be absorbed within not more than 52 percent overage above the actual cost of constructing the building, is that correct?

Mr. STAATS. Yes. The 52 percent is a percentage factor against the total cost of design and construction of these facilities.

Mr. WRIGHT. Under this new agreement, the Postal Corporation agrees to pay up to 52 percent for this overhead management and the related services, is that correct?

Mr. STAATS. That is correct. If I may, we develop this point later on in our statement.

Mr. WRIGHT. All right. But at this point let me simply adduce, if I may, a general conclusion from you.

Has the history of the Corps of Army Engineers indicated that by the accounting procedures that would be employed under the new agreement it has, in fact, been able to construct facilities of this character within a 512-percent overhead?

Mr. STAATS. We don't have detailed information on this point, but the 52-percent figure was arrived at, as I understand it, generally in line with what the corps submitted their costs had been for the NASA construction work.

Do you want to add to that?

Mr. AHART. I think it is a little bit difficult to answer you very specifically, Mr. Chairman. As I understand it, the experience which the corps had on the military construction program, which would include the work for NASA and the other agencies, was about 8 percent. That was historically, if you calculated it on the same basis as the 5.5 percent which is incorporated in the agreement.

Now, the corps, in agreeing to the 5.5 percent, as I understand it, tried to visualize what differences there would be between the work they were doing in the past on their other programs and the work which they would be doing for the Postal Service. Apparently they reached a conclusion they could get by for quite a bit less. At the same time, I think they recognized it was going to be a cost control problem to stay within that, particularly since the limitation is on a total program basis, and of course they incur their costs on an individual project basis.

Presumably, they will try to do on each one of these projects what is necessary to protect the interests of the Government to make sure the design is right and the construction is performed properly and

so on.

Mr. WRIGHT. Yes, we would assume that. But you declare in the past, to the best of your ability to gage it, the overhead when measured by the accounting standards that will be required under the new arrangement for corps projects, has been closer to 8 percent than to 512 percent?

Mr. AHART. It would be about 8 percent, yes, sir.

Mr. WRIGHT. Now, if the corps should be unable to manage this project within a substantially lesser amount such as 52 percent, and if indeed the overage should run to approximately 8 percent, who pays for the difference? Is it the Postal Corporation or is it the corps out of appropriated funds?

Mr. SOCOLAR. I think the problem you suggest in your question has a different answer, depending on whether you are looking at the situation before July 1 when the Post Service began functioning or after.

68-528 0-71- -9

I think under the situation before July 1, if the corps weren't able to stay substantially within the 52 percent, I think that they would run afoul of the prohibitions against using their appropriations for a purpose other than that for which they were provided.

After July 1, however, I think that the authority in section 411 of the Postal Reorganization Act is so broad that I would find it difficult to conclude that there would be any illegality.

Mr. WRIGHT. I wasn't asking a question of legality.

Mr. SOCOLAR. I think it would be the corps that would pay under the terms of the agreement.

Mr. WRIGHT. It would pay out of appropriated funds and the taxpayers ultimately would pay; is that correct?

Mr. SOCOLAR. That would be my interpretation; yes.

Mr. WRIGHT. Thank you.

Mr. STAATS. I think it should be emphasized with respect to the situation on any construction initiated under the Postal Reorganization Act, that it would be possible for the Postal Service to make a further adjustment in the 512 percent.

Mr. WRIGHT. If they desired to do so?

Mr. STAATS. Right.

Mr. WRIGHT. But they are under no obligation to do so, are they? Mr. SOCOLAR. On that point, I think the agreement itself is perhaps subject to varying interpretations. From the background of the agreement, as I construe the intention of the parties to the agreement, it was intended as a 512 percent ceiling. However, from the wording of the agreement itself, there is another reasonable interpretation that could be given—that the Postal Service was to pay costs with the corps making its best effort to keep those costs below 512 percent.

Mr. WRIGHT. Well now, we are talking about two different things, aren't we? If I contract with John Constandy to build a house for me, and the contract says he will build it within 52-percent overhead above the actual cost of construction, I think I would want to understand and I think he would want to understand-before we entered into the agreement what it meant. I don't think it would be an acceptable agreement if I were under the impression that he had promised to build it within 52-percent overhead cost and that that was all I was obligated to pay him, and if he were under the impression that it just meant he would try to build it within 5/2-percent cost, but I was obligated to pay whatever it did cost. That latter is not really a contract, is it?

