The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XXIX
Contract Settlement in Operation

The Terms of Settlement

The central purpose of the entire system of contract settlement was the payment of fair compensation to war contractors for work done on their terminated contracts. Promptness of payment was an essential ingredient but the heart of the settlement problem was the task of defining and applying principles of settlement which would be fair both to the contractor and to the ultimate purchaser--the general public. Most of the difficulties were associated with the settlement of fixed-price contracts; as already indicated, reimbursement for terminated CPFF contracts presented no great theoretical problems inasmuch as reimbursable costs were defined in each contract and elaborated in special manuals and regulations devoted to the purpose.1

Very early in the settlement program, the procuring agencies recognized that fair compensation in the case of terminated fixed- price contracts consisted of the following elements: (1) the full contract price for all items completed under the contract prior to termination; (2) all costs allocable to the terminated portion of the contract; (3) a reasonable profit on work undertaken or performed as represented by the costs in (2); (4) posttermination expenses, including the costs of the contractor's termination organization and expenses of storing and protecting government property. The sum of all costs in categories (1), (2), and (3) was not to exceed the total price specified in the procurement contract.2

The complexity of the Army's task of determining the kinds and amounts of contractor reimbursement under each of these categories for more than 100,000 contracts varying widely in purpose and scope cannot be adequately described. The chief problems centered around category (2), and to a smaller extent (3).

To illustrate the initial difficulties, suppose a firm with a number of war contracts had agreed in a contract undergoing settlement to deliver 10,000 jeeps at a fixed price of $1,000 each. Suppose also that at the date of termination, 6,424 jeeps had been completed and would be paid for, under standard termination provisions, at their full contract price. Two broad problems of cost allocation would immediately arise in con

____________________
1
See Chapter XII, above. It was, however, necessary to develop a CPFF termination article to provide for posttermination expenses and other considerations. See above, page 663, note 81.
2
These four categories of reimbursement were contained in the standard termination article adopted by the War Department in October 1942, and were continued under the Contract Settlement Act throughout the program. See Malman article in War Contract Termination, cited above, page 613, note 2(2), App. C, "Article . . . Termination for the Convenience of the Government". See also, PR 15-443, 14 Aug 43. The exclusion of post- termination expenses from the limitation on total reimbursement did not appear in the 1943 regulations, but was later recognized as a valid exclusion. JTR 534.2.

-667-

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