SEC. 3. For the purposes described in this Act, any department or agency may utilize any funds now available or hereafter made available to it under any appropriation. [S. 1280, 78th Cong., 1st sess.] A BILL To provide authority to the Secretary of War to use funds now or hereafter appropriated for adjustment of contracts, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That any funds now or hereafter available under any appropriation contained in this Act, or hereafter made available for the Military Establishment, may be utilized by the Secretary of War, in connection with the termination of War Department contracts, under such regulations as he may prescribe and without regard to any provision of law relating to the making, performance, amendment, or modification of contracts, for advance or partial payments to contractors with the War Department, or to subcontractors or suppliers directly or indirectly under such War Department contractors, or for loans or guaranties of loans to such contractors, subcontractors, or suppliers, or for the purchase of the rights of such contractors, subcontractors, or suppliers to such amounts certified by them to be due in connection with any such termination and upon such terms as the Secretary may permit by such regulations. [S. J. Res. 80, 78th Cong., 1st sess.] JOINT RESOLUTION To prohibit the use of the cost-plus-a-fixed-fee system of contracting in connection with war contracts Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That as used in this Act the term "Department” means the War Department, the Navy Department, the Treasury Department, the Maritime Commission, Defense Plant Corporation, Metals Reserve Company, Defense Supplies Corporation, Rubber Reserve Company, or any other department or agency of the Government (including Government-owned or controlled corporations) exercising functions in connection with the prosecution of the war effort. SEC. 2. Notwithstanding any other provision of law, no Department shall, in the exercise of its functions in connection with the prosecution of the war effort, enter into any contract providing for payment to the contractor of cost plus a fixed fee, except in extraordinary cases in which the head of such Department personally certifies that, because of lack of precedents or experience upon which to base fixed prices, it is necessary to use the cost-plus-a-fixed-fee system of contracting. SEC. 3. Where any Department has outstanding on the date of enactment of this joint resolution any cost-plus-a-fixed-fee contract which is unexecuted in whole or in part, the head of such Department shall proceed as rapidly as possible to require the contractor to renegotiate such contract for the purpose of placing it on a fixed-price basis, and shall pursuant to such renegotiation place such contract on a fixed-price basis. SEC. 4. Nothing herein contained shall be construed to supersede or modify in any way the provisions of section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942, as amended, except that, where practicable, the renegotiation of any contract under section 3 of this joint resolution may be carried out in conjunction with any renegotiation required wtih respect to such contract under such section 403. Senator MURRAY. In opening these hearings of the Military Affairs. Subcommittee on Contract Termination, of which I have been appointed chairman, and Senators Truman and Revercomb members, I want to say a few words about the apparent importance of the subject we are hearing here. We are having witnesses this morning in connection with S. 1268, a bill which I have introduced, and also S. 1280, a bill introduced by Senator Reynolds. Last spring I made a statement in connection with the bill which I introduced, and I think it would be appropriate for me to read from that statement at this time. The termination of a war-production contract creates a serious situation for the prime contractor and all his subcontractors and sub-subcontractors. Although his capital is tied up with work performed on a terminated contract, it is impossible for a prime contractor to obtain immediate and final payment of the amount due him. It is impossible for his various subcontractors to obtain final payment until after settlement between the Government and the price contractor. This situation will be especially disastrous for small contractors and subcontractors. Although a tremendous volume of war contracts will be terminated after the war-estimates run from about $50,000,000,000 to $75,000,000,000— shifting of military requirements will undoubtedly call for a great volume of contract terminations during the couse of the war. One procurement agency alone, the War Department, reports that during the war period it has already terminated 3,764 contracts-of course, that has been greatly added to in the meantime and more than 2,300 of these are still unsettled and more than 400 of these have remained unsettled in 6 months. In only 44 cases have advance payments been made by the War Department, and to prime contractors only. This means that hundreds of prime contractors and many thousands of subcontractors have spent large amount of money on Government contracts for which they have not been reimbursed. The War Department reports that, as a result, many of them are financially