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Seattle Post-Intelligencer
June 13, 2008 Company agrees to collect far less than the $1.9 billion claimed to resolve issue
By Tony Capaccio, Bloomberg News
The Boeing Co. sought $1.9 billion in "unjustified" payments on U.S. military contracts, according to a Pentagon audit.
Boeing's claim was based on a Labor Department index that triggers increased payments to defense contractors as economic costs increase generally. Boeing, the second-largest U.S. defense contractor, realized the index had become slanted "in Boeing's favor" and didn't inform the military, the audit found.
Boeing sought $1.9 billion extra on three of its largest contracts -- the C-17 transport, F-18 Navy fighter and AH-64 Apache helicopter, together worth $20.6 billion. The Pentagon's inspector general warned this payment constituted "windfall profit" and would be "unjustified," according to the 51-page audit obtained by Bloomberg News.
With this finding, Undersecretary for Acquisition John Young demanded settlement talks. Boeing agreed to $792.9 million as a starting point and will collect $272.3 million, the audit said.
The cost increases claimed by Chicago-based Boeing "were the result of changes indirectly influenced by Boeing actions and not the result of national economic changes," Pentagon spokesman Chris Isleib said.
Boeing spokesman John Dern said the company is receiving "substantially less than it was eligible for," yet is "pleased that this situation was resolved in a way that was satisfactory for our customers."
The Employment Index for Aircraft Manufacturing that allowed Boeing's claim was created by Boeing and other aerospace companies. It is the basis for escalator clauses in long-term aircraft contracts, triggering "adjustments to the contract price" that compensate for economic conditions beyond the control of the companies or the government, Isleib said.
Boeing reimburses the Labor Department for collecting data for the index.
The department's Bureau of Labor Statistics does not publish the data that supports the index and didn't cooperate with the Pentagon's investigation, according to the audit. The Pentagon inspector general subpoenaed data on the index from Boeing, the audit said. Boeing supplied some data, spokesman Todd Blecher said.
Gary Steinberg, spokesman for the Bureau of Labor Statistics, said bureau officials hadn't seen the audit.
Isleib said Pentagon auditors began investigating the use of the index two years ago after "abnormal increases" in costs were noticed.
Boeing claimed as a "cost" for the index $8 billion in pension fund contributions even though only $1.1 billion was used to cover current liabilities.
The remaining $6.9 billion was claimed as "prepayment credit" for future liabilities that did not need to be paid during the 2003-06 period, the audit said.
Boeing also would claim reimbursement for the $6.9 billion later as general overhead when the money was actually paid, the audit said. The Pentagon would "essentially pay Boeing twice for the same pension costs."
Boeing's Dern said the $8 billion in pension contributions represented "responsible management" of Boeing's "underfunded pension plan" that "had the unintended consequence of generating an issue with the index used to adjust prices."
June 13, 2008 Company agrees to collect far less than the $1.9 billion claimed to resolve issue
By Tony Capaccio, Bloomberg News
The Boeing Co. sought $1.9 billion in "unjustified" payments on U.S. military contracts, according to a Pentagon audit.
Boeing's claim was based on a Labor Department index that triggers increased payments to defense contractors as economic costs increase generally. Boeing, the second-largest U.S. defense contractor, realized the index had become slanted "in Boeing's favor" and didn't inform the military, the audit found.
Boeing sought $1.9 billion extra on three of its largest contracts -- the C-17 transport, F-18 Navy fighter and AH-64 Apache helicopter, together worth $20.6 billion. The Pentagon's inspector general warned this payment constituted "windfall profit" and would be "unjustified," according to the 51-page audit obtained by Bloomberg News.
With this finding, Undersecretary for Acquisition John Young demanded settlement talks. Boeing agreed to $792.9 million as a starting point and will collect $272.3 million, the audit said.
The cost increases claimed by Chicago-based Boeing "were the result of changes indirectly influenced by Boeing actions and not the result of national economic changes," Pentagon spokesman Chris Isleib said.
Boeing spokesman John Dern said the company is receiving "substantially less than it was eligible for," yet is "pleased that this situation was resolved in a way that was satisfactory for our customers."
The Employment Index for Aircraft Manufacturing that allowed Boeing's claim was created by Boeing and other aerospace companies. It is the basis for escalator clauses in long-term aircraft contracts, triggering "adjustments to the contract price" that compensate for economic conditions beyond the control of the companies or the government, Isleib said.
Boeing reimburses the Labor Department for collecting data for the index.
The department's Bureau of Labor Statistics does not publish the data that supports the index and didn't cooperate with the Pentagon's investigation, according to the audit. The Pentagon inspector general subpoenaed data on the index from Boeing, the audit said. Boeing supplied some data, spokesman Todd Blecher said.
Gary Steinberg, spokesman for the Bureau of Labor Statistics, said bureau officials hadn't seen the audit.
Isleib said Pentagon auditors began investigating the use of the index two years ago after "abnormal increases" in costs were noticed.
Boeing claimed as a "cost" for the index $8 billion in pension fund contributions even though only $1.1 billion was used to cover current liabilities.
The remaining $6.9 billion was claimed as "prepayment credit" for future liabilities that did not need to be paid during the 2003-06 period, the audit said.
Boeing also would claim reimbursement for the $6.9 billion later as general overhead when the money was actually paid, the audit said. The Pentagon would "essentially pay Boeing twice for the same pension costs."
Boeing's Dern said the $8 billion in pension contributions represented "responsible management" of Boeing's "underfunded pension plan" that "had the unintended consequence of generating an issue with the index used to adjust prices."