stand, and he said, "Suppose you had a construction contract, would it be something like this: Suppose you had a 3-story building that you were putting up, and you terminated the contract before the building was completed-you would not give your contractor the whole anticipated profit on the whole building, but you would give him the amount of profit which represents a fair profit on the foundation and the first story, which is completed." Do I make myself clear? If I don't, I would like to go into that. But that is as good an illustration as I have been able to get.

Colonel FRIEDLICH. In other words, Mr. Martin, if you are half through with your contract, you get half of the profit which you would have gotten.

Dr. FENTON. It is based on the amount of work that is done?

Colonel FRIEDLICH. Yes.

The CHAIRMAN. That is, in settlement of these 3,000 contracts that were spoken of here yesterday

Colonel CUTTER (interposing). We have terminated more than that, something like 3,500.

The CHAIRMAN (continuing). No anticipated profit has been allowed on the termination of those contracts?

Colonel CUTTER. That has been the principle by which they have been guided. Of course, the determination of the amount of profit which has accrued on the amount of work that has been done is a difficult matter sometimes.

Mr. MARTIN. You also make allowance for any amount of loss they may have incurred through acquisition of materials?

Colonel CUTTER. I will go into that.

Mr. MARTIN. That is separate from the anticipated-profit question? Colonel CUTTER. Yes; I will go into that later.

The authority to terminate contracts is reserved by these contracts really as a prudent exercise of the Government's authority 'to negotiate contracts and to amend them by subsequent action. It is merely a use of the War Department's or the Navy Department's general contracting power in a manner to protect the interests of the Government, and to prevent the incurring of expense which changed plans make unnecessary.

I think this policy was followed to some extent at the end of the last war. Generally speaking, during the last war termination clauses were not usual, but toward the end of the war, particularly in the Ordnance Department, they began to come into vogue, and there is a very interesting study of that subject by a Mr. J. Donald Edwards, of the United States Department of Labor, called Termination of Ordnance Contracts-1918, which was published in January of this year. And it reviews some of the termination clauses which were beginning to come into operation at the end of the last war.

The CHAIRMAN. That may be entered as appendix 1.

Colonel CUTTER. It is a very interesting study, and has been most helpful to us in the work we have been trying to do.

I think also that Mr. Crowell wrote a book on the termination of War Department contracts, or at least dealt with that, and that has been useful. It deals with termination of contracts in the last war. There are various general discussions of that problem.

But at the beginning of the defense period the procuring services wanted to be sure that they reserved the right to terminate, and that

they cut down to the greatest extent that was was fair, the contractor's right to recover by reason of a termination for what was called the convenience of the Government.

I won't go into what has already been said on the subject of the types of articles that are used

Dr. FENTON (interposing). Which clause is used mostly, which is the most prevalent clause?

Colonel CUTTER. In the Army, that 324 which you have in front of you, is most generally used. There is a general policy in the Army of avoiding cost-plus-a-fixed-fee contracts wherever we can. In other words, we want to get our contracts on a lump-sum basis. The Under Secretary of War is pressing constantly to get the costplus-a-fixed-fee contract eliminated. We feel that we get more efficient operation under lump-sum contracts; there is greater incentive to economical use of materials, and in general it is a much more satisfactory arrangement. There is less accounting to be done; it involves less use of procurement personnel, less supervision. All you have to do is to hold your contractor responsible for delivering an item which conforms with specifications for a stated price; whereas, in a cost-plus-a-fixed-fee contract you have a constant problem of supervision, which involves a great use of Government personnel, and we try to avoid it. We haven't been able to do it fully.

So the lump-sum supply contracts are infinitely more numerous than the others.

Now, looking at the contract article 324, subparagraph (a), beginning with line 1-and when I refer to line numbers I mean those line numbers appearing on the typewritten copies which were furnished to the committee-provides that the Government may at any time terminate the contract in whole or in part. That is done by sending a written notice from the contracting officer to the contractor.

