Reaping the Benefits of a Global Defense Industry

 Greg Sanders CSIS photo

As the Defense Department’s budget goes down, the number of contracts awarded without competitive bids is going up. The share of contracts awarded without competition has risen from 39 percent in 2009 to 42 percent in 2012, according to a report I co-authored with Jesse Ellman and Rhys McCormick on DoD Contracting Trends.

The news for competition in 2013 is not much better. The non-compete rate has crept up again despite a decrease of more than $20 billion in contracts awarded without competition.

So are reformers’ efforts for naught? No. Even in the midst of cutbacks and fears of a declining industrial base, the percentage of contract dollars awarded after competition with multiple offers has begun to rise. While the 2013 rate of 49.3 percent is still below the 50 percent mark achieved in 2009, it is higher than the years in between. This seemingly contradictory result was made possible by a drop in obligations for contracts that were nominally competed but only one company responded. The share of competed contracts that were awarded after receiving only one offer dropped to 7 percent, the lowest level this century. Moreover, contract competitiveness varies by major DoD component. The most notable change was in the Air Force, which had been the least competitive service. The service reduced its non-compete rate by four percentage points; the Navy moved four percentage points in the opposite direction, with both services now awarding nearly three-fifths of their contract dollars without competition.

Does this matter? Maybe. While competition is a touchstone in our larger economy, the defense sector is in many ways not a free market. Jacques Gansler (former head of Pentagon acquisition) recently argued in the New York Times that in times of budget cuts “we need to turn to one of the commercial world’s most basic cost-control weapons — competition.” Yet a report by the consulting firm Technomics found “no definitive evidence that competition has consistently reduced program technical, schedule, or cost risk” for the Defense Department and taxpayers. Both sides agree that competition can work; the controversy regards how challenging it is to build a competition so it garners efficiencies.

With this in mind, my co-authors and I studied two factors that can affect the number of qualified applicants competing.

Research on service contracts for the federal government revealed that multiple-award indefinite delivery vehicles —a means of contracting in which vendors compete twice, first to qualify to be in a limited pool and second to win any given task order — correlate with higher levels of competition. So the regulatory rule to increase their use is probably one of the reasons that competition with three or more offers has became more prevalent.

The second factor is contract size. We found in 2012 that contracts worth $100 million or more each year had much lower competition rates than smaller contracts. Some large projects are irreducible, but in other cases size results from choosing consolidation in hopes of achieving economics of scale. Shrinking contract size may increase demands on the Pentagon acquisition workforce, but they will also allow small and medium vendors to compete.

Another way to increase competition is for policymakers to allow commercial firms or defense vendors with foreign headquarters to participate in the acquisition process. Our research has found that about one third of major weapons platform obligations experienced multiple offer competition, and approximately half of their dollars were exempted from competition because only one source was available between 2009 and 2012. We are presently in a buyer’s market for arms due to European budget cuts and attempts to build local defense industries throughout Asia. The concentration of non-competed contract dollars in non-commercial sectors suggests it would be worth the effort to find ways to work with trusted vendors tied to democratic allied nations.

Despite the rise in the rate of non-competed obligations, reformers have made some progress in improving the quality of competition. Improving competition and making it effective and beneficial to the taxpayer is neither simple nor susceptible to a one-size-fits-all solution so the process of finding efficiencies will be challenging. Smaller contracts, better data and other measures are likely to help expand and deepen effective competition.

Greg Sanders is an expert on federal and defense acquisition at the Center for Strategic and Internatonal Studies.

 

Comments

  • Guy

    This article may be precisely accurate, but it is very difficult to determine that. Many “sole source” contracts (i.e. non-competitively awarded) are merely follow-on contracts. I guarantee that no one can bid a better price for an airplane that is already in production with Lockheed or Boeing or whoever than the current manufacturer. Sometimes, contracts are awarded non-competitively because the only potential competitor(s) are simply too far behind in a critical technology (and yes, I have personal experience with those). It’s possible for the government to “level the playing field” in such cases by awarding (non-competitively) technology transfer contracts with the lagging competitors, but the analysis to show that such investments yield results is both mind numbing and highly problematic. Dr Gansler’s commitment to competition is, to some degree, based on his study of competition in defense procurement. But direct conversations with Dr Gansler indicated that the original study (which, I must admit, may have been updated) was based on competition among companies providing commodities. There is a world of difference between buying printer paper and buy fifth generation tactical airplanes. This is an enormously complicated and complex area, and there is no real interest in fixing the broken parts (see GAO report publishing in the first quarter FY 1993 — it remains distressing accurate and applicable).

    • Greg Sanders

      Guy,

      Thanks for reading and engaging with some of the controversies about competition. Dr. Gansler has been continuing to make the case for competition in venues like the Naval Postgraduate Research forum. He has specifically leaned on the example of the great engine war which isn’t at the same complexity of a complete tactical airplane but is certainly more complex than simple commodities.

