Defense Acquisition Trends 2023: A Preliminary Look
Over the past year, the defense acquisition system has continued to face changes and to shift its priorities in response to the broader strategic landscape. These transformations will continue in 2024, as the new National Defense Industrial Strategy is released to shape priorities and as external challenges continue to pose riddles for the acquisition system to help solve. Understanding the most recent data on acquisition trends helps shed light on the past and creates a baseline of knowledge to use to better understand future acquisition. Fiscal Year (FY) 2022 contracting faced multiple external influences: the tail end of Covid-19 responses and supply chain disruptions, increasing inflation, and large-scale U.S. support to Ukraine. Despite all this, FY 2022 defense contract spending showed marked continuity with the prior year. Contract spending grew 0.1 percent after applying a 6.9 percent rate of inflation. Spending on ordnance and munitions slowly ramped up, falling in FY 2022 with real gains not seen until the preliminary FY 2023 data. Other Transaction Authority (OTA) spending fell further as commercial contracts took over as the mechanism of choice for responding to Covid-19. Finally, the largest shift in contracting approaches has been the burgeoning use of incentive fee contracts in FY 2023, suggesting that the Department of Defense (DoD) may be turning to this instrument to balance cost-controls and flexibility when addressing defense industrial base challenges.
According to Dr. Laura D. Taylor-Kale, the assistant secretary of defense for industrial base policy, the Department of Defense (DoD) has “seen in the response to COVID and the conflicts in Ukraine and the Middle East that our industrial ecosystem needs to be ready to provide the capabilities that the department needs.” The driving forces for change are the rapidly changing threat environments across the globe. Specifically, the ongoing war in Ukraine, tensions in the Indo-Pacific, and now a budding war in the Middle East between Israel and Hamas threaten to strain the United States’ defense industrial base for the foreseeable future.
This brief illustrates the state of the defense acquisition system in FY 2022 as it pivoted to a world shaped by Russia’s expanded invasion of Ukraine. In a bid to capture the impact the war in Ukraine has had on acquisition, this brief incorporates FY 2023 year-to-date (YTD) data where possible. Defense contract obligations were broadly steady, showing 0.1 percent real growth after applying a 6.9 percent measure of inflation. Efforts in FY 2022 to supply Ukraine and recapitalize drawdowns had not yet shifted the flow of DoD contracting dollars. Certain platform portfolios, which intuitively should have experienced dramatic increases because of the security assistance sent to Ukraine, such as ordnance and missiles, have either decreased or experienced mild increases that likely do not reflect forthcoming demand from the DoD. A spending lag was most likely occurring as a component of the institutions and processes that underpin the United States’ procurement and acquisition system.
However, defense contract obligations are set to continue to rise as the acquisition ecosystem responds to the significant presidential drawdowns which accompanied the Biden administration’s assistance to Ukraine in FY 2022. This will replace the equipment that was provided to Ukraine to support its self-defense with modernized stockpiles. By the first quarter of FY 2023 the decline in ordnance and missile spending had already begun to reverse and other key developments not yet shown in acquisition reporting promise further growth.
This brief provides insight on pertinent trends in acquisition and bases its analysis on data collected from the Federal Procurement Data System (FPDS), which is downloaded in bulk from USAspending.gov. OTA data is accessed through SAM.gov. For this brief, the CSIS Defense-Industrial Initiatives Group analyzed data from FY 1990 to Q2 of FY 2023. All figures are in constant FY 2022 dollars, which are calculated with the Office of Management and Budget’s gross domestic product deflators.
For this brief, the CSIS Defense-Industrial Initiatives Group focuses on five overarching themes:
- The Budgetary Context of Acquisition
- What Is the DoD Buying?
- How Is the DoD Buying?
- How Is the DoD Acquiring Innovation?
- What Is the Shape of the Industrial Base?
The Budgetary Context of Acquisition
Defense contract spending was steady in FY 2022, despite the United States ongoing military support to Ukraine. After a drop from FY 2020 ($467.1 billion) to FY 2021 ($413.9 billion), contract spending plateaued in FY 2022 ($414.3 billion), rising by a modest 0.1 percent from FY 2021. The inflation adjusted figures used throughout this brief underemphasize how spending has kept up with inflation, but it is important to flag this budgetary choice. As seen in Figure 1, the DoD’s Total Obligation Authority (TOA) mirrored this change by increasing by 1.2 percent; the TOA was $760.3 billion in FY 2021 and $769.5 billion in FY 2022. These leveling budgets highlight the importance of present debates surrounding supplemental spending in the face of ongoing conflicts in Ukraine and Gaza, along with heightening competition between the United States and China.
