimating information when negotiating a fixedprice contract for the Government. I think the regulation should be

revised in this respect.

Mr. MAHON. Do you insist that the Government does not have the

right, and does not have the privilege of studying the cost figures?

.Admiral RICKOVER. That is correct, sir.

Mr. MAHON. Of the contractor who is performing the work?

Admiral RICKOVER. That is essentially correct, sir.

Once you label the negotiated fixed-price contract a competitive

contract, only the GAO can look, and their investigations are usually

years after the fact.

Mr. MAHON. This is a very interesting idea. I would like you to

say whether or not, in your opinion, this matter is of special concern

since we have the renegotiation procedure. Does that cpme to bear in

this matter in a very significant way?

Admiral RICKOVER. The Renegotiation Board considers whether a

contractor made excessive profits in defense business from all its

divisions for a fiscal year. This is not very helpful in determining

whether one division of a large company is making an excessive profit

under what are purported to be competitive situations.
5

Mr. FLOOD. I am at a total loss, Skipper, to understand what you

meant by the flat statement the Government is foreclosed from examining cost structures once you decide you are on a competitive basis.

What is the law? What is the regulation? What is the source?

What is the authority for establishing a foreclosure? I never heard

of any.

Mr. MAHON. I want this clarified carefully for the record. I am

going to ask the staff to cooperate with you in seeing we have ample

clarification.

Mr. FLOOD. I wish you would have your people supply for the record

the citation and the basis for the authority which you say forecloses

the Government from examining cost structures once it is established

the contract will be of a certain kind.

Admiral RICKOVER. I will supply this for the record.

(The information follows:)

1. Armed Forces Procurement Act of 1947, 10 U.S.C. 137, as amended by Public

Law 87-653 of September 10, 1962.

2. Armed Services Procurement Regulation (March 1, 1963) paragraph 3-807.

Mr. MAIION. Do you know if this procedure would apply to the

General Accounting Office in its studies?

Admiral RICKOVER. It does not apply to the GAO, but as I mentioned earlier, they do not usually look at cost before a contract is

placed. They look at the deal after it's all over. It is my understanding that once a decision is made that a negotiated fixed-price contract

is competitive, the Department of Defense agency making the contract

gives away its right to look at the contractor's costs without the contractor's permission. That is the point, Mr. Flood, I am attempting

to make.

Mr. FLOOD. I understand. If you establish the nature of the contract is competitive, are you foreclosed from looking at costs because

of that fact, or is it to protect a statistical report on the extent of competition in defense procurements?

Admiral RICKOVER. I am certain the true objective of the regulation is to encourage competitioh wherever possible. There has been

a great deal of pressure by this committee to enhance the amount of

competitive bidding. Fostering real competition is the best way to

insure that the Government is moving in the right way to reduce its

costs and to increase industry's efficiency and growth.

• Mr. MAHON. That is right.

Mr. FLOOD. I want to be sure they are not rigging their statistics

to make us feel better.

Admiral RICKOVER. I do not say anyone is trying to fool this cornmitteee. I doubt that. I am only trying to tell you that under existing regulations contractor's cost information cannot be obtained or

used to evaluate the price of a negotiated, fixed-price procurement

which has been judged to be competitive.

Mr. FLOOD. I raise the question.

Admiral RICKOVER. Yes.

Mr. ANDREWS. If a contractor is awarded a contract on a low bid

and there is competition, then the Government agency has no right

to go in and check?

Admiral RICKOVER. For clarification let me split this thin tiotio two types of fixed-price contracts—formally advertised co ts for
6

common items, and negotiated contracts involving a limited number of

suppliers for complex equipment.

Suppose I want to buy brooms, or flour, or paint. They are standard items, and are bought on a formally advertised, low-bid basis.

You get bids in from a large number of contractors and you may award

a contract for one-tenth of a cent a pound differential. I am not talking about contracts of that type. These are the ordinary items of life,

and you can get true competition for them on a formally advertised

basis. However, about 60 percent of the dollars for Defense Department are spent on complex equipment which does not lend itself

to this criteria. In the case of complex equipment you have to use the

second type of fixed-price procurement, negotiations with a few companies.

As I said before, regardless of what label you put on negotiated contracts where you are dealing with unique equipment, they are usually

not really competitive. You can try to make them competitive., but

you do not, and industry has an excellent opportunity to make excessive profits from them. We should not be prevented from looking

at the contractor's costs in these circumstances.

