For six years, Turco Disposal Inc. of Lake Havasu City, Ariz., collected the garbage at the Naval Weapons Center in China Lake Calif. But last year, the Department of Defense decided it didn't need Turco, or 14 other small companies providing base services at China Lake, anymore.

The change resulted from a series of memos sent to military bases last year by Deputy Secretary of Defense Frank Carlucci. He gave instructions to try to "consolidate" base services contracts as a way to cut the Pentagon's administrative costs. The 15 jobs at China Lake were combined into one contract, and larger companies were invited to bid on it.

Looking for a way to compete, Joe Turner, president of Turco Disposal, made a deal with one of the bidders. He and Pan Am World Services Inc., a subsidiary of Pan American World Airways Inc., agreed that Turco would haul the base's garbage as Pan Am's subcontractor. They set a schedule of prices, depending on whether Pan Am would retain Turco's services for one year or several years. The one-year rate was $495,000, for a five-year contract, it would be $400,000 for the first year.

Pan Am won the contract -- in part, Turner says, because of the 52-page section on garbage service that he wrote for Pan Am's proposal to the Navy. Then, he says, Pan Am asked him to work at the five-year rate, but with only a one-year contract guarantee. He refused, and Pan Am canceled the deal. Turner is planning legal action against Pan Am. A Pan Am manager involved in the situation declined to comment.

Said Richard Hanneman, the director of government and public affairs for the National Solid Wastes Management Association in Washington, D.C.: "The bad-faith practice used by Pan Am in this case could never have occurred if the refuse-hauling contract was let directly by thc Navy [rather than through an intermediary]."

After complaints about such situations reached Washington, the deputy secretary of defense reversed his decision. A new memo stated, "Future solicitations [for base services contracts] will be packaged so as not to preclude performance by small and small, disadvantaged concerns as prime contractors." Rep Parren J. Mitchell (D-Md.), chairman of the House Small Business Committee, plans to monitor the policy "to be sure that DOD follows through with its directive."

But that didn't help Turner or his 14 former co-contractors. The China Lake job represented almost half of Turco Disposal's business. "It hit me pretty hard," he says. "I have $250,000 worth of equipment sitting idle."