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Title II of the First War Powers Act. In fact, but for the reverberating shock of Pearl Harbor, this extreme change must have seemed no less than heretical to many an old-time Government lawyer. In addition to lifting the bars completely on all the time-honored limitations on Government contracting, it authorized the War and Navy Departments, and the United States Maritime Commission, to “enter into agreements with contractors and/or obligors modifying or releasing accrued obligations of any sort, including accrued liquidated damages or liability under surety or other bonds" whenever such action in the judgment of the Services or of the Maritime Commission would facilitate the prosecution of the war. Amendments and modifications of contracts could be made with or without consideration and “irrespective of rights which may have accrued under the contract.”
The second half of Executive Order 9001 carried a few sobering limitations. A prohibition against racial discrimination was required to be inserted in all contracts; assignments of claims against the United States might be made only in accordance with the Assignment of Claims Act of 1940 (54 Stat. 1029; 41 USC 15); advance payments under contracts could be made only where they would promote the national interest, and were required to be carefully scrutinized; contractors had to warrant that they were not paying commission agents any fee for soliciting or securing the contract; the cost-plus-a-percentage-of-cost system of contracting was prohibited (as it was by the Act itself); existing ceilings upon profits and fees were retained, and the fee in costplus-fixed-fee contracts was limited to seven per cent of the estimated cost of performance; finally, the sanctity of the Walsh-Healey (49 Stat. 2036, 41 U.S. Code 35), Davis-Bacon (46 Stat. 1494, 40 U.S. Code 276a) and Copeland (48 Stat. 948, 40 U.S. Code 276b-a) Acts was preserved, and the Eight Hour Law, as amended on September 9, 1940 (37 Stat. 137, 40 U.S. Code 324), was continued in effect.
This virtually complete emancipation from peacetime procedural limitations on contracting, accomplished by the First War Powers Act and Executive Order 9001, had been foreshad
* Public Law 168, 76th Congress; 53 Stat. 1000, 10 U. S. Code 313.
owed, in part at least, by modified relaxations upon contracting procedure during the two and one-half year period of defensive preparation preceding the outbreak of hostilities on December 7, 1941. The Public Works Act of April 25, 1939 (Public Law 43, 76th Congress; 53 Stat. 590), in aid of the burgeoning defense activities of the nation (particularly the construction of off-shore bases), authorized the Secretary of the Navy to negotiate for the construction of public works projects to be located outside the continental limits of the United States and to have such work performed on a cost-plus-fixed-fee basis, the permissible fee being limited to 10 per cent of the estimated cost of the work. That this first step was timidly taken is evidenced by the safeguards which Congress threw around the authority it granted. The approval of the President himself was necessary for the validity of any contract made under the new relaxed rules; the fee, as noted, was limited by statute; before a contract could be let, negotiations had to be conducted with three or more contractors regularly engaged in construction work of the type and magnitude contemplated; and a naval officer had to be permitted to participate in meetings of the Board of Directors of the contractor "for the purpose of safeguarding the interests of the United States.” The same Act also authorized the employment on a negotiated basis of outside architectural or engineering firms for the preparation of designs, plans and specifications for any public works project or for the construction of any naval vessel or aircraft.
From this small beginning other legislation, loosening in part the restrictive bonds of peacetime purchase procedure, found favor with Congress and paced the intensifying defense effort of the country. In July of 1939, the War Department was permitted to negotiate for the procurement of aircraft parts, instruments, and accessories without regard to public advertising when their classified nature was such that they should not be publicly divulged. A certificate of secrecy made by the Secretary of War was a necessary condition precedent, and an award might be made only after the proposal had been submitted to at least three reputable concerns for their respective bids.1
In March of 1940 the “Multiple Awards Act" 2 authorized the Secretaries of the War and Navy Departments, in the interests of national defense and as an aid to expanding aircraft production, to award contracts for aircraft, aircraft parts and accessories not alone to the lowest responsible bidder but to the three lowest bidders, dividing the work among them and avoiding the overloading of aircraft production facilities.
