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and interest expense which has been incurred is an expense which comes directly off their profits.

Any donation which is necessary to be a good citizen by the company in the local area is not allowable as an item of cost on a Government contract. And advertising, institutional advertising to attract attention to the community and the company, are also not allowable as costs under Government contracts. And as I mentioned before, interest on late payments by the Government is not allowed. However, I have a little note on a case where the Government overpaid us some $3,000 and although we have been in business and doing business with the Government since 1947 we received a two-page letter which stated:

You may request a postponement of payment which we will forward to the Defense Logistics Agency for determination if the debt has been appealed to the Armed Services Board of Contract Appeals or if immediate payment is impractical. If you request a postponement of payment of an appealed debt, your request must be accompanied by your statement of income and statement of financial position which have been certified by an independent public accountant and which cover the last 12 months. If certified statements are not available, you are requested to submit similar statements which have been signed by a senior official of your company. If you request a postponement of payment when immediate payment is impractical, your request must be accompanied by the aforementioned statements of income and financial position, a proposed payment schedule, a cash forecast showing receipts and disbursements for each month of your proposed payment schedule, the feasibility and probable effect of immediate payment, and the dollar value of scheduled deliveries on Federal Government contracts for each month covered by your proposed payment schedule. In the event the debt is appealed to the U.S. Court of Claims, collection action will be suspended to the extent of the bonds posted with the court.

If payment in full is not received within 30 days of the date of this letter, we are required to charge interest from the date of this letter on any unpaid debt principal at the rate established by the U.S. Department of the Treasury under Public Law 92-41. The current rate is 14.625 percent per annum. Should a higher interest rate be subsequently established, that rate will be charged from the date it becomes effective. If bonds have not been posted with the U.S. Court of Claims. and neither payment in full nor adequate support for your request for postponement of payment is received within 30 days of the date of this letter, we are required to offset the debt against payments due you. When offsets are not readily available, we are then required to report the debt to the Defense Logistics Agency in Alexandria, Va., where the following actions will be taken immediately upon receipt of the file:

a. The name of Essex Cryogenics of MO, Inc. will be submitted for inclusion in the List of Contractors Indebted to the United States so that any contracting agency of the Government may offset the indebtedness against amounts due you, and the contracting officers can consider the debt in determining your responsibility for future contracts.

b. The delinquency will be reported to Dun & Bradstreet for inclusion in their credit reporting system.

c. If subsequent collection does not materialize, the indebtedness file will then be sent, as applicable, to either the U.S. General Accounting Office or U.S. Department of Justice for appropriate action.

Your fully supported request for postponement of payment, or your payment in full made to the order of the "Defense Contract Administration Services Region, St. Louis," is to be forwarded to:

Your cooperation is requested.
Sincerely.

Mr. HAROLD GULLER. And that was the first notice.

Senator DANFORTH. I would like to go on at some length with this panel because it has been excellent and think you have had some thoughts which are interesting and will really bear careful consideration. I just want to ask you a couple of general questions, bearing in

mind the lateness of the hour, it is almost 20 of 10 now and again my plane leaves at 11 o'clock and we have got two other people to hear from after this panel, but let me just ask you a couple of questions.

I guess the major purpose of the Government in doing business is to try to have a climate of competition in the field of suppliers as competition generally keeps the price down and quality up, and also to try to take advantage of innovation, of technological improvements, of changes in manufacturing methods, and so on, and then secondarily, from the standpoint of small business, to try to encourage it, to try to encourage small business to do business with the government. Is the point of your testimony that in fact the complexity, the detailed specifications, the volume of paper and the cost of it discourages people, as Mr. Gilbert says he has been discouraged, from doing business with the Federal Government, reduces the number of businesses willingly doing business with the Government, provides a disincentive to small businesses less able to hire the extra personnel to keep up with the requirements and provides a further disincentive to innovation, advances in the state of the art, because of the detailed requirements which will tell you exactly how to execute a contract? Would that be a fair summary of your comments? Would you all agree with that?

Mr. HAROLD GULLER. Very good.

Mr. WILLIAMS. Sure,

Mr. GILBERT. Could I comment?
Senator DANFORTH. Yes.

