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earlier in the report against inclusion of escalation clauses in future contracts are equally valid arguments against provision of relief for losses sustained under past contracts. In particular, it appears to the Bureau that long-term suppliers of milk under the contracts covered by the bill assumed the risk of rising milk prices during the contract period; signs of rising prices evidently appeared in the latter part of 1965, and the actions of the Secretary of Agriculture not only tended to follow rather than force price rise but also were only one element in the extremely complex play of market forces determining the price of milk. To grant relief to the suppliers covered by this bill could easily lead, in the opinion of the Bureau, to demands for similar relief by suppliers of milk to other Federal and to nonFederal consumers as well as by all suppliers of commodities and services who assert their losses are due to official actions of the Federal Government. Sincerely yours,

PAUL C. WARNKE.

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: “$ 2389. Contracts for the procurement of milk; price adjustment "Under regulations prescribed by the Secretary of Defense, any contract for the procurement of fluid milk for beverage purposes which was being performed on or after March 1, 1966, may be amended to provide a price adjustment for losses incurred by a contractor because of increased prices paid to the producers for such milk as a result of action by the Secretary of Agriculture on or after March 1, 1966, increasing the price of milk. A price adjustment shall not be made unless it has been determined by the Department that

(1) such amount is 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, not merely a diminution of anticipated profit, under the contract because of such increases in producer prices."; and (2) By inserting the following new item in the analysis thereof: “2389. Contracts for the procurement of milk; price adjustment."

Senator SALTONSTALL. It is my understanding, or I am told, that the subcommittee in the House has reported out the Defense Department bill as it is written, is that correct?

Mr. BABJONE. That is our understanding; yes, Senator.

Senator SALTONSTALL. So really, if the Department of Defense approves of this bill, and if the House passes it, then what you would like to have the Senate do would be to pass the same bill, and that would be agreeable to the Department of Defense.

Mr. BABIONE. Yes, sir.

Senator SALTONSTALL. Now there are several things that I would like to ask about. You say here

A price adjustment shall not be made unless it has been determined by the Department that, one, such amount is not included in the contract price.

Now, just what do you mean by that?

Mr. BABIONE. What we mean by that is that the amount which the contractor initially offered the Government did not provide a sufficient amount of cost to pay the additional cost that is now in effect as a result of a Federal milk marketing order.

a Senator SALTONSTALL. Then the contract wouldn't be a fixed price contract, would it? I called that to the chairman's attention. That word “such amount” is not clear to me, because if it is a fixed price contract and they are making somewhat of a profit, then this bill wouldn't apply, necessarily, even if the cost to the producer had gone up and the contractor had to pay more.

I just am not clear what you mean by that No. 1

Price adjustments shall not be made unless it has been determined by the Department that, one, such amount is not included in the contract price.

There may be a very simple explanation to that, but I just wondered what it was?

Mr. BABIONE. Our intent is to examine after the fact the claim of the contractor that at the time he submitted his quotation he took into effect reasonable forecast of what would be the producer prices

Senator SALTONSTALL. I see what you mean.

Mr. BABIONE. As regulated by the Department of Agriculture, and that subsequent to that time action was taken that he could not have forecast and that adversely affected him and caused him to suffer a loss, and that he is seeking relief in that amount.

Senator SALTONSTALL. In other words, that the amount of the increase or the amount of the increased cost to the contractor, if he knew of that when he made the contract and still made a fixed contract, then this No. 1 would apply.

Mr. BABIONE. That is right; yes, sir.

Senator SALTONSTALL. Now the second question I would ask is on No. 3—you say

The price adjustments shall not be made unless it has been determined by the Department that the contractor will suffer a loss not merely a diminution of anticipated profit under the contract because of such increases in producer prices.”

Isn't that pretty rough? In other words, not only will the contractor have no profit, but he has actually got to show a loss before the Department will change that contract. That seems to me a little rough.

Mr. BABIONE. That is the intent, and the reason that we recommend that is because that has been the consistent policy followed by the Department of Defense in granting the relief under other administrative remedies available to the Department. The position of the Department of Defense has been that we are not in a position of guaranteeing profit simply because you deal with the Department of Defense, and that when cases arise where we feel there is a valid claim for relief, those cases have been adjudicated on the basis of only restoring losses.

