Report: Sequestration slashed DoD contract spending by 16 percent in 2013

A new analysis of federal procurement data on Thursday confirmed what Defense contractors already knew: Sequestration caused a sudden and sharp drop in DoD contracts during 2013, slashing contract dollars by 16 percent compared to the year before.

The analysis, conducted by the Center for Strategic and International Studies, represents some of the first detailed insight into how DoD’s spending patterns changed as sequestration hit in 2013. The automatic reductions cut the Pentagon’s...

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A new analysis of federal procurement data on Thursday confirmed what Defense contractors already knew: Sequestration caused a sudden and sharp drop in DoD contracts during 2013, slashing contract dollars by 16 percent compared to the year before.

The analysis, conducted by the Center for Strategic and International Studies, represents some of the first detailed insight into how DoD’s spending patterns changed as sequestration hit in 2013. The automatic reductions cut the Pentagon’s overall spending authority by $56 billion, or 8 percent, between 2012 and 2013. But the analysis shows a disproportionate share of the cuts fell on products and services, leaving contracts with a smaller piece of a smaller pie.

“Of the total gross outlays, 53 percent went to contract obligations in 2012, and only 49 percent went to contracts in 2013,” said David Berteau, who leads the National Security Program on Industry and Resources at CSIS. “The money’s going down, and the percentage of that money going to contracts is going down as well. It’s a double-whammy effect in terms of both the overall addressable market and reliance on contractors.”

The DoD-wide numbers obscure some more dramatic changes in the military services. The Army’s obligations fell by 21 percent, the Air Force declined by 22 percent and other defense agencies’ spending fell by 18 percent.

Spending on Navy contracts fell by just 2 percent through — driven mainly by the fact that that service committed funding for a lot of expensive products in 2013, including $7.4 billion for the F-35 program, more than $1 billion for nuclear reactors, and $800 million for upgrades to the USS Nimitz aircraft carrier.

That point underscores another key finding from the CSIS report: While sequestration hurt almost every procurement program, big-ticket items bought from the Pentagon’s biggest vendors seem to have found some shelter from sequestration.

Contracts to small, medium and large firms each fell by 19 percent in 2013. The story is different when it comes to the six super-large vendors that are the prime contractors on many of DoD’s biggest systems. Contract obligations that collectively flowed to Boeing, Lockheed Martin, Northrop Grumman, Raytheon, General Dynamics and BAE Systems declined by just 9 percent that year.

“We saw the same pattern with contracts that were worth more than $500 million. They were down only about half the rate of all the others,” Berteau said. “This is something we’re going to have to watch closely though. Is this a one-year anomaly because it was harder to suddenly postpone those large contracts, or is this a trend that will continue?”

Pentagon officials have expressed increasing levels of worry that they are underinvesting in research and development, and the CSIS study appears to back up their concerns. Broken out by category of contract spending, R&D took the biggest hit from the 2013 cuts, falling by 21 percent, said Greg Sanders, a research fellow at CSIS.

“And the cuts were spread reasonably evenly,” he said. “In 2012, we looked at it and the news was relatively good because you could trace the declines at that point to major programs being canceled or maturing out of R&D and into procurement funding, neither of which is necessarily a problem. But this year it was more widely based, and we’re seeing cuts in early-to-mid R&D. All the military services have gone down in absolute dollar terms.”

Berteau said that trend bears watching over the next several months. Initially, researchers had speculated that it might be a one-year dropoff, because when sequestration first struck the Pentagon, officials were pressuring program managers to simply delay much of their spending to the next year in the belief that Congress would undo the automatic spending cuts.

But initial indications from Treasury Department data appear to indicate that DoD is still spending at the same levels.

“The idea that you could punt was a one-year idea,” Berteau said. “What we’ve been watching for in 2014 is to see whether these R&D numbers would start coming back up. The initial data says they didn’t. They’re down another 4 percent in 2014, even though there was more money available. It looks like 2014 is very much a continuation of the same decline.”

On a positive note, the report seems to indicate the department is doing a reasonably good job of fostering competition even as top-line budget numbers have fallen.

In fact, CSIS’ numbers paint a happier picture of the trend than the Defense Department’s own figures, partially because the two organizations define competition in different ways.

DoD’s math counts any procurement that was technically open to bidders as “competitively awarded” — even if it was obvious that there would be only one bidder. If those single-bid awards are counted as competitive, the competition rate fell from 62 percent in 2010 to 57 percent in 2013.

But CSIS argues that a competition with only one bidder isn’t actually a competition. Once those procurements are taken out of the picture, the competition rate is smaller, but it is much more consistent, between 48 and 50 percent over the past six years.

But there are also outliers. Across the board, the military departments are much better at getting competitive offers for services than they are for products, but in the case of the Air Force, competition for services has been steadily declining. That figure dropped from 56 percent in 2008 to 42 percent in 2013. Researchers said the reasons would require more study.

“The Air Force is declining, and it’s declining from an even lower starting point than the rest of the military services,” Berteau said. “In fact, the data shows that across DoD, competition actually isn’t down at all if you take out Air Force services. Obviously, you can’t do that, but it does tell you that there are different prescriptions for different parts of the problem, and if you treat it as a universal problem across DoD, you’re perhaps going to come up with the wrong answer.”

2013 was a unique year for DoD spending as sequestration hit the department midway through the fiscal year. While it seems likely that the department will be living within similar top-line budget constraints for the next several years, Berteau said right now, it’s difficult to predict whether some of the patterns the report picked up for 2013 are likely to turn into ongoing trends versus one-year events.

“But it is very safe to predict, based on the budget numbers, that unless Congress acts — not so much to raise the caps, but to allow DoD to spend more properly within the caps — then contract actions will continue to pay a disproportionately high share,” he said. “The rate of growth in military pay and benefits, the amount of excess inventory we have to sustain because we’re not allowed to close bases, the costs that don’t provide value. That’s the $30-70 billion that Deputy Secretary [Robert] Work has been talking about.”

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