General JEFFREY. I indicated I would give you an indication of the technical optimism that we think the contractor exercised at the time of his bid.

This chart shows along the horizontal axis, the zero weight line, the basic weight of the airplane. This would be in terms of contract empty weight, that line would represent 319,809 pounds. And anything below or above this line means the airplane is underweight, or overweight. We normally follow a curve such as this black line which represents about a 2 percent weight growth per year. This is what you can expect in building an airplane.

So, at the time they got the contract they really, in order to arrive at the 319,000 pound weight, in 1969, should start off at 20,000 pounds below that line.

Actually at that time they started off some 18,000 pounds above it. Once they got into design it was 18,000 pounds above weight. They made changes and brought the weight down and then it went back up, and then through an active weight reduction program they did get below the line and have been following this line out to here [indicating].

We anticipate the airplane will probably weigh some 2,000 or 3,000 pounds more than the contract weight. You can see the weight problem they had in back here. A great deal of redesign was necessary in order to get the weight down.

Let's go to the next chart, please.

Finally, to present some of the cost estimates I would like to compare our October

The CHAIRMAN. Are you telling us Lockheed, despite its great capacity, ran into a weight problem here that they didn't anticipate? General JEFFREY. Yes, sir. They ran into a weight problem, and in order to design that weight out of that airplane they had to do a lot of work. They had to hire a lot of extra people.

The CHAIRMAN. They didn't anticipate this?
General JEFFREY. They didn't anticipate this.

The CHAIRMAN. What about the other contractors?

General JEFFREY. Well, I guess we will never show how the other contractors might have come out had they won this contract. Maybe at some point in time, when we learn what Boeing's costs are we can see how they came out.

The CHAIRMAN. Aren't they having problems now with the SST they didn't anticipate?

General JEFFREY. Yes, sir. They are having problems with the SST that weren't anticipated. That airplane has been redesigned from a swing-wing airplane to a fixed-wing airplane. Boeing indicated to me on a recent visit they didn't expect to break even until they had produced approximately 200 747's.

The CHAIRMAN. On a simple thing as a 747.

General JEFFREY. The 747 is about the same class of airplane as the C-5, Mr. Chairman, except it is a passenger airplane.

The CHAIRMAN. Let me ask you this: Is there anything good you can say about this company?

General JEFFREY. Yes, sir.

The CHAIRMAN. What about the performance? Has the performance exceeded your expectation?

General JEFFREY. Performance is expected to exceed the expectation, exceed the contract performance guarantees in every regard. This company has built many, many fine airplanes. I don't know of anybody in the country that can build any better airplanes than this

company.

The CHAIRMAN. With the five airplanes you have got flying, they exceed what?

General JEFFREY. We expect that the production airplane will exceed the performance expectations. These are research and development test airplanes we have right now.

The CHAIRMAN. Yes.

General JEFFREY. It is based on what those airplanes are doing now that we make these projections.

The CHAIRMAN, I see. Go ahead.

General JEFFREY. This is our 1964, October 1964, estimate of the costs to build these airplanes, research and development, and production. This was almost a year prior to the time the contract was awarded. We estimated, as I reported to the committee last week, that these airplanes would cost $3.116 billion.

Our estimate in October of 1968, which is our current estimate, that these airplanes will cost $4,348 million. This is for 120 airplanes.

Now, if you subtract the $3.116 billion, from the $4,348 billion estimate in 1968, we come up with a difference of $1.232 billion. We attribute that difference to the factors indicated under the title of "Adjustments." $500 million to inflation. The 1964 estimate was made in terms of constant 1964 dollars. There was no economic escalation included in those figures. The $500 million is included in the 1968 estimate.

Mr. BLANDFORD. Mr. Chairman, I would like to ask if the inflation figures that you are using for 1964 was a part of the request for proposals, and did the competitors submit a proposal in which they absorbed the cost of living increases for a certain period of time?

