McDonnell Puts Jet Cost Overrun at $790 Million : Aircraft: The contractor concedes that the C-17’s price will exceed the ceiling. The Air Force is even less optimistic.

After denying for nearly two years that its C-17 cargo jet program was headed for a big cost overrun, as the Air Force was predicting, McDonnell Douglas acknowledged Thursday that the program will end up about $790 million over its contract ceiling.

The important revision in the cost estimate--representing about 3% of the value of the contract to develop the C-17 and produce the first six aircraft--came on the heels of an $80-million write-off against the cargo jet program, disclosed Wednesday in the firm’s first-quarter results.

Until Thursday’s cost revision, McDonnell was projecting that it would break even on the C-17 contract and that the cost overrun would amount to about $350 million. It planned to recover most of that by filing claims it expected the Air Force to pay.

Although C-17 costs have risen relentlessly the past several years--amid technical problems, production line snafus and a disruptive management reorganization--it now appears that the price tag has been stabilized and that huge additional overruns are unlikely, according to company executives, Air Force officials and securities analysts.

David O. Swain, McDonnell’s C-17 program manager, said he was “unhappy” about the excess cost, which the company must bear.

Swain blamed the higher costs on plant disruptions caused by layoffs, additional engineering required on the aircraft, higher supplier prices and lack of investments needed to improve quality. He also cited the cost of fixing fuel leaks on the first C-17 test craft, which have prompted the Air Force to ground the plane three times since Oct. 31.

But Swain said that 92% of the contract has been completed and that he was “quite confident” of the current cost projections.

“We are awfully close to topping out,” Brig. Gen. Kenneth Miller said in a recent interview. Miller said that while McDonnell was making progress in its productivity on the C-17 program, it was not rapid enough to escape a big cost overrun on the contract.

An Air Force spokesman, Capt. George Sillia, said Thursday that the service had examined claims submitted by McDonnell and “found them to be without merit.” McDonnell has made hundreds of millions of dollars’ worth of claims on the C-17 and said it expects to recover about $200 million from the Air Force.

McDonnell Douglas stock fell $1.875, to $59.25, in trading Thursday on the New York Stock Exchange.

“They have an embarrassing situation,” Prudential Securities analyst Paul Nisbet said. “Their estimates were wrong. . . . They have had some sloppy management, that is what it is. It makes them look like they are devious, but they are not at all. They are just sloppy. They are cleaning it up.”

McDonnell’s contract to develop the C-17 and build the first six planes has a ceiling of $6.6 billion.

On Thursday, the firm said it estimated the ultimate cost at $7.39 billion, for a cost overrun of $790 million.

The Air Force still projects a slightly higher overrun of $850 million.

For accounting purposes, McDonnell has pooled all its C-17 contracts in the hope that profit from the most recent production contract will offset some of the $790-million cost overrun.

That is why it wrote off only $80 million against the program in its quarterly report earlier this week.