cluding the Government, requiring for its performance articles or services of the kind or type covered by this order is terminated, in whole or in part, or amended, so as to eliminate or reduce such requirements. Such notice shall state the extent and effective date of such termination; and, upon the receipt thereof, the seller will, as and to the extent directed by the buyer, stop work under this order and the placement of further orders or subcontracts hereunder, terminate work under orders and subcontracts outstanding hereunder, and take any necessary action to protect property in the seller's possession in which the buyer has or may acquire an interest.

(b) If the parties cannot by negotiation agree within a reasonable time upon the amount of fair compensation to the seller for such termination, the buyer in addition to making prompt payment of amounts due for articles delivered or services rendered prior to the effective date of termination, will pay to the seller the following amounts without duplication:

(1) The contract price for all articles or services which have been completed in accordance with this order and not previously paid for.

(2) (1) The actual costs incurred by the seller which are properly allocable or apportionable under recognized commercial accounting practices to the terminated portion of this order, including the cost of discharging liabilities which are so allocable or apportionable, and (ii) a sum equal to 2% of the part of such costs representing the costs of articles or materials not processed by the seller, plus a sum equal to 8% of the remainder of such costs, but the aggregate of such sums shall not exceed 6% of the whole of such costs. For the purpose of subdivision (ii) such costs shall exclude any charge for interest on borrowings and shall exclude the cost of discharging liabilities for parts, materials and service not received by the seller before the effective date of termination.

(3) The reasonable costs of the seller in making settlement hereunder and in protecting property in which the buyer has or may acquire an interest.

Payments made under this paragraph (b), exclusive of payments under subparagraph (3), shall not exceed the aggregate price specified in this order, less payments otherwise made or to be made.

(c) With the consent of the buyer, the seller may retain at an agreed price or sell at an approved price any completed articles, or any articles, materials, work in process or other things the cost of which is allocable or apportionable to this order under paragraph (b) (2) above, and will credit or pay the amounts so agreed or received as the buyer directs. As directed by the buyer, the seller will transfer title to, and make delivery of, any such articles, materials, work in process or other things not so retained or sold. Appropriate adjustment will be made for delivery costs or savings therein.

Sec. 8006.1

under Prime

Fair compensation
Contract Article when parties fail
to agree.

8006.2 Fair compensation under the Subcontract Article when parties fail to agree.

8006.3 Standards governing the provision of fair compensation to war contractors for the termination of fixed price war supply contracts. 8006.4 Standards applicable to termination settlements by agreement under prime contracts not containing the Prime Contract Article. 8006.5 Standards applicable to the settlement by agreement of terminated subcontracts.

8006.6 Determination required by section 6 (e) of the act.

AUTHORITY: §§ 8006.1 to 8006.6, inclusive, issued under secs. 4 (b), 6, 58 Stat. 651, 652; 41 U.S.C., Sup., 104 (b), 106.

SOURCE: §§ 8006.1 to 8006.6, inclusive, contained in Regulation 7, Oct. 5 and 7, 1944, 9 F.R. 12285, 13592, 14071.

§ 8006.1 Fair compensation under Prime Contract Article when parties fail to agree. It is determined that the method of settlement established by paragraph (d) of the Prime Contract Article (§ 8002.1 of this chapter) in the event of the failure of the contractor and the contracting officer to agree provides for fair compensation for the termination of the contract, and that paragraph (d) of that article and the statement of cost principles (Part 8003 of this chapter) take into account or exclude, as the case may be, the several factors enumerated in section 6 (d) of the act in accordance with the requirements of that section. The contracting agencies will, to the extent provided in §§ 8002.1 and 8002.2, use the Prime Contract Article in new contracts and offer it by amendment, before or after their termination, to the holders of existing contracts.