Mr. SOCOLAR. What I am saying is, without the background of the intention of the parties as to this 512 percent being a ceiling, as I look at the agreement itself, it is susceptible of an interpretation that the Post Office Department would pay.

Mr. CONSTANDY. May I interject? There will be additional testimony from the documents which fairly clearly sets out the intentions. As we reviewed this, the original objective of the corps is that they would have a target of 5.5 percent. In the rationale of the brochure of February 12, they stress the fact that it would be illegal for them to charge 5.5 percent. They develop how they arrived at the spread they would be shooting for, which at that time was 5.5 to 6.98 percent, and they came to the conclusion as a result of that brochure, which you have to

presume is their best thinking at the time, that they would hope to have it fall someplace between 5.5 and 6.98, even though their experience in past work was in excess of 6.98.

Now, when they signed the agreement, it is subject to two interpretations. I think it is clarified as you review the documents from the corps after the signing of it, where the general in charge of the program makes it clear to his people in the field that they will not get more than 5.5 percent, followed by a two-page document where he tried to rationalize what he had committed himself to in the February 12 agreement to try and overcome what was an obvious discrepancy between their reasoning in the February 12 document and their act on March 11.

Subsequent to that, I think there is other information from the Comptroller of the Corps of Engineers which goes yet the other way. Whatever it is they agreed to before, he is of the opinion they will charge the Post Office whatever the bills are.

This is a sticky affair, no question. I don't know if anybody can come to any fixed conclusion with it. We will have additional testimony. Mr. SOCOLAR. All I was meaning to suggest was that before July 1, particularly in light of the question that the chairman asked before, is that I think the better interpretation of that agreement to avoid the kinds of legal problems that would exist if the corps, in fact, went over, would be to construe that agreement as requiring the Postal Service to pay more than the 52 percent.

Mr. CONSTANDY. May I just say two things in regard to that?

If they overrun, from where do they get the money? What pot does the corps dip into to make up the money that isn't in the pot that pertains to the Postal Service?

Mr. SOCOLAR. After July 1, Mr. Constandy, they get it from their appropriations.

Mr. CONSTANDY. It would be like my excess with Mr. Wright's house. It will be in there, but good luck to him in finding it.

Mr. SOCOLAR. Before July 1, if the substantial excess over 512 percent weren't paid by the Postal Service, the Corps of Engineers would have been in violation of law.

Mr. WRIGHT. We are talking now about the present, Mr. Socolar. Mr. SOCOLAR. At the present, I don't think there would be any violation.

Mr. WRIGHT. I don't think we are talking about a violation of law. I think we are talking about who pays.

Mr. SOCOLAR. It would be the Corps of Engineers.

Mr. WRIGHT. Thank you.

Why don't you proceed? I see that further in your text you do answer some of these questions.

Mr. STAATS. The Postmaster General decided to defer entering into a formal agreement with the corps until after passage of the Postal Reorganization Act.

On September 26, 1970, after passage of the Postal Reorganization Act, the Postmaster General formally requested the Secretary to authorize the corps to provide support in connection with an accelerated postal building program. At that time, he anticipated utilizing the corps for a $750 million program over a 22- to 3-year period. On

October 8, 1970, the Secretary of Defense informed the Postmaster General that he was authorizing the Secretary of the Army to proceed with the negotiation of a definite agreement covering the services which the Department desired.

On March 11, 1971, the Department executed two agreements with the Department of the Army to continue in effect for a 3-year period. One agreement was a "broad umbrella type" between the Postmaster General and the Secretary of the Army covering basic principles and policies. The other agreement, signed by the Postmaster General and the Chief of Engineers, was more specific and established the responsibilities, terms, and conditions under which the corps would furnish the services required.

The latter agreement also provided that the corps would establish controls over its operations to insure that its costs would not exceed 5.5 percent of the total design, construction and mechanization costs. This rate was based on the assumption of a continuing program of not less than $250 million annually and the scheduling of postal projects at least 6 months in advance of dates on which services are required.

