A Defense Department plan to save taxpayer dollars by paying defense contractors less money upfront on major weapons deals has drawn the ire of influential Republican lawmakers, who say the scheme will hurt the technological prowess of the U.S. military.
In a Sept. 24 letter addressed to Deputy Secretary of Defense Patrick M. Shanahan, House Armed Services Committee Chairman Mac Thornberry (R-Tex.) and Senate Armed Services Committee Chairman James M. Inhofe (R-Okla.) asked the Defense Department to walk back a proposed policy that would cut the amount of financing support that defense contractors get in the early phases of a contract.
They called the plan “fundamentally flawed” and asked for it to be rescinded, saying that it would cause the department to fall behind on its national security strategy, which prioritizes competing with Russia and China for technological dominance.
“We have grave concerns about the harm this rule could cause to innovation investment, small business and stable workforces in our defense industrial base,” the two lawmakers wrote.
The Pentagon has given contractors until Oct. 23 to submit comments on the rule, and it plans to implement it by the end of 2018. The letter was reported earlier by the trade publication Inside Defense and separately obtained by The Washington Post. The Office of the Secretary of Defense did not respond to a request for comment.
Political pressure from Inhofe and Thornberry, who exert tremendous sway over Defense Department policy and budgeting from atop their respective committees, could become an obstacle.
If successfully implemented, the new rule would lower the amount of government funding that defense contractors get when they incur exorbitant costs in the early phases of a contract. Under rules in place since 2001, such payments typically covered 80 percent of those costs.
The Defense Department wants to slash that rate to 50 percent and instead tie payments to certain performance measures while also putting in place new penalties for fraud.
The Defense Department argued that it has been overpaying contractors for years because it never amended its financing rate when the Federal Reserve slashed interest rates after 2008, something that should have made it easier for contractors to finance weapons development without the help of subsidies.
In a policy document published late last month, the Pentagon said the new rules would save money and better reward good work.
“DOD believes the proposed rule will eliminate the unintended consequences of not updating its contract financing policies (which, in turn will save hundreds of millions of dollars for the taxpayers), will improve contractor performance, and will distinguish and meaningfully recognize high performing companies and divisions of companies,” the Defense Department wrote in its proposal.
Defense contractors and their lobbyists reacted sharply to the proposal, with the three major defense industry associations unanimously opposing the rule in a Sept. 14 meeting.
The National Defense Industrial Association said the new rule would discourage the most advanced companies from working with the military by making defense companies shoulder the cost of research and development. The Aerospace Industries Association said the rule would slow down the pace of advanced weapons development and the Professional Services Council argued the rule would fail at its intended aim.
Thornberry and Inhofe echoed similar concerns when they joined the debate more than a week later.
“With the sophisticated threats our nation now faces, as highlighted in the National Defense Strategy, our service members need the very best technology as quickly as possible,” they wrote to Shanahan. “We demand innovation from our industrial base to provide a warfighting over match. This new rule would discourage greater industry investment in innovation at a time when we need it most and will make it harder to attract and retain a technically skilled workforce necessary to tackle the most challenging national security problems.”
It remains to be seen whether the Defense Department will bow to outside pressure. Still, the intervention of Thornberry and Inhofe — powerful congressional Republicans who wield significant influence over defense budgets — raises the profile of what otherwise would have been a run-of-the mill regulatory debate.
Thornberry, who has headed the House Armed Services Committee since 2015, has been a hawkish advocate of increased defense spending. But he has also spearheaded initiatives designed to streamline the military acquisition process, occasionally to the benefit of defense firms.
Last year he sponsored a bill that opened up the federal procurement process to e-commerce companies, giving government buyers a way around acquisition regulations, which can be cumbersome. At other times he has taken an axe to the Pentagon’s back-office functions, seeking to eliminate layers of bureaucracy he sees as overly costly.
Monday’s letter could also be an early indication of how Inhofe, the new Senate Armed Services head, will approach the Defense Department’s relationship with defense contractors. Inhofe rose to his post after John McCain, the previous chairman, died last month. McCain had been a tireless advocate for increased defense spending who also took an aggressive stance toward defense contractors, calling Lockheed Martin’s oversight of the F-35 Joint Strike Fighter program “dismal” in a 2017 statement.