Mr. AHART. That is correct.

Mr. CONSTANDY. We have seen that section 2 of that is not exactly so, and to the extent that it is not, his answer is not susceptible to logical reasoning; that is, not to me.

And discovering some of the unknowns that existed less than 2 months before the balance of your work suggests that there are in addition other unknowns which perhaps moved back the other way.

Mr. AHART. I think certain of the unknowns also which were cited in the brochure, as making it difficult to estimate the total program costs, certainly are not at this time being overcome, such as lack of experience in dealing with the Post Office.

We are still in the very early stages of this program, and I would doubt by the fifth of May, when this was written, that they had had enough experience in operating in this context to be able to overcome that particular uncertainty. And other aspects of it, such as inclement weather and construction periods and whatnot, I do not think you can overcome these even in a longer time frame.

Mr. CONSTANDY. Section 3 of that pertains to two basic assumptions, and is it not true that at least for fiscal 1971, neither one of them have been met; have they? Had the Post Office within fiscal 1971-by the time of the end of it-turned over $250 million worth of work actually?

Mr. AHART. Well, this is $250 million annually. Of course the agreement was entered into in March, and we are now in July, so I am not sure that you could annualize what has happened so far.

Mr. CONSTANDY. There is another point there that we do keep in mind, that this is a new program, and it is a big program, and it is not going to get off in the same way that it will be functioning after it has had some experience, so we had not mentioned that before, but I think it has been explicit in our look at the thing.

Subsection 3 refers to scheduling the projects at least 6 months in advance. That has not happened either from your testimony?

Mr. AHART. Well, it is my understanding that there has not been a first 6-month schedule. In other words, they have not gotten this off the ground as yet. The different offices within the corps, the district offices, have been advised as to what they might expect. As we mentioned this morning, in certain of the districts, two of the three that we went to, they have not received all of them that they expected to get and apparently were greaed up to handle.

Mr. CONSTANDY. Perhaps that will improve as their operations go further along.

Mr. AHART. I would suspect there would be some improvement in this.

Mr. CONSTANDY. Just for the record, as of the date of the March 11 agreement, the corps had been requested by the Post Office Department to perform services of a construction nature on six projects, and the earliest one, the first project turned over to the corps was on October 13, 1970, Kearney, N.J. Well, that is a peculiar rationale, to say the least, in my own opinion, of page 2 of the May 5 memo. If we could, Mr. Chairman, I would like to make that exhibit No. 22. Mr. WRIGHT. Without objection, this document will be included in the record as exhibit No. 22.

(Exhibit No. 22 was marked for identification, and follows:)

EXHIBIT 22

MAY 5, 1971. Subject: Corps of Engineer Support for the Postal Public Building Program 1. Purpose. The purpose of this paper is to provide background information to the writing of subject brochure so as to provide a better understanding of the contents considering the context of present and changed circumstances.

2. The brochure, dated 12 February 1971, was written at the request of the Post Office Department to answer the twq questions indicated in the preface, namely:

(a) To indicate the organizational arrangement by which the Corps of Engineers will accomplish the Postal Public Building Program, and

(b) To indicate the Corps of Engineers estimated in-house costs associated with the execution of this program.

3. There are two important points to be made in terms of placing one section of the brochure in proper perspective, and this is the section dealing with the second question indicated above.

(a) Target versus Ceiling Figures.-When the brochure was written, the discussions with the USPOD were in terms of a range of estimated Corps inhouse costs and a target figure. Subsequent to the writing of the brochure, the Postmaster General insisted upon a ceiling figure. The 5.5% ceiling was arrived at based upon :

(1) Historical cost data contained in the brochure,

(2) Considerations of the specific nature of the Postal Public Building Program to include the fact that these are large projects near District offices, the construction schedules are relatively short, etc., and

(3) The following assumptions contained in the 11 March 1971 Agreement signed by the Postmaster General and the Chief of Engineers:

(a) "a continuing program of not less than $250 million annually and" (b) "a schedule of projects at least six months in advance of dates on which services are required."

(b) The meaning of 5.5%.

(1) In the brochure, 5.5% is the ratio of the total Corps in-house costs to the total value of the construction contracts and the mechanization contracts; i.e.

5.5%=

Corps in-house costs

Construction contracts+mechanization contracts.

