Report details sequestration's impact on DOD contractor spending

Defense contractors, like the Defense Department and its components, have felt the pinch of reduced budgets in recent years. The Center for Strategic and International Studies has attempted to quantify it in a new report that looks at 10 years of DOD contract spending, with a particular focus on the impact of sequestration.

The report, U.S. Department of Defense spending and the Industrial Base, 2003-2013, found that, under sequestration, overall spending dipped by 8 percent—$702 billion to $646 billion—from 2012 to 2013, but the cuts hit contractors harder. DOD’s contract spending fell by 16 percent, from $373 billion to $314 billion, while non-contract spending remained flat from 2011 to 2013.

The drop in contract spending was four times the reduction during 2009 to 2012, and left contract spending at 49 percent of DOD’s budget, the smallest share since 2002, the report said.

CSIS also breaks down contract obligations by the military services and spending categories. Spending by the Army fell by 21 percent, and by the Air Force 22 percent. Spending by the Navy, buoyed in part by the ongoing costs of the F-35 Joint Strike Fighter program, fell by only 2 percent.

By categories, research and development took the biggest hit under sequestration, with contract spending falling 21 percent in 2013, on top of an 11 percent drop in 2012, and an average annual decrease between 2009 and 2012 of 8.1 percent. The reductions were spread throughout DOD, though not evenly. R&D contract spending fell by 35 percent for the Army in 2013, 27 percent for the Air Force, 10 percent for the Navy and 15 percent for a combination of DOD’s other components.

The report notes that DOD components, especially the Army and Air Force, “were forced to make significant cuts in the stages of R&D that are critical to identifying and developing future critical technologies.” Mid- to late-stage research was hit hardest, with advanced technology development falling by 27 percent, advanced component development and prototypes by 24 percent and systems development and demonstration by 21 percent. Basic research fell by 19 percent and applied research by 18 percent, significant reductions but both less that the reductions in overall R&D spending. Cuts to what the report calls fundamental R&D, especially in missile and space research, accounted for the biggest part of the reductions.

As for contractors, bigger was better. Spending with what the report called the “Big 6” defense vendors—Boeing, Lockheed Martin, Northrop Grumman, Raytheon, General Dynamics and BAE Systems—fell by 9 percent, while contract spending fell by 19 percent in each of the small, medium and (non-Big 6) large categories.

Overall, though, the report says DOD has been consistent over the last decade in spreading the wealth among the contractor categories. From 2000 to 2013, small businesses received between 15 and 16 percent of contract obligations each year, medium-sized contractors held steady from 2003 to 2013 at 21 to 23 percent, and large contractors received between 28 and 32 percent between 2003 and 2013.

The Big 6, in fact, have seen a decline over that stretch, going from 32 to 35 percent of contract spending in the years 2000 to 2004, to 27 to 32 percent in the years since.

And overall, the rate of competitive contracts has held steady near 50 percent for the years studied.