I just returned from a an interesting class on Earned Value Management Systems.

A classic case involving cost overruns and coverups was the McDonnell Douglas Aircraft Corporation - General Dynamics Corp JV for the Navy's A-12 "Stealth Fighter." The Navy desperately wanted their own "stealth" fighter - the Air Force had both a fighter and a bomber.

I believe the contract was a FPI type contract, awarded in January 1988. Target Price was about 4.1 Billion with a max Gov't liability of $4.8 Billion.

Basically, somebody "cooked the books" on cost performance report information in early 1990, which would have indicated estimates at completion reflecting large overruns in both cost and time.

A Government analyst from OSD independently analyzed and predicted overruns of 1.2 billion and 1 year slip. His report to Undersecretary of Defense for Acquisitions, John Betti, a high level OSD official was not revealed to Secretary of Defense, Dick Chaney, the next day (April 5, 1990, in a final Major Aircraft Review briefing on the A-12. Instead, Chaney was told that the program was on cost and schedule.

Chaney then briefed Congress, in a briefing three weeks later (April 26, 1990), that the program was on time and on schedule and recommended that the program be funded.

Eight days later (May 4, 1990), the Contractors suddenly reported new delays, probable cost increases, business problems to the A-12 program office.

On May 31, 1990, the Navy exercised the contract option for the first 6 production aircraft at a ceiling price of $1.2 billion.

June 1, 1990 - ONE DAY LATER - the program office informed the Sec. of the Navy of the cost/schedule problems. He informs Chaney. Chaney orders DOD and Navy Investigation.

In November 1990, the investigations reveal wide-ranging A-12 problems had not been reported to the Navy and Pentagon leaders. Navy fired, reprimands, censures and admonishes all who knew " but didn't tell."

Congress held hearings in December 1990 and Chaney told the Navy to "show cause" why the A-12 program.

Chaney rejected Navy proposals to restructure the program and cancelled it on January 7, 1990 (on January 8, John Betti resigned).

We learned that cancellation of this program dramatically increased overhead costs allocated to the Government's other contracts with these firms - massive overheads/G&A allocations to this program had to be absorbed by the other contracts. It took years for the firms to unload the unabsorbed overhead expenses.

As it turns out, the predicted cost/time overruns on the A-12 program actually turned out to be within the range of a 30 year historical average for non-FFP contracts of various types. I lost my notes concerning the numbers but they were somewhere in the range of 0.60- 0.65 cost performance indices (67% - 54% cost growth)!

What a study in coverups! Happy Sails! Joel

By joel hoffman on Saturday, December 02, 2000 - 10:39 am:

Clarification - the title of this thread said "cost contracts". The contract in question was a form of FPI (I believe FPI - it had a cost ceiling and a cost share ratio) but the typical overruns apply to cost reimbursible, as well as CPI type contracts, in general. Happy Sails! Joel

By bob antonio on Saturday, December 02, 2000 - 11:22 am:

Joel:

I think this may have been the procurement in which the contractor took DCAA to court for calling this a FP contract when someone wrote "best efforts" into the contract. I am not sure anymore but DCAA took a hit for $25 million. I never looked to see if the government appealed.

By bob antonio on Saturday, December 02, 2000 - 11:33 am:

Joel:

I may also be confusing the A-10 with the A-12. 

By Vern Edwards on Saturday, December 02, 2000 - 12:20 pm:

Joel:

You may find the following quote interesting. It is from the preface to Cost/Schedule Control Systems Criteria: The Management Guide to C/SCSC, Rev. Ed., by Quentin W. Fleming (Chicago: Probus Publishing Co., 1992), p. ix:

"On January 7, Secretary of Defense Richard Chaney canceled the A-12 program. To those of us interested in earned value performance this was quite an event. The good news was that C/SCSC compliant management control systems at both prime contractors were working well. The bad news was that the most senior management on the A-12 program would appear not to have been utilizing the C/SCSC data.

C/SCSC as an 'early warning' system worked. But one must look at the data, and believe in the data, in order for the process to work."

