Pentagon unveils markers for cutting defense costs

The Pentagon on Tuesday announced a series of guidelines — many of which will be implemented immediately — to cut the costs of Pentagon contracts and boost productivity in the defense sector.

Defense Secretary Robert Gates and Ashton Carter, the Pentagon’s acquisition chief, are seeking to change the way the Defense Department buys weapons and services amid the growing U.S. fiscal crisis.

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As part of the new guidelines, the Pentagon acquisition corps would have to determine from the very beginning whether a new weapon or service is affordable; set shorter timelines for buying new weapons; constrain technical designs to schedule and cost so that the price tag of new weapons system does not spiral out of control; and ensure that cost overruns are shared by defense contractors and the Defense Department.

The Pentagon’s new buying guidelines highlight a shift toward fixed-price contracts with incentive fees — a contracting vehicle that would in essence reward contractors for beating the expected cost of a weapons system or service contract. The flipside of such contracts is that the contractors will have to absorb losses for cost overruns and share the development risks with the Pentagon.

“In too many instances, cost estimates that are based on past programs — I might say past mismanagement — have deprived us of the incentives to bring down costs,” Gates said at a Pentagon briefing Tuesday.

Gates also had a clear message for the defense industry as well as the Pentagon’s acquisition corps. “Higher performance should naturally lead to higher financial reward: profit,” he said.

Gates indicated that the new guidelines would be implemented for several new and high-profile defense contracts, including the Navy’s next-generation ballistic missile submarine, the Army’s Ground Combat Vehicle program, long-range strike systems for the Air Force and Navy and the new presidential helicopter.

“Implementing this guidance will enable this department to make programs more affordable without sacrificing important capabilities and prevent us from embarking on programs that have to be canceled when they prove unaffordable,” Gates said.

The new guidelines are part of Gates’s overarching drive to find $100 billion in savings over the next five years — money he wants to spend on the modernization of fighting forces and weapons.

Gates, who has been the defense chief for nearly four years, spanning two administrations, and Carter, who has been the acquisition chief for more than a year, have been warning that the defense budget would see very small growth in the future, given the dire economic times. Gates stressed that he is not looking to reduce the overall defense budget, but to shift resources within the budget to pay for capabilities the military needs today and in the future.

“These are the initiatives that are appropriate to the circumstances in which we find ourselves,” Carter said at the Pentagon press briefing.

Until now, Carter explained, the Pentagon’s budget has grown “so fast” that managers in charge of defense programs “had more money to help them get out” of problems when they encountered them.

“So, naturally, that becomes the managerial habit. You're maximizing more fighting capability within the context of an ever-rising budget,” Carter said. “That's not what we have now. That's not what we're going to have. The taxpayer says, ‘Give me the security I need for the money I have.’ And so the circumstances change."

Carter said the defense industry, which has grown accustomed to banner profits, would be supportive of the new guidelines. Some defense contractors, including Lockheed Martin, have begun to reduce their workforce.

“The overall reaction is positive to this, because they say they understand the alternative. They know we're entering a different era,” Carter said. “Turbulence, canceled programs, programs that never get into production, these are not good things for industry. So managing together to a new era [is a] very important joint project for government and industry.”

Carter said he wants to ensure the Pentagon uses profit as an incentive for productivity from defense companies.

“They need profit; we need an industry that is financially successful and technologically successful,” he said.