The case for the $435 hammer.

• Author: Fairhall, James
• Position: Investigation of Pentagon's procurement

the CASE FOR THE $435 HAMMER

"You want how much for abeer?!' asks the patron of a bar in the cartoon strip "Motley's Crew.'

"Four bucks,' the bartender replies.

Says the patron: "That must be the same outfitthat sells hammers to the Pentagon.'

Claw hammers, to be exact. The kind you buyat your local hardware store for between $7 and $10; billed to the Pentagon for $435 a piece. In the three years since the story broke, the $435 hammer has become synonymous with waste in the Department of Defense (DOD). From Beetle Bailey to Walter Mondale, everyone has expressed outrage at this apparent swindle. The hammer contract has been investigated by Congress, discussed during the 1984 presidential debates, and used as Exhibit A by politicians, journalists, and businessmen in their recent calls for military reform.

But here's the rub: the DOD didn't pay $435for a hammer. It's a good bet we paid too much for it (for reasons related in part to something called the equal allocation method and in part to larger problems in defense procurement). But the Pentagon didn't pay nearly $428 too much.

Hints of a rip-off

In 1981 the Navy decided to offer a sole-sourcecontract to the electronics company that manufactured the flight instrument trainer for the T-34C aircraft. That made the Simulation Systems Division of Gould, Inc., the lone provider of a comprehensive list of more than 400 different parts needed to keep trainers in the field in good repair. In June 1982, the Naval Training Equipment Center (NTEC) at Orlando, Florida, issued the contract. Of the items ordered, some were peculiar to the trainer and would have to be manufactured by Gould; others, known as "buy-and-sell items,' could be bought at an ordinary hardware store. Since the Gould plant is located on Long Island, the job of reviewing and negotiating Gould's proposal fell to the Defense Contract Administration Services Management Area (DCASMA) in Garden City, New York.

An outpost of the Defense Logistics Agency,DCASMA Garden City does a variety of tasks for the buying offices of the military. A man whom I shall call Dave Johnson, an administrative contracting officer there, was put in charge of the proposal. In November, his negotiating team brought Gould's price down from $896,011 to $847,000. This came close to the recommended price resulting from reports by an engineer, a price analyst, and a Defense Contract Audit Agency (DCAA) auditor. Johnson submitted his memo of negotiation and a contractual amendment to the Garden City Board of Review, whose five members saw nothing wrong with it. Then, after Gould had signed the amendment, he too signed it, making it legal and binding. The price it showed for the claw hammer was $435.

Why did no one protest? Because the equalallocation formula makes line item prices meaningless. Under this system the line item price does not reflect the item's true value. The equal allocation method calculates prices for large numbers of items in a contract by assigning "support' costs such as indirect labor and overhead equally to each item. Take a contract to provide spare...