They are, of course, limited to the subcontracts required for the performance of the prime contract. Every effort is, however, made to settle subcontracts on the same basis and principles as prime contracts, and this is very generally accomplished.

Unabsorbed amortization.-There are a number of costs incurred by the contractor for the performance of the whole contract and which are wholly or in part to be amortized over and in the price to be paid by the Government for the finished articles. The theory in these matters is to find out how much of the cost is covered in the unit price of each item and then to pay the contractor that amount multiplied by the number of items delivery of which was not made nor paid for because the contract was suspended by the action of the Government. Some such costs are:

(a) Facilities and equipment properly acquired for the performance of the contract, and the necessity for which might reasonably have been contemplated by the contractor, and the amortization upon which was covered in whole or in part in the price fixed in the contract. Here the amount to be amortized in the contract is for convenience, in the absence of exact information, ascertained by deducting from the total cost the fair value at the time of settlement, and the United States is then charged with such portion of the remainder as the uncompleted portion of the contract bears to the whole contract. Under this head come buildings, machinery, etc. But this allowance can in no case exceed what the contractor would have recouped had the contract been fully executed and completed.

Such facilities or equipment must have been purchased or constructed for the performance of the contract or in anticipation of it, and amortization will not be allowed on the regular preexisting plant of the contractor or where the amortization has already been. absorbed in other contracts whether commercial or with the Government.

(b) Experimental work and fees of expert advisers.-These initial costs are frequently necessary to successful production and are charged into the price of the finished articles. The amortization not absorbed because of the stopping of production under the contract is a proper item of cost to be paid by the United States.

(c) Cost of plant rearrangement before and sometimes after completion of the Government contract, if contemplated at the time the contract was made and covered by the contractor's estimate and unit price charged the Government, is to be apportioned in the same manner as experimental work, etc.

(d) Special tools adapted solely to the production under the contract and applicable to the whole contract, are to be considered like

facilities or equipment and the unabsorbed amortization paid by the Government in like manner.

All such costs, the subject of amortization, must have been reasonably appropriate for the work of performing the contract, and not in excess of its requirements, and the prices at which the contractor obtained the facilities or equipment or advice, etc., must have been such as might reasonably have been paid at the time and under the circumstances. If they were excessive, only such part may be considered as was reasonable.

Difficulty sometimes arises where the contractor has successive contracts for the same product and at the same or higher price and uses the facilities, etc., provided for the first contract. In such cases it is safest to assume that these were fully amortized in the first contract and not to allow unabsorbed amortization in settling those that follow unless it is clearly shown that such amortization was agreed upon in fixing the prices for both contracts and was understood from the beginning to extend over more than the first contract. Other items of cost not subject to be amortized.-(a) Excessive cost of operation at the beginning of production which would have been overcome by the greater efficiency of operation in the later stages of the contract. This item only remains a cost so long as it results in an actual loss and to the extent of such loss. If the contract has proceeded far enough before suspension for subsequent more efficient production to balance off the losses previously made, then there is no item of cost remaining to be paid by the United States. In many cases the contract was an improvident one and would have been a loss even if wholly performed. In such case only such part of the cost of the first part of production may be allowed as is in excess of the average actual cost of production for the whole contract. This excess is the true measure of the higher cost of the early part of production.

(b) Then there are the items of expense and cost covered by section E above quoted, being for the protection and care of property.

(c) There are also costs imposed on the contractor by the failure of the United States to fully perform on its part and which should be reimbursed to the contractor. Thus, for example, where the United States had made a contract for shells and was to furnish the billets to the contractor in accordance with certain specifications, quality, hardness, etc. The United States, however, furnished billets which are harder than the specifications call for and the contractor is put to extra expense to obtain additional machinery to anneal the billets before machining them, and does so; or, where the billets furnished have an unusually large proportion of latent defects, causing the contractor to machine many more billets to produce the required number of shells than was originally contemplated; or, where

the United States on a contract for copper bands, in which it agrees to furnish to the contractor all the copper required for the performance of the contract has, nevertheless, failed to furnish the so-called vehicle copper and has furnished the contractor only, pound for pound, the weight of the finished bands; or, in case the United States has through some action prevented the contractor from employing overtime labor or working on Sundays and such labor was contemplated at the time the contract was made.

Such items are generally in the nature of unliquidated damages and, where the contract has not been terminated by a complete performance by the contractor, or by breach, or otherwise, may be included under the settlement. Where, however, the contract has been completed by the contractor or terminated by breach, the expiration of time for performance, or otherwise, such items may not be paid. or settled by the Secretary of War unless the contract be an informal one, and the settlement to be made under the act of March 2, 1919. In the latter case the act appears to be wide enough to permit settlements and awards by the Secretary of War even under such circumstances.

Other compensation may be awarded under section G above quoted and which is sufficiently broad to cover unforeseen circumstances arising in particular cases as well as many of the items of cost above enumerated and commented on. Where the application of the abovestated basis does not give the contractor reimbursement for his expenditures and a fair compensation for such of his services as have not resulted in completed product, section G is applicable. It can not be used, however, to put an inefficient or improvident contractor in a better position than he would have been in had he completed the performance of his contract.

