DoD’s Misaligned Incentives

The Department of Defense procurement problems are extensive. Last week, my colleague Chris Edwards discussed a failed DoD attempt to replace the president’s helicopter fleet. The project was canceled after several years due to large cost overruns and schedule delays, which ended up wasting $3.2 billion.

Now, a new report by the Government Accountability Office (GAO) provides further insights into the DoD’s troubled procurement processes. GAO tracked the progress of 80 weapons systems, which have total projected costs of $1.5 trillion. Combined, all of these projects have gone over budget by a huge $448 billion. Furthermore, 42 percent of them had cost overruns greater than 25 percent.

Many of them are also well behind schedule. GAO estimates that the average project is 28 months behind schedule, up from 23 months in fiscal year 2011.

The GAO report does highlight some small improvements with DoD’s handling of the projects, albeit with a caveat: “the enormity of the investment in acquisitions of weapon systems and its role in making U.S. fighting forces capable, warrant continued attention and reform.”

Aside from huge cost overruns, the GAO also details numerous other problems within the DoD procurement process. For one thing, DoD officials face incentives that are often misaligned with taxpayer interests. Some of these incentives call for DoD officials’ close relationships with contractors, and constant demands by senior officials and policymakers for new and better technology.

The “funding dynamics” within the DoD is another problem. The agency’s officials, unlike their counterparts in private industries, are functionally rewarded for over-budget projects according to the report:

There are several characteristics about the way programs are funded that create incentives in decision-making that can run counter to sound acquisition practices… In DoD, there can be few consequences if funds are not used efficiently. For example, as has often been the case in the past, agency budgets generally do not fluctuate much year to year and, programs that experience problems tend to eventually receive more funding to get well. Also, in DoD, new products in the form of budget line items can represent revenue. An agency may be able to justify a larger budget if it can win approval for more programs. Thus, weapon system programs can be viewed both as expenditures and revenue generators.

Once weapon system procurements get underway, it is very unlikely that they will be canceled before completion. So for projects that turn into white elephants, Congress and Defense officials tend to throw good money after bad.

The GAO also notes that, unfortunately for taxpayers, these issues are not new: “while some progress has been made, too often GAO reports on the same kinds of problems with acquisition programs today that it did over 20 years ago.” In testimony before Congress yesterday, Frank Kendall, the under secretary of defense for acquisitions, said, “I’ve seen any number of attempts to improve defense acquisition. My view is many of the things we have tried have had little discernible impact.”

Major procurement reforms are clearly needed at the Defense Department. But until that happens, misaligned incentives within Congress and the DoD will continue to waste billions of taxpayer dollars.