Performance-Based Agreements: The Future of Defense Weapons Systems Support

Issue Brief

The United States military faces two related crises. First is the tightening of defense budgets, certainly as the U.S. presence in Iraq winds down, but increasingly likely regardless. Second are the growing costs of sustaining the force. Taken together, these twin crises will squeeze the military precisely at a time when it must both reset the force and modernize critical capabilities.

One solution to this problem is to seek ways of reducing the costs associated with sustainment, thereby freeing up resources to be applied to both reset and modernization. Fortunately, the Department of Defense (DoD) has begun to transform its logistics and sustainment activities in ways that promise to improve performance and save money. In particular, DoD is pressing forward, albeit not always as energetically as it might, to make Performance-Based Logistics (PBL) the centerpiece of its strategy for weapons systems support.

The goal of PBL is to achieve improvements in logistics processes that both enhance availability to the war-fighter while holding costs steady or, more positively, reducing the costs of sustainment. The idea is to buy performance outcomes and not resources, parts or even man hours of labor. Unlike a traditional fixed price contract, a Performance-Based Agreement (PBA) provides for a specified return to the contract for meeting performance targets. The contractor is required to provide the necessary resources to achieve the specified level of performance without being able to go back to the government for additional funds. This variation on traditional fixed price contracting shifts greater responsibility and risk to the contractor, but creates larger, more predictable bottom line returns through total life-cycle management and performance-based incentives.

PBL contracts have resulted in multiple benefits including significant cost savings, increased weapons availability, reduced customer wait times, and smaller logistics footprints. By leveraging the knowledge, advanced logistics and technological capabilities of the private sector while protecting and enhancing the skilled labor of the organic industrial base, a unique sustainment capability can be created which simultaneously benefits the war-fighter and controls costs.

According to a recent survey conducted by AIA of 23 Performance-Based Agreements to support various weapons systems, the average annual program cost savings was over $21 million and the average increase in availability was more than 16 percent. Fifteen of the cases examined had cost savings of around $300 million annually.

DoD should consider expanding the scope of its PBL program. The Secretary of Defense should require program managers to pursue PBAs wherever it can be shown that it will enhance performance and/or save money. PBLs should be implemented early in the acquisition cycle. Improvements need to be made to the methodologies employed by the government to assess the utility of PBAs.