UPPHOVIO FOR RtltflSt DAT! MAR IMl
56
FOR: Director of Central- Project AQUATONE
This memorandum is (or your information.
The first phase of our procurement activities under Project AQUATONE is in concrete form and all the contracts are sufficiently developed to allow an appraisal. It appears appropriate to review the situation at thia time when the Air Force plana an additionalphase of the equipment, particularly from our prime contractor, the Lockheed Aircraft Corporation. To this point the procurement has been Joint in nature. The CIA has signed the contracts and has provided the funds for the major procurement items; the Air Force is providing certain Government-furnished equipment and is procuring certain other items which it isetter position to develop and procure.
In considering thia joint procurement, it should be kept in mind that the CIA is authorized to exercise the authorities contained in the Armed Services Procurement Actncluding Sectionhereof. Sections specifically designed to facilitate procurement of supplies and equipment by one agency for another, and the joint procurement of supplies and services required by the agencies. It provides for such assignments and delegations of procurementwithin the Agency as may be deairable and thoand delegations of procurement responaibilitiea from one agency to another or the creation of joint or combined offices to exercise the procurement responsibilities. The procurement program for Project AQUATONE, therefore, is clearly within the contemplation of Sectionf the Armed Services Procurement Act
In general, the various contracts let under Project AQUATONE follow normal Government procurement atandards although they may differ as to type. In certain instances security or the urgency involved has required alteration of procedures or waivers of certain specific imitations. Insofar as the security precautions are concerned, we
IS1
T
a8 8
SECaftT
rely onb) of the CIA Act9 in order to have some of the contract* appear either Agency sterile or Government sterile and to issue paymentsecure manner. It is probable that the Air Force does not have the legal authority to achieve auch coverin precisely the same way, although commercial cover has been achieved by the Department of Defense through other devices. On tho waiver of limitations, however, we have had little occasion to issue any substantive waivers or exercise unusual authorities which were not available to the Air Force under its own authorities. Consequently, the procurement by the CLA has, to date, beenbasically.no different from that which could be accomplished by the Air Force. otential difference, however, arises from the fact that we can waive any and all limitations in the event Project security or other considerations requires us to do this, whereas the Air Force could be limited in what can be done In this regard.
Consideration was given to the Air Force undertaking thia procurement and the following facts wero ascertained.imilarfrom the corporation had previously been rejected by the Air Research and Development Command. The processing in the Air Force under the proposal known asad gone on for six to nine months before rejection. If tho present proposal in which the CIA had anwere to be sponsored by the Air Force, It would have to be referred back again to the ARDC for_fuil justification which would of necessity Include the CIA's interest. If approved by ARDC it would then have to go through the Air Materiel Command with full coordination under all the Air Force rules and procedures. Only after that could negotiations on the contract itself be instigated. No estimate of the time involved could be made, except that it wouldong drawn out procedure and that necessarily during thisonsiderable number of offices and individuals would get at least an Indication of the purposes for which the procurement was aimed. Withital factor aad absolute security indispensable, the Air Force channel of procurement wasimpossible.
In the opinion of the Air Force officers and officials concerned, there was no method by which the Air Force could short cut thiswithout raising as manyight be raised by going through the full coordination process. On the other hand, the CIA from the procurement standpoint alone could enter into the transaction almost
1 MIIMSYn IS)
O
instantly upon approval by the Director, and it would be neceaaary to informandful of people outside of those who would know the substantive nature of the Project in any case. Not only would there be far closer security, but also there would be much greaterwhich ia essential in view of the unknowns to be encountered and the extreme urgency in solving them. It waa unanimously agreed, therefore, that the CIA should handle the contracts and funds in an amount estimated to cover5 Fiscal Year needs were allocated. This was approved by the Bureau of the Budget.
7. From the outset it was apparent that if the CIA were tothe contract, it would have to be some formedecontract. Fixed-price contracts have the advantagesimpler administration, (ii) minimum of time-consumingless complex audit procedures, (iv) more responsibility onand (v) generally greater flexibility to cope withwhich this type of procurement would involve. likewise, are simplified. I, therefore, entered intowith Mr. Johnson, the Lockheed Project Engineer,ixed-price arrangement. He setroposal inprice was stated to At this time we had thefrom the Air Force that the similar proposal, previouslyby ARDC asad been estimated to
I stated that due to the uncertainty on costs we should..have some redetermination provision and asked Mr.an outside figure. He asserted that it was,
andetter contract which obligated the^ We then began negotiationefinitiveLockheed, and their Contracting Officer, Mr. Bias, told meMr. Johneon mentioned the figurethe Corpor-
ation Comptroller and that there wouldrice-redetermination ,the Comptroller had deemed it prudent to ask forprice redetermination upwardsstated that
the Agency did not have additional funds to obligate for this purposetime, but that if the need arose they could be made availablewould commit the Agency to an upward and downward pricewith the profit factor varying inversely with any increase inwas further discussed with Mr. Johnson,-who indicated that heconfidence in hie eetlmateouteide
figure, but that there were obviously some unpredictable items. ndertook to point out to Mr. Johnson the method by which we planned
IjUMIMIYk IS1
T
iYrJ IS!
to operate, including direct negotiation, elimination of detailedaudit procedures, and over-all simplification of contractall ofelt would allow Lockheed to make savingsavailable. Mr. Johnson agreed that this should notproduction but also should lead to savings on hishe was careful to point out that wage rates would beabove normal as they would be utilising the cream of thefor this Project. The definitive contract was,onwith negotiation upwards if cost
experience justified; unlimitod downwards. No price profit factoralthough wo indicated to Messrs. Bias and Johnson thatcould not go over the average profit factor oncontracta, which appeared to be in the neighborhood ofsubstantial savings through economy and efficiency werethat contrariwise, if the expenditures ran
would propose that the profit factor would be reduced.
