Category Archives: Us Economy

Federal Contractors Seek Edge in Specialized Services

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“In the cutthroat world of government services contracting, the lowest bid generally wins the project.
That trend has driven a cadre of technically specialized firms to reposition themselves in the market so they can compete less on price and more on the value of particular skills and knowledge. 
This shift is especially apparent in sectors like defense, space and intelligence that depend on contractors for highly complex missions. Companies that have the technical expertise are carving out niches where they can dominate and be less vulnerable to price wars. 
Lynn Dugle, CEO of government services contractor Engility Inc., said the company has been moving in that direction for the past couple of years, and the plan going forward is to focus more acutely on projects that are awarded based on “best value.”
“We are positioning our defense business to be more like our space and intelligence businesses, where we can differentiate the work we do in higher end services and engineering,” Dugle told National Defense. 
Dugle is finishing up her first year as CEO of $2.1 billion Engility. The company was spun off nearly five years ago from top defense contractor L-3. In 2015 it acquired the services contractor TASC and doubled its size.
Engility initially sought to compete in broader categories of federal support services that are awarded to the lowest bidder in so called “lowest price technically acceptable” contracting. Over the past eight months, only 5 percent of Engility’s bids have been for LPTA contracts, Dugle said. Now almost all the company’s proposals are “best value.”
LPTA is widely despised by companies in the defense industry and viewed as a race to the bottom. There is now a growing consensus that LPTA contracting works for nontechnical services like maintaining government facilities or staffing mess halls. Dugle has seen the Defense Department walk back from LPTA for engineering support and other “mission support.” Defense agencies frequently found that companies selected based on LPTA were technically unqualified.
“The market has shifted,” Dugle said. “Customers got burned on those higher end contracts with LPTA. Competitors bid really low and then they couldn’t staff the jobs.”
Engility is moving to hire specialized talent to shore up its defense expertise. “We are close to naming a senior VP for defense,” she said. “We need a certain percentage of our leadership to have operated and been successful at pursuing big programs, and at best value proposal writing. That’s a different skill than competing on price for smaller projects.”
The shift to higher end services appears to paying off. Engility reported an $11 million loss in 2016, but that was an improvement over $235 million of red ink in 2015. The numbers are “encouraging,” said Dugle. “Four contracts we won were over $200 million. That requires getting the right people with the right experience.” Engility has submitted at least 10 bids worth over $100 million that are still in source selection.
“We want to be primes in large jobs,” said Dugle. The company’s government work today is 40 percent defense. Dugle predicts that share will increase. “The market itself in DoD continues to get more attractive,” she said. 
Like other industry executives, Dugle is bullish but cautious about the anticipated spending boost to defense and veterans programs projected by the Trump administration. Even if the increase materializes, every agency in the federal government including the Defense Department will be squeezed. A new Trump executive order requires agencies to conduct a “thorough examination” of its operations and to recommend “where money can be saved and services improved,” White House Press Secretary Sean Spicer told reporters. That could result in layoffs of government workers but also in cutbacks in the use of contractors.
The message for contractors is that “we have to be prepared to respond,” said Dugle. “We do a lot of thinking about scenarios and how we can be prepared. Services is always a challenging business. It’s not a technology play, it’s a people business.”
Dugle is especially optimistic about the possible privatization of parts of the Federal Aviation Administration. “We just won the largest contract with the FAA, the largest we’ve ever won, to help them modernize their systems.”
Trump’s budget has been widely rejected on Capitol Hill and many specifics remain unknown so Engility, like other defense firms, has been conservative in its future earnings and sales guidance to Wall Street. “It’s premature until we know the program details of the FY18 budget,” she said. “We believe we are more advantaged than disadvantaged in a Trump administration but we did not want to put that in a plan.”
The industry also will be watching congressional action led by House Armed Services Committee Chairman Rep. Mac Thornberry, R-Texas. The committee is drafting a procurement reform bill to accompany the 2018 national defense authorization act. On the list of Thornberry’s targets are services contracts. 
The 2017 NDAA sets limits to the use of LPTA in defense procurements. Thornberry has pushed Pentagon officials over the years to more precisely articulate the military’s needs for contracted services and how services vendors are selected.
“One of the big challenges is the definition of requirements,” Dugle said. That is partly the reason DoD has had to re-evaluate its use of LPTA contracts, she noted. “If you just write a requirement that you need five people with 10 years of experience with a particular degree, that is when people default to price.” Conversely, the government could make the requirement to accomplish a desired mission, and leave it up to the bidders to decide how to staff the job. “If you are relying on systems engineering, you have to write good requirements.” 

