WASHINGTON — Pentagon contracts increased in 2016, but the defense industry is facing a lack of new programs that could stretch for a decade and force changes to how they do business, a new report has concluded.
An analysis by the Center for Strategic and International Studies found that overall Department of Defense contract obligations rose by 7 percent in 2016, something that Andrew Hunter, a former Pentagon acquisition official now with CSIS, called a sign that defense spending is "actually growing again."
The Pentagon has $296 billion in 2016 defense contract obligations, a modest increase from the $278 billion obligated in 2015 — but an increase nonetheless, the first such since 2008 and a positive sign for the defense sector.
The Missile Defense Agency, the Air Force and the Navy all saw significant increases in contract obligations in 2016, thanks largely to big programs for the C-130J transport, KC-46A tanker and Trident II missile, Hunter wrote in the report, titled "Defense Acquisition Trends 2016: The End of the Contracting Drawdown."
Contract spending now makes up about 46 percent of DoD’s costs, Hunter said at a rollout event for the report, a significant decline from where it was 10 years ago, as costs for things like health care have ballooned.
Additionally, contract costs have gone down thanks to internal Pentagon efforts such as the Better Buying Power initiative, and the number of contract breaches that have occurred are down significantly since 2010.
But there is a warning sign on the horizon for industry, due to the small number of new programs in the pipeline.
"There is no end in sight to the trough in the pipeline for weapon systems," Hunter warned. And while some of that may be made up from the commercial sector, where companies such as SpaceX will fill the gap of new products being used by DoD, "I’m guessing this trough will end up being 10-12 years long, which is unprecedented."
Unless that changes under the Trump administration — and despite pledges from the White House about a major defense budget increase, the figures put forth in the 2017 supplemental and 2018 budget don’t show major changes from the Obama-era levels — Hunter predicts the defense industry will look to shift even more away from research and development.
"What gain is it to Lockheed [Martin] to have a big Skunk Works, or Phantom Works at Boeing, if there’s nothing to compete for? So I think you’ll see their focus and their workforce shift," Hunter said. "Defense companies are like utilities, they, make a steady return. It’s never sexy, it’s never splashy, but you can count on it. And I think they become more like utilities in that world."
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.