According to its advance billing, the A-12 Avenger 2 was to have been the Navy's next superplane. Faster and better armed than the Navy's current bomber, the wedge-shaped A-12 was designed to use the same "stealth" technology as its bigger brother, the B-2, but be light enough and small enough to fly off the decks of aircraft carriers. All that by 1994, at about $84 million per plane.
Today, however, the $50 billion A-12 program is in a stall. The plane is 18 months behind schedule, 10 percent overweight and as much as 80 percent over its development budget. All week, the chief executives of the nation's two largest defense contractors have been prowling the outer ring of the Pentagon, conferring with Navy officials in a desperate effort to save the plane and perhaps even their companies.
By Monday, Secretary of Defense Richard Cheney is expected to decide whether to cancel the program outright, as he has threatened, or bail out the A-12's contractors, McDonnell Douglas Corp. and General Dynamics Corp., as the Navy has recommended. According to sources, the Navy proposal would call for the contractors to deliver fewer planes over a longer time, while the Navy absorbs some of the hundreds of millions of dollars in cost overruns already incurred.
What is widely viewed as the A-12 fiasco has rocked the Pentagon and the defense industry. The Pentagon's top civilian procurement official, John Betti, was forced from his job, largely because of the A-12, and two admirals and a captain in the A-12 program office have been censured for their handling of the program. The Justice Department, meanwhile, is pursuing charges of fraud and deception in contractor payments.
Cost overruns, management snafus and even fraud are nothing new at the Pentagon. But the A-12 was supposed to be different.
In 1987, McDonnell Douglas and General Dynamics signed a "fixed cost" development contract that differed from the traditional Pentagon arrangements in that it required them to absorb all of the overruns on the program. Earlier "cost plus" contracts had allowed contractors to recover all their expenses for developing and building a new weapons system, plus a fixed profit margin.
Although the A-12 is only in its development phase, it may be as much as $4 billion over its $4.8 billion development budget -- the amount set in the contract for designing the plane and assembling working prototypes. The contractors now maintain that they aren't fully responsible for the A-12's spiraling costs -- and in any case, absorbing them would seriously affect their financial health. They have asked the government to pick up $1.4 billion in added costs to keep the A-12 program going.
Both companies have announced that they will lay off 8,000 employees if the program is scrapped -- McDonnell Douglas primarily at its St. Louis facility, General Dynamics in Fort Worth, Tex. -- and have based their pitch to Cheney, in part, on the Pentagon's interest in maintaining a healthy defense contracting industry.
At the same time, the companies have tried to calm concerns of Wall Street and dismissed reports of overruns as overblown. General Dynamics has taken a $450 million charge on its books to cover A-12 overruns, while McDonnell Douglas -- thought to be the weaker of the two firms -- so far has refused to take any. And while investors have already driven down the price of both company's stock because of the A-12 program, defense analyst Wolfgang Demisch warns that potential overruns on the A-12 could wipe out most of the net worth of both of the contractors in a worst-case scenario.
Although some sort of bailout for McDonnell Douglas and General Dynamics would not be unusual -- the Pentagon has given contractors financial assistance in the name of national security more than 6,000 times since 1958 -- a government subsidy of the A-12's contractors "would certainly raise eyebrows in Congress" because the overruns are so large, a staff member of the House Armed Services Committee said earlier this week.
Moreover, defense industry observers say that by admitting the A-12's fixed-price contract was flawed, the government may provide a legal opening for other troubled contractors to ask for the taxpayers' help.
"If these guys are bailed out," said former Navy secretary John F. Lehmann Jr., "there's going to be a long line at the pay window."
Added an executive of another major defense company, "We're watching it very closely. If there's a decision to provide additional support for the contractors on the A-12, it seems logical that other companies that sustained losses will be entitled to recoup. There was a lot of money lost on fixed-price contracts."
Indeed, another former Navy official, who asked not to be named, said he expected the contractors of several major weapons projects -- such as the Air Force's C-17 cargo plane and the Navy's T-45 trainer jet and V-22 tilt-rotor plane -- would almost surely ask for billions of dollars in relief if the A-12 contract were renegotiated.
"Name a number," said the former Naval official. "This could be astronomical."
Ironically, critics of fixed-price contracts usually point the finger at Lehman, who was instrumental in adopting the procurement method at the Pentagon in the early 1980s. The goal of the fixed-price method, Lehman said, was to impose financial discipline on contractors and military officials alike by preventing them from changing a weapon's design in the middle of production. "Gold-plating" has frequently been blamed for driving up the cost of ships, planes, tanks and missiles and other weapons.
