The Washington Independent
The Washington Independent

Defense Contractors Gird for Fight

Last updated: July 31, 2020 | March 05, 2009 | Frazer Pugh

The F-22 Raptor is produced by Lockheed Martin, the largest American defense contractor. (Wikimedia) The F-22 Raptor is produced by Lockheed Martin, the largest American defense contractor. (U.S. Air Force photo)

With President Obama’s announcement Wednesday that he intends to attack wasteful Pentagon spending, one of the most powerful and entrenched interests in Washington — the multi-billion dollar defense lobby — is sure to retaliate. Obama aides insist that they’re prepared for the fight ahead. Defense reformers and lobbyists aren’t yet convinced that they are.

****As part of a plan for fiscal responsibility, Obama issued a memorandum to all government agencies and departments informing them that the White House’s Office of Management and Budget will issue new guidelines by July 1 instructing them on what “inherently governmental” jobs cannot be outsourced and what new procedures are to be created to prevent government contracts from spiraling over budget — including “modifying or canceling such contracts.” At a press conference unveiling the memorandum, Obama singled out the defense industry for special opprobrium. “The days of giving defense contractors a blank check are over,” Obama said.

Illustration by: Matt Mahurin Illustration by: Matt Mahurin

Defense bloat has stunned auditors. A report last year from the Government Accountability Office found that 95 ongoing major defense programs exceeded their budgets, providing an accumulated excess cost of $295 billion to taxpayers. The programs include big-ticket items beloved by the military services, including the Army’s Future Combat System, the Navy’s Littoral Combat Ship and the Air Force’s Joint Strike Fighter, which are built by defense-industry giants like Lockheed Martin Corp., Boeing Co., and Raytheon Company, all of which have aggressive lobbying arms and excellent relationships with defense barons on Capitol Hill. According to the government’s Federal Procurement Database, which tracks federal contracts,** **the Defense Department reported over $394 billion worth of business with private contractors in fiscal 2008 alone.

Defense contractors and their allies in government will not let that money go without a confrontation, say defense reformers. If he were a lobbyist, “I’d work with the bureaucrats to do what they always do,” said Winslow Wheeler, a three-decade veteran of Senate defense-budget fights who now directs a military-reform project at the Center for Defense Information. “The way the Pentagon wags say it is: ‘I’ll make them into a mushroom: keep ‘em in the dark and feed ‘em [manure].”

Kenneth Baer, a spokesman for the Office of Management and Budget, had a combative tone for the defense lobby. “We have just lived through an era of irresponsibility where taxpayer dollars were wasted and some of the biggest challenges we face were kicked down the road and not dealt with,” he said. “We can keep our people safe and our defense strong without all of this waste and inefficiency.”

Baer pointed to Obama’s YouTube address on his budget from Saturday, in which the president adopted more strident rhetoric than he has used to date to discuss the coming budget fight. “Special interests and lobbyists” are “gearing up for a fight” over his proposals, Obama said. “My message to them is this: So am I.”

Over the past several months, as the economic picture worsened and Defense Secretary Bob Gates publicly warned the defense industry that the financial “spigot that opened on 9/11… is closing,” industry efforts have fought back. A high-profile lobbying campaign to portray the Air Force’s expensive F-22 Raptor fighter jet — which the service and manufacturer Lockheed Martin fear may be a casualty of defense cuts — as a jobs machine has accelerated. ** Allies like Sen. Saxby Chambliss (R-Ga.), whose home state features a major F-22 manufacturing plant, **reciting the company’s talking point that 95,000 jobs could be lost if the jet gets the budgetary axe. A flurry of op-eds and blog posts from conservative writers have portrayed Obama’s first Pentagon budget request — estimated at $663.7 billion , which represents a four percent increase over the previous year’s budget before the costs of the two wars are factored in — as irresponsibly “sacrific[ing] American primacy,” in the words of a Bush administration Pentagon comptroller.

