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Mr. DURHAM. Do you settle with the subcontractor who has this clause in his contract with the prime contractor and not with the prime contractor?
Mr. MARBURY. Sometimes and sometimes not. When they make a lump sum contract with the International Harvester Co. we do not control the provisions in their subcontracts. They may have a variety of provisions with respect to terminations in their subcontracts.
Mr. DURHAM. Do you mean to say that the prime contractor does not insert the same clause in the subcontract as you ask him to insert in his contract?
Mr. MARBURY. Frequently not.
Mr. CLASON. At that point the War Department settles claims which ordinarily should go to the courts, by paying whatever sum you think should be paid to clear up the situation?
Mr. MARBURY. A prime contractor's claim is settled in accordance with the terms of the contract.
Mr. Clason. If that is so, why ask us to give you people the right to spend money as you see fit?
Mr. MARBURY. We are not asking you to do that. They will be settled in accordance with the terms of the contract. Subcontractors claims are claims against the prime contractor. Upon termination the subcontractor presents his claim to the prime contractor, who settles his claim, with the approval of the contracting officer, and for claims so settled the prime contractor is entitled to be reimbursed under the terms of the prime contract.
Our problem is a problem of finance. Those settlements are bound to take time. The auditing of those settlements is an enormous job, even a limited audit sufficient to protect the interests of the Government. There is a shortage of auditors, as everyone knows.
However, in order to be careful of the Government's money and see that nothing is paid either to the prime contractor or the subcontractor that they are not entitled to, time is required.
As I said, we have had 3,000 terminations, most of them fairly recent, and it is perfectly evident that unless careless settlements are to be made, it will take time to bring them to completion.
Mr. CLASON. Why is it not going to take as long for you to settle those cases, whether this bill is passed or not? It says, “Without regard to any provisions of law.” You can settle as you please.
We have just had one case brought to our attention, that is the case of the Narragansett Machine Works, where the settlement officer made a deal whereby he was paying 2 percent in cash as possible profit on work which was never done by that company. It seems to me Congress should keep a pretty close eye on some of these things, otherwise we will be paying more than 100 percent in settlement.
Mr. MARBURY. The bill gives no authority to pay any money in settlement above that which is now available, except in the shape of temporary authority to advance.
I think”it would be helpful to you if you will permit me to develop what we are trying to get at, and then we can see just what this does.
The amount to be paid the contractor by reason of the termination of his contract is determined by negotiation, but if it is impossible to agree upon the amount to be paid, settlement is made with the contractor in accordance with the formula provided in the termination article of the contract. As an aid to the contracting officer in making the settlement with the contractor, a certain amount of auditing and investigation of the contractor's costs is necessary and usually the contractor must prepare a complete inventory of the work in process and materials which he has on hand, as a step in asserting his rights to compensation under the termination article. This investigation and the preparation of an inventory inevitably takes time, and it is important that while settlement is being made contractors should receive partial payments on account of the amounts owing to them, and that they be in a position to borrow from banks and others on the security of their termination rights.
The position of the subcontractor in connection with terminations is also a difficult one. Subcontractors have no direct rights against the Government under the termination articles presently used by the War Department in lump-sum contracts, and must assert their claims against prime contractors. It is important that the Government be in a position to see that partial payments on account are made promptly to subcontractors so that they may be in position during the war to undertake other productive war work and at the end of the war to finance themselves in resuming peacetime production.
We have at present unsettled about 500 contracts which were terminated more than 6 months ago. We are now making every effort to improve our administrative procedure in order to expedite the settlement of terminated contracts and to encourage prompt payments on account to prime contractors and through prime contractors to subcontractors. However, it is recognized that with shortages of accounting and auditing personnel, with the difficulties involved in the disposal of inventories and work in process, and with various other obstacles to prompt action, delays will inevitably occur in making final adjustments.
Under the First War Powers Act and Executive Orders 9001 and 9112 issued thereunder, the War Department has the authority "without regard to any provision of law relating to the making, performance, amendment, and modification of contracts"—quoting from H. R. 3022—to make advance payments and partial payments to its prime contractors and to guarantee production loans to prime contractors or subcontractors. That power we now possess.
