Report: More Competition in DoD Contract Spending

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Photo: Andrew Brown

In a report released last week, the Center for Strategic and International Studies found that spending on defense contracting is increasingly going toward more competitive contracts. Further, the contracts the Pentagon is dropping money have been evolving over the past decade.

Here are some key takeaways from the report:

The Good News

Over the past 10 years, the competitiveness of DoD contracts has increased, the CSIS report finds, from 48 percent of contracts awarded to 63 percent. Not only does the growth in competitively awarded contracts dovetail with President Barack Obama’s 2009 memo, directing federal agencies to award more competitive deals, the trend in that direction, actually predates it.

Other data also bear out progress in awarding competitive contracts. For example, CSIS found that from 1999 to 2010, the number of fixed-price contracts awarded increased at a higher rate than that of cost-based ones.

Further, the number of companies making up the industrial base

Products vs. Services

Throughout the 1990s, what the CSIS report calls a “decade of stagnation following the Cold War,” DoD spending on products had declined.

However, in the years after 9/11, product spending increased to a 2008 peak of about $200 billion. More recently, though, spending on products has decreased by an average rate of 8 percent over the past few years.

Meanwhile, DoD contract spending for services were booming in the 1990s and saw an uptick in the 2000s, before dipping in 2008. “Since then, this category has been flat in absolute terms, but service contract spending rose in relation to overall DoD expenditures as spending on products decreased,” the report finds.

The (Potentially) Bad News

In contrast, spending on research and development fell throughout both the inert ‘90s and the post-9/11 buildup. Declining R&D spending has “potentially negative implications for product and process improvements,” the report states. Typically, because investments are made in period of buildup, the benefits of R&D spending aren’t seen until periods of drawdown, per the report. However, because R&D spending, according to CSIS data, appears to have been neglected, that means fewer benefits from R&D breakthroughs.

The Defense Marketplace

In contrast to the M&A boom of the 1990s, ushered in by then-Defense Secretary William Perry’s “Last Supper” speech, CSIS said there is little evidence the current marketplace is “consolidating into an oligopoly dominated by a small number of incumbent firms.” And while the five largest contractors remained the same from 1999 to 2010, there were “dynamic changes” in the makeup of the remaining 15 of the top 20 contractors.

Competition Has its Limits

However, even as defense contract spending has made gains toward becoming more competitive, David Berteau, director of CSIS’ Defense-Industrial Initiatives Group, has suggested there are limits to increasing competition.

“The political premise is that if we only worked harder at it we could have a lot more competition than we have today,” he said at an event last week describing the report’s findings. “And I think our analysis shows that, by and large, there’s not a lot of additional room available for competition that isn’t already occurring. You can’t double the amount of dollars awarded under competitive contracts. It’s just not physically possible, and there’s a point at which you’ll have a level of diminishing returns from a policy point of view.”

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