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Mr. FENTON. Colonel, have any of you gentlemen in your experience in settling these termination contracts run up against the problem of it being more difficult with those contracts that are put out on com: petitive bidding, or on negotiated contracts?
Colonel CUTTER. Practically no contracts at the present time are put out on competitive bidding. The War Production Board directive No. 2, issued originally I think in February 1942, and amended last October, directs all the procurement agencies to place all contracts under the First War Powers Act by negotiation. However, that does not mean that competition is excluded in the placement of contracts.
Dr. FENTON. Well, subcontractors have to bid.
Colonel CUTTER. The bids are carried out informally, that is there isn't the old procedure, but competition is obtained by informal bids both by the Government and by prime contractors. "So it would be very difficult to answer your question even if I personally knew, which I do not, because practically no contracts for war purposes are now placed by the old formal bidding procedure. So I don't see how I could answer the question. As a matter of fact, I am not personally engaged in the operations end of the settlement of contracts.
My problems have been primarily in connection with the drafting of termination articles and the over-all procurement regulations which govern termination procedures. I have done work on both those bases, but I have not been engaged at all personally in the actual negotiation of settlements.
I think the only one here who has been engaged in that work would be Lieutenant Gilchrist who has been in charge of that for the Navy.
Mr. BURTON. I would like to ask one question right here, Colonel Cutter. Is it not reasonable to suggest that in this proposed bill there be a limitation, based upon a percentage, as to the amount which a contracting officer could pay?
Mr. MARTIN. That is exactly the question I was going to ask, and I would like to ask the various groups represented here to include some discussion of that point in your report to us, because we will be asked that just as sure as can be, the first thing, in any discussion of this legislation.
Lieutenant GILCHRIST. I am the contracting officer that you have heard mentioned, and I have to resolve all these questions which say "in his discretion," and that is an awful job.
In some cases I have made partial payments where it is clearly a partial payment, just a question of paying money in installments. I think we have got to do that, and I will bring that up in answer to one of your questions in a minute.
Take the case where we canceled ammunition lockers: We had the material on hand, we knew what the material cost. The charge was entirely for material, no labor, it was what he had on hand. We had the recommendation of the Bureau of Ships in that case, which is a technical bureau, and they said, “We think this claim for (so many thousand dollars) is fair” because he itemized the material, it was described, and they felt that I could make a partial payment, we will say, of 75 percent.
But take the case of radio and radar equipment, which is very fancy and we don't know how much these claims of $2,000,000 will be reduced by diversion of material to other contracts that the fellow will get. There I would hesitate to do anything over 50 percent because of the very type of situation.
So I don't think, I don't see how, you can lay down a rule which will work in all cases. It depends on the type of material, what items of cost are included in the charge, plus the possibility of giving new business which will divert material and thereby reduce his charge.
Mr. BURTON. But under this bill you could pay 100 percent?
Mr. BURTON. And he relies upon recovering back from that contractor whatever excess payment is made?
Lieutenant GILCHRIST. Here is a question you asked before—what does this bill do that the contract provision does not do?
I have always had a very serious doubt as to the present authorityI don't think there is any authority—for the Navy to make an advance payment on a canceled contract.
Not even though a contracting officer is very sound, and we will take this particular case: We have a sound company that comes in, and maybe I will take the next step and make him put up a bond for its repayment; and then it turns out that because of diversions, that this payment I make of $100,000 is in excess of his net and final claim. There is no criticism of my judgment if I have the power to make an advance payment. He was a good risk for the loan and he paid it back. But I didn't have the authority to make an advance payment on a canceled contract. That is what you need in the law. Then the contracting officer can make that advance on the same basis as he would make an advance on existing contracts.
Mr. BURTON. But if you have the inherent right to settle with the contractor finally on an agreed settlement, you have the inherent right, it would seem to me, to make a payment on account.
Lieutenant GILCHRIST. Yes; but you are putting on the contracting officer a tremendous burden in trying to look into the crystal ball and saying, "I will make a payment on the chance-"
Mr. BURTON (interposing). But you are asking Congress to take that chance.
Lieutenant GILCHRIST. All the bill asks Congress is, "Give us the authority to make an advance payment on the same sound basis we presently make advance payments to a contractor."
Mr. MARTIN. I would like to refer, Lieutenant Gilchrist, to the point made before. In my opinion there is considerable difference between an advance payment on a going contract and an advance payment on a canceled contract where your stress is on making a quick payment to industry before you may have an opportunity to settle all the factors involved in the termination. You have standards for arriving at your reimbursement or payment on a going contract for a finished product, but you have many more dangerous or more uncertain factors involved in a terminated contract.
Lieutenant GILCHRIST. I agree.
Mr. MARTIN. And it is that element of risk that I think we as a committee must give some consideration to and consider putting a
reasonable limit on it. I don't have any suggestion as to the percentage, but I would like to have an opinion from all the departments and agencies involved, as to some reasonable percentage, some upper limit that can be paid on a terminated contract as an advance payment before the factors are all finally determined.
