Defense R&D takes a turn toward smaller vendors

As overall Pentagon R&D spending has declined over the past decade, more research contracts are going to smaller vendors at the expense of the so-called "Big Five" military contractors, according a budget analysis released this week.

An assessment by the Center for Strategic and International Studies (CSIS) of the defense industrial base found that Defense Department research spending has been declining steadily as a percentage of federal R&D contracts since its peak in fiscal 2009. Over that period, military R&D contract obligations declined from nearly half the U.S. research budget in 2009 to just 22.4 percent of last year's $49.3 billion federal R&D budget.

Washington-based CSIS concluded that the big losers in the R&D budget drawdown are the top five military contractors: Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics.

With less metal to bend, CSIS estimates that the share of military R&D contracts awarded to small vendors rose from 10 percent in 2009 to 17 percent in 2015. The same trend was found in contract awards by the three military services. "DoD R&D contract obligations to small vendors have declined far less steeply than DoD R&D overall," the spending analysis noted. "Small vendors have managed to largely hold their ground, even as the bigger players were facing sharp declines."

Part of the drop is attributed to the cancellation of large military R&D programs such as the Army's Future Combat Systems and the transition of big-ticket weapons programs like the F-35 Joint Strike Fighter from the R&D phase to procurement. That has left little in the pipeline for large weapons contractors, some of whom have attempted to beef up capabilities in areas like defense IT through acquisitions.  

As the Pentagon places heavier emphasis on areas like cyber security and cloud computing, few new major weapon programs have emerged beyond plans to build a new U.S. strategic bomber. The Air Force awarded Northrop Grumman a $21.4 billion contract last October to develop the B-21 stealth bomber. Lockheed Martin and Boeing were partners on a competing bid.

As a result, CSIS concluded, "there has been a dearth of new development programs for major weapon systems which replace those that have either graduated into production or been cancelled." Hence, "DOD is facing a six-year trough in its development pipeline for major weapons systems."

When spending shrinks, the conventional wisdom holds that federal agencies like DOD raid early stage R&D accounts in order to preserve development programs tied to high-profile programs. The CSIS analysis argues the reverse: "Early stage R&D has seen significant declines, but has been relatively preserved compared to the overall declines in R&D."

While basic (labeled as 6.1) and applied (6.2) accounts have remained relatively steady during the recent drawdown, later-stage advanced technology development (6.3) and system development (6.5) line items have seen cuts of at least two-thirds since 2009, the think tank reported.