Running Down Overruns

Defense contractors have often been accused of playing fast and loose with the public's money by bidding low for a new project and later billing the Pentagon for enormous cost overruns. But now the financial tribulations of Lockheed (see following story), which has been directed by Congress to swallow some $200 million in cost overruns, has convinced other contractors that they had better spot and announce excess costs well in advance of production. Last week the top echelon of the Pentagon was debating the future of a major new weapons system after its builder informed the Navy that the contract was no longer economically feasible.

The contractor was Long Island's Grumman Aerospace Corp., builder of the Navy's long-awaited F-14 fighter, a swing-wing Mach 3 jet that is designed to waylay any enemy missile-armed bombers sent to attack American ships. In 1969, the Pentagon awarded Grumman a contract to build 722 of the planes, figuring to pay $11.5 million for each of them, or $8.3 billion for the lot. But last April, a Grumman official formally announced to Navy headquarters that it had become "commercially impracticable" for his company to construct more than the 38 planes that it is contractually committed to build. By the Pentagon's estimate, the real costs of producing each of the remaining planes in the order would be anywhere from $1 million to $3 million more than the contract price--a staggering total of $684 million to more than $2 billion. The reasons for the overrun, says Grumman President Llewellyn J. Evans, are the high rate of inflation since the original agreement was drawn up and a reduction in the company's other defense business, which has raised overhead costs for remaining projects. As it is, Evans figures that Grumman will make little or no profit on the first 38 planes, although they have cost the Navy some $800 million, including design and tests.

Hot Rage. The news sent Deputy Defense Secretary David Packard, the Pentagon's procurement administrator, into a hot rage. He was angered at Grumman for not putting up danger signals earlier, though Evans says that he "outlined" his cost problems to Navy officials as far back as September 1969. Behind closed doors in his E-ring Pentagon office, Packard repeatedly chewed out Navy brass for failing to give him early warnings of Grumman's troubles. Some of the officers present during these sessions later called Packard "unreasonable." One result of the mess is that Vice Admiral Thomas F. Connolly, the Navy's air-operations chief, faces early retirement. Packard, too, may be tiring of his Washington job. He seems eager to decamp for his California ranch.

More important is the questionable future of the F14. Costs aside, production of the fighter fell six to nine months behind schedule after a hydraulic-system failure caused the first prototype to crash last Dec. 30. Though company designers are convinced that the defect has been corrected, the plane has also been hampered by delays in development of its advanced-model Pratt & Whitney engine. An influential group of Congressmen has urged the Pentagon to scrap plans for any new fighters and concentrate instead on updating McDonnell-Douglas' widely acclaimed F-4 Phantom. At one point last week, reports TIME Pentagon Correspondent John Mulliken, the Navy's command was certain that Packard had decided to scuttle the F14.

More for Less. Packard was then confronted by top Navy officials, including Admiral Elmo R. ("Bud") Zumwalt Jr., Chief of Naval Operations, who is an uncompromising defender of the F14. Zumwalt argued that the new fighter is essential to U.S. sea defense because 1) it is a launching platform for the Navy's air-to-air Phoenix missile, the key to future fleet protection against enemy aircraft, and 2) no other Navy plane will be a match for the Soviets' newest interceptor, the MIG-23 Foxbat. In addition, Navy men point out, advanced models of the F-14 will use the same engine as the Air Force's F-15 fighter, which is being built by McDonnell-Douglas. Thus, cancellation of one craft might well price the other out of reach. A decision on whether or not to go ahead with the F-14 is due this week, when the military procurement bill reaches the House floor. F. Edward Hebert, Armed Services Committee chairman, has promised to offer amendments to the bill as recommended by a forthcoming Pentagon report on the F14. The report will almost certainly urge a drawn-out production schedule, providing fewer planes than the Navy would like and at higher costs than originally projected. Whether Hebert and Packard will abide by Grumman's final cost estimates is still open to question. If no deal can be worked out, says Grumman's Evans, "we should turn it off and get out of here." Any attempt by Grumman to abandon its contract might well result in a lengthy court battle with the Government.

Milestone Formula. The F-14 controversy highlights anew the gathering crisis in defense industries. The weapons builders are extremely vulnerable to the decline in defense procurements and the nation's growing disenchantment with the military. Grumman, long noted as a well-run company, apparently could not foresee some of its problems. To illustrate the cost imponderables, President Evans recently phoned a friend who is a General Motors officer and asked how much a car comparable to his new $4,200 Chevrolet Impala will cost in 1978, the year that Grumman's F-14 contract is supposed to end. The answer: between $8,100 and $8,900.

To reduce the margin for error by both the Pentagon and its contractors, Packard has devised a procurement plan that follows the "milestone" formula, under which some projects are being developed in coordinated stages. Plans would call for the engine and airframe of a new plane to reach certain "milestones" of development within stated periods of time. Production, the final milestone, would be ordered only after many other testing and prototype stages have been successfully completed, each under a separate and relatively short-term contract. Other plans specifying even more discrete stages of the funding and development of new hardware are also being discussed. Whatever the final answer, the Pentagon must make drastic changes in order to restore the confidence of both the public and, increasingly, its own contractors.

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