Liquidated damages. Where the contract provides for the deduction of liquidated damages for delay on the part of the contractor, these, as soon as deducted from payments made the contractor for goods delivered, are held to be a vested property right of the Government, and not within the power of the Secretary of War to remit unless the original contract expressly so provides. (Matter of Hawthorne, 11 Comp. Dec., 113.) Being a vested money right of the Government, they are a matter for the Department of the Treasury. Many contracts provide that for certain causes, as, for example, that the delay was caused by the United States, the time will be extended. and damages remitted. The power and discretion to determine whether such a cause exists is usually placed in the contracting officer by the terms of the contract. The Comptroller of the Treasury will, however, review his findings and exercise of discretion, unless the contract provides that such are final and conclusive upon the parties. (Hydraulic Pressed Steel Co. claim, 26 Comp. Dec., 275.)

Exceptions to the above outlined basis.-There are classes of contracts made by the Quartermaster or Director of Purchase where the method of settlement has been on the basis of certain unit allowances which were established in agreement with groups of contractors producing certain classes of commodities. The application of these allowances is believed to secure substantially the same results as the above outlined basis and to make for economy in time and effort.

3. CONTRACT SETTLEMENT ORGANIZATIONS OF THE WAR

DEPARTMENT.

The armistice found the War Department under the terms of contracts, formal and informal, obligated to the industry of the country for a production which, under the new circumstances, was far in excess of the military needs of the Nation. To have continued this production would have meant not only an improvident waste of Government funds, but of materials and labor which were urgently needed in the reconstruction of our commercial life. The immediate problem was to determine what curtailment in production under these various agreements could be made which would accord with the revised military needs and be consistent with the smooth shifting back of the industrial machinery to a commercial basis. Boards were set up in each of the bureaus to review each of the outstanding contracts and to determine what curtailment of production was, under the circumstances, wise. These boards having made that determination, the next question for decision was as to the method to be used in effecting this curtailment. Two courses were open. The Government could notify the contractor that it would refuse to receive any articles under the outstanding contracts beyond the limits of the proposed curtailment of production. Such a refusal would constitute a breach of contract and throw the adjustment of any rights which the contractor might have, both for expenditures made in preparation for the curtailed portion of the contract and for anticipated profits, into the Court of Claims. Such a course would have resulted in widespread industrial hardship and have involved a wholesale repudiation of obligations, which the department could not contemplate.

The other course was to attempt to negotiate amendments to the existing contracts which would provide for the desired curtailment of production and, at the same time, reimburse and remunerate the contractor on a fair basis for those preparations which he had made for the production of those articles which, under the revised terms of the contract, he was not to complete and deliver. The negotiation of these amended or supplemental contracts was naturally a function of the same bureaus which had negotiated the original contracts, and those boards in the various bureaus which had been charged with the duty of determining what curtailment of production was desirable

were further charged with the duty of negotiating new supplemental contracts providing for such curtailment.

It was desired that this work be approached by both contractors and bureaus with the same spirit of cooperation which had animated the department and contractors in the making and execution of the original contracts, so that this final chapter of the war-time relations of industry with the Government would be animated by the same fine spirit which had characterized those relations to such a prevalent degree during the strenuous days of hostilities. It was deemed important that the work of negotiation of these new contracts be carried on while those who were familiar with the history of the making and production under the contracts were still available in the service, and to this end officers and civilians who had been engaged in the work of procurement, production, and inspection directed their energies toward working out a sound and fair basis for supplemental contracts curtailing production.

The contracts of settlement or statutory awards are executed, the former by the contracting officer and the claimant, and the latter by the district board and the claimant, but they are by their terms expressly subject to the approval of the bureau boards and in the case of statutory awards also by the War Department Claims Board, hereafter described. The whole record is thereafter transmitted to the bureau board, which in turn reviews the whole settlement on the record, including computations, valuations, or appraisements, and determines whether all the regulations of the War Department and of the comptroller and the law have been followed, etc. It may then approve or disapprove the settlement. If it approves, then the record is filed and the settlement contracts or statutory awards, after execution, are distributed to the appropriate places for record or payment, one being sent to the district board, one to the claimant, another to the disbursing officer, another to the Auditor for the War Department, and, in case of settlement contracts, one to the Returns Office. If disapproved it is returned to the district office for correction and to endeavor to arrive at and negotiate the new settlement with the claimant, or the bureau board may itself undertake the negotiation. There are also provisions and special forms for making partial payments to claimants before the final adjustment, either on items of claim proved or on a percentage of the estimated minimum total award, less debt due the United States. These forms and papers for partial payments are usually accomplished in the districts without reference to the bureau boards for approval, and this is permitted, because the whole settlement, including the partial payments and the items on which based, is ultimately sent to the bureau board in any event for review on payment of the final amount and the execution of the final settlement contract.