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Lieutenant Calhoun. That ought to be "for the performance and settlement of, and properly allocable to.”

Mr. COLE. There should be a comma after the first "of."
Lieutenant Calhoun. Yes, sir.
The CHAIRMAN. All right. [Reading:]

(8) Costs of engineering and development, and of special tooling, shall be allowed : Provided, That the contractor protects the interests of the Government by transfers of property and interests or other means deemed appropriate by the Secretary.

You differentiate between experimental and research expense and engineering.

Captain STRAUSS. The engineering and development are after the article has left the research stage, sir, and are incident to putting the article into production.

The CHAIRMAN (reading): Provided, That the contractor protects the interests of the Government by transfers of property and interests or other means deemed appropriate by the Secretary.

To what do you have reference there?

Lieutenant Calhoun. If they develop blueprints, for example, of these engineering devices. they have worked out, or if they have acquired patents, and if we pay for that cost of engineering and development, under this provision, the Secretary could protect the Government by requiring transfer of whatever property interests the claimant had. The Secretary could require transfer when he assumed the cost.

The CHAIRMAN. In other words, after you have had your experimental and research program and you are going out of that and doing some engineering work, and you took that factor and gave them credit for it, those blueprints and that information belong to the Government.

Captain STRAUSs. That is right.
The CHAIRMAN. That would not include a patent?

Lieutenant CALHOUN. I think, sir, that we intended to draw it broad enough to include a patent. It may possibly be that it would not under that language.

The CHAIRMAN. Let us see. [Reading:] Provided, That the contractor protects the interests of the Government by transfers of property and interests or other means deemed appropriate by the Secretary.

Mr. COLE. Let us put the patents in there.

Lieutenant Calhoun. If the man wants to keep the patent, should he keep it?

Mr. COLE. If the Government is going to pay for developing it, it should belong to the Government.

Captain STRAUSS. It works one way just as well as the other.
The CHAIRMAN. That is it, exactly. [Reading:]

(9) Costs with respect to special facilities shall be allowed in such amounts as may be reasonable under the circumstances, if incurred solely for the performance of the contract, or the contract and other war-production contracts: Provided, That the contractor protects the interests of the Government by transfers of property and interests or other means deemed appropriate by the Secretary.

What have you in mind as "special facilities”?

Captain STRAUSS. That may be a machine tool with a special purpose; a jig that has no other use.

The CHAIRMAN (reading): If incurred solely for the performance of the contract, or the contract and other war production contracts.

That is, if it has any relationship; or, if it had no bearing on the contract but could be used in other war production, do you take that as a factor?

Captain STRAUSS. No, sir. It has to be solely for the performance of this contract.

The Chairman. In connection with this particular contract?

Lieutenant CALHOUN. Except that where it includes some other war contract, the Navy could allocate to this particular contract its share. It has to be so limited to war contracts.

The CHAIRMAN (reading):

Provided. That the contractor protects the interests of the Government by transfers of property and interests or other means deemed appropriate by the

Secretary.

Captain STRAUSS. Having allowed him.money for the jig, tool, or fixture, it would become the property of the Government.

The CHAIRMAN (reading):

(10) With respect to special leases, there shall be allowed (i) rentals under leases clearly shown to have been made for the performance of the contract, or the contract and other war production, but only for the period necessary for complete performance of the contract and such further period as may have been reasonably necessary.

In other words, if it becomes necessary for a man to go out and rent a building in which to store his equipment, that is a factor that you can take into consideration?

Captain STRAUSS. Yes, sir.

The CHAIRMAN. And that is a factor we take into consideration every day when we are passing on acquisition of property in connection with a great many of the contracts that we have to arrange appropriations for.

Mr. COLE. When you use the expression “special leases", does that mean special leases entered into as an incident to the contract, or special leases in the sense that they are a peculiar type or lease?

Captain STRAUSS. Incident to the contract.

The CHAIRMAN. Incident to the contract. Is there any doubt or ambiguity about that?

