HASC Panel Report Highlights Hidden Costs In Defense Acquisition System

On Monday, the House Armed Services Committee’s (HASC) Panel on Business Challenges within the Defense Industry released a report titled, not surprisingly, Challenges to Doing Business with the Department of Defense. Based on extensive hearings, discussions with experts and industry roundtables, and with extensive support from the Pentagon, the report identifies many difficulties that companies, particularly small businesses and non-traditional defense companies experience in trying to do business with the Department of Defense (DoD). The report contains very thoughtful and useful recommendations.

The Panel’s report also does something else: it highlights aspects of the current acquisition system that not only serve as barriers to entry to the defense marketplace but act as hidden costs to DoD. One area is the explosion of paperwork, reporting requirements and demands for data. The Report points out that the War Department’s original request for proposals from industry to build the first airplane was two pages and the winning response by the Wright Brothers “is noteworthy for its brevity, focusing on engineering requirements and contractor compliance.” By way of contrast, the Report provides statistics on the most recent major aircraft proposal, that for the new aerial refueling tanker. The winning proposal by Boeing was 1,233 pages long with a 70 page basic contract and 27 attachments with 1,163 additional pages. Many of these attachments addressed areas unrelated to the development and production of the aircraft. This “nuclear” explosion in reporting requirements costs both the company and the government money.

The Report also points to the massive increase in rules and regulations as a challenge for the defense industry and a hidden cost to DoD. It cites a 1994 study by Coopers and Lybrand that identified over 120 regulatory and statutory cost drivers that increase the price DoD pays for goods and services by 18 percent. The report goes on to state that “despite the many acquisition reform efforts that have taken place since that time, it is likely that costs, due to added regulations, have only increased.”

There has been a major increase in auditing and reporting requirements over the past several decades. Much of this increase has been well-intentioned, motivated by the desire of lawmakers and government officials alike to root out waste, fraud and abuse. However, there are clear costs associated with the audit and reporting process, both to the government’s side and that of the private sector companies. Decades of audits and reports have shown that the vast majority of companies are honest and that waste, fraud and abuse constitute a relatively small “tax” on defense spending. But all companies, honest or not, must pay the costs of increased audits and reporting requirements. At this point in time the costs of compliance may well outweigh the savings.

Another hidden cost is the instability in many DoD contracts. The lack of long-term contracts creates business uncertainty for contractors. In addition, it prevents the most efficient allocation of capital and the use of common practices in the commercial world such as buying in bulk and advanced purchases on long-lead items. Short contract periods and frequent recompetes also disincentivize companies from investing their own capital to improve processes or infrastructure. Finally, the government is not a smart customer. As the report states “budget uncertainty, frequent changes to the funding and quantity buy of some programs, and multiple award contracts, may all inject uncertainty into the business planning of companies seeking to work for the DoD.”

In the current budget environment, the nation can no longer afford to pay the hidden costs associated with DoD’s dysfunctional acquisition system. Today, DoD spends more than $300 billion a year on goods and services. If the Coopers and Lybrand estimate that excess regulations impose an 18 percent tax on the price DoD pays for those goods and services then it would be possible to save tens of billions of dollars annually through regulatory reform. Add to such savings the billions in lower costs associated with reducing audits and reporting requirements, using commercial best practices and better contract management and the Pentagon could meet the current requirement to cut spending by $480 billion over ten years without eliminating a single person, plane, tank or ship.