By bob antonio on Monday, December 04, 2000 - 03:52 pm:

Joel:

Did you talk about this report at your course?

http://www.btc.suu.edu/business/fac/christensend/beacha-1.pdf

If the 28 page .pdf file does not pop up when you go to the site, just reload it again.

By Ron Vogt on Monday, December 04, 2000 - 04:05 pm:

There seems to be some confusion over the A-12 contract and General Dynamics' fight over a defective audit. Although I wasn't involved, this is what I remember:
To the best of my recollection, the $25 million DCAA hit was for neither the A-10 nor the A-12. It was for the Division Artillery contract, or Divad.
General Dynamics was subjected to extensive audits and a criminal investigation over the Divad contract, primarily because of the auditors' failure to understand the difference between a FP contract and a "best efforts" contract. Although GD eventually was cleared, it ran up several million dollars in legal bills. It filed a claim to recover these, but lost. It then tried suing in civilian court for a negligent audit. It won a $25 million judgment, but the award was later overturned for reasons unrelated to the quality of the audit.
I don't know where the case stands now.

By Eric Ottinger on Monday, December 04, 2000 - 04:12 pm:

All,

In the subsequent litigation, there has been quite a bit of controversy over the question of whether the Secretary of Defense “cancelled” the program or “terminated” the program. The Secretary was not the Contracting Officer and the Secretary did not have the authority to “terminate” the contract for default.

Only the Contracting Officer could terminate the contract for default, and the Contracting Officer would have to make this decision using his/her independent judgement.

This is one occasion where higher management might have saved the taxpayers some major grief if he had taken counsel from an experienced contracting officer, and been more careful to think through the correct procedures.

Note that I am not expressing an opinion on the correctness of the legal arguments one way or another. I am only commenting that this issue could have been avoided if the Contracting Officer and other contracting experts had had more input.

From the accounts that I have read, the low level employees who were expected to read and interpret the data were doing exactly what they were supposed to do. It isn’t that the higher levels weren’t reading the data. They were willing to “shoot the messenger” when the numbers weren’t what they wanted the numbers to be.

For whatever it is worth, the A-12 was a bomber rather than a fighter.

Eric

By bob antonio on Monday, December 04, 2000 - 04:18 pm:

Ron:

I seem to remember the Court case taking place in southern California. I copied the case a few years back but may have thrown it out.

Eric:

If it was the DIVAD, then it was Weinberger right after the 60 minutes show. Do you remember seeing the little test on national TV?

By Eric Ottinger on Monday, December 04, 2000 - 04:38 pm:

Bob,

No. I am talking about the A-12 and Cheney.

In view of the recent Supreme Court decision, Vern should double check the spelling for our Vice President (almost) elect.

I recently read that the interest on the amount being litigated in the A-12 case was running something like $300,000 a day. Ouch.

I thought Cheney was a heck of a good manager. But it would have been better if the A-12 had been wrapped up in a way that didn't leave room for prolonged litigation.

Eric

By bob antonio on Monday, December 04, 2000 - 09:30 pm:

Ron:

You are right. I actually found the case in my home office. It was decided on March 25, 1996 in the U. S. District Court for the Central District of California. It was the Divisional Air Defense Gun System (DIVAD). I remember reading it and it was certainly brutal on DCAA.

By joel hoffman on Monday, December 04, 2000 - 09:56 pm:

Thanks for the report, Bob. No we didn't have time to review it, as this was a two-day executive overview of EVMS. We talked about it for about 15-20 minutes, while covering management controls, oversight, etc. We were provided some handouts with EAC predictions and timeline summaries of events, etc. The report you linked to pretty well jives with what we were told, except that the SECDEF might have been told about some cost and schedule concerns. But it appears that the concerns were poohpoohed by the briefers. Happy Sails!

By John Ford on Tuesday, December 05, 2000 - 01:06 pm:

To all, the District Court's decision in the DIVAD case was overturned by the 9th Cir. There are no further court proceedings in that case. However, the ASBCA case is proceeding. The board has issued one decision holding that FFP contracts cannot be covered by GD's claim for its litigation costs. The issue is whether GD can recover its costs relating to the investigations although it has established final overhead rates for the years in question and has insurance to cover part of its costs. GD has not filed a claim under its insurance policies although the costs of the premiums were charged to government contracts.
As regards the A-12, the contracting officer did terminate the contract for default. Chaney terminated the program. This case is on-going and is back before the Court of Federal Claims after the original COFC decision was reversed by the Federal Circuit. Hopefully, the litigation over the election in Florida does not go on as long as these two matters have.