Mr. MAHON. Admiral, I assume that nothing you have said would

indicate your disagreement with the free enterprise system. You just

want to make the free enterprise system work more effectively?

Admiral RICKOVER. Sir, I think that if the free enterprise system

does not start doing some of these things to cure some of its ills, these

ills themselves are going to do away with the free enterprise system.

I am all for a free enterprise system, but freedom to set a price is not

license to make undue profit from your own Government.

I have had many dealings with contractors and I have had discussions with the General Accounting Office with regard to problems I

have encountered. The GAO is trying to do something, but I think

that they do not place enough emphasis on correlating their various

reports in order to make broad policy recommendations to improve

Government contracting.

Mr. M-A.TION. I am told that the General Accounting Office confirms

what you had indicated earlier, that in a fixed-price contract awarded

to the lowest bidder after formally advertised competition, neither

the GAO nor the executive branch has the right to audit the contractor's costs.

Mr. SHEPPARD. Is there any case you know of in the negotiated or

advertised bid where there has been controversy and you have not

had the privilege to audit the account of the said contractor?

Admiral RICKOVER. Yes; we have had instances in negotiated procurements where companies did not want to show us their books on

the basis that the procurement was competitive.

Mr. FORD. In your advisory capacity in the awarding of contracts

do you have the right to veto the award to X company, or X shipyard

Admiral RICKOVER. Where I have direct responsibility for the

equipment, my recommendations are usually carried out. In other

areas I do not have the right to veto the award but I can and do make

myself heard so that people become concerned about the consequences.

I have had some rough encounters on this.

Mr. LAIRD. We need more of that in Congress.

Admiral RICKOVER. Congress has more problems than I. Congress

is answerable to many bosses. My jth is easier. It is easier for me to
7

be critical than it is for a Congressman. I recognize the circumstances under which you operate. I am not talking about Congress.

Mr. LAIRD. You are not trying to win a popularity contest. Admiral RICKOVER. I could not if I tried, sir.

Mr. FORD. May I add this comment: I was privileged to introduce Admiral Rickover to a dinner group, or a gathering of about 700 people in my district. He did not come out to win a popularity con- test. He came out for the purpose of talking about a controversial

matter, and the reactiqn was good. There was a fine response. I

want to thank you personally.

Mr. LAIRD. What did he talk about, education?

Mr. FORD. Yes.

Mr. FLOOD. I want to join my friend from Michigan because I had the identical subject and the identical reaction.

Mr. MAHON. Have you finished your response to my question?

SHIPBUILDING CONTRACTS

Admiral RICKOVER. I have not. I will now get into shipbuilding

contracts, and I believe this is something Mr. Sheppard is interested in. Mr. 1VIAnoN. As you get into shipbuilding, let me read something that has some reference to shipbuilding. This is a story from the Chicago Daily News Service:

Admiral Rickover blasts industry's failure in A submarine construction. It is remarkable that the Thresher is the first nuclear submarine to be lost by the U.S. Navy.

That was not a quote from you. This is the newspaper article.

I just wanted you to have in mind that reference to the newspaper in connection with your testimony.

Admiral RICKOVER. I will clear up that article. Several months before the Thresher was lost—

Mr. MAHON. You do not need to get into the Thresher disaster at this point. •

Admiral RICKOVER. Several' months before the Thresher was lost I

delivered an address called "The Never-Ending Challenge," in which

gave chapter and verse on what I considered—with examples—of the

poor job industry was doing in manufacturing equipment for the

nuclear Navy. In nearly all cases, the bad work was not in nuclear

components, it was in standard components.

I would like to furnish a copy of that for the record if I may, if you

care to have it.

Mr. MA.HoN. All right.

(A copy of the speech, "Never-Ending Challenge," has been filed

with the committee.)

Admiral RICKOVER., I stated in that article that there had been more

than one time I had been on a submarine where the failure of material

due to poor workmanship could have lost the ship if someone had not

been alert. This speech was delivered several months before the

Thresher was lost so it had no direct connection with the Thresher.

Now I would like for a few minutes to get back into shipbuilding

contracts.

Shipbuilding contracts are frequently awarded to shipbuilders

either to keep the shipyard going, or for labor surplus considerations.

