Procurement: Lifesavers Are Late And Over Budget


May 26, 2011: Last year, 98 major American military procurement projects were $402 billion over budget and, on average, 22 months late. Some 40 percent of the cost overruns are the result of suppliers submitting unrealistically low bids for new weapons, and then coming back for more and more money as "unforeseen problems" appear and costs kept escalating and delivery delayed. This has come to be called "lowballing." Currently, procurement of weapons and major equipment make up about a third of the defense budget. While this is expected to decline over the next decade, as defense budgets shrink, the problem also extends to upgrades and refurbishment of existing equipment.

The military goes along with the lowball angle because it makes it easier to get Congress to approve the projects. Once a new project is in the military budget a few years, it is very difficult to get it cancelled. Since Congress has a short memory, the military does not take much heat for this never ending "lowball" planning process.

Actually, it's poor planning in general that causes most of the high costs. It's bad planning by the military, when coming up with the initial design, and bad planning on the part of the few manufacturers that have a monopoly on building certain types of weapons systems. Monopolies do not encourage efficiency. There are many examples of all these bad habits at work. Don't expect any of this to change anytime soon. It's the way things have worked for a long time. Many generals and admirals, members of Congress, and even a few manufacturer executives, have called for reform. But it just doesn't happen, at least not to a large extent.

One encouraging post-Cold War trend has been an increased reluctance to build a lot of a weapon that became extremely expensive. Thus the B-2 bomber, Seawolf submarine, F-22 fighter, Crusader artillery system, Comanche helicopter, and DDG-1000 destroyer all got production cut sharply, or were cancelled, when their budgets went too far out of control. So there's hope yet.

Another problem is that military spending has, over the last 50 years, continually declined as a percentage of GDP. Thus while ten years of war against Islamic terrorism (especially in Iraq and Afghanistan) has cost about $1.2 trillion, that's not as big a chunk of change as it used to be. For example, World War II cost, at the time (in current dollars) over four trillion dollars. That amounted to over 33 percent of U.S. GDP at the time. The current war on terror is costing about one percent of GDP. So while war may appear to be getting more expensive, relative to the amount of money available, it's actually getting cheaper.

As a percentage of GDP, military spending continues a decline that has been going on since the 1960s (when, because of the $713 billion cost of the Vietnam war, defense spending was 10.7 percent of GDP). That went down to 5.9 percent of GDP in the 1970s and, despite a much heralded defense buildup in the 1980s, still declined to 5.8 percent. With the end of the Cold War, spending dropped sharply again in the 1990s, to 4.1 percent. For the first decade of the 21st century, defense spending is expected to average 4.5 percent of GDP. Most of the current defense budget is being spent on personnel (payroll and benefits), and buying new equipment to replace the Cold War era stuff that is wearing out and to pay for operations in Iraq and Afghanistan.

This trend is all because of the industrial revolution of the 19th century, which created a lot more money, much of which nations promptly squandered on wars they could not have afforded earlier. The American Revolution, for example, cost the United States less than $2 billion. The main reason for the low cost, compared to later wars, was that there simply was not a lot of wealth (money or goods) to scrounge up for the war.

The United States has always been enthusiastic about spending enormous amounts on weapons, ammunition, supplies and equipment for the troops, with the idea of keeping U.S. casualties down while still winning the war. Thus during World War II, U.S. combat deaths were 300,000 (plus 100,000 non-combat dead). The Soviet Union, on the other end of this scale, lost 10.7 million dead in combat (including 4.4 million captured and missing), and nearly 20 million civilians killed as well. Of all the major combatants in World War II, the U.S. had the lowest casualty rate (about 2 percent). Russia lost about 15 percent of its entire population during the war. For every American killed during World War II, 75 Russians died.

The U.S. kept its losses down partly because of the amount of money spent per person in the military (over $250,000). The current casualty rate is a third of what it was during World War II, and the amount spent per person has more than tripled (exact comparison is tricky, as all military expenses were counted during World War II, while the current war is being fought with only a small portion of American military might, and the navy and air force continue to take care of many non-war-on-terror responsibilities.) While the dollar cost of war is good for a hot headline on a slow news day, the fact that the money saved lots of American lives, never seems to make it to the front page.

However, there are other expenses that are rarely mentioned. The initial cost of World War II, and most wars that came after it, will eventually double because of the cost of taking care of the veterans. There were over a million casualties in World War II, many of them serious, with long range effects. The long range health problems were not anticipated, nor were the more expensive treatments. You have to pay. The vets are owned a debt that cannot be avoided.

All dollar figures mentioned above are in terms of 2011 (inflation adjusted) dollars.


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