the administrative procedures which will be laid down by the responsible executive officers.

I think that a fair indication of the form which such regulations would take would be an indication of the requirements which have been prescribed for advance payments and loans, and there very careful review of the security is required, both by the Army and by the Navy, the matters are reviewed by the advance payment and loan sections of the chiefs of the technical branches, and by the advance payment and loan sections of the fiscal director of the Army service forces, and very carefully analyzed before a guaranteed loan is made, or before an advance payment in the technical sense is made.

Similar regulations would unquestionably be prescribed for the review, which should take place by contracting officers and by the chiefs of the technical services, in a preliminary way, of the amount of these claims, and the extent to which the claims would certainly equal the amount of the advance. Standards would be prescribed for application in determining, in a preliminary way, what the advances might properly be; standards of analysis of the financial condition of the contractor who is being dealt with in the particular case, would unquestionably be prescribed by the fiscal director.

It would be the sort of scrutiny which has been employed in connection with the "V" loans, the sort of scrutiny which has been employed. in connection with advance payments.

I think, therefore, you must view this in the light of authority to exercise reasonable administrative procedures in carrying out a broad, general policy, and one in which the administrative department concerned will be just as anxious as you are to see that there is no abuse.

Mr. MARTIN. Except this-along the line, I think, that Mr. Burton is driving at-that in making an advance payment you, by the very nature of the transaction, are moving with greater speed and less supervision than you would on the final determination of the amount of final settlement of any claim.

Colonel CUTTER. That is true.

Colonel FRIEDLICH. That is why you cut the percentage of your advance payment down to a point more than you think you ought to, or would be required to cut it. If you feel you are safe in paying the man $100,000,000

Mr. MARTIN (interposing). Who is going to determine what percentage it is safe to pay?

Colonel FRIEDLICH. Number one would be the regulations of the Secretary of War that would fix that over-all. Now, when you get all through with it, the contracting officer, who, as Colonel Cutter has said, is not a contracting officer at all but a collection, an office, an organization, in the last analysis would. have to do it, with such safeguards as the fundamental regulations of the Secretary of War or Navy would set up.

Mr. MARTIN. Now, I would like to ask, along that line, about the conclusiveness of a finding of fact. I have been struck by the contrast of the final sentence in the Navy contract, this one under 1172-P (reading):

The finding of fact of the contracting officer shall be final and conclusive, subject only to appeal within 30 days by the contractor to the Secretary of the Navy or his duly authorized representative, whose decision on such appeal, as to the facts of the failure or delay, shall be final and conclusive.

There is no similar clause in the other termination article.
Mr. KENNEY. There is by reference.

. Colonel CUTTER. Section 12 covers that.

Mr. HAWES. Mr. Chairman, may I ask a question about this request for an analysis of the bill? Was that also to include the War Production Board?

The CHAIRMAN. I believe so.

Mr. MARTIN. We would like to have that analysis from all of them. Mr. HAWES. All right.

ANALYSIS

Memorandum.

WAR PRODUCTION BOARD, Washington, D. C., June 26, 1943.

To: Mr. H. Ralph Burton, General Counsel, Military Affairs Committee, House of Representatives.

From: Alexander B. Hawes, Assistant General Counsel.

As requested by the subcommittee on June 24, I am enclosing a memorandum analyzing and commenting on H. R. 3022, as revised. You will notice that this memorandum contains certain criticisms of the bill. I am sorry that I was not in a position on Thursday to give these criticisms. If you would like a further clarification of our point of view or suggestions for carrying it into effect, I should be glad to come up to talk with you or to appear before the members of the subcommittee. I am authorized to say that the views expressed in this memorandum have received the personal approval of Mr. Nelson as Chairman of the War Production Board.

Enclosure.

Memorandum.

JUNE 26, 1943.

To: Hon. Carl T. Durham, chairman, subcommittee of the Military Affairs
Committee, House of Representatives.

From: John Lord O'Brian, General Counsel.
Subject: H. R. 3022, as revised.

This memorandum is submitted in compliance with the request, made to Mr. Hawes by your subcommittee, for an analysis of and comments on the bill H. R. 3022, as revised.

1. Legislation of this general character is needed. Doubt exists in the minds of many contracting officers as to their authority to make advance payments on terminated contracts. The authority granted by the First War Powers Act to make advance payments is interpreted by many to apply only where such payments will facilitate production under an unterminated contract. The War Department reports that, out of over 1,900 terminated contracts now in the course of settlement, advance payments have been made only in the case of 44.