embarrassed and their dissatisfaction is very great. It is obvious, therefore, that these hearings are going to be very important and very helpful in considering some manner in which this problem can be handled. This morning we have several witnesses here. The first witness to be called will be Mr. M. R. Berry, of the Electrical Products Co., of Cleveland, Ohio. Mr. Berry. STATEMENT OF M. R. BERRY, ELECTRICAL PRODUCTS CO., CLEVELAND, OHIO Senator MURRAY. Mr. Berry, will you give your name and the corporation that you represent? Mr. BERRY. Maxwell R. Berry. Senator MURRAY. Where do you live and what is your position with the company you represent? Mr. BERRY. I am president of the Electrical Products Co., Cleveland, Ohio. Senator MURRAY. Have you a prepared statement or do you wish us to interrogate you? Mr. BERRY. No, sir; I only have some prepared notes as to dates and conditions and amounts. Senator MURRAY. First, then, will you briefly tell the committee something about your company, how long it has been established, the general nature of its business, the number of its plants, the number of its employees, its capitalization, and the character and extent of its work for the Government in the war? Mr. BERRY. The Electrical Products Co. was organized in 1906. It moved to Cleveland in 1910. It organized its business on an idea and a garage in a back yard and about $5 in capital. It has grown in the 37 years, according to the regular American fashion, until it has today about $700,000 total net worth. It has developed a variety of products that have been found to be very necessary and very vital in the war effort. We did, in our highest peacetime year, about a million dollars' worth of business. During last year, in wartime business, we did $3,500,000 worth. We carried over into this year about $3,000,000 worth of unfilled Government war orders. The pattern of our orders shows about 93 percent of a priority rating of AAA or AA1, the two highest ratings, and only about 7 percent in all the rest. There is no civilian business being done at all. We have about 350 employees. In normal peacetime years the liquidity of our business, as in any other business, is the ratio between quick assets and quick liabilities. That would show ordinarily an average of about 5 to 1. Those reserves are the minimum or the necessary reserves for our sort of business in order to keep our credit good, in order to be able to ride out ordinary depressions. Today, our ratio of quick assets to quick liabilities is about 12 to 1, due to the tremendous expansion in the volume of business done on the stated capital which we employ in our business. We have received no financing from the Government at all. We have extended our business operations very largely. We purchased another factory and more than doubled the capacity of the main plant. Our overhead expenses, in highest peacetime years, averaged about $14,000 a month. Today they are averaging $75,000 a month, so that the compression after the war period back to the peacetime period is almost an impossible task, to compress $75,000 back to $14,000. On the other hand, our products which we have largely supplied to the war are also peacetime products. We have not gone outside of our regular lines very widely. We have made quite a number of developments and changes to meet the war situation but our regular customers are also producers of war material. We have loaded them up; people like the Bell Telephone System that have so largely had to extend their operations, and similarly with the railroads, with the central station power companies, with all those other good customers of ours, so that the prospects for the sale of our goods in the post-war period are rather doubtful. I believe We do not know what conditions we will have to face but that situation we will have to face and that is a common condition. that gives you an answer to that first question. Are there any other details that you see that I have omitted? Senator MURRAY. You have told us pretty fully your dealings with the Government, that is to say, the character of the dealings you have with the Government. Mr. BERRY. Our products for the Government are for such purposes as this: Machinery for chrome-hardening of the large Navy gun barrels; machinery for charging submarine batteries; machinery for servicing submarine batteries; machinery for welding the hulls of the large Navy vessels. There was developed during the war period really a new theory of approach to the welding and the old welders did not make that type of equipment, so the Navy induced us to get in it as a specialty product. For instance, the transportation of ammunition is done by means of little electric trucks. Our equipment is more widely used than any other in charging the batteries in those trucks. Our specialty has been really in converting one type of electrical energy into another type; if high frequency, into low, or vice versa, high frequency into low; alternating into direct, or vice versa, or a combination of all six of them, so they are highly technical products and not used in quantities. We have no contracts from the Government calling for large orders. They are highly technical prod ucts used in small quantities. Senator MURRAY. You have had experience already then with the Government in termination