after the work is done is just equal to the estimated cost, the lump sum consideration is paid, exactly as in "C." However, if the contractor is able to reduce the actual cost below the estimate, any reduction is shared half and half between the government and the contractor, provided that the contractor shall not receive more than a certain maximum. On the other hand, if the actual cost exceeds the estimate, half the excess is carried by the government and the other half is deducted from the lump sum compensation that was the basis; provided again, that the contractor's profit shall not be reduced below a certain minimum.

In this form of contract the contractor is again put practically on a salary and rental basis, but with a penalty and bonus provision that brings about a community of interest between him and the government, so safeguarded that unduly excessive profits to the contractor are prevented and also so as to ensure that he neither loses money on account of his work for the government ncr finishes without any compensation whatsoThe contractor has every reason to reduce his actual costs, and so far a community of interest has been established. On the other hand, he has the temptation of inflating his reported costs to the government. It will therefore still be necessary for the government to check or determine costs, as in both "B" and "C."

ever.

To summarize-this form of contract saves time and prevents demoralization of markets. It establishes a community of interests between government and contractor. It involves the government in the expense and trouble of determining or checking contractor's costs, but involves no supervision of sub-contractual relations, since the contractor's interests and the government's are identical so far as keeping down costs of subcontracts are concerned. Assuming that the difficulties in determining contractor's costs can be met, it appears to be a satisfactory form of contract.

The first group of contracts for the construction of our newest navy, as entered into by the Navy Department, is the cost-plusten-per-cent-profit style of contract. In view of the fact that, as has just been indicated, this contract has been regarded as perhaps the least desirable of the three kinds of cost-plus contracts, from the government point of view, it may be asked why the Navy Department entered into a cost-plus-ten-per-cent-profit contract in preference to a fixed-profit-on-a-sliding-scale contract. The

answer to such a question is complete and twofold: First, the cost-plus-ten-per-cent-profit contracts were formally entered into in April, 1917, and actually were agreed upon by the middle of February, 1917, before as much was known of the relative advantages and disadvantages of the different kinds of practicable

contracts as is now known. Second-perhaps the more important reason of the two-the policy of the Navy Department at that time made the cost-plus-ten-per-cent-profit contract preferable to all others-in fact, made its adoption inevitable.

VI

Governance is one of the most difficult and delicate arts in the world. In its last analysis, the tools and instruments of administration are persons-hence, machine action can never be counted upon from them. In all important situations, the psychology of human beings must be considered. Governance can, therefore, never be a science, but must ever remain an art. It is hoped that the expression of these facts here will not be found platitudinous in considering the reasons for the adoption of the types of contracts entered into by the Navy Department with the shipbuilders.

For many years past, the orders placed by the Navy Department with the principal civilian shipyards for the construction of naval vessels had furnished the very backbone of the “old-line" shipyards' business. Such orders enabled the shipbuilders to stabilize their laboring force, to assure sub-contractors of a reliable market for fabricated articles entering into naval vessels, and to constitute a steady demand for the producers of raw materials. Such orders have been a financial guarantee to the stockholders of the respective shipbuilding companies, since they represented work upon whose completion no such thing as a bad debt existed out of all of the millions involved, because the debtor was the United States Government itself. It will thus be seen that the shipbuilders owed a particular responsibility to the Navy Department and, in fact, owed a very great and very particular debt of gratitude to the Navy Department because the department had enabled the shipbuilders to carry on their business in good times and bad times alike.

On the other hand, the maintenance of an efficient shipbuilding industry was of primary importance to the Navy Department, and to the nation. Commerce, industry, and agriculture itself, are alike dependent, directly or indirectly, upon the ships that sail the seas. While our interoceanic commerce-bearers are usually spoken of as negligible in quantity, they are so only relatively to the seagoing vessels of certain other nations and relatively to

the vast quantity of goods transported overseas from this country. Actually, the interoceanic tonnage of this country is very great. More important is the fact that our coastwise trade is, by law, carried on in our own bottoms and that these bottoms are, by law, made in America. For the construction of these vessels, a sound shipbuilding industry is essential. It is vital, therefore, that the government, which is only the people itself, should take the necessary measures to sustain, at all times, an adequate shipbuilding industry. As part of this industry, it is necessary that men-of-war should be built sufficient in number. and size and quality to sustain and protect the national policies in all parts of the world.