At the same time it reports that 500 settlements now pending relate to contracts which were terminated more than 6 months ago. If there is any increase in the number of terminations during the war, and, certainly, when the flood of terminations at the end of the war takes place, even more delay in securing final settlements can be anticipated. No matter how clearly the rights of the Government and contractor upon termination are stated by contract clause or by regulation, still a large number of settlements will be delayed for a long time. This is because any settlement fair to both the Government and the contractor must bear some relation to the costs incurred by the contractor. Securing a statement of such costs will require the services of cost accountants, either employed by the Government or by the contractor. Certainly at the end of hostilities, when the major terminations occur, there will be such a shortage of a accounting personnel that, aside from all questions of interpretation of the rights of the parties, delay will occur in the ascertainment of the accuracy of the most straight-forward claims.

In the meantime contractors and their subcontractors will have large amounts of their capital tied up in claims against the Government. Some means of interim financing must be found, or the American economy, particularly at the end of the war, will face disaster. This bill would provide such a means.

2. The subcommittee has asked whether it would be feasible to place in the bill a percentage limitation on the amount of advances which might be made, in order

to safeguard the Government against loss through overpayment. One suggestion advanced has been that the payment be limited to a percentage, say 75 percent of the amount estimated by the contracting officer to be due. A limitation of this kind, in the statute, might possibly defeat the purpose of the legislation. Under such an arrangement, the contracting officer might feel it necessary to buttress his estimate by such detailed examination of accounts as to delay the advance payment beyond the period in which it would do any good. A better sort of base on which to calculate the percentage would seem to be the amount of certain costs certified by the contractor (perhaps as a minimum amount due). The types of costs which could be included in such a statement might well be limited to the types which are most easily ascertainable, such as direct labor and direct material costs and some others, where the question of allocation and other difficult questions do not create too much uncertainty. On the whole, it is believed that such a limitation can better be developed in a regulation or contract clause, rather than in the statute, since its terms may vary as between different types of contracts and contracts for different items.

If such a limitation is inserted in the legislation, however, it is recommended that authority be granted to exceed the limitation with the approval of the head of the department or his authorized representative. This will give necessary flexibility in cases where extraordinary hardship calls for a higher payment.

3. The bill, in its present form, appears to be open to two principal criticisms. In the first place, the bill is merely an enabling act or grant of power. Whether it will be of any benefit whatever to contractors and subcontractors entirely depends upon further action by the departments involved. On this subject, representatives of contractors and subcontractors have made the point that they want the right to receive advance payments and that they are not satisfied merely with the grant of a power to the contracting officer, which he may or may not exercise according to his discretion. Obviously, such discretion may be wrongly used. Even more serious than this criticism, however, is the fact that if payment is discretionary, the discretion will probably be exercised with a great deal of caution. The result will be that advance payments will be made to financially strong contractors, just those members of industry who probably do not need them, while financially weak contractors who desperately need funds to survive may well be refused all advances. It is recommended therefore that the legislation be altered so as to direct advance payments, within limitations to be established either in the statute itself or by regulation. Beyond such limitations the bill should probably continue to authorize discretionary payments, subject to the approval of the head of the department or his authorized representative. To safeguard the Government against loss, through overpayment, authority could be given to require the furnishing of a proper bond.

The second criticism is that, in its present form the bill will probably result in a diversity of procedures with respect to advance payments. The bill gives the authority to prescribe the governing rules and regulations to the head of each of the Departments concerned (War, Navy, Treasury, and Maritime Commission). Under this provision a contractor who did business with more than one of these departments might easily be required to present requests for advance payments supported by schedules drawn up in different ways according to the regulations of the different departments. Every effort should be made to secure uniformity in procedure throughout the Government, on this subject as on others. The very considerations which make it desirable to have uniformity in the terms and principles of termination clause also make it desirable to have uniformity in the procedures for requesting and granting advance payments in case of termination. It is recommended, therefore, that the authority to issue regulations governing advance payments on termination should be lodged in a single body, leaving to the individual departments authority to prescribe detailed regulations not inconsistent with the general overall regulations so issued.

The Chairman of the War Production Board is the logical coordinating official for this purpose. He is now advised by a Procurement Policy Division, which has set up a Procurement Policy Board, including representatives of the more important procurement agencies, such as War, Navy, Treasury, and Maritime Commission. The Procurement Policy Board, as advisor to the Director of the Procurement Policy Division of the War Production Board, can assist the Chairman of the War Production Board in performing the extremely important function of coordinating policy on all questions of termination, as it has on certain important questions of procurement in the past.

The CHAIRMAN. We would appreciate it if you could get those to us by tomorrow.

