A way to control defense costs

No single solution will dramatically reduce the costs of maintaining the military establishment required in the dangerous world in which we live. But a first step can be made to control defense budgets by increasing the role of competition in military procurement.

The existing detailed bureaucratic oversight of military production is counterproductive. It has not prevented numerous cost overruns and problems with quality control. The record of competition in the private marketplace, in contrast, has been impressive over the years - driving down costs and providing efficient production. Thus, substituting economic incentives for detailed surveillance of the operations of government contractors is likely to produce more defense output for the dollar.

The attempt to regulate the operations of defense contractors in Byzantine detail is self-defeating. Often the detailed provisions of the Armed Services Procurement regulations work at cross-purposes. For example, one section of the procurement regulations seeks to encourage prime contractors to subcontract as much of their work as possible to small business. However, another section attempts to prevent contractors from realizing large profits on the work that is subcontracted. In essence, the contractors are told that they will be given favorable treatment if they subcontract to small business but that their profits will be less than if they do the work themselves - a strange combination of incentives.

The multiplicity of provisions unrelated to defense which are required in all defense contracts represents an unnecessary burden on the entire process of acquiring military goods and services. The provisions may help in a very small way to achieve social objectives, but in a very large way they slow up and complicate defense contracting.

Some of these provisions, such as those that mandate wage rates on government construction projects, are vestiges of depression-era legislation. They protect segments of the population who, by current standards, do not require any government assistance.

One way of improving the current military-industrial relationship is to preserve the contract system while restoring the traditional arms-length relationship between government and industry. The defense industry would be better off if it would forgo the advantages of military subsidies in order to shake loose from the accompanying red tape and interference with management.

Government financing through progress payments should be drastically reduced - to the levels provided by airlines and other civilian purchasers of capital equipment. Defense contractors should be required to obtain commercial financing in the same way as other manufacturers - and the resulting interest payments should be an allowable charge to defense contracts.

Competition should be encouraged by awarding separate contracts on a competitive basis for research and development, and then for the production phases of weapons programs. This contrasts with the present arrangements of lumping development and initial production in one negotiated contract and then awarding the following-on contract to the same company without competitive bidding.

Contracts for a weapon system should be awarded to two or more firms in the early stages of the program, before the government settles on a single contract for the major production work. This is especially useful in aircraft and missile programs where it is feasible for the government to pay for several prototypes that can be tested before it decides on a final version. Ultimately, that would be cheaper than the present arrangements, which are so often characterized by costly overruns.

Participation in subcontracts should be broadened so that small companies now oriented to civilian business have a greater opportunity to get military work. Such a change would dilute the close relationship between the military establishment and a relatively narrow group of industrial suppliers.

The present procedure, whereby the government on the one hand supplies plant, equipment, and working capital to defense contractors and on the other hand attempts to keep down their prices and profits, is a charade. Encouraging defense contractors to rely more heavily on their own resources through the strengthening of competition would help bring about a resurgence of the self-regulating mechanism of free enterprise.

But if we are serious about increasing the degree of risk-bearing and competition in defense business, we must emphasize the role of that enticing carrot, profits. Not that total profits on defense business should necessarily rise, but the range of profitability should be widened.

A truly successful weapon system program should yield very high profits for its producer, and, it is hoped, no congressional committee would greet the results with grandstand displays. But similarly, an inefficient program should result in low profits - or outright losses. Pleas for special assistance could then be ignored more readily than they have been.

The key to making defense contracting more efficient is an increased reliance on private enterprise. Actually, we have not given it much of a chance. Defense contracts are awarded to private companies. But the contracts require the companies to behave like arsenals. Rather than concentrating on performance, contractors spend their time studying the government's rule books. Thus, the nation does not now get the full benefit of the innovation and efficiency that we expect from the private sector.