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Mr. RABAUT. Does it affect the total amount of money on the bid?

General CASSIDY. No, sir; that relationship between the subcontractor and the prime is their business, and the prime gives us his bid.

Mr. RABAUT. It does not change the category of the contract?
General CASSIDY. No, sir, it does not.

Mr. RABAUT. It does not make any difference whether it is in either stage in the $500,000 class or those up to $650,000 ?

General CASSIDY. Yes, sir; we are urging our contractors to consider subcontractors from labor surplus areas, instead of using a sole source, or using the same man every time in their subcontracts. We are urging them to get out and use other small contractors, small businesses and labor surplus area subcontractors; but this is a question of working with the prime contractor and urging him to do it.

PROGRAM CHANGES

Mr. Cannon. Before we close, General Cassidy, we have a letter here from Secretary Stahr under date of April 14 concerning two proposed program changes. Would you explain those to the committee?

I will say to the committee I wish you would give this matter some attention because we are going to have to act on this proposal made by Secretary Stahr.

ACCELERATION OF CONSTRUCTION ON MAXWELL LOCKS AND DAMS General CASSIDY. The first item in the letter is with respect to Maxwell locks and dams, a replacement structure on the Middle Monongahela. The successful bidder was the Dravo Construction Corp. The contract time in the bidding was 1,000 days. The corporation has come in with a proposal to reduce the contract time to 745 days at their low bid price, which would mean that we would require money at a faster rate in order to pay them for the work they are doing.

They are going to reduce time and put the dam and locks into operation about 1 year earlier. This would mean a saving to the Federal Government of about $125,000 in Government costs, and it would mean, of course, that the benefits from that construction would be available 1 year earlier. It is a good proposal from that viewpoint.

There are funds in the amended budget to carry on the construction at this new rate. However, we will need about $1,700,000 for the remainder of this fiscal year to pay the contractor at that increased rate. Our 15-percent transfer authority is $200,000. So we would need the authority of this committee to transfer from other projects $112 million to permit the contractor to develop his project about 1 year earlier.

Mr. CANNON. And you recommend that because of the saving in cost and because it encourages completion of the project at an early date?

General Cassidy. And perhaps one other consideration, sir. This is in a labor surplus area.

Mr. Caxxon. Now the second, one, General.
Mr. RABAUT. Mr. Chairman.
Mr. CANNON. Mr. Rabaut.
Mr. RABAUT. Off the record.
(Discussion off the record.)

INCREASED COSTS IN DREDGING ON THE DELAWARE RIVER

General CAssidy. The second one was a contract for dredging on the Delaware River. The firm that took the contract was not an experienced firm in this particular type of work. In addition, they ran into changed conditions and we did recognize the changed conditions. Our boring logs said they would hit sandy clay and clayey sand, and they actually hit bedrock. There has been about a year and a half of negotiation with the contractor. His original bid was 68 cents a yard. He has claimed up to $2.30 a yard. We have audited his books and arrived at what we consider a reasonable figure. He came in with a settlement figure of $1.37 a yard. Actually it is slightly less than what we have arrived at, and we have accepted that figure for settlement of the contract. This means in order to pay him off on a contract which has been completed and which has now been settled, we believe in fairness to both parties, the Government and the contractor, that we need an addditional $1,094,000. Mr. CANNoN. What would have been the situation, General Cassidy, if you had a contract with him under the impression that he was to work in rock, and later it developed that he was working in clay and sand 2 General CAssidy. We pay him for the material removed as specified in the contract. Mr. RABAUT. How much work did he get done? General CAssidy. He has completed the contract. Mr. RABAUT. How much is the increase? General CAssidy. $1,094,000. His original bid was 68 cents and he increased it by 69 cents. So it is roughly double the original contract price for some areas. Mr. JENSEN. Mr. Chairman. Mr. CANNoN. Mr. Jensen. Mr. JENseN. General Cassidy, did this contract with the Government provide for additional pay should he encounter harder subsoil or rock, or whatever you say he had to work in General CAssidy. *. is a changed conditions clause in all of our contracts. Under this the contractor makes the claim that the conditions were not as represented in the basic contract, and for some sections of this river we have had to agree with him that the conditions were changed. Mr. CANNoN. In cases like that, who makes the borings? Does the Corps of Engineers make the borings, or the contractor? General CAssidy. The Corps of Engineers makes the borings. Mr. CANNoN. Prior to the ...} General CAssidy. The Corps of Engineers. Mr. JENSEN. That is the question I was going to ask. Mr. CANNoN. And you didn't hit rock then? General CAssidy. The interpretation of what came up from the borings in the laboratory was not correct. Mr. JENSEN. That brings up this question: I presume that before you sign a contract you demand a performance bond from the contractor, do you not? General CAssidy. That is correct.

