THE NAVY'S TURN TO SQUIRM

DEFENSE contractors have long been under fire for the steadily rising costs of their major products, including tanks, helicopters and notably the C-5A jet transport. So far, the suppliers to the U.S. Navy have escaped relatively unscathed. Now, however, the details of shocking cost overruns in the Navy's shipbuilding program are surfacing. In secret testimony before a House subcommittee, to be released before year's end. Navy Secretary John Chafee has estimated that Navy overruns of the past dozen years may have totaled $800 million. Other experts calculate the amount to be closer to $1 billion.

Navy money keeps U.S. shipbuilders afloat. It accounts for 85% of their business, which has attracted major aerospace contractors and conglomerates, including Lockheed Aircraft, Litton Industries and Ogden Corp. The builders are now vying for some of the richest contracts in history. Early next year the Navy will award one builder a $2,270,000,000 contract for 30 destroyers. That will be followed eventually by an order for another 32, worth $2,032,000,000.

Changing in Midstream. In this atmosphere of controversy and competition, TIME Washington Correspondent Mark Sullivan investigated the Navy's cost problem and its plans for coping with it. "The Navy's request for funds to build the new ships comes hard on the heels of a disastrous record of mismanagement," he reports. "While the Air Force's C-5A had a cost overrun of some 25%, the Navy's overrun in some cases has amounted to 50% and even 100% of contracts and budget estimates. On orders from Defense Secretary Melvin Laird, the Navy is now making a clean breast of its troubles and asking for a fresh start."

Inflation accounts for about two-fifths of the excess costs. A bigger factor has been the Navy's operating methods. Since the days of sail, the service has always designed its own ships, contracting with many firms for hull and equipment and changing specifications and ordering new gear while a vessel was being built. The ships have been much better for the changes, but, as Lockheed Executive Vice President Robert Waters says: "Better ships cost more money, and ships that are not built in an orderly manner are bound to have cost increases." The Navy owns up to its share of the blame. "Some of this was mismanagement," says Admiral Ignatius J. Galantin, the chief of shipbuilding. "There were inadequacies of design. We were outreach-ing the state of the art."

Double Profit. The Navy, of course, is not wholly at fault. Rear Admiral Edward J. Fahy complained at congressional hearings last May that "shipbuilders are insisting on more than twice the profits they previously accepted." For example, General Electric demanded and got a 13% profit margin on a cost-plus-fee contract for turbine electric-drive equipment for submarines. The Navy had based its original estimate on a profit allowance of 6.9%, the average that the Pentagon pays for this kind of equipment. The Navy also discovered that it had far less negotiating clout than might be expected by a huge purchaser. Manufacturers, Fahy testified, "give the civilian electrical utilities more attention than we get."

The admirals also suspect that they have been victimized by the practice of "buy-in," long familiar to the aircraft and electronics industries. A company "buying in" enters a low bid to get a military contract, then submits enough overrun claims later to turn a handsome profit. The Navy, too, is guilty of a form of buyin. It submits to Congress fairly low requests for funds, then returns for more to pay for overruns.

The overruns have immersed the whole Navy in a sea of red ink. Among the most expensive items: >-A new destroyer escort pleased the Navy so much on paper that the admirals ordered 46 in all--14 from Todd Shipyards, five from Lockheed, and 27 from Ogden Corp.'s Avondale subsidiary, which departs from tradition by launching its ships sideways, into the Mississippi River at New Orleans. After the ships were ordered, specifications were drawn and redrawn as the admirals sought scientific perfection--or were sold on new electronic gadgets. Many important parts were only in the development stage and thus arrived late at the assembly sites. Todd delivered the first ship last March, 16 months late, and to date has collected overrun claims of $96.5 million. Lockheed is claiming $45 million in overrun costs and Avondale $137 million. Altogether, the destroyer escorts, originally budgeted for $510 million, will wind up costing taxpayers close to $800 million.

-- Huge and highly advanced amphibious landing craft, each equipped with a below-deck unloading ramp and a helicopter flight deck, will be built by Litton Industries' Ingalls division at Pascagoula, Miss. Last May the company signed a $1 billion contract for nine vessels. Costs have already escalated, largely because of design changes. The first ship alone will cost $185 million, compared with the $143 million appropriated for it last year.

-- The nuclear-powered carrier Nimitz, now under construction at Newport News, Va., was estimated to cost $427 million when work began in mid-1968. Design was not complete when the contract was signed. Some deliveries of parts were late, and the builder's costs went up. Overruns now exceed $116 million, and the Navy has no choice but to settle up. Newport News Shipbuilding and Dry Dock Co., owned by the Houston-based conglomerate Tenneco, is the only yard in the U.S. big enough to put together carriers of the Nimitz class.

-- Assault ships, designed to launch landing craft and helicopters, are being built at Lockheed's Seattle yard. The seven ships were priced at $25 million each when the contract was signed in 1963. There have been many design changes, late delivery of gear, and the usual toll of inflation. Lockheed has not yet submitted its claim for what promises to be a large overrun, and the Navy is keeping its own estimate secret--while budgeting for the assault ships in its total overrun account.

-- Nuclear attack submarines, being built at half a dozen yards, were originally priced at $2.7 billion for a group of 39. That has risen to more than $3 billion, partly because suppliers increased their prices.

Riches for One. The Navy has overhauled its purchasing system--in which the Navy designed the ships and then contracted piecemeal for the hull and equipment--in hopes of preventing overruns in the future. The old, costly system is scheduled to change with next year's contract for 30 destroyers. The whole $2,270,000,000 job will go to one of just two bidders: Bath Iron Works in Maine or Litton Industries. Under a new "total package procurement" plan, originally put into effect by former Defense Secretary Robert McNamara, the Navy will get out of ship designing entirely. The admirals will provide only the general specifications for the destroyers; the contractor will design the ship from the keel up, subcontract for the electronic equipment and even decide how many sailors will be needed to man the vessels. The builder will thus be able to plan ahead and modernize management and production techniques that now are, as one yard operator acidly puts it, "about on a par with the railroads."

Though some builders doubt that a big ship can ever be fully designed ahead of time, the Navy is resolved to reform. Its Naval Material Command was reorganized in May. Navy project managers henceforth will be held personally responsible for the accuracy of cost estimates, and any new additions to ships under construction must be matched by deletions. Still, at least one high shipyard executive doubts whether it will all work. "The Navy has not got the talent to manage a program the way it would like to," says he. "As well-meaning a group as the admirals are, you cannot find a topnotch management guy there. The Navy does not pay enough to attract or keep this kind of talent."

To make up for past mistakes and present overrun claims, the Navy has already cut back its destroyer-escort program by ten ships, and is scrapping plans for several other vessels, all at the cost of hefty cancellation fees. The new building program seems more shipshape. The Nixon Administration has recommended granting the first half of the Navy's request of $35 billion for new ships over the next ten years. Two weeks ago, a joint Senate-House conference reported out an authorization bill that gave the Navy all of the $2.8 billion that it requested for fiscal 1970.

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