Tracking Pentagon’s Annual Information Technology Spending Binge

February 7, 2018 Chris Cornillie

Defense acquisition regulations are overly burdensome and should be changed to give program managers more flexibility in the way they use funding for information technology projects, according to findings from an independent advisory panel.

In a report released Jan. 31, the Section 809 Panel, established under the fiscal 2016 National Defense Authorization Act (See BGOV Bill Summary) to find ways to improve the defense acquisition process, takes aim at federal regulations that limit how defense agencies are allowed to spend congressionally appropriated funding. Under current policies, U.S. Department of Defense program managers must spend their budgets by the end of the specified fiscal year, and may not redistribute funding appropriated for RDT&E, Procurement, and O&M.

The panel contends that, in reality, the current rules produce notable inefficiencies. The complex budget authorization process tends to push spending to the very end of the fiscal year, forcing managers to scramble to “use it or lose it.”

A Bloomberg Government analysis of the Pentagon’s fiscal 2017 IT spending confirms this conclusion. DOD spent $5.1 billion on IT products and services, or about 17 percent of its fiscal 2017 total, in the last two weeks of the year. In the final week of the fiscal year, Sept. 23-30, DOD completed 9,422 transactions valued at over $3.2 billion. The only other weeks where DOD spent more than $1 billion were those at the tail-end of the second and third quarters.

What’s at Stake?
One consequence of current spending rules is that they constrain program managers from using iterative, or Agile, methods to fine-tune IT projects based on the needs of customers and end-users, as is common in successful private sector IT organizations. DOD’s recent history is rife with examples of business systems completed late, over budget, and lacking essential requirements. And despite plans to scale Agile across the defense enterprise, the 809 Panel asserts that “the current acquisition process inhibits use of modern methodologies and commercial best practices.”

Additional concerns regarding current regulatory standards are that they put contracting offices in a difficult negotiating position because companies know that agencies must use their budgets by years end or face losing them. A 2013 study on federal IT acquisitions affirms a correlation between funding obligated at the very end of the fiscal year and low-quality project outcomes.

What Does DOD Splurge on in September?

BGOV’s analysis of year end spending data indicates that DOD doesn’t just buy more in late September, it buys differently. Notably, it shifts purchasing from IT services to products. In the first 51 weeks of fiscal 2017, DOD spent 38 cents of every IT dollar on products and 62 cents on services. In week 52, however, that ratio shifts to 53 cents on products and 47 cents on services.

As the table below highlights, IT products dominate the list of most expensive transactions in the final week of 2017:

There may be several ways to explain the high volume of IT product purchases at the very end of the fiscal year. Commodity IT purchases, which have relatively standard pricing and low complexity, may be a relatively safe way to expend budget surpluses. But it’s also possible that this effect was amplified by a $267 million transaction with Northrop Grumman Corp. for anti-improvised explosive device (IED) equipment, DOD’s largest single IT purchase of fiscal 2017 by a wide margin.

What’s Ahead

The 809 Panel makes several notable recommendations about how best to counteract the cyclical nature of the DOD’s existing acquisition processes:

  • Create “carryover” authority that enable program managers to roll portions of their budgets over into the next fiscal year.
  • Pass biennial appropriations bills to reduce dependence on continuing resolutions.
  • Increase the use of working capital funds, such as those established by the Modernizing Technology Act, to give agencies greater budget flexibility.
  • Improve the level of trust between Congress and the Defense Department and combat the culture of “use it or lose it.”

But with none of these recommendations likely to be implemented in the short term, the federal contracting community should expect September of fiscal 2018 to look a lot like last year. This may come as welcome news for organizations that count on heavy spending at the end of the fiscal year. But for advocates of federal acquisition reform, it’s a reminder that any progress will take time.

(Chris Cornillie is a federal market analyst with Bloomberg Government.)

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