DoD’s vendor base shrunk by 20 percent as defense cuts set in

The number of vendors selling goods and services to the Defense Department declined substantially between 2011 and 2015 as the government began a defense drawdown and then imposed hard caps on military spending, according to a new analysis of federal contract data.

An executive summary of the findings, published last week by the Center for Strategic and International Studies and the Aerospace Industries Association, shows that the total number of prime vendors who won Defense contracts dropped 8 percent in 2011 and 2012 – a timeframe the authors characterized as the “Defense drawdown period” – and fell a further 15 percent between 2013 and 2015.

In all, the number of first-tier contractors shrunk from 78,500 prior to the drawdown to 61,700 by 2015, the latest full year of data in the analysis.

The authors cautioned that it’s impossible to tell how many of those companies exited the Defense marketplace entirely. Some of them, for example, may have continued to do business as subcontractors whose data is not readily accessible in the public version of the Federal Procurement Data System. But it seems clear that a significant proportion of the 17,000 vendor reduction in the Defense supply base can be blamed on declining contract spending, particularly in the research and development arena.

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Overall, DoD contract spending fell by 23 percent after the imposition of the Budget Control Act’s spending caps, but previous analyses by CSIS have shown that R&D contracts fell much more sharply. Those cuts were most acute within the proportion won by the five largest defense firms: Lockheed Martin, Northrop Grumman, Raytheon, Boeing and General Dynamics, which saw their R&D contracts decline by 48 percent during the first two years of the BCA period.

By contrast, R&D contracts to small and medium-sized firms declined by only between 14 and 18 percent after caps were imposed.

Nonetheless, those firms are much more vulnerable to wild swings in Defense obligations, said Wes Bush, the CEO of Northrop Grumman.

“It is clear that the sequester has had very significant negative effects across the defense industrial base, not only in its impact on R&D investments but also in terms of the demand signal that it has sent to the supply chains,” he said in remarks to the Reagan National Defense Forum earlier this month. “Larger companies like ours, to a very large extent, have been able to soak this up a bit, and I commend the companies in our industry that have maintained their commitment to R&D. But it is difficult in the supply chain.”

In the case of procurement contracts, vendors supplying military hardware saw declines across the board, but the reductions varied widely between the military services and between different types of weapons systems.

Arranged by platform type, they ranged from “catastrophic” impacts to the Defense industrial base in the case of land vehicles (a 56 percent cut) to “modest” in the case of ships and submarines (16 percent).

Broken down by military service, the departments of the Army, Air Force and Navy responded in different ways to cuts that were spread across the Defense budget, the analysis found.

The Army tended to protect air and missile defense systems even as it slashed spending on its ground combat vehicle fleet. The Navy, in many ways, did the opposite by applying disproportionate cuts to air and missile defense and facility maintenance while prioritizing aircraft and ordnance, while the Air Force’s cuts were more evenly applied across most of its programs.

As a general matter, all sectors of the Defense industrial base saw negative impacts, but some suffered more than others, the authors concluded.

“Some sectors saw continual declines in contract obligations, while others experienced a whipsaw effect, swinging rapidly from growth to decline,” they wrote. “Small and Top 5 vendors’ market share remained steady, while medium and large vendors’ shares were more volatile. Over the course of the drawdown, the Top 5’s contract portfolio shifted toward products and services, and away from R&D.”