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Cancelling Defense Programs Isn’t Cheap

People don’t just lay down their tools and walk away…

Last Monday, Secretary of Defense Robert Gates revealed the Department’s vision for acquisition programs now and in the near future.  He made some very tough calls and some that raise real questions.

On the canceled programs — ranging from the new Presidential helicopter to the Airborn Laser missile defense aircraft — people don’t just lay down their tools and walk away.  Defense contracts — like all other federal contracts — require that the government pay much of the cost of shutting down what a contract might otherwise have required to continue for years.  Laying people off, getting out of supplier contracts and closing factories are all expensive to do.

There are actual, up front cash costs to be considered amounting to billions of dollars of real taxpayer money.   There are human costs.  There are costs in the future when the Department has a military requirement for an urgent war-fighting capability and the technical, engineering, manufacturing capacity must be developed from scratch.  (Now there’s a challenge:  recreating an industrial capability can take decades).

Let’s talk about real cash money costs. When the government spends money on a weapons program; and cancels the program during the development phase before fielding any weapons, that’s a loss; good decision, bad decision, doesn’t matter.  Money has been spent, and no value is received.
 
A good example is the Army’s Aerial Common Sensor program, a program intended to field sensor-loaded aircraft to provide reconnaissance capability for the Army and Navy.  Started in 2000 with a completion date of 2017, the program was canceled when it was discovered that the aircraft that won the competition could not carry the weight of the equipment, could not power the equipment and could not cool the equipment.  The approximate cost to the taxpayer, $1.2 billion and no aircraft fielded.  

Though the production of the F-22 fifth generation stealth fighter will end after the planned production run of 187 aircraft, the shut down costs will exceed $200 million.  

Additionally, there are termination liability costs.  These are cost the government must pay the contractor when a contract is terminated early.  The government is liable for most of the costs reasonably incurred by the contractor. Those costs include facilities and equipment acquired for the purpose of producing the weapon system.  They also often include severance pay for the workforce.  Generally, the larger the contract, the larger will be the cost of terminating the program early.  The decision not to go forward with a second Airborne Laser aircraft that had been planned will be expensive for the government.

There is a toll on the families whose jobs are placed in jeopardy or lost.  In his economic analysis of the employment impact of the C-17 cargo aircraft program on the communities where manufacturing of the out sized cargo aircraft takes place, Dr. Gerald Gordon, President and Chief Executive Officer of the respected Fairfax County Economic Development Authority, makes the following calculations.  

The major employment centers where the C-17 aircraft is build, St. Louis, Missouri, Mesa, Arizona, Palmdale, California, Macon, Georgia and Long Beach, California provide jobs for over 7520 workers. (And there are, of course, more jobs in play than just those directly involved in the manufacture of the defense program.)  

Again using the C-17 program as an example, more than 18,820 other jobs in the local communities are supported by this program. Gordon estimates that total annual wages associated with those jobs amounts to more than $2.2 billion.

There really isn’t, however, a good way to put a price tag on the turbulence and uncertainty caused by the cancellation of defense programs on the lives of the families of the aerospace and defense workers.  Seldom is the reason for canceling a defense program the poor quality produced by the American aerospace and defense worker.  When contracts are signed and commitments made, the worker on the line should have an expectation that the commitments will be kept.

Lastly, when canceling programs, the Defense Department really does need to consider the impact on the United States capacity to develop and produce future weapon systems.  With the total number of aerospace workers having decreased by roughly 30 percent from 1990 to 2007, industrial base is far more fragile now than it once was.  Weapons programs depend on very sophisticated manufacturing processes and a skilled workforce that takes years to train and gain the necessary experience.  Looking at the ship building industry a welder certified to work on nuclear reactors aboard Navy vessels can take up to eight years to become fully qualified.  Electricians can take up to five years to become fully qualified; tool and die machinists as many as eight years.  When work for this highly skilled workers goes away, their experience and skills go away as well.  

When the C-17 production line closes, it will be the end of the last large, out sized cargo aircraft manufacturing capability in the United States, a capability that has been in place for over 40 years.  In the early 1990s, when there was a chance that the C-17 line would be shut down, the cost to restart the line once it was shut down was over $2 billion.  Today, the cost is well over $2 billion.  

When the subject of restarting the C-17 line once shut down has been raised in the past, the rebuttal inside the Pentagon was that it was done with the C-5B, a restart of the C-5A large military cargo aircraft, so it shouldn’t be a problem with the C-17.  But, the C-5B production had the advantage of a continuously operating production line.  The wing modification on all the C-5As required to fix the wing relied on much of the same tooling and workforce as the new C-5B would.  Attempting to restart a closed C-17 line would have no such advantage.

Whenever major changes are made to the Defense Department’s acquisition plans are made, they should be done in the context of a full analytical examination of the requirements they were supposed to meet, a comparison of the costs and benefits of continuing and canceling, and an assessment of the effect on industrial capabilities.

It’s very difficult to see how such major decisions can be made without such an analysis.

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Written By

Mr. Patterson is the Executive Director, National Defense Business Institute in the College of Business Administration at the University of Tennessee, and until June of last year served in the Bush Administration as the Principal Deputy Under Secretary of Defense, Comptroller.

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