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out, is the fact that the War Department did not want to have this committee avoid its legislative functions in providing this authority by asking the Senate to attach the legislative rider to the appropriation bill. They asked us to do this, and stated very frankly that they did not want to have us avoid that responsibility.
The principal reason I had for bringing the representatives of the War Department here was to keep somebody from making a point of order against a legislative rider on an appropriation bill and to give this committee a chance to get the information as to what is going on in connection with these small contractors, and to see what kind of a predicament they are getting into, and to see to it that they would not suffer disaster because of lack of power in the War Department to facilitate these payments.
Mr. Elston. I think the purpose of the legislation is very good, but I am wondering if it should be limited to the War Department. It is a type of legislation that is probably needed for all departments.
Mr. MARBURY. There are representatives of the Navy Department here who will speak for themselves. I should have said before we started that we are authorized here only to speak for the War Department. The Bureau of the Budget has stated that they have no objection to our coming here and speaking for the War Department, but that the Bureau of the Budget has not had a chance to examine the bill, and we are therefore not speaking for the administration in this testimony.
I agree fully that it should be made applicable to other departments and agencies.
Mr. HARNESS. There is a committee in the War Production Board headed by Mr. Hoffman.
Mr. MARBURY. That is not in the War Production Board. Mr. Hoffman is on the Purchase Advisory Committee of the War Department,
Mr. HARNESS. Have you discussed this matter with him and his committee?
Mr. MARBURY. Yes, sir.
Mr. HARNESS. Is this bill the result of those discussions on the part of that committee?
Mr. MARBURY. It is the result of long consideration by various people in the War Department and in the other procurement agencies, and these questions have been very fully considered by the Purchase Advisory Committee, of which Mr. Hoffman is a member, and perhaps the chairman. I think they wholeheartedly endorse it. As a matter of fact, this bill represents to some considerable extent suggestions made by members of that committee from time to time.
The CHAIRMAN. Will you proceed with your statement, Mr. Marbury!
Mr. MARBURY. Contractors or subcontractors having advance payments or guaranteed loans outstanding at the time their war production contracts are terminated are relieved by the terms of their contracts from the danger that at the end of the war they will be immediately squeezed for payment before they can collect from the Government or from contractors immediately above them.
Under existing law and procedure, however, war producers do not have assurance that they can cash in rapidly on their war production inventory and receivables pending the final negotiation of settlements of terminated war contracts.
Regardless of what method of settlement is used, a certain amount of time is bound to elapse.
Contracting officers are reluctant to make substantial partial payments on account of contractors' or subcontractors' termination claims pending final negotiation and determination of costs. They fear that if by any chance a partial payment was too large they would be subject to accountability upon review by the General Accounting Office.
Although a contractor who owes the Government for advance payments need not return the unliquidated balance of his advances until the final settlement day, nevertheless all moneys coming in on his Government receivables must be deposited in a special account where they remain frozen. Thus, although the contractor is not squeezed for payments, he cannot get working cash to go about his usual business.
Guaranteed loans likewise protect the contractor against immediate payment of the loan pending settlement since an amount of the loan proportionate to the amount of his cancelations is suspended. Moreover, a contractor having a guaranteed loan, if the loan provisions so provide, can get a certain amount of the cash out of collections which may be used for general business purposes. However, these facts have a tendency to make contractors borrow excessive amounts under guaranteed loans that they do not need for war production, but merely as a hedge against the settlement period.
Other contractors who have neither advance payments nor guaranteed loans, and do not need them now for war production, nevertheless are faced with the prospect of excessive inventories and receivables running many times their normal volume during the settlement period. After termination day, a guaranteed loan cannot be made to carry these receivables and inventory. Advance payments, as distinguished from partial payments, cannot be made on a terminated contract. Financing based on receivables and inventory frequently cannot be obtained through a private bank without guaranty because the risk is too great for the depositors' money.