Captain STRAUSS. I think the fact that the question arises in Mr. Cole's mind indicates that it is ambiguous.

The CHAIRMAN. If it is a special lease for carrying out that contract we can say so.

Lieutenant COLE. Possibly the word "special"' is superfluous. It does raise a question as to whether you mean an extraordinary kind of lease. I think you can leave out the word "special."

The CHAIRMAN (reading):

With respect to leases, there shall be allowed (i) rentals under leases clearly shown to have been made for the performance of the contract. and so on. That is definite enough.

(ii) reasonable costs of alterations; and (iii) costs of restoring the premises, to the extent required by the reasonable provisions of the lease.

As to the reasonable cost of alterations, who has supervised those alterations?

Captain STRAUSS. Presumably the contractor. Suppose he had to tear down some partitions. Suppose he had to put a barbed wire fence around it for security purposes, and at the termination of the lease, he agreed to restore the premises to the condition in which he found them, which meant putting the partitions back in and tearing down the fence.

Mr. GRANT. You are recognizing the reconversion principle there for the landlord, but you deny it to the contractor.

Captain STRAUSS. Only on leased property. If it were in the terms of the lease and we did not recognize it, he would have to perform it and not be reimbursed.

Mr. GRANT. That is true. You recognize it to the benefit of the contractor to the extent of the leasehold.

Captain STRAUSS. It is an operating expense of his business, sir.

The CHAIRMAN. You are putting his property back in the condition it was before he made his lease.

Captain STRAUSS. Provided his lease called for it.

Mr. GRANT. I do not understand why the same argument does not apply to the building which the contractor might own, and which he would restore to its own pre-war condition.

The CHAIRMAN. I am inclined to think that you have to draw a line there, because that would be a profit to him.

Admiral ROBINSON. We are under no obligation to restore the property in that case, sir, because we did not undertake to do so in the contract. Now, he has it in the contract that he is under obligation to restore this property, and he has to do it and it has to be paid for. But he made his contract with us well knowing that we were not going to reconvert his industry into something else.

Mr. COLE. There is a very clear distinction between the two items. Admiral ROBINSON. Quite; yes, sir. The CHAIRMAN (reading): Provided, That the contractor shall have made reasonable efforts to terminate, assign, or settle such leases or otherwise reduce the cost thereof.

That is right. If he is guilty of failing to minimize damages, it might be charged against him.

Mrs. Smith. Captain, in the first instance does he not include the cost of that item we are talking about in his profit when he bids on the job?

Captain STRAUSS. Yes. This does not pay him for that. This pays him for removing it if he contracted to remove it, on the assumption it is the restoration of the property to its original condition. A great many leases contain language equivalent to that as a standard provision, and if that provision is in the lease, it must be done. Suppose, for example, he cut a window in the building and he had to board it up.

Mrs. SMITH. Yes; but has he not included that in his first profit? The CHAIRMAX. On the finished article he has.

Captain Strauss. On the finished article he has included it in the article and been paid for it. This has only to do with determining what is due him on the partially completed portion of his contract, the terminated portion of his contract, as to which he has got no profit.

The CHAIRMAN. And that is the answer to a great deal of reconversion, because it has already been taken care of.

Mrs. Smith. Yes; if he knows he has to go back to that originally.

Captain STRAUSS. It is one of the arguments against paying anything for reconversion.

The CHAIRMAN. Yes; because on everything he has that we are going to pay him for now, his leases, his alterations, and so on, everything is charged in the price that we pay him. Is that not correct ?

Captain STRAUSS. That is correct.
Mr. GRANT. But not his alterations in his own building?
Captain Strauss. No; not on the terminated portion of the contract.
Mr. Grant. Only to the extent of his leased property.

Mr. COLE. Should not this allowance of leasehold obligations which might be properly charged as an item of cost be limited only to those articles which are unfinished ?

Captain Strauss. This whole section applies only to articles which are unfinished. He is paid 100 percent of his contract on the finished articles.

