By Emelie Rutherford
Presidential candidates Sens. John McCain and Barack Obama are proposing contracting reforms as cost savers in the wake of the U.S. credit crisis, with McCain last Friday calling for an end to cost-plus Pentagon contracts days after Obama pledged to cut federal spending on contractors by 10 percent.
Campaign observers said that in the defense realm, the contracting changes floated by either or McCain (R-Ariz.) or Obama (D-Ill.) may prevail, considering the similarities between the opponents’ proposals and movement in Washington toward reforming Pentagon acquisition.
Yet defense industry sources cited concerns with the candidates’ criticisms of cost-plus contracts, saying for cutting-edge defense programs those contracting arrangements can be preferable.
“I think there is concern in the defense industry that proponents of fixed-price contracts don’t understand how hard it is to project prices, or why it could be counterproductive to prematurely impose a ceiling on costs,” said Loren Thompson, chief operating officer of the Lexington Institute.
When asked during last Friday night’s presidential debate how he would help pay the cost of a proposed government bailout of Wall Street, McCain pointed to the high cost of defense spending. He said “we have to do away with cost-plus contracts” and “we need to have fixed-cost contracts.”
“We need very badly to understand that defense spending is very important and vital, particularly in the new challenges we face in the world, but we have to get a lot of the cost overruns under control,” McCain said. He pointed to the rising cost of the Navy’s Littoral Combat ship program, for which the service has had trouble convincing competing contractors General Dynamics [GD] and Lockheed Martin [LMT] to shift to fixed-priced contracts.
McCain has talked repeatedly in favor of reforming and trimming defense procurement programs and requiring more openness in contracting.
For example, he pledged April 15 during a speech in Pittsburgh “to make every aspect of government purchases and performance transparent,” including posting “every step of contracts and grants” online “in plain and simple English,” along with an agency’s performance evaluation.
Obama on Sept. 22 released a major government reform plan that says as president he would “reform federal contracting and reduce the number of contractors, saving $40 billion a year.” Obama’s “Plan to Reform the Greed and Excesses of Washington” states he would “cut federal spending on contractors by at least 10 percent.” (Defense Daily, Sept. 23)
In the plan Obama pledges to hire more government contract managers, lamenting “wasteful spending” with the Coast Guard’s massive $24 billion Deepwater modernization program, overseen initially by a Northrop Grumman [NOC]-Lockheed Martin team.
“I will…save billions of dollars by cutting private contractors and improving management of the hundreds of billions of dollars our government spends on private contracts,” Obama said Sept. 22 during a speech in Green Bay, Wis.
His government reform plan laments the increase in the government’s number of cost-plus contracts, calling them “vulnerable to waste,” and says he would “encourage the use of fixed-cost or incentive-based contracts and when cost-plus contracts are necessary, force agencies to use mitigating procedures like incentives tied to performance goals and cost savings.”
Obama’s plan calls for audits of a quarter of large contracts each year, focusing at first on noncompetitive and cost-plus contracts.
Defense industry observers asked about Obama and McCain’s proposed contracting changes noted that while fixed-price contracts work well for stable programs with known costs, they don’t always bode well for developmental defense programs with still-emerging technologies for which the Pentagon tweaks the requirements.
“I think there would be concern if you tried to apply fixed-price contracts to non-fixed-price programs,” said Cord Sterling, the vice president of legislative affairs at the Aerospace Industries Association. “It’s a question as to whether or not people would pursue those contracts with the risk to the individuals that would pursue them, anywhere from your small businesses to large corporations.”
Thompson noted that the view in the defense industry is “that most cost runs are traceable to mistakes the government customer makes, rather than to mis-performance by companies.”
“If the government is determined to have fixed-price contracts, then it has to commit to stable designs and performance requirements up front,” he said. “Otherwise, it will void the contract….Because most of the Nunn-McCurdy (cost) breaches that represent deviations from the original baseline begin as changes in performance parameters or design configurations instigated by the government. And it’s just inevitable that if the government changes its requirements after the contract is written, the costs are going to go up.”
Regarding calls to cut government waste and increase efficiencies, Sterling noted that politicians have cut government programs in the past for such reasons, only to see the per-unit costs of the systems rise because of unavoidable reductions in production quantities.
Travis Sharp, a military policy analyst at the Center for Arms Control and Non-Proliferation, said the atmosphere in Washington is primed for defense acquisition reform. He pointed to reform ideas floated in the Pentagon, by think tanks, and in Congress by Senate Armed Services Committee Chairman Carl Levin (D-Mich.) and House Appropriations Defense subcommittee Chairman Rep. John Murtha (D-Pa.).
Sharp also noted signs of a squeeze on defense budgets in the coming years, including declining base defense budgets forecasted by the Pentagon and movement away from war supplemental spending as activity winds down in Iraq.
“In scarce budgetary times you really need to maximize your investments; that’s going to be what drives [defense] acquisition reform,” Sharp said.
“Some of the things that McCain and Obama are talking about are active on the Hill from the people who set defense policy…and also are going on within DoD,” he said. “So I think that there’s going to be some support for some of the things that Obama and McCain are talking about.”