Defense industry moves to thwart McCain provision

The defense aerospace industry is fighting to kill Senate legislation that seeks to curb the rising costs of weapons systems.

The provision, crafted by Sen. John McCain (R-Ariz.) and adopted as part of the Senate’s 2007 defense authorization bill, calls for the Pentagon to award fixed-price contracts for the research and development stage of major weapons systems.

McCain, a senior member of the Senate Armed Services Committee and probably the panel’s next chairman in 2007, is a critic of Pentagon contracting practices and of its delayed, and increasingly expensive, next-generation weapons.

McCain is among a growing number of lawmakers who have expressed concern that, despite the delays and cost overruns of defense programs, contractors continue receiving incentive bonuses from the government.

The senator’s solution is to prevent the Pentagon from awarding any other types of contracts that normally allow for fees or profits above the actual cost of developing and producing a weapons system. Therefore, fixed-price contracts set a limit on the cost of a defense product.

The Senate provision, however, stipulates that the secretary of defense can circumvent the use of fixed-price contracts if he deems the program so complex and technologically challenging that it would be impractical to use a fixed-price contract.

John Douglass, president and CEO of the Aerospace Industries Association (AIA), sees problems with McCain’s legislation. The group, which represents a large number of aerospace contractors, is working to persuade Senate and House conferees on the defense authorization bill to drop the provision.

The House version of the 2007 defense authorization does not contain such a measure, although lawmakers on the defense panel have introduced their own acquisition reforms.

The AIA argues that fixed-price contracts could be disastrous for the industry, which could fail to make a profit, as well as for the government, which would find it harder to manage those contracts and could face the possibility of canceled programs.

“Contract type is probably not the most efficient way to control the rising costs. There are other ways of doing it,” Douglass said in a briefing to reporters last week.

One way of controlling costs is to have more stability. That means consistent funding, clearly defined requirements and the possibility of entering long-term, multiyear contracts, Douglass explained.

Another way of keeping costs down is to place a congressionally mandated cost cap on a defense program, Douglass added. The Navy’s Seawolf submarine program did well with cost caps, he recalled.

“We are not trying to say that people who are trying to get cost control are on the wrong track,” Douglass said, acknowledging the need to rein in costs. “This [provision] is sponsored by a member of Congress who is a patriot and who spent his whole life devoted to national security. We are simply saying getting the contract type is not going to be the answer.”

Fixed-price contracts won’t work for the development of complex fighter jets or ships because of the many changes required throughout the development of the program, Douglass argued.

Being forced into fixed-price contracts can also stifle innovation, as the industry won’t allow itself to take high risks. Also, using fixed-price contracting for some risky development programs might dissuade some companies from bidding on the work for fear of losing money, critics say.

For example, the Pentagon has been trying to find solutions for defeating improvised explosive devices, more commonly known as roadside bombs, in Iraq, but “if a contractor comes in with a high-risk solution, he is not going to take a fixed price for that,” Douglass said, adding that he does not support the view that the Pentagon pays less for fixed-price contracts.

The defense industry has the lowest profit margins of the entire manufacturing sector and fixed-priced contracts could drive those profits into the negative, Douglass argued.

The industry is trapped in the middle of an issue that concerns the Congress and the administration, Douglass said. “Right now relations between the Department of Defense [DoD] and the administration and this industry are pretty darn good,” Douglass said. “These are all issues that are in between Congress and the administration.”

The Bush administration opposes the Senate’s legislation on grounds that it is premature, because DoD is pursuing initiatives to reduce program risk according to a statement of administration policy.

As defense authorization conferees are getting into gear, defense-industry representatives are trying to change McCain’s mind even before they make their case to the House members, an industry source said.

“The industry is engaging with Senator McCain to make our case on policy grounds,” the source said. “We are trying to explore creative ways to allow accountability. We want accountability in research and development.”