It is, however, a power which is dependent upon finding that it will facilitate the prosecution of the war, and conceivably some question can arise as to the application of that power in the case of contracts which have been terminated, which I will discuss in a moment.
The powers that have now been granted by Congress are adequate to finance the war production of contractors, subcontractors, sub-subcontractors, or suppliers at lower levels.
At this time some two billion of advance payments are outstanding in the hands of prime contractors, and $3,200,000,000 of guaranteed loans have been authorized since March 26, 1942, to other war producers.
Under the language of the First War Powers Act, however, there is considerable doubt as to how far such methods of financing may be employed after the termination of a war production contract or after the end of the war. We do not admit that that doubt is valid but we know it exists in the minds of some important personages.
Our primary concern is with our current termination because of the effect on current procurement. We have suffered some loss in production, and undoubtedly some of that may be due to a certain amount of uneasiness about this termination situation.
It is of first importance to the question of procurement that we take every step possible to put the minds of our contractors and subcontractors at rest as to what is going to happen to them as the possible result of one of these revisions in the supply program. Also, There is the obvious effect on the financial condition of the contractor which follows termination. Unless some method can be found to get in some cash quickly he can not take on more war business.
Mr. HARNESS. Do you feel that this legislation would give the War Department authority to expedite the settlement of claims that may arise in connection with the termination of contracts?
Mr. MARBURY. It gives them authority to make payments pending the final conclusion. There may be cases so complex that in order to protect the Government interests properly it may take a year to reach final determination.
Mr. HARNESS. That delay would occur at any rate.
Mr. MARBURY. This legislation will not prevent delay in settlement. That delay is due to the circumstances which require careful study before final settlement.
Mr. HARNESS. Do you, in the War Department, recognize the fact that you may destroy hundreds not only of small contractors but big ones if there is any unreasonable delay in the settlement of claims on the termination of contracts?
Mr. MARBURY. Yes; that is why we are here. That will result from the contractor not being able to get his payments. This legislation permits us to advance to the contractor, or pay the contractor, that amount which it is reasonably certain he is entitled to.
Mr. HARNESS. I am fully in accord with the idea that I would rather you pay out a little more money to these contractors to get these claims settled as quickly as possible, because if you have any delay, that will destroy literally hundreds of small businessmen who have their money tied up in inventories. They could not get back into peacetime production if you do not get almost immediate settlement.
Mr. MARBURY. That is right; that is what we are striving for.
Mr. HARNESS. If this legislation will do that, I am in favor of it. But I cannot quite see the point where it will help you in that direction.
Mr. JOHNSON. Do you not have any power now to advance any sums?
Mr. MARBURY. Yes; but there is some question as to the authority to make advances after the contract has been terminated, and particularly to use the power to guarantee loans of banks after there has been an actual termination of the contract.
Mr. DURHAM. Suppose you terminate a contract and renegotiate at the same time; will this expedite that? You will have to settle and renegotiate.
Mr. MARBURY. Before you decide how much you can pay where they are both being done at the same time, that would be true.
Mr. DURHAM. Would it help to expedite that, do you think?
Mr. MARBURY. The legislation does not expedite the final determination of the amount due. It is payment of the amount that is due.
Mr. DURHAM. If you have not determined what is due
Mr. MARBURY. It does more than that. It expedites the payment of that amount which it is clear he is entitled to without waiting to find out the last dollar he is entitled to.
Mr. DURHAM. I imagine some of the 3,000 settlements also involve renegotiation; you will terminate the contract at a later date, but you have renegotiation in progress,
Mr. MARBURY. There have been such cases, and in those cases we make provision by which termination and renegotiation are bound up in one package, and it is all settled together.
Mr. Elston. Do you feel there is any lack of authority in the law at the present time to enter into an agreement or settlement with any contractor with whom the War Department has a contractual relationship, and in that agreement provide that if there is overpayment it shall be returned, and if there is underpayment the War Department will owe the balance.
