SECRETARY OF THE NAVY John Lehman found that General Dynamics, the nation's third-largest defense contractor, had padded its bills. He insisted that it repay $75 million in disputed "overhead" charges, the most memorable of which is a kennel fee for an executive's dog. He also found that the company had tried to buy favor by giving a series of gifts worth more than $65,000 to Adm. Hyman G. Rickover when he was overseeing its work on nuclear submarines. The secretary fined the company $676,283 -- 10 times the value of the gifts -- and gave the 85-year-old retired admiral a nonpunitive letter of censure. Mr. Lehman also cancelled two contracts worth $22.5 million with offending units of General Dynamics, and insisted that the company adopt a "rigorous code of ethics" for its officers in the future. He did not bar company chairman David S. Lewis from further defense activity, as the Pentagon's inspector general had urged. But a day later, Mr. Lewis announced that he will resign by the end of this year.

Some Democratic critics of Mr. Lehman say that, if only as a deterrent to other contractors, he should have imposed harsher punishment. They talk of such alternatives as barring the company itself from defense work for a while. They note that General Dynamics' stock went up a point and three-fourths the day after the secretary's action -- a sign, they say, that investors had expected worse. But neither the company's stockholders nor its board can feel good about what happened to it. The financial penalties are not important. General Dynamics has more than $1 billion in current contracts with the Defense Department; it had profits of $381.7 million last year. But public humiliation has to count for something. General Dynamics has been found to have violated a public trust, and other contractors are on notice.

There is an acknowledged limit to how sharply the Pentagon can deal with a major contractor. General Dynamics is the sole supplier of the Navy's No. 1 submarine, the Army's No. 1 tank, the Air Force's No. 2 fighter and much more. The Navy and other services need General Dynamics. They are as dependent on it as it is on them. There are serious questions about what the Defense Department's relationship should be with its contractors. Is it right to think of these specialized companies as private industry? Does it make sense to call for competition, firm prices and other features of private commerce on big weapons contracts? Or should there be more direct methods of control? But these are larger issues. In the context in which he was acting, Secretary Lehman served the public well.