26-511-63-2
8

Contracts are also awarded to higher priced yards because the low

bidder can't meet the delivery schedule for the total quantity of ships.

I am not arguing about how the decision is made to award contracts.

I recognize that economics is the handmaiden of politics. It is not

my business if the Government decides to award a contract to someone

because of unemployment or any other reason. This is a political

decision and is not in my province.

I do say, however, that when contracts are awarded for reasons other

than low price the contractor should not be permitted to make a large

profit out of this circumstance.

In my opinion, the price for shipbuilding contracts is usually determined in the following way: A shipyard, recognizing full well it will

probably receive a contract, figures out the price it would like to have

for the contract. Management then raises the price a certain amount

and then negotiates final price with the Government. The shipyard

can put all its talent to negotiating this so-called fixed-price contract

and deals with a few harassed and overworked Government people

who are not as well equipped with detail cost data as the shipyard

negotiators so it ends up that the shipyard generally gets what it

originally decided on.

Another disadvantage to the Government is the fact that shipbuilding is characterized by numerous contract changes which provide

the shipbuilder with a method for protecting his profits if he gets

into more costs than he originally figured on. In other words, you

might start with a good fixed-price contract, but because of changes,

you quickly lose what fixed-price protection you had. I'm not arguing

that there should be no changes; often they are essential if we're going

to factor experience back into our ships.

It is possible for a shipbuilder to submit a low initial price in order

to get the contract, but finally end up with a profitable contract as

a result of changes and claims.

Another characteristic of the shipbuilding industry is the fact

that many traditional practices have developed which protect the

shipbuilder against damages and losses and even limit his responsibility for guaranteeing his own work. All of this, of course, means

that the Government must assume the damages and losses.

If you agree that there is some question in this area, it seems to me

it would be proper for this committee to make a study of the type of

contracting being used for shipbuilding and the obligations of the

shipbuilder in these contracts. I think they result in what, in essence,

amounts to a cost-type contract; therefore the Government should

be afforded all the protection it is normally entitled to in cost-type

contracting, including approval of the shipbuilder's accounting system

and a determination of allowability of costs. I also think that allowable profit levels in shipbuilding contracts should take into consideration the limited extent of the contractor's financial risk, the fact that

he may be using Government facilities, is indemnified against many

types of liability, and the fact that he may have been awarded the

contract not because of his low price, but on the basis of unemployment,

unused capacity in his yard, or any other reason which is not based

strictly on the lowest price to the Government concept.
9

INCENTIVE CONTRACTS

Mr. MAHON. What do you think of the idea that if you give the

contractor some incentive whereby he can increase his profits if he

does an even more efficient job, you get a better product and better

end result?

Admiral RICKOVER. These incentive contracts that you speak of

involve setting a target cost for the performance of the contract and

adjusting the contractor's profits based on how well he performs.

For example, if his actual cost of performance is lower than the target

cost, he is rewarded by being paid some of the money he saved the

Government. If he spends more than the target, he is penalized by

being charged part of the cost above the target. The idea, of course,

is to reward efficiency and penalize inefficiency, thereby motivating

the contractors to reduce the overall price to the Government.

The principal difficulty with incentive contracting is that in many

cases we don't have enough competition to insure a reasonable price

level. The contractor knows more about how much the item costs

than the Government and can set a high initial price. The contractor

can then say his lower costs were due to his own efficiency rather than

his superior knowledge of how much the item was really going to cost,

and the Government rewards him for these so-called cost savings by

paving him higher profits.

The effect of this high initial price is that you wind up with a contract where the contractor has little financial risk, and you are paying

him a higher profit rate than would be allowable on a cost-plus-fixedfee-type contract.

I am also concerned over the fact that contractors may be interested

in increasing, rather than decreasing their costs under a loosely priced

incentive contract, in order to justify high prices for future production orders.

I have no panacea for these problems, but more extensive use of incentive type contracts is not the answer to everything. It is like all

simple systems. If they were so good, they would have been used to a

greater extent a long time ago. Incentive contracts should be used

with caution. Greater vigilance should be exercised on the part of all

the people involved in Government contracting, particularly in setting

the initial price.

Mr. MAHON. I think you have made some very stimulating suggestions.

Admiral RICKOVER. I have some more along this line. I want to

stimulate you some more, sir.

Mr. MAHON. I wish you would continue with your presentation of

this idea.

