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(d) Mandatory provisions in connection with each termination notice authorizing the storage and safeguarding of the inventory and property involved at the expense of the Government, unless its other disposition is given within 30 days from date of termination notice. (e) A definite separation of the claim itself from the problem of disposition of inventory and property covered in the claim. Under present procedures, settlement of claims and even the question of advance payments are held up pending the salvage of the inventories and property involved. Under wholesale termination this would cause delays which would prevent and defeat the prompt liquidation of frozen working capital. All such inventories and property should not be dumped on the market at sacrifice values but should be handled by a single Government agency for its gradual introduction into the peacetime economy. The ultimate salvage value will be much greater and the net cost to the Government of termination much less if this is done, as a large part of the materials and products involved in these inventories has a peacetime use.

With the proper uniform rules and regulations a clear definition of what constitutes war business subject to claim, certain mandatory provisions in the termination notices down the line, and definite releases to customers up the line at any point where the option of a single over-all claim was exercised there can be no possibility of duplication of claims, and the legal right of any war contractor to file a claim direct to the Government can be definitely established. It is also possible to determine the relation that the aggregate of all claims bears to the aggregate value of the canceled prime contracts and safeguard the requirement that the former does not exceed the latter.

I do not support the viewpoint that claims will be padded and urge that Congress authorize at least a 75-percent mandatory cash advance against claims properly certified by the claimant. The filing of requests for cash advances, even in the event of wholesale termination, will spread over a period of several months, and the manpower problem of issuing checks within 30 or 60 days will not prove serious, especially if most companies use single over-all claims, provided that procedure is authorized.

The question has been raised as to whether the procurement departments and agencies of the Government have the legal right to negotiate settlements which are binding on the Government in the event of the termination of Government contracts. This point should be cleared up in the proposed termination legislation if necessary. If these agencies have the right to negotiate and execute fixed price contracts subject, however, to renegotiation under the legislation providing for renegotiation, the ordinary businessman does not see why they should not be given the right to negotiate termination settlements.

Other matters which deserve the serious consideration of your committee and which require legislative action are:

(1) Legalizing informal or legally defective contracts and commitments undertaken in good faith to speed the war effort, as was done by the Dent Act following World War I.

(2) Establishing a single agency of the Government for the disposition of materials, supplies, and property taken over by the Government under termination claims.

As already suggested, the disposition of such inventories should be a distinct and separate transaction from the settlement of termination claims. Exception can be made to completed articles, spare parts, drawings, and possibly jigs, tools, and fixtures under the prime contra t itself, which are the only items in which the original contracting agency of the Government would be interested. Much of all other material has a peacetime use, should not be dumped on the market at sacrifice vales, and should be gradually introduced into the peacetime economy. If this is done, the net cost of termination to the Government and the taxpayers will be less. This is in line with proposals which are before Congress for the handling of Government-owned plants, machinery, and excess supplies and products already in the hands of the Government and no longer required for the war effort. (3) Establishing impartial tribunals which are local in character for the adjustment of disputes which may arise in the final settlement of any claim.

Experience in the last war and the litigation in connection with claims clearly indicate the desirability of this suggestion. The contracting agency or department of the Government which is only one party to an agreement should not make all final decisions. Experience under terminations which have so far taken place in the present war also emphasizes the need for such impartial tribunals, and if these are local in character, serious delays in settlement will be avoided. I will cite one instance which may appear minor in which our company did not receive equitable treatment.

Our termination claim as a subcontractor had received verbal approval by a representative of the contracting agency of the method used in calculating the termination claim-actual cost of material, labor, and overhead, plus the percent of profit allowable to the prime contractor. In addition, our claim had been reviewed and approved by the company's certified public accountants. After the claim had been filed, and acting as agent for the contracting agency of the Government, we were asked to obtain bids on the material and were authorized to sell the material. Our own company purchased some of this material at higher prices than the scrap prices offered by others, even though we had no immediate use for this material. Part of the material was sold to another bidder at the price bid. The salvage value of the material plus the percent of profit included in the claim was deducted from the claim instead of the salvage value of the material only. As a result, the profit to which we were entitled under the claim was reduced some $800, and in addition we incurred expense in acting for the contracting agency in disposing of the material-clerical work, handling, cartage, and so forth. We accepted this decision under protest rather than have an indefinite further delay in the payment of the claim. If such rulings are general, they remove entirely any incentive to the manufacturer to use and liquidate any part of the inventory embodied in a claim.

