Natural Versus Forced Competition For Defense Contracts

Competition has become the mantra of the Department of Defense’s (DoD) acquisition corps. The Under Secretary of Defense for Acquisition, Technology & Logistics, Mr. Frank Kendall has gone on record saying “I think that nothing, nothing, works better than competition to drive cost down.” DoD has established metrics for competition, sort of like a quota system. Many more prime contracts are being competed. The acquisition system is using more ID/IQ contracts to create the basis for competition at the task order level. The idea is to the greatest extent possible to replicate the commercial marketplace.

Unfortunately, the defense marketplace does not resemble the ideal free market where competition produces optimal market efficiency. Indeed, there are reasons to believe that the competition goals set by DoD and the policies implemented to encourage competition are not contributing to acquisition cost savings. A recent study by the Center for Strategic and Budgetary Assessments concluded that efforts to increase competition within the defense industry based on the presumption “that the defense industry operates like a normal free market is not only unlikely to improve efficiency, but have often made things worse.” There are several reasons for this. One is that the industry faces a monopsony buyer who can change the terms and conditions for a contract at will. The financial risks associated with being in the defense sector are high. Second, the specialized products the military requires have virtually no commercial counterparts meaning that they are high cost with a relatively low demand. Third, the barriers to entry are very high. There are massive numbers of regulations and specifications that apply to all defense work. In addition, defense companies have to abide by a different accounting system than that used by commercial firms.

In order to meet arbitrarily set targets for the number of competitive contracts awarded, the Pentagon acquisition staff is shortening the period of performance on many maintenance and logistics contracts, often to as little as one year. This is the case even for contracts involving high technology, capital intensive services and equipment. Such short contracts result in significantly increased overhead cost, create an environment in which permanent proposal activities interfere with performance, and may actually discourage some entrants from bidding on contracts where an incumbent is present. Also, short contract periods eliminate any incentive for private companies to invest in durability and performance improvements since such investments cannot be recovered during the period of the contract.

Moreover, the drive for more competition is restricted to the private portion of the defense industry. The public portion of the defense industrial base has a protected status. It is guaranteed 50 percent of all depot maintenance dollars. The public installations do not have to compete either against one another nor, in most cases, with the private sector for non-restricted workload. This despite evidence that competition between the public and private sectors yield savings approaching 30 percent. (Reference Note 20.)

The capitalist economic system is based on competition and the free flow of ideas, information and resources. Unfortunately, the defense sector is really a state monopoly and should be treated as such. There are approaches to improving performance and reducing costs such as performance-based contracts. But to pretend that this sector can be a mirror of the commercial marketplace is wrong and ultimately counterproductive to the goals of reducing costs for defense goods.