Lockheed Aircraft Corporation suffered $2.1 billion in cost overruns in manufacturing the U.S. Air Force’s C-5A Galaxy transport plane, leading to congressional hearings into the spending of taxpayer dollars.
In 1965, the Lockheed Aircraft Corporation
The three major competitors for the enormous military contract were Douglas Aircraft Corporation, Boeing Company, and Lockheed. The award-winning proposal was for 115 aircraft and an anticipated cost to the Pentagon of $1.9 billion.
On September 3, 1969, the U.S. Senate began hearings, under the charge of Senator William Proxmire (a Democrat from Wisconsin), concerning the possibility of a $2.1 billion cost overrun in the production of the C-5A aircraft by Lockheed. These Senate hearings received national attention not only because of the significant amount of potential cost overruns but also because of the political and industrial practices hinted at and accusations made by numerous witnesses. How Lockheed could find itself in the financial situation it did requires a review of the history of the contract negotiations and manufacturing practices.
In April, 1965, the three primary contractors submitted their final bids for the 115-plane contract. Boeing was highest with a bid of $2.3 billion; Douglas bid $2.0 billion, and Lockheed bid $1.9 billion. In addition to the bids, the contractors provided more than 200,000 pages of supporting technical data to the Air Force. This material included cost projections, construction schedules, and aircraft performance data. The Boeing proposal was selected based on design superiority, and the recommendation was sent to the top levels of the Air Force and the Department of Defense (DOD), including DOD secretary Robert McNamara, for the final decision. Air Force secretary Eugene Zuckert, USAF chief of staff general John P. McConnell, and others overruled the selection board recommendation and awarded the contract to Lockheed-Georgia of Marietta, Georgia.
The C-5A Galaxy.
The contract negotiated for the C5-A with Lockheed-Georgia included a new method of contracting known as Total Package Procurement
One of the obvious problems of the TPP concept became evident during the congressional hearings on the Lockheed cost overruns on the C5-A. The time frame of major military contracts can sometimes range from five to ten years. In the case of the C5-A contract, for example, the Air Force and Lockheed were negotiating in 1965 on the basis of cost estimates for work that would not be completed until 1972. For Lockheed, this time frame proved disastrous in estimating costs with precision. The Lockheed contract required five experimental planes, an initial production run of fifty-three planes (Run A), and an optional second run of fifty-seven additional planes (Run B), for a total of 115 aircraft. In addition, Lockheed was to provide for flight and ground test programs, crew and maintenance training for six squadrons, ground support equipment, and spare parts.
The contract also contained penalty clauses. Specifically, schedule delays would bring penalties of $12,000 per day for each of the first sixteen planes delivered late, with a maximum penalty of $11 million. The contractor would also absorb the costs of correcting any structural deficiencies and would earn no profit on costs incurred as a result of design changes.
Although the terms of the contract appeared strict, there was an additional clause that later proved to be a loophole for extreme cost overruns. This clause contained a very complex and sophisticated repricing formula. Simply put, it used the cost experience on the fifty-three planes in production Run A as a basis for renegotiating the cost of the additional fifty-seven planes in Run B. If costs on Run A rose above the ceiling price (30 percent over target price), the over-ceiling percentage was multiplied by a factor of 1.5. The multiplication factor rose to 2 if costs went higher than 140 percent of the target. The resulting figure was then used to multiply the original target cost of Run B, producing new, higher target and ceiling prices for Run B. It was this confusing environment that eventually led to the well-publicized congressional hearings by Senator Proxmire in September, 1969, on substantial cost overruns on the C5-A project.
There was no single contributing factor to the cost overruns on the C5-A Galaxy. The nature of the aircraft, the apparent underbid, political influences, and inefficient management caused Lockheed to ultimately suffer losses of approximately $648 million on the C5-A contract.
Soon after the contract award, engineers at the Lockheed-Georgia plant began to encounter a series of unforeseen technical problems with aircraft design. In early 1966, Lockheed was forced to redesign the wing, nose, and other parts as a result of wind tunnel tests demonstrating too much drag on short takeoffs. In changing the original design, weight became a problem, and designers had to plan for lighter but more expensive metals in the aircraft construction. These design problems caused concern for Air Force plant representatives. They issued a “cure notice” on February 1, 1967, stating that unless the technical deficiencies were soon solved, the contract might be terminated for default.
Lockheed was forced to expand the scope of its development program and in so doing incurred extraordinary labor costs for the project. Forced to live up to contract specifications, Lockheed had to spend millions of extra dollars, money not anticipated in the company’s original cost estimates. The extra costs began showing up as increased overhead on Lockheed’s monthly program reports to the Air Force in early 1966. To curb this trend, Lockheed claimed that initial budget estimates had been mistaken and simply increased the budget for this developmental stage. The overruns therefore disappeared.