Your committee is rendering a real service to industry, especially small business, in the study it is making of termination problems and legislation which will provide equitable settlements, the prompt liquidation of frozen working capital, and a prompt return to normal peacetime operations. I again emphasize the desirability of single over-all claims which will be especially important to small business handling a multiplicity of war orders down the line as the only means

by which settlements can be promptly effected with a minimum of unemployment.

Senator MURRAY. You may proceed with any additional observations you have.

Mr. COLLENS. I think that the committee is fairly familiar, because it has been mentioned so much already, of the difference between what I call individual claims via the prime contractor route, and a single over-all company or plant claim which covers all of the terminated business irrespective of its pattern, how many prime contracts, subcontracts, or sub-subcontracts, or how many contracting agencies of the Government are involved, because I feel that that is the only prompt solution. I mean the only prompt solution which will permit a prompt liquidation of frozen assets with a minimum of unemployment at this time when we face reconversion and going back to a peacetime economy.

Senator MURRAY. That would save a great deal of time, to have it all considered as one settlement with the whole corporation, is that correct?

Mr. COLLENS. A great deal of time and expense both on the part of the company and the Government. At the present time, as I think you know, there are about 250,000 prime contracts, and under.neath that structure there are at least 800,000 subcontracts in the first tier, and the arithmetical figures when you go to the second, third, fourth, or fifth tier run into the millions. If there is any wholesale termination, it would make an impossible situation to have those millions of claims filter up through the prime contractor for approval. There are many companies that would have hundreds of claims and others that would have thousands of claims if they all have to go the prime-contractor route, so that I feel that the single over-all company or plant claim covering all of the terminated business is the only procedure which will permit prompt liquidation and settle many of these frozen assets.

Senator MURRAY. Does that create any difficulty where you consider the subcontracts entirely separate and apart from the prime contracts under which the subcontracts were active?

Mr. CCLLENS. I do not visualize any real difficulty there. Of course, there will have to be proper procedure set up so that certain definite mandatory notices go down from the prime contractor all the way down the line. That is, the prime contractor, in terminating his contract, would have to show the prime contract number, the contracting agency, and so forth. And the subcontractor, in terminating his orders or contracts under the one that has been terminated by him, would have to pass down the same information in his termination notice, so that there would filter down in termination notices the proper information required in connection with each termination notice, information on the basis of which somebody down the line could establish his legal right to a claim. That is, he could make up the pattern of his terminated business, showing the aggregate amount and the aggregate amount to be allocated, showing the aggregate amount to each contracting agency of the Government, and then the contracting agency of the Government having the preponderance of terminated business, would handle the over-all claim just the same as it is handled under renegotiation, and it could be direct with the Government rather than filtering up

through the prime contractor. The multiplicity of individual claims and the advance payments could be handled in that same way, direct by a single agency of the Government, which agency has the preponderance of the terminated business.

"

Of course, if the man down the line doesn't use the over-all claim method, there would have to be proper releases go up the line that he is filing his claim direct rather than going up through the prime

contractor route.

Senator MURRAY. Has that proposed procedure been given any consideration by the war agencies?

