Long-Felt Need.

The desirability of having a Standard Termination Article for all agencies has been generally recognized. It has been advocated by business groups, independent organizations, the procurement agencies themselves as well as several important committees of Congress, including those headed by Senators George and Murray.

Efforts to develop such a uniform termination clause have been going on within the Government for more than a year and a half. The fact that agreement has been obtained in these last weeks is a tribute to the fine, cooperative spirit with which the Joint Contract Termination Board and its staff has functioned and to the preparatory work that has been done by the other agencies, particularly that done under the auspices of the War Production Board.

Protect Public Interest.

The article applies only to domestic contracts, not foreign. Consideration is being given to certain other exceptions and an approved list of such exceptions will be issued soon. Obviously, where the sums involved are so small or the time of the contract is short, the termination article is not needed.

In drawing up this article, the joint board was under instructions to protect the Government's interests fully, not giving contractors more than they are entitled to under existing contracts, but to assure them their just and fair rights. The termination article necessarily is a merging of the many types of contract termination provisions that have been used by the agencies and will not fit all cases perfectly. Differences between this article and existing contracts will be outweighed by the advantages of the unified, simpler, and speedier procedure for settling contracts which this uniform termination article makes possible.

Workable Principle.

Both the Termination Article and Cost Statement are confined to broad, workable principles, with details left to be covered in administrative regulations, manuals, and instructions. Many points were not included because they were questions of detail which will require constant refinement in the light of experience and could be handled best by regulations which can be revised readily and which are more easily adjusted to special cases.

Briefly summarized, the Termination Article provides that the Government may terminate a prime contract at any time by giving notice, which is the common provision in existing contracts. What the contractor must do on receiving his termination notice is set forth. Contractors will be paid for all completed articles at the contract price.

7

Two Settlements.

Two types of settlement are provided for: One, for the contractor and the Government to agree upon a fair and reasonable settlement through negotiation; the second, if such negotiations prove unsuccessful, for settlement through the application of a specified formula. Profit Formula.

Of particular interest, is the margin of profit allowed on work which the contractor has begun but has not completed. Clearly, the simplicity of a flat, uniform rate of profit would yield enormous administrative benefits in easing the problems of settlement for both contractors and the Government. However, under certain conditions, a single flat rate might give excessive profits, as where a manufacturer's costs consisted largely of assembling an inventory of raw materials.

Accordingly a profit formula was devised which (a) limits the aggregate profit in all cases to a maximum of 6 percent, and (b) further limits to a maximum of 2 percent the profit on unprocessed inventory, and only to the extent that this inventory is properly allocable to the contract. Both these rates of profit are maximums and there will be instances where only a fraction of a percent profit will be allowed on raw materials. Obviously no profit will be allowed except on work done or cost incurred.

We have felt that it would contribute to fair and speedy settlement, with protection for both the Government and the contractor, to set forth a specified, though not too rigid, yardstick for measuring profit. Allocable Costs.

The Cost Statement is based upon the recognition only of those costs that are properly allocable to the contract and only to the extent that they are quantitatively reasonable for the performance of the whole contract. In determining these costs, recognized accounting practices are to be used. The Cost Statement goes further to clarify some of the uncertainties that have arisen in the minds of contractors as to which costs are properly allocable to the contract and which are definitely excluded.

In bringing the drafting of this Termination Article and Cost Statement to decision and conclusion, our thinking has been that the interests of both contractors and the Government will be best served by a clear definition of their mutual rights and obligations and by preparing the ground for prompt settlement on the basis of those rights and obligations.

BERNARD M. BARUCH,
JOHN M. HANCOCK,

Advisory Unit for War and Post-War Adjustment Policies, Office of War Mobilization.

2. Uniform Termination Article for Fixed Price Supply Contracts.

Article termination at the option of the Government: (a) The performance of work under this contract may be terminated by the Government in accordance with this article in whole, or from time to time in part, whenever the contracting officer shall determine any such termination is for the best interests of the Government. Termination of work hereunder shall be effected by delivery to the contractor of a notice of termination specifying the extent to which performance of work under the contract shall be terminated, and the date upon which such termination shall become effective. If termination of work under this contract is simultaneous with, a part of, or in connection with, a general termination (1) of all or substantially all of a group or class of contracts made by the Department for the same product or for closely related products, or (2) of war contracts at, about the time of, or following, the cessation of the present hostilities, or any major part thereof, such termination shall only be made in accordance with the provisions of this article, unless the contracting officer finds that the contractor is then in gross or willful default under this contract.