The TOA for 2023, however, rose to $813.7 billion—a 5.7 percent increase from the previous year—suggesting a reflection of ongoing discussions in Washington about the changing threat environment. Additionally, overall DoD contract obligations in FY 2022 increased by 26.0 percent since they hit a low point in FY 2015, which was reinforced by the level of funding from exports over this timeframe. Over the same period, the DoD’s TOA increased by 13.5 percent.
Foreign Military Sales (FMS) complicate this analysis, as defense contract obligations are partially funded by international buyers, such as Taiwan, even though the obligations are processed by the United States’ acquisition system and support the U.S. defense industrial base. FMS-related obligations are driven in part by large programs such as the F-35, which results in significant fluctuations as contracts for these large programs are unevenly distributed from year to year. FMS-related obligations made up 9.3 percent of total defense contract obligations. FMS-related obligations were $26.5 billion in FY 2021 but jumped to $38.7 billion in FY 2022. In Q2 of FY 2023, they already totaled $28.9 billion, suggesting a potential increase in spending from the previous two years. Since FY 2012, FMS-related obligations peaked in FY 2020 at $55.4 billion and hit a recent low in FY 2014 at $19.2 billion.
As shown in Figure 2, quarterly spending is variable but is still useful for giving context to spending for years that do not yet have complete data available. Quarterly trends from FY 2021, FY 2022, and FY 2023 will likely follow similar obligations patterns. The Q1 value in 2023 matches Q1 obligations from FY 2021 and FY 2022. It is too soon to tell what total spending will be in FY 2023, but FY 2023 Q2 obligations are approximately 25.7 percent higher than FY 2022 Q2. However, a comparison of FY 2021 and FY 2022 Q2 and Q3 spending shows that variation in quarter-by-quarter spending does not necessarily predict changes in overall spending. The rise in budgetary total obligation authority shown in Figure 1 gives room for higher contract spending in Q3 and Q4 of FY2023 than in the prior two years.
When considered by the contracting agency, as shown in Figure 3, the largest changes happened below the military department level. Spending on the F-35 continues to fluctuate. Due to the placement of the Joint Project Office (JPO), that program is entirely reported under the Navy, despite the F-35A also being a leading acquisition priority for the Air Force. Spending for the F-35 Major Defense Acquisition Program (MDAP) increased to $20.7 billion in FY 2022, a 97.0 percent increase over FY 2021 but still below the $39.7 billion spent in FY 2020. These fluctuations are a result of the uneven distribution of major contracts rather than major changes of plan for this program.
Contract obligations among the military services in FY 2022 had all dropped slightly because of inflation. The Army’s obligations fell 4.1 percent to $112.7 billion. The decrease relates to the tailing off of spending on Covid-19 response, which were funded through the Army, a drop that FY 2023 Q1–Q2 data suggest may be ongoing. Instead, starting in FY 2021, Covid-19 response accounts for around a quarter of Army contract obligations. For example, the Army spent $31.6 billion in FY 2021 and $23.6 billion in FY 2022 on drugs and biological products, and in FY 2022, the Army spent $4.6 billion on medical and surgical instruments. The share going to the Army may further fall in FY 2023, with the first two quarters of spending only reaching 37.6 percent of FY 2022 levels. When excluding the F-35, Navy contract obligations fell by 5.3 percent to $103.1 billion in FY 2022. Finally, Air Force contract obligations fell by 6.6 percent to $79.0 billion.
Growth was concentrated instead in the Defense Logistics Agency (DLA), which experienced a 15.1 percent increase to $48.2 billion in FY 2022. An analysis of product and service codes reported by the DLA did not show a clear source for this increase. That said, the agency has spent on medical supplies in a heightened manner since FY 2020, and FY 2023 spending levels suggest a reversion to mean rather than sustained growth. The Missile Defense Agency also grew by 4.4 percent, to $9.8 billion. The remaining other DoD agencies fell by 0.9 percent in aggregate, to $40.8 billion.
What Is the DoD Buying?
The continuity between FY 2021 and FY 2022 contract spending is notably given the global disruptions caused by Russia’s February 2022 invasion of Ukraine, inflation in the larger economy, and ongoing supply chain challenges. Contract spending grew from $387.1 billion to $414.4 billion in current dollar terms, a 7.0 percent increase. After accounting for inflation, that change represented 0.1 percent real growth.
A key factor enabling this continuity is that while as of February 2023 Ukraine has been given $46.6 billion in current dollars of U.S. aid, with much of that aid transferred in FY 2022, the majority of the arms transferred used Presidential Drawdown Authority. Because drawdowns transfer items already in stock, there was a need to transport them to Ukraine, but they did not have to be purchased as products.
