Grumman v. the Navy

IN recent years the scenario involved in developing new weapons has almost always followed the inevitable course of a Greek tragedy: the contractor signs with the Defense Department to do the work; then he runs into cost problems and manages to renegotiate the contract at a higher price. The Pentagon's budget suffers. Lately an angry audience of Congressmen, fed up with the repetitive drama, has been clamoring for the Pentagon to get tougher with defense contractors. Last week Grumman Corp. of Bethpage, Long Island, talked tough in return as it argued the basic question of who pays for cost overruns: the contractor or the taxpayers? The company risked a court fight by flatly refusing to fulfill a contract unless it gets more money.

Grumman's action was prompted by the Navy's decision to exercise its option to order 48 more F-14 Tomcat fighter-bombers at a cost of $16.8 million each. Within hours, the company announced that it would not deliver the planes at that price. The terms of its contract, said Grumman, were legally unenforceable. Grumman took its case to the public in full-page ads in the New York Times, Wall Street Journal and Washington Post. The company, which has contracted to build as many as 313 Tomcats, said that it has already lost $1,000,000 each on the first 86 planes that it is producing (22 have been completed and tested, though none are yet with the fleet). Building 48 more planes at contract prices, Grumman officials claimed, would cause the company to lose another $105 million, a cost that would threaten its survival.

Defense Department lawyers refuse to say whether they will go to court, but the Navy has indicated that it simply does not believe Grumman will go bankrupt if it fulfills its obligation. Moreover, pressure from Congressmen to hold down weapons costs continues; Democratic Senator William Proxmire of Wisconsin, a sharp critic of the Pentagon, has scheduled hearings this week that will delve into the F-14 dispute. Grumman's major problem stems from the fact that the contract it signed in 1969 called for cost estimates to be projected up to five years ahead--a period that has proved too long for accurate forecasts. Indeed, the Pentagon has since switched to "milestone" agreements that call for development costs to be restudied every year or so and prices to be changed if necessary.

Grumman Chairman E. Clinton Towl insists that the rising costs are not the company's fault. He blames unexpectedly rapid inflation and the steady loss of other defense work, which made remaining projects more costly by forcing them to absorb more of the corporation's overhead. Grumman was hurt by termination of the moon-exploring Apollo program and the loss earlier this year of the prime contract for the $2.6 billion space-shuttle. Grumman sales in the first nine months of 1972 dropped 26% below the 1971 period, to $475 million, and profits dived 90%, to $1.4 million. Bankers are holding back loans, and the company was recently forced to negotiate a $36 million line of credit with the Navy.

The swing-wing F14, which can take off from land runways or carriers and has a primary mission of protecting the fleet against air attack, has proved extremely effective in tests. Actual construction of the planes in the latest Navy order is not set to start until mid-1974, and company officials believe that they can work out a satisfactory arrangement with the Navy before then.

The company has two other things going for it: the Navy desperately wants the plane, and the Government is not likely to force into bankruptcy a firm that has served it well. Still, Grumman's stand underscores the need for a hard new look at both the spirit and the letter of the understanding under which the Pentagon and defense suppliers work out their deals.

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