You Know DoD’s In Trouble When Contractors Tell It “Hell No”

What are the signs that the U.S. military is in decline? Stalemate on the battlefield. Withdrawal from long-occupied positions in the world. A shrinking force posture. By all these indicators, the U.S. military is in trouble.

An even more telling sign is when defense contractors defy their major, sometimes primary, customer. For more than 60 years, the Department of Defense has enjoyed privileged position as the world’s largest buyer of military-related goods and services. The Pentagon is what economists call a monopsony: one buyer but many suppliers. This position had allowed DoD to write the rules and act like the proverbial 600-pound gorilla in the room. How many buyers have the power to cancel a legal contract for its own convenience? What would happen to any other purchaser who ordered 100 of something only to turn around later and tell the seller it now wanted only 80, then 50, 30 and finally that it was backing out of the whole deal? No seller would deal with such a buyer.

DoD’s “do as it pleases” position in the defense marketplace is eroding fast. In the past when the Pentagon changed its mind or cancelled a procurement, the companies often complained but in the end sucked it up. But this submissive posture is changing.

In an eye-opening Defense News article, editor Vago Muradian reports that Italy’s Alenia has informed the Pentagon that if it sells the Air Force’s 28 surplus C-27J tactical airlifters to a foreign country the company will refuse to support them. DoD had been shopping the C-27Js overseas in direct competition with the manufacturer. What makes the company’s action all the more surprising and significant is that it plans to bid on a multi-billion dollar program to provide the Air Force with its new jet trainer.

It is rare for a defense company to risk angering its customer so directly. But Alenia and its fellow companies under the Finmeccanica umbrella have been the victim of Pentagon capriciousness before. AgustaWestland was under contract to supply aircraft for the VH-71 presidential helicopter program which was canceled in 2008. Regarding the C-27J contract, the Pentagon demanded a very low price for the original firm fixed-price contract but proposed to buy 145 aircraft. Progressively, the size of the buy was reduced first to 78, then 38 and finally 21. Not only had Alenia lost money on the reduced buy but now DoD was going after the company’s international business.

DoD is about to discover that its power to define the terms in defense contracts is declining fast. Companies are increasingly pushing back and in some instances refusing to participate. As defense spending declines further DoD may well find itself having to strike more equal bargains with industry — and stick to its agreements.