Senator SALTONSTALL. But don't you personally think that that is a little tough? I make a contract with you, and then, if I may say most respectfully to my chairman and the gentleman on the other side of the aisle, a bureaucrat in the department of government increases the price to the producer, so that the man with whom I make a contract now not only has no profit, but he has got to show a loss before another department buying the milk will allow a change in price.

Mr. BABIONE. I think it is a matter of judgment, Senator, and I think that reasonable people will have varying opinions on this point, but that is the policy we have followed in the past in granting relief in other situations.

Senator SALTONSTALL. Thank you, Mr. Chairman.
Chairman RUSSELL. Senator Symington.

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Senator SYMINGTON. Thank you, Mr. Chairman. Missouri people are interested in this. I refer back to what Senator Saltonstall said to the effect that price adjustments shall not be made unless it has been determined by the Department that such amount was not included in the contract price. What amount are you talking about?

Mr. BABIONE. The amount of the claimed loss resulting from increases in producer prices required by the milk marketing order.

Senator SYMINGTON. How could the amount be included in the contract if the contract was made before the decision from the Department of Agriculture?

Mr. BABIONE. He could have been paying more than the minimum required. The Federal milk marketing orders only establish a minimum price. Suppose the minimum price established was $5 a hundredweight and he already was figuring $5.50 a hundredweight. Maybe the milk marketing order did not even adversely affect his cost because he was paying more than the minimum, as opposed to the case paying right at the minimum.

Senator SYMINGTON. Then the whole situation is theoretical, is it not?

Mr. BABIONE. I believe each case will have to be adjudicated on the information and circumstances surrounding that particular contract.

Senator SYMINGTON. I don't want to labor it, but I just don't see why you have that in. If the amount was not included in the contract price, why is there any problem? If it is included in the contract price, why is there any problem? Let's skip that for a minute and go to the point the Senator from Massachusetts made.

Suppose the Government has a contract to build airplanes, and agrees to take aluminum from the Government stockpile at say 30 cents a pound. Certainly, the Government wouldn't expect the contractor to absorb a higher price if another Government agency increased the price of the aluminum being supplied to the contractor to, say, 40 cents a pound. That is what we are talking about, aren't

. we?

The action of the Secretary of Agriculture was an executive action which automatically increased the price, action by another Government agency, after the contractor in good faith has made a contract with a second Government agency.

If you make a contract based on the position of the Department of Agriculture, and then the Department of Agriculture arbitrarily increases cost, you would be in the same position as if the Office of Emergency Planning automatically increased the cost of aluminum they were supplying to a contractor to produce airplanes; isn't that correct?

Mr. BABIONE. It would be a similar situation. It would seem so.

Senator SYMINGTON. If that is true, inasmuch as the contractor himself had nothing to do with the increase in price, and the supplier to the contractor had nothing to do with the increase in price, and the increase is the result of a Government directive which neither of the two parties incident to the contract had anything to do with or knew about, it would seem only logical and fair that those facts should be recognized in the contract; isn't that correct?

Mr. BABIONE. Yes, sir.
Senator SYMINGTON. Thank you, Mr. Chairman.
Chairman RuSSELL. Senator Cannon.

Senator CANNON. Mr. Chairman, I certainly agree with the points that have been made by the distinguished Senator from Massachusetts and the Senator from Missouri that if you have a fixed-price contract, and I would like to ask the witness, if you have a cost-plus contract and the cost goes up through no fault of the contractor, you don't reduce the contractor's profit on it, do you?

Mr. BABIONE. No, sir.

Senator CANNON. And you pay him the agreed percentage of profit no matter how much the cost goes up, not necessarily whether he is or is not losing money on the contract.

Mr. BABIONE. In a cost-plus-fixed-fee contract, the contractor has a fixed fee and does not assume the risks of rising costs. The difference is that we pay a higher profit on firm fixed-price contracts tban on cost type for the very reason that the contractor assumes risk of fluctuating markets that could adversely affect him under normal circumstances. The problem is in determining what is an abnormal risk or a normal business risk, and to the extent that the contractor can forecast or is willing to risk future market fluctuations, he does take on a responsibility for normal business risks which does affect his profit one way or the other.