One Pentagon official expects much more of that as the services and the defense industry push back against reform. Their “ground game,” the official said, will be run from the services’ legislative outreach and public-affairs offices, feeding talking points and strategy information to sympathetic members of Congress — something that “got the services in trouble in 2002″ with Defense Secretary Donald Rumsfeld when the Army resisted his ultimately-successful plan to scrap an archaic artillery system called Crusader. An “air game” will feature “a lot of ominous whispers on background to the press and conservative think tanks and commentators about endangering the American people and costing lives in some future fight.”

Gates, whom Obama tasked with working closely with OMB, has told confidantes that he views a sustainable long-term rebalancing of defense priorities as one of his most important tasks now that Obama has given him the chance to continue on as Pentagon chief. His service under the Bush administration was more about supporting the immediate needs of the Iraq war after Bush fired Rumsfeld in November 2006. “The services are accustomed to reviews that start out with a lot of talk about setting priorities and making tough choices but in reality usually end with leaving everything more or less intact,” the Pentagon official said. “This time they have a secretary who really means it.”

A former Lockheed Martin official who requested anonymity spelled out a substantive scenario for the defense industry to combat the OMB review process. The process would put the blame for cost overruns not on the contractors, but on the military services for failing to be specific about what precisely they want built or delivered. “I would lead with [telling the government], ‘We waste money because you can’t make up your mind,” the ex-official said.

The ex-official explained that there is an inherent dynamic in the procurement process leading to companies undervaluing the true expense of their work in order to win a contract. “I make up a budget with my engineers, ‘OK, this is how much the project will cost.’ One bid will come in low among contractors A, B, C and D.” But in order to offer the low bid and win the contract, a contractor feels an incentive to shade down the project’s true cost. “So I’ll cut [my bid] 10 percent across the board,” the ex-official continued. “The engineers gave an accurate assessment, but you just cut it. When it comes to actually building the ship, everyone says ‘I need more money,’” in line with what the original engineering assessment of cost. Since the Pentagon has few restrictions against paying the increased cost of the contract after it’s been awarded — a practice that the OMB review will study — little prevents the overages from accumulating. Even less prevents the defense industry from low-bidding on a contract.

One solution, the ex-Lockheed official proposed, is called firm fixed-price contracting, whereby the Defense Department informs contractors that it will pay for a contract up to a certain point and any overages must be paid by the contractor. Firm fixed-price contracting is in place for some defense items. “When they do that, contractors are very honest” with their cost estimates, the ex-Lockheed official said. “But then the government tends to say ‘We don’t like that number,’ or it’s too expensive. For decades you’ve been getting low bids, so when you get an honest bid you say it’s way too expensive.”

The Pentagon official said that a smart strategy for the services would be to combat reform “indirectly through industry or military and veterans’ associations rather than directly.” Noting that the Army has already started distributing information about the value of Future Combat Systems, the official added, “The Army doesn’t seem to have figured this out.”

If the ex-Lockheed official’s scenario doesn’t work, Scott Amey, the general counsel of the Project on Government Oversight, a budget watchdog organization, anticipates a different one. “I guarantee you we’re going to hear that the government can’t operate without defense contractors,” Amey said.  “They’re [portrayed as] the driving force behind technology and innovation, and so a reliance on defense contractors is justified. We’re also going to hear some kind of backlash: ‘Many contractors operate efficiently and effectively, don’t allow a few bad defense contractors to spoil the bunch.”

For Wheeler, the author of “The Wastrels of Defense: How Congress Sabotages U.S. Security,” the process will come down to how prepared OMB chief Peter Orzsag, his deputy for defense programs, Steve Kosiak, and Gates are to outmaneuver the defense lobby and its allies. “This is a real test for Gates and Peter Orzsag to write regulations that make it easier to do right thing and harder to do wrong thing and then fight the nasty brutal battles that will make it stick,” he said. “This is the first step in a long journey, if they’re serious.”

Frazer Pugh | I work in the investment management sector as a professional. Previously, I advised top financial services companies on balance sheet management, portfolio planning, and valuations as a consultant. I am currently pursuing a part-time MBA at Melbourne University, where I am a lecturer in accounting and hedge fund strategies, as well as a mentor/coach in a part-time equity analysis initiative. I have a bachelor's degree in economics, a master's degree in finance, and am a Chartered Accountant. I enjoy instructing and assisting others in achieving their objectives.

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