How to Save on Defense: Reduce the Regulatory Bulls**t

Way back in the Stone Age — 1994 — the well-respected accounting firm Coopers and Lybrand did a study of the impact of government regulations on defense contracts. They found that DoD paid on average a regulatory cost premium of 18 percent of contract value. The regulatory “tax” for advanced technology programs was even higher. There were many factors that contributed to this burden, among them the enormous costs associated with mindless collection, retention and reporting of data down to the most minute levels, continuous program reviews, over specification in activities that, in turn, necessitated continuing corporate and government inspections, reviews and unnecessary remedial steps and specialized accounting processes.

This figure is undoubtedly higher today, given all the added regulations and reporting requirements. At a minimum, the current regulatory “tax” on defense expenditures is probably on average 20 percent.

The Department of Defense contracts for some $400 billion of equipment, parts, services and consumables. Applying a 20 percent regulatory burden factor to this annual buy of stuff produces a figure of $80 billion a year. That is the regulatory overhead burden on the defense budget. It is also an amount greater than the entire official defense budget of the United Kingdom, France, Japan or China.

If this overhead burden prevents $80 billion worth of waste, fraud or abuse annually, it would at a minimum be a wash. But there is no evidence of this. In fact, there appears to be an inverse relationship between the growth in regulations and oversight and problems with acquisition programs and DoD contracting. There has been no reduction in cost overruns, performance snafus, Nunn-McCurdy breaches and procurement/contracting scandals over the past 20 years. Acquisition programs now take two, three and even four times as long to reach fruition as they did in the era before all the regulations were imposed. What are the costs associated with stretching out programs? I bet it is a lot more than any savings that might have been realized through tighter controls over the acquisition process. It is fair to conclude that DoD is suffering from both a surfeit of regulations and continuing problems of waste, fraud and abuse.

If DoD were to seek to reduce the regulatory burden on defense contracting by 50 percent, this would produce an annual savings of $40 billion. Moreover, by cutting down on regulations, reporting requirements and oversight activity, the number of government personnel required to conduct such activities would be less, saving enormously on DoD personnel costs. Consequently, it might be possible to cut the regulatory burden by as little as 25 percent and still save approximately $40 billion with appropriate reductions in DoD manpower.

It is time to take a sharp red pencil to the volumes and volumes of regulations that burden defense programs. One way to start would be to zero base major regulatory processes, requiring that they be rejustified in light of changing circumstances. For example, if DoD is so hot on fixed price contracts, maybe it is time to get rid of all the reporting requirements and minutia of the Truth in Negotiations legislation. If Congress doesn’t want to spend more money for defense, then it should stop mandating oversight activities and imposing new reporting requirements.