Three Steps The Pentagon Can Take To Reduce Its Future Costs

With fanfare and press releases Secretary of Defense Chuck Hagel announced his plan to streamline Pentagon staffs and produce $1 billion in savings over the next five years. It is a little difficult to be terribly impressed by actions that amount to a reduction of less than half a percent of total defense spending over this period. I should also point out that the 20 percent reduction in headquarters personnel will still leave Hagel with more “horse holders” than were in the Pentagon before 9-11.

If the Secretary wants to get serious about reducing waste and excess in the Department of Defense (DoD) there are many steps he could take. Here are three easy ones — bookkeeping practices, really — that Secretary Hagel or his new Deputy, Christine Fox, could take that would have substantial impact on the way the Pentagon does business and on the way it spends the people’s money.

One: Fix the Pentagon’s abysmal accounting practices. If I filled out my annual tax forms the way DoD does its financial reporting I would go to jail. Yet, the Pentagon is so bad at tracking its expenditures that according to the Government Accountability Office, it could not stand up to a Congressionally-mandated audit. Despite years of preparation, the Office of the Secretary of Defense and the military services have all indicated that it will take years to get in shape just to do an audit.

A recent Reuter’s story on defense accounting practices reported that the organization responsible for managing DoD’s books, the Defense Finance and Accounting Service, routinely submitted false information to the Treasury. “At the DFAS offices that handle accounting for the Army, Navy, Air Force and other defense agencies, fudging the accounts with false entries is standard operating procedure, Reuters has found. And plugging isn’t confined to DFAS. … Former military service officials say record-keeping at the operational level throughout the services is rife with made-up numbers to cover lost or missing information.”

Currently, DoD has a backlog of $500 billion in unaudited contracts. If just one percent of that number constitutes recoverable funds based on waste, fraud or mistaken payments to contactors that would save the government five times what Secretary Hagel proposes to achieve through staff reductions.

Two: Full and accurate cost accounting for work performed in government depots. As the war in Afghanistan winds down and the size of the military shrinks in response to budget cuts, there will be pressures to move more maintenance and sustainment work currently contracted out to the private sector into the public depots and air logistics centers. Before DoD takes such steps it needs to require full public depot cost accounting in a form that is comparable to the required cost accounting systems in the private sector, and there must be clear performance metrics to ensure depot cost, schedule and performance accountability. The private sector and public-private partnerships such as that supporting maintenance of the C-17 transports, have demonstrated an ability to improve workflow and save money. The problem is that the public sector institutions do not have to account for all their costs while private entities do. Hence, claims that insourcing maintenance and repair work to the public sector will save money are without foundation. Transparency of these public cost systems and the business case analysis process for making public/private comparisons also is vitally important.

Three: Expand the purchase of commercial items. The United States no longer maintains a unique military-industrial complex. An increasing fraction of the goods and services the Pentagon acquires are commercial in nature. The commercial industrial base produces these goods and services far more cheaply and, in many cases, more reliably, than what is done for military-unique items.

The Pentagon has had a policy for nearly 20 years of buying commercial items whenever it makes sense and, this is the important point, to use standard business practices when doing so. The reason for the latter requirement is that when DoD tries to impose defense-unique regulations, requirements and accounting standards on the acquisition of commercial items their price skyrockets. The same item, a ship’s generator for example, can cost three times as much when all the unique government processes and procedures are piled on top of the commercial costs.

As discussed in a recent report by the Aerospace Industries Association, DoD acquisition officials are increasingly seeking to undermine the savings from buying commercial items. Government officials are asking private companies to provide certified cost and pricing information on commercial items as if these were military-unique products. In many cases, the commercial company doesn’t even collect the required data. In other instances, DoD is demanding that commercial companies relinquish patent rights and intellectual property associated with items that were developed solely with private resources.

If Secretary Hagel and Deputy Secretary Fox were simply to maintain current commercial items definitions and implement the 1994 acquisition law as intended, they would not only avoid a protracted fight with U.S. industry but guarantee itself lower costs and improved quality for a wide range of goods and services. DoD should also try to work with industry to get the most out of acquisition of commercial items, rather than treating the private sector as an adversary.