Measure seeks penalties for contract cost overruns

After years of issuing hollow threats to defense firms over record cost increases on some of the Pentagon's most expensive weapons systems, House lawmakers are attempting to hit the lucrative industry where it hurts most: their pocketbooks.

With little fanfare, the House approved language in the fiscal 2007 defense authorization bill last week to permit the Defense Department to penalize companies that dramatically exceed cost goals on major defense acquisition programs by taking away their multibillion-dollar contracts.

House Armed Services Chairman Duncan Hunter, R-Calif., inserted the language into the $512.9 billion bill, saying it would reopen weapons programs to competition, among other options, if program costs increase 25 percent or more above current estimates, or 50 percent above original estimates.

Defense industry officials, who are long accustomed to congressional attempts to improve Pentagon weapons-buying, said they view it as an impractical, if not impossible, approach to acquisition reform.

"Nobody who knows how this business works thinks this is a feasible tool to employ," said John Douglass, president of the Aerospace Industries Association.

But, if it passes Senate scrutiny and is implemented by the Defense Department, it might have long-lasting repercussions on critical programs.

Both the Joint Strike Fighter and the Virginia-class submarine are teetering on the edge of those parameters, posting cost increases of between 30 percent and 50 percent over original cost goals, according to the Pentagon's most recent quarterly acquisition report released in April.

The Pentagon has 25 programs that have surpassed original cost estimates by 50 percent, including the F-22A Raptor fighter jet and the Army's Future Combat Systems. But the Pentagon is readjusting those program costs, a move that might make them immune to Hunter's provision.

The April report also indicated the department's total program costs had increased by $39.7 million, or 2.6 percent, above previous figures. The department attributed the hikes to, among other things, prolonged development and procurement schedules and increases in support requirements.

Hunter, a vocal critic of the skyrocketing costs of weapons systems, declared that the language would serve as a "tool for competition" that would provide defense companies with a strong financial incentive to stick to program cost targets.

But the defense industry isn't so sure, with several trade group leaders arguing that the language might be a counter-productive exercise that would ultimately drive up costs and delay schedules.

"I am a little concerned about the practical implications," said Cynthia Brown, president of the American Shipbuilding Association. "Just to say you're going to re-compete something I don't think solves the problem."

Indeed, the Pentagon might remove the original contractor from a program -- the development of which can sometimes stretch over several decades -- only to hire a new one that does not fully understand the scope or complexity of the program or the military's technology requirements.

The result? It might have "unintended consequences that may be more costly to the taxpayer," Brown said.

Under Hunter's provision, the Defense secretary would be required to "carry out a rapid assessment" of programs with runaway costs, and determine whether the military could use cheaper alternatives to meet the same weapons systems requirements, according to the committee. If the secretary cannot find an alternative, Defense Department officials still must certify that they reopened competition.

But industry officials have long argued that the fault of those cost increases does not always rest with contractors. Costs of ships, for example, have ballooned in recent years for several reasons, including unpredictable procurement plans and low rates of production.

"Really, it is a three-way street between the customer, the industry and Congress," Brown said.

Douglass agreed, arguing that budget fluctuations and changes in the political environment are not the fault of contractors.

Meanwhile, it does not appear the provision is serving yet as a warning shot to a highly consolidated defense industry, where major players have carved out their own niche. That, of course, drives down competition and limits the Defense Department's ability to shop around for lower-cost alternatives.

"This is nonsense," Douglass said. "If the aircraft carrier program begins to overrun, what do you think they're going to do? Call down to Tampa, Florida" to a small firm to replace a Northrop Grumman or General Dynamics?

Douglass acknowledged the lack of competition, but noted that the military is "pretty much stuck" with the defense industrial base it has.

"There are people out there saying maybe we ought to figure out how to make it more competitive, but this [provision] is not one of them," he added.

The Senate Armed Services Committee did not include similar language in its markup of the authorization bill, portending a conference fight.

Douglass said he was unsure whether Hunter's language will make it through to the final bill. But he noted it amounts to a "harmless" provision that just might.

"This one is not going to shake the foundations of the American industrial base, I don't think, anytime soon," Douglass said. But then, perhaps imagining the provision surviving a conference, he added: "You never know. This is Washington, right?"