Navy Sets Deadline for Defense Contractors

The Navy gave General Dynamics Corp. and Boeing Co. a Sept. 30 deadline to return to the Treasury a total of $2.3 billion paid during development of a fighter aircraft that was canceled.

Then-Defense Secretary Dick Cheney canceled the A-12 program in January 1991. McDonnell Douglas Corp.--which later merged with Boeing--and General Dynamics sued, triggering the military’s largest contract dispute. A federal court ruled against the companies in August 2001; talks have continued since then, with another session scheduled Thursday.

General Dynamics called the demand “an unseemly negotiating tactic and an apparent effort to gain advantage during settlement talks.” The company said it would ask a federal appeals court to delay the collection if negotiations fail.

The companies earlier this year offered a settlement worth as much as $2.5 billion over 10 years through discounts, upfront payments, services and free enhancements to the F/A-18 E/F fighter and Virginia-class submarine programs and other unspecified cost savings. The Justice Department rejected the offer.

The Navy is demanding that the companies repay $1.3 billion in progress payments plus $1 billion in interest, or the money will be garnisheed from existing contracts.

“Given the large size of the debt, we are prepared in the spirit of cooperation to discuss the possibility of negotiating a repayment schedule, or a schedule to offset the amounts owed upon an installment basis, if either of those approaches would be in the best mutual interest of all parties,” Navy Director of Financial Management Dionel Aviles wrote General Dynamics and Boeing officials Friday.

Baring payment or agreement on an installment plan, the Navy would turn over the claim to the Pentagon’s Defense Finance and Accounting Service for garnishment against existing contracts, Aviles wrote.

“Boeing has received the letter and is disappointed the letter was sent in light of the ongoing business discussions,” Boeing spokesman John Dern said.

Boeing is preparing a legal appeal to the August 2001 ruling, Dern said. He declined to speculate on what effect, if any, repayment would have on company finances.

General Dynamics in a May 15 SEC filing said it would face about a $1.2-billion pretax liability, or a $630-million after-tax loss taken as a charge against discontinued operations, if it was forced to repay the government.