The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XIV Multiple-Contract Pricing Review: The Company Pricing Program

Inadequacies of Individual Contract Pricing

In devising techniques for the negotiation of sound prices in its procurement contracts for World War II, the War Department quite logically placed primary emphasis upon its individual contracts. The development of price and cost analysis, the provisions of various contractual articles to facilitate close pricing, and even the formulation of broad pricing principles were basically geared to the negotiation and administration of particular contracts. By the fall of 1943, however, procurement officials realized that reliance upon attempts to obtain correct pricing in each individual contract was not sufficient to attain the fundamental objectives of War Department pricing policy. The shortcomings of the individual contract approach led to developments which culminated in the company pricing program adopted in 1944 and continued until the end of the war. This program was essentially a procedure for the review and correction of out-of-line prices and pricing practices of important war contractors, without waiting for the after-the-fact, profit-recapture technique of renegotiation.

A number of influences contributed to the development of company pricing. The most important of these was experience under the renegotiation law. The Renegotiation Act of 1942 had been adopted as an instrument both for recovering past excessive profits and developing sound forward prices which would prevent excessive profits in the future. As indicated hereafter, it was found totally impracticable to administer the renegotiation law on a contract-bycontract basis, and from the outset statutory renegotiation was applied to a company's total renegotiable sales for each past fiscal year.1 This over-all approach to a company's war business revealed many defects in both the theory and practice of pricing on an individual contract basis. For a number of reasons, however, the renegotiation function became increasingly devoted to the recapture of past profits, and the majority of renegotiation agreements confined their treatment of current and future prices to the familiar "Boy Scout Pledge," under which the contractor promised generally to adopt a closer pricing policy in the future. Although the treatment of past profits under renegotiation created a favorable environment in which contracting officers could apply close pricing techniques in negotiating new contracts, it was clear that a major gap existed between renegotiation and forward pricing.2

A second influence leading to the company pricing movement was the discovery, both in renegotiation and from a wide array

____________________
1
See below, pages 361-62.
2
See below, pages 382 ff.

-339-

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