How the Conglomerates get Free Money From the Navy
Winslow, John F.
How the Conglomerates Get Free Money From the Navy by John F. Winslow America’s biggest shipbuilders have been putting up a great hue arid cry lately over the stinginess of the Navy. They say...
...Spectacularly dubious costs are claimed...
...ment, have moved into the shipbuilding business and started raising their claims to outrageous heights...
...This may sound very sad, but it’s also very misleading...
...The case of Litton Industries, Owner of Ingalls Shipbuildfng Corp., is even more brazen...
...Tenneco says the Navy has hired away a large number of Newport News workers to work in the Navy's own yards, forcing Tenneco to spend an extra $380 million to train new workers (that's at $42,000 per worker)-but in fact, Admiral Hyman Rickover has testified that during the claim period Tenneco spent no more than $9.2 million on hiring and training, or 2.5 per cent of the amount claimed...
...A court ordered the Navy to pay up, and now construction on the assault ships continues...
...Tenneco says if the claims don't come through it may have to stop construction and even close down the yards-but its profits from Newport News have been consistently high,exactly how high it won't say...
...Sure enough, the Navy awarded the contract for nine amphibious Landing Helicopter Assault ships and 30 destroyers to Ingalls, which, while not the low bidder, had promised the most advanced technology...
...Initial contracts can be bid at artificially low rates, in the knowledge that they can be jacked up later on...
...At the last minute, under pressure from Proxmire’s Joint Economic Committee, the Pentagon abandoned its plan to pay the claims without reading them, and they are now under adjudication...
...When it built the nuclear cruisers U.S.S...
...South Carolina, for instance, it submitted a claim for $151 million beyond the original contract priceand settled for less than a third of that amount, which seems to indicate that the $151 million was a bargaining ;,::c12?siHpn rather than a reflection of f(;~bV~J;:costs...
...Hearing the still unfolding 38 story of the Navy’s contract with Litton in a closed-doors meeting of the House Armed Services Committee in 1972, Representative Floyd Spence asked, “How did we get into this mess in the first place...
...The reason for this strange attitude is that Tenneco and Litton have outlawyered the Navy, submitting an avalanche of evidentiary material so heavy that the Navy couldn’t possibly size it up...
...Is it your testimony that much of the claims you worked on included exaggerated, unsupported, or inaccurate figures...
...for just one $270 million chunk of its claims, it submitted 15 volumes of summary, and this summary would have taken years to document fully...
...Litton demanded the rest of the money immediately...
...There are a couple of cases that show what can happen: In the late 1960s Tenneco bought the Newport Ncws shipyards and quickly began taking full advantage of the claims system...
...As a result, building ships for the Navy can be a way of getting what amounts to free money from the government-and claims are so high now because huge conglomerates, seeing the possibilities in this arrangeJohn Winslow, former counsel to the House Committee on the Judiciary, Antitrust Suhcommittee, is the author of Conglomerates Unlimited: The Failure of Regulation (Indiana University Press...
...Now Tenneco's claims ~,an16'iint to $900 million to cover the construction of the nuclear aircraft carriers Eisenhower, Nimitz, and Vinson...
...He also said Newport News had told the Navy that a three-day strike had actually lasted 14 weeks...
...The claims were on the assault ships, and work on the destroyers couldn’t begin until the assault ships were out of the way, so the Navy, to speed things along, canceled its order for four of the nine assault ships...
...Within two years, the ships were over a year behind schedule, and their price had doubled...
...The unpaid claims are large, it’s tru’e, but for reasons precisely opposite to those put forth by the shipbuilders: the claims speak not to the Navy’s parsimony...
...There’s no end in sight to a system under which, in the words of one member of the House Armed Services Committee, “we are always paying double the contract price for half the constructed goods...
...So Litton got $130 million from the state of Mississippi a,nd began to build a new Ingalls facility across the Pascagoula River from the old one...
...Tenneco says the Navy has slowed production by sending over too many inspectors, and raised costs by making the yards conform to environmental, anti-pollution, and health regulations -but these regulatory costs apply to its commercial as well as Navy work, and the Navy is being asked to pay for all of it...
...That is correct," he said...
...The Navy, meanwhile, had only one lawyer in charge of sizing up claims, partly because Tenneco and Litton had lobbied on Capitol Hill to stop the Navy from enlarging its legal staff...
...Last year, the Pentagon announced it would pay off $740 million of the $1.8 billion that Tenneco and Litton were claiming without even reading the claims...
...Despite the delay Litton submitted claims of over $270 million for added payment for the construction-more than twice the cost of the facilities on which the ships were to be built...
...Litton submitted a ton and a half of claims papers...
...the Navy refused...
...They say they’re being driven to bankruptcy when they build Navy ships because they’re unable to extract full payment from the Scrooges in the Pentagon...
...We used these changes to cover up inefficiency in late work...
...but to the ease with which it can be taken to the cleaners by unscrupulous contractors...
...The contracting system is flexible to allow compensation for late changes in specifications or unavoidable delays, but it’s notable chiefly for all the enticements to rob the Navy that it offers...
...And when the Navy balks at paying up, shipbuilders threaten to halt construction- a tactic that is impossible to combat, because it’s too late for the contract to be sent elsewhere...
...At the moment, shipbuilders have $2.3 billion in unpaid claims for construction costs...
...Verv Acrimonious’ It’s a mess that’s difficult to get out of, too...
...Glenn McDaniel, a Litton Industries executive, said in a heart-rending interview with Time not long ago, “you cannot expect a private company to finance the U.S...
...In 1967, five years after Litton bought Ingalls, the Ingalls manager informed corporate headquarters that the yard had deteriorated to the point where it couldn’t compete against the other shipbuilding giants...
...and Litton sued for permission to stop work...
...But the threat of work stoppage is still hanging over the Navy, and the contracting system that allows legal extortion of the Navy is under no major challenge...
...Judging the claims on their merits, said then-Deputy Secretary of Defense William Clements, would be “a multiyear, drawn-out process, involving many, many lawyers, and a very acrimonious atmosphere...
...Senator William Proxmire asked Cardwell...
...At the same hearing, Vice Admiral R. C. Gooding, commander of the Naval Sea Systems, said the shipyards had shifted scarce manpower from Navy production to its commercial production, thus billing the Navy for work it did for private customers...
...In order to prevent the Navy from knowing just how late the work was-and thus whose fault the delays really were-the shipyards showed the Navy fictitious production schedules, Cardwell, who has since left Tenneco, testified...
...In 1970, Litton convinced the Navy that its unconstructed Ingalls yard was capable of (in the words of a report to shareholders) “the largest single contract in the annals of American shipbuilding...
...By 1976, Litton had delivered only one of the five assault ships it was supposed to build, but the Navy had paid it $830 million of the total original contract price of $970 million...
...In unpublished testimony, William R. Cardwell, the official of the yards who was in charge of processing claims against the Navy, told the Joint Economic Committee earlier this year that any change in specifications by the government "has little to do with any construction delay...
...Califoriziu and U.S.S...
...Because of the way Navy contracts (among others in the government) are set up, shipbuilders can and do keep upping what they say are their costs during construction, and the Navy will usually keep paying for these inflated claims...
...it would be, in other words, “more expensive in the long run than to settle...
...Tenneco says unforeseen inflation has driven the costs up-but Navy contracts are already automatically adjusted for inflation...
Vol. 9 • November 1977 • No. 9
