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Mr. F. A. SCOTT. My understanding is that the Ordnance Department is now making the inventories which it has to make under the contract with the British Government and under its contracts with these companies, and eventually they can produce those figures, but I do not have them at this time, and I never have had them.
The CHAIRMAN. Would it be possible to determine what would be a reasonable price to pay for the production of a commodity on the cost-plus basis without any information as to the capital that is required to carry on the operations!
Mr. F. A. SCOTT. Oh, yes; if you control the situation, and you will find—I am sure about this, as to that contract—that the Ordnance Department has complete control of the situation. It has alternatives as to what may be done. It may buy the raw material and furnish it to the companies.
The CHAIRMAN. I am not speaking about that phase of it. Assuming that a commodity is manufactured economically, and under conditions about which there can be no complaint, can you determine whether a certain percentage is reasonable or unreasonable withou any information about the capital utilized by the company?
Mr. F. A. SCOTT. In advance, do you mean?
Mr. F. A. Scott. No, sir; and that is the reason you make these cost-plus contracts. You make them because you can not determine what is reasonable. That is one of the chief arguments in favor of a cost-plus contract. That is the reason the Government did that in the construction of the cantonments, because they had no means of determining in advance what a reasonable price would be. You see, when that was determined on the Government undertook a building program when it did not even know where the cantonments were to be built. I think this would be your question: Can we decide what would be a fair percentage to pay to any given industry?
The CHAIRMAN. No. Either you do not know what I have in mind
Mr. F. A. Scott (interposing). I do not get what you have in your mind, although I am trying to. I am trying to give you the information you want.
The CHAIRMAN. The volume of a business determines the profit, where there is a percentage. I mean the amount or the volume of the output
Mr. F. A. Scott. The turnover.
The CHAIRMAN. Without any knowledge of the amount of capital to be used in the turnover, how can it be decided that a certain per-centage on the cost of production is a reasonable or unreasonable profit?
Mr. F. A. Scott. Of course, in this case the Chief of Ordnance was dealing with an article with which he was perfectly familiar-that is, the manufacture of rifles—and he had associated with him, besides his own officers- I do not remember who the particular officers were, but there were probably two or three of his people-a civilian who was in the metal-working industry who also was familiar with the steps necessary to produce an article of the character of a rifle.
Mr. Sisson. May I ask who the civilian was?
Mr. F. A. SCOTT. I was the civilian. My business is the metalworking business.
The CHAIRMAN. I do not want to place you in an unfair position, but the Secretary of War and the Chief of Ordnance stated that you were the man who had this information, or who could give us the information about these contracts.
Mr. F. A. Scott. If you want me to go into the details of those contracts, I will read them over and refresh my mind as to the circumstances.
The CHAIRMAN. I wanted you to make a statement
Mr. F. A. SCOTT (interposing). I am perfectly willing to do so. If you want me to state whether I concur in the opinion of those gentlemen that these are fair contracts and that they will produce rifles at a reasonable price to the Government and not at an exorbitant profit to the manufacturers, I am perfectly willing to say, " Yes; I do believe that." I remember the general atmosphere surrounding the transaction.
The CHAIRMAN. Can you give us the facts upon which that conclusion was based !
Mr. F. A. SCOTT. Yes, sir; I will give you all the facts I can. If you desire that I read the contract over and meet with you again, I will be glad to do so.
Mr. ROSENWALD. May I ask a question right there? Is it not to some extent a matter of judgment, of business judgment, when these questions arise, as to what is fair and what is not fair; and do you not have to form your own conclusions?
The CHAIRMAN. The question is whether the judgment is sound or not, and that depends on the information upon which the conclusion is based.
Mr. SHERLEY. Here is what was in the minds of some members of the committee: Manifestly, in determining what profit a manufacturing concern is to make under a contract such as this, which was a contract of cost plus 10 per cent, counting in as one of the elements of cost 6 per cent upon the investment that the company had in the part of the plant engaged in turning out these rifles, it is necessary to not only consider the value of their organization, and therefore their ability to do the work, but also the investment they have in it, eliminating what they might be entitled to charge by virtue of their organization.
Mr. F. A. SCOTT. That is cared for in the 10 per cent.
