4749. We shall see that when we come to it.

Chairman.

4750. May we go to the second paragraph of the Report: "Special

advances to Contractors at the end of the year." This is a general question of very great importance which has been often before this Committee and is referred to a great many times in the Epitome which we have here. Tell me if I state it correctly and see if I understand it. There are two kinds of contracts. One provides for payments as progress is made and the other does not provide for that. Where no payments are provided for as progress is made, it has been the custom acknowledged by this Committee to make payments on account from time to time as the work done justified it, but if I understand it rightly, your Department has now departed from the previous custom in two respects; in the first place, where a contract itself provides for payment of certain amounts as progress is made, you have made payments in excess of this provision, and in the second place, whereas hitherto payment for work done has only been made to the extent of 80 per cent., 20 per cent. being kept in hand till the close of the contract, you have been making advances up to 100 per cent. of the work done : Is that a correct statement?— That is a correct statement of the points brought forward by the Comptroller and Auditor General. (Sir Malcolm Ramsay): This relates, of course, to a special class of cases where payment is made in order to avoid carrying over into the next year. 4751. The purpose of making these payments has largely been not merely to accommodate the contractor, but so that you may not show a surplus on this year which would have to be surrendered and revoted by Parliament for the next year?--(Mr. Bland.) That is very much the object.

4752. I will just read what I think is the most pithy part of what the Public Accounts Committee has said, and it is on page 255 of the Epitome: "These so-called special cases may be defined as cases which fulfil the following conditions: (a) Although the instalment is not due, the advance has been really earned. (b) The work done for which the contractor cannot claim payment at so early a date, is work which has not been pro

[Continued

as an

vided for in the Estimates of the following year, but formed part of the authorised programme of the current year, and has in that year been provided for by a Grant from Parliament. (c) The work done and the materials used are capable of identification on the premises of the contractor, as having virtually become the property of the Crown." Those are the three conditions. Will you tell us why the Department have departed from precedent, if you admit they have done so?-Well, Sir, I do not think I admit it, because if you take a contract which provides for payment by instalments, an advance made on an instalment seems to me exactly in the same category advance made on the total of a lump sum contract. You frame the particular Estimate on the basis of paying in the current year three out of five instalments and two are going to run over into the following year. When you reach the 31st March your contractor has not quite completed his third instalment, and if you are going to let the whole of that instalment lapse into the following year you are defeating the very object the Public Accounts Committee had in view, and therefore, to avoid that, you give an advance on the instalment. You have work done which is in excess of the previous instalment stage, but you have not reached, we will say, the third instalment stage. Are you therefore precluded from paying in advance at all to the Contractor? If that is so, then it seems to me you defeat the object of the system adopted by the Committee.

4753. The Committee has very carefully hedged round the cases in which those payments could be made. Clearly, on the first blush of it, you do not pay money until it is due under the contract. This is paying the money before it is due under the contract, and the first condition is that although the instalment is not due, the advance has been really earned. If the contract does not provide for any instalments, then you are thrown back upon this paragraph, that you are to pay what has been earned, but if the contract provides for instalments at certain times and under certain conditions, surely it is right to say that you could not speak of the money as having been earned until the contract has been fulfilled up to the point of the first instalment or the second instalment or the third instalment?--I submit that the position is the same as regards an instalment as

it would be as regards the whole contract. Take a contract which is under inspection, you get a certificate from your inspector showing that work has been done up to 80 per cent. of the value of your contract and the stuff is still on the contractor's premises. That is what you mean by saying that the advance has been really earned. In the period of your instalment contract your contractor has to earn £100,000 in five instalments, and if at the 31st March he has only earned £80,000 out of the £100,000, still that £80,000 has been earned, and you therefore pay him that at the end of March.

