Defense Giants Score Poorly on Arms Development

Defense Giants Score Poorly on Arms Development

Northrop Grumman Corp., maker of unmanned systems including the Global Hawk drone, and Raytheon Co., the world’s largest missile-maker, rank at the bottom of the pack in weapons development performance, according to a new report from the Defense Department.

The acquisition document, called the 2014 Performance of the Defense Acquisition System and released last week, compared the Pentagon’s top contractors in terms of their ability to develop and produce weapons systems on time and on budget.

The report analyzed contracts for major defense acquisition programs over more than a decade, from 2000 through 2013, and compared the performance of the biggest firms by the development and production phases of the acquisition cycle.

In terms of cost overruns on development programs, Northrop fared worse than any of its peers, with a weighted price growth average of 41 percent, followed by Lockheed (37 percent), Raytheon (32 percent), General Dynamics Corp. (22 percent) and Boeing Co. (8 percent), according to the document.

The British defense giant, BAE Systems Plc, was the only one of the group to develop weapons under budget, with a price growth of –3 percent, it showed.

Overall, cost overruns on development contracts averaged 29 percent, fueled by an average price growth of 77 percent on contracts held by more than a dozen smaller contractors, including the ship-builder Huntington Ingalls Industries Inc. and the drone-maker General Atomics.

The pool of development contracts included such programs as Lockheed’s F-35 fighter jet and Boeing’s KC-46A refueling tanker, which, though not complete, have obligated enough funding to get an indication of performance, the report states.

While the authors of the report couldn’t determine the cause of the price increases, they did note that contractors with the highest cost growth received two-thirds or more of their dollars through so-called cost-plus-award-fee, or CPAF, contracts — a type of award that’s “now discouraged for most purposes because it has not provided an effective incentive to control costs in most cases.”

BAE, which makes the M109 Palandin howitzer, also bested its peers in developing weapons on time, according to the document. “In terms of schedule growth, BAE Systems had the best performance (with no schedule growth on any of its six contracts),” it states.

The company with the longest developmental delays was Raytheon Co., with an average schedule growth of 2.8 years, followed by Lockheed (2.5 years), Northrop (0.9 years), Boeing (0.8 years) and General Dynamics (0.2 years), according to the document. Overall, delays on development programs averaged 2.5 years, driven by an average delay of 3.4 years on contracts held by the group of smaller contractors.

Contractor performance, however, was markedly different for weapons production.

In terms of cost overruns on production programs, Boeing performed the worst of any main contractor, with an average price growth of 24 percent, followed by Huntington Ingalls (21 percent) and trucker-maker Oshkosh Corp. (13 percent). The rest of the prime contractors all performed significantly better than the overall average of 12 percent and, in several cases, recorded negative figures.

The company with the longest delays on production contracts was also Northrop, with an average schedule growth of two years, followed by United Launch Alliance LLC (1.3 years) and Boeing (1.1 years). Overall, production program delays averaged half a year.

Oshkosh was the best performer in this category, completing all of its contracts on time or sooner than planned.

The report didn’t go into detail about cost and schedule differences by weapon systems, but did note that General Dynamics, on the whole, performed better than Huntington Ingalls, with “significantly lower cost, price, and schedule growth” even though both ship-builders received the same types of contracts.

Finally, the document pointed out that defense contractors are earning “adequate” profit margins of about 9 percent, which is consistent with the 8.4 percent average margin on the sample of development and production contracts. “There is adequate opportunity to provide effective incentives to industry without changing aggregate returns for defense firms in general,” it stated.

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Like I’ve said before, NO more cost-type contracts. Every contract should be firm fixed price for that year’s efforts. Otherwise, the government, who wants the product and has no incentive to properly manage the taxpayer’s money, allows the contractors to run up the bill.

And that’s exactly *not* what the report says. It calls out problems with Cost-Plus-Award-Fee contracts, but specifically highlights Cost-Plus-Incentive-Fee contracts that are working well. The bottom line from the report regarding contract types is not that any particular contract type is good or bad, but that the contract type must be appropriate to the phase a program is in and the risk that is assumed. Firm Fixed Price contracts can be equally bad, causing the government to spend significantly more than required, when applied in the wrong context — the difference is you never see a cost overrun, but the contractor is incentivized to bid high to cover their risk and pocket any resulting savings.

Much of what is being highlighted here, since the programs in question are engineering-heavy, is down to an inability to competently manage technological risk.

That is a multifactorial problem. Plenty of blame to go round.

