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Analysis of Air Force pricing in negotiated procurement

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Analysis of Air Force pricing in negotiated procurement

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Content ANALYSIS OF AIR FORCE PRICING IN NEGOTIATED PROCUREMENT
i f
fry
Gerald Eugene Mann
1
|
i
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(Economics)
January 1959
UMI Number: EP44763
All rights reserved
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U N IVE R SITY O F S O U T H E R N C A L IF O R N IA
GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES 7
Ea. 'SI M&&I
T h is thesis, w ritte n by
GERALD EUGENE MANN
u nd er the guidance o f h A $ ...F a c u lty C o m m itte e,
and a p p ro ve d by a ll its m em bers, has been p re
sented to and accepted by the F a c u lty o f the
G rad uate S chool, in p a rtia l fu lfillm e n t o f the
requirem ents fo r the degree o f
MASTER OP ARTS
D ate.
Faculty Committee
0 Q Chairman 0
TABLE OF CONTENTS
CHAPTER PAGE
I. THE PROBLEM OP PROCUREMENT PRICING .... 1
The problem ............................ 1
Statement of the problem ............. 1
Importance of the study . ......... 2
Limitations of the study ....... 4
Definitions of terms .......... 4
Procurement . . . . . . . . . . . . . . 4
Weapon system concept ......... 5
Buyer or contracting officer ......... 5
Redetermination or price revision
clauses 5
Review of the literature . ........... 6
Organization of the remainder of the
study . . . . . . . . . . . . . . . . 8
II. TYPES OF AIR FORCE CONTRACTS ....... 10
Selection of contract type ....... 10
Factors determining selection ..... 12
Compensation arrangements ...... 12
Fixed-price contracts .... ......... 13
Fixed-price, or lump-sum contract . . . 13
Advantages.......................... 14
Limitations ........................ 15
Fixed-price contract with escalation . 15
iv i
TABLE OF CONTENTS j
(continued)
CHAPTER PAGE
Advantage ............. ..... 16
Limitations ........... ..... 16
Cost-type contracts .................. 17
Cost-reimhursement contract .... 18
Advantages and disadvantages . . . 18
Limitations ...... 19
Cost-plus-a-fixed-fee contract . . . 19
Advantages and disadvantages . . . 20
Limitations ...... 21
Cost-plus-ineentive-fee contract . . 22
Advantages and disadvantages . . . 22
Limitations ...................... 23
Cost-sharing contract . ........... 23
t
Summary of cost contracts ..... 24
Other contract types . ........... 25
Time-and-materials contracts .... 25
Disadvantages ..... ......... 26
Limitations 26
Call contracts .................... 27
Limitations .. .. .. .. .. 27
Open contracts ............... . . 28
Limitations 28
V
’TABLE OF CONTENTS
(continued)
CHAPTER PAGE
Types as to form of contract . . . . . 29
Letter contract or letter of intent . 29
Notice of award .... .. .. .. 30
Summary *«»o«ooo«««oe«»e 31
III. PROCUREMENT BY NEGOTIATION ........ 32
Development of Air Force procurement . . 32
Differences "between formal advertising
and negotiation . .. ....... 32
Formal advertising ......... 32
Negotiation .ooeo.o...*o 35
Procurement prior to World War II . . . 34-
Procurement during World War II . . » • 36
The Armed Services Procurement Act of 194-7 38
Circumstances permitting negotiation . 39
Extent of recent use ......... 4-2
Techniques of negotiation ........ 4-8
Analysis of price and costs ...... 50
Time element ................. 51
Lowest prices . ..................... 52
Preparation for negotiation ..... .53
The contractor's bargaining position . 54-
Contractor's need for contract . . . 54-
Certainty of obtaining contract .. . 55
TABLE OF CONTENTS
(continued)
CHAPTER PAGE
Time available for negotiation . . . 56
Price, cost and profit analysis as a sub
stitute for competition ........ 57
Extent of competition in Air Force pro
curement . . . . . . . e . o o . . . 56
Sole sources ....... .. ... 59
Broadening the base ......... 60
Price comparison . .. ........ 60
Competitive prices ......... 61
Past prices ...o.eo.o... 61
Price trends ..... ............... 62
Summary . . . . . . . . o o . . . . . . 62
IV. FUNCTIONS OF AIR FORCE PRICING ...... 64
Pricing policy ..... .. ... .. 64
Importance of sound pricing ..... 65 !
Responsibility for sound pricing . . . 66
Pricing concepts ... .. ....... 67
Competition . ................... 67
Incentive approach ..... ........... 68
Negotiation . . . . . . .. .. . .. 69
Requirements for competition .... 69
Complexities of negotiation ........... 70
TABLE OF CONTENTS
(continued)
CHAPTER PAGE
Types of pricing . . .................. 70
Prospective pricing .................. 70
Retroactive pricing . . . ......... 71
Price analysis.......... ............... 72
Objective of price analysis ...... 72
Techniques of price analysis ......... 73
Comparative prices ......... 73
Product or value analysis ........... 73
Cost analysis . . 74
Advisory audits . ............... 75
Learner's curves ......... ..... 77
Summary . . . . . . . . . . . . . . . . 79
V. PROBLEMS OF CONTRACT REDETERMINATION . . . 81
Use of price redetermination clauses . . 81
Conditions for use ......... 82
Limitations . . . . . . . . . . . . . 83
Types of redetermination clauses .... 83
Form A— Prospective periodic price re
determination at stated intervals . . 84
Conditions for u s e .......... 84
Limitations 85
Cost data required.................. 85
i
| Form B— Prospective price redetermina-_______
CHAPTER
f
t
!
viii 1
TABLE OF CONTENTS
(continued)
PAGE
tion on request ......... 85
Conditions for use ......... 86
Limitations ....... ......... 86
Form C— Retroactive and prospective price
redetermination at a stated time prior
to completion ............... 87 j
Conditions for use ......... 87
Cost data required ......... 88
Form D— Retroactive and prospective price
redetermination including further pros
pective redetermination upon request 88
Conditions for u s e ........... 89
Limitations .................. 89
Form E— Retroactive price redetermina
tion after completion ........ 90
Conditions for use ......... 90
Limitations .. .. . .. . .. . . 90
Limitations ........................ 90
Form F— Price redetermination upon hap
pening of specified contingency . . . 91
Conditions for u s e ............. 91
Limitations ........... 91
Cost data required ......... 92
TABLE OF CONTENTS
(continued)
CHAPTER
Requirements for contractor’s accounting
sy s t e m................................
Adjustment during performance of con
tract ......................... . . .
Auditor General's survey .............
Negotiations .............................
Avoidance of retroactive pricing . . .
Importance of prompt price redetermina
tion ..........................
Administrative problems ...............
Relevancy of cost data ........
Large dollar amounts ..................
Effects of change proposals and notifi
cations on redetermination . . . . .
Summary ..... ......................
VI. CONCLUSIONS, ANALYSIS AND RECOMMENDATIONS .
Conclusions . . . ......................
Stabilization of personnel ...........
Military ........ ......... .
Civil service employees ...........
Proposed weapon system concept . . . .
Better Air Force-contraetor relation
ships . . . . . . . . . . . . . . .
i x i
PAGE
92
92
93
94-
95
96
97
98
100
»
100
100
102
103
105
105
106
109
111
TABLE OF CONTENTS
(continued)
CHAPTER PAGE
Simplification of government contracts 11J
The prenegotiation conference . . . 114
BIBLIOGRAPHY....................................... 115
LIST OF TABLES
TABLE PAGE
I. Percentage of Negotiation Under Various
Exceptions for Fiscal Tear 1956-57 . . . 4-4
II* Air Force Negotiated Procurement Tran
sactions of $10,000 or More in 1952,
1953 and 1954 47
III* Air Force Negotiated Procurement Transac
tions of $10,000 or More in 1955 >
1956 and 1957 49
This thesis represents the views
of the author and does not necessarily
reflect the official opinion of the
United States Air Force.
CHAPTER I
i
THE PROBLEM OE PROCUREMENT PRICING
I
Military procurement is the connecting link be
tween the national security and the national economy;
it takes from the economy the military requirements
j necessary for security. This is a fact that must be
t
I recognized by civilian government officials concerned
j with economic stabilization and by military officers
J whose main concerns are the military requirements for
national security.
I. THE PROBLEM
J A postulate of military procurement is that it
must function within the particular price system of the
economy of which it is a part. This system provides the
incentive to efficiency for both individuals and busi
ness enterprise.
Statement of the Problem
It is the purpose of this study: (1) to examine
pricing in Air Force negotiated procurement in order to
analyze basic concepts, policies and methods now employed
in the negotiation of contracts for Air Force equipment;
(2) to determine the effectiveness of these methods;
2- i
i
and (3) to attempt to develop ways of improving military
procurement. ;
Importance of the Study
fhis study on procurement pricing comes at a time
when the Government is trying to limit the national debt.
With defense spending rising at an alarming rate, due
to the cold war becoming warmer and the inception of the
Space Age? pricing of government contracts becomes more
and more important.
Price can act as an incentive to the lowering of
cost, the conservation of resources and the maximization
of production. Proper procurement practice, however,
will also result in "reasonable" prices, costs and prof
its, assist in discouraging general inflation, and pro
vide the strongest possible incentives to production ef
ficiency.
During full employment in peacetime, large mili
tary procurements can be inflationary. Likewise, rapid
curtailment of military procurement in a period of de
clining business activity, such as the fall of 1957?
might accelerate the decline and have a marked deflation
ary effect on the national economy.
During wartime the Government has the moral and
legal power to dictate its buying prices, but it pre
fers to rely upon the more democratic factors of volun-
3
tary cooperation through free negotiation. During
peacetime the Government is the only buyer for many of
the military items or systems purchased. However, its
position is not completely "monopsonistic" as the term
would imply in pure economics, even though it does have
a monopoly on the demand side.
The Air Force is a larger buyer of items through
direct purchase than any other department of the Govern
ment, It does not function, however, as a true monop
sony in the classic sense. Although price is an impor
tant element of any procurement, the main objective is
to establish a fair and reasonable price with all de
fense contractors. Unlike a private individual or a
private business, the Air Force does not have the free
dom to buy as it sees fit because it must conform to
public law in all of its purchases. Hany controls have
been developed to insure this practice, and while they
prevent the Air Force from being a true monopsony, they
do protect the taxpayers' dollars.
It is believed that an analysis of military pro
curement as it is now practiced may result in "more
Air Force per dollar" for the taxpayers and increased
cost consciousness on the part of Air Force procurement
personnel.
4
Limitations of the Study
Because of the long lead time necessary to develop
many items for the Air Force, this study does not con
sider the highly speculative subject of the use and man
ipulation of military procurement for counter-cyclical
purposes. The military must meet certain requirements
regardless of the status of the economy. At the time of
an actual or threatened war, it would not be feasible
to delay procurements because of costs.
Renegotiation of government contracts has not
been considered in this work because this is a method
of recouping excessive profits which might indicate
poor pricing of contracts in the first place, or because
defense equipment has become so complex that no up-to-
date cost data exist upon which to forecast an accurate
price.
II. DEFINITIONS OF TERMS
Procurement. At first glance this term seems to
lend itself readily to definition, at least in the dic
tionary sense. When applied in the military, however,
this one word connotes myriad operations with far-
reaching effects throughout the economy. In its broad
est sense, the sense in which it is used in this thesis,
procurement includes, in addition to the actual buying,
5
t
I determination of requirements, planning, administration
j of contracts, auditing, inspection of the finished prod'
I
i uct and transportation.
Weapon system concept. Headquarters United
States Air Force defines a weapon system as:
. . . a composite of equipment, skills and tech
niques that forms an instrument of combat which
usually, but not necessarily, has an air vehicle
as its major operational element. The complete
! system includes all related equipment, materials,
i services, and personnel required solely for the
' operation of the air vehicle, or other major ele
ment of the system, so that the instrument of com
bat becomes a self-sufficient unit of striking
power in its intended operational environment . ■ * -
Buyer or contracting officer. Throughout this
thesis the use of the terms buyer and contracting offi
cer are used synonomously.
Redetermination or price revision clauses. These
clauses are contractual devices designed to effect an
adjustment in a contract price. They were developed to
protect the interests of both the contractor and the Air
j Force under conditions in which both parties are unable
to agree as to a firm price, due to uncertain circum
stances peculiar to the procurement.
Air Force Regulation 20-10 Weapon System Project
Offices (Washington: United States Government Printing
Office, March 24, 1958), p. 1.
6
III. REVIEW OF THE LITERATURE
Very few books have been written on government
procurement. Only two of those reviewed by this writer
deal specifically with the pricing of military procure-
2 ■
j ment— Pricing of Military Procurement and Subcontract-
2
ing Policy in the Airframe Industry.
| The learned journals have little to offer on the
!
I
! specialized problem under discussion in this thesis.
i
j The majority of the contributions relating to pricing
are largely concerned with industrial capabilities or
economic stabilization. The few exceptions to this gen
eral situation are cited in the text or the bibliography
of this thesis.
Most of the literature on this subject has been
published by the Armed Services. The Armed Services Pro
curement Regulation and the Air Force Procurement In
struction are loose-leaf type publications that are in a
continual state of revision.
The Armed Services Procurement Regulation (ASPR)
was published as a result of the Armed Services Procure
ment Act of 1947. It consists mainly of general guide-
2
John Perry Miller, Pricing of Military Procure
ments (New Haven: Yale University Press, 1949).
2
vJohn S. Day, Subcontracting Policy in the Air
frame Industry (Boston! Harvard University Press, 1956).
j lines and procedures for all procurement by the Armed
i
j Serviceso Using it as a basic guide, each service has
I
published further detailed instructions pertaining to
its particular requirements» In the Air Force it is
called the Air Force Procurement Instruction (AFPI) and
establishes for the Department of the Air Force uniform
policies, procedures and instructions relating to the
procurement of supplies and services < > There are twenty-
I
: five sections in the AFPI, but only a small part of
Section III, "Procurement by Negotiation," deals with
pricing of military contracts < >
In 1955 the Commission on Organization of the
Executive Branch of the Government made a task force
report on military procurement.. This report recommended
t
four major programs for strengthening military procure
ment, as follows:
Program for Producing Better Procurement Plans
Program for Securing More Efficient Buying
Program for Increasing the Effectiveness of
Inventory Control and Distribution
Program for Building More Forceful and Informed
Leadership Over Military Procurement^
4
Report on Military Procurement s prepared for the
Commission on Organization of the Executive Branch of
the Government by the Task Force on Procurement (Washing
ton: United States Government Printing Office, June,
1955), p. aciii.
8
Besides the ASPR and the AFPI, there are a few
Air Force procurement circulars issued that are later
incorporated into the AFPI.
The Directorate of Procurement and Production
Headquarters Air Materiel Command at Dayton, Ohio, is
sues various training guides in mimeographed form from
time to time. They summarize ideas on different subjects
presented in pricing conferences and training courses
given at Wright-Patterson Air Force Base.
IV. ORGANIZATION OF THE REMAINDER OF THE STUDY
In order to provide the reader with a frame of
reference for the fuller appreciation of the problems
inherent in pricing of government procurements, it is
necessary to have a good understanding of the types of
contracts used and a brief knowledge of the history of
procurement practices. Accordingly, the types of Air
Force contracts and the advantages and limitations of
each are defined, discussed and analyzed in Chapter II.
Attention is given in Chapter III to procurement by nego
tiation, the history of Air Force procurement, the method
of source selection, price, cost, and profit analysis.
Chapter IV discusses Air Force pricing policies and the
importance of sound pricing concepts. Chapter V is a
discussion of the selection- of price redetermination
j clauses» Probably no aspect of the procurement pricing
i process is more significant from a pricing standpoint
i
j than the appropriate selection and administration of
contract pricing provisions. The final chapter of the
thesis contains a summary, conclusions, analysis and
recommendations. A bibliography of the literature per
taining to procurement concludes the study.
i
I
CHAPTER II
TYPES OP AIR PORCE CONTRACTS
I. SELECTION OP CONTRACT TYPE
One of the magor responsibilities confronting the
Air Force buyer in negotiated procurement is selection
J of the type of contract best suited to the procurement
S he is conducting. Because of the variety of situations
I
involved, a single contract form cannot be adopted. The
buyer’s ehoice of contracts will have an important effect
on the ultimate cost of the contract to the Air Force,
on the incentive to the contractor to use materials and
manpower efficiently, and on the nature of the super-
i
vision which must be exercised over the performance of
the contract.
