'Incomplete' Report Used to Save Lockheed Project, Pentagon Says

Ai Force pilots salute the arrival of a Lockheed Martin-built C-130J cargo plane at Little Rock Air Force Base in Jacksonville, Ark. The plane was originally intended for commercial use. (By Mike Wintroath -- Associated Press)

Defense Secretary Donald H. Rumsfeld relied on potentially faulty data when he saved Lockheed Martin Corp.'s C-130J Hercules from cancellation last year, the Pentagon inspector general said in a report yesterday that partly blamed a poorly written contract for keeping the transport plane alive.

The Pentagon had recommended canceling the program, which had been plagued by rising costs and questions about its performance. However, an Air Force report to Rumsfeld concluded that it would cost nearly as much to cancel the contract -- about $1.78 billion -- as it would to complete it. That finding, along with intense pressure from members of Congress worried about jobs in their districts and industry leaders worried about Lockheed, prompted Rumsfeld to reverse course.

The new report challenged the Air Force's conclusions, saying it may have overstated the cost of canceling the contract by as much as $1.1 billion.

The cost estimate used by Rumsfeld to revive the Hercules was "incomplete and did not provide reliable information for making an informed decision," the report said. With the information given, Rumsfeld could not decide "the cost-effectiveness of continuing or terminating" the contract.

Part of the problem, the report said, was that Lockheed was operating under a commercial contract and not a typical government one, which meant the company did not have to provide cost and pricing data, including its profit margin.

In addition, "conflicting statements and ambiguities in the contract limited the Air Force's ability to assess" cancellation costs, the report said.

Lockheed began developing the C-130J in the early 1990s, using more than $1 billion of its own funds and expecting to find commercial customers for the large cargo aircraft. That market did not materialize, though.

In a response included in the report, the Air Force said its estimate of the cancellation cost was based on its best interpretation of the contract.

"The Air Force believes that the C-130J termination cost estimate was supported with the information that was available at the time," said Lt. Gen. Donald J. Hoffman, the military deputy in the Air Force's acquisitions office.

The proposed cancellation of the C-130J was part of a package of $30 billion in cuts aimed at reducing the federal budget deficit and offsetting the costs of the Iraq war. The cuts were decried by Congress, which accepted some but reversed others, including a plan to retire an aircraft carrier early.

The C-130J, which is used to move soldiers and equipment to hot spots, has been lambasted by watchdog groups for years for its escalating costs and checkered performance record.

Lockheed has delivered more than 60 of the planes to the Air Force and Marines at a cost of $66 million each.

"How could you decide to buy something and not know how much it costs to get out of the contract?" said Jennifer Gore, spokeswoman for the Project on Government Oversight. "This shouldn't have been a commercial contract in the first place."

The inspector general's office has previously reported that many of the planes Lockheed delivered did not meet their contract specifications or operational requirements and that the Air Force fielded aircraft that could not perform their intended missions. The Air Force has challenged those findings.

The company declined to comment on the latest report.

After facing criticism from Sen. John McCain (R-Ariz.), the Air Force said last year that it would convert the commercial C-130J contract into a traditional one.