The Pentagon recently sent Congress some draft bill language to consider this year that reads like an advertisement for taking a Costco-like approach to buying hardware. In its proposal, Pentagon leaders tout the power of long-term consistent demand and the benefits of purchasing enough so as to achieve economies of scale.
It’s clear that buying military equipment in bulk is a win for the customer (those in uniform), a win for industry and its workers, and a win for Congress and the taxpayer to maximize return on public investment.
What is remarkable is that given these kinds of welcome results, why aren’t block buy and multiyear purchases used much more often by the Defense Department?
According to the Congressional Research Service, annual defense appropriations acts “since [fiscal] 1990 typically have approved the use of [multiyear procurement] for zero to a few” programs each year. Indeed until recently, this privilege was mostly reserved for ships and select aircraft.
Just last year, the Pentagon asked for multiyear purchasing authority for eight munitions, of which Congress granted six. This year’s budget has still more requests — along with reform of this particular authority to establish now a purchasing contract with a company for many years to come.
Specifically, the Pentagon is requesting Congress increase the dollar and cancellation thresholds for multiyear contracts from $500 million to $1 billion, and from $100,000 to $250,000 respectively. The argument is that it will allow for quicker contract awards given the current environment takes about three years from “ask” to “contract” — far too long, as the U.S. military is increasingly falling behind.
While the language talks of raising the ceiling for cancellation as necessary for alignment with bigger allowable contracts, the Pentagon notes simply that “no multiyear contract in history has ever been cancelled.”
The proposal asks Congress to broaden the multiyear authority to include any subcontractor, vendor or supplier, as well as to lower the 30-day waiting period to 10 days between multiyear certification and contract award to “reduce risk to production and delivery schedules while still providing time for appropriate congressional notification.”
As if on cue, the Defense Department goes on to seek approval for the Navy to enter into a two-year block buy contract for 37 CH-53K King Stallion heavy-lift helicopters and to enter into a multiyear contract for its T408 engines over five years.
In its request to Congress for these Marine Corps capabilities, the proposal notes that these purchasing strategies will provide:
- “industrial base stability”
- “incentivize prime [contractor] and supplier investment”
- “improve production efficiency”
- “reduce administrative burden of annual contracts”
- “take advantage of procurement volume, resulting in significant cost savings when compared to annual procurement cost estimates.”
Calling the King Stallion “one of the critical aviation programs of the United States Marine Corps,” the draft reminds Capitol Hill that “the health and stability of the rotary wing industrial base is of strategic importance ... to facilitate on-schedule, quality production and sustainment.” By allowing a block buy, Congress would therefore “provide the stability necessary to encourage long-term investment in requisite skilled labor, capital equipment, and efficiency improvements that will not only improve near-term performance but reduce overall risk.”
As if any more salesmanship were needed, the Pentagon suggests bulk buys will result in a cost savings of 4% to 10% for the two programs — compared to single-year pricing primarily from the “reduction of labor, material, and overhead rates that result from a stable long-term procurement, as well as favorable inflation and fee impacts.”
The use of multiyear contracts create “enhanced workforce stability” that cuts labor costs, the document states. This stability is based on “assumed lower employee turnover from having a guaranteed minimum production base to forecast labor needs and avoiding hiring spikes and sudden layoffs.” The spinoff from stability in labor means less learning loss in the program, which will contribute to keeping it on schedule and therefore on cost.
Adding another perk, the “ability to distribute fixed labor costs across a wider time period will result in lower unit acquisition cost as compared to single year pricing where uncertainty of future lots would require the contractor to bid full time equivalent personnel in each lot versus spread across” a two- or five-year period.
One can almost hear the contractors shout: “Amen!”
Further benefits include lower overhead rates as a “result of avoidance of any production break, as well as use of economic ordering quantity acquisition of material for the engines.” By reducing total purchase orders and increasing “production base stability and confidence,” the prospect of bulk buys will “enable the prime contractors to secure long term agreements with sub-vendors, increase use of [economic order quantity] buys of materials for engines, and utilize the workforce more efficiently.”
Simply having the authority means the prime contractor will “be more aggressive in the pursuit of long-term agreements with major sub-vendors.”
There is much to appreciate about the Pentagon’s pitch. Policymakers may only ask why these special contracting mechanisms are used so infrequently. Congress should carefully consider the Pentagon’s proposals to reform the authority, as well as grant it for more munitions in fiscal 2025 along with the CH-53K and its engines.
In short, where does Congress sign on the dotted line?
Mackenzie Eaglen is a senior fellow at the American Enterprise Institute think tank. She also serves on the U.S. Army Science Board.
