profits taxes, could only partially solve the problem.

Those contesting the constitutionality of the Renegotiation Acts argued, however, that even assuming Congress' authority to eliminate excessive profits from war contracts, Congress could delegate such authority to the Secretaries of the Departments or to an independent administrative agency such as the War Contracts Price Adjustment Board only if it adequately defined the applicable legislative policy and standards. The Court quickly disposed of this contention by pointing out that it was always difficult to define precisely the nature of the standards which Congress must specify in granting administrative authority and that, in time of crisis, the Constitution could not be construed to hinder rather than help the people in defending their National security. In any event, the standards contained in the 1943 Act were held to be sufficiently precise since renegotiation had been conducted in accordance with the same standards administratively for some time prior to the enactment of the 1943 Act in February 1944. Congress, therefore, had knowledge of these standards at the time it enacted the 1943 Act and was presumably satisfied that they carried out Congress' intention. The 1942 Act which defined "excessive profits" as "any amount of a contract or subcontract price which is found as a result of renegotiation to represent excessive profits" obviously contained somewhat less definite standards. The Court was satisfied, however, that when the term "excessive profits" was read in the light of the conditions to which it was applied, it was sufficiently meaningful to provide adequate guides to the renegotiation agencies in the elimination of excessive profits.

The final argument made against the constitutionality of the Renegotiation Acts was that "due process" was not accorded contractors under the rather informal renegotiation procedure which has been heretofore described. Any defects in this respect that may have existed in the 1942 Act, as originally drafted, were corrected by the 1943 Act which provided for a hearing de novo before the Tax Court of the United States to all contractors who were aggrieved by determinations of excessive profits made under the 1942 Act, as

well as under the 1943 Act. The aforementioned de novo hearing afforded an aggrieved contractor all the elements of "due process" accorded a taxpayer who has been aggrieved by a decision of the Commissioner of Internal Revenue, including the right to cross-examine witnesses and the making of a record. It is elementary that the demands of due process do not require a hearing at the initial stage or at any particular point in an administrative proceeding, so long as the requisite hearing is held before the final order becomes effective. In view of the Lichter case, it may be fairly assumed that the 1948 Act will also be upheld by the Supreme Court. The 1948 Act operates only prospectively, that is, with respect to contracts made after the effective date of the Act. Moreover, it would seem that the basic authority of Congress to make all laws which are necessary and proper to raise and support armies and to provide and maintain a Navy, permits such legislation at a time like the present as during a shooting war. Conscription of men has already been accomplished. The amount of production required for the military is not as great now as it was during World War II. Yet it is substantial and it is as difficult to estimate in advance the costs of performing certain types of contracts as it was during wartime. Under the circumstances it is doubtful whether the Supreme Court will strike down the Renegotiation Act of 1948 as being in excess of Congress' authority.

Furthermore, the procedures prescribed in the 1948 Act are the same as those in the 1943 Act except that in addition to his right to a redetermination de novo by the Tax Court, the contractor is specifically given the right of appeal to the Circuit Court of Appeals from a determination by the Tax Court. It is unlikely, therefore, that contractors will seriously assert that the 1948 Act is unconstitutional for lack of procedural due process.

Another question which might arise in connection with the constitutionality of the 1948 Act relates to the adequacy of the standards provided by that Act for the determination of excessive profits. In that regard, the 1948 Act provides that the Secretary of Defense shall promulgate regulations "prescribing standards and procedures for determining and eliminat

ing excessive profits hereunder using so far as he deems practicable the principles and procedures" of the 1943 Act, "having regard for the different economic conditions existing on or after the effective date of this Act from those prevailing during the period 1942 to 1945."

While the above guide is not completely specific, it certainly has more meaning than the guide set forth in the 1942 Act. As the Supreme Court stated in the Lichter case:

"It is not necessary that Congress supply administrative officials with a specific formula for their guidance in a field where flexibility and the adaptation of the congressional policy to infinitely variable conditions constitute the essence of the program. 'If Congress shall lay down by legislative act an intelligible principle ... such legislative action is not a forbidden delegation of legislative power.' Hampton Co. v. United States, 276 U. S. 394, 409. Standards prescribed by Congress are to be read in the light of the conditions to which they are to be applied. "They derive much meaningful content from the purpose of the Act, its factual background and the statutory context in which they appear.' American Power & Light Co. v. S. E. C., 329 U. S. 90, 104 ..."

In any event, even though a contractor might choose to argue that the 1948 Act is inapplicable or unconstitutional as applied to his renegotiation proceedings, he will not be permitted to enter into any renegotiation agreement providing that in the event the Act is subsequently determined by the courts to be inapplicable or unconstitutional, such agreement shall be of no force and effect. The renegotiating agencies, under the 1942 and 1943 Acts, uniformly followed the policy that agreements must be final. If a contractor refuses to abandon his constitutional objections then a unilateral order will be made and the contractor can raise his objections before the Tax Court and the Circuit Court.

