McNamara's 97<-L-

The average net profit on defense jobs has dropped to less than 3-c- on every contract dollar. Even that ardent cutter of costs, Defense Secretary Robert S. McNamara, does not think that the profits of defense contractors can be cut further. In fact, he now hopes to save billions on his defense budget by offering higher profits to defense companies that can hold their costs down. "We mustn't expect the savings to come from the 3-c- profit the average defense contract now provides," says McNamara. "We must seek to cut the 97-c- of costs."

Rewards & Penalties. The Pentagon, after months of experimenting with various incentive contracts, in January will begin a system that will evaluate and mathematically rate the way defense companies perform on all noncompetitive contracts. Such contracts cover 60% of defense spending, and all the big-ticket hardware from Nike to Nautilus. The new system, devised by McNamara's deputy assistant, Graeme C. Bannerman, 53, will award extra profits to a contractor who stays within his bid (contractors now frequently run well over bids), delivers on time, finances the job without the help of Government money, contributes his own technology and accepts a fixed-price contract rather than cost-plus-fixed-fee.

The shift to fixed-price contracts alone could save 10-c- on each defense dollar, argues McNamara. In addition, the plan puts a premium on high quality workmanship and careful inspection procedures. The military officer watching each project will submit a top-secret report every six months evaluating the company's performance, and the report will figure heavily in whether a company gets future defense contracts.

The rewards of the new system could mean net profits as high as 10% for a company. The Pentagon says that one unnamed but efficient U.S. firm, in a test run of the new system, increased its gross profit from $805,000 to $960,000 on a contract for missile parts. But the system also includes, as well as increased rewards, penalties for failure to perform that could drive weak companies out of the defense business.

Wary Approval. The defense contractors have generally accepted the Pentagon's new approach, with some misgivings about how it will work out in practice. "Our fingers are crossed," says a wary spokesman for the Electronic Industries Association. "We've had a lot of sad experience with front-office policy being ignored or emasculated by the field." McNamara concedes that, if he were still president of Ford, he might be concerned about the new method of evaluating each company separately. "I might not have liked it at first," he says, "but my reaction would have been, I'm sure, to buckle down and not lose the business." That is exactly the reaction he hopes to inspire in the U.S. defense industry.

This file is automatically generated by a robot program, so reader's discretion is required.