The Winds of Reform

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formality. Production funds for such weapons as the Maverick and DIVAD are locked into the budget even before their testing has been completed.

The symbiotic ties between the military and defense contractors, reflected in the revolving door that allows top officials of the Pentagon to go to work for the firms they dealt with, drives costs still higher. In addition, stars and bars are awarded for pushing a major project to completion, whatever the price. "No one ever gets promoted for killing a project," says one analyst. Thus it is no surprise that Pentagon officials wink at the unrealistically low cost estimates initially submitted by contractors. These fanciful figures are needed to get a green light from Congress; the price escalates to its true level after the funding commitment is secure. The inevitable overruns are disingenuously blamed on inflation or the need for design changes to meet new threats.

An example of the cozy relationship between the Pentagon and contractors was revealed last week: the Navy has negotiated contracts for 13 cargo ships under which the Government will compensate the builders in the event they lose a dispute with the IRS over a questionable tax deduction. The Navy claims this is a standard charter contract procedure.

Less than 10% of contracts for weapons are subject to stringent competitive bidding; the Defense Science Board has said that competition might lower costs by as much as 20% on an average contract. "You obviously can't compete on aircraft carriers," says Sprey, "but there are thousands of other programs that would benefit if competition, one of the basic forces of the marketplace, were allowed in."

As it is, major defense contractors are all but impervious to market forces. In most respects, they are monopolies. They are assured a predetermined profit, a minimum of 5% and usually 12% and up over their costs. Since their contracts are long term, they are guaranteed business for years at a time. Once a weapons system is in production, they rarely face competition from another manufacturer. There is limited incentive to hold down overhead. Defense industry labor costs, for example, are generally higher than those in comparable industries. Says one Pentagon analyst: "Many of our defense contractors would go belly up if they had to operate in the real world."

In 1981, Frank Carlucci, who resigned as Deputy Defense Secretary last year, initiated 32 well-publicized procurement reforms designed to control costs. Their object is to make production schedules more stable and cost estimates more reliable. So far they have failed to have much impact. Says Gordon Adams of the Council on Economic Priorities: "The Carlucci initiatives don't even begin to get near the problem and in many cases may actually exacerbate it."

Carlucci's reforms have helped contractors by introducing multiyear contracts and fixed production rates. This has been done without forcing the contractors to bid competitively for projects (although that was one of the proposed initiatives) and without reference to the contractors' past performance. For example, Lockheed Corp. and Rockwell International Corp., both contractors with long histories of inadequate cost controls, have been given exclusive contracts to build the C-5B cargo plane and the B-1B bomber respectively.