Defense Cuts Increase Risks for Smallest Contractors | The Fiscal Times


As defense budget cuts drag on, and with the sequestration looming on the horizon, smaller contractors in the Pentagon’s supply chain are feeling the pinch.

Whereas prime and top-tier firms have several if not dozens of contracts with the Department of Defense, allowing them to absorb losses from occasionally canceled orders, small business manufacturers often provide parts for just one or two projects. That leaves them susceptible to even modest reductions in military spending.

“Of particular concern to DOD are the implications of the continued budget environment for small innovative companies,” the Pentagon said in its annual report to Congress detailing the state of its industrial capabilities. “As we collectively live through this downturn, small companies are going to have the greatest difficulty absorbing cuts.”

Bigger, publicly traded companies such as General Dynamics, Lockheed Martin and Northrop Grumman have weathered the defense-wide spending reductions pretty well, despite persistent warnings to the contrary. That’s one reason why the Pentagon has the authority to keep afloat small, privately held manufacturers that may be the sole supplier of specific hardware for vital programs facing unexpectedly higher unit costs.

“We continue to focus on smaller, lower-tier firms to identify those which may warrant action if appropriate,” the Pentagon said in its annual report.

Such action may be warranted between now and mid-June. Last week the Defense Department said two programs – unmanned helicopters and a guidance system for plane landings – had unit-cost increases of at least 50 percent, prompting congressional notification and a 60-day review by Pentagon officials who will decide whether continuation of the programs is vital to national security. The new expenses stem from fewer orders based on shifting priorities for the Defense Department.

Sean Kennedy, director of research for the watchdog group Citizens Against Government Waste, said such decisions are best left to Pentagon officials and not members of Congress who can sometimes view defense contracts through the lens of constituents or campaign donors and not the national interest.

“DOD acquisition should never be misconstrued as a jobs program,” said Kennedy. He noted that while “the service providers in the defense industry are the ones who are hurting after the boom years of Pentagon spending, those supplying weapons systems are reporting record profits.”

Still, prime and top-tier contractors such as Lockheed Martin and Northrop Grumman are not immune to fewer defense dollars in circulation, at least in the eyes of the Pentagon.

“Sequestration and longer-term budget cuts, as well as prolonged uncertainty, could limit capital market confidence in the defense industry,” the Defense Department said in its industrial capabilities report.

While the little guy at the bottom of the supply chain is dependent on those at the top, austerity measures should force the Pentagon to reconsider which producers need saving, something that rarely occurs, according to a former director of manufacturing and industrial base policy at the Defense Department.

“Instead of understanding the true, critical nature of the lower tiers of the industrial base there was an effort to preserve platforms to help all suppliers survive,” Brett Lambert told National Defense Magazine. He said that in timers of cutbacks the Pentagon should support “the industrial base we need, not the one we have.”

via Defense Cuts Increase Risks for Smallest Contractors | The Fiscal Times.