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Admiral LAND. Yes.
Mr. WIGGLESWORTH. You have not been responsible for the renegotiation of the Kaiser profits, as far as W. S. A. is concerned?
Admiral LAND. No, but I am responsible as the Chairman of the Maritime Commission.
Mr. WIGGLESWORTH. I was interested in what a Member of the House placed in the record the other day, indicating that on a $100,000 initial cash investment, in respect to two of the many companies that Mr. Kaiser operates, he had apparently realized å $27,000,000 profit after taxes and after renegotiation.
Admiral LAND. I furnished the information on Kaiser's profits to various committees in Congress in full detail. Extensive testimony on shipyard profits will be found in the hearings before the subcommittee on shipyard profits of the House Merchant Marine and Fisheries Committee on March 22 and March 23. Similar testimony will be found in the hearings before the Ways and Means Committee on H. R. 2628 on April 16, 1945. You apparently are referring to material placed in the Record by Mr. Woodruff on February 21, 1945. The $27,000,000 figure mentioned by Mr. Woodruff represents profits after renegotiation but before taxes. The statement of California Shipbuilding shows a profit of approximately $19,700,000 before taxes, but only $4,250,000 after taxes. Profits of the Oregon Shipbuilding Co. are listed at approximately $10,700,000 before taxes. No figure is stated in the Congressional Record as to the tax liability.
I am quite prepared to submit any and all figures on shipbuilding as fast as they come in under renegotiation, and the results thereof You are not going to get anywhere at all on capital invested in the business of shipbuilding. It is a fundamental error to attempt to adjudicate those things on the capital invested in the business.
In the first place, those people were practically forced by us to go into the business.
Mr. WIGGLESWORTH. It seems to have been a gainful operation.
Admiral Land. Yes, and a very small return. The best yard, as I recollect, is somewhere between 4 and 5 percent. That is the Oregon yard, the best Kaiser yard there is.
Mr. TABER. Over-all?
UNREASONABLE CHARGES CLAUSES IN CERTAIN CONTRACTS
Mr. Taber. Among them were Nos. 29,039 and 33,546. In those contracts there was this provision, 7.23, Unreasonable charges. I will skip over parts that are not of very much importance, comparatively,
Excessive or unreasonable payments, whether in cash, stock, or other properts, shall not be taken into account. In computing the shipbuilder's profit, no salary of more than $25,000 per year to any individua) shall be considered as a part of the cost of building the ship or group of ships. All subcontracts, regardless of the amount involved, are subject to the provision that the Commission shall scrutiniz construction costs, to determine that they are fair, just, and not in excess of s reasonable market price for the commodities or goods or services purchased or charged.
Then, I have article 10 involved. Subsequent to the completion of the work to be performed hereunder and the determination of profits derived from the performance thereof by the contractor, the contractor shall pay the Commission an amount equal to that by which such profits exceed $8,800,000. The amount of such profit shall be determined by the Commission pursuant to the provisions of its regulations prescribing the method of determining profit, adopted May 4, 1939, including amendments and annotations to September 1, 1941, and for the purpose of such determination the contractor shall make such statements and returns to the Commission as it shall direct and shall also make available to inspection and audit by representatives of the Commission all books, files, and other records of the contractor.
It is understood and agreed that the Commission, in determining the contractor's profits in accordance with the aforesaid regulations, will apply such regulations as regulations for determining profit under a fixed price contract and not as regulations for determining reimbursable costs, charges, and liabilities incurred by the contractor, including those resulting from the negligence of its corporate officers, agents or employees, or those made necessary because of any guaranty contained in this contract and all insurance premiums, including, without limitation, premiums on products liability insurance, the cost of completion or termination of this contract (unless the contractor shall be compensated therefor under another agreement with the Commission), including the cost of preserving and protecting any property of the Commission located in the shipyard and legal, accounting, clerical, office, administrative, and other expenses incident to final settlement of this contrct. The Commission, in determining profits, will make the specific exclusions provided for in said regulations, but no item of cost, properly allocable under sound accounting practice to the performance of the contract work, shall be disallowed on the grounds that it is excessive or unreasonable except in cases where (i) there is a showing of reckless or willful misconduct or evasion on the part of the contractor or its corporate officers; (ii) the payment has been made for the liability incurred to a corporation affiliated with the contractor or in which a director or corporate officer of the contractor holds a substantial stock interest or for a purpose other than salary payments to a director, corporate officer or employee of the contractor or a partnership in which such person is a member;
That seems to be a provision that is in only these particular Kaiser contracts.
Admiral LAND. No, sir; it is in some other contracts; but I invite your attention to the fact that it has nothing to do with the contract price; it has only to do with the recapture of excessive profits.
