TO AUTHORIZE THE SECRETARY OF WAR TO USE FUNDS FOR ADJUSTMENT OF CONTRACTS

FRIDAY, JUNE 25, 1943

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE OF THE COMMITTEE ON MILITARY AFFAIRS,

Washington, D. C.

EXECUTIVE SESSION

The subcommittee met, pursuant to adjournment, at 10:30 a. m., in room 1310, New House Office Building, Representative Carl T. Durham (chairman), presiding.

Present: Representatives Durham (chairman), Sikes, Martin, and Fenton.

Also present: Mr. H. Ralph Burton, general counsel, Military Affairs Committee.

The CHAIRMAN. We called this meeting for the purpose of analyzing H. R. 3022, the draft submitted by the War Department, which has to do with the termination of contracts.

Mr. Morgan, who is the legislative clerk, is here with us. We have called the hearing to try to analyze this bill.

STATEMENT OF GERALD D. MORGAN, HOUSE LEGISLATIVE

COUNSEL

The CHAIRMAN. Will you give the committee your explanation of this bill?

Dr. FENTON. Mr. Chairman, before Mr. Morgan starts, may I ask whether those various departments sent us their analyses?

The CHAIRMAN. Not yet.

Mr. MORGAN. I was up in Mr. Burton's office the other day when he had a conversation with Mr. Marbury from the War Department over the telephone which he asked me to listen in on, and in that conversation Mr. Marbury stated what the purpose of this is, what the need for this bill was. (See appendix 2, p. 136.) He said at the present time there is no question but what they have authority to enter into agreements for the settlement of claims arising out of the termination of contracts and to make payments to the contractors under those settlements. He did not, as I recall, state whether that authority existed to make payments to subcontractors and to suppliers. Do you recall that, Mr. Burton?

Mr. BURTON. I understand that he does not feel now that they have the right to deal directly with subcontracors, but that they can deal with them through the prime contractors.

Mr. MORGAN. Through the prime contractors?

Mr. BURTON. Yes.

Mr. MORGAN. He said that the problem, they believed, was this: When they cancel their contract with the prime contractor, why, the prime contractor in turn has to cancel all the contracts with the subcontractors, and the subcontractors with their subcontractors and suppliers. It just travels out like a spider's web and you sometimes have as many as 3,000 concerns involved, and these concerns have money tied up in these contracts and are being required by either the War Department or the Navy Department to perform other contracts, and as long as they have their money tied up in this particular contract, the subcontract or the supply contract, why, they cannot get their hands on the funds to finance other contracts which the War Department considers essential.

He said a great many of the subcontractors haven't an established credit and, hence, cannot get very substantial loans through credit channels, and so the War Department said in order to keep these subcontractors and suppliers going on their work, as well as to get the contractor going on their work, they had to devise some means of unfreezing, so to speak, the funds which the contractor, the subcontractors and suppliers had tied up in these contracts which had been terminated.

Mr. MARTIN. At that point, would there be any objection on their part, from what you understand, to a limitation being placed in the deal to limit payments for that purpose of enabling the contractors to enter into other war-production contracts?

Mr. MORGAN. Of course, I do not know. He said that was why they had to make the payments. You never can tell. I do not know what his position on that is. He said that was the purpose of it. To begin with, he said there was no doubt in his mind but what the War Department had authority to settle, that is, to enter into an agreement to settle the claims of prime contractors against the United States. He did not think—or at least he thought there was some doubt that the War Department had authority to make any payments to subcontractors or suppliers since they were not contractors with the United States and the United States had dealings with them only through the prime contractor.

He also said that he had doubt whether the War Department had authority, or at least there was considerable about it, to make advance payments in contemplation of settlement. He gave as an example the contract with the International Harvester Co. He said it might take 6 months to settle it. If there were a great deal of money tied up in that contract it was very possible the War Department did not want to wait 6 months until a final agreement had been entered into to settle the claim before they could make any payment at all to the International Harvester Co.

In other words, they want authority specifically to make advance payments in contemplation of settlement both to the prime contractor and to subcontractors and suppliers.

Now, in the case of payment to subcontractors and suppliers, since the United States has no contractual relationship with them it is necessary to make those payments either in the form of loans, secured, I take it, by an assignment of the subcontractors' or suppliers' claims

against their contractor, or the United States purchase the same, and I suppose they would become subrogated to the rights of the subcontractor or supplier.

Similarly, if the War Department wants to guarantee any loan which the subcontractor or supplier secures through regular banking channels, I take it that the guaranty would be secured by an assignment to the United States of the claim of the subcontractor or supplier against his contractor, and that, generally, is what the bill proposed to do.