CONSTRUCTION CONTRACTING

Admiral RICKOVER. Let's take construction contracting for facilities. Here is an area where I think much money could be saved in the

Government. I talk from personal experience with facility construction contracts in the Atomic Energy Commission. I found that no

matter how you went about it, the final construction costs were always
10

higher than you estimated. After many painful experiences, I learned

the reason. Despite the fact that most facility construction contracts

are awarded on a formally advertised fixed price basis, cost increases

come about through changes and claims.

I think it would be revealing for your committee to have an analysis

made of Government construction contracting to find out what the

original Government estimate was • what the contractor's price was;

and the actual ultimate cost to the drovernment. I believe you will find

in many cases that due to these changes and claims the fixed-price contracts effectively became cost-type contracts.

In my opinion a good deal of the construction contracting today is

bid on the basis that the contractor expects he will get additional large

sums of money on every contract through changes and claims. He not

only expects to exploit necessary changes to the work, the weather, and

job conditions, but will devote considerable effort searching for unreasonable interpretations of the plans and specifications and other imaginary "changes."

The Government simply does not have enough people to devote to

protecting itself from these unsupported and exhorbitant change

claims.

Mr. MAHON. Last year we had quite a study made of contracting

and procurement. The information we obtained was the basis of some

of our interrogation of witnesses on the defense bill this year.

We recognize this as an important area, and if we can get any support, or assistance, or fresh ideas on this subject which will enable

us to do a better job for the country, we will be very much plea§ed. It

is for that reason I was very much interested in having your reactions

to this matter of procurement and construction.

Admiral RICKOVER. I will continue with my problems in construction contracting. We devoted considerable effort about 3 years ago attempting to write a contract which would protect the Government

against, undue claims, taking into account the many lessons we had

learned over quite a few years. We hoped to minimize misunderstanding by providing, for example, that no change could be authorized

except byAc :specified Government representative, and that any change

orders were to be priced out before the contractor was authorized to

proceed with the work. The specifications were carefully prepared

from the viewpoint that the contractor would exploit every uncertain

area to the maximum possible extent. Notwithstanding all our precautions, the contractor is claiming he is entitled to additional money

in an amount greater than the contract price. We consider that over a

million dollars of these claims are unfounded.

Even though we anticipated claims for a price increase, and had the

construction contractor agree to rules which should have protected

both parties from disputes, he still submitted these claims.

In many construction contracts we are at a disadvantage because of

the importance of completing the job on time. Unfortunately, it becomes easier for the Government to negOtiate a settlement—even an

unsatisfactory settlement, so as to get on with the work. Fighting

construction contractors interferes with my primary job of developing

nuclear propulsion plants.

The only place where we can get relief is to have Congress set up

certain rules which would be mandatory upon the executive branch to
Ar

11

carry out. And also, to make it more difficult and less rewarding for

the contractor to make unfounded claims against the Government.

The onus today is entirely on the Government; it is not on the contractor. The Government is the only customer I know of who is always wrong.

Mr. SHEPPARD. I am vitally interested in your remarks on construction.

Our committee holds rather extensive hearings because of the accumulated nonpayment accounts on the part of the U.S. Government.

The basic problem presented was one of a very reasonable understanding once exposed.

The Federal Government, insofar as its procurement attitude is concerned, is no different from a basic business or corporation.

First, you know what you want, and then you start to do business

under a legitimate contract.

One of the big faults I ran into was the fact we are in a transition

period to the extent that when you issue a contract you do not know

what you want yourself.

Admiral RICKOVER. In many cases that is true, and I have no objection to the payment of legitimate price increases due to change in

contract scope.

- Mr. SHEPPARD. The man on the furnishing end knew less about it.

You get halfway up with a $10 million silo and the black-box boys will

come along and say your leads have to go out here.

Admiral RICKOVER. Since we are dealing with human beings, there

must be some solution to some of these problems.

Mr. SHEPPARD. I am inclined to go along with you. I hope there are

solutions.

Admiral RICKOVER. The ordinary businessman does not enter into a

large-scale construction program until he knows what he wants.

Mr. SHEPPARD. We, in the Government, do it every day.

Admiral RICKOVER. The businessman, however, has the choice of

going to any contractor he wishes. We do not have that choice. We

must allow anyone to bid, and we have to award contracts on the basis

of lowest responsible bid. It is very difficult to declare a low bidder

'not responsible" if he can furnish performance and payment bonds.