of contracts? Mr. BERRY. We have had only two terminations that were appreciable. We have had dozens of small ones that involved no problems at all, just little subcontracts largely, but we had one termination of the James River Shipyard at Richmond which was abandoned shortly after it was started, and it was under the supervision of the Navy Department. That project was abandoned and fortunately I happened to be in Washington with the Navy Department about 2 weeks later and they showed me a telegram they had from Boston calling for equipment of similar character, so that was a transfer of the material ordered at James River and sent to Boston, so that involved no problem not involved in such a change. The one I came to testify about was a cancelation by the Maritime Commission with the James River Shipyard Co. at Jacksonville. The amount of that was $21,717. Those are the only two cancelations of any consequence we have had with the Government. Senator MURRAY. Have you been paid in full in those two cases? Mr. BERRY. No, sir; we have received no payment at all on that second case. Senator MURRAY. But you are having no difficulty about it. You anticipate that that will be handled? Mr. BERRY. We are not having any difficulty in the sense of there being any difference of opinion between the Government and ourselves. It is merely the fact that we cannot find, on the part of the Government, any opinion at all, and we have been waiting a year in order to see if we could not let them define some position on what was proper and what was not proper, so we have been waiting a year and getting nowhere. Today, we are just where we started a year ago. Senator MURRAY. It has been pending, then, a whole year? Mr. BERRY. Yes, sir; but there was no question of ill will on their part. They are just as anxious to settle this as we are. There is the best will on their part. It is just a question of no two of them having the same opinion on the subject. Senator MURRAY. When did you first submit the claim to the Government for this particular problem, this last case that you are talking about now? Mr. BERRY. When was it canceled? Senator MURRAY. When did you submit the claim? Mr. BERRY. The order was dated August 13, 1942. The delivery they specified was 60 days. It was canceled verbally on October 5, when delivery was scheduled for October 8; in other words, 3 days before delivery was actually scheduled. The final confirmation, what they call the changed order, was received on October 23. We submitted our estimate on November 4, about 11 days after we had the final confirmation of the cancelation. Mr. SILVERMAN. What was the amount of the claim? Mr. BERRY. $6,965.24. Mr. SILVERMAN. What was the total amount of the contract? Mr. SILVERMAN. What was the contract for? Mr. BERRY. The contract came to us in this way: Jacksonville called us on the telephone and said we have had an order with another electrical manufacturer for some equipment consisting of 90 welder operation adjuster boxes, and they have fallen down on the delivery of this equipment and we want you to take it and put it through for us on an emergency schedule. We can only give you 60 days in which to produce it. We have all the rest of the equipment on hand. We said to them that we are a small company; there is more flexibility about us than some of the larger electrical companies, and we can do it for you if you will help us get the necessary war materials. So we took it on that basis. They were to work with W. P. B. on getting the raw materials expedited for the order. Mr. SILVERMAN. You say this contract was for welder resistance boxes? Mr. BERRY. Yes, Mr. SILVERMAN. For how many? Mr. BERRY. There were 90 of them. Mr. S.LVERMAN. And the total amount was what? Mr. BERRY. $21,717. Mr. SILVERMAN. And you put in a claim for $6,900? Mr. SILVERMAN. How did you arrive at that figure? Mr. BERRY. We arrived at it this way: In the first way, we had an estimated profit of 11 percent on the contract. That amounted to about $2,300. We figured that since the cost of that job was far more than normal to us because of the emergency character of the work, getting it through in half the time allotted for that sort of job, that we were at least entitled to our full profit on the job. Mr. SILVERMAN. In addition to the 11 percent, what were the other items? How much inventory was involved in the $6 900? Mr. BERRY. We took off of their hands all the inventory except $33. We charged them $533 for scrap. Mr. SILVERMAN. That is $2,300 for the profit and $500 for the inventory. What about the balance? Mr. BERRY. We had a sales commission cf 10 percent to our agent in Jacksonville. Our product was sold through our Jacksonville agent. His commission was 10 percent, and that was $2,171. Mr. S.LVERMAN. That brings you to $4,800. What about the balance? Mr. BERRY. $4,600 of that was overhead. Dr. LAMB. Before you get into that, about the sales agent there, were his services necessary to the performance of this contract or was that just a favor from you to him to keep him going? Mr. BERRY. In the first place, he got the inquiry from the St. Johns Shipbuilding Co. That means he had been contacting them for It came to his office. months and years before the inquiry came in. They called up him to go out to their yard and show them what they |