Evening star. [volume] (Washington, D.C.) 1854-1972, 1918-03-10


about the price paid for various COM
modities by the different
Supplies for governmental dep a TT
ments that something
the navy. about this problem. as
faced by the bureau Of supplies and ac-
counts, which purchases supplies for
the Navy. should be of interest
In order to meet the many develop
ments in the price policy. various
methods have been employed from time
to time by the bureau. but finally the
plan was adopted of placing Navy or
ders with producers. making 1t ob1iga-
tory upon them to deliver certain sup
plies, assuring them at the Same time
of a reasonable profit, providing pre-
liminary payments at sufficient rate
to meet at least the cost of production
and leaving the nnal price to be later
determined.
On certain materials. in order to de-
termine proper price for the Navy to
pay. it was deemed advisable to request
the Federal Trade Commission to in
vestigate the cost of production in the
industry as whole. In other cases
the plants to Investigate and report
upon the cost of production. Such ex-
tended Investigations were feasible
only in those cases in which the pur-
or in which it was known that the price
quoted the Navy was considerably in
excess of the cost of production and a
reasonable profit thereon. In a num-
made when it was obvious that the ma
terial was produced by concern hav-
ing a practical monopoly of the pro-
duction. While there are number Of
disadvantages in procuring materials
in this manner on a preliminary pay
ment basis, it was the only method
which could be followed to obtain the
materials wanted in the absence of a
clearly defined price policy.
The work of inquiry into the cost of
the many and varied articles required
for the Navy has necessitated the es-
Enlistment Of a chain of cost inspec-
ton offices under officers of the Pay
Corps, which at the end of the year ex-
new construction work, about sixty
yards doing repair work on vessels and
to a number of plants manufacturing
ordnance material. The system must,
of course. be still further extended
Three general forms of contracts
have been entered into covering this
work-namely, a cost plus 10 per cent
contract for new construction; repair
contract providing for reimbursement
of labor plus SO per cent overhead,
material plus 10 per cent overhead,
tool rates and a profit of 10 per cent
on the total. and manufacturing con-
tracts providing for reimbursement of
actual cost plus fixed profit per unit
Of output
These three contracts in the order
| named represent an evolution in the
form OF cost-plus contracts. 1t early
became evident that cost-plus-per-
centage profit contract is undesirable
for several reasons. chief of which is
the fact that it offers no incentive to
the contractor for economical per-
formance-in fact since the profit in
creases with the cost the incentive is
In exactly the opposite direction. The
percentage contract is based on the
assumption that compensation should
increase with increased service, and
this assumption is a fair one. but IN
ing audit is necessary to insure that
increased cost really represents in
creased service instead of extravagant
expenditure or padding.
Bearing these things in mind, rep
| resentatives of other departments of
the government were communicated
with as to investigate all phases of
the subject These representatives had
similar ideas as to the value of the
interchange Of views and study of the
new conditions surrounding govern
partmental committee was formed AS
a result. considerable progress has
been made toward arriving at-frst, a
more satisfactory form of cost-plus
contract. and. second. a clear definition
of what elements should be permitted
to be charged to cost of work done fer
the government.