General JEFFREY. I am told that is not the case. Is that right, Colonel Beckman?

Colonel BECKMAN. Mr. Blandford, will you state that question again? I think I understand it.

Mr. BLANDFORD. I would like to know if Boeing, McDonnell, and whoever submitted the dirigible concept, agreed to accept the cost

of-living increases as a part of their cost for, I think it was a 3-year period, before the cost of living would then accrue to their benefit. Colonel BECKMAN. That is correct, sir. They were to assume those extra expenses.

Mr. BLANDFORD. In other words, if McDonnell had gotten this contract, or they were building a dirigible, they would have assumed the cost of living increases as a part of the contract.

Colonel BECKMAN. Until January 1, 1968, when the clause began to operate, or abnormal escalation, sir.

Mr. BLANDFORD. I see. This was not just the assumption of a risk on the part of Lockheed.

Colonel BECKMAN. No, sir; it was for all four contractors.

Mr. PRICE. Mr. Chairman, in connection with that cost-of-living increase, the inflation there, don't contractors include projection of cost-of-living increases during the terms of their contract? Colonel DAVIS. Colonel Davis, sir.

Yes, sir; sometimes these usually do, for any contract of long duration, they include a factor for inflation. I would suggest for your consideration, sir, the fact that 1958-64, which was the 6-year period immediately preceding the contract award, the gross national product figures that were issued by the Department of Commerce, I believe, indicated an 8-percent growth over this time period, 112 percent a year of growth. Each year it went up after that, and last year it went up 41/2 percent.

So, I think the contractors had reason to expect, based on recent history, there would be a relatively small amount of inflation in the future. It would be my thought they probably projected a relatively small amount. As a matter of fact, I think Lockheed projected something like 2 percent, maybe, in the annual growth.

The point is, because shortly after contract award the Vietnam situation expanded, the commercial aircraft market expanded, and we have had a significantly greater amount of inflation, which was not anticipated.

The CHAIRMAN. At any time in this contract, or these contracting periods to which you have alluded, was anything done to bail Lockheed out at any point?

General JEFFREY. No, sir. The formula, the adjustment formula was applied at the time that it had been intended, at the time that the contract was awarded. The same formula would have been applied to whoever won this contract. So, no special provisions were made to bail the company out.

The CHAIRMAN. Have you fulfilled the provisions of this contract from origin to date?

General JEFFREY. I am afraid I don't understand your question, sir. Have we fulfilled the provisions of this contract?

The CHAIRMAN. Yes, sir; from its inception.

State it so he understands, Mr. Blandford.

Mr. BLANDFORD. Has Lockheed fulfilled its contract so far, as far as you are concerned?

General JEFFREY. Yes; as far as I am concerned.

Mr. BLANDFORD. I understand they are meeting 101 percent of the performance requirements; they had technical difficulties, but so far as you are concerned, other than I understand they are not on schedule,

are they subject to a penalty for not having an operational capability by a specific date?

General JEFFREY. Yes, sir..

Mr. BLANDFORD. Will they meet that operational capability date? General JEFFREY. They will not meet the original operational capability date.

Mr. BLANDEORD. So they have not fulfilled their contract to that extent ?

General JEFFREY. The contract has been a change in schedule, which has been negotiated, and they will have to pay the penalty-am I wrong about this apparently I am wrong.

Mr. BLANDFORD. Colonel Beckman.

The CHAIRMAN. Colonel, you seem to know about all of these things, what do you have to say about the situation?

Colonel BECKMAN. We, today, calculate the contractor will not deliver the aircraft on schedule. There may be reasons for this that are excusable under terms of the contract.

We have estimated that the contract will be 6 months delinquent at the time the first operational aircraft are scheduled to be delivered, but we will have to wait until that time to find out whether he had excusable delays in delivering the aircraft.

Mr. BLANDFORD. These excusable delays would be Air Force-imposed changes in the design?

