Five key DOD contract trends

January 24, 2018 Robert Levinson

This analysis was first available to Bloomberg Government subscribers.

The Black Knights may have vanquished the Midshipmen in their annual football game last month, but the U.S. Navy is surpassing the Army in another bitter rivalry: the battle over federal contract dollars.

That’s one of five Pentagon spending trends identified by Bloomberg Government that are expected to continue in fiscal 2018.

Contract spending at the Department of the Navy, including the Marine Corps, totaled $114.2 billion in fiscal 2017, again surpassing the Army’s $91.1 billion, while spending by the Air Force and other defense agencies held steady.

The Navy has been gaining Defense Department market share since fiscal 2013, primarily as the result of the drawdown in ground forces from Afghanistan and Iraq, which reduced Army spending.

Overall, Pentagon contract spending continued an upward trend that began fiscal 2015, reaching $331 billion in fiscal 2017, according to Bloomberg Government’s analysis of unclassified obligations.

That level is still about 14 percent less than the $385 billion spent in fiscal 2008, when the U.S. had about 180,000 troops in in Iraq and Afghanistan.

Weapons acquisition generated some of the largest spending increases in fiscal 2017, compared with the year before.

Among the top 10 market classifications in fiscal 2017, which collectively represented about a third of all defense contract obligations, all categories increased. These include major weapons systems such as ships, submarines, missiles and aircraft, as well as fuel, while spending on logistics support, maintenance, health care, and professional services increased by somewhat smaller percentages.

The five biggest defense contractors — Lockheed Martin Corp., Boeing Co., General Dynamics Corp., Raytheon Co., and Northrop Grumman Corp. — all maintained their positions at the top of the defense contracting food chain in fiscal 2017. These companies also collectively maintained their share of the overall market, with about 32 percent of all defense contract spending.

Texas pulled ahead of California and Virginia to become the state where the Pentagon spends the most contracting dollars. Defense contracting in Texas jumped nearly 60 percent to $45.4 billion in fiscal 2017 from $28.5 billion in fiscal 2016, according to data compiled by BGOV.

The total in Texas for Lockheed Martin alone was $29.1 billion, more than all defense contracting work in the state in fiscal 2016. The spike is attributable to Lockheed’s workon the F-35 Joint Strike Fighter at its plant in Fort Worth. Production is scheduled to increase to 60 aircraft annually by 2023, from 46 per year in 2018, and remain at that level through 2043.

What’s Ahead

Until a budget deal is reached on discretionary spending levels for fiscal 2018, forecasting contract spending during this fiscal year is difficult. The current continuing resolution only permits spending at a level slightly below that of fiscal 2017 because the spending caps are lower in fiscal 2018. Without a deal on higher levels, contract spending by the Pentagon, as well as civilian agencies, will remain constrained and program increases and most new starts will be barred.

It’s likely that a deal on higher spending levels will be reached eventually. As BGOV has noted, the longer the budget impasse continues, the more difficulty DOD will have putting money on contract before the end of fiscal 2018.

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