The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XXI
Government Financed and Owned
Industrial Facilities

The Emergency Plant Facilities Contract

In the summer and fall of 1940, when major segments of the defense program were temporarily stalled over the problem of facility expansion, the NDAC sought a method, of reimbursing contractors for their emergency capital outlays which would guarantee, in advance of expenditure, the complete recovery of all capital costs. Such a guarantee was particularly needed in the aircraft industry, which had to be built virtually from the ground up in order to fill military requirements under the defense program. The large quantities of plant and equipment to be constructed during the emergency would in many respects be suitable for the peacetime production of commercial aircraft, but they were expected to be of little actual value at the end of the emergency because of shrunken markets. Moreover, in view of the uncertain volume of production to be undertaken or completed during the emergency, inclusion of plant costs in the unit price of the product afforded a far from dependable method of insuring complete cost reimbursement. Under these circumstances the stimulus of the tax amortization privilege would be insufficient to induce the necessary expansion; tax abatement alone would not guarantee the recovery, either during the emergency or thereafter, of extensive capital costs. To meet this situation the NDAC developed a pioneer measure known as the Emergency Plant Facilities contract.

Briefly summarized, EPF was a method of financing which provided specific and complete reimbursement, over a period of five years, of facility costs incurred in the performance of supply contracts under the defense program. The usual EPF contract was awarded in conjunction with, or subsequent to, the award of a supply contract, and covered the construction or conversion of buildings, plus, if desired, the purchases and installation of machinery and equipment. The contractor made his own arrangements for expansion and provided initial financing--typically with funds borrowed from banks--and was to be reimbursed by the government in sixty equal monthly installments. In turn, facility costs were rigorously excluded from supply prices of all items produced from EPF establishments. Title to the new facilities was initially vested in the contractor but passed to the government when reimbursement was complete. Upon completion of the contract, the contractor had an option to retain the facilities by payment to the government of cost less depreciation or a lower negotiated price. If the contractor failed to exercise his

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