10. THE DOD'S COST-PLUS CONTRACTING SYSTEM TAXPAYER
The welfare mother who drives a Cadillac and uses several aliases to
defraud the government of thousands of dollars always makes good front
page copy; the multi-billion-dollar corporation which uses illegal bookkeeping
techniques to defraud the government out of millions of dollars and
then fires employees who report the fraud doesn't seem to be as newsworthy;
and the federal contracting system that encourages overruns, inefficiency,
and fraud is even less newsworthy.
Rockwell International, one of the nation's largest space and defense
contractors, fired at least two employees for reporting contract fraud
to NASA's Inspector General. These two, along with other former and
current Rockwell employees, all allege that Rockwell illegally transferred
cost overruns to get the government to pay.
Like other defense suppliers, Rockwell has two types of contracts with
the government. The first, fixed price contracts, are negotiated in
advance with a set price, and any cost overruns must be absorbed by
Rockwell. The second, cost-plus contracts, are like open-ended price
tags, with the government covering all expenses no matter how high they
go. The B-1 bomber is a fixed price contract, for example, while the
Space Shuttle is a cost-plus contract.
What the employees revealed was that Rockwell was shifting the billing
for extra time and money spent on fixed contract to the cost-plus contracts.
Employees were told to bill work done on the B-1 (fixed) to the Space
The U.S. Justice Department began to investigate and then suddenly
dropped the case for several years. When it finally was re-opened Rockwell
lawyers agreed to an out-of-court settlement. A month later, the cases
were settle with no admission of guilt on Rockwell's part. Rockwell
agreed to pay the government $500,000 and to invest $1 million in a
computerized timekeeping system that supposedly will ward off abuses.
Government watchers were incensed that the Justice Department would
settle for so little. It was once estimated that Rockwell's fraudulent
charges amounted to as much as $5 million. Some critics pointed out
that it was fortuitous for Rockwell that William French Smith was U.S.
Attorney General. Smith was formerly a partner in the firm of Rockwell's
longtime legal counsel, Gibson, Dunn & Crutcher.
The bottom line is that despite occasional press exposes of a fifteen-cent
bolt that costs hundreds of dollars when it enters the Defense Department
contracting system, the fraud-susceptible cost-plus system continues.
The 1.6 trillion taxpayer dollars President Reagan wants to give the
Pentagon over the next five years is overly plump for cost-plus plucking.
COMMON CAUSE, March, 1983, "Whistleblower!," by John Hanrahan.