Mr. COLLENS. They are studying it and I agree with them that, until you have the procedure set up for handling individual claims via the prime contractor route, and until that is uniform for all contracting agencies of the Government, it would be impossible to consider a merged claim, but if they can get their procedures for accounting and the accounting manuals and the termination notices and policies and rules and regulations uniform for all agencies of the Government, there is no reason why there should be any difficulty in handling an over-all claim by a single company. Comparing the number of claims that would be involved on an over-all company basis with what would be involved on the prime contract route, I think everybody will acknowledge that there are going to be millions of claims if it goes via the prime contract route whereas, if we can judge from income tax returns and the number of companies classed as manufacturers, there would be less than 90,000 claims in all if all companies elected the over-all procedure against the millions of claims through the prime contract route

Senator REVERCOMB. May I interrupt to ask you to give us at this point the number of cancelations there have been in your industry?

Mr. COLLENS. You mean in my company or industry?

Senator REVERCOMB. Your industry. I believe you stated you are chairman of the committee?

Mr. COLLENS. Yes; but I have no data on that, Senator. I simply know in our own case we have had quite material cancelations so far, and the picture of our company, if there was wholesale termination, we have active on our books at the present time over 600.

Senator REVERCOMB. When there is a cancelation of a prime contract, naturally that results in cancelation of subcontracts. Have you had any litigation from subcontractors attempting to claim damages against the prime contractor?

Mr. COLLENS. No. As far as our own experience is concerned, we have not.

Senator REVERCOMB. The subcontractor has been willing to wait until the matter is settled with the prime contractor?

Mr. COLLENS. I cannot say he has been willing but, in most cases, he has had to wait. In our own case, we probably have 600 active war orders and contracts at the present time tying in with 120 different prime contracts with 4 contracting agencies of the GovernmentArmy, Navy, Maritime Commission, and the Treasury Department, under lend-lease.

Under the present procedure, if there were wholesale terminations, we would have to send up the line 600 individual claims. We would have to allocate a lot of common materials and parts, jigs, tools, and

fixtures that have been made for this war production to 600 claims. Then there would have to be 600 settlements and 600 audits and reviews as well as the disposition of 600 different lots of this material, most of which is common, and under the disposition you have got to earmark everything against the individual claims, store it, and then, in some cases, you are asked to obtain bids on that inventory and you have to get 3 bids for each lot. That would be 900 bids against 3 if it were handled in a single lot with all of this common material rather than on the individual claim basis up through the different prime contracting agencies.

As a very simple example, I can give our own case where last November we had three cancelations from one of the procurement agencies of the Government, one of them a prime contract and the other two subcontracts, and the two subcontracts involved identical material. We had to make three separate claims, segregate the common materials to the different claims, earmark, and store each separately and get the bids on the three lots, whereas, at less expense to the Government and at less expense to ourselves, all of that could be handled as a single lot. In that case, it involved merely one contracting agency of the Government.

Senator MURRAY. This material was all similar?'

Mr. COLLENS. There was much common material, and in connection with two of the subcontracts there was identical material because they covered identical material for two different prime contractors.

Senator MURRAY. Would the aggregate of the material be any very large amount or would it be a quantity that could easily be absorbed by some other corporation that would need that material?

Mr. COLLENS. We did not include in our claim at that time any material that was usable by us, merely some of the special material that was peculiar to these particular contracts.

Senator MURRAY. You say any material you could use yourselfMr. COLLENS (interposing). We cannot include in the claim at all. We took that right over. But, in a wholesale termination, much of that material would have to be included because it would represent excess inventories that could not be used for years under the volume of war production that many companies have, because we have expanded a little over four times normal production in doing war

business.

Senator MURRAY. In connection with the disposal of this material at the close of the war, there is a sentiment to the effect that it should not be sold or offered for sale in huge amounts but should be broken up so it would give the smaller concerns of the country an opportunity to bid for it.

Mr. COLLENS. That is one of the suggestions I had in my prepared statement, that is, that the question of the disposition of these inventories on termination should be kept absolutely separate and distinct from the claim itself, because much of that material can be used in peacetime operations and it should not be dumped on the market at sacrifice values.

Senator REVERCOMB. When you speak of materials, Mr. Collens, do you mean materials that go into the finished product or the finished product itself?

Mr. COLLENS. Both.