Mr. SHERLEY. If you pay them 10 per cent for that entirely, then the question of what investment they have becomes immaterial. But it seems to the committee that that fact was a necessary fact in arriving at a conclusion as to what percentage should be paid. For instance, if a man was required to have only $100,000 invested and he got 10 per cent, and if that should run 100 or 200 per cent upon the capital invested in the business, it would seem that the contract was an unusually profitable one for him, and therefore not a fully fair one to the Government. But if, on the other hand, he had invested several millions of dollars, so that his 10 per cent represented only 10 per cent, or less than that, upon the investment, then the contract might seem to be a very reasonable one for the Government and less profitable to him. It may be that as a business man you did not attach the same value to the amount of capital that is invested in the business that some members of the committee attach to it, and that you did attach a greater value to the organization
that enables that capital to be properly used in producing the material that is being manufactured. But we did not understand how the Government could really determine the question fully without having as one of the factors the value of the investment that these companies had in the plant.
Mr. F. A. SCOTT. Well, the most expensive thing probably that they have, the thing that costs the most and for which you get back the least, is an organization. You pay a great deal in acquiring an organization of the size of any one of these three companies. Looked upon as a business proposition and it will work out to be the fact if the Ordnance Department enforces the terms of that contract, as I have no doubt it will it will work out as a business proposition that it was an absolute godsend to this country that we had in existence three organizations of the size of Winchester, Remington at Eddystone, Pa., and Remington at Ilion, N. Y., with the machinery all ready to go on to the manufacture of rifles for the American ammunition, and which could be produced within a period of less than one year, because I believe that if we could get the organization expenses of the plant at Eddystone you would see that it cost a very large sum of money-perhaps $1,000,000 or more—to just bring together the men who comprise the 10.000, 12,000, or 15,000 employees of the Eddystone plant. I am not trying to sidetrack, Mr. Sherley, the question that you raisel. I think that is a question that can be answered and within all rea-on should be answered. I am merely stating the general fact that the transaction as a whole will, in my opinion, be a very desirable one for the Government.
Mr. SHERLEY. I am not personally expressing an opinion by the character of my questions, but here was machinery owned by the Federal Government; it bought it by paying half of what it had cost the English Government, They practically paid $9.000,000 for machinery that cost something over $18,000,000, on the theory that the English Government had made something over 1,000,000 rifles out of it and we would make something like 1,000,000 and, therefore, a 30 per cent division was proper. Now, here was a company that was guaranteed a contract with no question as to payment; having all of its cost paid for, and that includes the salaries, wages, etc., of its laborers, its superintendents, and its cverhead charges of all sorts; 6 per cent upon the money that it had invested in the plant and then 10 per cent as a profit over and above all. Now, the output of these three plants for 1,000,000 rifies would approximate something between $30,000,000 and $10,000,000. Assuming the later figure, 10 per cent of it would represent $1,000,000; assuming $30,000,000, it would represent $3,000,000. Now, if they had invested in all three of them something like $7,000,000, then $1,000,000, within that period of time, would indicate a rather large yield, because all the elements of loss are taken out of it; they certainly get what it cost and 10 per cent. If, on the other hand, they had invested in it $10,000,000, $1,000,000 would represent a very much less turnover, and if they had $20,000,000 invested in it, still less. So it appeared to some of us, in examining into the wisdom of this contract, that if it had been made without a knowledge as to approximately the investment that these companies had in it, the contract had been made without a knowledge of one of the factors that ought to be determining.
Mr. F. A. Scort. Well, Mr. Sherley, you must allow, of course, for business experience, judgment, and opinion on the part of the officers and civilians engaged in the making of that contract. Now, a manufacturer, such as Gen. Crozier, knows that if we take that $9,000,000 worth of machinery for rifle manufacture—and if you want me to inject myself into it I will say I also have the impression that that much machinery requires buildings of a certain type and dimensions in order to house it and make it operative, and that those buildings, in a rough way, represent so much money. In addition to the buildings must go some form of power plant, must go some accommodations for the working people who are going to work on those machines, must go some housing for the raw material, must go some yard space for the assembling of raw materials, and all those things. Now, if you were dealing with the matter of lumber-Mr. Brookings used to be a lumberman, among other things-and you would state to Mr. Brookings that you were going to operate so many thousand acres of lumber land, there would come into his mind about what machinery and equipment would be involved in that operation. I suppose when you get the report from the Ordnance Department you will find that these companies must use equipment of their own valued, perhaps, somewhere around $15,000,000, and it might run up to $20,000,000. If that turns out to be the case, you see the profit which would be based on a total possible cost of $40,000,000 would be within reason.
