Bloomberg News

Pentagon Contracts Decline 11% in March

April 10, 2014

The Pentagon

The U.S. Defense Department announced 245 contracts with a maximum value of $35.1 billion last month, compared with $39.4 billion a year earlier, according to data compiled by Bloomberg. Photographer: Rich Clement/Bloomberg

Pentagon contracts fell 11 percent in March as the military cut program spending and prepared to withdraw from Afghanistan.

The Defense Department announced 245 contracts with a maximum value of $35.1 billion last month, down from $39.4 billion a year earlier, according to data compiled by Bloomberg.

The pool of defense contracts has been shrinking since 2009, when the U.S. was fighting two wars. There are no signs it will rebound this year as the military removes combat forces from Afghanistan by December and absorbs automatic federal budget cuts under a process known as sequestration.

“It’s not just that the defense budget is flat,” said Loren Thompson, a defense industry consultant and an analyst with the Lexington Institute, an Arlington, Virginia-based research organization. “It’s also that the composition of military spending is migrating away from hardware and into things like paying benefits.”

While awards almost tripled in March from the $12 billion in February, defense analysts and contracting specialists said they weren’t impressed. They said the gain was driven by an end-of-the quarter surge and a deceptively large contract for troop supplies that’s unlikely to reach its $10 billion ceiling during its lifetime.

The two-year award, which may be extended for three additional years, is known in federal jargon as an indefinite-delivery, indefinite-quantity contract. It sets a total spending limit with no guarantees that the companies involved will win any orders, said Brian Friel, a Bloomberg Industries analyst.

Annual Orders

Annual orders will be closer to $700 million to $1 billion and won’t come close to reaching $10 billion by the end of the contract, Friel said.

“The numbers seem to be going up, but ‘seem’ is the key word here,” said Mark Amtower, a partner at Amtower & Co., a Clarksville, Maryland-based consulting firm specializing in government contracting.

Six small businesses, including Harrisonburg, Virginia-based Tactical & Survival Specialties Inc., were selected to compete under the Defense Logistics Agency’s troop-supply contract announced March 7.

The second-biggest contract in March was a $5.79 billion Air Force award announced March 27. It went to 12 small businesses for information-technology services and might run for seven years if options are exercised.

Larger companies will be invited later to compete under the same contract, Friel said. The award was an attempt by the Air Force to consolidate all of its information-technology services under one umbrella, he said.

Aircraft Carrier

A unit of Munich-based Siemens AG (SIE) was awarded the No. 3 contract last month, a modification with a maximum value of $1.79 billion for radiology systems and support, the Defense Logistics Agency announced March 26. This was the fifth option year on a contract that began in 2009.

Huntington Ingalls Industries Inc. (HII:US), based in Newport News, Virginia, received a $1.29 billion contract modification for work on the nuclear-powered John F. Kennedy aircraft carrier. The Navy announced the fourth-largest contract of the month on March 4.

“This additional funding helps us maintain our positive momentum” in advance of a construction contract expected to be awarded later this year, Mike Shawcross, a vice president of Huntington Ingalls’ Newport News Shipbuilding division, said in a press release.

The fifth-biggest contract, a $1.16 billion award announced March 4 by the Army, went to Chicago-based Boeing Co. (BA:US) for 82 new and refurbished Apache AH-64E helicopters, support services and engineering studies.

To contact the reporter on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net

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


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