PROFIT LIMITATION PROVISIONS OF
THE VINSON-TRAMMELL ACT

As we have already seen, the operation of the Vinson-Trammell Act provision which imposes a fixed profit limitation on contracts and

subcontracts for Naval vessels and for aircraft was suspended during World War II. However, with the repeal of the excess profits tax, the profit limitation provision of the act was revived with respect to contracts and subcontracts within the scope of the Act which were made in a taxable year of a contractor or subcontractor beginning after 31 December 1945.

Since it is anticipated that the profit limitation provision of the Act will be substantially altered and may be repealed, no attempt has been made in this paper to explore the myriad problems that may arise in connection with the interpretation and application of the profit limitation provision of the Act, as it is now written.

However, so long as the present Act or some fixed profit limitation similar to that contained in the present Act remains on the statute books, certain problems will arise in connection with the joint application of the 1948 Act and the Vinson-Trammell Act to profits under certain contracts and subcontracts.

No reference is made in the 1948 Act to the Vinson-Trammell Act and, of course, the converse is also true. Difficulties may arise because the Vinson-Trammell Act is applied to profits from contracts in the year such contracts are completed, while the 1948 Act is applicable to all renegotiable contracts of a contractor in each fiscal year regardless of the state of completion of any individual contracts. If several years are required for the performance of a contract, renegotiation proceedings will be conducted with respect to such contract prior to its completion and prior, therefore, to the application of the Vinson-Trammell profit limitation to such contract. It follows that, until the Vinson-Trammell Act is repealed or suspended with respect to contracts subject to renegotiation, it will be necessary, in the case of renegotiation proceedings involving uncompleted contracts which are subject to the Vinson-Trammell Act, to allocate any excessive profits which may be determined to each of the individual contracts considered in renegotiation. Otherwise, it would be impossible to determine at the time of completion of the contract the actual profits which had been retained by the contractor under an individual contract which

is subject to the Vinson-Trammell Act and with respect to the profits under which renegotiation had already been conducted.

In cases where a contract has been completed and where, prior to renegotiation, a contractor has refunded profits to the Treasury pursuant to the provisions of the VinsonTrammell Act, it has been suggested that, for the purpose of renegotiation, such refund be treated as if it were a voluntary prepayment of excessive profits.

CONCLUSION

At the present time, it appears that renegotiation is the most popular device for the limitation of profits arising from those contracts with the Departments of the National Military Establishment with respect to which profit limitation is considered desirable or necessary. Other devices which have the effect of limiting profits, such as redetermination, repricing, and excess profits taxes, are being employed or considered for future utilization. However, such devices usually have something other than

profit limitation as their chief object, or, in the case of the Vinson-Trammell Act, will probably be substantially modified in the near future. The chief advantage of renegotiation is that it takes into account all the operations of a given contractor within the area delineated by the Renegotiation Act and permits an averaging of his transactions with the Government. Furthermore, renegotiation accomplishes this through an agency which, while it is intimately connected with procurement, is nevertheless sufficiently independent to permit a fresh analysis at the close of each year of a contractor's dealings with the Government. While the Renegotiation Acts place great power in the hands of renegotiating agencies, the procedures prescribed by the various Renegotiation Acts provide an adequate safeguard of the contractor's interests even assuming that the power of the renegotiating agency was not properly exercised. In practice, the safeguards mentioned above have not been necessary in view of the general excellence of the methods employed in the conduct of renegotiation proceedings.

INTRODUCTION

The enormous scale, complexity and novelty of naval procurement during World War II greatly stimulated the development of new types of contracts having greater flexibility than the standard fixed-price contract but without the vice of the cost-plus-a-percentage-ofcost contract. The success of that effort is indicated in some measure by the variety of contracts described in this chapter. Yet it would be easy, by thinking too much in terms of the number of new types of contracts developed, to exaggerate the success achieved. The truth is that the perfect type of Government procurement contract has not yet been drafted. Each of the types discussed in this chapter has its own weakness and the more clearly this is recognized, the less is the danger. It can be stated with assurance, however, that real progress has been made during and since the war years in the development of types of contracts which more nearly meet the needs of naval procurement.