During World War I fixed-price contracts were too 1
i
great a gamble for contractors to undertake. This risk !
was caused by the unstable conditions affecting prices
of raw materials and labor costs. If the contractors
accepted a fixed-price contract, they included vast con
tingencies in their prices for these unknowns. This led
ultimately to the development of two types of contracts:
eost-plus-a-fixed-pereentage-of-eost and cost-plus-a-
fixed-fee. The cost-plus-a-fixed-percentage-of-eost
11
type of contract was particularly subject to abuse,
since the interests of the contractor were diametrically
opposed to the Government's interest due to the increase
of profits with the increase of costs. This resulted
in the subsequent prohibition of the use of the cost-
plus-a-percentage-of-cost "system" of contracting in
1
government procurement.
After World War I and prior to World War II,
there was little variation in the types of government
contracts used. Procurement was normally accomplished
by formal advertising and paid for on a fixed-price
basis. But the urgent need for speed in placing con
tracts, the requirements of negotiation, the importance
of close pricing, and the uncertainties under which pro
duction must be accomplished in wartime called for the
development of other types of contracts.
In World War II considerable progress was made
in modifying and adopting the flexible contractual in
struments whieh are used today. The large number and
variety of items purchased and the widely varying prac
tices of the services presented many difficulties in de
signing contract forms for general use. The military
^George William Lupton, Jr., Government Contracts
Simplified (Richmond, Virginia: The William Byrd Press,
Incorporated, 1953)* p. 197.
12
services eventually made substantial progress in stand
ardizing contract forms and clauses. The Armed Services
Procurement Regulation* hereinafter referred to in this
thesis as ASPR, now specifies standard contract types
and clauses which are applicable to most procurement.
Factors Determining Selection
The flexibility permitted by the negotiated con
tract provides a challenge to procurement officers and
industry to work out arrangements which promote the
over-all objectives of mobilization. The buyer, there
fore, before selecting the type of contract, should con-
' N
sider carefully the nature of the procurement, the con
tractor's production cost experiences, and the.extent of
the control which can or should be maintained over the
defense contractor's operations. It is doubly important
to avoid a premature decision, because the course of the
negotiations themselves will be considerably influenced
«
by the type of contract used.
Compensation Arrangements
"The selection of an appropriate contract type
and the negotiation of prices are related and should be
2
considered together." The objective is to negotiate
2
"Procurement by Negotiation," Armed Services Pro
curement Regulation* 1955 Edition, Part 3-803» May 14,
1958 revision (Washington: United States Government
Printing Office), p. 341. _____ _________________________
j a contract type and price that includes reasonable risk
j and provides the contractor with the greatest incentive
1 ‘ for efficient and economical performance. If it were
always possible to establish firm prices that were fair
to both the Air Force and the contractor, there would be
no problem in determining the most suitable type of con-
i
tract. A straight, fixed-price contract always would be
used, because this type of contract is the easiest and
I
I
most economical to administer and gives the contractor ;
the greatest incentive to reduce his costs.
II. FIXED-PRICE CONTRACTS
Fixed-Priee, or Lump-Sum Contract
The fixed-price contract is the basic contract
for the procurement of commercial-type items, as well as
for many items for special use by the Air Force. It is
I
the only type of contract that may be used when purchas- j
3 I
ing is accomplished by the formal advertised method. I
When negotiation is used, however, a wide variety of con
tracts with various types of compensation arrangement
are available for use. As the name implies, the fixed-
price, or lump-sum contract represents an agreement by
the contractor to furnish designated supplies or services
^Ibid., Part 2-104-, p. 202.
14 :
at a specified price. It should he used whenever the
buyer is able to determine that the prices quoted by
the prospective contractor are fair and reasonable.
Advantages. In its basic form, a fixed-price
contract carries the greatest possibility of profit to
the contractor. Ihe realized profit is dependent upon
the ability to produce and to control cost. Thus, a
fixed-price contract places the maximum risk and respon
sibility upon the contractor and affords him the greatest
incentive to avoid waste and to devise production meth-
4
ods that will save labor and material. Inasmuch as the
nation's ability to survive in another World War may de
pend largely on the ability of the Armed Services to en
list the cooperation of defense contractors in conserv
ing resources, the Air Force should use firm fixed-price
contracts wherever practicable. When the firm fixed- j
price contract is not used, the Air Force should attempt
to use other contractual instruments which will give
contractors an incentive to reduce their costs.
Ihe straight fixed-price contract has a further
major advantage in that it is relatively easy for the
Air Force to administer. 3?his ease of administration
conserves the time of the buyer, the administrative
^Tbid., Part 3-405, p. 318*
! 15 ;
j contracting officers, and other Air Force personnel. It
| also is advantageous from the contractor's point of view
!
; beeause he is not required to adapt his accounting meth-
5
ods to conform to Air Force audit procedures.
Limitations. Price and cost data must be suffi
cient to enable the buyer to determine the reasonableness
of quoted prices. This' is particularly true in the case
i of new items never before produced by the contractor.
■ But in spite of the inconclusive evidence in such cases,
s
the buyer may use firm fixed prices in placing production
contracts if the amount involved does not justify the
I
use of a more complicated type of contract or if the i
prospect of securing lower prices by the use of other
contract terms is not promising. According to the ASPR,
i
I "the fixed-price contract shall not be used when contin
gencies proposed in the contract price are considered
unreasonable.
Fixed-Price Contract with Escalation
The fixed-price contract with escalation provides
for the upward and downward revision of the stated
^Air Force Procurement Circular No. 12 (Washing
ton: United States Government Printing~T)ffice, March
21, 1956), p. 6.
6ASPR. loc. cit.
16 |
contract price upon the occurrence of certain con
tingencies which are specifically defined in the
contract.'
These contingencies should he limited to those beyond
the control of the contractor; for example, uncertainty
concerning the future movement of prices and wage rates
often gives rise to contingency allowances which con
tractors consider necessary for their protection.
Advantage. The advantage of a fixed-price con
tract with escalation is a two-way street, i.e., it can
be beneficial to the Air Force or the contractor.
Limitations. The Air Force Procurement Instruc
tion, hereafter referred to in this thesis as AFPI,
states:
. . . it is Air Force policy to avoid the use of
price escalation clauses and to use them only when
contractors will not accept a contract without in
cluding contingencies in their price.®
The business risk of the contractor in a fixed-price con
tract is reduced by the inclusion of escalation provi
sions in which the Air Force agrees to revise the stated
price upon the happening of the prescribed contingency.
7ASP1, 1955 edition, Part 5-405.2, March 1?, 1958
revision~XWashington: United States Government Printing
Office), p. 318.
Q
“Procurement by negotiation,” Air Force Procure
ment Instruction 1957 edition, Part 3-403•2b, January
20, 1958 revision (Washington: United States Government
Printing Office), p. 352. _____ ______________ __________
17
i
i
The AFPI lists four conditions under which price
escalation provisions will not be used;
(a) If reasonable fixed prices can be negotiated
(b) If an appropriate and authorized type of
price redetermination contract can be
used to offset contingencies and is ac
ceptable to the contractor
(c) When the item to be procured is other than
the standard or semistandard item nor
mally sold at ’established' or 'pub
lished9 prices in the commercial market
or other than an item which the contrac
tor customarily offers for sale commer
cially, modified according to the speci
fication of the contract
(d) If delivery will occur within 90 days of
the effective date of the contract“
Fixed-price contracts providing for the redeter
mination of price are covered in Chapter V, “Problems
of Contract Redetermination*“
III * COST-TYPE CONTRACTS
Following the declaration of the national emer
gency in September, 1939? the complex procurement prob
lems which arose made it imperative that the use of some
type of cost-reimbursement contract be employed. As a
result, cost-type contracts have been developed primar
ily for use whenever there is no valid basis for the con
tractor to estimate the cost of performing the contract.
9Ibid., Part 3-403~2c, p. 333.
18
Cost-Reimbursement Contract
The 'cost-reimbursement type of contract provides
. . o for payment to the contractor of allowable
costs incurred in the performance of the contract,
to the extent prescribed in the contract. This
type of contract establishes an estimate of total
cost for the purpose of: (1) obligation of funds,
and (2) establishing a ceiling which the contractor
may not exceed (except at his own risk) without
prior approval or subsequent ratification of the
contracting officer.10
All cost-reimbursement type contracts provide for
the determination and acceptance of cost by the Air
Force in accordance with a statement of cost principles
in ASPR.^ Although Section XV generally defines the
principles to be used in determining allowable costs
under cost-type contracts, it leaves many costs for neg
otiation. These should be agreed upon with the con
tractor and defined in the contract. Since the con
tractor is reimbursed for all his allowable costs, cost-
reimbursement type contracts provide no incentive for
the contractor to use materials and labor economically.
Advantages and disadvantages. The main risk a
contractor faces with a cost-reimbursement contract is
the possibility of cost disallowances either in current
audit by the Air Force Audit Agency or in post-audit by
■^ASPR, op. cit., p. 325.
^ Ibid.. Section XV, pp. 1501 to 1512.
12
the General Accounting Office* It is essential that
the contractor’s cost accounting system he adequate for
the determination of costs applicable to the contract.
The contractor also suffers an inconvenience because
Air Force quality-control personnel keeps the contract
under surveillance to see that inefficient or -wasteful
methods are not being used.
A major disadvantage of cost-reimbursement type j
contracts is that they increase the administrative bur
den on both the Air Force and the contractor. Also, ad
ministration is further complicated by the fact that all
raw material and work in process under the contract is
government property.
Limitations. This type of contract may be used
only when: (1) such a method of contracting is likely
to be less costly than other methods, or (2) it is im
practical without it to secure supplies or services of
i
the kind or quality required. I
Cost-Plus-a-Fixed-Fee Contract
This type of contract is a cost-reimbursement
type that provides for the payment of a fixed fee to the
contractor. "The fixed fee once negotiated does not
] P
AFPI. 0£. cit., Part 3-404, p. 361
20
vary with actual cost, but may be adjusted as a result
of any subsequent changes in the work or services to be
13
performed under the contract," v
Under the cost-plus-a-fixed-fee type of contract,
the contractor is reimbursed for the "true" or "allow
able" cost of performing the work and receives in addi
tion a fixed fee for his services. This avoids the vice
of the cost-plus-a-percentage-of-cost contract in that
the contractor does not benefit by increasing the cost
of performing the contract. Irrespective of whether his
actual costs are greater or less than the estimated
cost, the contractor receives the predetermined fixed
fee .
Advantages and disadvantages. There are not many
advantages to the cost-plus-a-fixed-fee type contract
except that this type often simplifies contract financ
ing by providing for periodic reimbursement for allow
able costs and part of the fee,
A disadvantage is that the fixed fee is not con
sidered to be a very strong incentive to control costs.
There has been a widespread feeling that since the Gov
ernment is paying the bill, many such contractors are
indifferent about effecting economies. This type of
1^ASPR. op. cit., Part 3-4-04.3, p. 326.
21
I
contract is -used primarily now for experimental research
! and for developmental work when firm estimates cannot he
; made .
i
Limitations. ASPR provides that in the case of
cost-plus-a-fixed-fee contract ". . . the fee shall not
exceed 10% of the estimated cost of the contract, ex-
14
elusive of the fee." On experimental, developmental
or research work the fee may he as high as 15%°
! The dollar of procurement should he substantial
enough to warrant the administrative costs involved.
For example, this type of contract will rarely he em
ployed in procurement amounting to less than 1100,000
unless all work undertaken in the particular plant is
under a cost-plus-a-fixed-fee hasis.
Another limitation is that normally only the
Headquarters Air Materiel Command, Air Materiel pro
curement activities, Air Transport Command, Air Research
and Development Command, and the Air Force Academy Con
struction Agency are allowed this type of contract for
15
limited use.
14Jhid., Part 3-4-04.5c °
^ AFPI, op. cit., Part 3—4-04.3» p° 363°
22 i
i , I
J Cost-Plus-Incenti ve- Fe e Contract j
J The cost-plus-incentive~fee contract is a cost-
I reimbursement type contract with provision for a
i fee which is adjusted by formula in accordance with
the relationship which total allowable costs bear
to target costs.16
Under this type of contract, the Air Force and
the contractor agree at the time of negotiation of the
contract upon the estimated cost of performance < > The
contract provides that if the allowable cost of perform-
i ing the contract is less than the estimated cost, the
{ contractor will be entitled to a bonus for saving of
cost equal to an agreed, specified percentage of the
total costs saved. Such contracts may also provide
that the fee may be reduced if the costs exceed the
estimate.
Advantages and disadvantages . The incentive fee
is useful because it introduces an element of risk for
the contractor. Although he does not take the risk of
monetary loss, the contractor does face the risks of
having his fee reduced or eliminated in the performance
of the contract. An incentive fee is impracticable,
however, where costs are difficult or impossible to
estimate, or where there is doubt that a project can be
completed successfully.
■^ASFR, ojdo cit., Part 3-4-04-.4, p. 326.2
23
. .. i
Limitations. The cost-plus-incentive-fee con- i
~ ~ I
tract is authorized only for use by Headquarters Air
Materiel Command, Air Materiel Command field procure
ment activities, and Air Research and Development Command
and only for procurement of items in production quanti-
17
ties. ‘ In no ease will either the target or the maxi
mum fee exceed the percentage of estimated cost author
ized by Section 4b of 10 United States Code 2506d. For- |
i
mally the decision to use this type of contract will not
be made until negotiations have progressed to a point
where the contracting officer can determine that its
use is feasible. He will not use the cost-plus-incen-
tive-fee contract unless its use will result in lower
costs to the Air Force than other forms of cost-reim-
bursement-type contracts through cost-reduction incen
tive to the contractor.
Cost-Sharing Contract
As the name implies, the cost-sharing contract
is a cost-reimbursement type under which the contractor
receives no fee but is reimbursed only for an agreed
portion of its allowable costs.
This type of contract recognizes that contrac
tors sometimes benefit substantially (apart from profit)
^ AFFI. op. cit. , Part 3—404.4c, p. 364.
24 !
i
by the performance of government -work. This is particu
larly true in the field of research and development
where the results of the work performed may have profit
able commercial application. However, this type of con
tract is normally used in research and development work
with non-profit, educational institutions or other non
profit organizations.
Summary of Cost Contracts
In general, cost-type contracts should be used
in those situations in which production specifications
are incomplete or the scope and nature of the work re
quired cannot be definitely specified. These situations
are normally found in research and development projects.
They also should be considered where there are likely
to be frequent major changes in the specifications or
in the scope of the work to be performed.
In deciding upon the use of a cost-type contract,
the buyer should keep in mind that such a contract com
mits the Air Force to reimburse the contractor for his
allowable costs, regardless of whether or not he per
forms the contract satisfactorily. For this reason,
cost-type contracts shift the burden of responsibility
for both cost control and contract performance from the
contractor to the Air Force. The buyer should be par
ticularly careful, therefore, to avoid placing cost-
type contracts with contractors who do not have a satis- j
factory record of performance and who lack the resources
and experienced personnel needed to perform M r Force
work.
17. OTHER CONTRACT TYPES
All types of contracts described thus far in
this chapter depend, within varying degrees of toler
ance, upon the making of a reasonable estimate of the
cost of performing the contract prior to entering into
it. However, there are occasions, particularly during
time of war, when the cost of performing the contract
cannot be estimated in advance with reasonable accuracy
or when there is not sufficient time for careful esti
mating. The time-and-materials contract may be the
only workable type of contract to use under these cir
cumstances .
