U.S. DoD Cannot Solve its Budget Woes by Squeezing the Defense Industry

March 9, 2012

The Holy Grail of defense acquisition reform is a methodology, system, approach -- something -- that will enable the Department of Defense to procure equipment, platforms and services of quality relatively cheaply and quickly. Over the recent decades, DoD has careened from one fashion to another in acquisition reform. Sometimes diametrically opposed solutions are advertised as somehow saving the exact same percentage of defense costs.

Right now, the strategy is one of achieving better buying power largely by squeezing the private sector companies on whom the department relies. This is being pursued in a number of ways. DoD is increasing competition among private sector companies for contracts. Where only one qualified bidder exists, program managers are sometimes attempting to create a competitor or cancelling desperately needed procurements for fear of having to award a sole source contract. The Pentagon is making the winning companies assume a much greater degree of risk by requiring fixed price bids even for programs that require lots of developmental work. There is also an increased use of criteria for contract award such as the lowest cost, technically acceptable bid. This particular approach is all but guaranteed to result in the dumbing down of the industry since there are no points scored for innovation, superior quality or even a better workforce.

The cost structure in the defense and aerospace sector is heavily burdened by the weight of regulations, technical specifications, oversight and reporting requirements, material standards, testing requirements and even export sales limitations. As a consequence, it is very difficult for the aerospace and defense sector to lower their prices except when they have contracts of sufficient duration and size to allow for the companies to exploit the effects of moving down the performance learning curve. But since DoD is championing more and more frequent competitions, the opportunities to exploit the learning curve phenomenon are becoming fewer and fewer. 

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