Mr. STULTS. It was roughly $40,000 less than centrally procured; is that right?

Captain HONSINGER. That is correct.

Mr. STULTS. Then you should have counted on them for $176,000? Admiral MANSEAU. We have to allow for errors both upward and downward. An estimate is only a guess.

Senator FERGUSON. These contractors were not guessing.

Admiral MANSEAU. No, sir, but that is not part of the contract. Captain HONSINGER. That is one way of figuring it, $102,000 plus $76,000. That is the basic price.

Senator FERGUSON. That is what you figured you could have built these ships?

Captain HONSINGER. We estimated $220,000.

Senator FERGUSON. But $178,000 was your actual contract price. Mr. FORSYTHE. Is that on the basis of 87?

Captain HONSINGER. It is on the basis of 87. It is on the basis per tug.

Mr. FORSYTHE. Is that not up to $260,000 if you are figuring it on 87 rather than 99?

Captain HONSINGER. The basis of $220,000 is 99, and $240,000 is the basis of 87.

Mr. WOODRUFF. You said $22 million?

Captain HONSINGER. $22.5 million.

Mr. WOODRUFF. If you divide that by 87, you get $260,000, minus a little.

Captain HONSINGER. Well, there is a credit in there for uncompleted tugs.

Mr. WOODRUFF. In the salvage of that material?

Captain HONSINGER. No, no, that is for the work that has not been done. The $22.5 million is on the basis of completing 99 tugs.

Admiral MANSEAU. Mr. Chairman, would you be agreeable to our recomputing this later and furnishing it for the record? We are tossing a lot of figures around, and I think we might be inclined to overlook some really important figures.

Senator FERGUSON. Very well.

(The figures referred to follow :)

Reference: (a) Senate Small Business Committee Report of Proceedings, Volume II of May 20, 1954

1. Pages 347 and 359 of reference (a) indicate certain cost estimates for construction of 65-foot harbor tugs as submitted by Bureau of Ships representatives during committee hearings held on May 20. This is submitted to correct and explain certain of the cost estimates included in reference (a).

2. The Bureau has been unable to determine the source of information available to the Senate in reference to sums indicated on pages 346 and 347 as to the total funds available for the 65-foot tug program. The total funds held by the Navy for the 99 vessels as of an amendment to the MIPR dated February 13, 1954, are $27,568,561.

3. The total estimate to complete the 99 vessels as of March 16 was $27,369,999 which included $430,000 for design and central procurement services. Later in March of 1954, it was determined that the original estimate for central procured material was $3,960,000 higher than actual cost. Therefore the cost of completing the 99 tugs was reestimated to be $27,359,999 less $3,960,000, or $24,409,999.

11 See letter of transmittal from Adm. B. E. Manseau, Bureau of Ships, appendix 15, enclosure 2, p. 261.

4. As of May 15 the cost was reevaluated in light of 87 vessels completing and a new total of $22,500,000 was set to complete 87 vessels and to absorb the accrued costs resulting from termination of the 12 vessels at Smith Basin and drydock. 5. Captain Honsinger's statement on page 359 should be corrected to reflect that the $22,500,000 is the Bureau's estimate to complete 87 vessels plus part of the 12 vessels terminated at Smith Basin.

6. Relative to the 12 vessels the costs expended on the 12 tugs are approximately $543,968 for construction and $888,000 for centrally procured machinery totaling approximately $1,323,000. Subtracting this sum from the total cost of $22,500,000 leaves a total of $21,178,000 to complete 87 vessels only. This averages $242,000 per vessel for the 87 completed.11a

7. A recapitulation of the early estimates as against present estimates is as follows:

Estimate as of February 27, 1951, for construction and July 1951, for centrally procured machinery/vessel

a $40,000 per vessel return has been realized due to better than anticipated procurement of machinery. An average increase of $59,000 per vessel is anticipated for the construction portion of the contracts as that required to cover change order requests, delay claims, terminations, and reawards.

Senator FERGUSON. Mr. Milliken, were you told this was an emergency contract and you had to get it filled at once?

Mr. MILLIKEN. Was I told it was an emergency contract?
Senator FERGUSON. Yes, and that you had to let it at once.

Mr. MILLIKEN. This contract involved funds which would expire on June 30, sir.

Senator FERGUSON. And that is why you were hurrying up in June, to get it let, and you let it by letters of intent, is that not true? Mr. MILLIKEN. I do not recall I believe that is correct, sir.