      The Technomonics study does echo many of your points just as some of the earlier commenters echo Dr. Gansler’s points. I hope to get at some of these issues in future research projects, and I do wonder if the positive case for competition ends up resting more on alternate grounds than direct cost savings.

      What’s your favored solution of those the GAO recommends?

      • Guy

        Greg, Thanks for responding. Your question about GAO actually introduces a second question — one beyond the serious issue of the value of competition. The GAO report (and I can forward that to you in .pdf, if you’re interested) is focused on the larger issue of a dysfunctional acquisition system — that none of the stakeholders wants to fix because it gives all of them what they ultimately want — it just takes unconscionably more money and more time than it should — and so no one cares because it isn’t either their time or their money.

        Back to competition — I think that, given that there really are limited resources (that’s time, money, people, capital, facilities, raw materials, etc), there should be competition at multiple levels, among various solutions to problems, varying levels of requirements, potential vendors, etc. Each of these needs to be done with integrity and discipline (I won’t go into it, but the competition among solutions today is rife with a lack of integrity). I also think that, to maintain true competition, we must stop buying mega-programs on the fairy tale belief that they save money. If we had committed to buying five successive tactical aircraft programs at 700 airplanes each and each with greater capability (some evolutionary, some revolutionary), we could have kept three to five tactical airplane manufacturers in the business and losing would not have kicked you out of the business. It would also reduce the risk by limiting the “invent anti-gravity before lunch” pressure. It would have reduced the “first liar doesn’t have a chance” phenomenon. It would also have enormously compounded the problems faced by potential adversaries. The recent F-35 engine fire demonstrated emphatically that, if an enemy can develop one effective countermeasure for the F-35, we are, in the highly technical vernacular of aerospace engineering and war fighting, screwed. Just say country R or country C figures out how to hack into the F-35 software …

        Be happy to wax eloquent longer, but you have a day job, BTW, I was a major program manager for over six years and for small, medium and BIG programs in research, in development, in production and in end-of-life. I have, in fact, been there and done that.

        Guy

        • Greg Sanders

          Guy,

          Thanks for the elaboration and it’s good talking with you. Our research definitely did find that there’s more competition below the $500M a year level, so that’s some support for your fairly intuitive premise of more smaller programs resulting in more competition. I don’t have any data to really properly evaluate the counter argument about economics of scale, but in a past project I saw any number of satellite megaprojects that ended up being more expensive than the two separate systems they combined.

          It might be worth just posting the report number here for the record for anyone curious. I’ve seen a good number of reports on weapon system acquisition that touch on some of the points you raise, but that sounds like a classic.

  • Don Bacon

    Why not consider all the faux “Native Alaskan” contracts and the “sweetheart” sole-source contracts, to personal friends and former military? Example of the latter:

    Pentagon, Jul 25, 2014

    Persistent Systems, LLC, New York, New York, was awarded a $49,000,000 cost-plus-fixed-fee, indefinite-delivery/indefinite-quantity, incrementally funded contract for the Program Manager for Special Programs program office for analysis and support, research and development, procurement and production, sustainment and training. Funding and work location will be determined with each order, with a completion date of July 25, 2019. One bid was solicited with one received. Army Contracting Command, Natick, Massachusetts, is the contracting activity (W911QY-14-D-0016).

    Persistent Systems, LLC

    Vice President of Business Development and Marketing: Adrien Robenhymer
    Prior to joining Persistent Systems, Mr. Robenhymer was the Technical Advisor and Technical Program Manager of numerous advanced wireless systems for the US Army Special Operations Command and the Joint Special Operations Command where his focus was to enhance the speed of tactical operators by developing dynamic Command, Control, Intelligence, Surveillance and Reconnaissance systems. Mr. Robenhymer holds a Bachelors of Science in Electrical Engineering from Worcester Polytechnic Institute.

    • Greg Sanders

      Don Bacon,

      There is data out there for looking closer at both of these issues. However, for this broad overview, We wanted to focus on the rate of competition where two offers were received. It is worth exploring the range of reasons why a contract wasn’t competed or only received one offer, but I’d argue the first step is figuring out the big picture.

  • mad taxpayer

    THEN FORCE LOCKHEED MARTIN TO ALLOW QUALIFIED CONTRACTORS TO BID ON THE JSF PENTAGON !! THEY WON’T! THEIR SUPPLIERS STINK LOOK AT THE SCHEDULE SLIP LIKE AN ICE FOLLIES SHOW !! HELLO!!

  • Jason Wisdom

    Easy, How much paperwork & time does it take to get a gov’t contract? Are you in a world of chopping trees down, or in a free world made of 1’s and 0’s where the rest of humanity resides? There are tons of humans out there that would love to help, unfortunately sending applications in the post was finished when the fax machine arrived. ~ComputerWisdom