In the light of these considerations, the enactment of this bill will facilitate returning contractors and subcontractors whose contracts have been terminated to other useful production.
The bill as drawn confirms certain authority given to the War Department by Title II of the First War Powers Act with respect to con'tracts made to facilitate the prosecution of the war and explicitly make that authority applicable "in connection with the termination * * * of contracts.” It authorizes expressly in connection with terminations advance or partial payments to War Department contractors and to subcontractors and suppliers working directly or indirectly on War Department contracts. It grants power to make loans or guaranties of loans to such War Department contractors, subcontractors, and suppliers, thus making possible, in connection with the termination of war contracts, the same types of financing through "V" loans, or loans like “V” loans, permitted by Public Law 603, of the last Congress. That is section 7 of the Smaller War Plants Act.
Although certain of the loans authorized by the present bill probably could be made under the authority of the Smaller War Plants
Act and Executive Order 9112, it is felt that their authority to make such loans in connection with terminations would avoid legal doubts which might be raised by attorneys for bankers and contractors who, as the committee knows, are always very cautious, and by attorneys for contractors, who are less cautious.
In addition to the other powers granted, the present bill would authorize the purchase of the rights of contractors, subcontractors, or suppliers to compensation owing to them for the termination of their contracts or subcontracts. Such purchases would be subject to regulations to be prescribed by the Secretary of War. Under this authority the War Department would be able to make commitments to purchase the termination rights of suppliers and subcontractors either for full value or for some percentage of value upon the demand of the subcontractor, supplier or of any person, such as an assignee, claiming through the subcontractor or supplier. This would reduce the risk that subcontractors and suppliers would not be able to receive full payment of the amounts owing to them on their subcontracts because of the possible bankruptcy or insolvency of the prime contractor or the intermediate contractor with whom they have been dealing:
That is very important to us because we are meeting difficulties in procurement today because of subcontractors who begin to worry about the condition of their prime contractors who are overextended and are being urged to take business out of all proportion to their working capital. Subcontractors are beginning to think, “Where will we be with our prime contractor if the contract is terminated tomorrow, it may be as the result of some change in military necessity.” They ask, “Where will we stand; what is going to happen to us? Will we have a claim that is worth anything, or will we be litigating in bankruptcy?”
Upon the strength of this type of commitment banks or financing institutions would be willing to lend on the security of termination rights of subcontractors and suppliers because of the assurance that, if necessary, the United States would be required to purchase such termination rights at some stated percentage of their ascertained value. No further value guaranty should be necessary.
Perhaps the most direct and immediate use of the powers proposed in this act which would be made in connection with current terminations would be by way of a combination of partial payments and loans to contractors. At the present time contracting officers are reluctant to certify, and disbursing officers are reluctant to pay, partial payments on account until some accounting analysis has been made of the amount due.
The pending bill would permit the War Department to combine with a partial payment a provision that, if the partial payment proved to be excessive—when an audit of the contract had been completed—the excessive amount would be regarded as a loan, which might bear interest, to be repaid by the contractor forth with. Authority to make the loan would be given by the proposed amendment. The contracting officers, if they had clear authority to make loans as well as partial payments, could be directed to make this type of arrangement with contractors and subcontractors who certified that at least some minimum amount was due to them by reason of their termination rights.
By paying, say 80 to 90 percent of the amount certified and taking from the contractor or subcontractor an agreement that any amount found to be excessive, as a partial payment, would be treated as a loan, the contracting officer would accomplish without risk to the Government or to himself prompt payments on account, which could be made without the necessity for any substantial amount of investigation or checking. Naturally, he would wish to make some investigation of the contractor's financial position, and if it appeared in any degree not stable he would probably want to require some security or bond to insure the repayment of any amount found to be excessive.
It is believed that the proposals in this short and simple bill will provide helpful authority in connection with the current termination program, and obviously such authority will be most useful and necessary at the termination of hostilities,
Mr. MARTIN. This bill, as I understand it, does not affect in any way your yardstick or your procedure in the settlement of the contracts. It only provides for the advance payments.
