Defense contracting rebounded in 2016, but R&D spending continues to suffer

A new analysis of government data shows that 2016 may have been the low ebb of Defense contract spending, following six years of steady declines. Contracts for military hardware made a robust comeback last year, and to a lesser extent, so did those for services. But spending on research and development continued to suffer following years of large, disproportionate declines.

The conclusions come from a report by the Center for Strategic and International Studies, based on the think tank’s review of numbers in the Federal Procurement Data System. It shows that DoD contract obligations fell in every year from 2009 to 2015, from $414 billion to $278 billion. But the decline began to level off in 2015, and then reversed itself last year: Newly available data shows the Pentagon spent $296 billion on goods and services in 2016.

“It went up 7 percent, which definitely exceeded our expectations,” said Andrew Hunter, a senior fellow at CSIS and a co-author of the report.

The rebound was driven almost entirely by increased spending on procurement contracts: major weapons systems the military has already figured out how to build. Overall, spending on products was up 12 percent compared to 2015. Service contract spending grew by a meager 2 percent, but any growth in that sector is significant following a 23 percent drop between 2012 and 2015.

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But the report paints a worrying picture about the future of DoD’s technology base. There was no noticeable increase in 2016 R&D spending, which has been in decline for longer than the department’s contracts for services or products: R&D contracts plummeted by 53 percent between 2009 and 2015.

“And the particular stage of contracts that we call the ‘weapon systems pipeline’ continues to decline,” Hunter said, referring to contracts for system development and demonstration (SD&D). “That’s actually been a nine-year trough, it’s been steadily decreasing, and there’s no end in sight. This is going to be a real issue for the new administration coming in.”

He said some of the trend lines in lower spending for late-stage R&D can be explained by the cancellation of massive programs like the Army’s Future Combat System and the F-35 Joint Strike Fighter’s graduation from the development stage to actual production.

But the military has moved very few new systems into the final R&D stages over the last several years. Partially because of that, spending on advanced technology development and SD&D have fallen by 72 percent and 69 percent, respectively, since 2009.

Frank Kendall, the Pentagon’s most recent undersecretary for acquisition, technology and logistics, said that out of all of the budgetary “imbalances” the military dealt with in the aftermath of the onset of the 2013 Budget Control Act, the ones that impacted R&D accounts worried him the most.

“It’s a lack of investment in the new product pipeline, the new investments you have to make in order to field a new program in large quantities,” he said.

However, spending on early-stage R&D has been more stable, and more in line with the overall trajectory of Defense contract outlays. Applied research, for example, declined by only 25 percent between 2009 and 2015.

Kendall said that was the result of deliberate decisions DoD made after the BCA started to constrain the department’s top-line budget.

“What we were able to do in our last couple of budgets was to do a number of things to advance technology and experiment with concepts that could eventually be translated into products and then into production,” he said. “We funded the most inexpensive part of the product lifecycle — proof of principle, basically, and those are the demonstrations you’re seeing from the [Strategic Capabilities Office] and the [Defense Innovation Unit-Experimental]. But what the department really needs to do is make some decisions about which of those concepts it’s going to take to production and get the money into the budget to actually field them. That’s the major shortfall that’s pointed out in this report.”

Jared Serbu discusses this story on Federal Drive with Tom Temin

Although the new administration has pledged to increase the defense budget and “rebuild” the military, it’s far too early to know where exactly where those additional resources would be spent, even assuming the Congress finds a way to overcome the BCA caps and appropriate the additional funds for which the administration has asked.

Indeed, until the administration develops a focused strategy and describes the precise ways in which it wants to improve military capabilities, no amount of money will be enough to accomplish any particular task, said Sean O’Keefe, a former Navy secretary, Pentagon comptroller and NASA administrator.

“The vice chiefs of staff have all testified that the current budget is woefully deficient and that the increase the administration has proposed would make a marginal improvement toward rebuilding. But from their perspective, the size of the unfunded requirements will always exceed whatever the amount is in any budgetary framework,” he said. “Absent a strategy that specifically articulates what the priorities are, it becomes an auction, or a circumstance in which everything improves marginally, but none of it successfully in order to achieve any of the goals that anyone’s articulated.”

It’s also unclear what a buildup in military spending will mean to the Defense industry.

Hunter noted that the report shows that out of DoD’s total expenditures over the past nine years, contracts were squeezed disproportionately within a budget that was declining overall. Contracts made up 56 percent of all of DoD’s obligations in 2008 as a greater share of the budget went to personnel and other costs that couldn’t be cut quickly; that figure fell steadily before flattening out in 2015 at 46 percent.

“The market share, if you will, of the DoD budget that goes to contracts has declined by 10 percent, and we don’t know for sure if that’s going to turn around now that the budget is starting to grow again,” he said. “But the last year shows a huge change, and it’s going to be of great interest for the Defense industry about the opportunity for them in the DoD budget.”

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