Multiyear contracts could solve plenty of Pentagon problems

The document devotes a page to the Pentagon’s signature policy under Biden: “integrated deterrence.” (Saul Loeb/AFP via Getty Images)

After pushing Pentagon leaders for months to take more seriously the negative effects of rampant inflation, Congress is finally seeing some action. But now it may be defense leaders who need to push Capitol Hill to be bolder.

After failing to adequately account for rampant inflation in its fiscal 2023 budget request, the Department of Defense is now proposing solutions to mitigate inflation’s effects on the troops and the industrial base.

In recent guidance, Pentagon contracting officers were advised to provide “extraordinary contractual relief” to companies on fixed-price contracts now suffering inflation. With the gross domestic product chain-type price index at 8.9%, this help is welcome, especially for smaller companies.

However, a better solution to inflationary woes is not just added flexibilities from the Defense Department, but added dollars from Congress — and sustained funding. Congressional appropriators should heed the calls of Bill LaPlante, undersecretary of defense for acquisition and sustainment, and give the feds greater authority to negotiate multiyear procurement contracts for munitions and missile systems. This authority eliminates the need to negotiate contracts each year, keeping production lines hot, saving taxpayer dollars and improving our ability to replenish stocks emptied by the war in Ukraine.

Multiyear contracts last two to five years, potentially saving taxpayers anywhere from 5% to more than 15%. The reason is simple: With this authority, contractors have a steady funding source, signaling that their product is going to be purchased for years and creating an incentive to invest in their own company workforce, research and development, and facilities.

Take the Block IV Tomahawk missile, for example. A multiyear procurement contract contained in appropriations legislation for FY04 resulted in an output of around 357 missiles per year, with an average price tag of $1.4 million per missile in FY22 dollars. Fast forward 16 years and the Pentagon is again procuring the same Tomahawk missile, but this time without a multiyear contract. From FY20 to FY22, the DoD bought about 94 missiles per year at an average price of $2.9 million per missile — a 107% price increase.

Not only does the DoD lose money when multiyear deals aren’t in place, but it receives fewer needed capabilities, like the Tomahawk missile.

By law, each and every time the Pentagon wants to contract for longer than one year, it needs specific approval from the Appropriations committees. With the clear benefits of multiyear procurement contracts, one would expect appropriators would use them.

Wrong. In the House and Senate defense appropriations bills for FY23, this authority was only approved for the Arleigh Burke-class guided-missile destroyer. Despite the obvious need for sustained purchases of munitions, zero multiyear procurements were approved in the tranches of Ukraine aid passed by Congress since the start of the war.

Why are multiyear procurement contracts rarely approved by Congress? Appropriations staff do not want to relinquish any power to question expenditures in subsequent years, and members opt not to overrule the powerful staff. As a result, everyone pays more.

But that is not the only cost to skipping multiyear deals. Forced into year-by-year planning, the defense industry is likely not to make necessary capital investments beyond a one-year horizon. The Pentagon doesn’t incentivize companies to improve capacity and drive down costs.

One way the Pentagon has tried to get around this dilemma is to contract for one year where it has appropriated dollars and then have a series of one-year options.

The Defense Department will not get the best price in these arrangements, as industry factors in a risk premium. Further, since there is no guarantee of any future production, industry is still disincentivized to invest beyond the barest minimum.

With America’s munitions stockpiles reaching an “uncomfortably low” level and the Army planning to “nearly triple” artillery shell production, House and Senate appropriators should meet the moment and allow multiyear procurement contracts for more than capital assets like ships. Congress should allow them for the weapons that warfighters use daily — the bombs, missiles, rockets and other munitions that pack a punch in our arsenal. More multiyear contracts also means doing away with producing weapons at a snail’s pace under minimum sustainment rates and instead move at Operation Warp Speed-like tempo.

Solving the inflationary woes of the defense-industrial base will take more than attention and guidance. Contractors need stability to produce systems at meaningful rates for sustained periods of time. Predictable dollars beget stability, and multiyear procurement contracts should be the vehicle for it. Now that the Pentagon is calling for them, it’s your move, Congress.

Mackenzie Eaglen is a senior fellow at the American Enterprise Institute think tank. She has worked on Capitol Hill, at the Pentagon and on the Joint Staff. Bill Greenwalt is a nonresident senior fellow at AEI, a former senior staffer on the Senate Armed Services Committee and a former deputy undersecretary of defense for industrial policy.