In the quest for federal block grants to create jobs in small communities, Charles County's commissioners have chosen to seek funds for a water and sewer line for a proposed industrial park. The project that lost out in last month's competition was Melwood Farm Training Center, which teaches woodworking to mentally handicapped persons.

For more than two years, eight mentally retarded persons at Melwood Farm in Nanjemoy, about 30 miles south of Washington, have worked in a wood shop with a plastic sheet for a roof and a plywood floor laid over freight skids, steadily developing a craft they hoped would earn them an income.

Then earlier this year, the state fire marshal declared the rickety structure a fire hazard and ordered its heater torn out.

With no money to rebuild the shop, officials at Charles County's private training center for the retarded faced having to close when cold weather returns.

One last hope that Melwood Director Daniel D. Pearce could see was in the $540 million Small Cities Community Development Block Grant jobs program that Congress created in March as part of the $4.6 billion federal jobs bill. It was part of the legislative drive to create "productive employment for jobless Americans" and to give "humanitarian assistance to the indigent."

Pearce asked the county to request $40,315 for a new building from the federal Department of Housing and Urban Development, which grants the funds.

Melwood's project, though, was turned down before it ever left the county. In other HUD programs, the county commissioners would have been allowed to include it on a shopping list of projects. But there has been such a great demand for the block grant funds across the country that officials said they can choose only the most promising projects. HUD's Maryland regional office restricted each jurisdiction's request to a single project, and the competition has come down to one desperate neighbor against another.

Last month, the county commissioners decided to back a $173,000 project that would run water and sewer lines to a yet undeveloped industrial park, the La Plata Commerce Center.

Charles is among nine other counties and 17 municipalities in the state requesting a total of $6.5 million; HUD has only $1.4 million to offer them.

"Communities with the greatest need and poverty, and good projects that are going to have an impact on the problems they've identified--those are the ones that will be funded," said Joseph J. Connor, program manager for HUD's regional jobs-bill block grant program. Officials expect to announce the chosen projects by early September.

A new facility for Melwood's wood shop and its adjoining ceramics shop would have provided immediate construction jobs, Pearce contended, and would have enabled Melwood to join its Nanjemoy wood shop operation with its other center in Upper Marlboro, changing the status for all 16 trainees to full-time, sheltered employes.

The county decided that the sewer project, backed by Raymond T. Tilghman, executive director of the county's Economic Development Commission, was likely to produce more results.

"There's no question that the commissioners are very sensitive to the needs of Melwood," said Marland Deen, president of the county commissioners. "But it came down to having to make the decision: We had to pick the project that would do the most good for the most people."

Margaret E. Cheseldine, a former HUD administrator who is the county housing officer and who headed the block grant task force that recommended the sewer project, said: "We are looking at 350 versus 16 jobs that would be created."

The county had zoned the 136 acres for industry as early as 1978, but with other jurisdictions offering hookups that Charles could not, it wasn't until this year that the planned industrial park was able to attract its first tenant--a tractor dealer who agreed to use an experimental septic system.

Only 100 of the jobs Cheseldine projected would come directly from water and sewer line construction, she said. The rest are estimates for construction and jobs that officials hope would be brought by industries attracted there, she said.

Tilghman acknowledged that there is no guarantee that sewer service would bring industry to Charles County, but added, "If the water and sewer doesn't go down there, there's no possibility."

While the commerce center's backers hope for a favorable HUD decision, Melwood officials are not optimistic about the future of their woodworking students.

"This was going to be the beginning of an industry," Pearce said, stepping into the cramped workshop where the crew has produced large, sturdy picnic benches of treated pine that sell for $125 each. "The likelihood is that the program will shut down and the clients will have to do nonproductive work."