Defense Giants Score Poorly on Arms Development

Northrop Grumman Corp., maker of unmanned systems including the Global Hawk drone, and Raytheon Co., the world's largest missile-maker, rank at the bottom of the pack in weapons development performance, according to a new report from the Defense Department.

The acquisition document, called the 2014 Performance of the Defense Acquisition System and released last week, compared the Pentagon's top contractors in terms of their ability to develop and produce weapons systems on time and on budget.

The report analyzed contracts for major defense acquisition programs over more than a decade, from 2000 through 2013, and compared the performance of the biggest firms by the development and production phases of the acquisition cycle.

In terms of cost overruns on development programs, Northrop fared worse than any of its peers, with a weighted price growth average of 41 percent, followed by Lockheed (37 percent), Raytheon (32 percent), General Dynamics Corp. (22 percent) and Boeing Co. (8 percent), according to the document.

The British defense giant, BAE Systems Plc, was the only one of the group to develop weapons under budget, with a price growth of -3 percent, it showed.

Overall, cost overruns on development contracts averaged 29 percent, fueled by an average price growth of 77 percent on contracts held by more than a dozen smaller contractors, including the ship-builder Huntington Ingalls Industries Inc. and the drone-maker General Atomics.

The pool of development contracts included such programs as Lockheed's F-35 fighter jet and Boeing's KC-46A refueling tanker, which, though not complete, have obligated enough funding to get an indication of performance, the report states.

While the authors of the report couldn't determine the cause of the price increases, they did note that contractors with the highest cost growth received two-thirds or more of their dollars through so-called cost-plus-award-fee, or CPAF, contracts -- a type of award that's "now discouraged for most purposes because it has not provided an effective incentive to control costs in most cases."

BAE, which makes the M109 Palandin howitzer, also bested its peers in developing weapons on time, according to the document. "In terms of schedule growth, BAE Systems had the best performance (with no schedule growth on any of its six contracts)," it states.

The company with the longest developmental delays was Raytheon Co., with an average schedule growth of 2.8 years, followed by Lockheed (2.5 years), Northrop (0.9 years), Boeing (0.8 years) and General Dynamics (0.2 years), according to the document. Overall, delays on development programs averaged 2.5 years, driven by an average delay of 3.4 years on contracts held by the group of smaller contractors.

Contractor performance, however, was markedly different for weapons production.

In terms of cost overruns on production programs, Boeing performed the worst of any main contractor, with an average price growth of 24 percent, followed by Huntington Ingalls (21 percent) and trucker-maker Oshkosh Corp. (13 percent). The rest of the prime contractors all performed significantly better than the overall average of 12 percent and, in several cases, recorded negative figures.

The company with the longest delays on production contracts was also Northrop, with an average schedule growth of two years, followed by United Launch Alliance LLC (1.3 years) and Boeing (1.1 years). Overall, production program delays averaged half a year.

Oshkosh was the best performer in this category, completing all of its contracts on time or sooner than planned.

The report didn't go into detail about cost and schedule differences by weapon systems, but did note that General Dynamics, on the whole, performed better than Huntington Ingalls, with "significantly lower cost, price, and schedule growth" even though both ship-builders received the same types of contracts.

Finally, the document pointed out that defense contractors are earning "adequate" profit margins of about 9 percent, which is consistent with the 8.4 percent average margin on the sample of development and production contracts. "There is adequate opportunity to provide effective incentives to industry without changing aggregate returns for defense firms in general," it stated.