2021 Defense Acquisition Trends: Topline DoD Trends after a Half Decade of Growth

Defense contract obligations grew to $421.3 billion in fiscal year (FY) 2020, a dramatic 41 percent increase since Department of Defense (DoD) contract spending bottomed out in FY 2015 due to budget caps and reduced overseas deployments. This surge in spending has coincided with dramatic shifts in acquisition and strategic priorities, shown in a surge in product spending and a partial displacement of traditional contracts by Other Transaction Authority (OTA) agreements as a means of conducting research and development (R&D). As the 2022 National Defense Authorization Act approaches becoming law and the Biden-Harris administration is on the verge of releasing a new National Security Strategy, there is an excellent opportunity to look back at how the last five years have reshaped acquisition and may influence the path of defense acquisition under the Biden-Harris administration. This analysis is drawn from CSIS’s forthcoming report on defense acquisition trends, which draws on the Federal Procurement Data System (FPDS) and CSIS’s historical databases.

Q1: How has the relationship between defense budget and contract spending changed?

A1: Increases in the overall defense budget were a prerequisite for the contracting rebound, and defense total obligation authority (TOA) grew by 4 percent in FY 2020. Strikingly, even the complications introduced by the Covid-19 pandemic did not prevent an 8 percent rise in annual contract obligations. In FY 2020, contracting obligations reached their highest share (nearly 58 percent) of defense TOA in the past two decades.

Q2: What is DoD buying and how has that changed to reflect the 2018 National Defense Strategy (NDS) priorities?

A2: In dollar terms, the largest annual spending increases have been for aircraft ($13.1 billion), facilities and construction ($6.9 billion), and ships and submarines ($6.0 billion). Aircraft growth has been driven by DoD’s largest weapons program, the F-35, which had a long-planned ramp into production. The growth in ship and submarine spending is in large part due to the Navy placing an order for the Virginia Class Block V submarines, with many featuring the Virginia Payload Module. In addition, the growth in obligations for ships and submarines, while not enough to meet fleet-size goals, aligns with a greater focus on the Indo-Pacific region. Increased spending on facilities and construction is driven by a doubling in construction spending in the last five years and is more difficult to account for because it is not tied to a platform portfolio, though fluctuations in spending can have a multitude of drivers and do not inherently reflect changes in strategic or operational priorities. Foreign military sales (FMS) have also had an important influence on both F-35 obligations and the five-year, 95 percent growth in ordnance and missile obligations.

In keeping with the NDS’s technology modernization priorities, in FY 2020 air and missile defense spending grew by 29 percent and ordnance and missile spending by 7 percent. Contrary to NDS priorities, spending on electronics, communications, and sensors—which includes command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR)—and on space systems each fell by 2 percent, although spending in classified high-tech contracting may have a very different trajectory, especially in space. Increasing portfolio spending also reflects a response to China’s military modernization and renewed great power competition. The 2018 NDS influenced defense contract spending, but this pivot is mostly seen in purchases of major air and sea platforms and only partially in investments in specific technology priorities that reach across the joint force.

In line with post-2015 trends, product spending has dominated, growing 11 percent in FY 2020, reaching its highest level in the past two decades. As seen in Figure 1, although unclassified R&D contract spending fell 0.4 percent, OTA R&D spending—partially in response to Covid-19—more than made up that gap. As mentioned above with high-tech sectors, classified R&D spending may also be telling a different story not covered in the public data. Regarding spending on services, the FY 2020 increase on facility-related and construction spending (15 percent) is difficult to parse in relationship to the NDS, but the growth in information communication technology spending (11 percent) is in line with its emphasis on C4ISR and cyber defense.

Q3: What are the significant trends in defense acquisition reform efforts?

A3: Efforts to reform the acquisition process since 2015—including by establishing the Defense Innovation Unit (DIU), using OTA agreements, implementing the Adaptive Acquisition Framework (AAF), issuing proposals through the Defense Innovation Board, and experimenting with initiatives such as the Air Force’s pitch day—have continued to emphasize flexibility, innovation, and access to commercial technological advances. OTA agreements are a vanguard for defense acquisition transformation, with defense OTA R&D spending surging 122 percent in FY 2020 while defense R&D contracting slightly decreased by 0.4 percent. The main driver of this jump was the U.S. government response to the Covid-19 crisis, but even discounting the Covid-19 bump, the past five years have seen a sustained increase in OTA R&D expenditures, suggesting that OTA agreements have become a rapid-acquisition substitute for some traditional defense R&D activities. This shift is the greatest within the Army, which accounted for 82 percent of OTA spending in FY 2020.

