A-12 termination sets harmful precedent for defense programs.

• Author: Fox, J. Ronald
• Position: Viewpoint

After more than a decade of litigation, the Department of Defense continues to seek vindication for its inappropriate use of a fixed-price contract and its faulty management of the $5 billion A-12 stealth aircraft research and development (R&D) project.

In 1991, the Pentagon terminated for default its contract with General Dynamics Corp. and McDonnell Douglas Corp. The resulting trials, whereby the companies sued the government for improperly terminating the contract for default have produced fear and distrust throughout the defense industry and have reduced confidence in defense contracting policies.

The government's insistence on its right to terminate the A-12 project for default is inappropriate, for several reasons. Certainly, the Defense Department always has the right to terminate a contract for its own convenience and at its own cost. Yet, in this case, the government terminated for default after the Navy had directed its contractors to implement newly approved design agreements, at a cost to the contractors of several hundred million dollars. The combination of these actions is not consistent with reasonable acquisition policy.

Nor is it consistent with defense-acquisition policy to terminate contractors for default for performance shortfalls that the Navy considered of minor importance. Defense-acquisition policy has a congressional mandate to be fair and equitable. Indeed, if the government were permitted to revoke its agreements by terminating contracts and shifting all of the cost burden to the contractors, few industrial firms would agree to undertake large research and development projects for this customer--especially one conducted with a fixed-price contract. Such a practice would therefore only impede the government's essential effort to develop state-of-the-art weapons systems and equipment.

The A-12 default finding currently is under appeal. If allowed to stand, it would create a severely unfair precedent for defense contractors, Nearly all contractors with fixed-price R&D contracts would be in jeopardy of default termination and the associated substantial penalties. Neither the government nor industry contemplated that the standard fixed price R&D default clause would expose contractors to such extreme risks.

Program History

This case has involved two trials. In the mid-1990s, the first trial concluded with the judge's decision that the government inappropriately terminated the A-12 contract for default. The government then appealed the decision. In 1999, the appeals court returned the case to the trial court for another hearing--but without overturning the original court's factual findings adverse to the government's case. Navy testimony by Adm. Jerome Johnson, vice chief of naval operations, and others during the second trial in 2001 revealed that the A-12 aircraft, as designed by the contractors, had satisfied the Navy's operational requirements. Indeed, the government contracting officer, along with the Navy acquisition and operations professionals, had planned to continue the A-12 project. But the office of the secretary of defense unexpectedly withdrew funding from the project on January 6, 1991--one day before the funds were required to be added on the contract.

In the second trial, the court reversed itself and ruled against the contractors, citing schedule slippage of an interim first-flight milestone. Yet, the court ignored the Navy's acceptance of that same minor delay. No court has found that the contractors were not going to achieve the Navy's ultimate objectives. Senior Navy civilians and military officers continued to support the A-12 R&D project until the day the Pentagon removed the funding, thereby terminating the project. Still, the second trial court's decision, if allowed to stand, could force the contractors to repay the government more than $2 billion of costs incurred on the A-12 project.

Nature of Defense R&D

Some background on the nature of large defense R&D projects may shed light on the fate of the A-12. Such R&D projects require contractor and government personnel to work together under conditions of significant uncertainty. Their goal is to generate comprehensive designs, test them, identify problems, revise designs, retest them, build prototypes, test again and create yet additional designs to ensure that the final products meet the government's requirements. Not surprisingly, these projects consume enormous resources and several years to complete. Management of these projects entails iterative trial and error, rather than a linear process of development.

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