There is no basis for selection of other than the low responsible bidder

because of demonstrated superior qualifications or a record of outstanding past performance and fair dealing, even though it may be reasonably apparent that acceptance of his bid will result in lower final cost

to the Government. It is not surprising that construction contractors

have taken advantage of our contracting methods and have exploited

the Government, rather than being efficient, to assure profits. This is

why I advocate several remedies which I will try to explain. They

are not inclusive.

I advocate, one, that a list showing degree of performance be established on construction contractors. The Government needs to record

its experience with construction contractors.

Second, I advocate greater flexibility in awarding construction

contracts. Government agencies should have clear authority to award

contracts to other than the low bidder where this would be in the

best interests of the Government, all factors considered. It is time

we crave recognition to superior performance and aboveboard dealing

in terms of increased opportunity for future Government contracts.
12

Mr. 1VIAHoN. You would pay closer attention to the previous performance of a contractor?

Admiral RICKOVER. Yes; and I would realistically consider past

excessive and unfounded claims and suits in making any future awards.

Mr. FLOOD. I would certainly question the constitutionality of any

legislation that would attempt to do that. Under our philosophy of

law, how can the legislation establish as a matter of law a right of

action under our system of courts? You cannot do that under law.

You cannot stop the right of action.

Admiral RICKOVER. Every procurement action also provides not

only for the lowest bidder, but in many cases the lowest satisfactory

bidder.

Mr. LAIRD. That is the present law.

Mr. MAHoN. The lowest responsible bidder, I believe.

Admiral RICKOVER. Mr. Chairman, I am telling you my thoughts.

I do not know what the answers are to this. I am sure that this committee has considered this problem for years, so I am not telling you

anything you do not already know.

• Mr. MAHON. Do you have any further suggestions in response to the

question which I asked you?

Admiral RICKOVER. My first two suggestions are directed toward the

heart of the problem—Government contracting methods that provide

a marginal contractor with the same opportunity to obtain Government

contracts as they provide to the superior contractor. I have some

further suggestions, procedures I have used to do the best I can under

the present rules.

The construction contractor generally claims that he was ordered to

do something by a Government agent. Therefore, in every contract

I would clearly specify that only one designated official be authorized

to request changes. All changes should, whenever possible, be priced

in advance of the work and agreed to in writing.

Mr. FORD. Are these rules only in your part of the Navy, or are they

broader?

Admiral RICKOVER. I have taken extra care to avoid disputes and

claims and provide greater protection for the Government. I do not

know that other people are not doing it. I consider what I am doing

is within the intent of present laws.

Mr. FORD. In these change orders, do I understand when a change

order is directed by the Navy that you require the contractor to submit

in writing what his estimate will be of additional cost?

Admiral RICKOVER. Yes, sir; we ask what his price is for the change.

Mr. FORD. It is more than an estimate?

Admiral RICKOVER. An estimate has no legal meaning. An estimate

is only an estimate. I do more than that where I have direct responsibility for the equipment or facility. I require him to submit in writing his fixed price for the change. It is essentially like entering into

a new contract, a new fixed-price contract. Then we consider it and

decide whether we think it is just. I say even with thAt, we are not

protected from claims. That is the point I am making—we are not

protected even then, since some contractors consider that the Government should automatically make up any cost overruns experienced on

any part of the contract or change. I am disturbed that specific agreements on how the contract will be administered to fairly protect both

parties are ineffective in dealing with some companies that make a
13

practice of bidding low based only on expectations of success in sustaining claims and lawsuits against the Government.

Mr. ANDREWS. Your thought is that some companies, those you refer

to as suing the Government repeatedly, have reached the point at

which it appears that they are making a racket out of suing the

Government?

Admiral RICKOVER. We have reached a point where it is like degraded currency. It has become in some cases the normal way of doing

business with the Government. You take a contract at a low price,

figuring from your past experience you will be able to file claims and

make a settlement with the Government, by lawsuit if necessary.

Mr. SHEPPARD. You know you are going to get change orders, and

you will take up your slack in the change orders and then sue?

Admiral RICKOVER. You mention, sir, that some of the things we do

may have to be changed—and without fixed-price agreements. If

there is an urgent or priority program, I do not argue that. I think

a lot of them do not have to be changed to the extent they are, but I

grant there will inevitably be situations in the Defense Establishment

where you must make changes and price the change as expeditiously

as possible.

