Broken Contracts

Cuts to defense damage economy, weaken military preparedness, insiders say

April 3, 2012

A series of major cuts in military spending is gutting the defense industry, imperiling the country’s economy and weakening military preparedness for many years to come, defense contractors and military experts say.

The nearly $1 trillion in mandated defense cuts have already led some major Department of Defense (DOD) contracts to stall, prompting unprecedented worry from an industry that generates $324 billion in revenue and accounts for 2.23 percent of U.S. gross domestic product.

Congress, in its August debt limit deal, signed off on $487 billion in defense cuts over the next decade. Failure to agree on further cuts by December will lead to another $500 billion reduction in defense spending, otherwise known as "sequestration."

"We’re looking at it all with a great deal of concern," said Cord Sterling, a vice president at the Aerospace Industries Association, explaining that quality is ultimately sacrificed as contractors are forced to appeal to the lowest common denominator.

The cuts are expected to cost the industry a third of its active workforce, cause manufacturing plants to be shuttered, and lead to a reduction in the amount of money spent on research and development projects, which are seen as critical to the industry’s ability to innovate.

"There are major shifts that will take place," Sterling said. "This is significant and long term. You can’t turn it off and on."

One major defense contract, the E-SMARTS, has been stalled for more than a year, sparking several rounds of layoffs that have cost eligible contractors more than $63 million, according to some estimates.

Operating out of the National Geospatial-Intelligence Agency (NGA), the E-SMARTS is meant to provide logistical and technical support to the intelligence community.

But, with the contracts dangling in limbo, industry insiders are beginning to express worry.

"We’ve started scratching our heads" because the contracts are a "critical key to America’s military intelligence," noted one longtime defense contractor and former government consultant who is knowledgeable about the issue. "We’re trying to figure out if they’ll just drop it altogether."

The source explained that the contract should have been finalized by June 2011. However, the government pushed the contract back until October, then November, and then March of this year, the source said.

"The anticipated award for E-SMARTS will be NO LATER THAN March 2012," according an email sent by the NGA’s Acquisition Contracting Office obtained by the Free Beacon. "I will not provide individual offers or more information about E-SMARTS."

The repeated deferral has cost around 100 potential bidders money, employees, quality, and stability, the source said.

"There are critical positions in all these contracts that need to be filled," said the source, explaining that postponements have cost his company "hundreds of people," which, in turn, can compromise quality.

"Can we blow a hell of a lot of money on no work or what?" complained the source. "Now you know why contractors are so frigging expensive. The upfront cost to satisfy the government bureaucracy is unparalleled."

Confusion surrounding the E-SMARTS is just one example of what insiders call a disturbing trend in the way defense cuts are impacting the industry.

"The country is hiring inadequate contractors with minimum standards being provided—sometimes below minimum standards," said Andrew Garfield, founder of Glevum Associates, a research and analysis firm that works closely with governments across the globe. "And it’s getting particularly harder as of late."

"With the defense cuts," Garfield added, "it will get much, much worse."

Industry standards are plummeting and the U.S. government is looking to complete complex tasks on a shoestring budget. This means that contracts are being awarded to firms that are poorly prepared to manage the tasks at hand.

This approach "has gotten much worse since this administration came in," added a second contracting source who requested anonymity. "What they want is to secure the lowest bids, and they will manipulate the process any way they can to get the lowest bid. There’s almost no measure of effectiveness."

Contractors risk their livelihoods by publicly criticizing the administration’s policies, this source said.

"It’s very daring to speak out against this administration because it’s very vindictive," one contractor said, suggesting that contracts could be cancelled as retribution.

Defense cuts and the looming sequester have negatively impacted the troops’ readiness for battle, said Michael Rubin, a former Pentagon adviser on Iran and Iraq who is now a resident scholar at the American Enterprise Institute, a conservative think tank.

"For at least the past five months the funding has been so hand-to-mouth that the normal training for troops has fallen by the wayside because they depend on contractors who need more than a day’s notice," Rubin said.

Due to issues like short notice from the government, he said, it can take "four times as much money to do the same thing."

Poorly prepared contractors also can cause international incidents.

Cultural sensitivity courses, typically a prerequisite for the troops, have been cast to the wayside in certain instances, said Rubin, pointing to an increase in embarrassing encounters such as the recent Koran burning episode in Afghanistan.

Units such as the one involved in the Koran burnings "were in the minority of units that didn’t go through the culture training, so that seems to indicate that there is value," Rubin said.

Economic prognoses for the industry are dire.

Estimates show that $45.01 billion in spending reductions on equipment in 2013 may result in additional losses of $164,059,027,945 throughout the broader economy, according to a report recently released by George Mason University.

"For each $1 in DOD spending reductions for military equipment, an additional $2.64 in sales losses will be experienced by other businesses with 71 percent of these lost sales occurring as a result of decreased consumer spending by workers directly and indirectly affected by these DOD spending reductions," the report concludes.

In addition, the U.S. could lose more than 1 million "full-time, year-round" jobs, raising unemployment rates to 9.7 percent.

The grim outlook and decreasing number of viable defense contracts has forced some companies to consider diversifying their businesses.

"Honestly, we’ve never had to" do that before, said Carole Bionda, vice president and general counsel at the Nova Group, a general engineering contractor that has worked mostly with the government.  "We’re deliberately looking outside of that comfort level."

Cutbacks mean that the government is "robbing Peter to pay Paul and even Robert will be broke, too," said Bionda.

"Some of us can’t remember a backlog as small as this," Bionda said of her job prospects. "Will the work still be there in six months? I don’t know. Will it be there in nine months? I really don’t know."