While the rise in OTA usage has been largely encouraged by policymakers, the period has also seen a decrease in the share of competed obligations, a key metric for efforts to maintain a competitive environment. Nearly 50 percent of obligations went to contracts awarded without competition, the highest share in the past two decades. Some of this trend is explained by foreign military sales where any competition would take place on the recipient end, but this trend highlights the importance of reform efforts such as modular open system approaches, which seek to enable competition at the subsystem or component level even when there is only one supplier for the platform.

Q4: Have there been any major trends in the structure of the defense industrial base?

A4: While acquisition reform efforts have called for an expanded industrial base with more participation by nontraditional vendors and commercial providers, as shown in Figure 2 this growth period has also been one of consolidation for traditional defense-industrial contractors. Obligations to the Big Five vendors—Lockheed Martin, Raytheon, General Dynamics, Boeing, and Northrop Grumman—grew by 21 percent in FY 2020, rising to their highest level in the past two decades. During this period, the share of total obligations going to the Big Five vendors increased six percentage points to 36 percent. At the same time, the total number of vendors in the contracting base declined, dropping 10 percent from FY 2019 to FY 2020. On the other hand, the Big Five vendors play a smaller role in OTA-funded projects. If OTAs for R&D mature into major projects with a smaller role for “nontraditional significant participation,” that may act against this consolidation trend in traditional contracting or plant the seed for potential future merger and acquisition activity, depending in part on the regulatory response.

Q5: Have there been any big shifts in defense contracting trends between the major DoD components?

A5: Among the Armed Services, the Navy has seen the greatest growth in spending, which increased 20 percent from FY 2019 to FY 2020 and 62 percent since FY 2015, as seen in Figure 3. This is partially explained by FPDS treating the Navy as the purchasing service for all F-35 obligations, as well as by an increase in ship and submarine spending. Among the other defense agencies, the MDA stands out with 37 percent spending growth in FY 2020, rising to 2.9 percent of DoD contract obligations, its highest share in the past two decades. The Air Force and the Army experienced slower growth, increasing 0.6 percent and 3 percent, respectively. The Air Force may be seeing more growth in the classified domain, and those programs are more likely to align with the operational challenges posed in the Indo-Pacific region and make up a significant portion of the new Space Force’s R&D budget. Additionally, overall changes in spending patterns reflect a growing strategic emphasis on the Indo-Pacific region.

Q6: What comes next for defense acquisition?

A6: The contracting rebound over the past half decade has coincided with a transformation of the defense acquisition system. FY 2020 may prove to be a peak year for defense contract obligations. Even if the funding environment changes, the shifts during that rebound period—which reflect markedly different priorities than during the prior buildup when focus was on the wars in Iraq and Afghanistan—will have lasting implications. Although FY 2021 data will begin to show the influence of the change in administration, many of these same drivers, including a focus on the Indo-Pacific, are carrying over into the Biden-Harris administration. There are a few key questions to ask going forward: Will the high rate of spending on products be sustained, or will the new administration’s concerns about legacy platforms change buying patterns? Will the Air Force and Navy follow in the Army’s footsteps by increasing use of OTA contracts? Will the Biden-Harris administration’s skepticism regarding defense consolidation translate into changes to vendor size, count, and competition? And, in a time of renewed attention to supply chains and a consolidating industrial base, what will be the role for commercial industry and allied industrial bases?

Finally, as the acquisition system changes, so too must the measures analysts use to observe it. Present reporting tools—including some FPDS fields and the Selected Acquisition Reports as a whole—are well suited to tracking major defense acquisition programs. But as the AAF matures and OTA agreements play a larger role in the R&D process, analysts and policymakers will need to evolve new approaches and create reporting and oversight mechanisms appropriate to those tools.

Won Joon Jang is a research fellow at the Korea Institute for Industrial Economics and Trade (KIET) and a visiting fellow with the Defense-Industrial Initiatives Group (DIIG) at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Gregory Sanders is deputy director and fellow with the CSIS Defense-Industrial Initiatives Group. Alexander Holderness is a research intern with the CSIS Defense-Industrial Initiatives Group.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2021 by the Center for Strategic and International Studies. All rights reserved.

Gregory Sanders
Deputy Director and Fellow, Defense-Industrial Initiatives Group

Won Joon Jang