§ 8006.2 Fair compensation under the Subcontract Article when parties fail to agree. The statement of cost principles (Part 8003 of this chapter) will be rec

ognized by the Government as representing recognized commercial accounting practices as that term is used in the Subcontract Article. It is accordingly determined that the method of settlement established by paragraph (b) of the Subcontract Article, if the parties cannot by negotiation agree upon fair compensation, provides for fair compensation for the termination of the order or subcontract, and takes into account or excludes, as the case may be, the several factors enumerated in section 6 (d) of the act in accordance with the requirements of that section. The contracting agencies will, to the extent provided in § 8005.1, recommend the use of the Subcontract Article in first tier or more remote fixed price subcontracts or purchase orders for the manufacture of supplies under Government war contracts, and authorize, approve or ratify amendments of such subcontracts or purchase orders, before or after their termination, to include the Subcontract Article.

§ 8006.3 Standards governing the provision of fair compensation to war contractors for the termination of fixed price war supply contracts. The primary test of the methods and standards of settlement to be established by the contracting agencies pursuant to section 6 (b) of the act is whether they provide fair compensation. Various methods of determining fair compensation are to be developed. Fair compensation is inherently a matter of judgment and therefore incapable of exact measurement. In a given situation, more than one method of arriving at fair compensation may be appropriate, and differing amounts, within the range of reasonable variations of method and sound judgment, may all be regarded as constituting fair compensation. Cost and accounting data, like other criteria for judgment, are to be regarded as guides to the ascertainment of fair compensation, and not as rigid measures of it. Settlement by agreement is to be facilitated to the maximum extent feasible; and the amount of record keeping, reporting, and accounting in connection with the settlement of termination claims is to be reduced to the minimum compatible with the reasonable protection of the public interest. The following standards are established for the guidance of contracting agencies in the settlement of claims by agreement, in cases in which the settlement is negotiated on the basis of a consideration of costs and profit.

(a) General. The object of the negotiation will be to agree upon a total amount to be paid in settlement of the contractor's claim which will constitute fair compensation. The amount agreed upon may be determined as an entirety, leaving flexibility in the determination of any particular element entering into the final result. However, in the consideration of costs and profit as elements of the total amount to be agreed upon as fair compensation, certain principles should be observed which are stated in paragraphs (b), (c), and (d).

(b) Costs. (1) Part 8003 of this chapter reflects certain policy determinations regarding the type of costs which should be taken into account in determining the compensation to which the contractor is fairly entitled by reason of the termination of his contract for the best interest of the Government. Contractors can properly expect that their costs of the types described in that part as includible will be so taken into account in a settlement by agreement. Conversely, such a settlement should not be made the means for reimbursing expenditures of the types which Part 8003 excludes.

(2) The contracting agencies will of necessity require contractors to submit, and will review, relevant information in support of their claims. This information will include technical and accounting data to the extent deemed necessary. Cost data should serve, however, not as a first step in an attempt at an exact determination of cost but rather as the basis for a business negotiation leading directly to a prompt settlement which will be fair to the contractor and will adequately protect the interest of the Government. Reasonable estimates and approximations may be used for the purpose of expediting settlements; and, to the fullest practicable extent, differences should be compromised and questions of doubt settled by agreement.

(c) Profit. Profit should be limited to preparations made and work done for the terminated portion of the contract; but, subject to this limitation, any reasonable method of arriving at a fair profit may be used. The most satisfactory criterion of what is a fair profit on the terminated part of a contract is ordinarily a proper proportion of what the parties have agreed upon. Evidences of this agreement might be either (1) the amount of the profit which was agreed

upon or contemplated by both parties at the time when the contract was negotiated; or (2) the amount of profit which the contractor would have earned had the contract been completed; or (3) the amount of profit which the contractor agreed to accept in the event the contract was terminated and litigation resulted. Ordinarily, the ascertainment of the profit which the contractor would have earned had the contract been completed would involve complicated timeconsuming forecasts which cannot in practice be made with reasonable accuracy; and the most satisfactory substitute for this criterion will be the amount of profit which the parties agreed upon at the outset. Accordingly, the following considerations may be taken into account in arriving at a reasonable profit, whether determined separately or as part of a reasonable over-all total:

(1) Where satisfactory evidence is available and it is practicable to do so, one method of arriving at a reasonable profit on the terminated portion of the contract is as follows:

(i) Ascertain the dollar amount of the profit which was agreed upon or was contemplated by both parties at the time when the contract was negotiated.

