LETTER FROM THE UNDER SECRETARY OF WAR ROBERT P. PATTERSON ON TERMINATION OF CONTRACTS Hon. JAMES E. MURRAY, OCTOBER 8, 1943. Chairman, Subcommittee on Contract Termination, Senate Military Affairs Committee, Washington, D. C. DEAR SENATOR MURRAY: In your letter of September 25, 1943, you requested my views on the letter written to you by the Comptroller General on September 20, 1943, in answer to your letter of July 21, 1943, with reference to certain proposed legislation relating to contract terminations. The first part of the Comptroller General's letter consists of comments on the draft of a bill contained in the preliminary report on War Contract Termination Legislation of the Senate Special Committee to Study Problems of American Small Business. With these comments the War Department is in substantial agreement, as hereinafter indicated. In the opinion of the War Department the provisions of paragraph 2 of the proposed bill, for mandatory partial payments, do not provide sufficient protection for the Government's interest. The bill would require payments to be made upon certificates of contractors, regardless of their solvency, without any administrative check as to the propriety, reasonableness, or legality of the amount shown on the contractor's certificate. It is not thought that the reference to section 35A of the United States Criminal Code and the provision for interest on excessive payments would in themselves prevent overpayments and loss to the Government. Nor would it seem that a provision for mandatory partial payments based solely upon the certificate of the contractor is necessary to promptly provide funds with which the contractor can meet his obligations and can resume normal operations. It is felt that these results can be accomplished by permissive partial and advance payments made after a preliminary check of the contractor's figures and by financing contractors through loans in the same way that their needs for war production have been financed heretofore. The legislation which the War Department is proposing for such permissive partial and advance payments and loans is hereinafter discussed. For similar reasons this Department also agrees with the Comptroller General in questioning the wisdom or necessity of that part of section 5 of the proposed bill which deprives the Government of its right of set-off or counterclaim of amounts due to it by the contractor. This is a departure from normal business procedure, and particularly in the case of an insolvent contractor, would put the Government at a disadvantage in requiring an independent suit against the contractor for overpayments or illegal payments. The War Department also agrees with the Comptroller General that the requirement for mandatory direct payment by the Government to subcontractors is dangerous to the interests of the Government because it would tend to result in duplicate and overlapping payments. Such procedure would also present legal, accounting, and administrative complications, which would tend to delay rather than expedite the final settlement of terminated contracts and subcontracts. It is believed that the War Department's proposed financing bill, hereinafter referred to, fully protects the interest of the subcontractor and makes it possible for him to obtain funds promptly after termination. Likewise the War Department shares the view of the Comptroller General that the right of the contractor or subcontractor to bring suit for partial payments after 30 days would tend to complicate and delay both final settlements of contractors and temporary financing thereof, and would also tend to involve both the Government and the contractor in needless litigation and expense. In agreeing with these contentions of the Comptroller General the War Department is not differing with the objectives sought to be accomplished by the Special Committee to Study Problems of American Small Business and is not unmindful of the great contribution which that committee has already made to the solution of these difficult problems. On the contrary, the War Department heartily agrees that it is important (a) to expedite as far as practicable the final settlement of terminated contracts, (b) to simplify to every reasonable extent the process of settlement, and (c) to provide means to put the contractors and subcontractors promptly in funds through partial or advance payments or through loans. 91096-43-pt. 1- -6 In order to accomplish these purposes the War Department for the past several months has studied the problem carefully and has conferred with the other procuring agencies of the Government and also with representatives of your committee and other committees of Congress and as a result thereof has evolved a termination financing bill which, in the opinion of this Department, will make it possible not only to provide contractors and subcontractors with funds promptly after termination but to do so without endangering the interest of the Government. A draft of this legislation is enclosed herewith. The War Department is formally proposing the bill to the chairmen of the respective Senate and House Committees on Military Affairs. Conferences with representatives of the Navy Department, the Maritime Commission, and the War Production Board lead us to the belief that its provisions will in general be satisfactory to them, with the sole qualification that the latter agency may wish to propose some additional provisions. It will be noted that the bill provides for advance and partial payments and continues in general the successful system of guaranteed loans which the War Department, Navy Department, and Maritime Commission have used and are using to expedite production and that it centers the administration of termination financing in those