Time-and-Materials Contracts
The time and materials type of contract provides
for the procurement of supplies or services on the
basis of direct labor hours at specified fixed
hourly rates (which rates include direct and indi-
‘ " bor, overhead, and profit) and material at
tablish either a price ceiling, or a ceiling amount
(The time-and-materials type of contract may es-
^ASPR, op. cit., Part 3-4-05 ? P« 327
I i
! 26
which the contractor may not exceed, except at his own |
! risk. This type of contract provides for payment of a
fixed dollar amount for every direct labor hour the eon-
i
tractor expends performing the contract. The fixed
dollar amount includes the wages paid the direct labor,
plus an allocable portion of overhead and a profit fac
tor.
i
Disadvantages. Because a contractor's profit !
and overhead contribution increase in proportion to the
use of direct labor hours, this type of contract is not
generally considered desirable. The greatest use of
time-and-materials contracts in the Air Force has been
[ in connection with repair and maintenance operation.
The administration of this type of contract must be
carefully conducted in order that the Air Force* receives
adequate protection.
Limitations. A time-and-materials type of con
tract should not be used when any other type is equally
advantageous to the Government, because it provides that
the amount of profit obtained increases with the number
19
of hours required to complete the work. J In common
with the cost-plus-a-fixed-fee contract, it has the
19AFPI, op. cit., Part 5-405.1, p. 367*
27
defect of not being conducive to the economical use of J
labor and requires close and costly government super
vision.
Call Contracts
Call contracts have been designed to facilitate
the purchase of standard articles which are required in
varying quantities throughout the fiscal year. In or
der to avoid the necessity for a new contract each time \
I
a requirement arises, the buyer may place an indefinite
quantity or call contract against which orders or ' ’calls"
20
can be issued as the need arises. Call contracts
contain a detailed description of the articles or ser
vices required and fixed contract prices. Although
there usually are no definite quantities in delivery
schedules in call contracts, estimated quantities may
be included, and the contractor may be obligated to de- j
liver minimum and maximum quantities over a specified
period of time.
Limitations. "Call contracts will be written
for a period not exceeding 12 months. . . . Any call
using 1 year funds will be supported by fiscal year
20
Air Force Procurement Circular No. 12,
op. cit., p. 36.
| 28
i
21
1 funds in effect at the date of the call.*'
! Open Contracts
Delivery of spare parts and other items needed
for aircraft maintenance is often required in a rela
tively short period of time. Since it is extremely
difficult to prediet in advance gust what spare parts
j will he needed, it is difficult to contract for deliv-
I (
| ery of these articles. For this reason, open contracts
j have heen developed to facilitate the procurement of
i
spare parts and other items which may he required in an
emergency.
Open contracts are described hy the Air Force
Procurement Circular Ho. 12 thus:
. . . they do not obligate the Government to order
any supplies or services but do contain either
general or detailed descriptions of the supplies
or services which the Government may order during
a specified period of time. Ho prices are con
tained in the contract, but provision is made for
the method by which pricing is to be effected.22
Funds for both the call contract and the open contract
are obligated and quantities are established by each
order and not by the contract itself.
Limitations. The open contract is not authorized
21Ibid.
22Ibid.
! 29 ;
! i
; for use by local purchase activities and foreign pro- !
j , i
j curement activities. It will be, written for a period
23
not exceeding 12 months.
Types as to Form of Contract
The following discussion of contracts will deal
j with the form of contract to the extent that the form
is a procurement tool. The appearance of the contract,
; or its format, will not be of concern here.
j Letter contract or letter of intent. Frequently
it is necessary, in order to assure delivery of mater
ial and equipment at the time required, to give a con
tractor a binding commitment to commence work before
he is able to estimate his costs or establish a fair
price for his service. Although a letter contract usu
ally does not contain a contract price, it does commit
the Air Force to reimburse the contractor for costs in
curred up to a specified amount (not to exceed 50% of
the total estimated cost of the procurement).2^
In order to encourage the contractor to enter
into a definitive contract as soon as possible, the let
ter contract usually provides that the contractor will
25Ibid.
24ASPR, pp. cit., Fart 3-405.4, p. 328
30 :
i
j not be reimbursed for more than 50 per cent of his in-
.
curred costs prior to the execution of a definitive
contract, and it specifies a date by which the letter
i contract must be converted into a definitive contract.
Since a letter contract does not commit the contractor
to any performance schedule and yet assures him of
eventual reimbursement of his costs, it should not be
used unless necessary and then should be converted into
I
a definitive contract at the earliest possible date.
| Notice of award. Another form of temporary con
tractual instrument is the notice of award. It is often
desirable to authorize the contractor to begin work
after the contract price has been established and the
terms negotiated, without waiting for the preparation
of the definitive contract document. In such cases the
buyer may issue an award informing the contractor that
a contract will be placed with him and authorizing him
to proceed with the work. If the contractor's proposal
is changed in any respect as a result of contract nego
tiations, the contractor should be required to submit
a new proposal before an award is issued. Although an
award is only a temporary contractual instrument, it
I
commits the Air Foree and constitutes a binding con
tract .
Y. SUMMARY
51
Air Force contracts are of three general types:
fixed-price, cost-reimbursement, and incentive or
time-and-materials. Whenever possible, it is Air Force
policy to use the fixed-price contract because it not
only offers the contractor the greatest incentive to
reduce costs, but also is the simplest to administer.
However, all procurements are not suited to fixed-price
contracts because of a number of reasons centering
around "unknowns” to both the Air Force and the con
tractor. Fixed-price escalation is designed to over
come uncertainties concerning the future movements of
prices and wages. They provide for upward or downward
adjustments based on specific changes in material prices
and wage rates.
(There is no automatic rule for selecting the ap-
i
propriate type of contract. The circumstances of each
individual procurement must be considered in making the
selection, and any contract which promotes the best
interest of the Air Fprce may be employed.
CHAPTER III
PROCUREMENT BY NEGOTIATION
A system with more flexibility and less formality
than the rigid, formal advertising procurement method
is required to meet the rapidly changing conditions of
procurement in the Space Age.
I. DEVELOPMENT OP AIR FORCE PROCUREMENT
The legislative enactment for all government pro
curement is set forth in Revised Statute 3709 (4-1 U.S.C.
5). The Code continues a method of purchasing which was
established as long ago as 1861.
Differences between Formal Advertising and Negotiation
A brief discussion of the differences between
the formal advertised method of procurement and negoti
ation is considered- important before taking up the his—
tory of procurement.
Formal advertising. The first method of procure
ment, or formal advertising, entails the solicitation of
bids by the Government.; the submission of bids by quali
fied suppliers; the opening and recording of bids by
the Government; and the award of a contract by the Gov
ernment to that responsible bidder whose bid conforms
; 35 ;
i i
! to the invitation for bids and which will be most ad-
i I
' vantageous to the Government? considering price, qual
ity and delivery. The important thing in formal adver
tising procurement is the formality of the required
procedures. Strict'compliance with the rules laid down
by Congress, the General Accounting Office and the ad
ministrative offices of the procuring agency is manda-
i
tory. Seldom do such rules permit a contracting offi
cer to consider unrestrictedly such important bargain
ing factors as quality and business reputation.
Negotiation. When procurement by negotiation is
employed, the formal procedures and rigid rules govern
ing procurement by formal advertising need not be ob-
I served. However, it should be remembered that negotia
tion does require competition and bargaining. Instead
of mailing, advertising or public posting of invitations
to bid, with the imposed safeguard that all qualified
sources of supply be canvassed so as to assure full and
free competition, informal price quotations are requested
|
from qualified sources of supply for the particular items
or work being procured. These quotations must be sup
ported by statements of estimated cost or other satis
factory evidence of reasonable price. Thereafter, on the
basis of these informal price quotations, and without
; any formal or public opening, the contracting officer
54 I
for the Government negotiates a contract with that sup- J
plier who offers the "best deal” to the Government. In
the process of negotiation, many different factors are
considered and weighed, such as:
1. Quality
2. Delivery possibilities
3* Satisfaction of technical requirements J
4. Comparison of the business reputations and
responsibilities of the various suppliers
5. Hie extent and nature of expected subcon
tracting
6. Comparison of the prices of suppliers and
services similar to those which are being
procured
7* An extended analysis of the most favorable
type of contract (usually in terms of a
fixed-price contract as compared with a
contract of the cost-reimbursement type).
Bargaining is conducted by the buyer and seller, by
mail or by conference, or by both. In short, in pro
curements by negotiation the Government is free, like
any other purchaser, to do business with the supplier
who seems to offer the most satisfactory terms.
Procurement Prior to World War II
Except for the period during World War I, pro-
curement prior to World War II was "by formal advertising
and competitive bids. The purpose of this formal method
of procedure was to prevent fraud or favoritism, to af
ford equality of opportunity to all prospective Govern
ment contractors, and to secure the advantage of bona
fide competition.
Prior to World War II there were three principal
exceptions to the advertising requirement: (1) if ad
vertising was impracticable, (2) if there was a public
exigency requiring immediate delivery, and (3) if per-
1
sonal service contracts were involved.
In July of 1939? when it appeared that the United
State would become entangled In a major war, the War
Department was permitted to negotiate for the procure
ment of aircraft parts, instruments and accessories with
out regard to public advertising when their classified
nature was such that the detailed designs and specifi-
2
cations should not be publicly divulged. In 194-0 the
"Multiple Awards Act"^ authorized the Secretary of War,
in the interests of national defense and as an aid to
^"John Perry Miller, Pricing of Military Procure
ments (New Haven: Tale University Press, 194-9), p. 28.
^Public Law 168, 76th Congress, 53 Stat. 1000,
10 U.S.C. 313.
^Public Law 4-26, 76th Congress, 54- Stat. 45,
10 U.S.C. 310.
1 V
| expanding aircraft production, to award contracts for
i aircraft, aircraft parts, and accessories not alone to
!
| the lowest responsible bidder but to the three lowest
bidders, dividing the work among them and thus avoiding
the overload of aircraft production facilities. Gn
July 2, 1940, Congress enacted public law 703 which per
mitted, among other things, the Secretary of War to en
ter into such contracts and amendments as he deemed 1
1 . ■ !
j necessary to construct government-owned defense industry 1
i
J facilities and to provide for their operation and main-
I
tenance with or without advertising*
Procurement during World War II
With entry into World War II, Congress enacted
Z l
the First War Powers Act on December 18, 1941, putting
emergency wartime buying on a footing substantially as
free as that enjoyed by private enterprise, and confer- i
!
ring upon the President, as Commander in Chief of the
Armed Forces, broad powers to enter into negotiated
contracts. Later that month the President, by Executive
Order 9001, re-delegated these powers to the War and
Navy Departments and the Maritime Commission.
t L
Public Law 354, 7?th Congress, 1st Session,
Title II, 55 Stat. 839, 50 U.S.C.
^Executive Order No. 9001, December 27, 1941,
6F.R. 6787.
Executive Order 9001 specifically provided that
advertising, competitive bidding and hid payment, per
formance, or other bonds need not be required. As a
result, war contracts were let in much the same manner
as ordinary business deals are transacted between pri
vate parties, i.e., by negotiation.
The military departments operated successfully
under the broad authority of the First War Powers Act,
and by the end of the war it was clear that the negoti
ation of contracts did not necessarily lead to higher
prices, but more often than not led to lower costs to
the Government. Also, rather than as anticipated, in
stead of concentrating procurements in the hands of a
few large producers, it led to a wide distribution of
suppliers. Further, it was recognized that the mili
tary services had, in general, demonstrated their abil
ity to use judgment, discretion and sound sense when
exercising the extensive authority granted them during
the war; and finally, if the services were required to
revert to the inflexible procedure of formal advertis
ing, the needs of the military would soon be supplied
by only that group of suppliers who were willing to
undertake contracts under this relatively complicated
method of purchase. The use of the formal advertising
method, then, would result in making a fixed-price form
of contract.the only type suitable for use. Conse-
38
quently, all bidders for procurement of modern weapons
of defense would include large contingencies for un
known factors.
II. THE AHMED SERVICES PROCUREMENT ACT OF 194?
As indicated above, the enormous procurement pro
gram occasioned by World War II gave rise to a great
many departures from the historical practice of procure
ment by formal advertising. The nature of the war re
quirements and the time element involved often rendered
past methods of procurement either too slow or cumber
some .
As a result of World War II experience and so
that the government peacetime procurement might become
an instrument for keeping industry in a state of readi
ness, House bill #1366 was introduced in the 80th Con
gress on January 27, 194?. This bill became known as !
c I
the Armed Services Procurement Act of 1947. The Act
was approved by the President on February 19? 1948, and
it became effective on May 19, 1948, ninety days after
its enactment, and reliance upon the First War Powers
Act as procurement authority ceased on that date.
6
Public Law 413, 80th Congress, 2nd Session
39 I
Circumstances Permitting: ITegotiation I
The Armed Services Procurement Act of 1947 was de- !
signed to give the services greater flexibility in pro
curement than they had prior to World War II. The Aet
adheres to formal advertising as the normal and pre
ferred peacetime method of procurement, but provides
for negotiation under seventeen specific circumstances.
The Armed Services Procurement Act of 1947 > Public Law
n \
415 of "the 80th Congress, Section 2(c)( provided in 1
pertinent part that all purchases and contracts for sup
plies and services be made by advertising, as provided
in Section 3« Such purchases and contracts may be nego
tiated by the agency head without advertising if':
1. Determined to be necessary in the public in
terest during the period of a national emer
gency declared by the President or by Con
gress. i
2. The public exigency will not admit of the de
lay incident to advertising.
3. The aggregate amount involved does not exceed
one thousand dollars.
4. For personal or professional services.
5. For any service to be rendered by any univer
sity, college, or other educational
^Public Law 413? 80th Congress, 2nd Session, Sec
tion...2 (.c) .. _ __ i
4 0
institution*
6. The supplies or services are to be procured
and used outside the limits of the United
States and its possessions.
7* For medicines or medical supplies.
8. For supplies purchased for authorized resale.
9. For perishable subsistence supplies.
10. For supplies or services for which it is
impracticable to secure competition.
11. The agency head determines that the purchase
or contract is for experimental, develop
mental, or research work, or for the manu
facture or furnishing of supplies for exper
imentation, development, research, or test
ing.
12. For supplies or services which the agency
head determines that the character, in
gredients, or components thereof are such
that the purchase or contract should not
be publicly disclosed,
lj. For equipment which the agency head deter
mines to be technical, the procurement of
which is necessary without advertising in
order to assure standardization of equip
ment and interehangeability of parts. Such
; 4i i
! standardization and interchangeability is
I '
I necessary in the public interest,
i 14. For supplies of a technical or specialized
nature requiring a substantial initial
investment or an extended period of prepar
ation for manufacture, as determined by
the agency head when he determines that
advertising and competitive bidding may
1 require duplication of investment or prepar-j
ation already made, thus unduly delaying {
procurement of such supplies. j
15. For supplies or services for which the bid 1
prices are not reasonable or have not been
independently arrived at in open competi
tion, as determined by the agency head
after advertising therefor.
16. 2?he agency head determines that it is in the
interest of the national defense that any
plant, mine, facility or any producer,
manufacturer, or other supplier be made
or kept available for furnishing supplies
or services in the event of a national
emergency, or that the interest of indus
trial mobilization in case of such an emer
gency, or of the national defense in main-
42 I
i
taining active engineering, research and j
development are otherwise subserved.
8
17• Otherwise authorized by law.
The first ten of the above exceptions are, for
j the most part, restatements of similar exceptions to
I formal advertising previously authorized by Congress.
The next six exceptions were recommended to Con
gress by the Armed Services as a result of their pro-
| curement experience under the First War Powers Act.
After consideration by Congress, they were included as
exceptions to the formal advertising requirements of
the Act because it was felt that negotiation under each
of these circumstances would result in monetary savings
1
to the Government or was essential from the standpoint
of national defense or public interest. The seventeenth
exception merely reserves to the agencies any other
negotiation authority granted under other laws, not in
cluded in the Act and not specifically rescinded by the
Act.
