More Criticism of Wartime Contracts
Public criticism continued and in October 1942 the Minister of Public Works, Mr Armstrong, reminded the House of Representatives of some of the underlying difficulties:1
‘There is no doubt in my mind, nor in the minds of my officers, that the tender system would have failed completely to meet the tremendous defence programme of the past few months, and, moreover, costs would certainly have soared. Members will recollect the serious competition for labour between building firms and the manner in which labour rates were being increased and increased, to obtain that labour. The necessity for organisation and control of materials due to our limited resources also rendered the tender system inapplicable.’
By this time a further difficulty had emerged. For many types of work, the profits earned under the master schedule system had turned out to be very much in excess of what had been in mind when the master schedule was first worked out. The Minister of Public Works went on to inform the House of adjustments in the schedule rates. He said:
‘The master schedule rates constituted a basis upon which payments would be made to the various firms to which jobs had been allotted. It became evident long before final payments were made to these firms that the basis was too high for certain grades of work, though fairly right for others, in which a higher standard of workmanship was demanded. Accordingly, I arranged with officers of my Department to take the requisite steps to have the whole position fully investigated, and, as a result of this investigation and various conferences arising from it between the Commissioner of Defence Construction, quantity surveyors,
the master builders’ associations, and the Public Works Department, an agreement has been reached with the master builders’ associations whereby works generally are graded into four groups, namely, (1) For works of a permanent nature but requiring a superior finish—for example, hospitals—for which master-schedule rates with certain approved additions will apply. (2) For works of a permanent nature, in which case the master-schedule rates in full will apply. (3) For works requiring a moderately lesser standard of construction, in which case master-schedule rates less 7 ½ per cent on the labour-content will apply. (4) For works of a temporary nature, wherein a still lower standard of construction is required, in which case the master-schedule rates less 15 per cent on the labour-content will apply. It should be realised that there are two aspects of the master schedule—rates for materials, and rates for labour. The materials rates are fixed on ruling prices, and would be the same were the tender system being used. It is the labour rates in the schedule which affect comparative costs, and it is on this section that the schedule is adjusted….
‘Over and above this arrangement, which is as near perfect as it can be made arbitrarily, there is a final check on the cost of the works after they have been completed, the purpose of which is to see that the various firms concerned do not realize more than 5 per cent profit and 2 ½ per cent overhead on the cost of the work.’
This last statement is particularly interesting in view of later revelations about profits earned on some of the wartime contracts.1
The Controller and Auditor-General, in his report for the year ending 31 March 1943, again focused attention on weaknesses in contracts for war work. Speaking of building contracts he said:2
‘Much the greater part of building constructional works for defence purposes is now being effected on the “master-schedule” basis introduced into this sphere of activities by the Commissioner of Defence Construction, as referred to in my last year's report. Competitive quotations are not obtained, but contracts are arranged upon schedules of quantities priced according to schedules agreed upon by the Commissioner of Defence Construction and the master builders’ associations. Each schedule sets out the unit rates for labour and material in the area or district to which it relates, and includes full allowances for workshop expenses and profit in the case of materials such as joinery, plumbers’ requisites, electrical, metal, and similar supplies,
whether produced on the contractor's own premises or furnished by a subcontractor. It was intended that schedules of quantities to be used should be prepared by quantity surveyors, but owing to a shortage of qualified men it has not always been practicable to carry out the intention. The contractor is allowed to add to the schedule a list of any adjustments which he wishes to claim as arising from any special circumstances, and if these are accepted the schedule is adjusted accordingly, and the contract price is settled by adding 5 per cent for the contractor's profit, and a further 2 ½ per cent of the total to cover his overhead expenses.’
Referring to the profit rates being earned in building contracts, the Controller and Auditor-General went on to say:
‘Investigation by the Public Works Department indicated that the original schedules gave contractors an unduly high rate of profit on certain types of buildings, and a reduction in rates was effected in September last. It is desirable that tests of the fairness of schedule prices should be made from time to time by reference to the actual profits earned by contractors as shown by their own records, and the contracts provide for such reference if it is desired. Representations were accordingly made to the Commissioner and the Public Works Department and these authorities have agreed that examination of the contractors’ records will be made forthwith.’
Once more there was recognition of the need for early steps to review contracts, but, in the event, there was to be very little effective action.