We Need to Audit the Pentagon




“In 1994 Congress passed legislation requiring every federal agency to be auditable.

Since then every agency has complied—except for the Department of Defense.

“We have known for many years that the Department’s business practices are archaic and wasteful, and its inability to pass a clean audit is a longstanding travesty,” Chairs John McCain (R-AZ) and Mac Thornberry (R-TX) of the Senate and House Armed Services Committees said recently in a joint statement. “The reason these problems persist is simple: a failure of leadership and a lack of accountability.”

The Department’s… inability to pass a clean audit is a longstanding travesty

Increasing Pentagon spending under these circumstances is the opposite of fiscal responsibility. In fact, giving the Pentagon $54 billion and finding out why later is bad budgeting.

Both the Republican and Democratic party platforms included the need to audit the Pentagon, and Congress should resist calls to give more money to an agency they know to be irresponsible with taxpayer dollars.

You can learn more about the seemingly endless saga surrounding the Pentagon’s utter failure to get a clean audit opinion here.”






Innovating Federal Contracting: Be Careful What You Wish For

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“FEDERAL TIMES” By Michael P. Fischetti

“We’re all aware of — and perhaps have participated in — the criticism of today’s model of contracting with the federal government.

However, when  change is forthcoming, criticism and second-guessing is swift in response and often before the results of such innovation are yet known.

Recent examples include lowest price technically acceptable selection strategies, transactional data reporting or other transaction authority. All of these initiatives have resulted in constituencies warning, criticizing or outright objecting to their use for numerous reasons. The mantra “damned if you do; damned if you don’t” comes to mind.

So what’s the contracting officer or program manager to do? Everyone wants innovation in acquisition, but not really? Take risks, but make sure everything works out well? Leadership has your back, as long as [insert favorite oversight authority or trade association here] is supportive. Buy more commercial, but make sure [insert favorite administration, agency, industry priority, or compliance and socioeconomic statutory and regulatory requirements here] is adhered to and included.

Under a new administration, there is a sense of unpredictability. Everything is on the table across multiple government policy areas — acquisition included. Thus, along with optimism that true “reform” could actually occur, there is conversely fear as well that, yes, true “reform” might actually occur! Perhaps the many subsets of today’s government contracting community should be cautious and prudent in criticism of today’s acquisition system, and thus be careful of what they ask for. One is reminded of the line from Charles Dickens’ “A Tale of Two Cities”:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness … [I]t was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”

The credibility of today’s professional pundits and promoters of acquisition change is under threat. What if change really occurs? What if the innovation we all say we want actually happens? While there will always be individual winners and losers in such a scenario, one winner might be empowering those innovative acquisition professionals in government and industry interested in program results; those invested in improving what is acquired versus how it’s acquired. Another winner might be the American taxpayer.

Time will tell. Hang on to your seats and let’s see what happens. ”


Michael P. Fischetti is the Executive Director of the National Contract Management Association.









Explaining the Foreign Lobbying Revolving Door



“Former government employees doing any kind of work for foreign clients should be held to a higher level of accountability, as they could be putting foreign interests and goals first, regardless of how it may affect US citizens.

To increase accountability of government employees who pass through the revolving door to lobby for foreign clients, we need more transparency.

POGO Investigator Lydia Dennett explains the loopholes in the Foreign Agents Registration Act (FARA) and the Lobbying Disclosure Act (LDA) that could allow lobbying agents with foreign clients to get around President Trump’s foreign lobbying ban. When President Trump issued his Ethics Executive Order, Dennett wrote:

“By restricting this lobbying ban only to those who would go on to register under FARA, several other areas where administration officials could trade on their public experience for the benefit of foreign companies and governments are left out. The full extent of foreign influence will remain in the dark.

If President Trump truly wants to drain the swamp he must work toward closing the loopholes between FARA and the LDA and encourage Congress to initiate its own effort to stop the revolving door between those in Congress and foreign lobbying firms.”

