*Obama estimates reforms will save $40 bln annually
*Reforms would end unnecessary no bid, cost-plus contracts
*Defense companies say they played by the rules
(Updates with additional details, quotes, background)
By Ross Colvin
WASHINGTON, March 4 President Barack Obama said on Wednesday the U.S. government was paying too much for things it did not need and ordered a crackdown on spending he declared "plagued by massive cost overruns and outright fraud."
The Democrat, under fire from Republicans for the $3.5 trillion price tag for his 2010 budget plan, also took aim at predecessor George W. Bush and noted the cost of government contracts had doubled to more than half a trillion dollars over the past eight years.
Obama, who inherited a $1.3 trillion budget deficit when he took office on Jan. 20, said wasteful spending was a problem across the government, but he zeroed in on the defense industry and costly weapons projects hit by "delay after delay."
"The days of giving defense contractors a blank check are over," Obama told reporters in a briefing on his reforms.
He has singled out the ballooning costs of a Lockheed Martin Corp (LMT.N) project to build a new presidential helicopter fleet as an example of the procurement process "gone amok."
Defense companies, however, bristled at Obama's suggestion they had been running wild with taxpayers' money and insisted there had always been oversight and accountability.
Obama said he was ordering a reform of the way the government did business, a move he said would save taxpayers $40 billion a year and help cut the budget deficit, which he has forecast will hit $1.75 trillion for the 2009 fiscal year.
"We will stop outsourcing services that should be performed by the government and open up the contracting process to small business. We will end unnecessary no-bid and cost-plus contracts," he said.
Critics say cost-plus contracts invite abuse because they allow companies to charge the government costs plus a fixed profit, no matter how poor their performance.
Obama has sought to show his determination to apply fiscal discipline even as he ratchets up government spending he says is vital to tackle the worst economic crisis in decades.
Republicans, including his former Republican opponent in the election, Senator John McCain, support procurement reform but say his $3.5 trillion budget proposal for the 2010 fiscal year is part of a "tax-and-spend" onslaught.
SPOTLIGHT ON IRAQ
For example, the Government Accountability Office had examined 95 major defense projects in 2008 and found cost overruns totaling $295 billion, Obama said.
He had instructed White House budget director Peter Orszag to start working with cabinet officials and agency heads to develop new guidance on contracting by the end of September.
"Far too often spending is plagued by massive cost overruns, outright fraud and the absence of oversight and accountability," said Obama, who campaigned on promises of sweeping change and greater accountability in Washington.
"We are spending money on things we don't need and we are paying more than we need to pay and that is completely unacceptable. I reject the false choice between securing this nation and wasting billions of taxpayers' dollars," he said.
Obama spotlighted the war in Iraq, where he said too much money had been paid for services never performed and buildings never completed, while companies "skimmed off the top."
Defense Secretary Robert Gates has already told Congress the Pentagon faces tough decisions on expensive weapons programs partly as a result of the global economic downturn and continuing war costs in Iraq and Afghanistan.
The Pentagon is reviewing the acquisition process and is expected to make decisions on the fate of big-ticket programs such as Lockheed Martin's premier F-22 jet.
Lockheed Martin, the Pentagon's top supplier by sales, said on Wednesday it would work with the government and Congress to ensure effective systems were developed and deployed.
Boeing Co (BA.N), the No. 2 contractor, said it was committed to providing "the very best value for the taxpayer."
The Aerospace Industries Association, which represents top U.S. defense contractors, disputed Obama's statement that there had been a blank check for contractors.
"There's always been oversight, accountability and enforcement of acquisition rules," said Cord Sterling, the group's vice president.
(Writing by Ross Colvin; Additional reporting by Jim Wolf, Caren Bohan, Andrea Shalal-Esa, Matt Spetalnick, David Morgan, and Jeff Mason; Editing by Cynthia Osterman)