Military contractors accused of overcharging U.S. Firms testify on charges they overbilled on subcontractor costs, reaping windfall profit.

May 22, 1991|By Stacey Evers | Stacey Evers,States News Service

WASHINGTON -- Defense contractors, including Westinghouse Electric Corp., are reaping millions of dollars in excess profits from the federal government, according to a government watchdog agency.

The General Accounting Office, the investigative arm of Congress, said the days of over-priced toilet seats have not gone away. The situation may be worse, four GAO reports being released today show.

Questionable subcontracting practices by Westinghouse, Maryland's second largest employer with more than 17,000 workers, are the subject of two of the reports.

When bidding for government contracts, companies estimate their subcontracting costs. But after being awarded the contracts, the firms then renegotiate with subcontractors for lower prices, the GAO said. The contractors pocket the difference instead of passing the savings on to the government, according to the GAO.

The practice occurs with contracts of all sizes, the GAO said. Officials said they cannot yet put a price on the total loss to the government, but one congressional source estimated it in the billions of dollars.

"We strongly disagree with the inference that Westinghouse used this technique to overstate its proposed cost and realize windfall profits during contract performance," Francis J. Harvey, general manager of the marine division of Westinghouse, said in remarks prepared for delivery today to the Senate Governmental Affairs Committee. Pentagon officials also were testifying.

No one has called the activities of Westinghouse or any other defense contractor illegal.

The Defense Contract Audit Agency intends further examination of 888 of 2,066 subcontracts that the GAO reviewed, a congressional source said.

The practice, which may have resulted in as much as $880 million in inflated subcontracting costs, may violate the Truth in Negotiations Act, which requires contractors to give the government certified price and cost information before a contract is signed.

In addition, the Pentagon's Defense Criminal Investigative Service is investigating Westinghouse's contracting practices, a congressional source said.

A spokesman for Westinghouse Electronic Systems Group in Linthicum refused comment on the defense agency's investigation.

The Linthicum operation devises electronics systems for the Pentagon.

Defense contracts make up about 25 percent of its sales, a corporate spokesman said.

The GAO reports are the first in-depth survey of subcontracting. Subcontractors' costs are taking up more of the total costs of weapons systems, with at least 50 percent of all costs at this level, compared to 20 percent in 1965, a congressional source said. At the end of fiscal year 1989, prime defense contractors had awarded about $195 billion in subcontracts, the GAO said.

The GAO reports allege that:

* Contractors are thwarting government attempts to increase competition in the procurement process by submitting inflated prices for subcontracts. Four defense contracts awarded to the Marine Division of Westinghouse between 1985 and 1987 were overpriced by about $9 million because the company's estimated subcontracting costs "were not accurate or reliable," the GAO said.

When Westinghouse awarded its subcontracts, it did not use the same price quotations included in its proposal to the government. Instead, it reopened bidding for lower prices.

In one contract, Westinghouse proposed $68 a unit for a part for the Peacekeeper missile. After seeking new bids, Westinghouse bought the part for $6.57 a unit -- $377,426 less than the proposed price of the total order, the GAO said.

Defense contract officers accepted Westinghouse's proposal because it was based on competitive bidding, the GAO said, adding that the officers also said they did not know that Westinghouse had received different estimates from subcontractors.

In his response, Harvey said, "the Peacekeeper contract was negotiated over several years, resulting in extreme overlap" of the development and production phases of the program. Also during the talks, the program underwent "expensive" design changes and many competitive subcontract quotes expired.

Since Pentagon officials knew the company's buying practice and pricing history, Harvey said, they had the information they needed to talk down the proposed prices.

* Defense subcontract cost-estimating problems are widespread. Of 101 contractors reviewed in 1988 by the Defense Contract Audit Agency, 83 had estimating flaws. Forty-two of the companies had problems too severe to provide reliable estimates, the GAO said. But in fiscal year 1989, these 42 companies received $11.3 billion in Pentagon sales.

Many contractors, including Westinghouse, have no plans to change their subcontracting process because they assume contracting officers realize that proposed prices are subject to change, the GAO said.

Harvey said it "would not be prudent" for a prime contractor to award subcontracts until it has received the government contract.

He also said Westinghouse has made "significant" improvements in its cost estimating system.

* The Pentagon refuses to consider the subcontracting pricing system a management weakness, despite recommendations to look more carefully at subcontracting prices.

In a review of 68 subcontract estimates totaling about $162 million, the Defense Department paid about $11.7 million more to three prime contractors than the firms negotiated with their subcontractors.

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