(2) However, in the Agreement of 11 March 1971, between the Postmaster General and the Chief of Engineers, the 5.5% has a different meaning which is the following:

5.5%=

Corps in-house costs

A-E contracts+construction contracts+mechanization contracts. (c) The difference is that architect-engineer (A-E) contract costs are included in subparagraph (2) above but not in subparagraph (1) above (if the Corps does the design in-house, rather than having the design done by A-E, these direct costs would be in the denominator). The net effect is that, if the same construction and mechanization costs and the same Corps in-house costs, which give a percentage of 5.5% in subparagraph (1) are applied to subparagraph (2), the percentage will be less than 5.5% because the denominator in subparagraph (2) is larger than the denominator in subparagraph (1) by the amount of the A-E contracts. The difference will depend upon the total value of the A-E contracts.

(d) This difference in meaning is touched-upon via the footnote on page 22. 4. With regard to paragraph 3c(1)(a), page 17, it was indicated that the Corps "may not provide a predetermined unadjustable rate or amount for performing Post Office work because, if such rate or amount should prove to be less than actual costs, the Corps has no appropriation or fund which could legally be charged with the deficit." And, in subparagraph (b) in the same page, reasons were indicated as to why it is difficult to determine a program cost. One might claim that the Corps has violated this position by accepting the 5.5% ceiling. Actually, there is no inconsistency. It is still true that the Corps has no other source of funds to cover actual costs, if these costs should exceed reimbursements. However, the Corps will have no difficulty in meeting the 5.5% limitation because of the three factors discussed in paragraph 3a

68-528 0-71-17

above plus the fact that many of the unknowns discussed in subparagraph (b) on page 17 of the brochure have, since the writing of the brochure, become susceptible to reasonable estimating.

GEORGE A. REBH,
Brigadier General, USA,

Assistant to the Chief of Engineers for Postal Construction Support.

Mr. CONSTANDY. There is reference to the effort that would be made to stay within the 5.5 percent. In that connection, this morning I read the pertinent portion of General Rebh's March 19 memorandum. We do not have to do that again. But there is the use of the term performance of work. I will read the paragraph:

Further, the district officials stated that as a means of controlling costs, they expected to place greater reliance on the performance of work clause in architect-engineering contracts for the design of postal facilities and provide less technical review of the design than furnished past projects in military construction.

What does that mean?

Mr. AHART. As I understand the term, it refers to a clause which was incorporated in all contracts subsequent to July 6, 1970. Basically, the intent of the clause included in the (A-E) contract is to requirewell it might be better just to read what the clause provides.

Mr. CONSTANDY. May I clarify something. You say from that date. That is not restricted to post office work?

Mr. AHART. No. This is Corps of Engineers. This document I am reading from is identified as ER 1180-1-1 change 2, dated July 6, 1970. And the basic part of it is as follows:

The following clause shall be included in all lump sum architect-engineer contracts: Where the services involved are primarily associated with the production of designs and specifications in the design of construction.

There is a heading, "Responsibility for Work," paragraph (a). Notwithstanding, any review, approval, acceptance, or payment by the Government, the architect-engineer shall be responsible for the professional and technical accuracy of all designs, drawings, specifications, and other work or materials furnished under this contract, and shall, without additional cost or fee, correct or revise any errors or deficiencies in his performance.

Paragraph (b)

Mr. CONSTANDY. Excuse me. Before you get paragraph (b), I want to ask this. Have they not always expected people to do that?

Mr. AHART. I might ask Mr. Zimmerman to comment more fully. It is my understanding that in some cases in the past, the corps has taken the product of architect-engineers in-house and revised it and corrected it and whatnot to some extent with their own personnel. Mr. CONSTANDY. They incur that cost.

Mr. AHART. That would be cost incurred by them.

Mr. ZIMMERMAN. This was the information presented to us in a discussion with the corps district offices, that in the past they have done a lot of corrective work to A-E designs, which they now propose not to do on postal work. They expect the A-E design work for the postal work to be completed to a better degree than what they had in the past achieved on the military construction work.

Mr. CONSTANDY. Did they tell you what they based that on?

Mr. ZIMMERMAN. They are going to invoke this clause, performance of work or responsibility of

Mr. CONSTANDY. If mistakes are made, the A-E firm has to, at their own expense, correct them. The second part of the sentence says: And provide less technical review of the design than furnished past of projects in military construction.

Who was going to discover it?

