DoD Continues to Support Multi-Year Contracts

by: Matthew Potter
March 2, 2012

Category: Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, Military Aviation, production program, Services | RSS 2.0

The way the U.S. government does its budgeting and contracting primarily requires one year contract options for most work supporting them. This includes not only hardware but also services. It is driven by the fact that Congress passes annual authorization and appropriation bills. By doing this there is tighter control of how the money is allocated and executed but at the same time as it prevents long term investment and bulk buying of some items it may cause price increases and drive costs up.

That is why Congress allows the Pentagon in some cases to award multi-year contracts. These are normally for high cost hardware systems in steady state production and last five years. This allows the contractor to buy long lead items and other parts in bulk and have a smoother production line. This should provide better costs and prices to the government and a more reliable delivery profile.

The Pentagon has multi-year contracts for things like ships, the V-22 Osprey, helicopters and the F/A-18 fighter. Once systems like the KC-46A tanker and F-35 Joint Strike Fighter (JSF) make it to the steady state part of their life cycle they are sure to ask for multi-year for them as well.

The downside is that the government is locked into a long term contract and cannot make major contract changes without having to renegotiate the whole contract at some cost. For example if the Pentagon wanted to save money and buy less then the minimum number of systems in the multi-year they would have to cancel that contract and start over. This means that the contractor is protected in some measure from major cuts.

Even though we are entering a period of reduced defense spending OSD and the Services still want multi-year contracts. This week leaders were at Congress testifying in favor of the concept and recommending that the next V-22 contract currently under negotiation be one as well as future destroyer orders.

The estimates are that the use of these contracts save over ten percent from if they were awarded in one year options. For these types of programs that is billions of dollars over the five year process.

The chances of Congress disallowing the contract type are minimal but there is a chance that they will due to desires for more control and more flexibility.

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