Mr. GILBERT. If I were to sell one of those to the construction people for their in-house type of surveying. I would charge $2.50. I wouldn't begin to make that for less than $4 for the Federal Government, and I would probably lose money at $4. where I would make a profit at $2.50. Why should the Government be a different type of customer than somebody else for the same function? And I think that is the real environment.

Senator DANFORTH. Well, I suppose the answer to that is just what you said earlier. Nobody wants to be blamed if something goes wrong. If they buy something that is wrong or that is sleazy, if they have been ripped off, they want to be able to point to the specific provisions and say, "We will enforce the absolute letter of the specifications.“

Mr. GILBERT. But private industry has come to grips with that problem because the same thing is true there. A purchasing agent or inspector or whatever also wants to avoid these things but they get fair value for their dollar.

Senator DANFORTH. Let me ask you just one other question, and it is a big question. The whole question of encouraging minority business has been publicized a great deal, particularly right here in St. Louis where the Globe-Democrat has run a series of articles. It is quite controversial. Mr. Williams, you have stated specifically that you think that it is really necessary for minority business to have a set-aside program, at least that is what I understood you to say at the end of your testimony.

Mr. WILLIAMS. Yes, sir, Senator, it is unfortunate that regulations are not written by small business people. I think that they would do much better or put more effective type of regulation into being, if they were consulted on these issues. The issue of minority business par

ticipation-I feel that as a taxpayer I am a partner with every other citizen in this country, and I think that our community should be developed to enhance or to bring back to that community part of that tax that we pay.

Now the transfer of knowledge sometimes, and of course won't go into the history of what has occurred in the past, but we understand that transfer of technology has to take place and we are put in somewhat of a position of needing I guess what you could call sort of a foreign aid type of assistance where our technology is brought through the community and disseminated among the small businesses that exist in our community and I think that the procurement end of the Federal Government should recognize this and assist those agencies or develop other activities that would enhance this transfer of technology.

Senator DANFORTH. Do any of the others of you have any comments on the question of encouraging minority business to do business with the Federal Government-keeping in mind the criticism of the minority set-aside program?

Mr. GILBERT. In line with what he said, how can a guy starting out possibly get into selling to the Federal Government. He just doesn't have the resources.

Mr. HAROLD GULLER. We have been able to help in that regard by taking some of our subcontract work which has known capabilities and finding groups in the area who can do that job through McDonnell, who has a published list of minority companies in the area with their capabilities, and from our own procurement people we have been able to have a very good percentage, and I think one of our companies, Propelex, was just recognized for doing such a program, finding the job that fits their capability; and it just requires a little bit of extra work on the part of our procurement people as small as we are to find a shop like yourself that has it and then get that information disseminated, and I think it can be done if this company will tell this company what they can do and pass the word around, which is something we are trying to do.

Senator DANFORTH. Gentlemen, thank you very much.

The next witnesses are Mr. Brent Hardesty, corporate director, McDonnell Douglas Corp., and Mr. Doug Corderman, senior vice president, Emerson Electric Co., who will testify concerning the procurement policies of the Department of Defense.

TESTIMONY OF BRENT A. HARDESTY, CORPORATE DIRECTOR, MCDONNELL DOUGLAS CORP., AND DOUGLAS G. CORDERMAN, SENIOR VICE PRESIDENT, EMERSON ELECTRIC CO.

Mr. HARDESTY. I am delighted to be here and to contribute to your efforts to streamline the acquisition system.

In response to your April 23 letter I will address whether new Federal procurement legislation is needed and I will identify a few of the biggest problems that the private sector faces in doing business with the Government and make recommendations for features to be included in such legislation.

Is new legislation needed? Yes, to apply to all procurement agencies. It is needed to (1) consolidate over 4,000 existing procurement statutes, (2) establish objectives, principles and policies regarding needed reforms, (3) to serve as a baseline for new and revised regulations, directives and instructions, standards, specifications, data requirements, manuals, handbooks, and guidelines, which are issued and used by Federal agencies, (4) to assure implementation of the reforms-the probability and degree of good policies being implemented will be enhanced by public law. We have waited 5, 10, 15 and sometimes 20 years to see good policies implemented and they may never be unless they are legislated; (5) to reduce waste in Federal spending; (6) to improve national productivity; and (7) to increase reliance on the private

sector.

What are the biggest current problems? The biggest, the No. 1 problem that we have is Government intrusion into contractor's management. If your legislation cures but this one problem it will well be worth your efforts. Federal agencies are the only customers that attempt to dictate how contractors should manage their businesses. Commercial customers specify what, not how to do it.

