On a chilly Saturday last January, Defense Secretary Dick Cheney headed to the Pentagon to meet with a small band of senior officials, including Navy Secretary H. Lawrence Garrett III. The capital was in the throes of Persian Gulf war fever, but this January 5 session focused on another crisis: what to do about the Navy's A-12 aircraft, which was at least $1 billion over budget, 8,000 pounds overweight, and eighteen months behind schedule.

Secretary Garrett argued for a federal bailout to rescue the plane. Others demurred. After six hours of discussion, Secretary Cheney dropped a bomb: He would reject a bailout. He would kill the A-12 outright.

The Secretary's summary execution of the A-12 abruptly ended the saga of a plane that, six months earlier, enjoyed broad congressional support and appeared problem-free. The stealthy, carrier-based attack plane had been naval aviation's top priority since 1984. What caused it to nosedive from preeminence to oblivion?

Investigators and officials place the blame on four factors:

• Overly protective Navy officials, who didn't want to endanger the plane by pointing out problems. A Pentagon analyst first detected a possible cost overrun two years ago, but the Navy program manager continued to describe the A-12 as being on track until after a major Pentagon review last year.
• A "don't-rock-the-boat" segment of the Pentagon bureaucracy, which was aware of the problems but apparently reluctant to buck its superiors to press its case. In one incident, a report noting A-12 problems was tucked away and forgotten.
• Overly optimistic A-12 contractors, who miscalculated the extent of the technical difficulties in producing such a plane and shielded the problems from the government. An inquiry by Navy Deputy General Counsel Chester Paul Beach found that General Dynamics and McDonnell Douglas discovered "increasing cost and schedule variances" but did not alert the Navy in a timely fashion.
• Excessive secrecy, which blanketed the project and prevented examinations that might have brought problems to light. Officials assigned to Secretaries Cheney and Garrett were kept away, standard reporting procedures were abandoned, and information was transmitted verbally rather than in writing.

Secretary Cheney's kill order, unveiled January 7, rocked the defense community. It left the Navy struggling to find a successor to its A-6 jets and worsened the woes of the aerospace industry. The disaster forced the resignation of Under Secretary of Defense for Acquisition John Betti and the sacking of two Navy admirals and a captain. It effectively ended the Air Force's program to develop a derivative of the A-12 to replace F-111 and F-15E aircraft.

Suspicion and Ambition

A-12 development began early in the 1980s. In January 1988, the Pentagon awarded General Dynamics and McDonnell Douglas a contract worth $4.8 billion for full-scale development, including production of eight prototypes. It later added contracts of $1.2 billion for Lot 1 production of six aircraft and $200 million in long-lead funds for Lot 2.

Plans called for production of 858 aircraft. First, the Marine Corps opted out of the program, reducing the planned buy; then, due to tight budgets, Secretary Cheney pared the buy to 620 in April 1990, though he continued to endorse the program.

Until last June, the A-12 appeared to be in good shape. According to the inquiry conducted by the Navy, however, the program fell into trouble almost from the outset. At the heart of the crisis were technological challenges inherent in creating such an advanced aircraft.

The biggest problem, say officials, stemmed from the difficulties of creating and applying highly advanced composite material in the radar-evading stealth plane. The two contractors had inadequate experience with this material to carry out the project smoothly and with a minimum of delay.

Evident mutual suspicion between the two contractors compounded the problem. One Pentagon analyst who studied the issue said the two A-12 contractors appeared loath to share sensitive technology to further the A-12 program. The reason: They were competitors on another project--the program to build the Air Force's Advanced Tactical Fighter. (That project pits a team of Lockheed, General Dynamics, and Boeing against Northrop and McDonnell Douglas.)

"There were technologies that could have helped in the overall [A-12] effort, but they weren't willing to share those," said the analyst. "If you have a technological advantage, how willing are you to share that if . . . it could help you in some other program?"

An overly ambitious schedule exacerbated the problem. Under the original timetable, the contractors planned first flight for June 17,1990. They mapped out a design-to-assembly schedule of only nine months, far shorter than the fourteen months normally allotted for such an effort.

Workers in top-secret areas of plants operated by General Dynamics in Fort Worth, Tex., and by McDonnell Douglas in Saint Louis, Mo., would spend four and a half months on subassembly. Sections would be shipped to Tulsa, Okla., for final assembly.

According to the report, the manufacturers were only feeling their way along. They lacked proper tooling, missed key target dates at various steps in the development process, and were forced to issue "stop work orders" because of engineering problems. Delays in the arrival of parts further delayed production.

"Evidence of Trouble"

When the program manager's production oversight team assembled in the summer of 1989 to begin working toward a first flight in June 1990, the contractors should have had a firm design in hand for their manufacturing elements. "Hard" (production-quality) tooling should have been on the assembly floor by September 1989.

