The Ely miner. [volume] (Ely, Minn.) 1895-1986, 1942-07-16

The Navy department, like the War
department and the Maritime Com
mission, has a Price Adjustment Board
engaged now in Recovering excessive
profits on war contracts for the gov
eminent. Talking with members of
the Navy board the other day, some
interesting facts concerning profits
and production developed.
1t seems that in the majority Of
cases where war contractor is max
ing or has made excessive profits, he
also is doing an outstanding produc-
ton job, and the large profits are a
direct result of that fact. 1t happens
this way:
Suppose a contractor has contract
for 10000 units of some war equip
ment, to be delivered over period
of two years, with an estimated profit
of SO per unit. If he carries out the
contract on schedule, that would give
him total profit of $1,200,000 for "a
months or $4,000 a month, which is
assumed to be reasonable for large
concern.
But then suppose this contractor
takes off his coat and does really
outstanding production job, discover
ing shortcuts that save time and
money, and he completes delivery of
| the 10000 units in six months in
stead of two years. His profit per
unit, because of economies, shortcuts
and lower overhead, may double or
even triple. Say it is $40 per unit.
That would total $2,400,OO0 for the
contract, or 100000 per month for
the six months, which is eight times
the $4,000 considered a reasonable
profit.
The point I am trying to make is
simply that many cases of excessive
profits are not due to any profiteering
but due to the fact that the contractor
has done much better job of produc-
ton than either he or the Navy
thought he could do. A less efficient
contractor with the same contract
might have made only nominal profit:
or even lost money and not produced
the munitions on time. That, in fact
has happened time and again where
. the same item is being made b!
; several different contractors.
The Price Adjustment Board, in re
negotiating such contracts to recove
excessive profits, takes into accoun
,, the production job done, but even s.
is recovering hundreds of millions o
dollars. Actually, the bulk of the re
coveries would have been paid il
excess profits anyhow, and the Adjust
ment boards duplicate the auditing
job done by the Treasury department
The danger in the renegotiatiol
business is that it is based on tn
relationship between costs and profit
and does not emphasize production
: enough. It is bound in the long rul
to lessen the incentive to more eff
Gent and economical production. Il
other words, any formula which reg
ulates profits primarily on the basi
of costs tends toward the cost plus
percentage of cost system whicl
: created so many scandals in the frs
: World War.
Many civilian users write us won
dering why they cannot obtain prior
tiles to buy this or that piece of essen
tial equipment. Recently We ran int
| a situation on boilers that illustrate
| the reason.
The same plants which make stee
| plate make boiler plate. The WPB, O.
| investigation, found that completion
| of nine naval vessels urgently needle
] had been delayed because the rollin
mill supposed to furnish ship plat
f for the decks had been busy rollin
= boiler plate for production of boiler
! for civilian use.