persons in the War Department (Navy Department and Maritime Commission) who are most familiar with the business and accounting problems of war production contracts. It will be noted that the Comptroller General does not oppose either advance payments or preliminary loans to contractors except that he suggests that loans be limited to cases of financial need. The War Department feels that this exception represents a misconception of the purpose of the loan and that any such limitation of the lending power would be extremely unfortunate. Not only would it present a difficult administrative problem tending to delay financing, but it would also tend to retard resumption of normal operations by many companies which, although not confronted with danger of insolvency, yet should promptly have funds for making payments to subcontractors and suppliers in connection with the contract being terminated and for resuming civilian production. Since these advances and loans represent only a part of the amount due directly or indirectly by the Government, there would seem no reason to deny them to a company because of its size or solvency. The remainder of the Comptroller's letter does not directly relate to the problem of temporary financing, presented by the draft of bill incorporated in the report of the Special Committee to Study Problems of American Small Business, but deals with a proposal of the Comptroller General that termination settlements of war contracts be made in the General Accounting Office. It is the opinion of the War Department that such suggested procedure is not consistent with the objects sought to be accomplished by the special committee, with which objects, as previously stated, the War Department fully agrees. At the outset of his letter the Comptroller General states that termination of uncompleted war contracts will not occur in great bulk until the cessation of hostilities and that, therefore, there is no great urgency for immediate legislation. It is respectfully suggested that the Comptroller General is under a misapprehension as to the nature of the problems now confronting the procuring agencies. The fact is that more than 8,500 contracts have been terminated by the War Department alone since the beginning of this war, involving cancelations of approximately $6,000,000,000—inore than the face amounts of all contracts terminated at the end of the last war. It is further a fact that during the past few months uncertainties and doubts as to termination procedures and fears of delay in termination payments have been so widespread as to affect the production of war materials. The War Department agrees with the special committee that it is desirable to enact promptly such legislation as is necessary to remove these uncertainties and prevent these delays. One premise upon which the Comptroller General bases his recommendation is a criticism of the contracting officers of the procuring agencies, particularly with reference to their handling of cost-plus-a-fixed-fee contracts. While inevitably some mistakes have been made by contracting officers, the War Department feels that the number and extent of these mistakes have been negligible in view of the volume of the war production and the speed with which it had to be accomplished. It is not believed that many of the expenditures approved by the contracting officers and criticized by the Comptroller General go beyond the purpose of cost-plus-a-fixed-fee contracting which as stated by the Comptroller General in 20 Comp. Gen. 632, at page 636, is to reimburse the contractor for his actual costs. Based in large part upon his criticism of the contracting officers, the Comptroller General attacks negotiated termination settlements and proposes a statute which would vest exclusively in the General Accounting Office the settlement of all terminated contracts and the validation of all preliminary advances. The War Department finds it necessary strongly to disagree with this suggestion. After a careful study of the Comptroller General's letter I am unable to determine whether he intends to challenge the present legality of settlements made by negotiation pursuant to contract provisions expressly providing therefor. It is hard to believe that such a contention would be seriously advanced in the light of Executive Order 9001 (issued under the First War Powers Act (55 Stat. 838)), the Attorney General's opinion of August 29, 1942, and the Comptroller General's own decisions. * In his opinion to the Secretary of War, the Attorney General in part says: "In particular, the language of the act respecting amendments or modifications of contracts without regard to the provisions of law relating to the making, performance, amendment, or modification of contracts' would be largely meaningless if it did not include the power to settle claims and release obligations in favor of or against the United States arising either in connection with the original contract or as a result of a modification or amendment thereof. It is clear that these powers of settlement and release are not in any wise denied to you by the provisions of the act of June 10, 1921, 42 Stat. 24, or by the provisions of section 1 of Title I of the First War Powers Act." The right of the procuring agencies to fix the obligations of the Government upon termination of contracts has been substantially recognized by the Comptroller General in the following decisions: 18 Comp. Gen. 826 at page 828; B 24215, September 2, 1942; B 28750, October 1, 1942; B 34255, June 19, 1943 The Comptroller General has suggested that the negotiated termination settlement is an infringement upon his rights under the Budget and Accounting Act of 1921 (31 U. S. C. 41). With this suggestion the War Department takes definite issue. The Comptroller