Carter administration officials yesterday said they want to give two defense contractors $541 million more than Navy auditors say they deserve to resolve a dispute that has threatened to disrupt the Navy's shipbuilding program.
Overriding strong opposition from inside the Navy, civilian Pentagon officials concluded that the only Practical way out of their disputes with General Dynamics Corp. and Litton Industries was to make large cash settlements with both companies, they said yesterday.
At a hearing before the Senate Armed Services Committee, however, Sen. William Proxmire (D-Wis.) called the payments to General Dynamics and Litton "back-door welfare" that rewarded bad management in both companies and invited further abuses by shipbuilders in the future.
Proxmire released a previously confidential memorandum from Adm. H. G. Rickvoer, head of the nuclear submarine program, blasting the proposed payment to General Dynamics as unwarranted and unwise. Rickover's views were overriden by civilian officials in the Pentagon.
No administration has ever before proposed such large cash payouts to defense contractors under a law that allows these payments if the secretary of the Navy certifies simply that they will "facilitate the national defense."
The total the Navy proposes to give the two firms is $931 million, $484 million to General Dynamics' Electric Boat Division and $447 million to Litton. The payments are based on claims for increased costs allegedly caused by the Navy.
Either house of COngress can veto the payments by a majority vote, though aides to Proxmire said yesterday there is no apparent eagerness in the House or Senate to overrule the payments.
The payments are for contracts held by Electric Boat to build 18 SSN-688 nuclear attack submarines, and by Litton's Ingalls Shipbuilding Division to build five LHA assault ships and 30 spruance class destroyers.
Both contracts have produced bitter fights between the Pentagon and the contractors. Litton was only prevented from stopping work on its contracts in 1976 by a court injunction secured by the Navy, and Electric Boat also threatened to stop work on its contracts unless the Navy paid it more money.
The Carter administration inherited these disputes, and Secretary of the Navy W. Graham Claytor said yesterday it has been his top priority to resolve them amicably.
A fight, Claytor said, could have taked eight to 10 years in court, something the Navy could not afford at a time when it is trying to build more ships in a hurry, largely with the help of Electric Boat and Litton. Several officials noted at yesterday's hearing that there are now only three private contractors (the third is the Newport News, Va., shipyard) that can produce large ships for the Navy.
Claytor described the deals he has negotiated with Litton and General Dynamics as the best that could be obtained. He and Deputy Secretary of Defense Charles W. Duncan Jr. emphasized that both companies had agreed to accept substantial losses on their contracts as a condition of the compromise settlement.
According to Pentagon figures, General Dynamics accepted a loss of $359 million and Litton a loss of $200 million after hard bargaining.
Numerous previous congressional and government audits and investigations have charged both companies with mismanagament and waste, and Pentagon officials did not deny this yesterday. Claytor referred to "new, competent and experienced management" at Electric Boat which, he said, would mean a substantial improvement in the situation there.
Claytor said he thought these settlements would end the period of contentious relations between the Navy and these contractors, opening a new era of cooperation.
This idea was all but ridiculed in the memorandum Rickover sent to Claytor just last week attacking the proposed settlements. Rickover said he had information that Electric Boat is already preparing new claims against the government and is seeking to establish a new basis for executing its Navy contracts that will ensure large additional claims in the future.
The negotiated settlements provide for cash payments based on the claims for unanticipated costs both companies had made, but without an adjudication of the actual merits of the claim.
For example, Electric Boat has filed claims for $544 million. Navy auditors studied these claims and concluded that the Navy was liable for $125 million under the claims - in other words, they disallowed $419 million of the original claims. In the negotiated settlement, the Pentagon proposes to pay the $125 million plus $359 million more.
Ordinarily, a dispute between a contractor and the Navy's auditors in a claim case would go to the Navy's board of contract review, and then - if the parties continued to disagree - into court. This procedure was short-circuited by the negotiated settlement.
Claytor testified yesterday that the Navy's $125 million estimate of the true value of Electric Boat's claim was "partisan" and "one-sided," and he noted that in other cases review boards or courts have found similar Navy estimates to be undervalued. (In other cases, Navy figures have been upheld.)
Navy auditors valued the LItton claim at $312 million.
Duncan, Claytor, and Assistant Secretary of the Navy Edward Hidalgo all noted in testimony yesterday that they regarded the negotiated settlement as more than the resolution of two defense contractors' claims.
Duncan said the issue was "the whole future relationship between the Navy and the private shipbuilding industry," and he said resolution of the dispute would remove "the most serious obstacles" to the maintenance of American superiority on the world's seas.
Proxmire, a longtime critic of Pentagon procurement policies, said the issue was more basic. He charged that the settlements were reached under threats from the contractors, that they set bad precedents by being too generous, and that their payment would impair Navy shipbuilding programs.
Proxmire said the Defense Department already has plans to pay the settlements out of this year's defense appropriation be eliminating one of the atomic attack submarines in its contracts with Electric Boat, and using the money that would have gone for that sub to pay the settlements.
In his memo to Claytor, Rickover said the proposed payment to General Dynamics "leaves the Navy vulnerable in future to unfounded and inflated claims of the same sort you are now proposing to settle."
He added, "Shipbuilders will continue to harass the Navy with unsubstantiated claims as long as they believe the Navy would rather pay off claims than face litigation or threats of work stoppage."