Mr. JENSEN. Had you not agreed on a compromise price for this contract, and had the contractor not been financially able to stand the loss, the bonding company would have been required to finish the contract ?

General CASSIDY. This is correct.

Mr. JENSEN. After the contractor had discovered that he had to remove rock instead of sandy clay, he would have then so informed the Army Engineers, which I presume he did do at that time, did he not?

General CASSIDY. He did, sir.

Mr. JENSEN. And that it would necessitate a greater cost for him to finish the contract. Now, at that point did the bonding company intercede with you and ask you to make a settlement with the contractor?

General CASSIDY. I do not know what action the bonding company took with respect to the contracting officer of the district, but the contractor himself made the claim in accordance with the established procedures of the contract. That claim has been investigated and considered and then we actually audited the contractor's books to see what his costs were. Then in the negotiations between the contracting officer and the contractor, we have arrived at a settlement cost.

Mr. JENSEN. Was the contractor a large contracting concern, General?

General Cassidy. He was a large contractor, but he was new to dredging.

Mr. CANNON. What would be his remedy if he went to court? Could he expect as favorable or less favorable settlement than you propose ?

General Cassidy. That is really a hard question to answer, sir, since that would be up to the court. Usually his next step would be to continue his appeal to the Board of Contract Appeals, our own board, for consideration. If he then appealed from that board, to go beyond that, he would have to take it to the Court of Claims and prove his case in the Court of Claims.

We believe we have arrived at a very fair settlement both to the contractor and to the Federal Government.

Mr. CANNON. Your recommendation as contained in this letter, is that we provide this additional money?

General Cassidy. That is correct, sir.
Mr. RABAUT. Mr. Chairman.
Mr. CANNON. Mr. Rabaut.

Mr. RABAUT. What laboratory made this examination, General Cassidy?

General CASSIDY. It was in the Philadelphia District, a Government laboratory. They made probe borings and also some drive borings to determine what was on the bottom of the river. From this the boring logs were written up which were given to the contractor on the drawings.

Mr. RABAUT. Did they make a sufficient number of borings according to the Army Engineers now? When did they wake up to this situation?

General Cassidy. According to our knowledge, or their knowledge of the river, they considered that they had obtained sufficient information. The information was not completely correct.

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Mr. RABAUT. It was about 100 percent off.
Mr. JENSEN. It must have been completely incorrect.

General CASSIDY. This is spotty and we are just making the adjustments at the spots where we didn't have the correct information.

Mr. JENSEN. Mr. Kirwan, I can well remember when a certain big dam was built in the West, and after the dam was under construction they discovered that the rock underneath the dam was full of cracks, and it was necessary to drill thousands of holes and to grout those cracks with cement grout which cost, as I remember it, around $10 million. Do you remember that, Mr. Kirwan? Mr. KIRWAN. Off the record. (Discussion off the record.) Mr. CANNON. General Cassidy, in all the range of your experience, is this the only instance of this character, or are we to expect to have other instances presented for readjustment?

