Smarter Bargainer

While a Senate subcommittee last week looked for signs of favoritism in the award of a TFX all-purpose-fighter contract to General Dynamics, many companies in the defense industry were worried about just the reverse: the Pentagon's increasingly sharper bargaining on defense contracts. The defense industry admits that Defense Secretary Robert S. McNamara's band of tough-minded procurement officers is doing the best job of military buying in history. "The longer the Government is in business, the smarter it gets," says Lawrence A. Harvey, president of Harvey Aluminum. "The smarter it gets, the closer it bargains. The closer it bargains, the lower the profits."

The Government's new tightfisted look is expected to produce big results. McNamara predicts that $750 million will be saved in this fashion in the current budget year, and that within five years annual savings will reach $3 billion. To get more for its dollars, the Government is cutting back on cost-plus-fixed-fee contracts, which guarantee a set profit regardless of how badly a company misses its delivery dates or its cost estimates. In their place, the Pentagon is increasingly signing fixed-price and incentive contracts, which reward companies with extra profit if they do well but dock them if they fall down. The Hebert act, recently passed by Congress, enables the Pentagon to delve deeply into the books of a defense supplier if he won a contract without competitive bidding, to make sure that cost estimates are accurate.

Auditing Forays. For Government contractors, the new toughness means mountains of paper work to justify every figure. A Midwest contractor found a Navy procurement officer stalking through his plant with a stopwatch, doing time-motion studies on the employees to see if the company could do the Navy's work more cheaply. The General Accounting Office, whose hawk-eyed civil servants dog the Pentagon procurers, has a San Francisco headquarters from which 85 auditors foray out to make sure that company costs are being held down. Chicago's Hallicrafters Co., which had a fixed-price contract to deliver electronic components for the Army's Nike-Zeus, is under Pentagon pressure to reduce the profit it made.

Where possible, the Pentagon wants parts re-engineered to save money; by relaxing overly rigid circuit requirements, it has chopped the price of capacitors in the Terrier missile from $73.96 to $8.54 each. On the other hand, where quality will save maintenance costs, the Pentagon demands higher standards of contractors. Massive amounts are being saved by putting items once sold by a single company up for competitive bids; in one such case, the cost of each aircraft windshield of a certain type was lowered from $669.72 to $443. Moreover, arguing that Government-supported research often gives a company an advantage in future Government orders or in making civilian products, the Pentagon is making companies pay more and more of the cost of research on defense projects.

Taking Advantage. As much as this delights the taxpayer, it is hard on defense-industry profits, which dropped from a pretax average of 6.3% of sales in 1956 to 3.1% in 1962. The Pentagon has canceled and held back on so many projects that many large companies, and hundreds of small subcontractors, are beginning to starve for orders. The Government is thus able to take advantage of a competitive situation that it created itself. Even the companies concede admiration for its tactics. "It would be a pretty naive Government negotiator," says Vice President William Hafstrom of North American Aviation's Autonetics division, "who wouldn't take advantage of the extremely severe market competition."

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