Air Force Withholds $56 Million in Dispute Over C-17 Payments

In another punitive action against McDonnell Douglas, the Pentagon withheld $56 million last month from the firm’s C-17 cargo jet program after defense auditors found that the firm had improperly shifted $447 million between different contracts, according to a government memorandum.

The audit found that C-17 work that should have been charged to the full-scale development contract was shifted to three production contracts, enabling McDonnell to receive unauthorized payments. The company had already exceeded the maximum payout allowed on the development contract.

In a terse memo dated Nov. 19, a contracting officer at the Defense Contract Management Command said auditors had found “serious deficiencies in internal controls over engineering labor costs charged to C-17 contracts.”

In the memo, David Q. Ganus wrote that he had made “repeated attempts . . . to resolve my concerns,” but that Douglas’ response had “failed to address the accounting propriety” of its practices. Ganus concluded that “in the absence of adequate justification, I am compelled” to reverse the charges and cut future payments to the firm.

An agency spokeswoman said the reversal would not change the estimated cost to develop and build the first six C-17 aircraft--even though $77 million of the $447 million was reallocated to that portion of the program.

“We disagree with it,” a Douglas spokesman said, indicating that the issue was raised last year by the Pentagon inspector general. “We don’t believe it takes into account an agreement we have with the Air Force. We are in discussions with the government.”