Mr. SHEPPARD. You touched on one thing brought out before our

committee which was that many times there were verbal transfers

from authority A down to B, C, and D, and it was a hypothetical deal

from start to finish.

Admiral RICKOVER. Someone on the Government side may make a

chance remark. The contractor makes a record of it and later on he

submits it as a claim. In fact many contractors have a large clerical

staff just to prepare their case for change claims against the Government.

Mr. MAHON. We have developed considerable information along

the lines which you are discussing here with respect to the production

of various items for the Defense Department. I grant we could pursue this to a greater extent.

Admiral RICKOVER. If you are, interested in saving money, I think

this offers a pretty wide field for you.

Mr. FLOOD. You can reach back into Blackstone's commentaries and

you will find some very interesting discussions on what was known

in those days as champerty and barratry. You are getting pretty

close to this charge of barratry. This is recognized in the law as not

only immoral, but illegal, and can be attacked.

Mr. MAHON. Admiral, when this transcript comes to you, I wish

you would present any additional views you care to and make any

necessary corrections.

Admiral RICKOVER. I would appreciate it if it is possible for me

to get a chance to look at this before you circulate it.

Mr. MAHON. It Will go directly to you.

NUCLEAR NAVY PROPOSALS

Now, will you give us your idea as to the nuclear Navy?

It has been suggested that perhaps all ships over a certain tonnage

should be nuclear powered. What is the latest thinking, and what is

your latest thinking on this question?
14

Admiral RICKOVER. There has been considerable discussion over

many years as to what extent the Navy should go nuclear powered.

As tar as the submarines are concerned, a clean-cut decision was

made several years ago and all submarines authorized for quite some

years have all been nuclear powered. That is the policy of the Navy

Department.

Mr. LAIRD. Up until this year?

Admiral RICKOVER. Not on submarines, sir.

Mr. LAIRD. In the 5-year program submitted by the Secretary, there

has been a new policy established of conversion of present conventional powered submarines instead of maintaining last year's program

of construction of new nuclear subs. This, I believe, is a mistake and

developed a record supporting my position when Secretary McNamara

appeared before this committee.

Admiral RICKOVER. For submarines, I am not aware of any new

policy. Of course, the current policy to build only nuclear-powered

combat submarines does not preclude building prototype models of

other types of submarines for testing new developments.

I would like to add here, it is not my job to decide whether a ship

should or should not be nuclear powered. However, I have very

definite ideas.

Take an aircraft carrier. It is not my job to recommend whether

we should have aircraft carriers, or how many we should have. That

is the function of the operating people in the Navy Department. I

do claim that for certain types of ships, if we are going to build them,

we would be better off if we make them nuclear powered, and that is

as far as I can go. I can only render a technical recommendation on

the type of propulsion we should have; not an operating judgment on

the types of warships we should build.

Mr. MAHON. What do you think we probably should do, as Members

of Congress, toward encouraging the Navy to change its determination with respect to the carrier which we most recently financed so as

to provide that it be made nuclear powered rather than conventionally

powered, as has been previously determined by the executive and the

legislative branch?

Admiral RICKOVER. May I answer this question by going back to

your previous question?

I want to answer your questions concerning surface ships. I have

covered the submarine part, I believe. I said there had been a great

deal of discussion whether we should also go to nuclear power in the

surface ship Navy.

Two years ago the House Armed Services Committee recommended

as a result of hearings, that all combatant surface ships over 8,000

tons should be nuclear-powered. The Navy at that time was conducting a study and came to the conclusion that over a 20-year life of

a surface ship, by including construction as well as operating costs,

a nuclear ship would cost roughly 1.3 to 1.5 times as much as a con-

-ventional ship. Additional studies have been made over the last 2

years as we have gained experience through the construction and

operation of our first nuclear surface ships. Last winter another

study was made by the Navy. This study came about because of the

.experience gained in the initial operation of the aircraft carrier Enter-
15

prise, the guided missile cruiser Long Beach, and the guided missile

frigate Bainbridge, and because of the increase in reactor power and

core life of nuclear plants being developed by the Atomic Energy Commission. The immediate purpose of this study was to determine

whether the conventionally powered aircraft carrier authorized in last

year's appropriation should be changed to nuclear propulsion.

