INDUSTRY: 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.