In harmony with these ideas, it is vital for the Navy Department to make sure that the price at which naval vessels are built for it by civilian shipbuilders should represent not less than the actual cost, not less than a reasonable profit. While the Navy Department uses records of costs secured in the course of the construction of men-of-war at navy yards to check up and to correct the claims of civilian shipbuilders, yet, at the same time, it uses the navy cost-records to justify its allowance to civilian shipbuilders of such price as may be agreed upon. In the case of the policy of the cost-plus-profit contracts now before us, the Navy Department believed it to be necessary—particularly in view of the national and international emergency then existingto make such arrangements with the shipbuilders as fully to protect the government, and not less fully, to protect the interests of the shipbuilders. Even more, it seemed necessary to err, if at all, on the side of liberality to the shipbuilders, in order that the work might proceed with the utmost possible dispatch and with the utmost cordiality of feeling.

VII

Having in mind the above outlined considerations as to the protection of the government's interests, and, per contra, the considerations as to the protection of the shipbuilders' interests, the Navy Department, so far as concerns the construction of new vessels, entered into contracts on a basis of cost-plus-ten-per-centprofit. These contracts are of a sort that any disinterested person must concede to be not illiberal toward the shipbuilders. The terms of these contracts allow as actual costs various items which, under ordinary circumstances, are considered only as proper

charges against a profit and loss account, and, hence, not reimbursable to the shipbuilder or manufacturer. Some of such items are interest, rent, selling expenses, and taxes of all kinds, excepting those imposed by the United States Government. By the terms of the contracts, the cost of these items, plus ten per cent thereof, must be allowed as part of the compensation to the shipbuilders.

It must be understood that the cost-plus-ten-per-cent contract was entered into only after very extended discussion between the Navy Department and the "old-line" shipbuilders, and between both of these groups and the proper committees of congress. If anyone should care to investigate the matter, he would find innumerable pages of discussion published in the Hearings of the Committee on Naval Appropriations, House of Representatives, of the Session of 1915-1917. He would there find that the shipbuilders proposed that a contract be entered into on the basis of the actual-costs-plus-sixty-five-per-cent of the direct labor-this sixty-five per cent to cover overhead and profit. So evident is it that the adoption of this method would have immensely simplified the tasks of the government in checking costssince much of the contentious question as to what is or what is not overhead would have been removed-that one may well wonder why this arrangement was not at once agreed to by the department. There were various reasons of policy, as already referred to, but, in addition, there was the fact that the shipbuilders, for the most part, were unable to make clear to the Navy Department how much of the sixty-five per cent was profit.

The above circumstance is not so remarkable as one who has not had actual experience with the accounts of even the largest corporation might imagine: I think it is not too much to say that it is only the unusual company which has an accounting system satisfactory to anyone but itself, or which can clearly show to outsiders or even to its own officials what are or what are not the actual costs of its own product. The hearings above referred to would make clear to anyone who should read them that the Navy Department and the shipbuilders' discussions were at cross. purposes, or, at least, that their points of view could not, at that time, be made to harmonize as expressed in the terms of any other form of contract than the one finally adopted: viz., contracts upon a basis of actual cost plus ten per cent profit thereon.

It is worth while noting that the cost-plus-ten-per-cent-profit form of contract soon gave way to the cost-plus-fixed-profit form. As a matter of fact, only a relatively few of the total number of vessels have been constructed under the all-inclusive cost-plusten-per-cent form-by far the larger number are now being built under the superior cost-plus-fixed-profit form. Of this, more. hereafter.

VIII

Examination of the terms of a contract for the construction of ships on a basis of cost-plus-profit will show that the Compensation Board, as representatives of the Navy Department, is charged with four distinct sets of duties. The first duty is that the Compensation Board shall control the method of checking costs and shall ascertain the correctness of such costs. The second duty is that it shall satisfy itself that the prices charged by the shipbuilders for material are the lowest possible market prices obtainable, having in view the necessity for speedy delivery and the necessity for the delivery of material of the proper quality and quantity. The third duty is to determine what additional facilities a shipbuilder must have to carry out naval contracts and to allow the expenditures necessary to construct such facilities or a part of them. The fourth duty is to appraise the value of such facilities after the completion of the contracts.

It will be evident that when scores of naval vessels are being constructed with the utmost possible dispatch and when expenditures will eventually run considerably over $1,000,000,000, the Compensation Board, having its headquarters in Washington, can itself do no more than supervise and decide upon the actions necessary to keep account of costs. The task might have seemed almost insuperable except that the navy had already within its organization various agencies which could at once be employed upon matters of cost inspection.

Line officers of the navy skilled in steam-engineering have often been pioneers in all matters connected with marine engines and propelling machinery for vessels. The constructors of the navy are not approached by any part of the civilian world in their knowledge of ship design and of the actual construction of ships. The civil engineer officers of the navy stand, in regard to all phases of civil engineering, in the same position as do the naval