Cracking Down on Contractors

By Anastasia Toufexis

When the Pentagon detected irregularities in its audit of General Electric's contract to replace the warheads on Minuteman missiles, it did not file a civil suit. Instead, in an unusual move, it referred the case to the Justice Department for criminal prosecution. Last week U.S. Attorney Edward Dennis Jr. announced that a federal grand jury in Philadelphia had returned an indictment against G.E. for allegedly defrauding the Air Force of more than $800,000. In a swift and stiff follow-up punch, the Pentagon declared that it was temporarily barring G.E. from any new military contracts. As if that were not enough, the Pentagon disclosed that it was taking another "exceptional action" against the company, demanding that it voluntarily return what the Defense Department considers excess profits collected on contracts for Navy and Air Force jet spare parts. Amount of the requested refund: $168 million.

The one-two-three attack on G.E., the nation's fourth-largest military supplier (an estimated $4.5 billion in contracts in 1984), is only part of a broader fusillade that the Pentagon is aiming at the defense industry. Last week the Defense Department revealed that it has hit Pratt & Whitney for a refund of $40 million in higher-than-expected profits made supplying jet- engine spare parts. The widest barrel, however, remains pointed at General Dynamics, the country's top defense contractor, which found itself facing investigations by a federal grand jury in Connecticut and a congressional subcommittee as well as by Pentagon auditors (see following story).

The Pentagon crackdown comes just when the Reagan Administration is battling to push its enormous defense budget through an increasingly combative Congress. The White House has called for military spending to increase by 12.7% in fiscal 1986, to $277.5 billion. But critics, incensed by stories of $7,600 coffeemakers and $400 hammers, are now challenging the price that the Pentagon pays for everything from wrenches to warplanes. Air Force Secretary Verne Orr acknowledged the public furor in his dunning letters to G.E. and Pratt & Whitney: "National support for building military strength has been severely battered by public perception that we pay too much for the goods and services we acquire."

G.E., which supplies the Government with everything from washing machines and light bulbs to engines for the B-1B bomber and nuclear reactors for ships, is determined to retain its share of the defense budget. The Fairfield, Conn.- based company, which in addition to the suspension faces a fine of more than $1 million if found guilty on all 108 counts of the indictment, denies there was any criminal wrongdoing. The alleged fraud occurred between January 1980 and April 1983 while the company was refurbishing Minuteman warheads. One of the contracts on the $47 million project included a "fixed price incentive"--that is, costs above a certain price were to be absorbed by the company. According to the indictment, when labor costs on that contract hit the ceiling, G.E. illegally shifted the overruns to other contracts by altering workers' time cards without their knowledge. Some employees were asked to submit blank cards that were then filled out by managers. G.E. maintains that any juggled numbers were the result of simple procedural "errors" on only 100 time cards out of approximately 100,000 submitted, and has offered to reimburse the Government for mistakes.

The $800,000 involved in this criminal case is piddling compared with the $168 million repayment sought by the Government in a separate action against G.E. on billings for aircraft parts. A Pentagon audit of 8,000 agreements from 1978 to 1983 revealed that G.E. realized an actual profit of 24.6% on the deals compared with the anticipated rate of 15.2%. The Defense Department puts some of the blame on too lenient Air Force and Navy employees who negotiated the contracts. But it also accuses G.E. of overestimating inflation and labor costs and setting up a delivery schedule that benefited the company. For example, say the auditors, the company frequently delivered parts faster than called for (a somewhat unusual occurrence in the defense business), and thus kept as profit the money that had been factored into the prices as inflation adjustments.

G.E. is quick to agree with some of this, claiming that it did indeed make money by fulfilling its fixed-cost contracts at a lower cost and a quicker pace than projected. In effect, it argues, the Pentagon is complaining that an efficient company benefited from cost underruns, rather than being faced with cost overruns. The whole point of these contracts, argues G.E., is to give the supplier an incentive to perform better. "There were no cost overruns and no overcharging," declared Brian Rowe, a G.E. vice president. "The Government did not pay one cent more than it contracted to pay." Both G.E. and Pratt & Whitney, which on similar contracts made profits averaging 14.6% instead of the projected 13%, indicated that they would not meet the Government's refund request.

Some critics were skeptical of the Pentagon's ballyhooed crackdown. "It's all show," said George Spanton, who was a Defense Department auditor for 25 years and became a celebrated whistle blower. "I can assure you that the last four years have been the worst that the department has seen. They are going after the brush fires."

The Pentagon's Inspector General, Joseph Sherick, counters with an impressive array of statistics that he says reflect a near doubling in the amount of savings and avoided waste at the Defense Department in each of the past three years. If he is correct, such vigilance will eventually do more than simply save money. More important, it will restore the public support for a stronger defense that has been squandered by repeated revelations of the waste, fraud and abuse that Ronald Reagan pledged to conquer.

With reporting by Jay Branegan/Washington