Contractors brace for coming defense cuts

As the Pentagon readies a fiscal 2013 budget expected to map out $487 billion in cuts over the next 10 years, many contractors already are bracing for a new climate of austerity, but they are heartened by the Obama administration's pledge to preserve America's industrial base.

At the Pentagon on Thursday with President Obama, Defense Secretary Leon Panetta and Deputy Secretary Ashton B. Carter stressed the need for innovation and scientific progress. Both touched on the importance of innovation, maintaining the industrial base, and fostering science and technology.

"As we reduce the overall defense budget, we will protect our investments in special operations forces, new technologies like [intelligence, surveillance and reconnaissance] and unmanned systems, space and cyberspace capabilities, and our capacity to quickly mobilize," Panetta said.

Carter said, "this guidance tells us to preserve investment, and even in some cases to increase our capabilities in key areas that are clearly important to the future -- special forces in counterterrorism, countering weapons of mass destruction, building partner capacity, cyber, and aspects of our science and technology investments -- making sure that we don't simply revert to yesterday's pre-9/11 force structure under the pressure of budget cuts."

He offered assurance that the Defense Department does not "eat the seed corn" by making cuts that are irreversible. "As we make program changes, we want to make sure that 10 years, 15 years from now, we still have an industrial base that supports our key weapon systems even if we're not able to buy in those areas at the rates or in the volume that we had planned before we were handed this $487 billion cut."

The Professional Services Council, a contractors trade group, issued a statement applauding the administration for recognizing that a "strong, flexible and resilient industrial base is integral to ensuring future readiness and mission success." But the council warned against "arbitrary cuts" to contracts, programs and personnel.

"Clearly, the planned reductions will have an impact on both the military and the industry. Those impacts could be exacerbated if the department does not pay close attention to how it can best capitalize on the capabilities of the private sector," said PSC President and Chief Executive Officer Stan Soloway. "It is therefore more important than ever that the department buy smart and ensure it genuinely incentivizes and rewards performance and innovation rather than simply buying at the lowest price."

The Aerospace Industries Association also was encouraged by the Pentagon's approach, saying in a statement that officials "recognized the importance of a strong industrial base" and for planning reductions based on "a new national defense strategy … rather than simply lower numbers across-the-board."

Richard Rector, a partner with DLA Piper who runs the law firm's contracting practice, told Government Executive he expects "contractors' work and the legal work to track the decline in spending, and that companies will be less willing to accept a loss on a key programs as the pie shrinks and there are fewer large programs."

During the previous defense spending downturn, in the mid-1990s, the number of bid protests went down commensurately, he said, but companies today are apt to be "less sanguine about accepting a loss when profitability and margins are thin, and more likely to fight over things that at other times they would let slide." That might mean more bid protests and more claims against agency contract officers for changing the scope of contract work, he added.

The American Federation of Government Employees urged the Pentagon "to take a balanced approach to spending reductions that subjects private contractors to the same cost-cutting scrutiny that has already been placed upon the civilian workforce," AFGE President John Gage said in a statement.

"Tens of thousands of civilian jobs are slated for elimination, despite strong evidence that having civilians perform these jobs is the most cost-effective strategy," he said. "Meanwhile, the department continues to increase spending on contractors, even though they are more costly and less accountable."

The nonprofit Project on Government Oversight criticized both Defense officials and an advance story about the Pentagon review in The New York Times for failing to address possible savings through decreased reliance on contractors. "Beyond the secretary's failure to provide specifics on how he's going to achieve his budget savings, it was what he didn't say that left us flabbergasted," POGO Executive Director Danielle Brian said in a statement. "Not once did he mention the need to take a serious look at the more than $200 billion the Pentagon spends each year on outside service contractors."

Brian said her group's research shows the Pentagon spends more on service contractors than on its uniformed military and civilian employees combined, and that contractors, on average, bill the government "nearly twice as much as it would have cost federal employees to do the same jobs."

Defense budget analysts Barry Watts and Todd Harrison of the Center for Strategic and Budgetary Assessments wrote a December 2011 op-ed in Politico underlining the importance of contractors in maintaining the industrial base and the need for a long-term Pentagon strategy that sets priorities for critical capabilities.

"For-profit companies, defense firms cannot afford to maintain a broad range of weapon design and production capabilities if there is no funding," they warned. "In 1997, for example, the British navy wanted to develop a new class of nuclear attack submarine, only to find that the British defense industrial base no longer had the necessary design or production skills. Fortunately, the Royal Navy could turn to a U.S. firm for the lost expertise. But if the Pentagon finds itself in a similar situation, to whom would it turn?"