and welding machinery, stiff-leg and sheer-leg derricks, and what not, to do a good job.

Is the over-all cost to the Navy made to include these items of machinery and if so, when the work is done, do they become the property of the contractor?

Admiral MOREELL. There are a number of different cases, Senator. Senator BONE. How far in your accounting system do you allow the contractor to go in the acquisition of building equipment which would subsequently be his property. Do you see what I am trying to develop?

Admiral MOREELL. Yes, sir.

Senator BONE. Because otherwise I might be a contractor and have nothing but a skeleton staff of experts, engineers and the like, and I would make a deal with the Government and I would emerge from that deal having been paid this fixed fee but I would also be possessed of a magnificent set of equipment that I could utilize in subsequent jobs. Now that, of course, would have to come within the framework of your accounting system. How do your experts adjust those matters? Admiral MOREELL. I will explain that, Senator.

It is explained in considerable detail in this booklet. I will explain it here briefly.

There are a number of different cases. The ordinary large building contractor-and by "building contractor" I mean a man who builds a structure such as we are in now-retains comparatively little equipment.

If he is a big operator, he buys the equipment for the job-it pays him to do that—and at the end of the job, he sells it to a small contractor or an equipment dealer. It is only the smaller contractors who maintain equipment because they do the smaller pieces of work which are not sufficiently large to finance the equipment needed for that job.

Now the big contractors, the big operators like the Turner Construction Co. or the Geo. A. Fuller Co., buy special equipment for the job because it pays. They usually get new equipment, in good shape, and they "take the guts out of it," so to speak. Then they sell it and charge up the difference between the cost and selling price to that job. It pays them to do that.

Let us take a specific case of our work; let's say the Alaska work. The contractor buys a lot of equipment for those Alaskan air stations, with our money. We own that equipment; it belongs to us. At the end of the work, we do one of two things. We either retain that equipment to be used in the maintenance and operation of that station or else we sell it and the money goes into miscellaneous receipts of the Treasury. The contractor does not get the equipment.

Two years ago I asked the Senate Appropriations Committee for authority to sell that equipment and credit the job account so that I could use that money to build other projects with, but the committee would not give me that permission because they stated that it might lead to abuses. So I got out an order to our field offices saying that when any equipment is sold, the money must go into miscellaneous receipts of the Treasury and cannot be credited to the job account.

Now, then, there is the case of what we call a "heavy contractor," the fellow who builds dams and roads and water-front structures. He usually has a lot of expensive equipment, such as dredging equipment, which he cannot afford to buy and sell for each job.

He retains that equipment as a part of his "stock in trade." You will notice in the appendixes to this book, there is a description and a table of plant rentals. The table is on page 41, and is accompanied by a very detailed description of how we arrive at the payments that should be made to a contractor from whom we are renting equipment. The underlying principle is that a contractor who is doing a piece of work for us must make no profit from his equipment. His equipment must be rented to us at what we consider to be the cost to the contractor.

Senator BYRD. Admiral, excuse me there, sir.

Admiral MOREELL. Yes, sir.

Senator BYRD. The 42-percent fixed-fee, does that include furnishing of equipment?

Admiral MOREELL. Furnishing of equipment at cost; yes, sir.

Senator BYRD. But the cost of equipment is not taken out of the fee, is it?

Admiral MOREELL. No, sir; we pay him a rental for the equipment that he owns, but that rental is calculated to reimburse him only for his out-of-pocket cost of owning that equipment.

Senator BYRD. The 42-percent fee then does not include any cost to the contractor for equipment?

Admiral MOREELL. No, sir; that does not.

Senator BYRD. What does that include? In other words what does the contractor perform for this 4% percent?

Admiral MOREELL. I think I can read it

Senator BYRD (interposing). I don't want to interrupt you, but I think that is pertinent.

Admiral MOREELL. I can give you a better statement on that if I am permitted to read from this booklet, which describes that point in some detail.

The CHAIRMAN. It is more than general supervision?

Admiral MOREELL. Yes, sir.

Senator LUCAS. What page?

Admiral MOREELL On page 14 at the bottom of the page. "The fees allowed under these contracts were determined by the Chief of Bureau." That isn't strictly correct. The fees were determined by a board and approved by the Chief of Bureau.

