which presently exists which says that the Renegotiation Board shall not be subject to the Administrative Procedure Act. That act was enacted after some 15 or 18 years of consideration by the bar association and the committees of Congress for the review of administrative action in the Government. It is a pretty good act. I would keep it. I know of no reason to exempt the Renegotiation Board from it.

We have at least one more problem which, I think, should be considered at the present time. Under the old law and the old practice, the reconversion costs with which industry was confronted in the tail-end of 1945 and 1946, the costs which you heard Mr. Rockwell discuss this morning, are very apt to wipe out all war profits. Those costs should certainly be considered in determining excessive profits. They are part of the cost of the defense program. If your contracts are terminated, if the emergency is over, and you begin to reconvert to civilian production, the costs of that are just as much a cost of your defense program as the original costs of converting over to a defense facility.

I would most strongly urge that the starting point be the Renegotiation Act of 1948, and that these additional suggestions that I have made, to the extent that they seem practical to you, and if they were not practical to me I would not be advocating them, be considered and adopted. If you do that, you might have a renegotiation procedure that might work during the period of our defense program, whatever period that is.

Finally, there are still pending before the Tax Court a fairly substantial number of cases involving renegotiation during World War II. Based largely upon the doctrine, I presume, that "The King can do no wrong," an existing policy has been established that these cases will not be settled on their merits. Of course, if any mistakes were made they will be corrected. But whether the Board's decision was right on the merits will not be considered. I know of no basis for according this kind of sanctity to the decisions of the Renegotiation Board, or any other administrative agency. Government counsel should be authorized to negotiate with the contractor's counsel and every effort should be made to dispose of the pending cases without litigation. I repeat that renegotiation litigation is time-consuming and costly. It should and can be avoided by the adoption of reasonable and sensible settlement policies.

The CHAIRMAN. Are there any questions? If not, we thank you, Mr. Alvord.

Mr. ALVORD. Thank you.

The CHAIRMAN. We will insert in the record at this point a statement from Mr. Robert H. Shields, president and general counsel of the United States Beet Sugar Association.

(The statement is as follows:)

STATEMENT OF UNITED STATES BEET SUGAR ASSOCIATION, ROBERT H. SHIELDS, PRESIDENT AND General CouNSEL, WASHINGTON, D. C.

The United States Beet Sugar Association recommends that your committee amend H. R. 1724 to make specific provision for a definition of standard commercial articles and to make further provision authorizing the Renegotiation Board proposed to be set up by the bill to interpret and apply such definition as was done by the Congress in the act of April 28, 1942, Public Law 528, Seventyseventh Congress, as amended.

Under the World War II legislation, the Board had authority to exempt from renegotiation amounts received or accrued under contracts or subcontracts for the

manufacture or furnishing of a number of articles which were determined by the Board to be standard commercial articles. Under the old act the term "standard commercial articles" was defined and the Board was authorized by regulation to interpret and apply the standard commercial articles exemption provided for in that act. Pursuant to this authority, the Board determined that contracts for the purchase of sugar by the Government were entitled to exemption from renegotiation.

It seems quite obvious that if sugar is purchased by Government agencies through competitive bidding, with each processor offering sugar in competition with all other beet and cane sugar processors, that the lowest bidder would be awarded the contract on such a standard commercial article. Since sugar is a standard commercial article and is the same whether produced for civilian or military use--whether used directly or for cooking or for other further processing, either by a housewife or the armed services-it does not appear that any basis for contract renegotiation exists in the case of such a standard commercial article. The purchase of a standard commercial article such as sugar or wheat flour is greatly to be contrasted with the purchase of products manufactured specifically for military purposes.

For the reasons above indicated, based upon the experience in the procurement of sugar and other such commercial articles during World War II, it is respectfully recommended that H. R. 1724 be amended to make specific provision for the exemption of standard commercial articles, such as sugar, in the same manner in which these exemptions for such articles were provided for in World War II legislation.

The CHAIRMAN. We will next hear from R. P. S. McDonnell. Will you please come forward and identify yourself for the record?

STATEMENT OF R. P. S. MCDONNELL, WASHINGTON, D. C.