Read Dennett’s full explanation of the foreign lobbying revolving door and President Trump’s Ethics Executive Order here.

By: Iulia Gheorghiu
Beth Daley Impact Fellow, POGO

Photo of Iulia Gheorghiu Iulia is the Beth Daley Impact fellow at the Project On Government Oversight.”

Budget Control Act and the Pentagon – The Elephant in the Room

Elephant in the Room.png



“The Elephant in the room is the Budget Control Act [BCA] that imposes strict limits to federal discretionary spending.

Mattis’ budget guidance goes out the window if the BCA is not repealed.

Defense pundits and industry watchers were surprised this week when the Pentagon released extensive new “budget guidance” from Secretary James Mattis that spells out the process for how the Pentagon will justify its upcoming funding request to Congress. The proposed budgets will seek to plug immediate funding holes but also set in motion the military buildup that President Trump promised.

Photo: Defense Secretary Jim Mattis meets with the Joint Chiefs of Staff at the Pentagon (DEFENSE DEPARTMENT)

“It’s our hope and intent that we can operate in a budget environment outside of sequestration,” said Defense Department spokesman Navy Capt. Jeff Davis. “We’ll continue to work these budget submissions very closely with the Office of Management and Budget.”

Mattis has held private discussions with members of Congress on the issue but Davis would not comment on whether the secretary is confident that the BCA caps will be lifted any time soon.

The restrictions in the Budget Control Act are in effect until fiscal year 2021. “We have not seen any plan to lift or strike the BCA and foresee difficulty getting a major hike through fiscal conservatives and Senate Democrats,” noted industry analyst Roman Schweizer, of Cowen Washington Research Group. “OMB’s budget blueprint is expected this month and the reaction to it will be the first indicators of likelihood.”

It is noteworthy that the Pentagon is putting out documents on its budget “sausage-making” when there are no top-line targets yet from OMB, Schweizer observed.

Davis said Mattis intends to build the budget request from the ground up, based on legitimate needs rather than artificial targets. “We don’t just pick a number and fill it in with capabilities,” he said. “We’ll come up with very real capabilities we need to restore readiness and balance programs. Then we’ll work to get the appropriate price tag for it.”

This will not be a free-for-all, Davis said. “Secretary Mattis has said he wants to be a faithful steward and get maximum value for the taxpayer dollar. That’s what this process is designed to do.”

According to the three-phase plan, the Pentagon will request by March 1 an emergency budget amendment for fiscal year 2017 to fund immediate needs like precision-guided munitions and pilot flying hours. The fiscal year 2018 budget proposal due May 1 would seek longer-term investments to increase the size and capability of U.S. forces. The foundation for the 2019-2023 five-year budget would be a new National Defense Strategy that the Pentagon is now drafting. The Trump administration also has ordered a nuclear posture review and a missile defense review, both of which could add significant new expenditures.

The Pentagon’s budget not only faces huge political and fiscal pressures but also practical constraints such as a narrow window of time on the congressional calendar.

“There is lots to do, and not much time,” said Bloomberg Government analyst Rob Levinson. A deadline to increase the national debt limit looms March 16. Federal funding for fiscal year 2017 runs out April 28, when the current continuing resolution expires and action will be needed to prevent a government shutdown.

There are larger variables at play, too, Levinson said during a Bloomberg webinar. “Trade-off decisions could be affected by changes in relations with Russia,” he said. The Pentagon’s ambitious “third offset” strategy is predicated on the need to counter rising powers like China and Russia. “Trump appears to feel differently about Russia than many in Washington, but is concerned about China, which could steer more money to the Navy and Air Force at the expense of the Army.”

Trump, like every president, will be forced to make tradeoffs between spending plans, tax cuts and deficits, said Levinson. “A most likely outcome is increases — not necessarily equal — for defense and domestic spending with resulting deficit growth. No faction will get everything they want: not the fiscal hawks, defense hawks, Democrats or the president.”

Congressional Vote to Gut Anti-Corruption Law


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“POGO Executive Director Danielle Brian said:

“By gutting this anti-corruption rule, lawmakers have showed us they have no guts.

