Defense "Seed Corn" R&D Preserved in 2015
March 28, 2016
After five years of drawdown, two questions have loomed large: “When will defense contracting hit bottom?” and “Are future capabilities being preserved despite the current drawdown?” The recently released CSIS report on Department of Defense (DoD) Acquisition Trends answered these and other questions by analyzing DoD contracting data through 2014 to examine how the budget drawdown, sequestration, and its aftermath had affected the defense acquisition portfolio. Though the decline in DoD contract obligations continued in 2014, the decline slowed noticeably compared to FY2013, and based on available budget data, CSIS predicted that 2015 would see the beginning of a bottoming-out for defense contracting.
The decline in DoD contract obligations disproportionally affected the defense research and development (R&D) contract portfolio, but despite worries that early-stage “seed corn” R&D would be disproportionally targeted for cuts, CSIS found that the “seed corn” R&D was relatively preserved. At the same time, obligations for mid- to late-stage R&D fell dramatically, reflecting what CSIS has termed a “five-year trough” in the development pipeline for major weapons systems. Meanwhile, DoD’s services contract portfolio, which was targeted for savings in numerous policy statements from within DoD and in Congress, had surprisingly declined less steeply than DoD contracts overall since 2012.
With FY2015 contract data now available and complete through the Federal Procurement Data System (FPDS), CSIS is able to examine these findings and predictions:
- The rate of decline for overall DoD contract obligations slowed considerably in 2015, which may signal that the decline has begun to bottom out.
- While overall DoD R&D contract obligations declined sharply, early-stage, “seed corn” R&D continued to be relatively preserved, while the trough in the development pipeline for major weapons systems continued into its sixth year.
- DoD services contract obligations declined more steeply than overall DoD contracts, indicating that the unexpected preservation of the services contracting portfolio in recent years may be coming to an end.
- The Navy continued to weather the budget drawdown better than any of the other major DoD components, while the Army’s rapid decline has begun to slow and the Missile Defense Agency declined sharply for the second straight year.
The Decline in Overall DOD Contract Obligations Began to Bottom Out in 2015
Figure 1 shows DoD contract obligations from 2000 to 2015, broken down by what is being contracted for—products, services, and R&D. Above each column is the total for DoD contract obligations in that year. 
Figure 1: DoD Contract Obligations by Area, 2000–2015
Source: FPDS; CSIS analysis.
Since the peak in 2009, DoD contract obligations have declined by 35 percent, from $421 billion to $272 billion, with two-thirds of that decline coming since 2012 under sequestration and its aftermath. As shown, contract obligations declined by 15 percent in 2013, followed by an additional 9 percent in 2014. Based on budget data and other indicators, CSIS predicted that 2015 would see the decline in DoD contract obligations begin to bottom out. This prediction was well founded, as overall DoD contract obligations fell by only 5 percent in 2015, the lowest rate of decline since 2011. Though 2015 saw overall DoD contract obligations fall to their lowest level since 2002, the dramatic slowing of the decline over the last two years indicates that DoD contract obligations may be close to reaching the floor for the current drawdown.
"Seed Corn" R&D Continues to be Preserved, while Trough in Major Systems Development Extends into Sixth Year
Since 2012, R&D contract obligations have declined by 39 percent, half-again larger than the decline of overall DoD contracts. This notable decline was not unexpected, as many observers both inside and outside of DoD have expressed concern that R&D would suffer disproportionately under sequestration and its aftermath. In one respect, however, the decline in R&D contract obligations has defied expectations—while many observers worried that DoD’s early-stage, “seed corn” R&D  would bear the brunt of the coming declines, CSIS’s recently released report on Defense Acquisition Trends found that “seed corn” R&D had actually been relatively preserved, falling by only 29 percent since 2012.
Figure 2 shows DoD contract obligations from 2000 to 2015, broken down by stage of R&D.  Above each column is the total for DoD R&D contract obligations in that year.
Figure 2: DoD R&D Contract Obligations by Stage of R&D, 2000–2015
Source: FPDS; CSIS analysis.
Despite DoD R&D contract obligations falling by 17 percent in 2015, over three times the rate of DoD contracts overall, obligations for “seed corn” R&D fell by only 11 percent. It thus appears that, contrary to the fears of many policymakers, DoD has not targeted its early-stage R&D contracts for disproportionate cuts.
Rather, the bulk of the decline in R&D contract obligations during the drawdown has come from mid- to late-stage R&D, particularly Advanced Technology Development (6.3) and System Development & Demonstration (6.5). In prior reports, CSIS identified the bulk of this decline as resulting from large development programs for major weapons systems either being canceled (such as with the Army’s Future Combat Systems) or maturing out of development into production (such as with the F-35 program). Meanwhile, the military services have struggled to start and sustain new development programs for major weapons systems: the Army has faced particularly severe difficulties in recent years, while the Navy has had to push back several large development programs due to budget constraints, and the Air Force has only recently begun to issue large contracts for its forthcoming development programs. As a result, DoD has suffered through what CSIS has termed a “five-year trough” in its development pipeline for major weapons systems.
