H. R. 4789, introduced on May 10, 1944 incorporates the provisions which the committee feels should be contained in contract-termination legislation.

The principal recommendations of the committee and a summary of the provisions of H. R. 4789 are given below.

SCOPE OF THE PROBLEM

At the present time and until victory is achieved the war effort must dominate our economy. Approximately one-half of the total goods and services produced at the current rate of high production is for war purposes. Of the persons now employed in manufacturing, about two-thirds are engaged in war work.

The volume of our war production from July 1940, to the end of 1944 will total about $205,000,000,000, of which $130,000,000,000 represents the production completed by the end of 1943 and $75,000,000,000 is scheduled for completion in 1944. The number of prime contracts has been variously estimated at from 100,000 to 250,000, depending upon what is counted as a separate contract. A survey made in September 1943 showed that there were 105,000 contracts for $50,000 or more held by approximately 17,000 establishments, and another 100,000 smaller contracts. The number of subcontracts might run well over a million, involving 70,000 establishments, large and small.

As the war progresses, requirements for certain items become filled and, due to changes in war strategy, the need for others is reduced. As a result many contracts when completed are not replaced and many uncompleted contracts have been cut back or canceled. As of the middle of February 1944 the contracting agencies bave terminated over 14,000 war contracts, the uncompleted value of which would have amounted to over $13,000,000,000. By comparison, after World War I, the unfinished amount of war contracts canceled was under $4,000,000,000.

The actual amount of claims involved in the settlement of canceled contracts will be much less than the face value of the contracts. In the first quarter of 1944, the Army settled $1,250,000,000 of cancelations. On $585,000,000 of this amount, the contractors elected to settle without making any claim whatsoever. On the other $668,000,000 of unfinished contracts, for which claims were submitted, the settlements totaled $62,000,000.

It must be recognized that in these early cancelations new contracts were usually substituted for those terminated, a fact which tended to hold claims to a minimum. Undoubtedly in the later stages of the war, and at the war's end, we shall more nearly approach or may substantially exceed the experience following World War I when the $4,000,000,000 of unfinished contracts resulted in $450,000,000 of settlements.

Generally speaking, the amounts involved in termination include the finished products and goods in process at the time of termination in the hands of the prime and subcontractors, plus allowable profits and other expenses incurred on the contract. The Department of Commerce estimated the average war inventory of raw materials and goods in process, during the latter quarter of 1943, at approximately $8,000,000,000. Including finished goods and allowances for

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other costs, the gross amount of termination claims would probably have been somewhere around $11,000,000,000 if all contracts hadbeen terminated at that time. The net amount would be considerably less, since the Government would be credited with goods retained by the contractor, and since many contracts already enjoyed advance payments to meet needed outlays. Finished goods on hand, covered by current invoices, would be paid for before claims were filed. Thus, claims would represent, at the maximum, less than 5 percent of the total cost of the war.

DIFFICULTIES OF TERMINATION

Many problems arise when contracts are canceled before they are completed. Because of the difficulty of determining what should be paid for the uncompleted work, no fixed percentage can be applie 1, as the costs during the early portion of the contract may be higher than those in later stages of the contract. In some of the earlier cancelations, due to changes in design, the claims consisted almost wholly of preparation charges on which little or no actual productiou was realized. In the metallic industries, parts fashioned to the specifications or dimensions of war material may have negligible value for any civilian purpose. In negotiating settlements, the informed judgment of the contracting officer will be crucial in determining the speed and equity of the settlement, and in protecting the interests of the Government.

The members of the Special Post-war Committees of the House and the Senate are in general agreement with the Office of War Mobilization on this point-that invoices submitted on the cost of inventories, and on the contract price of finished goods should be promptly paid without waiting for the negotiations required on the claims for other allowable expenses or fees. Given a well-trained staff in the contracting agencies, the area of negotiation should be well below the $1,500,000,000 estimated as the amount of claims for allowable costs and profits on unfinished items.