As a practical matter, when it is decided that a type of contract must be terminated, the decision usually follows a revision of the Army supply program. That decision is transmitted to the Chiefs of the technical services, and the nature of the way in which that revision will take place through the termination or partial termination or contracts is usually decided in the Chief's office and transmitted to the district offices for actual execution in the district offices.

You will notice that the article provides for termination in whole or in part. That provision permits not only a total discontinuance of the contractor's right to proceed with the performance of the contract, but a partial discontinuance of his right to proceed. A contractor may be told that on an order for a thousand trucks we now find that we are only going to need 500 of them. We tell him that, and the necessary adjustments are made pursuant to this article. It gives great flexibility in a program which must have flexibility.

Upon receipt of the notice of termination the contractor stops work-and that is provided for in the article in general terms-stops placing orders, cancels outstanding orders and subcontracts which are chargeable to the terminated contract, and may be required to deliver to the Government all completed supplies, work in process, materials which have been obtained for the contract, or produced for the contract, or which he has on hand reasonably allocable to this particular contract.

The CHAIRMAN. He is required to deliver that to the Government? Colonel CUTTER. He may be required to do that. On the other hand, it may be advantageous to have him retain those materials and dispose of them, because the contractor usually is the person best equipped to deal with the problem of disposal of work in process. In the first place, he has bought the stuff, he knows what the usual channels of distributing that material are, and he may be able to use it himself. And the article provides, beginning at line 28, at the bottom of the page

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.

The CHAIRMAN. Now the determination of the cost of that article, or whatever it is worth, is worked out between the contracting officer and the contractor?

Colonel CUTTER. That is correct. I might point out

The CHAIRMAN (interposing). And their recommendation then is passed on to the settlement board?

Colonel CUTTER. Perhaps I had better give you a little picture of what a contracting officer really is.

I first visited a large contracting office about a year and a half ago, when I went to the Detroit Ordnance office. The contracting officer there at that time was an Ordnance colonel who had perhaps three other persons authorized to act as contracting officers. He had a staff which occupied I think the First National Bank Building, which is one of the largest office buildings in Detroit, and I think it occupied everything above the fourth floor, and it is quite a high building.

A contracting officer today is, a large corporate entity, really, headed up by a responsible officer of the Government. In Chicago at the present time, and in Detroit, it is headed up by a brigadier general.

That office contains a complete legal staff, a complete engineering staff, a specialized technical staff, persons particularly skilled in property matters, people who are particularly skilled in accounting matters, people who are inspectors, and generally the whole equipment that you would expect of a large, modern industrial concern, collected as well as they can be.

When you speak of a contracting officer taking action, you are speaking of the action which is taken after thorough study of any subject by the group in this large office, which is the best equipped to deal with the particular problem, and such action is taken after consultation by all the interested groups in that office.

Mr. MARTIN. Do these contracting officers function under the jurisdiction of the service commands, or under the branch chiefs?

Colonel CUTTER. I have been speaking, Mr. Martin, primarily of the contracting officers in the technical services, because it is in those services that the contracts which are large enough to contain termination articles are usually found.

Mr. MARTIN. They function, then, primarily under the chiefs of the branches in which they are contracting?

Colonel CUTTER. Right. Our technical services are: Chief of Ordnance; Chief of Engineers; Surgeon General; Chief Signal Officer; Chief of Transportation; Quartermaster General; Chief of Chemical Warfare Service; and the Army Air Forces.

Mr. MARTIN. Ánd the contracting officers are those officers designated as such by the chiefs of the branches?

Colonel CUTTER. The chiefs of the branches; yes.

Mr. MARTIN. Are the chiefs of the branches limited in their jurisdiction; are they subject to the supervision of the Secretary of War, for example, in the number of contracting officers and the rank or standing of those officers that they select?

Colonel CUTTER. No; they are given a very wide discretion in that matter, and they themselves in turn limit the scope of discretion of contracting officers in placing contracts.

Mr. MARTIN. But the selection of the contracting officers, or the designation of them, is primarily a function of the chief of branch? Colonel CUTTER. That is correct.

Now there are also contracting officers in the service commands. Those contracting officers are largely at posts, camps, and stations. They do such things as buy lumber for repairs, buy quartermaster's supplies that are temporarily needed, and so forth.

