We have, in the Army, a standard form of termination article for lump-sum supply contracts which is before you, and which was presented at the hearing yesterday. We also have a standard form of termination article for lump-sum construction contracts.

We have, in addition to that, a standard form of termination article for cost-plus-a-fixed-fee construction contracts. Our termination articles for cost-plus-a-fixed-fee supply contracts vary in the manner in which you suggest.

The CHAIRMAN. Now can you furnish for the record at this point each type of clause that you insert in these contracts?

Colonel CUTTER. Well, I can furnish you here, which might be marked exhibit 1

The CHAIRMAN (interposing). I think that should go right in the record.

Colonel CUTTER. I am presenting paragraph 324 of Procurement Regulation No. 3, which contains the standard lump-sum supply contract termination article in use in the Army. I have some other copies here which the committee may find convenient to use, as the lines are numbered.

Mr. MARTIN. That is the same one we were given yesterday, page 3? Colonel CUTTER. Yes; I had some extra copies made when I got back, in order to supply the members of the committee who didn't have them.

PARAGRAPH 324.1

Hon. CARL T. DURHAM,
Committee on Military Affairs,

House of Representatives, Washington, D. C.

JUNE 25, 1943.

DEAR Mr. DURHAM : There are submitted to you herewith copies of termination article used in lump-sum construction contractors (War Department Procurement Regulations, par. 324.1) and termination article found in cost-plus-a-fixedfee-contract Form No. 32 which is used to some extent in the Army Air Forces. This is in accordance with request made of Lieutenant Colonel Cutter at a hearing before your subcommittee' on Thursday morning, June 24, 1943.

Sincerely yours,

JULIUS AMBERG,

Special Assistant to the Secretary of War.

[324.1] Every lump-sum construction 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 the following clause without deviation: Article * * Termination for Convenience of the Government. (a) The Government may terminate this contract in whole or in part at any time by a notice in writing from the Contracting Officer to the Contractor, specifying the date upon which such termination shall become effective and the extent to which the performance of such contract shall be terminated. Termination shall be effective upon the date and to the extent specified in said notice. (b) Upon receipt of the notice of termination the Contractor shall except insofar as the notice directs otherwise with respect to this contract, or, in the event of partial termination, with respect to the part thereof covered by the notice:

(1) Discontinue all work and the placing of all orders for materials and facilities otherwise required for the performance thereof;

(2) Cancel all existing orders and subcontracts to the extent such orders and subcontracts are chargeable to the performance thereof;

(3) Transfer to the Government, in accordance with the directions of the Contracting Officer, all materials, supplies, work in process, facilities, equipment, machinery or tools acquired by the Contractor in connection with the performance thereof, and all plans, drawings, working drawings, sketches, specifications and information for use in connection therewith. 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 materials, supplies, equipment, machinery, tools, or other things, provided, however, that the Contractor may retain any such equipment, machinery and tools as of right if he so elects in writing, stating that he will forego reimbursement therefor. The proceeds of any 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.

(4) 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 chargeable thereto to the extent that such orders or subcontracts are so chargeable;

(5) Take such action as the Contracting Officer may prescribe for the protection and preservation of all property in the possession or control of the Contractor, title to which is transferable to the Government under the provisions of this article.

Should the notice of termination cover only a portion of this contract, the Contractor will proceed to completion of such portions as are not terminated. (c) Upon compliance by the Contractor with the above provisions of this Article and subject to deductions or credit for payments previously made, and without duplication of any such payments, 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 with respect to this contract, other than the expenditures and costs referred to in paragraph (e) of this Article. The Contracting Officer shall include in such sum such allowance for profit with respect to 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 shall instead compensate the Contractor in the following manner, subject to deductions or credit for payments previously made, and without duplication thereof, and upon compliance with the provisions of paragraphs (a) and (b) of this Article:

(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 this contract, including expenditures and costs made or incurred in connection with any portions of the contract which may have been completed prior to termination, as well as expenditures and costs made or incurred after termination in completing those portions of the contract which the Contractor may have been required by the notice of termination to complete.

(2) By reimbursing, or providing for the payment or reimbursement of, the Contractor for all expenditures made or costs incurred with the prior written approval of the Contracting Officer in settling or discharging any outstanding contractual obligations or commitments incurred or entered into by the Contractor with respect to this contract; and

(3) By paying the Contractor, as a profit on this contract, insofar as a profit is realized hereunder, an amount to be computed by the Contracting Officer in the following manner:

(A) Estimate the profit which would have been realized on this contract if the contract had been completed and labor and materials costs prevailing at the date of terminations had remained in effect.

(B) Estimate, from a consideration of all relevant factors, the percentage of completion of the contract including any work performed after termination. In estimating the percentage of completion, the Contracting Officer shall estimate the percentage of the total work required by the contract which the work actually accomplished represents.

(C) Multiply the profit determined under (A). by the percentage determined under (B). The product is the amount to be paid the Contractor as profit.

(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 necessary 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.

(1) 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 materials or workmanship.

(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 adjustment, 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 (c), (d), and (e) 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, an 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 * 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 (DelaysDamage). Notwithstanding 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 wilful 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 324.2, 324.3, and 324.4.) In connection with the Termination Article set forth in this paragraph, see Section IX of Procurement Regulation No. 3.

Colonel CUTTER. I did not have copies made of the lump-sum construction contract article, but have previously furnished to Mr. Burton, in Procurement Regulations, a copy of that article, which in many respects is similar to the one which I have just offered with respect to lump-sum supply contracts. With your permission, I will furnish those to Mr. Burton, and ask that they be included in the record. The CHAIRMAN. Without objection, that is ordered.

Colonel CUTTER. Those are found in paragraph 324.1 of the Army's Procurement Regulations.

