Back in 1977, the U.S. Army began building and sending to Western Europe a new type of 155mm artillery shell that would fly to the target area, burst in the air and drop 88 grenades that would explode when they hit the ground.

Called the Improved Conventional Munition (ICM), each shell cost $500, more than three times the normal 155mm round.

By October, 1980, the Army had bought close to 1 million ICMs at a cost of nearly $500 million. Most were stockpiled in Europe.

Then, as it was put during a closed hearing last summer before the House Appropriations subcommittee on defense, the shell "experienced several performance problems."

Unpublicized, the problems were serious enough for the Army to restrict use of the ICMs to "emergency combat situations" and then only with a powder charge that cut back how far they could be fired.

What had happened was:

In June, 1980, two ICMs exploded in gun barrels during firing.

Four months later, the powder charge used to propel the shell blew off the noses of five ICMs, causing the grenades to drop from the front rather than the rear.

In the interim, according to the subcommittee's hearing, there were "reports of high dud rates and a high incidence of grenade malfunction."

A year-long investigation by the Army found that the base plugs on some of the shells had cracked, apparently causing them to explode when fired.

Now, according to an Army spokesman, every one of the 966,100 ICM shells built and accepted by the Army before September, 1980, will have to be examined individually to see if its base is cracked.

How long will that take and how much will it cost?

"The whole screening program is classified," the spokesman said yesterday. As for the cost, that is still being worked out.

Who is going to pay for the inspection and any faulty shells?

"The Army is going to pay the bill," a Pentagon official said yesterday. The investigation, he said, found that although a manufacturer, Chamberlain Corp. of New Bedford, Mass., "was faulted in some part, it was not major." What exactly went wrong that was the fault of the Army, he said, was also "classified."

The official said payment would be made from the Army's procurement and operations and maintenance accounts.

The ICM case is not unique. As Congress begins its review of the Pentagon budget, Army spending for artillery ammunition, which has been running at nearly $600 million a year, could become a target for cuts.

It will be an alluring one, because last year congressional investigators and the General Accounting Office uncovered several cases of failures, such as the ICM, and misapplied purchases involving millions of dollars.

Take the $83 million the Army wanted to spend in fiscal 1982 for 645,000 mid-range propelling charges for 155mm shells. GAO found a problem with this: The figure was for twice as many propelling charges as the Army had mid-range shells to propel.

Right, said the Army, it needed only half as many mid-range charges as it had budgeted. But there was this other problem: It had budgeted only half as many shorter charges as it really needed. So could it please use the extra mid-range money--$40 million--to buy the charges it had forgotten? Congress let it do it.

Another artillery round that has run into production and financial problems is the eight-inch rocket-assisted projectile (RAP), a $1,500 shell that will travel more than 16 miles, almost twice as far as the normal $150 eight-inch round.

The extra distance is achieved simply by attaching a rocket engine to the projectile, firing both of them out of the gun and then having the rocket ignite to carry the shell along.

The first RAP rounds were approved in 1978, but the program ran into a series of difficulties.

First there was a strike at Norris Industries in Vernon, Calif., where the RAP was being built. The strike delayed initial testing of the production rounds. Then there was a ballistic failure which added another nine months to production.

Finally, production began. But in that process, according to the Pentagon, the manufacturer changed the way he made the screw-like surface connecting the projectile to the engine. The result, in the words of a congressional hearing, was an "excessive gap" between these two key parts. They didn't hold together, in other words.

By the time it was discovered, however, some 10,000 of the new, expensive RAP shells had been turned out.

"This change . . . resulted in approximately 20 percent of the 10,000 projectiles having an interference fit with mating components," according to the Army. A $225,000 inspection program was started to find the roughly 2,500 mismated ones so they could be reworked.

Who's paying for this? The Army, according to its officials, because its technical data package, which lays out exactly how the shell should be made and inspected, did not define exactly how the screw portion involved had to be done. Total cost of the error has not been established.