Hollinger Corp. 
 pH8.5 
 
UC 267 
 .U6 
 1919e 
 Copy 1 
 
 xNOTKS ()\ .11 H 181 MICTION 
 
 oi- nil-; 
 
 SECRETAHY OF WAR 
 
 TO SirriLK (:().\TUA(.TS, ETC., \M) LSI AE liXSIS 
 
 USED IN doing; so 
 
 SEPTEMBER 8, 1919 
 
 CK L ^- ^ '^l ^ 
 
 \>.\SHl^(;lOI^ 
 
 GOVERNMENT PRINTING OFFICE 
 
 I919 
 
>1 
 
 
 MEMORANDUM. 
 
 These notes were originally written for the inforniation of the 
 members and examiners of the Board of Contract Adjnstment. 
 After their completion the writer had the good fortune to obtain the 
 suggestions of Goldthwaite H. Dorr, Esq., Assistant Dii-ector of 
 Munitions, in the light of which these notes are now revised. 
 
 September 22, 1919. 
 
 2 
 
 o« or -'. 
 
 NOV 2« 1919 
 
(ONTENTS. 
 
 Pare. 
 
 1. Jurisdiction of the Secretary of War to settle contracts, etc_ 5 
 
 2. The usual basis of settlement 8 
 
 3. The claims settlement organizations of the War Depart- 
 
 ment 14 
 
 4. Jurisdiction of the Board of Contract Adjustment 'i<> 
 
 3 
 
NOTES ON JURISDICTION OF SECRETARY OF WAR. 
 
 1. The Jurisdiction of tlu' Secretary of War to Settle Contracts and ()\er 
 Claims, Doubts, and Disputes Arisin>; Out of War Department Contracts 
 Whether Durin>>: Performance or I'pon Suspension or Termination. 
 
 I'lulci- M'clidii .S74I of llu' rnittvl States Ivrvi-rd Statiilc-. t-nu- 
 ti'acts must lu> ill writin<r aiul sI^iumI at the end l>y Uoth paitii's. 
 This provision is in tlio natuic ol' a statute of frauds ami is for tli,^ 
 prot<'ctioii of till' I'nitod States oidy (New '^'ork i^ Porto Kico 
 Steauislii|> Co. /•. Tnited States, -j:*.!* I'. S.. ss). Kailure to comply 
 with it will not. therefore, prevent thi' I nited Stati's from enforcinir 
 the eontrart. The eHret of it is. howe\er. to innnt'diatt'ly divide 
 War r)ei)artment contraet^ into two classes, those e.\e( nt<Ml in com- 
 pliance with the statute, called formal, and those not so executed, 
 oalled informal. With the former are to ho classified those contraels 
 which are expressly excepted from the act. These are jjenerally 
 all contracts to he |X'rfonned within (U) days or involvinjj |)ayment 
 of less than $r>()0 as a total consideration (("omp. Stats, sec. (is."):'), 
 a, h, and c. ()S.")4). The distinct i<Mi is further emphasized hy (he 
 principle that any a<rreement is invalid unless it he to the interest 
 of the United Stativ-> to uuike it. It would seem, therefore, that the 
 Secretary of War could not bv a supplemental a<rreement cuih' the 
 informality of the contract. The contract was already enfoi-ceahh' 
 against the contractoi- and it woidd not he to the interest of the 
 I nited States to <:ive him ri<rhts to enh)rce it against the (lovernment 
 unless he gave something more in return. For the same reason the 
 Secretary of War coidd not >ettle any claims of a conti'actor or make, 
 any payments to him under such a contract, whethei- under the ex- 
 press terms of the contract or otherwise. Tlie only lights of the 
 contractor would se<'m to be to recover on a (plant um meruit for 
 propert}' or services actually deli\ered to and acce|)ted by the I'nited 
 States. Such imj^lied contracts, it would seem, are not shut otl' by 
 Revised Statutes ;iT44 (United States /•. .Vndrews & Co., "JOT V. S., 
 229). In order to remedy this disability, whi<h applie<l to great 
 numbers of war contracts, the act <d" March li hereafter discussed 
 wa.s passed. 
 
 ((/) Formal contracts executed in ac<'ordance with section •\'i W of 
 the Revised Statutc^s and otherwise'. 
 
 The i)owei- (if the Secretary of War and heads of otlu-i- de|)art- 
 nients to make contracts required for tlie exercise and |)erformance. 
 of their duties arises by necessary implication and is confirmed by 
 statute, and it is held that this power to c(mtract necessarily carries 
 with it the power to amend by supplemental contract and to ter- 
 minate by agreement in like manner (Corliss Steam Phigine Co. r. 
 United States. 91 T". S., 321). Furthermore, this involves power 
 nx the Secretary of War to cover in such agreement of settlement a 
 
G JURISDICTION OF THE SECRETAEY OF WAR. 
 
 cojuplete adjustment of all claims, including unliquidated damages 
 that may have arisen during tlie performance of the contract (W. O. 
 Burton claim r. United States, in Comj). Dec. 489, and opinion of 
 the comptroller of Xoa . -J."), 191S, paragraph 9). It will be noted, 
 liowever, that this powei- of the Secretary of War to settle formal 
 contracts l)y agreement with the contractor rests wholly upon the 
 existence of the contract itself and can not be exercised where the 
 contract has been fully executed by performance or terminated by 
 breach. In such cases the powers and functions of the Secretary ot 
 War to amend the conti'act have ceased and the claims of the parties 
 are merely for danuiges for some breach of tlie contract and can 
 only be determined by a rourt having jurisdiction. 
 
 The power of the Seci-etai'v of War to contiact is necessarily 
 delegated to the chiefs of the bureaus of the AVnr Department and 
 by them in turn to certain officers and perhaps civilians selected 
 i)y them. AVithout such delegation the functions of the War De- 
 partment could not be performed. Such delegations are usually 
 by order in writing, but may be by mere oral ajjpointment. The 
 power to make supplemental contracts altering the terms of or 
 terminating the original contract is also ordinarily delegated to 
 the chiefs of bureaus and officers acting under them. Such con- 
 tracts may not only curtail or terminate production, but may also 
 linally dispose of all (|uestions. including those of unliquidated dam- 
 ages, which have arisen under the original contract. 
 
 In all such supplemental or settlement agreements, whether for 
 the complete tei-mination of the contract or foi' curtailment, the 
 provisions of the contract itself fix the maxinunn amount to be paid 
 to the contractor, which amount the contracting officer should not 
 exceed unless by reason of unliquidated damages or of some valid 
 modification of the contract itself. Otherwise the settlement would 
 not be in the interests of the United States. So it is connnonly said 
 that the United States can not settle for more than what it would 
 have had to pay to complete the contract, and only in rare cases 
 can a settlement be justified where the amount ]iaid to the contractor 
 equals or exceeds the prospective cost to the ITnited States for the 
 additional completed articles less the additional prospective cost to 
 the manufacturer in manufacturing the same. Most War Depart- 
 ment contracts have termination clauses permitting the Secretary 
 of War to terminate the contract and setting forth the basis for 
 computing the amount to be paid the contractor. The settlement 
 would not be in the interest of the United States and the settlement 
 contract would be void if the amount exceeded what might be fixed 
 under the method agreed to in the termination clause of the original 
 contract. This rule is also subject to the above exceptions as to 
 changes pursuant to the terms of the contract, thus increasing the 
 cost, and an additional amount to be paid by the United States as 
 unliquidated damages as foi* breach of warranty or for failure to 
 deliver raw material or components at the times specified, or some 
 other cause. Many contracts have so-called change of specification 
 clauses. These permit the War Department to change the specifica- 
 tions and pi-ovide that the compensation to the contractor will be 
 modified accordingly. Under such circumstances the changes need 
 not be made in writing under section 8744 Revised Statutes, but may 
 
JURISDICTION or Tin: SKCKKTAltV OK WAH. 7 
 
 be iiiadi' iiil"oiiiiall\ , a.> tlu'V air act- dom- in the cxiv lit ioii of l!.i' 
 tonus of a contiiK t and are not tlu' inaUinir of a new < nntiart. 
 
 (b) Infornial and implied contracts. 
 
