Seeking Services

There are few surprises among the names atop the list of the biggest Defense contractors for fiscal 2003. Arms manufacturing giants such as Lockheed Martin Corp. and Boeing Co. lead the pack, as they have for several years, followed by information technology firms such as Computer Sciences Corp. and SAIC. But closer scrutiny shows the impact that military operations, especially the wars in Iraq and Afghanistan, are having on military spending. Halliburton Co., a services contractor, has vaulted into the top ranks of Defense firms.

"Our budget for contracted goods and services over the past five years has moved more and more toward service contracts and away from simply hard goods," said Michael Wynne, principal deputy undersecretary of Defense for acquisition and technology, at a June hearing of a House Armed Services subcommittee. "This change is the reflection of our desire to buy capabilities. When we buy capabilities, contracts that once fell under the heading of goods are now considered service contracts."

Wynne added that over the past five years, Defense has consistently spent more money on services than on equipment or supplies. Previously, purchases of goods and supplies had always exceeded spending under service contracts.

Halliburton has been the biggest beneficiary of the recent trend, attracting both dollars and controversy by winning large service contracts to assist the armed forces in rebuilding and stabilizing Iraq. The company received more than five times as much in Defense contracts in fiscal 2003 as it did the previous year. In fiscal 2002, the Texas-based firm was the 30th-ranked Pentagon contractor with $491 million in awards. In fiscal 2003, the company received more than $3 billion in contracts, putting it in Defense's top 10.

The trend toward services comes at a time when Pentagon spending on hardware has leveled off, at least temporarily. For fiscal 2005, the Bush administration proposed a $143.8 billion acquisition budget ($68.9 billion for research, development, test and evaluation and $74.9 for procurement) that is slightly smaller than the current year's $145.7 billion budget.

"The budget before you is, in a real sense, a request for the second installment of funding for the priorities set out in the president's 2004 budget request," Defense Secretary Donald Rumsfeld told the Senate Armed Services Committee in February. "We did not rebuild every program. We made changes to just 5 percent of the department's planned 2005 budget, and then only on high-interest and must-fix issues-and then only when the costs incurred to mitigate risk could be matched by savings elsewhere in the budget."

The Pentagon's budget continues to highlight military transformation, with nearly one of every five acquisition dollars ($29 billion) going toward investment in transforming military capabilities, Rumsfeld said. For example, the Pentagon wants to spend $775 million on the Transformational Communications Satellite, which will reduce the time it takes to send imagery around the battlefield from several minutes to less than a second.

Other spending priorities outlined in the Pentagon's fiscal 2005 plans include: $10.3 billion for missile defense systems; $3.2 billion for the Army's Future Combat System; $700 million for the Joint Unmanned Combat Air System; $14.1 billion for tactical aircraft such as the Joint Strike fighter, the Air Force's F-22 fighter, the Navy's F-18 fighter and the Marine Corps V-22 Osprey tilt-rotor aircraft; $11.1 billion for nine new Navy ships; and $600 million for the Joint Tactical Radio System.