The CHAIRMAN. We pay him the full amount of everything on finished articles.

Mr. COLE. That is right. That is item No. (1).

Lieutenant CALHOUN. "Without duplication of cost," Mr. Cole, was put in for that reason. Whenever costs are covered under (1) they are not included in other costs under (2), (3), and (4).

Mr. COLE. At any rate, it is definitely understood that upon termination of a contract, if the contractor has some leasehold obligation he is not going to be allowed the full cost of fulfilling those obligations.

Lieutenant CalHOUN. No, sir; not where part is properly allocable to other contracts.

Captain STRAUSS. I think under this he would receive it, sir.

Mr. COLE. That is the way it looks to me, but it seems to me the point Mrs. Smith has raised is very pertinent, that he should not be allowed the full costs of reconverting the building because, anticipating that he would have that obligation eventually, he has charged that item in his price.

Captain STRAUSS. These are all discretionary. Suppose he had delivered 99 percent of his contract and had been paid in full for 99 of the guns that he was going to deliver and he had 1 gun left and you canceled that while he was half-way through. You obviously are not going to give him 100 percent of his leasehold obligation as against

Mr. COLE. Put it the other way around. Suppose he is only 10percent completed.

Captain STRAUSS. Then he is entitled to something roughly proportionate. These are all permissive allowances on the part of the negotiator.

Mr. COLE. I know you do not have to allow it. I realize the Department is not obliged to allow it.

The CHAIRMAN. But it is the basis upon which he files his claim.

that 1 gun.

Captain STRAUSS. Yes; and this means the contracting officer has this much leeway.

Mr. Cole. It seems to that those leasehold obligations, in the law, should be tied in with the allowance on unfinished articles.

Lieutenant CALHOUN. I think, Mr. Cole, that that “without duplication of cost” has that effect, since we assume, in No. 1, if the articles are half completed, that half of these general overheads are taken care of.

The CHAIRMAN. All right; let us see. Go way back to No. 1 on page 7:

Full payment at the contract price shall be allowed for completed items accepted by the Navy Department. then, from thereon, it all deals with articles that have not been delivered, and these factors apply to those articles.

Captain STRAUSS. That is right.
Mr. COLE. Oh, no.

Lieutenant SwIDLER. I think only to the extent that those costs are allocable to the uncompleted part of the contract under the language that Mr. Calhoun just read. At least that was the intention of "without duplication of any costs."

The CHAIRMAN. What about that?

Lieutenant Calhoun. That is correct. At least it was intended to mean, if he is half through his contract and you have allocated half of his rent costs to the contract, then it is the part that you have not allocated to the contract price articles that is taken care of under this other provision.

Lieutenant SWIDLER. There would be a duplication if you paid 100 percent of a man's rent after paying him 100 percent of the fixed price of the completed article.

Mr. Johnson of California. What if a man owns his property and alters it in order to carry out a contract, and then he performs 10 percent of the contract and his contract is canceled ?

Lieutenant SwIDLER. That is what this clause 10 is intended to take care of.

Captain STRAUSS. Oh, no; this is his own plant.
Mr. JOHNSON of California. He will get nothing.
Captain STRAUSS. There is no provision for that.
Mr. Johnson of California. Should there not be?

Captain STRAUSS. I think if we did that we would not settle 5 percent of the terminated contracts within the first 5 years after the end of the war.

Admiral ROBINSON. I suggest, Mr. Chairman, that that sort of thing be put into a separate bill, so that we can get this one working easily, and if reconversion is to be handled, it could be put into a separate bill which the Congress could draw and put in whatever provisions they thought were fair and equitable, and we would not have to administer it. This is our contractual obligation that we are dealing with here, and if we can get that clear of the other, that is a national thing about which we do not know anything.

The CHAIRMAN. And the principle of this bill is to get business back on a pre-war basis without any chasm or any gap, and without bringing on any chaotic condition.

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