Mr. ANDREWS. We have some detail questions but at this time it will be in order for the other members to ask questions on the general

statement.

Mr. Casey.

AUDITS OF COMMERCIAL-TYPE ACTIVITIES IN CAPITOL BUILDING

Mr. CASEY. I notice in your annual report on some of the audits that you make on activities here in the Capitol you audit the House beauty shop, the Senate beauty shop, the Senate employees barbershop. Do they have a separate barbershop for the employees in the Senate from the Members?

Mr. SAMUELSON. Yes; this is a separate barbershop.

Mr. CASEY. Do you audit the House barbershop?

Mr. SAMUELSON. The House beauty shop, the Senate beauty shop, and the Senate employees barbershop are audited on the basis of requests. We have had no request for audit of this House barbershop. Mr. KELLER. I think we explained earlier under the provision of the Legislative Reorganization Act we may now have to audit the House barbershop also.

Mr. STAATS. It is right across the board, any commercial or business-type activities.

Mr. CASEY. Snack bars and what have you?

Mr. STAATS. Yes. News vendors.

Mr. CASEY. This will be a new operation and in your next report? Mr. STAATS. It will be in the next report; that is correct. We cannot at this time identify how much manpower is going to be required for this. It is relatively new. We will reflect that in the next annual report.

AUDIT OF DEFENSE CONTRACTS

Mr. CASEY. You have received a lot of publicity with reference to your report on the defense contracts.

Mr. STAATS. The defense profit study?

Mr. CASEY. Yes. And you received some criticism for what I understand was a revision of your report. The first report, was it a preliminary report?

Mr. STAATS. We were criticized on two counts. One was that two members of the press did not believe it was proper that we give the contractors a chance to comment on our draft report. This has been the practice and procedure we have followed for many, many years, actually going back to 1955 as a written policy, of allowing agencies and contractors or any outside organization, who is the subject of one of our audit reports, to have a chance to comment on the draft as a draft.

These are not final by any means when they go out as drafts. If they were, there wouldn't be much point in sending them out.

Mr. CASEY. The purpose is to see if they

Mr. STAATS. If they differ with our conclusions.

Mr. CASEY. If they have factual material.

Mr. STAATS. Factual material they say we haven't considered; that we should take into account.

In some cases we find as a result of questions raised we go back and get additional information. So we think that it is a necessary procedure

to protect the outside party as well as protect us and the Congress because if we came forward with a report which people say is factually incomplete or inaccurate, where we didn't take into account the views of the agency or the views of the outside party, I don't think it would be a too useful report. We in effect would be dumping a report on the Congress' lap where we hadn't done our homework.

The report we sent out in draft was made available by some party unknown to the columnists. They wrote it up. I won't say they misled anybody, but they certainly misinterpreted our report. And the misinterpretation came about in this way:

The report we were asked to prepare was to find out how much contractors were earning on their defense work and relate that to what they were earning on their commercial work.

The argument had been advanced that the defense contractors were making too much money. Others said they weren't making enough money to attract the contractors to compete for Government work. This argument had gone on for several years.

For the purpose of our study we took the period 1966 through 1969 and developed a questionnaire. This questionnaire went to contractors who covered 60 percent of all of the defense business in that 4-year period, 80 percent of all the work done for NASA, and virtually all of the work for AEC in support of the defense program, and the Coast Guard.

In other words, we covered in that questionnaire about $125 billion worth of defense work for that 4-year period.

In the same report, we were trying to develop data to show what the "going-in" profit objective was on individual contracts as against what was realized at the end of the work to see how much difference there was between the two.

We were interested in knowing how this related to the capital investment of the contractor because there has been an issue as to whether or not consideration should be given to capital investment requirements more than has been done in the past and as an incentive to the contractor to put in labor saving and other types of capital investment, that would improve his efficiency.

The Defense Department has been using primarily the cost of sales in setting their profit objectives, and to a very little degree the return on investment. Some contractors have been arguing there ought to be more emphasis on return on investment. Others stoutly maintain the present system is the right one.

In order to try to deal with this problem we took 146 contracts which involved 37 contractors and we asked our regional offices to go in and develop earned profit information on a few recently completed

contracts.

So the data that was developed for the 146 contracts was designed not to measure overall profits. That was the purpose of the questionnaire, but what we were trying to get at was the other issue.

At the time the first draft was prepared and sent out this material appeared as chapter 2 in the report, that is, material on the 146 contracts, because the questionnaire data wasn't all in yet. Our main interest in sending it out for comment was not to obtain comments on the data but rather to obtain comments on the question of return on investment. It so happened that the 146 contract analysis when averaged

showed a higher profit than the questionnaire data showed on 4-year analysis.

So in the revision of the draft in order to try to clarify this and in order to put the questionnaire data where we felt it belonged in the report, we made that chapter 2 and made the other chapter 5. This is essentially what it was all about. As a result of that rearrangement we were charged with softening the report, burying the information and so on which had really nothing to do with the issue involved.

Mr. CASEY. I would hope you wouldn't revise your procedures. In other words, I think before you hang somebody as the case might be or be harsh with them, you give them an opportunity to submit data and factual material that you didn't know about.

Mr. STAATS. That is correct.

Mr. CASEY. In other words, if you are going to have an objective report that will stand up you have to have that. Otherwise if you wrote a report without the information, say, from your questionnaires that you could verify by your staff people, you would have had distorted reports.

Mr. STAATS. I think so, too, Mr. Casey. I will be quite frank in saying that with respect to our conclusion on return on investment as being an important consideration, we didn't alter that. What we did was to make it clear that you cannot apply a return on investment criteria too rigidly on all types of contractual situations because they vary all over the landscape in terms of the amount of risk involved.

