Large defense contractors in general have seen their share of Pentagon purchases decline over the past decade as more vendors garner a piece of the defense budget, according to a new report by the Center for Strategic and International Studies (CSIS).
This data “seems to indicate a larger range of vendors becoming involved and I think runs a little bit contrary to some of the concerns you often hear raised of it merely being centralized at the top,” Greg Sanders, a fellow within the Defense-Industrial Initiatives Group at CSIS, said Thursday while presenting the new report.
In 2002 the top five defense contractors received 72 percent of obligated Pentagon contracts awarded to the top 20 contractors but only 62 percent in 2012, the report said. In those same periods, the top 20 defense contractors saw their share of total defense obligations dip from 47 percent to 43 percent, it said.
The report, U.S. Department of Defense Contract Spending and the Supporting Industrial Base, 2000-1012, said that defense contract obligations in 2012 stood at 55 percent of total DoD outlays, well off the 69 percent share in 2008 and still below the 62 percent share in 2000.
Defense contract obligations for products fell slightly less than the overall budget from 2009 through 2012, with the decline driven solely by
a “reduction in Army contract obligations for products, as all other components saw mile growth.” For services, contract obligations declined slightly faster than overall defense contract obligations from 2009 to 2012, due again to the Army, the report said.
The greater decline in services contracts versus products and other categories such as military pay “should not surprise us [as] service contracts are more malleable, more flexible and at least in some areas it’s easier to say, ‘Okay, we don’t have to do as much of that next year,’” David Berteau, director of the CSIS National Security Program on Industry and Resources, said during the presentation.
The Army has seen its share of contract obligations erode since peaking at 40 percent in 2008, which was driven by the wars in Iraq and Afghanistan. With the drawdown of U.S. forces, Army contract obligations have fell almost three times the rate of the Defense Department to a 30 percent share in 2012.
The share of contracts obligated by the Navy has hovered around 25 percent since 2005 except for a spike to 28 percent in 2011. In 2000, the Navy’s share was 30 percent. Meanwhile, the Air Force’s share contract obligations fell from 28 percent in 2000 down to 17 percent in 2011.
As the three major services have witnessed their respective shares of contract obligations decline over the past 12 years, other DoD components, including the Defense Logistics Agency, have seen their shares rise, CSIS says.
In the area of research and development (R&D), the report said that contract obligations have declined more than twice as fast as the rate of overall defense declines, from an 11 percent share of contract obligations in 2009 to 10 percent in 2012. This decline was mainly driven by a drop in Army R&D contract obligations and was related to the termination of the Future Combat Systems contract, Berteau said.
The Navy also saw a decrease in R&D contract obligations either due to canceled programs or others that transitioned to production such as the F-35 Joint Strike Fighter, the Mobile User Objective System satellite program and the DD-1000 destroyer program.
With the declining defense budget there have been concerns among defense experts that R&D declines will rob the nation of future innovations. However, Berteau said that the overall reduction in R&D contract obligations appears to stem from either canceled or maturing programs, so “I think there is less concern as a result of peeling that back and again we’re going to want to look very carefully going forward but I’m a lot more encouraged about the future of R&D spending in the near-term in that regard.”
CSIS plans to release another of its defense contract trends reports late next winter or early spring to include 2013 data, including impacts from sequestration, Berteau said. That report will also look at whether there has been an expansion or contraction of competition. As the defense industrial base “diminishes” there will likely be less competition, he said.
The other thing that next year’s report will look at will be the distribution of market share among defense companies, specifically changes within the top 20 contractors in the various categories of products, services and R&D, Berteau said.
The current report said that the share of defense contract obligations awarded without competition hit 42 percent in 2012, up from 38 percent in 2000.