Contract Settlement in Operation
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-____________________