Some of it is due to management deficiencies at the prime contractors. Who along with the rest of American industry decided starting 30 years ago that it was perfectly all right to have nontechnical MBA managers in charge of highly complex technical programs. (This attitude has caused problems in industries across the board, including ones with no defense component.)

Some of it is due to the uniformed services having short-sightedly slashed and “deskilled” their own in-house design and procurement staffs in the 1990s, and not having rebuilt that capability since.

And, ultimately, a _lot_ of it is down to the ultimate authority in defense procurement, the definitive wielder of the national checkbook, being Congress. We have a Congress which is scientifically and technologically illiterate, consisting overwhelmingly of lawyers and career political hacks.

Very few elected people on Capitol Hill have a STEM background. They exert a damaging effect on engineering program management for defense simply because they have no clue as to how engineering is done in the real world.

China has the huge advantage that its defense industries are much more efficient and the gap is getting wider. In the US the contractor mantra is deliver less for more. Whether that is cost overruns or simply already bloated procurement budgets and rigged contracting is just a matter of tactics. The bottom line is that if you get exactly the same job done by a military contractor it will be at least 260 times more expensive than getting it done in the commercial world. The commercial world has to compete with china the military contractors just have to beat the US taxpayer.

I really don’t get the whole, “it’s Congress’ fault” thing. The Federal Acquisition Rules are written and implemented by the Executive branch, not Congress. Congress is responsible for the A-10 still flying and most of the open airplane and tank assembly lines we have today. The executive branch wants to close all existing weapons assembly lines and spend all their money on defense contractors doing the very development work they suck at. Your dissatisfaction would be better targeted where it does some good.

While the authors of the report couldn’t determine the cause of the price increases, they did note that contractors with the highest cost growth received two-thirds or more of their dollars through so-called cost-plus-award-fee, or CPAF, contracts — a type of award that’s “now discouraged for most purposes because it has not provided an effective incentive to control costs in most cases.”

Now this is what I think is f’ed up. Even when they identify what kind of contract is the worst of the worst, duh, they can’t figure out why. It’s a contract that essentially guarantees a contractor $1.10 for every $1.00 they spend, but “we can’t figure out why that might be a bad thing.”

Only a cursory reading of the document and we find the title of the publication is accurate, and the title of this article is ‘not’.
Closer examination shows it is a somewhat limited of an analysis of the ‘system’ trying to identify what ‘is’ with no finger-pointing as to any particularly causes or culprits for any problems observed. In fact the document goes further to explicitly state there is insufficient information to do so. Aside from the questionable application of statistics throughout, this is a remarkably benign document.
Hope some contractors don’t decide the title and related aspersions regarding ‘performance’ are a product of malice vs. incompetence.

BTW: The FAR System is the means by which the Federal Government applies and complies with the requirements of 41 U.S.C. chapter 13: laws passed by and amended at the whim of Congress.

And this study was brought to you by the hard working folks in the “Defense Giants are sucking the life out of us Department” as a part of SecDef and is headed up by a 4 star air force generalli. This department manages to produce this report with only a staff of 5,348 and a budget o only $847.53 Billion

An interesting thing about this department is that they have their own Cyper SWAT team since Lockhead Martin was caught hacking into their power point presentations, and making Northrup looks worse, last year ;-P

Passed at the whim of congress. That’s funny.

What that tells us is that straight up socialism works better than our form of defense procurement. Of course, who couldn’t see that coming? Our system pays defense contractors more if they f up, more if they drag things out, more if they kill someone. Then we all sit around wringing our hands wondering why this stuff happens. It’s like no one has any idea what capitalism is. Everything is pure f’ing magic. Everything is a buzzword and that’s as much thought as anyone in this country wants to invest in how this country is run.

I liked the line about how they are going away from Cost Plus Award Fee contracts. Right, probably only 99% of your tax dollars are wasted that way every year. Hell, that”s why the Navy can’t design their own ships anymore. They might keep one of their damn contractors from getting their fair share of that free money give away otherwise known as “profit on development costs.”

I say quit spending our money on development period. If a private company wants to sell the government something, then they cover they development costs and recover those costs through profit on the sales of goods. If no commercial companies want to step up, then the service branches should staff their own design bureaus, like they used to. This system we have now is worse than useless. It’s nothing more than welfare for the corporate elite. Hell, I’d rather the federal government send all my tax dollars to crack whores than give another cent to the CEO’s of Boeing and Lockheed. Those jerks are screwing this country right into the ground.

