Evening star., 1946-08-14
U. 5. Lost S1,178,412
InConvertingW Wartime
Cost-PIus Contract
By Joseph Honlon
Washington Correspondent OF the 81. Louis
Post Dispeicn.
Third OF q SerieS.J

Post oispeien.
Third OF SerieS.J
Negotiated fixed price con-
tracts with war producers were
one of the principal avenues
through which untold billions
were wasted, in the judgment OF
Controller General Lindsay C
Warren.
This account in the series on wal
waste will deal with contracts ol
this type-both those entered into
originally on that basis and those
converted from cost-plus fixed fee
TO fixed price after work was j:
progress or completed
There is the contract the Arlny
Air Forces had with the America
Propeller Corp, Toledo, Ohio, origi-
nally cost-plus. converted later tc
fixed price. Auditors of the General
Accounting Office figured the con-
version cost the Government
S1,178,412.
no VA q WA VA 1Sl SlAloilS. RlOpCllCl
firm was to make 1890 blades
Estimated cost was $1l l,495,331 and
the fixed fee for profit and over
head was to be S689,7l9. The cost
element of the original document
was subject to adjustment, one way
or the oIner, depending on what
actual costs proved to be.
Late in January, l943, this con-
tract Is converted to fixed price,
retroactive to the beginning. The
fixed price, to cover everything, was
S11 AIT ,654-substantially less than
The estimated price on the cost plus
basis
But GAO auditors figured that
actual costs we're so much less than
cost-pluS operation continued, the
Air Forces would have got their
propellers for S10.239,24l, or $1,178.-
4l2 less than they paid under con-
version to fixed price
The difficulty with the fixed price
contract under wartime conditions
is that the urgent need for haste
rules out competitive bids, ordinar-
lily safeguard against excessive
payments In wartime the fixed
price is arrived at, in .irtually all
cases, by direct negotiations with
one manufacturer.
Costs Were Built Up.
Similarly the cost-plus fixed fee
Is not an ideal contract although
1t is a big improvement over the
costs plus percentage of costs agree
ment used In World War I. In the
first war, the manufacturer could
be tempted to build up his costs,
because when the costs went up the
percentage-his profit-went up with
1t. In this war, manufacturers were
tempted to hoard manpower-be-
cause costs meant nothing to them,
and were tempted to allocate to
costs overhead charges properly
charged to the fixed fee.
No one with whom this reported
has discussed the problem has been
willing to propose an alternative to
eliminate the evils of the two types
OF contracts in a time when speed
of production is the all important
factor.
Returning to the American Pro-
peller contracts-thec conversion was
accomplished on a showing by the
company of what its costs expert
ence had been. But GAO auditors
who examined the companys books
reported that they showed excess
costs through write-of of inven-
tory, inclusive of excessive training
expense, failure to account for re-
Jected blades, inclusion of substan-
tial amounts of capital items. and
by giving no consideration to ex-
penSes treated as unbelievable in the
Army Air Forces Audit"
Army Refused Audit.
But the payment under fixed
price stood. The War Department
held that 1t ought not to make the
complete audit which would have
proved or disproved GAO's con-
tention. To this GAO responded
that If the War Department made
even the s'irhtest projections for
comparison Of costs a determine
ton would have shown that true
costs were considerable under the
costs OF the cost-plus fixed fee con-
tract and a saving of approximately
sl,l76,4l2 would have been effected. u
For further illustration of how
Hxed price contracts operated, il
will be necessary now to describe two
held by the Consolidated-V -Vultee Air
craft Corp, whose cost-plus con-
tracts were considered in some de-
tail yesterday
On the first Of these, GAO audi
tors figured the Government lost
S2,367 ,909, but recovered it by q
supplement to later contract. The
GAO men found that in executing
fixed zee contracts for conversion ol
bomber planes to transports, the
company had not credited the Gov
eminent with parts removed from
bombers nor with the difference ir
value between Government-ownec
parts exchanged for company.
owned parts.
Large Refund Received.
In still another Consolidated.
Vultee case, the Government got
back $l,222,215 because its auditor.
found the charges made on a fixed
price contract were not authorized
by the contract. This instance il.
lustrates vital difference between
cost-plus and fixed price contracts
The GAO men can make some sor
OF audit Of cost-plus contracts, bu
IN examining fixed price contract,
they are limited to determinin.
that The amount paid correspond,
with the agreed fixed price.
The fixed fee contract in thi.
case required that assembly line.
and handling equipment should bt
provided by the contractor, theil
cost to be amortized BY adding tc
the price per unit. and that Wher