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STATEMENT OF WILLIAM L. MARBURY, CHIEF COUNSEL, PUR

CHASES DIVISION, HEADQUARTERS, ARMY SERVICE FORCES, ACCOMPANIED BY COL. R. A. CUTTER, PURCHASE DIVISION, AND COL. JOHN MECHAM, OFFICE OF FISCAL DIRECTOR, WAR DEPARTMENT

Mr. MARBURY. Yes, Mr. Chairman; that is the heart of the matter.

The legislation which we are asking you to consider here is designed to expedite the settlement of contracts which have been terminated, of which there are a large number, and we are finding that, because of certain legal obstacles, or threatened legal obstacles, the terminations are moving slowly, with the resultant hardship not only on the prime contractors but particularly on the subcontractors, who are, in large numbers, the small businessmen to whom you have referred.

The CHAIRMAN. Let me interrupt a moment to make a very brief statement for the benefit of the members of the committee, and that statement is simply this, that the War Department first asked that the provisions of this bill be attached to the seventy-one billion Army appropriation bill as a legislative rider. Having had considerable experience with legislative riders on appropriation bills, and knowing the feeling of this committee that legislative authority should first be granted, I did not agree to allow the Senate to attach a rider of that kind to the Army appropriation bill, but felt that this committee should consider the legislation and exercise its own prerogative.

I will say that General Persons was nice enough to request that this committee first determine for itself whether we would permit a legislative rider to be attached to the bill, or take steps to provide independent legislation, and I assumed the responsibility of saying that we would consider this bill as an independent measure.

Mr. MARBURY. As the committee knows, in conformity with the policies established by Congress, the War Department has been pressing many small contractors to undertake war work, and has been making every effort to spread work as much as possible, but from time to time, changes in strategic considerations, or other factors, have called for a revision of the Army supply program. That is inevitable in time of war.

As a result, cancelations have affected these small contractors and others very seriously, and the War Department is most anxious to see that contractors, particularly the smaller contractors, do not suffer because of delays in payments, due principally to terminations, and the primary purpose of the present bill is to give the Department an authority sufficiently broad and flexible to permit them to finance these contractors through termination.

During the present war period, almost all the larger War Department contracts have contained or have inserted in them a provision which permits termination for the convenience of the Government. Similar articles are in use by the other procurement agencies.

The purpose of such a termination article is, of course, to permit the Government, in its discretion, to terminate a war contract in whole or in part, if military requirements make such cancelation desirable. It was inserted to protect the interests of the Government. But the fact is that this unusual contractual provision is not unusual in our war contract; it is in substantially all of them.

Mr. DURHAM. Will you read the termination clause or provision!
Mr, MARBURY. It is quite long:
Mr. DURHAM. It seems to me it is important enough to be read.
The CHAIRMAN. How many pages does it occupy?
Mr. DURHAM. It consists of four and one-half single space pages.

Mr. HARNESS. Mr. Chairman, may I suggest that Mr. Marbury put that in the record.

The CHAIRMAN. Very well, you may insert that provision in the record. (The provision referred to is as follows) :

Procurement Regulation No. 3

Section VIII

Paragraph 324 (in part)

Every lump-sum contract regardless of subject matter, except:

• (a) contracts to be completed in six months or less for an amount of less than $500,000 and

(b) contracts for an amount of less than $50,000 regardless of the date of completion will contain an article without deviation as follows:

Article Termination for the Convenience of the Government.

(a) The Government may, at any time, terminate this contract in whole or in part by a notice in writing from the Contracting Officer to the Contractor that the contract is terminated under this Article. Such termination shall be effective in the manner and upon the date specified in said notice and shall be without prejudice to any claims which the Government may have against the Contractor, or any claims which the Contractor may have against the Government. Upon receipt of such notice the Contractor shall, except as the Contracting Officer directs otherwise, (1) discontinue all work and the placing of all orders for materials and facilities in connection with performance of this contract, cancel all existing orders chargeable to this contract, and terminate all subcontracts chargeable to this contract; (2) transfer to the Government, by delivery, f. o. b.---

or by such other means as the Contracting Officer may direct, title to all completed supplies (including spare parts, drawings, information and other things) called for herein, not previously delivered, and partially completed supplies, work in process, materials, fabricated parts, plans, drawings, and information acquired or produced by the Contractor for the performance of this contract; and (3) take such action as may be necessary to secure to the Government the benefits of any rights remaining in the Contractor under orders or subcontracts wholly or partially chargeable to this contract to the extent that such orders or subcontracts are so chargeable. If and as the Contracting Officer so directs or authorizes, the Contractor shall sell at a price approved by the Contracting Officer, or retain at a price mutually agreeable, any such supplies, partially completed supplies, work in process, materials, fabricated parts or other things. The proceeds of such sale or the agreed price shall be paid or credited to the Government in such manner as the Contracting Officer may direct so as to reduce the amount payable by the Government under this Article.