The Navy came to the conclusion there was a differential of only

about 20 percent in investment, operating, and maintenance cost for a

new four-reactor aircraft carrier over a 20-year period, compared to a

conventional aircraft carrier, instead of 30 to 50 percent. The cost

increase for nuclear propulsion does not include any allowance for the'

reduction in the cost of replenishment of the fleet that would be

brought about by the elimination of the need for fuel oil in the. nuclear

ships. Based on the results of this study and the improved characteristics which can now be incorporated in a four-reactor aircraft carrier,.

the Secretary of the Navy, last January, recommended to the Secretary of Defense that the fiscal year 1963 aircraft carrier, which you had

appropriated for as conventionally powered, be changed to nuclear.

propulsion.

When this came to the Secretary of Defense, he decided he wanted

additional information so he caused additional studies to be made.

These studies are currently going on.

I think these studies will get into other features besides the particular carrier. I believe the Secretary of Defense has decided to withhold

a decision until he gets the study results which as far as I know, may

encompass the composition of the surface Navy. That is where the

matter stands now.

You asked, what can Congress do? I think what you can do to

augment, to hasten the use of nuclear power, is to recognize that we

are not going to make progress unless we build something. As long

as we keep it in our minds and on the drawing boards, we cannot make

the improvements that can come only through manufacturing and

operating this equipment. We have found that the only way we can

cut costs and make real improvements in our propulsion plants is by

actually building them.

For example we built the Enterprise. It was undoubtedly a costly

ship. But we learned a great deal from the Enterprise. We learned

how to design a plant with four reactors that can power an aircraft

carrier the size of Enterprise instead of eight reactors, but we would

not have learned how to design the four higher powered reactors if

we had not built the eight-reactor plant.

Through our experience we have also learned how to design and

build reactor cores that will last more than twice as long as those now

in Enterprise even though they must also operate at about twice the

power. We can do this. But until we actually start building more

plants and more ships, we cannot continue making advances. The

LongBeach,Enterprise, and Bainbridge were authorized in fiscal years

1957; 1958, and 1959. In the ensuing 5 years only two more nuclear

surface warships have been authorized by Congress. One of these,

the nuclear frigate in the 1963 program has now been deferred for 2

years because the new weapons system planned for this ship is not

yet developed, and the funds have been assigned to other programs.
16

Mr. FLOOD. With reference to the tonnage, and to identify a class

SO I understand, on the 8,000 tons as the minimum for nuclear, what

would be the class ship?

Admiral RICKOVER. A frigate or a large destroyer, depending on the

armament that is put on the ship. The Bainbri:dge which carries

TERRIER missiles, is a frigate. Admiral Hayward, who until a few

days ago wa s fleet commander of the Enterprise and Bainbridge in the

Mediterranean, has a glowing account of the performance of these

ships as compared with similar conventionally powered ships. In

fact, the Bainbridge has been operating so well that he is recommending omission of the yard overhaul required for a new ship shortly after

she leaves her building yard. The Bainbridge does not need any such

overhaul, she is operating so well.

Mr. FORD. What is the tonnage of the Bainbridge?

Admiral RICKOVER. About 9,000 tons, sir.

Another aspect about nuclear-powered ships is that we believe we

can keep them out of Navy yards for a longer period of time, and this

we are now doing.

On submarines, when we started, the time between overhaul periods

was 18 months. That has now been increased to about 3 years. I have

recommended 5-year intervals between submarine overhauls, and I

believe the same may be done for nuclear surface ships.

Mr. FLOOD. Five years?

Admiral RICKOVER. Yes, sir.

I have recommended that the interval between overhauls, for submarines except for something unusual, be 5 years.

Mr. FLOOD. Can you not do that under your cost differentials?

Admiral RICKOVER. I am a prejudiced witness.

When you are building a weapon of war you cannot set down a specific figure that one is 20 percent cheaper than another, especially when

you are trying to look into the future to determine relative costs 15

to 20 years from now. For the very short time in its life that it may

perform under real war conditions, its only purpose for existence, the

significant question becomes, Will it do the best job?

Mr. FLOOD. A witness can never establish his own prejudice. We

will decide that.

Admiral RICKOVER. I know what goes on in my mind better than

you do, Mr. Flood. I am an expert personal thinker. I am prejudiced, sir.