 As above stated, the Secretary of ^^'al• had iu> jiirisiliction to mmiIc 
 (juestions arisin<r under >ucli contracts, and iiii;:;ht only pay foi prop- 
 erty and servi<es actually received and accepted. TJie pressure and 
 necessities of the war had. however, caused the niaUin<r of ^ireat num- 
 bers of such contracts and this number was >welled by the i ujin^ <d* 
 the Com|)tr()ller of the Treasury that |)roxy->i<!:ned contracts were not 
 executed in accordance with the [)ro\ision> of section :»7-44 of the 
 Revised Statutes. (Opinion of comptrollei- <»f -J.") November, 101s.) 
 These j)r()xv-si<;ned ctmtracts had been drawn in the name of .some 
 contractin<r oflicer whose name also appeared in the siirnature for tlu' 
 United States, but the contract was in fact sijrned i)y another ollicvr 
 who added his own name to the sij^natui-e. (iri-at numl)ers of the-^e 
 contracts were su>pended shortly after the armistice. .Vnd as the 
 contiiU'tors learned that the Tnited State> (oidd not reimlturse them 
 foi" their <'osts. unlini-hed woik. nuiterials. unab^orbcd auio!"tization 
 of ei|nipment and machinery. et<-.. they brou»rht the matter to tlu' 
 attention of ("ou<rre>s. which. aft^M' consideration of a numlu'r of i)ro- 
 l)osed bill>. pa»ed the act of March 2. 15»llt, .sometimes calli'd the Dent 
 Act. This act authorizes the Secretary of War. under certain limita- 
 tions, to " adjust, pay. or discharfre " such agreements, whether ex- 
 l)i-e>s oi" implied. '* upon a fair and e<|uitabl(' lia-^i-."' I'nder this 
 act the Se<ri'tary of War exercises, in M)me I'opects. a wider jiirixlic- 
 tion in the adjustment »d" contract> not properly executed than in the 
 ease of contracts which have l»cen executed in accordance with the 
 terms of the statutes. For example, he may make adjustments oi such 
 improperly executed contracts whether the same have been completed 
 in whole or in part, and ndght therefore adjust a <|ue>tion of mi- 
 liquidated damages on an informal contract which had been entirely 
 comi)leted. Furthei", his jiUMsdii-tion is extended to the adjustment of 
 contracts not executed in the uiaum*r prescribed liy law made by other 
 agencies of the (ioxcrnment acting under the authority (d" the Picsi- 
 dent. On the other hand, claims uuist be filed before dune 1)0. liUO. 
 The original agi'eement must lia\e been made bcd'oi'e November 12. 
 191H, and expendituro mu>t have been made, or oliligatious incurred 
 on the faith of it before that date. Prospe<tive or anti<-ipated profits 
 may not be allowed but "a reasonable remuneration for expemlitnres 
 and obligations or liabilities necessarily incurred in perfonning or 
 preparing to perform " may be given. The word " remuneration *" is 
 construed to have a much wider meaning than reimbursement an<l to 
 include compensation. Theic is also a clause i-harging the Secretary 
 of Wm with especial res|)onsibility with regaid to claims of subcon- 
 tractors under >uch settlements. None of these liiiiitati(»ns. however, 
 apply where the contract is one with a foreign go\ernment of a na- 
 tional thereof except that the contract must have l)een made before 
 November 12, 
 
 It would seem also that this act permits settlements on a wide ba.sis 
 under implied contract. It purports to cover "'any agreement, ex- 
 press or implied ''■' that has been entered into in good faith 
 * * * and * * * jjjjj^ j^^j been executed in the manner pres- 
 cribed bv law." It would seem that under it the Secretarv of War 
 
8 JURISDICTION OF THE SECRETARY OF WAR. 
 
 inay on the deteniiination that a compulsory order, purporting to be 
 issued under section 1'20 of the national defense act of June 3, 1016, 
 was not properly issued, settle the various elements of expense, un- 
 absorbed amoilization, etc., in like manner as in case of informal 
 express contract. This is because the in^•a]id compulsory order has 
 required production by the claimant like a coutract and thus has 
 similiar elements of costs and expense arising out of preparation to 
 perform, etc., and gives rise to an implied contract because the United 
 States has by its proper officei- and under authority of la^^■ induced 
 the contractor to do all these things and received the benefit. 
 
 It will be seen that where contracts have been executed in the 
 manner prescribed by law, this jurisdiction of the Secretary of War 
 depends entirely upon his right to make suplemental or amending 
 contracts. It does not, therefore, trespass at all on the jurisdiction 
 of the courts. Tlie Secretary of War has to determine what financial 
 arrangements he will make and what disposition of property he will 
 make in his suplemental contract of settlement, and if he makes this 
 determination by applying rules of law and uses semijudicial meth- 
 ods, that will not make his act a judicial one nor an infringement on 
 the functions of the courts. And for the same reason the making of 
 these determinations by him are not in conflict with Compiled Stat- 
 ute 368, which reads as follows: 
 
 Ail claims ami deinamis wluitever by tlie United states or ajiuiust them, 
 and all accounts whatever in which the United States are concerned, either 
 as delators or as creditors, shall he settled and ad.iusted in the Deptirtnient of the 
 Treasni-y. 
 
 The settlements of the Secretary of War under the act of March 
 2, 1919, are administrative acts within his express authority under 
 that statute, and are not an exercise of judicial power, or in conflict 
 with section 368 of Compiled Statutes above quoted. 
 
 2. The Usual Methods and Basis of Settlement. 
 
 It may generally be said that where a contract contairis a termina- 
 tion clause, setting forth in itself the basis of settlement, the Secre- 
 tary of War may not make a settlement more favorable to the con- 
 tractor than that permitted by the termination clause. For if he 
 did so, it would not be in the interest of the United States. The ex- 
 ceptions to this are where the amount of the settlement is increased 
 by reason of additions or amendments or changes to the contract, 
 or by reason of unliquidated damages caused by a default of the 
 United States. 
 
 Where, therefore, the contract contains a ternunation clause of 
 this character, the basis of adjustment set forth therein is almost 
 invariably followed unless some arrangement more favorable to the 
 United States can be negotiated. This rule would, it seems, apply 
 both in case of formal contracts and to informal contracts settled 
 under the act of March 2, 1919. 
 
 Where, however, there is no" termination clause, or the same does 
 not set forth any basis of settlement, the Secretary of War may ar- 
 rive at any amount to be paid the contractor in his discretion. But 
 for convenience and to secure uniformity, certain rules have been 
 set forth in Supi)ly Circular No. Ill, of November 9, 1918, and again 
 in Supply Circular No. 19, of March (>, 1919. These rules apply both 
 
JURISDICTION or THE SECKKTAKV Ot WAR. 9 
 
 to formal ami informally executed contract settlements ;ui<l aUo 
 wherever the termination clauses of contiacts permit, ami arc stated 
 in the latter circiihir, as follows: 
 
 Sn-tion .1. — Foi- raw iimterijils, flirt-cr and imliifri. aii<l < .>iii|M»Mt'iii parts mi 
 liarid, in an anmuni n..t k-xivtMlin^,' ilu* nMiuiifni-nts Inr |Iih ciinipleliiMi of tin- 
 cnntract: Cost -pins itiwanl liandliiiir cliar^'cs pins sndi portion of ovorlirad 
 as is appiiniltl<> ii-ss sndi snnis as may represent tiic fair a5rr»-pd valnt- of ail or 
 an.\ iMirtion tlicicol, il tlw til!<' and possession of tjir sanu- are rctaiiwd !•> 
 tlu" conirartor. 
 
 Srcfion It. — For articles in process, in an amoinit not oxcecdin^' the reqnire- 
 nieiits for tlu' completion of the contract: Cost of raw material and labor pins 
 snch portion of ovt'rhead as is directly apjilicahle, less such sums as may rejire- 
 s^nt the fair a;;ree<l valuo of all or any portion thereof, if the title aud ix)s.ses- 
 siou of the same arc retained hy the contractor. 
 
