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Aviation History
1969
1969 - 0075.PDF
FLIGHT Internotionol, 9 January 196* 59 The Government way of buying BY A SPECIAL CORRESPONDENT f ?m -IHi Design . • . development •MWP wmSBB . . . and run-of-the-mill production A new deal between industry and Government provides for new contract conditions and an independent Review Board A NEW DEAL has been struck between Government and industry. Fair play contracts replace the law of the jungle, and involve give and take on both sides. So long as the old system appeared to work moderately well, it was not the subject of any particular public interest But when it failed—as in the overcharging scandals of recent years—the time had obviously arrived for a new look at the system. Contracting with the State cannot be exactly equated with ordinary commercial business. Because public money is involved Government contract conditions are required which would not be acceptable in commercial contracts. The Government feels obliged to impose them for the protection of the public purse. Contract conditions contain provisions for premature cancellation on terms which would not be considered acceptable commercially. Also, while there is provision for arbitration, a Government contract provides that the decision of the Government is final. This is made acceptable by a "fair and reasonable" price which takes into account all the contingencies and all the risks and uncertainties. The price-fixing procedure in force since pre-war days until this new deal has therefore been the real subject of the recent negotiations. As with every question, there are two sides to it. The Government were naturally concerned at recent instances of excess profits due, on their argument, to inadequacy of the information supplied by the contractors. New contract con ditions ensure that up to the time prices are fixed there is equality of information. And the price to be agreed, on the basis of this information, is to be based on profit rates in line with the average earnings of industry over recent years. One question mark is whether this is fair on an industry with a high R&D demand and high vulnerability to politics— particularly to changes in defence policy. As for the method of price-fixing, the basic costing pro cedure works (and worked) thus. The Ministry of Technology or Government department concerned issues an ITP (Instruc tion to Proceed). This is the authority for the contractor to undertake the work specified on certain terms and conditions. It is itself a contract because it entitles the contractor to be paid a fair and reasonable price for the work, and there is provision for arbritration. Where, as was usual, agreement of final prices became long delayed, provisional prices were agreed—on the basis of which the contractor would receive progress payments. The contractor would be invited to submit a quotation for the work in hand. The quotation could, Jn theory at any rate, then become the subject of scrutiny and investigation by Govern ment officials, accountants under the DAS (Directorate of Accountancy Services) as well as TC (Technical Costs). As with any other price negotiation, the customer could accept or reject the quotation or submit a counter-figure. All this is little different under the new procedure, but the controversial Standard Condition (43—Price Fixing) has been revised to ensure, beyond any possible argument or ambiguity, that the Government has information equal to that available to the contractor up to the time the price is finally fixed, as well as, under a new Standard Condition (48), "post-costing" of individual contracts. Post-costing means the right of the Goverenment to look at actual man-hours, etc, after a contract is completed. It was opposed by the Lang Committee, who feared it might remove the incentive to efficiency. The intention is that the Government and the contractor should be in the same position at the time the price is fixed. In general, the Govern ment will not be entitled to information beyond what is available from the contractor's normal accountinig system. Any further information will be limited to what can reasonably be shown to be necessary. Government post-costing rights under the new Standard Condition 48 may be exercised (a) in pricing follow-on contracts; (b) to enable Government departments to check the accuracy of their own estimating procedures; and (c) to provide information on particular contracts in the event, of reference to the Review Board. There is a danger that so much information will be demanded by the Government that delays in settling prices will be caused. A backlog of unsettled prices could lead to a return to cost plus, which nobody wants. It would seem to be up to the Government to avoid asking for unnecessary information. v In addition to the new Standard Contract Conditions designed to provide for equality of information and for post-costing, a Government Contracts Review Board is to be established as the ultimate control. With an independent chairman, and equal membership from Government and industry, the Review Board's functions fall into three categories:^ (1) Individual contracts may be referred by either side to the Review Board where it is considered that there has been an excessive profit (27£ per cent or more on capital employed) or an unconscionable loss (15 per cent or more). (2) After three years the Board is to review the new arrangements and make recommendations to the Government, so that a Continued at foot of pafe overleaf
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