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MISCELLANEOUS BILLS

THURSDAY, SEPTEMBER 29, 1966

U.S. SENATE,
COMMITTEE ON ARMED SERVICES,

Washington, D.C. The committee met, pursuant to call, at 10:30 a.m., room 212, Old Senate Office Building, Senator Richard B. Russell (chairman) presiding.

Present: Senators Russell of Georgia, Symington, Cannon, Young of Ohio, Inouye, Byrd of Virginia, Saltonstall, and Smith.

Also present: William H. Darden, chief of staff; T. Edward Braswell and Gordon A. Nease, professional staff members; Charles B. Kirbow, chief clerk; and Herbert S. Atkinson, assistant chief clerk.

Chairman RUSSELL. The first bill on the committee agenda this morning is S. 3834, which was introduced by Senators Allott and Dominick, to authorize price adjustments on certain Defense milk contracts.

(The bill referred to follows:)

S. 3834

[S. 3834, 89th Cong., 2d sess.) A BILL To amend chapter 141 of title 10, United States Code, to provide for price adjustments in contracts

for the procurement of milk by the Department of Defense Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That chapter 141 of title 10, United States Code, is amended

(1) by inserting at the end thereof the following new section: "§ 2390. Contracts for the procurement of milk; price adjustment

"(a) Under regulations prescribed by the Secretary of Defense a contract of the Department of Defense for the procurment of milk where the period of performance exceeds ninety days shall include a provision for an equitable price adjustment for increased or decreased prices paid by a contractor for such milk as a result of increases or decreases in the producer price of fluid milk for beverage purposes ordered by the Secretary of Agriculture after the date of bid opening in a formally advertised procurment or the date of the contract in a negotiated procurement.

“(h) Under regulations prescribed by the Secretary of Defense, any contract for the procurement of milk which was being performed on or after March 1, 1966, may be amended to provide an equitable price adjustment for increased prices paid by a contractor for uch milk as a result of increases in the producer prices of fluid milk for beverage purposes ordered by the Secretary of Agriculture on or after March 1, 1966. A price adjustment shall not be made unless it has been determined by the Department that,

“(1) such amount was not included in the contract price;

“(2) the contract does not otherwise contain a provision providing for an adjustment in price; and

"(3) the contractor will suffer a loss under the contract because of such increases in producer prices.”.

(2) by inserting the following new item in the analysis thereof: “2390. Contracts for the procurement of milk; price adjustment."

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Chairman RUSSELL. Members of the committee will probably recall that the Defense appropriations bill this year contained a Senate amendment that was intended to provide this relief.

However, certain milk marketing orders of the Secretary of Agriculture have required milk suppliers to the Department of Defense to pay higher prices than those in effect at the time the contracts were entered into. Without express legislative authority, the Department of Defense cannot afford any relief to these contractors.

The witness on the bill is Mr. Dale R. Babione, Deputy Executive Director for Procurement and Production, Defense Supply Agency.

Will you please have a seat at the table, Mr. Babione.

STATEMENT OF DALE R. BABIONE, DEPUTY EXECUTIVE DIREC

TOR FOR PROCUREMENT AND PRODUCTION, DEFENSE SUPPLY AGENCY; ACCOMPANIED BY JULIAN F. ROSS, SMALL BUSINESS ADVISER AND ALBERT RABY, JR., ASSISTANT COUNSEL, DEFENSE SUPPLY AGENCY

on my left.

Mr. BABIONE. Mr. Chairman and members of the committee, I am Dale R. Babione, Deputy Executive Director, Procurement and Production, Defense Supply Agency. I am accompanied by Mr. Julian F. Ross, on my right, Defense Supply Agency small business adviser and Mr. Albert Raby, Jr., assistant counsel, Defense Supply Agency,

We are pleased to have the opportunity to present to you the Department of Defense views on S. 3834, 89th Congress, å bill to amend chapter 141 of title 10, United States Code, to provide for price adjustments in contracts for the procurement of milk by the Department of Defense.

The purpose of the bill is to require the inclusion in future Department of Defense contracts for the procurement of milk of a provision for equitable price adjustments for increased or decreased prices paid by a contractor for such milk as a result of increases or decreases ordered by the Secretary of Agriculture in the producer prices of fluid milk for beverage purposes.

The bill would also provide relief for contractors, performing contracts for milk on or after March 1, 1966, who have suffered losses because of increases in producer prices for fluid milk for beverage purposes ordered by the Secretary of Agriculture on or after March 1, 1966, where the contracts contain no provision for such price adjustment.

The Department of Defense agrees with the objectives of the proposed legislation. Under Federal milk marketing orders in effect in parts of 35 States and the District of Columbia the minimum price which the handler (the dairy) is required to pay the producer (the farmer) for fluid milk for beverage purposes is regulated by the Secretary of Agriculture. In March 1966, and again in June 1966, the Secretary of Agriculture increased these minimum prices. Handlers subject to the orders, the holding long-term contracts with the Department of Defense on the effective date of the orders, were required to pay these increased prices to producers but could not obtain a corresponding increase in their fixed price Defense contracts. In the absence of legislation the Department of Defense is unable to afford these contractors any relief.