I have here copies of paragraph 350 of the Army's Procurement Regulations, which contains the standard form of cost-plus-a-fixed-fee construction contract termination article, and I present that for the record:

(Par. 350). The following clause will be incorporated in all cost-plus-a-fixed-fee construction contracts without deviation:

TERMINATION FOR CONVENIENCE OF THE GOVERNMENT

1. The Government may terminate this contract at any time by a notice in writing from the contracting officer to the contractor. 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. Upon receipt of such notice, the contractor shall, unless the notice directs otherwise, immediately discontinue all work and the placing of all orders for materials, facilities, and supplies in connection with performance of this contract, and shall proceed to cancel promptly all existing orders and terminate all subcontracts insofar as such orders and/or subcontracts are chargeable to this contract.

2. If this contract is terminated for the fault of the contractor, the contracting officer may enter upon the premises and take possession, for the purpose of completing the work contemplated by this contract, of any or all materials, tools, machinery, equipment, and appliances which may be owned by or in the possession of the contractor, and all options, privileges, and rights, and may complete or employ any other person or persons to complete said work. Following such termination rental shall be paid to the contractor for such construction plant or parts thereof as he may own, and which the Government may retain at rates prescribed in article

* *

3. Upon the termination of this contract, full and complete settlement of all claims of the contractor arising out of this contract shall be made as follows: (a) The Government shall assume and become liable for all obligations, commitments, and claims that the contractor may have theretofore in good faith undertaken or incurred in connection with said work, the cost of which would be reimbursable in accordance with the provisions of this contract; and the contractor shall, as a condition of receiving the payments mentioned in this article, execute and deliver all such papers and take all such steps as the contracting officer may require for the purpose of fully vesting in the Government the rights and benefits of the contractor under such obligations or commitments.

(b) The Government shall reimburse the contractor for all expenditures made in accordance with article * * * and not previously reimbursed.

(c) The Government shall reimburse the contractor for such further expenditures after the date of termination for the protection of Government property and for accounting services in connection with the settlement of this contract as are required or approved by the contracting officer..

(d) The Government shall pay to the contractor any unpaid balance for the rental of the contractor's equipment in accordance with article * * * to date of termination.

(e) If the contract is terminated for the convenience of the Government, the contractor will be paid that proportion of the prescribed fee which the work actually completed bears to the entire work under this contract, less fee payments previously made. If the contract is terminated due to fault of the contractor, no additional payments on account of the fee will be made.

* *

(f) The obligation of the Government to make any of the payments required by this article, or by article of this contract, shall be subject to any unsettled claims in connection with this contract which the Government may have against the contractor.

4. Prior to final settlement the contractor shall furnish a release as required in article * ** hereof.

Colonel CUTTER. There is no standard form of cost-plus-a-fixed-fee supply contract termination article, but they are very similar to the provisions of the cost-plus-a-fixed-fee construction article, they vary

slightly depending upon the contract, the type of product which is covered by the contract, and the terms of the particular arrangement. The Air Forces have a good many airplane construction contracts which are really supply contracts, which are on a cost-plus-afixed-fee basis, and those, I think, almost uniformly contain a termination article.

The only other technical service-formerly supply services-which uses a cost-plus-a-fixed-fee supply contract to any extent is the Ordnance Department, and their practice is to make up a termination article for each particular contract roughly following the same pattern, but varying slightly. No termination article has been prescribed for use by the Ordnance Department, but I can give you a sample of one which perhaps may be included in the record.

The CHAIRMAN. Yes; we would like to have all these termination clause contracts included in the record.

Colonel CUTTER. I will give you Ordnance Form No. 1, revised to March 20, 1942, and call your attention to title V, termination, article V-A, reading as follows:

ARTICLE V-A. TERMINATION BY GOVERNMENT

1. The Government may terminate this contract at any time by a notice in writing from the contracting officer to the contractor. 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 which the contractor may have against the Government. Upon receipt of such notice, the contractor shall, unless the notice directs otherwise, immediately discontinue all work and the placing of all orders for materials, facilities, and supplies in connection with performance of this contract and shall proceed to cancel promptly all existing orders and terminate all subcontracts insofar as such orders and subcontracts are chargeable to this contract.

2. If this contract is terminated for the fault of the contractor, the contracting officer may enter upon the premises for the purpose of completing the work contemplated by this contract, take possession of any or all materials, tools, machinery, equipment and appliances, and exercise all options, privileges, and rights, and may complete and employ any other person or persons to complete said work. 3. Upon the termination of this contract, full and complete settlement of all claims of the contractor arising out of this contract shall be made as follows: (a) The Government shall assume and become liable for all obligations, commitments, and claims that the contractor may have theretofore in good faith undertaken or incurred in connection with said work and the cost of which would be reimbursable in accordance with the provisions of this contract; and the contractor shall, as a condition of receiving the payments mentioned in this title, execute and deliver all such papers and take all such steps as the contracting officer may require for the purpose of fully vesting in the Government the rights and benefits of the contractor under such obligations or commitments.

(b) The Government shall reimburse the contractor for all expenditures made in accordance with title IV and not previously reimbursed.

(c) The Government shall reimburse the contractor for such further expenditures, made after the date of termination, for the protection of Government property and for accounting services in connection with the settlement of this contract as are required or approved by the contracting officer.

(d) If the contract is terminated for the convenience of the Government, the contractor will be paid all fees which have accrued at the date of termination, less fee payments previously made. If the contract is terminated due to fault of the contractor, no additional payment on account of the fixed-fees will be made. (e) The obligation of the Government to make any of the payments required by this title shall be subject to any unsettled claims in connection with this contract which the Government may have against the contractor.

4. Prior to final settlement the contractor shall furnish a release as required in section 4 of article IV-B of title IV hereof.