Bloomberg News

Pentagon Contracts Little Changed in August as Cuts Sap Spending

September 11, 2013

Pentagon Contracts Little Changed in August as Cuts Sap Spending

Boeing Co., based in Chicago, won $1.1 billion in potential work, including $904 million from the Army for 36 new Block III Apache Helicopters for Korea. Photographer: Chris Ratcliffe/Bloomberg

The U.S. Defense Department awarded $17.6 billion in contracts in August, little changed from July and one-third less than the same month a year ago.

Only one award topped $1 billion in value: an extension of a current deal to upgrade electronics in U.S. weapons systems and provide other engineering services, held by seven defense contractors including Lockheed Martin Corp. (LMT:US) and Boeing Co. (BA:US)

August awards increased 1.7 percent from the previous month after dropping 55 percent in July from June. The larger decline reflects the continuing effect of across-the-board budget cuts on Defense Department operations, said Mark Amtower, who runs a government contracting consulting firm in Clarksville, Maryland.

“Sequestration is definitely putting a stranglehold on things,” Amtower said. “That wasn’t in place this time last year. That has to factor in somehow.”

The value of 324 contracts awarded in August was almost 34 percent less the $26.5 billion announced during the same month in 2012, as budget reductions unfolded under a process known as sequestration. The Pentagon is required to announce contracts of at least $6.5 million.

More than a third of the awards last month were modifications of existing agreements, such as a $410 million award Aug. 20 from the U.S. Air Force to Providence, Rhode Island-based Textron Inc. (TXT:US) for 1,300 cluster bombs for Saudi Arabia. The Pentagon also has held off on some maintenance in anticipation of additional budget cuts, analysts said.

Modification Trend

“If you’ve got a contract right now, that’s good for you,” said Brian Friel, an analyst at Bloomberg Industries. “We’ll see more of these kinds of modifications and extensions happening as long as the uncertainty continues.”

The single largest award last month was a $1.3 billion contract modification to seven companies -- Lockheed, Boeing, General Dynamics Corp. (GD:US), BAE Systems Plc, Northrop Grumman Corp. (NOC:US), Raytheon Co. (RTN:US) and Honeywell International Inc. (HON:US) -- to continue upgrading electronics in existing weapons systems.

Defense Microelectronics Activity, based in McClellan, California, is supervising the project, which has a value of $6 billion following the modification. That Pentagon agency is responsible for fixing operational problems in weapons systems.

With the Sept. 30 deadline for Congress and the White House to agree on spending for the next fiscal year, the Pentagon may continue to find it easier to modify existing awards than put new contracts up for bid, Amtower said.

Some House Republicans are insisting that any legislation to fund the government in the next fiscal year eliminate spending for the new health-care law that provides coverage to millions of uninsured Americans.

Targeting Obamacare

House Republicans have also said they would demand an end to funding for the health-care law, additional spending cuts or other concessions in exchange for separate legislation raising the government’s authority to borrow money. The Treasury Department has said the federal government could reach the debt ceiling next month.

There will be “more spending on things that are already in place so you can spend the budget you know is there,” Amtower said. “You’ll see more activities on those existing contracts.”

Sequestration stripped $37 billion from Pentagon programs in the current fiscal year. The Defense Department required about 85 percent of its civilian workforce to each take about six unpaid furlough days to help meet the budget target.

Lost Days

If every one of the 24,360 contracting employees took those six days off, that would mean 146,140 days of work lost, adding “to the delays that budget uncertainty has caused in the procurement process,” Friel said.

The largest individual contract, $925 million over five years, went to Hoist Liftruck Manufacturing Inc. of Bedford Park, Illinois, for heavy-duty equipment such as forklifts and container handlers. That award was made by the Defense Logistics Agency.

Two companies that shared in the technology award also received more than $1 billion each in other contracts, according to data compiled by Bloomberg.

Lockheed, based in Bethesda, Maryland, received $1.5 billion in contracts, including $852 million from the U.S. Navy for work tied to the F-35 fighter planes. The F-35 is the Pentagon’s costliest weapon system, with 2,443 aircraft costing an estimated $391 billion.

Boeing, based in Chicago, won $1.1 billion in potential work, including $904 million from the Army for 36 new Block III Apache Helicopters for Korea.

Defense Shares

“We have a robust strategy, diversified portfolio, and well-integrated, high-performing leadership team,” said Donna Savarese, a spokeswoman for Lockheed. “We remain focused on meeting our commitments to customers and delivering value to our shareholders.”

Boeing spokesman Todd Blecher said the U.S. contracts are “representative of our continued focus on meeting our customers’ needs around the world.”

The sequestration budget cuts haven’t stopped defense shares from outperforming the broader stock market. A Bloomberg index of the 10 biggest contractors advanced 34 percent this year through yesterday, compared with a 18 percent gain for the Standard & Poor’s 500 Index during the same period.

-- With assistance from Nick Taborek in New York and Anthony Capaccio in Washington. Editors: David Ellis, Steve Geimann

To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net; Kathleen Miller in Washington at kmiller01@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $196.84 USD
    • 0.41
    • 0.21%
  • BA
    (Boeing Co/The)
    • $131.63 USD
    • 0.39
    • 0.3%
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