Extent of Recent Use
Analysis of negotiated procurement actions under
public law 415, 80th Congress, for the fiscal years
1956 and 1957 reveals that the national emergency
8
"Procurement by Negotiation," Armed Services
! Procurement Regulation. Section III, part 2, pp. 303-
'313* “
j 2(c)(1) has declined as the reason supporting the nego-
i
| tiation of contracts rather than award of contracts as
i
! a result of advertised competition. Although the nation
al emergency is still in effect from the Korean War, pro
curement officials have tended to use other exceptions
for their authority for negotiation.
See Table I for percentages of various exceptions
for the years 1956 and 1957 • Negotiated contracts under j
j 2(c)(1) are becoming fewer and fewer as time goes by. |
i |
j The reason for the percentage still being high is that j
i
the money spent was applicable to contracts on which
Q
negotiations were started prior to January 1, 1956.
Most, but not all, research and development contracts
are awarded under 2(e)(ll). Hesearch and development
i
contracts for less than $100,000 have been awarded under
2(c)(1) in the past‘ d because it is sometimes . .im
possible to draft, for solicitation of bids, adequate
specifications or any other adequately detailed de
scription of the required supplies or services."11 A
few contracts have been awarded under 2(c)(10) where
9
^See Dept, of Defense Form 228 for Fiscal Tear
1957 Directorate Procurement and Production Headquar
ters, Air Materiel Command, Dayton, Ohio.
I o
Idem., Dept, of Defense Form 228.
II
"Procurement by Negotiation," Air Force Procure-
i ment Instruction. Section III, Bart 210.2.
44
TABLE I
PERCENTAGE OF NEGOTIATION UNDER VARIOUS EXCEPTIONS
FOR FISCAL YEAR 1956-57
Percentages
Exceptions
Fiscal
Year
1956
Fiscal
Year
1957
2(c)(1) National Emergency 80.2 25«0
2(c)(14) Production Contracts 11.86 54.8
2(c)(ll) Research and Develop
ment
1.7
18.2
2(c)(10) Where competition is
impracticable
4.9 17.0
Source: Specialized Reports and Bailment Control
Branch (Department of Defense Form 228 for fiscal years
1956 and 1957) Directorate Procurement and Production
Headquarters, Air Materiel Command, Dayton, Ohio*
; 45 :
I
I competition is impracticable; for example, flight test-
1 12
; ing of aircraft and handbooks on weapon systems.
I An article on Defense Procurement in Time quotes
Massachusetts' Senator Leverett Saltonstall, ranking
Republican member of the Senate Armed Services Committee,
as saying: "The present procurement laws result in de
lay and unnecessary expense that our nation can no
15
; longer afford." ^ The article further reports that the*
lowest bid is not always the most economical because
the "lowest bid often comes from a marginal producer
with limited experience, poor management or inadequate
14
financing." This points out only that advertised pro
curement is often more costly in the long run. Con-
!
j gressional committees on defense projects are influ-
j enced by the General Accounting Office, which is strongly
15
in favor of advertised procurement. x Congressmen are
in favor of advertised procurement because: (1) public
funds are involved and they desire that every potential
voter be allowed to compete for military contracts; (2)
12Idem.
■^"Defense Procurement," Time, Sept. 8, 1958,
p . 86.
•^Idem.
15
"Five Staff Papers Prepared for the Task Force
on Procurement," Vol. 2. Commission on Organization of
the Executive Branch of the Government. June, 1955 >
| C-28. (Mimeographed)
the assumption is that advertising will bring the lowest
prices; and (3) there is a lack of confidence in civil
service procurement personnel. One would think Congress
men would pay more attention to the Commission on Organi
zation of the Executive Branch of the Government, and
specifically to the Task Force report headed by Herbert
Hoover. Congressmen and the General Accounting office
should realize that the nature of the item being pro-
•
cured itself determines the proper method of procurement.
During the past several years, in spite of the
legal preference for advertising, the preponderance of
procurement, expressed both in dollars and procurement
actions, has been by negotiation. This fact is illus
trated in Table II. The years shown in the table span
and overlap the Korean War period. Because of the M r
Force's urgent need for materials and equipment of every
nature during wartime, it is only normal to find a sub
stantial amount of procurement being placed under nego
tiated rather than advertised procurement methods. It
would seem that with the termination of hostilities
greater amounts of procurement could be placed according
to the congress!onally preferred method of procurement
by formal advertisement. Such, however, has not been the
actual procurement experience, and although the cold war
may have been and continues to be an increasing influ
ence, the tide of procurement_has continued strongly in
47
TABLE II
AIR FORCE NEGOTIATED PROCUREMENT TRANSACTIONS
OF #10,000 OR MORE IN 1952, 1955 and 1954-
Fiscal Year Fiscal Year Fiscal Year
1952
1.252
1954
Transactions Transactions Transactions
% # % f t % f t
78.5 98 61 92.5 77 97
Source: Adapted from "Five Staff Papers Prepared for
the Task Force on Procurement," Vol. 2. Commission on
Organization of Executive Branch of the Government.
June, 1955* C-29- (Mimeographed)
i 48
j
jfavor of the negotiated system„ Set out in Table III
iis the Air Force experience for the fiscal years of 1955 >
I1956 and 1957-
III. TECHNIQUES OF NEGOTIATION
i
The principal advantage of negotiation is its
flexibility, which is conducive to efficient purchasing
Jeven when competition may be lacking, specifications are
;indefinite, or time is short. This flexibility, however,
|imposes a correspondingly large responsibility upon the
ibuyer. Under negotiation the buyer has considerable
latitude in fixing prices and choosing contract terms.
If his choice is poor, he can make a less satisfactory
procurement than under the relatively rigid system of
formal advertising. The buyer's, or purchasing contract
ing officer's, whole background of professional know
ledge, however, must be brought to bear in the face-to-
face discussions of the negotiation conference. It is
not enough merely to know and lay down the principles
which apply to a given procurement; negotiation implies
give and take leading to a final agreement which is mu
tually satisfactory to both parties, rather than the ex
clusive proposition of one party alone.
The negotiation of a fair price is one of the
major elements of procurement. But negotiating a fair
TABLE III
AIR FORGE NEGOTIATED PROCUREMENT TRANSACTIONS
OF #10,000 OR MORE IN 1955, 1956 and 1957
Fiscal Year
1555
Transactions
Fiscal Year
1956
Transactions
Fiscal Year
1557
Transactions
% $ % # % ■#
80.1 97o5 76.7 97-2 76.1 95*4-
Source: Specialized Reports and Bailment Control Branch
(Dept, of Defense Form 228 for Fiscal Year 1955, 1956
and 1957) Directorate Procurement and Production Head
quarters Air Materiel Command, Dayton, Ohio.
50 !
!
!
I price should not he confused with "price haggling," for
i
16
;which there is little justification. Indeed, the abil
ity to negotiate a "good price" rather than a low price
i 17
'is sometimes held to he the prime test of a good buyer.
No other responsibility of the buyer demands so much
knowledge and skill as obtaining a proper contract price.
Analysis of Price and Costs
The first essential in negotiating price is an
jadequate analysis of prices and estimated costs. Without
'it, the buyer cannot determine what is fair and reason
able, and price negotiation is likely to degenerate into
a haggling process in which the buyer attempts to drive
the price down regardless of the risks involved. Hag
gling of this nature becomes both ineffective and dan
gerous in the long run. If contractors believe that the
buyer is interested solely in reducing prices and has
no yardstick for judging what is fair and reasonable,
they will tend to satisfy him by quoting excessively high
prices initially and reducing them during negotiations.
The Air Force gains nothing from this and may lose a
great deal, particularly if the buyer fails to obtain a
proper price reduction.
^Howard T. Lewis, Procurement Principles and Cases
(Homewood, Illinois: Richard D. Irwin, Inc., 1953T7~P° 470
i
L . . . . Ibid., p. 4J4. _ ______ ____________
j The buyer mdst, therefore, make a thorough analy-
jsis of proposed prices and costs before entering negotia-
I
jtions. The buyer's team can be of great help in prepar
ing for negotiation. He should use the assistance and
advice of the price analysts and should himself be fami-
a
liar with the general principles of cost and price analy
sis so that he can interpret and judge their findings.
!Even after expert analysis, the reasonableness of a con- ;
|
|tract price often comes down to a matter of the buyer's
judgment, and he should be prepared to assume the respon
sibility. The buyer's knowledge of what constitutes a
fair contract price will greatly strengthen his bargain
ing position and will enable him to place the burden of
proof on the contractor to justify the proposed price.
Under these conditions, he is much more likely to get
concessions from the contractor than if he simply re
peated the opinions of the price analyst without being
able to support them.
I
Time element. It is a serious mistake for the
buyer to prolong price negotiations to the point where
the equipment or material could not be delivered on time
to meet a schedule. If the buyer doesn't have sufficient
skill and bargaining strength to obtain what he considers
to be a proper price, he can avoid delay in delivery and
protect the Government's interests by providing for price
52 |
redetermination after the contract is partially per
formed. Even if the contractor refuses to accept a re
determination provision, the "buyer should sometimes ac
cept the contractor's proposed price rather than delay
delivery. If these conditions are present, the "buyer
should attempt to develop alternate sources of supply
in order to assure reasonable prices in subsequent pur
chases .
j
Lowest prices. The buyer, on the other hand,
should not take advantage of his bargaining position to
extract the lowest possible price from a contractor. A
price which is too low may impair performance of the con
tract, seriously weaken the contractor’s financial
strength, and even cause him to default on the contract.
In such cases, the Air Force fails to obtain equipment
at the time required and loses a desirable source of
supply. Small and inexperienced contractors are par
ticularly subject to this danger. They are often eager
to get government business and are willing to sacrifice
their profits in order to get established.
The Air Force cannot assure defense contractors
that they will be given future Air Force contracts. If
f
the buyer sees any danger that the contractor may incur
a loss because of price, he should go over the cost
estimates in detail with the prospective contractor's
1 representative to make certain that a mistake has not
j "been made and that the contractor clearly understands
what is involved in performing the contract. In many
J instances, the prospective contractor will withdraw his
proposal when he realizes that his quotation is too low.
, In other instances, it will appear that because of the
I
| nature of the work involved or the incompleteness of
I
J specifications accurate cost estimates are impossible.
i
■ Again, under these circumstances the buyer should in
clude a price redetermination clause in the contract,
permitting upward or downward adjustment of the con
tractor’s price which will protect both the contractor
and the Air Force.
Preparation for Negotiation
The process of negotiation begins with the sending
of the request for proposal to the prospective contrac
tors and culminates at the negotiation conference.
Throughout the negotiation period the buyer must
prepare his information. When the conference actually
i
takes place, he should be ready for any issues which may
arise and should be prepared to call on the appropriate
specialists for assistance in developing his case.
The buyer should fully explore the strength and
weakness of not only the contractor's bargaining posi
tion but his own as well. This part of his preparation
has an important influence on his handling of the issues
during negotiation,. Only through a knowledge of rela
tive bargaining strength can he determine how far he
should go in insisting upon the best terms for the Air
Force. He will also know when and if he should make
concessions to obtain the contractor's cooperation and
assure delivery of materials when required.
The Contractor's Bargaining Position
The contractor's bargaining position usually de
pends upon three factors? (1) his need for the con
tract > (2) his certainty of obtaining a contract, and
(5) the time available to reach agreement on contrac
tual terms.
Contractor's need for contract. Often the buyer
can easily determine if the prospective contractor is
eager by the number of telephone calls or personal vis
its he receives from the contractor’s representatives.
He also may even receive a direct request from a con
tractor whose plant may have to be closed because of
lack of government contracts.
If, on the other hand, the buyer knows that one
of his suppliers is operating at or near capacity and
is willing to quote prices only on exceptionally long
delivery dates, he is forewarned that the contractor
5 5 j
i
does not need a contract and may, therefore, he unwill
ing to make concessions during negotiations.
In many cases, however, there may he little indi
cation of the contractor's position. Sometimes the sup
plier may wish to create the impression that a contract
is a matter of indifference to him, even though in fact
he may he extremely eager to get one.
In such cases the buyer should attempt to deter-
J
mine if the contractor has a backlog of orders or if he
makes more profit from his commercial business than
from government contracts. The contractor's annual re
ports and his profit-and-loss statements will supply
much information about his backlog and volume of opera
tion. The Air Force normally gets these reports from
all defense contractors, and if they are not on file
the individual negotiator should request them. Today
over 95 per cent of many contractors’ volume of opera- j
tions is for the Government, and therefore their status
is easy to determine.
Certainty of obtaining contract« The second major
factor influencing the contractor's bargaining position
is his certainty of getting the contract. If a pros
pective contractor is the sole source of supply for the
buyer, he knows that he is in a good position to get
his price and he may refuse to make concessions or even
56 j
cooperate during negotiations < , I
i
In extreme cases, there may be nothing for the
buyer to do but to accept the supplier's terms. But to
counteract such a condition, the buyer should, whenever
Ifi
possible, develop alternate sources of supply. The
more successful the buyer is in developing alternate
suppliers, the more chance he will have of negotiating
a sound contract at the best possible price.
Sometimes a supplier may learn that his quotation
is lower than that of any other source and will there
fore refuse to cooperate with the buyer. To counteract
this the buyer can go to another more cooperative source
and strengthen his own future bargaining position by
making sure that no information concerning the competi
tion leaks out before negotiations take place.
Time available for negotiation. The third major
factor influencing the contractor's bargaining position
is the time available to negotiate contract terms. When t
the contractor discovers that there is great urgency for
immediate delivery, the buyer loses his bargaining power.
In the case of the sole supplier, this immediacy may
mean that the supplier will simply prolong negotiations
to force the buyer to meet his terms. While the buyer's
^ M i l l e r , o p . c i t . , p . 224.
57 :
j
primary responsibility is to assure delivery at the time j
and place required, he must sometimes accept the con
tractor's terms, whatever they are. He can sometimes,
however, avoid an unsound transaction by the use of a
price-revision clause.
Successful negotiation, in the long run, depends
upon the development of a team of able men with varied
talents who have been trained in the objectives and
19
techniques of military procurement. y
IV. PRICE, COST, AND PROFIT ANALYSIS AS A
SUBSTITUTE FOR COMPETITION
A fundamental rule of Air Foreaprocurement is to
obtain the material needed by the Air Force at a mini
mum cost, both in order to reduce the strain on the
national economy and to make sure that the Air Force
budget will suffice for its essential needs. Therefore, !
contractors' profits must not be excessive, but this is
really only a small part of the problem. In every pro
curement, the contractor's costs are far greater than
even the most generous profits. From the standpoint of
the Air Force, costs create the real budget problem,
not profits. From the national standpoint, the situa-
19Ibid., p. 150
tion is still more important, since these costs repre
sent the consumption of manpower and materials. On
the other hand, the possibility of earning a good profit
is one of the most effective ways of getting efficient
manufacturers to work for the Air Force and of persuad
ing efficient contractors to reduce their costs still
further. It is the established policy of the Air Force
to use this incentive approach to the fullest extent.
Thus, the most important purpose of price, cost and
profit analysis is to contribute in every way possible
20
to the reduction of costs.
Extent of Competition in Air Force Procurement
Procurement of a standardized article by straight
competitive bidding among a reasonable number of estab
lished suppliers not only secures the lowest possible
price for the particular procurement but also forces
every supplier to strive continually to reduce his costs
by preventing waste and developing improved methods of
manufacture. This type of procurement does not set any
specific, arbitrary limit to a "fair1 1 profit, but makes
profits depend on each manufacturer's efficiency of
production.
Unfortunately, the great bulk of Air Force pro-
20
AFPI. op. cit., Section III, part 801, p. 399.28.
59
curement cannot be carried out in this simple way be
cause few of the important procurement items are sub
ject to a genuinely competitive market., Generally,
such items as fire control systems, Mach 3 aircraft,
or rockets are not thoroughly standardized; and some
do not even exist in a single, definitive prototype
at the time the procurement is made* In such cases,
effective competition is impossible and cost analysis
becomes the most effective known control over cost and
21
price o
Sole sources. (There may be only a single source
for an article, either because its maker is legally pro
tected through patent rights or simply because he has
developed the design, production methods, and know-how
to such an extent that effective competition is impossi
ble, practically speaking. Although the buyer must
strive continually to obtain competition, such a source
may be temporarily the only one which meets the Air
Force's needs. In this case, the Air Force must nego
tiate a proper price with this source, based on a care
ful analysis of costs.
