WASHINGTON ― Defense industry associations are laying the groundwork for a lobbying blitz next week when Congress returns from its summer recess to seek relief for contractors from inflation.
The push will be focused on shaping the stopgap funding bill known as a continuing resolution that lawmakers are expected to use to keep the government functioning past September. A continuing resolution maintains government funding at current levels ― often straining budgets even without record inflation ― so trade groups hope to modify it.
A legislative proposal from the trade groups would allow the Pentagon and the rest of government expend funds at a faster rate and adjust otherwise firm-fixed price contracts to account for inflation. It would also include exceptions, called anomalies, for any new program starts agreed to by both the House- and Senate-passed defense policy bills for next year and let the military buy replacements for any weapons it supplied to Ukraine’s fight against Russia.
Leaders from the National Defense Industrial Association, the Aerospace Industries Association and the Professional Services Council have been strategizing behind the scenes in recent weeks, and on Aug. 26, they met with Pentagon Comptroller Mike McCord and Undersecretary for Acquisition and Sustainment Bill LaPlante at the Pentagon to preview the proposal.
After Labor Day, trade group leaders and members hope to make their case to lawmakers and particularly to congressional leaders, who typically craft year-end budget deals. The groups are readying a white paper for Congress, drafted by NDIA president and chief executive David Norquist, who served as deputy defense secretary and DoD comptroller in the Trump administration, and John Whitley, the former director of DoD’s Cost Assessment and Program Evaluation office, who is now a senior fellow and consultant for NDIA.
The flurry of political activity likely faces headwinds both from Democrats, whose leaders often seek parity between defense and non-defense accounts in budgetary matters, and Republican fiscal hawks. With midterm elections looming in November, lawmakers from both parties may want to pass a “clean CR,” unencumbered by political dealmaking, that avoids a government shutdown and no more.
But industry representatives see recent widespread bipartisan action to increase defense spending as a tailwind. They argue that without congressional action, the Pentagon faces a steep drop in buying power just as it seeks to replenish weapons sent to Ukraine and as China is saber rattling over Taiwan.
Though Congress has advanced defense bills for 2023 with multibillion-dollar increases, for as long as they’re not passed, the Pentagon would lose ― by NDIA’s reckoning ― $6 billion of its buying power per month.
“Deterrence doesn’t work when we handcuff the Department of Defense’s hands and we handcuff the budget,” said retired Maj. Gen. Arnold Punaro, the chairman of the National Defense Industrial Association.
Industry hopes to revisit Pentagon guidance issued to contracting officers in late May that was intended to limit inflationary increases to contracts. In that memo, John Tenaglia, the principal director for defense pricing and contracting, said “economic price adjustment” clauses can be used in contracts to share the risk of inflation, but urged limited use. If a vendor has a firm-fixed price contracts without such clauses, the contracting officer should not grant an adjustment, the memo said.
Calling the memo “out of sync with reality,” Punaro argued the Pentagon should be allowing adjustments along a broader range of defense contracts, akin to the budgetary tweaks it’s making to address rising fuel costs and cost of living increases for troops. He stressed that industry wants to work with the Pentagon and White House budget office on a fix.
“It’s not DoD’s fault, it’s not industry’s fault we’re dealing with these issues, but you have suppliers telling their primes, ‘We’re not able to meet our obligations because of the inflationary rates and unfortunately when we signed this contract four years ago, no one anticipated this,’” Punaro said. “My hope is we’re able to educate and inform people in Congress working with the Department of Defense. There’s no finger pointing going on here.”
Likewise, the Aerospace Industries Association’s vice president for national security policy, John Luddy, said suppliers are struggling with ballooning costs.
“We’re hearing more and more about situations ― particularly down the supply chain, where the cost variability hits first and is the most volatile ― where companies are saying, ‘I have a fixed price contract, but I cannot deliver at that price because my suppliers are charging me 8 or 10% more,” Luddy said.
For its part, the Office of the Secretary of Defense says it’s working on the problem, sharing information internally, striving for a uniform approach and collaborating with industry on solutions.
“The Department is actively engaged with industry leaders through multiple outlets including industry association meetings and working groups to understand the impacts of inflation on existing programs and to-be-negotiated contracts, and to implement strategies to mitigate these effects,” said Pentagon spokeswoman Jessica Maxwell.
Meanwhile, defense firms and officials have cited economic forces as a cause of delays for new Air Force One airplanes, as well as other Air Force programs. Defense firms have been public about how the lingering effects of the COVID-19 pandemic ― inflation, supply chain snags and labor shortages ― are hurting their ability to finish crucial projects and driving lowered earnings projections.
“They’re talking about revenue, but in reality it’s eating into performance, it’s eating into delivery on contract, because if you don’t have the workers, you can’t do the work,” said David Berteau, the president and chief executive of the Professional Services Council, which represents services contractors.
Without greater latitude in defense contracting, “elements of the industry are at risk of going under,” Berteau said, adding that the Pentagon could take a page from the General Services Administration, which has been more open to inflation adjustments. “You have governing bodies saying do what you can and others saying don’t do much at all. We need a consistent government approach.”
The Pentagon is still assessing how widely defense firms are seeking economic adjustments for existing contracts, but officials from several of the armed services said it’s been a trickle at best. Gen. Duke Richardson, the chief of Air Force Materiel Command, said officials are “worried about inflation” and bracing for those requests.
“To date, we haven’t had that happen. We’ve been talking about it, but none of them have come forward and asked for relief,” Richardson said an Aug. 11 briefing at the Air Force’s Life Cycle Industry Days conference in Dayton, Ohio.
“We do see it in program schedules,” he added. “Most often, it manifests within the supply base. I think that the defense industry is kind of struggling just like the rest of the economy to really find the workers that they need. We see that come across in multiple programs.”
However, defense officials said vendors appear to be raising prices on future contracts.
“Where it shows up is people get a contract proposal that maybe has been developing over six months that is significantly higher than what they expected to see from industry,” the Air Force’s acquisition chief, Andrew Hunter, told reporters separately at the Dayton event.
“And then as a government, we have to go back and say, ‘Well, what’s driving this highest price?’ Oh, it’s ‘inflation.’ OK, well, we need to be more specific than that, right?” Hunter said, adding that contractors should be using economic price adjustment clauses and granting requests for equitable adjustment to cope with unexpected inflation.
Inflation, supply chain snags and labor shortages are spurring companies to submit “almost unaffordable” proposals for weapons contracts, Maj. Gen. Robert Rasch, the Army’s program executive officer for missiles and space, told the Space and Missile Defense Symposium in Huntsville, Ala., on Aug. 9.
Rasch said the government is willing to pay higher costs for new weapon systems, if they’re justified and reasonable.
“We’re absolutely going to ensure that that we look at it from a reasonableness perspective ... but you just can’t wrap it up in a big bundle and throw it over the fence. Proposals are coming in almost unaffordable,” he said.
Courtney Albon, Jen Judson, Stephen Losey and Megan Eckstein contributed to this report.
Joe Gould was the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He had previously served as Congress reporter.