partment as well as from the inspector acting for the Government. Thereupon the subcontractor is paid by the prime contractor. These reports are then reviewed by the contracting officer and his representatives and, if approved, the prime contractor draws a public voucher, attached to which are all of the supporting papers. This public voucher and supporting papers are then delivered to the contracting officer, who, in turn, delivers them to the fiscal officer of his particular department for final audit and review. Ultimately the voucher comes to the Government finance officer, who makes payment to the prime contractor. In due course, the record reaches the General Accounting Office. In many cases the particular payment may not be audited by the General Accounting Office until from 1 month to 1 year or more from the date the original expenditure was made. As a matter of fact, there is no time limit imposed upon the General Accounting Office for the purpose of review. If the General Accounting Office believes that the payment is not properly supported by the documentary evidence submitted, an informal suspension is issued which the contracting agency of the Government and the prime contractor are required to answer within 60 days from the date of issuance. If additional data submitted to the General Accounting Office satisfies that office that the payment is proper, nothing further is heard and presumably the payment becomes approved. On the other hand, if the General Accounting Office still believes the payment to have been made improperly, it may initiate a procedure whereby the amount of the "improper payment" is collected by the Government by means of a set-off under any other Government contract which the prime contractor may be performing. It is obvious that this right of set-off, although so far it has not been exercised against Baldwin, is a potent weapon and summary in its effect.

The situation as it stands today is that although the War Department recog nizes its obligations to assume the claims of Baldwin subcontractors, the claims are not being paid. We understand that the Government finance officer feels bound by a decision of the Comptroller General in the Triumph Explosives case which holds that as these are claims against the Government they must be audited by the General Accounting Office before they can be approved for payment. The finance officer is as much concerned with the effect on him of the payment of a claim subsequently invalidated in whole or in part by the General Accounting Office as is the prime contractor. Therefore, neither Baldwin nor the War Department is in a position to pay out substantial sums in the aggregate if the General Accounting Office is to exercise the veto power.

II. CONCLUSIONS

Our conclusions as to the method whereby the settlement of termination claims can best be handled are:

1. If capacity production of war materials is to be maintained for the duration of the war, and if economic chaos is to be avoided upon termination of the war, the claims of prime contractors and subcontractors arising from contract termination, whether such termination occurs during or after the war, must be settled on the basis of negotiated settlements as distinguished from strictly applied legal and acounting rules and restrictions incident to the ascertainment and proof of actual costs incurred in the performance of partially completed work.

The war materials required by military necessity could not have been produced under the usual governmental contracting procedure requiring all contracts to be awarded on a competitive bid basis. To meet this difficulty, the First War Powers Act gave the procurement agencies of Government the right to award contracts on a negotiated basis. The problem of settlement of cancelation charges is closely related to procurement. Substantially the same reasons exist for the negotiated settlement as for the negotiated procurement. While the factors surrounding the settlement of cancelation claims do not have the same dramatic appeal as the factors incident to speedy production of war materials, nevertheless it is believed that from the standpoint of the general welfare of the country the two problems are not wholly unrelated. Also, there are many valid and practical reasons why the settlement of cancelation charges by means of detailed cost analysis and auditing procedure will not work. To illustrate:

(a) Many prime contractors and many more small subcontractors do not maintain complete cost accounting systems and experienced auditing personnel so that in many instances it is impossible to obtain suporting data of the type which the General Accounting Office is inclined to regard as necessary to support a claim against the Government.

(b) The subcontractors of a prime contractor are located in all parts of the United States. It is impossible under present conditions, and there is not enough competent manpower available, to inspect physically each subcontractor's plant, to take an inventory of the raw and partially completed material on hand acquired for the particular contract which has been conceled, and to audit the books of each subcontractor. It would take years to complete this work even if manpower were available to perform it.

(c) Many of the claims filed with Baldwin run from five to twenty-five thousand dollars. Many claims are for less than this amount. The cost of physical inspection, detailed audit and travel would, in many instances, be out of all proportion to the amount of the claim and might well represent as much as 50 percent of the amount of the claim. This additional cost would of necessity be borne by the Government and it is doubtful if such additional cost would be justified by the results accomplished.

(d) Reimbursement on the basis of precise costs will result in inequitable settlement of contract obligations if certain admitted expenditures are excluded from consideration for technical reasons or because of the absence of detailed supporting cost data.

(e) The negotiated settlement, on the basis of our experience is not a careless hit or miss affair. Several months may be required before all of the facts are available and before a final decision can be reached. However, the time required to effect a negotiated settlement will be much less than if the claim is to be subject to the detailed audit of the General Accounting Office. In one case months may be involved. In the other case years will elapse.

2. Negotiated settlements approved by the contracting agency of the Government responsible for the award of the prime contract should be final and conclusive as to all departments of the Government, including the General Accounting Office, in the absence of fraud or bad faith.

If settlement of claims is to be made by negotiation, the exercise of sound judgment on the part of the contractor and the contracting agency familiar with the details of the original contract must play an important and, perhaps, dominant part in reaching a conclusion with respect to the propriety of any claim. It is not believed that the General Accounting office, without reflecting in any way on the representatives of that Office, is the agency of Government best qualified to exercise discretion and judgment in connection with the settlement of termination claims on a negotiated basis. It would seem that the proper function of the General Accounting Office is to perform an auditing function subject to all of the rules, laws, and regulations applicable to the complex limitations imposed on the contractual relationship between the private individual and the Government. If the negotiated settlement is given recognition, then we do not feel that the General Accounting Office should act as the final arbiter of the propriety of negotiated settlements. It is fair to state that as a result of the experience gained in connection with the audit by the General Accounting Office of items of disbursement under Baldwin's fixed-fee contracts relating to procurement and production, the approach of the General Accounting Office has been highly technical and legalistic. Again we say this without any intent to reflect on the ability or capacity of any individual representative of the General Accounting Office and we recognize the important service which that Office is rendering in protecting the interests of the United States. It may be that the Comptroller General is obliged under existing law to take the position he does, in which event the fault lies not with the Comptroller General but with the law as it now exists, a law which is too restrictive and too unrealistic to meet conditions we are now facing and which could not have been anticipated when Congress created the General Accounting Office in 1921.

We are firmly of the opinion that if the negotiated settlement is to be given effective use, settlements must be left to the discretion of the agency of the Government responsible for the award of the original contract. It is certainly the experience of Baldwin in its relation with the Ordnance Department that that department has at all times been zealous in protecting the interests of the Government in the light of the extraordinary conditions which now exist.

3. Settlement of claims on a negotiated basis without review by the General Accounting Office will not involve a wasteful expenditure of public funds. First, it might be pointed out that the cancelation of any contract will save the Government substantial sums in dollar expenditure. Whether the setlement be made on a negotiated basis or some other basis, the costs of settlement will be far less than the costs of complete performance for which sufficient funds

have already been appropriated. In other words, the costs of settlement will not be superimposed on or added to the original expected and anticipated cost of procurement. If the negotiated settlement is subject to the approval of the applicable governmental procurement agency, there will be a constant check on the part of responsible officers and civilian employees of the Government on expenditures made in settlement. Even assuming, however, that a negotiated settlement might involve payment of a larger sum than would have been the case had the claim been audited by the General Accounting Office in accordance with strict legal and technical principles, the advantage of speed, equity, and finality should so far outweigh the possible dollar saving as to leave no room for argument. So long as the war continues, canceled contracts must be disposed of promptly if capacity production is to continue, and after the war is over the claims also must be disposed of promptly if industry is to convert to peacetime operations without delay. There must be every opportunity for the absorption of the demand for employment which will inevitably come with the war's conclusion. Contractors will simply be unable to perform this obligation if their financial position remains insecure for a period of years pending final settlement of their cancelation claims.

4. Means must be available for making advance payments to prime contractors and subcontractors pending settlement of their claims where the necessity therefor is indicated and whether or not the negotiated settlement is employed.

In order to assemble the data necessary to consider a cancelation claim on a negotiated basis a period of months will often be required. In this interval it would seem proper to advance to the contractor some percentage of his claim ranging from 50 to 75 percent. If burdensome restrictions and responsibilities are imposed on the advance payment, the whole purpose sought to be achieved will have been lost. The Comptroller General's objection to the mandatory provisions of the proposed Murray bill can doubtless be met satisfactorily, if necessary, by providing that before the advance is made it must have the approval of the governmental contracting agency responsible for the award of the particular prime contract involved, and by including penal provisions to cover claims asserted in bad faith for the purpose of securing an advance.

III. LEGISLATIVE RECOMMENDATIONS

The complex nature of this entire problem requires the most careful consideration of experts. This memorandum can only suggest certain points which should be given consideration.

If the Congress is willing, after weighing carefully all of the factors, to delegate to the procurement agencies the function of settling termination claims, then the jurisdiction of the General Accounting Office should be limited and defined by appropriate law, not only for the protection of the procurement agencies and contractors, but also for the protection of the Comptroller General. The law should state in substance that all settlements of cancelation charges arising out of the termination of Government contracts, not terminated through the default of the contractor, should be final and conclusive as to all agencies of Government, including the General Acounting Office, in the absence of fraud or bad faith. The finality of negotiated settlements should specifically apply not only to the settlement of the cancelation charges of the prime contractor, as between the Government and the prime contractor, but also to the settlement of fixed price subcontracts under both fixed price and cost-plus-a-fixed fee prime contracts.

The practice, pursuant to Executive Order 9001, of amending existing contracts which do not contain a termination clause permitting settlement on a negotiated basis, should be affirmed, whether or not the amendment is executed prior or subsequent to the notice of termination.

Provisions should be made for the making of advance payments pending settlement of claims without imposing burdensome and impossible restrictions on the governmental agency or prime contractor making the advance. The present provisions of the proposed Murray bill cover this thoroughly and effectively. Some of those provisions could be modified to meet certain objections of the Comptroller General without seriously affecting the purpose intended to be accomplished.

The foregoing statement does not purport to cover more than the high spots. It has been prepared in the hope that it may contribute something constructive to the proper solution of the complex problem. Baldwin has no personal ax to grind or selfish purpose to promote.

It has been stated on high authority that the volume of contract terminations to date already exceeds the total volume of such cancelations following the end of the last war. The problem is therefore with us today and must be met now-not at some later date. The time for congressional action is at hand and the existing situation must be promptly clarified if settlement of contract cancelation claims is not to bog down completely to the detriment of the war effort and to the prejudice of our national welfare when victory has been attained.

Mr. STOKES. My name is J. Tyson Stokes. I am appearing here as a vice president of the Baldwin Locomotive Works, Philadelphia, Pa. I appreciate very much this opportunity to discuss some problems incident to contract termination because I sincerely hope that, as a result of Baldwin's experience which we have had to date, it may be possible for our company to throw some light and to contribute something toward the proper solution of these problems.

In the course of my remarks, I shall have occasion to refer to the Comptroller General and to the General Accounting Office and to disagree with some conclusions that the Comptroller General has expressed in his letter to you, Senator Murray, under date of September 20. Perhaps my disagreement will be vigorous if I get warmed up to the subject.

I want to make it perfectly clear at the outset that I am not in any sense critical of the Comptroller General or his assistants or his staff but my criticism is directed to the restrictions imposed by the law and the interpretation by the Comptroller General of the functions of his Office in the light of the present wartime conditions and the conditions which will follow the war.

A few facts and figures as to Baldwin's actual experience may be helpful. We understood the production of military tanks as far back as August of 1940, and from that date on, we have entered into several cost-plus-fixed-fee contracts with the Ordnance Department in very large amounts for the production of military tanks of various. types and sizes. Had we been permitted to continue under those contracts, we would have been producing tanks at capacity rate through the entire year of 1944.

In the spring of 1943, the military requirements of the country changed and all of the locomotive builders were cut back in their tank production in order to enable them to build up their production of locomotives so, in February of 1943 in one case and in May of 1943 in the other case, we received notices of termination from our contracting officer to terminate the production of tanks at the close of or by the end of the year 1943.

In round figures, the termination involved approximately two-thirds of the contract total for the number of vehicles.

The production of a tank on an assembly-line basis is a complicated thing and there are many other types of military articles which are even more complicated. To give you some ideas as to just what is involved in our case, we issued over 4,100 separate subcontracts in connection with these 2 terminated contracts alone.

Senator MURRAY. You say 4,100?

Mr. STOKES. 4,100; yes. We had dealings with about 475 separate subcontracting entities. The difference between the two figures means that one company may get several subcontracts.

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When we started to terminate our prime contract, we have to go right down the line and it fans out in almost geometrical progression as you go down through tier after tier of subcontractors. The first problem is a very difficult one. That is to determine how you are going to terminate your subcontracts most efficiently; to utilize partially finished components or spare parts, whether some obsolete material should be scrapped. All kinds of decisions enter into the question and practically everybody in the company has something to do with the decisions reached, so very early in the procedure we set up a contract cancelation department in charge of a competent man to coordinate our whole contract-termination problem.

I have here, and it may be of interest for the record to show how this is working out in actual fact, some figures on our actual experience to date with claims that have been presented, claims of subcontractors for charges arising out of the termination of their subcontracts due, of course, to the termination of our prime contract.

In the 1 contract which was terminated earlier, we had to cancel 165 subcontracts and 127 claims that have been presented to date. Twenty-three have involved no charge whatever. We have processed these claims to a point where there are approximately 45 under that contract ready for settlement.

On our other contract, which is much larger, there are still a number of claims which have not been presented. The amount in dollars is very substantial and the biggest claims have not yet come in because we deal with the biggest corporations, who act as subcontractors, and with the little fellow, the 1-man shop, who takes a blueprint and works on a particular part, and he may employ as few as 10 men or perhaps three or four hundred people. The big subcontractor has exactly the same problem that we have. He has to go down the line and get cancelation charges from his subs and so on, so that our largest subcontracts have not yet been presented in shape for settlement.

The fact is that we have not paid out to any subcontractor, as yet, his cancelation charges in connection with these two canceled contracts and I think I should explain why that is so. Our prime contract which is, as I said, a cost-plus-a-fixed-fee contract, contains a termination clause which was in general use at the time that these particular contracts were executed.

Senator MURRAY. I think if you gave the dates of those terminations and the dates of the presentations of the claims, it would help us a little in considering this problem.

Mr. STOKES. The date of partial termination of, I will call it the heavy tank contract, was in the latter part of February 1943, and the date of the official termination of the medium tank contract was in the latter part of May of 1943, so that that involves from 6 to 9 months to date.

Mr. SILVERMAN. Have you received any payments on account? Mr. STOKES. Under a cost-fixed-fee contract, it does not quite work that way, sir, because we are constantly being reimbursed for expenditures under that kind of contract.

Mr. SILVERMAN. That is correct.

Mr. STOKES. Our contract provides that, in the event of termination for the convenience of the Government-and I quote:

The Government shall assume and become liable for all obligations, commitments, and claims that the contractor may theretofore have undertaken