21
Warner Robins Air Materiel Area, Handbook for
Price Analysis. (Robins, Georgia: Directorate of Pro
curement and Production, 1957)> p. 2. (Mimeographed)
I 1
| 60 ,
| i
{ !
I Broadening the base. The policy of broadening the j
j industrial base, which means developing two or more
sources for each important military item, is one way
the Air Force develops competition. To develop this
effective competition, it will often be necessary to
pay new suppliers higher prices than those quoted by
the existing source, particularly in the initial stages
of production. Again, cost analysis is the best known
j method of assuring that these prices are no higher than
J they need be. Since prediction of costs is extremely
difficult at time of initial production, it will often
be desirable to provide for price redetermination, which
requires further analysis at a later date.
Price Comnarison
Although the larger and more important part of
f
Air Force procurement deals with nonstandard articles, j
*
an appreciable number and dollar amount of procurement j
actions are devoted to items which are commonly bought
and sold commercially, or to very near equivalents of
such items. In these cases, the fairness and propriety
of prices can often be appraised adequately without the
effort of calling for and analyzing the seller’s costs,
If a price is to be analyzed without a study of costs,
it is usually necessary to be able to make price com
parisons. This is possible only when the article has
61
been sold by several manufacturers for a reasonable
period of tiie. When the item is a relatively new one,
cost analysis will generally be necessary even if there
are several sources, in order to determine the extent
to which growing experience with production should
bring about a reduction of cost and therefore of price.
Competitive prices. Competitive prices must al
ways be examined to make sure that there has been real
price competition. Many industries in civilian selling
tend to concentrate on non-price competition, such as
prompt delivery, advertising, and various kinds of cus-
22
tomer service. Some of these activities have no di
rect value to the Air Force.
Past prices. If possible, prices should always
be compared with previous and current prices of vari
ous suppliers. This will help to reveal whether there
is real price competition, but it will also serve other
purposes. An appreciable increase in price may be ex
plained by rising costs (inflation) or by the fact that
earlier procurements called for larger and hence more
economical quantities. But it may also indicate that
total demand for the product has become so large that
22
E. Bryant Phillips, Consumer Economic Problems
(New York: Henry Holt and Company, 1957)» PP« 98-116.
62 i
I !
| I
i it is beginning to exceed productive capacity.- In such |
| cases, it may be desirable to postpone a part of the
procurement, if this is possible, until the supply has
increased.
Price trends. A long delivery schedule in a time
of mild inflation may lead a contractor to raise his
prices under an Air Force contract even though he him-
, self has not yet experienced a rise in costs.* In this
situation, it may be cheaper for the Air Force to sub
stitute a contract allowing for price redetermination
^ than to accept a price which involves an excessive al
lowance for contingencies.
| V. SUMMARY
The Air Force has shown a great deal of improve
ment in procurement since World War II and is still con
tinuing to refine its procurement methods. The Armed
Services Procurement Act was a step in the right direc
tion, but even this Act should be modified or amended
so that advertising and negotiation both could be avail-
!
able to contracting officers on an equal basis, without
special justification required for the use of either.
Maybe some type of general guidance could be incorpor
ated into the Armed Services Procurement Act whereby
advertising could be used when specifications are firm
63
and real competition exists among many sources; and
negotiation could be used where items are complex,
specifications uncertain, or other contingencies occur#
In general, contracting officers should have the author
ity to use that method of procurement which seems most
likely to result in the best all-round deal for the
Government, without requiring lengthy and detailed
justification for the choice.
The trend today is away from 2(c)(1) national
emergency exception. Other exceptions like 2(c)(14)
production contracts, 2(c)(11) research and development,
and 2(c)(10) where it is impracticable to secure com
petition are being used. A determination must be made
on each exception prior to use, which entails an addi
tional work load for the buyers. The point here is not
that there should be more negotiation and less.adver
tising; it is simply that negotiation should be recog
nized in law for what it is* namely, a perfectly nor
mal, sound buying method during both peacetime and mo
bilization periods.
CHAPTEE IV
FUHCTiOHS OP AIE FOECE PEICIKG
In the field of Air Force contract pricing, the
most important interest to be served is that of the
public. It is the public's money that is being spent,
j and the public is entitled to the most goods for the
j minimum number of dollars spent, within reason.
I. PEICING POLICY
Price is an important element of any Air Force
procurement. The Air Force procurement objective is to
secure required supplies and services of the desired
quality, when needed, at fair and reasonable prices.
A fair and reasonable price does not necessarily mean
the lowest price, but rather should be considered the
most economical price to the Air Force, taking into
consideration quality, ease and cost of maintenance,
storage and distribution. However, the Air Force, be
cause of countervailing power'*' of the Small Business
Administration or political pressure from some labor
surplus area, does not always make the best contract
■^■John Kenneth Galbraith, American Capitalism: The
Concept of Countervailing Power (Boston: Houghton-
| Mifflin Company, 1952), p. 118.
I __________________________________________________________________________
65
from an economic point of view* But from the standpoint
of the over-all economy, it is the legislative directive
that requires a contract to he placed with Small Busi
ness or in particular areas.
In order to buy at prices calculated to result in
the lowest over-all cost, the Air Force encourages and
develops competition and negotiates close firm prices
2
whenever possible. Recognizing that profit is the
motivating force in inducing contractors to use labor
and materials economically and efficiently, the Air
Force uses the incentive, or increased profit, approach
in negotiation whenever possible. Pricing cannot be re
duced to a few simple terms or formulas. In the long
run, sound pricing can be considered as an art requir
ing the exercise of common sense, a keen sense of fair
ness, and a recognition of certain basic pricing con
siderations .
Importance of Sound Pricing
"Air Force appropriations constitute a substantial
share of the defense budget and expenditures thereunder
have a tangible effect upon the stability and health of
^AFPI, Part 5, 801, February 14, 1958 revision
(Washington: United States Government Printing Office),
p. 399.28.
j 66
I 3
j the national economy.This points out that procure-
| ment officials have a double responsibility to not only
i
i purchase material on terms most beneficial to the Air
j
j Force, but also to consider in the broadest sense the
4
impact of procurement 'upon the economy. Close, sound
pricing is necessary for'the conservation of materials,
manpower and public funds. In fact, General Baker, the
past head of the Directorate of Procurement and Produc-
J tion, Headquarters Air Materiel Command, made it a car-
j dinal principle that contracting officers should learn
to use sound pricing to stimulate defense contractors
5
to greater efficiency. This involves establishing a
pricing objective based on what the product should cost
and then negotiating a price and type of contract which
will place the maximum responsibility for cost control
6
on the contractor.
j
Responsibility for Sound Pricing
The primary duty of the contracting officer or
^Ibid.. p. 399.28.
Z j .
John Perry Miller, "Military Procurement Poli
cies: World War II and Today," American Economic Re
view, Papers and Proceedings 42: 453-475* May, 1952.
^Major General Baker, Speech at USAF Advanced
Pricing School, Los Angeles, February 18, 1957*
6ASPR, Section III, Part 2, pp. 303-513.
j 67 :
buyer, aided by supervisory, technical, and management j
; personnel, is to obtain fair and reasonable prices in
: buying Air Force equipment and services < > Price analysts
are available to aid the contracting officer in his ef
forts to negotiate fair and reasonable prices.
II. PRICING CONCEPTS
The following concepts apply mainly to negotiated
fixed-price-type contracts, including redetermination
and incentive. However, some of these concepts have
application to the negotiation of cost-reimbursement-
type contracts.
Competition
Competition is the best known and most reliable
method of achieving fair and reasonable prices. It is
one of the dynamic economic forces underlying the econ
omy. The receipt of more than one bid does not neces-
I
sarily mean that real competition has been achieved,
because real competition is the actual striving by two
or more suppliers for the particular business. It is
this competitive striving for business that induces
economy and efficiency in the industrial world. How
ever, it is not always possible to achieve real competi
tion, but when it exists it should be recognized as a
force of varying degrees. If it is keen, it is a re-
' 68 j
| liable gauge of price; if it is token or collusive, it j
|
is not likely to be a good measure of price. Thus,
t
when competition is real, it may be relied upon gener
ally to bring about fair and reasonable or close prices.
Once again, the contracting officer must exercise judg
ment in determining the effectiveness of competitive
forces.
S Incentive Approach
i
! In order to encourage a high degree of efficiency
and economy on the part of Air Force contractors, it is
Air Force policy to negotiate contracts from the incen
tive, or increased profit, approach both at the time of
original price negotiation and at the time of price re-
determination, if any. This approach is based on the
i
expectation that the ultimate cost to the Air Force will
be less than it otherwise would be and,, if less, the
profit to the contractor will be greater. This concept
recognizes that the prospect of greater earned profit
reward is the strongest incentive to induce contractors
J to become more efficient in performing Air Force con
tracts .
The foregoing should not be construed to mean that
only the specific incentive-type contracts should be em
ployed. This incentive approach can be applied in some
real measure to all negotiated contracts, including
69 I
price redetermination and incentive types; for example, {
one of the best forms of incentive is provided by the
firm, fixed-price contract.
Negotiation
Negotiation is used to accomplish procurement,
where formal advertising is not appropriate. Negotia
tion generally implies the impracticability of advertis
ing because of one or more of the seventeen circumstances
listed in Chapter III under "Circumstances Permitting
Negotiation." Negotiation, however, does not mean that
Q
it is impossible or impractical to obtain competition.
For example, it may be impractical to advertise for bids
because of inadequate specifications that preclude such
formality, but there may be many sellers willing to com
pete for the particular procurement. In negotiation,
therefore, competitive forces should be encouraged and
i
relied upon as much as possible to produce fair and rea- |
i
sonable prices.
Requirements for competition. It should be rec
ognized that because Air Force requirements are often
of a highly specialized nature, the number of potential
^Idem.
^Miller, op. cit., p. 4?0.
70
suppliers is often limited and an area for effective
competition is reduced, if not eliminated.
Complexities of negotiation. While negotiation
often lends itself to informal procedures and expedi
tious action, it is not necessarily an easier method of
procurement than formal advertising, particularly from
the pricing point of view. Actually, negotiation of
price is often a difficult process requiring much skill
and judgment, and it frequently places a greater respon
sibility on the contracting officer for the determina
tion that fair and reasonable prices have been obtained,
especially in the absence of competition.
Types of Pricing
There are two distinct types of pricing that
merit consideration— prospective and retroactive.
Prospective pricing. Forward, or prospective,
pricing is the negotiation of prices for items or serv
ices which are to be supplied in the future.
It is applied to the pricing of firm, fixed-price-
type contracts, to the pricing of prospective por
tions of redeterminable contracts, to the estab
lishment of target prices under incentive-type
contracts and other redeterminable types providing
for retroactive adjustment, and to the hourly rate
portion of time and material type contracts.^
3 9 9 . 3 4 .
^AFPI, op. cit., October 1, 1957 revision, p.
71
Prospective pricing is the art of negotiating a
price in advance of performance on the basis of com
petition, estimates or forecasts» Such negotiations
involve the evaluation of estimates of reasonable costs
and profit. The reliability of estimate will be a
prime consideration in determining whether the negotir-
ated price will be on a firm price or redeterminable
basis. Sound prospective pricing requires an ability
to evaluate comparative prices or to estimate or fore- I
cast the various elements of price in the light of the
circumstances.
I
Betroactive pricing;» This is the negotiation of
prices after the items or services have been supplied
or completed. Betroactive pricing is applied to the
pricing of the retroactive portion of contracts with
price redetermination clauses (Forms C, D, and E) and
to the fixed-price-incentive-type contract.^..
This type of pricing is based on historical or
experienced cost and generally requires some degree of
cost analysis. Betroactive pricing negotiations may
be undertaken from data submitted by the contractor or
from information furnished by the Air Force Auditor
General. Begardless of the source of data, price,
10Ibid., Part 3.403.3, pp. 339-34?.
72
not costs, is to be negotiated by the contracting offi
cer. But in practice there is considerable doubt as to
whether this is done. Pricing is not to be construed
as a direct function of cost. It is neither necessary
nor desirable to reach complete agreement on the dollars
and cents of each separate element constituting the
proposed price. The important objective is to arrive
at a fair and reasonable price through the proper appli-
i
cation of the cost analysis technique and evaluation of
the major factors in the circumstances.
III. PRICE ANALYSIS
Price analysis is the method employed by the Air
Force to determine whether or not a particular price
is fair and reasonable. It may be considered to include
not only the analysis of price, but under certain cir
cumstances the analysis of elements of cost and profit j
as well.
Objective of Price Analysis
Price analysis in the Air Force is used in the
establishment of a close price in negotiated contracts.
It is consistent with the principle of obtaining "more
Air Force per dollar." It is also an effective method
i:LIbid., p. 399.35.
73 1
of controlling excessive profits.
Techniques of Price Analysis
Among the various techniques that may be employed
alone or in combination in the negotiated pricing proc
ess are comparative prices, product or value analysis,
cost analysis, advisory audits, and learner's curves.
A brief discussion of each follows.
Comparative prices. The comparative price tech
nique involves the act of comparing two or more prices
quoted at the same or different periods of time from
the same or different suppliers. "It is a technique
which readily discloses differences in price, although
12
it may not as readily explain the differences." Where
the fairness and reasonableness of price can be deter
mined by this method, there is no need for further analy
sis. But in the pricing of some procurement, particu
larly products with close civilian counterparts, compar
ative prices may afford a useful standard for pric-
15
ing. ^ However, this standard is not adequate for the
large volume of specialized Air Force procurement.
Product or value analysis. A knowledge of the
product being purchased and the use to which it is to be
12Ibid., p, 599,32,
^J; ohn Perry Miller, Pricing of Military Procure-
i ments (Haw Haven? Yale University Press. 1949;, p. 200,
74
put is essential to sound procurement pricing. Every
buyer or contracting officer should plaee some price or
value on any product or services prior to negotiating.
Product or value analysis, then, is the technique of
0
placing a value or price on the product by physical
inspection, by review of drawings, quality requirements
and Job process sheets, and by means of knowledge of
14
manufacturing and assembly techniques. Here again,
because of the complexity of the many different items
procured for the Air Force, it is understandable that
this technique has definite limitations.
Although detailed knowledge would be impossible
to acquire in many cases, surprising economies often
can be achieved by the thoughtful buyer who will take
15
time to look at the product he is buying.
Cost Analysis
Price analysis by itself is not enough. "Cost
analysis is the key to effectiveness in incentive pric-
ing.H The methods of cost analysis are various. The
AFPI, o£. cit., p. 399*20.
15
"Howard T. Lewis, Procurement Principles and
Cases, Revised edition (Homewood, Illinois: Richard D.
Irwin, Inc., 1953)? p« 365*
16
Thomas Blanchard Worsley, Wartime Economic Sta
bilization and the Efficiency of Government Procurement
(Washington: United States Government Printing Office,
1949;, P* 255. _ ___________________ ______
75 I
best techniques and their merits will vary from one con
tract to another or from time to time. In the early
stages of procurement, cost analysis will be least ef
fective .^ This is the technique of evaluating specific
elements of cost or price to ascertain whether the cost
of any elements can be influenced by closer pricing.
The aim of cost analysis is to encourage contractors to
1 f t
control and reduce costs, not to control profit. In
evaluating costs, it is advisable to focus attention on
those cost elements which are large in dollar amount
or in percentage relationship to total cost or price.
If, as is often the case in Air Force procurement,
material or labor, or both, constitute 50 cents or
more of the sales dollar, it is necessary to give
particular regard to those elements of cost.1”
Advisory audits. An audit is concerned primarily
with a contractor's historical costs, while cost analy
sis is generally concerned with the future activity of
costs. Advisory audits are helpful to the contracting
officer when they are available in time to permit orderly
20
and prompt pricing. They are particularly helpful in
17
rMiller, o|). cit., p. 158.
■^®AFPI, o£. cit., Febr. 14, 1958 Revision, p.
