Page 2 POGO's Report:
Taxpayers Carry the Load: The C-130J Cargo Plane Does Not




Holding the Contractor Accountable

C-130J supporters have claimed it would cost the Air Force $2 billion to terminate the contract. That is contrary to the actual contract language, even if the contract is cancelled “at the convenience” of the government. The contract has a ceiling price that the government must pay if it decides to cancel the contract under those terms: $439.7 million if it cancels by November 2005 and $383.3 million if it cancels by November 2006. There are no contractual obligations for the government to pay any other termination costs, something the Air Force has confirmed privately to Congress.

Lockheed Martin is trying have it both ways. The only benefits of commercial purchases to the government are that it is not held responsible for ancillary costs associated with selling specifically to the government. Given that this is a “commercial item,” special manufacturing equipment to produce the C-130J should not have been required, nor should a government contracting officer approve such a purchase. With “just-in-time” materials purchasing, Lockheed Martin and its subcontractors should not have purchased materials to build planes in the out-years. Normally, long-lead should not exceed one year’s worth of material. The termination is not scheduled until the end of 2006.

However, no cancellation fees would be paid by the government if the program is cancelled “for cause” rather than “convenience of the government.” Because all of the first 50 C-130Js delivered to the Air Force had serious deficiencies, the government should cancel the contract for new transport aircraft for cause. Lockheed Martin failed to manufacture an aircraft that meets contract specifications, even after eight years of development and testing. The Federal Acquisition Regulation (FAR) states that a contract may be cancelled for cause “in the event of any default by the Contractor, or if the Contractor fails to comply with any contract terms and conditions, or fails to provide the Government, upon request, with adequate assurances of future performance.”24

The FAR also says in the event of termination for cause “the Government shall not be liable to the Contractor for any amount for supplies or services not accepted, and the Contractor shall be liable to the Government for any and all rights and remedies provided by law.”

If the government does cancel the C-130J contract for cause, the Pentagon needs to learn from past mistakes. History has shown that contractors fight vigorously for every dime, even if its weapons system is proven to be substandard.

The Pentagon has cancelled contracts to develop major weapons systems “for cause” on at least two prior occasions. The first such contract termination was in 1985 when the Army procurement contract office notified the Army’s division air defense gun (DIVAD) contractor, Ford Aerospace & Communications Corp., that the performance on the anti-aircraft system was “totally unacceptable.” Unfortunately for the government, the decision to cancel the DIVAD by then-Secretary of Defense Caspar Weinberger was made two years after the so-called Sergeant York Gun went into production. It ended up costing the taxpayers $1.4 billion.25

The second major Pentagon weapon system to be cancelled for cause came in 1991, when then-Secretary of Defense Richard Cheney canceled a contract with McDonnell Douglas (now owned by Boeing Company) and General Dynamics to build the Navy’s A-12 Avenger medium attack aircraft, a program riddled with huge cost overruns and schedule delays. Cheney’s decision was based on the fact that the contractors could not complete the work on schedule, nor could they meet the contract requirements. At the time of termination, nearly $3 billion had been spent on the A-12 project, with nearly $2.7 billion of that amount already paid to the contractors. The Navy demanded that the contractors pay back the government $1.35 billion.26

The contract cancellation ended up in the federal courts in June 1991, when the contractors filed a lawsuit against the Navy to recover cancellation costs and damages. A federal judge ruled in 1995 that the A-12 Avenger contract was cancelled at the convenience of the government, and in a final judgement in 1998, awarded the contractors $1.2 billion plus interest. In 2001, a three-judge appeals court panel ruled in favor of the government’s decision to cancel the contract with cause. A subsequent appellate court ruling sent the case back to the trial court. Hearings were conducted in June of last year, and a decision on the case is pending.27

Given this history, the Pentagon should learn from past mistakes and ensure it terminates the C-130J program without any excessive cost to taxpayers.
Recommendations

1. Terminate the C-130J transport aircraft program for cause.

2. Authorize an independent study to determine future C-130 requirements.

3. Study the possibility of bringing older C-130 models that were placed into early retirement back into service to replace aircraft taken out of service.



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© The Project On Government Oversight 2005
updated:Thursday, March 17, 2005