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War Economy

Attempts to Review War Contracts

Attempts to Review War Contracts

Growing recognition of the need to review war contracts led to the inclusion of a provision in the Finance Act 1943 which gave the Treasury and the Audit Office power to investigate the accounts of firms engaged in government contracts.3

This became effective in August 1943. However, early in December, the Master Builders’ Federation obtained a legal opinion to the effect that the provision did not give power to inspect all a contractor's records, but only those relating to government contracts. This would have made it impossible to examine profits made by contractors, but it was agreed that, rather than seek extra powers immediately, investigations should proceed on a voluntary basis.

Accordingly Cabinet, on 17 December 1943, approved the ‘Appointment of a Commission consisting of three persons to inquire into the costs incurred in the construction of defence and other buildings under the emergency conditions existing during the possible Japanese invasion, with a view to reducing such charges

3 All government contracts and sub-contracts were covered. The provision was not limited to construction work.

page 356 to a reasonable economic basis and obtaining where necessary reimbursement of any sums overpaid….’ The Commission was known as the Contracts Adjustment Commission and comprised a Government representative and a representative of the Master Builders’ Federation, with Mr Justice Tyndall1 as Chairman.

Meantime the Controller and Auditor-General was becoming increasingly concerned. In his 1944 report he said:2

‘Reports from Great Britain, United States of America, and Canada show that many war contracts in those countries to which the State has been a party have been investigated to ensure that contractors have not received more than a reasonable profit. When unduly high profits have been disclosed, refunds have been negotiated.

‘The Audit Office has, so far as staff was available for the purpose, inquired into profits made on war contracts in this Dominion, and has also examined reports on the same subject made available by other Departments.

‘A figure of 6 per cent return on capital, after deducting income tax at basic rates, has been given by the Minister of Finance as a profit guide to Departments concerned in the negotiation of war contracts. In some cases noticed by this Office this rate has been far exceeded, and in others profits earned have been in excess of the rate fixed by the terms of the contract. In only a few cases, however, has an endeavour been made to effect re-negotiation.’

Speaking specifically of building contracts the Controller and Auditor-General said:

‘In my last report mention was made of the desirability of testing the fairness of prices paid under master schedule contracts by reference to the actual profits earned by contractors as shown by their own records. Accordingly, arrangements were made with the Public Works Department that it should examine contractors’ accounts, and, in all, the results of over eighty contracts of a total value of well over £1,000,000 were obtained. The investigation showed that contractors were earning profits far beyond the 5 per cent on profit bearing costs contemplated by the master schedule, and representations were made to the Department that it should endeavour to recover from contractors sums considered to be in excess of fair and reasonable profits. In December last, Departmental representatives met a Committee of the Federated Builders’ Association of Employers3 and agreement was reached

1 Later Sir Arthur Tyndall.

2 B–1 [Part II], 1944, p. xxi.

3 Commonly known as the Master Builders’ Federation. (Author's footnote.)

page 357 with the Committee for re-negotiation of contracts on a voluntary basis. After some delay a Contracts Adjustment Committee was set up to review the accounts of those contractors who were agreeable to adjustment, but to date no determination in respect of any contract has been made by the Committee. In fact, the latest information to reach the Audit Office is that the Federated Builders’ Association has withdrawn its member from the Committee and has suggested that the Committee be disbanded. The total value of contracts let under the master schedule system is estimated by the Public Works Department to be in excess of £15,000,000 and the totals of the contracts let to individual contractors vary from less than £1,000 to £1,500,000.’

Actually the Contracts Adjustment Commission had had three meetings and was at the stage of assembling information for study when, in August 1944, the Master Builders’ Federation representative withdrew. Following some discussion about the terms of reference, the Master Builders’ Federation wrote on 23 August 1944, stating that it was not prepared to continue to support the Contracts Adjustment Commission, and suggesting that the Commission be disbanded.

No satisfactory arrangements to review defence construction contracts were ever made. After a number of attempts to have the Contracts Adjustment Commission re-established, War Cabinet finally disposed of the matter on 3 August 19451 by approving ‘acceptance of the Master Schedule position as reported and that no further action be taken regarding the Contracts Adjustment Commission.’

Attempts to have shipbuilding contracts reviewed were also largely ineffective. The Controller and Auditor-General in his 1944 report said:2

‘The Audit Office has maintained a reasonably close check on current payments, and has supplemented this check in selected instances by an examination of contractors’ accounts. Where contractors appear to have earned high profits the circumstances have been reported to Treasury, but in no case has this resulted in any cash recovery to the State.

‘In my last report I advised that the Controller of Shipbuilding intended to retain the target price type of contract in respect of ship construction, but contracts let since that date have actually been (a) firm price contracts, or (b) cost plus a percentage, or (c) cost plus a fixed price.

1 Official War History of the Public Works Department, Vol. I, p. 280.

2 B–1 [Part II], 1944, p. xxii.

page 358

‘As the production or turnover of shipbuilding contractors has expanded, a percentage to cover actual overhead expenses, based on a previous year's accounts, has usually resulted in the contractor receiving a “profit” on such expenses, but this profit has been the reflection of a larger turnover rather than an indication of increased efficiency. In response to Audit representations, Treasury therefore has agreed that, where possible, contractors’ overhead expenses will be reimbursed on the basis of actual cost rather than on a percentage of wages cost.’

The Controller and Auditor-General became resigned ultimately to the fact that no effective general investigation of wartime contracts was likely to result from the criticism which these contracts had received over the years. In his 1945 report he said:1

‘In my last report I indicated that undue profits had been earned on building contracts let on a master schedude basis and that a Contracts Adjustment Committee has been set up to review these profits and re-negotiate the contracts. I now have to report that the Committee has not functioned and that no adjustments on the grounds that master schedule prices permitted contractors to earn excessive profits have been made.

‘The Audit Office was represented at several conferences of departmental officials on the matter mentioned in the foregoing paragraph, and as a result of exchange of views, I am of the opinion that the authority given by Section 2 of the Finance Act (No. 3) 1943,2 to investigate Government contracts is unlikely to lead to the adjustment of excess profits unless such adjustment is specifically provided for in the relative contract itself. It appears, therefore, that the value of the statutory power to investigate will lie mainly in the direction of securing information which may enable Government Departments to negotiate future contracts on terms more favourable than might otherwise have been secured.’

Because of the failure of attempts to investigate war contracts, review procedures generally seem to have been less effective in New Zealand than in a number of other countries.3

1 B–1 [Part II], 1945, p. xix.

2 See also p. 355.

3 In the United States of America, for example, ‘Total War Department recoveries from corporations (with minor exceptions), which accounted for 89 per cent of all War Department recaptures under renegotiation, amounted to £6.6 billion’.—R. Elberton Smith, The Army and Economic Mobilization, p. 369. £6.6 billion represented 3·9 per cent of the United States national income, so was equivalent to £13 million in New Zealand.