Senator BYRD. One more question: 41⁄2 percent is based on your estimate of the cost?

Admiral MOREELL. Yes, sir.

Senator BYRD. I mean, that is the fixed percent?

Admiral MOREELL. Yes, sir.

Senator BYRD. Based on your own estimate of it?

Admiral MOREELL. Yes, sir.

Senator BYRD. Now, if the cost exceeds your estimate?

Admiral MOREELL. The contractor gets no more fee.

Senator BYRD. He gets no more?

Admiral MOREELL. No, sir.

Senator BYRD. If the cost is less than your estimate?

Admiral MOREELL. He gets no less fee [reading].

The fees allowed under these contracts were determined by the Chief of BuIt was considered wise that the selection of the contractors should not be

reau.

influenced by their ideas as to the amount of the fee.

The con

The chance of gambling with the fee item was thus eliminated. tractors, whoever they might be, were assured a just fee and the Government's interests were properly safeguarded.

60805-41-2

The law allowed a maximum fee of 10 percent of the estimated cost of the work in each case, exclusive of the fee. The allowed fees amounted on the award dates to 6 percent, 5.8 percent, and 5.6 percent, for the Pacific islands, the Alaska, and the San Juan contracts, respectively.

The fees absorb interest on moneys, contingent fees or commissions, rent and other expenses of the central offices of the contractors, and services and traveling expenses of officers and employees of the central office organization except as specifically authorized by the contracting officer

and then, of course, after those expenses are represents the net profit to the contractor.

deducted, the balance

Senator BYRD. Absorbs interest on money? You mean the contractor has to advance the money?

Admiral MOREELL. Yes, sir. I have here now this book which I mentioned before, Manual of Accounting, Auditing, and Control of Negotiated Cost-Plus-Fixed-Fee Contracts, Bureau of Yards and Docks, Navy Department.

This manual sets out in complete detail the procedure which must be followed by our officers in auditing the accounts of a contractor before he can be reimbursed for moneys that he has advanced.

In some cases those advances, Senator, amount to a very sizable sum. For instance, in the Western Pacific contract, they have gone up as high as $5,000,000 that has been advanced by the contractors. Senator ELLENDER. You mean not reimbursed for some time? Admiral MOREELL. Yes, sir.

Senator ELLENDER. How long a time?

Admiral MOREELL. The contractor told me recently that they average a continual advance of about $2,500,000.

Senator ELLENDER. It takes that capital?

Admiral MOREELL. Yes, sir.

Senator ELLENDER. Don't you make your accounts every week? Admiral MOREELL. We make them every week; yes, sir.

Senator BONE. Suppose he advances or is required to have bank advances, is that charged to the cost of the work?

Admiral MOREELL. No, sir, that is charged to his fee.

Senator ELLENDER. He has to furnish that.

Senator BONE. I note this statement, "The fees absorb interest on moneys, contingent fees." You mean by the term "absorb" that he must pay interest on moneys that he is compelled to borrow? Admiral MOREELL. Yes, sir..

Senator BONE (reading):

Contingent fees or commissions, rent and other expenses of the central offices of the contractors, and services

and the like.

Senator BYRD. What do you mean by "contingent fees"?

Admiral MOREELL. There is a provision in the contract-I will point that out.

On page 34, article 19 [reading]:

The contractors warrant that they have not employed any person to solicit or secure this contract upon any agreement for a commission, percentage, brokerage, or contingent fee.

Breach of this warranty shall give the Government the right to terminate the contract, or in its discretion, to deduct from the contract fixed fee the amount of such commission, percentage, brokerage, or contingent fees.

This warranty shall not apply to commissions payable by contractors upon contracts or sales secured or made through bona fide established commercial or selling agencies maintained by the contractors for the purpose of securing business.

I think, perhaps, the words "contingent fees" is a rather unfortunate term, because it gives the impression that a man is hired on a contingent basis but

Senator BYRD (interposing). I understand that, but if an organization is established here at Washington for the purpose of getting Government contracts, then the cost of that organization would have to be paid by the fee-you can't use the word "contractor."

Admiral MOREELL. We use the word. We pay the contractor a fee.

Senator BYRD. In other words the Navy Department cannot pay for the fees for the purpose of getting this business?