399*33.
19Ibid., p. 399.33*
2QIbid., p. 599.36.
I 7 6 j
connection -with price redeterminations. Advisory audits
i
| are generally used when doubt exists as to reliability
I
j of contractor's cost systems, or when the dollar amount
I is large on the contract and warrants the expense o The
j contracting officer should bear in mind that advisory
I . . . .
audits cost money and take time to prepare.. He should
also determine the extent of the audit for his purpose.
I
I If the contractor's accounting system has been approved,
|
: detailed audit should not be necessary.
i
The "Five Staff Papers Prepared for the Task
; Force on Procurement" point out the distinction between
the function served by the audit on two different types
of contracts.
In the first, i.e., the cost reimbursement situation,
the audit is conclusive, so far as the Government is
concerned, on the price to be paid. In the second,
i.e., the redeterminable fixed-price situation, the
audit is advisory only to the contracting officer
and the. final price is to be arrived at through nego-
tiation.2- * -
The role of audit has been getting out of hand in
connection with fixed-price contracts providing for re-
determination. This is because many contracting offi
cers have a strong tendency to treat the audit report
21
"Five Staff Papers Prepared for the Task Force
on Procurement," Vol. 2. Commission on Organization of
the Executive Branch of the Government. June, 1955,
p. C-68. (Mimeographed)
77 |
!
in the same way as a cost reimbursement type contract |
i
where the audit is final. "When'this occurs, negotia
tion becomes subordinate to auditing— the tail wags
22
the dog." Industry has criticized the Air Force
audits because of the detailed way in which the audit
is performed on fixed price redeterminable contracts
where the contractor's accounting system has already
been approved; and because the contracting officer
doesn't always negotiate the costs but uses the audit
as the authoritative measure of the amount to be paid
the contractor in addition to his fee or profit.
Learner's curves. A specialized technique of
evaluating labor hour estimates is known as the learner's
curve. It is a mathematical and statistical measure em
ployed to predict the efficiency of labor in the per-
formanee of work. ^ The proper utilization of the learn-j
ing curve provides a means for the buyer or contracting j
i
officer to aid corporative suppliers in arriving at a
fair price.
The theory of the learning curve is relatively
simple. It is based on the concept that a worker learns
22
Ibid.. p. C-69.
^Frank J. Andress, "The Learning Curve as a Pro
duction Tool," Harvard Business Review, XXXIIt 91, No.
1, January, February, 1954«
78 j
by doing; the more often he repeats an operation, the
more efficient he becomes, with the result that the di-
24
rect labor input per unit declines. This theory has
been reduced to a measurable statistical curve. An 80
per cent learner's curve, for example, means that as
production of the same item doubles, the cumulative
average hours required per unit are approximately 20%
less than the previous cumulative average hours required
25 I
per unit. Stated another way, every time production i
is doubled, the cumulative average hours required to
produce the new quantity is only 80 per cent as great
as the prior quantity. The 80 per cent learning curve
reflects the average experience of the aircraft industry
26
during World War II. Today the learning curve concept
can be applied readily to common types of manufacturing
27
in any industry.
The learning curve is a specialized method that
is useful only when the following conditions exist:
1. When a non-standard part is being manufac
tured
24
Ibid., p. 87.
25
^North American Aviation, Inc., Purchasing with
the Learning Curve, August, 1953, p. 3* (Pamphlet")
Andress, op. cit., p. 93*
27Ibid.. p. 8 7.
79 ;
2. When the amount of money involved justifies I
the use of the theory ■
J. When free competition is prevented "by such
factors as proprietary items, expensive or
complicated tooling, specialized equipment,
specialized "know-how," or patents
4-. When direct labor is a substantial increment
of the costs.
It is under these conditions that the learning curve
concept becomes an extremely useful technique in pric
ing. A little knowledge is dangerous when using the 1
learning curve. To apply this technique successfully,
it must be possible to develop a reasonably close esti
mate of the direct labor hours needed to produce the
first unit, since the curve always relates baek to the
starting level and magnifies any errors in that esti-
?Q
mate. ' Because judgment and broad experience are essen
tial for the selection of the proper curve, the buyer or
contracting officer should obtain the assistance of a
specialist familiar with this method of pricing.
IV. SUMMARY
Price is an important element of any negotiated
Air Force procurement. It is the procurement objective
of the Air Force to secure necessary supplies and ser-
28
North American Aviation, op. cit., p. 2.
29 . «
yAndress, op. cit., p. 9 0.
vices of quality at fair and reasonable prices. This |
does not necessarily mean the lowest prices hid, hut
prices that are most economical to the Air Force in the
long run. To achieve satisfactory procurement, it is
the policy of the Air Force to encourage and develop
competition and to negotiate close firm prices wherever
possible. Because profit is the factor that motivates
contractors to operate economically and efficiently,
the incentive approach should he applied in negotiation. I
f
i
CHAPTER V
PROBLEMS OF CONTRACT REDETERMINATION
Price revision clauses are contractual devices
designed to effect an adjustment in a contract price.,
There are a number of types of redetermination clauses
I used in fixed-price contracts. This study deals with
I six redetermination clauses used by the Air Force„
The necessity for price adjustment devices arises
partially as a result of the problem of profits., The
profits of Air Force contractors cannot be unrestricted
or excessive; they must be held to levels acceptable
to the public* Price quotations to the Air Force are
high, in many cases, because contractors are unable
to estimate accurately the cost of performing a con
tract and therefore include large allowances for con
tingencies in their cost estimates* Wages and material
costs, for instance, may rise significantly if the con
tract is to run for a considerable period of time. Un
der such circumstances, prospective contractors natur
ally tend to include allowances in their quotations
for these increases in costs. If the prospective con-
I. USE OF PRICE REDETERMINATION CLAUSES
82 j
tractor has not produced the item previously, he also
is likely to estimate his costs high in order to avoid
loss because of unforeseen production problems. If
these high costs should not actually occur, the quoted
price would result in excessive profits which could not
be recovered by the Air Force under straight fixed-
price contracts.
Conditions for Use
The Armed Services Procurement Regulation states:
. . . price redetermination clauses are suitable
for use in varying degrees in negotiated contracts
where (1) adequate estimates of quantities of mater
ial and labor are not initially available; (2)
specifications adequate for a firm fixed-price are
not initially available; (3) sound initial estimates
of total cost performance cannot be made; (4) ef
fective competition or other reasonable justifica
tion of price is not available; or (5) where the
use of price redetermination would otherwise materi
ally assist in effecting fair and reasonable price.1
Repricing clauses are suitable for use when:
1. The contractor has an adequate accounting
system.
2. The contract is of sufficient dollar amount
to warrant the necessary administrative
control.
.3. Lower prices are likely to result.
"Procurement by Negotiation," Armed Services
Procurement Regulation, Part 3-403 • > 3 (b ) , Apri 1 4, 1955
revision (Washington: United States Government Print
ing. Office, 1955)> P» 319* ____________ _________
83
4. "Reasonable assurance exists that contract
price redetermination can be accomplished
2
on a timely basis."
5. "There is at the outset, or will be avail
able at a point early* in contract per
formance, sufficient pricing information
available to negotiate a prospective
fixed or target price."-'
i
1 limitations
"A price redetermination will never be used as a
substitute for an intelligent initial analysis of
price.
II. TYPES OP REDETEEMIHATION CLAUSES
Six price-redetermination clauses have been author
ized by the Air Eorce Procurement Instruction for use in
fixed-price contracts.^ These clauses are commonly
identified as Forms A, B, C, D, E, and F. Each form
^Ibidc, p . 320.
^Ibid., p. 320.
"Procurement by Negotiation," Air Force Procure
ment Instruction. No. 5? part 3-403.3, January 20, 1958
revision (Washington s United States Government Print
ing Office, 1957)? p* 333-
^Ibid., p . 32 6,
8 4 i
has been designed for use under specific conditions; j
therefore, they differ as to (1) the extent of the re
pricing action, (2) the timing of repricing, and (3)
the cost data required to administer the contract.
Form A— Prospective Periodic Price Redetermination at
Stated Intervals
This clause is priced prospectively or "forward”
only. It authorizes upward or downward price revision
to be negotiated at fixed periods ranging from three to
six months in length. "In one sense this form can be
said to provide for a series of short-term, fixed-price
6
contracts in lieu of one of long duration." Periods
may be measured in time, production, or delivery of
items.
Conditions for use. The Form A redetermination
clause may be used whenever the contractor is able to
make an accurate cost and price estimate for the first
production period, but not for the duration of the con
tract. Under such circumstances, the Air Force and the
contractor will be bound by the initial price for the
first period only. In many cases, it is impossible to
^Gerritt W. Wesselink, "Price Redetermination,"
Government Contracts Review, Vol. I, Ho. 5 (Washington:
The Lupton Company, May, 1957)> P* 8* (Supplement to
Government Contracts;Simplified)
85 :
establish a firm price for the entire contract because
i
' of prolonged delivery schedule or widely fluctuating
j raw material prices - When these conditions are present,
i
a Form A will enable the contractor and the Air Force
buyer to review costs and estimates and to negotiate
revised prices at fixed intervals.
Limitations. ’ ’This clause should be used only
i 1
1 when the prospective pricing periods can be made to
i
conform with the operation of the contractor's account
ing system."*'7
Cost data required. In order to permit the nego-
! tiation of a revised price which is fair and reasonable,
the contractor must promptly report his experienced
Q
production costs and an estimate of unit costs prior
to the next repricing period. The buyer should be cer
tain that the contractor understands the nature of the
required cost and pricing data and will be able to sub
mit these data promptly.
Form B— Prospective Price Redeterminations on Request
This clause provides for an unlimited upward or
^ASPR„ op. cit., p. 520.
8AFPI. op. cit., p. 537.
86 i
downward revision from time to time upon written demand
of either party. All price revi'sions under this clause
are prospective only. This form of contract comes clos
est to a firm fixed-price contract, since the price re
mains firm unless either party demands a revision.
Conditions for use. The Form B redetermination
clause is suitable whenever the contractor is able to
make an accurate cost and price estimate for the per
formance of the entire contract, but it is believed
that significant variations in costs may occur because
of unpredictable changes in volume, material prices, or
wage rates.^
Limitations. Under the Form B redetermination
clause,
. . . the first redetermined price and any subse
quent redetermined prices shall remain in effect
for a substantial portion of the remaining period
of contract performance, but only in exceptional'
cases shall price redetermination requests be pro- |
vided for more frequently than every 6 months after
the initial price redetermination.10
"The Form B clause is not authorized for use in
11
Air Force procurement."
^ASPH, op. cit., p. 521.
10Ibid., p. 521.
11AFPI, op. cit., p. 339.
87!
i
Form C--Retroactive and Prospective Price Redeterminationl
at a Stated Time Prior to Completion i
Under the Form C price revision clause, the Air
Force and the contractor agree to revise prices upward
or downward after delivery of a specified percentage
of the items required by the contract. As a general
rule, the time designated as the cutoff point for price
redetermination purposes should not exceed 20 per cent
of deliveries, 20 per cent of shop completion, or 40
per cent of cost of performance on a cost-incurred
12
basis, as compared with the initial estimates. Once
the price is redetermined, it may apply to all supplies
or services delivered under the contract.
Conditions for use. The Form C redetermination
clause is suitable whenever the contractor is unable to
make an accurate cost estimate at the outset, but will
be able to project unit costs after part of the items
required by the contract have been produced. If the
work on the contract is of a repetitive nature and the
production schedule is relatively long, the contractor
will usually acquire sufficient engineering and cost
data after the contract is partially complete to permit
the negotiation of close prices for the entire contract.
~^ASPR, loc . cit.
88
Under these conditions, Form C permits the negotiation
of a tentative price which is revised upon the review
of the actual costs of producing not more than 20 per
cent of the items required by the contract. This re
vised price applies retroactively to the initial period
and prospectively to the undelivered portion of the con
tract . The fixed-price Form C contract has been used
where cost-type contracts were the primary alternative.
Cost data required. For this price revision
clause to operate correctly, the contractor must have
an approved accounting system. Under the Form C price
redetermination clause, the contractor must furnish ex
perienced production costs for the first period, plus
projected unit costs with supporting data for balance
of the contract. After the first period, the contractor
needs to furnish periodic statements of costs and esti
mated percentage of work completed.
Form D— Retroactive and Prospective Price Redetermination
Including Further Prospective Redetermination upon Re
quest
The Form D clause provides for a mandatory and
unlimited upward or downward revision of the price at a
designated time. This revised price applies retroac
tively to the initial period and prospectively to the
8 9
1-5
undelivered portion of the contract. ^ Thereafter,
the price may remain firm or subsequently be revised
on demand of either party in essentially the same man
ner as in Forms B and C. The initial redetermination
point should be established as soon as possible, usu
ally before actual cost amounts to 6G per cent of the
14-
total estimated costs. A price ceiling for this
15
price revision clause is mandatory.
Conditions for use. The Form D. redetermination
clause is used when it is impracticable to establish
firm prices at the time of the execution of the con
tract, but there is a reasonable probability that firm
fixed prices can be negotiated after an initial perform
ance period.
Limitations. The use of a Form D pricing revision
clause requires prior written approval of the Pricing
Staff Division, Headquarters Air Materiel Command,
1
Wright-Patterson Air Force Base, Ohio. It should
not be used if the cost of administration is prohibi-
~^ABPI, op. cit., p. 526.
14ASPR. o£. cit., p. 522.
1^AFPI, loc. cit.
16Ibid., p. 542.
90 i
tive. Also, the contractor’s accounting system must be
17
adequate for contract redetermination purposes.
Form E--Retroactive Price Redetermination After Com
pletion
The Form E redetermination clause provides for a
ceiling price and retroactive price redetermination af-
18
ter completion of the contract.
Conditions for use. The Form E redetermination
clause is used primarily in research and development
contracts or for the procurement of supplies and ser
vices where the time for performance is so short as to
preclude the use of one of the other types of redeter
mination clauses. The price initially negotiated must
bear a reasonably close relationship to the expected
final price.^
Limitations. The use of the Form E price revision
clause requires prior written approval of the Pricing
Staff Division, Headquarters Air Materiel Command,
Wright-Patterson Air Force Base, Ohio.
^ ASPR„ op. cit., p. 320.
18Ibid., p. 322.
•^AFPI, op. cit., p. 3^-6.
91 i
I
Form F— Price Redetermination upon Happening of Speci
fied Contingency
The Form F redetermination clause is used only
hy the Air Force and only in limited cases. "This type
of contract provides for an equitable upward revision
of prices upon the happening of a contingency specified
20
in the clause as a 'basic assumption.'"
i
Conditions for use. The Form F redetermination
clause is used when accurate cost estimates can be pro
jected and firm, reasonable prices negotiated initi-
21
ally. Its purpose is to limit any upward revision
to the identified contingency situation which is beyond
the contractor's control.
Limitations. The Form F price revision clause
may be used only in. motion-picture production con-
22
tracts. The AFPI lists two other limitations:
1. The contractor must warrant that there is i
not included in the price any charge fbr
the specified contingency*
2. The contingency must be such as to be outside
the control of the contractor; i.e., wea-
20 !
Ibid., p. 34-8.
21Idem.
22Idem.
92 '
ther, failure of Government to furnish
23
equipment, etc. ^
Certain contingencies, such as changes in taxes, wage
rates, or material cqsts, cannot he covered by the
clause.
Cost data required. (The Form F price revision
clause requires the contractor to have an approved ac-
! counting system. !
III. REQUIREMENTS FOR CONTRACTOR'S
ACCOUNTING SYSTEM
Adjustment during Performance of Contract
i
All the clauses which provide for an adjustment
during the course of performance of the contract (Forms
A, B, C, D and F) contain a "Submission of Data" para
graph which requires the contractor to submit at the
times specified:
1. A new estimate and cost breakdown (plus sup
porting data) of the unit costs and the
proposed prices of items to be delivered
in the succeeding period; or in the case
of clauses providing for retroactive price
adjustment, a new estimate as to all items
; 2^Ibid., p. 349.
