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Defense Contractors Get a Second Bite, Congress Takes a Second Whack May 4, 2010

Posted by Guest Blogger in Analysis.
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Dan Madden is a former Marine Corps artillery officer and has served on Congressional staff.

By Dan Madden

We could save hundreds of millions in the defense budget every year while still providing our military with the finest weapons and protection in the world.  All it takes is holding defense contractors accountable for their performance.  Unfortunately that’s tougher than it sounds.

The House of Representatives recently passed a bill aimed at reforming the Pentagon’s much abused acquisition system – their second major attempt at reform in under a year.  The procurement system is complex enough to shame a Rube Goldberg machine, leaving most acquisition reform efforts ineffective.

Meanwhile, the defense industry continues to receive billions in bonuses each year from the Pentagon, often regardless of performance.  When discipline is imposed and a performance bonus withheld, they frequently get a second bite at the apple.  That’s a pretty good deal even by Wall Street standards.

Most of us cheered in February when Secretary Gates responded to the F-35’s 89% cost increase and two-year schedule slip by cracking the whip and denying Lockheed Martin $614 million in performance bonuses. Few of us realized that the $614 million was being “rolled over” into the next bonus evaluation period.

Lockheed Martin executives may sigh to themselves – profits delayed are profits denied – but Lockheed Chief Executive Robert Stevens was still able to reassure investors. Once this political season’s populist furor over predatory contracting dies down, the Department of Defense (DOD) will be free to fall back into its standard operating procedures, rewarding big contractors with big bonuses as a matter of course.

A 2005 Government Accountability Office (GAO) report found that DOD had distributed “$8 billion in award fees to date on the contracts in our study population, regardless of outcomes.”  Since GAO “sampled” only 1/6th of the DOD’s contracts offering these kinds of bonuses, called award and incentive fees, DOD may have spent as much as $48 billion over four years.  A rich dish indeed – and troubling since decades of studies by RAND, Harvard University and GAO have found that these bonuses fail to discipline contractors into consistently controlling costs.

DOD under Secretary Gates has made strides since the 2005 GAO study’s release, implementing has a whole suite of policies in place to help control the abuse of these award and incentive fees.  Now we just need to make sure they’re enforced.  And there’s the rub, which brings us back to Lockheed Martin’s $614 million.

As the acquisition reform bill moves into the Senate, members should offer an amendment capping the portion of a performance bonus that may be rolled over from one year to the next.  Capping it at 50% would save us $307 million off of just the F-35 program, and create a strong incentive for industry to perform to schedule.

The defense industry is a strategic asset to the country, with many fine men and women doing admirable work.  Yet like any business, defense contract firms will play as aggressively as possible within the rules.  Just as we’ve seen in the financial industry, complex rules favor big companies that can afford to invest in the expertise to navigate them.  As Congress acts to reform defense acquisition, they should begin by placing some simple, commonsense constraints on how we compensate the defense industry.



1. Edmund H. Mantell - May 4, 2010

While I read Dan Madden’s essay I experienced a mixture of attitudes: I was appalled as well as gratified. I was appalled by the waste of taxpayer dollars given as “performance bonuses” to defense contractors who underperform. The irony is so profound that even as eloquent a commentator as George Orwell would be left speechless. On the other hand, I was extremely gratified by the knowledge that Dan Madden’s trenchant essay illuminated this disgraceful practice in defense procurement. It has been remarked that sunshine is the best disinfectant. If Dan Madden’s essay disinfects this manifestation of procurement wastefulness, he deserve a medal as well as a big monetary bonus!

2. econochick - May 4, 2010

Excellent post! These defense contractors must be held accountable.

3. y3y3n.s - May 5, 2010

Very nice article.. worth reading it. Thank you for posting such a nice good!!!!!

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