Magazine article National Defense

Industry and Government Butt Heads over Weapons Maintenance Contracts

Magazine article National Defense

Industry and Government Butt Heads over Weapons Maintenance Contracts

Article excerpt

The Army's Abrams main battle tank was introduced in 1980 and its projected retirement is in 2050. The Humvee combat truck began service in 1984 and will stay in the fleet until 2040, as will the Air Force's B-52 bomber that first flew in 1955.

Cold-War era weapon systems are a mainstay of the Pentagon's inventory, and could be around even longer than expected if the military is unable to replace them.

Repairing and maintaining decades-old inventory has been big business for the defense industry, and will continue to be despite funding cuts that will hit the Pentagon over the next several years. Industry analysts estimate the Defense Department will be spending about $90 billion a year on "sustainment" of equipment, and nearly $70 billion more on spare parts and logistics support.

How the Pentagon will manage that large pot of money is now the source of contentious debates within the office of the secretary of defense and the military services.

The Pentagon's new procurement policy, known as "Better Buying Power 2.0," calls for more efficient use of tax dollars, and endorses the concept of "performance-based logistics," or PBL, as a mechanism to lower the cost of weapons maintenance. Defense contractors strongly favor the use of PBLs because they provide long-term work and create incentives for suppliers to cut costs. Under a PBL arrangement, a contractor will agree to provide a certain outcome" for a pre-negotiated price, rather than get paid for individual products and services. If the PBL is for tank engines, for instance, the contractor would be held accountable for ensuring that a certain number of engines are available at any given time.

The Defense Department, however, has not warmed up to PBLs. Only 5 percent of the military's maintenance work is performed under such deals. About 87 PBL contracts are in place today, compared to more than 200 in 2005. Critics assert that these arrangements do not give the government sufficient visibility into contractors' true costs and create a monopolistic market dominated by a few large firms.

These philosophical differences are palpable and have polarized the logistics community. Managers who oversee the Defense Department's 17 major logistics depots, which cost the Pentagon $32 billion a year to operate, also worry that PBLs disproportionately favor the private sector. By law, the Pentagon must assign 50 percent of its "core" maintenance work to public depots, but the rules for such allocation are fuzzy and subject to interpretation.

A factious business environment is not unusual during times of declining budgets, says Nick Avdellas, a Pentagon adviser and program manager at LMI, a nonprofit consulting firm.

The war drawdown means there will be less money for combat-related equipment repairs and upgrades, he says. "Sustainment funding will probably be smaller and will have to be managed more efficiently."

PBL supporters point to studies that show that the government could save 10 to 20 percent by shifting more maintenance work to performance-based deals. The jury is still out, Avdellas says. "We should always pay for good performance and good outcomes. That's the wisdom behind PBL arrangements," he adds. "Those have been very effective." Regardless of who does the work, he says, contract awards should be based on performance.

At the root of the problem is a basic disagreement about who should bear more "risk," says Joe Chenelle, managing director at Accenture, a global management consulting firm.

Risk is a huge concern in the defense logistics business, he says. Contractors worry that if they bid too low, they will lose money so they price the work to compensate for the risk they take.

In PBL contracts, industry is making an educated gamble that it can meet the responsibility and make a profit. "With a PBL, the military doesn't have to stock excess or wrong inventory," Chenelle says. …

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