General is entitled to a copy of the termination settlement agreement, just as he is entitled to a copy of any other contract or supplemental agreement. He is also entitled to have any payment under the settlement agreement supported by a voucher and documents showing that the contractor has complied with his part of the settlement agreement. There is nothing in PR 324, or in PR 15, or in any other War Department regulations or directives which affects or assumes to affect this right of the Comptroller General. For the purposes of investigation and report to Congress, the Comptroller General is entitled to all factual data relating to the making of any contract or supplemental agreement. This right, of course, also applies to the settlement agreement, and no War Department regulation assumes to affect this right. However, the Comptroller General does not have the right to question the basis on which a final contract or supplemental agreement of the War Department has been reached, nor may he disallow payments made pursuant thereto. Under the War Powers Act, the Executive order, and the regulations issued by the Secretary of War, and in accordance with the Attorney General's opinion, the settlement agreement is valid and, in the absence of fraud or mutual mistake, is conclusive upon the General Accounting Office. As in the case of other valid agreements, that office does not have the right to review the negotiations. I assume, therefore, that the Comptroller General does not seriously challenge the authority of the War Department to make negotiated settlements or the legality of the regulations issued by the War Department to which reference is made in his letter. That such is the fact is indicated by the recommendation made at the end of his letter for incorporation in any proposed legislation of provisions which would give the General Accounting Office jurisdiction to settle all termination claims. The real question presented by the Comptroller General is whether the power conferred upon the procurement agencies by existing legislation should now be withdrawn. In this connection it is important to bear in mind that the privilege of termination at the convenience of the Government is an extraordinary one, justified solely by the necessity for flexibility in the procurement of war materials so that varying military requirements may be met. If contractors are to be subjected to termination at any time that the Government may see fit to exercise the privilege, it is only just that the contract make provision for speedy and fair adjustment of the contract terms so as to take into account the new situation thereby created. The contractor is entitled to know where he stands at the earliest possible moment so that he may go forward with other business arrangements with certainty as to the amounts which will be available to him. Aside from any question of fairness, the national interest demands that the contractual relationships which are interrupted by cancelation be finally adjusted at the earliest possible moment. This is obviously true during the war when terminations are in general followed by the conversion of the contractor's facilities to the production of other war materials. Failure to make prompt and final determination of the amounts due in such cases deprives contractors of the capital required for the production of items needed for the prosecution of the war. Nor will the need for speedy and efficient termination procedures be any less urgent at the end of hostilities. In view of the extremely large volume of terminations which will then take place, there is grave danger of economic stagnation which will prevent the reemployment of those millions who will have been discharged from the Army and released from wartime jobs. The cost to the Nation of such a disaster is dreadful to contemplate. It is with these considerations in mind that the procurement agencies have all prescribed in regulations and by directives, a form of contract authorizing termination for the convenience of the Government which specifically provides that the amount payable upon such termination may be settled by negotiation between the parties. Such a provision permits the parties to negotiate a final and conclusive adjustment in accordance with orderly businesslike procedures and without unreasonable delays. In accordance with such provisions, numerous agreements have actually been made and payments made in reliance thereon. To abolish conclusive negotiated settlements at this time would be manifestly unfair to those contractors who have relied on the contract provisions and would of certainty make contractors in the future wary about expanding the scope of their operations. This would have a tremendously adverse effect on the production of war material. The possibility of a prompt negotiated settlement has induced war contractors in many instances to expand their businesses much beyond the point which they would have been willing to reach if their contracts provided only for the type of settlement which would involve detailed checking and auditing with the consequent delay. Under the circumstances it may be doubted whether legislation which would abrogate contract provisions for negotiated agreements could be supported as constitutional. The arguments advanced by the Comptroller General in favor of such action are based upon the assumption that the contracting officer will be authorized to make the settlement agreement on the basis of the contractor's unverified statement of costs and "that the contracting officer's determination of the amounts to be paid will be based largely on the contractor's representations as to the amounts owing and that no sufficient effort will be made in the vast majority of cases to verify or scrutinize