Three months later, on June 14, 1940, Congress gave authorization for an 11% expansion in the size of the Navy; and the following month; authorization for a 70% expansion, the authority for the two-ocean Navy said (Public Laws 629 and 757, 76th Congress; 54 Stat. 780, 34 U.S. Code 498). Between the effective dates of these two authorized increases in naval strength, Congress passed a bill, H.R. 9822, which was approved by the President on 28 June 1940 as Public Law 671, 76th Congress (54 Stat. 676; 50 USC App. 1152). Although superseded and greatly overshadowed by the First and Second War Powers Acts, said Public Law 671 (colloquially and not inappropriately called the “Speed-up Act") was the cornerstone upon which much of our wartime procurement authority and practice was erected. It authorized advance payments to contractors up to 30% of the contract price; it authorized contracts for the acquisition, construction, repair or alteration of naval vessels and aircraft, or any portion thereof, to be made by negotiation without regard to existing requirements for competitive bidding and award to the lowest bidder; and it was the basis upon which preference ratings were founded by providing for priority of deliveries of material under Army or Navy contracts over deliveries for private account or export. An amendment dated May 31, 1941 (Public Law 89, 77th Congress; 55 Stat. 236), provided for allocations of all materials as to which a shortage threatened, from which allocation authority there emerged rationing and all its attendant discomforts. The Act of June 28, 1940, also authorized the Navy Department to construct and provide for the construction of plant facilities, including extensions and
additions to private plants, and to take over and operate any existing manufacturing plant or facility necessary for the national defense whenever a satisfactory agreement with the owner for its use or operation for defense purposes could not be arrived at a grant of authority which, though not exercised until after the outbreak of war, illustrated eighteen months before Pearl Harbor a realization on the part of Congress that the approaching war clouds justified drastic measures. Public Law 671 in large measure, therefore, was the vehicle which first converted the country from a peacetime to a wartime footing.
As a further stimulus to the expansion of private industrial capacity for war production, Congress by the Second Revenue Act of 1940, approved October 8, 1940,3 provided for the accelerated amortization over a five-year period of emergency facilities constructed or acquired after June 10, 1940, and certified by the Secretary of War or the Secretary of the Navy as necessary in the interests of national defense. In view of the fact that the Second Revenue Act of 1940 imposed an Excess Profits Tax up to 95% of adjusted excess profits net income, the accelerated amortization deduction for emergency facilities constructed under Certificates of Necessity was a tremendous inducement to the investment of private capital in tooling up for war.
As might have been expected, the increasing volume of the Navy's procurement during the eighteen months intervening between the increased tonnage authorizations in the summer of 1940 and the onset of hostilities in December of 1941, gave rise to some far-reaching changes in the Navy's procurement practices. As noted above, substantially all Navy purchases were required to be made pursuant to public advertisement “when the public exigencies do not require the immediate delivery of the articles, or performance of the service" (Section 3709, Revised Statutes; 41 USC 5); and with very few exceptions (as in the case of contracts for the construction of vessels, of guns, or of facilities) the Navy's purchases were made by the Bureau of Supplies and Accounts on contracts executed by that Bureau.
The “Speed-up Act,” Public Law 671, (supra) provided in Section 2(a) thereof:
? Public Law 426, 76th Congress; 54 Stat. 45, 10 U. S. Code 310 note.
Public Law 801, 76th Congress; 54 Stat. 974.
"That whenever deemed by the President of the United States to be in the best interests of the national defense during the national emergency declared by the President on September 8, 1939, to exist, the Secretary of the Navy is hereby authorized to negotiate contracts for the acquisition, construction, repair, or alteration of complete naval vessels or aircraft, or any portion thereof, including plans, spare parts, and equipment therefor, that have been or may be authorized, and also for machine tools and other similar equipment, with or without advertising or competitive bidding upon determination that the price is fair and reasonable...." (Italics supplied.)
By a letter dated June 29, 1940, the President formally "deemed ... (it) ... to be in the best interests of the national defense during the national emergency” for the Secretary of the Navy to be authorized after June 28, 1940, (the date of the approval of the Act) to negotiate the contracts specified in the Act without advertising or competitive bidding. The President, however, placed certain limitations upon such authority which did not appear in the Act. The first of these limitations was expressed in the alternative and required a finding by the Secretary of the Navy that either (a) the bids which would be received upon advertising or bidding would not represent the operation of effective competition or (b) advertising for a reasonable time would seriously hamper, impede and delay the desired acquisition. Neither of such findings was expressly or impliedly required by the Act.
The Act, however, did require that there be a "determination that the price is fair and reasonable.” It did not require the Secretary of the Navy to make such determination, but the letter of June 29, 1940, from the President required that prior to the execution of any negotiated contract the Secretary of the Navy shall find and determine that the price or prices included therein are fair and reasonable.