Senator FERGUSON. Is it not customary in your department to try to get these funds committed, and you get caught in May and June, and you have got to speed them up?

Admiral MANSEAU. That is right, sir. We operate on an annual basis and it takes us a long time to iron things out.

Senator FERGUSON. Speed them up in June and we pay for them next October.

Captain VANGELI. Mr. Chairman, that depends on circumstances and the times. At this particular time that we are talking about, the amount of money to be spent by the Bureau had been multiplied many times the increase in personnel to handle these things had not taken place quite as rapidly. If you are talking about what is our practice today

Senator FERGUSON. Where were you in June 1951?

Captain VANGELI. June 1951 I was in San Francisco.
Senator FERGUSON. You were not in this department?

11a The $888,000 figure for centrally procured machinery is salvageable at full value since the 12 ship sets of machinery are intended for backup maintenance purposes.

Captain VANGELI. But I have been

Senator FERGUSON. Wait a minute. You were not in this department?

Captain VANGELI. I was doing some contracting at the time. I know what conditions were at the time.

Senator FERGUSON. Now do you want to dispute Mr. Milliken? Captain VANGELI. I was just saying that when you say it is our practice to

Senator FERGUSON. Well, the admiral said it was.

Captain VANGELI. Well, I want to get in my 2 cents' worth, that it all depends on the time. Right as of today, where we can look ahead to some extent, and we have more adequate personnel to do the work, we do not issue letters of intent at the last minute. During this entire year, for example, we have issued only 11 letters of intent and most of them have been converted into definitive contracts and that was done early in the year and not late in the year.

Senator FERGUSON. Has there been any change on this idea that in June you have to hurry up and get your money committed?

Admiral MANSEAU. Yes, sir. There have been a lot of changes on that. We have a requirement of law now that says that our obligations during May and June cannot exceed a certain percentage of what we do monthly.

Last year was a good example and the year before last was better yet. We have numerous cases where the appropriations act does not get passed until 1 or 2 months after the end of the fiscal year. It is annual funds, and

Senator FERGUSON. Did we not pass a resolution telling you that you have at least the amount of money that is in the House billdon't we pass that kind of resolution before the end of the fiscal year, so that you know how much money you are going to have?

Admiral MANSEAU. Well, we don't know until the act is finally passed. We do have the continuing authority to conduct our business in a normal manner.

Senator FERGUSON. What appropriation is in this?

Admiral MANSEAU. Which one?

Senator FERGUSON. The appropriation that this money came out of. Admiral MANSEAU. That was fiscal 1951, I believe.

Senator FERGUSON. Yes, but what particular appropriation? Admiral MANSEAU. It was Army funds. It was in the military program.

Captain VANGELI. We have it right here.

Senator FERGUSON. Do you have any further questions?

Mr. FORSYTHE. I have one more question for Mr. Milliken.

I am going back to something we took up about 15 minutes ago, Mr. Milliken.

Following through on your activities as a negotiator on these contracts, Armed Service Procurement Regulation 3-406.1 specifically limits the use of cost-plus-fixed-fee contracts to those instances where a determination has been made that this method of contracting is likely to be less costly than other methods or where it is impractical to secure supplies or services of the kind of quality required without its use.

Now, before I ask the question, I just want to bring up one thing here: Mr. Rosenblatt in his statement said:

In the middle of May 1951 Capt. J. B. Smythe, senior assistant supervisor of shipbuilding, United States Navy, New York, inquired by telephone whether this company would be able and willing to undertake work on a 65-foot tug similar to that just assigned on the 100-foot tug. An affirmative answer was given and within a short time we were advised to proceed, under contracts 5526 and 5527, with designing procurment services for 65-foot harbor tugs.

The question is this: Under the armed services procurement regulations who has to make this so-called determination to use a cost-plusfixed-fee contract?

Mr. MILLIKEN. There are people within the contract division. The name of the person right now I cannot recall

Mr. FORSYTHE. You do not make that determination?

Mr. MILLIKEN. No, sir, but there was a determination and finding furnished to the negotiators, sir.

Mr. STEIN. I think I can answer that question. The determination and finding that a cost-plus-fixed-fee contract is required because no other form will be practicable or because it is more costly to use another form, is made by a contracting officer.