the excessive statements of cost furnished by the contractors." The Comptroller General further states, "I am convinced that the contracting officers will allow improper payments which, perhaps will total millions of dollars." It is respectfully submitted that neither the regulations of the War Department nor the practical operation under the contracts which have been terminated justify these assumptions. On the contrary, the War Department has been careful to require that the negotiation of contract terminations be conducted under suitable safeguards. In every case of consequence these negotiations are conducted by an organization which reports to a commanding officer of high rank and experience. In each case the negotiators have the advantage of adequate legal, accounting, and engineering assistance to the end that every necessary check be made to insure that the contractor receives no more than a proper payment in accordance with the terms of his contract. Thus, for this purpose, the contracting officer functions in a manner comparable to that of a responsible executive of a large corporation with every resource available to protect the interests which he represents. In particular it is the intention of the War Department, proven by its practice, to make full use of accounting review to verify statements of contractors as to costs and expenditures incurred in connection with terminated contracts. In every case where such statements have been filed, the advice of accounting personnel has been sought before payment has been made and in a large proportion of cases the assertion of the contractor as to costs and expenditures has been modified as a result of accounting investigations. Furthermore, the or ganizations which review and supervise the conduct of negotiations will include within their membership a fiscal representative of the War Department whose duty it will be to report to the commanding officer in any case where, in his opinion, improper settlements are being considered. The Comptroller General suggests that the War Department considers speed essential in the settlement of terminated contracts. The Department does consider speed as highly important, but it has not in the past, and does not in the future, intend to rush settlements to the extent indicated in the opinion of the Comptroller. As a matter of fact, the principal criticism is that too great care has been taken in the making of settlements and that undue delay has resulted. The Comptroller General intimates that the practical needs of the contractor will be met by provisional partial payments with the final settlement to be made by an audited formula. The War Department does not agree with this view. In the first place, provisional partial payments do not provide the contractor the certainty of a final negotiated settlement and leave him in doubt as to the subsequent charges which may be made against him. Furthermore, even if a contractor received a substantial partial payment, the unpaid balance, particularly in the case of small, overextended companies which have expanded to meet war-production schedules, would frequently exceed the entire working capital of the corporation. Only a prompt and final settlement on termination will suffice. The need for such prompt termination settlement exists today and will increase as hostilities end either in whole or in part. It is, therefore, hoped that the suggested legislation of the Comptroller General will not be enacted. The War Department feels strongly that the enactment of the requested legislation would not only create confusion in current and future terminations, but would create a present obstacle to war contracting and war production and would impede the prompt conversion of industry to peacetime production at the end of the war. As stated previously, the right of the War Department to make a negotiated settlement seems entirely clear under the contract provisions and under the law. However, the Comptroller General's letter has impressed numerous present and prospective Government contractors with the possibility that the Comptroller General will not recognize negotiated settlements and will suspend payments made thereunder. Any such suspensions would be a serious blow to the war effort; and even the remote danger of such action is already creating an undesirable situation with Government contracting and prospective contractors. If the Congress has any doubt as to whether existing law authorizes the making of negotiated settlements, the War Department believes that there should be additional specific legislation authorizing such settlements to be made. Such legislation could either be added to the termination financing bill enclosed herewith or made the subject of a separate enactment. If desired, the War Department will suggest appropriate language therefor. There should be placed beyond debate the right to make final negotiated settlements, which the Comptroller General, upon a possible interpretation of his letter, has now undertaken to question for the first time. The War Department has not been advised by the Bureau of the Budget as to the relationship to the program of the President of the legislation referred to herein. Sincerely yours, ROBERT P. PATTERSON, (Enclosure 1 above mentioned immediately follows:) A BILL To facilitate the termination financing of war production contracts and subcontracts, and for other purposes. [Based largely upon H. R. 3022, S. 1268 and amended committee print of July 7, 1943] Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. SECTION 1. ADVANCE AND PARTIAL PAYMENTS.-(a) In connection with the termination in whole or in part of any prime contract which is connected with or related to the prosecution of the war, each department or agency which has been |