McDonnell Profit on F-18 Questioned in Pentagon Audit

An internal Pentagon audit released Monday charged McDonnell Douglas, the nation’s largest defense contractor, with making excess profits in building the Navy’s F-18 jet. The report recommended an $11.1-million price reduction.

The report by the Chicago office of the Defense Contract Audit Agency said the St. Louis-based company received a $10.1-million cost reduction from a subcontractor and did not inform the Navy of the lesser charges while the firm and the Navy were negotiating for a lower price on the F-18.

“The contractor made misleading statements during negotiation,” the 11-page audit report said.

The report said McDonnell should offer an $11.1-million price reduction to the Navy, with an additional $1-million adjustment for excess profit.

In addition, Rep. John Dingell (D-Mich.), chairman of the House oversight and investigations subcommittee, charged in a letter to Defense Secretary Caspar W. Weinberger that McDonnell did not disclose a $42-million reduction in its contract with the Hughes Aircraft for F-18 radars.

A spokesman for McDonnell in St. Louis denied any wrongdoing and said discussions have begun with the Navy about the F-18 audit. He said the company had not yet analyzed the audit on the radar contract.

The F-18 audit reviewed a 1983 agreement between the Navy and McDonnell for the sale of 168 planes for $2.9 billion for fiscal years 1983 and 1984. Los Angeles-based Northrop was the subcontractor in question. It supplied a portion of the plane’s fuselage.

“The contractor did not provide the most current, accurate and complete information concerning Northrop subcontract cost,” the audit said. Northrop was charging McDonnell $5.9 million for each fuselage section, the report said.

In October, 1983, a month before the agreement with the Navy, the president of McDonnell Douglas, Sanford McDonnell, telephoned Northrop Chairman Thomas Jones and got $100,000 off the price for each fuselage section, company spokesman Jack Cooke said.

The price reduction was in accordance with Navy demands for lower prices, and Cooke said the Navy had been informed about the $100,000 price cut.

In November, McDonnell Douglas accepted the Navy’s price for the planes and told the Navy that it “would have to get lower prices from Northrop and other suppliers,” Cooke said. The company returned to Northrop and asked for another $60,000 price cut, or $10.1 million for 168 planes, Cooke said.

“We got Northrop to agree to $40,000 per aircraft for a $6.7-million reduction,” he said.

He said McDonnell was not personally involved in negotiations with Northrop after October.

Cooke insisted that the Navy knew that McDonnell would be asking Northrop and other suppliers for price reductions after the agreement had been made--not before, as alleged by the audit.

“We didn’t hide anything from the Navy,” he said. “We didn’t deceive them. We told them exactly what we were doing.”