Now, as I understand, under the regulations relating to lump-sum contracts they have a standard provision which is required to be inserted in all lump-sum contracts with respect to the payment which they are now making but which they doubt their authority to make. Mr. BURTON. They have a similar arrangement, as I understand it, so far as the cost-plus or fixed-fee contracts of suppliers are concerned. Although it is not in a definite form, there is a provision in every such contract for termination of the contract.

Mr. MORGAN. As I understand it, the provision varies from contract to contract.

Mr. BURTON. That is true.

Mr. MORGAN. That is not a standard form.

Mr. BURTON. But it does provide for settlement upon termination of the contract.

Mr. MORGAN. That is correct; yes. These regulations provide that the contracting officer cannot pay as an advance payment any more than 75 percent, I think. Is that correct, or is that just the practice? Mr. BURTON. Í do not think there is any definite amount which they are permitted to pay, but that they pay such amount as the contracting officer feels it is safe to pay.

Mr. MORGAN. I think that is correct. Mr. Marbury said that might vary. It might be 75 percent, it might be 80 percent. It is really what the contracting officer thinks it is safe to pay.

Now, there is also a provision relating to anticipated profits which contains a formula for computing anticipated profits on the uncompleted portion of the contract. Now whether anticipated profit is a proper element of damages or not, I do not know. Mr. Burton knows a great deal more about that than I do.

Mr. BUETON. It is an element of damages.

Mr. MORGAN. It is an element of damages, but under these payments which they make to the contractors and subcontractors at the present time, they do take into consideration the anticipated profits of the contractor on the uncompleted portion of the contract.

Mr. BURTON. Isn't it true that under this proposed bill it is possible for a contracting officer to pay even the full amount of what he estimates the amount of the settlement will be?

Mr. MORGAN. That is true. As a manner of proceeding I was going to say first what the War Department was going to do and then I was going to try to go into the bill for a little bit.

The CHAIRMAN. If you are through with that part of your statement, we will go into the bill.

Mr. MORGAN. Yes.

Mr. MARTIN. Just one question before you go into the bill. The explanation given you, that you listened in on, was that these firms

needed these advanced payments in order to facilitate their work on other war contracts?

Mr. MORGAN. That is right. It is really to free their working capital.

Mr. MARTIN. That is right. From the Government's point of view, it is to make them more able to continue war production?

Mr. MORGAN. That is right.

Mr. MARTIN. For the Government's benefit?

Mr. MORGAN. That is right.

Mr. MARTIN. I was wondering whether that would lead to the proper inference that at least during the actual war, up until the cessation of hostilities, the limitation might be proper, it might be proper to limit the advance payments on these cases where the funds so advanced are needed for further production in the war effort.

Would you have any impression of that kind from the explanation they gave you, or is it their desire to have a blanket authority to settle all contracts, whether or not that firm is in need of advance funds for further production in the war effort?

Mr. MORGAN. Mr. Marbury did not say anything which indicated one way or the other.

Mr. MARTIN. But he had expressed the opinion that it was the type of funds they needed for production in the war effort?

Mr. MORGAN. That is right. There is one thing I might say in that connection. The settlement and payment at the present time, as I understand, are made by the contracting officer. Now, with a limitation of that character you would run into the question of who would make the determination, whether it would be the contracting officer who made the determination that the making of this payment was necessary, or whether it would be the Secretary of War, or somebody. else. Of course, this particular contracting officer may not know of other contracts that are being made through some other contracting officer.

The CHAIRMAN. Right at that point, I think I would like to ask you what the effect of this bill would be. You are ready to go into the bill at the present time?

Mr. MORGAN. Yes, sir.

The CHAIRMAN. What effect it would have on the general accounting laws that we have. As I understand it, on certain contracts the General Accounting Office refuses to make payment because they feel they are not O. K. or just right, that there is something wrong with them. Now, would they have the same authority on the settlement of the claim at the termination of these contracts?

Mr. MORGAN. I think the General Accounting Office would have authority, of course, to review all these settlements and determine whether they were proper; that is, whether they were made in accordance with law relating to damages upon termination of contract; that is, whether all the elements of damages which the contracting officer took into consideration were proper elements.

The CHAIRMAN. Would this bill in any way affect that as it stands at the present time?

Mr. MORGAN. It is kind of hard to answer that, Mr. Chairman, because of this phrase, “with regard to any provision of law relating to the making, performance, amendment, or modification of contract."