"Now, it is clear, the John Lehman approach to development contracting -- placing contractors in a position of virtually unlimited financial risk -- is seriously weakening the U.S. industrial base," wrote Prudential-Bache analyst Paul Nesbit last month.
In an interview, Lehman said his insistence on fixed pricing has been misunderstood. The Pentagon, he said, should not have imposed fixed-price contracts on companies working on the development phase of projects, in which obstacles -- and thus budgets -- are impossible to predict.
"It's not appropriate and never has been appropriate for ... exploring the frontiers of a new technology," said Lehman, who is now an investment banker in New York. "It's entirely appropriate for full-scale development. If you don't have the risks and unknowns reduced at that point, you shouldn't cross the threshold into development."
Despite this, the Pentagon has signed fixed-price contracts for the development of 22 new systems since 1988 alone, according to the Department of Defense. Among the most troubled programs was the P-7A, an antisubmarine plane, which the Navy canceled last July. The plane's prime contractor, Lockheed Corp., wrote off $300 million as a result of the program -- fully half again as much as the program's $600 million budget. Lockheed and a number of other large contractors now refuse to bid on development programs with fixed budgets.
Lehman said the A-12 program, which was begun during his time in office, did not constitute a totally new development effort and therefore costs should have been more predictable. "By definition, it was assumed the problems {in developing the A-12} would be dealt with by the B-2," he said.
Instead, McDonnell Douglas and General Dynamics say they have encountered numerous unforeseen problems that have slowed development.
Specifically, the companies are having trouble with the composite material that forms the A-12's radar-deflecting outer-skin. Unlike the B-2, the the A-12's composite frame not only must withstand the wind and salt spray of an oceangoing carrier but the pounding of carrier landings and takeoffs as well. As such, General Dynamics has had trouble making a strong enough frame that is also light enough, said a former Naval officer.
However, aerospace analyst Lawrence Harris, who has followed the A-12 program closely, said the General Dynamics team appears to have been stymied by a poor "flow of information" about stealth-manufacturing technology from the B-2's contractors, Northrop Corp. and Lockheed. "It's not quite clear that Northrop and Lockheed's experience base was transmitted to General Dynamics," Harris said.
The contractors also say they have been stuck with the added costs of innumerable design changes ordered by the military. The Navy, for example, changed the design of the two pilots' seats in the A-12 cockpit from a side-by-side arrangement to tandem style, a modification that reportedly drove up the program's costs by millions of dollars.
But Pentagon investigators say the contractors are not blameless for the A-12's problems. General Dynamics and McDonnell Douglas currently are the subject of a criminal investigation into whether the companies received hundreds of millions of progress payments for work that was incomplete or never performed. Company officials declined to comment on the allegations.
In addition, the Pentagon's inspector general said in a report last month that the contractors worked with high-ranking Navy officials to cover up the A-12's financial and engineering problems, and that Pentagon officials consistently provided incomplete and misleading data about the program to their civilian superiors.
Last May, the day after Navy Secretary H. Lawrence Garrett III signed a $1.2 billion limited-production agreement, the contractors made their first full disclosure to the Navy of the extent of the A-12's problems.
In another alleged incident raised by the inspector general, General Dynamics ordered government inspectors to relinquish their notes, claiming the company needed to review them for "security considerations." As a result, one set of notes was lost.
But canceling the A-12 program outright now would be painful not only to the contractors but also to the Pentagon. Cheney has said replacing the Navy's aging fleet of A-6 carrier bombers -- a plane designed in the 1950s -- is one of the Pentagon's "most urgent requirements," and the stealthy A-12 has generally been viewed as the A-6's prime successor. Such alternatives as starting from scratch with a new plane or retooling existing aircraft might be as expensive as building the A-12, some observers say.
In either case, the A-12 debacle "puts the nail in the coffin of fixed-price contracting for state-of-the-art technology," said Gordon Adams, director of the Defense Budget Project, a nonpartisan, nonprofit research firm. At a time of declining real defense spending, Adams said, the Pentagon will have to find ways to alleviate the financial strain on shrinking defense companies.
"No one has proposed abolishing the armed forces, so we're going to have to keep a production base in place," he said. "If we're not careful how we manage the build-down, the risk is that we're going to lose the research and development teams and our manufacturing capabilities. Then it's going to be difficult, and more expensive, and take longer to ever get it back."