Congress to mull performance bonds for arms programs

WASHINGTON (Reuters) - A proposal that would force U.S. defense contractors to buy performance bonds will be weighed by Congress as a way of fighting arms' cost overruns, a prominent member of the House of Representatives' Armed Services Committee said on Wednesday.

Gene Taylor, head of the subcommittee that oversees the Navy, said he planned to hold hearings on the related costs and benefits as soon as possible, perhaps together with Rep. Neil Abercrombie, who chairs the subcommittee on air and land forces.

"The cost overruns cannot continue," Taylor, Democrat of Mississippi, told a defense industry conference. "And I can't think of a better alternative" than mandating performance bonds for new arms programs.

If adopted, such bonds in effect would guarantee "that what you said you were going to build would be delivered on time at the proper price," he said. "If you failed to do that ... that bonded amount would go to the government."

The proposal is the latest in a series designed to contain weapons-program budget overruns amid the worst economy in decades. President Barack Obama is pushing to cut fat from procurement spending as well as trim outsourcing, sole-source awards and cost-plus contracts that critics say invite abuses.

Last year, the nonpartisan Government Accountability Office found that 95 major Defense Department arms programs' price tags grew a total of $295 billion beyond their original cost estimates.

Taylor, at the conference co-hosted by Aviation Week Magazine and McAleese & Associates, said performance bonds were standard procedure for companies doing business with state and local governments.

"It works at those levels," he said. "And I see no reason why it shouldn't work at the national level." He said he had discussed earlier in the day holding hearings with Abercrombie, Democrat of Hawaii.

Any such bonding requirement would impact major defense contractors such as Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, General Dynamics (GD.N) and BAE Systems Plc.

The Aerospace Industries Association, the arms makers' chief lobbying group, had no immediate comment on the proposal.

(Editing by Carol Bishopric)