Mr. MCDONNELL. My name is R. P. S. McDonnell. I am engaged in the practice of law with offices at 1025 Connecticut Avenue NW., Washington, D. C. My interest in the proposed legislation stems from the fact that during World War II, while on active duty as an officer of the Naval Reserve, I participated in the administration of Navy Department war contracts dealing with problems of procurement, renegotiation, and termination. Since 1945, in association with other representatives of industry, I have taken part in discussions with public officials on matters pertaining to the drafting and administration of the Armed Services Procurement Act of 1947 (Public Law 413), the Armed Services Procurement Regulations, the Renegotiation Act of 1948 (Public Law 547), and the Defense Production Act of 1950 (Public Law 774).

My practice of law has been and is largely devoted to the representation of small business firms with problems raised by Federal administrative action. At present, while these firms have not engaged in defense work, they undoubtedly will participate in the procurement program and will be affected by this bill providing for the renegotiation of Government contracts.

When the President signed the Armed Services Procurement Act February 19, 1948, he wrote the Secretary of Defense, in part, as follows:

It declares that a fair proportion of all procurement shall be placed with small business concerns.

According to a report of the Munitions Board for the fiscal year 1950, the armed services made direct purchases from small companies (fewer than 500 employees) which amounted to 24.5 percent of the annual total ($1,310,615,000 out of $5,355,296,000). In terms of the number of purchases made, 1,267,000, or 73 percent, were transacted

with small firms. Of the total purchases in fiscal 1950, some 72 percent of the dollar value represents purchases by negotiation-and of this percentage small business obtained defense business of about only 14 percent Therefore, it is seen small firms have begun to participate in the procurement program. However, the business they have received has been predominantly awarded to these firms on a competitive-bid basis.

During the past week, I have had the occasion to discuss some of the problems raised by current defense procurement with executives of small companies as well as to receive some of their reactions to provisions of H. R 1724 I would like to give your committee the benefit of certain observations I have made as a result of these discussions.

Small business expects to participate more fully in the defense contract programs. In the first place, executives feel that their firms can better do business with the Government on a negotiated basis than through competitive bidding. The declaration of the national emergency by the President has made possible a greater application of the negotiated contract in procurement under section 2 (c) (1) of the Armed Services Procurement Act of 1947. This belief is reinforced by their observation that a great many small businesses, which were awarded contracts under competitive bidding before the Korean conflict, are now having serious financial difficulties because of the rise in costs since last June which has undermined the basis on which they quoted prices to the Government. In the second place, these businessmen feel that their firms will be forced into a position where they will have to take defense work because of scarcity of materials. for civilian production and the operation of the priority program of the National Production Authority.

I will now proceed to discuss several features of this bill which I believe deserve your particular attention.

Senator CONNALLY. You say in your statement, while on active duty as an officer of the Naval Reserve, you participated in the administration of war contracts dealing with problems of procurement and renegotiation and termination. Were you representing the Navy?

Mr. MCDONNELL. Yes, sir; I was an officer on active duty.

Senator CONNALLY. Were you representing the Navy before the renegotiation boards?

Mr. MCDONNELL. I was an officer in the administration of the contracts, and when renegotiation problems come up, they were referred to the renegotiation officers.

Senator CONNALLY. You did not go before the board?

Mr. MCDONNELL. No.

Senator CONNALLY. You just talked to some of their employees? Mr. MCDONNELL. Yes; we did. We forwarded the material when it appeared that excessive profits were being made.

Senator CONNALLY. Would you regard your duties there as representative of the Government to try to cut these negotiations down as much as you could, or were you just there in a general capacity? Mr. MCDONNELL. Well, we regarded our duties to see that the contract was fairly and properly administered from the point of view of the public interest and the Government, and at the same time that

it was fairly administered from the point of view of doing a fair job to the business firms that were cooperating with the Government. Senator CONNALLY. But you were not a part of the staff of the board?

Mr. MCDONNELL. No, sir.

Senator CONNALLY. That is, the renegotiation board?

Mr. MCDONNELL. No, sir.

Senator CONNALLY. You just sort of sat on the side lines, and if you saw something going wrong, you would come in?