4754. I see your point of view, but would it not in ordinary business be said if the contractor came and asked for payment on account, "Well, but the contract provides when the payments on account are to be made, and therefore we are going to stick to that "? If, on the other hand, the contract did not provide for that point, it would be reasonable to say: "This has not been provided for in the contract and we must provide for it according to reasonable dealing between man and man"; and when the contract provides for a certain rate of instalments is there not a very strong argument for sticking to that rather than making some variation?-With all deference, I would still try to work the analogy, because there are other contracts which provide only for one final payment when the whole work has been completed, and you depart from that at once when you say that you will pay for a proportion of the whole work which has been earned up to the 31st March. So on that analogy what we did, simply, was actually to pay for that proportion of the third instalment of the contract which had been earned by the 31st March, and I think it is analogous in that way.

4755. What do the Treasury say to that? (Mr. Millar.) I think it is the same in principle. The point is that this payment is made not in these cases for the convenience of the contractor at all but for the convenience of the Department in order to save them having to surrender so much which has been voted for this year.

Sir William Barton.

4756. Do you think that payments made in that way are justified?--I think it is arguable. But I observe that it has been the practice agreed upon between the

[Continued

as

con

4758. What does the Comptroller and Auditor General say-has it ever been settled on non-progress payment tracts? (Sir Malcolm Ramsay.) I think I am right in saying that the point has never been exactly defined by this Committee. They have laid down the general principles, and it seemed to me proper to call attention to these points with a view to having them settled. I should say to Mr. Bland's point that there is a much weaker case from the public point of view, which is the only point of view we are considering, for making advances on instalment contracts than on the others because presumably the sums involved which might be carried over on a contract which makes definite provision for progress payments are ex hypothesi smaller than when you have a contract which contemplates one large payment at the end.

4759. Can you tell us what has been the practice hitherto in those progress payment contracts?-I have not been able to trace any case where advances have been made on the progress contracts.

Sir Henry Craik.

4760. You have got two classes of contracts, those payable by a lump sum at the end and those payable by instalments. Now, it appears in practice that those do not cover all the cases, because the Ministry have found it necessary to invent a new system which neither conforms to the payment at the end nor to the payment by stipulated instalments.With deference to the right honourable member, I should put it in this way, that

15 June 1922]

the Committee has laid down principles, and this is a new point in the application of them. The principle is the same, that under certain circumstances you may anticipate payments to contractors in order to avoid carrying over to the next year the fulfilling of a provision in this.

Sir William Barton.

4761. Excuse my interrupting, the payments are for something which has been actually rendered.-(Mr. Watson.) For work done.

4762. What do you mean by anticipation, then? (Sir Malcolm Ramsay.) They are not due under the contract. Let me explain it by an illustration. One of the contracts in question was a contract with Napier and Son for the production of engines, and a progress payment of 60 per cent. of the contract price was due when each engine had been erected and was ready for test. Towards the end of the year it became evident that the contractor had completed 60 per cent, of the work, but he could not get any engines erected, and still less tested, and in those circumstances the Ministry made an advance of about 50 per cent. of the contract price, which was not due under the contract at all, but was a payment for work done up-to-date on the value of the work done.

Chairman.] There I would suggest that was distinctly wrong, because the engines had not been tested, and you could not tell whether the work was efficiently done.

Sir William Barton.

4763. Why did you make that payment? Because, as I understand, there was no provision in the Estimates for next year.

4764. Do you mean that you paid the money simply because there was no provision in the Estimate for the next year in the case of any one of your contracts? -It is partly for public reasons; the money has been voted in this year for the particular work, and the Estimate for the next year was framed on the assumption that the payments would be cleared off. The object is to avoid surrendering the grant of Parliament in respect of the current year and having a charge put on the next year's Votes, in which no specific provision has been made to meet it.

Mr. Stewart.

[Continued

4765. Is it not quite common for contractors to require a little money as they go along? They get it through their bankers as a rule.-These advances are made not for the convenience of the contractors, as Mr. Millar has already pointed out.

Sir William Barton.

