New analysis points to 'equilibrium' in DoD contract spending

Tuesday - 10/2/2012, 6:07pm EDT

David Berteau, senior vice president and director of the International Security Program, CSIS

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Over the past 20 years, spending on defense contracts far outstripped growth in the overall defense budget.

But a new analysis from the Center for Strategic and International Studies points to a growing "equilibrium," or steadiness, between contract spending as a share of DoD dollars in the last few years.

Between 1990 and 2011, contract spending grew by 4 percent annually while the overall defense budget inched up just 0.02 percent per year, according to the report.

In other words, spending on noncontract outlays, mostly made up of personnel costs for DoD civilians and military service members, remains essentially unchanged from two decades ago (in inflation-adjusted dollars), said David Berteau, the senior vice president and director of the International Security Program at CSIS and one of the co-directors of the report, in a recent interview on In Depth with Francis Rose.

Contract spending, on the other hand, has doubled, he added.

"That's been a huge increase," Berteau said. "It says that most of the increase for defense (spending) for the last 10 years, more of it has gone to contracts than it has to personnel."

Budget cuts threaten 'steadiness'

The outsized contract spending only intensified during the middle part of the last decade during the wars in Iraq and Afghanistan. The peak came in 2008, followed by a "profound shift," in which the trend reversed — contract spending fell slightly while other defense spending rose, according to the report.

Since then, there's been a "slight downturn," overall in defense spending, although not as dramatic as many defense observers thought it would be, Berteau said. That has contributed to what he called an "interesting steadiness" in contract spending.

"Projecting forward, though, I think that you'll see a more dramatic reduction in the amount of money going to contractors, both on the services side and for hardware for weapons systems and research and development," Berteau added.

Looming large in the future of the defense budget are the impending across-the-board cuts, known as sequestration, set to go into effect in January unless Congress comes up with an alternative plan.

Sequestration would slash Defense budget accounts by 9.4 percent, according to a report provided to Congress by the Office of Management and Budget.

Changing defense industry landscape

The CSIS report also compares a list of the 20 largest DoD contractors in 2011 with the largest contractors in 2001. The top-five ranking "remained nearly intact," the report stated.

But Berteau said examining the full roster reveals three emerging trends.

Some of the companies that made the 2001 list no longer exist as their own discrete identities, he explained, having been bought by other companies. That consolidation began in the 1990s post-Cold War drawdown but continued "even as the budgets were going up" in the 2000s, he said.

Another difference is the number of companies providing services — as opposed to products — that made the list. "Some of that's driven by the wars in Iraq and Afghanistan; some of it driven by the inability of the government to hire and retain the workforce it needs to have to do the work in-house," Berteau said.

Finally, the 2011 lists includes three large healthcare companies. A decade ago, there was only one. Berteau said this reflects the growth in spending for military health care, which is growing 2 and-a-half times faster than for civilian personnel.

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