The policy of the Government is to shift over from any kind of costplus-fixed fee contract to a fixed-price contract. In so doing, with C. P. F. F. contracts already in existence, you have to make some concessions, or else the contractor will not shift. There is nothing in the law to make them shift.
We have been using our best endeavors to get them over onto a fixed-price basis throughout the whole shipbuilding industry and have been successful and may continue to be.
Mr. TABER. I wonder why they felt obliged in making that shift to insert the words including those resulting from the negligence of its corporate officers, agents, or employees?
Admiral LAND. There is a very long story attached to that. If you want to take the time, I shall be glad to tell it in my own words; or I can submit a memorandum of about 10 pages to do it. As I have just explained, this provision is included in the recapture clause only. It does not affect the basic substantive rights under the fixed-price contract. What we were trying to do was to shift the C. P. F. F. contract into a fixed-price contract and at the same time to add a recapture clause which ordinarily is not associated with a fixed-price
contract. Because of the contractor's strong fear that the type of audit on the fixed price recapture clause might be as severe as that under the C. P. F. F. contract, they insisted on a clarification as to the items which could be deducted from their actual costs for the purpose of determining excess profit. That is why the language was used. But I call your attention to the fact that it does not extend to conduct which might constitute misfeasance or malfeasance since the costs resulting from willful misconduct, reckless misconduct, evasion, and other certain types of conduct may be disallowed by other provisions to the clause to which you have referred. Therefore, so far as I am concerned, it is a lot of verbiage which the contractors wanted in order to have a more satisfactory yardstick for the guidance of our accountants.
Mr. TABER. Do you mean it is legal verbiage? I cannot see why any organization that is at all properly conducted would be obliged to ask to have that kind of language put in a contract.
Admiral LAND. Well, you may not have had as much experience with lawyers as I have had. I know they will ask for a good many things of this type if they can get them in. A good many of the things they have asked for have been thrown out. This was a concession which seemed to please them, but which we think is of no value whatever.
Mr. TABER. In other words, you do not think it means anything?
Admiral LAND. Well, I mean to say, as far as analyzing it is concerned, if they committed any of the serious things that you may feel are excused by that clause, they would be committing either misfeasance or malfeasance covered by the reckless and willful misconduct clauses I have referred to above. However, the clause has nothing to do with contract price; it has to do only with recapture of profits anyhow. Also the clause does not control in renegotiation. That would come up before the renegotiation committee and also come before me as final arbiter of renegotiation, because the law puts that responsibility on me. I myself do not think much of the phraseology; I am merely saying it was a concession.
Mr. WIGGLESWORTH. How can you get away from it if it is a contractual obligation?
Admiral Land. Merely by what I say: If they do the things you seem to fear are referred to, it would be malfeasance or misfeasance and covered by other provisions.
Mr. Case. As a matter of fact, did it not have some effect when you came to renegotiate?
Admiral LAND. No, sir.
It is understood and agreed that the Commission, in determining the contractor's profits in accordance with the aforesaid regulations, will apply such regulationsin such a way that youwili al.ow for the purpose of determining the contractor's profits all costs, charges, and liabilities incurred by the contractors, including those resulting from the negligence of its corporate officers, agents, or employees, or those made necesssary
Well, the rest of it is not so important, but that part of it that I read is important.
I do not just see why your legal force would approve the execution of any such proposition as that.
Admiral LAND., Well, as I told you, in the history of any shipyard organization there are always costs that are in controversy. When you have 20,000 men or 40,000 men, you have great difficulty in your wage schedules alone. There are always differences of opinion as to whether they are correct or incorrect. If they become of any importance, then the matter has to be referred to Washington anyhow.
As a matter of fact, we are trying to get rid of that phraseology, and I think we will get rid of it. I myself am not keen about it, and the importance that has been attached to it is, to my mind, entirely beyond its real importance, for the reasons I have indicated. It applies only to profit, not to price.
Mr. WIGGLESWORTH. Do you think the company considers it unimportant?
Admiral LAND. I felt that they asked for it because of a row they had with our accountants; and therefore their lawyers think it is of some importance.
It represented a very long controversy, in which we were trying to get them over from a cost-plus-fixed-fee or a cost-minus contract into a fixed-price contract, in accordance with the will of Congress and the Maritime Commission. In so doing, that concession was made. If there is any serious doubt about it, we will endeavor to cure it now.
Mr. CASE. As a matter of fact, how could you set up a special basis for determining profits and renegotiation in your contracts different from that which is employed in other contracts under the central administration of the central Price Adjustment Board?
Admiral Land. We cannot and have not attempted to do so. This has nothing to do with renegotiation at all, Mr. Case, nor is the provision in any wise more favorable to the contractor than the procedures under the rules of the central Price Adjustment Board. When it somes up under renegotiation we will handle the matter as an entirely separate thing. Let us assume the Commission made a mistake and allowed something that should not be allowed. It is still capable of being picked up by renegotiation, which is an entirely independent body. So we have that anchor to windward regardless of what errors of omission or commission may be made in there.
