NDIA PERSPECTIVE BUDGET
Budgets Require Industry-Government Cooperation
We should all celebrate the recent passage and signing of the 2019 Bipartisan Budget Act that ended the federal budget impasse and did away with the destructive spending caps imposed by the 2011 Budget Control Act. Thankfully, the way legislators wrote the budget deal and its two-year coverage means the threat of sequestration has finally passed.
Observers will note, however, the budget deal hints at the feared decline of defense resourcing going forward. While the defense topline grows by 2.64 percent in 2020, that growth slides to 0.33 percent in 2021; and these percentages do not consider inflation. That is well below the 3-5 percent real growth after inflation called for by former Secretary of Defense Jim Mattis. He saw that growth level as a requirement to regain readiness and make the necessary investments in modernization and recapitalization to ensure the U.S. military can carry out the National Defense Strategy.
While defense experts, think tanks and the Defense Department all call for fully resourcing the strategy, harbingers of flatter defense budgets yet again call for the hard thinking required to get the absolute most out of every defense dollar spent. One critical avenue of that approach is better government-industry collaboration. The more government can work with industry to identify key technology and workforce investments, telegraph future requirements, and develop innovative contracting vehicles, among other things, the more efficiently and cost-effectively industry can provide the best services and products to our warfighters over time.
This may seem obvious, but recent policy efforts both on the Hill and in the Pentagon indicate otherwise. One example is the recent effort to revamp how the government funds capital-intensive projects for companies through contract financing. Right now, companies receive financing on average for 80 percent of the total cost of these projects. This financing frees up internal capital, allowing the company to make upfront investments in research and development, workforce hiring and training, tooling, etc.
Instead, the revamped rule would have lowered the cap on financing to 50 percent, with outyear incentives to bring that percentage higher while requiring industry to self-finance the rest. This would have been onerous for larger contractors and existential for smaller ones, which would have suffered from the trickle-down impact of prime contracts having less available capital. Tellingly, this proposed rule came out without any engagement with industry on its impact and industry’s ability to remain viable and thrive. Thankfully, both congressional and industry opposition led the Pentagon to reconsider.
Similarly, the case of the Defense Department Inspector General finding that an aerospace contractor took excessive profit on sustainment parts led to proposed legislation requiring every contractor, even the smallest, to provide certified cost and pricing data to prove they are not padding profits. This would require companies to invest in defense-unique business systems, driving up costs and forcing more companies out of the defense sector, exacerbating the real problem, a lack of competition as the supply chain dwindles. We hope that provision is not included in the final conferenced fiscal year 2020 National Defense Authorization Act.
Hopefully these examples end up as the exception vice the rule going forward, and we have reasons for optimism coming out of the department’s office of the undersecretary for acquisition and sustainment.
The first is the way the office has gone about the implementation and enforcement of new cybersecurity standards. Soon the department will require every contractor hoping to do business to have cybersecurity certifications done by a third party. At first glance, this seems like another high burden for the defense industrial base, but the aggressive cyberattacks by competitor nations make it a necessity.
Undersecretary Ellen Lord, and the project’s lead, Katie Arrington, acknowledge the potential burden these new policies will have and have gone out of their way to engage industry in listening sessions, such as in July at NDIA’s Navy Gold Coast event in San Diego, to understand industry’s perspectives and develop a program that is effective while affordable. This ongoing collaboration should produce a procedure, referred to as the Cybersecurity Maturity Model Certification system, in the very near future.
Additionally, the office of acquisition and sustainment developed another excellent example of collaboration, one lower on the radar screen but more forward-looking, with its Public-Private Talent Exchange program and the recent pilot validating its value. Authorized by the fiscal year 2017 NDAA, the program takes industry professionals and puts them into some of the department’s important acquisition offices while doing likewise with defense acquisition officials’ placement in participating companies.
Initial indications after the first pilot highlight the value of each participant learning about and understanding the various perspectives, limitations and incentives driving the actions of those on the other side of the negotiating table. As a second tranche of exchangees prepares for their assignments, we expect this exchange to bear more fruit of not just understanding, but shared interests in developing innovative programs and contracting methods to maximize benefits on both sides of the table.
The specter of flattening budgets requires all who believe in a strong national defense to endeavor for the maximum effect out of each dollar. Understanding that as a common goal and striving for it day after day necessitates an exemplary level of collaboration between the government buyer and the industry producer. Efforts like the Cybersecurity Maturity Model Certification system and the Public-Private Talent Exchange show a willingness and a way forward we should commend.
Wesley P. Hallman is NDIA senior vice president for strategy and policy.