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.

{mosads}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.