the Secretary of Defense that there is no prospect that the base will be on the list to be closed.

Mr. SHEPPARD. This question, insofar as that level of policy is concerned, should be handled by Secretary Morris because he is in a position of responsibility in regard to this question. He will be in at the close of our hearings.

Mr. JONAS. We have had experiences in the past, where considerable changes in thinking have occurred in the Pentagon, and we have built up installations one year to see them close the next year.

In the face of this drive that is on to eliminate unnecessary bases, I think the subcommittee would have to be given pretty strong assurances that these places where substantial construction projects are planned are not to be included.

Mr. SIKES. I certainly share the gentleman's feeling. I think we must be doubly careful. We have been made to look awkward previously by being asked to fund programs in one year and then seeing them closed the next. I do not want to go through that again.

Mr. SIKES. This committee has tried for years to have a firm program and to have assurances that existing facilities would be used where possible rather than to build new ones that would not in time be required, but I do not think we have made much progress.

CONTRACTS AWARDED ON NONADVERTISED BASIS

Mr. JONAS. I had another question to ask of Admiral Peltier. I notice in your statement, Admiral, that as of December 31 you had only 11 negotiated contracts. There is a list of those 11 at page 298 of this report, beginning there. I think that list probably ought to be in the record.

Mr. SHEPPARD. What does the list pertain to?

Mr. JONAS. It is a list of negotiated contracts.

I notice three of the items involve defaulted contracts. Are we having contractors other than Hal B. Hayes default?

Admiral PELTIER. Yes, we do, Mr. Jonas. Unfortunately, there are other contractors besides Hal B. Hayes that have not come up to their initial promises.

Mr. JONAS. Have we sustained any losses in these three contracts, the first two on page 298 and the last on page 299, which involve defaulted contracts?

Admiral PELTIER. Generally, the bonding company makes up the difference, if there is a difference. I would have to check this specifically, and I will for the record, if you desire.

(The following information was provided for the record :)

There have been no losses sustained as a result of contracts negotiated due to defaults on prior contracts. On defaulted contracts, the surety company furnishing the performance bond is responsible for the satisfactory completion of the work. Completion of a defaulted contract has been achieved by either a contractor of the surety's choice completing for the remaining unpaid contract moneys, or the Government completing by a new contract and billing the surety for the additional costs of completion. In each case of the latter category, the surety has paid promptly upon receipt of Government demand for payment.

Mr. JONAS. Are there any instances in which you do not require performance bonds? Admiral PELTIER. Not on the continental United States.

Mr. JONAS. Do you require sufficient bond to take case of any losses? Admiral PELTIER. Yes, sir.

Mr. SHEPPARD. May I interject a question at that point, with the gentleman's permission?

Mr. JONAS. Yes.

Mr. SHEPPARD. Does that also apply to the set-aside category? Admiral PELTIER. Yes, sir.

Mr. SHEPPARD. In other words, across the board you are utilizing the same bonding protectiveness?

Admiral PELTIER. No difference in that, Mr. Chairman.

Mr. SHEPPARD. Thank you.

Mr. JONAS. You say as of the present time you have no cost-plus

fixed-fee contracts outstanding?

Admiral PELTIER. That is right, Mr. Jonas.

Mr. JONAS. What about that Naval Academy job?
Admiral PELTIER. That is a negotiated lump-sum contract.
Mr. JONAS. That is not 1 of the 11. Is that in 1962?

Admiral PELTIER. This is as of December 31. We have not brought it up to date. We just finished negotiations last week.

Mr. JONAS. What were the circumstances under which you negotiated the last phase of the Bancroft Hall contract instead of advertising for bids.

Admiral PELTIER. Yes, the Naval Academy renovation, as you know, is a major project. The prime contractor we have on the site building wings 7 and 8 has done a real outstanding job. Our timetable for those two wings, the first increment, requires us to get in there very early after the close of this academic season and to complete certain portions of that before September 1962 in order to make spaces available to start the second increment of this renovation. It is a very tight schedule.

