Four points are to be noted in regard to Special Rentals "B": First, no depreciation is allowed. Second, the value of such rentals is carried in toto into the costs of the vessels concerned. Third, at the expiration of the contract, the government takes title to the property, but the government gives the shipbuilder the option of acquiring title to the property at an agreed-upon price. If the shipbuilder does not offer a price satisfactory to the government, the property remains the property of the government. Fourth, no profit is allowed the shipbuilder upon expenditures under Special Rentals "B."

Under the act of October 6, 1917, additional plant facilities were authorized. These are of the general nature of Special Rentals "B," i. e., their full value is payable by the government to the shipbuilder. However, two important differences are to be noted. First, under no circumstances is the value of such plant facilities charged as part of vessels. Second, the title to property of this nature vests in the government.

Recapitulating, then, this part of the Navy Department's arrangements to finance the shipbuilder, we find that plant extensions are financed thus: First-Special Rentals "A"-a fifty per cent allowance, or less, to the shipbuilder, of the value of the property, the title to the property vesting forthwith in the shipbuilder; second-Special Rentals "B"-a one hundred per cent allowance to the shipbuilder, the title to the property vesting in the government, but the shipbuilder having the option of purchase from the government; third-Plant Facilities under act of October 6, 1917-a one hundred per cent allowance to the shipbuilder, but the title to the property vesting definitively in the government.

XII

Bills covering reimbursement by the government to the shipbuilder for expenditures made by him for material, labor, indirect expense, and to cover his profit, are made monthly. Such bills are made up at the shipyard, certified to by the local Cost Inspection Board, then forwarded to the Compensation Board at Washington for review. The board, if satisfied with the bills, then recommends to the Secretary of the Navy that they be paid. After receiving the signature of the Secretary of the Navy and of the chiefs of the Bureaus of Steam Engineering and Construc

tion and Repair, they are sent for payment to the disbursing officer of the Cost Inspection Board concerned.

It is evident that if payment were made to the shipbuilder only on his monthly bills, he would always have large amounts of money due him from the government, and, hence, would have his available supply of liquid capital much "tied-up" at any given time. To obviate this difficulty-to pay the shipbuilder with the utmost promptness-preliminary payments are authorized to be made on the spot. The shipbuilder can present a material invoice or a labor roll to the local cost inspector, certify that he has actually made the expenditures, and receive reimbursement forthwith from the disbursing officer detailed by the Bureau of Supplies and Accounts for duty with the local Cost Inspection Board. The shipbuilder is actually paid large sums almost every day within four or five hours after he presents his bill, if he so desires.

The next step authorized by the Navy Department to finance the shipbuilder was to make reimbursements to him for progress payments made by the shipbuilder to a sub-contractor. Warrant of law for the making of partial payments had been granted by the act of March 4, 1911, but such warrant had not been utilized to its full extent. Under the cost-plus contracts, however, this law has come to a wide range of usefulness. For example: five boilers are ordered by shipbuilder, A, from sub-contractor, B. When one boiler is finished but not yet delivered, a navy representative certifies to the local Cost Inspection Board that the boiler appears to be satisfactory. Payment is thereupon immediately made by A to B for the one boiler, even although it may remain undelivered indefinitely, and reimbursement in the proper sum is made by the navy to A.

The next method of assisting in financing the shipbuilder was authorized by a recent act of congress-Urgent Deficiency Act of October 6, 1917. Under the power of this law, the Navy Department has authority to advance to contractors any amounts up to thirty per cent of the value of the contract. Thus, if the shipbuilder makes a contract with a boiler manufacturer in a total amount of $90,000, the shipbuilder can advance to the boiler manufacturer the sum of $27,000, and the Navy Department will immediately reimburse the shipbuilder the $27,000. However, in order that this privilege may not be abused, the prior authority of the department is necessary for each specific sub-contractor.

Also, the sub-contractor is usually required to furnish sufficient security.

Finally, under the act of October 6, 1917, already referred to, the department has authority to make advances to the amount of thirty per cent of the value of the contracts made with the shipbuilders. Thus, if a shipbuilder had a contract for building one hundred ships at $1,000,000 apiece, or $100,000,000, the department could advance $30,000,000 on such ships. In no case, however, although it has advanced several million dollars to the respective shipbuilders, has the department found it necessary to advance even half of thirty per cent.

XIII

In the early autumn of 1917, an interesting development of the cost-plus" idea took place. The act of October 6, 1917, made available a considerable sum of money for the construction of additional vessels. It was decided that these vessels should be built on a cost-plus-fixed-profit basis, with a bonus privilege. As intimated in the earlier part of these remarks, where the recommendations of the Inter-Departmental Conference were referred to, a cost-plus-fixed-profit arrangement, supported by a bonusor-penalty-clause, is the best of the possible forms of cost-plus

contracts.