 Section r. -A fair and e<initiiltle remnneration ;1) for expenses and services 
 of the contractor in coinuHtion with the items included in Section A of this 
 article, but not to exceinl interest at (» per <-ent i>er amium ou the capital in- 
 vested therein, or if the c;ii>ital was borrowed, interest at the rale paid by the 
 contractor; and C2) for expenses and services of the contractor in connection 
 with the items included in Stxtion H of this. article, but not to excee<l 10 per 
 cent of the cost thereof. 
 
 Section I). — Such amoimts as are properly paid by the contractor iti the ad- 
 justment and termination of unperformed subcontracts and unperformed coui: 
 mitmeiits for siii>plies which were ju'operly eidered into or made in <onnection 
 with the iterformance of said original contract. 
 
 Section H. — Pay rolls and expenses paid or incurred with the approval of (he 
 contractiuix otlicer. or proiierly iiaid or incurred without such apjiroval for the 
 cu.stody and jtrotcction of iiropeity, since the date <»f suspeiisiou above recited 
 and pendinj^ linal settlement. 
 
 Sc<-litin I'. — -Where sfiecial facilities were pntiterly provided in coimkmI ion willi 
 the performance ()f the oriirinal contract, necessity of which was contemplate<l 
 by the contractor and included in his estimate of cost at Mie time the ori'.'inal 
 contract was ma«le. such ixution of the cost thereof as would reasonably have 
 been recouped had the unco)n|>leted iKU'tion of the oritrinal contract been per- 
 formed. The amount .so allowetl shall not exceed a sum which shall be com- 
 puted as follows : 
 
 From the cost of such spe<-i.il facilities deduct their fair value at the date 
 hereof, aud state suih portioii of the remainder .-is is represenltnl by Ihe 
 ratio of the uncomplett^l portion to the whole of the ori;:inal contract. 
 
 Section <l. — Such additional sums, if any, as the StK-retary of War may deem 
 necessary, fairly and Justly to comiiensate Ihe contractor for expeuditun»s, 
 obligations, and liabilities iiecessjtrily incurnnl, iucludiufj work, labor, and 
 service necessarily rendere^l, under the ori^iaal contract or in jireparatiou for 
 the i)erformance thereof, or under this supplemental agreement. 
 
 It will be observed that the whole method of settlement is ha cd 
 on costs and not on ratios of proportion of completion to the contract 
 ])rice for finished work. Thus all element of anticipated profit is e.x- 
 chulcd. In this respect the .settlement may be said to be les-; favoral)]e 
 to the contractor than a judoment for dama^res for breach of contract 
 woidd be. It is in fact, however, much more favorable than litiiration 
 of so ^eat a number of claims a^ain^t tlie United States would l)e 
 with the conse(iuent delays l)oth in reacliino a judgment and in ob- 
 taininof from Conirress the ai)i)ropriation to |)ay the same. 
 
 The above-quoted panig:raphs cover a numl)er of items under each, 
 and .some of these items recjuire comment because of the especial 
 methods of apply in": them in use in the War Dejjartment. 
 
 The rides for cost accountinfr in the "War Department are set forth 
 
 in Supply Circular No. 126 dated December 7, 1918, and these are 
 
 applied so far as practicable in workinof out all .settlements. The 
 
 following: notes on the basis of settlement as set forth under sections 
 
 140773—10 L' 
 
10 .irRisnicTiON of thk secuetaky of war. 
 
 A to (t al)()ve are for the most part applications of these cost prin- 
 ciples. 
 
 Direct iDater'tah and their cost are defined as raw materials and 
 component parts pnrchased for use in and entei'ing into the articles 
 contracted for. The cost of direct materials is the net cost to the con- 
 tractor, i. e., invoice cost, less cash, trade, and quantity discounts, 
 plus duty, import expense, freight, and drayatre paid hy tlie con- 
 tractor. 
 
 Such materials should be on liand and paid for by the contractor 
 or sliould liave been invoiced and the contractor obligated to pay for 
 them. They must not exceed in (}uantity an amount reasonably 
 necessary to complete the contract but may include sufficient allow- 
 ance for spoilage and overage. To this will be added the proportion 
 of contractors' overhead and general expense directly applicable, and 
 also interest on the tottil cost thus ascertained including the over- 
 head at 6 per cent per annum, or if the material, etc., had been paid 
 for with borrowed money then at the rate of intei-est of the loan. But 
 if the completion of the contract would have resulted in a loss the 6 
 per cent sliould not be allowed at all. 
 
 If the contractor keeps the materials, and this is generally desired 
 by the Secretary of War, their fair value as agreed to at the time of 
 settlement will be deducted from the aboAe total. 
 
 For convenience overliead is discussed under a separate paragraph. 
 
 If these materials have already been paid for in whole or in part 
 by the United States, the amount of the claim and the basis for fig- 
 uring the C) per cent will be modified accordingly. 
 
 Indirect 'materials are supplies, perishable tools, and materials not 
 entering into the articles contracted for but used in connection with 
 their production. 
 
 The mode of ascertaining cost and the basis and rules for settle- 
 ment are the same as in case of direct materials except that where in- 
 direct materials are made by the contractor himself it is customary 
 to allow a 10 per cent compensation as if they wx're articles in 
 process. 
 
 Such materials are generally of use in the commercial business of 
 the contractor and are in their nature more like equipment. There 
 is, therefore, much stronger reason to require the contractor to retain 
 such materials, which is generally done. 
 
 Direct labor is the wages paid for labor performed upon and 
 chargeable to the work contracted for. These wages should not 
 exceed the rate of wages then being paid for the same work in the 
 locality, and should in general conform to the necessities of each 
 particular situation. Overtime allow^ances in excess of the flat rate 
 are generally charged to " Operation overhead." 
 
 Such labor must have been performed on the partly finished direct 
 materials entering into the settlement, or upon direct materials the 
 property of the United States, upon which, pursuant to his contract, 
 the contractor is having work done. 
 
 Articles in process are the direct materials upon Avhich direct labor 
 has been applied in such manner as to modify or assemble them. 
 Here the rule applied is to ascertain the cost of the direct material 
 in manner above stated, and to add to that the direct labor expended 
 thereon, the cost of indirect materials \ised. the overhead and gen- 
 
.1 riMSKKTiO.N <i|' rilK SKCHKTAUV OT WAi;. 11 
 
 ••nil expense' direct ly aj)[)Iie:>ble, and on thi.-> to li<;iire and add a flat 
 10 per cent compensation. If the direct materials l»eIon<:ed to the 
 United States that item wouM he omitted. If the c(jntract were a 
 losin<r contiact this item of 10 per cent shonhl not be avowed. 
 
 If the contractor retains tlie articU\s in i)rocess, and it i.s jjenerally 
 desired that he do so, their fair vahie at the time of settlement shonhl 
 he deducted from the co.st ascertained as above. 
 
 The articles in process tojrether with direct materials not in [)rocess 
 may not exceed an amount leasonalily i-erpiired to complete the con 
 tract |)lus an allowance for >|)oila^e and overaire. 
 
 Operation ovvrJuitd is detined to include the pro rata share of all 
 indirect expenses whicli inure to the partiiular contract and which 
 are 1)V theii- very nature attributable immediately to production 
 rather than to administrative and general expeii.se. 
 
 It is understood to include .salaries and wa<res paid to sui)eiin- 
 tendents, foi-emen. and clerks, overtime cost of direct labor, cost of 
 labor not expended directly upon tlu' product or in the performance 
 of the Avork conti'acted for but required to l)e performed in connec- 
 tion with the |)roduction of the article contracted for. upkeep of the 
 operating- plant. de|)reciation. taxes (other than Federal war jjrofits. 
 excess profits, and income taxes), insurance. i)ower. futd. buildin<r 
 maintenance, current rej)airs, etc. 
 
 Repairs and alterations allowed as overhead are ordinarily only 
 tho.se made currently to jirovide for the ordinary and I'c^ndar upkeep 
 of the ])lant. Those of a ^eneial nature necessary only at intervals 
 of nioi'e than a year oi* replacenients and unusual repairs which 
 would in\()lve a si<>:nificant increase in the overhead expen.-e, arc not 
 ordinarily considered as char<j:eable apiinst the United States. 
 
 Insurance is confined to that on the contractor's property and 
 liability as distinjrui.shed from (lovernment property. But in ca"-e 
 the contractor carried his own insurance such expense shall not 
 include a i)rofit to the contractor and shall not exceed in cost the 
 rates char<2:od by insurance companies for similar insurance less com- 
 missions or ac(|uisition expense. 
 