(ii) Allow to the contractor the portion of this amount determined by the relation between the work performed by him on the terminated portion of the contract and the work contemplated by the entire contract.

(iii) The estimate of this relationship does not necessarily depend on the percentage of the costs incurred on the terminated portion of the contract to total estimated costs, nor on the percentage of materials acquired for this portion to total materials required. While these factors should be considered, emphasis should rather be put on the extent and difficulty of the work completed by the contractor (including engineering work, production scheduling, planning, technical study and supervision, arrangement and supervision of subcontracts, as well as other services) as compared with the total work required of him by the contract. Engineering estimates of percentage of completion should not ordinarily be required, although entitled to proper consideration if available.

This principle will result in fair compensation in cases which have involved the arrangement of subcontracts and the supervision of their performance, by re

flecting this work in the estimate of the extent of completion, while at the same time properly avoiding the practice of measuring the prime contractor's profit by the amount of his payments to subcontractors for their termination claim. This principle will also avoid excessive compensation in cases where a large proportion of the contractor's costs represents merely the acquisition of materials not processed by him.

(2) Another method which may be appropriate is to approximate the amount of the profit which the contractor would have been entitled to receive under the formula in his contract in the event of the failure of the parties to agree. This will be especially helpful in cases or classes of cases where it is impracticable to determine the amount of profit in accordance with principles stated in subparagraph (1), or where payment of this approximation of the formula will increase speed of settlement, or where it appears that the contractor would have failed to realize a profit in the event of completion of the contract.

(d) Overall considerations. To avoid forcing the contractor to unnecessary litigation to establish his legal rights against the Government, it will be appropriate in any case, where the contractor so desires, to pay the amount of the approximation of the formula.

As indicated in the case of settlements in the absence of agreement, the gross amount of the settlement (exclusive of sums paid as compensation for posttermination expenses and services) should not exceed the contract price, less payments otherwise made or to be made to the contractor. This amount is subject to proper deduction for advance or partial payments or other items in accordance with any applicable provisions of statute or contract, as for example paragraph (e) of the Prime Contract Article. (See Part 8002 of this chapter.)

§ 8006.4 Standards applicable to termination settlements by agreement under prime contracts not containing the Prime Contract Article. Part 8002 of this chapter requires the contracting agencies, with the exceptions therein stated, to use the Prime Contract Article in future contracts and to offer to their existing contractors an opportunity to amend their contracts to include the Article. In cases where contracts not containing or amended to contain the Article are terminated for the conven

ience of the Government, the principles stated in § 8006.3 should nevertheless be applied in making settlements by agreement, to the extent not inappropriate in the light of the provisions of the particular contract.

§ 8006.5 Standards applicable to the settlement by agreement of terminated subcontracts. (a) Part 8005 of this chapter provides in part the criteria to be used by the contracting agencies in approving the settlement of terminated subcontracts. That part provides, among other things, that it is the policy of the Government to encourage the use of the process of negotiation for the settlement of terminated subcontracts to the same extent as for the settlements of terminated prime contracts, and on the basis of substantially the same general principles; that such settlements will be approved if, upon review as provided in that part, they are found to be fair and reasonable; and that settlements based upon reasonable estimates by the parties of the aggregate amount which would be due under the formula set out in paragraphs (1), (2) and (3) of paragraph (b) of the Subcontract Article will be considered fair and reasonable.

(b) Section 6 (a) of the Contract Settlement Act provides that fair compensation for the termination of subcon

tracts shall be based on the same principles as compensation for the termination of prime contracts. Accordingly, the contracting agencies shall approve or provide for the approval of subcontract settlements (in addition to the circumstances set forth in Part 8005) when such settlements are made upon the principles of § 8006.3. However, since the contracting agency will not ordinarily have participated in the negotiation of the original subcontract, the contracting agency where consideration is given to the factors set forth in § 8006.3 (c) may, elect to take into account the profit which the contracting agency would have agreed to pay in connection with a direct procurement of the same or a similar item rather than a profit determined in accordance with § 8006.3 (3).