Senator CANNON. Would you say it is a normal business risk when the Government steps in and fixes the price that raises his costs very materially, that that is a normal business risk?

Mr. BABIONE. I think that we have to examine each situation in the light of the events that affected it. It is very difficult to say. Senator CANNON. That doesn't answer my question. Do

you

think that when the Government steps in and takes action that raises the contractor's costs, that you would assume that to be a normal business risk?

Mr. BABIONE. In the contexi of the cases involving milk marketing orders and complaints we have received, we agree that there have been some abnormal risks that have taken place, and we are recommending a revision to the proposed legislation to correct it.

Senator CANNON. All right. Then if it is an abnormal risk, wouldn't you say that it should depend on whether the fact actually occurred rather than whether the contractor lost money or reduced his profit?

Mr. BABIONE. There are two things that we are talking about here. One is to establish that he was adversely affected by whatever happened.

Senator Cannon. That is right. Mr. BABIONE. And the second part is the policy of not granting relief in excess of his actual loss. Now the part about not granting relief in excess of his loss is based on the policy that contracting with the Department of Defense does not guarantee a profit, and it is based also on other types of relief that we have provided under other administrative remedies, we have followed this policy.

Senator CANNON. Are you saying that any time you renegotiate a contract with a contractor, that you only allow him to recoup his loss and not to recoup any profit?

Mr. BABIONE. We are talking about extraordinary relief versus negotiation.

Senator SYMINGTON. Will the Senator yield?
Senator CANNON. I will be very happy to yield.

Senator SYMINGTON. What you are saying is that, if a man puts a contract in and estimates a profit of 8 percent, and after he makes the contract the Secretary of Agriculture makes a decision that eliminates his profit, you are going along with that elimination. That is clear. You say “The contractor will suffer a loss under the contract because of such increases in producer prices." In effect you are letting the Secretary of Agriculture, without a hearing, renegotiate this price for milk downward to the point where the contractor could lose all his profit; isn't that correct?

Mr. BABIONE. The circumstances that you outline could take place.

Senator SYMINGTON. "Could take place”? It does take place. You ask us to pass a law which would insure it would take place. You say

"A price adjustment shall not be made unless it has been determined by the Department the contractor will suffer a loss." The obvious implication is he can only recover loss.

Mr. BABIONE. That is correct.
Senator SYMINGTON. Not any profit.
Mr. BABIONE. That is correct.

Senator SYMINGTON. So let the Department of Agriculture renegotiate a contract made by the Department of Defense. That would appear plain silly. I thank the able Senator for yielding.

Senator CANNON. Following up on the example that the Senator from Missouri gave, the Senator took an example of a man figuring in an 8-percent profit. Let's assume, because of the action of the Secretary of Agriculture, he doesn't have his 8-percent profit in this fixed price contract, but he has one-tenth of 1 percent profit. You are in effect saying, if this legislation were to pass, that this contract then could not be renegotiated because he didn't sustain a loss, but he is limited to his one-tenth of 1 percent profit, is that correct?

Mr. BABIONE. The relief would be granted to his actual loss, yes, sir.

Chairman RUSSELL. Is there anything in this bill that would protect the interests of the Government if a bureaucrat lowered the price of milk greatly?

Mr. BABIONE. No, sir, not under the relief provision.

Chairman RUSSELL. His profits would be greatly enhanced and the Government would be without any recourse whatever in that event, would it not?

Mr. BABIONE. That is correct.
Chairman RUSSELL. Senator Smith.

. Senator SALTONSTALL. Would the Senator yield for a comment? Have you ever heard, as chairman of this committee now for a great many years, a bureaucrat lowering the prices?

Chairman RUSSELL. Yes. Milk has been lowered in a number of instances in these milk shed hearings. Senator Smith.

Senator SMITH. I have no questions.
Chairman RUSSELL. Senator Young.

Senator Young. Thank you, Mr. Chairman. If you are a knowledgeable contractor, say you are dealing in milk or in any other product, before you enter into a long-term contract you are obligated to figure out the risks, aren't you, whether they are normal or abnormal risks?

Mr. BABIONE. Yes, sir.

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