8. It is important to keep in mind that in the prime contract as well as the others executed by this Agency for Project AQUATONE, the responsibility for performance was put on the Contractor. Byhere is meant more than the actual flight performance of the plane. It is the performance of the whole system with all itsparts, so that the responsibility was not onlyachine which flewertain heightertain distanceertain speed but also to assure that the flight performance was capable of sustaining the camera, communications, navigation, and other necessary equipment. In normal Air Force procurement, each part and all materiel must meet rigid Air Force specifications and inspection so tha: aa the product comes off the line its performance Is largely the result of the Air Force's supervision. Under our Contract No.he contractor was aware of the performance which was required and it Is his responsibility to produce this performance in such manner as he deems most effective and efficient. Lockheed, therofore, worked directly with Perkin-Elmer, Hycon, Ramo-Wooldridge, and tha restembeream toomplete and balanced system. In the event of disputes or the need for policy determinations, Lockheed could turn to one place to provide the answers instead of having each aspect staffed through separate staff components as in the Air Force. In certain instances modifications have been required for the Government's purposes over
and above the original specifications, which will add to costs otherwise contemplated, but these have been or will be reflected in change orders so that the basic concept ofs not affected.
considering the circumstances under whichasit appears that the definitive contract is advantageous bothContractor and to the Government. To the Contractor it gavepossible freedom from inspection and supervision whilo,throwing upon him responsibility for results. Since thewtth the CIA is small for this particular corporation, theto produce results which would then be attractive to tho Air Forceprocurement. Thisremium on efficiency and From the Government's viewpoint, the price redeterminationwith provision for upward redetermination tends tocontingencies which the corporation would put intoew production item. Furthermore, the profitandgo up as the Government's expenses arethe other hand the percentage will go down and perhaps thetoo if the cost to the Government goes up. As ofContractor is ahead of schedule and actual expenditures are some
under what it was anticipated expendituree would be aa of
thia date. However somework haa been added
since inception of the contract. This means that the original work, plus
that which has been added by change orders, will still be accomplished
under the original contract price, with some residue, provided that no
unusual costs are encountered during the next six or seven months.mrs
to the Contractor's long years of experience withcontracts, the negotiation on the price redetermination iadifficult since all cost factors are well established,items as overhead allocations. This Is bolstered by the factcontract provides for inspection and audit of the books and records
of the corporation at any time and arrangements are now being made to have the Air Force audit the contractecure basis and inwith procedures familiar to Lockheed and to the Air Force. the contract has the usual benefits and ease of administration and performanceixed-price contract with the further benefit to the Government of recovering any contract funds not,actually expended for the contract work, by virtue of the redetermination factor. This, of course, is feasible onlyompany haa had such an extensive course of dealinge with the Government that cost elements are well
settled'and both parties are thoroughly familiar with Governmentpractices. Negotiation of the final fee or profitercentage orump sum) is the only area in which difficulties may arise.
connection with procurement which the CIA isagent for the Air Force through Contractenerallypractices and procedures are being followed as applied tothe CIA is, however, the agent of the Airetailedoutlining this agency has been executed between the Agency andForce. In thia the Air Force clearly undertakes responsibilityand specifications and for inspection and acceptanceCentral Intelligence Agency performs the contractual functionsthe contract and any changes thereto, in accordancowritten request of the Air Force. Present known requirements
of the Air Force indicate that someoontracts on behalf of the Air Force will have to be processed by us under this arrangement.
the foregoing we have discussed in considerableboth because it is the major and basic contract and becausethe contracts it is tho only one in which thereepartureGovernment procurement practices as opposed toon that point, which involved the implied commitment ofover and above the immediate obligation of funds, the samecould be achieved by other devices available to armedagencies. Other contracts with Perkin-Elmer,Westinghouse,re all similar ton theutilised and, again, probably are all within the legalthe Air Force to procure in this manner. The contract withis in all substantive aspects the same as the Airstandardixed-fee contract. It iato note that in the so-called unusual type contracts written toPerkin-Elmer, Westinghouse,hich provide'forredetermination of price, no such request for additional fundsmade as yet, and will not, In all probability be made. CPFF standard contract has increased considerably in costoriginally budgeted. This indicates only that it is the nature ofthat determines the ultimate cost to the Government rathermethod of contracting. The administration of the contracts hasthe normal service practices, as for security reaaona it
rs (S)
JRE T
decided to limit the number of contract officers to the minimum, and the large staffs which normally review contracts in varying aspects were here reduced to one small staff. Within these limitations, however, the administration has been meticulous with particular attention to change orders. All contracts and all changes thereto have been reviewed by the General Counsel or his Deputy and specific approvals on policy or fiscal matters have been obtained from the appropriate approving officers in all cases. Again, granting that this system may work only when dealing with companies which arc themselves competent In the running of their business and are familiar with Government procurement, under the circumstances surrounding this Project, we believe the procurement
system involved adequately protected the Government, was effective in meeting procurement needs, and through its efficiency and simplicity was
economical for the Government.
(Signed) LAWRENCE R. HOUSTON General Counsel
Original document.
Comment about this article, ask questions, or add new information about this topic: