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living with the problem, you are in a position to exercise this element that I call judgment.

I do agree that you have got to have something that is going to sustain the over-all picture. Whether you can have something that the Comptroller General will accept on the basis of his standards of proof, that is something I do not know.

There is one case here, and I will not discuss it, but I think it will illustrate your point. A purchase order for $59 and some cents. It was terminated before the man did any work on it. He sends in our contract adjustment form, which consists of 9 or 10 pages calling for very precise information and his cancelation charge is $5.97, which he reaches by saying this is a flat 10 percent charge to "reimburse us for the expense involved in studying blueprints, issuing and canceling shop orders and purchase orders."

You cannot do anything in a corporation, no matter how trivial it is, without its costing somebody something. I do not think the Comptroller General would approve that $5.97 payment, although I know and I think everybody knows that there is nothing very shocking in the fact that a 10 percent payment on that basis would not be proper. The 10 percent would not apply to the $1,000,000 order in the same cases. There is where your judgment comes in. Maybe he gets a $1,000,000 order and does a good deal of work, but the contract is canceled, and the cancelation charge might be $1,000 or it might be $5,000.

Senator MURRAY. I believe the Reconstruction Finance Corporation has a system of charging a fee for cancelation of an application for a loan?

Mr. STOKES. I have no doubt.

Senator MURRAY. And it is based on some sort of a percentage.

Mr. STOKES. While I am on this, I have just one more of these cases. Here is one which goes to the other extreme, from the large producer of a very complicated subassembly. It consists of page after page of single-spaced itemized inventory. It has attached to it a letter from one of the largest firms of public accountants in the country that certifies to its correctness. To give you an idea of the dollars the claim is for, the amount is $94,000. The total amount of the original purchase order was $526,000 of which $399,000 had already been paid because of completed material.

Our contract man is going out to Wisconsin next week. There is going to be a representative of the ordnance district of Chicago there. The senior executives of this company are going to be there and they are going to discuss this claim because there are things in here that everybody is not going to agree on. There isn't any question about that.

I think another firm of public accountants might just as well approve this on a slightly different basis

Senator MURRAY. When this conference is held, will they agree on the amounts at that time?

Mr. STOKES. I do not know, sir. Either they will take the position this is right and they are going to stick to it or, if there are things that need correcting, they will be willing to accept that and reach a figure that is satisfactory.

The next point I want to bring up is the question of advance payments to contractors. The advance payment is, at best, a stop-gap,

as I see it. It is not the final answer to the thing, and whether you have a negotiated settlement or an audited settlement it is going to take some time before the subcontractor or the contractor gets paid off.

I would hope very much to see legislation passed which would specifically recognize this need for advances. The Comptroller General objects to certain of the provisions of your proposed bill, Senator, and I think they can be met without very much difficulty. It may be that a subcontractor or a contractor should not get an advance merely for the asking. There ought to be some check, I think really, on that request before it is made. I think you cannot also demand a great, big record to justify the advance because by that time the need for that advance is gone. It has got to be done quickly, and I should think it would be perfectly practical to make an advance payment somewhere between 50 and 75 percent, provided the prime contractor and the Government and, in the case of an advance to a subcontractor, the Government and the prime contractor looking over the papers and seeing it is justified.

There might be a provision for a further percentage after the claim has been filed in final shape if the extra percentage is justified, with a final settlement of the balance when you are ready to settle in full. But the important thing in any legislation on advance payments, it seems to me, is to restrict the right of the Government to collect any moneys that have been paid over and above the amount of the claim as finally settled, restrict that right to the person who receives the money, and do not hold the Government disbursing officer or the prime contractor who make it responsible as an insurer for its propriety after it has gone through the audit. If you do that it is just a practical fact that you are not going to advance payments because people are going to be worried. They are going to make them on somewhat slight evidence, and if they are going to be held responsible in the case of an overpayment you just cannot take the risk. I think this advance payment as a national-policy proposition will accomplish so much good that the few cases which may involve an overpayment do not worry me at all.

I hesitate to talk about anything that might be done in the way of legislation because I am not a legislative expert; and, as a matter of fact, I do not think I am a lawyer any more. There has not been time for me in the last few years to be a lawyer, but I have these general thoughts.

It seems to me that Congress must first face this question: Are we willing to relax the normal standards and to permit the negotiated settlement? If we are, are we willing to delegate pretty much the final authority to the procurement agencies and to relieve the General Accounting Office of its statutory obligations as regards this particular problem only, namely, termination of war contracts? If you should reach that conclusion, then it seems to me the substance of the law can be stated briefly and simply that settlements of cancelation charges arising out of the termination of Government contracts not terminated through the fault of the contractor should be final and conclusive as to all agencies of the Government, including the General Accounting Office.

I think the legislation ought to also give its blessing to what Executive Order 9001 purports to do. The Comptroller General has cast some doubt as to the propriety of these negotiated settlements

purporting to be wholly within the control of the procuring agencies, and I think it is important that the law permit that a contract be modified, after notice of termination as well as before notice of termination, to insert the clause permitting the negotiated settlement if it is not already there.

In other words, you may say that there would not be any consideration, let's say that, for such an amendment under usual principles and it may well be that if certain rights have accrued under a contract prior to termination, the General Accounting Office would not recognize any change which had affected those rights after the notice of termination. The termination clauses vary, of course, between the various departments of Government. They are by no means uniform. The War Department uses the negotiated settlement clause now exclusively, I think. I do not know about the Navy Department or the Maritime Commission, but that is going to be a question of administration and perhaps joint regulation, rather than a question of congressional law.

This same law should, of course, have the provision in it that ad-\ vance payments, on whatever base is ultimately agreed on, the advance payment should be made on that base.

That has covered a pretty broad field, Senator, and concludes my general statement, except I want to emphasize that I think the time has come for action. It has been said already that the volume of terminations is greater than that of the last war. I think the war effort is being impeded, frankly, at the present time because of this existing confusion and doubt and worry that exists as to how this matter should be treated, and if industry is going to do its job after the war, which is to go out and dig for business and to employ people to the full extent, it has got to be relieved of the worry of wondering what its ultimate financial situation is going to be.

I think that is one worry. There aren't many but I think that is one worry that Congress can eliminate from the present situation. That is all I have, Senator.

Senator MURRAY. A few moments ago in your testimony, in discussing the legislative requirements to carry this purpose out that we are discussing here, you mentioned that the agreement that would be arrived at would be binding on all of the agencies of the Government, including the Comptroller General. Of course, you intend that there should be an exception there in the case of fraud?

Mr. STOKES. Yes, that is apparent, I should have said that. Everything I say with respect to finality of settlements, regardless of by whom, is subject to that exception.

Senator MURRAY. What could be included in the legislation which would be helpful in carrying this program out and avoiding fraud? That is to say, I suppose there should be some very drastic penalties provided which would probably be a deterrent.

Do you approve of having some very powerful, very strong provisions in it providing penalties in the case of fraud?

Mr. STOKES. Well, some kind of penal provision is undoubtedly desirable and necessary. When you're dealing with fraud, you are dealing with a thing that is so difficult to define that if you put penalties on the thing and make it just sound so awful that even the person acting in good faith may be terribly frightened and discouraged from

putting in a claim that is perfectly justified-whether it is fraud or not is hard to tell sometimes.

In most cases, there are two sides to it. However, the out-and-out crook, I think, is going to be smart enough to get away with it until he is caught up regardless of what you say. He is not going to be deterred by the penal provisions if that is his frame of mind. I hope the Justice Department will catch up with him, and it usually does. As I say, when there is some question of judgment to be used, I think a penal provision can deter. But with the man who says, "Let's try it out, let's stick in $15,000 and see what happens to it," I think that is a thing you can discourage by making it plain he is making a claim against the Government, have it signed under oath and make it so he has no doubt when it is over, if he goes overboard, he has to face the consequences.

Senator MURRAY. I think you have made a very excellent presentation of the problem. I think it will be very helpful to us, with the statement you have given here this morning and I thank you for your appearance.

Mr. SILVERMAN. Mr. Stokes, can you suggest any provision that would accomplish this twofold purpose; namely, not impair the finality and conclusiveness of a settlement reached between the contracting officer and the prime contractor and, at the same time, provide some check that would be calculated to detect glaring cases of overreaching collusion and fraud?

Mr. STOKES. If the primary responsibility for approving settlements is to be put on the procurement agencies assume that for the moment-then I think that those procurement agencies could set up within their own organizations a board of review of competent topflight men who would have the over-all picture going through that and checking up on the work done in the field and I certainly would have no objection to any such procedure if they do not try to collect the payment that is simply what you might call a careless payment, in their judgment, from the person who has made it if there isn't this element of fraud or collusion or something else.

Mr. SILVERMAN. You would restrict it in some way?

Mr. STOKES. That is right, unless there is participation of the party paving it in the fraud.

Senator MURRAY. Thank you very much, Mr. Stokes.

The next witnesses are Mr. Wilson, Mr. Mogensen, and Mr. Shaw.

STATEMENT OF WEBB WILSON, TREASURER, FAIRCHILD ENGINE & AIRPLANE CORPORATION, NEW YORK, N. Y.

Senator MURRAY. You may proceed, Mr. Wilson.

Mr. WILSON. Gentlemen, my name is Webb Wilson. I am treasurer of Fairchild Engine & Airplane Corporation, one of many small companies that are doing a big war job. I am appearing on behalf of the hundred-odd companies which are members of the Aeronautical Chamber of Commerce of America.

Since 1921 the chamber has been the recognized spokesman for the aircraft-manufacturing industry on matters of public interest. Its member companies are now producing about 75 percent of the total value of all airframes and aircraft engines, propellers, accessories,

and spare parts that are being produced in this country for the prosecution of the war.

Senator MURRAY. Do they represent the large companies as well as the small ones?

Mr. WILSON. They do.

The remaining 25 percent is produced almost entirely by companies whose normal business is outside the aviation field.

This industry which developed and now turns out the Flying Fortresses, the Liberators, the Lightnings, the Thunderbolts, and the other important planes is deeply concerned about the possible effects of war contract termination.

The difficulties to be faced at the end of this war by our industry will differ, perhaps, only in degree from those to be faced by other industries. In certain respects, however, our case is unparalleled in industrial history.

American aircraft production has expanded phenomenally and the industry today surpasses in volume of sales any other that the world has ever known.

In 1939 output was approximately $200.000 000. The Government has estimated 1943 output at around $20,000,000 000. The 1943 output of the pre-war aircraft manufacturers is about 60 times 1939 or approximately $12,000,000,000. By comparison, the all-time peak for automobile production was less than $4,000,000.c00.

Because of relatively slender financial resources and this very great overexpansion, the aircraft industry faces financial problems, created by the war, that are of such magnitude that the policies and precautions of individual companies cannot greatly change the situation facing the industry. Any major corrective action must be initiated by Congress.

Of all the problems to be solved, none appears to be more important in its direct and indirect effects upon both industry and labor than the manner of handling contract terminations.

We consider that the prompt establishment of uniform policies and procedures, which will assure speedy and equitable settlement of terminated contracts by the procurement agencies of the Government, to be of vital importance to the survival of the aircraft industry. This is the industry which has done so much to make America supreme in the air. We believe the maintenance of that supremacy is the firm resolve of the American people.

To better understand and appreciate some of the financial problems facing the aircraft industry, we invite your attention to the industry's financial status as it existed at the end of 1912, the latest period for which figures are available.

The most recent, authoritative, and impartial analysis of such status we know of is contained in a bulletin of the Harvard Business School, entitled "Financial Position of the Aircraft Industry," which has just been published. We have furnished copies of that bulletin to your committee and, at this time, we ask to have it marked as an exhibit in this hearing.

Senator MURRAY. It may be received as an exhibit.

(The document referred to has been filed with the subcommittee). Mr. WILSON. Data used in the Harvard study were obtained from 11 major airframe manufacturers which were roughly estimated to

91096-43-pt. 1——5

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