The U.S. Defense Department is taking back responsibility for billions of dollars in pay and benefits for veterans, a task handled since 2002 by Lockheed Martin Corp, the Pentagon's No. 1 contractor by sales.

A switch to using government workers, prompted by Congress, will save $22 million to $25 million over the next 10 years, Tom LaRock, a spokesman for the Defense Finance and Accounting Service (DFAS), said on Monday.

Rep. Dennis Kucinich, an Ohio Democrat who led an investigation and held hearings into the matter, said Lockheed's performance under its contract had been marked by mishandling, delay, poor quality and exorbitant charges.

This is a great day for veterans and a victory for government oversight, Kucinich said in a statement.

But Bethesda, Maryland-based Lockheed said it was very proud of its performance under the contract, which had an estimated aggregate value of $346 million in 2007.

The company delivered more than $400 billion in benefits accurately and on time under this contract, said Joseph Wagovich, a spokesman for Lockheed Martin's Information Systems and Global Services business unit in Rockville, Maryland.

Kucinich's investigation found delays of as much as 5-1/2 years in delivering retroactive pay awards to eligible disabled veterans under legislation enacted by Congress in 2003 and 2004. He blamed government mismanagement and Lockheed Martin.

Lockheed's Wagovich said the company's program had received the highest customer satisfaction ratings of any DFAS function for six straight years, as measured by a survey conducted by the Office of Personnel Management, the federal human-resource agency.

Terri McKay, head of DFAS, said the switch back to the government would allow us to sustain and potentially improve service delivery and customer satisfaction.

DFAS spokesman LaRock said a provision in the 2008 National Defense Authorization Act had been the driving factor in the plan to phase out Lockheed's role effective early next year.

The law directed the Defense Department to consider hiring civilians rather than outsourcing, particularly for functions performed by civilian employees any time in the past 10 years.

LaRock said DFAS expected to hire 500 to 600 people to take over the military retirement pay function, which is based in Cleveland, Ohio.

Lockheed began the eighth year of its work in February under a one-year contract option, DFAS said. The company said it was processing monthly payrolls totaling more than $3.5 billion for roughly 2.6 million customers, including veterans and their survivors.

Kucinich said he would continue to review the previous Bush administration's privatization efforts in his capacity as chairman of the House of Representatives' subcommittee on domestic policy.

I hope that this experiment in privatization will demonstrate to other agencies the costs, both financial and otherwise, of outsourcing the responsibilities of government, he said.

(Reporting by Jim Wolf; editing by Tim Dobbyn)