Colonel BECKMAN. Or act of God, sir. Labor difficulty, strikes, over which he has not control, these things are excusable.

The CHAIRMAN. Answer this question: For this delay in the contract, who is going to pay for it?

Colonel BECKMAN. If it falls into the excusable delays, sir, the Government will pay for it. If it is because of Lockheed's inefficiency, inability to meet the schedule by things they have not done, or things they have done, it will be up to Lockheed to stand the penalty for those deliveries, sir, and the penalty for the delivery is $12,000 a day, per day for the first 16 aircraft for a maximum limitation on this exposure of $11 million.

The CHAIRMAN. All right. When will you decide who is doing what to whom?

Colonel BECKMAN. At the time those aircraft are presented for delivery, sir.

The CHAIRMAN. What date is that?

Colonel BECKMAN. The first aircraft we expect will be delivered in December of 1969, this year.

The CHAIRMAN. All right. If it is not delivered then, then you will go into it and see what is the reason for it?

Colonel BECKMAN. That is exactly correct, sir.

The CHAIRMAN. Is it too early to assess a delinquency now, or to assess a figure now?

Colonel BECKMAN. Much too early, sir.

The CHAIRMAN. So you will not do anything until December 1969, am I right?

Colonel BECKMAN. Yes, sir. We will have estimates until that time only.

The CHAIRMAN. Then you will decide who is in error or who pays, or who assumes the risk?'

Colonel BECKMAN. That is correct, sir.

The CHAIRMAN. Or the overrun, or whatever it may be?
Colonel BECKMAN. Yes, sir.

Mr. PIRNIE. Mr. Chairman.

The CHAIRMAN. Mr. Pirnie.

Mr. PIRNIE. May I ask whether the Air Force may change its specifications, or have they since the awarding of the contract?

General JEFFREY. The Air Force has changed the specifications? Mr. PIRNIE. Yes.

General JEFFREY. Not in any significant terms. The changes to the contract, as I mentioned before, represent about 1 percent. The fundamental specifications have not been changed.

Mr. PIRNIE. The reason why I am asking this is because of the response just made. There seems to be no opinion on the part of the Air Force as to whether or not delay was due to any cause within their control. Do you know of any way that you contributed to the delay in schedule?

Colonel BECKMAN. The answer to that is "No, sir."

General JEFFREY. Colonel Beckman indicated we will have to wait until we get down the road to pin them down definitely.

Mr. PIRNIE. Is the larger aircraft indicated in the adjustment? Does that refer to the weight problem you are talking about?

General JEFFREY. No, sir. The airplane that was proposed by the Lockheed Co. was larger than that in the initial estimate we had made in 1964.

Mr. PIRNIE. How does that enter into the adjustment, because that wasn't in the specification of the Lockheed Aircraft. It doesn't relate to the contract which you awarded to them; did it?

General JEFFREY. We didn't specify the weight of the airplane in the contract, sir.

Mr. PIRNIE. You didn't?

General JEFFREY. No, sir.

Mr. PIRNIE. Wasn't that an important item?

General JEFFREY. No, sir. They could bid on any size airplane they wanted.

Mr. PIRNIE. I know, but when you awarded the contract you weren't going on any size aircraft they wanted, you were going to buy something significant; weren't you?

General JEFFREY. That has changed.

Mr. PIRNIE. Well, then, how is it an item of adjustment because of the larger aircraft?

General JEFFREY. Adjustment through the October estimate that we made, that October estimate was an Air Force estimate based upon a 645,000-pound airplane. That is what we thought at the time we made that estimate. We thought it could be built within that weight. The contractors proposed airplanes of different weight. The Lockheed Co., I believe, proposed an airplane

Mr. PIRNIE. So I don't get confused, General, are we talking, and are you computing now, on a larger aircraft than you were in October 1964?

General JEFFREY. A larger airplane than that upon which we made our estimate.

Mr. PIRNIE. Did you make your estimate on the contract?