Mr. MARTIN. They have the smaller contracts that wouldn't be so much in issue in this?

Colonel CUTTER. That is right. I visited the Seventh Service Command in February, in connection with some other problems, and as a matter of interest inquired of one of the officers there working on procurement how many times he included a termination article, and my recollection is that he told me that he had seen about two in a month, which is a pretty small proportion.

Mr. MARTIN. Generally speaking, this provision we are discussing here would be of no general use to the service commands?

Colonel CUTTER. I think that is true, Mr. Martin. The type of thing they are doing is the housekeeping work of the Army, the small procurement from day to day. Stuff is ordered one day and is delivered the next. Or they make contracts for laundry service, contracts for utility services, and things of that sort. They are doing the routine, day-to-day work, where there is practically no opportunity to change your mind; you have got to have the work done.

Dr. FENTON. Do the commanding officers of the service commands have any jurisdiction?

Colonel CUTTER. The commanding officer of the service command has jurisdiction over all the contracting officers whom he appoints and who perform functions under his direction.

The contracting officer may direct that any items obtained for the performance of the contract shall be sold at a price approved by him, instead of being turned over to the Government, or he may permit the contractor to retain such items, paying for them an agreed price. This provision is important particularly during the war, for it permits putting war materials to use promptly without the delays incident to transferring title to the property to the Government, and reselling it under the restrictions which apply to the sale of Government property

The CHAIRMAN (interposing). Just another question right at that point. Suppose a man bought $50,000 worth of material and got it

at a reasonable price, but that with the scarcity of materials the price of that material doubled. How do you settle that?

Colonel CUTTER. If he goes ahead and sells that at a profit, we get the benefit of the profit. If, as is much more frequent, unfortunately, he buys $50,000 worth of material, starts to work on it, and gets it into a state where it is nothing but work in progress, and you don't need the thing which that work in progress was going into any more, 9 times out of 10, or I am afraid it would be 99 times out of 100, you will find that that material is useful primarily as scrap, and the sooner we recognize that that is the fact, I think the sooner we are going to clear up some of these terminations, because you can shop around trying to find somebody who can use a component, and you may find one, but the number of times you will find a customer for a component that is partly finished are very few.

Whereas, if you dispose of the material for scrap, or for its scrap purposes or reclamation purposes, usually you will get it back into circulation in the war effort more rapidly than if you try to do a long selective job which takes the time of personnel who are already inadequate in number.

Mr. SIKES. Right at that point, suppose he has his $50,000 worth of material in process, and the Government is unable to use- -or rather we will say that he has not completed any of the material which is being processed, does the Government reimburse him for his full $50,000 worth of merchandise, plus other expenses that he has undergone, and take over this material which you say is best adapted to scrap?

Colonel CUTTER. Well, that is not inevitably true, but if it is work in process, it is very apt to be true.

Mr. SIKES. Then how is it determined what profit he is entitled to for the completed portion of his contract?

Colonel CUTTER. I will be very glad to cover that, I was just coming to it, and I think perhaps if I could develop that point it would be a little more orderly presentation. I might point out, however, that he gets reimbursed for his costs of particular materials, less any credit which it has been possible to work out by salvage in a manner approved by the contracting officer.

În paying the contractor, you must distinguish between items which are wholly completed and those which are partially completed. For completed items, the contractor receives payment at the unit price specified in the contract for each of the items which is completed and delivered. This affords the contractor just what he bargained for and gives him, presumably, a reasonable margin of profit. That you will find in paragraph (b) of the article.

It must be recognized, however, that starting costs on a contract, that is the process of tooling up, getting the wrinkles out of a difficult manufacturing operation, and similar initial charges, are frequently very heavy at the start of a contract, and that some of these are properly to be spread over the contract as a whole in appropriate cases and in accordance with recognized accounting practices.

Sometimes, therefore, not all the early costs are properly attributable to completed items. Some portion of that cost may be attributable to the later portions of the contract.

With respect to the uncompleted portion of the contract—and that includes everything which is not completed-the contractor usually