General CASSIDY. It is the only one that has come to my attention of this type in the past year and a half. We will make mistakes in trying to work underground, of this type, from time to time. For instance, last year you remember we missed an underground riverbed on one of the dams in Oregon. There it was and it wiggled right through all of our holes. The places where we did hit it we thought it was a pothole, but actually it was an underground riverbed which was connected.

In the initial phases of designing, as we make our explorations, there is a decision on how far and how many holes you will put down to make sure you are right. We have the judgment of people familiar with the river and who have done the dredging before and are out there exploring. They thought they were right when they came up with the drive borings and the samplings they took. In certain areas of this river they were wrong and the contractor bidding on that for soft material actually found hard material, and we found that he was right. It was hard.

Mr. RABAUT. Do you think that the percentage of the dredging which they found to be in hard material in the river, justified the increased price?

General Cassidy. Yes, sir. We audited his costs, what he actually spent there, and took out some things and disallowed quite a few of his costs. Off the record. (Discussion off the record.) Mr. PILLION. Then the procedure would bypass the Army Engineers in making a settlement. Is that good practice? Would you advise that?

General CASSIDY. The first area in which we attempt to make a settlement is between the contracting officer and the contractor. If the contractor will not accept that settlement he appeals again and it will go to the division engineer, who goes through the entire procedure. If he appeals that, that goes to the Claims and Appeals Board in a regular trial procedure.

Mr. PILLION. Assuming that the contract was right and there was a mistake made that could not be helped and was not foreseeable, and your contract provided for it, then in such event he is entitled to such money. Is this the right way to settle it? Is there any precedent we may be setting here?

General Cassidy. No, sir. Under that changed conditions clause we have this type of problem coming up very, very frequently.

Mr. JENSEN. I presume, General, as soon as the contractor discovered the hard material he notified the Department. Then the Department, the U.S. Army Engineers, directed him to continue his work, and that settlement would be made which would be justified.

General CASSIDY. Yes, sir.
Mr. RABAUT. Will the gentleman yield to me?
Mr. JENSEN. Yes.
Mr. RABAUT. This contract is completed.
General CASSIDY. Yes.
Mr. RABAUT. But the project is not completed ?
General Cassidy. That is correct.

Mr. RABAUT. What effect is this going to have on the benefit-cost ratio? We are going to walk into a new price here, are we not?

Colonel SMITH. In the project as a whole we have overestimated the cost of work and, for instance, since we started the project the cost has gone down continuously. It is now down to $80 million. So actually the benefit-cost ratio has improved in spite of this claim.

Mr. RABAUT. What percentage of the project is completed ? Colonel SMITH. The project is approximately 65 percent complete. Mr. RABAUT. Do we anticipate a new price on the part still to be done, or do we figure that the borings there are more correct than this section that was just completed ?

General CASSIDY. This contractor, in his 68-cent bid, bid very, very low. So low that the other contractors came in and said that he couldn't do it. We have had difficulty with him right along and in our own pricing for this we priced it much higher than the original 68 cents.

Mr. RABAUT. Was he a contractor in character for this type of work?

General CASSIDY. He was a good contractor-an experienced contractor—but as far as I know, he had done no dredging before.

Mr. RABAUT. Then he was not much in character.
Mr. JENSEN. But he furnished a performance bond.

General Cassidy. He agreed to furnish equipment and a performance bond. In other words, he had the financial backing and could get the equipment we specified.

Mr. CANNON. Following up what the gentleman from Michigan says, if we allow this increase in this contract, does that mean we must allow a similar increase in the remainder of the contract ?

General CASSIDY. No, sir. This contract has been completed.

Mr. Cannon. This will involve further expenditure other than the expenditure you indicate in the letter?

General CASSIDY. That is correct.

Mr. RABAUT. They indicate further we will save some money on the whole project up to date.

Mr. CANNON. Gentlemen, what is your wish in the matter?
All those in favor show their hands.

Gentlemen, the committee approves unanimously. Thank you, General Cassidy.

General Cassidy. Thank you, sir.
Mr. CANNON. The committee will stand adjourned until 2 o'clock.

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