Admiral MOREELL. That is correct, sir.

Senator LUCAS. Where do the commissions come in?

Admiral MOREELL. That is also under that same article. That was on page 34, article 19. The matter of commissions is discussed there.

Senator BYRD. The Government is protected in either case from either charged commissions or fees for the purpose of securing Government work?

Admiral MOREELL. Yes, sir.

Senator LUCAS. The contractor pays out of his fixed fee assuming his 41⁄2 percent?

Admiral MOREELL. Yes, sir. I would like to make this additional statement:

There are some other items that the contractors have found it necessary to pay and we have made them pay them out of their fixed fee.

For example, we have established a top limit of $9,000 per year for any employee of the contractor, because we felt that we didn't want to expose ourselves to the criticism of allowing the contractors to take people on at exhorbitant salaries. So we told the contractors that we would only allow $9,000 as a top salary.

Now we know that particularly in isolated and difficult places like Wake or Midway or Guam, they must pay much higher salaries to get properly qualified personnel.

I am told that in one case a contractor is paying $35,000 to one of his employees. He is paying the excess above $9,000 out of his own fee. Senator ELLENDER. How do you draw the distinction as to what is required them to furnish in the line of executives and what the Government will furnish. I notice you are speaking of central office. Don't you require one executive on the job?

Admiral MOREELL. Yes, sir.

Senator ELLENDER. Furnished by them?

Admiral MOREELL. Yes, sir.

Senator ELLENDER. That you don't pay?

Admiral MOREELL. We don't pay that.
Senator ELLENDER. That executive?

Admiral MOREELL. That is right.

Senator ELLENDER. That must be one of their top men?

Admiral MOREELL. One of their top men. It isn't always the same man, Senator.

Senator ELLENDER. They shift him?

Admiral MOREELL. Yes, sir. We don't reimburse the contractor for his salary.

Senator ELLENDER. There must be one executive on that job all the time no matter where it is?

Admiral MOREELL. Well, not always. Not on a small job but in the western Pacific, for example

Senator ELLENDER (interposing). Yes; out there.

Admiral MOREELL (continuing). There are eight contractors. Now, each of those eight has an executive who is particularly qualified for our work. I have insisted that at least one of those eight executives be actually on the scene of the work at all times.

Senator ELLENDER. And the Government doesn't pay him?
Admiral MOREELL. No, sir.

Senator ELLENDER. You pay all the other personnel whom they may transfer?

Admiral MOREELL. Yes, sir.

Senator ELLENDER. What about the difference between their pay in their old organization and when they are transferred to the Government, do you have any limits outside of this $9,000?

Admiral MOREELL. Yes, sir. We made an arbitrary limitation in the Western Pacific contract of approximately 25 percent.

Senator ELLENDER. They couldn't increase over that?

Admiral MOREELL. They couldn't increase over that unless they made a special issue of it and came to us and said, "Here is a man whom we employed in a low rating and he is very much better qualified than that rating would indicate. We want to give him greatly increased authority and responsibility, and we want to increase his salary by something more than 25 percent."

Each of those cases is considered on its own merits. There are few of them.

Senator BONE. Let me set up a hypothetical case: Here is a big contracting firm-I want to assume that it is doing five separate jobs for the Navy. Obviously an outfit capable of handling five big operations at one time would have to have a central office?

Admiral MOREELL. Yes, sir.

Senator BONE. Would have to have a big staff of accountants and presumptively a considerable staff of executives.

In your accounting system do you break that up and check the five jobs separately or what part of the cost do you permit to be allocated to the central office and charged against each specific job?

Admiral MOREELL. We pay none of the central office expense, Senator. Let's take a specific example

Senator BONE (interposing). Do you isolate each job and set it off by itself and pay only the active personnel on the job?

Admiral MOREELL. Yes, sir. We pay only the salaries of men engaged on the scene of the work, except in some very special cases where, as a matter of convenience to the work, the employee is permitted to work away from the site.

Let's take a specific contractor. I think we can explain this better if we do that. Let us take the Turner Construction Co. who are now one of the eight contractors engaged in our Western Pacific operations, an operation which now amounts to approximately $125,000,000.

They have in New York their central office, which occupies, I think, two floors of a big building and comprises very extensive engineering, administrative staff, and executive staffs.