The Pentagon's premier whistle blower told a congressional panel yesterday that military contractors routinely mark up their hourly labor charges and materials costs, often tenfold, because of overhead costs on everything from spare parts to guided missiles.
Speaking before the Joint Economic Committee of Congress, A. Ernest Fitzgerald, deputy assistant secretary of the Air Force for management systems, said well-known "horror stories" -- such as $436 claw hammers and a $7,400 coffee brewer -- were not isolated incidents, but evidence of systematic markups endemic to the entire defense procurement process.
Fitzgerald's analysis, based on a study of the labor and materials costs of six large contractors, was the most comprehensive criticism so far of the Pentagon buying system, which has been blasted in an internal Defense Department audit and is the subject of several bills before Congress. Defense Secretary Caspar W. Weinberger last summer instituted a 10-point reform plan after several instances of exorbitant spare parts prices made headlines.
Before giving his analysis, Fitzgerald accused Air Force officials of "intimidation" by warning him beforehand that it may be a crime to disclose the financial details of the six contractors.
He presented his findings of cost markups by all six firms, but declined to say which findings applied to which firms. "When I am warned by the general counsel of the Air Force that I may go to jail," he explained, "I must give that some consideration."
Fitzgerald and a colleague, Colin Parfitt, an assistant for financial systems, said they were instructed to respond to committee questions "in generalities and not specifics." Fitzgerald added: "In other words, we should waffle."
"If I were the procurement generals, I would want to cover this stuff up too," Fitzgerald said. Later he said, "I think what is embarrassing here is the notion that the spare parts horror stories that we're all so familiar with are not isolated examples, but, rather, are the result of faulty procurement."
An Air Force spokesman said later that "no intimidation was intended." He said Fitzgerald was asked not to disclose the names only while Air Force officials decided whether any findings might reveal financial secrets, or harm the competitive positions of the firms.
The firms are Pratt and Whitney, General Electric, General Dynamics, North American Rockwell, Lockheed Aircraft and Boeing.
In one case, an unnamed contractor took a standard labor cost of $13.93 per hour and increased it to $99.13 per hour by adding various overhead and administrative costs. The firm's profit was then based on that higher cost, despite the fact that, in Fitzgerald's view, much of the added cost was unnecessary. A source later told The Washington Post that the firm involved was Boeing, for its work on the air-launched cruise missile.
Another contractor, after adding heavy overhead costs, ended up charging the Pentagon $340.76 for an hour's worth of work, even though its actual standard labor costs were $52 per hour. A source said later that the firm in question was General Dynamics of Fort Worth, for work on the F16 jet.
Sen. William Proxmire (D-Wis.), who chaired the hearing, said afterward he was "distressed, because of what was said and what the Air Force ordered be unsaid." Rep. James H. Scheuer (D-N.Y.) called the findings "horrendous, shocking, and to me, offensive."
Some small contractors are scheduled to testify today that they could do the same jobs for $35 per hour without markups.