(b) After receipt of a notice of termination and except as otherwise directed by the contracting officer, the contractor shall (1) terminate work under the contract on the date and to the extent specified in the notice of termination; (2) place no further orders or subcontracts for materials, services, or facilities except as may be necessary for completion of such portions of the work under the contract as may not be terminated; (3) terminate all orders and subcontracts to the extent that they relate to the performance of any work terminated by the notice of termination; (4) assign to the Government, in the manner and to the extent directed by the contracting officer, all of the right, title, and interest of the contractor under the orders or subcontracts so terminated; (5) settle all claims arising out of such termination of orders and subcontracts with the approval or ratification of the contracting officer to the extent that he may require, which approval or ratification shall be final for all the purposes of this article; (6) transfer title and deliver to the Government in the manner, to the extent, and at the times directed by the contracting officer, (i) the fabricated or unfabricated parts, work in process, completed work, supplies, and other material produced as a part of, or acquired in respect of the performance of, the work terminated in the notice of termination, and (ii) the plans, drawings, information, and other property which, if the contract had been completed, would be required to be furnished to the Government; (7) use his best efforts to sell in the manner, to the extent, at the time, and at the price or prices directed or authorized by the contracting officer, any property of the types referred to in subdi

vision (6) of this paragraph; provided, however, that the contractor (i) shall not be required to extend credit to any purchaser and (ii) may retain any such property at a price or prices approved by the contracting officer; (8) complete performance of such part of the work as shall not have been terminated by the notice of termination; and (9) take such action as may be necessary or as the contracting officer may direct for protection and preservation of the property, which is in the possession of the contractor and in which the Government has or may acquire an interest.

(c) The contractor and the contracting officer may agree upon the whole or any part of the amount or amounts to be paid to the contractor by reason of the total or partial termination of work pursuant to this article, which amount or amounts may include a reasonable allowance for profit, and the Government shall pay the agreed amount or amounts. Nothing in paragraph (d) of this article prescribing the amount to be paid to the contractor in the event of failure of the contractor and the contracting officer to agree upon the whole amount to be paid to the contractor by reason of the termination of work pursuant to this article shall be deemed to limit, restrict, or otherwise determine or affect the amount or amounts which may be agreed upon to be paid to the contractor pursuant to this paragraph (c).

(d) In the event of the failure of the contractor and contracting officer to agree as provided in paragraph (c) upon the whole amount to be paid to the contractor by reason of the termination of work pursuant to this article, the Government, but without duplication of any amounts agreed upon in accordance with paragraph (c), shall pay to the contractor the following amounts:

(1) For completed articles delivered to and accepted by the Government (or sold or retained as provided in paragraph (b) (7) above) and not theretofore paid for, forthwith a sum equivalent to the aggregate price for such articles computed in accordance with the price or prices specified in the contract;

(2) In respect of the contract work terminated as permitted by this article, the total (without duplication of any items) of (i) the cost of such work exclusive of any cost attributable to articles paid or to be paid for under paragraph (d) (1) hereof, (ii) the cost of settling and paying claims arising out of the termination of work under subcontracts or orders as provided in paragraph (b) (5) abové, exclusive of the amounts paid or payable on account of supplies or materials delivered or services furnished by the subcontractor prior to the effective date of the notice of termination of work under this contract, which amounts shall be included in the cost on account of which payment is made under subdivision (i) above, and (iii) a sum equal percent of the part of the amount determined under sub

to

1

1 Not to exceed 2 percent.

division (i) which represents the cost of articles or materials not processed by the contractor, plus a sum equal to

2

percent of the remainder of such amount, but the aggregate of such sums shall not exceed 6 percent of the whole of the amount determined under subdivision (i), which for the purpose of this subdivision (iii) shall excludes any charges for interest on borrowings;

(3) The reasonable cost of the preservation and protection of property incurred pursuant to paragraph (b) (9) hereof; and any other reasonable cost incidental to termination of work under this contract, including expense incidental to the determination of the amount due to the contractor as the result of the termination of work under this contract.

The total sum to be paid to the contractor under subdivisions (1) and (2) of this paragraph (d) shall not exceed the total contract price reduced by the amount of payments otherwise made and by the contract price of work not terminated. Except for normal spoilage and to the extent that the Government shall have otherwise expressly assumed the risk of loss, there shall be excluded from the amounts payable to the contractor as provided in paragraph (d) (1) and paragraph (d) (2) (i), all amounts allocable to or payable in respect of property, which is destroyed, lost, stolen, or damaged so as to become undeliverable prior to the transfer of title to the Government or to a buyer pursuant to paragraph (b) (7) or prior to the 60th day after delivery to the Government of an inventory covering such property, whichever shall first occur.

(e) The obligation of the Government to make any payments under this article: (1) shall be subject to deductions in respect of (a) all unliquidated partial or progress payments, payments on account theretofore made to the contractor and unliquidated advance payments, (b) any claim which the Government may have against the contractor in connection with this contract, and (c) the price agreed upon or the proceeds of sale of any materials, supplies, or other things retained by the contractor or sold, and not otherwise recovered by or credited to the Government, and (2) in the discretion of the contracting officer shall be subject to deduction in respect of the amount of any claim of any subcontractor or supplier whose subcontract or order shall have been terminated as provided in paragraph (b) (3) except to the extent that such claim covers (a) property or materials delivered to the contractor or (b) services furnished to the contractor in connection with the production of completed articles under this contract.

(f) In the event that, prior to the determination of the final amount to be paid to the contractor as in this article provided, the contractor shall file with the contracting officer a request in writing that an equitable adjustment should be made in the price or prices specified in the

To be established at a figure which is fair and reasonable under the circumstances.