The effect of this personal and non-delegable grant of authority to the Secretary necessitated the establishment of procedures whereby the Secretary of the Navy could make the requisite determination (1) that the price was "fair and reasonable," and (2) that advertising and competitive bidding would not result in the operation of effective competition or that advertising and competitive bidding would seriously hamper, impede and delay the procure
ment. By Navy directive dated July 5, 1940,4 provision was made for the submission of all negotiated contracts to the Secretary's Office for execution by him, each such contract being required to contain a certification as to the facts upon which the Secretary could predicate the required determinations.
This procedure was further amplified by a. directive of June 20, 1941,5 which required, rather than a simple certification by the technical Bureau of the ultimate facts, a request to the Secretary for “Authority to Negotiate," which request had to recite sufficient facts to serve as a sound basis for the determinations that the Secretary under the President's letter was required to make.
The laborious procedure involved in first investigating and ascertaining facts which would justify the required determinations, in setting forth these facts at length and processing through channels to the Secretary the request for Authority to Negotiate, in then negotiating the procurement, and finally in preparing and forwarding the resulting contract or letter of intent to the Secretary's Office for execution was manifestly unsatisfactory and a material impediment to that expedition in procurement which the worsening world situation increasingly demanded. Tedious and retarding though they must have been, these requirements for personal determination and action by the Secretary himself nevertheless laid the groundwork for the program of centralized control and coordination of procurement in the Secretary's Office that proved so successful during the war.
Needed relief from the stringent requirements of the President's letter of June 29, 1940, was forthcoming through the medium of Executive Order 8891 issued on September 4, 1941. This Executive Order created the Division of Contract Distribution in the Office of Production Management (forerunner of the War Production Board) and vested it with the broad functions of securing a wider diffusion of defense procurement (particularly among subcontractors and small business) and facilitating the conversion of industry to defense production. The purposes of this Executive Order were used as a vehicle for getting the President to cancel his letter of June 29, 1940,
• Sec Nav 1tr AL-3/A18 (400603)P. s SecNav ltr EN/L4-3 (410620)P HBC:mp.
to the Secretary of the Navy and to supersede it on October 7, 1941, with a letter requiring only, as a condition precedent to negotiating under Public Law 671, that the Secretary of the Navy or the Chief of the cognizant Navy Bureau determine that the price was fair and reasonable, having due regard to the program and objectives of Executive Order 8891.
On October 25, 1941, both the Executive Order and the President's revised letter of authority were promulgated in the Navy Department by a directive materially broadening the field of permissible negotiation of contracts without regard to advertising or competitive bidding.“ The new directive required only that requests for Authority to Negotiate show that the proposed procurement fell within the contemplation of Public Law 671 (i.e., was for “the acquisition, construction, repair or alteration of complete naval vessels or aircraft, or a portion thereof, including plans, spare parts and equipment therefor,” or “for machine tools and other similar equipment”) and that the price was fair and reasonable. Furthermore, in determining the reasonableness of price, consideration was to be given to the objectives of the Executive Order, so that a higher price might be justified if the effect of the proposed contract would be to spread defense production over a wider area and out of tight labor markets.
By directive dated September 29, 1941,' authority to execute contracts made after October 15, 1941, for the construction of vessels, facilities, equipment and naval materiel, theretofore executed by the Secretary of the Navy, was delegated to the Chief of the technical Bureau having cognizance of the subject matter of the contracts, provided that in the case of all negotiated contracts there was first secured from the Secretary the requisite Authority to Negotiate. Thus, by the beginning of World War II some experience in negotiating contracts for the Navy's requirements had been gained and the concept of central coordina
tion in the Secretary's Office of contracts made by the technical Bureaus had been born.
Mention has already been made of the virtually complete emancipation from all statutory restrictions on procurement procedure granted by Title II of the First War Powers Act and the President's Executive Order 9001 thereunder. The day following the Executive Order the Secretary issued his directive of December 28, 1941,8 putting the new war contract procedures into effect in the Navy. Under this directive there was delegated to contracting officers in the Department (i.e., those authorized by the Chiefs of their respective Bureaus to contract on behalf of the Bureau) authority to execute and deliver contracts and amendments and modifications of contracts without regard to the requirements for competitive bidding, and without limitation as to form or substance except for the following contractual provisions: (1) those required for classified contracts, (2) in the event of progress payments, appropriate provision for a lien in favor of the Government in accordance with the Act of August 22, 1911,9 (3) labor provisions required by the Walsh-Healey, Davis-Bacon, and Copeland "Anti-kickback" Acts referred to above, (4) racial non-discrimination, (5) employment of aliens, (6) assignability, if any, under the Assignment of Claims Act,10 (7) in cost and cost-plus-fixed-fee contracts, provision for the preservation of records, and (8) required patent and patent infringement clauses. The directive authorized advance payments up to any amount, and dispensed with all requirements for bonds or other security for payment or performance.
