Pentagon Will Seek to Recover $1.9 Billion Paid to A-12 Firms

The Pentagon said Tuesday that it would seek to recover as much as $1.9 billion that it has paid McDonnell Douglas Corp. and General Dynamics Corp. for work on the canceled A-12 Navy attack plane.

Pete Williams, spokesman for the Pentagon, said that the government has so far paid the two contractors a total of $3.1 billion on the A-12 development contract and have in hand $1.2 billion worth of “deliverable goods--parts, software, plans, that kind of thing.”

The two aerospace firms have submitted an additional $1.4 billion in claims for work done on the A-12, officials said.

Williams said that the government would refuse to pay any more bills for the A-12 and would seek to recover the money already spent on the plane, which Defense Secretary Dick Cheney ordered killed on Monday after determining that the contractors had failed to meet the terms of the contract.

“We will attempt now, because this is a contract (termination) for default, to go back and recover the additional funds. Whatever the dollar figure is, we will try to go back and get that,” Williams said.

Meanwhile, Wall Street delivered its own harsh verdict on the two companies, which are both based in St. Louis.

McDonnell Douglas’ stock was the biggest loser of the day on the New York Stock Exchange, falling $7.50 a share to close at $31.25. General Dynamics closed down $2.50, at $22.50 a share.

In addition, the nation’s two largest bond-rating agencies placed the firms’ debt on “watch” to assess the impact of the A-12 cancellation on their future financial prospects.

Moody’s Investors Service Inc. and Standard & Poor’s put the debt of both companies under review for possible downgrade. McDonnell’s debt has already been downgraded twice.

The Pentagon’s effort to recover money already paid to the two contractors is likely to touch off years of legal battles. Under terms of a contract “default,” which Cheney invoked in killing the A-12 program, the government is entitled to recover some, but not all, costs incurred by the contractor.

“The companies would still be paid for direct labor and items that have been delivered. But they clearly will not recover any profit,” said Kathleen A. Buck, former Pentagon general counsel, now an attorney in private practice in Washington. “It’s going to be a complex process, sorting through what costs will be paid and what will not be paid. But certainly the companies will not be made whole.”