Trying to cut cost of '75,000 parts flying in formation'

The Reagan administration can quite properly take credit for clamping down on the most visible signs of fraud, waste, and abuse at the Pentagon. Spare-parts ''horror stories'' have been revealed and corrected largely from within, and Defense Secretary Caspar W. Weinberger's ''acquisition improvement program'' has begun to save money in weapons procurement.

Still, the Defense Department continues to resist the kinds of fundamental changes in military spending that many experts say are necessary if mounting costs are to be avoided.

And for all his talk about saving money at the Pentagon, Democratic presidential hopeful Walter F. Mondale has not addressed this broader question.

The potential scope of the issue is enormous: Last year, the Pentagon let nearly 15 million contracts totaling $141 billion.

Top Reagan appointees at the Pentagon insist that they have made substantial improvements in defense contracting.

''We already are working on this problem,'' Deputy Defense Secretary William H. Taft IV told the University Club of Chicago last week. ''Only people who are unaware of the first round of reforms we have instituted could feel that a second major overhaul of our system is needed.''

However, others are not so sure.

The Defense Department could save at least $30 billion a year if it cut out contractors' overcharges, says famed Air Force whistleblower Ernest Fitzgerald. A group representing some 14,000 machine shops says $8 billion a year could be saved in spare parts alone if most of these were purchased from small businesses instead of major contractors.

''The basic problem is that if the contractor claims he spent the money, we pay what he says he spent plus a profit,'' says another Pentagon financial analyst. ''There are quite literally thousands of examples of parts and tools that are priced absurdly high.''

This is largely due to what the Pentagon pays for the so-called ''standard hour'' of work. In many cases, say Mr. Fitzgerald and others, this is several - and sometimes many - times higher than is charged in the more competitive commercial sector.

For example, Fitzgerald told a recent Senate hearing, one contractor added overhead and administrative charges to a labor cost of $13.93 per hour and boosted the total to $99.13 per hour (not counting profit).

''The excessive markups are across the board,'' Fitzgerald said.

''We have not looked at every contractor,'' he continued. ''But every one we looked at has markups which appear excessive in terms of what their own industrial engineers say it should take internally for the factory labor and the kinds of overhead markups you'd expect to see in competitive business.''

There are several institutional problems, according to J. Ronald Fox, a former senior defense official now at the Harvard Business School: Uniformed program managers stay on the job a relatively short time and are rewarded for getting things bought, not questioning price; there is a high turnover rate among senior civilian appointees as well; and Congress - to the extent that it tries to change the system at all - tends to focus on ''quick fixes'' like warranties, more competition, and independent weapons testing.

Recent improvements legislated by Congress and ordered by the Defense Department itself can help, say some experts, but more needs to be done.

In a recent article in the Harvard Business Review, Mr. Fox points out that, unlike most commercial business where ''managers are rewarded for lowering costs ,'' in defense contracting ''higher costs generally mean higher profits.''

''This common practice has a perverse effect,'' Fox writes. ''The higher the estimated cost of a program, the higher the profit considered appropriate for the contractor. It is thus a disincentive for a contractor to run an efficient, low-cost operation.''

He suggests broader use of one practice that has been tried in some instances: allowing defense contractors somewhat higher profits in return for significantly reduced costs.

Fox also says there should be career incentives for military officers specializing in procurement or weapons program management. Promotions should be awarded those who oversee programs completed below budget and ahead of schedule, with advancements withheld from those who fail.

Fitzgerald and the other financial analysts he works with say the military services should make more use of the ''should-cost'' accounting principle.

This involves closer figuring of what it ought to take to build an item to military specifications, then holding contractors to that price, plus reasonable profit and overhead.

A full-page ad in the trade journal Military Logistics shows an F-16 fighter and says, ''Think of it as 75,000 parts flying in very close formation.''

With a different purpose in mind, Fitzgerald uses the same analogy to describe a weapons-procurement problem he sees as much broader than overpriced bolts and diodes.

''All those ace investigative reporters have missed the real story,'' Thomas Amlie, Fitzgerald's associate, wrote in a recent Pentagon memo.

''The real story is that everything we buy (aircraft, missiles, tanks, electronic equipment, etc.) is priced just like the spares,'' he wrote.

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