It is rather complicated from the standpoint of being a rehabilitation job. We have had very good experience with the present contractor. We have only had about $80,000 worth of change orders on a contract of around $11 million. He has been very cooperative. He knows what the situation is that he has entered into. He is acquainted with the people at the Academy. He has done an outstanding job. Mr. JONAS. That is the type of circumstance you would consider unusual, and you feel that it would be better to negotiate such a contract? Admiral PELTIER. Yes, sir.

Mr. SHEPPARD. May I interject a question at that point along this same line?

Mr. JONAS. Yes, sir.

(Discussion off the record.)

Admiral PELTIER. As I recall, Mr. Chairman, we have allowed him 3 percent profit and about 41/2 percent contingency, and in this contingency there is about 11/2 percent he claims social security tax and other taxes.

Normally in this type job your contingency would be much higher, probably 10 percent at least. We have been pretty rough on the negotiation, but I think we allowed him sufficient to do the job.

Mr. SHEPPARD. Under a normal competitive bid contract in a field of this kind of construction, how many change orders would you have anticipated?

Admiral PELTIER. You mean on the present wings 7 and 8, where we have had $80,000 of changes. I would say we would have probably expected somewhere around $400,000 at least. Of this $80,000, some of that was of our own doing, not really part of the uncommitted work.

Mr. JONAS. I would like to yield to the gentleman from Wisconsin. He has to leave. Then we will return to this.

Mr. SHEPPARD. I have completed my question. It is all right.

SET-ASIDE FOR SMALL BUSINESS

Mr. LAIRD. Mr. Chairman, I was interested in the questions which you asked regarding the small business set-aside. I was not familiar with the fact that the Navy was following a practice of the small business set-aside. As I review the record of last year and the year before, it seems to me that just the opposite testimony was given to this committee. I refer to page 11 of part 2 of our hearings in which Mr. Poole testified as follows:

From our discussion with both the Corps of Engineers and the Bureau of Yards and Docks, we find that their considered opinion and judgment is that if they had set-asides the way the Small Business Administration intended, it would have cost us more money. We might have had to split contracts to make them the right size, so to speak.

Admiral PELTIER. Did you say more money?
Mr. JONAS. More.

Mr. LAIRD. Just prior to the discussion, it was stated that the Bureau of Yards and Docks, insofar as total money value in the fiscal year 1959, 82.2 percent of their contracts had gone to small business, and as far as contract actions in the Navy 96.5 percent had gone to small business according to the record of last year's hearings.

We have had testimony here today that the Navy has gone along with a set-aside program and that it is costing them more. This is the first I knew that you were following this type policy. It would seem to me that the interests of the taxpayers are not being protected in this procedure and that it is unnecessary in view of the record we have had so far as small business is concerned.

Admiral PELTIER. Mr. Laird, it is not optional with us. We have to set aside. It is part of the DOD directive.

Mr. LAIRD. Well, this must be something that has just taken place in the last 6 or 7 months.

Admiral Peltier. It became effective October 1960.

Mr. LAIRD. The same people in the Department of Defense who testified here that this was not going to be done are the people who issued the directive?

Admiral PELTIER. Well, it was Mr. Maguire's office, Supply and Logistics; I think Mr. Poole is in the Comptroller's Office, Mr. Lincoln at that time.

Mr. SHEPPARD. That is correct.

Mr. LAIRD. I go back in the hearings of the year before last, and this whole matter was discussed. The record shows that the percentage going to small business is very high.

Admiral PELTIER. It always has been that way, Mr. Laird.

Mr. LAIRD. If you are disqualifying certain bidders on these jobs and in the few cases where you have been able to check out you find your cost from 10 to 15 percent higher?

Admiral PELTIER. That would not hold throughout, but on this particular one that I was referring to

Mr. LAIRD. You mean you have not been able to check them all, have you?

Admiral PELTIER. No.

Mr. LAIRD. On the ones you have been able to check, where you had a disqualified bidder, how much were the costs higher?

