Business Regulation

Defense Industry Under the Gun

Contractors are being called to account for costly waste and abuse.

By Richard Sammon, Senior Associate Editor, The Kiplinger Letter

February 5, 2010

Military contractors face closer scrutiny and oversight from a brigade of government inspectors and accountants headed their way.

President Obama aims to double the number of highly specialized Defense Department contracting accountants from 5,000 to 10,000 in the next few years. He’ll also designate several more thousand civilian and military personnel to become full-time acquisition oversight officers.

This amounts to putting a lot more accounting cops on the beat to rein in cost overruns and spot waste and abuse in big-ticket defense procurement that put a serious drain on the federal budget.

Part of the reason for the beefed-up accounting mission is to find budget savings to help reduce the federal deficit, but a large part is also to hold contractors to task for what have become routine and even legendary cost overruns and delays in programs vital to national security and military readiness.

The day Obama’s fiscal 2011 budget was released, for instance, Defense Secretary Robert Gates announced he was withholding $614 million in contract performance fees for Lockheed Martin because of delays, cost overruns and other problems in the huge Joint Strike Fighter combat jet program. He also dismissed the Pentagon official in charge of the fighter project, and he pledged to save billions by ending production of the large C-17 cargo plane made by Boeing.

Currently, two in three major weapons programs run 30% or more over budget. The annual defense procurement budget is about $110 billion, up from $65 billion in the mid-1990s. While much of the increase is due to a general defense buildup during President George W. Bush’s tenure and also the added military needs of the wars in Iraq and Afghanistan, large cost overruns have also pushed spending higher. There’s bipartisan support in Congress and in defense policy forums for enhanced procurement accounting.

Even defense hawks say heavier contracting oversight will produce savings that can be directed to other needs, such as recruitment and retention programs as the Army and Marines grow their ranks over the next few years.

Facing extra accounting oversight are Navy ship and submarine, military transport plane, combat fighter jet and Air Force bomber programs, Army communications and advanced weapons programs, including smart bombs and unmanned drones. In addition to Lockheed Martin, prime contractors coming under greater surveillance include Boeing, Northrop Grumman, General Dynamics and United Defense. The closer cost scrutiny will have a ripple effect, no doubt, from prime contractors to many of their suppliers.

In addition to having more accountants eyeing contracts, look for Congress to insist on more transparency. Lawmakers later this year plan to require the Pentagon to notify Congress when procurement programs go 15% over cost. Additionally, the secretary of defense will need to justify on national security grounds why programs that run much higher than original cost estimates are not being terminated or scaled back or why contractors are not subject to fines for serious contracting performance failures.

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