 Kovalties are not an item of oxcrhead unless allowed by tin* con- 
 tract "it-^df. 
 
 Rentals and iiiterot are not ordinarily coiividcii'd iti'uis of cost. 
 l)ut rather to l)e a part of tlie profit or to be j)ai(l out of i)ront. 
 
 Adni'/iiifttrafirc und (/<ii< raJ cr/xiif^' include^; the pro rata ^hare of 
 all expense necessary and incidental to the administrative and <ren- 
 eral office activities of that ]iortion of the contractor's business 
 devoted to and nece-sary for the fulfillment of the contract. 
 
 The United States, luiless the contract expi-e.-sly provides to the 
 contrary, assumes that the contractor has an office or;_ranizat ion and 
 capital adequate to the performance of the contract. There is. 
 therefore, generally excluded from cost the interest on investment 
 or on bonded indebtedness (wliich is siipposed to be paid out of 
 ])rofits and to be a part thereof), advertising expenses, losses on bad 
 debts, collection expenses, subscriptions, and other expenses not ap- 
 plicable to the contract. On the other hand, there is included such 
 items of expenses incidental to the administrative and general activi- 
 ties of the business (in so far as the same are properly chargeable 
 (o the performance of the contract) .as resonable salaries of execu- 
 
12 
 
 JURTSD[('TION OF THE SECRETARY OF WAR. 
 
 tives, engineers, draftsmen, •md office employees, taxes (other than 
 Federal Avar profits, excess profits, and income taxes, and other 
 than those already allowed under operation overhead), stationery, 
 telephones, traveling, etc. The test, as in the case of operaticm 
 overhead, is from direct benefit to the performance of the work con- 
 tracted for. 
 
 These items of administrative and general expense, like those of 
 operation overhead, enter into the settlement so far as they are ap- 
 plicable to the direct and indirect materials and work in process as 
 above indicated and may also enter in the ascertainment of other 
 items herein mentioned. 
 
 Commitments are the sums paid by the prime contractor to sub- 
 contractors or material men in settlement of their claims against 
 him for terminating their contracts. These become items of cost 
 against the (Tovernment and may properly be allowed when they come 
 within Avhat the subcontractor might reasonably have recovered 
 against the prime contractor in a court having jurisdicticm. They 
 are, of course, limited to the subcontracts required for the per- 
 formance of the prime contract. Every effort is, however, made to 
 settle subcontracts on the same basis and principles as prime con- 
 tracts, and this is very generally accomplished. 
 
 Unahsorhed amortizatwn. — There are a number of costs incurred 
 by the contractor for the performance of the whole contract and 
 which are wholly or in part to be amortized over and in the price 
 to be paid by the Government for the finished articles. The theory 
 in these matters is to find out how much of the cost is covered in 
 the unit price of each item and then to pay the contractor that 
 amount multiplied by the numl)er of items delivery of which was 
 not made nor paid for because the contract was suspended by the 
 action of the Government. Some such costs are : 
 
 («) Facilities and eqidpTnent properly provided for the perform- 
 ance of the contract and the necessity for which was contemplated 
 by the contractor and included in whole or in part in the price 
 fixed in the contract. Here the amount to be amortized in the con- 
 tract is for convenience, in the absence of exact information, ascer- 
 tained by deducting from the total cost the fair value at the time 
 of settlement, and the United States is then charged with such 
 portion of the remainder as the uncompleted portion of the con- 
 tract bears to the whole contract. Under this head come buildings, 
 machinery, etc. But this allowance can in no case exceed what the 
 contractor would have recouped as amortization had the contract 
 been fully executed and completed. 
 
 {})) Experimental vork and fees of e.i-perl ndeisers. — These 
 initial costs are frequently necessary to successful production and 
 are charged into the price of the finished articles. The amortization 
 not absorbed because of the stopping of ])roduction under the con- 
 tract is a proper item of cost to be paid by the United States. 
 
 (c) Cost of plant rearran-geinent before and sometimes after com- 
 pletion of the Government contract, if contemplated at the time 
 the contract was made and included in the contractor's estimate 
 and unit price charged the Government, is to be apportioned in the 
 same manner as experimental work, etc. 
 
 {d) Special tools adapted solely to the pi-oduction under the con- 
 tract and applicable to the whole contract, are to l>e considered like 
 
.iri:isi)i<Ti(>\ OF TFiK ?<K(Rkt.m;v ok wai;. 13 
 
 facilities or ('(jiiipiiiciit and the tmahxirlxMl aiiioiti/.ation i)ai(l l)y tin* 
 Govornnieiit in like manner. 
 
 On all these items of unabsorhed amortization it is to be noted 
 that if the costs were not contemj)lated before the contract was 
 made and, therefore, were not in whole or in jiart included in the 
 contract price, theie is nothinji for the (lovernnient to pay. For, 
 if the cost was not included in the contract j)rice, the loss of the 
 opportunity to perform the balance of the contract will not, as to 
 these items, afVect the j^osition of the contractor. lie would not have 
 recouped them in any event. The cost of machinery, etc., found 
 necessary and piovided by the contractor after the contract has been 
 made, is not, therefore, char<reablc a^^ainst the United States unless 
 under the ])rovisions of the contract or of an amendment. 
 
 All such costs, the subject of amortization, must have been reason- 
 ably appropriate for the work of performin<j: the contract and not 
 in excess of its rc(|uireinents, and the prices at which the contractor 
 obtained the facilities or e(iuipment or advice, etc., must have been 
 such as mijrht reasonably have been paid at the time and under the 
 circumstances. If they were excessive only such part may be con- 
 sidered as was reasonable. 
 
 Difficulty sometimes arises where the contractor has successive 
 contracts for the same product and at the same or higher price 
 and uses the facilities, etc., provided for the first contract. In such 
 cases it is safest to assume that these were fully amortized in the 
 fiT>;t contract and not to allow unabH)rbed amoitization in settling 
 tlmse that follow unless it is clearly shown that such amortization 
 was actually made in fixing the prices for both contracts and was 
 intended from the beginning to extend over more than the first 
 contract. 
 
 Other itciii-s of cost not xubjert to he anwrtizcd. — (a) Increased 
 cost of operation at the beginning of ])roduction which would have 
 l)een overcome by the gi-eater efficiency of operation in the later stages 
 of the contract. This item only remains a cost so long as it results in 
 an actual loss and to the extent of such loss. If the contract has \nu- 
 ceeded far enough before suspension for subsequent more efficient 
 production to balance off the losses previously made, then there is no 
 item of cost remaining to be paid by the United States. 
 
 {h) Then there are the items of exjxMise and cost covered by Sec- 
 tion P] above (|iiote(l, being for the i)rotection and care of property. 
 
 ie) There are also costs imposed on the contractor by the failure 
 of the I'^'nited States to fully jieiform on its part and which shouhl 
 be reimbujsed to the contractoi'. Thus, foi- example, where the United 
 States had madi' a contiact for --hells and was to fuiiii~~li the billets to 
 the contractor in accordance with certain specifications, ([uality. hard- 
 ness, etc. The United States, however, finiiished billets which are 
 harder than the specifications call for and the contractor is put to 
 extra expense to obtain additional machinery to anneal the billets 
 before machining them, and does so: or, where the billets furnished 
 have an unusuallv large pi-oportion of latent defects, causing the 
 contractor to machine many more billets to produce the recniii-ed 
 number of shells than was originally contemplatetl : or, where the 
 United States in a contract for copper bands, in which it agrees to 
 furnish to the contractor all the copper required for the perfoiinance 
 of the conti-act ha^. nevei'theless, failed to furnish the so-called ve- 
 
14 JURISDICTION (»F THE SECKETAKY OF WAR. 
 
 hide copper and has furnished the contractor only, pound for pound- 
 the weight of the finished bands; or, in ease the United States has 
 through some action prevented the contractor from employing over- 
 time labor or working on Sundays and such labor was contemplated 
 at the time the contract was made. 
 
 Such items are generally in the nature of unliquidated damages 
 and, where the contract has not been terminated by a complete per- 
 formance or by breach, ma}' be included under the settlement. 
 Where, however, the contract has been completed or terminated b.v 
 breach such items may not be paid or settled by the Secretary of 
 War unless the contract be an informal one, and the settlement to. 
 be made under the act of March 2, 1919, In the latter case the act 
 appears to be wide enough to permit settlements and awai'ds by the 
 Secretary of War even inider such circumstances. 
 
 Other co'mpensation may be awarded under section G above quoted 
 and which is sufficiently broad to cover unforeseen circumstances aris- 
 ing in particular cases as well as many of the items of cost above 
 enumerated and commented on. Where the application of the above- 
 stated basis does not give the contractor reimbursement for his ex- 
 penditures and a fair compensation for such of his services as have 
 not resulted in completed product, section G is applicable. It can 
 not be used, however, to put an inefficient or improvident contractor 
 in a better position than he Avould have been in had he completed 
 the performance of his contract. 
 
 Exceptions to the above outlined Ixi^h. — There are classes of con- 
 tracts made by the Quartermaster or Director of Purchase where 
 the method of settlement has been on the basis of certain unit 
 allowances which were established in agreement with groui)s of con- 
 ti-actors producing certain classes of commodities. The apjilication 
 of these allowances is believed to secure sul)stantially the same re- 
 sults as the aboA'e outlined basis and to make for econiomy in time 
 and effort. 
 
 3. Contract Settlement Organizations of the War Department. 
 
 The armistice found the War Department, under the terms of 
 contracts, formal and informal, obligated to the industry of the 
 country for a production which, under the new circumstances, was 
 far in excess of the military needs of the Xation. To have continued 
 this production would have meant not only an improvident waste of 
 Government funds, but of materials and labor which were urgently 
 needed in the reconstruction of our commercial life. The innnediate 
 problem was to determine what curtailment in production under 
 ihese various agreements could be made which would accord with 
 the revised military needs and be consistent with the smooth shifting 
 back of the industrial nuichinery to a connnercial basis. Boards 
 were set up in each of the bureaus to review each of the outstanding 
 contracts and to determine what curtailment of production was, 
 mider the circumstances, wise. These boards having made that de- 
 termination, the next question for decision was as to the method 
 to be used in effecting this curtailment. Two courses were open. 
 The Government could notify the contractor that it would refuse to 
 i-eceive any articles under the outstanding contracts beyond the 
 limits of the proposed curtailment of production. Such a refusal^ 
 Avould constitute a breach of contract and throw the adjustment of 
 
.1 nil.SDll Tl().\ Ol' TliK SKCltl/IAKV or WAH. 15 
 
 any rifrhts whicli the contractor iiiifrht liavc, both for i'Xi)eiulitiiies 
 mukU' ill prt'i)aiatioii for the ciiitailiMl portion of the contiact and 
 for anticipated prolit-. into the C'onrt of (Maims. Snch a coni'se 
 wonid ha\-e rt'snhed in \vi(k'sj)read in(histrial hardship and have in- 
 volved a wholesale repudiation (d' oldipit ions, which the departnient 
 could not contemplate. 
 
 The other course was to attempt to nejiotiate amendment.s to the 
 oxistinjj; contracts which would provide for the desired cJirtailment 
 of i)r{)duction and, at the same time, reimburse and remunerate the 
 •contractor on a fair basis for those pre|iarations whicli lie had made 
 for the i)ro<luction of tlio.se articles which. undi>r the revised term.•^ 
 of the contiact he was not to complete ami deliver. The negotiation 
 •of the.se amended or supplemental contracts was naturally a func- 
 tion of the same bureaus which had ne.irotiated the original con- 
 tracts, and those boards in the various bureau> which had been 
 charged with the duty of deterniinin<r what curtailment of produc- 
 tion was desirable were further chargeil with the duty of neirotiating 
 new sui>plemental contracts providiiiir foi" such curtailment. 
 
 It was desired that tlTn worU l)e a])proached by both c()ntractors 
 and bureaus with the >ame >i)irit of coopi-ration which had animated 
 the de|)arlnieiit and contractor^ in the making and execution of the 
 original contracts, so that thi.s final chapter of the war-time rela- 
 ti<)ns of industry with the (iovernment would be iinimated by the 
 same fine spirit wliicli jiad characterized tho.se relations to such a 
 prevalent degree during the strenuous days of hostilities. It was 
 'deemed important that the woik of negotiation of these new con- 
 tracts l)e carried on while tliose who were familiar with tlie history 
 of the making and |)roduction under tlu^ contracts were still avail- 
 able in the service, and to this end olliceis and civilians who had 
 been eng:',ged in the work of |)rocurement. |)rodui'tion. and inspection 
 directed their eiieigies toward working out a soun<l and fair basis 
 for sup})lemental contracts curtailing production. 
 
 These contra(ts oi- statutory awards are execuleil. the former bv 
 the contracting oftii er and the claimant and the latter by the district 
 board and the claimant, but they are by tlieir terms expressly sub- 
 ject to the approval of the bureau b-oards and iii the case of statntoi-y 
 awards also by the War Departmciu Claims lioard. hei-eaftei- 
 described. The wliole lecord is thcreaftir tiansmitted to the bureau 
 hoard, which in turn reviews the whole settlement on the record, 
 including computations, xaluatioiis oi- appraisements, a determina- 
 tion whether all the regulations of the War Department and of the 
 comptroller and tlie law liave been followed, etc. It may then ap- 
 prove or disapjjrove the settlement. If it approves, then the record 
 is filed and the settlement contracts or statutory awards, after exe- 
 cution, are distributed to the aj)pi-opriate ])laces for record or pay- 
 ment, one being .sent to the district hoard, one to the claimant, 
 another to tlie disbursing olHcer. another to the Auditor foi- the War 
 Department, and. in case of settlement contracts, one to the returns 
 office. If disap])roved it is returned to the district office for cor- 
 rection and to endeavor to arrive at and negotijite the new settle- 
 ment with the claimant, or the bureau board may itself undei"take 
 the negotiation. There are also provisions and special forms for 
 making ])artial payments to claimants before the final adjustment, 
 either on items of claim proved or on a percentage of the estimated 
 
16 JURISDICTION OF THE SECRETARY OF WAR. 
 
 miniiiuuii total award less debts due the United 'States. These 
 forms and papers for partial payments are usually accomplished in 
 the districts without reference to the bureau boards for approval, 
 and this is permitted, because the whole settlement, including the 
 partial payments and the items on which based, is ultimately sent 
 to the bureau board in any event for review on payment of the final 
 amount and the execution of the final settlement contract. 
 
 A typical set of regulations and forms for such bureau settle- 
 ments is to be found in Ordnance Claims Board Circular 74, which, 
 it is recommended, should be obtained and studied. 
 
 Some of the bureaus have established especial boards to operate 
 on claims on certain groups of contracts, as, for example, the nitrates 
 board of the Ordnance Department. These function as district 
 boards. 
 
 The bureaus with more limited numbers of contracts do not gen- 
 erally operate through district organizations. The bureau board 
 itself in such cases conducts the whole investigation and negotiation 
 and makes the award and settlement contract subject to the approval 
 of or, if a statutory award, execution by the War Department 
 Claims Board member assigned to that bureau. 
 
 Where for any reason an agreement can not be reached by the 
 district within the limits of the regulations the case goes, first, on 
 appeal to the bureau board and, if no agreement is reached there, 
 then, on further appeal, to the board of contract adjustment. 
 
