Pentagon tightens reins on contractors
DOD calls on contractors to reduce overhead spending, increase efficiencies in cost and production
The Defense Department is calling on government contractors to do their part to reduce inefficiencies in procurement as part of a larger stratgey to address expected shrinking budgets that DOD will face over coming years , according to a senior DOD official.
The announcement follows up on recent plans released by Defense Secretary Robert Gates to shave $100 billion from the DOD budget over the next five years.
Ashton Carter, undersecretary of defense for acquisiton technology and logistics, outlined his new initiatives for garnering the 2 percent to 3 percent net growth needed to fund the war, without increasing budgets, by eliminating some overhead costs and transferring the savings to combat capabilities.
“Everybody knows we’re entering a new era. We need to play the game that’s on the field,” Carter said at a Pentagon press briefing today. Defense contractors need to “look at their activities, practices and processes, and see where you can identify savings.”
DOD aims to slash budget by $100B to pay for war
The approach is two-pronged, looking within the DOD workforce for better techniques and acquisition analysis and challenging industry to do a better job of providing goods and services on time, on budget, and on schedule for less, one industry executive said.
“The goal is laudable, unquestionably,” said Alan Chvotkin, executive vice president and counsel for the Professional Services Council, who attended an invitation-only summit this morning that Carter held to meet with defense industry executives. “There isn’t enough money to sustain the military’s long-term needs.”
In efforts to close the gap, Carter and his office are taking aim at contracting activities, particularly at the different types of contracts, program costs and the practices that surround them.
One concern is what type of contracts are used for particular needs. Carter’s plans include a move to phase out award-fee or cost-plus contracts that reimburse contractors for legitimate costs plus award additional bonus revenues, instead favoring fixed-price contracts “in which government and industry share equally in cost overruns and underruns,” according to Carter’s memo to industry. Fixed-price contracts also would be favored over less-certain time-and-materials contracts as well.
It’s a move that is causing a considerable stir in the defense contracting industry as the companies remain unsure as to what the new guidelines will mean for their business. In a client memo, FDR Markets predicted the initiative “will likely increase uncertainty, and the risk profile, of the defense industry and we expect it to cause the group to weaken as a result.”
“There’s a lot of uncertainty of the implementation,” Chvotkin said, expressing concern about unnecessarily eliminating a contract type that could still be of use, depending on the goods or services. “You want to match what you want to buy with the right contract type. You don’t want to decide how to buy before you decide what to buy.”
Contracted goods and services “cover a broad span of activities and no one size fits all. Yet some of his initial recommendations may unnecessarily limit flexibility,” Chvotkin said in a released statement from his association. “For example, the department is right to focus on choosing the right contract vehicle, but why take a tool out of the toolbox by eliminating time and material contracts?”
Still, Carter insisted he wants to work with industry and understands the vital role defense contracting serves. “We do not have an arsenal system in the United States: the Department does not make most of our weapons or provide many non-governmental services essential to warfighting. These are provided by private industry,” Carter said in the memo.
At the Pentagon briefing, Carter also outlined plans to incentivize the trimming of excess spending, while leaving open the repercussions for companies that don’t work to get leaner.
“This is about costs, not profits. We want to use profits as an incentive for the defense industry, an incentive for saving taxpayer dollars. We want to foster productivity growth,” he said. Companies that do participate “will retain programs, get new programs and remain profitable if you’re leaner.”
Carter added that final guidance would be released in coming weeks.