Without the rule, taxpayers will remain the dark, which is where the companies want to keep us. We have no idea right now how much, if any, the industry is paying in taxes. The Cardin-Lugar rule would’ve opened their books to public scrutiny.

The claim that Cardin-Lugar would damage the ability of American companies to be globally competitive was always bogus – as international companies are already subject to similar rules. Rather, it’s about keeping vital information away from the public, lest we find out, for example, that the US government isn’t receiving its fair share of taxes from natural resources extracted from public lands.”

The Project On Government Oversight (POGO) emphatically condemns Congress’ vote to eliminate an important anti-corruption measure critical to ensuring American taxpayers can hold the government accountable for its dealings with the oil, gas, and mining industries.

The rule, known as the Cardin-Lugar provision, or Section 1504 of the Dodd-Frank Act, required oil, gas, and mining companies listed on US stock exchanges to disclose the royalties and taxes they pay to the US and foreign governments in order to extract natural resources, including those that are publicly owned.  This protected U.S. national security and energy security interests by preventing secrecy and government abuse abroad.

Since the 1990s, POGO’s investigations into the federal government’s oversight of the oil, gas, and mining industries have uncovered widespread corruption and ethics violations that allowed the extractive industries to cheat billions of dollars of potential income from U.S. taxpayers.

The Cardin-Lugar provision is widely supported by investors, citizens, lawmakers from both sides of the aisle, and governments around the world. It is a key element of the Extractive Industries Transparency Initiative (EITI), a global transparency standard in which the US participates. Companies operating in the European Union (EU) are also required by law to make similar disclosures.”

Turbulent Times for Civilian Defense Workers




“Per congressional mandate, performance will be used as the “primary retention factor.”

This marks a dramatic departure from current provisions that base retention on tenure, veteran’s preference, length of service and performance, in descending order.

Civilian employees of the Defense Department are starting to come to terms with a new reality. Significant new policies — some initiated by the Trump administration and others by Congress — are being put in place and rattling the status quo.

In a major policy shift, the Pentagon on Jan. 26 unveiled a new process for deciding who gets laid off when “reductions in force” are required.

The new process was signed into law in the 2016 National Defense Authorization Act, and affects the entire cadre of defense civilians, or about 750,000 employees. The intent was to prevent the Pentagon from letting go high-performing workers in across-the-board downsizing drills.

The overhaul in RIF procedures was announced just three days after President Donald Trump signed an executive order that freezes federal hiring across the entire U.S. government, setting off concerns within the Pentagon and across the federal workforce about what all this bodes for the future.

Defense Department spokesman Capt. Jeff Davis said the new policy that protects the most valuable people from the budget axe should not be read as an omen of impending layoffs. “These are changes in response to the 2016 NDAA,” Davis said. “To be clear, RIFs happen all the time, at the local levels, at the installation levels, at individual commands.” All this new policy does is change the process for how senior leaders go about determining who gets cut when reductions must be done. “Our civilian workforce is one of our most important assets,” said Davis. “There are, unfortunately, times when the department must make difficult decisions, and in doing so it’s imperative that we continue to execute our national security missions.”

The law requires that when reductions must happen, the determination of employee terminations be made primarily on the basis of performance. The NDAA also extends the “probationary period” before civilians are hired to two years and allows military departments to extend probationary periods. This allows managers more time to assess new hires and extends by one year their authority to fire poorly performing employees.

Seeking to ease anxiety, the Pentagon stated it will “continue to consider every reasonable action to mitigate the size of reductions, including the use of voluntary early retirement authority or voluntary separation incentive payment, hiring freezes, termination of temporary appointments, and any other pre-RIF placement options.”

Trump’s Jan. 23 executive order, meanwhile, mandates a hiring freeze for federal agencies as the administration considers options for downsizing the workforce over the long term. The policy bans all executive branch agencies from filling vacant positions as of Jan. 22, 2017. Military personnel are exempted. Some exceptions could be made for civilians, however. “The head of any executive department or agency may exempt from the hiring freeze any positions that it deems necessary to meet national security or public safety responsibilities.” The director of the Office of Personnel Management also could grant exemptions in special cases.

The Office of Management and Budget and OPM were given 90 days to draw up plans to shrink the federal workforce through attrition.

