In the midst of the largest military expansion since the Reagan administration, industry analysts warn that the gravy days cannot last much longer.
While that austere forecast may be hard to comprehend in the context of soaring defense budgets, it does make sense when one looks at how the Pentagon spends its money. During this buildup, in fact, the Pentagon is not buying massive quantities of new hardware, but is spending far more on so-called “services.”
The Defense Department last year acquired $295 billion worth of products and services. More than half — $152 billion — was for services. This category is vaguely defined as anything that contractors do for the Defense Department — from delivering food to military bases in Iraq to refurbishing nuclear missiles.
Officials argue that the surge in contractor hiring was necessary following a decade of government downsizing that contributed to the post-Cold War peace dividend. But there also are signs that the Defense Department may have gotten a tad sloppy in the way it oversees and manages service contracts, which is bad news for taxpayers.
“A lot of money could be saved on acquisition of services,” says Eileen Giglio, assistant deputy undersecretary of defense for business transformation. In some offices at the Pentagon, she says, there are four or five contractors providing the same services but charging different prices. “It’s a really hard problem,” Giglio tells an industry conference. “If we could simplify that process a lot of money could be saved.”
An avalanche of contractors may have delivered much needed help to understaffed Defense Department offices, but it may be time to reevaluate the situation. Congress now is requiring the Pentagon to provide regular updates on the “acquisition workforce,” which is one area that lawmakers see as being overpopulated with contractors.
The Defense Acquisition University is expected to report to Congress this month on the number of contractors involved in military acquisition management. According to unofficial estimates, the office of the undersecretary of defense for acquisition, technology and logistics — which oversees all Pentagon procurements — has 400 government employees and more than 3,000 contractors.
The Defense Acquisition University is studying options to rebalance the workforce, Giglio says.
Employee morale at many Pentagon offices also has suffered because contractors tend to make considerably more money for doing the same work that civil servants do. “That’s not a very good work environment,” Giglio says.
The Pentagon, however, is not expected to slow down the hiring of contractors any time soon.
“There is going to be a continued emphasis on the acquisition of services,” says Dave Ahern, director of portfolio systems acquisition at the office of the undersecretary for defense.
Under pressure from Congress, the Pentagon is trying to impose more discipline in the system and ensure that contracts are awarded based on real needs, Ahern says at the conference. “In services acquisition we have been too easy on ourselves,” he says. Government managers are being asked to precisely define what they want contractors to do, and to set clear guidelines for measuring performance.
Ahern cited the Navy’s “seaport-enhanced” program as an example of how the Defense Department wants to manage service contracts in the future. Seaport allows the electronic procurement of engineering, financial, and program management support services via a web portal. The site provides standardized guidelines for issuing competitive solicitations amongst a large group of pre-approved contractors.
Weapon manufacturers, meanwhile, fret about the dwindling opportunities to score big-ticket production contracts. They have good reasons to get the jitters. The Army, Navy, Air Force and Marine Corps are in the throes of a budget crunch caused by soaring personnel, health care and fuel costs. All the services are taking serious looks at their procurement budgets, and in some instances have decided to stretch out their weapons buying plans, which means fewer aircraft, ships and ground vehicles will be manufactured.
But industry will continue to get plenty of business. The services’ aging fleets of equipment will, for decades to come, require costly repairs, maintenance and replacement of components. The Air Force alone estimated it would need almost $12 billion to rebuild its Vietnam-era C-5 cargo planes. At a newly created Air Force combat wing that only operates unmanned aircraft, more than half of its 450 maintenance personnel are contractors, and that number will grow substantially, officials said. The Army said it will cost at least $15 billion a year just to repair hardware coming back from Iraq.
Congress has begun taking a more careful look at service contracts, and many lawmakers have railed against what they consider war profiteering. The scrutiny has prompted Pentagon officials to launch a series of oversight measures that are designed to more carefully manage services contracts. But it would be unrealistic to expect the Pentagon to cut back on service contracts any time soon. Industry need not worry.
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