(b) The Government shall, upon such termination of this contract, pay to the Contractor the contract price of all supplies (including spare parts, drawings, information, and other things) called for herein which have been completed in accordance with the provisions of this contract and to which title has been received by the Government under the provisions of Paragraph (a) (2) of this Article and for which payment has not previously been made.

(c) In addition to, and without duplication of, the payments provided for in paragraph (b), or of payments made prior to the termination of this contract, the Government shall pay to the Contractor such sum as the Contracting Officer and the Contractor may agree by Supplemental Agreement is reasonably necessary to compensate the Contractor for his costs, expenditures, liabilities, commitments, and work in respect to the uncompleted portion of the contract so far as terminated by the notice referred to in para

graph (a). The Contracting Officer shall include in such sum such allowance for anticipated profit with respect to such uncompleted portion of the contract as is reasonable under all the circumstances.

(d) If the Contracting Officer and the Contractor, within 90 days from the effective date of the notice of termination referred to in paragraph (a) or within such extended period as may be agreed upon between them, cannot agree upon the sum payable under the provisions of paragraph (c), the Government, without duplication of any payment made pursuant to paragraph (b) or prior to the termination of this contract, shall in the above events compensate the Contractor for the uncompleted portion of the contract as follows:

(1) By reimbursing the Contractor for all actual expenditures and costs certified by the Contracting Officer as having been made or incurred with respect to the uncompleted portion of the contract;

(2) By reimbursing, or providing for the payment or reimbursement of, the Contractor for all expenditures made and costs incurred with the prior written approval of the Contracting Officer in settling or discharging that portion of the outstanding obligations or commitments of the Contractor which had been incurred or entered into with respect to the uncompleted portion of the contract; and

(3) By paying the Contractor, as a profit on the uncompleted portion of the contract insofar as a profit is realized hereunder, a sum to be computed by the Contracting Officer in the following manner:

(A) The Contracting Officer shall estimate the profit which would have been realized on the 'uncompleted portion of the contract if the contract had been completed and labor and material costs prevailing at the date of the termination had remained in effect.

(B) Estimate, from a consideration of all relevant factors, the percentage of completion of the uncompleted portion of the contract.

(C) Multiply the anticipated profit determined under (A) by the percentage determined under (B). The result is the amount to be paid to the Contractor as a proportionate share of profit, if any, as

above provided. Notwithstanding the above provisions, no compensation shall be paid under this Paragraph (d) by way of reimbursement for expenditure, including expenditures made in settling or discharging obligations or commitments, or by way of profit on account of supplies and other things which are undeliverable because of destruction or damage, whether or not because of the fault of the Contractor.

(e) The Government shall pay to the Contractor such sum as the Contracting Officer and the Contractor may agree upon for expenditures made and costs incurred with the approval of the Contracting Officer (a) after the date of termination for the protection of Government property, and (b) for such other expenditures and costs as may be necesary in connection with the settlement of this contract, and in the absence of such agreement as to the amount of such expenditures and costs shall reimburse the Contractor for the same.

(f) The obligation of the Government to make any of the payments required by this Article shall be subject to any unsettled claim for labor or material and to any claim which the Government may have against the Contractor under or in connection with this contract, and payments under this Article shall be subject to reasonable deductions by the Contracting Officer on account of defects in the materials or workmanship of completed or partially completed supplies delivered hereunder.

(g) The sum of all amounts payable under this Article, plus the sum of all amounts previously paid under this contract, shall not exceed the total contract price, adjusted in the event that this contract contains an article providing for price adjustments, on the basis of the estimate of the Contracting Officer, to the extent which would have been required by such article if this contract had been completed and labor and materials costs prevailing at the date of termination had remained in effect.

(h) Should the above provisions of this Article not result in payment to the Contractor of at least $100, then that amount shall be paid to the Contractor in lieu of any and all payments hereinbefore provided for in this Article.

(i) The Government shall promptly make partial payments to the Contractor.

(1) on account of the amounts due under paragraphs (b), (c), and (d) of this Article to the extent that,' in the judgment of the Contracting Officer, such payments are clearly within the amounts due under such paragraphs, and

(2) of such amounts as the Contracting Officer may direct, on account of proposed settlements of outstanding obligations or commitments, to be made by the Contractor pursuant to paragraph (d) (2) of this article, if such settlements shall have been approved by the Contracting Officer and subject to such provisions for escrow or direct payment to the persons entitled to receive such settlement payments as the Contracting Officer may require.

