WASHINGTON — The Senate is expected to vote on legislation that would authorize the Pentagon to modify fixed-price defense contracts when lawmakers return to Washington next week after the midterm elections.
The legislation marks a significant potential victory for defense industry groups that had pushed Congress to authorize economic price adjustments for Pentagon contracts, arguing that doing so is necessary to help companies cope with the impact of inflation and persistent supply chain issues.
“Inflation hurts our national defense and is particularly damaging to the small businesses in our defense-industrial base,” Kea Matory, the director of legislative policy for the National Defense Industrial Association, told Defense News. “We understand there are significant limits to what [the Department of Defense] can do on its own to address this challenge, which is why we support Congress increasing the DoD top line and providing the department additional authority so DoD can minimize the disruption and protect our national security.”
The fiscal 2023 National Defense Authorization Act, which the Senate Armed Services Committee advanced in June, authorizes $847 billion in defense spending — an 8% increase over the fiscal 2022 budget, in large part to cope with inflation. That amount includes $817 billion in Pentagon top-line funding. The amendment authorizing Pentagon contract adjustments, introduced by Sen. Kevin Cramer, R-N.D., is included as part of a package of 75 amendments to the FY23 NDAA.
“The specific amendment on inflation and contract flexibility better allows the Pentagon to tackle rising costs in the defense supply chain,” Cramer said in a statement.
Senate Armed Services Chairman Jack Reed, D-R.I., and ranking member James Inhofe, R-Okla., filed the 75-amendement package to the NDAA last month. The Senate is expected to begin voting on the bill — and its numerous amendments — when it reconvenes next week after more than a month of recess.
The House NDAA, which passed 329-101 in July, does not authorize fixed-price contract adjustments. So if the Cramer amendment passes, it will still have to survive Senate and House negotiations in the NDAA conference committee later this year.
The Cramer amendment would require the undersecretary of defense for acquisition and sustainment — currently Bill LaPlante — to issue guidance on fixed-price contract adjustments within a month after Congress passes both the NDAA and defense spending legislation. LaPlante said at an event last week that, without congressional action, it appears the Pentagon cannot do more.
“Intuitively, I believe people are getting hurt,” LaPlante said. “I believe that small businesses are getting hurt. I believe suppliers are getting hurt. Wanted to make sure that we were providing within the regs, within the law, the most flexibility to contractors.”
LaPlante provided a similar message last month in a letter to Sen. Elizabeth Warren, D-Mass., who pressed him on the Pentagon’s intentions to pursue fixed-price contract adjustments at the request of defense industry groups.
Warren, in an October letter to LaPlante, argued that “well-intentioned DoD policies to support vulnerable suppliers will instead result in taxpayers underwriting defense contractors’ executives’ lavish compensation packages” while paying for stock buybacks.
“I particularly urge DoD to be circumspect about the industry’s claims about the impact of inflation given their second quarter profits, which show operating incomes that increased over the last quarter and average 11.7%, suggesting there was little or no adverse impact due to inflation,” Warren wrote in her letter to LaPlante.
The Pentagon in May released inflation guidance to its acquisitions workforce, reminding them they can use economic price adjustment clauses when drafting contracts. The department then issued an update in September.
To sway lawmakers to allow adjustments to existing contracts without such clauses, LaPlante said he’s implored the defense industry to provide data to justify the flexibility its seeking. That’s been slow to come.
He also wants companies that can no longer afford to make new bids on contracts or to honor previous bids to speak up — or to include data to justify their higher bids — but none have.
“People do grab it as a be-all; show us the data,” LaPlante said. “I think Congress wants to be sympathetic to it, I think they want to help, but they’re in the same position that we’re in ... we can’t do it, we have to do it based upon data.”
“I’m open-minded: On the other hand, we’re not going to arbitrarily open up every contact,” he added. “We can’t do that, and we’re not going to do that.”
Bryant Harris is the Congress reporter for Defense News. He has covered U.S. foreign policy, national security, international affairs and politics in Washington since 2014. He has also written for Foreign Policy, Al-Monitor, Al Jazeera English and IPS News.
Joe Gould is the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He served previously as Congress reporter.