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War Economy

Cost-plus Contracts for Defence Construction

Cost-plus Contracts for Defence Construction

The early use of special types of contract, and the resulting misunderstandings, disputes, and excessive charges are referred to cryptically in the Controller and Auditor-General's report for the year ended 31 March 1940. He says:

‘In view of the extreme urgency of the work of erecting and equipping the mobilization bases and training camps, both for land and air forces, the normal procedure of calling for tenders for the carrying out of the work was found by the Public Works Department to be impracticable, and the Hon. the Minister of Public Works approved the system of the letting of contracts on a “cost plus” basis. The “cost plus” contract system was a feature of armament expenditure in the United Kingdom and in the United States of America during the war of 1914–18.

page 343

‘Under the New Zealand system contractors are reimbursed for proved expenditure, and receive an additional percentage designed to cover general overhead and to return some margin of profit.

‘The Audit Office agreed to check before settlement all claims made by the contractors under this system, and this service entailed considerable urgent work on the part of my inspectors.

‘Some little time after the commencement of work on “cost plus” contracts the Public Works Department prepared a standard contract form which was drawn to embody the conditions verbally conveyed to contractors by Public Works Engineers. Several groups of contractors declined to sign the contract documents, claiming that the contents did not coincide with their impressions of the position, and that they did not wish to prejudice their rights to maximum remuneration. This attitude led to disputes during the settlement of claims, and several of the “cost plus” contracts when settled had to carry a final on-cost considerably in excess of the originally intended 7 ½ per cent. The intervention of Audit before payment resulted in substantial savings of public moneys, and contractors' claims in respect of one mobilization camp alone were, due substantially to Audit action, reduced by more than £8,000.’1

The refusal of contractors to sign the standard type of contract was a symptom of the rapid change in the market for war work. Because of the urgent need to get massive volumes of work done with limited resources, contractors soon found they had a seller's market for their services. Some exploited the position to the full.

Special types of contract were soon in extensive use for building operations, for shipbuilding and ship repair work, and for munitions manufacture.

The Government's difficulties were to get worse. The rapid upsurge of war expenditure through 1940, 1941 and 1942 brought it to levels, in 1943 and for the remainder of the war, which by peacetime standards would have seemed impossible for the economy to bear.2 Much of this money was spent in New Zealand and added to the pressure on the private enterprise part of the economy. There was mounting pressure on New Zealand producers, not only to handle the upsurge in Government contracts, but also to replace normal civilian supplies which could no longer be imported.

These extra demands fell on producers whose manpower was, by the end of 1941, seriously depleted and whose supply of imported page 344 materials had in many cases started to fall away even before the war. It was not surprising that control over contract work became difficult. Despite determined attempts to find new types of contract to meet the situation, the position continued to deteriorate. Only in industries where pressure of private work was successfully held back by controls could the Government expect fair treatment.

1 B1, Part II, 1940, p. ix.

2 See also Chapter 10.