San Diego Union-Tribune

June 25, 2001

Cheney's canceling of A-12 jet pact may be costly lesson

By OTTO KREISHER 
COPLEY NEWS SERVICE
 
WASHINGTON -- When the Bush administration faced a decision of
whether to cancel the Marine Corps's cherished but accident-marred Osprey
program early this year, the prospect may have sent a chill through Vice
President Dick Cheney.

When Cheney was faced with a similar decision on another high-priority
program 10 years ago while defense secretary, his action triggered a
continuing legal battle that could result in two defense contractors getting a
total of $5 billion for airplanes they never produced.

Cheney apparently was correct in deciding that the Navy's $57 billion A-12
attack jet program was hopelessly fouled up. But the way he pulled the plug
on the Navy's top-priority weapons project may have been a $2 billion
mistake.

The A-12 contract dispute is being retried in a federal court in Washington,
D.C. If the verdict goes against the government, which is considered likely,
the award to the contractors would be a penalty for the Pentagon's failure to
follow its own complex rules on how to kill a major weapons program that
goes terribly wrong.

Cheney will not discuss the project because the case is in court, his
spokeswoman said.

But the costly 10-year legal saga stemming from his termination of the A-12
should serve as a warning to administration officials who may have to kill
other large programs, such as the MV-22 Osprey.

"You can't just snap your finger and say, 'The party's over,' " a defense
industry source observed.

The histories of the two big aircraft programs, and the Pentagon's handling of
them so far, are quite different.

The Osprey, conceived in 1982 as a replacement for the Vietnam-vintage
CH-46 helicopters, offered revolutionary tilt-rotor technology that blended
the flying qualities of helicopters and fixed-wing aircraft.

But after 20 aircraft were built and $12 billion spent, a series of test failures
and four accidents that killed 30 people put the Osprey program in danger of
termination.

The Bush administration, however, accepted a blue-ribbon panel's
recommendation to give the contractors about two years to prove they can
make the Osprey safe and reliable.

That probation period gives the contractors, the Bell and Boeing helicopter
units, a warning that would make it easier to kill the Osprey if they fail to fix its problems.

It was the failure to provide any such notice to the A-12 contractors that
could come back to haunt the Pentagon.

The A-12, dubbed the Avenger II after a famous World War II Navy plane,
was started about the same time as the Osprey. It was supposed to be a
high-tech, radar-evading marvel to replace the aging A-6 attack jets. The
Navy planned to buy 858 of the carrier-based bombers for an estimated $57
billion.

When Cheney canceled the plane on Jan. 7, 1991, the Navy had paid nearly
$3 billion on a $4.8-billion, fixed-price development contract to build six
prototype aircraft. Although the Avenger's first flight had been expected that
June, the contractors had not even assembled an aircraft and still were
struggling with the design.

When he killed the program, Cheney insisted that the contractors and the
Navy program managers had never told him how badly the project was going.

"No one can tell me exactly how much more it will cost to keep this program
going," he said then.

But the evidence indicates Cheney had been warned repeatedly that the
program was at least 18 months behind schedule, more than $2 billion over
budget and the plane was more than 8,000 pounds too heavy.

Although it is clear the contractors had badly mishandled the A-12 program,
the issue in dispute is not why the contract was terminated, but how.

"The central theme . . . of the legal case is whether or not the (A-12)
termination was handled in accordance with the appropriate procedures," said John Douglas, a former Pentagon acquisition executive and now president of the Aerospace Industry Association.

In the first trial, the judge ruled in favor of the contractors, awarding them
$1.2 billion. That judgment was reversed partially on appeal, and the battle
was rejoined last month.

The case in the Federal Claims Court pits the Pentagon against two of its
biggest contractors: General Dynamics and Boeing, which inherited the legal
fight when it acquired McDonnell Douglas.

Cheney said he canceled the A-12 contract for "default," which means the
contractors had failed to fulfill the terms of the contract.

But by personally ordering the program terminated immediately, he erred on
two counts, the contractors argued.

The regulations say a default termination can be made only by the contracting
officer, which in the A-12 case was the Navy program executive.

And to terminate for default, "the government has to have clear and
convincing evidence the contractor cannot or will not perform. Other than
that, it's a termination for convenience," explained Douglas, who had handled
defense procurement contracts as an Air Force officer and as the Navy's
acquisition executive.

And a default termination requires "a reasonable series of notices, show-cause notices to the contractor," with a chance to correct the problems, he said.

The difference between the two definitions can determine whether the
contractors have to pay the government for some of its costs or receive
payment for their expenses and a reasonable profit.

"It is the government's position that the contractors defaulted, that the plane
was overweight, behind schedule and the contract was over the fixed price,"
Justice Department spokesman Charles Miller said. "The United States
contends this was the contractors' fault due in a large measure to poor design
and inability to manufacture the parts."

But a General Dynamics statement said: "The company continues to believe
that the government's default termination was improper, both as to process
. . . and because the contractors were not in default."

The original trial judge agreed with the contractors. 

An appeals court, however, returned the case to the Court of Claims with
instructions to re-examine the contractors' role. That is being litigated now,
while interest on the $1.2 billion settlement accumulates.

If the government loses, the settlement could be up to $2 billion, making a
total cost of $5 billion, counting the money spent before the program was
killed.