Mr. MARBURY. I think that is sufficiently subject to question to make the contracting officer hesitate to make any payment on such a contract.
Mr. ELSTON. You indicated that these settlements would be of amounts that were admittedly due. There would be some delay because of the necessity of making audits. In any event, you would have a reasonable idea of the approximate amount due in almost every case, would you not?
Mr. MARBURY. Then we would make an advance or partial payment, or guarantee a loan, although I think we would have to have some reasonable basis for believing that the amount of the payment we were making or that we were guaranteeing was due.
But the bill explicitly deals with the possibility that if the amount due were found to be excessive it provides explicitly-I think it would be better if you let me proceed with the analysis of the bill, and I think that will answer questions that have been asked.
Mr. HARNESS. I think the bill explains that.
The CHAIRMAN. Suppose we let him proceed with his statement, and the statement may cover that.
Mr. HARNESS. On the first page of the bill, in line 7, it says, "under such regulations as he may prescribe”; I presume that is the Secretary of War.
Mr. MARBURY. Yes, sir.
Under such regulations as he may prescribe and without regard to any provision of law relating to the making, performing, or modification of contracts, for advance or partial payments to contractors with the War Department, or to subcontractors, or suppliers directly or indirectly under such War Department contractors, or for loans or guaranties of loans to such contactors, subcontractors, or suppliers, or for the purchase of the rights of such contractors, subcontractors, or suppliers, to such amount certified by them to be dueand so forth.
That is, if a contractor certified by the War Department owes a certain amount of money this would authorize the Secretary of War, under certain regulations, to advance money before an audit has been made?
Mr. MARBURY. The chances are he would not advance it all, but a certain percentage of it.
Mr. HARNESS. This authorizes him to advance part of it pending final conclusion by audit to determine what is due.
Mr. MARBURY. That is right.
Mr. ELSTON. I agree with the objective, but do you not have that authority now?
Mr. MARBURY. I think the authority now is sufficiently cloudy so that contracting officers would be hesitant to make payment because they fear they would be personally liable and it would be charged back to them. We know from our own actual experience in terminations that contracting officers will not make partial payments. Under the present contract clause, as the committee will find, there is a provision for partial payments, but the contracting officers do not make them because they do not feel that they can do it with any sort of security without having an audit made. By the time you have done that you might as well make your settlement. I do not believe we have authority in the clear form necessary as the basis for expediting action, particularly to make payment on a certificate.
It is premature to say what the regulations would be, but I might guess that they might be that you would have a certificate of a certified public accountant prepared in accordance with a certain form which would mean that it would have to be analyzed correctly.
Mr. ELSTON. That is the contractor's own audit.
Mr. MARBURY. That is right. The contractor would be given instructions on what basis to prepare the audit. He would be required to certify to it and some arrangement would be made for a limited spot check, on the basis of which the contracting officer would be instructed to make partial payment under an arrangement by which, if they are paid
Mr. Elston. Then this legislation would expedite the payment of those claims.
Mr. MARBURY. Yes. That would be subject to final check by which it might be found that a man had been overpaid, or that he had not been paid enough, and that would have to be audited and checked, and then the final settlement would not be made until that had been done.
In the meantime-
because it was contended that you did not have this authority? Have you had some cases you could not settle because there was a question about it and you did not have authority to settle?
Mr. MARBURY. We have authority to settle if we go through the necessary preliminaries and to make speedy payments, but we have not that authority in such clear form that we can use it.
Mr. ELSTON. Have you made any such speedy payments?
Mr. MARBURY. I should say that less than 1 percent of the payments that have been made have been of that kind.
Mr. Elston. Have you asked for any appropriation of money in connection with this bill?
Mr. MARBURY. I think not. I think it would come out of the same fund from which we are expected to pay for the completion of the contract.
The CHAIRMAN. Let me make this statement. The only reason for taking up this bill today, aside from the needs that have been pointed