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Cost-Cutting Undermining U.S. Weapons Programs

February 05, 1989|RALPH VARTABEDIAN | Times Staff Writer

When Rockwell International won a contract in 1987 to develop a new gunship for the Air Force, it appeared that the big aerospace firm had broken into an important business and had succeeded in at least partly offsetting the decline of its B-1 bomber program.

But today the company is mired in a colossal cost overrun--reportedly about $90 million--and has fallen behind schedule as it attempts to complete the first of the gunships, The Times has learned. The Air Force has notified Rockwell that it intends to withhold contract payments on the program.

Meanwhile, Rockwell has retained the defense industry law firm of McKenna, Conner & Cuneo to conduct a legal review of its contract with the Air Force, based on concerns that the contract might be flawed, Rockwell executives said in a recent interview. Among the issues under review is whether the contract fails to specify all the work necessary to develop the gunship.

The troubled program to produce the gunship, an aircraft known as the AC-130U, appears to be a case study of how the Pentagon's efforts in recent years to create aggressive competition and to drive down the price of weapons have created costly trauma, not only for industry, but also for the military services.

The legacy of the Reagan Administration's effort to drive down contractor prices and profits is a trail of sick weapons programs across the nation. Even though the Pentagon recently has moderated its adversarial methods, the contract pipeline is full of programs carrying significant liabilities for the industry.

"The defense industry is not like a department store, where you can take a few loss leaders," said retired Rear Adm. Stuart Platt, who helped set the competitive policies for the Navy. "The government is dealing with too powerful a hand. It has to remember that it has responsibility for stewardship of this industry."

At the same time, some defense contractors have become desperate to obtain new business in an era of tight Pentagon budgets, leading them sometimes to make fixed-price bids that are unrealistically low in their price projections and risky on technical issues.

"It shows what happens when you have aerospace companies without any business--they are willing to bid anything to get a contract," said Paine Webber aerospace analyst Joseph Campbell, who estimates that the defense industry faces more than $6 billion in losses on fixed-price development contracts.

For example:

- Former Navy Secretary John F. Lehman Jr. once boasted that he cut the development cost of the T-45 trainer aircraft in half with aggressive negotiating. But, as a result, McDonnell Douglas had to forgo wind-tunnel tests of the aircraft, among other things. Now, the Navy has discovered that the aircraft is unstable and needs engine modifications to even land on an aircraft carrier.

- Grumman, a Long Island aircraft builder, agreed to develop a new version of the F-14 fighter plane without any profit and under a fixed-price contract. It suffered a $120-million cost overrun, though it ultimately persuaded the Navy to absorb half the loss.

- The Norden unit of United Technologies was stung with a loss of several hundred million dollars on a fixed-price contract to develop new radar.

- Hughes Aircraft suffered a $250-million loss on a new tactical missile for the Air Force.

- Five major aircraft companies, organized in two teams, will collectively lose an estimated $2 billion on a project to develop a new Air Force fighter, which now faces delays because the government does not have enough money to keep it on track.

Surprisingly, the Pentagon has no administrative system to even monitor such losses, even though it so often expresses concern about its industrial base. A study by the Defense Science Board, a government advisory panel, concluded last year that "investors' skepticism has caused a virtual closure of the equity and debt markets to all but a few major contractors."

"These losses are weakening considerably the industrial base for national security," said Paul Nisbet, an analyst at Prudential Bache Securities. "It is a bad way of doing business, and it is government shirking its responsibility. They are shifting as much risk as possible onto the industry."

Hughes Official's Complaint

In today's competitions for defense contracts, companies sometimes go to extremes to get business. A few months ago, Hughes Aircraft bid a fixed price of $1 to win a position as a second supplier for a Navy electronic warfare program known as the SLQ-32. Although the future payoff may be substantial, the company is expected to lose as much as $10 million in qualifying as the second supplier.

"This is what we are forced to do," a Hughes official complained. "We don't like to make $1 bids."

The tortured case of the AC-130U illustrates how competitive bidding and tough Pentagon negotiating can turn a relatively small contract carrying a modest profit into a nightmare involving a major loss.

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