Although this area of negotiation represents only a small proportion of the total face value of terminated contracts, the effect of delays in settlement may be very great. The working capital and plants tied up through slow settlements must be weighed, not only in terms of the insolvency which that may bring to firms whose credit has been strained by wartime commitments, but especially in terms of the pay rolls which cannot be resumed on new work while the settlements hang fire. Eight million workers in war manufactures on whom information was available had an average monthly pay roll of $1,750,000,000 in 1943. Each month's delay in getting the war industries cleared for new production through prompt settlement may prove far more costly, in dollars as well as in industrial morale, than any possible loss to the Government from efforts to speed negotiation.

The Government, nevertheless, must be fully protected, with adequate safeguards against fraud or waste of funds.

NEED FOR PROMPT CONGRESSIONAL ACTION

To date the problem of terminated contracts has been alleviated to a large extent by the granting of new contracts. Delays due to settlement have not been so vital because the employees could be

transferred immediately to new contracts, and production continued without a break. The time is approaching, however, when new contracts will not keep pace with those terminated. If plans for prompt settlement of terminated contracts have not been adopted, the war effort itself might easily be hampered.

When the hostilities actually cease, the great bulk of contracts will be canceled. When that time comes, a smoothly working experienced administration of contract termination can make the difference between early resumption and business stagnation.

Practically all witnesses who have appeared before the committee have stressed the need for a plan for settling contracts under which funds could be made readily available to war contractors and the materials, products, and equipment promptly removed from the plants of the contractor so that peacetime production could be resumed with a minimum delay. With such a large portion of the plant equipment of the manufacturing industry tied up with war production and with such a high proportion of working capital tied up with working inventories, it is obvious that a long delay in unfreezing this situation would have a disastrous effect upon the economy of the country. Long delays in making these settlements would counteract the effects of all other plans for dealing with the immediate post-war problems.

The present procedures for the settlement of contracts now being terminated are not adequate. Delays in settlement have prevented, in many cases, the prompt removal of material and supplies and the release of working capital. Adequate plans have not been available for financing during the period of settlement. The situation has been improved since the issuance of the Uniform Termination Article on January 8 by the Director for War Mobilization, but these regulations have not entirely corrected the shortcomings.

Legislation is needed to take care of such matters as interim financing, payment of interest on claims not settled, providing prompt payments to subcontractors, the authority to make negotiated settlements, appeal procedures, adequate provision for the detection and prosecution of fraud, the financial liability of contracting officers and prompt removal of termination inventories.

In the opinion of the committee, it is very important that Congress itself should determine the general over-all policy which should be followed by the contracting agencies in making the settlement for terminated contracts. The committee, therefore, recommends prompt enactment of legislation under which a sound and adequate system of contract termination could be established.

RECOMMENDATIONS OF SPECIAL COMMITTEE

The special committee, as a result of its study of the problem, has felt that an integrated program for the settlement of war contracts should aim to achieve the following objectives:

It should provide fair compensation to prime contractors and subcontractors.

Settlements should be speedy and certain. They should be made by negotiation wherever possible; once made the settlement should be final, except for fraud.

Interim financing should be provided during the period of settlement.

Government property should be removed promptly from the contractor's plant.

Appropriate provision should be made for appeals.

There should be adequate protection of the interests of the Government against fraud and waste of funds.

The committee feels that these objectives would be met if the following recommendations were adopted:

1. ORGANIZATION AND ADMINISTRATION

The committee recommends the establishment of an Office of Contract Settlement, headed by a Director who is not affiliated with any of the operating agencies. He serves as an independent coordinator and appraiser of termination policies and practices. The Director would prescribe policies, principles, methods, and procedures to be followed by the war agencies now handling contracts and contract termination.

In establishing such policies and procedures, the Director would be concerned with providing adequate protection of the Government against fraud and overpayment, as well as with the equitable treatment of contractors' claims and with facilitating settlements.

