Suspending Big Firms Risks Defense Cost Hikes

The Pentagon, in its increasingly public efforts to crack down on unethical or illegal behavior by its major suppliers, is facing a dilemma brought on by the limited number of companies to which it can turn to produce some of its most crucial weapons.

At the same time, there is concern that suspensions of giant contractors may have little impact because they are applied for relatively brief periods.

‘Window Dressing’

“This new procedure, the temporary debarment, is just window dressing,” said one frustrated Senate source who is often supportive of the military.

“We can get painted into a corner,” conceded Lt. Col. Craig MacNab, an Army spokesman. “If you have Amalgamated Wing Nut Fabricators, one of 1,500 makers of wing nuts, it is easier to stop doing business with them.”

In the last year, the Defense Department has temporarily suspended three giant defense companies from bidding on government contracts--but, in doing so, it has risked eliminating competition in the production of major weapons.

It is a step, officials acknowledge, in which the remaining source for a project can take advantage of its position and drive up the contract proposal.

Suspensions--or debarments, as they are officially known--are intended to block companies from being awarded contracts until the government is assured that any improper procedures are being eliminated. They have been applied only recently to major defense suppliers, industry spokesmen say.

Not Punishment

Defense officials and others point out that the suspensions--which have blocked Rockwell International, General Electric and, most recently, General Dynamics from bidding on contracts in 1985--are not meant as punishment. Rather, they are intended to encourage a company to correct problems, with punishment left to the courts, if convictions or guilty pleas are obtained.

But, in the case of General Dynamics, the Navy announced only a day after suspending the firm earlier this month that it would also delay accepting bids on four new SSN-688 submarines--a step that could keep the huge shipbuilder, which was indicted on fraud charges, in the running for the work.

The delay immediately raised questions about whether the suspension would accomplish anything if it failed to jeopardize the company’s right to bid for particularly profitable contracts.

Less than a week after the delay was announced, Defense Secretary Caspar W. Weinberger reminded the Navy in a public statement that the delay could be tolerated for only a limited period.

“The extension reflects the Navy’s commitment to competition as the primary means of achieving fair and reasonable prices. Other action could have placed the Navy in a disadvantageous sole-source negotiation position for its attack submarines, with only one shipyard available for the contract,” the statement said.

But, it continued, such bidding extensions “must be weighed against the intent of the suspension and the circumstances giving rise to it.”

Costlier Submarines

In this instance, officials said, the Navy was well aware that, with General Dynamics prohibited from bidding, Newport News Shipbuilding and Dry Dock Co. was more than likely to raise the proposed price for construction of the submarines.

Thus, said Joe Burniece, a staff member on the Project on Military Procurement, “we have severely slapped General Dynamics on the wrist, while we continue to hand over contracts to them.” The project is a privately funded organization that studies Pentagon purchasing issues and seeks to provide a conduit for Pentagon employees drawing attention to military waste and fraud.

Numerous examples exist of the impact that competition has had on contract prices. In just one, cited by a Navy official, the price of a cruiser, which had cost nearly $1 billion, dropped $300 million when Bath Iron Works Corp. joined the competition for a class of ship that had previously been built by only one company, Ingalls Shipbuilding Corp.

So far, all three debarred companies have refused to offer estimates of what the suspensions have cost them in terms of major contracts.

Rockwell was suspended for six weeks, beginning Oct. 31, after it pleaded guilty to overcharging the Air Force. The company is in the midst of a multibillion-dollar contract to assemble the B-1B bomber, an agreement that the suspension never jeopardized.

Can’t Halt Dealings

“With a company that size, you can’t stop doing business with them,” said an Air Force officer, speaking on the condition that he not be identified.

But, said spokesman Don O’Neal, “obviously there is some pressure” when a bidding suspension is put into effect.

General Electric’s bidding rights were taken away for three weeks, although its Space Systems Division was on the ineligible list for 13 weeks. During the shorter period when the bidding ban applied to the entire company, the firm was prohibited from selling “even light bulbs in the PX,” said Jack Batty, a GE spokesman, adding: “We know we lost some business.”