Mr. AHART. This might require some clarification on somebody's part because I am not sure I understand it. But it would seem if you were going to require the architect-engineer to correct a mistake, you first have to find the mistakes. This would require a pretty thorough review of the design documents themselves, unless you are going to wait until the mistake shows up during the course of construction and take care of it at that time.

Mr. ZIMMERMAN. We had a little difficulty with the rationale the same way you do. If you are going to require more of the A-E you have to make some determination that he is achieving this, and this is going to require more review on your part to see that he is doing his job. The rationale escapes me at the moment as to how this is going to be accomplished.

Mr. CONSTANDY. Have they suggested that they will increase the level of their technical review of the design when he finishes with it? Mr. ZIMMERMAN. This is something they expect to do. I might point out, since the program is new, they have not really had an opportunity to determine how well this approach is going to work. This is an idea they have in mind as a way of keeping their costs down.

Mr. CONSTANDY. It is a hope?

Mr. ZIMMERMAN. It is a hope.

Mr. CONSTANDY. It should not be such a hope that they are predicting its functioning to keep the 5.5 percent down then. If I read the sentence that you have on the top of page 35, they are going to rely more on his doing his work properly as they are paying him to do it, and incur the expenses involved when he makes a mistake, but at the same time, they are going to reduce the technical review of his work.

Mr. AHART. I am not sure just what they did mean by that, Mr. Constandy. It may be and I am speculating now-that in the past the work which they spent in correcting the mistake of the architectengineer would be charged as a supervision and review cost rather than in-house design cost, so it may be that by making a more thorough review of the plans and getting him to correct his mistakes himself, they could still achieve some savings. I just do not know.

Mr. WRIGHT. If they are charged as a supervision and review cost, who pays them? Who pays the cost?

Mr. AHART. This would be within the 5.5-percent cost reimbursement limitation from the Postal Service.

Mr. WRIGHT. It would have to be absorbed within the 5.5-percent

ceiling.

Mr. AHART. That is correct.

Mr. WRIGHT. Thank you.

Mr. CONSTANDY. Is this not actually simply transferring overhead costs to construction? If I am an A-E, and they tell me I am going to

work on this basis, I probably have to take that into account when in fact I negotiate with them for the price I am going to do the work

at.

Mr. AHART. You are correct. We would take it out of in-house cost and put it in the construction cost base.

Mr. CONSTANDY. Assuming the dollar amount is the same, all we have succeeded in doing is transferring some of the dollars from overhead which would not be operative against the 5.5 percent, moving them accross the line and charging them as direct costs on contract with the A-E.

Mr. AHART. That would be correct.

Mr. CONSTANDY. Mr. Zimmerman, do you have any knowledge as to whether the overhead cost elements as used by the Corps of Engineers have diminished as result of like transference of items which formerly had been in overhead items to construction. Maybe I can clarify that. As an example, it was my understanding that at sometime the overheads costs included the production of "as built plans" for the building and that would be included in the corps' overhead cost, and there was a subsequent change to the charge of the "as built plans" as a construction item, that would have the logical effect of making the overhead cost lower, as it would make the construction cost higher.

Mr. ZIMMERMAN. I believe in 1968 a decision was made in the Department of Defense that costs incurred during military construction work by the Corps of Engineers and the Naval Facilities Engineers Command, such as "as built plans," would be considered as construction costs rather than design costs.

Mr. CONSTANDY. This would account to some extent for the historical drop in the Corps of Engineers' overhead costs, would it not?

Mr. ZIMMERMAN. It would have an effect. In the past if they were considering those costs as design costs, and now they are being considered as construction costs, this would decrease the design cost.

Mr. CONSTANDY. Okay. We have only three other items, one of them on slippage, and I think you have some additional information on that. If you could give us the detail on the material that you had pertaining to the slippage. You have, I believe a May 28, 1971, Post Office Department summary report, do you not?

Mr. AHART. Mr. Zimmerman will respond.

Mr. ZIMMERMAN. We have a summary report, as you have just stated, and I would like to read the introduction to this report: The major facilities summary report provides current data on major milestone status and costs, status of the approved project schedules developed in accordance with headquarters circular 70-12, and status of the Corps of Engineers support activities with respect to the major postal facilities program. This report has a limited distribution. It directs itself to the needs of top management by analyzing major performance trends and highlighting current critical developments pertaining to the program.

This, of course, is a post office document.

On

page 8 there's a chart which is called fiscal year 1971 major postal facilities program, comparison of planned versus actual accomplishments as of May 28, 1971.