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Summary of Defense Acquisition Trends, 2016: The End of the Contracting Drawdown

Core Content

This report, Defense Acquisition Trends, 2016: The End of the Contracting Drawdown, examines the trends in U.S. Department of Defense (DoD) acquisition activities from 2009 to 2016, with a particular focus on FY2016 data. It highlights changes in what the DoD is purchasing, how it is purchasing, and from whom it is acquiring goods and services.

Main Points

1. End of the Contracting Drawdown

• Overall Contract Obligations: The decline in DoD contract obligations, which had been significant since 2009, began to stabilize in 2015 and saw a notable increase in 2016, marking the end of the drawdown period.
• Stabilization in 2015: The decline in overall DoD contract obligations slowed, with a 0% change in 2015, compared to a -14% change in 2014.
• 2016 Increase: DoD contract obligations rose by 7% in 2016, which was higher than expected. This increase was primarily driven by procurement of major weapons systems, though some programs like the F-35 saw declines.

2. Defense Innovation Initiative

• Third Offset Strategy: The initiative, aimed at maintaining U.S. technological superiority, was a top priority for the DoD.
• DIU(X) Expansion: The Defense Innovation Unit (DIU(X)) opened offices in Boston and Austin to foster innovation and technology acquisition.
• Strategic Capabilities Office (SCO): The SCO, led by Dr. Will Roper, has been instrumental in identifying and integrating innovative technologies across the military services.
• Uncertainty for Future: The new administration's stance on military innovation remains unclear, though the retention of Deputy Secretary Bob Work suggests continued interest in the initiative.

3. R&D Contracting Trends

• R&D Cuts: R&D contract obligations have seen significant cuts, particularly in mid- to late-stage programs such as Advanced Technology Development (6.3) and System Development & Demonstration (6.5).
• Seven-Year Trough: The development pipeline for major weapons systems has been in a trough for seven years, with little new development replacing canceled or matured programs.
• Service-Specific Trends:
  • Air Force: The B-21 bomber program is expected to drive increased R&D spending.
  • Navy: The Columbia-class submarine program is on the horizon and will likely see significant contract obligations.
  • Army: Largely stagnant in development programs since the failure of the Future Combat Systems initiative, with continued uncertainty about future missions and capabilities.

4. Acquisition Reform in the FY2017 NDAA

• Structural Changes: The FY2017 National Defense Authorization Act (NDAA) introduced major changes to the defense acquisition system, including reorganization of the USD AT&L into USD R&E and USD A&S.
• Shift from MDAP: The report suggests a move away from the traditional Major Defense Acquisition Program (MDAP) structure, favoring more prototyping, technology demonstrations, and commercial technology acquisition.
• Implementation Delay: Many of the reforms are not expected to be fully implemented until 2018, and future debates on acquisition reform are anticipated.

5. Performance of the Defense Acquisition System

• Cost Performance: The Better Buying Power (BBP) initiatives have shown improvement in cost performance, with a net buying power gain of $10.7 billion in 2015.
• Schedule Delays: Despite cost improvements, schedule growth has worsened, likely due to unrealistic initial estimates rather than increased project cycle time.
• Contract Termination Trends: Shorter-duration contracts began during the budget drawdown had higher termination rates, while longer-term contracts have been more stable.

6. Contract Pricing Trends

• Stable Pricing Models: The balance between fixed price and cost reimbursement contracts remained largely unchanged during the drawdown period.
• Fee Type Shifts:
  • Fixed Price Incentive Fee: Increased from 2% in 2008 to 14% in 2014–2015.
  • Cost Plus Incentive Fee: Declined from 23% in 2011 to 14% in 2015.
  • Cost Plus Award Fee: Declined from 40–49% in 2000–2007 to 11% in 2015.
  • Cost Plus Fixed Fee: Rose from 36% in 2007 to 67% in 2015.

7. Vendor Composition Changes

• Small Vendors: Gained market share, increasing from 16% in 2009–2013 to 19% in 2014–2015, and maintaining their share in 2016.
• Big 5 Vendors: Maintained a consistent share of DoD contracts (27–31%) from 2009 to 2015, though their share in R&D has continued to decline.
• Services Contracts: Relatively stable despite M&A activity, with small vendors gaining ground.
• Products Contracts: Shifted toward the Big 5 vendors, with the Army showing the most significant shift toward larger vendors.

8. Future Outlook

• Continued Focus on Innovation: The DoD is expected to continue prioritizing innovation and technological superiority.
• Need for Improved Schedule Estimation: For those seeking on-time delivery and an agile acquisition system, addressing schedule estimation weaknesses is crucial.
• Long-Term Uncertainty: The future of the Defense Innovation Initiative will depend on the selection of the next Deputy Secretary of Defense.

Key Information

• Data Sources: Federal Procurement Data System (FPDS), DoD Comptroller Financial Summary Tables, and CSIS analysis.
• Budget Context: The report is set against the backdrop of postwar budget drawdowns, defense budget caps, and sequestration.
• Trends by Component:
  • Army: Contract obligations began to stabilize in 2015.
  • Navy: Stabilized with a focus on submarine development.
  • Air Force: Continued decline in services contract competition.
  • Missile Defense Agency (MDA): Saw significant increases in contract obligations due to major procurement programs.
  • Defense Logistics Agency (DLA): Maintained stability in contract obligations, with small vendors gaining share.

Conclusion

The report concludes that the contracting drawdown has ended, and the DoD is beginning to increase its spending. While cost performance has improved, schedule management remains a challenge. The shift toward small vendors and changes in contract pricing types indicate a broader trend toward more flexible and diverse acquisition strategies. The future of defense acquisition will depend on continued reform efforts and the ability to balance cost efficiency with timely delivery and innovation.