Weapon Development Cost Sharing Must End

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Periodically over the last 55 years, the Defense Department has made repeated attempts to characterize and then re-characterize the acquisition and procurement of weapons systems.

The latest series of efforts have lived under the moniker of “Better Buying Power” and now are enjoying a further rebirth under the oft-used title of “acquisition reform.”

The Pentagon has approximately 90 major weapons programs in development. A fair number of these programs owe their R&D origins to classified efforts of the early and mid-1980s and were focused on countering fifth- and sixth-generation offerings of the Soviet Union. It is a reasonable assumption — with only a few exceptions — that the objective of these programs is to complete research and development, testing, engineering, low-rate production and ultimately put the systems into inventory.

So what is wrong with the “system” for producing major weapons?

Increasingly, major weapons programs are failing. Failure is defined as never making it into inventory. The reasons include an unrecognized lack of need — defined as absence of a relevant threat — cost growth and changes in roles and missions. The changes in roles and missions today pit the absence of major theater conflict against the increasing presence of asymmetric warfare and the consuming need to conduct stability operations.

When the objective of a major weapons program was matching the progression of a Soviet monolith, there might have been some excuse for program starts that would never make it to inventory. However, continuing such a process today is questionable.

During the Cold War, defense acquisition management could regularly shift development risk to contractors because they had a reasonable expectation of return on their investments. They expected to earn production contracts. It was more the rule than the exception that the process from R&D into production was compressed. The defense establishment was readily able to move the color of money from research to procurement, and the failures of this process were notable but relatively rare.

Meanwhile, the blatant efforts to shift the risk from government to contractor by the threshold use of fixed-price RDT&E contracts were — each and every one of them — distinct failures. These included the C-5A, the F-14 and a series of shipbuilding programs that included the LHA amphibious assault ships, frigates and the DD-963 destroyer, with some SSN submarines thrown in for good measure. Some of these acquisition experiments had grand titles such as “Total Package Procurement.”

These programs wound up “converted” from fixed-price contracts to cost-reimbursement contracts and the most frequently used means was Public Law 85-804. The last of such overt risk-shifting programs was the A-12 reconnaissance aircraft, which was never “converted.” It was terminated for default because it was clearly unneeded and, after more than 20 years of litigation, was settled by a barter arrangement.

Today’s weapons manufacturing industry is about 10 percent of what existed in the 1960s and 1970s. Further, the throughput dictated by the Cold War is absent and not likely to be replaced. This accounts not only for the reduction in capacity but also for the accelerating, oncoming singling up of industry capabilities. In short, the surmised “competition” that was always the unrequited desire of many will cease almost entirely to exist. At an accelerating rate, the nation is heading to a noncompetitive private arsenal system for major weapons.

These factors drive the need for developmental “risk retention” by the government. Today’s weapons are immensely complex systems, consisting not simply of components and materials but also of tiers of systems. Increasingly, these systems-within-systems, often threaded together with equally complex software, are at materially different stages of development. The very idea of a new weapons system with components that are at the same stage of maturation represents a nearly impossible goal.

The critical subject to be addressed here is: Who bears the cost and financial risks of the development and maturation of compound weapons systems? As a matter of constitutional and statutory law, the government is mandated to bear the financial risks of weapons development. This constitutional and statutory premise flows directly from the so-called “appropriations” clause of the Constitution, which provides that no funds may be drawn from the treasury without an appropriation passed by Congress.

The unarguable purpose of the appropriations clause was to ensure that Congress had complete control over spending by the executive branch. This “purse strings” power was intended to be absolute, and it permits no exceptions. It could be said that a contractor who is willing to take the risks of weapons systems development and “cost share” with the government would not be barred by the purse strings powers. This is simply not the case as even the comptroller general notes that the appropriated funds may not be “augmented” by conduct on the part of the executive branch that obtains funds or benefits  — such as contract performance — without the appropriation function. 

Augmenting appropriations by executive branch actions is not simply unconstitutional, it is also illegal and punishable. Thus when industry and the Defense Department set out to “cost share” the development of weapons systems, the acts of cost sharing in either the design or language of contracts are illegal. This plainly ignores 55 years of common practice, but most of that practice was between consenting adults who had the appropriate expectation of mutual benefit. Because of the absence now of any reasonable expectation of sufficient throughput to amortize the development investment, there is no longer a reasonable expectation that cost-sharing investment practices will continue. 

The Defense Department must abandon the practice.

Herbert L. Fenster is senior of counsel at Covington & Burling LLP, Washington, D.C.

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department