These personnel moves by the administration have drawn stern rebukes from members of Congress, federal employee unions and others who worry about the ramifications of a draconian hiring freeze on agency morale and ability to fulfill their missions.

Advocates of defense reform for years have called specifically on the Pentagon to rebalance its civilian bureaucracy and free up resources to shore up military personnel. The defense workforce is “bloated in some areas yet stretched thin in others,” said national security analyst Mackenzie Eaglen, in an April report by the American Enterprise Institute. Rather than “whack-a-mole” cuts, the Defense Department should take a holistic look at its civilian talent, and reallocate resources, Eaglen suggested. “While federal defense civilians form the backbone of the Pentagon’s day-to-day operations, an unnecessarily large civilian workforce is detracting from the Pentagon’s raison d’être: the production and employment of hard combat power in the service of deterring and winning wars.”

Civilians should be “realigned with care,” Eaglen noted. “Hiring freezes and across-the-board reductions at headquarters and agencies, such as the effort announced in March 2016, simply give the appearance of action while lowering morale.”

One of the biggest impediments to “right-sizing” the defense civilian workforce,” she said, is the unwillingness of Congress to authorize a new round of base closures. The Air Force and Army estimate that they currently carry 32 percent and 33 percent excess infrastructure, respectively. Without a new base closure round, it will remain difficult to downsize the workforce.”

Pentagon Playing Key Role in Reshaping U.S. Industrial Future


Photo: 3D Manufacturing – US Marine Corps


“Federal agencies led by the Defense Department have been quietly laying the foundation for a high-tech manufacturing surge.

The Pentagon, notably, has been assembling a large network of government, private-sector and academic players in a bid to secure access to critical technologies the military needs, while also trying to motivate corporations to invest in advanced manufacturing research.

The Defense Department last week announced it awarded a contract to American Robotics Inc., based in Pittsburgh, Pennsylvania, to manage the “Advanced Robotics Manufacturing,” or ARM Institute, the eighth DoD-led hub that becomes the 14th member of the “Manufacturing USA” network.

Defense officials and industry analysts have hailed this business model because it spreads the financial burdens across many players and puts both the government and the private sector in a position to win big, if projects end up developing successful products that can be commercialized.

American Robotics — a consortium of state and local governments, industry, universities, community colleges and non-profit organizations from across the country — contributed $173 million to the ARM Institute. That will be combined with $80 million in federal funding.

The Pentagon is showing growing interest in these public-private partnerships at a time when it fears the U.S. military is seeing its technological edge slipping, and worries that private-sector innovations are moving far too rapidly for the government procurement bureaucracy to keep pace.

The ARM Institute will “organize the current fragmented domestic capabilities in manufacturing robotics technology and better position the United States, relative to global competition,” said a Pentagon news release.

The goal is to promote a democratization of sorts in the industry so manufacturing robots becomes less expensive and more accessible even to small businesses. “The use of robotics is already present in manufacturing environments, but today’s robots are typically expensive, singularly purposed, challenging to reprogram, and require isolation from humans for safety.” Robotic systems are viewed as essential to “achieve the level of precision required for defense and other industrial manufacturing needs, but the capital cost and complexity of use often limits small to mid-size manufacturers from utilizing the technology.”

The Pentagon for years has made it known that low-cost, multifunctional autonomous systems are at the top of its wish list. The manufacturing hubs are one vehicle to make that vision a reality.

The ARM consortium is one of the largest, with 123 industry participants, 40 members from academia and 64 government and nonprofit partners. The group will be directed to “create and then deploy robotic technology by integrating the diverse collection of industry practices and institutional knowledge across many disciplines — sensor technologies, software and artificial intelligence, materials science, human and machine behavior modeling and quality assurance.”

The Manufacturing USA network started out three years ago, when Congress authorized it in the Revitalize American Manufacturing and Innovation Act of 2014. The program was previously known as the National Network for Manufacturing Innovation. The legislation was passed with bipartisan cooperation and has drawn praise from politicians for supporting small and mid-sized manufacturers, and for creating venues to train the next generation of manufacturing workers.