Mr. Case. When renegotiation was amended by the Revenue Act of 1943, as I recall it, a provision was made for central Price Adjustment Board and coordination of the policies as to what should be allowed or disallowed in determining excessive profits.
Admiral LAND. That is right.
Mr. Case. Does not this presume to set up some special basis for determining profits as distinguished from that applying to other types of Government contracts in other procurement agencies?
Admiral LAND. No; it applies only insofar as the right of the Commission to recapture excess profits by contract is concerned, but not so far as renegotiation is concerned. The renegotiation body is not controlled by the allowance that is made by the contracting body.
Mr. CASE. But it refers to the determination of profits. It seems to me the thing is related, certainly.
Admiral LAND. No. The Commission might determine certain profits exist under the contract for recapture or other purposes under the Maritime Commission contract, but it would not control in renegotiation.
Mr. CASE. Did you approve this contract?
Admiral Land. Yes, with some reluctance, in order to get it on fixed-price basis.
Mr. Case. You stated earlier that the law places upon you the responsibility for passing upon the renegotiation of your contracts.
Admiral LAND. That is right; but the Commission approved this contract. I am quite independent when it comes to renegotiation; and as I say, this merely relates to the recapture clause in the contract.
I should be very glad to submit a rather long dissertation on this, because it is a controversial matter with us, and it is not satisfactory.
I am not coming here and telling you that I like that phraseology; I do not. We are doing our best to get it changed, and I think we will succeed.
Mr. WOODRUM. I think we ought to have the amplified, clear statement that the Admiral speaks of.
(The statement referred to is as follows:)
SUPPLEMENTAL STATEMENT OF VICE ADMIRAL EMORY S. LAND RELATIVE TO
RECAPTURE PROVISIONS IN CONTRACTS FOR CONSTRUCTION OF VESSELS BI UNITED STATES MARITIME COMMISSION
As pointed out in my testimony the two contracts referred to are contracts for the construction of vessels on a fixed-price basis. In no event will the Commission be obligated to make any payments thereunder to the contractors in excess of the contract prices stated in the contracts as adjusted for changes in plans and specifications, and under the so-called escalator clause for changes in the Department of Labor's material and labor indices. Thus the contractor have accepted a risk of loss in the event that their cost shall prove to be actually more than the contract prices stated. These prices are believed to be fair and reasonable. The price stated in the contract with Kaiser Co., Inc. (contract No. MCc-29039) is $2,700,000 per tanker. The cost and fees paid to this company for tankers of the same design, built under cost-plus-a-fixed-fee contracts, was approximately $2,860,000 per tanker. The price specified in the contract with Marinship Corporation (contract No. MCc-33546) is $2,800,000 per tanker. The cost and fees paid to this company under its cost-plus-a-fixed-fee contracts covering this type of vessel was approximately $3,181,000 per tanker. Therefore, even if the Commission never collected any profits under the so-called recapture provision contained in article 10, the cost of the vessels to the Commission would probably be less than that which it will pay under the cost-plus-a-fixed-fee type of contract.
There is no requirement of law for the inclusion of the recapture provision contained in article 10. Such provision is included in the contract in addition to the renegotiation provision. In this connection it may be pointed out that under the Merchant Marine Act the Commission was required to include a provision whereunder all profits in excess of 10 percent of the contract price should be re captured. Such a requirement does not apply to vessels constructed under Public Law 247 (77th Cong.) as are those covered by the contracts under discussion, Furthermore, it may be pointed out that neither the War Department nor the Navy Department have, since the suspension of the Vinson-Trammel Act, includeri any provision for recapture of profits in contracts entered into by them on a fixed-price basis, but merely rely on the provisions for renegotiation.
At the time the Commission determined to make, insofar as possible, all conitracts on a fixed-price basis, it determined as a matter of policy to include in thos contracts which covered the construction of vessels a provision for the recapture of profits in excess of an amount which, in the opinion of the Commission, was reasonable. This provision, therefore, merely affords an added protection to the Government and does not either confer additional rights on the contractor vi purport to affect any of the provisions of law in regard to Government contracta
At the time the Commission commenced negotiations with contractors who had been constructing vessels on the cost-plus-a-fee basis, for the purpose of having contracts on a fixed-price basis, representatives of all of the larger cotr tractors stated that one of their primary objections to a fixed-price contract with a provision for recapture was that in determining profits auditors of the Court mission would continue to audit their books and records in the same manner as under the cost-plus-a-fee contract. They pointed out that not only would they be assuming the risks of loss incident to performance of work under a fixed-price