Hummm,…can’t quite pin down the reasons for the variations in cost and price, and need future studies to continue to examine the problems. The conclusions in the analysis sound vaguely similar to the costs problems in the contracts themselves. Plus, the authors suffer from the same sickness as the defense industry in general, that is, create a a little business for yourselves in perpetuity. So, we have the blind leading the blind, and the taxpayer gets shafted yet once again.

Once a contract is awarded, systems are added. Who’s gonna pay for that?

This response by Dfens seems to be written by someone that definitely has not or does not work in the defense industry. As someone who is an engineer for one of those companies, I can fully attest that all blame does NOT fall on the contractors. It is atrocious at how the government runs most of these programs. They are indecisive, afraid to make decisions, provide horribly written requirements if they provide them at all, and are constantly changing the requirements once programs are underway. That is what drives the delays and costs.

I remember a contract where we wanted to do something easier, faster, cheaper and better based on emerging technology. Government representatives said they couldn’t do that as the requirements couldn’t be changed. Their reasoning was that the requirements for the software had been there for 10 years and needed to be met as written. Much money was wasted, and delays encountered while we recreated the “old way” on a new software platform. Sheesh.

Prime example of Government at it s best. The bean counters do not understand that COTS equipment is not meant to last for decades like MIL equipment That is why it takes so ling to get something up-graded and cost more

I could not agree more. It is true that the contractors are not blameless in many cases. I’ve been on some REALLY poorly managed programs at one of the big firms, but he customer has to take a large chunk of the blame. If the customer keeps changing the requirements, tries to make one program do absolutely everything, and wants reams of documentation for every bit of code or hardware, the costs and schedule will soar. I’ve also dealt with contracts that have been successfully completed after years of development only to have the government decide they don’t like the design anymore. They’ve moved on to the next shinny thing. Contractors are the way they are because they operate in this messed up environment that the customer has created.

While you whine about “who is to blame” the defense contractors are making record profits all the way through the last recession only to have those profits dented slightly by sequestration. Yes, I too want to cry my heart out for these poor defense corporations that are forced to make so damn much money off of the tyranny of indecisiveness that plagues them from the customer side. It’s clearly a conspiracy which instead of damaging their bottom line, somehow miraculously helps it. Golly gee, it makes me want to believe in unicorns.

Otherwise known as “research for the sake of funding.” Been there and spent that money. Another thing I’m not proud to have participated in. Guess what happens to the guy who says, “I guess we’re done here?” It’s not pretty.

Name one system that has been added to the F-35 or F-22? I worked on F-22 and there were no systems added, only deleted. We deleted capabilities continuously on that program and every time we did the cost of the program went sky high.

Two Government issues never addressed:
— Requirement/Specification/Schedule creep — I wonder when the F-35 will need to be a submarine…
— Accountability — Government idiots are never fired or rendered unemployable

Yeah, saw a lot of that on P-3. They claimed it was to save money in training. Because it is always easier to type a command in the command line than it is to just hit an icon, right?

Straight from the article: “the document pointed out that defense contractors are earning “adequate” profit margins of about 9 percent”

9 percent is certainly not “record profits”, nor are profit margins particularly high compared to other industries. You can easily look up this public information on YCharts, e.g., http://​ycharts​.com/​c​o​m​p​a​n​i​e​s​/​B​A​/​p​r​o​f​i​t​_​m​a​r​gin.

Old Lockheed proverb, cost much more to delete than to add

In this case, it cost a lot to delete, but even more to keep because they were falling flat on their ass trying to do what they said originally they could do. It was the same way with space station. Every year they’d cut huge amounts of capability and still the cost would go up exponentially.

Here again, name one requirement that the government has added to the F-35. One more person talking out of their ass.