However, these transfers still had important implications for the acquisition system, as the DoD plans to replace the stocks with equivalent or successor systems in addition to taking further steps to strengthen production capacity strained by the unanticipated surge in demand. The United States reported obligations of $432.5 million for Ukraine Mission Support in FY 2022, although this likely excludes or severely undercounts spending for replacements of items transferred to Ukraine.
As shown in Figure 4, the DoD has managed to maintain its system-wide spending in inflation-adjusted terms with mild changes across the broad product, service, and research and development (R&D) areas. Product spending increased by 1.0 percent to $209.1 billion, a comparable level to FY 2018. The peak product spending in FY 2020 was driven in good part by a substantial contract for the F-35. Large contracts for MDAPs often experience increases and decreases rather than steady year-on-year growth. R&D spending grew by 0.4 percent to $35.1 billion dollars, growing six out the last the seven years in real terms. 2. Finally, services contracting fell by 1.0 percent to $169.5 billion.
When considering contract spending by platform, as shown in Figure 5, FY 2022 spending shows a large decline in ordnance and missile spending. As seen in Figure 5, that category fell to $20.5 billion, a 12.8 percent decline, a result that merits closer inspection given the demand for both munitions to backfill U.S. and allied stocks as well as ongoing research into hypersonic missiles. Much of this can be attributed to obligations for the guided missile product category falling from $6.6 billion to $5.1 billion. Some of these changes included normal fluctuations in project funding, with Trident II spending rising from $1.7 billion in 2020 to $3.1 billion in 2021 before falling to $2.5 billion in 2022. However, other shifts run directly contrary to expectations based on external events. Largely within the guided missile product category, obligations for the Guided Multiple Launch Rocket System (GMLRS) dropped from $1.8 billion in FY 2021 to $1.3 billion in FY 2022. However, GMLRS spending in the first two quarters has risen to nearly $2.2 billion, already higher than any prior complete year on record. The rise in GMLRS is in line with a larger overall reversal. In FY 2023; at the halfway mark, nearly $14.5 billion has already been obligated, equal to 70.6 percent of the FY 2022 spend and 61.5 percent of the FY 2021 spend.
Analysis of other platforms is made more challenging by a shift in categorization after FY 2020 that decreases the amount of detail available on DoD R&D spending, which contributed to the rise in other knowledge base systems from $48.9 billion in FY 2020 to $55.8 billion in FY 2021. This shift is a change in classification rather than priority. Obligations are in no small part linked to space systems that are R&D intensive and had fallen due to the decreased granularity of data in FY 2021. However, from that new lower baseline Space Systems increased by 19.8 percent to $4.6 billion. While space spending is widely believed to be tied to classified contracts, space has been an ongoing area of interest both for cutting-edge research and in supporting a range of established DoD capabilities, including global positioning systems and communication satellites. The second-largest increase was in missile defense, which rose by 6.8 percent to $13.8 billion. That level is still below the recent peak of $21.4 billion in FY 2020 but is consistent with an increasing strategic emphasis on air and missile defense driven in part by the demonstration of Russian missile attacks against Ukraine, including the regular targeting of power facilities and civilians.
How Is the DoD Buying?
Assessing acquisition based on contract pricing gives insight into the incentives and distribution of risk between the defense industrial base and the DoD. That said, the reality of acquisition is more nuanced than the data shown in Figure 5. Contracts for high-end weapons systems and other complex acquisitions may employ a mis of contract pricing mechanisms but be entirely reported using the most prominent mechanism.
The inflationary environment that characterized FY 2022 found contractors, especially small and medium-sized firms, vulnerable to the impacts of inflation because most obligations are conducted through firm fixed-price contracts. Firm fixed-price contracting allows for the government to reduce the risk of cost growth by locking contractors into fixed rates for their goods. As a result, contractors assume the risk if their prices were to rise, as they did in FY 2022. Contractors engaged in firm fixed-price contracts were able, in some cases, to receive economic relief from the government in the form of economic price adjustments. However, in dealing with the fallout of recent inflation, alternative contract pricing is likely being pursued by contracting officers and defense contractors. As seen in Figure 6, firm fixed-price contract obligations fell by 2.5 percent from $226.9 billion in FY 2021 to $221.3 billion in FY 2022.