Prime defense contractors must contend with about 700 procedural requirements and organizational arrangements which have been preordained by Government personnel.

Research done to determine if externally imposed management techniques result in better program performance has shown, and I quote from a study of the results of 108 Government sponsored R. & D. projects, that:

The application of a large volume and variety of management control techniques tends to be associated with greater numbers of technical, schedule, and cost failures than were associated with projects not having such control. Directing contractors how to manage is an unfortunate and very costly 20-year experiment that has failed. Legislation to prohibit "how to" requirements and to prohibit micromanagement surveillance would save at least $20 billion annually.

Senator DANFORTH. Could you just repeat that last sentence?

Mr. HARDESTY. Legislation to prohibit "how to" requirements and to prohibit micromanagement surveillance would save at least $20 billion annually.

The second biggest problem is delays, discontinuities, and unstable employment. The acquisition process takes too long: Delays cause unnecessary cost, obsolescence, program cancellation, employee layoffs. Lack of needed public confidence and loss of technology lead to a potential enemy who demonstrates a greater sense of urgency.

Delays between program phases can double or even triple the acquisition time without any compensating benefits. They break up contractor and DOD teams.

Mr. Sidney Guller testified earlier this morning he has a problem waiting 1 year for a go-ahead. That is the good news. We have to wait much longer than that. The acquisition time on major systems has grown from what used to take 7 years to now 12 to 20 years. Thus, many of the principals who first recognized the need for some of these programs will not be alive to see the systems in the field being used by troops who were not born when the systems were started.

There are four primary reasons for this growth in the length of the acquisition cycle. First, the lack of prompt and adequate funding after a need is identified. Most new programs wait 2 years on the DOD/ OMB/Presidential/congressional budget and appropriation system. One hundred thirty million dollars in 1979 terms in an emergency fund, which would be less than one-tenth of 1 percent of the DOD budget, would allow a competitive and timely exploration of all of the military needs identified in 1979 and it would save 2 years of delay at the front end of the acquisition cycle.

The second cause of this lengthening of the cycle is that too often all of the possible acquisition steps that can be taken are taken in a series toe-to-heel fashion, rather than omitting unnecessary steps and applying some reasonable concurrency, that is, doing a few things in parallel. For example, you could begin production prior to the completion of development on the low risk programs, or when the urgency of the need dictates that you can't wait. Reasonable concurrency could save 5 years versus doing things in toe-to-heel series fashion.

The third reason that programs have lengthened is time gaps between contracted program phases. Time gaps create lengthy unfunded periods and layoffs. If these time gaps were eliminated, and they can be, you could save at least 12 years in the acquisition cycle.

The fourth cause of the increasing length is an overall lack of prompt decisionmaking caused by a lack of accountability, authority, and responsibility. Many delays are caused from inadequate accountability, authority, and responsibility. In the late 1960's, the President's Blue Ribbon Defense Panel was chaired by Gilbert Fitzhugh, who characterized the acquisition system this way, and I quote:

Everybody is somewhat responsible for everything, and nobody is completely responsible for anything. There is nobody that you can point your finger to if anything goes wrong, and there is nobody you can pin a medal on if it goes right, because everything is everybody's business, and as you know, what is everybody's business is nobody's business.

They spend their time coordinating with each other and shuffling papers back and forth and that's what causes all the red tape and the big staffs in the Department. Nobody can do anything without checking with seven other people.

Unfortunately, there are more than 30 offices today, rather than 7 other people. So there has been a growth, an inflation in the bureaucracy as well as in the monetary system.

Program managers today are complaining about giving 30 presentations to different groups to launch their program or to move from one phase of the program into the next phase of the program. Necessary engineering changes take 6 months to 2 years today to get approved by the Government and some of these changes are vital to the tional performance of the weapons system. Sometimes it takes longer to get the change approved than it does to build and deliver it. Therefore, many of the changes have to be incorporated in the field after the weapons system is developed and delivered.

Former Deputy Secretary David Packard said:

opera

Every time we want something done in a hurry and want it done right, we have to take the project out of the system. We give a good man direction and authority and let him go-and it works. On the other hand, when we are not in a hurry to get things done right, we over-organize, over-man, overspend and under-accomplish.

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