By bob antonio on Tuesday, December 05, 2000 - 02:14 pm:

Thanks John:

I guess it is on to the 9th Circuit to find out why. The judge in the District Court was downright abusive towards DCAA.

By Kennedy How on Wednesday, December 06, 2000 - 12:17 pm:

I have a claim that's 10-11 years old right now. I've never gotten a good handle on what the actual dollars are now, but originally, the claims were for about $60M, but there were some other CLINs involved at $32M apiece.

Last I heard, it's at the CoFC; the ASBCA decision left one hole open for them to go there. 

Regarding decisions from up high, I've seen and heard of some interesting decrees coming back to us when we send stuff up that way for blessing. If SecDef Cheney came to me and said find a way to T4D, I'd probably find a way. And, some legal type would concur on what I was able to find out.

Kennedy

By John Ford on Wednesday, December 06, 2000 - 02:57 pm:

Bob, the 9th Cir. held that the cause of GD's costs was not a flawed DCAA audit, but the exercise of prosecutorial discretion by DoJ. As such, the cause of GD's harm fell within the discretionary function exception to the Federal Tort Claims Act under which GD brought its suit. As an aside, it should be noted that the GAO also considered the DIVAD contract to be FFP and did not pick up on the significance of the best efforts language.
As regards the earlier comment regarding SECDEF's authority to terminate a contract, the Secretary is the ultimate contracting officer in DoD. By virtue of his position, the Secretary has the powe to perform all contracting functions.

By bob antonio on Wednesday, December 06, 2000 - 03:13 pm:

John:

Few, if any, non-contracting people would understand the problem with FFP and "best efforts" in the same breath. GAO and the Department of Justice are no exceptions since they typically are not versed in federal contracting. As contract pricing auditors, DCAA should have caught it.

From "prosecutorial discretion," I assume that means the Justice Department lawyers should have known it was effectively a cost contract and not treated it as a FFP contract. Is that it? Do you have a citation for the case?

By Ron Vogt on Wednesday, December 06, 2000 - 06:38 pm:

Bob,
John was referring to the 'discretionary function' exception to the Federal Tort Claims Act, not prosecutorial discretion. Under the FTCA, the government is not liable for tort claims based on actions that were within the government's discretionary functions, e.g., investigations. Effectively, this is an immunity from a lawsuit.
However, it is not quite correct to say that the cause of GD's harm was not the flawed audit. It was, but GD has no redress through the FTCA.

By bob antonio on Wednesday, December 06, 2000 - 07:08 pm:

Ron or John:

Do you have a case number?

By John Ford on Wednesday, December 06, 2000 - 11:18 pm:

Bob, the docket number for the 9th Cir. was 96-55821. This is a reported case but I don't have the citation for it. The case was decided in March 98.
The gist of what the court held was that the decision to investigate and prosecute was a matter within the discretion of the prosecutors. Because of that discretion, the government was immune from suit under the FTCA. This was not a contract suit. The contract matter is in litigation before the ASBCA. The claim was filed against the Navy because the Navy administered contracts at GD Pamona when the indictment occurred.

By bob antonio on Thursday, December 07, 2000 - 06:02 am:

John:

Thanks. Here it is. http://www.ca9.uscourts.gov/ca9/newopinions.nsf/
04485f8dcbd4e1ea882569520074e698/2659e4ae0f8ffece88256958006e99c4?OpenDocument

By bob antonio on Thursday, December 07, 2000 - 07:58 am:

John:

That was interesting. The dissenting judge also said that the claim was not timely.

Here is the section that exempted the prosecutors.

http://www4.law.cornell.edu/uscode/28/2680.html

By Anonymous on Friday, December 08, 2000 - 09:23 am:

If the new Sec Def leaves it to the courts will you rip her the way you did Dick Cheney? Are you the same Eric Ottinger who wrote, "I thought Cheney was a heck of a good manager. But it would have been better if the A-12 had been wrapped up in a way that didn't leave room for prolonged litigation."?

