Defense Contractors Aren’t Given Incentives or Latitude to Do a Job Right

In the past, discussions about military waste have centered on excess spending at the Pentagon, such as the now infamous $435 hammer or the $659 ashtray. From such extreme examples came suggestions on how to contain military hardware costs in the Pentagon. If the new policies and procedures are measured in pounds of paper, the reforms have been spectacularly successful. But they are a dismal failure if measured by improvements in the cost, delivery time and performance of our weapons systems.

The bureaucracy that the Pentagon has created to regulate military contractors is sending costs right through the roof. The ratio of actual manufacturing costs to the cost of support functions (program administration, quality assurance, etc.) can be as high as 1 to 10. Well-run commercial companies rarely exceed 1 to 4.

Yet the new secretary of defense, Dick Cheney, does not appear to be focusing sufficient management attention or re sources to the high costs imposed on contractors by government rules, costs that merely get passed to the taxpayer. He should certainly be applauded for moving swiftly to make cuts in military programs. However, the $10 billion a year that these cuts are expected to save is less than half of what proven methods of manufacturing- cost management could yield.

Most defense companies still employ the “functional” structure that was popular in the late 1940s and 1950s. This antiquated structure allows independent functions such as engineering and quality assurance to behave like fiefdoms and dominate plant operations.

Without the benefit of teamwork, companies are plagued by a lack of proper planning, inadequate scheduling and supervision. The results are predictable--high cost and inefficient operations.

Meanwhile, companies in other industries have been structuring themselves around product teams, or business units. For example, by establishing teams consisting of people from manufacturing, quality control and engineering, they have reduced engineering costs by as much as 50%, speeded product development and reduced per-unit manufacturing costs.

A major reason military contractors do not reorganize for more effectiveness and efficiency is that they lack incentives to do so. If a contractor cuts costs, it keeps only a small part of the savings; but with proper incentives from the Defense Department, it could cut up to 30% percent of its costs. If contractors were allowed to keep half of what they save, the taxpayer would still save $12 billion the first year and up to $24 billion in each subsequent year (assuming a Pentagon hardware budget of approximately $80 billion).

In its effort to modernize quickly, the Department of Defense has underfunded prototype development and testing. In the future, it must provide adequate funding for these activities to ensure that new weapons systems are proven before production begins. Experience shows that each dollar spent on prototype development and testing will be returned more than tenfoldif it precludes design mistakes that go undetected until initial or full production.

At the same time, the Defense Department should encourage more creative solutions to hardware requirements by providing less stringent specifications. The typical prototype design discourages the contractor from using some of the new and more economical technology. Instead, weapons design specifications should be more flexible and based on the overall required performance of the system.

All of these opportunities depend on the Pentagon’s willingness to change its orientation in a major way. It must no longer measure how companies build weapons, but rather the cost and the end result--without sacrificing safety and quality.

The Pentagon’s new Total Quality Management program, designed to improve the quality of our procurement process, should focus more on cost reductions. The current tendency of the Pentagon is to request countless design changes, even after production begins. These changes should be limited. And if the government makes latechanges that require a contractor to spend more for the system, the government should assume the cost. Further, all Pentagon cost-reduction programs should allow economic incentives for contractors to hold costs down.

The Pentagon also must be willing to streamline its oversight organizations. Cumbersome policies and procedures need revamping, and the size and number of field offices could be cut by two-thirds.

Until the Pentagon provides contractors with the right incentives to cut costs and gives them more latitude to apply their full creative talents to building our nation’s weaponry, we can expect many more horror stories about cost overruns, design flaws and the loss of human life.

Government rules unwittingly encourage contractors to waste money--and reforming this flawed system should be Cheney’s priority.