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If an HQ looses strength points it will reduce its ability to supply nearby units. Does being understrength reduce the command rating that it contributes to attached units as well? The game manual is not clear on this point. Grateful for your clarifications.

It sounds like it would be reduced under the conditions stated in section 5.12. How much better a commander with a good rating would fare as opposed to a poor one is hard to say.

Yes, that was the only reference I could find in the manual to the effect on the command rating. My guess is that the effect will be proportional to the reduction in strength. Thus a leader with a rating of 5 would provide only a command bonus of 4 if reduced to strength of 8. But it would be good to know that for certain.

Please see 7.30.4. Unit Readiness and Its Effect on Combat on page 86 (96 of 216) of the Manual, and especially the first paragraph on the next page, entitled The Importance of HQs.

Is this effect instantanious?
Because I did a little hotseat experiment (in the WW1 game, but it should be the same, right?):
I put some units under the same HQ and put the units and the HQ on the front line. Then I ended the turn with this side and started to attack the HQ with units from the other side, while monitoring the readiness and moral of the HQs units. The morale was not affected at all and the readiness of the units was slightly INCREASING because the HQ got XP from the attacks on itself. So a str 2 HQ with a bit of XP gave a higher bonus to its units than the same HQ at str 10 and 0 XP.

It will recalculate at the beginning of the HQ owner's next turn.

I've found that if you damage or destroy an HQ first, attacking units it controls(ed) gets better predictions/results than attacking said controlled units first.