U.S. defense industry adapts to newly cost-conscious Pentagon

Posted Friday, Feb. 01, 2013  comments  Print Reprints

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As looming budget cuts threaten to put a big squeeze on military spending, local defense contractors say they've already been adjusting to a new era of cost-consciousness at the Pentagon.

Under the 21/2-year-old initiative known as "Better Buying Power,'' increasing numbers of defense contracts are now "fixed-price" deals, leaving little or no wiggle room for cost overruns. Contractors are being closely monitored and required to provide clear proposals with explicit details of work. Those who bust budgets are being penalized while those who come under budget are given bonuses.

"It's about forcing contractors to prove what they're saying more than they used to,'' said Mike Cox, director of communications for AVX Aircraft Co., a start-up with offices in Benbrook. The Pentagon is "looking at this stuff a lot closer ... Now they're saying, "Prove it, show me.'"

New buzzwords have been introduced to denote the heightened emphasis on value. "Should-cost management" is about trimming superfluous expenses from budgets. The practice ensures savings by "scrutinizing every element of government and contractor costs," the Pentagon says.

"Affordability is what it's all about,'' said Navy Capt. Cate Mueller, spokeswoman for the assistant secretary for Navy research, development and acquisition.To compete, many local contractors have tightened their internal controls or teamed with competitors to reduce expenses. Others have ponied up their own resources prior to a formal call for bids in an attempt to get an edge over competitors. Many also say they have decided not to bid on contracts if development costs appear excessive. And some, including smaller start-ups, have recast their business structures to cut overhead.

"Now, you better be able to get what you're competing for or you are liable to be out of business," Cox said.

Critics of the Pentagon's new marching orders say that such efforts can backfire and dampen innovation.

"You are pushing the risk on to the contractor and it tends to show up in other ways, such as in increased unit costs or contracts that are basically rendered un-executable,'' said Dan Stohr, spokesman for the Aerospace Industries Association, a Virginia-based trade group of major aerospace and defense manufacturers.

But the Pentagon isn't expected to do an about-face. Its cost-cutting efforts will likely be stepped up as the nation heads toward the fiscal cliff, putting billions at risk through "sequestration." Under the Budget Control Act of 2011, the Defense Department must make $500 billion in automatic across-the-board reductions over the next decade. The cuts are expected to take effect March 1 if Congress doesn't act.

"Sequestration causes a lot of uncertainty about the business,'' said Jennifer Barton, spokeswoman for L3 Communications, which operates in several North Texas locations including Arlington.

Meanwhile, some local contractors say they applaud the Pentagon's efforts.

"We've always had to be very meticulous on our costs and our efficiencies and our values,'' said Raanan Horowitz, president and CEO of Elbit Systems of America, a Fort Worth supplier of high-tech electronics for combat helicopters and stealth jet fighters to companies including Lockheed Martin. The vast majority of Elbit's contracts are fixed-price, he said. So that's not going to be an obstacle for the company.

"Actually we welcome that, from that perspective of the Department of Defense putting more emphasis on that," Horowitz said.

Like most, Elbit Systems is having to get used to filling out additional audits and other paperwork that are required. It's a good idea to adapt as quickly as possible, Pentagon officials have said. Those post-9-11 days, when contractors thrived on a steady diet of large government contracts that guaranteed sizable profits, are long gone.

"The gusher has been turned off and will stay off for a good period of time," former Defense Secretary Robert Gates said in a speech before he left office in July 2011.

Yamil Berard, 817-390-7705

Twitter: @yberard

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