(j) Any disputes arising out of termination under this Article shall be decided in accordance with the procedure prescribed in Article 12 of this contract.

(k) Upon the making of the payments called for by this Article, all obligations of the Government to make further payments or to carry out other undertakings hereunder shall cease forthwith and forever, except that all rights and obligations of the respective parties under the Articles, if any, of this contract applicable to patent infringements and reproduction rights shall remain in full force and effect.

(1) The Government shall terminate this contract only in accordance with this Article, except as otherwise provided by law or by Article (Delays-Damages) and any defaults of the Contractor, the Government shall terminate this contract only in accordance with this Article if such termination is simultaneous with or part of or in connection with a general termination of war contracts at, about the time of, or following the cessation of the present hostilities or the end of the present war, unless the Contracting Officer finds that the defaults of the Contractor (1) have been gross or willful and (2) have caused substantial damage to the Government.

The foregoing clause may be inserted in any contract as to which its inclusion is not mandatory. (See also paragraphs 324.4 and 370 et seq.) In connection with the Termination Article set forth in this paragraph,

see Section IX of Procurement Regulation No. 3. Mr. HARNESS. I think at that point the gentleman from North Carolina (Mr. Durham) asked about the termination clause.

Mr. MARBURY. This is a copy of a procurement regulation which, except for the introductory sentence, is merely the standard termination clause. The introductory sentence sets forth in what type of contract the clause must be used. It says “every lump-sum supply contract except the following will contain the following clause."

Mr. DURHAM. You are making settlements today under this clause?
Mr. MARBURY. Yes, sir; we are.
Mr. JOHNSON. This covers the whole procedure ?

Mr. MARBURY. Perhaps not the whole procedure, but to a very considerable extent. It is outlined in there.

The clause was prepared in an effort to give the Government the protection to which it is entitled, but at the same time to give the contractor fair treatment.

The contractors, naturally, are very much concerned about a clause which permits their contracts to be terminated in midstream, so to speak, and it is necessary to insert in that clause provisions which give them the security that they are reasonably entitled to.

In summary, the contract gives the contractor the unit price of complete supplies, and fair compensation for his cost and expenditures on the uncompleted portion of the contract, plus a reasonable profit for that part of the work which he has completed and which actually has been done.

Mr. DURHAM. Who has the final authority in the settlement of the claims? Does the War Department pass on such a claim, or is it settled in the corps area?

Mr. MARBURY. The contracting officer negotiates the settlement. The contractor is entitled, in the event of any dispute on questions of fact, to take the matter to the office of the Secretary.

Mr. DURHAM. Does the contracting officer in the corps area have authority to terminate a contract?

Mr. MARBURY. It is not strictly in the corps area, but substantially that is right. It is the contracting officer probably of the Procurement District of one of the technical services, or the Air Force.

In the Chicago ordnance district they are now negotiating settlement of a number of contracts and those negotiations are conducted by persons who are in the office of the contracting officer, who is the commanding general of the Chicago ordnance district.

Mr. DURHAM. Is there some one here who passes on it?

Mr. MARBURY. In some instances. There will be a termination group engaged in conducting termination settlement negotiations.

Mr. DURHAM. Do you recall at the present time how many contracts have been settled ?

Mr. MARBURY. I think the figure is about 1,800 which have been actually settled out of about 3,800 that have been terminated since the war began.

The CHAIRMAN. Let me see if I cannot get to the meat of the matter. The War Department is still pursuing the practice of issuing letters of intent to some large concerns as prime contractors. Then the prime contractor is permitted, under this clause, under the War Department practice, to let subcontracts to people who furnish parts of the supplies that the prime contractor has agreed to furnish. As a result there may be one part made here and another part made somewhere else that have ceased to be required for the war effort. Then you want to close the contract, so far as one subcontract is concerned, and let that contractor do something else which he can do, but you think you do not have authority to close that contract and make a settlement, and you want to have this money made available so that you may make whatever settlement is desirable with the subcontractor. Is that a typical case?

Mr. MARBURY. There are some such cases, Mr. Chairman, but that is not a typical case. That is not the problem with which we are trying to deal.

May I illustrate that by calling attention to a termination which has attracted some public attention, and that is in connection with a contract with the International Harvester Co. for the production of tanks. I believe that the estimates are that the uncompleted portion of that contract may run to $225,000,000.

The number of subcontractors who are interested and whose money is involved in the termination runs to about how many, Colonel Cutter?

Colonel CUTTER. In the first tier they run to about 300, and in the second tier they run into about 1,000.

Mr. MARBURY. Those men have received notice from their prime contractors that the thing is called off. They have got to make disposition of the raw materials and the work in process that they have on hand and be paid for that, and get busy doing other work.

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