"THRESHER" SUBMARINE DISASTER

Mr. MAHON. Admiral, the country was shocked by the loss of the

Thresher. We have lost submarines before, and we have lost other

types of ships before, and we will lose ships in the future, but the loss

of the Thresher does raise questions as to the safety of the submarine

fleet.

Will you comment on the Thresher generally?

Admiral RICKOVER. I have to do this very generally. I have testified before the Thresher court of inquiry, which is still in session, and

I may not divulge my testimony.

Mr. MAHON. We do not wish you to do that. Tell us what you think

regardless.

Admiral RICROVER. I am trying to see how I can answer your

question.
17

In the first place, a submarine is probably the most complicated

weapon, particularly a nuclear-powered submarine, that has ever existed. It has millions of parts. There is an essential difference between

a warship and an airplane or a missile. An airplane is expendable

after a few years. A missile is also quickly expendable. A submarine

is not. It must last a minimum of 20 years. This gives us a serious

problem in design, construction, and operation.

Naturally, when you have so many items in a ship, there is a great

deal of chance for poor design or workmanship. I think what will

probably come out of the Thresher disaster is some change in the way

the Navy designs, constructs, and operates submarines.

I would like to look on the Thresher as a providential warning

rather than a means of assigning blame to anyone. Everyone concerned was well intentioned. If we look at it as a means for learning

how to do better, then the loss of the T hresher will have served a useful

purpose. I only hope we do learn the true lessons.

There have been other submarine casualties where we have not

learned the true lesson. We have not taken full advantage of them.

Our society must find a way of benefiting from mistakes and not glossing over them because we are afraid of hurting the feelings of people.

The loss of the Thresher and her crew is too important to permit

personal considerations to enter. I hope we can eke out all the lessons

we can.

Mr. MAHON. Do you think we will ever find the Thresher?

Admiral RICKOVER. It may be possible to find her. To raise her

would be obviously a very difficult thing.

I get many letters from people, particularly from schoolchildren,

with on how to raise the Thresher. The suggestions generally divide themselves into two basic types; one we call the ice-tong

-method--,--to lower a large ice tong and raise her; the other is the horseshoe magnet approach.

Many of the children who are quite interested and probably encouraged by their schoolteachers have offered to give us the idea free.

Mr. MAHON. You have to find her first.

Admiral RICKOVER. If she is not buried in silt, it may be possible to

find her. The Navy has already taken some pictures of the bottom

which show debris which may or may not be from the Thresher.

We do have means of taking pictures of the bottom. I have seen

.some of the pictures. The Thresher may have gone down at a high rate

,of speed and become embedded in silt.

Mr. FLOOD. Was there an implosion or an explosion ?

Admiral RICKOVER. I consider there was little or no possibility of

there having been a nuclear accident, because the reactor is so designed

as to prevent this.

Furthermore, with the type of reactor construction we use, the reactors are impervious to sea water. We have had no evidence of any

release of radioactivity from the Thresher.

Mr. MINSHALL. I do not believe he understood the question by Mr.

Flood.

Admiral RICKOVER. I do not know what caused the accident to the

Thresher. .110 E

One theory is that a leak developed in the ship which admitt

•siderable quantities of salt water and caused her to sink. Thi -hat *to\

-
41'01

18

one would gather from the last cryptic words reported in the newspapers.

I am not telling you anything here that is not public knowledge.

Mr. SHEPPARD. Was it sunk by an external force?

Admiral RICKOVER. I do not believe so. My personal opinion is that

a leak developed inside the ship that admitted water faster than the

ship could cope with, and the ship sank.

Mr. LAIRD. Last year, Admiral, you went into some detail in your

presentation before us on the personnel problem. I wonder if we

could have some comments on that later this year, off the record?

Admiral RICKOVER. I do not object to putting this on the record.

Mr. MAHON. I want to thank you for your appearance here today.

We will want to follow up on the question that has been asked you by

Mr. Laird at a later date in regard to personnel problems which we

have discussed with you on previous occasions.

Admiral RICKOVER. I would appreciate it if you advise me of the

approximate date, if possible.

Mr. MAHON. We have this bill before us. We have to write it. We

have to present it to the Committee on Appropriations and we have

to pass it through the House. Then there will be Senate action and

conference. I think we will have to wait quite a while until we can fix_

a date.

Admiral RICKOVER. Whatever date is convenient to you, sir.

Mr. MAHON. Thank you very much.

0