Each Manufacturing USA institute focuses on a technology area, such as additive manufacturing, integrated photonics or smart sensors. The federal government has committed over $1 billion, matched by more than $2 billion in non-federal investment. The Pentagon noted that the hub in Youngstown, Ohio, attracted over $90 million in new manufacturing investments and is poised to train 14,000 workers in the fundamentals of 3D printing.

In a move aimed at building awareness and shoring up support for manufacturing consortiums, the Pentagon funded an independent study that looked at the overall performance of Manufacturing USA.

The study, conducted by the consulting firm Deloitte and released last week, reported that the first eight advanced manufacturing institutes were able to bring together 1,200 companies, universities and government agencies. The value of these massive networks is that they can help to “accelerate innovation,” the Deloitte study said. Over time, these centers would be the launch pads for the future technically trained manufacturing workforce and for a “sustainable national manufacturing research infrastructure.”

The first eight Manufacturing USA institutes were established by the Department of Defense or Department of Energy. There are early signs that the organizations are reaching “tipping points” where the benefits for both the government and the private sector are self-evident, the study said.

The private-sector members include influential U.S. companies such as Boeing, GE, Johnson & Johnson, Lockheed Martin and Ford. The study found that the institutes have created “true public-private partnerships that are successfully uniting academia, industry and government across the country.”

Deloitte analysts noted that Manufacturing USA addresses the so-called “valley of death” between research and commercialization, a problem that has plagued defense technology for decades. “By breaking down market barriers in the right technological areas, the program facilitates the acceleration of U.S. manufacturing R&D.” The institutes also focus on ensuring that there are enough workers with the right skills to meet the needs of advanced manufacturers.

The study compliments the program too for helping entrepreneurs and small businesses by providing access to expensive equipment, pooling project costs, creating technology roadmaps and promoting knowledge exchange.

One project at the Digital Manufacturing and Design Innovation Institute, in Chicago, linked researchers from the Rochester Institute of Technology and several businesses that were seeking to commercialize wearable technologies. At the Power America advanced electronics institute in North Carolina, a member company called AgileSwitch applied a newly patented switching technique for use in high-power silicon carbide applications. The technology has applications in solar and wind turbine energy, and electric vehicles.

The Defense Department believes it has a huge stake in the success of these ventures as the Pentagon continues its pursuit of low-cost systems such as drones and surveillance sensors. One plan, for instance, is to deploy swarms of minidrones to overwhelm enemy forces and weapon systems. That will require systems that cost a fraction of current products, so they can be deployed in large numbers and used as disposable gear. Buzzwords like “distributed, persistent sensor networks” have been used to describe that vision.

Deloitte warns that Manufacturing USA should increase collaboration with the Pentagon’s own labs and avoid overlapping efforts. “Manufacturing USA was designed, in part, to complement the national labs and propel their work through the manufacturing innovation process,” the study said. “In practice, however, by focusing institute efforts on technology development, the program risks creating non-strategic overlap with these peer entities.”



Outgoing Weapons Chief : “Acquisition Improvement Must Come From Within”



Frank Kendall, Under Secretary of Defense for Acquisition, Technology and Logistics


“The Pentagon’s outgoing acquisition chief slammed Congress for recent efforts to improve the weapons buying process.

“What it does do, almost inevitably is create more bureaucracy. Because everything it gets put in statute, we have to implement to demonstrate compliance, and that adds and adds and adds to the body of regulation that is a burden to our acquisition system.”

Lawmakers on Capitol Hill have only “imperfect tools” to improve defense acquisition, said Frank Kendall, under secretary of defense for acquisition, technology and logistics, during a Tuesday speech at the Center for Strategic and International Studies. Congress can overhaul organizational structures and set very firm regulations on how the Defense Department operates, but ultimately those actions can be counterproductive.

In a wide ranging speech that drew from his new 228-page book, “ Getting Defense Acquisition Right,” Kendall shared anecdotes about his career in the Pentagon and made the case that incremental changes would serve the procurement process better than sweeping change.

“Acquisition improvement is going to have to come from within. It is not going to be engineered by Hill staffers writing laws for us. It’s going to be done by people in the trenches, everyday, dealing with industry, trying to get the incentives right, trying to get the performance right, trying to set up business deals and enforce them, set reasonable requirements in our contracts [and] do all the hundreds of things that are necessary to get good results,” he said.