The exercise of central control in the Secretary's Office, which had been engendered by the non-delegable nature of the negotiation authority conferred on the Secretary of the Navy by the President's letter of June 29, 1940, was retained in the directive of December 28, 1941, by requiring that authority to contract by negotiation must continue first to be obtained from the Secretary in connection with any contract or amendment involving the payment of $200,000 or more. This limitation upon the Secretary's delegation, it should be noted, provided one of the cornerstones upon which rested the Navy's wartime system of checks
• SecNav 1tr QM/L4.3(410930) PLD/WJK:vmc.
? Sec Nav 1tr EN/L4-3(410923) JAG:rld; supplemented by SecNav 1tr EN/L4-3(410923)P JDM:mk, dtd Nov. 5, 1941.
& Sec Nav Itr QW20/L4-3(411228) PLD/HSH:jhf.
and balances on procurement. The request for authority to make contracts under the new directive differed materially from the Request for Authority to Negotiate under Public Law 671. No longer was emphasis placed on reasonableness of price or the type of procurement; the information now required was essentially statistical: the name of the proposed contractor, the kind of supplies being purchased, the price to be paid, the location of the producing plant or site of the proposed facility, and the certificate of the contracting officer that the article or facility was necessary for the prosecution of the war. The requirement for this certification of necessity was later dropped 11 inasmuch as the President, in Executive Order 9001, had to all intents and purposes made the finding of facilitation of the prosecution of the war required by Section 201 of the First War Powers Act, thereby obviating the necessity for an individual finding in connection with each contract.
Finally, the directive of December 28, 1941, was explicit on the point that it was not designed to "change or affect in any way the present distribution among the several Bureaus and Offices either of business or authority to make or execute contracts.” This statement was not entirely gratuitous. With the rapidly increasing volume of Navy procurement, considerable opposition was being manifested to the historical distribution of procurement authority whereunder the Bureau of Supplies and Accounts, with only limited exceptions, did all of the Navy's buying upon requisition from the technical Bureaus. At a time when substantially all Navy purchases had been effected through the mechanical means of advertising and competitive bid procedures, the centralization of the procurement function in one Bureau had been entirely logical and satisfactory. With the advent of negotiated procurement, however, the buying function could not be wholly disassociated from the persons familiar with the technical requirements involved. As a result of increasing material
shortages, rigid specifications became subordinated to the capacity of an available supplier to produce the item. Negotiations covered not only price but time of delivery, use of substitute materials, preference ratings and the like, thereby requiring the presence and views of persons in the Bureau actually charged with responsibility for the item. Furthermore, the vastly increased volume of procurement and the necessity for utmost economy in manpower required that any duplication of effort between the technical Bureau and the Bureau of Supplies and Accounts as the buying agency be reduced to a minimum, or eliminated.
In December of 1941 the time was not ripe for any radical change in the division of procurement responsibilities between the Bureaus. During the summer and fall of 1942, however, the preparation, executing and administration by the Bureau of Supplies and Accounts of contracts which of necessity had to be negotiated in the technical Bureaus became increasingly anomalous and wasteful with the result that on December 13, 1942, a directive12 was issued which had as far reaching and significant an effect on the division of the Navy's procurement responsibilities as the First War Powers Act had on the Navy's procurement practices. Briefly, this directive authorized the Chief of any Bureau having technical cognizance over materiel and services to be procured to determine in his discretion the extent to which contracts embodying the terms of such procurement should be negotiated, prepared and executed in his Bureau and the extent, if any, to which the Bureau of Supplies and Accounts should be availed of for the purpose. Thus, the procurement function within the Navy became decentralized, whereas at the same time procurement policy, as will be noted below, remained centralized.
The directive of December 13, 1942, also gave formal recognition to the establishment within each Bureau (other than Medicine and Surgery, which had no procurement function) of an Office of Counsel for the Bureau. Counsel for each respective Bureau was charged with the preparation or approval of all contracts, and with furnishing all necessary legal advice and services to the Bureau in matters of procurement. The various Counsel were answerable
11 SecNav ltr (PLD/JK:11) dtd March 17, 1943; NPD Par. 11, 131. (“NPD" refers to the "Navy Procurement Directives," a loose. leaf volume published by Commerce Clearing House and available for distribution to naval personnel through the Office of General Counsel.)
1 SecNav ltr (PLD/HSH:jhf A3-1/EN).