You have service type contracts, you have contractors who operate Government-owned, contractor-operated plants, but we still came out after considering their position with the conclusion that the Defense Department ought to pay more attention to the capital required for the work in setting a profit objective.

In that sense we didn't alter our conclusion, but we did alter our statement of conclusions to make it clear that, in our opinion, you should not apply return on investment as a single criterion across the board. This is one of the criticisms we got when we sent it out to the contractor associations, that you could not apply this as rigidly as our first draft seemed to imply.

We think the procedure of getting comments on our draft reports is an essential one. We are not always going to agree with the contractor. This isn't really the point. We think the point is that when we and the contractor or agency disagree, it is important for us to consider their position before we reach our conclusion, and we think it is important to Congress to know if they disagree with us when we make our recommendation to the Congress.

Mr. CASEY. I just think there has been a lot of publicity obtained on your report and the writings have been such that somebody who doesn't know your operation jumps to a wrong conclusion. I don't know how many times I have seen critical releases attributed to different members.

They all read like the same handout. I have confidence in your organization. I know what you do. I did want to bring out that this was a preliminary draft and didn't have all of the data in it yet, didn't have all of your investigations in. There should be two sides to this thing or it wouldn't be an objective report and a report anyone would have any confidence in if you didn't go into both sides.

Thank you, Mr. Chairman.

Mr. ANDREWS. Mr. Rhodes?

NEED FOR STANDARDIZED DATA PROCESSING INFORMATION SYSTEM

Mr. RHODES. Mr. Chairman and Mr. Staats, on page 5 of your statement you mentioned that section 201 of the Legislative Reorganization Act of 1970 requires you to cooperate with the Secretary of the Treasury and the Director of the Office of Management and Budget in developing, establishing, and maintaining a standardized information and data processing system for budgeting and financial data.

Personally I can't think of anything that needs to be done more urgently in this Federal Government. In the other subcommittees on which I serve, and the chairman of this committee serves with me on both of them, we are frequently met with a request or budget estimate to either buy a facility for automatic data processing which is now being leased or to acquire an automatic data processing system where none is now in use.

We are, of course, investing huge sums of public money in this. I don't suppose there is any doubt but what in the long run these systems, if properly used and properly programed, save money for the taxpayers. But you can't help but feel it is getting to be a status symbol to have an automatic data processing system. Quite often there are systems being requested where none is really needed and there is no significant savings to taxpayers. That is the first point.

Second, I also get the feeling that there must be automatic data processing systems in the Government which are not being used up to capacity, and that there might be means of pooling these resources so that we could actually have fewer of them across the Government than we have but get the same amount of work done.

Is it your thought and the thought of the other persons who are charged with this responsibility to try to address yourselves to these two problems?

Mr. STAATS. Yes, sir, we are concerned with both of them. I would like to recall we are doing a great deal of work in the Department of Defense for the House Appropriations Committee looking toward both of these objectives within the Department of Defense itself. We also have work going on in the civilian agencies as well.

STUDIES OF DATA PROCESSING SYSTEMS IN DEPARTMENT OF DEFENSE

Mr. Bailey might want to comment a little more on what we are doing in the Defense Department. We have a number of studies, some completed and some underway for the House Appropriations Committee.

Mr. RHODES. Before he does, I would like to say for the record that I think as a result of your work and the work of the Appropriations Defense Subcommittee, the procurement of further automatic data. processing systems has been put in the hands of the Assistant Secretary of Defense (Comptroller). And Mr. Bailey, would you address yourself also to how this system is working?

Mr. BAILEY. You are quite correct, Mr. Rhodes, it has been placed under the overall leadership of the Assistant Secretary of Defense

(Comptroller). We think this is a step in the right direction because it will tend to eliminate the various people going off in various directions, coming up with systems that may not be relatable to other systems in the Department of Defense.

The services are also beginning-in the Army particularly to put together some of their systems on a coordinated basis. For example, in the area of logistics where they formerly had independent efforts underway to develop systems such as the CS-3, COSMOS and various other logistical systems that were designed for a set purpose, they are now centrally controlling their development and testing to insure compatibility and interface.

I think the attention being given to this by the Appropriations Committee and their efforts in trying to slow down this headlong rush into data processing systems, has had a very salutary effect in the Department of Defense. I think cutting back on additional funds for new equipment in some areas has had a substantial and good effect.

The services are now looking a little more closely at their requirements and the job the system is intended to do before they go ahead with acquisition of equipment. I think all of these things are on the plus side. I think we still need to continue to look at these systems, and we are doing this on a continuing basis pursuant to Mr. Mahon's request.

We have at the present time a number of reviews underway in the area of not only tactical data systems, but logistical data systems and administrative data systems.

I think overall you do need long-term planning in determining what data system you need and whether you need any substantial revisions in the systems now in use.

Mr. RHODES. Mr. Bailey, are you satisfied that before recommending the purchase of new systems, the Assistant Secretary of Defense (Comptroller) is considering the availability of unused capacity in other systems which might be used?

Mr. BAILEY. I am not satisfied this is being done completely, Mr. Rhodes.

Mr. RHODES. I am not either. I hope you can continue to address yourselves to that problem.

Mr. BAILEY. We are trying to address ourselves to this problem. Mr. RHODES. It is relatively easy to justify the use of an ADP system in a given activity, but until you know whether or not there are other systems which could be used for that purpose you don't have the whole picture.

Mr. BAILEY. There are other questions related to this also, though, and that is the fact that maybe some of the material being turned out by the current system isn't too usable.

Mr. RHODES. That is right.

Mr. BAILEY. We hope to cover this problem in the course of our reviews.

Mr. STAATS. The Assistant Secretary of Defense (Comptroller) undertakes this new responsibility with the three services having already built up a lot of investment in this area. So it is going to take him some time to work this out.