Military equipment repair contracts take on increasing importance

By Marjorie Censer
Monday, September 13, 2010; 10

One of the perks of winning a contract to build an aircraft or truck for the military has always been the potential for future awards to modernize or repair that equipment.

But that possibility has become all the more important -- and competitive -- in today's budget-constrained environment. Local defense contractors increasingly say they expect maintenance work, whether it be repairing equipment damaged in war or updating equipment that needs to last longer, to be a central part of their bottom lines.

McLean-based Science Applications International Corp. touted its repair work during a call with investors earlier this month. The company recently unseated incumbent Raytheon for a contract worth up to $241 million to support Anniston and Red River Army depots, two mainstays of the Army's repair efforts.

Jim Cuff, SAIC's executive vice president for business development, strategy and mergers and acquisitions, said the company has prioritized maintenance and modernization work as a key market with high growth potential.

BAE Systems, which bases its U.S. operations in Arlington, also is taking a closer look at maintenance and modernization as the pipeline for other weapons programs grows smaller. The company lost a bid to build lighter-weight bombproof trucks for Afghanistan as well as a contract it held for years building medium-size tactical vehicles for the Army. At the same time, a major program to build a new combat vehicle has been stalled.

So BAE is expanding its options. Earlier this month, the firm announced a $629 million contract award to repair and update 1,700 trucks it built several years earlier.

Lawrence B. Prior III, who oversees BAE Systems' services business, said BAE has strategically focused on increasing its footprint in the repair business. For instance, the company bought ship maintenance and repair business Atlantic Marine earlier this year but is not interested in purchasing Northrop Grumman's shipbuilding business, now up for sale.

BAE "spent $350 million to really get a foothold in all of the important shipyards, where you absolutely do the fundamental repair and modernization," he said. "There was a purposeful strategy ... to invest in the repair and sustainment side and really not be a player in the big yard production side."

In general, maintenance and repair work will provide a more certain stream of funding than new programs, said Philip Finnegan, an analyst with the Teal Group.

"There's a stability there that contractors are looking for -- and there's also a tremendous amount of money," he said.

Cuff said the original builder of a piece of equipment used to almost always win contracts for its upkeep, but today there are more opportunities for other companies to pick up that business.

"The economic realities of the budget situation [are] going to force the government to look at, 'Is there a more competitive solution to sustain and keep my vehicles at high readiness?' " Cuff said.

Finnegan, too, warned that the field will likely be competitive as contractors known for producing equipment compete against contractors who primarily provide services. Though the original manufacturer often has an edge, it's not insurmountable, he said.

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