 The boards which were charged witli the duty of determining- 
 what curtailment of production was desirable and in negotiating 
 contracts for such curtailment came generally to be known as 
 claims boards. One such board was set up in each bureau. The 
 Ordnance Department Claims Board was established as early as 
 November G, 1918. In certain of the bureaus, as in the office of the 
 Director of Purchase, and in Ordnance, it was necessary, if this were 
 to be done efficiently, to further decentralize their activities; and in 
 these bureaus, the Ijureau claims board became a reviewing board, 
 while the actual negotiations for the new contracts were carried on 
 in the case of ordnance by claims boards established on November 
 •26, 1918, in each of the ordnance districts into which the country was 
 divided; and in the case of purchase, by claims boards in each of the 
 supply zones into which the country was divided. Of these district 
 boards, the district chief or zone-supply officer was made chairman; 
 a prominent business man of the district was generally made a mem- 
 ber of the board, and to it was attached a lawyer. The existing 
 personnel in the district or zone was coordinated to assist in the 
 work. This personnel had been engaged during the war in activi- 
 ties of inspection, acccounting, finance, expediting production, etc., 
 and contained the best available material to check and examine the 
 statements submitted by the contractors on prescribed forms as to 
 the expenditures and commitments which they had made in prep- 
 aration for the curtailed portion of the contract and the other ele- 
 ments which they claimed ought to be taken into consideration in the 
 negotiation of the new contract with them providing for the curtail- 
 ment of their production. This personnel was formed into groups 
 under the leadership of officers or civilians designated by the chair- 
 man of the board, and these heads, with their principal assistants, 
 are usually known as the staff. 
 
JURISDICTION OF- THE SECRETARY OF WAR. 17 
 
 The ili.^ti'ict or /oiu* board, or the bureau elaiins board in tbox- 
 bureiiii> where there are no loeal boartls, makes a comph'te dettMiui- 
 nation as to the facts stated by the contiactor an<l embodies its fin<l- 
 ings in a eon<h>nsed statement, <renerally on a |)rescril)ed form, 
 known as an awaid. This award, when assented to by the eon- 
 tractor, becomes tlie basis for the settlement or >iii)i)h'mental con- 
 tract: or, where tlie contract is not executed in the manner pic- 
 scribed by hiw, for the statutory award under the act of March "i. 
 
 Reference has been made above to tlie Wai- l)e[)artnient chiims 
 board. This board ai-ts under the presi(h'ncy of the Assistant Secre- 
 tary of "War. who. as Dii-ector of Munitions, has su])er\ ision and 
 direction of tlie whole suj)ply sy-tem of the Army and conse(|uently 
 of all conti'acts and (|uesti()ns lelatiiifj thereto. This board was <2:i\en. 
 by Circuhir Xo. "Jt") of the War Department, dated January '20. l*>li>. 
 power ''to suix'ivise and coordinate the work of the various ^^'ar 
 Department agencies enp^aged in the settlement of claims resultin<r 
 from the termination of contracts or other procurement obli<rations 
 of the department cxinsecjuent upon the suspension of hostilities and 
 to authorize and a})pi"ove such settlenuMits." All settlement contracts 
 ne«rotiated by the bureaus, before they can beconu' effective, must 
 be approved by this board or one of its members designated for the 
 purpoM'. T'pon the passage of the Dent Act. the powers of the Sec- 
 retary of War to adjust, pay. and discharfje the afrreements covered 
 by that act, so far as they related to contracts made in the United 
 States and Canada, were deleofated to the AVar Department claims 
 board by General Order No. 40 of March 10. l'.»10. and all statutory 
 awards made under this act are made in its name by the board or 
 by one of its members authorized for that |)urpose. The actual 
 consideration of settlement contracts and the makinp: of statutory 
 awards are. except in special cases, cai-ricd on by specially desiirnated 
 memlters of the board, who sit with the bureau claims boards, the 
 board, as a whole, confininfr itself ordinarily to the determination 
 of questions of policy and the supervision of the administration of 
 various agencies of the department engaged in contract settlement 
 work. 
 
 In administering its powers under the Dent Act, the Wai- Depait- 
 ment Claims Board makes use of the bureau and local hoards in the 
 negotiation of prop()S<»d statutory awards and has also delegated 
 important parts of its jurisdiction to the Board of Contract Ad- 
 justment. 
 
 The Board of Contract Adjustment was organized on November 
 6, 1918, in order to meet requirements for a boai-d that would per- 
 form the functions provided for in the standard form of contract 
 required by Supply Circular 88, 1918, in the determination of ques- 
 tions of doubt and of other incidental question- arising during the 
 performance of contracts. It was intended that this board -hould 
 relieve the Secretary of War from the determination of many per- 
 plexing questions which would otherwise be submitted to him. It 
 was planned to have it composed of men drawn from civil life, of 
 high standing in their communities, and whose views would com- 
 mand the confidence of contractors and make them feel that theii- 
 rights under their contracts were being considered in a broad and 
 
18 JURISDICTION OF THE SEOKETARY OF WAR. 
 
 business-like fashion by men who had been aecustonied to dt-al with 
 similar important questions in civil life. 
 
 After the armistice, when the work of negotiating new contracts 
 was imposed upon the department, it was immediately felt that the 
 Board of Contract Adjustment would be a useful agency in passing 
 upon the terms of proposed supplemental contracts where the ne- 
 gotiating bureaus and the contractor could not come to an agree- 
 ment as to the terms of the new contract. Consequently, it was pro- 
 vided that, where the bureau board and the contractor are unable 
 to come to an agreement, the contractor nuiy appeal to the Board of 
 Contract Adjustment for a re^'iew of the proposed terms of the 
 settlement contract. If the Board of Contract Adjustment is in 
 agreement with the views of the bureau board, and its position is 
 sustained by the Secretary of AVar on a submission to him for re^ 
 view, then, unless the contractor is willing to make an adjustment 
 upon that basis, the original contract is breached and the contractor 
 relegated to his rights in the Court of Claims. In the event that the 
 Board of Contract Adjustment finds that a supplemental contract 
 ought to be )nade on terms other tlian those pi'oposed by tlie bureau 
 board and objected to by the contractor, the matter is sent back to 
 the bureau board for the making of a supplemental contract along 
 the lines outlined by the Board of Contract Adjustment. 
 
 A similar appellate jurisdiction from the action of the bureau 
 boards with reference to Dent law awards was delegated to the Board 
 of Contract Adjustment by the War Department Claims Board, and 
 it was also given an extensive original jurisdiction under that act 
 which will presently be described. 
 
 The other principal l^oard of the War Department for the settle- 
 ment of claims is the War Department board of appraisers con- 
 stituted by General Order No. 30, of April, 1918. This board has 
 the function of determining amounts due for property comman- 
 deered or requisitioned under the national-defense act of June 3, 
 1916, section 120, and the food-control act of August 10, 1917, section 
 10, and may also by award in advance fix the amounts to be paid for 
 work and property received under compulsory oi'ders under the same 
 acts. To it are referred also claims relating to real estate under 
 the act of March 2, 1919. (See resolution of AVar Department Claims 
 Board meeting No. 23, held Mar. 18, 1919.) 
 
 In settling the claims of contractors it usuall}^ becomes necessary 
 for the district or bureau board also to take part in or check up the 
 settlements made by the prime contractor with his sub-contractors. 
 This involves a great number of determinations by district boards 
 generally greatly exceeding in number the prime contract settle- 
 ments. However, as these subcontractors have no contractual 
 relations with the United States, the basis for such settlements is 
 not so prescribed and the approval of these settlements by the bureau 
 boards is not required. Such subcontract settlements may be ap- 
 proved by the district boards where they are within the limits of 
 the amount which the subcontractor would rex?over from the prime 
 contractor in an action or suit in court. 
 
 An idea of the work performed by all these boards and the man^- 
 thousands of officers and men and Avomen they employ may be gained 
 from the fact that about 21,800 War Department contracts had been 
 settled by them U]i to August 31, 1919, for an aggregate sum of 
 
JURISDICTION OF THE SECRETARY OF WAR. 19 
 
 about $272.78(5.000, and ihal an (-liiuali'd uiiiuber dI' about ."),00<J 
 claims amounting to al)out $800.(M)0.00(J then leinained to be settled. 
 The settlements above made were at an average of V] \wv cent of 
 the amount which (he Ignited States would have been obli<:jatetl to 
 pay had the then unperformed uart> of the contracts been complet^nl. 
 Other claims to a lunited iiumnci- i-omini; before the board of con- 
 tract adju>lnieiit undei' tlu' act <if Mai't-h 2, l»ased on a<;reeMU'nts 
 made by ollicers or others actinjr un«ler the authoiity of the Proident 
 are not here iuchided. 
 
 LIST OF BOARDS SI I'ERVISING AM) PASSING I I'ON THE ADJUST- 
 MENT OF CONTRACTS IN THE WAR DEPARTMENT. 
 