Milk prices have been rising this past year even in those market areas which are not regulated by Federal milk marketing orders. Under subsection (a) of the proposed section, however, only dairies regulated by Federal milk marketing orders would be covered. Other dairies could also suffer losses just as severe because of actions of the Secretary of Agriculture, such as an increase in the support price for manufacturing milk or because of the impact on the market price for milk of amendments or suspensions of Federal milk marketing orders

The Department of Defense was, prior to the introduction of S. 3834 already in the process of exploring several methods for achieving the objectives of the legislation. Among the methods being considered are use of an escalation provision, shorter term contracts, and provisions for adjustment prices on contract extensions.

It might appear that escalation is an obvious method for accomplishing the objective. However, it is not only cumbersome to administer, but difficult to apply equitably to all contractors. Procurement of milk is made by formal advertising with award made to the low competitive bidder. Hence, an escalation clause would pose problems to which we do not at this point have ready answers. For example, there would be problems in evaluating bids between handlers in regulated areas and handlers in nonregulated areas and in assessing the impact of the marketing order on a particular contract without knowledge of the cost basis for the handler's bid.

These problems are compounded by the fact that the price of fluid milk is regulated by over 70 different Federal milk marketing orders and numerous State and local controls. Furthermore, enactment of provisions requiring the inclusion of escalation clauses in milk contracts would establish an undesirable precedent which would tend to undermine the benefits of competitive fixed price contracting. Producers and suppliers of many other commodities susceptible to cost change could be expected to seek similar legislation.

Accordingly, it is recommended that subsection (a) of the proposed section be deleted with the understanding that the Department of Defense will develop procedures in connection with the procurement of milk within existing administrative authority to avoid situations comparable to that which occurred as a consequence of the recent actions by the Department of Agriculture.

Subsection (b) of the proposed new section would provide relief for those Defense contractors required to pay higher prices to milk producers because of increases in producer prices of fuid milk for beverage purposes ordered by the Secretary of Agriculture. In areas not covered by Federal milk marketing orders this increase in the manufacturing milk price could have had an effect on the price paid by Defense contractors to producers for fluid milk for beverage purposes because of its impact on the general market price for milk. In order to provide equitable treatment for all Defense contractors adversely affected by orders of the Secretary of Agriculture in increasing the price of milk, it would be necessary to revise subsection (b) of the bill to provide for price adjustments on the basis of actions of the Secretary of Agriculture increasing the price of milk without limiting such action to increases in producer prices for fluid milk for beverage purposes. Regulations would provide that contractors seeking relief under such a provision would be required to show how these actions of the Secretary of Agriculture affected the price they were required to pay.

We have submitted for your consideration a draft of a bill incorporating the changes I have suggested. In addition, the revised draft includes a clarification in subsection (b)(3), line 22, page 2 of the bill. The revised language makes clear that an adjustment in the contract price is not authorized for loss of anticipated profits. Also the section should be numbered 2389 instead of 2390 since the last section in chapter 141, title 10 is now numbered 2388.

The cost to the Department of Defense of the price adjustments authorized by the bill cannot be ascertained at this time.

I will be happy to respond to any questions the committee may have.

Chairman RUSSELL. The bill that you suggested is retroactive only to March 1 of this year?

Mr. BABIONE. That is correct.

Chairman RUSSELL. I suppose your difficulty in getting the cost estimate derives from the fact that there are so many different increases in so many different areas, milk sheds?

Mr. BABIONE. Yes, Mr. Chairman. Also we have to determine the validity of how they were adversely affected, and so on.

Chairman RUSSELL. Down in the country from whence I came, when a man signed a contract and the prices changed on him, he was just unlucky, but our great and good Government has contracts for the manufacture of ships, tanks, and planes, so I don't know why we shouldn't do it for the producers of milk. Senator Saltonstall.

Senator SALTONSTALL. Mr. Chairman, after that remark, which seems to indicate that you believe in the bill

Chairman RUSSELL. No, I didn't intend to create that impression, to try to influence any other members in their vote.

Senator SALTONSTALL. Mr. Chairman, I would like to ask several questions here. I know that the Senators from Colorado are very much interested in this subject. A letter was addressed from the General Counsel of the Department of Defense dated September 28, and that includes at the end a copy of a bill on this subject.

(A copy of the letter referred to follows:)

GENERAL COUNSEL OF THE DEPARTMENT OF DEFENSE,

Washington, D.C., September 28, 1966. Hon. Richard B. RUSSELL, Chairman, Committee on Armed Services, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: This is in reply to your request for the views of the Department of Defense on S. 3834, 89th Congress, a bill “To amend chapter 141 of title 10, United States Code, to provide for price adjustments in contracts for the procurement of milk by the Department of Defense.”