4766. Is that done in accordance with something established by this Committee? -Yes. (Mr. Bland.) The general principle of it has certainly been laid down by the Committee. (Sir Malcolm Ramsay.) The question is what is the interpretation of the principles; are they to cover contracts which provide for regular progress payments as well as contracts which make no provision for progress payments, and the second point is if you make those payments at all ought you to pay as much as 100 per cent. of the value of the work done?

Chairman.

4767. As to the first point where those payments are made and the things still remain on the contractor's premises, because that often happens, is there not a serious danger of public loss in the first place because the goods cannot very well have been thoroughly examined and checked for quality and tested, and so on, if they remain on the contractor's premises, I take it; and in the second place, there is the danger of fire. There is one instance on this list here of Government goods having been burned on the contractor's premises and we have had to write off the loss. I am not quite sure whether they have been paid for or whether it was reasonable in the circumstances that we should pay for them?(Mr. Bland.) I am not sure about that particular instance, and we may have had to pay the contractor simply on the ground that we are our own insurers and take the risk of loss by fire ourselves. On your earlier point, Mr. Chairman, may I say that the aircraft and engines are rather a peculiar class because they are inspected all the time during manufacture and before delivery, so that when we pay for aircraft and engines on the contractor's premises we really do know that that work has been done and has passed inspection.

Sir William Barton.

4768. I thought Sir Malcolm Ramsay told us that you had just paid for engines

which had not been tested?-They had not been finally tested, not tested in the aeroplane in the air.

4769. That is the only test you as Department are concerned with, is it not? That is the final result, but there is the process of inspection going on all the time during manufacture; every part is inspected as produced.

4770. That is technical inspection, not an inspection based on accounting?—No, but that argument would vitiate any payment on account at all on this class of

cases.

4771. Then it seems to me that there is an overlapping between the two kinds of advance payments; the whole thing seems not to be on a clear footing. You have two systems which more or less merge into each other, and there is no clear definition of what the one is and what the other is?-May I carry it just a little further? I would like to say that we have assumed, and I believe Mr. Watson of the Treasury bears me out, that the practice of paying advances in respect of instalments on a contract is more or less recognised. Then, in order to safeguard that we do not incur a public loss, we have paid less than the amount of the work done, except in a few cases which are referred to here by the Comptroller and Auditor General where we actually paid 100 per cent. of the work done, but in those, cases we were within the total amount of the contract, so that we still had our margin of safety, do you see? The total amount of the contract was not in danger of being fully paid up or exceeded, and we had our margin of safety there.

Chairman.

4772. Did the margin, although it represented a margin of the contract price represent any margin of the work done? -No, they got the full value of the work.

4773. What assurance was there that the work would be done?-That the further work would be done?-Yes.

Sir William Barton.

4774. What was the reason for doing it there? Why did you pay 100 per cent. on uncompleted work?-The reason is just the same our anxicty to spend the money in the year for which it was voted we should have to spend the money anyhow but in the right year.

Chairman.

[Continued

4775. We have really dealt with the first point, that is as to the paying of money in advance of instalments where instalments are provided for. Do the Treasury still think that that need not be objected to?-(Mr. Millar.) There seems to be some doubt as to the actual practice, and Mr. Watson has had some experience in connection with it. (Mr. Watson.) I am prepared to speak as to the War Office practice on the Committee's ruling and on the Treasury's ruling, and the War Office practice prior to the War was to make advances even in the case of contracts where payment was provided for by instalments. They made these advances towards the end of the financial year in cases, for example, where the contract provided for the payment of 40 per cent. on the material being ready and 40 per cent. on proof being passed of the shells, and the balance on delivery. If they had got to the stage, or nearly to the stage, of proof and some of the shells had passed, for example, they would make a proportionate payment on the second instalment for the convenience of the Department at the end of the financial year.

4776. Before the shells had been tested -before the remaining shells had been tested?-When some of the shells had been tested and it appeared likely that the balance would pass proof, they were perfectly willing under this scheme to make an advance to the contractor in order to save the surrender of funds.

Sir Henry Craik.