The department’s procurement wing is on the right track, and “we should be reinforcing” good practices, he said. For instance, data shows that cost overruns have been coming down “significantly” over the last couple of years, in part because program managers feel empowered to do the “right thing” for the program instead of simply adhering to regulations.

That flexibility is important in many areas of contracting, Kendall said, pointing to his fight with Congress over fixed price contracts. Although many lawmakers favor fixed-price contracts that shift risk to industry, data gathered over the past few years shows that fixed-price and cost-plus contracts seem to generate the same amount of cost growth.

“The idea that fixed price is the solution to our problems. It was tried. It was tried and it failed. One of my frustrations having been in this business for so long is that we don’t seem to learn from the past,” he said. “I spent a few years in the Pentagon in the late ’80s, early ’90s cleaning up the messes that fixed price development caused across the department.”

Kendall offered a couple suggestions on how Congress could help the acquisition process. For one, it could make it easier for the department to recruit and retain skilled personnel and compensate them fairly.

The Pentagon also needs more money for research and development. Over the past few budgets, the department has invested in a number of demonstration programs that prove out innovative and cutting edge technologies, but it doesn’t have the budget to turn them into procurement programs.

“We have, I’m afraid, conveyed the impression, unintentionally, that lack of innovation is our problem, and that more innovation is the solution to our problems. I don’t believe that. We actually have quite a bit of innovation. What we haven’t had is the money to take that innovation and translate it into products,” he said.

There are signals that the Trump administration could funnel more money into the Defense Department, something that Kendall said “wouldn’t be a bad thing.” However, some of that money needs to flow into modernization programs.

Although much of Kendall’s comments focused on how congressional meddling negatively impacts defense acquisition, he offered some sharp criticisms of Pentagon policy as well.

So far, the department’s Third Offset effort has funded a series of demonstrations, with artificial intelligence and autonomy being seen as two of the key enabling technologies. However, officials do not have a clear vision of the capabilities needed or how they can be used to revolutionize warfare.

“We’re doing a lot of experimentation,” Kendall said. “But we do not yet have the clear design concept … for a new suite of capabilities that will be dramatically better on the battlefield.”

Requirements development could also be improved by doing more analysis to ensure that what is being asked for will actually make a difference to the warfighter, he said.”

America’s Military Has a Big Problem: It’s Dead Broke




“The Pentagon has made big plans for which it lacks the money.

DoD has breathtaking liabilities—as much as $88 billion a year—that ought to be addressed before procuring a single additional plane, ship or tank.

“We’re broke.” In essence, that’s the message Deputy Secretary of Defense Bob Work delivered to Defense-Secretary-in-Waiting James Mattis at the December 5 Future Strategy Forum.

Military leaders have testified to the problems caused by five straight years of budget cuts and how these cuts, combined with an extraordinarily high operational tempo, have resulted in a smaller, less capable military force.

What has received less attention is the degree to which the Pentagon’s future plans bank on questionable assumptions and budgetary sleight-of-hand to balance the books for 2018 and beyond. These gimmicks include: relying on rosy future estimates for the cost of labor, fuel and currency exchange; pushing the costs of large modernization programs like the nuclear triad into the ill-defined “out years,” and using Overseas Contingency Operations funds to help cover normal DoD operating costs. Taken together, these liabilities, combined with the administration’s decision to submit budgets in excess of the Budget Control Act caps, constitute about $100 billion dollars per year of unbudgeted liabilities or risk—a staggering sum that will severely limit the new administration’s ability to quickly rebuild the U.S. military.

In October 2016 a Pentagon spokesman publicly acknowledged, and Secretary Work confirmed, what many have known for some time: that as much as half of the money requested in the DoD Overseas Contingency Operations (OCO) funding is planned to go to normal Pentagon operations such as training soldiers, steaming ships or flying planes—not the extraordinary wartime operations which OCO was designed to cover.

The President-elect’s nominee to head the Office of Management and Budget, Rep. Mick Mulvaney, (R-SC), has decried such misuse of OCO funds, calling it a “backdoor loophole” in the budget process. Considering that comment, if Congress and the country want DoD’s normal operating costs captured in the appropriations process versus the wartime funding mechanism, this $30 billion annual cost must be eventually covered in the base budget, further adding to DoD’s liabilities. And while it may be a worthy goal to move these enduring costs into the base appropriation it’s important to note that this shift by itself won’t do anything to restore military capabilities.