§ 8006.6 Determination required by section 6 (e) of the act. It is hereby determined that to the extent that it is presently deemed practicable to do so without impending expeditious settlements, the provisions of §§ 8006.3, 8006.4 and 8006.5 require the contracting agencies to take into account the factors enumerated in section 6 (d) of the act in establishing methods and standards for determining fair compensation in the settlement of termination claims by agreement.

PART 8040-GUARANTEED TERMI

Sec.

8040.37 Deferred participations or repurchase agreements. 8040.38 Information and certification from public financing institutions.

AUTHORITY: §§ 8040.1 to 8040.38, inclusive, issued under secs. 4 (b), 8 (c), 58 Stat. 651, 655; 41 U.S.C. Sup., 104 (b), 108 (c).

FEDERAL RESERVE BANKS

§ 8040.1 Procedure for guaranteeing termination loans by War and Navy Departments and Maritime Commission. There is hereby prescribed the procedure for the guaranteeing of termination loans by the War Department, the Navy Department and the Maritime Commission through the Federal Reserve Banks, outlined in the Guarantee Agreement, the Loan Agreement, and Explanatory Notes set forth below. In the execution of this procedure the following policies will be observed:

(a) Termination loan (hereinafter called T-Loan) guarantees should not be

refused by the contracting agency having the preponderant interest in the borrower's war contracts if the borrower is or has been engaged in performing an operation connected with or related to war production, except in such classes of cases as may be prescribed by the Director. The borrower's certification of his investment in termination inventories and receivables and of the amounts payable to subcontractors should not be questioned by the Federal Reserve Bank or the contracting agency unless there is reason to believe that it is substantially overstated in value. Financing institutions should be encouraged to make unguaranteed production and termination loans, and the fact that a financing institution has made such an unguaranteed loan shall not affect its right subsequently to apply for a T-Loan guarantee, even if the proceeds of the T-Loan are used to retire the existing loan.

(b) If a contracting agency which utilizes the Federal Reserve Bank as fiscal agents for T-Loan guarantees has local representatives in connection therewith, it should delegate to such banks authority to approve, after consultation with and in the absence of objection by such representatives, all applications for guarantees of loans totaling (1) $500,000 or less to any one borrower when the requested percentage of guarantee is not in excess of 90 percent, and (2) $100,000 or less to any one borrower when the requested percentage of guarantee is not in excess of 95 percent. Any such contracting agency which does not have such local representatives will provide them in the localities where, and at the times when, it is determined that they are required, in the light of its prospective volume of contract terminations and after consultation with the Director, and in the absence of such representatives should delegate such authority to the Reserve Banks as is necessary to insure prompt processing of applications for and execution of such guarantees.

(c) Conditions other than those required under the standard loan agreement should be prescribed by the contracting agencies or the Federal Reserve Banks only in exceptional circumstances and when they are clearly necessary to protect the Government's interest. Additional conditions agreed upon by the borrower and the financing institution, if not unreasonable and not inconsistent with the standard loan agreement, should

not be objected to by the contracting agency or the Reserve Banks.

(d) The requested percentage of guarantee should not ordinarily be questioned by the Federal Reserve Bank or the contracting agency if it does not exceed 90 percent; and a contracting agency should not authorize a percentage of guarantee in excess of 90 percent, or 95 percent in the case of small loans, unless the circumstances clearly justify the financing institution in requesting it and other means of interim financing are not promptly available.

(e) In general, the percentages in the loan formula certificate agreed upon by the financing institution and the borrower should not be questioned by the Federal Reserve Bank or the contracting agency. After consultation with the Board of Governors of the Federal Reserve System, the contracting agencies will, to the extent practicable, specify general criteria or standard maximums which may be employed in typical classes of cases.