Uniformity of procedure and cooperation to expedite settlements should be provided for through a Contract Settlement Advisory Board, which would include the Director, who shall act as its Chairman; the Secretary of War, the Secretary of the Navy, the Secretary of the Treasury, the Chairman of the Maritime Commission, the Administrator of the Foreign Economic Administration, the Chairman of the Board of Directors of the Reconstruction Finance Corporation, the Chairman of the War Production Board, the chairman of the board of directors of the Smaller War Plants Corporation, the Attorney General, and the Comptroller General of the United States, or any alternate or representative designated by any of them.

The office of the Director is conceived as a policy-making agency, the duties to be performed through the personnel facilities of the contracting and other established Government agencies. Quarterly progress reports would be submitted to Congress by the Director, which will be studied by the appropriate committees of the House.

2. SETTLEMENTS AND FINANCING

Under this plan the agencies which have let the war contracts. would handle their termination. All of these agencies have many trained accountants, lawyers, negotiators. This corps of 30,000 trained contracting personnel has already had a wide experience during the war in placing contracts and is therefore better fitted to terminate the contracts than new personnel, even if it were feasible to recruit a new staff under present war conditions. Furthermore, at this stage of the war, contract termination is closely linked with the placement of new contracts. In most cases the new contracts are given immediately to replace the terminated contracts. When the final settlements are made, a familiarity with the history of the successive contract negotiations will be prerequisite to an equitable and expeditious settlement.

Settlement of prime and subcontracts.

One of the most difficult problems arising in the settlement of terminated contracts is the network of claims involving subcontractors.

A prime contract may involve hundreds or even thousands of subcontracts. Often there are several tiers of subcontractors, requiring successive settlements for each contractor down the line. It is most important that provision be made for the prompt payment of the claim of subcontractors as well as prime contractors. In this connection a realistic view must be taken of the deficiencies in the cost records of many small firms which may have the greatest need of prompt reimbursement.

The committee's proposal is that the Director shall be empowered to prescribe flexible policies for expediting settlements between subcontractors and prime contractors; and where such settlements are not feasible, provision is made for the contracting agency to settle directly with the subcontractors, or to purchase the subcontractors' claims. The contracting agencies are charged with supervision over payments to war contractors on account of termination claims with the subcontractors, to assure the receipt of payment by the subcontractor. The Director should also be authorized to prescribe the policies for over-all company or group settlements.

The contracting agencies should be given authority to make payments in particular cases, dictated by considerations of equity and good conscience, to subcontractors who have been unable because of bankruptcy or default to obtain payments from the prime contractor. The policy should be to use a variety of means to insure speedy and fair compensation to all war contractors, regardless of their particular position in the scale of prime and subcontractor. Under the heading of fair compensation, provision should be made for reasonable expenses of termination, removal and storage of inventories after termination, allowance for profit on work done and interest on unpaid claims pending final settlement. Each contracting agency is to establish methods and standards for determining fair compensation-whether on the basis of actual, standard, or estimated cost; or on the percentage of contract price which the completed work represents; or on any alternative basis which is regarded as equitable and appropriate in the given case.

Finality of settlements.

When a settlement is made, it should be final and conclusive except for fraud or upon renegotiation to eliminate excessive profits under the Renegotiation Act.

The finality of the negotiation must be regarded as an essential element in clearing the way for the resumption of production by the contractor. Where the war contract has tied up a substantial part of the contractor's working capital, he is neither free to make new business commitments nor to reemploy workers, if payment is to be held up pending an audit of the negotiations, or so long as the contingency of a reversal of his contract settlement hangs over him. By the same token the prime contractor will hesitate to honor the claims of his subcontractors so long as his own settlement with the Government is in suspense or subject to revision. It must be expected that both the contractor and the contracting officer will be reluctant to enter into an agreement in a mutually cooperative spirit of give and take, when a review of the negotiation can upset the concessions upon which the settlement has been made. It is thus believed that the main pur