Military contracts for new weapons systems are almost uniformly plagued by mammoth cost overruns. The Department of Defense (DOD) has paid $400 for $17 hammers, $56 for $0.08 Allen wrenches, and $27 for screws that hardware stores sell for less than a dime. Prices for custom‑built items in aircraft are even more startling: $600 armrests and toilet covers, $400 ashtrays, and $17,000 coffee pots. The U.S. Army abandoned its unserviceable Sergeant York battle tank after sinking almost $8 billion into the project.
Critics cite examples of this sort to indict defense contractors for price‑gouging and the bureaucrats who administered these contracts for incompetence. If the basic problems were this simple, the solution would be incredibly straightforward: Prosecute dishonest contractors and deny them future contracts, and hire competent administrators.
Such problems are not unique to the military. Government office buildings, flood control projects, highways, and nuclear plants also often entail sloppy work and cost overruns. Some contracts require delivery of weapons systems years into the future, and inflation may drive up costs. For high-tech weapons, it takes 8-16 years to go from concept exploration to full scale production and deployment. Many weapons systems are obsolete by the time they are battle ready. Contract specifications are often vague because designs are still on the drawing board. Bids on such projects cannot be ironclad.
The nature of government contracting, however, may make problems of this type unavoidable. Defense procurement, for example, is characterized by (a) all or nothing competition (if an aircraft company loses or does not bid on a new "stealth" bomber, it may not have another opportunity for 20 years); (b) high technological demands and product precision uncertainty (many projects are vaguely specified initially, but have demanding requirements in the end); (c) unpredictable funding because of changing world events and the political nature of long-term contracts; and (d) heavy capital requirements.
A recent study summarized the precarious world of defense contracting:
The buyer can pressure the seller to reduce prices or threaten to stop purchasing altogether, leaving the seller with heavy capital outlays that reap no returns. Suppliers are clearly reluctant to make such investments for fear of exploitation. Inducements to do so include charging higher prices (to compensate for the risk) and writing long-term contracts with stiff penalty clauses for buyer withdrawal. Interesting, ... defense transactions have an implicit third party. Not only are a producer and a military buyer involved, but the U.S. Congress as well, with the latter intermittently withholding funding for forcing changes in the procurement. Not surprisingly, with Congress reluctant to permit multiyear contracts, recourse to higher selling prices is a main inducement for firms to remain as defense contractors.*
Some problems with government contracting lurk in bureaucratic behavior. C. Northcote Parkinson, an English writer, developed "laws" of bureaucracy, one of which is "work expands to absorb the time available." As a project unfolds, specifications tend to grow excessively complex, which can be extremely costly. This occurs because many bureaucrats try to stay (or look) busy. One easy way to stay busy is to constantly write directives that detail the work of people you supervise. The 1985 DOD recipe for fruitcake is an unintentionally comic example—it took 18 pages. The recipe for a modern aircraft carrier runs hundreds of thousands of pages. If the ratio of overspecification for fruitcake holds for U.S. Navy ships, the excess costs from this problem alone sums to billions of dollars. Doing business with the Pentagon is not easy. Reporting an oversight by DOD is thick and burdensome. So much so, that during 1982-87 (the height of the Reagan defense build-up), the number of defense suppliers fell by two-thirds.**
Another problem is that contractors and contract administrators may share interests that violate the public interest. For example, many retired generals and admirals ultimately go to work for defense contractors. If you were about to retire as a high‑ranking military officer, might you be "understanding" about exorbitant costs incurred by a contractor in accommodating your design changes—especially if that firm was a major employer of someone with your expertise?
We can only touch on some problems of government procurement; a detailed discussion would take volumes. DOD contract foibles have been on display recently, but many government contracts seem executed at much higher costs than private contracts would be. The ultimate problem is inadequate incentives for efficiency. The costs of the resulting inefficiencies are borne by taxpayers.
* Donald L. Losman and Shu-jan Liang, The Promise of American Industry, (Wesport, CT: Quorum Books), 1990, pp. 126-127.
** James Blackwell, et al, Deterrence in Decay, Washington, D.C.: Center for Strategic and International Studies, May, 1989, p. 31.