4777. But, Sir Malcolm, I want you to explain a little further the point I raised, as you did not quite remove my difficulty. When you are making a contract, as I understand you either arrange that the payment should be made when the work is completely done, or in other cases you think that that will not be fair and that you must make advances to the contractor and you arrange an instalment principle? (Sir Malcolm Ramsay.) Yes.

4778. But if you put any contract into that second category and say, "We will pay you on the instalment principle" why do you not adhere to that? You anticipate the course of the work, and in consequence of that anticipation you have arranged to pay by instalments. If it was not so, you would have had to make the payment when the whole work was done. Why are you going, having made

this bargain with regard to instalments, to re-open the question again and say, "We will do it even short of the instalment period and without the work always being thoroughly tested "? As I said before, are you not by that means establishing a new category of contracts, contracts which are neither to be paid at the end when all the work is done nor at fixed periods, but at certain uncertain periods anticipating the instalments arranged for? That is my difficulty, and I want to get that removed?-(Mr. Bland.) I quite admit that when you have instalments provided for, it reduces the need for discretionary payments, but I should be sorry to say that we had introduced a third category of contract, because it seems to me that all we are doing is extending the principle of advances from the first category to the second, the reaso:1 being that in the second category generally the amount involved is very large. otherwise we should not have divided it up in instalments. My view is that to pay an advance on an instalment is really much the same as paying an advance on a smaller contract on the total sum, provided always you safeguard the public from any loss; and here, I submit, the proof of the pudding is that we have not burned our fingers in any one of these cases. We have not lost anything by making these payments.

Mr. Stewart.

4779. Does the final decision as to the payment of this money rest with you?Yes, it rests with the Air Ministry within the rules which have been laid down and which the Chairman read out a little while ago.

4780. It is all explained to you and you pass the money as being due, do you? -Yes.

Chairman.

4781. Sir Malcolm, have you any further comment on that first point?(Sir Malcolm Ramsay.) No.

4782. The other point is as to advancing up to 100 instead of 80 per cent. of the value of the work done. Have you any precedent to quote for that?-(Mr. Bland.) The 80 per cent. is more or less a matter of War Office practice. I do not think there has been anything definitely laid down about only 80 per cent. of the work done, but the War Office certainly did institute that practice, and they made exceptions themselves in the

[Continued

case of firms who were known to have a small percentage of rejections. Now I maintain that our aircraft and engines are in that position because we inspect ali the time during manufacture, so that there is no danger of a rejection. Then the further point I referred to a little while ago was this, that I think the safeguarding should rather be in relation to the total value of the contract than in relation to the particular amount of payment that has been earned by work done at the moment. I mean I do not see the harm of paying even up to 100 per cent. if you have still got a margin of 20 or 30 per cent. on the whole contract.

4783. That is assuming that the contractor is going to do the remainder of the work?—Yes.

4784. If he goes into liquidation, he is not? If he goes into liquidation there is that danger, yes.

Sir William Barton.

4785. Is it based on any ruling or is it just something which has been resorted to by the War Office?-That is all, really; it is a practice which grew up in the War Office.

4786. Do you yourself think it is justified? I think that to pay 100 per cent. is going rather far. I must confess frankly that I think paying 100 per cent. of the work done is going rather far, but I still think the point to safeguard is that there is a good balance left on the total contract.

4787. That is very doubtful, for this reason, that if you have paid for something which has not yet been done, the general experience is that it affects the efficiency of what remains to be done and what remains to be paid for. I am glad that you recognise that 100 per cent. is too high, and I think myself that you should stick to the ruling of 80 per cent.

Chairman.

4788. What does the Treasury say about this point?-(Mr. Millar.) Our view is that there should be some such recognised rule as that the payments should not exceed 80 per cent. We think it wrong in principle that you should pay the whole amount when you cannot prove that it has been fully earned and you do not know what may happen in the future.

4789. And the Comptroller and Auditor General? (Sir Malcolm Ramsay.) I very