 Will' I ))>|i:ii-tiii<'iil <'l;iiiiis r>ii:iril. W'asliiiii^toii. I >. ( '.. .Miiiiil ions I'.iiihiiii;;. 
 
 I'.ojinI (it Cniitinit Atl.iustliieiit. Tweiilielli aiiil C Strt'cls NW. 
 
 Will- I »i'ii:iriiiii'iM I'.iiard of A|)praisers. .Miiiiiiioiis I'.iiililiiiLr. Wasliinirton, 
 1>. C. 
 
 Oi-(lii}inre Chiiiiis lioartl. Wai- I »f|iar(iiH'iit. Washiiiulnii, I >. < '. 
 
 Claims Hoard. Air Scrx ice. War I >e|iartineiil. Waslijimiun. 1 ». ( '. 
 
 Claims Hnaril. <'licmi<al Warfare St-rvii-c. War I >i'i>artmcnl . Wasliiiitrloii. 
 1>. C. 
 
 Claims lioanl. Constnietictn Division, War De|ianmeni, WasliiiiKtoii. D. C. 
 
 Claims Moanl. Simial Corps. War I >ei)artmeiii. Wasliiii;xl<>ii. D. C. 
 
 Claims Hoartl. oflice Cliief of En^riiieers, War n<-itarlmenl. Wasliiii^ton. D. «'. 
 
 Claims Hoard. Direetor of Pnnhase. War Depai-tmeiit, WaKliiimtim. D. C. 
 
 Traiisportalioii Service Claims Hoard. War Depiirtmeiit. Waslnnsrton. I). C. 
 
 I'.oard of Uc\ iew for Medical and llosjiital .Sii)tplies I»ivision. War I">epurt- 
 m<ni. Washinjitoii. D. c. 
 
 Hoard of Keview for .Macliiiicry and Kimiiiceriiii: Materials Division. War 
 1 ><'l arfmoul. Washington. D. C. 
 
 Hoard of Keview for Molois and Veliiclc< l>ivisioii. War I >cp!"'"'"''"- W Msli- 
 in;-'ton. D. C. 
 
 l»isiiiJ( r AM> /,o^^: Hoahi>>. 
 
 OKI>N.\N(K mSTHKT CLAIMS HOAKUS. 
 
 Haltimori'. I'ark I'laiU. Colnmbia Avenue, Baltimore. .Md. 
 Bridgeport. 04'i Main Streel. Bridp-port, Conn. 
 Boston, in Portland Street. Boston, Ma.ss. 
 Cliicatro, 1").") East Superior Street. Chicago. III. 
 Cincinnati, corner Third and Vine Streets. Cinciiiiiai i. <>liio. 
 Cleveland. ri.Niiioulli r.uildiiig. Cleveland. ( Miio. 
 Detroit. 35 Washington Boulevard. Ih'troit. .Mich. 
 
 New Voik. .Mheiiiarle Building, Twent.v-fourth Street ami P.roadwa.v. New- 
 York Cit.v. 
 
 Philadelphia. 1710 Market Street, Philadelphia, Pa. 
 Pittsburgh. Chiimher of Commerce Building, Pittslnngh. i*a. 
 Rochester. 8-J St. Paul Street. Rochester, X. Y. 
 St. Louis, Missouri State Life P.tiilding. St. Louis, Mo. 
 Toronto, 0(m; Royal Hank Building. Toronto. Canada. 
 
 <HF.>[tCAI. WAKKAKK SKRVICK. 
 
 Boartl of "Review, Ga.s Defense. Edgewood Arsenal. 
 
 ZONK lUtARKS Ol (ONTKACT RKVtKW. OFKICK OK THK lltRKCTOU OK IM;KrllASK A\l» 
 
 .STORAGK. 
 
 Zone No. ]. Boston. Mass., 108 .Massachusetts Avenue. 
 
 Zone No. 2. New York City, 4CA Eighth Avenue. 
 
 Zone No. :^. Philadelphia. Pa.. Twenty-first and Oregon Avenue. 
 
 Zone No. 4, P.altimore. Md., Coca-Cola Building. 
 
 Zone No. ">, Atlanta. Ga.. Transportation Building. 
 
 Zone No. G, J'effersonville. Ind.. Meigs Avenue. 
 
20 JURISDICTION OF THE SECRETARY OF AVAR. 
 
 Zdiie No. 7, Chicago. 111., 1819 West Thirty-ninth Street. 
 
 Zone No. 8. St. Louis, Mo., Second and Arsenal Streets. 
 
 Zone No. 9, New Orleans, La., Audubon Building. 
 
 Zones No. 10 and No. 12, San Antonio, Tex., (Joneral Suppl.v r)ei)ot. 
 
 Zone No. 11, Omaha. Nebr.. Army Building. 
 
 Zone No. 13. San Francisco, Calif., Fort Mason. 
 
 Zone No, 14, Wa.shington, D. C, Seventeenth and V ^ftreets NW. 
 
 IIIK DlsriiH T OhFICKiS OK .Ml! SKKVICK FIXANCK, 
 
 ]Mr. W. Ct. P'arnsworth, Disti-ict Finance Manager, New York, N. Y.. 360 
 Madison Aveime, Abercronibie iV: Fitch Building, Ninth Flooi-. 
 
 4. The Jurisdiction of the Board of Contract Adjustment Is From Several 
 
 Sources. 
 
 (a) On formal contracts. 
 
 General Orders, Xo. 103, of November 6. 1918, in creating the board 
 of contract adjustment, described its jurisdiction in the words: 
 
 It shall be the duty of the board to hear and determine all claims, doubt.s, 
 or disputes, including all questions of performance or nonperformance, which 
 may arise under any contract made by the War Department. 
 
 This language would, on its face, seem to cover all contracts made 
 by the War Department, whether .formally executed or not. How- 
 ever, as there seems some doubt whether the Secretary of War may 
 settle a claim on an unauthorized, informally executed contract, 
 except for work or property had and received by the United States, 
 this clause has usually been construed to give jurisdiction only where 
 the contracts were executed in accordance Avith No. 3744, Revised 
 Statutes, or where informal contracts are authorized by law, such as 
 the informal contracts of the Ordnance or of the Quartermaster for 
 performance within 60 days, or involving amounts less than $500 
 (Comp. Stat.. G854, 6853b). This jurisdiction is not confined to 
 claims arising out of terminated contracts but relates to claims aris- 
 ing out of contracts during their performance, such as matters of 
 construction of contracis, etc. It has been shown that the jurisdic- 
 tion of the Secretary of War to adjust unliquidated damages arising 
 under formal contracts rests upon either the agreement of the parties 
 as expressed in the original contract, or upon the power to make 
 supplemental contracts. Such supplemental contracts may modify 
 or terminate the original contract. In so doing he may adjust mat- 
 ters of unliquidated damages arising during the performance of the 
 original contract. These contracts would, hoAvever. be iuA'alid where 
 they Avere not in the interest of the United States. The board may, 
 therefore, for example, adjust claims groAving out of a desire of 
 the Secretary of War to curtail a contract, leaving part only to be 
 performed, and in fixing the amount to be paid under the supple- 
 mental contract for such curtailment may include matters of un- 
 liquidated damages arising out of the failure of the United States 
 or of the contractor to comply Avith the details of the contract, thus 
 causing the other party losses, and for which one of the parties 
 might elect to consider the contract as having been breached and to 
 absolve him from further performance but for the making of the 
 supplemental contract. 
 
JURISDICTION OF THE SECRETARY OF WAR. 21 
 
 III iiiaiiy ciises donltts or <li.si)iitt'> arc to !»•' tlcti'iiiiiiu'tl iiiuK-i' llu* 
 terms of the oiiirinal cniitracts thcinsclvos hy some orticci- or lioard 
 or hv ailiitiation. Jii tlu'se eases, the Secretary of War lia\'iii<; so 
 agreed will, as a rule, use such method of adjustment and the matter 
 may only come before the hoai'd of contract adjustment for construc- 
 tion of the clauses for arbitration or perhaps on review. 
 
