Sequestration may hit defense industry harder than troops

Friday - 3/30/2012, 5:33am EDT

Jared Serbu, reporter, Federal News Radio

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Pentagon leaders have been telling Congress for months that sequestration would have a "devastating" impact on military programs. On Thursday, officials said it could also mean hundreds of thousands of layoffs in the defense industrial base and undo what progress the Pentagon's made on driving better business deals with industry.

The Pentagon already is worried about the defense industry based on the spending cuts it's already planning for the next 10 years. The reductions mandated by the Budget Control Act reduce DoD's previously-planned budget by $487 billion over that period. Officials say they're keeping a close eye on things, including building a comprehensive sector-by-sector and tier-by-tier map of the defense industry so they can keep better tabs on the health of the industrial base.

Frank Kendall, acquisition chief nominee, DoD (DoD photo)

But Frank Kendall, the president's nominee to be the new Pentagon acquisition chief, told Congress sequestration, which would roughly double DoD's cuts, would change the picture entirely.

"We've already taken $50 billion a year out of the Defense budget. If we had to take another $50 billion out, a lot of that would fall onto industry," he told senators at his confirmation hearing Thursday before the Senate Armed Services Committee.

It would fall disproportionately onto industry because the language in the Budget Control Act lets the President exempt military personnel from the additional sequestration cuts, an authority Kendall said President Barack Obama would likely exercise in order to prevent mass layoffs of servicemembers. Doing so wouldn't reduce the overall cuts to the DoD budget. It would just concentrate them elsewhere. "That would just increase the burden on the research and development, and investment accounts," Kendall said. "It would have a devastating impact."

All vendor tiers would be affected

Heidi Shyu, the acting assistant secretary of the Army for acquisition, logistics and technology, who also appeared before the committee for confirmation Thursday, agreed personnel programs would be shielded from the blow of sequestration. Industry would not.

Heidi Shyu, acting assistant secretary of the Army for acquisition, logistics and technology (DoD)

"The bulk of the Army's budget is in the manning area. That's not going to go down quickly," she said. "The procurement accounts that impact our prime contractors, our second, third, fourth-tier companies are all going to be significantly impacted. And everything we've judiciously worked over the past year to identify cost savings and cost avoidances will be gone."

Gone, DoD argues, because the Pentagon could no longer pay vendors the amounts it's agreed to under existing contracts. Kendall said those contracts have been hard-fought victories under DoD's "better buying power" initiative.

"A lot of the work we've done over the past couple years to get better contract structures would be broken," he said. "The tanker, for example, which the Air Force went through a very laborious process to get under contract with a sound strategy, we'd have to break that fixed-price contract. We'd have to go renegotiate it. And once there's no competitor for the contract, it's a lot harder for us to negotiate a low price. The littoral combat ship is another example. We've got very good prices for that over the next few years, and we'd have to break that one as well. Across the department, there are places where a devastating impact would occur. And it would ripple down to all tiers of the industrial base."

The Pentagon is building a database of the entire defense sector so it can keep tabs on the impact defense cuts are having on small and medium firms.

Kendall said DoD is worried about those companies and wants to be able to intervene quickly if it spots a problem. But under current budget constraints, he said those interventions are going to be few and far between, reserved for cases when a company's failure would mean that the military would forfeit an important niche capability that it can't do without.

DoD facing May 10 deadline

Sen. Carl Levin (D-Mich.), the Armed Services Committee's chairman, asked Kendall to get back to the committee by May 10 with a report on how third-and-fourth-tier contractors would be hit by the cuts DoD's already planning for.

Sen. John McCain (R-Ariz.) grilled Kendall over the cost growth in the military's most expensive modernization program, the F-35 Joint Strike Fighter. DoD reported to Congress earlier in the week that the overall program could cost more than $1.4 trillion before all planes were retired. And the F-35 has already incurred $150 billion in cost overruns.

"We're doing everything we can to drive down the cost," Kendall said. "I think it's getting under control. We're focusing on the sustainment costs, which are larger than the production costs."

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