Lieutenant GILCHRIST. That is right, Mr. Martin. The point I was making is that I was directing myself to the question of why we needed the statute—and I am saying that supposing we even put in a 75 percent roof, and we paid it, but ultimately, for some reason or other, such as diversion of materials which reduced the cost, that payment turned out only to be 70 percent—now the
contracting officer, and I will be a very conservative contracting officer, I will take a bond for that money, so there is no criticism of my financing, but by hindsight now it appears that I made an advance payment that wasn't due, it wasn't a partial payment because it was in excess—I don't think the law authorized me to make an advance payment on a canceled contract no matter how conservatively I made the advance, and I suggest that in answering Congress' point about delegating this right to advance payments by the Navy or the Army or other agencies, you are relying on the same judgment in making the advance as you have relied on when you gave them the power to make an advance on a going contract.
True, the dangers are greater. Therefore, the financing officers have got to be a lot more careful, but they can be careful. But they have no authority, right today, to make an advance payment, I believe, on a canceled contract, on whatever basis.
Colonel CUTTER. I think that the really important question is not whether they have the authority, but whether they will exercise it, and you have here, as exhibit A, a contracting officer who is sufficiently worried about the point so that he would be reluctant to exercise it.
Lieutenant GILCHRIST. I have refused to, and I have had cases where the contractors have come to me-to implement what the Colonel has said—and have said, “Let me off the hook; let me out of the contract; I will pay you whatever you think your damage is.” And I would say, "Why, we need the stuff.” And he would say, "Because I just got to thinking of what will happen at the end of this war when the contract is terminated, there will be a delay before you pay me off, and this contract has been hocked in the bank in the meantime, the bank will want their money, but we won't get our money for
Mr. BURTON. You have two things there, then; you have the principle of authority to a contracting officer to make an advance payment, and you have the question of degree—that is, how great that should be—and that is the point which I have been making here.
Mr. MARTIN. And at some point it is going to be dangerous to go up to 100 percent by way of advance payments. And the question I would like to ask is whether or not we should incorporate any modification in this legislation?
Mr. KENNEY. Just before I came over I talked to our disbursing officer in the Navy Department and asked him how many payments on account, or advances, he had made on terminated contracts. And out of 1,500 contracts he said he had made about 6. He had made those 6 because there was great urgency in those cases. They needed the contractor to do work; other war work.
He said, “I knew I was taking a chance when I did it, but I got the cost-inspection people to go in and take a look and they estimated that the amount paid on the terminated contract would not be in excess of a certain number of dollars, and I made a payment on account for that amount."
When the termination of all these contracts comes at the end of the war you are not going to be able to get your cost-inspection people to go in and take that preliminary "look-see.”
Lieutenant GILCHRIST. And if you did, your preliminary audit is still going to take some time. I had a case the other day where the subcontract involved $4,000,000, and to make a preliminary audit would require a certain amount of time, and the auditors in the Navy, just like in the Army, are scarce, as compared to the need for them.
Mr. MARTIN. And the difficulty you are going to have in getting a preliminary audit only emphasizes the dangers of paying 100 percent.
Lieutenant GILCHRIST. We agree to that.
Colonel FRIEDLICH. I don't think, Mr. Martin, if you leave it open, that there is any danger in the world that any contracting officer is going to be allowed to pay, or would pay, 100 percent. There may be the very, very exceptional case where, to keep the business going, with the country needing the product, they might do it; but these fellows have a lot of pride, they don't want to stick their necks out.
Mr. MARTIN. Don't misunderstand my point, Colonel, I hope my comment here doesn't cast any reflection on any contracting officer, as I don't intend that at all. I am only thinking now of what is good, sensible legislation by Congress as a congressional effort to meet the situation, whether or not the percentage should be included in the law—and not to cast any reflection at all.
Colonel FRIEDLICH. I think, Mr. Martin, if you were dealing with a subject matter where there was definiteness, where you knew what the subject was going to be with some certainty, that it would be perfectly proper to put a limit of X percent; but here we are in an unknown field, certainly after the war, and' in a fairly unknown field right at the present moment.
Now, we also know that whatever limit you put, there are going to be some cases where we are going to be sorry
we could not
above that limit, in a special case.
Mr. BÚRTON. Isn't it reasonable to pass legislation now with a limit, which at least would be safe from the standpoint of Congress, and then if you find, in the course of months, that there are special instances, or that there is a good reason for a modification of that legislation, you could come back to the committee and point them out.
Colonel FRIEDLICH. That is quite true if the time in which we could possibly get the quickest action doesn't damage us.
Mr. "MARTIN. Or could we provide that no percentage above a certain percent should be paid as an advance payment without the express approval of the Department head?
Colonel FRIEDLICH. Yes; the Secretary of War in this case, or to whom he might delegate that approval.
There used to be a statute, I know it was in force in the last war, that the Government couldn't make any advance payments. For example, they had to get the Comptroller's decision to allow a Government officer to go up and pay a railroad for a ticket, before he took a ride.
Mr. Hawes. Colonel Cutter discussed the Army termination clause at length this morning, and I imagine that it will have some effect on the consideration of the bill by the committee; but I want to call your attention to the fact that a revision of the clause is under consideration at the present time, which may change some of the provisions in the present Army clause, although I don't think in any important respect that would influence your judgment.
The CHAIRMAN. Well, gentlemen, we must adjourn at this time. I want to thank you very much for your contributions, and we will now go into executive session to determine when we shall meet again.
Pending that, the committee will recess, subject to the call of the chair.
(Whereupon, at 1:10 p. m., the committee recessed, subject to the call of the Chair).