GAO Report Criticizes C-17 Settlement : Military: The agency says McDonnell Douglas will pay only $46 million out of pocket, not the $454 million as first announced.

The Pentagon settled its dispute with McDonnell Douglas over the C-17 cargo jet on unfavorable terms for U.S. taxpayers and then suggested those terms were tougher on the company than the data actually showed, according to the General Accounting Office.

GAO officials were expected to tell a Senate Armed Services Committee panel today that McDonnell Douglas will pay only $46 million in out-of-pocket costs under the C-17 settlement--not the $454 million that defense officials claimed when the deal was announced last December.

“We think it is a lousy deal,” said Louis Rodrigues, the GAO’s director of system development and production issues, who helped author a report issued late last week that was sharply critical of the settlement.

Replied McDonnell spokesman Larry McCracken: “It is not a bad deal. The government is on record and we agree that it removes the gridlock over the claims and the disputes.”

McDonnell had blamed much of its $1.4-billion cost overrun on the cargo jet program on government mismanagement. Under the settlement, the Pentagon agreed to buy just 40 C-17s and consider additional aircraft in 1995 only after it determines whether McDonnell improves its performance.

Congress will have to approve legislation to authorize and pay for the settlement, although the Pentagon has not yet made a specific request for additional money, a congressional aide said. Congress could block the deal if it sides with the GAO.

So far, Congress is only taking a tough look at the settlement and no opposition to it has materialized yet. A congressional staff member said that Sen. Edward Kennedy (D-Mass.), chairman of the subcommittee holding today’s hearing, “is keeping an open mind about the issue.”

The GAO report, titled “C-17 Settlement Is Not a Good Deal,” also asserts that the cost of the transport jet continues to soar, while the aircraft is dogged by reliability and performance problems.

“Rising program costs, less than anticipated performance, and lengthy delays raise serious doubts about the C-17’s cost-effectiveness and undermine the program’s credibility,” the GAO said.

The GAO recommended that Congress reject the Pentagon’s settlement provision calling for the purchase of 40 aircraft and the consideration in 1995 to buy additional planes.

“We should make our decision now, not in 1995 when we will be $5 billion further into the program,” Rodrigues said. “All it does is pump more money into the program and you don’t have any additional information about the cost effectiveness of the plan to make the decision.”