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Controls on Contracts

The largest single area of concern about reductions in controls over the conduct of departmental business was the placing and pricing of contracts. The accepted principle was that government contracts should wherever possible be placed on the basis of fixed-price competitive contracts from a range of suitable suppliers. Although departments paid lip-service to the principle it was often difficult to persuade them to follow it consistently in practice. Sometimes this was due to pressures of other work, sometimes to lack of effort to find different suppliers, and sometimes for more complex technical reasons. For example, the War Office and the Admiralty, which together incurred by far the heaviest contract expenditure, frequently asserted that special in-service requirements and priorities meant that only a strictly limited number of companies, or sometimes only one, had the skills, experience, and production capacity to meet demanding specifications and timescales and to ensure continuity of supply. They also argued that companies would not invest in new manufacturing facilities to improve efficiency without guarantees, or near guarantees, of a share in future work. Subsequent contracts, placed by negotiation and not competitive tendering, were often claimed to be necessary.

In matters of pricing, it was thought unreasonable to expect contractors to quote firm prices at the outset of a contract when specifications or timescales were not finalized and would inevitably be subject to frequent change during a time of great uncertainty, when new demands emerged often unexpectedly and with great urgency. The preferred alternative of pricing contracts on a cost-plus-percentage profit basis was regarded as being in the government's interest as well as that of contractors, even though this brought its own uncertainties and difficulties in verifying contractors' costs and establishing an acceptable profit based on return on capital employed. These arguments, which were sometimes difficult to dismiss in normal circumstances, were even more difficult to challenge under wartime priorities and pressures. As a result, in the lead-up to 1914, and increasingly during the war, many of the largest contracts, particularly for Army and Navy procurement, were placed on a noncompetitive cost-plus-percentage profit basis. Nevertheless, the C&AG continued to produce reports on the larger or more questionable contracts for examination and report by the PAC. The reports focused mainly on action being taken to secure fair and reasonable prices, rather than seeking to maintain the principle of competitive tendering. Increasingly it seemed to have been accepted that, certainly as the war progressed, emergency needs meant that on large military procurement contracts this was largely impracticable. Some large civil projects were also affected, for example the ?2 million building programme under the Housing Act 1914.6 Even in areas where there was still some competition there were concerns over the risk of company 'rings' conspiring to fix prices to obtain excess profits.

Early in the First World War the Admiralty's arrangements for checking contractors' prices were less than satisfactory, particularly for ship repairs, new ships, and munitions. For example, a lack of dockyard capacity meant that urgent ship repairs were increasingly placed with private yards, even though they had previously been found to be much more expensive. Instructions were issued that tenders should be obtained if time permitted, but otherwise officers 'should make the most advantageous terms they could with any competent firm'.7 There were provisions allowing technical officers to inspect some areas of contractors' costs, but whilst the PAC accepted that these provided some safeguards against extravagance they concluded that 'more specific powers should have been taken to secure due economy'.8 Ships were sometimes being ordered and construction started before prices were agreed. Where broadly similar ships had been built before, in the dockyards or privately, an approximation could be made as to the cost.

With munitions, the Admiralty had no data as to the actual cost of supplies such as shells and guns. Their usual method of purchase was to invite tenders from their existing suppliers and to determine the reasonableness of prices solely on the basis of previous prices and the opinions of their professional officers. In contrast, the Ministry of Munitions had instituted a system of actual costing of shells and other supplies and, coupled with the powers conferred by the Munitions Act and regulations under the Defence of the Realm Act, the Ministry had been able to secure substantial reductions in prices as compared with those paid in the early stages of the war, irrespective of the increased cost of labour and material. Although the Admiralty had recently introduced a system of placing orders for shells, leaving the price to

PAC First Report, 1916, HC 88, paras 5-6.

PAC Second Report, 1916, HC 115, paras 7-11. PAC Second Report, 1916, HC 115, paras 7-11.

be settled later, and employing skilled accountants to investigate the firms' books, the PAC report:

greatly regretted that no such system seems to have been adopted before the War, in order to break down rings which were known to exist among contractors, and that even now, with the experience of the Ministry of Munitions, the system is but slowly being introduced; so that prices paid by the Admiralty for shell and other supplies show no such reduction from the rates ruling just after the commencement of the War, as has been effected by the Ministry of Munitions.[1]

For army supplies, the War Office at the outbreak of war at once resorted to direct negotiation with contractors, appointing expert agents to shop around and buy from stock, or negotiate deals directly with the manufacturers. This procedure, however, was soon found to be unsatisfactory. The government were taking nearly as much as some industries could produce, and in some cases wanted far more, which meant that all the goods offered had to be accepted irrespective of prices. In June 1915 the War Office started to require manufacturers to justify their quoted prices by giving statements of the cost of manufacture and negotiating price reductions where possible. Further developments culminated in February 1916 in an amendment to the Defence of the Realm regulations, which gave the government power, in the last resort, to requisition the output of any factory in the country and to pay for that output at a fair agreed price. Contractors had to show that their prices were reasonable by disclosing their costs of manufacture and satisfying expert departmental advisers. This also had the effect of breaking up and preventing combinations of manufacturers against the government.[2]

In the absence of competitive tendering, cost-plus-percentage profit contracts were increasingly seen as the most effective basis for settling fair and reasonable prices under wartime conditions. When the PAC returned to the subject in 1917 and 1918 they commented favourably on the cost-accounting expertise of the War Office that had enabled them to secure substantial economies by reducing contractors' prices. The Committee also referred to the considerable advances in the powers now available to the War Office, Admiralty, Ministry of Munitions, and the Food Controller to examine contractors' books and fix prices on actual costs of production. It emphasized that the exercise of powers of detailed investigation not only helped to reduce prices but also brought home to manufacturers the demands this placed on their own conduct of business and helped to secure economies in their production processes. The PAC thought these arrangements 'a development that would be widely welcomed on both sides' and 'were likely to have large and far-reaching effect in the future... [and] trusted that these powers will be retained on return to normal conditions'.[3] As a result, cost-plus contracts, with their benefits and uncertainties, would continue to be a dominant feature of government purchasing through to the Second World War and for many years afterwards. These and the many other changes to normal processes demanded by the unpredictable demands of war presented the C&AG with many urgent challenges.

  • [1] PAC Second Report, 1916, HC 115, para. 11.
  • [2] PAC Second Report, 1916, HC 115, para. 28.
  • [3] PAC Report, 1917, HC 123.
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