In regard to cost-plus-ten-per-cent-profit contracts, there was once current a rather harsh saying: "The more the contractor spends, the more he gets." Owing to competent cost-inspection, this saying has never been meant to refer to navy work, but has been applied in other directions only. It means, however, that the higher the value of the contractor's costs, the greater the sum of money paid to him as profit, since, by the contractual terms, he must be paid as profit ten per cent of his costs. In the costplus-fixed-profit contracts, quite a different result ensues. The more the shipbuilder spends, the less profit he gets. This happy condition arises from the bonus privilege referred to.

A concrete example, based on the existing form of cost-plusfixed-profit contract, will make this point clear. The Navy Department and the shipbuilder agree upon the estimated cost of a vessel say $1,200,000. Upon this, the Navy Department agrees to pay the shipbuilder a fixed profit-say $120,000. If, however,

it is found, upon completion of the contract, that the vessel has actually cost only $1,000,000, then the shipbuilder receives onehalf of the "savings," in addition to his fixed profit. In this example, then, the "saving" below the estimated cost-that is, the difference between $1,200,000, and $1,000,000-being $200,000, the shipbuilder receives one-half of the $200,000, or $100,000, this being in addition to his fixed profit of $120,000. Hence, his total profit on the vessel will be $220,000. It will be seen that, by this kind of contract, the shipbuilder is keenly stimulated to economy in production, quite unlike the cost-plus-ten-per-centprofit contracts. Thus, the cost-plus-fixed-profit-with-bonus contracts may be expressed in a formula: "the less the shipbuilder spends, the more he gets."

Of course, it would be a still more economical arrangement if a penalty feature were embodied in the present contracts, that is, if the vessel exceeded the estimated costs, the shipbuilder's profits should be cut down by one-half the overrun. This would be a move toward an ideal contract. However, the country does not yet seem to have achieved a state of mind to make this ideal form feasible.

It is a clear indication of the great progress in mutual understanding made possible by the stress of war that, in the relatively short period from April, 1917, to October, 1917, the shipbuilders were willing to shift from the original all-inclusive cost-plus-tenper-cent-profit contracts to the present vastly more economical cost-plus-fixed-profit-with-bonus-for-savings contracts. They

have come to a fuller realization than ever before that they are just as much a part of government as are those of us whose particular duty it happens to be to administer the people's affairs and to see that the laws of the people are carried out. If business men act for the government they act for themselves. If government is ruined by reckless expenditures, business men are ruined. The consequences of defeat in this war would be as hideous to business men as to government. The interests of one are the interests of the other. They cannot be separated. They are the same interests. I venture to think that the work of cost inspection, almost as much as any other one thing arising out of this war, has enabled the business world to acknowledge-let us hope. forever! these inexorable truths.

XIV

The savings to the government effected by cost inspection have been very great. Only the merest glance can be given to them here. Amounts saved at the respective "old-line" shipyards, by the correction of actual errors, run from $10,000 to $100,000 each month. While the actual number of shipyards under the cognizance of the Compensation Board cannot be named here, yet the fact may be accepted that the direct savings thus made already aggregate several hundred thousand dollars.

The prevention of the accumulation of improper costs, made possible by the rigorous scrutiny given the shipbuilders' records by the local Cost Inspection Boards, has resulted in economies almost incalculable.

In addition to keeping down costs in the manner above indicated, the Compensation Board has been able to make savings of great sums by negotiations conducted direct from its own office. Lower prices for material than prices first offered have often been secured on large items. In more than one case, as much as a million dollars has been struck off from the price of a single class of equipment.

Various decisions made by the Navy Department, after consideration of recommendations presented by the Compensation Board, have attracted great attention throughout the country. Among these may be mentioned a ruling that bonuses paid by the shipbuilders to officials of their companies cannot be accepted as charges against naval vessels. Of even wider application, is the ruling that no part of federal taxes-income taxes, excess profit taxes, munitions taxes, corporation taxes-paid by the shipbuilders can be reimbursed to them by the navy. Such rulings as these have saved the government very great sums of money, and have prevented inflations of a sort whose deteriorative influences on our national economy might have been almost illimitable.

The time is not suitable for giving more details of the great success of cost inspection. An account of notable results may be permissible in the future. But that the Navy Department's policy has been amply justified in the securing of good-will on the part of shipbuilders and on the part of their employees, to the end that expeditious construction of vessels has been effected, let the commanders of our constantly augmented fleets testify.