Both Informed and Mule make a good point. I am a recently retired engineer for a major defense contractor. During my time there I worked on several programs where “requirements creep” caused new requirements to be added after the development was well along. In the FCS program, Shinseki gutted TRADOC and subverted the existing acquisition process so badly that the government ended up outsourcing the requirement writing to the competing contractors. We were tasked with envisioning future warfare (on a competitive basis), and then writing specifications for families of vehicles to fight it. One of the teams ended up making everything amphibious on the assumption there would be no usable bridges in combat zones. Another included a bridge-layer and got around the amphibious requirement. Another thought everything should be air-cushion vehicles. There was no government-specified ballistic threat, so some contractors got around weight limitations by “assuming” that Blue forces would always have such information dominance that they could avoid contact with enemy forces and would seldom be shot at. As Mule says, documentation requirements for defense contracts are unbelievable. One day in the mid-1990’s I was walking past a conference room with a temporary sign that said “1985 Audit in progress. No Entry”. I assumed this was some audit connected with some Form 1985 or something, but I learned it was an audit to account for some cadmium plated bolts for the 1985 production year. The bolts had been provided by the government, and we had to prove they had all been installed in vehicles we built that year. As for calls for elimination of Cost+ programs, frequent cancellation of programs “for the convenience of the government” means that most contractors would “No Bid” requests for proposals, based on likelihood that the company would pay for development of systems, and the Government would then decline production. Companies are lucky to break even on development. They make money on production. In one incident involving a major system (which we lost), our competitor lost money on the development phase, won the contract, and then the Government lost interest as another “shiny thing” caught its attention. My boss quipped, “All we have to do is lose another two or three of these programs, and we’ll run the competition out of business.”

Good summation, Torquewrench. The erroneous belief that MBA’s can contribute “pure management” without knowledge of the technical issues was fomented in the ’80’s by people who believed that the Harvard Business School and its kindred could produce people who could manage anything. Technical industries fell for it, with the result that engineers in the trenches spent a lot of their time explaining to their bosses what we were doing. I remember a presentation I attended in grad school at the University of Michigan. The President of Toyota Motors, Mr. Toyoda (different spelling) personally briefed the intricacies of their new automatic transmission to an audience of graduate automotive engineers, and then went off-script to answer questions afterward. At the same time, CEO’s in Detroit were bemoaning the ascendancy of the Japanese auto industry while they concentrated on designing DVD players that fit into the backs of headrests so the kids could watch cartoons in the back seat.

There was all this “requirements creep” but funny how you don’t identify any requirements that caused any increase in scope. As usual.

Boy oh boy — is the U.S. Government stupid or what!!! Cost plus is a program that is absolutely guarenteed
to end up with the U.S. Government getting screwed bigtime (but who in the government cares, because
they (and the retired Generals) get kickbacks. How do the Generals get kickbacks? When they retire
they get a job as a Vice president with a denfece company. They contact their old buddies that replaced
them and everybody gets rich at the expense of the taxpayer. Whet I worked as a Security Guard at Lockheed Martin I once asked a friend of mine (from another Lockheed branch) why when four guys visited our company they would each rent a big Hertz Rental car when they could get by with one car. He said “Bill, Lockheed gets
cost plus 11 percent on this contract. If we rent one car and it costs us four days rent at 30 dollars a day
then we (Lockheed) gets only ll percent of $120.00 dollars. We rent four cars and take out all the insurance possible and the bill comes to more than 1,000.00 dollars” On and on it goes. Retired Chief.

Nothing will ever change people. This is a racket that has gone on for over 60 years and it will continue. Both sides profit way to much to change things.

60 years? Maybe if you include NASA. Cost Plus started being used by the Air Force in the early 70s. Cost plus award fee started in the 90s. If they can get worse, they can get better.

Commercial build specs are totally different to milspecs. I worked for a defence electronics contractor (not in the USA) that thought it would expand its business by starting to use the military production lines for commercial production. Didn’t work — you either end up with sub-standard military items or over-specced and tested commercial items.
In certain fields this might work, but it the majority it won’t.
Cost-plus contracts are a contractor’s dream — but sometimes are the only way forward when you are entering a completely new field where no-one has the expertise or the experience to produce what’s needed.
The fairest (to both sides) is a firm price adjustable for inflation in terms of specific matters, such as materials, power, etc., as this takes out a lot of the risk for both sides.
Looks as if the F-35 contract + having the government to pay for for all the engineering cock-ups in design and construction must seem like a blank signed cheque to LM — blame the military for not knowing how to write a decent contract and then insist on compliance. Methinks that the military becomes terrified at the possibility of not getting its latest toy and throws money at contractors who point out that the dream toy cannot be made/designed/finished/flown until another few billion comes there way.
The more complex and over-engineered items become, the more they cost and the more that can go wrong. The USA seems to be dazzled by the latest gadget instead of using hi-tech in some areas and common sense in others.

Research and development and technologies are mostly provided by BAE Systems Plc and Cobham Plc and supplied to Raytheon and Northrop. Grumman, Boeing, Lockheed, General Dynamics, et al. Without British and Israeli super technological know-how U.S. modern defence systems would come to a standstill.