The purpose of the bill is to require the inclusion in future Department of Defense contracts for the procurement of milk of a provision for equitable price adjustments for increased or decreased prices paid by a contractor for such milk as a result of increases or decreases ordered by the Secretary of Agriculture in the producer prices of fluid milk for beverage purposes. The bill would also provide relief for contractors performing contracts for milk on or after 1 March 1966 who have suffered losses because of increases in producer prices for fluid milk for beverage purposes ordered by the Secretary of Agriculture on or after 1 March 1966 where the contracts contain no provision for such price adjustment.

The Department of Defense agrees with the objectives of the proposed legislation, Under Federal Milk Marketing Orders in effect in parts of 35 states and the District of Columbia the minimum price which the handler (the dairy) is required to pay the producer (the farmer) for fluid milk for beverage purposes is regulated by the Secretary of Agriculture. In March 1966 and again in June 1966 the Secretary of Agriculture increased these minimum prices. Handlers subject to

answers.

the orders and holding long term contracts with the Department of Defense on the effective date of the orders were required to pay these increased prices to producers but could not obtain a corresponding increase in their fixed price Defense contracts. In the absence of legislation the Department of Defense is unable to afford these contractors any relief.

Milk prices have been rising this past year even in those market areas which are not regulated by Federal Milk Marketing Orders. Under Subsection (a), however, only dairies regulated by Federal Milk Marketing Orders would be covered. Other dairies could also suffer loses just as severe because of actions of the Secretary of Agriculture such as an increase in the support price for manufacturing milk or because of the impact on the market price for milk of amendments or suspension of Federal Milk Marketing Orders.

The Department of Defense was, prior to the introduction of S. 3834, already in the process of exploring several methods for achieving the objectives of the legislation. Among the methods being considered are use of an escalation provision, shorter term contracts, and provisions for adjusting prices on contract extensions. It might appear that escalation is an obvious method for accomplishing the objective. However, it is not only cumbersome ot administer, but difficult to apply equitably to all contractors. Procurement of milk is made by formal advertising with award made to the low competitive bidder. Hence, an escalation clause would pose problems to which we do not at this point have ready

For example, there would be problems in evaluating bids between handlers in regulated areas and handlers in non-regulated areas and in assessing the impact of the marketing order on a particular contract without knowledge of the cost basis for the handler's bid. These problems are compounded by the fact that the price of fluid milk is regulated by over 70 different Federal Milk Marketing Orders and numerous state and local controls. Furthermore, enactment of provisions requiring the inclusion of escalation clauses in milk contracts would establish an undesirable precedent which would tend to undermine the benefits of competitive fixed price contracting. Procedures and suppliers of many other commodities susceptible to cost changes could be expected to seek similar legislation. Accordingly, it is recommended that Subsection (a) of the proposed section be deleted with the understanding that the Department of Defense will develop procedures in connection with the procurement of milk within existing administrative authority to avoid situations comparable to that which occurred as a consequence of the recent actions by the Department of Agriculture.

Subsection (b) of the proposed new section would provide relief for those Defense contractors required to pay higher prices to milk producers because of increases in producer prices of fluid milk for beverage purposes ordered by the Secretary of Agriculture. However, the bill would not provide relief for those contractors required to pay higher prices to producers because of increases in the price of manufacturing milk ordered by the Secretary of Agriculture. In areas not covered by Federal Milk Marketing Orders this increase in the manufacturing milk price could have had an effect on the price paid by Defense contractors to producers for fluid milk for beverage purposes because of its impact on the general market price for milk. In order to provide equitable treatment for all Defense contractors adversely affected by orders of the Secretary of Agriculture in increasing the price of milk, it would be necessary to revise Subsection (b) of the bill to provide for price adjustments on the basis of actions of the Secretary of Agriculture increasing the price of milk without limiting such action to increases in producer prices for fluid milk for beverage purposes. Regulations would provide that contractors seeking relief under such a provision would be required to show how these actions of the Secretary of Agriculture affected the price they were required to pay.

There is enclosed for your consideration a draft of a bill incorporating the changes recommended above. In addition, a clarifying change is recommended in Subsection (b)(3), line 22, page 2 of the bill. The revised language in the enclosed draft makes clear that an adjustment in the contract price under the bill is not authorized for loss of anticipated profits. Also, the new section should be numbered 2389 instead of 2390 since the last section in Chapter 141, Title 10, is now numbered 2388.

The cost to the Department of Defense of the price adjustments authorized by the bill cannot be ascertained at this time.

The Bureau of the Budget advises that while there is no objection to the submission of this report, the Bureau is seriously concerned about the enactment of legislation to pay for losses incurred in the performance of a fixed-price government contract. In general, the Bureau of the Budget thinks the reasons cited

70-95966

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