for purchasing practice. This statute, which has been characterized properly as a monument in the history of Government purchasing, permits wide use of negotiation where circumstances justify a departure from the rigid rule of formal advertising and competitive bid procedures. It will be discussed at considerable length later in this chapter.

Thus procurement in the Navy during World War II, a procurement that aggregated 100 billion dollars, was characterized by a latitude of practice that closely approximated the freedom of bargaining enjoyed by private business, by a distribution of the buying function to all the material Bureaus rather than alone to the Bureau of Supplies and Accounts, and by a central coordination and control exercised in the Secretary's Office, as to procurement policy by the Office of Production and Material and as to legal policy and approach by the Procurement Legal Division.

Passing now from the broad picture of the development of the Navy's procurement organization and practices during World War II to other wartime innovations which have set the pattern for present procedures, attention will be given briefly to (1) financing production for the Navy, (2) disputes and claims under Navy contracts, (3) claims for contract relief, (4) renegotiation, and (5) patents, each of which phases of procurement activity have left their mark upon present practices.

FINANCING PRODUCTION FOR THE NAVY The tremendous expansion demanded of American industry to meet the requirements of total war, as well as the costly conversion from peacetime to war production, could not have been met without extensive financial assistance from the Government. As has been indicated briefly above, and as will be developed in a later chapter,1 this assistance was provided in large part through Government financing of plant expansion, with the Government itself con

" Chapter 10, "Industrial Plant Expansion and its Relation to Navy Procurement."

18 Sec. 8(b) of P.L. 671, 76th Congress, as noted above, authorized the Navy to provide for facilities expansion in public or private plants. Similar authority, accorded the Secretary of War under P.L. 703, 76th Congress, was extended to the Secretary of the Navy by Executive Order 9262 on 5 November 1942. See also P.L. 808, 77th Congress, approved 17 December 1942.

19 31 U. S. Code 529.

20 34 U. S. Code 582.

structing additional industrial plants and shipyards or paying for additions and extensions to existing privately-owned production facilities.18 It was furnished, in addition, through the medium of accelerated amortization under Certificates of Necessity pursuant to Section 124 of the Internal Revenue Code, to which reference has already been made.

19

However, important as was the expansion of the nation's productive capacity, the furnishing of working capital to enable industry to meet the financial burden of greatly expanded sales, labor force and inventory, and the expenses incident to tooling up and preparing for an entirely new type of production was no less important. Mention has been made of the fact that the "Speed-up" Act, Public Law 671, 76th Congress, authorized advance payments up to 30% of the contract price, and that under the First War Powers Act advances might be made up to the full amount of the contract price. Specific statutory authority in this respect was necessary because of the restrictions of Revised Statutes 3648 (derived from an Act of January 31, 1823) prohibiting advances of public moneys and payment for services or articles which have not at the time of payment been rendered or delivered. The Navy had had statutory authority since 1911, however, to make contractual provision for payments under its contracts as the work progressed, taking a lien upon all materials and work in progress in connection with which payment is made.20 While the making of progress or partial payments did not have the effect of increasing the contractor's working capital, it did afford a means of effecting payment up to 80% or 90% of the contract price without compelling the contractor to carry the entire financial burden of the contract through to the time of final delivery and acceptance by the Government.

The 30% advance payment authority under Public Law 671, 76th Congress, and the 100% of the contract price advances authorized by the First War Powers Act, provided the necessary legislative sanction for Government financing of the contractor's initial outlay. In order to retain control over the use made of such advances, it was customary to require their payment only into "controlled accounts," out of which withdrawals could be made by the

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

1 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

2 Public Law 426, 76th Congress; 54 Stat. 45, 10 U. S. Code 310 note.

Public Law 801, 76th Congress; 54 Stat. 974.

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:

"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

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ment. By Navy directive dated July 5, 1940,* 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,