By Eric Ottinger on Friday, December 08, 2000 - 11:04 am:

Anon,

You should go back and read the newspaper articles, specifically the ones that were included in the Department of Defense "Early Bird."

I am not taking any position on the merits of the legal arguments one way or another.

I was merely repeating the substance of the newspaper articles as best as I can remember.

I did not intend any kind of “rip.” I thought Cheney was a strong, effective manager, and I very much admire him for that.

Sometimes it is important, not only to do the right thing, but to do it in a way that doesn’t leave the door open for subsequent litigation.

Sometimes my GC will say, “Don’t worry about that. We will win that case in Court.” I respond, “The only case that I win is the one that I don’t have.”

That was my point.

I think we all understand that these decisions involve several key advisers and that it is pointless to single out any individual.

Notwithstanding, John’s comment, I believe, OSD took some care to state that it was the NAVAIR PCO who terminated the A-12 for default. The contractors are arguing that the Secretary of Defense had other motivations and other agendas.

Eric

By Kennedy How on Friday, December 08, 2000 - 01:07 pm:

I know I'm going to have trouble enunciating this, but I'll give it a shot.

In the general contracting community, I believe that the disclosures that Martin Marietta are talking about are not that critical. This is especially true when you are talking about non-superfocused procurements.

When you talk about cruise missiles, Arleigh Burke destroyers, B-2 bombers, things that are really focused, limited and basically the same 1-2 bidders being alternated with, then a sharp corporation can start to see trends. These big companies aren't stupid; they've done this routine for years, they know the rules, they know what DCAA does, they know what NAVSEA/AIR/etc. policy is. Eventually you start putting two and two together, and your variables start to decrease. Plus, you can get info like "well, what union represents Pascagoula", and you know what it takes to build the item. All you have left is rates. And, we know what the Govt's views on that are.

And, once you start getting predictable, and that's where you head when things go on for a long time, then it gets easier. You start looking for ways to get an advantage, which you don't want to disclose.

From the contractor's viewpoint, I can see this. I can see this because when I negotiated with a contractor who has a number of different programs with us, we can talk among ourselves to see what past history tells us. And, when said contractor merged with somebody else, we talked to those people. Interesting!

Kennedy

By Kennedy How on Friday, December 08, 2000 - 01:13 pm:

Re: A-12

My personal opinion is that the Government wanted to get out of the contract as painless as possible. A T4C on an overrun contract would essentially pay out everything that was obligated to that time, if the costs incurred were allowably. In a T4D, the Government is not liable for anything.

I had a T4C once where the contractor spent the entire amount of a FFP contract to try and manufacture an item that really couldn't be manufactured the way it was set forth in the TDP. The TCO had a real problem, there was another issue complicating things, but the end result was that the contractor couldn't recover all the costs incurred. Basically, we paid $190K for absolutely nothing.

Kennedy

By joel hoffman on Saturday, December 09, 2000 - 09:13 am:

Kennedy, in your T4C situation, I assume that the TDP was furnished the Contractor by the Government. Is that correct? Then you said that the Contractor wasn't reimbursed for all incurred costs. That was a little confusing. Was this a FFP contract?

Does this mean that the Contractor didn't claim the additional expenses were incurred in trying to meet defective Government furnished specifications - and that the Government applied the shared loss formula to the T4D settlement?

If defective Government furnished specifications caused the overrun, the contractor could normally submit an REA or claim before or during the termination settlement to justify the overrun. Then the Government couldn't apply the rule which requires the contractor to share in projected losses, in the settlement. However, the contract type could have a bearing on the set of facts.

I generally have little sympathy, except to the taxpayers, when the Government issues a contract with defective specifications, then receives "absolutely nothing" after a T4C, when the Contractor, despite a valiant effort, couldn't produce the item in accordance with the TDP. Happy Sails! joel

By Kennedy How on Monday, December 11, 2000 - 12:14 pm:

Joel,

Yes, it was a FFP, Govt furnished TDP. Generally speaking, the contractor could have submitted an REA for a defective TDP, but in this case, he didn't do so.

Kennedy