Instead, Navy counsel Beach said, "there was early evidence of trouble affecting the production schedule. The amount of engineering effort required by the design of the airframe . . . was the first indicator that first flight of June 1990 would slip. By then, the first flight date of June 1990 was likely unattainable due to lack of ample tooling and parts flow."

Late release of engineering design drawings delayed other development stages. "In addition to the tooling problems," said Beach, "further delays in initial fabrication of the composite, sheet metal, and machined parts pushed back the initial-load dates for assembly jigs and fixtures."

Somewhere along the line, the contractors began to see that they had made a gigantic mistake in taking on the program under a fixed-price contract, which the Navy had imposed in an effort to get a grip on weapons costs. It was too inflexible to allow for unforeseen costs, say industry and Pentagon officials, even though such costs are inevitable when contractors are working on the frontiers of technology.

Moreover, the aerospace contractors, who had sustained financial setbacks because of government defense cuts, were under pressure from upper management to maximize cash flow. They relied heavily on progress payments given at various points in the development process, Beach said.

"Such pressure would create an incentive to be optimistic," since progress payments would be reduced if the contractor or the government estimated an overrun, said the Navy lawyer.

Beach also said that the progress payments were poorly scrutinized by the government. In one instance, the Navy signed off on three contract line items, even though work on each was not yet complete. Payments were also approved for work that was substantially below requirements, Beach said.

Consequently, the contractors, with approval by the Navy, "fostered the illusion that internal program milestones had been successfully passed" when critical elements of the contract "had, in fact, only been pushed downstream."

The technical and schedule problems set the stage for the eruption of fatal political problems in 1990. Secretary Cheney had been a strong supporter until early last summer, when he learned of major difficulties leading to cost overruns and delays. These had not been detected during a nineteen-week-long Major Aircraft Review (MAR) of the A-12 and three other planes: the Air Force's B-2, C-17 transport, and Advanced Tactical Fighter (ATF).

A Clean Bill of Health

Following the MAR--and as a direct result of it--Secretary Cheney appeared before Congress and on several occasions gave the A-12 a clean bill of health.

Later, Pentagon probes showed that the program at that time had been floundering and no one had thought to let the Defense Secretary in on the secret. This outraged the Defense chief when he heard of it, and it set the stage for his January 5 kill order.

Investigations by Beach and by Defense Department Inspector General Susan Crawford indicate that top officials in the Navy and DoD were aware of the problems but, for various reasons, either didn't react or didn't follow through.

They pointed out that Secretary Cheney himself was present at briefings in March and Apri11990 in which briefers raised the issue of a potential $1 billion overrun on the A-12 program. Under Secretary Betti, Cheney's top procurement officer, gave short shrift to the estimate, and the discussion veered off in a new direction.

In another instance, a Pentagon staff member received a report about potential delays. He later said that he simply put it aside and forgot about it.

Until his forced transfer in December, the Navy's principal overseer for the A-12 program was Capt. Lawrence G. Elberfeld, an aviation engineer with three advanced degrees. As program manager since June 30, 1986, Captain Elberfeld had full authority and responsibility for the program. He commanded a small staff with assistance from onsite personnel at the two defense plants.

As portrayed in Beach's investigation, Captain Elberfeld was protective of the A-12 and showed "good news" slide presentations to accentuate the positive, despite increasingly ominous signs. However, Beach also backed Captain Elberfeld's claim that he "repeatedly and forcefully" told superiors of "major challenges in the program" and that "he insisted at all times on candor."

One early indication of trouble came from a Navy cost analyst, who in March and July 1989 presented Captain Elberfeld with a range of cost estimates predicting that the contract could exceed the ceiling by as much as $200 million.

In reports to superiors in November 1989 and February 1990, Captain Elberfeld replaced the analyst's estimate with a lower calculation, "which he believed would result in an improvement in the contractor team's cumulative cost performance," according to the Beach investigation.

The Pentagon's own comptroller, in an October 1989 budget recommendation, warned that the A-12 program was two years behind and $500 million over ceiling. The budget recommendation and its accompanying forecast were shelved because "no one agreed with us," according to an analyst in the comptroller's office.

One Day, One Billion Dollars

The news got worse. On March 26, 1990, Deputy Director for Cost Management Gary Christle, an independent cost analyst assigned to Under Secretary Betti's office, was brought in to review the A-12 program. One day later, after gaining access to classified A-12 data, Christle concluded that the program was $1 billion over budget and a year behind schedule. Christle's own boss, Under Secretary Betti, refused to take the warning seriously.