Mr. HAWES. I will try to do so.

Colonel CUTTER. The problem of settlement of these terminated contracts is a problem of getting a contractor and his hierarchy of subcontractors in various tiers, from work which they legitimately expected to finish, into other productive war work. If termination occurs at the end of the war it will be a problem of getting them into other productive peace work.

The man who finds his plant suddenly shut off from doing the work which he was all set up to do, must turn from operations to proving how much the Government owes him for what, in the absence of a termination clause, would be a breach of contract. He must devote his time to inventories and accounting, but he has got to meet pay rolls as they come along and has got to keep his organization together in the meantime.

It is particularly hard in the case of the smaller subcontractors down the line who must reach the source of all these payments through perhaps one or perhaps two tiers of subcontractors, and still go through the prime contractor in getting reimbursement.

Some of those people are going to be very seriously embarrassed; unless we can improve our administrative procedures for getting money out to them fast, they are going to be embarrassed if they are not going to be able to borrow in some form or another upon the security of their right to compensation for the termination of their subcontracts.

The CHAIRMAN. Are you having that difficulty at the present time? Colonel CUTTER. We are having some of that difficulty at the present time. We are trying to meet it administratively. The feeling is that we ought to be able to apply the same "V" loan procedure that we apply in connection with productive contracts which have been terminated. We want to be in a position which the banks will recognize as being satisfactory to guarantee these loans to the extent that it seems wise to do so, pending investigation.

We realize that final settlements are going to take a substantial amount of time. They have got to take a substantial amount of time in order to protect the interests of the Government-

The CHAIRMAN (interposing). Ordinarily, how long does it take, operating under your present system?

Colonel CUTTER. I can't give you any average figure. I can tell you that out of approximately 1,900 settlements now pending we have somewhere between four and five hundred that are over 6 months old. Mr. MARTIN. And that situation will increase in volume and delay as the terminations pile up?

Colonel CUTTER. Well, I hope we are going to improve our administration as time goes on, regardless of what we do. In other words, I hope we can speed up our settlements. This whole termination problem has come upon us, sir, in the last 6 to 8 months. The size of the thing has grown very rapidly. I expect that that is true with respect to the Navy, as well. I understand that it has grown in the Maritime Commission.

We have been getting experience, and as we get experience we are going to improve our procedures. As a matter of fact, at the present

time a very careful study is being made of the principal causes of delays; regulations are to be revised; we have men out in some of the districts at the moment, studying the procedures in force, trying to cut down the time involved in carrying on the various steps that are necessary in connection with checking these contractors and their claims for compensation for termination of contracts.

The CHAIRMAN. Do you feel that you have got to delegate more authority to these contracting field officers to expedite this?

Colonel CUTTER. I think the primary thing we have got to do is to work out, by an intelligent study of the operations of some of the terminations now in progress, methods which will expedite their operations. They have broad discretion, as it is now, but the problems have come up. They have been met as they came up as well as we could, but we have got to prescribe procedures and forms and routines which will deal with these problems as efficiently as possibly can be done.

Mr. MARTIN. And we must, of course, prepare for a situation that may involve an increase in the volume of that termination of contracts.

Colonel CUTTER. I think it would be hopelessly impossible to predict whether it is going to increase or decrease. This war is a changing war in a great many respects. I think all of you have imagination that would enable you to conceive of situations which might require very substantial changes in the whole Army supply program, and the whole Navy supply program.

The CHAIRMAN. If that were to come all of a sudden it would create almost chaos in your whole industry?

Colonel CUTTER. That is true, and unless you provide the tools for financing these contractors and subcontractors, you are going to be faced with a very serious situation if a lot of these terminations come at once.

In other words, we have got to be authorized to set up the procedures now that will deal with the volume of difficulties that may confront us if a great many terminations take place at once.

The CHAIRMAN. Industry throughout the country, certainly with the termination of the war and all contracts, couldn't exist on the basis of your present situation, having so many claims which you haven't settled after a period of six months?

Colonel CUTTER. It would be impossible, and industry is apprehensive about this, there is no question about it. I expect that Mr. Hawes, over at W. P. B., Mr. Kenney at the Navy Department, and I, have received in the course of a week perhaps twenty-five calls from different companies, worried about the termination situation. You find subcontractors apprehensive about it. You get reports constantly of very serious concern about it all through industry; trade associations are consulting with us all the time on the problem, and it is one of the most serious problems which confront us at the present time.

Mr. MARTIN. We cannot permit a situation to develop where these industrials engaged in war production are stopped for a period of six months or for any appreciable period, because of the cancelation of these contracts.