 It would seem that one of the princi]ial causes for the is>ue of 
 (reneral Orders, No. lOH, was to establish a lioai'd for such arbitra- 
 tioJis and in accordance with tlu' clauses pi-escrii)ed in Supi)ly Cir- 
 cular Xo. 88 to l)e inserted in War Depaitment contr^ct^. ( For 
 copy of those clnu>es see Tnfoiniation Circuhn- Xo. 1.) 
 
 The jurisdiction of this board is not final under (ieneral Orders, 
 No. 103, ^vhich further ])rovide8, "The findings and decisions of the 
 board shall be final and conclusive, subject only to review i)v the 
 Secretary of War.'' The simple procedure laid down for presenta- 
 tion to the board of these cases is to l)e found in Information Cii- 
 cular Xo. 1 heiewith. 
 
 In addition to this oi'iirinal jurisdiction under i'oiiual contracts, 
 the board of contract adjustment has an appellate jurisdiction, as 
 outlined above, to i-eview. at the instance of the contractor, the terms 
 of the projjosed settlement contracts for the curtailment of produc- 
 tion and reimbuisement and comjiensation to the contractor for what 
 he has done with reference to the eliminated i)ortion of his contract. 
 This jurisdiction was definitelv confirmecl bv Supplv Circidar No. 
 IH. dated July 11, 1010. 
 
 The ])iactice for appeal> in thex' and (crtain other case> is also 
 set forth in Su|)ply Cii-cular Xo. 4<>, her to attaclu'd. On su; h ap- 
 peal this board i- not confined to the grounds stated for appeal or 
 review, but may con-idcr tlu' iMitire case. 
 
 (A) On infoiiiial rontiact-. 
 
 As stated above, the jurixlit tion of the Secietary of War to ^^ettle 
 claims on the termination or curtailment of informal executory 
 lonti-act- i> doulitful. While he may in such case pay for services 
 rendeicd and accepted, and for property had and re. eived, liis 
 jxtwcTs seem limited to payments on such implied <ontract^. Il 
 would seem that these are not within the prohibition of K. S. .'»7U. 
 (Ignited States r. Andres & Co., 207 U. S., 220). He may not, how- 
 ever, under such contracts, make binding sui)i)lemi'ntal contracts ex- 
 tending to the payments for other items, as, for example, work in 
 i:)ro(ess and unliiiuidated damages, etc. To <'over tl\is the act of 
 Marcli 2, 1010. was passed, and followed by (ieneral Orders Xo. 40. of 
 March 10, 1010. which established the' War Department Claiui> 
 Board as the agency witliin the T'nited States "thi'ough which >ha!l 
 be exerci.sed in the name of the Secretary of War and by his author- 
 ity all powers and duties conferred u])on the .Sci ivtaiy of Wav \iy 
 the act of Congress " of March 2, and further provided that, 
 "for the expeditious ]),rformance of its duties the Wai- Department 
 Claims lioard is authorized to make such use a^ it may find desir- 
 able of the Board of Contract Adjustment, the War Department 
 Board of Ap])raisers, and any othei- agency or agencies of the War 
 Department." 
 
22 JURiSDicTioisr or the secretary of war. 
 
 The. Director of Purchase. Storage and Traffic then issued for 
 the War Department Chiims Board, Snpplj^ Cir: uhir No. 17. re- 
 vised, dated March 3, 1919, in which it was provided: 
 
 5. Procediu-e by the Board of Conti-acr Ailjustmeiit on Class V> claims: 
 
 (a) Class B claims shall he suhmitted to the Board of Contract Adjustment, 
 which, in handlings them, will follow the procedure above outlined for Class A 
 flaims so far as it is applicable: but these claims which are based upon 
 alleged agreements entered into with an officer or agent acting mider the 
 authority, directi«in, or instruction of the Secretary of War shall be kept 
 separate and given mnnbers of a different series from those entered into by 
 an officer or agent acting under the authority, direction, or instruction of the 
 President, and the forms of award used by the Board of Contract Adjustment 
 shall provide for signature by that board and approval by the War Department 
 Clainjs Board. 
 
 (i^^) The Board of (.'ontract Adjustment will establish, mider the direction 
 of the War Department Claims Board, procedure for the proof of claims pend- 
 ing before it. 
 
 (c) The Board of Contract Adjustment may, in any case wiiei-e tlie nature, 
 terms, and conditions of the agreement have been established and certified 
 by it, refei" the claim to the ai)propriate biu'eau claims board for action and 
 for re<-onnnendation of a fair and equitable basis upon which the agreement 
 .should be adjusted, paid, or discharged, and the bureau claims board shall 
 then proceed in the niamiei- provided in subsections d, c. /, and r/, of section 
 8 liereof. and in the following general i)rovisions. 
 
 7. In the event that the claimant is not willing to accept a finding made or 
 an award reconnnended by a biuvau claims board, he n\ay appeal to the 
 Board of (-ontract Adjustment. 
 
 It will be noted that under this circular the Board of Contract 
 Adjustment was given jurisdiction in three classes of cases: 
 
 1. The detenu inaticm of all claims on infornuil, oral, or implied 
 contracts of the War Department. These are connuonly known 
 as Cla,ss B claims for the reason that the form of proof of contract 
 set forth in Supply Circular No. 17 for use in such cases is desig- 
 nated Form B. It is usual in these cases for the Board of Contract 
 Adjustment to determine merely Avhat the nature, terms, and con- 
 ditions of the contract were, if any ; and to attach and execute the 
 Certificate C, called for by Supply Circular No. 17. The record is 
 then transmitted to the bui-eau or department of the War Depart- 
 ment from which the claim originated for settlement and payment. 
 Since the issue of Supply Circular No. 17, the War Department 
 Claims Board has, by its resolutions, taken two classes of such cases 
 from this board, as follows: 
 
 (a) All Class B claims arising "from agreements covering the acqinsition 
 of lands or the use thereof or for damage resulting from notice by the 
 Government of its intention to acquire or use such lands" are to be submitted 
 to the War Depaitment board of apprai- ers for investigation and recommenda- 
 tion in the same maimer as Class B claims submitted to the Board of (Con- 
 tract Adjustment. (Minutes of meeting No. 2o of the War I>epartnient Claims 
 Board, held Mar. IS. 1919.) 
 
 (h) The Transportation Service claims board is directed to assume 
 
 jurisdiction of ; the adjustment and settlement of all ■ Class B 
 
 claims that may arise or have ari.sen out of the operatioi\s of the Transporta- 
 tion Service; and is hereby vested with all the powers in re- 
 spect to such claims that the provisions of Purchase, Storage, and Traffic 
 Supply Circular No. 17, revised, 1919, have made applicable to the Board 
 of Contract Adjustment. (Minutes of meeting No. 48 of War Department 
 Claims Board, held May 23, 1919.) 
 
 2. The determination of all claims on informal eontrticts made by 
 the President or liis representatives other than the AVar Depart- 
 ment for purposes connected with the prosecution of the war. As 
 
.1 iiusDK Tlox or riii; skcrktahv <»f wai;. 23 
 
 t(» thc-t' -t'tlli'iiii'iil-- it will Itccoiiii' iu'ci'.-«>:iiy in many (•a^c'^ for tlii< 
 hoard to make a conipU'tc (U'tennination and adjustment of the 
 claims bt'causi' the aj^encies of tlui (lovermnent liiat madi' tlic con- 
 tracts liavo no claims settlement orjranizatious. 
 
 ',\. Appeals and ([uestions presi-nted for re\ it'W from the vaiions 
 bureaus and department hoards of the War Department. Thes(> 
 appeals and icMpiots for review oi" suhmissioiis of (|Uestions in doui)l 
 are similar to those mad<> in cases arisinjr uniler formal conti-acts. 
 But in these cases (|uestions also aris*' under CMass A infoi'mal con- 
 tracts ri'latinjj: to a determination of theii' nature, terms, and con- 
 ditions. The procedure on such appeaU and in other cases is set 
 forth in Su[)ply C'iicular No. f(>. This board may. in case of anv 
 appeal, icxiew not only the (piestions s|)eciHcally presented but may 
 .also <^t> into tin' whole case. 
 
 John Kuss 1)ki.ahki.1). 
 ('nloiii'] (Ji(hunicc I >c I'd if m^ tit, 
 (' lidiiiniui Boon! of Contiuict Adjustimnt. 
 
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