A new report from the Center for Strategic and International Studies (CSIS) found an increase in defense contracting following years of a defense drawdown and sequestration limitations.
The report, “Defense Acquisition Trends, 2018: Defense Contract Spending Bounces Back,” said the growth in defense contract obligations outpaced growth in Defense Department Total Obligation Authority (TOA) over the past two years.
The report said TOA increased from $582.9 billion to $609.3 billion between FY 2015 and 2017, a 5 percent increase.
Meanwhile, defense contract obligations grew at over twice that rate in the same period. From FY 2015 to 2017 contract obligations increased from $282.5 billion to $319.8 billion, a 13 percent increase.
The report noted in FY 2016 contract obligations increased by eight percent but lowered to a five percent growth rate in FY 2017.
When looking at defense contract obligations as a share of TOA, the obligations have risen from 48 percent in FY 2015 to 52 percent in FY 2017. The report said this conforms with recent historical averages of 52 percent.
While defense contract obligations increased at a rate of 13 percent, non-defense obligations increased by a rate of 10 percent between FY 2015 and 2017. The report underscored non-defense contract obligations started “rebounding” in FY 2015 while defense obligations only began rebounding in FY 2016.
The Defense Department contract obligations rebound is concentrated in defense products, which increased 22 percent from FY 2015 to 2017. In comparison, defense services contracting grew 5 percent and research and development grew 6 percent in the same period.
From FY 2015 to 2017 the defense contracting increase was uneven across parts of the defense industrial base. Contract obligations for aircraft increased by 34 percent, ordnance and missile by 32 percent, and ship and submarines by 22 percent. Land forces increased 10 percent in FY 2017, after being one the portfolios hit hardest by sequestration.
In contrast, the air and missile defense contract obligations fell by 11 percent and space systems fell by 1 percent, even amid the increased defense budget.
The report also examined how different parts of defense contracts are recovering from the budget drawdown, including research and development
The report warned “the eight-year trough in major weapon systems development pipeline appears to have bottomed out but does still exist in some stages of R&D, and it will still be some time before DoD fully recovers.”
Systems development and demonstration took the largest share of cuts during the trough and more recently increased 11 percent in FY 2017. However, it still lies as less than half the historical average level since 2000. Advanced Technology Development contract obligations have only increased three percent in FY 2017 while Operational Systems Development has only increased one percent.
However, Advanced Component Development & Prototypes obligations “surpassed historical averages in FY 2016 and FY 2017,” by reaching $4.9 billion in 2016 and $5.1 billion in 2017.
The report noted basic research and applied research categories were largely protected by the drawdown and sequestration. From FY 2015 to 2017 basic research obligations increased two percent and applied research increased eight percent.
The report said 42 percent of the DoD’s contracting obligations since 2000 went to services, which includes maintaining infrastructure and equipment as well as administrative and medical work. These service obligations grew five percent between 2015 and 2017, reaching $132.1 billion. While growth in defense services contract obligations lagged growth in the defense topline, defense services fell slightly below average as a share of defense obligations from 2015 to 2017, reaching 41 percent.
The report said the defense acquisition system “sits at an inflection point that will likely transform the defense acquisition system and supporting defense industrial base over the next 10 to 20 years. Defense contracting has rebounded these past two years, but there are unanswered questions about continued defense budget growth and the long-term effects of the last few years’ acquisition reform efforts.”
The report underscored that Congressional efforts to reform acquisition “are the biggest changes to the defense acquisition system since the changes post-Packard Commission and Goldwater Nichols.”
The report’s authors argued dividing the Under Secretary of Defense for Acquisition, Technology and Logistics into two positions and delegating decision-making authority to the services “could fundamentally alter which capabilities DoD develops and procures.”
Concurrently, program management changes meant to divorce technology development efforts from platform development efforts “could spur the end of MDAPs [major defense acquisition programs] as we have known them.”
The report said it will not be known if Congress’ goal of speeding up acquisition and spurring faster technological advancement will be accomplished for many years. Regardless “they will transform the nature of the defense acquisition system.”
The authors said DoD has the challenge of balancing competing readiness and modernization priorities while finding the right balance within the modernization investment portfolio.
How it decides these factors “will reverberate in U.S. force construct planning for the next 30 years, which will only further compound the likely forthcoming transformation of the defense acquisition system.”
Their data shows that during the recent contracting rebound, the department has focused on immediate and longer-term (10-15 years) challenges rather than those facing them in the next five to 10 years.
“The recent large increases in products contract obligations and composition of its R&D portfolio balanced towards Basic and Applied research further supports that assertion.”
The authors argue this balancing will become more challenging in the next years as the department looks to increase investments in emerging technologies like hypersonics and access innovations from non-traditional suppliers, while also trying to prevent parts of the existing force like the F-18 “from tipping over and entering a death spiral.”
“Any of these issues by themselves would likely transform the defense acquisition system, but combined, they could bring some of the most radical changes to the modern defense acquisition system since its inception at the end of World War II,” the report said.