Big numbers can lead to big misunderstandings, and the US Defense Department budget is almost unfathomably big. Hence some canards and exaggerations such as the $600 hammer and $125 billion in waste. Most of confusion stems from the opacity of the Pentagon contracting process, which is also pretty much unfathomable.
Previously in this space we’ve had fun daydreaming about how we might spend more than $750 billion a year, but I figured it was time for some reality. So I reached out to someone who has crunched those numbers year after year: retired Marine Colonel Mark F. Cancian. Now a senior adviser at the Center for Strategic and International Studies, Cancian previously worked in the office of the secretary of defense on force-structure and acquisition issues, and spent more than seven years at the Office of Management and Budget as chief of the Force Structure and Investment Division. Here is a lightly edited transcript of our exchange.
Tobin Harshaw: There’s been a lot of consolidation in the defense industry, with the number of Pentagon “prime vendors” reportedly dropping by 36% in the last decade. Is that a problem?
Mark F. Cancian: The number of prime contractors has been dropping steadily for decades. For example, in the 1980s there were a dozen US companies that could produce military aircraft. Now there are three: Northrop Grumman, Lockheed Martin and Boeing. The same has happened in all the major defense areas. Given the immense costs and technical demands of large acquisition programs, and the sharp decline in funding after the Cold War, this consolidation was inevitable. However, it reduces competition and puts pressure on the government to manage contracts to keep the existing companies viable.
TH: It’s also said that two-thirds of contracts are awarded without bidding. Is that bad, and if so, how can the trend be reversed?
MFC: The statistic is misleading. Most major programs have competition at the beginning. Once a prime contractor is selected, however, future contracts are sole-source. The F-35 fighter program had a competition at the front end, but once Lockheed Martin won the contract, there was no more competition on the project. Because of the high cost of these programs, continuing competition is not viable.
TH: The F-35 has become the poster child for out-of-control Pentagon spending. It was an unusual contract in that it called for “concurrent” production and development. Can you briefly explain that model, and predict whether it will ever be used again?
MFC: Concurrent development and production means that systems are being produced while development continues. At the time, the program office argued that modern aircraft development techniques, including computer-aided design, allowed such an approach. In theory, it saves money by shortening the amount of time that a program operates.
In retrospect, it was “acquisition malpractice,” as described by Frank Kendall, then a senior acquisition official in the Barack Obama administration, and now secretary of the Air Force. It is unlikely to be repeated soon because of the searing experience of the F-35.
TH: Yes, I did a Q&A with Kendall in 2016. I didn’t get the feeling all the lessons had been fully learned.
MFC: I expect at some point in the future that some program manager will make the same argument, that modern techniques make past experience irrelevant, and that a program will take a concurrent design and production approach, probably with the same results.
TH: Have any of the biggest Pentagon procurement projects in recent years been particularly well run? If so, what can be learned from them?
MFC: The presidential helicopter program, the (Sikorsky/Lockheed Martin VH-92A) was extremely successful, being on schedule and on budget, which is probably why you have not heard about it. The predecessor program (VH-71) was a disaster because the specifications outran what was achievable on the timeline directed by the White House. Ultimately, that program was terminated.
The Navy, which was the executive agent for both aircraft, learned from the earlier experience and kept tight control over the specifications for the VH-92A. The program also used an existing helicopter, the Sikorsky S-92, as the base, which reduced risk.
TH: The littoral combat ship — or “little crappy ship” as the Navy wags call it — is an object of ridicule. The contracting was a mess. Congress got involved, and in the end two different shipyards made two different ships, neither of which turned out well. What can be done to keep lawmakers from putting jobs in their districts over national security?
MFC: The Navy always intended to begin production with two shipyards. The problem with the congressional pressure was that the Navy did not down-select to a single shipyard. That decision was partly to blame for producing more of the one version, the Freedom class, which seems to be the more troubled, though the Navy is retiring ships early from both classes.
The fundamental problem wasn’t congressional interference, it was a faulty concept. The Navy thought that it could use modular mission systems that could be swapped out, though that turned out to be impractical. The Navy also envisioned the ships to be fast and operated by a small crew, almost like missile boats. The speed was very expensive, and the automation required for crew reduction was overly optimistic.
TH: There’s been a claim for a decade — initiated I think by my friend Mike O’Hanlon of the Brookings Institution — that it cost a million dollars a year to keep a single marine in Afghanistan. That is, a cool million more than in regular peacetime costs. Was that figure accurate? Is such a thing measurable?
MFC: O’Hanlon arrived at that figure by taking the total amount of war funding in a particular year and dividing it by the number of deployed service members, not just Marines. That’s not wrong, but the number included costs not directly associated with deployed service members, for example, support to the Iraqi and Afghan governments. Most analysts used $500,000 as the average additional cost of one servicemember deployed to such an austere environment.
TH: Senator Bernie Sanders is the self-appointed congressional watchdog of Pentagon spending, promoting a Government Accountability Office report from August on “waste and fraud.” Is the problem as widespread as that? The Pentagon has famously never had an audit. Is one called for?
MFC: GAO identified risks for waste and fraud, not waste and fraud itself. The Defense Department has extensive mechanisms in place to audit each contract. That is the fundamental misunderstanding about the financial audit.
All contracts are audited to ensure that the monies are spent in accordance with financial directives. What the department has not done is a financial audit that includes, for example, assessing the value of its inventory. Whether knowing such a number has value to decision makers is unclear, but the annual cost of getting the information runs about $900 million.
A financial audit will not identify waste and, indeed, in the civilian realm it would be illegal under the post-Enron, Oxley-Dodd legislation for the financial auditors to do that. Auditors can only state whether the financial records accurately reflect the condition of the firm, not whether the firm is making wise investments. That is extremely important for publicly held companies because investors need to know whether the financial information being presented — inventory, accounts receivable, accounts payable, retained earnings, cash on hand, etc. — is accurate. Whether it is valuable for the Pentagon is debatable.
Further, “waste” is often in the eye of the beholder. Many critics, like Sanders, would point to the F-35 as an example of waste, whereas the military services argue that it is a critical warfighting capability.
Bloomberg
