Defense Contract Trends

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U.S. Department of Defense Contract Spending and the Supporting Industrial Base

In DoD contracting overall, services grew at a much faster pace in the past 20 years than did products and R&D, and were it not for combat operations in Iraq and Afghanistan would possibly have continued to receive the lion’s share of DoD contract awards. Also as a result of these operations, Army and “other DoD” (primarily DLA) shares of total contracting grew while the Navy and Air Force shares declined. With U.S. forces set to withdraw from Iraq, the Army’s contract spending started to decrease in 2008 while the Navy’s spending also shrunk and continued its long decline after a short period of stagnation. In an unprecedented occurrence, the share of Air Force contract spending in the last few years declined to the lowest of all DoD components.

Trends in competition and funding mechanisms were mostly encouraging. Overall, the majority of DoD contract dollars were awarded on an increasingly competitive basis towards the end of the period analyzed, and dollars awarded competitively rose faster than those awarded without competition. The share of contract dollars awarded using fixed price contracts also grew, at a faster rate than cost-based contract awards. Up through 2009, there was a disturbing and sudden rise in “combination” contracts, which obfuscated the total distribution of cost and price-based contracts, but contract spending allocated to this category seems to have all but disappeared in 2010. Finally, in another trend viewed with concern in light of recent efficiency-promoting directives within DoD, the spending on indefinite delivery vehicles rose sharply in the past several years while definitive contracts and purchase orders stagnated and even declined in 2010.

Regarding the industrial base supporting DoD, there is little evidence in the data that the defense industry is consolidating into an oligopoly dominated by a small number of incumbent firms. While the top 5 defense contractors overall and in products and R&D retained their position from 1999 to 2009, there were dynamic changes in the composition of the top 20 contractors in the industry during this time. Health care contractors rose closer to the top within the services category, while energy companies and ground vehicle producers did the same in products. Furthermore, in the fastest growing sector – the services sector – the top 20 list from 1999 is very different than the top 20 list from 2009. This indicates that there is a healthy circulation of contractors in and out of the top positions by value of contracts awarded.

In terms of distribution of contract dollars according to the company size, it is clear that there was a “squeezing” of mid-sized contractors from both large and small contractors. This is particularly noticeable in spending on products, where medium-sized contractors lost their share in the market to both large and small contractors. These data indicate a positive development, however, as it appears that the government’s small business set-aside program is succeeding. Finally, taking into account the numbers for R&D spending and the relatively static positions of top contractors within that industry, it appears that the same 4 large contractors dominated the R&D market for the last 10 years.

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

Jesse E. Ellman

Elena Derby

Roy Levy

Nicholas Lombardo

Cornelia Moore

Guy Ben-Ari

David J. Berteau

Joachim Hofbauer

Reed Livergood

David Morrow