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Report Cites Boeing's Missile Defense Overruns

Aerospace: Anaheim program's cost estimates were up by $319 million in first six months of this year.

August 25, 2000|From Bloomberg News

Boeing Co. has incurred major cost overruns since January in managing the new U.S. missile defense program, according to internal Defense Department documents.

First projected at $2.17 billion, Boeing's estimate grew by $125 million between January and March, then by another $194 million by June 30, according to the documents prepared last month.

The program is managed at Boeing's Anaheim-based Electronic Systems and Missile Defense unit. Seattle-based Boeing is the largest private employer in Southern California.

"Trends indicate the situation may deteriorate even more," according to a July 25 quarterly program review prepared by Army Maj. Gen. Willie Nance.

The Pentagon is assessing Boeing's cost problems as it reviews a recommendation to President Clinton on whether the U.S. should proceed with construction of a key radar site in Alaska, a crucial step if the system is to be deployed by its target date of 2005.

Neither Boeing nor the missile defense program office responded to calls for comment.

The U.S. National Missile Defense system ultimately envisions a network of ground-based radar, low-orbiting satellites, communications equipment and at least 100 interceptor missiles based in Alaska or North Dakota. The system's cost is estimated at $36.2 billion.

It is designed to protect all 50 states from a limited number of missiles carrying nuclear, chemical or biological weapons, presumably fired by "rogue" nations such as North Korea or Iraq.

Despite the assessment, Boeing shares rose $3.06 to close at $53.63 on the New York Stock Exchange after Credit Suisse First Boston Corp. said it expects commercial aircraft manufacturing stocks to perform well over the next few months.

Cost overruns are the latest bad news about Boeing's management of the missile defense program. Boeing earlier this month reassigned its program manager after receiving only 50% of the bonus fee for which it was eligible during the six-month period ending April 30.

The missile defense program office cited the cost growth as a "major contributor" to the cut of about $20 million in the bonus, according to Defense Week.

The company also lost $2 million for being about five months late delivering software needed to analyze computer simulations of missile attacks.

The Pentagon reports do not detail why costs have increased, but the program has been rocked with a series of test delays and technical problems.

Boeing has a $2.2 billion, three-year contract to develop and integrate the system's complex components of 100 interceptors, warheads, radar and communications links.

The Pentagon has set aside $330 million, or 15%, for potential bonuses or award fees. The bonuses are the company's only source of profit on the cost-reimbursable contract. They are paid every six months.

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