Here are some other liabilities Secretary Work didn’t mention:

Future Costs of Labor

Section 1009 of Title 37 United States Code requires military pay raises to equal the Economic Cost Index (ECI), a common measure of the cost of labor, unless the president invokes his authority to request an alternative pay raise. The Congressional Budget Office estimated in August that “the ECI will grow by more than 3 percent a year, on average over the next several years.” However, in its budget request, DoD has planned on much smaller raises than CBO forecasted. The 2017 DoD budget projects pay raises of only 1.6 percent for 2017-2019, and 1.8 percent and 2.1 percent for 2020 and 2021, respectively.

From 2014-2016 President Obama used his authority to lower the requested pay raises, and Congress complied. After three years of smaller than prescribed pay raises, this year Congress disregarded the president’s recommendation and set the pay raise at 2.1 percent in the 2017 NDAA, matching the growth in ECI.

Because the DoD has banked on being able to lowball military and civilian pay raises for the next five years, the liability incurred by Congress’ inconvenient compliance with law this year, and potentially in the future, will run to the tens of billions of dollars. Just next year’s change in pay will cost DoD about $800 million in 2017 than planned.

Hopeful Fuel Cost Assumptions

The DoD budget estimate projects that fuel costs for fiscal year 2017 will drop 8.2 percent from 2016. For future years, DoD used planning assumptions that reflected minor increases ranging from 4.8 percent in 2018 to only 1.8 percent in 2021.

However, the latest forecast from the U.S. Energy Information Administration predicts crude oil prices will gradually rise, not fall, next year. And future year energy estimates vary widely, with high end price per barrel of crude oil reaching $150 by 2020. If energy costs grow at even a modest rate of 5 percent annually, the Pentagon will be short billions of dollars compared to its plan.

Living Large In an “Out-year”

Former Secretary of the Army John McHugh famously commented that he always wanted to “live in an out-year.” In Pentagonese, “out-years” fall outside the rigid five-year planning window; they are, consequently, years in which unrealistic procurement plans magically come to fruition and normal budget rules don’t apply.

DoD is notorious for planning to acquire major systems such as planes, submarines and ships in quantities that are patently unaffordable in the next five years, but will be brought on-board when the money somehow materializes in an “out-year.”

This Pentagon has double-downed on that technique. In addition to the unpaid bills associated with the recapitalization of the nuclear triad mentioned by Secretary Work, the replacement for the Ohio class submarine and many other major systems are also all awaiting an out-year deus ex machina to save the day.

For example, the Navy’s current, approved 30-year shipbuilding program only gets them to 308 ships—even though they just announced they need 355, nearly matching the president-elect’s promise to get to 350 ships. Yet when the Congressional Budget Office analyzed the Navy’s 308-ship plan, they found it would cost $3-5 billion dollars more per year than what was budgeted.

In an excellent study of the out-year issue, CSIS’s Todd Harrison suggested that just to execute the DoD’s planned modernization programs would require approximately 7 percent more funding— around $40 billion per year—than was budgeted. This includes nothing of the re-building that President-elect Trump has promised.

Other problems lie ahead. DoD has made optimistic assumptions about foreign currency exchange rates, counting on them to remain near where they are today, which is very favorable for the United States. Another liability includes Pentagon requests for changes to military health care programs that the 2017 NDAA did not fully support.

At the Bottom of a Very Deep Hole

The liabilities described above will build to about $100 billion a year over time, seriously complicating matters for a president-elect who has pledged to rebuild our depleted military.

The Pentagon can save some money through efficiencies, base realignment and closure, restructuring and better business practices, and some of these efforts are already underway. But those savings won’t be nearly enough to close liabilities of this magnitude. It’s unfortunate this critical information hasn’t been part of a national discussion by our nation’s leaders, including the president, prior to the imminent transition.

In It’s a Wonderful Life, George Bailey’s financial problems were solved with a crowdfunding solution among the residents of Bedford Falls. General Mattis won’t be so fortunate. It’s among the many challenges that the new administration’s leaders will have to grapple with in their first hundred days to begin the necessary restoration of our military.”