Lockheed Accused of Inflating C-5B Costs : Pentagon Claims $500-Million Overcharge on Cargo Plane Contract

The Pentagon, alleging that Lockheed improperly withheld financial data about wage negotiations, accused the huge defense contractor Thursday of inflating the production price of its C-5B cargo plane by as much as $500 million.

Pentagon officials said that it was the largest “defective pricing case” they had ever brought and that the Air Force will “initiate action with Lockheed-Georgia . . . to obtain an appropriate price adjustment.”

However, Lockheed’s chairman, Lawrence O. Kitchen, said in a statement that the company had “provided the government with complete, current and accurate costs and pricing data” in the course of negotiating for the $7.8-billion contract to supply 50 of the transport aircraft. The contract was signed in 1982.

“Lockheed considers the allegations of defective pricing to be totally lacking in merit,” Kitchen added. “Lockheed intends to dispute any claim the Air Force may assert and is confident that it will prevail.”

Air Force officials said the claim is based on findings of an audit performed last May by the Defense Contract Audit Agency. The audit results have been under review for the last three months and were not made public until Thursday.

Second Claim Against Contract

It is the second claim that the service has made against the Lockheed cargo plane contract. In December, 1984, the Air Force announced that it had negotiated a $439-million price reduction on the contract because inflation had been less than expected in the previous two years.

This time, however, the Air Force is charging that Lockheed in 1982 “failed to tell Air Force negotiators their collective-bargaining objectives for union negotiations” scheduled the next year. The resulting wage structure at Lockheed’s Georgia plant was “far different” and much lower than what Lockheed told the Air Force, according to the Pentagon, and this and other “defective pricing issues involving materiel and subcontractor costs” inflated the overall cost of the contract.

The union contract that resulted from the 1983 negotiations for the first time allowed Lockheed to establish a two-tier wage system, under which new employees were paid less than established workers performing the same jobs.

Lockheed, by law, should have disclosed to the Air Force in 1982 its plan to bargain for such a cost-saving wage system, Defense Department officials said.

Pentagon auditors projected that Lockheed’s alleged “defective pricing” would amount to between $400 million and $500 million by the time the 50 planes are to be completed in 1989. To date, contracts have been signed for 29 of the 50 planes.

The case against Lockheed is a civil proceeding and does not involve accusations of any criminal wrongdoing by the company or any of its officials.

If Lockheed refuses to agree to a price reduction, the federal Truth in Negotiation Act allows the Pentagon to adjust the price unilaterally. Lockheed could appeal such an action to the Armed Services Board of Contract Appeals, part of the U.S. Claims Court, officials said.

Earlier this month, the Defense Department announced that it will withhold a substantial part of its payments to Lockheed on a classified project--believed to be the radar-evading stealth fighter plane--until the company tightens its record-keeping security.

The action stemmed from Lockheed’s acknowledgement that 1,400 classified documents on the project were missing from its files.