TRW Agrees to Trim Overhead by $100 Million

TRW signed an agreement with the Air Force on Tuesday to reduce its overhead costs by $100 million over the next three years, the firm’s Redondo Beach defense unit said.

The agreement, which officials described as a voluntary memorandum of understanding, is the first of its type to be signed by a defense contractor, but more are expected, Air Force officials said.

TRW agreed to a wide variety of overhead cost reductions in its large defense operations, but it said the reduction are not expected to result in layoffs or in salary cutbacks. New hirings will come under increased scrutiny, said John Gray, TRW’s director of cost analysis and settlement. TRW was awarded $1.08 billion in defense prime contracts in fiscal 1985. Including subcontracts and other government business, the firm had $2.5 billion in federal work.

Gray said some of the specific cost reductions outlined by the agreement cover reduced business travel, consolidation of some facilities, reduced space per employee and restrictions on phone usage.

“Each individually doesn’t sound like much, but when you come up with a number of these over several years, it is a substantial amount of savings or cost reduction,” Gray said. He said the agreement formalized an ongoing TRW effort to cut its costs. The plan will reduce costs below what they otherwise would have been, but overhead payment may continue to grow because TRW’s defense business is growing.

The Pentagon and defense firms typically negotiate how much overhead will apply to any specific contract, based on projections of future overhead costs. Thus, cutting overhead can make a firm more competitive in winning future contracts, but it can also eat into profits on cost-plus-fee type contracts.

The memorandum was signed by Maj. Gen. Bernard Weiss, commander of the Air Force Contract Management Division, the agency that negotiates overhead payments with aerospace firms, and George E. Solomon, TRW executive vice president.