In spite of the warning signs, Captain Elberfeld continued to present the A-12 as an unqualified success. In an April 14, 1990, briefing, he made no mention of the $1 billion cost overrun estimate and said the A-12 was "on track." He also warned that renegotiating the contract would strap the Navy with legal liabilities. On April 26, not long after the conclusion of the MAR, Secretary Cheney appeared on Capitol Hill to reassure key Senators and congressmen that the program was doing well.

Then the roof began to fall in. On May 4, 1990, eight days after Secretary Cheney's congressional appearance, Captain Elberfeld evidently had a frank talk about the A-12 with the two contractors and soon began to revise his optimistic assessment. "For the first time, they acknowledged a very strong likelihood they would exceed their ceiling costs," Captain Elberfeld told investigators.

The program manager, now worried, called a briefing three days later to alert his superiors. One of the officials, Rear Adm. John F. Calvert, the A-12 Program Executive Officer, resisted taking the problem further up the chain of command to the Navy's Assistant Secretary for Research, Development, and Acquisition, Gerald Cann.

"I'm not going to take a problem to [Cann] without a solution, because if I do, he may give me a solution I may not like," Admiral Calvert reportedly told his subordinate. Captain Elberfeld then recommended a candid briefing for Cann to air the problems but was told by Admiral Calvert to reduce his points to a two-page working paper.

The working paper was further edited to one page. At a subsequent meeting between Captain Elberfeld and his Navy bosses, they decided not to tell Cann about the problems disclosed by the contractors on May 4. Admiral Calvert told Captain EIberfeld not to bring his talking paper to a meeting with Cann to discuss the Lot 1 purchase of A-12s. During the meeting, Captain Elberfeld kept quiet. To do otherwise, he said, would "have been contrary to [Admiral Calvert's] desires."

Others in the Pentagon were sluggish in responding to the bad news. Although Christie's $1 billion estimate was discussed in two briefings with Secretary Cheney, Betti said he made no effort to raise it as a "red flag" because he considered the analyst a "new kid on the block" unfamiliar with the A-12.

Problems weren't brought to Secretary Cheney's attention until June 1, when the contractors officially advised the Navy of severe delays and cost overruns and pushed the first flight to December 1991. The Pentagon then ordered inquiries to determine why the problems had not surfaced during the recent MAR.

Visions of a Bailout

In a December 17 letter, the Navy's Assistant Commander for Contracts, Rear Adm. W. R. Morris, informed the two contractors that they had "failed to fabricate parts sufficient to permit final assembly" and had failed to meet specification requirements. He ordered the two aerospace giants to show cause why the Navy should not cancel the contract for default.

Still, few expected Secretary Cheney to kill the A-12. Most predicted that the January 5 "show cause" meeting would result in a government bailout to keep the airplane going.

Pentagon spokesman Pete Williams described the discussions: "[Secretary] Garrett did all the early talking, kind of laid out for [Secretary Cheney] what he thought the issues were and walked through his recommendations. Then Yockey [Donald Yockey, then the acting deputy secretary for Acquisition] made a follow-up presentation. They both kind of described the current problems with the contract and where we should go from there."

After that meeting, Secretary Cheney met for about an hour and a half with a smaller group that included Joint Chiefs of Staff Chairman Gen. Colin Powell, Deputy Defense Secretary Donald J. Atwood, and "only a few other people," Williams recalled.

The Pentagon spokesman said the choices boiled down to three options: carrying out the existing contract despite its problems, modifying the contract to bailout the manufacturers, or terminating the program.

"The general view," Williams said, was that the current arrangement was "not going to work" and that "the contractor cannot proceed under the current contract." The choice was between a bailout or a termination, and the issue focused on money. "Every time [Secretary Cheney] asked about additional costs, he was told that no one could be sure," Williams said. "That was part of the problem."

Was that a dominant factor in Secretary Cheney's decision? "Absolutely," said Williams.

The Pentagon chief made up his mind after the meetings and called Secretary Garrett late Saturday afternoon. "I don't want a bailout," Williams quoted Secretary Cheney as saying.

Now unable to continue the program, the Navy formally canceled the contract on Monday, January 7. The contractors were first informed by Admiral Morris. They were told that the contract was terminated for default.

General Dynamics and McDonnell Douglas stated that they did not agree that they were in default and that they would contest Secretary Cheney's decision and his characterization of the condition of the program.

How could such a fiasco occur? Williams said that Secretary Cheney had always been led to believe the program was on track. Even though the Secretary attended the two Pentagon briefings during the spring in which an estimated $1 billion overrun was mentioned, according to a Navy inquiry, Williams said that Cheney didn't react strongly because he was still being led to believe the problems were manageable. "The constant message to him was: 'Don't worry, we've got this under control.' "

Was Secretary Cheney's credibility hurt as a result of the A-12 imbroglio? "I think he's concerned that he went out and told Congress one thing, and he found out later that another thing was the case," Williams reports, "but I don't think his long-term credibility suffers for it." .