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McDonnell Douglas Repays Air Force for C-17 Overcharges

February 15, 1996

WASHINGTON (AP) _ The Pentagon is satisfied with a $182,000 settlement paid by McDonnell Douglas Corp. over a pricing disagreement on the C-17 transport plane. But the issue may not be settled on Capitol Hill.

Rep. Charlie Rose, D-N.C., who requested an audit that turned up questionable price increases on C-17 spare parts, asked the House National Security Committee on Wednesday to examine the issue.

The General Accounting Office, at Rose’s request, examined price changes on spare parts for the huge, four-engine C-17 airlifter. The GAO, Congress’ investigative arm, found that in 1991 and 1992, McDonnell Douglas was lagging in production and hastily took over manufacture of some spare parts that had been the responsibility of subcontractors.

With the company tooling up rapidly for production of these parts at a St. Louis plant, the prices charged to the Air Force rose dramatically, the GAO concluded.

``This calls attention to the larger problem out there in government contracting,″ said Heidi Pender, spokeswoman for Rose. ``This is one contract in thousands and thousands of government contracts out there.″

In one instance, a door hook produced by a subcontractor for $389 was made by McDonnell Douglas and priced at $8,842, the audit by the GAO found. In another, a door hinge priced by a subcontractor at $31 cost the Air Force $2,187, according to a draft version of the GAO report which was obtained by The Associated Press.

After the GAO’s findings came to the attention of the Air Force, McDonnell Douglas agreed to pay $182,000 to settle the pricing dispute.

Both Pentagon and McDonnell Douglas disputed the degree of the price increases.

McDonnell Douglas spokesman Dave Eastman said the GAO failed to count some start-up costs paid to subcontractors but counted them for the parts made by McDonnell Douglas. Initial prices cited by the GAO represented unrealistically low bids by the subcontractors, Eastman said. When these firms realized they couldn’t cover their own costs, production ground to a halt and McDonnell Douglas had to take over, he said.

``Obviously, we could not keep contracting with someone who couldn’t deliver on schedule,″ Eastman said. The company repaid the government, he said, because it conceded that the Air Force should not have been forced to pick up all the extra costs.

``Our feeling was that the customer was not happy and had we not been behind schedule we might have made some of those parts a little more expeditiously,″ Eastman said.

The GAO said the impact on taxpayers may have been far greater than the $182,000 settlement.

According to the agency’s estimate, McDonnell Douglas, among the nation’s largest defense contractors, should have received $860,000 less in profit on the spare parts.

A Pentagon official, speaking on condition of anonymity, said the profit-margin question was a matter of judgment and that Air Force officials disagreed with the GAO’s conclusion that McDonnell Douglas earned more profit than it should have.

The Air Force has 24 C-17s in service. Last fall, the Pentagon approved a long-term program to build a total of 120 C-17s, citing dramatic improvement in what had been a deeply troubled Pentagon program.

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