Mr. MCDONNELL. The duties that were imposed upon my office. were those which I did not determine, and when such questions came up, they were carefully considered and then forwarded, if necessary. Section 105 (f) (1) (p. 22 et seq.) of the bill provides that a contractor or subcontractor with a minimum of $100,000 volume business will subject the contractor or subcontractor to renegotiation. The 1944 Renegotiation Act provided for a minimum of $500,000. When the exemption was changed under that act from $100,000 under previous legislation (the 1943 act) to $500,000, a practical reason favoring the $500,000 minimum was found in a letter (March 25, 1943) from the Secretaries of the Army and Navy to the Speaker of the House of Representatives:

It has been found that in the administration of the section

which would subject the contractor or subcontractor to renegotiationwith a $100,000 floor that a difficult task is presented by the great number of contractors with whom renegotiation is required. This

referring to the provision of the 1943 act which increased the minimum from $100,000 to $500,000

greatly facilitates renegotiation with larger contractors and subcontractors without seriously affecting the principal objectives of this section.

Likewise, the Truman committee, in its report on renegotiation recommended the $500,000 exemption. (See Rept. No. 10, pt. 5, of Special Senate Committee Investigating the National Defense Program.)

It should be further pointed out that part 4 of the Armed Services Procurement Regulations (sec. 3-400 to 3-409) provides a variety of types of negotiated contracts which can make provisions for the adjustment of contract prices where it is found during the administration of the contract excessive profits appear to be occurring under the contract. Conscientious administration of smaller war contracts should be able to reveal excessive profits, which can be adjusted by a redetermination of prices without resort to renegotiation.

It is my contention that the floor of $100,000 provided for in section 105 (f) (1) of H. R. 1724 should be changed to a $500,000 minimum volume of business. This would avoid the administrative task of renegotiating smaller defense contracts after their completion and would eliminate the imposition of the burden of expense, time and effort upon small business. Careful drafting of original contracts with small firms and efficient administration of the contract during its operation should be used as the lever to recoup profits in situations where profits are out of line. In this way, when the contract is completed, the small firm knows what profit it has made on the contract and can plan to use these profits in its business without the fear

of a renegotiation proceeding many months later and the Government has protected the public interest.

From the definition of "excessive profits" under section 103 (e) it would appear that contracts derived from competitive bidding may be subject to renegotiation. The report of the Committee on Ways and Means re. H. R. 1724 does not clarify as to whether or not such contracts are to be subject to renegotiation. It is submitted that this should be clarified in the bill and not left to administrative interpretation. Further, I urge for you favorable consideration the position that defense contracts let pursuant to competitive bidding and for standard commercial items should not be subject to the drawn-out, expensive process of renegotiation. In the case of such contracts, the price quoted has been submitted in terms of the competitive market for such articles and competitive bids, which win the award of a contract, necessarily have gone to the lowest bidder. It is hard to visualize how the public interest is prejudiced when the profits on such contracts have been determined in competition with the open market. This seems especially true because the Armed Services Procurement Regulations in part 4, section 2-403, imposes the duty on the contracting officer to reject bids (i) when rejection is in the interest of the Government or (ii) when he finds the bids are not reasonable. Unreasonably high prices quoted by bids on a contract, to which an excessive profit figure might attach, would be a most proper ground to reject bids. Since, as pointed out earlier, small business participates in the defense work primarily by the award of contracts on a bid basis, it is important to these firms that such contracts are not made subject to renegotiation since there are existing safeguards to protect the public interest.

Section 107 (a) of the bill establishes an independent, five-member renegotiation board and provides that not less than three members of the board shall be appointed from civilian life. The objective of setting up an independent board, according to the report of the Committee on Ways and Means, is to keep final responsibility for the renegotiation of Government contracts separate from the procurement authorities which initially issued the contracts. This is a step in the right direction, namely, to divorce the administration of the procurement program from renegotiation.

While the President may appoint the entire board membership from civilian life, this is not mandatory under subsection (a). It is suggested that the business community would have greater confidence in the work of the board if the language of the bill provided that all members of the board shall be appointed from civilian life.

There is reoccurring criticism of the Federal Government related to its inability to secure top-caliber men for administrative positions. Under World War II statutes, $200,000,000,000 in contracts were subject to renegotiation and gross amounts of more than $11,000,000,000 were recaptured through renegotiation. Certainly, in the administration of the important renegotiation program ahead, the Government should try to attract highly competent professional and business men to serve on the renegotiation board. For this reason, favorable consideration might well be given to compensation for members of the board at an annual rate, say of $15,000, instead of the $12,500 provided for in section 107 (a) of the bill. As you gentlemen know, during World War II a number of outstanding men were