The 2015 contract data shows that this trough has extended into a sixth year. Contract obligations for Advanced Technology Development (6.3) declined by 29 percent in 2015, while System Development & Demonstration (6.5) fell by 18 percent. This trough is likely to continue for the foreseeable future, despite the impending start of large Air Force development programs like the Long Range Strike Bomber, because of the Navy’s decision to push back the start of some of their largest development programs, and the Army’s lack of resources and continued uncertainty regarding future missions and requirements.
Contracts for Services Show Relative Decline for First Time Since 2011
Throughout the current budget drawdown there has been speculation, often backed up by official statements from DoD policymakers, that the DoD services contract portfolio would be disproportionally targeted for savings. However, despite that conventional wisdom, CSIS has found that in each year between 2009 and 2013 services contract obligations have declined roughly in parallel with overall DoD contract obligations. In 2014, DoD services contracts actually declined at less than half the rate of overall DoD contract obligations.
In 2015, however, this trend began to reverse. As overall DoD contract obligations declined by 5 percent in 2015, services contract obligations declined by 8 percent. DoD saw declines in all five categories of services that CSIS tracks, with the largest declines coming in Facilities-related Services & Construction (FRS&C), Equipment-related services (ERS), and Medical services. CSIS believes that this may be the delayed implementation of policy targeting the services contract portfolio for savings, but given that overall contract obligations appear to be bottoming out, it is questionable whether this trend will continue in the coming years.
Army Decline Begins to Slow, and Navy is Stable
Figure 3 shows DoD contract obligations from 2000 to 2015, broken down by major DoD component: Army, Navy, Air Force, Defense Logistics Agency (DLA), Missile Defense Agency (MDA), and “Other DoD,” which includes all other DoD contracting entities.
Figure 3: DoD Contract Obligations by Component, 2000–2015
Source: FPDS; CSIS analysis.
The Navy has weathered the current drawdown exceptionally well, declining at slightly more than half the rate of DoD overall since 2012. In 2015, Navy contract obligations were virtually flat (-1 percent), while overall DoD contract obligations declined by 5 percent. Despite that relative stability, however, there were significant differences in the trends seen within the different areas of the Navy’s contracting portfolio—Navy contract obligations for products increased notably in 2015, largely due to increased obligations for aircraft, while obligations for services declined moderately, and those for R&D declined sharply.
Army contract obligations, which had declined by 36 percent since 2012 and 55 percent since 2009, declined by only 6 percent in 2015, less than half the rate of decline from 2014, and roughly in line with the decline in overall DoD contract obligations in 2015. Army obligations for products increased slightly, due largely to a significant increase in obligations related to Missiles & Space, while obligations for services declined sharply (due primarily to decreased obligations for FRS&C), and obligations for R&D contracts were stable. This data may indicate that the cratering of Army contract obligations in recent years has finally come close to reaching a bottom.
Contract obligations by MDA, which declined at over twice the rate of overall DoD contract obligations in 2014, declined by a further 24 percent in 2015, nearly five times the rate of decline for overall DoD. The decline in 2015 was primarily driven by a nearly three-fifths decline in MDA contract obligations for R&D, to the lowest obligations level in the 2000–2015 period. Overall, MDA contract obligations in 2015 were at their lowest levels since 2006.
Air Force, DLA, and “Other DoD” all declined roughly in parallel with the decline in overall DoD contract obligations in 2015.
Though CSIS is still in the early stages of analyzing the FY2015 DoD contract data, a few notable trends are already apparent. The bottoming out of the decline in overall DoD contract obligations that CSIS predicted in our recently released report on Defense Acquisition Trends appears to have begun in 2015. It is not a coincidence that this bottoming out comes at the same time that the decline in the Army’s contract portfolio has begun to slow; the massive decline in Army contract obligations was a major driver of the overall DoD decline. At the same time, the anticipated targeting of the services contract portfolio for savings, which had not come to fruition in previous years, is finally happening in 2015. R&D contract obligations continue to decline dramatically, even as “seed corn” R&D is relatively preserved, due to the now six-year trough in DoD’s development pipeline for major weapons systems. Finally, while the Navy continued to weather the drawdown relatively well, MDA has seen severe reductions in its contract portfolio over the last two years.
CSIS will continue to analyze the FY2015 contract data in the coming weeks and months; keep an eye onDefense360 for more analysis of defense contracting and acquisition trends.