Mr. SHERLEY. Are we to understand that the knowledge of yourself and ordnance officers touching the character of the plant capable of turning out 1,000,000 rifles within the time specified was such as to enable you to know that the investment made by these companies, together with the value of their organization, was extensive enough not to make a $4,000,000 profit, assuming $40,000,000 to be the value of the output, an excessive profit? Do I correctly interpret your answer to mean that?
Mr. F. A. SCOTT. Yes; if I understand your question.
Mr. SHERLEY. Did your knowledge of the general character of the investment that these companies would have to have and the value of their organization lead you to the conclusion that a profit of 10 per cent would not be an undue profit?
Mr. F. A. SCOTT. Plus the rental of their buildings, and so on, that were to be used, it will not produce an undue profit. I will be glad to have you remember that statement, if we all survive to see the time when we get the figures.
Mr. Sisson. Are you sure that the rental of the buildings is not figured in the cost ?
Mr. F. A. Scott. I know it is figured in the cost at Eddystone, where they rent their buildings.
Mr. Sisson. So you eliminate that from two-thirds of the profit? Mr. F. A. SCOTT. No; I do not.
Mr. Sisson. The Eddystone plant, according to Gen. Crozier's statement, was to make about two-thirds and the other two plants one-sixth each. Now, here is what has been a curious thing to me: That when you give a man 6 per cent on the investment actually used in the manufacture of this article, and not knowing the amount of
the capital and the number of times he may turn his capital over, how you are able to determine a reasonable profit on the business.
Mr. F. A. SCOTT. Well, you know this, that in undertaking this contract they have a piece of work that will take probably a year in its fulfillment. Mr. Sisson. I understand they propose to complete it in February. Mr. F. A. SCOTT. That would be 10 months. Mr. SISSON. Yes. The CHAIRMAN. It will take a year, maybe 14 months. Mr. F. A. Scott. Then, of course, the longer it takes the less there will be on the turnover of the capital involved.
Mr. Sisson. That is absolutely true.
Mr. F. A. SCOTT. And I think you will find that there will be no volume out of those plants for probably three or four months, and that may be a short time from the time that they undertake the work, not from the date of the contract.
Mr. Sisson. What about the terms of the contract with reference to payments? Do you pay them so much each month from the time they begin the contract in order to take care of their labor cost?
Mr. F. A. Scott. I could not state that; I do not recall that, Mr. Sisson.
Mr. Sisson. That would be a very essential feature of the contract. The CHAIRMAN. I think they make periodical payments. Mr. F. A. Scott. I would have to look at the contract.
Mr. Sisson. Gen. Crozier's statement was that they were to be paid so much a month on the contract. That was his statement in answer to a question which I asked him, that they were to be paid so much, which would be about enough to take care of the labor and material cost. Now, what control has the Government over the contract which it has entered into in reference to the price paid for labor and the price paid for material?
Mr. F. A. Scott. I think you will find in that contract—and you will, of course, remember now that I have seen hundreds of contracts since I have seen that contract-but I think you will find in that contract that the Ordnance Department, through certain officers hat are designated to the work at the different plants, has entire control of the labor--that is, it may intervene at any time in respect to wages paid to labor—and that it has the right at any time to furnish any part of the raw material that it prefers to furnish, so that if the price which the contractor desires to pay for the raw material is more than the Government wishes to approve the Governinent may state that it will furnish its own raw material
. Mr. Sisson. At what time, according to the contract, must the Government make its objection to any purchases they may make of material or any contracts they may make for labor!
Mr. F. A. Scott. Well, as to material I do not remember specifically, but I should suppose it would have to be a period of a number of months, because they have got to acquire it in the market.
Mr. Sisson. It would have to be prior to the purchase of the material?
Mr. F. A. Scott. Yes; and that must be a number of months in advance of the need of the material.