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updated 5/20/2004 7:26:35 AM ET 2004-05-20T11:26:35

U.S. government investigators have recommended possible criminal charges against Honeywell for allegedly misleading the U.S. Air Force over a $1.2 billion contract to upgrade satellite ground stations.

In the latest in a spate of critical probes into large defence contractors, a report by the Pentagon's inspector general found evidence that the U.S. aerospace and automotive group had lied about what steps it had taken to prevent cost-overuns.

The investigation was triggered by an internal whistleblower who also alleged that Honeywell had deliberately underestimated the cost of the work to win the contract which could now cost $1.7 billion.

However, the Pentagon's report said it could not substantiate this second claim and focused instead on whether appropriate steps had been taken to track cost overuns on the 15-year project to modernize ground networks monitoring dozens of military, navigation and weather satellites.

In particular, it found the company had charged the Air Force for a specialized cost management system which had, in fact, not been properly implemented. The Pentagon also concluded the work was two years behind schedule and $60 million over-budget — suggesting the Air Force should conduct a review into the whole program.

The critical report follows a series of recent crackdowns on defence contractors which have led to severe sanctions in some cases.

Last month, Darleen Druyun, a former Boeing employee, pleaded guilty to conspiracy for seeking a job with the company while she worked for the Air Force overseeing Boeing business deals.

Halliburton, the oil services company formerly run by Vice-President Dick Cheney, has also come under intense scrutiny for the pricing of contracts to support U.S. armed forces in Iraq. This week, the Pentagon suspended $160 million in payments for meal services in Iraq after Kellogg Brown Root, a Halliburton subsidiary, failed to provide information that would help the Pentagon evaluate the extent of overcharging by the company.

Though seemingly not on the same scale as the Boeing or Halliburton investigations, the latest Pentagon report into Honeywell concluded that steps should be taken to recover any overpayment for the management system and prosecute those responsible.

"The Air Force Space and Missile Systems Center should initiate appropriate civil or criminal proceedings, or both, against Honeywell for violating false claim and false statement statutes," recommended the report.

The Pentagon also said the next award fee determination for this contract should reflect Honeywell's inability to meet contract requirements for having the so-called "earned value management system" properly in place.

Honeywell said it was "cooperating with the government and providing information to the audit agency as requested by the Air Force."

The work is being carried out by Honeywell's Technology Solutions subsidiary which has annual sales of $600 million.

Copyright The Financial Times Ltd. All rights reserved.

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