Even so, strikingly, inflation’s impact on the approaches of the acquisition system has not resulted in tens of billions in inflation-adjusted economic price adjustment contracts but instead a clear uptick in incentive-based contracting. Incentive-based contracting through Q2 in FY 2023 is $44.1 billion, already exceeding 80.6 percent of the $54.7 billion FY 2022 annual spending. Such contracts allow the government to incentivize contractors to achieve certain metrics in exchange for additional profits—typically in cost savings. With incentive-based contracts, government and contractors generally share risk, with contractors generally making higher profit if spending is below a contract ceiling and lower profit in the event of a cost overrun.
Defense contracting approaches may be subject to further shifts because of the planned December 2023 defense industrial strategy and larger federal shifts. In early November 2023, the Biden administration released its Better Contracting Initiative that builds off of the “enterprise approach” developed under the Obama administration. The initiative is based on four prongs: data sharing across federal agencies to get lower prices, negotiating common enterprise-wide software licenses, training acquisition leadership to pinpoint requirements for high-priority acquisitions, and developing special tools to address high-risk contracts.
In recent years, acquisition reform efforts have focused on innovation, rapid prototyping, and the transfer of new systems to operators in time to maintain technology superiority. However, the war in Ukraine is an industrial conflict requiring large numbers of items like 155-milimter ammunition along with higher tech systems like drones. While U.S. and allied transfers are often technologically superior to Russian equivalent systems, production capacity—especially for munitions—has increasingly been an area of focus. Congress has authorized wider use of multiyear procurement, which is a vital tool for building this capability. Multiyear procurement gives industry greater certainty that they will receive the necessary return on investment on any costs involved in expanding factory capacity or training new workers.
Although an indication that the data may show increases in the future, the permissions granted in the FY 2023 National Defense Authorization Act (NDAA) have not yet had an opportunity to lead to increases in the FY 2022 data included in Figure 7. The value of this past data is to instead look at prior levels as a baseline. Because multiyear spending is tied to specific systems, Figure 7 shows peaks and valleys in multiple platform portfolios. But even with this volatility, some portfolios like aircraft and ships and submarines still average higher rates of use than others. When shown this data in December 2022, acquisition experts raised concerns as to the quality of multi-year reporting earlier in the century, which suggests treating this history with caution.
Usefully, given the relevance of air and missile defense in the war in Ukraine, multiyear contracting has a growing role for that portfolio, accounting for 14.9 percent in FY 2022. By comparison, only 3.1 percent of obligations in ordnance and missiles was devoted to multiyear contracting. The first half of FY 2023 has not yet shown a proportional increase in use of multiyear contracts for ordnance and missiles, still well below the example of other sectors. That said implementing the 2023 NDAA will be shaped not just by the DoD’s ability to move swiftly on contracting, but also on long lead times for standing up and expanding production activities.
How Is the DoD Acquiring Innovation?
While contract R&D spending has experienced steady contracting growth, the picture is different when including OTA arrangements. OTAs are a flexible alternative to contracting that allow greater freedom when nontraditional contractors have a significant role within a project or when the vendors have made notable internal investments in in developing the product or service they offer. The large FY 2020 spike in Figure 8 can be traced in part to the Army’s role in the federal response to the Covid-19 pandemic. That spending accounted for nearly half of OTA expenditures in FY 2020 and a significant portion of FY 2021 expenditures. OTA spending for R&D fell from FY 2021 fell from $12.6 billion to $8.9 billion, a 29.3 percent decline, with services and products also falling by substantial amounts (36.1 percent and 28.7 percent respectively). As shown in the left chart in Figure 8, OTA spending for products is on a faster pace in the first half of FY 2023 with $1.1 overtaking the total OTA product spending in FY 2022.
However, as shown in the right chart in Figure 8 while ordnance and missiles have been a consistent use case for OTAs, the war in Ukraine has not led to a surge in activity. Instead spending on ordnance and missiles dropped to $1.6 billion in FY 2022, a 29.4 percent decline.
While OTA use has declined from its initial pandemic surge, use of commercial items grew dramatically in FY 2021 and sustained that larger market share in FY 2022, rising 1.2 percent to $109.0 billion. As seen in Figure 9, for the past two fiscal years, at least 26.3 percent of DoD contracting has used commercial procedures, the highest proportional share of this century, although FY 2008 had $112.7 billion in commercial obligations, a slightly higher absolute spending level.
As shown in Figure 10, the Army and the DLA have been the primary users of commercial items and services. Echoing the FY 2020 spike in OTA spending, the growth in commercial contracting was largely driven by the Army Covid-19-related spending similar to the OTA spending mentioned above.
What Is the Shape of the Defense Industrial Base?