In early 1966, an official with the Office of the Assistant Secretary of the Air Force for Financial Management, A. Ernest Fitzgerald, wrote a report describing potentially disturbing overhead increases. These sharp increases continued for three years, until the Air Force was forced to publicly acknowledge the cost problems that Lockheed was incurring.
Finally, on November 13, 1968, Fitzgerald testified before Senator Proxmire’s hearings on military procurement that on the basis of the Air Force’s records, the projected overrun for the total C5-A program would probably reach $2.1 billion, and that Lockheed would run more than 100 percent over its original target price. Fitzgerald attempted to explain the overruns by indicating an initial underestimation of costs, ineffective cost controls, and problems tied in with the repricing formula in the contract award. The news of a potential $2 billion cost overrun made front-page headlines across the United States. Proxmire blasted the Air Force for concealing the cost increase from Congress and requested that the General Accounting Office
On November 14, 1969, the DOD formally announced its decision to limit the C5-A program to four squadrons, or eighty-one planes. Although appearing to be a cost-saving move, the contract for eighty-one planes still cost half a billion dollars more than the original contract for 115 planes. Lockheed, upset by the decision, protested the decision by filing an appeal notice with the Armed Services Board of Contract Appeals. Although the decision to build only eighty-one planes stood, an agreement was made to stretch out the production schedule for Lockheed until January, 1973.
Although the cost overruns of the C5-A by Lockheed appear to stem from unusual mismanagement or bad planning, it is not uncommon for military contracts to greatly exceed original estimates. The nature of the military-industrial-congressional system that produces these projects is subject to cost overruns, abuse, inefficiencies, and sometimes waste. Other programs have suffered extreme cost overruns. Both in terms of percentage and actual dollars, the $2.1 billion C-5A cost overrun set no records in defense contracting. In 1970, the DOD informed the Senate Armed Services Committee that twenty-seven of its major weapons programs were showing an aggregate cost growth of $15 billion.
On the basis of multiple cost overruns, it appears that cost controls over military procurement programs have been less than adequate. Such problems persist into the early twenty-first century. Until the military-industrial-congressional system for contracting military projects is changed, taxpayers will continue to support a flawed acquisition process.
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“Aircraft Maker Hurts from C-5A Cutback, Lag in L-1011 Orders.” BusinessWeek, February 14, 1970, 46-48. Addresses Lockheed’s relatively poor financial position, including the estimated loss of $500 million on production of the C5-A Galaxy. -
Biddle, Wayne. Barons of the Sky, from Early Flight to Strategic Warfare: The Story of the American Aerospace Industry. Baltimore: Johns Hopkins University Press, 2001. First published in 1991, this paperback edition examines the careers of the individuals “whose names became synonymous with today’s military-industrial complex.” -
Boyne, Walter J. Beyond the Horizons: The Lockheed Story. New York: Thomas Dunne Books, 1998. A history of Lockheed Corporation by a leading American aviation historian. -
“Cost Overruns Bring on the SEC.” BusinessWeek, June 6, 1970, 31-32. Discusses the introduction of the Securities and Exchange Commission into inquiries regarding whether defense companies with escalating contract costs have been giving stockholders adequate notice of their financial difficulties. -
Leland, John W., and Kathryn A. Wilcoxson. The Chronological History of the C-5 Galaxy. Scott Air Force Base, Ill.: Office of History, Military Airlift Command, 2003. A chronological history of the Air Force’s C-5 Galaxy transport and of military airlifts. -
“Lockheed Asks DOD Fiscal Help.” Aviation Week & Space Technology 92 (March 9, 1970): 224-225. Discusses Lockheed’s appeals to the Pentagon for immediate financial relief, pending settlements of four military contracts. -
“Lockheed Flies into Heavier Flak.” BusinessWeek, May 30, 1970, 28-29. Discusses the potential losses for Lockheed in its production of the C5-A Galaxy. -
Miller, B. “Complex Problems Hit Lockheed.” Aviation Week & Space Technology 92 (March 30, 1970): 56-60. Discusses Lockheed’s financial turmoil. Lockheed blamed spiraling inflation and the unknown costs of advanced technology as the primary reasons for the cost overruns. -
“Pentagon Plans Aid to Lockheed: Financiers Fear L-1011 Problems.” Aviation Week & Space Technology 92 (March 16, 1970): 22-23. Discusses Lockheed’s financial trouble with four major military contracts, including the C5-A super transport. -
Rice, Berkeley. The C5-A Scandal: An Inside Story of the Military-Industrial Complex. Boston: Houghton Mifflin, 1971. Provides an excellent chronology of the development and production of the C5-A Galaxy. Describes the initial bid competitions among Boeing, Douglas, and Lockheed and how the decision was made to award Lockheed the contract. He also details how key corporate and government officials were involved with the production of the C5-A and the ultimate congressional hearing regarding the substantial cost overruns on the project.
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