Admiral PELTIER. I am trying to recall from memory. The two I recall, one was a dredging job at Norfolk and the other was a job at Newport, and the Newport job was about 15 percent, the Norfolk job was more. Overall, I would say it would probably be less than 5 percent we are paying because these were unusual jobs in the type that probably small business should not be in. One was a dredging job and one was a heavy equipment paving job.

Mr. LAIRD. Your percentage in 1959 was 96.5 percent going to small

business without set-aside.

Admiral PELTIER. On actions.

Mr. LAIRD. Is this new set-aside provision going to raise that above 96.5?

Admiral PELTIER. I don't think so.

Mr. LAIRD. The only purpose this serves is to increase the cost to the taxpayer then, for this particular work; is that correct?

Admiral PELTIER. I am sure it is not set aside for that reason, Mr. Laird. It is to give more business to small business.

Mr. LAIRD. If it is not going to go up above the 96.5 the record states in 1959, what is the purpose?

Admiral PELTIER. When you get up above 95 percent, it is hard to get much more.

Mr. LAIRD. There must be some purpose for this. They must want to raise that percentage above 96.5.

Admiral PELTIER. It will probably be in the other percentage of dollar volume that will be increased more. These are actions.

Mr. LAIRD. In 1959 you had 82.2 percent in dollar value going to small business. What do you think that will be in fiscal 1962? Admiral PELTIER. The first 9 months was 78.4, as I recall. Mr. LAIRD. Then this set-aside has lowered the dollar value? Admiral PELTIER. Yes, but you really cannot blame it on the setaside. It happens to be the particular type project being dealt with. We have had several large projects moneywise not eligible for setasides in this first 9 months, it would lower the percentage. Our volume is rather small, and one or two projects can make a big difference.

Mr. LAIRD. I am trying to get clear in my own mind how this additional cost of at least 5 percent the taxpayer is being asked to pay is of any benefit to small business.

Admiral PELTIER. There are projects going to small business because of the set-asides that probably would not go to small business otherwise. We have had these four or five instances where we have had the low bid from large business that we had to throw out. This is more business going to small business contractors because of the set-aside.

Mr. LAIRD. I can see where in procurement or some other area this might serve a very useful purpose, but when you get up to the military construction and you have a record where over 95 percent of all contracts being let are going to small business, where you have dollar volume over 82 percent going to small business, I just cannot quite follow this directive.

Perhaps the Department of Defense did notify this committee, but I did not know anything about this until today. However, it would seem to me that this is a new procedure that you embarked upon and you should have at least made some presentation to the committee about it.

Admiral PELTIER. There was some effort made about a year ago, and we stalled it off because we felt we had a pretty good record in small business. It is costing us administratively a little more in addition to this. We have to have people in the field to watch out for this.

So it was delayed until October. In October they decided to go ahead with it. I am not sure the Department of Defense had an option on this. I think it might have been a directive from small busi

ness.

I I do not know the history of that.

Mr. SHEPPARD. Will the gentleman yield at that point?
Mr. LAIRD. I yield.

Mr. SHEPPARD. As far as I know there have been no committee hearings on this aspect of it or the end result that might emanate from it. It was a move made by DOD, and I presume persuaded by the Small Business Administration. At least, that is my information at the moment on it.

Mr. Reed. Secretary Connally has testified on this before the Defense Subcommittee. Would it be helpful to supply that information for your record here?

Mr. SHEPPARD. No, because we are going to make an absolute issue out of this when Secretary Morris appears before this committee. To use that testimony by remote control would not be satisfactory. It is not that your suggestion would not be helpful, but it is strictly a policy emanating from DOD, and as long as this committee is going to act on the dollar aspect in the construction field, it has the right to inspect and analyze and find out what it is all about.

Mr. LAIRD. This is the first I have heard of it. Mr. SHEPPARD. It is perfectly legitimate to inquire into it. Mr. LAIRD. We will follow through when Secretary Morris gets here.

NEGOTIATED CONTRACTS

Mr. JONAS. You said this list furnished as of December 31 is not current. You have had some contracts negotiated since. Do you mean that more than the 11 would be involved?

Admiral PELTIER. I have to check. The only one I remember right now is the Academy. This is a change order on an existing contract.