In this connection, it should be noted that, while the availability of more suitable types of contracts greatly enhances the possibility of negotiating a successful contract, ultimate success depends more upon the skill with which the contract is negotiated than upon the particular type of contract employed. For this reason, it is deceptive to think of new types of contracts, however ingenious, as assuring good contracts. New types of contracts represent only more suitable forms with which the negotiator may work; they are not a substitute for good negotiation. The successful negotiation of contracts therefore requires the closest co

operation between counsel and negotiator: first, to develop and draft good types of contracts; second, to select the right type of contract for a specific procurement; and third, to make the best use of the type of contract selected.

The term "type of contract" is commonly used with several different connotations. It is used in one sense to distinguish significantly different compensation arrangements. In this sense, fixed-price contracts, cost-plus-fixed-fee contracts, and time and material contracts are examples of different types of contracts. In another sense, the term "type of contract" is used, irrespective of the compensation arrangement, to indicate differences in the form and structure of the contract: In this sense letters of intent, purchase orders, and open-end contracts represent different types of contracts. Finally, the term "type of contract" is used to indicate the end purpose for which the contract is intended, regardless of the compensation arrangement or the form and structure of the contract. In this sense, research contracts, construction contracts, and ship repair contracts constitute different types of contracts. While it is convenient to think and write of types of contracts in the several senses described above, it must be emphasized that these are not mutually exclusive categories and that the finished contract represents the synthesis of form, compensation arrangement and endpurpose (e.g., an open-end contract for ship repair on a fixed-price basis, or a letter of intent for construction of an ammunition depot on a cost-plus-fixed-fee basis). It is impossible in the amount of space allotted for this purpose to describe all of the types of contracts used in the Navy Department or to describe any single type of contract in a

really comprehensive manner. Certainly no such attempt is made in this chapter. Here is simply a brief summary of some of the more common types of contracts-the possible combinations and variations of which may truly be said to be limited only by the imagination and by the Comptroller General.

COMPENSATION ARRANGEMENTS

Prior to 1940, there was little variety of compensation arrangements in Navy contracts. Procurement was normally accomplished by competitive processes. The Navy paid on a fixed-price basis for what it bought. The tremendous increase both in the magnitude and in the complexity of naval procurement, which began in 1940, coupled with the corresponding increase in the authority of the Navy Department to negotiate contracts, necessitated, and at the same time made possible, the use of different types of compensation arrangements. In this part, we shall consider the principal types of compensation arrangements-old and newused during the war and presently being used in Navy contracts.

FIXED PRICE

The basic type of contract for the procurement of Naval supplies is the fixed-price or lump-sum type of contract. When procurement is accomplished by formal competitive procedures, no other type of contract may be employed. When procurement is by negotiation, a wide variety of types of contracts is available for selection; however, even in the case of procurement by negotiation, the Armed Services Procurement Regulation (paragraph 1-304) specifies that "... it shall be the general practice for the fixed-price type of contract to be used (with or without provision for price revision)...."

The straight fixed-price contract, as the name implies, represents an agreement by the contractor to furnish designated supplies or services at a specified firm price. In its basic form, it carries the greatest risk and offers the greatest possibility of profit of any type of contract, since the contractor cannot collect. more than the agreed fixed price but is entitled to receive the full amount of the fixed price, regardless of the actual cost of perform

ing the contract. This type of contract is preferred whenever a sound estimate of the cost of performing a contract can be made at the time of negotiation. Since it is fundamentally a simple exchange of a specified sum of money for a specified item, it is also the easiest and least costly of all types of contracts to administer.

Because the fixed-price contract provides for the future delivery of supplies or services at a price agreed upon at the time the contract is negotiated, contractors frequently seek to protect themselves against contingencies by including allowances therefor in their fixed-price quotations. However, the negotiator may find that it is better business for the Government to assume the risk of specified contingencies than to include an allowance for such contingencies in the fixed price, which the contractor will retain whether or not the contingency in fact materializes. Hence, fixed-price contracts may provide for payments by the Government over and above the fixed price upon the happening of a specified contingency (such as the imposition of additional taxes, or an increase in the cost of labor or material). Such contingency provisions are frequently balanced by provisions for reducing the fixed price in the event that the happening of the contingency reduces the cost of performing the contract (as in the case of a reduction in taxes or a decrease in the cost of labor or material). From this point, the "fixed-price contract" loses its character as an unequivocal undertaking by the contractor to deliver at a firm price.

MAXIMUM FIXED-PRICE

It sometimes happens either that the lowest fixed price obtainable by the Government is greater than the negotiator is willing unequivocally to obligate the Government to pay, or that a reasonably accurate estimate of the cost of performing the work cannot be made prior to performance of part of the work under the contract. Yet the parties may wish to retain the benefits of the fixed-price type of contract. To meet this situation, the "maximum fixedprice" or "fixed-price with redetermination downward" type of contract has been developed. In this type of contract, the parties agree upon an initial price which represents