The majority of obligation values go to large vendors with more than $3 billion in annual revenue. Of these large vendors, the so-called Big Five contractors are Lockheed Martin, Raytheon Technologies Corporation, Boeing, General Dynamics, and Northrop Grumman. The present form of these companies was shaped in the post-Cold War consolidation in the 1990s and, as shown in Figure 11, since FY 2000 they have accounted for at least 27.8 percent of prime contract obligations. The Big Five’s share of DoD obligations decreased in FY 2021 to 29.4 percent from an FY 2020 high of 36.0 percent. In FY 2022, they received $121.5 billion, slightly lower than their $121.8 revenue in FY 2021.
Obligations to small vendors rose to $81.3 billion, the highest level this century and a tie with FY 2018 of the highest proportion of DoD prime obligations. Obligations to international vendors rose to 3.5 percent of prime contract obligations, still notably below the previous highs from FY 2007-FY2015. FY 2023 has seen Big Five obligations disproportionately arrive in Q1 and Q2, which may simply indicate a renewal of contracts for MDAPs rather than a larger share going to these prime vendors.
Competition and Consolidation
The share of contract obligations originally subject to competition has fluctuated notably in recent years. From FY 2021 to FY 2022, the value of contracts that received three offers or more rose by 15.4 percent to $150.0 billion. Because of this increase, the share of obligations that received two or more competing offers rose from 42.7 percent to 48.2 percent. That latter value is the highest level since FY 2015. This increase is in line with the Biden administration’s emphasis on competition.
As shown in Figure 12, the average level of competition varies greatly between products, services, and R&D. In the rightmost column and least competed for are defense products, where much of the spending goes to weapon systems that the developing vendor has exclusive rights to produce. During the Trump administration, a sustained increase in procurement spending was largely channeled into a purchase of existing weapons systems, which contributed to a falling share of contracts subject to competition. In FY 2022, the value of contracts for defense products receiving two or more offers rose from 27.0 percent to 37.3 percent. This led to the larger increase in competition noted above. This was driven not by a sudden surge of competition for weapons systems but instead by increasing competition for other products related to Covid-19 response.
Services, shown in the leftmost column, have had a stable rate of competition, even as total spending rose and fell. However, in the middle column, R&D contracts show a troubling trend of single-offer contract competition starting after FY 2005 and peaking in FY 2019 at 21.9 percent of R&D contract obligations. Single-offer competition can indicate weakness in the industrial base, as it shows that a contracting officer hoped for competition, but no more than one vendor found it worth their effort to bid. The rate of single-offer competition for R&D has begun to fall, reflected by a declining share of contracts awarded without competition. These R&D contracts awarded without competition accounted for 44.1 percent of R&D obligations in FY 2022, the highest level since FY 2006.
The continuity in contracting and acquisition trends is surprising given the dramatically changed global environment and the role the U.S. transfers have played in supporting the war in Ukraine. However, the acquisition system’s response to this changing operational environment is still evolving as can be seen in the preliminary FY 2023 data, and data on contract spending typically lags strategic shifts. The agility of the acquisition system to change in response to these pressing operational concerns will be shaped by executive branch policies such as the new defense industrial strategy but may be limited if the DoD spends a significant portion of FY 2024 under a continuing resolution rather than new authorizing and appropriation legislation.
This brief is an abridged version of a larger report yet to be released that will look at additional vectors in acquisition analysis. However, even if those vectors were factored into this publication, several questions loom for acquisition analysts. Though this is not an exhaustive list, several important questions stand out:
- Will the replenishment and recapitalization of U.S. and allied stocks lead to gradually increasing contractual obligations, or will the DoD’s obligations stay at the FY 2021 and FY 2022 levels?
- Will these obligations favor existing systems or newer programs such as the Optionally Manned Fighting Vehicle?
- To what extent is the DOD leveraging international partners to address the industrial capacity challenges of the present moment?
- How will the DoD employ its new multi-year authorities to sustain demand for the defense industrial base and develop the future force?
- Did any shifts in FY 2023 anticipate or contradict the new industrial base strategy, and will the apparent rise in use of incentive-based contracts and other non-firm-fixed pricing persist after inflation stabilizes?
- How will the new National Defense Industrial Policy shape future priorities and spending?
Gregory Sanders is deputy director of the Defense-Industrial Initiatives Group and a fellow with the International Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Nicholas Velazquez is a research assistant with the Defense-Industrial Initiatives Group at CSIS. Emily Hardesty and Audrey Aldisert are interns with the Defense-Industrial Initiatives at CSIS.
The authors would like to thank Cynthia R. Cook for her support as the project director. The authors would also like to thank copyeditor Phillip Meylan as well as Jeeah Lee and the CSIS publications team for their quick and thorough work.
This brief is made possible by general support to CSIS. No direct sponsorship contributed to this brief.
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