Mr. FORSYTHE. In this case Mr. Rosenblatt received a phone call. What negotiation went on, on this type of contract with the design agent? We have already heard what went on with the shipbuilders. The implication here is that he received one phone call and shortly thereafter he was advised to go to work on two contracts. Did anybody negotiate with him and, if so, what was the type of negotiation carried on?

Mr. MILLIKEN. The same type of negotiations were conducted for the 100-foot tugs as for the 65-foot tugs, with Mr. Rosenblatt. Mr. Rosenblatt was given an award which specified the date he could pick up and start working on this job.

Mr. FORSYTHE. Was it determined he was going to be the contractor on the basis of the phone call that was made or was something more done?

Mr. MILLIKEN. I have no knowledge of that phone call, sir. I do not. However, I can assume that when that phone call was made it was made to see if Mr. Rosenblatt had the facilities and personnel available to handle two jobs at the same time. I was furnished with a copy of a letter, or a memorandum, which told me that Rosenblatt was qualified and had the personnel by which he could perform this job.

Mr. FORSYTHE. Then he said that one of the things that delayed him and caused him difficulty was the fact that he could not find all of the personnel, engineeringwise and marinewise, that he would want in this particular setup.

Does that jibe with what was told to you or what your impression was of that firm when you let this contract?

Mr. MILLIKEN. No, sir, that does not jibe with what I was told when I let the contract.

Senator SMATHERS. Mr. Forsythe, let me interrupt here and ask a broad, general question, and get a statement from the admiral, so I can go vote:

Admiral, you did not get to finish your statement. I have been looking at it here and I frankly say that I think it is a very fine statement.

I want to read two paragraphs from it and then ask for your comment about it.

On page 1 you say:

It is not my intention to minimize this situation. Nor do I wish to deny any responsibility for it. I frankly acknowledge that the Bureau of Ships has been a party to some of the delays and additional costs incurred in building these tugs. In the light of subsequent events, it is apparent that the Bureau had made some substantial-although honest-mistakes of judgment.

Then we skip over here to page 6, starting with this paragraph: Other savings in centrally procured items reduced the estimated amount in each contract by about $40,000 per vessel. However, there were other plan changes which also proved to be costly in time and money. It is probable that they handicapped some of the builders in their efforts to complete the tugs on schedule.

There was a delay of several months in transmitting the working plans to the builders. Certain errors and omissions were discovered later in the plans. Other changes were caused by necessity for United States Coast Guard and American Bureau of Shipping certificates. These certificates were essential because the tugs were to be operated by civilian crews. While there was little overlapping of inspections by these authorities, minor conflicts and delays arose from time to time with regard to requirements imposed by these agencies as well as the Army, Navy, Air Force, and Public Health Service.

On page 7 you say:

Some of these plan changes were mandatory, others were merely termed desirable and could be adopted at the builder's option. Some of the changes resulted in increased cost to the builders. The Bureau has exerted every effort to effect mutually satisfactory contract adjustments for all such changes. We come over then to page 9, which you have thus far not had an opportunity to read, and I will read from it:

The Bureau has learned a great deal from the 65-foot tug program, and I believe that we will not make the same errors in the future.

I skip down.

In closing, I wish to pay a tribute to the many small shipyards throughout the country which are today performing excellent work for the Navy, and are thus making a valuable contribution to our country's defense. These small yards are building minesweepers, landing craft, barges, and boats and craft of almost every description. They constitute a mobilization asset which we would like to see preserved. I assure you that the Bureau of Ships will continue to afford these small firms every opportunity to obtain work for which they are qualified.

I sincerely hope and believe that the lessons we have learned from the 65foot tug program will help us to keep them, and the Bureau, out of trouble. I wish to commend you on that statement, the last two pages of which I think is a very fair statement and, may I say inasmuch as this is the Small Business Committee, and our primary function is to try to protect small shipyards and small business everywhere, in every way that we can, I trust that this experience which you people have had with that contract, will not affect any award of contracts to small shipyards in the future.

Admiral MANSEAU. No, sir; I would say not. I would think that by our new procedure we will be much more careful in evaluating the ability of the people whom we give the contracts to. I think that we will take actions that will enable them to do the work more expeditiously. It will provide maybe a later starting date with respect to plans than they have had in the past. I think that the sum total is that there might be some few people who under similar circumstances had awards in this program under this new scheme who might not get them for