U.S. Withholds C-17 Payments to McDonnell : Aerospace: The Air Force is refusing to pay up to $125 million a month, documents say. The military is also evaluating Douglas Aircraft's finances.

TIMES STAFF WRITER

The Pentagon has suspended contract payments to McDonnell Douglas Corp. on the $30-billion C-17 cargo jet program and has begun a major evaluation of the financial condition of the firm's Douglas Aircraft unit in Long Beach, the Air Force disclosed Wednesday.

The suspension began in August, but the Air Force did not disclose how much is being withheld. The service said the action was taken because McDonnell is re-examining its costs to complete the C-17 program and that "progress payments are being withheld until this review is complete."

Air Force officials did not elaborate on the statement, but such suspensions are often imposed if a contractor fails to make adequate progress on a program or has deficiencies in its work.

Douglas Aircraft confirmed that the Air Force has stopped making C-17 payments. "We are in discussions with them on that," spokesman Don Hanson said.

Meanwhile, internal McDonnell Douglas documents obtained Wednesday by The Times raise serious questions about whether the company's C-17 cost projections were valid. The Air Force apparently concluded that they were not.

Based on the documents, it appears that the Air Force is declining to pay as much as $125 million per month.

The loss of that much money could be disastrous for McDonnell Douglas because the firm has suffered serious financial pressures in the past year. McDonnell's debt rating has twice been downgraded as the firm has sharply increased borrowing.

Capt. George Sillia, an Air Force spokesman at the Pentagon, said the suspension applies to the periodic progress payments that the military services make to a contractor as it completes work on a weapon.

The evaluation of the financial condition of Douglas, where the C-17 is being assembled, is due to be completed in October and will include the firm's commercial business, Sillia said. Douglas also builds the MD-80 and MD-11 commercial airliners. The reason for the Pentagon study is to determine Douglas' financial health in light of the slowdown in the C-17 program ordered earlier this year.

Secretary of Defense Dick Cheney reduced planned production of the C-17 from 210 aircraft to 120 in a budget-cutting exercise and cut planned fiscal 1991 purchases of the plane from six to two. Since then, the Senate has voted to cut all C-17 production funding for 1991.

"We are telling Congress that they have to fund two aircraft for 1991 or there will be a gap in production, and turmoil," Sillia said. The financial evaluation, called a cost performance review, is at least in part an effort to document how changes in the C-17 production schedule will affect the corporation, Sillia said.

Rep. John D. Dingell (D-Mich.), whose staff released the internal McDonnell documents to The Times, said the firm has recently incurred sharp cost overruns on the C-17 project and that some areas of the program are 100% over budget.

Dingell charged that a "management collapse" at McDonnell Douglas has occurred and that each C-17 will cost $400 million, making it the most expensive noncombat aircraft in history.

Dingell staff members said the Air Force is attempting to rescue McDonnell by relaxing requirements that the C-17 complete certain milestones before additional funding can be released.

Sillia disputed the contention that C-17 costs have continued to grow, but he acknowledged that the Air Force is attempting to seek approval to alter the terms of the contract to allow release of certain funds before the company completes as much work as it was supposed to.

McDonnell officials asserted that the documents released by Dingell only confirm what the company has publicly disclosed--that the C-17 is far over its target cost but that it has not broken through the cost ceiling above which all financial liability would fall on the company.

Mike Cave, McDonnell's deputy general manager for business planning and management on the C-17, said it is not fair to presume that the company's costs are continuing to grow, though he declined to say whether McDonnell has exceeded its engineering contract ceiling since April.

Documents released by Dingell show that McDonnell was $836 million over its budgeted cost on the engineering portion of the program as of last April but still about $300 million under the $4.9-billion ceiling for C-17 engineering.

If the company does exceed its contract ceiling substantially, it could create severe financial pressures on the already heavily indebted firm. McDonnell's credit rating has been twice downgraded, and it is facing heavy cost overruns on another military aircraft program, the A-12 Navy attack jet.

McDonnell officials in recent months have sought to portray the C-17 program as getting more healthy.

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