Could it be that a part of these cost overruns go into black programs, sometimes I wonder…

Cost plus contracts are not the only way forward, nor are fixed price contracts the answer to everything. Companies can design products that meet mil spec when they design them for the military. There’s no magic involved in that. They should either design and prototype them on their own funds or they should let the military design their own weapons. There’s no reason for the federal government to sign the US taxpayer up to cover the development costs of any private corporation’s stuff — EVER! Hell, we have a 200 year history of the system working just as I say it should work now. I’m not reinventing the wheel here. I’m saying go back to what worked.

I suppose anything could happen, but typically it doesn’t work that way. There is a budget for classified programs that is separate and all but the high level numbers are themselves classified.



Here’s what the report says about fixed price contracts:

Prices on fixed-price contracts are only “fixed” if the contractual work content and deliverables remain fixed; such contracts can be (and often are) easily modified to handle unexpected technology gaps, engineering issues or shifting threats, leading to cost growth. At times fixed price vehicles can be virtually indistinguishable from cost plus vehicles, as was the case with the Air Force’s canceled Expeditionary Combat Support System (ECSS).

This is what I’ve been telling you about fixed price contracts. That’s not the solution. The solution is for the federal government to stop putting the US taxpayer on the hook for a private company’s development costs! It puts all the risk on us, and the private company gets free money. That’s a stupid system no matter what you call the contract it works under.

Here’s another interesting conclusion of the report that mirrors what I’ve been saying:

higher production margins should motivate contractors to get out of development as soon as possible.

Kind of a “duh,” I know, but here it is, a conclusion of an actual study. You paid for it, you might as well take advantage of it.

Part of the problem is that when a gov’t employee tries to hold the contractor to the FAR, that is when the phone calls from lobbyists and congressional staffers start. They exert more influence over a technical issue, than any gov’t engineer could. Welcome to my life… The big contractors make good sales pitches then fail to deliver. I agree we need to allow no requirements changes once the contract is let, this would also help.

The cause of overruns is obvious to anyone who works in the defense industry. Cost-plus contracts encourage underbidding by defense companies. Often, procuring Government agencies explicitly state they want lowest price, technically compliant with the requirements. To win such a contract, the contractor *must* underbid its competitors. But companies must make their profit to stay viable, so the winner will overrun. In addition, despite a lot of hype about “80% solutions” that are compliant with most but not all requirements, the Government still wants state-of-the-art technical performance, which means high risk. And must of the time, the requirements are not fully defined at contract award, so the Government and the contractor have to spend time and money refining them. Consequently, fixed price contracts will not control cost, but they may drive up bids and reduce the number of systems the Government can afford to buy (probably a good thing).

Oh, so you’re to blame for all this nation’s problems. You’re part of that vast conspiracy of procurement people who have forced the defense contractors to make huge profits even though all they really want to do is design good weapons on time and on budget. Despite the fact that they obviously profit from dragging out and f’ing up the design, they shun such behavior, but you gosh darn evil procurement people force them to do those very things and make double or triple the profit they would have made on their own without anyone to watch them. I have an idea, why don’t you give us some examples of all those requirements you’ve changed over the years that have driven the prices of these programs sky high? Just one or two examples would be great. There must be a million of them, but funny how no one ever identifies even one. Why do you think that is?

Hell yeah, there’s so much under bidding going on. That’s why a DDG-1000 costs more than 2 Iowa Class Battleships, because it was under bid. That’s why it nearly costs as much as a Nimitz class aircraft carrier ($4 billion vs. $4.5 billion) too. It was all that damn under bidding.

Based on this report, hats off to BAE, the only contractor to develop weapons on time, and under budget. The government should hold all contractors to this standard. The contractors with the high cost overruns should pay stiff penalties and cut into their hefty 9% profit margins. Their bids include overrun cost to start with, and their performance records should be a major factor in the selection for new bids. No one tied to government should be able to work for a government contractor. One of the best examples of this is the DTCI initiative. The government (American People) paid $ Billions for bloated transportation cost, from a third party.

Sure, here’s the magic answer. Clearly the system that pays contractors more to f us over will work if we just pick the right contractor. If we do that, maybe they won’t notice that they get paid more if they drag out development and jack the prices through the roof. Maybe they won’t notice that all the risk is on the US taxpayer and not them. By the way, does anyone know where I can get $1.09 for every dollar I spend? I’d love to be able to spend myself rich.


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