My question is, Have you made any advance payments thus far in the negotiations concerning the termination of contracts?
Mr. MARBURY. I think the fact is that in less than 1 percent of the cases have any such payments been made. There have been a few cases where the contracting officers had the courage to make the advance payment where they were convinced that they were safe.
Mr. MARTIN. Have they made any advance payments in the case of the Narragansett Machine Co.?
Mr. MARBURY. I could not answer that; I do not know.
Mr. MARTIN. In reference to the wording of this bill, in line 4, page 1, there is reference to any funds now “or hereafter made available, contained in this act.
Mr. MARBURY. May I say, Mr. Martin, that what happened was this. It was first suggested that the bill be made a rider to some appropriation bill. It was shown to the chairman in that form, and he said he would take it as written and introduced the bill in that form. I have here a redraft of the bill designed as legislation to correct that situation, and if the committee would like to have it I can offer it for insertion in the record. This redraft would take care of the points which Mr. Martin made.
Mr. THOMASON. Mr. Chairman, the way this hearing has been going today it seems quite apparent that the committee feels that this is sound and should become immediate legislation. So I would move to report the bill favorably, but, at the suggestion of the chairman, I will withhold that temporarily.
Mr. BROOKS. You mentioned it some time ago that the idea was to guarantee bank loans after the termination of a contract. What would be the reason for that guarantee of banking notes after the contract is completed? If you think you know what is due, why should not the money be paid rather than guarantee a loan?
Mr. MARBURY. If you know what is due there woud be no reason for doing that.
Mr. BROOKS. If you do not know what is due, how would you be able to guarantee a loan?
Mr. MARBURY. In the case of a subcontractor and a supplier, he has no direct claim against the Government. Take, for instance, the case of a subcontractor who has a claim against the International Harvester Co. That termination took place 10 weeks ago, and unless it has happened in the last week or two, when we looked into the matter, after 2 months, no subcontractor has gotten anything.
If, however, a subcontractor needs money he goes to the bank and says, “I have a claim against the International Harvester Co. in settlement, and I want to borrow some money.” The bank says,
hwe cannot risk depositors' money on a claim that we do not know how much the Government will ultimately allow the International Harvester Co. out of which they would pay you, or the International Harvester may not be paid by the Government."
Mr. Brooks. Under this legislation, without guaranteeing a loan on a contract that is terminated, you can pay what is due to a prime contractor and let that be worked out.
Mr. MARBURY. If we knew what was due the prime contractor we would pay it to the prime contractor and the prime contractor would pay the subcontractor and that would be the end of it.
Mr. BROOKS. You can pay what you know is due.
Mr. BROOKS. Why is it necessary to go further and guarantee a loan?
Mr. MARBURY. We are trying to get a system in operation whereby we can deal with the same situation, where we can handle it with an immediate payment to the contractor, and that is the best way to do it.
There may be cases, and there will be cases where before we are in a position to make any payment the subcontractor will need bank credit, and we think in those cases we should have available some method by which we can guarantee a loan for war production.
Mr. BROOKS. You would make a partial payment to the prime contractor.
Mr. MARBURY. Yes; let me give you this illustration.
In War Procurement we have the power to make progress payments. We also have the power to make advance payments, but we have found that with the use of the guaranteed Ioans to the subcontractor, or even to the prime contractor, he goes to the bank and says, “I want to use so much banking credit.” That is handled through the Federal Reserve System and comes to the War Department and they guarantee that loan. We have found that that method is a useful supplement to the authority to make advance payments or progress payments.
Similiarly, we find that in the termination cases there will be many instances where our ability to extend, after termination, the same privilege that we can now extend of guaranteeing loans in particular cases will expedite the payments that need to be made and will assist in the financing of these subcontractors, especially those that are several tiers down.
Mr. ELSTON. This legislation, as drawn, is permanent. Do you not think it should be confined solely to war contracts?