Photographer: Nadine Hutton/Bloomberg

Pentagon run more like a business? It’s been trying for years

This analysis was first available to Bloomberg Government subscribers. 

Pentagon officials, at the urging of Congress and successive administrations, has been trying for years to operate more like a business to cut costs and operate more efficiently. They have little to show for those efforts, an analysis by Bloomberg Government shows.

Shortly after Donald Trump was elected president, the Defense Business Board, which advises the Pentagon on management from a private-sector perspective, urged that the Department of Defense be run “like a modern business.”

However, getting the military’s massive bureaucracy to behave more like a corporation is harder than it looks, according to a report from the Government Accountability Office.

Buying Commercial

GAO’s July report looked at how the Pentagon buys goods and services using commercial contracting. Since 1994, the catalyst has been the Federal Acquisition Streamlining Act, or FASA, which encouraged the government to procure products and services from market sources.

FASA’s purpose was to force government to purchase more efficiently and save money. The GAO report highlighted how the National Defense Authorization Acts of 2013, 2015, 2016, and 2017 added language designed to encourage commercial practices.

GAO found that despite Congress’ insistence and specific legislative language, the Pentagon is buying about a fifth of what it needs from commercial sources — roughly the same as it did a decade ago.

Over a 10-year period, fiscal 2007 through fiscal 2016, obligations under DOD contracts awarded using commercial item procedures “have remained within a narrow range” of 16 percent to 22 percent, according to the report.

The Defense Department purchased about $3.4 trillion dollars of goods and services from contractors from fiscal 2007 through fiscal 2016 — including $676 billion using commercial practices. Bloomberg Government examined the data to determine why exceeding the 20 percent share of commercial purchasing each year is difficult.

The military needs fuel to make its planes and ships and tanks go, IT equipment and services to process massive amounts of information, and food and medicine for the troops. For these types of items, it doesn’t need a product or service that’s uniquely tailored to military missions.

Fuel was the largest category of purchases that fell under commercial rules over the past five fiscal years, according to the data. Other categories that made the top 10 included IT goods and services, food and medicine, and shipping, as well as IT, professional, and health-care services.

It’s clear that many of the Pentagon weapons systems can’t be purchased using commercial practices. In the GAO’s March 2016 assessment of 79 Major Defense Acquisition Programs in fiscal 2015, it found that the Pentagon planned to spend $1.4 trillion on purchasing systems that include fighter jets, aircraft carriers and submarines.

For the big things the military needs, there is no commercial market and the Defense Department has to rely on the Defense Federal Acquisition Regulation Supplement. With the exception of Lockheed Martin Corp., all of the top sellers to DOD using commercial rules are companies that offer goods or services that are also purchased in large quantities by civilian customers.

The Army and Defense Logistics Agency use commercial contracting extensively, according to the data. Since the Army spends more on personnel and operation and maintenance costs than the other services, and DLA provides many basic supplies, they are outpacing the Air Force and Navy in commercial contracting.

What’s Ahead

For certain contractors, the use of commercial practices does present some opportunities. If a vendor is selling a product such as food, fuel or certain IT goods and services, it may be able to work with DOD customers to use the streamlined commercial practices. This should be speedier, less cumbersome, and similar to dealing with commercial clients.

For vendors selling unique military goods and services, commercial practices are not well suited. However, recent legislative action to expand the definitions of commercial items for more products and services and acquisition reform could make some rules easier to navigate.

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