93 |
I under the contract.
i
t
! 2. An explanation of the difference between the
I
: new estimate and the previous estimate*
3. A statement of the experienced costs to the
extent available.
The paragraph provides that the Air Force may examine
the contractor's books and records and make an audit
j if deemed necessary.
1
Auditor General * s Survey
The use of price redetermination clauses is predi
cated upon the adequacy of the contractor’s cost account
ing system. It is the responsibility of the buyer to
request the Auditor General to determine whether or not
the contractor's accounting system will permit the con
tractor to furnish the cost data required by the spe
cific price redetermination clause to be included in
the contract. If any changes are recommended by the
Auditor General, no contract with a price redetermina
tion should be entered into until appropriate changes
in the accounting system of the prospective contractor
24
are made. "Unless this is done, there is every chance
that the parties will be subjected to the administrative
burden of comprehensive audits or the processing of a
24
Wesselink, op. cit., p. 10*
94 -
dispute .
IV. HEGOTIATIOUS
Price redetermination clauses A, B, C and D
provide that upon the filing of the cost statements
and data the parties mil promptly negotiate in good
faith as to price. It is specifically stated that the
negotiations for redetermination of the price will he
conducted on the same basis, employing the same type,
of data, as in the negotiation of a new contract.
This can be a most important provision. A case in
point is the Sea Coast Stevedoring and Transportation
27
Corporation. ' By this provision it is intended that
any element which would have affected the price if it
had been known at the time of the original negotiation
is a proper subject for consideration in a negotiation
leading to a revised price. This case involving a con
tract for the furnishing of terminal services contained
a Form C clause; the contract rates accepted by the par-
^ Idem.
pr
Air Force Procurement Circular No. 12 (Yfeshing-
ton: United States Government Printing Office, March
21, 1956), p* 8.
27
'Sea Coast Stevedoring and Transportation Corpora
tion, Armed Services Board of Contract Appeals 1792 6
CCF 61569 (Washington: Commerce Clearing House, IncT,
October 25, 1954-).
95
ties contained no specific allowance for profit. The
contractor explained this omission by stating that he
hoped to earn a profit of approximately five per cent
because of the efficiency of his operation and the ex
pectation that the volume would exceed the estimated
quantities upon which the rates were based. The Gov
ernment took the position that since a profit allowance
was not included in the original contract price, the
revised price should likewise contain no allowance for
profit at the rate of five per cent.
Avoidance of Retroactive Pricing
There is a great need for timely redetermination
to avoid excessive retroactive repricing. Negotiation
of prices must be prompt. This is of particular impor
tance in the contracts providing for redetermination
during the course of performance. To delay negotiation
for any appreciable time is to distort the purpose of
redetermination clauses. In the case of retroactive
price, prompt revision of price under retroactive price
redetermination will provide the Air Force with cost
and price data for the negotiation of close forward
prices on subsequent procurement for the same or like
items. Promptness of negotiation also results in prompt
recovery by the Air Force of excess payments and in
prompt payment to the contractor of any increase to
96
which he is entitled.
She buyer should avoid the use of retroactive re
pricing whenever possible because it reduces the con
tractor's incentive to lower costs. Although retroac
tive repricing is necessary under certain conditions,
ordinarily there should be only one retroactive repric
ing of a contract during the production of the same or
a similar item.
Importance of Prompt Price Bedetermination
Whenever a price redetermination clause is used,
it is the buyer's responsibility to assure the prompt ,
negotiation of revised prices. If revised prices are
not negotiated at the time specified in the Form A,
B or C clause, the purp*ose of price redetermination is
distorted. When, for instance, redetermination does
not take place prior to 40% of the deliveries, but is
delayed until the contract is substantially completed,
nearly all costs are known and the repricing action be
comes largely a matter of negotiating a retroactive
profit to be added to actuail costs. Under such circum
stances, contracts providing for price redetermination
resemble the effect of the illegal ncost-plus-a-
percentage-of-cost" system of contracting, and destroy
the contractor's incentive to keep costs low.
97 1
i
V. ADMINISTRATIVE PROBLEMS
I
Price redetermination is not a panacea for all
pricing problems, but it can be a useful tool in con
tract pricing if it is properly used and administered.
The AFPI specifically states: "Price redetermination
will never be used as a substitute for an intelligent
28
initial analysis of price/
I
Because of the additional price analysis and nego
tiation and the use of Air Force auditing for redeter
mination purposes, price revision clauses create a
heavier administrative work load than firm fixed-price
contracts.
Unless initial prices are carefully negotiated,
the administration of this type of contract will be
burdensome to both parties and disputes may result in
many cases. Prom the standpoint of the Air Force, all j
the redetermination clauses, particularly those with !
retroactive features, tend to relieve the contractor
of his full responsibility for controlling production
costs and eliminate his incentive to economize in the
use of material and labor until after the redetermined
price has been established.
28AFPI. 0£. cit., p. 553.
98 j
The major problem underlying the use of price
redetermination clauses, according to the AFPI, ”, . .is ,
\
to establish and maintain sufficient incentive through
proper target or prospective pricing to induce the con
tractor to control his 'controllable' costsgv^e
exercise of sound judgment on the part of the contract
ing officer and the contractor is required to solve the
difficult problem. Prospective or forward pricing has
f
an advantage in that it relieves the contractor and Air
Force personnel from the duties of innumerable negotia
tions by efficiently concentrating effort on one large
negotiation.
One inherent problem in redetermination is dis
tinguishing between (1) actual cost reductions due to
real efficiency and (2) apparent reductions due to
initial innocent or deliberate over-estimation of costs.
This problem frequently can be met by price comparisons,
cost analysis and trend studies for different contrac
tors initially and at the time of redetermination.
Relevancy of Cost Data
Most of the problems and disputes under price re
vision clauses arise in connection with the cost data
submitted by the contractor and its review and treatment
^Idem.
99 ;
by Air Force contracting officers. The contractor can |
reduce the number of disputes if he has an adequate cost ,
system. In this connection, the burden of proof rests
with the contractor and if his accounting system cannot
adequately segregate the costs, the Air Force Auditor
General will recommend certain changes. These changes
are to be made at no expense to the Air Force. This
added expense of revamping his accounting system could
cost a small contractor more than the profit he would
make on the contract.
There is the uncertainty of what is or isn’t an
allowable cost on Air Force contracts with price re
determination clauses. Section XV of the ASPS points
out the principles for determining costs, but leaves a
good many to be decided by negotiation. The end result
is that many of the costs are left to the judgment of
the contracting officer. Some contracting officers who !
!
are weak and afraid of being criticized disallow some !
i
costs that are legitimate on the recommendation of an
auditor.
An interesting sidelight on this subject of costs
is that a number of contractor's costs are recognized
for tax purposes, but not in Air Force procurement;
for example, interest, contributions and advertising
are recognized by the Bureau of Internal Revenue as
100
legitimate costs of doing business, but Air Force pro
curement does not recognize them as allowable costs.
Maybe it is too difficult to put these costs on a pro
rata basis.
Large Dollar Amounts
Because contracts with redetermination clauses are
expensive to administer by both the e ontractor and the
Air Force, they should be considered for use only on
contracts of large dollar amounts.
Effects of Change Proposals and notifications on Rede
termination
Contracting officers should consider in initial
negotiation the effects of engineering change:proposals
oil the price redetermination clause initially used
and contract change notifications that most likely will
ensue during the process of development. In some cases,
these changes in the contract could destroy any incen
tive that might have been in the initial procurement.
It is possible that such changes could cause the price
redetermination clause to lose its effectiveness.
VI. SUMMARY
The price redetermination clauses were developed
to protect the interests of both the contractor and the
'
I 101 ;
I Air Force under conditions in which increases or de- I
i
i
! creases in cost are beyond the control of a contractor.
i
| They are to be used under circumstances in which a fair
and reasonable price cannot be reached because of the
absence of effective competition, the lack of adequate
cost experience and data, or the inclusion of substan
tial contingency allowances in the firm prices that con
tractors were willing to quote. If the proper redeter-
! mination clause is selected after initial prices have
been negotiated as closely and fairly as the circum
stances admit, and if the problem of administering the i
contract is intelligently approached by both parties,
the clauses should continue to fulfill the purpose for
i
| which they were developed.
I
CHAPTER VI
t
I
CONCLUSIONS, ANALYSIS AND RECOMMENDATIONS
Air Force procurement and pricing until World War
II lagged considerably behind commercial business pro
curement practices. During World War II, a great need
| arose for closer pricing; attempts were made to improve
1
: contract types and to develop better methods of procure
ment pricing. The Armed Services Procurement Act of
1947 was a step in the right direction. Since 194-7 Air
Eorce procurement and pricing in general have been in
various stages of refinement. With entry into the Space
Age, pricing becomes more and more difficult because of
the nature of the product. Specifications are not fixed
because many items are being developed for the first
time. Contracts for products when there are no histori
cal data for determining a price usually result in a
cost-type contract. Under this type of contract, the
Government or Air Force assumes most of the risk. Most
defense contractors would rather use a fixed-priee con
tract whenever possible because it gives defense con
tractors the greatest incentive for profit. When the
"state of the art” is such that only a general idea of
the specifications can be given a contractor, the only
; alternative is to use a cost-plus-fixed-fee-type con-
I
105
I tract.
I
i
i
I
| I. CONCLUSIONS
Little forward pricing is done in the Air Force
I
because its very nature is such that the Air Force is
not equipped to do it. The buyer or contracting offi
cer, with his team which includes a price analyst, would
have to have the same familiarity with the item being
I produced as the contractor’s personnel producing it.
i
| Naturally, one price analyst in the Air Force cannot
! be as familiar with all the various aspects as the con
tractor building the product. Pricing a procurement
in this case involves little more than estimating the
costs based on engineering hours, labor rates, material
J costs and overhead, plus a percentage for general ad
ministrative costs and a profit, This is not to say
that pricing is not done in the Air Force. Quite the
contrary, the Air Force is to be commended for its pric
ing of semi-standard commercial items. After a certain
amount of cost experience has been accumulated, the
Air Force also does a good job of price redetermination.
Pricing, even for the contractor, is difficult without
some cost experience on which to base a price. When
a contractor submits a quotation on a proposed contract,
and when there are no previous cost data, the Air Force
i has to rely on judgment to determine if.the price is ___
104
fair and reasonable. This judgment, as previously-
stated, is based on such factors as overhead informa
tion received from audit, the buyer's opinion on mater
ial costs, the reasonableness of engineering hours
(another guess), labor rates, and the contractor's
reputation in making such estimates with reasonable
accuracy in the past.
In many cases, after the contracting officer or
! buyer has reviewed the cost, he may say to the contrac
tor during negotiation that the total price must be
reduced 20 per cent; if the contractor thinks it is
worth more, he must prove it. Thus, the burden of proof
for price in most cases rests upon the contractor. De
pending on how badly a contractor wants a contract, he
may accept one in which the Air Force has reduced his
estimated cost. In many such cases, the contractor
overruns the costs through no fault of his own.
Because future weapons are costly and more diffi
cult to price fairly, the Air Force would do well to
consider economies it might make by stabilizing per
sonnel, making better use of management practices, and
improving contractor relationships. In order to im
prove Air Force procurement and pricing in general, the
, writer feels stress should be put on these measures.
105 |
Stabilization of Personnel
A major problem in Air Force procurement is to
increase the stability in personnel assignment0 A high
personnel turn-over rate is very expensive in any or
ganization and does not lead to efficient operation.
Militaryo Colonel George Bostwick, in his thesis
on "The Organization, Manning, and Operation of the
Weapon System Project Office,” points out that officer
personnel in support activities average a two-year ten
ure, which is too short for either efficient management
or effective trainingo1 A report prepared by the Task
Force on Procurement of the Hoover Commission concluded:
. . . that long-term improvements require materiel
executives with specialized competence, developed
through training and experience and through rota
tion and personnel assignment policies which pro
vide proper tenure in key positions
These requirements apply equally to military and civil
ian career executives,. The Air Force now has a normal
tour for officers of three years* service. Even so,
the average officer spends the first year learning the
George E„ Bostwick, Thesis lOo 1061, Air War Col
lege, "The Organization, Manning and Operation of the
Weapon System Project Office," Air University, Maxwell
Air Force Base, Alabama, April, 1956? P«
2
Report on Military Procurement, prepared for the
Commission on Organization of the Executive Branch of
the Government by the Task Force on Procurement (Washing
ton: United States Government Printing Office, June,
1955), p. 68.
106
operation and becoming acquainted with personnel* The
second year is spent studying the operation to deter
mine what changes would improve the organization. By
this time, the officer is in his third year and is
afraid tomake any changes that might embarrass his suc
cessor, Although by the end of the second year he can
be called fully effective, it seems advisable for him to
remain a total of five years for maximum effectiveness.
His subsequent assignment should logically be in the
same line of work at some other Air Force Base,
Civil service employees, Congress, by general
agreement, lumps civil service employees into one
group. Procurement personnel not only have greater
capabilities than the average civil service employee,
but they also receive higher pay grades because of, bet
ter qualifications and more responsibilities. However,
there is still a large turn-over in civilian personnel.
The turn-over of personnel is due in part to the low
pay scales in effect which do not attract qualified
personnel who must assume responsibilities in some in
stances greater than those in industry. Other features
of government work that contribute to the turn-over of
personnel are: (1) the attempt of higher headquarters
to control decisions of human judgment that can be made
only by the local contracting officer or buyer; (2) un-
10? i
necessary reports, and (3) overwork by many in the vari- j
i
ous procurement divisions.
It seems that the more capable the civil service
employee, the more work he is given. Negotiators, for
example, because the press of other duties precludes
comprehensive preparation, sometimes enter negotiations
not fully prepared. These individuals, by working late
or by taking work home at night, subsidize the Govern
ment by working on their own time. Many of the nego
tiators receive an annual salary between i?,000 and
$9»000 and negotiate many contracts in the tens of
millions. Air Force personnel who are buyers and con
tracting officers are expected to be well-rounded in
cost analysis and price analysis work, besides having
high business acumen and good, sound Judgment. If all
these things were wrapped up in one individual in in
dustry, he could almost name his own salary.
It is sad, but true, that the Air Force is a !
training school for industry. The panacea for this exo
dus of personnel from the Air Force to industry will not
be solved by raising the pay of civil service employees
across the board, which in any event is not likely be
cause this takes Congressional approval. One way to
retain trained civil service personnel might be to
eliminate some of the undesirable features of govern
ment work; also, the lack of confidence in procurement
108!
3
personnel by members of Congress could be improved.
Most civil service employees are very capable,
conscientious workers who do a commendable job for the
Government. A program of public relations to point out
the good procurements that are made instead of publi
cizing the few bad blunders in government procurement
might help to build an esprit de corps. However, even
if Congress voted a pay raise, publicized the merits of
procurement personnel, and eliminated the undesirable I
features of government work, many trained government
employees below the age of 4-5 would continue to move
on to greener pastures. Those who stay are, like pro
fessors, dedicated to their work and get a great deal of
satisfaction from doing a good job.
A certain percentage of others do not leave gov
ernment work because they are marking time for retire
ment or have taken refuge in civil service work because
they are unable to compete in the commercial world.
This group generally has veterans' status and it is
most difficult, if not impossible, to eliminate them
through present reduction-in-force procedures. If their
jobs are abolished, they merely bump a non-veteran out
^"Five Staff Papers Prepared for the Task Force on
Procurement,” Vol. 2. Commission on Organization of the
Executive Branch of the Government. June, .1955, C-28.
(Mimeographed) . -
of his positiono For some time Congress has been re- j
viewing a proposal to eliminate this type of employee
from civil service rolls, but nothing concrete has de
veloped to date. In this connection, it may very well
be that nothing will be done to eliminate this "veter
ans' status concept" since many veterans' organizations
are applying a great deal of resistance to such a move.
