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War Economy

The Auditor is More Critical

The Auditor is More Critical

In his report for the year ended March 1942, the Controller and Auditor-General was becoming increasingly critical. He said:3

‘In former reports the subject of “cost plus” contracts has been mentioned, with particular reference to their use in defence construction contracts, and this type of contract is still in operation, although it has defects which have evoked criticism in many places where it has been used. The circumstances in which these contracts find favour include:


Where the time element is of great importance:


Where productive capacity is so limited that every productive unit, efficient or otherwise, must be pressed into service:


Where lack of production experience makes the accurate estimation of likely costs difficult or impossible.

‘Amongst its defects are the following:


The contractor receives his percentage to cover his overhead and profit irrespective of results or cost:


The more the cost is inflated, the greater the fee received by the contractor:


Incentives to speed, and to economy in the use of labour and materials are lacking:


The limitation of profit to a percentage on capital employed offers no reward for special effort; neither does it penalise inefficiency or negligence.

page 348

‘The “cost plus” system was applied during the year principally to building operations, shipbuilding and ship repair, and munitions manufacture. In respect of ship repair work and munitions manufacture, standardised contract forms have been devised, but the Audit Office understands that Departments have not made use of them, despite the desirability of ensuring that contractors should know what expenses the Crown is prepared to allow or disallow. There is very considerable diversity in the methods at present adopted for assessing overhead and profit allowances, and it is desirable that they be placed on a uniform basis for each manufacturing group.

‘In respect of ship repair, the Audit Office was not given the opportunity it would have wished to check expenditure as it proceeded, and as regards munitions contracts the data on which the Government Costing Officers based the prices agreed upon is not available in suitable form for ready investigation by Audit.

‘The target price or target cost contracts in connection with shipbuilding mentioned in my last report have now been completed, but the Department concerned advises that owing to material changes in design the final costs were approximately double the target price. The aim, therefore, was wide of the mark, and the value of fixing a target was altogether discounted. The Audit Office was, however, able to satisfy itself as to the expenditure which the contractors had incurred. An extra fee to be settled by negotiation is to be paid to the contractors on account of the excess cost.

‘Since the recent appointment of the Commissioner of Defence Construction, building contracts have been arranged upon the basis of schedules of quantities prepared by quantity surveyors and priced by reference to master schedules based on agreements between the Commissioner and the Master Builders’ Association. Provision is made for the contractor to claim adjustments of schedules arising from circumstances of a particular contract, and the contract price is arrived at by adding to the priced schedule 5 per cent for profit and a further 2 ½ per cent to cover overhead expenses. Timber requirements are arranged and paid for by the State Forest Service under a procedure which allows the contractor the agreed percentages upon the assessed value of timber incorporated in the works.’

3 B-1 [Part II], 1942, p. xvii.