Mr. WRIGHT. You have spoken of two agreements which the Department of Army signed with the Postal Service. Both of these agreements were signed on March 11, 1971. That is correct, is it not? Mr. STAATS. That is correct.

Mr. WRIGHT. One was sort of a short summary agreement. Another was a considerably more detailed agreement, is that correct. Mr. STAATS. That is correct.

Mr. WRIGHT. The short summary agreement was made public at that time to the Post Office and Civil Service Committee of the House of Representatives. To the best of my knowledge, and I think I am correct, the more detailed agreement was not made public at that time to that committee. Do you know of any reason why this was not done? Mr. STAATS. We are not aware of what the reasoning might have been.

Mr. WRIGHT. Thank you very much.

Mr. STAATS. On March 19, 1971, the Corps advised its field offices of the new mission to provide support to the Department and pointed out that they would be assigned those major postal projects over $2 million or 50,000 square feet and that projects falling below this criteria would generally be managed by the Department's regional

offices.

On March 11, 1971, the Postmaster General briefed the House Post Office and Civil Service Committee on his facility construction plans. In presenting his rationale for using the Corps, the Postmaster General stated that he anticipated a construction program of two to three times that previously experienced and that this level of effort would last for only a few years. It was estimated that an approximately 100 percent temporary staff expansion would be required for the Department if the needed facilities were to be placed in operation within any reasonable period of time. Rather than undertaking this temporary staff build-up within the Department he decided to use the services of the Corps. The Postmaster General further informed the committee that the agreement would necessitate transfer of personnel from the Department to the Corps, but the details had yet to be worked out.

On March 27, 1971, the Director, Office of Management and Budget wrote to the Secretary of Defense and the Postmaster General requesting that they suspend all activities pursuant to the agreement until his office completed a review of the desirability of using the corps for this purpose. The Director stated that in view of the size and nature of the Department's construction program, the agreement would result in a major change in the role and mission of the corps; and that it had implications affecting the role of GSA as the primary agent for the construction of buildings to house the civilian agencies of the Federal Government. To facilitate his review, the Director requested the three agencies to comment on the agreement.

In response to the Director's request, the Postmaster General by letter dated April 2, 1971, outlined the options that were available to him at the time he signed the agreement. He stated that it would be wasteful, inefficient, and time consuming to try to develop the necessary construction capability in-house and that basically, the corps already had precisely the kind of work force needed.

On April 12, 1971, the Secretary of Defense responded to the Director's request, describing the several benefits from a national security standpoint to be derived from this course of action. For example, he pointed out that the Department is devoting considerable effort toward advancing the state of the art in automated and computerized materials-handling equipment. The corps' participation in this program will equip it to take advantage of these advances in modernizing existing plants and arsenals.

On April 15, 1971, the Acting Administrator of GSA commented on the agreement and stated that: "We strongly feel that the role of the General Services Administration in the construction of buildings to house civilian agencies of the Federal Government would be seriously weakened if this agreement is implemented." Some of the reasons he gave were:

One, implementation of the agreement would further proliferate authority to construct public buildings within the executive branch, contrary to the intent and purpose of the Public Buildings Act of 1959.

Two, involvement by the corps would contribute to further confusion on GSA's role in planning, building, and managing public buildings, including the acquisition and management of leased space.

Three, GSA's work force would have to be curtailed substantially if the corps undertook construction activities which GSA heretofore performed.

On May 4, 1971, the Postmaster General and the Deputy Secretary of Defense sent a joint letter to the Director, Office of Management and Budget, stating that:

Since we have received no further questions from you concerning our replies to your letter of March 27, we assume that you have no problem with our proceeding to implement the March 11 agreement whereunder the Corps of Engineers will serve as a construction agency for the Post Office Department. Accordingly, we are moving forward under that agreement.

Mr. WRIGHT. At that point, we have here two agencies of the Government, one a semiautonomous, quasi-public, quasi-private agency, each making representations to the Office of Management and Budget. The Office of Management and Budget had theretofore declared that further proceeding under this agreement should be suspended until they had completed a review.