Proposed Weapon System Coneept j
It is recommended that the Air Force continue with
its Weapon System Management concept. The June, 1958,
issue of Fortune states:
The growing complexity of defense production . . .
has led all three services to adopt the "weapon
system" approach pioneered by the Air Force. Under
this approach, a single corporation is assigned
managerial responsibility for developing and pro
ducing a weapon system, e.g., Convair for the Air
Force's B-58.^
There are other reasons for the weapon system manage
ment approach than the ever-increasing production com-
|
plexities of new weapons. Some of these go back to the
pay and the number of civil service employees the Air
Force is authorized to hire in any one year.
No one contends that Air Force people are not as
well qualified as industry personnel, but the buyers
jt
Charles E. Silberman and Sanford S. Parker, "The
Economic Impact of Defense," Fortune, June, 1958, p.
104.
1 1 0 j
and contracting officers gust do not have the depth in
numbers. For this reason, they need to be backed up
by professionally qualified people. The contracting
officer with a team of two cannot possibly do the work
of a defense plant contractor who is the most familiar
with costs and pricing of these complex systems. Con
gress will approve money for the weapon system approach,
where it might never allow the Armed, Services to pay !
the price and obtain personnel necessary to do the job
that the weapon system manager is expected to do»
In effect, the weapon system management concept
authorized the Air Force to hire highly qualified pro
fessional people to do their technical legal work and
negotiate the prices with other major component prime
contractors= "The system manager . . . selects and
supervises the other prime contractors as well as the
sub-contractors.
It is possible that some may criticize the wea
pon system approach on the grounds that the prime con
tractor, who is the system manager, would be in a posi
tion to make a profit on other prime contractors* costs
and profits as well as on the sub-contractors'. This
is no different from sub-contraetors under a prime con
tractor today.
^Idem. i
The profit a system manager might make on other
prime and sub-constractors would be small in comparison
with the realized savings to the Air Force by having
highly professional people negotiate and manage other
contractors.
Caution should be exercised in the choice of a
weapon system manager. The Air Force should evaluate
the contractor to assure that he, as manager, does not
have an "axe to grind” with any sub-contractors.
Better Air Force-Contractor Relationships
Air Force-contractor relationships should be im
proved. The Armed Services should make an effort to
cultivate relationships with defense contractors. They
should create an atmosphere that industry is honest un
til proven otherwise. Reliance on government contrac
tors must be built up so that the defense contractor
has pride and professional accomplishment in the work
he is doing for the Government. Host defense contrac
tors have been in business many years and feel a moral
and patriotic duty to uphold the reputation that will
invite future government contracts.
Some would say that many of the Air Force procure
ment problems stem from lack of confidence in defense
contractors. Cultivating this good relationship and
creating an atmosphere of trust has direct benefits
112
to the Air Force; for example, if the contractor pro
poses an engineering change (safety or performance), he
does,,it in most cases to improve the product, not to
increase his profits. Looking over the contractor's
shoulder only costs the Air Force extra money in the
long run. After all, who knows the product better than
the man who has it under production? He has the "know
how" and the engineering capability to make it function
properly.. When engineering personnel at the Air Force
Laboratories Headquarters, Wright Air Development Com
mand, Dayton, Ohio, receive engineering change proposals,
they have no alternative but to "rubber stamp" them be
cause they are too far away from the problem to make a
thorough analysis from just sketchy engineering data.,
Nearly all engineering change proposals are ap
proved by the Air Force, but this duplication of effort
is costly and very time-consuming« , One method of saving
time would be to have an Air Force qualified engineer in
residence. It is hoped that the "weapon system" con
cept will improve this situation.
Cultivating contractor relationships should not
be too difficult for the Air Force because 78 per cent
of dollars spent on Air Force procurement is divided
113 I
6
among thirty-seven prime contractors. If for any rea
son these thirty-seven major defense contractors can
not he relied upon, others who can he must he developed»
Simplification of Government Contracts
There is a need for simplication in government
contracts. The hest principles of management are de
signed to tap the resources of all personnel in an or
ganization o Government contracts do not conform to
these principles. On the contrary, they are full of
7
labor’s legal hangovers' and terminology which trained
legal minds sometimes have difficulty in understanding.
The standard terms and general provisions of these con
tracts are so complicated that small business concerns
without an extensive legal staff cannot possibly under
stand their contractual rights and duties. This often
leads to serious misunderstandings, and more seriously,
sometimes delays performance of the contract. Many
small businesses, as a result, prefer other than govern
ment contracts without ’ ’red tape" and restrictions.
These clauses and specifications should be written so
simply and concisely that the average business man could
^Financial Control Branch, Headquarters Air
Materiel Command, Dayton, Ohio, May, 1958.
^Wall Street Journal, July 9, 1957? P- 12.
■understand them*
Complex specifications restrict the manufacturer
on standard commercial items and greatly increase their
8
cost to the Armed Services.,
The prenegotiation conference « > Although the pre
negotiation conference is a recognized procedure in the
Air Force, sometimes in practice its benefits are not
utilizedo It is believed that sound groundwork for for
mal negotiation could be laid in these conferences be
tween the Air Force negotiator and the contractor if
they took place at the contractor's plant„ Here the
negotiator could get a first-hand view of the contrac
tor's practices and the basic data he would use in the
performance of the contract» The circumstances of such
discussions could be such as to bring out a great deal
of information without the pressure and tension of a
formal negotiation session„ The prenegotiation confer
ences at the contractor's plant could also result in
more familiarity with the product being purchased than
negotiation sessions possibly several thousand miles
from the scene of operationo This proximity would also
insure that all records would be available to the nego
tiator at the critical judgment-forming time of action„
8
"Defense Procurement— Trench War Policies in
the Space Age," Time, September 8, 1958, p0 86»
I
BIBLIO GR APH Y
A. BOOKS
Backman, Jules. Price Practices and Price Policies■ ;
Selected Writings. Hew York: Ronald Press Company,
1953-
_______ , et al. War and Defense Economies. Hew York:
Rinehart and Company, 1952.
Bain, Joe S. Pricing* Distribution and Employment.
Hew York: Henry Holt and Company, 1948.
i
| Chamberlin, Edward H. The Theory of Monopolistic Com-
i petition. Cambridge, Massachusetts: Harvard Uni-
| versity Press, 1956.
Day, John S, Subcontracting Policy in the Airframe
Industry. Boston: Harvard University Press, 1956.
Dennison, H. S. and J. K. Galbraith. Modern Competition
and Business Policy. Hew York: Oxford University
Press, 1938.
Galbraith, John Kenneth. American Capitalism: The Con
cept of Countervailing Power. Boston: Houghton-
Mifflin Company, 1952.
Harlan, Heil E. Management Control in Airframe Subcon
tracting. Boston: Harvard University Press, 1956.
Heinritz, Stuart P. Purchasing. Hew York: Prentice-
Hall, Inc., 1947.
Kitchen, James D. Cooperative Governmental Purchasing.
Los Angeles: University of California, 1953«
Lewis, Howard T. and Wilbur England. Procurement Prin
ciples and Cases. Homewood, Illinois: Richard D.
Irwin, Inc., 1957»
Lewis, Howard T. Industrial Purchasing Principles and
Practices. Chicago: Richard D. Irwin, 1947»
_______ _ Procurement: Principles and Cases. Revised
Ed.* Homewood, Illinois: Richard D. Irwin, Inc.,
1953.
117 |
Lincoln, George A., William S. Stone and Thomas H. Har
vey. Economics of National Security. Hew York:
Prentice-Hall, Inc., 1950* 1
Lupton, George W. Jr. Government Contracts Simplified
Richmond, Virginia: The William Byrd Press, Inc.,
1953*
Hachlup, Fritz. The Economics of Sellers1 Competition.
Baltimore: The Johns Hopkins Press, 1952.
Miller, John Perry. Pricing of Military Procurements.
Hew Haven: Yale University Press, 194-9*
Phillips, E. Bryant. Consumer Economic Problems. New
York: Henry Holt and Company, 1957*
Reck, Dickson. Government Purchasing and Competition.
Berkeley: University of California Press, 1954.
Robinson, John. The Economics of Imperfect Competition.
London: Macmillan and Company, Ltd., 194-8.
Sea Coast Stevedoring and Transportation Corporation.
Armed Services Board of Contract Appeals 1792 6
ccf 61589. Washington: Commerce Clearing House,
Inc., October 25, 1954-.
Stigleward, Boulding. Readings in Price Theory. Chi
cago: Richard D. Irwin, Inc., 1952.
Worsley, Thomas B, Wartime Economic Stabilization and
the Efficiency of Government Procurement. Washing
ton: United States Government Printing Office,
194-9*
B. PERIODICALS
Andress, Frank J. “The Learning Curve as a Production
Tool," Harvard Business Review, 32:87-97, January-
February, 1954-.
Brodsky, Nathan. "A Proposal for Study of Military
Distribution,” The Journal of Marketing, 14:88-90,
July, 1949*
"Contract Negotiation," Time, July 14, 1958, p. 76.
118 |
"Defense Procurement-— Trench War Policies in the Space
Age," Time, September 8, 1958, p. 86.
DeRose, Louis J. "Reliability vs. Competition, Price,
Lead Time: How Can We Strike a Balance?" Aero
nautical Procurement, July 1958, pp. 18-24.
Gordon, R. A. "Short-Period Price Determination in
Theory and Practice," American Economic Review,
38:265—288, June, 1948.
Hitch, Charles. "Planning' Defense Production," Ameri
can Economic Review, 40:191-^98, May, 1950.
Klein, Burton. "A Radical Proposal for R and D," For
tune , May, 1958, pp. 112-13.
Lewis, Howard T. "This Business of Procurement," Har
vard Business Review. 24:377, 595, Ho. 3, March-
April, 1946.
Miller, John Perry. "Military Procurement Policies:
World War II and Today," American Economic Review,
42:453-4-75, May, 1952.
Silberman, Charles E. and Sanford S. Parker. "The
Economic Impact of Defense," Fortune, June, 1958,
pp. 102-105.
"The Rockefeller Report: A Dissent." Editorial, For
tune, June, 1958, p. 97°
I
The Wall Street Journal, July 9, 1957* j
Wesselink, Gerritt W. "Price Redetermination," Govern- !
ment Contracts Review. Washington: The Lupton Com- I
pany, Vol. 1, Humber 5, May, 1957° Supplement to
Government Contracts Simplified.
C. LECTURES AHD SPEECHES
Andrews, Mark E., Assistant Secretary of the Havy.
"Armed Services Procurement Act," The Industrial
College of the Armed Forces. Washington, October
26, 1948.
119 '
i
!
Baker3 David, Major Generals "United States Air Force j
Procurement," The Industrial College of the Armed
Forces. Washington, January 26, 1955®
Brink, Victor Z. "Cost Principles and Profit Margins,"
The Industrial College of the Armed Forces. Wash
ington, December 10, 1953®
Coggeshall, Thomas. "Renegotiation and Profit Control,"
The Industrial College of the Armed Forces < > Wash
ington, February 16, 1956*
Cook, Grval H,, Major General, USAF. "Production Prob
lems Affecting Contractual Relations," The Indus
trial College of the Armed Forces* Washington,
April 4, 1949o
Eckert, William D. , Colonel Army Air Force. "Air
Forces Procurement," The Industrial College of the
Armed Forces* Washington, February 28, 1946.
Elliott, Maxwell. "Procurement Policies of the General
Administration," The Industrial College of the Armed
Forces. Washington, January 26, 1950.
Freeman, W. M. B. "Peacetime Procurement," The Industrial
College of the Armed Forces. Washington, February
6, 1946.
Gerlach, Charles H., Captain, USN. "Requirements, Pro
curement, and Production," The Industrial College
of the Armed Forces. Washington, February 16, 1956.
Goubeau, Vincent deP. "Industrial Procurement," The In
dustrial College of the Armed Forces. Washington,
January 16, 1951®
t
Hayes, John D., Captain, USN. "Introduction to Procure
ment and Economic Stabilization," The Industrial
College of the Armed Forces. Washington, November
20, 1952.
Heflebower, Richard B. "Supply and Demand— Wages,
Prices," The Industrial College of the Armed Forces.
Washington, August 30, 1954-.
"Industrial Mobilization Course," The Industrial Col
lege of the Armed Forces. Washington, January-
June, 1946.
120
Johnson, G® Griffith,, "Effect of Government Purchases
j on Prices in War and Peace," The Industrial College
| of the Armed Forces® Washington, November 23, 1948.
i
i Nichols, Boss® "Cost Principles and Profit Margins,"
I The Industrial College of the Armed Forces® Wash-
j ington, February 14, 1956®
Biehlman, R® Walter, Congressman® "Congress and Mili
tary Procurement," The Industrial College of the
Armed Forces® Washington, February 6, 1956.
Rockwell, Willard F®, Colonel® "Coordinated Procure-
| ment," The Industrial College of the Armed Forces®
i Washington, January 12, 1955®
i _______ ® "Industry8s Reaction to Military Procurement,"
| The Industrial College of the Armed Forces® Wash-
| ington, February 8, 1956.
I Silverstrand, C® F® "Determination of Procurement Ob
jective,” The Industrial College of the Armed
Forces® Washington, January 28, 1946.
Smith, Phillips W®, Colonel USAF® "Procurement Organi
zation; Policies and Problems of the Department of
the Air Forces" The Industrial College of the Armed
Forces® Washington, November, 1948.
Wallace, Donald H® "Relation of Military and Civilian
Price Policies to Procurement in Wartime," The In
dustrial College of the Armed Forces® Washington,
January 20, 1948®
D. GOVERNMENT PUBLICATIONS
Air Force Procurement Circular No® 12. Washington:
United States Government Printing Office, March 21,
1956®
Air Force Procurement Instruction® 1957 Edition. Wash
ington: United States Government Printing Office®
Armed Services Procurement Regulation» 1955 Edition.
Washington:' United States Government Printing Of
fice .
I
t
1 2 1
"Contract Administration," Air Materiel Command Manual •
70-4-° Dayton, Ohio; Headquarters Air Materiel Com
mand, July 22, 1954.
"Manual for Analysis of Contractor Procurement," Air
Materiel Command Manual 70-5° Dayton, Ohio; Head
quarters, Air Materiel Command.
Report on Military Procurement, prepared for the Com
mission on Organization of the Executive Branch of
the Government by' the Task Force on Procurement.
Washington; United States Government Printing Of
fice, June, 1955°
i
i
E. STATUTES
Armed Services Procurement Act of 1947 (P.L. 413)°
Executive Order Ho, 9001, December 27* 1941. 6 F.R.
6787°
Public Law 168, 78th Congress,
515°
Public Law 354, 77th Congress,
(55 Stat. 839) 50 U.S.C.
Public La?; 413? 80th Congress,
2(c).
Public Law 426, 76th Congress,
States Code, 10 U.S.Co 310.
53 Stat. 1000, 10 U.S.C.
1st session, Title II
2nd session, Section
54 Stat. 45, United
P. UNPUBLISHED AHD MIMEOGRAPHED MATERIALS
Bostwick, George. "The Organization, Manning and Opera'
tion of the Weapon System Project Office." Unpub
lished thesis Ho. 1061, The Air University, Maxwell
Air Eorce Base, Alabama.
"Five Staff Papers Prepared for the Task Force on Pro
curement," Vol. 2. Commission on Organization of
the Executive Branch of the Government. June,
1955° (Mimeographed)
122
Department of Defense Form 1097? Financial Control
Branch, Headquarters Air Materiel Command, Day
ton, Ohio, May, 1958«
Department of Defense Form 228 for Fiscal Year 1957-
Directorate Procurement and Production Headquarters,
Air Materiel Command, Dayton, Ohio*
Forth American Aviation, Inc* "Purchasing with the
Learning Curve« , " 1955 • C pamphlet *
Warner Robins Air Materiel Area= "Handbook for Price
Analysis*" Robins, Georgia: Directorate of Pro
curement and Production, 1957° (Mimeographed)

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Asset Metadata

Creator Mann, Gerald Eugene (author)

Core Title Analysis of Air Force pricing in negotiated procurement

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,military studies,OAI-PMH Harvest,Political Science, public administration

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Phillips, E. Bryant (committee chair), Anderson, William H. (committee member), Garis, Roy L. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-447508

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Rights Mann, Gerald Eugene

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